TSMC
Annual Report 1999

Plain-text annual report

Taiwan Semiconductor Manufacturing Company, Ltd. Annual Report 1999 Printed on March 8, 2000 MAJOR FACILITIES Corporate Headquarters & FAB II, FAB V No.121, Park Ave. III, Science-Based Industrial Park, Hsin-Chu, Taiwan 300, R.O.C. TEL: 886-3-578-0221 FAX: 886-3-578-1546 FAB I Building 67, No. 195, Sec. 4, Chung-Hsing Rd., Chu-Tung, Hsin-Chu, Taiwan 310, R.O.C. TEL: 886-3-582-1240 FAX: 886-3-582-2616 FAB III & FAB IV No. 9, Creation Rd. I, Science-Based Industrial Park, Hsin-Chu, Taiwan 300, R.O.C. TEL: 886-3-578-1688 FAX: 886-3-578-1548 FAB VI No. 1, Nan-Ke North Rd., Science-Based Industrial Park, Shan-Hwa, Tainan, Taiwan 741, R.O.C. TEL: 886-6-505-2000 FAX: 886-6-505-2058 TSMC North America 1740 Technology Drive, Suite 660, San Jose, CA 95110, U.S.A. TEL: 1-408-437-8762 FAX: 1-408-441-7713 TSMC Europe World Trade Center, Strawinskylaan 1145, 1077 XX Amsterdam, The Netherlands TEL: 31-20-305-9900 FAX: 31-20-305-9911 TSMC Japan 16F, Queen's Tower C, 2-3-5 Minato Mirai, Nishi-Ku, Yokohama, Kanagawa 220-6216, Japan TEL: 81-45-682-0670 FAX: 81-45-682-0673 TSMC SPOKESMAN Name: Y. C. Huang Title: Vice President TEL: 886-3-578-0221 FAX: 886-3-578-1545 AUDITORS Company: T N SOONG & CO Auditors: S. C. Huang, Edward Way Address: 12Fl., No.156, Sec.3, Min-Sheng E. Rd., Taipei, Taiwan 105, R.O.C. TEL: 886-2-2545-9988 FAX: 886-2-2545-9966 STOCK TITLE TRANSFER Company: China Trust Commercial Bank Transfer Agency Department Address: 5Fl., No.83, Sec.1, Chung-Ching S. Rd., Taipei, Taiwan 100, R.O.C. TEL: 886-2-2361-3033 FAX: 886-2-2311-6723 ADR DEPOSITARY BANK Company: Citibank, N.A. Depositary Services Department Address: 21Fl., 111 Wall Street, New York, NY 10043, U.S.A. TEL: 1-212-657-1853 FAX: 1-212-825-2103 WEB SITE http://www.tsmc.com.tw Ta b l e o f C o n t e n t s LETTER TO OUR SHAREHOLDERS A BRIEF INTRODUCTION TO TSMC 1. Company Profile 2. Organization 3. Common Shares, Corporate Bonds and ADR Issuance OPERATIONAL HIGHLIGHTS 1. Business Activities 2. Marketing and Sales 3. Market Outlook 4. Labor Relations 5. Personnel Growth over the Last Two Years 6. Environmental Protection Measures 7. Major Contracts 8. Litigation Proceedings BUSINESS AND FINANCIAL PLANS 1. Production and Sales Plans for 2000 2. Year 2000 Plans for Disposition or Acquisition of Real Estate or Long-Term Investment 3. Research and Development Plans 4. Financing Plans 5. TSMC Education and Culture Foundation FINANCIAL STATEMENTS 1. Brief Balance Sheet 2. Brief Statements of Income 3. Financial Analysis 4. Net Worth, Earning, Dividends and Market Price Per Share 5. Auditor’s Opinion 6. Supervisors’ Report 7. Review and Analysis of Financial Status and Operating Result 8. Financial Statements and Independent Auditors’ Report 9. Consolidated Financial Statements SPECIFIC NOTES 1. Affiliates Information 2. Dividend Policy 3. Statement of Internal Control 4. Other Necessary Supplement 1 B u s i n e s s P h i l o s o p h y TSMC is committed to: Integrity Focus on Our Core Business - IC Foundry Globalization Long-term Vision and Strategies Treating Customers as Partners Building Quality into all Aspects of Our Business Unceasing Innovation Fostering a Dynamic and Fun Work Environment Keeping Communication Channels Open Caring for Employees and Shareholders, and Being a Good Corporate Citizen synergism noun [New Latin synergismus, from Greek synergos] (1910): interaction of discrete agencies (as industrial firms), agents (as drugs), or conditions such that the total effect is greater than the sum of the individual effects. (Merriam - Webster’s Collegiate Dictionary, 1996, p. 1873) Letter to Our Shareholders Dear Shareholders, 1999 was a year of upturn for the global semiconductor industry. In 1999, TSMC reached another record high both in revenues and profits. Sales revenues for 1999 reached NT$73.13 billion, a 45.6 percent increase over 1998 revenues. Net income totaled NT$24.56 billion, an increase of 60 percent over NT$15.3 billion in 1998. Diluted earnings per common share were NT$3.24 versus NT$2.00 a year ago. The past year was memorable in several ways. TSMC survived the most devastating earthquake to strike Taiwan in nearly 100 years. Fortunately, our operations returned to normal in less than 10 days, due largely to a well-prepared disaster recovery plan and the untiring efforts of our dedicated employees. Our recovery efforts were focused on minimizing the impact of the earthquake on customers businesses and securing Taiwan s reputation in the global electronics industry. As a result of our quick recovery, customer confidence in TSMC has increased and the partnership between TSMC and our customers has deepened. In addition, our speedy restoration to full production has earned TSMC international acclaim and received wide recognition by the global media. Out of this disaster, TSMC has further built a solid reputation as our customers "Virtual Fab", providing the best available services and maintaining our leadership position in the dedicated IC foundry industry. Our meticulous Y2K preparations enabled us to successfully transit into year 2000 without interruption to our operations. Given that TSMC has numerous individual pieces of highly automated semiconductor manufacturing equipment and computer-based systems, this represented a well-executed plan instated well in advance. In this endeavor, we again won recognition from the global community in demonstrating our strong ability to meet the challenges of a fast-changing environment. Morris Chang Chairman 3 Advanced Technology Continuous aggressive advancement in process technology is yet another major competitive advantage for TSMC. Our focused commitment to new technology development and increased production capacity has kept us in the lead position in the foundry industry, and propelled us into an elite position in the global IC industry. In 1999, TSMC achieved many milestones in technology, including volume availability of leading-edge 0.18µm process technology, which provides the performance and density necessary for true system-on-chip (SOC) design. In addition, TSMC was the first dedicated foundry to deliver high-yield copper interconnects for increased performance and flexibility. Moreover, our research and development team has made tremendous advances in developing 0.15 and 0.13µm technology. Our 0.15µm process technology will be available in the beginning of 2000, and the development of 0.13µm technology will be completed in the first quarter of 2001. These accomplishments are evidence of our commitment to provide customers with the most advanced and reliable technology available. Increased Capacity After a slow period in the IC industry, customer orders took a strong upward turn in the second quarter of 1999. To meet this sudden increase in demand, TSMC focused first on expanding the available capacity of our existing fabs, including Fabs III, IV, and V, and on increasing the percentage of manufacturing volume devoted to advanced 0.25µm and 0.18µm process technology. In addition, we added capacity from our affiliates at WaferTech, Vanguard International Semiconductor Corporation, and TSMC-Acer Semiconductor Manufacturing Corporation (TASMC) to provide our customers with critically needed wafers. Overall, our total wafer shipments increased to approximately 1.8 million eight- inch equivalent wafers in 1999, a 50% increase from 1.2 million wafers in 1998. In the meantime, TSMC has taken aggressive action in the area of new fab construction. TSMC’s Fab VI, located in the new Tainan Science-Based Industrial Park, began pilot production at the end of 1999, fully one quarter ahead of schedule. Also in December, TSMC broke ground for fab XII, our first 12-inch fab, in the Hsin-Chu Science-Based Industrial Park. Construction continued at Systems on Silicon Manufacturing Company, our joint venture with Philips in F.C.Tseng President synergism noun [New Latin synergismus, from Greek synergos] (1910): interaction of discrete agencies (as industrial firms), agents (as drugs), or conditions such that the total effect is greater than the sum of the individual effects. (Merriam - Webster’s Collegiate Dictionary, 1996, p. 1873) Singapore, with a plan to begin volume production by the end of 2000. In addition, we secured merger agreements with TASMC at the end of 1999 and with Worldwide Semiconductor Manufacturing Corporation at the beginning of 2000, both of which are expected to close in June of 2000. By the end of 2000, TSMC expects to increase its total wafer capacity to 3.4 million wafers. All of these actions should help satisfy our customers most urgent needs in this strong semiconductor market, creating significant benefit for TSMC and our shareholders. Vision and Future Outlook TSMC s vision is to be the most reputable, service-oriented and maximum-total-benefits silicon foundry in the world, thereby earning the reward of also being the largest and most profitable foundry. To fulfill this vision, we maintain a consistent focus on our foundry business and concentrate on our commitment to being our customers "Virtual Fab". Looking forward into 2000, the IC industry is expected to continue the steep climb which began in 1999 and is expected to end with yet another outstanding performance. From a broader perspective, foundry services will play an increasingly important role in IC manufacturing worldwide. Fabless IC companies already depend on foundries, and integrated device manufacturers (IDMs) are expected to cement stronger business relationships with foundries for their IC manufacturing. We believe that our "Virtual Fab" strategy enables us to capitalize on all of these trends. This strategy will also generate a positive impact on our financial performance in the coming year, and will further consolidate our leadership in the IC foundry industry. In closing, 1999 was a fine and memorable year. We would like to thank all of our customers, shareholders and employees for your continued support and dedication in the future. Morris Chang Chairman F.C.Tseng President 5 Believing in Synergism, TSMC treats all other semiconductor companies as partners. synergism [Gk synerg - (on) working together +-ism] Interaction of discrete agencies (as of industrial firms or physical equipment) in combination such that the total effect is greater than the sum of the individual effects. (Time Dictionary, 1999, p. 1772) A Brief Introduction to TSMC 1. Company Profile Founded in 1987, Taiwan Semiconductor Manufacturing Company (TSMC) is a dedicated independent semiconductor foundry based in Taiwan s "Silicon Valley," Hsin-Chu Science-Based Industrial Park. We are listed on the Taiwan Stock Exchange (TSE) and the New York Stock Exchange (NYSE) under the symbol TSM. TSMC was the first pure integrated circuit (IC) foundry in the world. Since the beginning, we have been dedicated to providing manufacturing services for advanced ICs. Our company s charter prevents us from designing or making our own brand-name IC products. TSMC therefore is a partner, not a competitor, to other semiconductor companies. TSMC s success in the foundry business has served as a model for many new entrants to the market. With TSMC as the engine of change, what was once only a concept a pure foundry is today a multi-billion dollar industry. As the semiconductor industry faces greater consolidation and spiraling IC fab construction costs, dedicated foundry companies like TSMC stand to become the primary sources to meet the growing worldwide IC demand. TSMC is the largest IC foundry in the world. At the end of 1999, we operated two 6-inch wafer fabs (Fab I & II), six 8-inch fabs (Fab III, IV,V,VI and Fabs I and II of TASMC), with annual capacity of 1.9 million top-quality, high-yield 8-inch equivalent wafers. To further expand our capacity, TSMC has broken ground for the company s first 12-inch fab in the Hsin-Chu Science Park in December 1999. TSMC s Fab VI, located in the new Tainan Science-Based Industrial Park will begin volume production from the first quarter of 2000. In addition, the merger with TSMC-Acer Semiconductor Manufacturing Corporation and Worldwide Semiconductor Manufacturing Corporation have been proceeding as scheduled and are expected to close in June of 2000. TSMC is an international company that serves the worldwide IC market. Consequently, we have established facilities in locations other than Taiwan, including marketing and engneering support offices in the United States, Europe and Japan. WaferTech, TSMC s first joint venture foundry in the United States, was established in an alliance with several long- standing customers and began volume production in mid-1998. A joint venture fab with Philips Semiconductor and Singapore EDB Investments - Systems on Silicon Manufacturing Company - is scheduled to start operation in Singapore in the year 2000. In addition to maintaining a competitive edge through steadily increasing capacity, TSMC also provides consistent volume production levels of new generation technologies. TSMC offers a comprehensive set of technology processes, including process to manufacture CMOS logic, mixed-signal, volatile and non-volatile memory, embedded memory, BiCMOS ICs and copper technology. Our firm commitment to the continued pursuit of advanced technology ensures that TSMC will provide the best possible value-added services and become true partners to our customers. TSMC’s objective is to become our customers’ "Virtual Fab." That is, to provide customers with the benefits of an in-house fabrication plant without the associated expense or organizational complexities. Our intent is to make our foundry services as transparent to customers as possible, so that they can run their operations as if they have their own dedicated fabs. TSMC is committed to continued improvement of its services, developing a long-term competitive advantage by strengthening the bond between ourselves and our customers through continued leadership in the global IC foundry business. As a good corporate citizen, TSMC takes the job of community service and employee relations seriously. For example, the TSMC Culture and Education Foundation was formed in 1998 to support activities in Taiwan that promote education, technology, art and culture. The Foundation aims toward creating a better quality of life for our society through our long- term community development efforts. TSMC s concerned efforts have been recognized by many distinguished entities, ranging from the Taiwan government (for environmental protection, health and safety, arts sponsorship, employee benefits, employee training and social welfare) to leading media in Taiwan and around the world. In addition, our Chairman Dr. Morris Chang has also received many honors worldwide. In 1999, for example, Dr. Chang was honored by the Fabless Semiconductor Association (FSA) with its first-ever "Exemplary Leadership award", which will be permanently named "The Dr. Morris Chang Award for Exemplary Leadership" in recognition of his outstanding contribution to the fabless semiconductor industry. 7 2.Organization 2-1 Organziation Chart synergism [Gk synerg - (on) working together +-ism] Interaction of discrete agencies (as of industrial firms or physical equipment) in combination such that the total effect is greater than the sum of the individual effects. (Time Dictionary, 1999, p. 1772) 2-2 Directors, Supervisors, & Major Officers (As of December 31,1999) Title Name Date Elected Term (Year) Shareholding* Spouse & Minor Shareholding* Education & Experience Remarks Chairman & CEO 1997.05.13 3 45,109,604 0 Ph.D., Electrical Engineering, Stanford University Morris Chang Chairman, Vanguard International Semiconductor Corp. Chairman, WYSE Technology Inc. Director 1997.05.13 3 1,295,885,897 0 B.S., Electronic Engineering, Eindhoven Technical University Philips Electronics N.V. A.P.M. van der Poel Chairman and CEO, Philips Semiconductors International B.V. Representative of Legal Entity Director J.C. Lobbezoo Director L.P. Hsu 1997.05.13 3 1,295,885,897 0 B.A., Business Economics, Erasmus University Philips Electronics N.V. Chief Financial Officer, Philips Semiconductors International B.V Representative of Legal Entity 1997.05.13 3 1,295,885,897 0 B.S., Physics, National Cheng-Kung University Philips Electronics N.V . Executive Vice President, Philips Taiwan Representative of Legal Entity Director 1997.05.13 3 1,158,545,600 0 Master of Comparative Law, University of Michigan Development Fund, Executive Yuan Ching - Chang Yen Director Chintay Shih Deputy Minister, Ministry of Finance, R.O.C. Representative of Legal Entity 1997.05.13 3 1,158,545,600 0 Ph.D., Electrical Engineering, Princeton University Development Fund, Executive Yuan President, Industrial Technology Research Institute Representative of Legal Entity Director & President 1997.05.13 3 12,132,090 49,828 Ph.D., Electrical Engineering, National Cheng-Kung University F.C. Tseng Senior Vice President of Operations, TSMC President, Vanguard International Semiconductor Corp. Supervisor 1997.05.13 3 1,295,885,897 0 MBA, Business School of Erasmus University / Philips Electronics N.V. Jan Kees van Vliet Supervisor George Shiu Delft University of Technology Executive Vice President, Philips Taiwan Representative of Legal Entity 1997.05.13 3 1,158,545,600 0 Master degree in Economics, John Hopkins University Development Fund, Executive Yuan Deputy Executive Secretary Development Fund, Executive Yuan Representative of Legal Entity Supervisor 1997.05.13 3 10,812 0 M.S., Chemical Engineering, University of Michigan Jerome S.N. Hu Chairman, Chao Ting-Chen Cultural Education Foundation * As per the actual reported number of shares on December 31, 1999 9 3. Common Shares, Corporate Bonds and ADR Issuance 3-1 Capital & Shares Type of Stock Authorized Capital Unit: Share Total Issued Shares Un-issued Shares Reserved Shares for Bond Conversion Listed Non-listed Total Common Stock 7,670,881,717 - 7,670,881,717 51,516,965 1,377,601,318 9,100,000,000 3-2 Status of Bond and Preferred Stock Issuance Issuance Issuing Date Tenor Coupon Rate (or YTM) Outstanding Use of Proceeds Status Description US$350 million July 3, 1997 5 years YTM=6.28% p.a. TSMC exercised the right to redeem this bond Eurodollar Convertible Bond (Zero-coupon, on November 5, 1999. US$341,821,000 was converted into 136.23% payable common shares and US$8,179,000 was repaid. at maturity, if not converted or redeemed) NT$4 billion March 4, 1998 5 years 7.71% p.a. NT$4 billion Repay long-term Completed Corporate Bond bank loan NT$6 billion November 18, 1998 - 5 years 7.12% p.a. NT$6 billion Upgrade of Fab III Completed Corporate Bond December 1, 1998 and Fab IV equipment NT$10 billion October 21, 1999 Tranche A: 3 years Tranche A: 5.67% p.a. Tranche A: NT$5 billion Procure equity Completed Corporate Bond Tranche B: 5 years Tranche B: 5.95% p.a. securities of Tranche B: NT$5 billion TASMC as long-term investment and Fab V equipment synergism [Gk synerg - (on) working together +-ism] Interaction of discrete agencies (as of industrial firms or physical equipment) in combination such that the total effect is greater than the sum of the individual effects. (Time Dictionary, 1999, p. 1772) 3-3 Status of American Depositary Shares (ADSs) Issuance Issuance & Listing: New York Stock Exchange (NYSE) Symbol: TSM 1 ADS = 5 TSMC common shares Depositary Bank: Citibank, N.A. - New York Branch Custodian Bank: Citibank, N.A. - Taipei Branch As of December 31, 1999, total number of issued ADSs is 77,356,859, and total number of outstanding ADSs is 76,893,859. Date Issuing Units* Total Amount Underlying Securities October 8, 1997 24,000,000 ADSs US$ 594,720,000 TSMC common shares from Selling Shareholders November 20, 1998 12,094,000 ADSs US$ 184,554,440 TSMC common shares from Selling Shareholders January 12, 1999, January 14, 1999 2,000,000 ADSs US$ 35,125,000 TSMC common shares from Selling Shareholders July 15, 1999 12,094,000 ADSs US$ 296,499,640 TSMC common shares from Selling Shareholders August 17, 1999 - September 16, 1999 5,486,000 ADSs US$158,897,088.5 TSMC common shares from Selling Shareholders pursuant to ADR conversion sale program * The difference between total number of issued ADSs and total number of each issuing unit is resulted from 45% and 23% stock dividend distribution in 1998 and 1999, respectively. 11 Over the past 13 years, customers have utilized TSMC's advanced IC manufacturing services for a diverse range of end-product applications. 1. Business Activities synergy If you say that there is synergy between two or more organizations or groups, you mean that when they combine or work together, they are more successful than they are when they are on their own; used mainly by business people. (Collins Cobuild English Dictionary, 1995, p. 1695) OPERATIONAL HIGHLIGHTS (1) Business Scope TSMC is dedicated to high integrity in business and has a single-minded focus on the foundry industry. The company provides advanced IC manufacturing services of the highest quality to the worldwide semiconductor industry. Building on our core competencies of excellent manufacturing and attentive customer support, we offer a full range of manufacturing services, including ULSI and VLSI wafer manufacturing, wafer probing, IC assembly and test, mask production, and design services. Wafer manufacturing accounted for approximately 88 percent of total revenue in 1999. Over the past 13 years, customers have utilized TSMC s manufacturing services in virtually every product and end market segment across the entire semiconductor application spectrum. We estimate that in 1999 TSMC produced approximately 5 percent of the world s supply of wafers. (2) Customer Applications The advanced ICs produced by TSMC for customers are used in a diverse range of the end-product applications, including PCs, network servers, computer peripherals, Internet appliances, wired and wireless communication systems, consumer electronics, automotive and industrial equipment. 2. Marketing and Sales 3. Market Outlook The recovery in the worldwide IC market coupled with the exceptional growth of the fabless IC companies, pushed TSMC s sales up 45.6 percent to NT$73.13 billion. The company’s superior performance can be attributed to three major factors. First, we maintained close relationships with a large customer base. TSMC has served over 400 customers in the past 13 years and approximately 280 customers in 1999 alone. Second, anticipating the steady long term growth of the IC industry and responding to strong immediate demand from key customers, TSMC expanded advanced manufacturing capacity aggressively at seven internal or affiliated 8-inch fabs. The company also broke ground for one of the industries first production scale 12-inch facilities. Third, we have approached our business as a service business from day one. We continue to re-engineer this approach with a strong commitment to e-Commerce as a new tool in realizing TSMC s vision — to become our customers "Virtual Fab" for semiconductor manufacturing. These factors extended our leading market position and when combined with our ability to produce the latest generation technologies, allowed the company to maintain excellent results through a turbulent year. After a slow period, strong recovery emerged in the worldwide IC market with 19 percent growth in 1999. Although the overall logic market grew at a rate of 14 percent, demand for foundry wafers grew at a rate of over 40 percent driven by accelerated growth of the fabless IC companies and expanded outsourcing from the IDMs. In 2000, the overall IC market is predicted to register yet stronger growth in the range of 20 percent over 1999, which should sustain a continuation of robust demand for foundry services. The growth rate for the logic component market will increase to about 15 percent, with the foundry-dependent fabless IC companies expected to grow at nearly twice that rate due to the higher value added applications that their chips address. Responding to strong demand from customers and anticipating the continuing recovery of the worldwide IC industry, TSMC quickly adopted the strategic actions necessary to expand capacity aggressively in support of our customer base. In the area of capacity expansion the company added capacity in its 8-inch fabs (Fabs 3,4,5) while at the same time running the fully equipped 6-inch fabs (Fabs 1, 2A, 2B) at greater than 100 percent of rated output. To further bolster deliveries to customers, the company secured additional 8-inch capacity through co-operation arrangements with TSMC-Acer Semiconductor Manufacturing Corporation and Vanguard International Semiconductor Corporation, as well as continuing to ramp capacity at its affiliate 8-inch fab in WaferTech, LLC at Camas, Washington. At the same time the company accelerated initial output at its newest 8-inch fab (Fab 6) in Tainan, continued construction of its joint venture fab with Philips in Systems on Silicon Manufacturing Company in Singapore and broke ground for its first 12-inch facility (Fab12) in Hsin-Chu. 13 While supporting record breaking growth for the fabless IC companies, TSMC continues to diversify its customer base. Major, long-term, customer opportunities have begun to emerge from the ranks of the Integrated Device Manufacturers (IDMs). These companies, with their large established customer bases and rich product portfolios, can give significant acceleration to the foundry industry as their outsourcing activities increase. Over the years, TSMC has strategically managed its exposure to the memory market by limiting the commitment of our memory manufacturing services to a certain percentage of sales revenue. Considering the current shortage of logic production capability and the historically high volatility of memory markets, TSMC will maintain the same policy in 2000 even as we work to expand our share of the emerging market for embedded memory products. In 1999, TSMC s customer base increased in the graphics, broadband communications, digital consumer electronics, and wireless communication markets. All of these markets are high growth segments and demand advanced manufacturing technologies. New customers in these markets utilized large volumes of wafers in 1999 and are expected to benefit TSMC increasingly over the next several years as these markets continue to grow. End market leaders such as Altera, Broadcom and Qualcomm drive TSMC’s demand from the fabless segment while leading IDMs such as Philips and Motorola are also significant customers. Through 2000, TSMC will continue targeted marketing efforts, engaging customers in similar high growth segments of the logic component markets. In the long run, we at TSMC believe that foundry services will play an increasingly important role in the manufacturing sector of the worldwide IC industry. Fabless companies already depend on foundries, and IDMs are expected to evolve stronger business connections with foundries for IC manufacturing. Industry forecasts predict that by the year 2000, more than 15 percent of world-wide IC production will come from foundries, increasing to about 30 percent by the year 2008. As better design automation and IP integration tools emerge, product development risks will continue to decrease and facilitate system companies ability to shift part of their IC needs directly to foundries. TSMC will continue to be a leader in reducing the barriers to entry to the IC business. At the supply chain level, TSMC believes that it is in an ideal position to benefit from the current trend toward "dis- integration," whereby fabless and systems companies and IDMs focus on their core competencies, shifting manufacturing and other services to partners with expertise in those areas. The frictionless business processes enabled by the Internet will add to the speed at which this trend continues. As TSMC continues to grow it will be able to positively influence other supply chain partners to expand support for the foundry model. Leading equipment and material suppliers such as Applied Material, ASML, Tokyo Electron, Taisil, Komatsu and Shinetsu continue to expand technology and service programs targeted at foundries. At the technological level, consumer demand for lower cost and higher functionality of products is expected to compel our customers to increasingly integrated chip design, creating a need for the higher density of our advanced technologies. TSMC hopes to be able to maintain high average selling prices for wafers as the company s production capacity evolves through more and more advanced technologies. Production over the Last Two Years Wafers Year 1998 1999 Capacity Quantity Amount 1,617,231 1,685,112 1,202,922 1,681,007 28,169,217 43,759,960 Unit: Capacity/Quantity (8"wafer) /Amount (NT$k) Net Sales over the Last Two Years TSMC fully understands that we will face serious competition in the future. Therefore, to ensure TSMC s continuing leadership and profitability in 2000 and beyond, we are determined to establish closer partnerships with customers and to provide the most advanced technologies and the most comprehensive services. Wafers Package Other Total Year 1998 1999 Quantity Amount Quantity Amount Quantity Amount Quantity Amount 1,131,512 1,686,433 44,871,574 64,428,905 44,891 67,832 3,566,003 5,131,796 - - 1,795,431 3,570,505 1,176,403 1,754,265 50,233,008 73,131,206 Unit: Quantity (8"wafer) /Amount (NT$k) synergy If you say that there is synergy between two or more organizations or groups, you mean that when they combine or work together, they are more successful than they are when they are on their own; used mainly by business people. (Collins Cobuild English Dictionary, 1995, p. 1695) For primary technologies, TSMC will focus on the following offerings: (1) Advanced CMOS Logic Process TSMC began mass-production of 0.22 and 0.18µm CMOS Logic processes in the beginning of 1999 and 0.18µm low- voltage process by the end of the same year. The company is expected to enter volume production of a 0.15µm generic and low-voltage CMOS Logic process in the second quarter of 2000. In addition, TSMC plans to introduce 0.18 and 0.15µm low-power processes in the second and fourth quarters of 2000, respectively, for customers in the portable electronic device markets. The 0.13µm CMOS Logic process is expected to be available in early 2001. The move into those advanced technologies will help TSMC’s customers develop higher-density and higher-performance chips that will be competitive in world markets. (2) Advanced Mixed-Signal Process In the mixed digital-and-analog market, TSMC has successfully developed the 0.25µm 1-layer-poly, 6-layer-metal mixed- signal and radio frequency (RF) processes to meet the demands of communication and consumer ICs in the second half of 1999. This process also makes it easier for TSMC’s customers to integrate digital-signal processors and/or data- compression chips with analog circuitry for the fast-growing multimedia market. The 0.18µm mixed-signal and RF processes will be available in early 2000. (3) Advanced SRAM/Embedded SRAM Processes TSMC’s 0.18µm high-speed SRAM process became available to customers in late 1999. The 0.18µm low-power SRAM process should begin mass-production in the first quarter of 2000. The 0.15µm high-speed and low-power processes are expected to be available in the fourth quarter of 2000. On the embedded SRAM front, the company completed the development of a 0.18µm 1-layer-poly, 6-layer-metal process in early 1999. The 0.15µm Embedded SRAM process should be ready at the same time as the 0.15µm Logic process in the second quarter of 2000. These processes will enable TSMC customers to further reduce their costs and enhance performance. (4) Advanced DRAM/Embedded DRAM Processes In 1999, TSMC completed development of the 0.22 and 0.21µm DRAM processes and began mass-production. TSMC finished the development of our 0.25µm embedded DRAM process for production, followed by a formal release to customers in the third quarter of 1999. The embedded DRAM solution offers great opportunities for TSMC’s customers in the notebook graphics, disk storage, communications, and digital consumer electronics markets. The 0.19µm DRAM and 0.18µm embedded DRAM processes will be introduced in the first and fourth quarters of 2000, respectively. (5) Advanced Flash/Embedded Flash Processes In non-volatile memory, TSMC finished development of a 0.25µm logic based 2-layer-poly, 2-layer-metal, split-gate Flash process in the third quarter of 1999 and a 0.25µm mixed-signal 2-layer-poly, 5-layer-metal, split-gate embedded Flash process in the fourth quarter of 1999. The embedded Flash process will help customers integrate Flash with logic, especially in microcontroller, digital signal processor and other system-on-chip applications requiring a high degree of integration. The 0.18µm Flash/embedded Flash development is expected to be completed and available for volume production by the end of 2000. (6) Special Logic Processes In addition to these advanced processes, TSMC began to develop the special logic processes in 1998, including CMOS image sensor, color filter, and high voltage processes, for our customers to target unique markets. The 0.5µm CMOS image 15 4. Labor Relations sensor processes were available in early 1999 and the 0.35µm processes were ready in late 1999. The 0.25µm development is expected to be finished and available for production by the end of 2000. The 6- and 8-inch versions of CMOS color filter processes were available in 1999. The development of 0.6µm 2-layer-poly, 3-layer-metal and 1.0µm 2-layer-poly, 2-layer- metal high-voltage processes were completed and ready for production in 1999. By the end of the same year, TSMC began to develop 0.5µm 2-layer-poly, 3-layer-metal high-voltage processes and should enter production in early 2000. (7) Design Services 1999 has been a prosperous year for TSMC in design services, which includes libraries, intellectual property cores (IP) and design engineering services. TSMC rolled out 0.18µm libraries with third-party library partners, introduced a broad network of providers of key IP blocks, and expanded its network of engineering service partners to cover customers’ design implementation needs. In 2000, TSMC is expected to present the high-performance 0.15µm libraries and key IP as well as a productized design reference flow – to further strengthen our design services capability. Greatly expanded use of the Internet will aid customer access to all levels of design service information. TSMC's labor relations record is one of outstanding harmony. For the past two years, there was not a single company- or division-wide labor dispute or labor-related work disruption. On the contrary, TSMC has been nominated by the Executive Yuan (the Cabinet) for several years running as an organization whose employee welfare, labor training, employee housing, public health conditions and working environments are among the best in Taiwan. Forecasting the future, we are confident that the possibility of loss resulting from labor dispute is extremely low. In fact, TSMC anticipates outstanding recruitment and retention prospects for the foreseeable future, for a number of reasons. These include: (1) Industry Leadership Status TSMC's unassailable position as the foundry industry leader attracts excellently skilled and qualified engineering talent. As an example, in 1999 alone, 38,000 candidates applied for work at TSMC, 9,144 interviews took place and 2,049 of these were hired. (2) Employee Development Programs Persistently developing people, in terms of both TSMC's short-term productivity and long-term skill development, TSMC's Performance Management and Development system was enacted companywide in 1999, with a focus on helping people improve their performance and develop their talents to maximum potential. Also in 1999, 492 training courses were offered and some 36,913 employees were enrolled. On average, every TSMC employee receives about 32 hours of training per year. (3) Excellent Employee Benefits Our harmonious employee relations can be attributed in part to well-planned employee benefits, provided without the requirement for labor unions or group-hire contracts. TSMC employees receive a variety of amenities for working here, including a free shuttle bus system, a discount restaurant, convenience store, dormitories, health care and insurance. (4) Coordinated Employee Activities TSMC's Employee Welfare Committee operates a variety of social clubs and employee welfare activities designed to maintain a continuously improving work environment for all TSMC employees. In 1999, NT$67million was allocated to sponsorship of employee-welfare-related activities. synergy If you say that there is synergy between two or more organizations or groups, you mean that when they combine or work together, they are more successful than they are when they are on their own; used mainly by business people. (Collins Cobuild English Dictionary, 1995, p. 1695) (5) Profit-Sharing System All TSMC employees join in TSMC’s profit-sharing system, a move which inspired the concept that "employees are the owners of TSMC." (6) Protected Intellectual Property TSMC’s sound Proprietary Information Protection (PIP) policy shields valuable information, and protects employees from unnecessary entanglements. 5. Personnel Growth over the Last Two Years Number of Employees Direct Labor Engineer Manager Total Year Average Average Years of Age Service Percentage by Education Ph.D. MS/MA BS/BA High School Others Total 1998 2,711 1999 3,675 2,467 2,716 730 1,069 5,908 7,460 29 29 3.9 3.8 2.2% 22.2% 37.7% 2.3% 23.1% 38.5% 37.8% 36.1% 0.1% 100.0% 0.1% 100.0% 6. Environmental Protection Measures TSMC has been ISO14001 certified since 1996. This certification has been successfully renewed and is effective until August, 2002. This renewed certification comes from the cooperative endeavors and hard work of every TSMC employee. The major spirit of ISO 14001, i.e. pollution prevention and constant improvement in that area, has been fully fulfilled at each fab during daily operation. Beginning with its handling of raw materials, TSMC merges cost-reduction programs with industrial waste reduction concepts by optimizing manufacturing processes, automating and improving the use of equipment and facilities and recycling. These are used to continually undertake waste reduction and more efficient management practices to ultimately decrease consumption. The programs conducted in 1999 include evaluating greener packaging materials by working with raw material suppliers, encouraging vendors/supplier’s EP performance by site visits, studying to replace C2F6 with C3F8 to reduce PFC emission, and recycling of plastic wafer carriers by encouraging the supplier to adapt to these changes. The results of these improvements are manifested in TSMC’s receipt of numerous awards and citations, including "Enterprise Environmental Protection", "National Industrial Waste Reduction Outstanding Factory" and "Energy Conservation" awards. Also, recommended by the Hsinchu County EPA, TSMC was honored by an "Special Award of Outstanding Environmental Performance" by the ex-director of the Taiwan Department of Environmental Protection, Mr. Long-Chi Chen. In the aspect of the compliance of EP regulations, on January 6, 1999, the EPA has promulgated the "Semiconductor Industry Air Emissions Standards" which regulate the emission of VOCs (Volatile Organic Compounds) and mineral acids. TSMC had already established VOC abatement systems a few years before this regulation was announced. We believe this is a good demonstration of a proactive attitude of not only compliance but also to go beyond current regulatory standards. In the past two years TSMC has completely complied with EPA regulations, and did not receive any penalties for incidences or non-compliance. In the future we expect to invest another NT$2.05 billion on the improvement of pollution control equipment throughout TSMC’s fab facilities. 17 7. Important Contracts (1) Technology Cooperation Agreement Term of Agreement: 7/9/1997 - 7/8/2007 Summary: Under this agreement, TSMC is obliged to pay to Philips Electronics N.V. royalty at a fixed percentage of net sales for certain products. Contracting Party: Philips Electronics N.V. (2) Submicron Technology Licensing Agreement Term of Agreement: 11/20/1990 - 12/31/2000 Summary: Under this agreement, TSMC is obliged to pay a licensing fee of NT$129.4 million to the Industrial Technology Research Institute over a five-year period, plus royalty fees at fixed percentages of net sales for certain products. The entire licensing fee had been paid by December 31, 1995. Contracting Party: Industrial Technology Research Institute (3) Building and Equipment Leasing Agreement (FAB I ) Term of Agreement: 4/1/1997 - 3/31/2002 Summary: Under this agreement, TSMC leases certain buildings and equipment from the Ministry of Economic Affairs. Contracting Party: Ministry of Economic Affairs (4) Land and Public Facility Leasing Agreement (FAB I) Term of Agreement: 4/1/1997 - 3/31/2002 Summary: Under this agreement, TSMC leases certain land and public facilities from the Industrial Technology Research Institute. Contracting Party: Industrial Technology Research Institute (5) Foundry Related Agreements Term of Agreement: 1995 - 2006 Summary: Under these agreements, TSMC guarantees a pre-determined capacity for a set number of years to customers in the United States, Europe, and Asia. In return, custormers deposit fees with TSMC. As of the end of 1999, more than ten companies had signed foundry related agreements with TSMC. Contracting Parties: More than 10 companies in the U.S.A., Europe, and Asia. (6) Manufacturing Agreement Term of Agreement: three years, upon commencement of production at WaferTech, LLC Summary: Under this agreement, TSMC is obliged for three years, upon commencement of production at WaferTech, LLC, to purchase a minimum of eighty-five percent of calculated installed capacity of WaferTech, LLC. TSMC has the option to purchase up to one hundred percent of the calculated installed capacity of WaferTech, LLC. Contracting Party: WaferTech, LLC (7) Purchase Agreement Term of Agreement: three years upon commencement of production at WaferTech, LLC. Summary: Under this agreement, TSMC is obliged to supply, and the three customers are obliged to purchase, a certain portion of wafers produced by WaferTech, LLC. Contracting Parties: Analog Devices, Inc., Altera Corporation and Integrated Silicon Solutions, Inc. (8) Shareholders Agreement Term of Agreement: May be terminated as provided in the Agreement Summary: Under this agreement, TSMC, Philips and EDBI agreed to form a joint venture "Systems on Silicon synergy If you say that there is synergy between two or more organizations or groups, you mean that when they combine or work together, they are more successful than they are when they are on their own; used mainly by business people. (Collins Cobuild English Dictionary, 1995, p. 1695) Manufacturing Company Pte Ltd." ("SSMC") to build an IC foundry in Singapore. TSMC holds 32 % of the shares. Philips and TSMC committed to purchase a certain percentage of SSMC’s capacity. Contracting Party: Philips Electronics N. V. ("Philips") and EDB Investments Pte Ltd. ("EDBI") (9) Technology Cooperation Agreement Term of Agreement: 3/30/1999 - 3/29/2008 Summary: Under this agreement, TSMC shall transfer its process technologies to SSMC and SSMC shall pay TSMC remuneration at a certain percentage of net selling prices of its products. Contracting Party: Systems on Silicon Manufacturing Company Pte Ltd. ("SSMC") (10) Technology Cooperation Agreement Term of Agreement: 7/21/1999 - 7/20/2008 Summary: Under this agreement, TSMC shall transfer its process technologies to TASMC and TASMC shall pay TSMC remuneration by way of giving discount to the selling prices of products sold to TSMC. Contracting Party: TSMC-Acer Semiconductor Manufacturing Corporation ("TASMC") (11) Merger Agreement Term of Agreement: Nil Summary: Under this agreement, TSMC will acquire and merge with TASMC. TSMC shall be the surviving company and TASMC shall be dissolved after the merger. The consolidation date is tentatively scheduled for June 30, 2000. Contracting Party: TSMC-Acer Semiconductor Manufacturing Corporation ("TASMC") (Note: TSMC has signed a merger agreement with Worldwide Semiconductor Manufacturing Corporation on January 7, 2000.) 8. Litigation Proceedings (1) Antidumping Investigation Against SRAMs On February 25, 1997, Micron Technology Inc. filed a petition for the antidumping investigation against SRAMs from Korea and Taiwan. Following the U. S. International Trade Commission’s final determination in April 1998 that U. S. industry is materially injured by imports from Taiwan, the U. S. Department of Commerce announced the antidumping duty order. Taiwan industry has appealed to the U. S. Court of International Trade. SRAMs account for a very small portion of TSMC’s total sales and TSMC’s direct sales to the U. S. is even less. Thus, the impact on TSMC’s business is expected to be very limited. (2) Antidumping Investigation Against DRAMs On October 22, 1998, Micron Technology Inc. filed a petition for the antidumping investigation against DRAMs from Taiwan. U. S. International Trade Commission made the final determination in November 1999 that the U. S. industry is not materially injured or threatened with material injury by DRAM imports from Taiwan. U. S. Customs subsequently instructed all field offices to discontinue suspension of liquidation of all shipments of DRAMs from Taiwan and to release the collected bonds or deposits. 19 The intellectual capital of our employees is the most important asset and greatest wealth to TSMC. syn(cid:127)er(cid:127)gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) Business and Financial Plans 1. Production and Sales Plans for 2000 2. Year 2000 Plans for Disposition or Acquisition of Real Estate or Long-term Investment Amount of disposing real estate / long-term investment up to NT$ 300 million or 20% of paid in Capital Company Nature Quantity Location Date Price Funding Source Purpose TSMC-Acer Long-term Common share: 348,936,000 Hsin Chu June 30, 2000 - - Merger for increasing Semiconductor investment Manufacturing Corp. Preferred share B: 376,815,000 consolidation date capacity to enhance competitiveness Amount of acquiring real estate / long-term investment up to NT$ 300 million or 20% of paid in Capital Nature Quantity Location Date Price Funding Source Purpose Name of Real Estate or Company Buildings Real estate 401,838m2 Hsin Chu Starting from NT$12,912 Retained & Tainan Q1, 2000 million Earnings or Bank Borrowing enhance Systems on Long-term Common share: 63,870 Singapore Starting from NT$958 Retained Silicon investment Q1, 2000 million Earnings or Increase capacity to competitiveness Increase capacity to enhance Bank Borrowing competitiveness Manufacturing Company Pte. Ltd. 21 3. Research and Development Plans TSMC’s Research and Development develops a broad spectrum of leading-edge logic, mixed-signal/RF, embedded memory, color image sensor, and high-voltage process technologies for volume manufacturing. These state-of-the-art processes are then used by our customers to enable system-on-chip (SOC) designs for a wide range of applications, such as PC, communication (network, wireless), information/infotainment appliances, and consumer electronics. Through hard work, innovation, and long-term R&D investment, TSMC has established technology leadership not only in the dedicated foundry business but also in the semiconductor industry as a whole. Our research and development commitment is to continue to stay ahead of the ITRS (International Technology Roadmap for Semiconductors) roadmap. TSMC’s semiconductor R&D organization is generally regarded as one of the best in the world. The success of the dedicated foundry model pioneered by TSMC has attracted both overseas and domestic talents and skills, thereby increasing the relative strength of our R&D organization day by day. Our overall R&D investment and expenditure is over NT$ 2.39 billion on R&D in 1999, approximately a 22 percent increase over the year 1998. Our R&D efforts continue to receive recognition, as well as harvest intellectual property rights (IPR), which enhances our strength in cross-license relationships with other IPR owners. TSMC was awarded 289 US patents and 169 ROC patents in 1999. We are the only Taiwan company among Top 50 US patent awardees in 1999. Over the years, TSMC received many awards, including the National Bureau of Standards’ prestigious National Invention Award, First Prize Gold Medal, in 1998 and the Distinguished Award for Industrial Technology Advancement presented by Ministry of Economic Affairs, R.O.C. in 1999. * The number of R&D expenditure has been reclassified to conform to 1999 classification. Complimentary to its independent R&D capabilities, TSMC collaborates with international technology leaders. In addition to being the sole Taiwanese member of the International Sematech and 300 mm (I300I), we maintain a strong presence in various consortia dedicated to technology development in the areas of IC process, tool and materials. Our R&D capability has earned TSMC the position of a technology forerunner in the IC industry. Our work in the development and introduction of low voltage, low power and high performance logic process technology is at the leading edge. In the core logic technology area, TSMC was among the first IC companies to release the state-of-the-art 0.18µm generation CMOS logic technology to production in 1999, consistent with the SIA technology roadmap. This 0.18µm logic process has the most aggressive design rules and geometry in the world, enabling world-class advanced low-voltage and high-performance transistors with gate lengths of less than 0.13µm. This technology is capable of supporting greater than 600MHz microprocessor and graphics chip performance levels. Our process also has the most advanced low-k (low dielectric constant) insulator integrated with conventional AlCu metallization scheme to reduce interconnect RC (resistance x capacitance) delay and improve customers’ product performance. In addition, in 1999 TSMC R&D also released our advanced copper interconnect process as a fully design-rule-compatible option of our 0.18µm logic technology. This copper interconnect process has the world’s tightest design rules and is the first to be commercially available from a dedicated foundry. In early year 2000, TSMC will lead the world with the release and mass production of a 0.15µm generation logic technology. This technology is expected to cover the entire application spectrum with three product lines: A high- syn(cid:127)er(cid:127)gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) performance, low-voltage technology for processor applications (e.g., microprocessors, network processors, media processors, etc.); A low-leakage technology for battery operation or wireless applications (e.g., cell phones); And a standard ASIC-logic technology. This industry-leading technology will have both aluminum/low-k as well as Cu/low-k interconnect options. Excellent yield has been achieved and qualification is under way. In the rapidly growing CMOS mixed-signal/RF area, TSMC R&D released a 0.25µm mixed-signal/RF process in 1999. This process has a rich set of modular analog devices and passive components. For example, high-Q metal-insulator-metal capacitors can enable modem, audio, and other mixed-digital-analog SOC applications, while high-Q inductors enable RF and wireless/baseband applications. The development of a 0.18µm version is nearly complete with successful prototype production and is expected to be in production in early 2000. Next-generation 0.13µm mixed signal, baseband, and RF technology development is underway to provide further performance and density value for SOC applications. During the past year, TSMC has also made great progress in the continuous scaling of Embedded Memory technology (Emb-SRAM, Emb-DRAM, Emb-Flash) that is an essential part of SOC integration. These value-added embedded memory technologies are fully compatible with their respective core Logic Technology platforms. They are also supported by a complete set of compilers, design kits, and test support, to enable SOC designs and product introduction. Our Emb-SRAM technology has been an integral part of the TSMC high performance logic technology platform since the 0.25µm generation. TSMC offers a variety of competitive 6T SRAM cells in terms of density, performance, and standby leakage. For example, cell size less than 3.5µm2 are available in the 0.15µm logic platform with compiler performance capable of reaching 1GHz. The same 6T SRAM platform also supports high density, high performance or low standby leakage stand-alone SRAM applications. TSMC's 0.25µm embedded DRAM has been successfully demonstrated on customers' products. This technology offers a very small cell size of 0.78µm2 and can incorporate 1 - 64 Mb memory sizes with different I/Os. This technology has been transferred to manufacturing for volume production. The 0.18µm Embedded DRAM technology is in development and is expected to be ready in 2000. Our 0.35µm Embedded Flash technology was introduced in 1999. Technology qualification was completed and several products have been demonstrated with good yield. The development of 0.25µm Embedded Flash technology is nearly completed, with process qualification ongoing. Our 4Mb Flash test vehicle has been proven with respectable yield. A version utilizing 0.18µm technology has been started with the goal to scale the cell size aggressively. The expected date for risk production is fourth quarter of 2000. In addition to advanced mixed-signal/RF and embedded memory processes, TSMC also offers color image sensors and high voltage technologies for system-on-chip (SOC) applications. The color image sensor is ideal for camera-on-a-chip applications. In 1999, we released 0.35µm color image sensor process to production, in addition to the existing production of 0.8, 0.6, 0.5µm color imager sensor processes. A 0.25µm imager process is under development for production by the end of 2000. These image sensors are further enhanced by color filters with micro-lens to double the sensitivity. A 6-inch TCF1 (TSMC Color Filter-1) with resolution down 5µm pixel size has been in production since 1998, and an 8-inch version (TCF3) will be released in early 2000. In the high voltage/power area, TSMC enriched the existing production of 1µm 16V and 40V processes by introducing 0.6 and 0.5µm versions of these processes, as well as a 0.8µm 40V BiCMOS version, in 1999. These processes are fully compatible with TSMC generic logic and mixed signal processes for mixed 5V and high voltage system integration. 23 TSMC has one of the largest in-house mask fabrication capabilities anywhere. Our mask shops are well known for excellent quality and cycle time to support fast prototyping, production, and mask technology R&D. Our facilities have all the key state-of-the-art Ebeam mask writer and inspection tools necessary to support both R&D and commercial use, including advanced optical-proximity-correction (OPC) and phase-shift mask (PSM) technology for use in the 0.15µm and 0.13µm logic processes and future technology generations. TSMC R&D began 0.13µm development in full steam in 1999 as well as exploratory work on future 0.1µm generation and beyond, such as <0.07µm devices, unit processes, advanced high-k gate insulator, and extreme low-k (k<=2) interconnect insulator materials. TSMC has the first 193nm step and scan photolithographic production equipment in Taiwan, capable of sub-0.13µm and 0.1µm production. We also participate in international next generation lithography (NGL) consortia to maintain leadership in sub-0.1µm lithography and process technology. TSMC has been building the first 12-inch fab in Taiwan with target volume production in early 2001. This 12-inch fab will also support future R&D of 0.10 m generation and beyond. With the skilled, experienced, and dedicated R&D management and research/development staff, the significant investment in the most advanced process tools and materials, and the commitment to excellence, innovation, quality, and value, TSMC R&D strives to be the cornerstone of the "Virtual Fab" for semiconductor manufacturing. We will continue to deliver the world's best and most cost-effective system-on-a-chip technology for fabless, IDM, and system partners and customers in the future. 4. Financing Plans 4.1 Capital Increase for Expansion Plans for 2000 Item Amount (NT$M) Objectives FabXII - Construction 8,805 Scheduled to produce 12" wafers FabVII - Construction 8,640 Scheduled to produce 12" wafers FabVI FabV 42,033 Increase 8" wafer output capacity to 40K pcs/month by the end of 2000 8,783 Increase 8" wafer output capacity to 38K pcs/month by the end of 2000 FabI~FabIV 3,208 Upgrade product mix 300MM pilot line 13,860 Exercise advanced module & integration Replacement and Others 10,307 Maintain technology superiority and competitiveness Total 95,636 Captital expenditures will be funded by internally generated cash flow or/and external funding activities. 4.2 Previous Financing Plans and Implementation (1) Financing Plan On October 21, 1999, TSMC issued NT$ 10 billion corporate bonds, the third time the Company tapped in the local debt market, to finance its procurement of machinery and equipment for Fab 5 and its long-term investment in TASMC. Out of the total fund raised in this issuance, NT$8,169,634,000 was used to acquire equity interests of TASMC and NT$1,830,366,000 was used to purchase equipment for Fab 5. The bonds was issued in two NT$5 billion tranches with tenors of 3 years and 5 years and the coupon rates are 5.67%, and 5.95%, respectively. (2) Status of Implementation By the end of December 1999, TSMC has completed this plan of procurement of manufacturing equipment for Fab 5 and investment in TASMC. syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) 5. TSMC Education and Culture Foundation Fundamental to TSMC s business philosophy, TSMC is committed to its role as a corporate citizen and its care for Taiwan s social development through monetary grants as well as time and talents of its employees. To satisfy the rising diversity of societal needs through a formal vehicle, TSMC established the "TSMC Education and Culture Foundation" (TSMC Foundation) in 1998. TSMC Foundation s mission is guided by the following three principles: (1) Commitment to Education To help develop university students talents in high technology, management and intellectual property rights, TSMC Foundation established three educational grant programs - "TSMC Undergraduate International Exchange Program Scholarship", "TSMC Intellectual Property Scholarship" and "TSMC Visiting Chair Professorship" - with Tsing Hua University, Chiao Tung University and Cheng Kung University. (2) Contributions to the Community TSMC Foundation supports community services in Hsin-chu and Tainan, where TSMC has major facilities, with both funding and volunteers to build a sound environment for our employees and neighbors. TSMC Foundation directs its efforts at arts and cultural activities, environmental protection, health, athletics, and similar programs to enhance the quality of life in our communities. (3) Sponsorship of National Arts and Cultural Activities Without grants from industry or government, major national arts and cultural activities cannot take place. We hope to increase the popular pursuit of national arts and cultural activities through TSMC Foundation s sponsorship. Our sponsorship of the "Le Monde de Picasso exhibition" at the National Palace Museum and production of the TV series, "The people who made dreams for Taiwan", are striking examples of that effort. Due to the devastating earthquake of September 21, 1999, TSMC s ongoing operations were substantially affected. However, the losses and misfortunes of the quake victims were clearly much more severe. After TSMC and its employees donated NT$200 million to the earthquake victims, TSMC further committed itself to the continuing support of spiritual recovery through sponsorship of arts performances and cultural activities. For example, "The Jose Carreras 1999 Taipei Concert" exclusively sponsored by TSMC Foundation, joined the call to provide quake victims with a "Mobile Library" made up of container trucks. In addition to annual activities, TSMC Foundation provides seed grants to selected arts and cultural organizations on a long-term basis, to support these organizations in developing themselves as cultural resources of Taiwanese society. One of the most significant examples was TSMC Foundation s endowment to the Cloud Gate Dance Theatre Foundation. Income from the endowment will be used to support long-term development of the dance group. 25 28 Financial Statements 1. Brief Balance Sheets Financial analysis from 1995 to 1999 Item Current assets 1995 1996 1997 1998 1 9 9 9 Unit: NT$K 16,070,964 16,529,359 23,790,795 26,378,422 38,770,670 Long-term stock investments 4,989,037 12,608,506 19,220,371 17,537,765 28,208,643 Fixed assets Other assets Current liabilities Before distribution After distribution Long-term liabilities Other liabilities Capital stock Capital surplus Retained earnings Before distribution After distribution Total Assets Total Liabilities Before distribution After distribution Total Equity Before distribution After distribution 26,643,665 41,978,952 61,697,723 73,636,209 89,566,029 599,369 2,018,827 3,804,923 6,554,817 4,877,392 5,075,481 5,357,895 10,088,672 8,138,796 14,469,329 5,926,696 5,926,138 10,250,285 8,276,867 * 5,556,381 5,720,000 20,009,357 25,025,206 20,000,000 4,091,928 9,943,809 9,001,390 6,872,545 6,183,565 14,390,000 26,542,000 40,813,000 60,471,760 76,708,817 19,428 59,086 62,082 164,219 11,831,411 19,165,640 25,523,456 28,641,292 24,162,113 33,320,615 6,162,425 10,684,213 8,820,919 9,010,971 * 48,303,035 73,135,644 108,513,812 124,107,213 161,422,734 14,723,790 21,021,704 39,099,419 40,036,547 40,652,894 15,575,005 21,589,947 39,261,032 40,174,618 * 33,579,245 52,113,940 69,414,393 84,070,666 120,769,840 32,728,030 51,545,697 69,252,780 83,932,595 * * Subject to change after shareholders’ meeting resolution 2. Brief Statements of Income Financial analysis from 1995 to 1999 Item Net sales Gross profit* Unit: NT$K(Except EPS: NT$) 1995 1996 1997 1998 1999 28,765,991 39,400,179 43,935,627 50,233,008 73,131,206 15,740,746 21,411,531 20,134,920 20,336,042 32,215,693 Income from operations 13,897,006 18,235,246 15,489,780 16,202,245 25,916,619 Interest revenue Interest expense Profit before tax Net profit Earnings per share 367,986 258,000 653,462 277,161 501,434 546,490 566,020 808,616 981,388 1,415,527 14,314,528 18,972,932 15,517,103 13,648,622 24,109,865 15,081,273 19,400,689 17,960,075 15,344,203 24,559,884 10.48 ** 2.00 *** 7.31 ** 2.57 *** 4.40** 2.38*** 2.54** 2.03*** 3.24 * * - Capitalized interest 102,926 181,168 255,054 661,414 305,312 * Certain accounts of 1995 through 1998 have been reclassified to conform to 1999 classifications ** Based on weighted average shares outstanding in each year *** Retroactive adjustment for capitalizations of unappropriated earnings and bonus to employees 28 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) 3. Financial Analysis Financial analysis from 1995 to 1999 Item 1995 1996 1997 1998 1999 Capital Structure Analysis Debts ratio (%) Long-term fund to fixed assets (%) Liquidity Analysis Current ratio (%) Quick ratio (%) Times interest earned (times) Operating Performance Analysis Average collection turnover (times) Average collection days Average inventory turnover (times)* Average inventory turnover days* Fixed assets turnover (times) Total assets turnover (times) Profitability Analysis Return on total assets (%) Return ratio on stockholders’ equity (%) Operating income to capital stock (%) Profit before tax to capital stock (%) Profit after tax to net sales (%) Net worth per share (NTD) Earnings per share (NTD) Dividends per share (NTD) Cash dividends (NTD) Stock dividends (NTD) Cash Flow Cash flow ratio (%) Cash flow adequacy ratio (%) Cash flow reinvestment ratio (%) Leverage Operating leverage Financial leverage 30.48 146.89 28.74 137.77 36.03 144.94 32.26 25.18 148.16 157.17 316.64 257.83 40.38 308.50 247.77 42.40 235.82 185.78 20.04 324.11 273.86 8.91 267.95 233.95 14.83 8.12 44.95 7.73 47.22 1.08 0.60 41.23 57.55 96.57 99.48 52.43 23.34 8.80 41.00 7.24 50.43 0.94 0.54 32.40 45.28 68.70 71.48 49.24 19.63 6.22 58.68 6.12 59.69 0.71 0.41 20.35 29.56 37.95 38.02 40.88 17.01 5.90 61.85 6.82 53.49 0.68 0.40 14.04 19.99 26.79 22.57 30.55 13.90 2.0 ** 2.57 ** 2.38** 2.03 ** 8.00 - 8.00 8.00 - 8.00 5.00 - 5.00 4.50 - 4.50 7.18 50.82 9.96 36.66 0.82 0.45 18.19 23.98 33.79 31.43 33.58 15.74 3.24 2.30 * * * 2.30 348.45 111.94 31.94 452.74 113.70 28.21 201.55 97.96 16.28 417.00 102.04 21.65 273.50 106.00 19.31 1.69 1.02 1.79 1.02 2.15 1.04 2.69 1.06 2.47 1.06 Certain accounts of 1995 through 1998 have been reclassified to conform to 1999 classifications * ** Retroactive adjustment for capitalizations of unappropriated earnings and bonus to employees *** Subject to change after shareholders’ meeting resolution 29 4. Net Worth, Earnings, Dividends and Market Price Per Share Market price per share Highest market price Lowest market price Average market price Net worth per share Before distribution After distribution Earnings per share 1997 1998 1999 173.00 55.50 109.35 17.01 11.45 173.00 56.50 100.80 13.90 11.12 171.00 68.00 117.10 15.74 - Weighted average shares 4,081,300,000 6,047,176,000 7,572,598,000 Earnings per share Earnings per share1 Dividends per share Cash dividends Stock dividends Dividends from retained earnings Dividends from capital surplus Return on investment Price/Earning ratio2 Price/Dividend ratio3 Cash dividend yield rate4 4.40 2.38 - 5.00 - 24.85 - 0 2.54 2.03 - 4.50 - 3.24 - * 2.30 * 39.69 36.14 - 0 * * *Subject to change after shareholders’ meeting resolution Note 1. Retroactive adjustment for capitalizations of unappropriated earnings and bonus to employees Note 2. Price/Earning ratio = Average market price/Earnings per share Note 3. Price/Dividend ratio = Average market price/Cash dividends per share Note 4. Cash dividend yield rate = Cash dividends per share/Average market price 30 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) 5. Auditors’ Opinion from 1995 to 1999 Year 1995 1996 1997 1998 1999 C P A Audit Opinion S.C. Huang, Edward Way An Unqualified Opinion, except the adoption of Statement of Financial Accounting Standards No.22. S.C. Huang, Edward Way An Unqualified Opinion S.C. Huang, Edward Way An Unqualified Opinion S.C. Huang, Edward Way An Unqualified Opinion S.C. Huang, Edward Way An Unqualified Opinion 12F, No.156, Sec. 3, Min-Sheng E. Rd., Taipei, Taiwan, R.O.C. Tel: 886-2-2545-9988 6. Supervisors’ Report The Board of Directors have prepared and submitted to us the Company’s 1999 business report, balance sheet, inventories of major assets, statement of profit and loss, statements of changes in shareholders’ equity, statements of cash flows, and proposal for allocating profit. The CPAs of T. N. SOONG & CO. were retained to audit the balance sheet, inventories of major assets, statement of profit and loss, statements of changes in shareholders’ equity and statements of cash flows and have submitted a report relating thereto. The above reports, statements and proposal have been further examined as being correct and accurate by the undersigned, the supervisors of Taiwan Semiconductor Manufacturing Company Limited. According to Article 219 of the Company Law, we hereby submit this report. Taiwan Semiconductor Manufacturing Company Limited Supervisor Jan Kees van Vliet Supervisor George C. Shiu Supervisor Jerome S. N. Hu February 18 , 2000 31 7. Review and Analysis of Financial Position and Operating Results Reversal of allowance for losses on short-term investments 120,766 SALES RETURNS AND ALLOWANCES (905,729) (1,208,564) 302,835 $74,036,935 $51,441,572 22,595,363 (1) Liquidity Analysis Item Current ratio Quick ratio (2) Analysis of Operating Result Item GROSS SALES NET SALES COST OF SALES GROSS PROFIT OPERATING EXPENSES INCOME FROM OPERATIONS NON-OPERATING INCOME Interest Insurance compensation Premium income Gain on sale of investments Foreign exchange gain - net Other Total Non-Operating Income NON-OPERATING EXPENSES Interest Investment loss - net Bond issue costs Loss on option contracts Foreign exchange loss - net Loss on disposal of short-term investments Loss on disposal of properties Provision for loss on short-term investments Other December 31 1999 December 31 1998 267.95% 233.95% 324.11 % 273.86 % Change % (17.33%) (14.57%) 1999 1998 Change Amount Unit: NT$K Change % 73,131,206 50,233,008 22,898,198 40,915,513 29,896,966 11,018,547 32,215,693 20,336,042 11,879,651 6,299,074 4,133,797 2,165,277 25,916,619 16,202,245 9,714,374 808,616 184,607 63,809 29,041 - 42,867 566,020 - - 8,280 242,596 184,607 120,766 55,529 756,522 (727,481) 97,229 66,607 (97,229) (23,740) 1,249,706 1,494,658 (244,952) 1,415,527 981,388 434,139 1,191,891 2,707,170 (1,515,279) 114,839 143,644 (28,805) 86,746 81,436 75,366 35,810 - 54,845 - - - 2,507 121,926 91,646 86,746 81,436 75,366 33,303 (121,926) (36,801) (991,821) 43.92% (25.06%) 45.58% 36.86% 58.42% 52.38% 59.96% 42.86% - - 670.64% (96.16%) (100.00%) (35.64%) (16.39%) 44.24% (55.97%) (20.05%) - - - 1328.40% (100.00%) (40.16%) (24.50%) 76.65% (73.46%) 60.06% Total Non-Operating Expenses 3,056,460 4,048,281 INCOME BEFORE INCOME TAX 24,109,865 13,648,622 10,461,243 INCOME TAX BENEFIT NET INCOME 450,019 1,695,581 (1,245,562) $24,559,884 $15,344,203 9,215,681 32 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) 8. Financial Statements & Independent Auditors’ Report We have audited the balance sheets of Taiwan Semiconductor Manufacturing Company Ltd. as of December 31, 1999 and 1998, and the related statements of income, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the management of Taiwan Semiconductor Manufacturing Company Ltd. Our responsibility is to express an opinion on these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 referred to above present fairly, in all material respects, the financial position of Taiwan Semiconductor Manufacturing Company Ltd. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with the regulations governing the preparation of financial statements of public companies and generally accepted accounting principles. January 24, 2000 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of another jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China. 33 BALANCE SHEETS December 31, 1999 and 1998 (In Thousand New Taiwan Dollars Except Par Value) ASSETS CURRENT ASSETS 1999 Amount % 1998 Amount % Cash and cash equivalents (Notes 2 and 3) $16,650,017 1 0 $8,292,152 Short-term investments(Notes 2 and 4) Receivable from related parties (Note 13) Notes receivable Accounts receivable Allowance for doubtful receivables (Note 2) Allowance for sales returns and allowances (Note 2) Inventories (Notes 2 and 5) Deferred income tax assets (Notes 2 and 12) Prepayments and others (Notes 2, 13 and 16) 236,250 468,903 164,134 13,380,253 (422,202) (706,886) 4,529,714 2,329,000 2,141,487 - - - 8 - - 3 1 2 5,661,327 234,507 34,868 7,936,255 (283,090) (441,973) 3,688,777 406,739 848,860 7 5 - - 6 - - 3 - 1 Total Current Assets 38,770,670 2 4 26,378,422 22 LONG-TERM INVESTMENTS (Notes 2 and 6) 28,208,643 1 7 17,537,765 14 PROPERTIES (Notes 2, 7 and 13) Cost Buildings Machinery and equipment Office equipment Total cost Accumulated depreciation Prepayments and construction in progress Net Properties OTHER ASSETS Deferred charges - net Deferred income tax assets (Notes 2 and 12) Refundable deposits Miscellaneous Total Other Assets TOTAL ASSETS The accompanying notes are an integral part of the financial statements. 21,337,655 102,672,163 1,939,392 125,949,210 1 3 6 4 1 7 8 20,037,080 77,290,435 1,657,981 98,985,496 17 62 1 80 (57,969,725) ( 3 6) (40,786,249) (33) 21,586,544 89,566,029 1 4 5 6 15,436,962 73,636,209 12 59 578,544 4,273,252 16,346 9,250 4,877,392 - 3 - - 3 711,822 5,811,827 21,918 9,250 6,554,817 - 5 - - 5 $161,422,734 1 0 0 $124,107,213 100 34 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Payable to related parties (Note 13) Accounts payable Other payable - construction and equipment Income tax payable (Notes 2 and 12) Current portion of long-term bank loans (Note 8) Accrued expenses and others Total Current Liabilities NON-CURRENT LIABILITIES Bonds payables (Note 2 and 9) Guarantee deposits Accrued pension obligations (Notes 2 and 11) Bank loans(Notes 7 and 8) Total non-current liabilities 1999 Amount $1,916,526 2,525,086 6,958,098 146,300 - 2,923,319 14,469,329 1998 Amount $359,097 2,047,871 3,181,099 775,508 299,449 1,475,772 8,138,796 % - 2 3 1 - 1 7 % 1 2 4 - - 2 9 20,000,000 1 2 22,631,717 18 5,185,362 998,203 - 3 1 - 6,123,825 748,720 2,393,489 5 - 2 26,183,565 1 6 31,897,751 25 Total Liabilities 40,652,894 2 5 40,036,547 32 SHAREHOLDERS’ EQUITY (Notes 2 and 10) Capital stock- $10 par value Authorized - 9,100,000 thousand shares in 1999 and 8,500,000 thousand shares in 1998 Issued - 7,670,882 thousand shares in 1999 and 6,047,176 thousand shares in 1998 76,708,817 4 7 60,471,760 49 Capital surplus Legal reserve Unappropriated earnings Cumulative translation adjustment Total Shareholders’ Equity 11,831,411 8,258,359 7 5 164,219 6,724,240 25,062,256 1 6 17,437,873 (1,091,003) - (727,426) 120,769,840 7 5 84,070,666 - 5 14 - 68 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $161,422,734 1 0 0 $124,107,213 100 The accompanying notes are an integral part of the financial statements. 35 STATEMENTS OF INCOME For the Years Ended December 31, 1999 and 1998 (In Thousand New Taiwan Dollars, Except Earnings Per Share) 1999 Amount % 1998 Amount % $74,036,935 (905,729) $51,441,572 (1,208,564) 73,131,206 1 0 0 50,233,008 100 40,915,513 32,215,693 5 6 4 4 29,896,966 20,336,042 2,097,835 1,810,701 2,390,538 6,299,074 3 2 4 9 1,367,301 809,302 1,957,194 4,133,797 60 40 3 1 4 8 25,916,619 3 5 16,202,245 32 808,616 184,607 120,766 63,809 29,041 - 42,867 1,249,706 1,415,527 1,191,891 114,839 86,746 81,436 75,366 35,810 - 54,845 1 1 - - - - - 2 2 2 - - - - - - - 566,020 - - 8,280 756,522 97,229 66,607 1,494,658 981,388 2,707,170 143,644 - - - 2,507 121,926 91,646 1 - - - 2 - - 3 3 5 - - - - - - - 3,056,460 24,109,865 450,019 4 3 3 1 4,048,281 13,648,622 1,695,581 $24,559,884 3 4 $15,344,203 8 27 3 30 $ 3.24 $ 2.54 $ 2.03 GROSS SALES (Notes 2 and 13) SALES RETURNS AND ALLOWANCES NET SALES COST OF SALES (Note 13) GROSS PROFIT OPERATING EXPENSES (Note 13) General and administrative Marketing Research and development Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME Interest Insurance compensation Reversal of allowance for losses on short-term investments Premium income (Notes 2 and 17) Gain on sale of investments Foreign exchange gain - net (Note 2) Other Total Non-Operating Income NON-OPERATING EXPENSES Interest (Notes 7 and 17) Investment loss - net (Notes 2 and 6) Bond issue costs Loss on option contracts (Notes 2 and 17) Foreign exchange loss - net (Note 2) Loss on disposal of short-term investments Loss on disposal of properties Provision for loss on short-term investments Other Total Non-Operating Expenses INCOME BEFORE INCOME TAX INCOME TAX BENEFIT (Notes 2 and 12) NET INCOME EARNINGS PER SHARE Based on weighted-average number of shares outstanding - 7,572,598 thousand in 1999 and 6,047,176 thousand in 1998 Based on 7,548,483 thousand shares The accompanying notes are an integral part of the financial statements. 36 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY For the Years Ended December 31, 1999 and 1998 (In Thousand New Taiwan Dollars) CUMULATIVE TRANSLATION TOTAL ADJUSTMENT SHAREHOLDERS’ CAPITAL STOCK ISSUED CAPITAL SURPLUS (Note 2) RETAINED EARNINGS (Note 10) (Note 2) EQUITY From Excess On Foreign Shares Long-Term Bond Gain on Disposal of (Thousand) Amount Investments Investments Properties Donation Total Legal Reserve Unappropriated Earnings Total BALANCE, JANUARY 1, 1998 4,081,300 $40,813,000 $ - $ - $62,027 $55 $62,082 $4,928,532 $23,712,760 $28,641,292 ($101,981) $69,414,393 Appropriations of prior year’s earnings (Note 10) Legal reserve - - Bonus to employees - Stock 129,291 1,292,910 Stock dividends - 45% 1,836,585 18,365,850 Bonus to directors and supervisors Net income in 1998 Gain on disposal of properties Adjusting arising from changes in ownership percentage in investees Translation adjustment - - - - - - - - - - - - - - - - 99,128 - BALANCE, DECEMBER 31, 1998 6,047,176 60,471,760 99,128 Appropriations of prior year’s earnings (Note 10) Legal reserve - - Bonus to employees - Stock 110,457 1,104,566 Stock dividends - 23% 1,390,850 13,908,505 Bonus to directors and supervisors Net income in 1999 - - - - Conversion of foreign bonds 122,399 1,223,986 Gain on disposal of properties Gain on disposal of properties of investees - Adjusting arising from changes in ownership percentage in investees Translation adjustment - - - - - - - - - - - - - - - 246,218 126,954 - - - - - - - - - - - - - - - 11,289,998 - - - - - - - - - 3,009 - - - - - - - - - - - - - - - 3,009 99,128 - 1,795,708 (1,795,708) - - - - - - - - (1,292,910) (1,292,910) (18,365,850) (18,365,850) (161,613) (161,613) 15,344,203 15,344,203 (3,009) (3,009) - - - - - - - - - - - - - - (161,613) 15,344,203 - 99,128 (625,445) (625,445) 65,036 55 164,219 6,724,240 17,437,873 24,162,113 (727,426) 84,070,666 - - - - - - 4,022 - - - - - - - - - - - - - - - - - - 11,289,998 4,022 246,218 126,954 - 1,534,119 (1,534,119) - - - - - - - - - - (1,104,566) (1,104,566) (13,908,505) (13,908,505) (138,071) (138,071) 24,559,884 24,559,884 - - (4,022) (4,022) (246,218) (246,218) - - - - - - - - - - - - - - - - (138,071) 24,559,884 12,513,984 - - 126,954 (363,577) (363,577) BALANCE, DECEMBER 31, 1999 7,670,882 $76,708,817 $472,300 $11,289,998 $69,058 $55 $11,831,411 $8,258,359 $25,062,256 $33,320,615 ($1,091,003) $120,769,840 The accompanying notes are an integral part of the financial statements. 37 STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999 and 1998 (In Thousand New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred income tax Investment loss recognized by equity method - net Accretion in redemption value of bonds Accrued pension liabilities Provisions for: Sales returns and allowances Doubtful receivables Loss (gain) on disposal of properties - net Gain on disposal of long-term investments Changes in operating assets and liabilities Receivable from related parties Notes receivable Accounts receivable Inventories Prepayments and others Payable to related parties Accounts payable Income tax payable Accrued expenses and others Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions: Properties Long-term investments Proceeds from sales of: Properties Long-term investments Decrease (increase) in short-term investments Increase in deferred charges Decrease in refundable deposits Net Cash Used in Investing Activities 38 1999 1998 $24,559,884 $15,344,203 18,041,320 14,592,897 (383,686) 1,191,891 585,614 249,483 264,913 139,112 31,854 (9,881) (234,396) (129,266) (5,443,998) (840,937) (1,292,627) 1,557,429 477,215 (629,208) 1,439,372 (2,471,239) 2,707,170 875,760 261,015 (93,241) (9,997) (371) (756,522) 268,533 200,044 1,697,948 1,031,254 505,748 (435,216) (612,275) 775,508 57,544 39,574,088 33,938,763 (29,842,159) (28,066,471) (12,105,618) (1,676,239) 36,824 16,106 5,425,077 (433,187) 5,572 3,476 1,466,879 (690,495) (322,735) 51,667 (36,897,385) (29,233,918) syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term bonds payable 9,450,634 9,772,500 1999 1998 Payments of: Long-term bank loans Commercial papers payable Decrease in guarantee deposits Bonus paid to directors and supervisors Adjustment of forward contract payable Net Cash Provided by Financing Activities (2,692,938) - (938,463) (138,071) - 5,681,162 (5,332,962) (250,000) (2,389,860) (161,613) (585,000) 1,053,065 NET INCREASE IN CASH AND CASH EQUIVALENTS 8,357,865 5,757,910 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,292,152 2,534,242 CASH AND CASH EQUIVALENTS, END OF YEAR $16,650,017 $8,292,152 SUPPLEMENTAL INFORMATION Interest paid (excluding capitalized amounts) Income tax paid Noncash investing and financing activities Effect of exchange rate changes on cash and cash equivalents Current portion of long-term bank loans Cash paid for acquisition of properties Total acquisitions Other payable - construction and equipment $1,300,591 $540,873 $850,661 $17,457 ($66,376) $ - ($150,518 ) $299,449 $33,619,158 $26,281,585 (3,776,999) 1,784,886 $29,842,159 $28,066,471 Conversion of foreign bonds into common stocks and capital surplus $12,513,984 $ - The accompanying notes are an integral part of the financial statements. 39 NOTES TO FINANCIAL STATEMENTS (Amounts in Thousand New Taiwan Dollars, Unless Specified Otherwise) (1) GENERAL The Company is engaged mainly in the: (a) manufacture, sale, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices; and, (b) manufacture and design of masks. The Company’s shares are listed and traded in the Taiwan Stock Exchange. On October 8, 1997, the Company offered shares of stock in the New York Stock Exchange in the form of American Depositary Receipts (ADRs). (2) SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The financial statements have been prepared in conformity with regulations governing the preparation of financial statements of public companies, and generally accepted accounting principles in the Republic of China. Cash equivalents Government bonds acquired under repurchase agreements and commercial papers with original maturities of less than three months are classified as cash equivalents. Short-term investments Short-term investments are carried at the lower of cost or market value. The costs of investments sold are determined by the specific identification method. Allowance for doubtful receivables Allowance for doubtful receivables is provided based on a review of the collectibility of individual receivables. Sales and allowance for sales returns and others Sales are recognized when products are shipped to customers. Allowances for sales returns and others are provided based on experience; such provisions are deducted from sales and the related costs are deducted from cost of sales. Inventories Inventories are stated at the lower of standard cost (adjusted to approximate weighted average cost) or market value. Market value represents net realizable value for finished goods and work in process, and replacement value for raw materials, supplies and spare parts. Long-term investments Investments in shares of stock for which the Company exercises significant influence on the investees are accounted for by equity method. The difference between the investment cost and the Company’s proportionate share in the net asset of the investee at the date of acquisition is amortized on a straight-line method over five years. Such amortization and the Company’s proportionate share in the earnings or losses of investee companies are recognized as part of "Investment income or loss" account in the Statement of Income. The increase or decrease in the Company’s share in the net assets of the investee companies because of the changes in its equity interest resulting from the issuance of additional new shares by the investee companies, on which the Company did not subscribe according to the original percentage of ownership, are accounted for as adjustment to the investment carrying value and capital surplus. Other stock investments are accounted for by cost method. These investments are stated at cost less decline in market 40 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) value of listed stocks or decline in value of unlisted stocks which is considered irrecoverable; such reductions are charged to shareholders’ equity or current income, respectively. Stock dividends received are recognized only as increase in the number of stocks held on the ex-dividend date. Investments in foreign mutual funds are stated at the lower of cost or net asset value (NAV). Writedowns of cost and write-ups to original acquisition cost resulting from subsequent recovery in NAV are debited or credited to shareholders’ equity. The costs of investments sold are determined by the weighted average method. If an investee company’s net income or net loss includes gains from the disposal of properties, the after-tax amount of such gains or losses shall be recognized as investment gains or losses in the year of occurrence in proportion to the Company’s equity interest and transferred in to capital surplus from retained earnings. When the Company subsequently disposed such investment in shares of stock, such capital surplus shall be transferred back to retained earnings. Gains or losses on transactions with investee companies wherein the Company owned at least 20% of the outstanding common stock but less than a controlling interest are deferred in proportion to ownership percentage until realized through a subsequent transaction with a third party. If the unrealized gains or losses stated above are due to a sale by the subsidiary to the parent, an adjustment should be made in accordance with ownership percentage. Properties Properties are stated at cost less accumulated depreciation. Major additions, renewals and betterment, and interest expense incurred during the construction period are capitalized while maintenance and repairs are expensed currently. Depreciation is provided on the straight-line method over estimated service lives which range as follows: buildings - 10 to 20 years; machinery and equipment - 5 to 10 years; office equipment - 3 to 5 years. Upon sale or disposal of properties, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to income. Any such gain, less applicable income tax, is transferred to capital surplus at the end of the year. Deferred charges Deferred charges, consisting of software and system design costs, issuance costs of bonds, and short-term credit instruments, are amortized over three years, five years, and the contract period of credit instruments, respectively. Convertible bonds The excess of the stated redemption price over the face value of the bond is amortized and recognized as interest expense over a period starting from the issue date to the last day of the redemption period or the actual redemption date, whichever is earlier, using the effective interest method. Capital stock account is credited for the face value of the bond converted into the Company’s shares of stock and the excess of the carrying value of the bond as of the date of its conversion over its face value is credited to capital surplus account. Pension costs Net periodic pension costs are recorded based on actuarial calculations. Unrecognized net transition obligation is amortized over 25 years. 41 Income tax The Company adopted interperiod tax allocation. Deferred income taxes are recognized for the tax effects of temporary differences, unused tax credits, and operating loss carryforwards. Valuation allowance is provided for deferred income tax assets that are not certain to be realized. A deferred tax asset or liability should, according to the classification of its related asset or liability, be classified as current or non-current. However, if a deferred asset or liability cannot be related to a asset or liability in the financial statements, then it should be classified as current or non-current based on the expected length of time before it is recovered. Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision. Income taxes (10%) on undistributed earnings are recorded as expense in the year when the shareholders have resolved that the earnings shall be retained. Derivative financial instruments Foreign currency forward exchange contracts (forward contracts), entered into for purpose other than trading, are recorded in New Taiwan dollars as assets or liabilities using the spot rates at the inception dates of the contracts. The differences in the New Taiwan dollar amounts translated using the spot rates and the amounts translated using the contracted forward rates are also recognized as premiums or discounts at the inception dates of the forward contracts. Such premiums or discounts are amortized over the terms of the forward contracts using the straight-line method and the amortizations are either deferred or recognized in income. At the balance sheet dates, the receivables or payables arising from forward contracts are restated using the prevailing spot rates and the resulting differences are recognized consistent with the recognition of the amortization of the premiums or discounts described above. Also, the receivables and payable related to the forward contracts are netted out and the resulting net amount is presented as either an asset or liability. Interest rate swap transactions entered into to manage liabilities are accounted for on an accrual basis, in which cash settlement receivable or payable is recorded as an adjustment to interest income or expense. The notional amounts of the foreign currency option contracts entered into for hedging purposes are not recognized as either asset or liability on the contract dates. However, amounts received on call options written are recognized as assets and amounts paid on put options bought are recognized as liabilities. Such amounts are amortized using the straight- line method over the period of the contracts and charged to current income. Gains or losses on the exercise of the options are also recognized in current income. Foreign-currency transactions Foreign-currency transactions, except derivative financial instruments, are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Gains or losses resulting from the application of different foreign exchange rates when cash in foreign currency is converted into New Taiwan dollar, or when foreign-currency receivables and payables are settled, are credited or charged to income in the year of conversion or settlement. At year-end, the balances of foreign-currency assets and liabilities are restated at prevailing exchange rates, and the resulting differences are recorded as follows: a. Long-term investments accounted for by equity method - as cumulative translation adjustment under shareholders’ equity. b. Long-term investments accounted for by cost method - as translation adjustment (same as above) if the translated New Taiwan dollar amount is lower than cost; otherwise, no adjustment is made. c. Other assets and liabilities - credited or charged to current income. 42 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) 1999 1998 $16,575,032 $7,453,517 74,985 - 804,564 34,071 $16,650,017 $8,292,152 1999 1998 $236,250 - - 236,250 - $530,640 4,625,769 626,844 5,783,253 (121,926) $236,250 $5,661,327 1999 1998 $653,347 3,618,693 320,685 718,344 5,311,069 (781,355) $467,368 2,346,837 371,874 619,971 3,806,050 (117,273) $ 4,529,714 $ 3,688,777 Reclassifications Certain accounts in 1998 have been reclassified to conform to 1999 classifications. (3) CASH AND CASH EQUIVALENTS Cash and bank deposits Government bonds acquired under repurchase agreements Commercial papers (4) SHORT-TERM INVESTMENTS Marketable equity securities U.S. Treasury bonds Corporate bonds Allowance for losses (5) INVENTORIES Finished goods Work in process Raw materials Supplies and spare parts Allowance for losses 43 (6) LONG-TERM INVESTMENTS Shares of Stock Equity method 1999 1998 Carrying Value % of Ownership Value Carrying % of Ownership TSMC International Investment $10,078,880 1 0 0 $11,096,090 Vanguard International Semiconductor TSMC-ACER Semiconductor TSMC - North America TSMC - Europe TSMC - Japan 5,010,897 3,630,193 255,025 25,956 10,168 Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) 360,177 2 5 3 2 1 0 0 1 0 0 1 0 0 3 2 2 5 2 5 2 5 2 5 2 5 2 5 1 0 0 4,723,014 - 178,294 25,077 9,287 - 100,657 100,659 100,680 100,661 100,641 100,643 9,653 103,017 103,012 102,773 102,770 103,003 103,005 9,968 19,998,844 16,645,356 Po Cherng Investment Chi Hsin Investment Kung Cherng Investment Chi Cherng Investment Hsin Ruey Investment Cherng Huei Investment TSMC Partners Cost method Listed Stock - Taiwan Mask 32,129 Unlisted Taiwan - ACER Semiconductor - preferred stocks 4,854,742 Taiwan Semiconductor Technology Lian Ya Shin-Etsu Handotai Taiwan Company Ltd. W.K. Technology Fund IV Hon Tung Venture Capital Fund Crimson Asia Capital Horizon Ventures Fund Stock paid in advance TSMC International Investment 500,000 146,250 105,000 50,000 80,000 5,768,121 34,534 31,744 66,278 2,375,400 $28,208,643 Net investment loss recognized by equity method in 1999 and 1998 were as follows: TSMC International Investment Vanguard International Semiconductor Others 44 1999 ($1,007,218) (527,823) 343,150 ($1,191,891) 2 2 8 1 9 1 1 7 4 1 0 - - - 32,129 - 500,000 146,250 105,000 50,000 40,000 873,379 19,030 - 19,030 - $17,537,765 1998 ($1,356,890) (1,400,026) 49,746 ($2,707,170) 100 26 - 100 100 100 - 25 25 25 25 25 25 100 2 - 19 11 7 4 10 - - - syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) The carrying values of investments accounted for by equity method and the related investment income and loss for the years ended December 31, 1999 and 1998 were based on audited financial statements of the investees, except for TSMC - Japan. Information on the investments is as follows: Market value of listed stocks Equity in the net assets of unlisted stocks Net asset value of fund (7) PROPERTIES Accumulated depreciation consisted of the following: Buildings Machinery and equipment Office equipment 1999 1998 $ 19,753,642 $10,196,822 20,177,278 12,718,756 66,278 18,504 1999 1998 $7,441,342 49,369,894 1,158,489 $5,475,083 34,390,645 920,521 $57,969,725 $40,786,249 Information on the manufacturing plant construction as of December 31, 1999 are as follows: Manufacturing Plant Estimated cost Accumulated Expenditures Expected date of start of operations Sixth Seventh Twelfth $66,846,000 $40,238,232 9,711,000 9,392,000 266,063 252,415 March 2000 June 2002 June 2002 Interest expense capitalized for the twelve months ended December 31, 1999 and 1998 were $305,312 and $661,414, respectively. As of December 31, 1999, properties with an aggregate net book value of $4,488,327 are mortgaged as collateral for long-term bank loans (Note 8). (8) LONG-TERM BANK LOANS N.T. dollar loans Bank acceptance - 6.95%interest; repayable by December 1999 but was prepaid in January 1999 Commercial paper - 7.00%-7.08% interest repayable by May 2003 but was prepaid in October 1999 Current portion Unused credit lines as of December 31, 1999 aggregate about $10,610,290. 1998 $299,449 2,393,489 2,692,938 (299,449) $2,393,489 45 (9) LONG-TERM BONDS PAYABLE Foreign convertible bonds - US$350,000 thousands, non-interest bearing, repayable in July 2002 Accretion in redemption value of bonds Converted into common stocks Redeemed before maturity Domestic unsecured bonds: 1999 1998 $11,322,500 $11,322,500 1,894,831 13,217,331 (12,914,338) (302,993) 1,309,217 12,631,717 - - - 12,631,717 Repayable in March 2003, 7.71% annual interest payable semi-annually Repayable in November 2003, 7.12% annual interest payable annually 4,000,000 6,000,000 4,000,000 6,000,000 Repayable in October 2002 and 2004, 5.67% and 5.95% annual interest payable annually, respectively 10,000,000 - $20,000,000 $22,631,717 The foreign convertible bonds can be converted into common stocks of the Company prior to its maturity at a price per share determined using an agreed formula. The Company may redeem the bonds prior to its maturity when certain conditions are met. As of December 31, 1999, $1,223,986 bonds with face value totaling to $1,223,986 were converted into 122,399 thousand shares of common stocks. The Company has redeemed the unconverted part prior to the maturity, on November 1999. The holders of the bonds with an aggregate face value of $6,000,000 and the Company can exercise resale agreements or repurchase agreements, respectively, thirty days before the second and third anniversaries of the issuance date, which range from November 18 to December 1, 1998. (10) SHAREHOLDERS’ EQUITY According to Company Law, capital surplus can only be used to offset a deficit or transferred to capital. The Company’s Articles of Incorporation provides that the following shall be appropriated from the annual net income (less any deficit): a) 10% legal reserve; b) Bonus to directors and supervisors and to employees equal to 1% and at least 1% of the remainder, respectively. These appropriations and the disposition of the remaining net income shall be resolved by the shareholders in the following year and given effect to in the financial statements of that year. The aforementioned appropriation for legal reserve shall be made until the reserve equals the Company’s capital. Such reserve can only be used to offset a deficit; or, when it has reached 50% of the paid-in capital, up to 50% thereof can be transferred to capital. Under the Integrated Income Tax System which became effective on January 1, 1998, non-corporate shareholders are allowed a tax credit for the income tax paid or payable by the Company on earnings generated in 1998 and onwards. An Imputation Credit Account (ICA) is maintained by the Company for such income tax and the tax credit allocated to each shareholder. The maximum credit available for allocation to each shareholder cannot exceed the balance shown in the ICA on the date of distribution of dividends. 46 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) (11) PENSION PLAN The Company has a pension plan for all regular employees, which provides benefits based on length of service and average monthly salary for the last six months prior to retirement. The Company makes monthly contributions, equal to 2% of salaries, to a pension fund which is administered by a pension fund monitoring committee and deposited in the committee’s name in the Central Trust of China. The changes in the fund and accrued pension cost are summarized as follows: a. Components of pension cost Service cost Interest cost Projected return on plan assets Amortization of prior period service cost 1999 1998 $248,378 $212,398 78,961 (22,317) 8,300 69,390 (16,992) 8,300 $313,322 $273,096 b. Reconciliation of the fund status of the plan and accrued pension Iiabilities Benefit obligation Vested benefit obligation Nonvested benefit obligation Accumulated benefit obligation Additional benefits based on future salaries Projected benefit obligation Fair value of plan assets Funded status Unrecognized prior service cost Unrecognized net transitional obligation Unrecognized net gain Additional liability $ - 428,257 428,257 975,345 1,403,602 (364,994) 1,038,608 - (174,291) 135,448 - $579 310,430 311,009 817,006 1,128,015 (287,493) 840,522 - (182,591) 91,059 - Accrued pension liabilities $999,765 $748,990 Vested benefit $ - $677 c. Actuarial assumptions Discount rated used in determining present values Future salary increase rate Expected rate of return plan on assets 6 . 5% 6 . 0% 6 . 5% 7.0% 6.5% 7.0% d. Contributions to pension fund $67,227 $51,055 e. Payments from pension fund $3,591 $ - 47 (12) INCOME TAX BENEFIT A reconciliation of income tax current payable before tax credits is shown below: Income tax on pretax income at statutory rate (20%) $4,821,973 $2,729,724 1999 1998 The tax effects of adjustments: Tax-exempt income Temporary differences Income tax current payable Income tax benefit as of December 31, 1999 and 1998 consist of : (3,434,802) (1,413,371) 221,129 (19,353) $1,608,300 $1,297,000 1999 1998 Income tax current payable before tax credits $1,608,300 $1,297,000 Tax credits Adjustment of prior years’ taxes (1,587,000) 21,300 (87,633) (751,492) 545,508 230,000 Net change in deferred income tax for the year Investment tax credits (1,798,325) (2,590,089) Temporary differences Valuation allowance 111,139 1,303,500 119,000 - ($450,019) ($1,695,581) Deferred income tax assets and liabilities as of December 31, 1999 and 1998 consist of: Current : Investment tax credits Noncurrent: Investment tax credits Valuation allowance Temporary differences Depreciation Integrated income tax information: 1999 1998 $2,329,000 $406,739 $5,806,891 $5,930,827 (1,303,500) 197,268 (427,407) - 247,844 (366,844) $4,273,252 $5,811,827 1999 1998 Ending balances of imputation Credit account $1,497 $22,633 The expected and actual creditable ratio for 1999 and 1998 are 0.006% and 3.51%, respectively. The imputation credit allocated to each shareholder shall be based on the balance in the ICA on the date of distribution of dividends, thus the expected creditable ratio for 1999 may be adjusted according to the difference between the expected and actual imputation credit allowed under the regulation. 48 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) The unappropraited retained earnings as of December 31, 1999 and 1998 included the earnings prior to 1997 of $752,612 and $2,096,679, respectively. The effective tax rates for deferred income tax in 1999 and 1998 are 5.9% and 9.5%. Unused investment tax credits arising from investments in machinery and equipment, and research and development expenditures as of December 31, 1999 will expire as follows: Year of Expiry 2000 2001 2002 2003 The income from the following projects and services are exempt from income tax: Amount $1,588,644 3,250,623 2,222,961 1,073,663 Tax-Exemption Period Expansion of second manufacturing plant and computer-aided design services, and third 1996 to 1999 manufacturing plant Expansion of first manufacturing plant, second manufacturing plant - modules A and B and third manufacturing plant, and fourth manufacturing plant 1997 to 2000 Expansion of first manufacturing plant, second manufacturing plants- modules A and B, third manufacturing plant and fourth manufacturing plant, and fifth manufacturing plant 1999 to 2002 Income tax returns through 1996 have been examined by the tax authorities. (13) RELATED PARTY TRANSACTIONS The Company engages in business transactions with the following related parties: a. Industrial Technology Research Institute (ITRI); its director is the Company’s chairman b. Philips Electronics N.V., a major shareholder c. Subsidiaries TSMC International Investment (TSMC-BVI) TSMC North America TSMC Europe TSMC Japan d. Vanguard International Semiconductor Corporation (VIS), an investee e. TSMC-Acer Semiconductor Manufacturing Corporation (TASMC), an investee f. Systems on Silicon Manufacturing Company Pte Ltd. (SSMC), an investee g. WaferTech, LLC, an indirect investee of TSMC-BVI h. TSMC Technology, an investee of TSMC-BVI. 49 The transactions with the foregoing parties in addition to those disclosed in other notes, are summarized as follows: For the year Sales ITRI Philips and its affiliates VIS TASMC WaferTech Purchase WaferTech TASMC VIS Rental expense - ITRI Manufacturing expenses Technical assistance fee - Philips General and administrative expenses Consulting fee - VIS Marketing expenses TSMC - North America (commissions) TSMC - North America (service charges) TSMC - Europe (commissions) TSMC - Japan (commissions) Sale of Property - WaferTech At end of year Receivable ITRI Philips and its affiliates TSMC - Japan VIS WaferTech TSMC Technology SSMC TASMC Prepayments and other current assets Prepayment - Rental to ITRI Payable Philips and its affiliates TSMC - North America TSMC - Europe TSMC - Japan VIS WaferTech TSMC Technology TASMC 50 1999 Amount $132,507 2,864,149 48,473 22,246 59,438 $3,126,813 % - 4 - - - 4 $4,636,780 4 0 808,926 381,989 $5,827,695 $161,488 7 3 5 0 5 4 $862,398 1 0 0 $20,400 - 1998 Amount % $173,375 3,422,090 65,301 - 38,452 $3,699,218 $ - - - $ - - 7 - - - 7 - - - - $161,477 $637,136 $ - 67 100 - $ 692,927 3 8 $388,513 99,087 87,414 81,951 5 5 4 78,448 25,975 51,665 $961,379 5 2 $544,601 $350,969 1 0 0 $ - $18,458 133,245 17,550 25,674 198,163 47,343 5,353 23,117 4 2 8 4 6 4 2 1 0 1 5 $30,668 162,750 17,550 7,884 6,405 9,250 - - 48 10 3 6 67 - 13 69 8 3 3 4 - - $468,903 1 0 0 $234,507 100 $42,541 2 $42,462 $305,756 1 6 $155,086 5 43 17 3 3 - 60,746 10,713 9,603 - 122,949 34 - - - - 125,637 13,422 13,189 184,741 730,483 3,832 539,466 6 1 1 1 0 3 8 - 2 8 $1,916,526 1 0 0 $359,097 100 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) Sales to related parties are based on normal selling prices and collection terms. Payable to WaferTech includes purchases of finished goods and compensation for violation of manufacturing agreement. As there is no comparable sales of properties and purchases, they were in accordance with contracts. (14) LONG-TERM OPERATING LEASES The Company leases the land, building and certain machinery and equipment of its first manufacturing plant from ITRI under agreements which will expire in March 2002, at annual rentals and other charges aggregating $170,166. The agreements are renewable upon expiration. The Company leases the land sites of its second through tenth manufacturing plants from the Science-Based Industrial Park Administration under agreements which will expire on various dates from March 2008 to April 2018 with annual rentals aggregating $42,149. The agreements are also renewable upon expiration. Future annual minimum rentals under the aforementioned leases are as follows: Year 2000 2001 2002 2003 2004 2005-2018 Amount $212,315 212,315 84,690 42,149 42,149 313,250 $906,868 (15) COMMITMENTS AS OF DECEMBER 31, 1999 a. Under a technical cooperation agreement with Philips, as amended on May 12, 1997, the Company shall pay technical assistance fee at a percentage of net sales of certain products, less specified deductions. The agreement shall remain in force up to July 9, 2007 and thereafter automatically renewed for successive periods of three years. Under the amended agreement, the fee is subject to reduction by the amounts the Company pays to any third party for settling any licensing/ infringement issue after the first five-year periods of the amended agreement, provided that the fee after reduction will not be below a certain percentage of the net selling price. b. Subject to certain equity ownership and notification requirements, Philips and its affiliates can avail each year up to 30% of the Company’s production capacity. c. Under a submicron technology license agreement with ITRI, the Company shall pay license fees of $129,400 (including 5% value-added tax) to ITRI plus royalty fee at an agreed percentage of net sales of certain products through December 31, 1998. As of December 31, 1995, the Company has paid the entire license fee. d. Under a technical cooperation agreement with ITRI, the Company shall reserve and allocate up to 35% of its production capacity for use by the Ministry of Economic Affairs (MOEA) or any other party designated by the MOEA. 51 e. Under a manufacturing agreement, the Company shall buy at least 85% of the calculated installed capacity of the wafer-fabrication plant ("WaferTech, LLC") constructed by TSMC Development, Inc. for three years from start of production. If the Company is unable or unwilling to buy the minimum purchase allocation, it shall compensate TSMC Development, Inc. at the selling price of the products less certain variable costs. Later, TSMC Development, Inc. transferred its rights under the agreement to WaferTech, LLC. f. Under a purchase agreement with three customers, the Company shall supply them with, and the three customers shall buy, a certain portion of wafers produced by WaferTech, LLC. If the Company or any of the customers is unable or unwilling to supply or buy the minimum purchase allocation, the defaulting party shall compensate the other party at the selling price of the products, less certain variable costs. g. Under several foundry agreements, the Company shall allocate a portion of its production output for sale to certain major customers from whom guarantee deposits of US$164,765 thousand had been received as of December 31, 1999. h. On February 27, 1998, the Tax Bureau assessed the Company additional income taxes of about $105,000 and $125,000 for 1994 and 1995, respectively, arising from the contention by the Bureau that the Company’s first manufacturing plant was not a science-based industry under the Science-Based Industrial Park Regulations. The Company is contesting the assessment, but has already accrued the amount of tax assessment. The additional income tax for 1994 has been reassessed to be $21,887. i. Under a Shareholders Agreement entered into by Philips and EDB Investments Pte Ltd. dated March 30, 1999, the parties agreed to: (a) form a joint venture company to be called Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) for the purpose of building an integrated circuit foundry in Singapore, (b) set SSMC’s total authorized capital at about S$1.2 billion (about NT$22,800,000), and, (c) allow the Company to invest 32% of SSMC’s capital. The Company and Philips committed to buy a certain percentage of the production capacity of SSMC. If any party is unable or unwilling to buy the committed purchase allocation and the capacity utilization of SSMC falls below a certain percentage of total available capacity, such party shall compensate SSMC for all related unavoidable costs. j. Under a Technical Cooperation Agreement with SSMC signed on May 12, 1999, SSMC shall pay TSMC remuneration for the technology service provided by SSMC at a certain percentage of net selling prices of its products. The agreement shall remain in force for ten years, and thereafter automatically continue for successive periods of five years unless and until terminated by either party under certain conditions. k. The Company provides collateral for loans of US$68,000 thousand obtained by TSMC Development, Inc. l. Under a Technical Cooperation Agreement with TSMC-Acer Semiconductor Manufacturing Corporation ("TASMC") signed on July 21, 1999, TASMC shall pay TSMC remuneration by way of giving discount to the selling price of products sold to TSMC. The agreement shall remain in force for 10 years, unless and until terminated by either party under certain conditions prior to its expiration, the parties shall meet 6 months prior to the expiration date to decide whether the Agreement shall be renewed. m. Unused credit lines as of December 31, 1999 are approximately $138,738. 52 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) (16) OTHER SIGNIFICANT EVENTS TSMC has two merger agreements signed on December 30, 1999 and January 7, 2000, with TASMC and WSMC, respectively. TSMC will acquire and merge TASMC and WSMC. TSMC shall be the surviving company, and TASMC and WSMC shall be dissolved after the merger. The consolidation date is tentatively scheduled for June 30, 2000. The agreed exchange ratio is five shares of TASMC to one share of TSMC, (The exchange ratio will be adjusted again based on the same proportion of TSMC’s stock dividends once such dividends are declared by the consolidation date.), and two shares of WSMC to one share of TSMC. The Agreement shall be further granted approval by the shareholders from both companies and the governing regulator. The capital of TSMC will be expected to increase by 1,488,684 thousand shares of common stock (such number will be adjusted after declaration of TSMC’s 1999 stock dividend.) (17) FINANCIAL INSTRUMENTS The Company entered into derivative financial instrument transactions for the twelve months ended December 31, 1999 and 1998 to hedge foreign-currency denominated receivables or payables, and interest rate fluctuations. The strategy is to hedge most of the market price risks. Certain information on these contracts is as follows: a. Outstanding forward exchange contracts as of December 31, 1999 and 1998: Contract Amount Fair Value Maturity Amount Year Currency (Thousands) (Thousands) Maturity (Thousands) 1999 Buy Sell Sell Sell 1998 Buy Sell US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ 25,000 81,367 16,000 30,000 JPY 2,472,080 JPY 8,303,350 NLG 34,926 NTD 941,847 Jul 2000 NTD 879,154 Jan to July 2000 NTD 2,564,297 Jan 2000 Jan 2000 NTD NTD 497,159 947,880 US$ 110,000 NTD 3,574,885 Jan. 1999 NTD 3,580,421 US$ 40,000 NTD 1,296,959 Jan. to Feb. 1999 NTD 1,262,120 Receivables and payables from forward exchange contracts (shown in the balance sheets as part of "Other current assets" or "Other current liabilities" accounts) as of December 31, 1999 aggregate about $19,144 and $102,784, respectively; and receivables (shown in the balance sheets as part of "Other current assets" account) as of December 31, 1998 aggregate about $21,572. Net exchange gains for the years ended December 31, 1999 and 1998 were $105,859 and $336,807, respectively. The net assets or liabilities that have been hedged by the above forward exchange contracts are as follows: Accounts receivable Accounts payable and other payable - construction and equipment Guarantee deposits 53 1999 Thousands 1998 US$375,749 US$206,926 151,392 764,765 66,397 189,058 b. Interest rate swaps The Company has entered into interest rate swap transactions to hedge exposure to rise interest rates on its floating rate long-term bank loans. These transactions are summarized as follows: Contract Date April 28, 1998 April 29, 1998 June 26, 1998 June 26, 1998 Period May 21, 1998 to May 21, 2003 May 21, 1998 to May 21, 2003 June 26, 1998 to June 26, 2003 July 6, 1998 to July 6, 2003 Amount $2,000,000 1,000,000 1,000,000 1,000,000 Interest expense on these loans for the twelve months ended December 31, 1999 and 1998 were $112,213 and $13,367, respectively. c. Option The Company has entered into foreign currency option contracts to hedge risks of exchange rate fluctuations arising from its anticipated U.S. dollar cash receipts from its export sales or Japanese Yen obligations related to its importation of materials and machinery and equipment. Outstanding option contracts as of December 31, 1999 were as follows: Contract Currency Call option sell Call option sell US$ US$ Contract Amount (Thousands) Carrying Value Fair Value Strike Price Maturity US$100,000 $3,911 $3,911 $0.9785~0.9940 (US$/EUR) Jan 2000 US$ 60,000 3,035 3,035 106.6 (US$/JPY) Jan 2000 The Company has no outstanding option contracts as of December 31, 1998. For the twelve months ended December 31, 1999 and 1998, the Company realized premium income of $63,809 and $8,280, respectively, on foreign currency put options written and incurred losses of $86,746 on foreign currency call options bought for 1999. d. Transaction risk 1) Credit risk: the banks with which the Company has entered into the above contracts are reputable and, therefore, the Company is not expected to be exposed to significant credit risks. 2) Market price risk: All derivative financial instruments are for hedging receivables or payables denominated in foreign currencies and interest rate fluctuations. Gains or losses from forward exchange contracts are likely to be offset by gains or losses realized from the settlement of the related receivables and payables. Interest rate risks are also controlled as the expected cost of capital is fixed. Thus, market price risks from exchange rate and interest rate fluctuations are minimal. 3) Liquidity and cash flow: The purpose of forward exchange contracts is to limit the Company’s exposure to loss resulting from adverse fluctuations in assets and liabilities denominated in foreign currency. Interest rate swap transactions result in adjustments for interest only. Therefore, no significant extra cash requirement is expected. 54 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) e. Fair value of financial instruments Non-derivative financial instruments Assets 1999 1998 Carrying Amount Fair Value Carrying Amount Fair Value Cash and cash equivalents $16,650,017 $16,650,017 $8,292,152 $8,292,152 Short-term investments Receivable from related parties 236,250 468,903 241,850 468,903 5,661,327 5,691,566 234,507 234,507 Accounts and notes receivable 13,544,387 13,544,387 7,971,123 7,971,123 Long-term investments Refundable deposits Liabilities 28,208,643 39,997,198 17,537,765 22,934,082 16,346 16,346 21,918 21,918 Payable to related parties 1,916,526 1,916,526 359,097 359,097 Accounts payable 2,525,086 2,525,086 2,047,871 2,047,871 Other payable - construction and equipment 6,958,098 6,958,098 3,181,099 3,181,099 Long-term bank loans Long-term bonds payable Guarantee deposits Derivative financial instruments - - 2,692,938 2,692,938 20,000,000 20,013,774 22,631,717 21,948,204 5,185,362 5,185,362 6,123,825 6,123,825 Forward exchange contracts (buy) 784,875 760,906 3,590,850 3,574,885 Forward exchange contracts (sell) 3,998,698 3,998,108 1,294,000 1,296,959 Interest rate swaps Option 7,488 6,946 7,488 6,946 7,423 - 7,423 - Fair values of financial instruments were determined as follows: (1) Short-term financial instruments -- carrying values. (2) Short-term investments -- market values. (3) Long-term investments - market value for listed companies and net equity value for the others. (4) Refundable deposits -- carrying values. (5) Long-term bank loans are forecasted using cash flows discounted at present value, using discount rates which are interest rates of similar long-term liabilities. Long-term bonds payable are discounted at present values. Fair values of other long-term liabilities are also their carrying values as they use floating interest rates. 6) Derivative financial instruments -- based on outright forward rates and interest rate in each contract. 7) Financial instruments or non-financial instruments are not necessarily all disclosed at fair values; accordingly, the sum of the fair values of the financial instruments listed above does not equal to the fair value of the company. (18) SEGMENT FINANCIAL INFORMATION a. Export sales Area America Asia Europe The export sales information is presented by billed regions. b. No single customer accounts for more than 10% of total sales. 55 1999 1998 $38,084,870 $26,438,864 16,493,721 4,778,646 9,667,353 3,595,809 $59,357,237 $39,702,026 9. Consolidated Financial Statements (1) CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 (In Thousand New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS Cash and cash equivalents Short-term investments Receivable from related parties Notes receivable Accounts receivable Allowance for doubtful receivables Allowance for sales returns and allowances Inventories Deferred income tax assets Prepayments and other current assets Total Current Assets 1999 Amount % 1998 Amount $17,643,762 1 0 $9,679,273 927,216 205,847 164,134 13,380,253 (422,202) (706,886) 5,841,965 2,447,163 2,202,895 1 - - 7 - - 3 1 1 5,906,339 201,301 34,868 7,940,062 (283,090) (441,973) 4,056,508 411,350 1,035,862 % 7 4 - - 6 - - 3 - 1 41,684,147 2 3 28,540,500 21 LONG-TERM INVESTMENTS 16,164,676 9 6,659,117 5 PROPERTIES Cost Land and land improvements Buildings Machinery and equipment Office equipment Total cost Accumulated depreciation Prepayments and construction in progress Net Properties OTHER ASSETS Deferred charges - net Deferred income tax assets Refundable deposits Miscellaneous Total Other Assets 783,809 28,421,769 123,940,807 2,728,204 - 1 6 6 8 1 807,087 27,010,514 88,466,784 2,312,238 155,874,589 8 5 118,596,623 - 19 63 2 84 (61,879,509) ( 3 4) (41,489,543) (29) 26,684,587 120,679,667 1 5 6 6 21,594,489 98,701,569 15 70 642,091 4,485,340 20,814 10,039 5,158,284 - 2 - - 2 773,637 6,039,395 23,755 23,509 6,860,296 - 4 - - 4 TOTAL ASSETS $183,686,774 1 0 0 $140,761,482 100 56 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Payable to related parties Accounts payable Other payable - construction and equipment Income tax payable Current portion of long term bank borrowings Accrued expenses and other current liabilities Total Current Liabilities NON-CURRENT LIABILITIES Bonds payables Guarantee deposits Accrued pension obligations Bank loans Other Total Non-current Liabilities MINORITY INTEREST IN SUBSIDIARIES Total Liabilities SHAREHOLDERS’ EQUITY Capital stock, $10 par value; authorized - 9,100,000 thousand shares in 1999 and 8,500,000 thousand shares in 1998, issued - 7,670,882 thousand shares in 1999 and 6,047,176 thousand shares in 1998 Capital surplus Legal reserve Unappropriated earnings Cumulative translation adjustment Total Shareholders’ Equity 1999 Amount $1,029,964 2,927,915 8,663,286 155,127 - 3,470,914 16,247,206 % - 2 5 - - 2 9 1998 Amount $155,086 2,176,023 3,601,832 777,424 299,449 1,773,804 8,783,618 % - 2 3 - - 1 6 20,000,000 1 1 22,631,717 17 5,185,362 999,998 12,952,462 7,738 39,145,560 7,524,168 62,916,934 3 - 7 - 2 1 4 3 4 6,123,825 750,222 8,620,864 79,689 38,206,317 9,700,881 56,690,816 76,708,817 4 2 60,471,760 11,831,411 8,258,359 25,062,256 (1,091,003) 120,769,840 6 5 1 4 ( 1) 6 6 164,219 6,724,240 17,437,873 (727,426) 84,070,666 4 - 6 - 27 7 40 43 - 5 12 - 60 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $183,686,774 1 0 0 $140,761,482 100 57 (2) CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1999 and 1998 (In Thousand New Taiwan Dollars, Except Earnings Per Share) GROSS SALES SALES RETURNS AND ALLOWANCES NET SALES COST OF SALES GROSS PROFIT OPERATING EXPENSES General and administrative Marketing Research and development Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME Interest Insurance compensation Gain on disposal of short-term investments - net Reversal of allowance for losses on short-term investments Gain on disposal of long-term investments Premium Income Foreign exchange gain - net Other Total Non-Operating Income NON-OPERATING EXPENSES Interest Investment loss recognized by equity method - net Issuance costs of bonds Loss on option contracts Foreign exchange loss - net Loss on disposal of properties Loss on decline in value of long-term investments Other Provision for loss on short-term investments Total Non-Operating Expenses INCOME BEFORE INCOME TAX INCOME TAX CREDIT INCOME BEFORE MINORITY INTEREST MINORITY INTEREST IN LOSS OF SUBSIDIARIES NET INCOME EARNINGS PER SHARE 1999 Amount % 1998 Amount % $74,060,145 (993,624) $51,645,934 (1,223,521) 73,066,521 1 0 0 50,422,413 100 41,560,169 31,506,352 5 7 4 3 32,282,644 18,139,769 2,616,518 1,669,399 2,390,538 6,676,455 4 2 3 9 1,638,379 736,834 1,957,194 4,332,407 24,829,897 3 4 13,807,362 896,223 184,607 48,575 140,137 67,772 63,809 - 43,025 1,444,148 1,878,182 288,500 114,839 86,746 81,436 35,843 31,568 99,576 - 1 - - - - - - - 1 3 - - - - - - - - 704,928 - - - 781,647 8,280 105,509 58,400 1,658,764 1,026,936 1,400,026 143,644 - - 4,421 5,862 99,568 121,926 2,616,690 23,657,355 386,631 24,043,986 515,898 $24,559,884 3 3 2 1 3 3 1 3 4 2,802,383 12,663,743 1,664,852 14,328,595 1,015,608 $15,344,203 62 38 3 2 6 11 27 1 - - - 2 - - - 3 2 3 - - - - - - - 5 25 3 28 2 30 Based on weighted-average shares outstanding of 7,572,598 thousand in 1999 and 6,047,176 thousand in 1998 $3.24 Based on 7,548,483 thousand shares $2.54 $2.03 58 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) Specific Notes 1. Affiliates Information (1) TSMC Affiliated Companies Chart Unit: Shares, % Taiwan Semiconductor Manufacturing Company, Ltd. TSMC, North America TSMC, Europe B.V. TSMC, Japan K.K. Shareholding: 100% Shareholding: 100% Shareholding: 100% TSMC Int’l Investment Ltd. Shareholding: 100% TSMC Partners, Ltd. Shareholding: 100% Reinvested in TSMC: ADR 302,434 TSMC Development, Inc. TSMC Technology, Inc. Shareholding: 100% Shareholding: 100% InveStar Semiconductor Development Fund Inc. Shareholding: 97% WaferTech, LLC Shareholding: 68% 59 Vanguard Int’l Semiconductor Corp. Shareholding:25% TSMC-Acer Semiconductor Manufacturing Inc. Common Shares: 32% Perferred Shares: 28% Kung Cherng Investment Co., Ltd. Shareholding:25% Po Cherng: 15% Chi Cherng: 15% Chi Hsin: 15% Cherng Huei : 15% Hsin Ruey: 15% Reinvested in TSMC: 984,000 Chi Cherng Investment Co., Ltd. Shareholding: 25% Po Cherng: 15% Kung Cherng: 15% Chi Hsin: 15% Cherng Huei: 15% Hsin Ruey: 15% Reinvested in TSMC: 984,000 Chi Hsin Investment Co., Ltd. Shareholding: 25% Po Cherng: 15% Kung Cherng: 15% Chi Cherng: 15% Cherng Huei: 15% Hsin Ruey: 15% Reinvested in TSMC: 641,500 Po Cherng Investment Co., Ltd. Shareholding: 25% Kung Cherng: 15% Chi Cherng: 15% Chi Hsin: 15% Cherng Huei: 15% Hsin Ruey: 15% Reinvested in TSMC: 641,500 Cherng Huei Investment Co., Ltd. Shareholding: 25% Po Cherng: 15% Kung Cherng: 15% Chi Hsin: 15% Chi Cherng: 15% Hsin Ruey: 15% Reinvested in TSMC: 641,500 Hsin Ruey Investment Co., Ltd. Shareholding: 25% Po Cherng: 15% Kung Cherng: 15% Chi Hsin: 15% Chi Cherng: 15% Cherng Huei 15% Reinvested in TSMC: 641,500 (2) TSMC Affiliated Companies December 31, 1999 Company TSMC North America TSMC Europe B.V. TSMC Japan K.K. Unit: NT(US, NLG, JPY) $K Date of Incorporation Registration Place of Paid-in Capital Business Activities Jan. 18, 1988 San Jose, California, USA US$ 1,000 Marketing & Engineering support Mar. 4, 1994 Amsterdam, The Netherlands NLG 200 Marketing & Engineering support Sep. 10, 1997 Yokohama, Japan JPY 30,000 Marketing & Engineering support TSMC Int’l Investment Ltd. Apr. 9, 1996 Tortola, British Virgin Islands US$ 389,788 Investment TSMC Partners, Ltd. TSMC Development, Inc. TSMC Technology, Inc. Mar. 26, 1998 Tortola, British Virgin Islands US$ 300 Investment Feb. 16, 1996 Delaware, USA US$ 168,601 Investment InveStar Semiconductor Development Fund Inc. Sep. 10, 1996 Cayman Island Feb. 20, 1996 Delaware, USA US$ US$ 0.001 Investment 46,350 Investment WaferTech, LLC Jun. 3, 1996 Washington, USA US$ 768,828 Wafer Manufacturing Po Cherng Investment Co., Ltd. Chi Hsin Investment Co., Ltd. Jul. 6, 1998 Jul. 6, 1998 Taipei, Taiwan Taipei, Taiwan NT$ 400,000 Investment NT$ 400,000 Investment Cherng Huei Investment Co., Ltd. Jul. 10, 1998 Taipei, Taiwan NT$ 400,000 Investment Hsin Ruey Investment Co., Ltd. Jul. 13, 1998 Taipei, Taiwan NT$ 400,000 Investment Kung Cherng Investment Co., Ltd. Jul. 14, 1998 Taipei, Taiwan NT$ 400,000 Investment Chi Cherng Investment Co., Ltd. Jul. 15, 1998 Taipei, Taiwan NT$ 400,000 Investment Vanguard Int’l Semiconductor Corp. Dec. 5, 1994 Hsin-Chu, Taiwan NT$22,000,000 IC Design & Manufacturing TSMC-Acer Semiconductor Manufacturing Inc. Mar. 31, 1990 Hsin-Chu, Taiwan NT$24,191,696 IC Design & Manufacturing NOTE: Foreign exchange rate on the reporting date is shown below: US$1 = NT$31.395 NLG1 = NT$14.33 JPY1 = NT$0.3078 60 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) (3) Business Scope of TSMC and its Affiliated Companies TSMC and its affiliates work together to provide dedicated foundry services to our customers around the world. In addition, few of TSMC’s affiliate companies are focused on conducting investment businesses. In general, TSMC and its affiliates give each other support in technology, capacity, marketing and services with an aim to create the maximum synergy, enabling TSMC to provide our worldwide customers with the best dedicated foundry services worldwide. The ultimate goal of this strategy is to ensure TSMC’s leading position in the global IC market. (4) TSMC Shareholders Representing Both Holding Companies and Subordinates December 31, 1999 Reasoning Name (Note 1) Shareholding (Note 2 ) Date of Incorporation Place of Registration Paid-in Capital Business Activities Unit: NT$K, except Shareholding Shares Holding % None The presumed interested parties representing both holding companies and subordinates include the company’s Director, the shareholders conducting business on behavior of the company, and the shareholde 61 (5) Rosters of Directors, Supervisors, and Presidents of TSMC’s Affiliated Companies December 31, 1999 Company Title Name TSMC North America Director F.C.Tseng Director Ronald C. Norris TSMC Europe B.V. Director Morris Chang Director Steve Tso Director Quincy Lin Director Andrew Shen President Hans Rohrer TSMC Japan K.K. Chairman Morris Chang Director F.C.Tseng Director Ronald C. Norris Director Makoto Onodera Supervisor Harvey Chang TSMC Int’l Investment Ltd. Director Morris Chang President F.C.Tseng TSMC Partners, Ltd. Director F.C.Tseng Director Rick Tsai Director Quincy Lin Director Steve Tso Director K.C. Chen Director Harvey Chang TSMC Development, Inc. Chairman Morris Chang President Morris Chang TSMC Technology, Inc. Chairman Morris Chang President Morris Chang InveStar Semiconductor Director Kenneth Tai Development Fund Inc. 62 Unit: NT$, except Shareholding Shareholding % - - Amount - - (TSMC holds 1,000,000 shares ) (100%) - - - - - - - - - - (TSMC holds 200 shares ) (100%) - - - - - - - - - - (TSMC holds 600 shares ) (100%) - - - - (TSMC holds 464,788,244 shares ) (100%) - - - - - - - - - - - - (TSMC holds 300,000 shares ) (100%) - - - - (TSMC International Investment Ltd. (100%) holds 168,600,800,000 shares) - - - - (TSMC International Investment Ltd. (100%) holds 1,000 shares) - (TSMC International Investment Ltd. holds 46,350,000 shares) - (97%) syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) Company Title Name WaferTech, LLC Director Morris Chang Director Ronald C. Norris Director Ken Smith Director Rick Tsai Director Gerald Fishman Director Rodney Smith Director Jimmy Lee President Ken Smith Unit: NT$, except Shareholding Shareholding Amount Common Share 262,500 Preferred Share 324,820 - Common Share 525,000 Preferred Share 32,581 - Common Share 33,334 Common Share 33,334 Common Share 33,334 % 0.10% 0.13% - 0.21% 0.01% - 0.01% 0.01% 0.01% (TSMC Development, Ltd holds 171,539,960 Preferred Shares) (67.27%) Po Cherng Investment Co., Ltd. Director K.C. Chen (Representative of Chi Hsin Investment Co., Ltd.) (Chi Hsin’s investment NT$60,000,000) (TSMC’s investment NT$99,999,960) Chi Hsin Investment Co., Ltd. Director Harvey Chang (Representative of Po Cherng Investment Co., Ltd.) (Po Cherng’s investment NT$60,000,040) (TSMC’s investment NT$99,999,960) Cherng Huei Investment Co., Ltd. Director Rick Tsai (Representative of Hsin Ruey Investment Co., Ltd.) (Hsin Ruey’s investment NT$60,000,040) (TSMC’s investment NT$99,999,960) (15%) (25%) (15%) (25%) (15%) (25%) Hsin Ruey Investment Co., Ltd. Director Rick Tsai (Representative of Cherng Huei Investment Co., Ltd.) (Cherng Huei’s investment NT$60,000,000) (15%) Kung Cherng Investment Co., Ltd.Director F.C.Tseng (Representative of Chi Cherng Investment Co., Ltd) (Chi Cherng’s investment NT$60,000,040) (TSMC’s investment NT$99,999,960) (TSMC’s investment NT$99,999,960) (25%) (15%) (25%) Chi Cherng Investment Co., Ltd Director F.C.Tseng (Representative of Kung Cherng Investment Co., Ltd.) (Kung Cherng’s investment NT$60,000,000) (15%) Vanguard Int’l Chairman Morris Chang Semiconductor Corp. Director Liu, Bor-Hong (TSMC’s investment NT$99,999,960) (25%) 3,240,448 shares (The Development Fund 0.15% (29.08%) (Representative of The Development Fund, Executive Yuan, R.O.C.) holds 639,713,750 shares) Director Liou, Ming-Jong (Representative of The Development Fund, Executive Yuan, R.O.C.) Director Shih, Chin-Tay (Representative of The Development Fund, Executive Yuan, R.O.C.) Director Wu, Quintin Y.G (Representative of USI Far East Corp.) (USI Far East Corp. (7.09%) Director Rick Tsai (Representative of TSMC) (TSMC holds 556,133,496 shares) (25.28%) holds 155,978,533 shares) 63 Company Title Name Vanguard Int’l Director F.C.Tseng (Representative of TSMC) Semiconductor Corp. Director Chiao, Yu-Heng (Representative of Walsin Lihwa Corp.) Unit: NT$, except Shareholding Shareholding Amount (Walsin Lihwa Corp. holds 58,827,741 shares) % (2.67%) Director Du, Eugene C.Y. (Representative of Orient Semiconductor Ltd.) (Orient Semiconductor Ltd. (2.60%) Director Miau, Matthew F.C. (Representative of Union Petrochemical Corp.) (Union Petrochemical Corp. (1.24%) holds 57,203,580 shares) holds 27,384,827 shares) Supervisor Yeh, Huey-Ching (Representative of The Development Fund, Executive Yuan, R.O.C.) Supervisor Chow, Sidney H. (Representative of Maw Chong Investment Co.,Ltd.) (Maw Chong Investment Co.,Ltd. (1.96%) Supervisor Hu, Benny T. (Representative of China Development Industrial Bank Inc.) (China Development Industrial Bank Inc. (1.94%) holds 43,092,356 shares) President Rick Tsai holds 42,709,252 shares) 2,095,353 shares 0.10% TSMC-Acer Semiconductor Chairman F.C.Tseng (Representative of TSMC) (TSMC holds : Common Share 348,936,000 32.00% Manufacturing Inc. Preferred B 376,815,000) 28.36% Director Morris Chang (Representative of TSMC) Director K.C. Chen (Representative of TSMC) Director J.B. Chen (Representative of TSMC) Director Stan Shin (Representative of Acer Inc.) Director Simon Lin (Representative of Acer Inc.) Director Ronald Chwang (Representative of Acer Inc.) (Acer holds : Common Share 312,784,872 28.68% Preferred B 298,342,580) 22.45% Director Hui-Ming Cheng (China Development Industrial Bank Inc. 4.44% (Representative of China Development Industrial Bank Inc.) holds : Common Share 48,431,563 Director Tieh-Min Soong Preferred B 137,059,612) 10.31% (Kuang-Hwa Investment Holding Co., Ltd (Representative of Kuang-Hwa Investment Holding Co., Ltd) holds : Common Share 71,396,368 Preferred B - ) Supervisor Harvey Chang (Representative of TSMC) Supervisor George Huang (Representative of Acer Inc.) Supervisor Raymond Soong President J.B. Chen Common Share 1,000 Preferred B 216 Common Share 300,000 Preferred B 500,000 6.55% - 0.00% 0.00% 0.03% 0.04% 64 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) (6) Operational Highlights for TSMC’s Affiliated Companies December 31, 1999 Company TSMC North America TSMC Europe B.V. TSMC Japan K.K. Paid-in Capital Assets Liabilities Net Worth Net Sales* Unit: NT$K, except EPS($) Income from Operation* Net Income* (net of tax) EPS* (net of tax) 31,395 339,066 2,866 9,234 35,280 24,868 84,044 9,329 14,699 255,022 792,648 128,857 25,952 10,168 87,918 81,527 7,995 4,205 84,345 5,572 150 84.34 27,862.29 249.76 TSMC Int’l Investment Ltd. 12,237,394 12,768,566 345 12,768,221 (1,662,062) (1,661,707) (1,007,218) TSMC Partners, Ltd. 9,419 125,894 116,005 9,889 1,905 549 121 TSMC Development, Inc. 5,293,228 13,018,596 11,699,441 1,319,155 (1,002,566) (1,005,505) (1,798,379) 0.031 176,879 513,120 (336,240) 91,459 11,562 (14,953) 1,455,158 1,577,599 283 1,577,316 336,385 109,028 125,369 24,137,355 33,565,682 13,482,740 20,082,942 5,065,535 (1,224,303) (1,522,128) 400,000 400,000 400,000 400,000 400,000 400,000 413,083 413,054 413,030 413,021 411,710 411,715 1,016 1,004 1,011 1,010 619 634 412,067 412,050 412,019 412,011 411,091 411,081 6,767 6,771 6,766 6,766 6,927 6,918 6,530 6,514 6,529 6,529 6,621 6,682 9,438 9,415 9,446 9,448 8,371 8,436 22,000,000 37,038,554 17,585,292 19,453,262 13,026,814 (2,007,016 ) (1,849,186) (0.90) 24,191,696 36,755,710 20,533,582 16,222,128 10,655,995 (5,794,994 ) (6,127,604) (5.62) (2.20) 0.40 N.A. N.A. 2.70 N.A. 0.24 0.24 0.24 0.24 0.21 0.21 TSMC Technology, Inc InveStar Semiconductor Development Fund Inc. WaferTech, LLC Po Cherng Investment Co., Ltd. Chi Hsin Investment Co., Ltd. Cherng Huei Investment Co., Ltd. Hsin Ruey Investment Co., Ltd. Kung Cherng Investment Co., Ltd. Chi Cherng Investment Co., Ltd. Vanguard Int’l Semiconductor Corp. TSMC-Acer Semiconductor Manufacturing Inc. * For the year ended December 31, 1999 65 Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation Combined Financial Statements as of December 31, 1999 Representation Letter The combined financial statements of Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation for the period January 1, 1999 to December 31, 1999 were prepared in conformity with the requirements on public companies and their affiliates, taken as a whole, of Securities and Futures Committee (SFC) in the Republic of China (ROC), the ROC regulations governing the preparation of financial statements of public companies and ROC generally accepted accounting principles. The accounting records underlying the financial statements accurately and fairly reflect, in reasonable detail, the transactions of the company and affiliates. There are no plans or intentions that may materially affect the carrying values or classifications of assets and liabilities. Very truly yours, Taiwan Semiconductor Manufacturing Company Ltd. By Morris Chang Chairman 66 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) The Board of Directors and Shareholders Taiwan Semiconductor Manufacturing Company Ltd. We have reviewed the combined financial statements of Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation for the year then ended. Our reviews were made in accordance with the guidelines for the review of combined financial statements of affiliates. It is substantially less in scope than an examination in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the combined financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the combined financial statements referred to above in order for them to be in conformity with "Regulations Governing the Preparation of Affiliates’ Combined Operating Report, Combined Financial Statements and Relationship Report" in the Republic of China. T N SOONG & CO Taiwan, ROC A member firm of Andersen Worldwide S.C. January 24, 2000 Notice to Readers The combined financial statements were not prepared with a view to complying with the published guidelines of the United States Securities and Exchange Commission or the American Institute of Certified Public Accountants ("AICPA") and have not been examined or otherwise reported upon under AICPA guidelines. They are not presented in accordance with generally accepted accounting principles in the United States of America for consolidated financial statements. 67 Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation COMBINED BALANCE SHEETS December 31, 1999 (In Thousand New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Short-term investments (Notes 2 and 5) Receivable from related parties (Note 17) Notes receivable Accounts receivable Allowance for doubtful receivables (Note 2) Allowance for sales returns and allowances (Note 2) Inventories (Notes 2 and 6) Prepayments and other current assets (Notes 17 and 22) Deferred income tax assets (Notes 2 and 16) Total Current Assets LONG-TERM INVESTMENTS (Notes 2 and 7) PROPERTIES (Notes 2, 8, 17 and 19) Cost Land and land improvements Buildings Machinery and equipment Office equipment Leased assets Total cost Accumulated depreciation Allowance for valuation loss Prepayments and construction in progress Net Properties COMBINED DEBIT (Note 2) OTHER ASSETS Deferred charges - net (Notes 2 and 9) Deferred income tax assets (Notes 2 and 16) Refundable deposits Pledged or mortgaged assets (Note 19) Miscellaneous Total Other Assets TOTAL ASSETS 68 Amount % $23,235,699 927,216 1,114,259 164,134 15,157,187 (460,111) (919,925) 9,967,233 4,748,520 2,547,130 56,481,342 7,130,226 783,809 41,987,989 185,754,339 4,683,233 562,039 9 - 1 - 6 - - 4 2 1 2 3 3 - 1 7 7 6 2 - 233,771,409 9 5 (95,900,299) ( 3 9) (2,534,642) ( 1) 28,746,476 164,082,944 1 2 6 7 2,784,765 5,942,748 9,126,737 37,596 357,530 22,558 15,487,169 1 2 4 - - - 6 $245,966,446 1 0 0 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) LIABILITIES AND SHAREHOLDERS’ EQUITY Amount % CURRENT LIABILITIES Short-term loans (Note 10) Notes and accounts payable Payable to related parties (Note 17) Other payable - construction and equipment Income tax payable (Notes 2 and 16) Current portion of non-current liabilities (Notes 11,12,13 and 19) Accrued expenses and other current liabilities (Note 22) Total Current Liabilities NON-CURRENT LIABILITIES Bank loans (Notes 11,17 and 19) Bonds payables (Notes 2 and 12) Lease obligation payable (Notes 2 and 13) Guarantee deposits (Note 20) Accrued pension obligations (Notes 2 and 15) Unrealized gain on sale - leaseback (Notes 2 and 8) Other Total Other Liabilities MINORITY INTEREST IN AFFILIATES (Note 2) Total Liabilities SHAREHOLDER’S EQUITY (Notes 2 and 14) Capital stock, $10 par value; authorized - 9,100,000 thousand shares; issued - 7,670,882 thousand shares Capital surplus Legal reserve Unappropriated earnings Cumulative translation adjustment Total Shareholders’ Equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY The accompanying notes are an integral part of the combined financial statements. $795,581 4,473,284 468,628 10,728,272 160,977 6,118,311 6,747,606 - 2 - 4 - 3 3 29,492,659 1 2 33,644,085 1 4 22,250,000 138,757 5,185,362 1,342,115 652,682 3,370 63,216,371 33,573,999 126,283,029 9 - 2 1 - - 2 6 1 3 5 1 76,708,817 3 1 10,744,988 8,258,359 25,062,256 (1,091,003) 119,683,417 5 3 1 0 - 4 9 $245,966,446 1 0 0 69 Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation COMBINED STATEMENTS OF INCOME For the Year Ended December 31, 1999 (In Thousand New Taiwan Dollars, Except Earnings Per Share) GROSS SALES (Note 17) SALES RETURNS AND ALLOWANCES NET SALES COST OF SALES (Note 17) GROSS PROFIT OPERATING EXPENSES (Note 17) General and administrative Marketing Research and development Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME Interest (Note 22) Gain on disposal of properties Insurance compensation Reversal of allowance for losses on short-term investments Rental revenue Gain on disposal of short-term investments - net Premium Income (Notes 2 and 22) Gain on disposal of long-term investments Foreign exchange gain - net (Note 2) Other Total Non-Operating Income NON-OPERATING EXPENSES Interest (Notes 2, 8, and 22) Provision for loss on properties (Note 8) Issuance costs of bonds Loss on disposal of properties Loss on option contracts (Notes 2 and 22) Investment loss recognized by equity method - net (Notes 2 and 7) Other Total Non-Operating Expenses INCOME BEFORE INCOME TAX INCOME TAX BENFFIT (Notes 2 and 16) INCOME BEFORE MINORITY INTEREST MINORITY INTEREST IN LOSS OF AFFILIATES COMBINED NET INCOME COMBINED EARNINGS PER SHARE Amount % $97,094,224 (1,606,528) 95,487,696 1 0 0 65,568,467 29,919,229 3,829,366 1,975,913 4,968,149 10,773,428 19,145,801 1,758,935 783,515 415,202 140,137 216,004 48,575 63,809 53,491 50,041 105,278 3,634,987 4,747,624 2,534,642 114,839 95,805 86,746 68,670 215,614 7,863,940 14,916,848 1,065,391 15,982,239 8,577,645 $24,559,884 6 9 3 1 4 2 5 1 1 2 0 2 1 - - - - - - - - 3 5 3 - - - - - 8 1 5 1 1 6 9 2 5 Based on weighted-average shares outstanding of 7,572,598 thousand $3.24 The accompanying notes are an integral part of the combined financial statements. 70 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation NOTES TO COMBINED FINANCIAL STATEMENTS (Amounts in Thousand New Taiwan Dollars, Except Per Share (1) GENERAL Taiwan Semiconductor Manufacturing Company Ltd. (TSMC), a Republic of China corporation, and its affiliates - Vanguard International Semiconductor Corporation (VIS) and TSMC-Acer Semiconductor Manufacturing Inc. (TASMC), are engaged mainly in the manufacture, sale, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices, and the manufacture and design of masks. Notice to Readers: The combined financial statements include the consolidated accounts of TSMC plus the accounts of VIS and TASMC , neither of which are consolidated subsidiaries of TSMC. TSMC’s consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles, would not include the assets, liabilities, revenues or expenses of VIS and TASMC. In September 1994, its shares were listed on the Taiwan Stock Exchange. In 1997, TSMC offered shares of stock in the New York Stock Exchange in the form of American Depositary Receipts. VIS’s shares are traded on the Republic of China (ROC) Over-the-Counter Securities Exchange starting March 25, 1998. TSMC has thirteen affiliates including eleven wholly-owned subsidiaries, namely, TSMC North America, Taiwan Semiconductor Manufacturing Company Europe B.V (TSMC Europe), TSMC Japan, TSMC International Investment, TSMC Partners, and 25%-owned affiliates - Po Cherng Investment, Chi Hsin Investment, Kung Cherng Investment, Chi Cherng Investment, Hsin Ruey Investment, and Cherng Huei Investment, and two which TSMC exercises significant influence - VIS (25%-owned) and TASMC (32%-owned). The presence of significant influence of TSMC on VIS results from the fact that the chairman of VIS is also the chairman of TSMC, whereas presence of significant influence of TSMC on TASMC results from the fact that the chairman of TASMC is the CEO of TSMC and that the CEO of TASMC is assigned by TSMC. Therefore, the combined financial statements include all of the aforementioned affiliates. However, the total assets or revenues of Vanguards Affiliates Inc., which is an affiliate of VIS, and its subidiaires are less than 10% of those of TSMC and, therefore, the combined financial statements did not include the information of these affiliates. TSMC North America, TSMC Europe and TSMC Japan are engaged mainly in marketing & engineering support. All of the other affiliates are engaged in investments. As of December 31, 1999, TSMC International Investment has two wholly- owned subsidiaries -- TSMC Development, Inc. and TSMC Technology Inc., -- and a 97%-owned subsidiary -- InveStar Semiconductor Development Fund, Inc. TSMC Development Inc. in turn has a 68%-owned subsidiary, namely, WaferTech, LLC. 71 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The combined financial statements include the accounts of TSMC and the aforementioned affiliates (hereinafter, referred to individually or collectively as "Company"). All significant intercompany accounts and transactions have been eliminated. Minority interests in the affiliates, including InveStar, WaferTech, VIS and TASMC are presented separately in the financial statements. Cash equivalents Government bonds acquired under repurchase agreements, commercial paper, and mutual fund acquired under repurchase agreements with original maturities of less than three months are classified as cash equivalents. Short-term investments Short-term investments are stated at the lower cost or market value. The costs of investments sold are determined by the specific identification method. Allowance for doubtful receivables Allowance for doubtful receivables is provided on the basis of a review of the collectibility of individual receivables. Sales and allowance for sales returns and others Sales are recognized when products are shipped to customers. Allowance for sales returns and others are provided based on experience; such provisions are deducted from sales and the related costs are deducted from cost of sales. Inventories Inventories are stated at the lower of standard cost (adjusted to approximate weighted average cost) or market value. Market value represents net realizable value for finished goods and work in process, and replacement value for raw materials, supplies and spare parts. Long-term investments Investments in shares of stock for which the Company exercises significant influences on the investee companies are accounted for by equity method. The difference between the investment cost and the Company’s proportionate share in the net asset of the investee companies at the date of acquisition is amortized on a straight - line method over five years. Such amortization and the Company’s proportionate share in the earnings or losses of investee companies are recognized as part of "Investment income or loss" account in the Statement of Income. Other investments in shares of stocks are stated at cost less decline in market value of listed stocks or decline in value of unlisted stocks which is considered irrecoverable; such reductions are charged to shareholders’ equity or current income, respectively. Stock dividends received are recognized only as increase in the number of stocks held on the ex-dividend date. Investments in foreign mutual funds are stated at the lower of cost or net asset value (NAV). Write-downs of cost and write-ups to original acquisition cost resulting from subsequent recovery in NAV are debited or credited to shareholders’ equity. Convertible notes and stock purchase warrants are carried at cost. 72 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) The costs of investments sold are determined by the weighted average method. Gains or losses on transactions with investee companies wherein the Company owned at least 20% of the outstanding common stock but less than a controlling interest are deferred in proportion to ownership percentage until realized through a subsequent transaction with a third party. If the gains or losses stated above are arisen form transactions involving sales by the subsidiary to the parent, an adjustment should be made in accordance with ownership percentage. Properties Properties are stated at cost less accumulated depreciation. Major additions, renewals and betterment, and interest expense incurred during the construction period are capitalized, while maintenance and repairs are expensed currently. Depreciation is provided on the straight-line method over estimated service lives which range as follows: buildings - 5 to 55 years; machinery and equipment - 5 to 10 years; office equipment - 2 to 7 years; leased assets - 2 to 3 years. Upon sale or disposal of properties, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to income. Any such gain, less applicable income tax, is transferred to capital surplus at the end of the year. Properties covered by agreements qualifying as capitl leases are carried at the lower of the present value of all minimum future rental payments, or its market value at the inception date of the lease. The lessee’s periodic rental payment includes the purchase price of the leased property, and the interest expense. Combined debit Combined debit is the excess amount of the acquisition cost of a parent over the net equity of the affiliates. Deferred charges Deferred charges are amortized on the straight-line method over the following periods: patents - 5 to 10 years; software design costs - 3 to 5 years; bonds issuance costs - 7 years and short-term credit instruments - contract period of credit instruments. Convertible bonds The excess of the contracted redemption price over the face value of the bond is amortized and recognized as interest expense over a period starting from the issue date to the last day of the redemption period or the actual redemption date, whichever is earlier, using the effective interest method. Capital stock account is credited for the face value of the bond converted into the Company’s shares of stock and the excess of the carrying value of the bond as of the date of its conversion over its face value is credited to capital surplus account. Pension benefits Net periodic pension costs are recorded on the basis of actuarial calculations. Unrecognized net transition obligation is amortized over 15 to 25 years, and unrecognized net transaction asset is amortized over 26 years. 73 Unrealized gain or loss on sale-leaseback The gain or loss resulting from the sale of leased property is deferred as unearned gain or loss on sales-leaseback. The unearned gain or loss on sales-leaseback is amortized depending on the nature of the lease. For operating leases, the unearned gain or loss is amortized over the lease term. For capital leases, however, the unearned gain or loss on sales- leaseback is amortized over the estimated service life of the leased property and the amount of amortization is accounted for as adjustment to depreciation. Income tax The company adopted interperiod tax allocation. Deferred income tax assets are recognized for the tax effects of temporary differences, unused tax credits, and operating loss carryforwards. Valuation allowance is provided for deferred income tax assets that are not certain to be realized. A deferred tax asset or liability should, according to the classification of its related asset or liability, be classified as current or non-current. However, if a deferred asset or liability cannot be related to an asset or liability in the financial statements, then it should be classified as current or non-current based on the expected length of time before it is recovered. Income taxes (10%) on undistributed earnings are recorded as expenses in the year when the shareholders have resolved that the earnings shall be retained. Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision. Derivative financial instruments Foreign currency forward exchange contracts (forward contracts), entered into for purpose other than trading, are recorded in New Taiwan dollars as assets or liabilities using the spot rates at the inception dates of the contracts. The differences in the New Taiwan dollar amounts translated using the spot rates and the amounts translated using the contracted forward rates are also recognized as premiums or discounts at the inception dates of the forward contracts. Such premiums or discounts are amortized over the terms of the forward contracts using the straight-line method and the amortizations are either deferred or recognized in income. At the balance sheet dates, the receivables or payables arising from forward contracts are restated using the prevailing spot rates and the resulting differences are recognized consistent with the recognition of the amortization of the premiums or discounts described above. The receivables and payable related to the forward contracts are netted out and the resulting net amount is presented as either an asset or liability. Also, the balances of forward exchange receivables or payables are translated on the basis of prevailing exchange rates and the resulting exchange gains or losses are credited or charged to current income. However, any premium or discount, and exchange gain or loss from hedging an identifiable foreign currency commitment is deferred to the actual transaction date and recorded as an adjustment to the transaction price. Interest rate swap transactions entered into to manage liabilities are accounted for on an accrual basis, in which cash settlement receivable or payable is recorded as an adjustment to interest income or expense. The notional amounts of the foreign currency option contracts entered into for hedging purposes are not recognized as either assets or liabilities on the contract dates. However, amounts received on call options written are recognized as 74 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) assets and amounts paid on put options bought are recognized as liabilities. Such amounts are amortized using the straight-line method over the period of the contracts and charged to current income. Gains or losses on the exercise of the options are also recognized in current income. Foreign-currency transactions Foreign-currency transactions, except derivative financial instruments, are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Gains or losses resulting from the application of different foreign exchange rates when cash in foreign currency is converted into New Taiwan dollar, or when foreign-currency receivables and payables are settled, are credited or charged to income in the year of conversion or settlement. At year-end, the balances of foreign-currency assets and liabilities are restated at prevailing exchange rates, and the resulting differences are credited or charged to current income. Translation of financial statements of foreign companies When the financial statements of a foreign company, accounted for by the equity method, are translated into the reporting currency, the exchange gains or losses resulting from such translation process are recorded as "cumulative translation adjustments" which are included as a seperate component of stockholders’ equity. Such cumulative translation adjustments are transferred into current income or loss when the foreign investee dissolved or when share in the foreign company no longer held. 75 (3) SIGNIFICANT ELIMINATING ENTRIES Company Account Amount Transaction Entity TSMC Payable to related parties $125,637 TSMC North America 13,422 13,189 3,832 730,483 539,466 184,741 47,343 198,163 17,550 23,117 25,674 59,438 22,246 48,473 TSMC Europe TSMC Japan TSMC Technology WaferTech, LLC TASMC VIS TSMC Technology WaferTech, LLC TSMC Japan TASMC VIS WaferTech, LLC TASMC VIS 4,636,780 WaferTech, LLC 808,926 381,989 692,927 99,087 87,414 81,951 20,400 8,175 TASMC VIS TSMC North America TSMC North America TSMC Europe TSMC Japan VIS WaferTech, LLC 1,672,552 TSMC Development 97,717 TSMC Technology 7,873,941 TSMC Development 313,950 627,724 25,029 142,957 13,790 64,055 63,050 TSMC Technology TSMC Development TSMC Technology WaferTech, LLC WaferTech, LLC WaferTech, LLC WaferTech, LLC Receivable from related parties Sales Purchase Marketing expenses(commissions) Marketing expenses (service charges) Marketing expenses (commissions) Marketing expenses (commissions) General and administrative expenses (consulting fee) Deferred revenue TSMC Interest receivable International Investment Notes Receivable Interest revenue TSMC Deferred revenue Technology Licensing Fee Sales Receivable 76 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) (4) CASH AND CASH EQUIVALENTS Bank deposits Commercial papers Mutual funds Government bonds acquired under repurchase agreements (5) SHORT-TERM INVESTMENTS Short-term investments aggregating $927,216 are marketable equity securities. (6) INVENTORIES Finished goods Work in process Raw materials Supplies and spare parts Allowance for losses 1999 $22,100,501 74,985 7,541 1,052,672 $23,235,699 1999 $1,313,523 7,659,840 997,004 1,124,240 11,094,607 (1,127,374) $9,967,233 77 (7) LONG-TERM INVESTMENTS Common Stocks Accounted for by equity method VIS Affiliates Inc. Systems on Silicon Manufacturing Company Pte Ltd. ( SSMC ) Accounted for by cost method Taiwan Mask (Listed stock) Powerchip Semiconductor Corp. Etron Technology Inc. Taiwan Semiconductor Technology Lian Ya Shin-Etsu Handotai Taiwan W.K. Technology Fund IV Hong Tung Venture Capital Global Test ChipStrate Technology Ritch Technology Scenix Semiconductor Walson Advanced Electronics Megic Form Factor Inc. Preferred Stocks Programmable Microelectronics Marvell Technology Integrated Memory Logic Divio Integrated Micromachines SiRF Technology Rise Technology Capella Microsystems Sensory Flow Wise Networks Equator Technologies Light Speed Semiconductor Centillium Technology Scenix Semiconductor Lara Technology Rapid Stream 78 1999 Carrying Value % of Ownership $765,530 360,177 1,125,707 32,129 2,651,216 386,545 500,000 175,500 105,000 50,000 80,000 71,613 32,927 7,407 5,407 414,481 150,000 64,360 4,726,585 47,092 139,055 23,546 15,698 4,709 41,860 47,092 12,040 39,244 15,697 42,011 68,562 23,546 66,277 83,197 32,965 1 0 0 3 2 2 9 5 1 9 1 3 7 4 1 0 5 2 1 - 1 0 1 5 1 3 1 0 2 1 - 3 3 1 3 1 3 5 2 5 6 2 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) Premier R. F. Krypton Isolation Pico Turbo Sonics 3Dfx Interactive Nanoamp Solutions T-Span System Memsic Menolithie Power System Formfactor Reflectivity Signia Convertible Note Integrated Memory Logic Sonics Rise Funds Crimson Asia Capital Horizon Ventures Fund Warrant Flow Wise Networks Allowance for loss 1999 Carrying Value % of Ownership 2 3 3 2 - 2 1 3 4 4 4 3 2 2 1 - - - 31,395 39,244 39,244 31,395 9,326 26,537 15,698 47,088 62,790 62,790 62,790 47,090 1,177,978 31,395 23,546 9,419 64,360 34,534 31,744 66,278 6 (30,688) $7,130,226 The carrying values of investments accounted for by equity method and the related investment income and loss for the year ended December 31, 1999 were based on audited financial statements of the investees in the same year as follows: 1999 ($75,977) 7,307 ($68,670) SSMC Others 79 Information on the investments is as follows: Market value of listed stocks Equity in unlisted stocks Net assets value of fund 1999 $8,031,082 4,134,917 66,278 As of December 31, 1999, the Company has unexercised stock warrants for purchase of shares, as follows: Shares Share (US$) Exercise Price Per Exercise Period 6,082 63,525 69,642 190,177 34,616 41,746 5,556 450,000 66,666 317,307 45,490 90,980 5.610 0.650 0.700 0.001 4.333 0.250 6.000 1.000 7.500 1.625 2.000 0.200 Stock(Maximum) Equator Technologies Preferred Equator Technologies Common Equator Technologies Common Flow Wise Networks Common Marvell Technology Preferred Capella Microsystems Common SiRF Technology Preferred Sonics Preferred Formfactor Preferred Lara Common Scenix Semiconductor Preferred Scenix Semiconductor Common (8) PROPERTIES Accumulated depreciation consists of the following: Land improvements Buildings Machinery and equipment Office equipment Leased assets and leasehold improvement 03/27/98-03/27/00 03/27/98-03/27/03 08/11/98-08/11/04 04/25/97-03/25/02 12/10/97-06/27/00 - 01/16/98-01/16/03 09/25/98-09/25/01 07/30/99-07/30/04 01/29/99-01/29/09 12/23/98-12/23/03 03/22/99-12/23/03 1999 $33,691 10,786,435 82,337,897 2,594,122 148,154 $95,900,299 80 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) The status of the expansion plans as of December 31, 1999, is as follows: Expansion Plan TSMC’s sixth manufacturing plant TSMC’s seventh manufacturing plant TSMC’s twelfth manufacturing plant VIS’s second manufacturing plant Interest expense capitalized in 1999 was $443,254. Estimated Total Cost Accumulated Expenditures Date of Start of Operations $66,846,000 $40,238,232 March 2000 9,711,000 9,392,000 6,912,000 266,063 252,415 June 2002 June 2002 555,700 January 2003 According to TASMC’s transformation project, in original manufacturing process of 0.25-micron logic IC technology related factory facilities, including machinery and equipment need to be rearranged and reinstalled in. The rearrangement, reinstallation and testing cost were totaling to $2,151,329 and were deferred and recorded as machinery and equipment cost in 1998. During the rearrangement and reinstallation period, the machinery equipment was not ready for use. As a result, the above machinery and equipment are ceased to be depreciated in accordance was the original schedule. The impact of depreciation totaled $2,168,661 in 1998. The management of TASMC evaluates the aforementioned machinery equipment and recognizes $2,534,642 of loss on value reduction on these assets in 1999. (9) DEFERRED CHARGES - NET Technical assistant fee Technology Patent Software design costs Cost of issuance of bonds Others (10) SHORT-TERM LOANS Bank loans: total of US$13,650 thousand, repayable by June 2000, interest 6.275%-6.83% Short-term notes and bills payable - repayable by March 2000, interest 4.40%-5.51% Discount on short-term notes and bills payable Unused credit lines as of December 31, 1999 aggregate about $12,908,627 thousand. 81 1999 $3,793,947 912,254 388,794 670,130 47,559 130,064 $5,942,748 1999 $427,694 370,000 (2,113) $795,581 (11) LONG - TERM BANK LOANS Loans (thousands) 1999 US$345,000 repayable by May 2001, interest at 6.408% in 1999 $10,831,275 US$67,565, repayable by October 2002, interest at 6.83% Repayable in semi-annual installments through June 2004, interest at 6.35%-6.80% Repayable in semi-annual installments through October 2005, interest at 6.42%-6.89% Repayable in semi-annual installments through February 2005, interest at 6.515%-6.795% Repayable in semi-annual installments through July 2004, interest at 6.765%-6.795% Repayable in semi-annual installments through February 2003, interest at 6.765%-6.795% Repayable in semi-annual installments through May 2002, interest at 6.765%-6.795% Repayable in 16 semi-annual installments commencing April 22,1994, interest at floating rate 6.12%~7.24% Repayable in 21 consecutive quarterly installments commencing June 27, 1998, interest at floating rate 8.07%~8.10% Repayable in 11 semi-annual installments commencing May 29, 1999 , interest at floating rate 6.04%~7.10% Repayable in 21 consecutive quarterly installments commencing September 23, 2000 , interest at floating rate 6.82%~6.85% Repayable in 20 consecutive quarterly installments commencing October 15, 2000 , interest at floating rate 6.19%~6.22% Repayable in 4 semi-annual installments commencing September 23, 2000 , interest at floating rate 8.73% Repayable once at December 23, 1999 and repayable In 4 semi-annual installments commencing September 18, 2000 , interest at floating rate 6.34%~6.94% Repayable in 15 consecutive quarterly installments commencing April 18, 2001, interest at floating rate 6.35%~7.52% Current portion 2,121,187 7,020,000 3,680,000 400,000 364,000 256,000 184,000 486,623 1,199,800 3,275,440 400,000 497,000 4,000,000 2,072,070 2,000,000 38,787,395 (5,143,310) $33,644,085 The loan agreements require, among other things, the maintenance of specific financial ratios. As of December 31, 1999, only TASMC has not complied to maintain the specific financial ratios for its loans, and the management of TASMC expected TSMC to negotiate with the banks as merging with TSMC is forthcoming. However, there is no final conclusion yet. Unused credit lines as of December 31, 1999 aggregate about $10,930,290 and US$5,000 thousand. 82 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) (12) BONDS PAYABLE Foreign convertible bonds - US$350,000 thousands, non-interest bearing, repayable in July 2002 $11,322,500 1999 Accretion in redemption value of bonds Converted into common stocks Redeemed before maturity Domestic unsecured bonds Repayable in March 2003, 7.71% annual interest payable semi-annually Repayable in November 2003, 7.12% annual interest payable annually 1,894,831 13,217,331 (12,914,338) (302,993) - 4,000,000 6,000,000 Repayable in October 2002 and 2004, 5.67% and 5.95% annual interest payable annually, respectively 10,000,000 Repayable in annual installments from November 6, 2000 to November 6, 2003, interest at 6.59% guaranteed by financial institution Current portion 3,000,000 23,000,000 (750,000) $22,250,000 The foreign convertible bonds can be converted into common stocks of the Company prior to its maturity at a price per share determined using an agreed formula. The Company may redeem the bonds prior to its maturity when certain conditions are met. As of December 31, 1999, $1,223,986 bonds with face value totaling to $1,223,986 were converted into 122,399 thousand shares of common stocks. The Company has redeemed the unconverted part prior to the maturity, on November 1999. The holders of the bonds with an aggregate face value of $6,000,000 and the Company can exercise resale agreements or repurchase agreements, respectively, thirty days before the second and third anniversaries of the issuance date, which range from November 18 to December 1, 1998. 83 (13) LEASE OBLIGATION PAYABLE Lease obligations payable Current portion 1 9 9 9 $363,758 (225,001) $138,757 (14) SHAREHOLDERS’ EQUITY According to the ROC Company Law, capital surplus can only be used to offset a deficit or transferred to capital. The Articles of Incorporation of TSMC provide that the following shall be appropriated from the annual net income (less any deficit): a) 10% legal reserve; b) Bonus to directors and supervisors and to employees equal to 1% and at least 1% of the remainder, respectively. These appropriations and the disposition of the remaining net income shall be resolved by the shareholders in the following year and given effect to in the financial statements of that year. Under the Integrated Income Tax System which became effective on January 1, 1998, non-corporate resident shareholders are allowed a tax credit for the income tax paid or payable by TSMC on earnings generated in 1998 and onwards. An Imputation Credit Account (ICA) is maintained by the Company for such income tax and the tax credit allocated to each shareholder. The maximum credit available for allocation to each shareholder cannot exceed the balance shown in the ICA on the date of distribution of dividends. The aforementioned appropriation for legal reserve shall be made until the reserve equals the Company’s capital. Such reserve can only be used to offset a deficit; or, when it has reached 50% thereof the paid-in capital, up to 50% thereof can be transferred to capital. 84 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) (15) PENSION PLAN TSMC, VIS and TASMC each has a pension plan covering all regular employees, which provides benefits based on length of service and average monthly salary at the time of retirement. The company makes monthly contributions, equal to 2% of salaries to a pension fund which is administered by the employees pension fund monitoring committee and deposited in the committee’s name in the Central Trust of China. Pension cost is accrued at 3%-6% of salaries and wages. Pension information are summarized as follows: a. Components of pension cost Service cost Interest cost Projected return on plan assets Amortization of prior period service cost b. Reconciliation of the fund status of the plan and accrued pension liabilities Benefit obligation Vested benefit obligation Nonvested benefit obligation Accumulated benefit obligation Additional benefits based on future salaries Projected benefit obligation Fair value of plan assets Funded status Unrecognized prior service cost Unrecognized net transitional obligation Unrecognized net gain Additional liability Accrued pension liabilities Vested benefit c. Actuarial assumptions Discount rate used in determining present values Future salary increase rate Expected rate of return on plan assets d. Contributions to pension fund e. Payments from pension fund 1999 $341,559 104,391 (34,821) 7,335 $418,464 $ - 559,680 559,680 1,249,944 1,809,624 (578,265) 1,231,359 - (166,754) 277,277 - $1,341,882 $ - 6.5% 5%-6.5% 6.5% $99,514 $3,591 85 (16) INCOME TAX Current Domestic Foreign Deferred Domestic Valuation allowance Foreign Adjustment of prior year’s income taxes Income tax benefit Deferred income tax assets consist of the following: Current Investment tax credit Accrued liabilities and others Valuation allowance Non-current Investment tax credit Operating loss carryforwards Interest expense Differences in depreciation for tax and financial purposes Deferred revenue Others Valuation allowance Integrated income tax information of TSMC: Ending balances of imputation credit account 86 1999 ($21,379) (63,388) (84,767) 2,379,368 (1,303,500) 1,075,868 7,818 1,083,686 66,472 $1,065,391 1999 $2,981,076 212,054 (646,000) $2,547,130 $11,545,027 2,427,765 201,798 (451,207) 43,753 (180,431) 13,586,705 (4,459,968) $9,126,737 1999 $1,497 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) The expected creditable ratio for 1999 was 0.006%. The imputation credit of TSMC allocated to each shareholder shall be based on the balance in the ICA on the date of distribution of dividends, thus the expected creditable ratio for 1999 may be adjusted according to the difference between the expected and actual imputation credit allowed under the regulation. The unappropraited retained earnings of TSMC and VIS as of December 31, 1999 included the earnings prior to 1997 of $752,612 and $743,888, respectively. The effective tax rates for deferred income tax applied were: TSMC- 5.9%; VIS- 20%; and TASMC -5%. Unused investment tax credits arising from investments in machinery and equipment, and research and development expenditures as of December 31, 1999 will expire as follows: Year of Expiry 2000 2001 2002 2003 The income from the following projects and services are exempt from income tax: Amount $2,921,989 5,168,052 4,362,890 2,073,172 Tax-Exemption Period Expansion of second manufacturing plant and computer-aided design services, and third manufacturing plant 1996 to 1999 Expansion of first manufacturing plant, second manufacturing plant - modules A and B and third manufacturing plant, and fourth manufacturing plant Expansion of first manufacturing plant, second manufacturing plants-modules A and B, third manufacturing plant and fourth manufacturing plant, and fifth manufacturing plant 1997 to 2000 1999 to 2002 TASMC is entitled to an income tax exemption for a period of four years for the income generated as a result of the capital increase effected in 1995. TASMC decided to commence such tax exemption from January 1, 1998. Income tax returns of TSMC through 1996 and income tax returns of VIS and TASMC through 1997 have been examined by the tax authorities. However, TASMC is contesting the assessment of tax authority for 1995 and 1996. 87 (17) RELATED PARTY TRANSACTIONS The Company engages in business transactions with the following related parties: a. Industrial Technology Research Institute (ITRI); its director is TSMC’s chairman. b. Philips Electronics N.V., (Philips), a major shareholder of TSMC. c. Systems on Silicon Manufacturing Company Pte Ltd. (SSMC), an investee of TSMC d. VIS America: an investee of VIS’s subsidiary (VIS Affiliates Inc.) e. VIS Micro: an investee of VIS’s subsidiary (VIS Affiliates Inc.) f. Orient Semiconductor Electronics Ltd. (OSE): a director of VIS g. Walsin Lihwa Corporation (WLC): a director of VIS h. WYSE Technology Taiwan LTD. (WYSE): of the same chairman with TSMC i. Acer Inc. (AI), TASMC’s supervisor and a member of board of directors of TASMC j. China Development Corporation (CDC), supervisor and a member of board of directors of TASMC k. Chiao Tung Bank (BOT), supervisor and major shareholder of TASMC before August 11, 1999. l. Investee of AI: Apacer Technology Inc. (APT) Acer Sertek Inc. (ASI) Addonics Technology Corp. (AT) AOpen Inc. (AOI) Taiwan Semiconductor (TSI) Acer Labs. Inc. (ALI) Acer Twp Corporation (ATC) m. Acer Testing Inc. (ATI): TASMC is a member of its board of directors and supervisor before March 31, 1998. n. Acer Semiconductor America Inc. (ASA), TASMC’s subsidiary. 88 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) The transactions with the foregoing parties in addition to those disclosed in other notes, are summarized as follows: 1999 Amount % During the year Sales ITRI Philips and its affiliates WYSE APT ASI AT AOI TSI Purchase APT ASI TSI Rental expense ITRI Cost of Sales OSE ITRI Philips (technical assistance fee) ATI TSI General and administrative expenses ITRI VIS Micro AI Marketing expenses VIS Micro ASA ITRI Research and development expenses VIS America ITRI Interest expenses CDC BOT 89 $132,507 2,864,149 26.436 3,673,798 839,568 459,969 317,301 211,357 $8,525,085 $7,476 20,186 25,291 $52,953 $161,488 $82,836 3,484 862,398 170,053 37,935 $1,156,706 $115 9 9 13,821 $14,035 $30,575 13,043 1 4 3 $43,761 $355,246 5 1 4 $355,760 $81,010 77,732 $158,742 - 3 - 4 1 - - - 8 - - - - - - 8 - - 8 - - - - 2 1 - 3 7 - 7 - - - Purchase of machinery and equipment WLC ASI At end of year Receivable ITRI Philips and its affiliates SSMC WYSE APT ASI AOI TSI Prepayments and other current assets Prepaid rental - ITRI Payable Philips and its affiliates VIS America OSE VIS Micro ITRI WLC ASI TSI ATI Others Long-term bank loans CDC BOT 1999 Amount % $938 22,083 $23,021 $18,458 133,245 5,353 6,327 632,380 166,765 120,020 31,711 - - - 2 1 2 - - 5 7 1 5 1 1 3 $1,114,259 1 0 0 $42,541 $305,756 34,855 12,574 3,532 2,001 9 3 8 8,717 37,182 62,155 9 1 8 $468,628 $1,600,000 897,000 $2,497,000 1 6 5 8 3 1 - - 2 8 1 3 - 1 0 0 5 2 7 Transactions with related parties are based on normal prices and collection or payment terms except for that VIS America and VIS Micro perform research and development and marketing activities for VIS, respectively and VIS pays actual expenses incurred related to such undertakings plus a 5% mark-up. 90 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) (18) LONG-TERM LEASES TSMC leases the land, building and certain machinery and equipment of its first manufacturing plant from ITRI under agreements which will expire in March 2002, at annual rentals and other charges aggregating $170,166. The agreements are renewable upon expiration. TSMC leases the land sites of its second through tenth manufacturing plants from the Science-Based Industrial Park Administration under agreements which will expire on various dates from March 2008 to April 2018 with annual rentals aggregating $42,149. The agreements are also renewable upon expiration. TSMC North America leases its office premises and certain equipment under non-cancelable operating agreement which will expire in June 2003. TSMC Europe entered into a lease agreement for its office premises which will expire in 2001, annual rent currently is totaled to $ 37,328. VIS leases the sites of its manufacturing plant and parking lot from the Hsinchu Science-Based Industrial Park Administration under agreements which will expire on April 2010, June 2015 and March 2018, but renewable upon expiration. Annual rentals aggregate to $32,668. VIS also leases machinery and equipment from Condisco Trade Inc. in terms of operating lease through December 2002. Annual rentals aggregate to $263,218 (US$8,409 thousand). TASMC entered into a twenty-year land lease agreement with Science-Based Industrial Park Administration to lease its plant site. The annual lease payment was $32,343. To renew the lease, TASMC must submit a written application three months before the lease expires. Future minimum rentals under the aforementioned leases are as follows: Year 2000 2001 2002 2003 2004 2005-2018 (19) PLEDGED OR MORTGAGED ASSETS Certain assets have been pledged or mortgaged as collateral as follows: Time deposit Properties (net) - for bank loans 91 Amount $585,873 533,965 389,199 115,161 115,161 1,225,077 $2,964,436 1999 $357,530 60,074,850 $60,432,380 (20) COMMITMENTS AS OF DECEMBER 31, 1999 a. Under a technical cooperation agreement entered into by TSMC and Philips, as amended on May 12, 1997, TSMC shall pay technical assistance fee at a percentage of net sales of certain products, less specified deductions. The agreement shall remain in force up to July 9, 2007 and thereafter automatically renewed for successive periods of three years. Under the amended agreement, the fee is subject to reduction by the amounts TSMC pays to any third party for settling any licensing/ infringement issue after the first five-year periods of the amended agreement, provided that the fee after reduction will not be below a certain percentage of the net selling price. b. Subject to certain equity ownership and notice requirements, Philips and its affiliates can avail each year up to 30% of TSMC’s production capacity. c. Under a submicron technology license agreement entered into by TSMC and ITRI, TSMC shall pay ITRI with license fees of $129,400 (including 5% value-added tax) plus royalty fee at an agreed percentage of net sales of certain products through December 31, 1998. As of December 31, 1995, TSMC has paid the entire license fee. d. Under a technical cooperation agreement entered into by TSMC and ITRI, TSMC shall reserve and allocate up to 35% of its production capacity, for use by the Ministry of Economic Affairs (MOEA) or any other party as designated by the MOEA. e. Under a purchase agreement with three customers, TSMC shall supply them with, and the three customers shall buy, a certain portion of wafers produced by WaferTech, LLC. If TSMC or any of the customers is unable or unwilling to supply or buy the minimum purchase allocation, the defaulting party shall compensate the other party at the full price of the products, less certain costs. f. Under several foundry agreements entered into by TSMC, TSMC shall allocate a portion of its production output for sale to certain major customers from whom guarantee deposits of US$164,765 thousand had been received as of December 31, 1999. g. On February 27, 1998, the Tax Bureau assessed TSMC additional income taxes of about $105,000 and $125,000 for 1994 and 1995, respectively, arising from the contention by the Bureau that TSMC’s first manufacturing plant was not a science-based industry under the Science-Based Industrial Park Regulations. TSMC is contesting the assessment, but has already accrued the amount of tax assessment. The additional income tax for 1994 has been reassessed to be $21,887. h. Under a Shareholders Agreement entered into by TSMC, Philips and EDB Investments Pte Ltd. dated March 30, 1999, the parties agreed to: (a) form a joint venture company to be called Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) for the purpose of building an integrated circuit foundry in Singapore, (b) set SSMC’s total authorized capital at about S$1.2 billion (about NT$22,800,000), and, (c) allow the Company to invest 32% of SSMC’s capital. TSMC and Philips committed to buy a certain percentage of the production capacity of SSMC. If any party is unable or unwilling to buy the committed purchase allocation and the capacity utilization of SSMC falls below a certain percentage of total available capacity, such party shall compensate SSMC for all related unavoidable costs. i. Under a Technical Cooperation Agreement with SSMC signed on May 12, 1999, SSMC shall pay TSMC remuneration for the technology service provided by SSMC at a certain percentage of net selling prices of its products. The agreement shall remain in force for ten years, and thereafter automatically continue for successive periods of five years unless and until terminated by either party under certain conditions. j. VIS shall pay royalties under various patent/license agreements as follows: 1) ITRI - at a specific percentage of sales of certain products for five years from November 11, 1994. 2) LUCENT Technologies, Inc. - a) at a specific percentage of net sales of certain products for five years from January 1996; b) at a specific amount for product and technology development, within a certain period from January 1998; c) at a specific amount in three installments within three years and a percentage of net sales of certain products for three years from January 1998; d) at a specific amount and a specific percentage of net sales of certain products within two years from January 1998. 92 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) 3) Texas Instruments Incorporated- at a specific percentage of net sales of certain products for ten years from January 1997. 4) HITACHI Corporation - at a specific amount in semi-annual installments within five years from May 1997. 5) Motorola Corporation - at a specific amount in four installments from September 1997 to December 2000. 6) Sun Microsystems - at a specific amount and a specific percentage of net sales of certain products before March 2003. 7) NEC Corporation - at a specific amount in six installments from February 1999 to 2003. 8) Mitsubishi Corporation - at a specific amount from August 1999. k. Under a new product development agreement between VIS and VIS America (an investee of VIS Affiliates Inc.), VIS shall pay a design fee covering the related expenses with a 5% mark-up. l. Under a product and technology development agreement entered into by VIS and Etron Technology Inc., VIS shall pay a specific amount of development fee within seven years and a specific percentage of net sales of certain product from September 1998. m. VIS provides guarantee of borrowings of VIS America for US$1,500 thousand n. Under a management agreement entered into by TSMC and InveStar Capital Inc. (ISC) of the Cayman Islands provides investment and administrative services to TSMC for which ISC shall receive quarterly, commencing from October 1, 1996, a management fee of 2% each year of total weighted average paid-in capital and capital surplus of TSMC excluding retained earnings and losses. o. WaferTech has recorded a reserve of USD 16,000 thousand for the litigation. The litigation alleges that the Company caused the contractors to incur additional labor and material costs outside the contracts. The reserve is reflected in accrued construction and equipment payables with the offset to construction in progress. On January 19, 2000,WaferTech entered into a settlement agreement with one of the construction contractors in the amount of USD $10,750 thousand. Payment of the settlement amount will be made in four installments throughout fiscal year 2000. p. In 1996, WaferTech adopted an Executive Incentive Plan, which was amended in 1997. Under the 1997 amendment, the Board of Directors approved the Senior Executive Incentive Plan and the Employee Incentive Plan ("Plan") under which officers, key employees and nonemployee directors may be granted option rights. As WaferTech is a limited liability company and does not have shares of stock, each option right granted pursuant to the Plans provides grantees rights to purchase ownership interests in WaferTech. The Plans provide for approximately 6% of the total ownership interests to be available for grant, represented by 13.5 million option rights. For option rights granted to date, the option purchase price exceeded fair value at the date of grant. While WaferTech may grant option rights to employees which become exercisable at different times or within different periods, it has generally granted option rights to employees which are exercisable on a cumulative basis in annual installments of 33-1/3% each on the third, fourth and fifth anniversaries of the date of grant. 93 The following table summarizes information about the Plans: Outstanding Option Rights Option Rights Available For Grant Number of Option Rights Balance, January 1, 1999 Options granted Option price > fair market value Options exercised Options canceled Balance, December 31, 1999 6,400,252 7,099,748 (3,084,305) 3,084,305 1,119,323 (1,119,323) 838,650 (838,650) 5,273,920 8,226,080 Exercise Price 0.74 0.86 0.74 0.74 0.78 These options will expire if not exercised at specific dates from May 2006 to December 2009. WaferTech has elected to follow U. S. APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its option plan. Under APB No. 25, because the exercise price of WaferTech’s option rights exceeds the market value of the underlying ownership interests on the date of grant, no compensation expense is recognized in WaferTech’s financial statements. WaferTech has computed for pro forma disclosure purposes the fair value of each option grant, as defined by U.S. Statement of Financial Accounting Standards No. 123, "Stock-Based Compensation" (SFAS 123), using the Black-Scholes option pricing model with the following assumptions: Risk free interest rate Expected dividend yield Expected lives 1999 7.00% 0 5 years As WaferTech is not publicly traded, a volatility factor was not utilized in the pricing computation. q.TSMC provides collateral for loans of US$68,000 thousand obtained by TSMC Development, Inc. r. TSMC has unused credit lines as of December 31, 1999 aggregating about $138,738. s. VIS has unused letters of credit aggregating about US$3,576 thousand and JPY601,375 thousand. t. TASMC has unused credit lines as of December 31, 1999 aggregating about $1,030,451. u.TASMC has entered into a technology licensing agreement with other companies in June 1998. According to the agreement, TASMC would pay certain technical service fees in several installments to obtain logic IC manufacturing technologies. 94 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) (21) OTHER SIGNIFICANT EVENTS TSMC has two merger agreements signed on December 30, 1999 and January 7, 2000, with TASMC and WSMC, respectively. TSMC will acquire and merge TASMC and WSMC. TSMC shall be the surviving company, and TASMC and WSMC shall be dissolved after the merger. The consolidation date is tentatively scheduled for June 30, 2000. The agreed exchange ratio is five shares of TASMC to one share of TSMC, (The exchange ratio will be adjusted again based on the same proportion of TSMC’s stock dividends once such dividends are declared by the consolidation date.), and two shares of WSMC to one share of TSMC. The Agreement shall be further granted approval by the shareholders from both companies and the governing regulator. The capital of TSMC will be expected to increase by 1,488,684 thousand shares of common stock (such number will be adjusted after declaration of TSMC’s 1999 stock dividend.) (22) FINANCIAL INSTRUMENTS The Company entered into derivative financial instrument transactions for the twelve months ended December 31, 1999 to hedge foreign-currency denominated receivables or payables, interest rate fluctuations and identifiable foreign currency commitments. The strategy is to hedge most of the market price risks. Certain information on these contracts is as follows: a. Outstanding forward exchange contracts as of December 31, 1999: 1999 Currency Contract Amount (Thousands) Fair Value (Thousands) Maturity Maturity Amount (Thousands) Buy Buy Buy Sell Sell Sell Sell US$ JPY NLG US$ US$ US$ US$ US$ 25,000 JPY2,472,080 Jul. 2000 NTD 879,154 JPY1,916,783 US$ 19,050 Feb. to Aug. 2000 USD 18,957 NLG 65,133 US$ 30,185 Mar. to Sep. 2000 USD 31,604 US$ 81,367 JPY8,303,350 Jan. to Jul. 2000 NTD 2,564,297 US$ 16,000 NLG 34,926 US$ 30,000 NTD 941,847 Jan. 2000 Jan. 2000 NTD 497,159 NTD 947,880 US$ 23,000 NTD 721,769 Jan. to Jun. 2000 NTD 725,426 Receivables and payables from forward exchange contracts (shown in the balance sheets as part of "Other current assets" or "Other current liabilities" accounts) as of December 31, 1999 aggregate about $29,797 and $147,314, respectively. Net exchange gains for the year ended December 31, 1999 was $108,695. The net assets or liabilities hedged by the above forward exchange contracts are as follows: Accounts receivable Accounts payable and other payable - construction and equipment Guarantee deposits Commitemets for purchase of properties 95 Thousands 1999 U S $ 415,537 151,392 764,765 J P Y1,916,783 N L G 65,133 b. Interest rate swaps Interest rate swap transactions entered into to hedge exposure to rising interest rates on its floating rate for long-term bank loans. These transactions are summarized as follows: Contract Date April 28, 1998 April 29, 1998 June 26, 1998 June 26, 1998 October 13,1997 April 27,1998 October 26,1997 December 9,1997 January 14,1998 Period Amount(Thousands) May 21, 1998 to May 21, 2003 May 21, 1998 to May 21, 2003 June 26, 1998 to June 26, 2003 July 6,1998 to July 6, 2003 October 15,1997 to October 15,2000 April 29,1998 to October 29,2000 October 28,1997 to October 28,2000 December 11,1997 to December 11,2000 January 16,1998 to January 16,2003 NTD2,000,000 NTD1,000,000 NTD1,000,000 NTD1,000,000 USD 100,000 USD USD USD USD 50,000 50,000 50,000 5,000 Interest revenue and expense on these loans for the twelve months ended December 31, 1999 were $2,927 and $112,213, respectively. c. Option contracts Foreign currency option contracts are entered into by TSMC to hedge risks of exchange rate fluctuations arising from its anticipated U.S. dollar cash receipts from its export sales or Japanese Yen obligations related to its importation of materials and machinery and equipment. Outstanding option contracts as of December 31, 1999 were as follows: Contract Currency Contract Amount (Thousands) Carrying Value Fair Value Strike Price Maturity Call option sell US$ US$100,000 $3,911 $3,911 $0.9785~0.9940 Jan 2000 Call option sell US$ US$60,000 3,035 3,035 106.6 (US$/JPY) Jan 2000 (US$/EUR) For the twelve months ended December 31, 1999, the Company realized premium income of $63,809 on foreign currency put options written and incurred losses of $86,746 on foreign currency call options bought. 96 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) d. Exchange and interest rate swap Exchange and interest rate swap are entered into by TASMC to hedge foreign currency needs arising from transactions of imports, exports and the financing arrangement of foreign currency. These transactions are summarized as follows: December 31,1999 National Amount Maturity date Interest rate range - Paid Interest rate range - Received USD 13,333 USD 14,286 USD 14,286 USD 7,143 USD 10,000 USD USD 5,000 8,333 September 23, 2000 90 day NTD rate plus 0.28% Six month USD LIBOR May 29, 2002 May 29, 2002 May 29, 2002 April 19, 2000 April 19, 2000 April 22, 2002 90 day NTD rate plus 0.28% Six month USD LIBOR 90 day NTD rate plus 0.28% Six month USD LIBOR 90 day NTD rate plus 0.25% Six month USD LIBOR 90 day NTD rate plus 0.1% Three month USD LIBOR 90 day NTD rate plus 0.1% Three month USD LIBOR 90 day NTD rate plus 0.14% Six month USD LIBOR As of December 31, 1999, payables from exchange and interest rate swap aggregate about $53,330 (shown in the balance sheets as part of "Other current liabilities" account). Foreign exchange loss and interest expense arising from these contracts for the twelve months ended December 31, 1999 were $77,786 and $39,556, respectively. e. Transaction risk 1) Credit risk: the banks with which the Company has entered into the above contracts are reputable and, therefore, the Company is not expected to be exposed to significant credit risks. 2) Market price risk: All derivative financial instruments are for hedging receivables or payables denominated in foreign currencies, interest rate fluctations and foreign currency commitments. Gains or losses from forward exchange contracts for hedging foreign currency denominated assets or liabilities are likely to be offset by gains or losses realized. Gain or loss from hedging an identifiable foreign currency commitment is deferred to the actual transaction date and recorded as an adjustment to the transaction price. Interest rate risks are also controlled as the expected cost of capital is fixed. Thus, market price risks from exchange rate and interest rate fluctuations are minimal. 3) Liquidity and cash flow: The purpose of forward exchange contracts and option contracts is to limit the Company’s exposure to loss resulting from adverse fluctuations in assets and liabilities denominated in foreign currency and foreign currency purchase commitments. Interest rate swap transactions result in adjustments for interest only. Therefore, no significant extra cash requirement is expected. 97 f. The estimated fair values of the company’s financial instruments are as follows: Non-derivative financial instruments Assets Cash and cash equivalents Short-term investments Receivables from related parties Accounts and notes receivable Long-term investments Refundable deposits Liabilities Payable to related parties Notes and Accounts payable Other payable - construction and equipment Bank loans (includes current portion) Guarantee deposits Derivative financial instruments Forward exchange contracts (buy) Forward exchange contracts (sell) Interest rate swaps Option December 31, 1999 Carrying/Notional Amount Fair Value $23,235,699 $23,235,699 927,216 1,114,259 15,321321 7,130,226 37,596 468,628 4,473,284 10,728,272 62,151,153 5,185,362 2,372,219 4,718,598 9,898 6,946 2,554,428 1,114,259 15,321,321 12,232,277 37,596 468,628 4,473,284 10,728,272 62,219,503 5,185,362 2,306,638 4,719,877 8,750 6,946 Fair values of financial instruments were determined as follows: 1) Short-term financial instruments -- carrying values. 2) Short-term investments -- market values. 3) Long-term investments - market value for listed companies and net equity value for the others. 4) Refundable deposits -- carrying values. 5) Long-term bank loans are forecasted using cash flows discounted at present value, using discount rates which are interest rates of similar long-term liabilities. Long-term bonds payable are discounted at present values. Fair values of other long-term liabilities are also their carrying values as they use floating interest rates. 6) Derivative financial instruments -- based on outright forward rates and interest rate in each contract. 7) Financial instruments or non-financial instruments are not necessarily all disclosed at fair values; accordingly, the sum of the fair values of the financial instruments listed above does not equal to the fair value of TSMC and its affiliates. 98 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) (23) SEGMENT FINANCIAL INFORMATION a. Geographic information 1999 Sales to unaffiliated customers Transfers between geographic areas Total sales Gross profit Operating expenses Non-operating income Non-operating expenses Income before income tax Minority interest Identifiable assets Long-term investments Total assets b. Gross Export sales Area America Asia Europe Others Overseas Domestic Adjustments and Elimination $12,059,737 975,431 $13,035,168 $4,962,308 $83,427,959 4,696,218 $88,124,177 $30,628,570 $ - (5,671,649) ($5,671,649) ($5,671,649) $34,807,935 $204,829,696 ($801,411) Combined $95,487,696 - $95,487,696 $29,919,229 (10,773,428) 3,634,987 (7,863,940) $14,916,848 ($8,577,645) $238,836,220 7,130,226 $245,966,446 1999 $42,591,567 17,445,429 6,769,052 2,603 $66,808,651 The export sales information of TSMC is presented by billed regions. c. No single customer accounts for more than 10% of total sales. 99 (24) ADDITIONAL DISLCLOSURES REQUIRED FOR PUBLIC COMPANIES According to the requirements of SFC as announced on March 31, 1999, TSMC and affiliates should make additional disclosures as follows: a. Financing provided to related parties: please see table 1 attached. b. Collateral provided to related parties: please see table 2 attached. c. Marketable Securities held at the end of the year: please see table 3 attached. d. Balance of Marketable securities acquired, disposed of and held, exceeding 100 million or 20% of the issued capital: please see table 4 attached. e. Acquisition of long-term equity investment, properties exceeding 100 million or 20% of issued capital: please see table 5 attached. f. Transaction of purchase or sales with related parties amounting to more than 100 million or 20% of the issued capital: please see table 6 attached. g. Receivable from related parties amounting to more than 100 million or 20% of the issued capital : please see table 7 attached. h. Financial instruments of the investees: none i. Information on investees on which the Company exercises significant influences: please see table 8 attached. 100 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation Financing provided to related parties For the twelve months ended December 31, 1999 (Amounts in Thousand New Taiwan Dollars, unless otherwise specified) Maximum balance for the period Ending balance (thousand) Interest Issue Allowance for bad debt per book Mortage Item Value Transaction Financing amount limit (Note2) Table 1 Financing provider Accounts Transaction entity Limit on No. Name 0 TSMC Receivables SSMC (Note1) from related WaferTech, LLC parties TSMC Japan K.K TSMC Technology VIS TASMC Prepaid rents ITRI Prepayments WaferTech, LLC to Suppliers Payments for others $ - $ 5,597 350,969 184,877 17,550 47,753 2,750 9,777 80,985 662,029 $ 5,353 - 184,877 17,550 47,343 1,608 4,159 42,541 - - - - - - - - - - Sale of Equipment Excess on payment made Payments for others Payments for others Payments for others Payments for others Rental expenditure Sales receipts - - - - - - - - - - - - - - - - - - - - - - - - $ - $ 5,597 $ 15,341,763 - - - - - - - - - - - - - 350,969 184,877 17,550 47,753 2,750 9,777 161,488 4,636,780 - - 407,538 - 355,246 1 2 BVI VIS Other TSMC Development - USD 304,077 USD 304,077 7.75% Operating capital receivables TSMC Technology USD 13,112 USD 13,112 7.75% Operating capital Receivables TSMC (Note 1) 20,400 20,400 from related parties Prepaid expenses ITRI VIS-America 50 78,510 - - - - - Rental income and 408 technology revenue Return on royalty Prepayments for product development - - Note 1: not exceeding 10% of the issued capital of the Company for each transaction entity, but also limiting to 30% of the issued capital of each transaction entity Note 2: not exceeding 20% of the issued capital of the Company 101 Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation Collateral provided to related parties For the twelve months ended December 31, 1999 Table 2 (Amounts in Thousand New Taiwan Dollars, unless otherwise specified) Collateral provider No. Name Name Transaction Entity Nature of the relationship Limitation on amount Maximum outstanding of collateral amount (Thousands) Ending balance (Thousands) Amount of % of accumulated collateral guaranteed amount of collateral on of collateral by properties provided(Note 1) Limit on amount net equity of the latest financial statement 0 1 TSMC TSMC Affiliate of (Note 2 )with the exception $ 4,608,276 $ 2,134,860 Development TSMC of approval by BOD (USD 145,500) (USD 68,000) VIS VIS- America Subsidiary of (Note 2) VIS Affiliates Inc. 46,950 46,950 (USD1,500) (USD1,500) - - 1.77% $ 23,012,645 0.24% 6,600,000 Note 1:30% of the issued capital of the Company Note 2:not exceeding 10% of the issued capital of the Company,but limiting to the issued capital of the collateral provider. 102 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation Marketable Securities held as of December 31, 1999 Table 3 TSMC: (Amounts in Thousand New Taiwan Dollars, unless otherwise specified) December 31, 1999 Carrying value % of ownership Market value or net asset value Type Marketable securities Relation with the issuer Account Stock Taipei Bank - Short-term investment TSMC North America Subsidiary Long-term investment TSMC Europe B.V. TSMC Japan K.K. VIS Subsidiary Long-term investment Subsidiary Long-term investment Investee Long-term investment TSMC International Investment, Ltd. Subsidiary Long-term investment Po Cherng Investment Co., Ltd. Chi Hsin Investment Co., Ltd. Investee Investee Long-term investment Long-term investment Kung Cherng Investment Co., Ltd. Investee Long-term investment Chi Cherng Investment Co., Ltd. Hsin Ruey Investment Co., Ltd. Investee Investee Long-term investment Long-term investment Cherng Huei Investment Co., Ltd. Investee Long-term investment TSMC Partners, Ltd. Subsidiary Long-term investment SSMC TASMC (Common) TASMC (Preferred) Taiwan Mask Corp. United Industrial Gases Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Investee Investee Investee - - - - Taiwan Semiconductor Technology Corp. - Hon Tung Ventures Capital Fund Crimson Asia Capital Horizon Ventures Fund - - - TSMC International Investment, Inc.: Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Shares (thousand) 8,750 1,000 - 1 556,133 389,788 - - - - - - 300 26 348,936 376,815 6,261 10,058 10,500 5,000 50,000 8,000 N/A N/A $ 236,250 255,025 25,956 10,168 5,010,897 12,454,280 103,017 103,012 102,773 102,770 103,003 103,005 9,968 360,177 3,630,193 4,854,742 32,129 146,250 105,000 50,000 500,000 80,000 34,534 31,744 Stock InveStar Semiconductor Subsidiary Long-term investment 45,000 USD 48,778 Development Fund Inc. TSMC Development Subsidiary Long-term investment TSMC Technology 3DFX, Interactive Subsidiary Long-term investment - Long-term investment 1 1 68 USD 42,018 (USD 2,020) USD 297 103 N/A 100 100 100 25 100 25 25 25 25 25 25 100 32 32 28 2 11 7 4 19 10 N/A N/A 97 100 100 - $ 241,850 255,025 25,956 10,168 19,575,899 12,454,280 103,017 103,012 102,773 102,770 103,003 103,005 9,968 360,177 1,841,747 3,768,150 177,743 154,477 74,290 67,040 458,340 80,157 34,534 31,744 USD 48,778 USD 42,018 (USD 2,020) USD 625 V I S : Type Marketable securities Relation with the issuer Account Stock VIS Associates Inc. Investee Long-term investment Powerchip Semiconductor Corp. Investee Long-term investment Walson Advanced Electronics Ltd. Investee Long-term investment Etron Technology, Inc. MEGIC Corporation Form Factor Inc. Investee Investee Investee Long-term investment Long-term investment Long-term investment United Industrial Gases Co., Ltd. Investee Long-term investment Shares (thousand) 23,570 151,110 31,410 5,775 15,000 267 2,011 December 31, 1999 Carrying value % of ownership 765,530 2,651,216 414,481 386,545 150,000 64,360 29,250 100 9 10 5 15 1 2 Market value or net asset value Note 7,238,856 Note 614,483 Note Note Note TSMC Development: Equity Interest WaferTech, LLC Subsidiary Long-term investment - USD 401,464 68 USD 401,464 InveStar Semiconductor Development Fund Inc.: Stock Common Global Test Corp. Chipstrate Technology, Inc. Rictech Technology, Inc. Sage,Inc Silicon Image Scenix Semiconductor, Inc Vtesse Semiconductor Long-term investment Long-term investment Long-term investment Short-term investment Short-term investment Long-term investment Short-term investment Preferred Programmable Microelectronics Corp. Long-term investment Marvell Technology Group, Ltd. Integrated Memory Logic, Inc. Long-term investment Long-term investment Divio, Inc. (Next Wave Technology, Inc.) Long-term investment Integrated Micromachines, Inc. SiRF Technology, Inc. Rise Technology Company Capella Microsystems, Inc. Sensory, Inc. Flow Wise Networks, Inc. Equator Technologies, Inc. Light Speed Semiconductor, Corp. Centillium Technology, Corp. Scenix Semiconductor, Inc. Lara Technology, Inc. Rapid Stream, Inc. Troopian, Inc. (Premier R.F. Inc.) Krypton Isolation, Inc. 104 Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 71,613 32,927 7,407 45,523 47,093 5,407 21,617 47,092 139,055 23,546 15,698 4,709 41,860 47,092 12,040 39,244 15,697 42,011 68,562 23,546 66,277 83,197 32,965 31,395 39,244 5 2 1 - - - - 3 10 2 1 - 3 3 1 3 1 3 5 2 5 6 2 2 3 74,738 35,874 7,587 251,663 942,692 5,407 110,004 62,162 150,985 23,546 45,000 5,651 54,418 47,093 9,368 39,244 11,228 42,011 101,238 28,256 42,731 117,446 70,152 61,824 39,244 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) InveStar Semiconductor Development Fund Inc.: Type Marketable securities Relation with the issuer Account Menolithi Power System, Inc. Formfactor, Inc. Reflectivity, Inc. Signia, Inc. Warrant Flow Wise Networks, Inc. Convertible Rise,Inc notes Integrated Memory Logic, Inc. Sonics, Inc. Note: No market value available for unlisted stocks. Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment December 31, 1999 Carrying value % of ownership Shares (thousand) Market value or net asset value 62,790 62,790 62,790 47,090 6 9,419 31,395 23,546 4 4 4 3 - 1 2 2 62,790 62,790 62,790 47,093 6 9,419 31,395 23,546 105 Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation Balance of Marketable securities acquired, disposed of and held exceeding 100 million or 20% of the issued capital For the twelve months ended December 31, 1999 Table 4 T S M C : Marketable Securities (Amounts in Thousand New Taiwan Dollars, unless otherwise specified) Balance. as of January 1, 1999 Acquisition Disposal No. of shares (thousands) Amount (thousands) No. of shares (thousands) Amount (thousands) No. of shares (thousands) Amount (thousands) Balance as of December 31, 1999 Amount (thousands) (Note 1) No. of shares (thousands) Gain(loss) on disposal International Commercial Bank of China- stock 4,117 $ 144,095 - $ - $ - $ 9,025 The Wan Pao Securities Investment Trust Fund China Money Mgm’t Securities Investment Trust Fund Kwang Hua Bond Fund Jin-sun Bond Fund Capital Safe Income Securities Investment Trust Fund First Global Investment Trust Wan Tai Bond Fund President Home run Bond Fund Grand Cathay Bond Fund TASMC- common stock TASMC- preferred stock Systems on Silicon Manufacturing Company(SSMC) - stock - - - - - - - - - - - - - - - - - - - - - - Etron Technology, Inc. - stock 5,156 386,545 13,385 8,829 13,574 15,113 14,015 15,443 13,814 18,612 348,936 376,815 26 - 164,000 110,000 170,000 170,000 170,000 180,000 160,000 200,000 3,314,892 4,854,742 442,792 4,117 13,385 8,829 13,574 15,113 14,015 15,443 13,814 18,612 - - - $ 114,095 164,000 110,000 170,000 170,000 170,000 180,000 160,000 200,000 - - - - 5,156 386,545 - - - - - - - - - - - - - - - - - 873 760 1,227 1,227 1,212 1,192 1,061 1,292 - - - 348,936 3,630,193 376,815 4,854,742 360,177 26 - - (1,160) TSMC International Investment Ltd. - stock 379,788 11,096,090 85,000 2,705,400 TSMC North America - stock 1,000 178,294 - - VIS - stock 521,418 4,723,014 34,716 694,320 Po Cherng Investment Co, Ltd. - stock Chi Hsin Investment Co, Ltd. - stock Kung Cherng Investment Co, Ltd. - stock Chi Cherng Investment Co, Ltd. - stock Hsin Ruey Investment Co, Ltd. - stock Cherng Huei Investment Co, Ltd. - stock - - - - - - Taiwan Semiconductor Technology Corp. - stock United Industrial Gases Co., Ltd. - stock Shin-Etsu Handotai Taiwan Co., Ltd. - stock 50,000 8,746 10,500 100,657 100,659 100,680 100,661 100,641 100,643 500,000 146,250 105,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 464,788 12,454,280 1,000 255,025 556,133 5,010,897 - - - - - - 50,000 10,058 10,500 103,017 103,012 102,773 102,770 103,003 103,005 500,000 146,250 105,000 - - - - - - - - - - - - Taipei Bank - stock U.S. TREASURY NOTES U.S.AGENCY BACKED BONDS FEDERAL HOME LN MTG CORP FNMA NATIONS BANK CORP NOTE NORWEST CORP MTN ABN AMRO BK GLOBAL SUB-NOTE 106 - - - - - - - - - 10,000 270,000 1,250 33,750 8,750 236,250 613 2,820,718 864,202 612,422 240,753 103,977 67,427 66,599 - - - - - - - - 988,405 - - - 63,010 52,523 - - - - - - - 2,820,718 1,852,607 612,422 240,753 103,977 130,437 119,122 - - - - - - - - - - - - - - - - - - - - - syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) Marketable Securities Balance. as of January 1, 1999 Acquisition Disposal No. of shares (thousands) Amount (thousands) No. of shares (thousands) Amount (thousands) No. of shares (thousands) Amount (thousands) Balance as of December 31, 1999 Amount (thousands) (Note 1) No. of shares (thousands) Gain(loss) on disposal DISCOVERY CARD MASTER TIER I SERIAL 98-4 CITI CORP MTN - - - 50,172 TSMC International Investment Ltd.: InveStar Semiconductor Development Fund Inc. - stock 45,000 USD 45,009 TSMC Development Inc. - stock 1 USD 12,705 - - - - 128,373 114,902 - USD 85,000 128,373 165,074 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 45,000 USD 48,778 1 USD 42,018 5,775 386,545 151,110 2,651,216 15,000 23,570 31,410 150,000 765,530 414,481 -USD 401,464 - - - - - - - - - - - - - - - - - - - - - - - 313 1,116 826 5,254 128 3,289 291 368 333 5,477 285 V I S : Etron Technology, Inc. - stock Powerchip Semiconductor Corp. - stock MEGIC Corporation - stock VIS Associates, Inc. - stock Walsin Advanced Electronics Ltd. - stock TSMC Development: - - - - - - 5,156 151,110 15,000 23,570 31,410 780,247 414,481 386,545 2,651,216 150,000 - - USD 145,065 - - - WaferTech, LLC - equity interest - USD 287,468 TAS MC: Grand Cathay Bond Fund The GP ROC Bond Fund Money Mgmt Fund Money Mgmt II Fund The First Global Fixed Income II Fund Kwang Hua Bond Fund Taiwan Bond Fund Bond Fund Increment Securities Investment Trust Fund Sheng Hua 1699 Bond Fund Truswell Bond Fund - 3,340 - 890 - 40,000 - 27,012 32,420 47,692 288,900 396,500 576,500 27,012 35,760 47,692 288,900 436,500 576,500 10,079 266,111 3,114,500 267,001 3,124,579 - - - - - - - - - - - - - - 8,182 100,000 8,182 100,000 150,394 1,874,700 150,394 1,874,700 16,732 1,234 25,007 252,236 18,886 192,500 166,100 304,000 16,732 1,234 25,007 192,500 166,100 304,000 2,559,500 252,236 2,559,500 199,500 18,886 199,500 Note 1: Balance as of December 31, 1999 includes investment gain or loss recognized by equity method and accumulated translation adjustment. 107 Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation Acquisition of long-term equity investment, properties exceeding 100 million or 20% of issued capital For the twelve months ended December 31, 1999 Table 5 T S M C : Property (Amounts in Thousand New Taiwan Dollars, unless otherwise specified) Transaction Date Transaction amount Payment term Transaction entity Nature of relationship Former transaction detail when transacting with related parties Owner Relationship Transferdate Amount Reference of price determined Purpose of acquisition Other commitments TSMC International Investment Ltd. - stock 88/04/21 $ 330,000 Lump-sum payment TSMC International 88/12/29 2,375,400 Lump-sum payment Investment Ltd. SSMC-Stock 88/04/14 30,496 Lump-sum payment SSMC 88/07/19 158,080 Lump-sum payment 88/10/21 254,216 Lump-sum payment TASMC-Stock 88/07/21 5,469,634 Lump-sum payment Acer Inc. and China 88/09/14 2,700,000 Lump-sum payment TASMC Development Corporation VIS-Stock 88/09/30 694,320 Lump-sum payment VIS TSMC International Investment Ltd.: TSMC Development - stock 88/04/21 USD 10,000 Lump-sum payment TSMC Development 88/12/29 USD 75,000 Lump-sum payment TSMC Development: - - - - - - N/A N/A N/A N/A Approval of board Long-term None of directors investment N/A N/A N/A N/A Issuance price of the Long-term None cash subscription investment N/A N/A N/A N/A Expert opinion Long-term None investment N/A N/A N/A N/A Issuance price of the Long-term None cash subscription investment N/A N/A N/A N/A Issuance price of the Long-term None cash subscription investment N/A N/A N/A N/A Approval of board Long-term None of directors investment 88/01/28 USD 77,501 Lump-sum payment Analog Devices, Inc (ADI) Customer N/A N/A N/A N/A Contract price Long-term None Integrated Silicon of TSMC Solution, Inc. (ISSI) investment 88/10/13 67,564 Lump-sum payment WaferTech, LLC WaferTech, LLC - equity interest V I S : MEGIC Corporation - stock 88/05/18 $ 150,000 Lump-sum payment MEGIC Corporation Etron Technology, Inc. - stock 88/08/10 386,515 Lump-sum payment TSMC - - Shareholder of the company N/A N/A N/A N/A Approval of board Long-term None of directors investment N/A N/A N/A N/A Par value of new Long-term None Kingwell N/A Investment Corp. & Wellta Investment Corp. etc. N/A N/A 87/11/25 386,545 investment Long-term investment None stock issuance Contract price approved by board of director N/A N/A Contract price Long-term None approved by investment board of director Powerchip Semiconductor Corp. - stock 88/08/10 2,651,216 Installments Mitsubishi Electric Corp. - & Kanematsu Corp. etc. 108 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation Transaction of purchase or sales with related parties amounting to more than 100 million or 20% of the issued capital For the twelve months ended December 31, 1999 Table 6 T S M C : Transaction party Nature of relationship Purchase (Sales) Amount Phillips and its affiliates Major shareholder Sales $ 2,864,149 WaferTech, LLC Indirect Investee of Purchase 4,636,780 the subsidiary (TSMC International Investment, Ltd.) It’s director is Sales 132,507 TSMC’s chairman Investee Investee Purchase Purchase 808,926 381,989 Major shareholder Sales 378,754 ITRI TASMC VIS V I S : TSMC WaferTech, LLC: TSMC TAS MC: (Amounts in Thousand New Taiwan Dollars, unless otherwise specified) Transaction Detail Abnormal transaction Notes, accounts payable or receivables % 4 40 - 7 3 3 Collection terms Unit price Collection Net 30 days from monthly closing date Net 30 days from monthly closing date None None terms None None Ending Balance $ 133,245 (730,483) Net 45 days from monthly closing date None None 18,458 Net 30 days from monthly closing date Net 30 days from monthly closing date None None None None (539,466) (184,741) Net 45 days from monthly closing date None None 170,533 % 28 (38) 4 (28) (10) Major shareholder Sales 4,636,780 98 Net 30 days from monthly closing date None None 730,483 100 Apacer Technology, Inc. Investee of AI Acer Inc. TSMC Investee of AI Major shareholder Addonics Technology Corp. Investee of AI Aopen Inc. Investee of AI Taiwan Semiconductor Investee of AI Technology Corp. Sales Sales Sales Sales Sales Sales 3,673,798 34 Net 30 days from monthly closing date 839,568 780,808 459,969 317,301 211,357 8 8 4 3 2 Net 30 days from monthly closing date Net 30 days from monthly closing date 14 days 14 days 14 days None None None None None None None None None None None None 632,380 166,765 568,055 - 120,020 31,711 42 11 37 - 8 2 109 Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation Receivable from related parties amounting to more than 100 million or 20% of the issued capital For the twelve months ended December 31, 1999 Table 7 T S M C : (Amounts in Thousand New Taiwan Dollars, unless otherwise specified) Transaction party Nature of relationship Ending balance Turnover Amount Management Overdue Amounts received from December 31, 1999 up-to-date Allowance for bad debts accrued Phillips and its affiliates Major shareholder $ 133,245 WaferTech, LLC Indirect investee of ( account receivables ) 19 days 60 days $ 4,055 225 TSMC International 13,286 Investment Ltd. ( account receivables ) N/A 184,877 (excess on payment made ) V I S : TSMC Major shareholder 190,933 89 days - - - - - - - - - - - - - - - - - - $ 6,362 213 - - - - - - - - - - - - - 3,819 - - - - - - - - 1,672,552 (interest receivable ) 7,873,941 (notes receivable ) 97,717 (interest receivable ) 313,950 (notes receivable ) N/A N/A N/A N/A 632,380 568,055 166,765 120,020 42 days 133 days 36 days 69 days 81,872 8,063 - 109,078 TSMC International Investment Ltd.: TSMC Development Subsidiary TSMC Technology Subsidiary T AS MC: Apacer Technology Inc. Investee of AI TSMC Acer Inc. Major shareholder Investee of AI Addonics Technology Corp. Investee of AI 110 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) Taiwan Semiconductor Manufacturing Company Ltd., TSMC-Acer Semiconductor Manufacturing Inc. and Vanguard International Semiconductor Corporation Information on investee on which the Company exercises significant influences For the twelve months ended December 31, 1999 Table 8 Investee Location Business Activity Owned by the company No. of shares (thousand) % Carrying value Net Income(loss) of the investee Investment income(loss) recognized Note (Amounts in Thousand New Taiwan Dollars, unless otherwise specified) 389,788 556,133 100 25 $ 12,454,280 ($ 1,007,218 ) ($ 1,007,218) Subsidiary 5,010,897 (1,849,186) (527,823) Investee 1,000 100 255,025 84,345 84,345 Subsidiary - 1 - - - - - - 300 26 100 25,956 5,572 5,572 Subsidiary 100 10,168 150 150 Subsidiary 25 25 25 25 25 25 100 32 32 28 103,017 103,012 102,773 102,770 103,003 103,005 9,968 360,177 9,438 9,415 8,371 8,436 9,448 9,446 121 2,360 2,354 2,093 2,109 2,362 2,362 Investee Investee Investee Investee Investee Investee 121 Subsidiary (236,923) (75,977) Investee 3,630,193 (6,127,604) 315,301 Investee 4,854,742 - - Investee TSMC International Investment Ltd. Tortola, British Virgin Islands Investment VIS Hsin-Chu, Taiwan TSMC North America San Jose, California, USA IC Design & manufacturing Marketing & Engineering Support TSMC Europe B.V. Amsterdam , The Netherlands Marketing & TSMC Japan K.K. Yokohama, Japan Po Cherng Investment Co., Ltd. Taipei, Taiwan Chi Hsin Investment Co., Ltd. Taipei, Taiwan Kung Cherng Investment Co., Ltd. Taipei, Taiwan Chi Cherng Investment Co., Ltd. Taipei, Taiwan Hsin Ruey Investment Co., Ltd. Taipei, Taiwan Cherng Huei Investment Co., Ltd. Taipei, Taiwan Engineering Support Marketing & Engineering Support Investment Investment Investment Investment Investment Investment TSMC Partners, Ltd. Tortola, British Virgin Islands Investment Systems on Silicon Manufacturing Singapore Company Pte Ltd. (SSMC) Wafer Manufacturing TASMC - common Hsin-Chu, Taiwan IC Design & 348,936 manufacturing TASMC - preferred Hsin-Chu, Taiwan IC Design & 376,815 manufacturing 111 2. Dividend Policy and Implementation Status (1) Dividend Policy (approved by the Board of Director; to be resolved in shareholders’ meeting) The dividend shall be allocated according to the following principles per resolution of the meeting of shareholders: 1) Except distribution of reserve in accordance with item 2) below, this Corporation shall not pay dividends or bonuses when there is no profit; however, where the legal capital reserve reaches over 50% of the authorized capital or the sums set aside as capital reserve in profitable years have exceeded 20% of such profits, this Corporation may, for the purpose of stabilization of market prices of this Corporation’s shares, distribute the amount in excess as dividends and bonuses. Profits of this Corporation may be distributed by way of cash dividend and/or stock dividend. Since this Corporation is in a capital-intensive industry, distribution of profits shall be made preferably by way of stock dividend. Distribution of profits may also be made by way of cash dividend. Profits may be distributed in total after taking into consideration financial, business and operational factors. 2) In case there is no profit for distribution in a certain year, or the profit of a certain year is far less than the profit actually distributed by this Corporation in the previous year, or considering the financial, business or operational factors of this Corporation, this Corporation may allocate a portion or all of its reserves for distribution in accordance with relevant laws or regulations or the orders of the authorities in charge. The dividend policy for the coming 3 years shall follow the principles above. This Corporation is in a growth stage and retained earning is to be re-invested. Distribution of profits for the coming 3 years is expected to be mostly in the form of stock dividend. 112 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) (2) Implementation Status: Impact on Business Performance, EPS and return on investment for shareholders resulted from stock dividend distribution over the past two years. Unit: New Taiwan Dollars for earning per share; Thousand New Taiwan Dollars for other items Item Year 1998 1999 Paid in Capital (beginning of year) 40,813,000 60,471,760 Dividend Payment Cash Dividend (per share) Stock Dividend from Retained Earnings (share/per share) Stock Dividend from Capital Surplus(share/per share) - 0.45 - - 0.23 - Business Performance Income from Operations 16,202,245 25,916,619 % Change of Income from Operation (YOY) 4.60 59.96 Net Income 15,344,203 24,559,884 % Change of Net Income (YOY) Earnings Per Share % Change of EPS (YOY) (Note) Average Return on Investment (%) (Reciprocal of Average P/E Ratio) Pro Forma EPS & If Retained Earnings Pro Forma Earnings Per Share P/E Ratio Distributed in Cash Pro Forma Average Return on Dividend Investment (%) If Capital Surplus not Pro Forma Earning Per Share Distributed in Stock Pro Forma Average Return on Dividend Investment (%) If Retained Earnings Pro Forma Earnings Per Share Distributed in Cash Pro Forma Average Return on Dividend & Investment (%) Capital Surplus not Distributed in Stock Dividend (14.56) 2.54 (14.48) 2.52 3.43 3.40 - - - - 60.06 3.24 59.61 2.77 3.81 3.25 - - - - Note: Based on weighted average shares ajusted from stock dividend and employee stock bonus. 113 Financial data adopted in the table is as follows: 1. Financial statement as of December 31, 1999 and 1998 together with independent auditors’ report at 24 January, 2000; and 2. Tax rates applied as effective tax rates, 5.9% for 1999 and 9.5% for 1998; and the annual rate based on Bank of Taiwan - 7.5%. We have reviewed the historical financial information and underlying assumptions used in obtaining the pro forma data in the table, Based on our review, we are not aware of any material modification that should be made. TN Soong & Co A Member Firm of Andersen Worldwide, SC Taipei, Taiwan The Republic of China February 18, 2000 Note: 1. Pro Forma EPS if retained earnings are all distributed in cash dividend = [Net Income - Pro Forma Interest Expenses on retained earnings if distributed in cash x (1 - tax rate ) ] / (number of shares at the end of year - number of shares from retained earning distributed in stock) Pro Forma Interest Expenses on retained earnings if distributed in cash = Retained earning distributed in stock x one- year prime rate Number of shares from retained earning distributed in stock: The number of shares increased from previous year’s retained earning distributed in stock 2. Avg. P/E ratio = Avg. share price / EPS 114 syn¥er¥gy technical additional energy that is produced by two people combining their energy and ideas. (Longman Dictionary of Contemporary English, 1995, p. 1465) 3. Statement of Internal Control Taiwan Semiconductor Manufacturing Co., Ltd. Statement of Internal Control (Translation) Date: February 18, 2000 TSMC has conducted a self-assessment of internal controls for the period of January 1, 1999 to December 31, 1999, based on TSMC’s internal control system. The results are as follows: 1. TSMC acknowledges that the Board of Directors and management personnel are responsible for establishing, performing, and maintaining an internal control system, which has already been established. The purpose of the internal control system is to provide a reasonable assurance for achieving the company’s goals: efficient and effective operations (including profit, efficiency and the safeguard of assets, etc.), reliability of financial reports, and compliance with applicable laws and regulations. 2. The internal control system has an inherent constraint. No matter how impeccable the system is, it can only provide a reasonable assurance of achieving the three goals abovementioned. Due to the changes in the environment and changing circumstances, the effectiveness of the internal control system may vary accordingly. However, TSMC’s internal control system has self-monitoring functions with which once a shortcoming is found, action will be taken to cure. 3. TSMC evaluates the effectiveness in the design and performance of its internal control system in accordance with the items for evaluating the effectiveness of internal control system as indicated in the Points Governing the Establishment of Internal Control Systems by Public Companies (the "Points") announced by the Securities and Futures Commission of the Ministry of Finance. Based on management control process, the items for assessing the internal control system specified in the Points divide internal control into five components: 1. Control Environment; 2. Risk Assessments; 3. Control Activities; 4. Information and Communication; 5. Monitoring. Each component comprises certain factors. For the said factors please refer to the Points. 4. TSMC has evaluated the effectiveness in the design and performance of its internal control system in accordance with the aforesaid factors. 5. Based upon the results of evaluation abovementioned, TSMC is of the opinion that the design and performance of its internal control, including the efficiency and effectiveness of operations, reliability of financial reports, and compliance with applicable laws and regulations, during the period of January 1, 1999 to December 31, 1999 is effective and provide a reasonable assurance of achieving the abovementioned goals. 6. This Statement of Internal Control will be a prominent feature of TSMC’s annual report and prospectus, and will be released to the public. Should any statement herein involve forgery, concealment or any other illegality, Articles 20, 32, 171 and 174 of the Security Transaction Law shall apply. 7. This Statement of Internal Control has been approved by TSMC’s Board of Directors at the meeting of February 18, 2000 with 10 directors present at the meeting and 0 director disagreeing with this Statement of Internal Control. Morris Chang Chairman of the Board F.C. Tseng President Taiwan Semiconductor Manufacturing Company, Ltd. 115 4. Other Necessary Supplement Any Events in 1999 which had significant impact on shareholders’ rights or the prices for the securities as stated in Item 2 Paragraph 2 of Article 36 of Securities and Exchange Law: The Board of Directors of TSMC has approved the merger of the Company with TSMC-Acer Semiconductor Manufacturing Corp.([TASMC]) and Worldwide Semiconductor Manufacturing Corp. ([WSMC]) on the meetings dated Dec.30,1999 and Jan.7,2000 respectively. TSMC shall be the surviving company after the merger, while TASMC and WSMC shall be dissolved after the merger. The consolidation date of the merger is targeted on Jun.30,2000. The exchange ratio for TASMC to TSMC was originally set at 6 to 1; however, this ratio was later adjusted to 5 to 1. The exchange ratio for TASMC to TSMC is to be adjusted proportionately should the paid-in capital of TSMC is increased due to distribution of stock dividend. The exchange ratio for WSMC to TSMC was set at 2 to 1, and this ratio shall remain unchanged should the paid-in capital of TSMC is increased due to distribution of stock dividend. 116 Taiwan Semiconductor Manufacturing Company, Ltd. No. 121, Park Ave. III, Science-Based Industrial Park, Hsin-Chu, Taiwan 300, R.O.C. Tel: 886-3-578-0221 Fax:886-3-578-1546 http://www.tsmc.com.tw TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY, LTD. Morris Chang, Chairman 

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