TSMC
Annual Report 2000

Plain-text annual report

MAJOR FACILITIES Corporate Headquarters & FAB 2, FAB 5 No.121, Park Ave. III, Science-Based Industrial Park, Hsinchu, Taiwan 300, R.O.C. FAB 8 No. 25, Li-Hsin Rd., Science-Based Industrial Park Hsinchu, Taiwan 300, R.O.C. TEL: 886-3-578-0221 FAX: 886-3-578-1546 TEL: 886-3-567-8888 FAX: 886-3-566-2051 FAB 1 Building 67, No. 195, Sec. 4, Chung-Hsing Rd., TSMC North America 2585 Junction Avenue, San Jose, Chu-Tung, Hsinchu, Taiwan 310, R.O.C. CA 95134, U.S.A. TSMC SPOKESPERSON Name: K. C. Chen Title: Senior 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: 886-3-582-1240 FAX: 886-3-582-2616 TEL: 1-408-382-8000 FAX: 1-408-382-8008 TEL: 886-2-2545-9988 FAX: 886-2-2545-9966 FAB 3 & FAB 4 No. 9, Creation Rd. I, Science-Based Industrial Park, Hsinchu, Taiwan 300, R.O.C. TEL: 886-3-578-1688 FAX: 886-3-578-1548 FAB 6 No. 1, Nan-Ke North Rd., Science-Based Industrial Park, TSMC Europe World Trade Center, Strawinskylaan 1145, 1077 XX Amsterdam, The Netherlands STOCK TITLE TRANSFER Company: China Trust Commercial Bank Transfer Agency Department TEL: 31-20-305-9900 FAX: 31-20-305-9911 Address: 5Fl., No.83, Sec.1, Chung-Ching TSMC Japan 21F, Queen's Tower C, 2-3-5 Minato, Mirai, Nishi-Ku, Yokohama, Kanagawa 220-6221, Japan 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. ShanHwa, Tainan, Taiwan 741, R.O.C. TEL: 81-45-682-0670~2 FAX: 81-45-682-0649 Depositary Services Department TEL: 886-6-505-2000 FAX: 886-6-505-2058 FAB 7 No. 6, Creation Rd. II, Science-Based Industrial Park Hsinchu, Taiwan 300, R.O.C. TEL: 886-3-578-5112 FAX: 886-3-578-2038 Address: 20Fl., 111 Wall Street, New York, NY 10005, U.S.A. TEL: 1-212-657-2770 FAX: 1-212-825-5398 WEB SITE http://www.tsmc.com.tw I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . Table of Contents LETTER TO OUR SHAREHOLDERS A BRIEF INTRODUCTION TO TSMC 1. Company Profile 2. Organization 3. Capital & Shares, Corporate Bonds and ADR Issuance OPERATIONAL HIGHLIGHTS 1. Business Activities 2. Marketing and Sales 3. Market Outlook 4. Employee 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 2001 2. Year 2001 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, Earnings, Dividends and Market Price Per Share 5. Auditors' Opinion 6. Supervisors' Report 7. Review and Analysis of Financial Status and Operating Results 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 01 Business Philosophy 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 02 LETTER TO OUR SHAREHOLDERS LETTER TO OUR SHAREHOLDERS Dear Shareholders, It has been, and is, TSMC's objective to be the most reputable, service-oriented and maximum- total-benefits silicon foundry in the world, thus earning the reward of also being the largest and most profitable. We are committed to developing long-term competitiveness by strengthening the bond between ourselves and our customers. To meet these goals, TSMC in the year 2000 focused on providing our customers with the most advanced technology, sufficient capacity, on-line and other services. Technology Advancement Throughout 2000, TSMC worked toward fulfilling its commitment to provide customers with the latest advancements in process technology, thereby enhancing our customers' competitiveness in the global market. Our 0.13µm process technology release surpassed the ITRS (International Technology Roadmap for Semiconductors) roadmap the first time. Breakthroughs in processes have taken TSMC's technology to a broad spectrum. In addition to the mainstream logic process, TSMC now offers Mixed Signal, RF, SiGe, BiCMOS, embedded memories, high voltage devices and CMOS Image Sensor process technologies. Taking 0.13µm process technology as an example, by the end of 2000, TSMC had already delivered fully functional circuits to customer products using different versions of 0.13µm process technology in our portfolio, including core logic, high-speed, low-power, and CPU processes. The value of this technology leadership not only benefits our customers, but also flows directly to TSMC's bottom line. By the fourth quarter of the year, shipments of wafers utilizing leading-edge 0.25µm, 0.18µm, 0.15µm and 0.13µm process technologies accounted for half of the company's total revenues and contributed to our substantial profit margins. Morris Chang, Chairman F. C. Tseng, President I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 03 Capacity Expansion In June of 2000, we completed the mergers of TSMC-ACER and Worldwide Semiconductor Manufacturing Company, providing immediate additional capacity to our customers. In addition, TSMC invested nearly NT$114 billion in capacity expansion to support our customers' growing needs. Several highlights are worth noting. In March, TSMC officially opened Fab 6, the world's largest IC manufacturing facility, in the new Tainan Science-Based Industrial Park. Fab 6 also houses the foundry industry's first 300mm pilot line. By the end of the year, TSMC had delivered the industry's first customer products utilizing 300mm wafers. We are also constructing two dedicated 300mm production facilities - Fab 12 in Hsinchu and Fab 14 in Tainan. At SSMC, our joint venture with Philips in Singapore, the first batch of test wafers made their way through production lines in September 2000, well ahead of schedule. In December, we increased our equity position in WaferTech, USA to almost 100 percent, thus increasing TSMC's flexibility to implement future strategic and capacity expansion plans. By year end, TSMC's total wafer output reached 3.4 million 8-inch equivalent wafers, a 90 percent increase over the 1.8 million 8-inch equivalent wafers produced in 1999. Upgraded On-line Service To allow our customers to focus on their design requirements, and ultimately enable greater innovation at the system level, TSMC in year 2000 created the Design Service Alliance, an umbrella organization that includes collaborative alliances with best-of-class vendors in the electronic design automation (EDA), library, semiconductor intellectual property (IP), and design center industries. Through these alliances, TSMC is able to provide customers with access to a wide selection of third-party products and services proven in TSMC silicon. Also, in 2000, we tailored TSMC Online to provide customers with a "personalized" environment. This created a transparent window into our manufacturing operations, which increased our customers' efficiency and optimized their supply chain capabilities. These services have significantly reduced our customers' time-to-volume and helped lower their product design cost. Record Revenues & Net Profit The year 2000 was one of remarkable growth for the global semiconductor industry in general, and for the foundry industry specifically. For the year, TSMC's efforts were rewarded by revenues of NT$166.2 billion and net profits of NT$65.1 billion, increasing 127.3 percent and 165.1 percent respectively, over 1999. As a result, earnings per share for 2000 reached NT$5.71, a significant gain over the 1999 earnings per share. Recognition and Awards In addition to financial results, TSMC has been recognized in many areas of performance. Our commitment to quality, environment, health and safety earned us the honor of being the first 04 semiconductor company in Taiwan to receive OHSA's 18001 certification. TSMC's Fab 5 was also recognized by Semiconductor International magazine as one of the top two semiconductor fabs in the world. In addition, CommonWealth magazine, in its annual corporate survey, ranked TSMC as Taiwan's number one company for the fourth consecutive year. The same magazine cited TSMC as the best corporate citizen in Taiwan for its devotion to public service. Far Eastern Economic Review also ranked TSMC first among the top 10 Taiwan businesses in its "Top Asia 200" corporation ranking. Finally, TSMC was named the most favored employer out of the top 100 private businesses in a survey of college students conducted by Taiwan's Cheers magazine. Future Outlook In retrospect, the semiconductor industry in year 2000 boomed to an overheated point. In 2001, an industry-wide return to a more normal growth pattern will most likely occur. In the long term, however, the foundry industry growth is still expected to surpass overall IC industry growth. In addition to maintaining close collaboration with fabless semiconductor companies, IDMs and systems companies, we intend to play a role in facilitating important technology developments in the future. As part of this effort, we plan to continue increasing our R&D investment and aggressively invest in 300mm wafer fabrication capabilities to accommodate emerging market demand. In closing, we would like to thank all our customers, shareholders and employees for their continued support and dedication that have made it possible for TSMC to achieve the outstanding results of this past year. Morris Chang Chairman F. C. Tseng President I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 05 06 A Brief Introduction to TSMC A Brief Introduction to TSMC 1. Company Profile Founded in 1987, Taiwan Semiconductor Manufacturing Company (TSMC) is the world's largest dedicated semiconductor foundry. Based in Taiwan's "Silicon Valley," the Hsin-Chu Science-Based Industrial Park, TSMC is listed on both the Taiwan Stock Exchange (TSE) and the New York Stock Exchange (NYSE) under the symbol TSM. TSMC was the first pure-play integrated circuit (IC) foundry in the world. Since the beginning, the Company has been dedicated to providing advanced IC manufacturing services to its customers. Our charter prevents us from designing or making our own brand-name IC products; TSMC therefore is a partner, not a competitor, to our customers. TSMC's success in the foundry industry has served as an inspiration for many companies, enabling a significant acceleration in technological innovation. With TSMC as the engine of change, the number of global fabless IC companies has grown sbustaintially, and what was once only a concept - a "pure play" foundry industry - has generated more than US $10 billion dollars in revenues in year 2000. As the semiconductor industry faces ongoing consolidation and spiraling IC fab construction costs, dedicated foundry companies like TSMC are now expected to become a primary source of IC manufacturing worldwide. One of TSMC's business strategies is to expand our production capacity deliberately to ensure customers with sufficient capacity and maintain operation flexibility. At the end of 2000, we operated two 6-inch wafer fabs (Fab 1 & 2), six 8-inch fabs (Fab 3, 4, 5, 6, 7 and 8). The Company also has substantial capacity commitments at its affiliate, Vanguard International Semiconductor Corporation (VIS), its joint venture - Systems on Silicon Manufacturing Company (SSMC) in Singapore, and its subsidiary - WaferTech in the United States. TSMC's annual capacity in year 2000 totaled 3.4 million 8-inch equivalent wafers. TSMC consistently produces the foundry industry's leading technologies, including 0.15µm and 0.13µm logic processes with copper interconnects. TSMC offers the foundry industry's most comprehensive set of tech- nology processes, including CMOS logic, mixed-signal, volatile and non-volatile memory, embedded memory, and BiCMOS. Also in 2000, TSMC delivered the first 300mm production wafers to its customers from our Fab 6 facility in the Tainan Science Park. TSMC is currently constructing two 300mm manufacturing facilities, Fab 12 in Hsinchu and Fab 14 in Tainan, which are expected to start production in the fourth quarter of 2001 and 2002, respectively. Proposals are on the drawing tables for several additional 300mm fabs, with construction timetables starting 2001. TSMC's objective is to be our customers' "Virtual Fab". That is, to provide customers with the benefits of an in-house fabrication plant without the associated expense or organizational complexity. Our intent is to make our foundry services as transparent to customers as possible. To that end, we launched the industry's first "e-foundry" service in year 2000, extending much of our customer service structure onto the Internet to provide our customers with a real-time and "personalized" view into our manufacturing operations. As a good corporate citizen, TSMC takes community service and employee relations seriously. For example, TSMC's award-winning Culture and Education Foundation established in 1987 supports activities in Taiwan that promote education, social services, 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 efforts have been recognized by many distinguished entities, ranging from the Taiwan government to leading media in Taiwan and around the world. I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 07 TSMC's operating committee is comprised of many outstanding individuals, all of whom are committed to the success of the foundry industry in general and TSMC in particular. Our chairman, Dr. Morris Chang, has been at the forefront of this effort, receiving international acclaim for his achievements. In 2000, Dr. Chang received the Institute of Electrical and Electronics Engineers (IEEE) first-ever Robert N. Noyce Medal for his vision and leadership in pioneering the silicon integrated circuit foundry industry. In 1999, Dr. Chang was honored by the Fabless Semiconductor Association (FSA) with its first-ever Exemplary Leadership award, which is now permanently named The Dr. Morris Chang Award for Exemplary Leadership in recognition of his outstanding contribution to the fabless semiconductor industry. 2.Organization 2-1 Organization Chart Shareholders' Meeting Board of Directors Chairman of the Board President Supervisors V.P. Assistant to Chairman Internal Auditing E.V.P. World-Wide Mkt. & Sales V.P. Design Service Sr. V.P. Finance Sr. V.P. Legal & Spokesperson Operations Sr. V.P. R & D V.P. Quality & Reliability Sr. V.P. Corp. Development V.P. HR V.P. Corp. Mkt. V.P. Business Operation TSMC North America TSMC Europe TSMC Japan Sr. Director North Site V.P. South Site V.P. Tainan Site V.P. Fab-7 V.P. Fab-8 08 2-2 Directors, Supervisors, & Major Officers (As of December 31, 2000) Title Name Date Elected Term (Year) Shareholding* Spouse & Minor Education & Experience Remarks Shareholding* Chairman & CEO 2000.4.14 Morris Chang Director 2000.4.14 A.P.M. van der Poel Director J.C. Lobbezoo Director L.P. Hsu Director Stan Shih Director Chintay Shih 2000.4.14 2000.4.14 2000.4.14 2000.4.14 Director & President 2000.4.14 F.C. Tseng Supervisor 2000.4.14 Jan Kees van Vliet Supervisor George Shiu Supervisor S.J. Paul Chien 2000.4.14 2000.4.14 3 3 3 3 3 3 3 3 3 3 57,634,912 - Ph.D., Electrical Engineering, Standford University Chairman, Vanguard International Semiconductor Corp. 1,658,733,948 1,658,733,948 1,658,733,948 2,159,520 1,413,936,368 - - - - - B.S., Electronic Engineering, Eindhoven Technical University Chairman & CEO, Philips Semiconductors International B.V. Koninklijke Philips Electronics N.V. Representative of Legal Entity B.A., Business Economics, Erasmus University Chief Financial Officer, Philips Semiconductors International B.V. Koninklijke Philips Electronics N.V. Representative of Legal Entity B.S., Physics, National Cheng-Kung University Koninklijke Philips Electronics N.V. Executive Advisor, Philips Taiwan Representative of Legal Entity Master of Science of Electronical Engineering, National Chiao Tung University Chi Cherng Investment Co., Ltd. Chairman & CEO, The Acer Group Representative of Legal Entity Ph.D., Electrical Engineering, Princeton University President, Industrial Technology Research Institute Development Fund, Executive Yuan Representative of Legal Entity 16,942,109 49,828 Ph.D., Electrical Engineering, National Cheng-Kung University Director, Vanguard International Semiconductor Corp. 1,658,733,948 1,413,936,368 1,005,120 - - - MBA, Business School of Erasmus / Delft Universityof Technology Koninklijke Philips Electronics N.V. Executive Vice President, Philips Taiwan Representative of Legal Entity Ph.D. Candidate in Economics, John Hopkins University Development Fund, Executive Yuan Deputy Executive Secretary, Development Fund, Executive Yuan Representative of Legal Entity M.S. and Engineer Degree in Chemical Engineering, Massachusetts Institute of Technology President, Vanguard International Semiconductor Corp. Hsin Ruey Investment Co., Ltd. Representative of Legal Entity *As per the actual reported number of shares on December 31, 2000 Information regarding the Juristic Person Shareholders as directors and supervisors of TSMC As of December 31, 2000 Name of Juristic Person Shareholders Shareholders who owned more than ten percent outstanding shares or top ten shareholders of the Juristic Person Shareholders Koninklijke Philips Electronics N.V. Shareholders who owned more than ten percent outstanding shares: None. Top ten shareholders: Unavailable in accordance to the regulations of the Netherlands Development Fund, Executive Yuan Development Fund Chi Cherng Investment Co., Ltd. TSMC and Kung Cherng, Chi Hsin, Po Cherng, Hsin Ruey, Cherng Huei Investment Co, Ltd. Hsin Ruey Investment Co., Ltd. TSMC and Kung Cherng, Chi Hsin, Po Cherng, Chi Cherng, Cherng Huei Investment Co, Ltd. I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 09 3. Capital & Shares, Corporate Bonds and ADR Issuance 3-1 Capital & Shares Type of Stock Authorized Capital Unit:Share Issued Shares Un-issued Reserved Shares Total Listed Non-Listed Total Shares for Bond Conversion Common Stock 11,689,364,587 - 11,689,364,587 3,433,034,095 1,377,601,318 17,800,000,000 Preferred Stock - 1,300,000,000 1,300,000,000 - - 3-2 Status of Preferred Stock Issuance Issuance Issuing Date Tenor Rate Outstanding Shares Use of Proceeds Status Description Preferred Stock November 29, 2000 2.5 Years 3.5 % 1,300,000,000 Purchase equipment for Fab12 Proceeding 3-3 Status of Bond Issuance Issuance Issuing Date Tenor Coupon Rate (or YTM) Outstanding Use of Proceeds Status Description NT$4 billion March 4, 1998 5 years 7.71% p.a. NT$4 billion Repay long-term bank loan Completed Corporate Bond NT$6 billion November 18, 1998- 5 years 7.12% p.a. TSMC exercised the right to call back this bond two years Corporate Bond December 1, 1998 after the respective issuance date NT$10 billion October 21, 1999 Class A: 3 years Class A: 5.67% p.a. Class A: NT$5 billion Procure equity Completed Corporate Bond Class B: 5 years Class B: 5.95% p.a. Class B: NT$5 billion securities of TASMC as long-term investment and Fab 5 equipment NT$15 billion December 4, 2000- Class A: 5 years Class A: 5.28% p.a. Class A: NT$10.5 billion Procure manufacturing Completed Corporate Bond December 15, 2000 Class B: 7 years Class B: 5.36% p.a. Class B: NT$4.5 billion equipment for Fab 8 10 3-4 Status of American Depositary Shares (ADSs) Issuance Issuance & Listing : New York Stock Exchange (NYSE) Symbol:TSM 1 ADS = 5 TSMC common shares Depositary Bank : Citibank, N. A. - New York Branch Custodian Bank : Citibank, N. A. - Taipei Branch Date Units Issued * Total Amount (US$) Underlying Securities October 8, 1997 24,000,000 ADSs 594,720,000 TSMC Common Shares from Selling Shareholders November 20,1998 12,094,000 ADSs 184,554,440 TSMC Common Shares from Selling Shareholders January 12, 1999 - 2,000,000 ADSs 35,500,000 TSMC Common Shares from Selling Shareholders January 14, 1999 July 15,1999 12,094,000 ADSs 296,499,641 TSMC Common Shares from Selling Shareholders August 23, 1999 - 5,486,000 ADSs 158,897,088.5 TSMC Common Shares from Selling Shareholders September 9, 1999 (Pursuant to ADR conversion sale program) February 22, 2000 - 6,560,000 ADSs 379,134,598.8 TSMC Common Shares from Selling Shareholders March 8, 2000 (Pursuant to ADR conversion sale program) April 17, 2000 4,000,000 ADSs 224,640,000 TSMC Common Shares from Selling Shareholders June 7, 2000 32,667,800 ADSs 1,167,873,850 Cash Offering TSMC Common Shares from Selling Shareholders * 1. TSMC has in aggregate issued 98,901,800 ADSs since 1997, which, if taking into consideration of stock dividend distributed over the periods, would amount to 145,071,739 ADSs. 2. As of December 31, 2000, total number of outstanding ADSs is 144,608,739, of which 463,000 ADSs have been redeemed. 3. Stock dividend distributed in 1998,1999 and 2000 was 45%, 23% and 28%, respectively. I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 11 12 OPERATIONAL HIGHLIGHTS OPERATIONAL HIGHLIGHTS 1. Business Activities (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 90 percent of total revenue in 2000. 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 2000 TSMC produced approximately six percent of the world's supply of ICs. (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 The recovery in the worldwide IC market coupled with the exceptional growth of the fabless IC companies, pushed TSMC's 2000 sales up 127.3 percent to NT$166.2 billion. The company's superior performance can be attributed to three major factors. First, we maintained close relationships with a large customer base. TSMC has served over 400 customers in the past 13 years and over 50 percent have returned to use our services in 2000. Second, anticipating the steady long-term growth of the IC industry and responding to strong immediate demand from key customers, TSMC expanded advanced manufacturing capacity aggressively at nine internal or affiliated 8-inch fabs. The company also continued the construction of two of the industry's first production scale 12-inch facilities. Third, we have approached our business as a service business from day one. We continue to re-engineer this approach with a strong commitment to e-Commerce as a new tool in realizing TSMC's vision - to become our customers' "Virtual Fab" for semiconductor manufacturing. These factors extended our leading market position, and when combined with our ability to produce the latest generation technologies, allowed the company to maintain superior results in a year of robust demand for the entire semiconductor industry. Production over the Last Two Years Net Sales over the Last Two Years Wafers Wafers Package Other Total Year Capacity Quantity Amount 1999* 1,895,112 1,788,472 43,759,960 2000 3,263,236 3,467,270 76,545,082 Year Quantity Amount Quantity Amount Quantity Amount Quantity Amount 1999 1,686,433 64,428,905 67,832 5,131,796 2000 3,314,407 152,595,853 93,682 5,815,381 - - 3,570,505 1,754,265 73,131,206 7,817,186 3,408,089 166,228,420 Unit: Capatity/Quantity (8"wafer) / Amount(NT$K) Unit: Quantity (8"wafer) / Amount(NT$K) * The numbers of 1999 capacity and quantity have been restated to conform to 2000 classification. I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 13 3. Market Outlook In 2000, the overheated semiconductor industry gradually returned to a more normal growth pattern since November. For the year 2001, predictions of the overall IC market growth over 2000 are divergent, ranging from negative to ten percent. Based upon the expectation of minor growth, the memory market is forecast to grow less than five percent in 2001, due to high inventory and soft PC demand in the first half of 2001. The growth rate for the logic component market is forecast to increase slightly higher than the overall industry, however the foundry-dependent fabless IC companies are expected to remain in double digit growth due to the higher value added applications that their chips address. With the low visibility for semiconductor growth in 2001, TSMC will adopt strategic actions necessary to expand capacity in support of our customer base. The focus will be on capacity expansion of advanced technology and 12-inch fabs. Currently, TSMC is constructing its two pure 12-inch facilities (Fab 12 in Hsinchu and Fab 14 in Tainan). Fab 12 is expected to enter risk productions in the fourth quarter of 2001 and Fab 14 clean room construction will be finished at the end of the same year. 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 comprehensive 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 2001 even as we work to expand our share of the emerging market for embedded memory products. In 2000, 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 2000 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 2001, 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 2001, more than 15 percent of world-wide IC production will come from foundries, increasing to more than 30 percent by the year 2010. As better design automation and IP integration tools emerge, product development risks will continue 14 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 sup- ply chain partners to expand support for the foundry model. Leading equipment and material sup- pliers 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 (ASPs) for wafers as the company's production capacity evolves through more and more advanced technologies. TSMC fully understands that we will face serious competition in the future. Therefore, to ensure TSMC's continuing leadership and profitability in 2001 and beyond, we are determined to establish closer partnerships with customers and to provide the most advanced technologies and the most comprehensive services. For primary technologies, TSMC will focus on the following offerings: (1) Advanced CMOS Logic Process TSMC began mass-production of 0.15µm high performance and ultra high speed CMOS Logic processes in the first half of 2000 and 0.18µm low power process in the second half of the same year. The company is expected to enter volume production of 0.13µm high performance and ultra high speed CMOS Logic processes in the second quarter of 2001. In addition, TSMC plans to introduce 0.13µm low power processes in the third quarter of 2001 for customers in the portable electronic device markets. The 0.10µm CMOS Logic process is expected to be available in late 2002. 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 0.18µm 1-layer- poly, 6-layer-metal mixed-signal and 0.25µm radio frequency (RF) CMOS processes to meet the demands of communication and consumer ICs in the first half of 2000. The 0.18µm 1-layer-poly, 6-layer-metal radio frequency (RF) CMOS processes were also ready in the second half of the same year. These processes make it easier for TSMC's customers to integrate digital-signal processors and/or data-compression chips with analog circuitry for the fast-growing communications and consumer markets. The 0.13µm mixed-signal and RF processes will be available in late 2001. I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 15 (3) Advanced SRAM/Embedded SRAM Processes TSMC entered mass production of 0.18µm high-speed SRAM process in the beginning of 2000. The 0.18µm low-power SRAM process also began risk production in the first quarter of 2000. The 0.13µm high-speed and low-power processes are expected to be available in 2001. On the embedded SRAM front, the company completed the development of a 0.15µm 1-layer-poly, 7-layer-metal process in first quarter of 2000. The 0.13µm Embedded SRAM process entered risk production in the end of 2000 and should support mass production in the first half of 2001. These processes will enable TSMC customers to further reduce their costs and enhance performance. (4) Advanced Flash/Embedded Flash Processes In non-volatile memory, TSMC entered production of a 0.25µm logic based 2-layer-poly, 2-layer- metal, split-gate Flash process and a 0.25µm mixed-signal 2-layer-poly, 5-layer-metal, split-gate embedded Flash process in the beginning of 2000. The 0.22µm 1-layer-poly, 5-layer-metal EEP- ROM-PLD process was also available in mid-2000. 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 in the middle of 2001. (5) Special Logic Processes In addition to these advanced processes, TSMC has developed special logic processes, including CMOS image sensor, color filter, and high voltage processes, for our customers to target niche markets. The 0.35µm CMOS image sensor process development was finished in the end of 1999 and entered volume production in the first quarter of 2000. The 0.25µm version development was finished in the end of 2000 and will enter mass production in the beginning of 2001. The 8-inch version of CMOS color filter processes was available in 2000. On high voltage technologies, the development of 0.5µm 2-layer-poly, 3-layer-metal CMOS and 0.5µm 2-layer-poly, 3-layer-metal LDMOS high voltage processes were completed in the end of 1999 and ready for production in the beginning of 2000. The 0.8µm BiCMOS high voltage process also entered mass production in the beginning of 2000. By the end of 2001, TSMC will complete the development of 0.35µm versions of high voltage technologies and then enter production. (6) Design Services 2000 has been a prosperous year for TSMC in design services, which includes libraries, intellectual property cores (IP), electronic design automation (EDA), and design engineering services. TSMC rolled out 0.13µm libraries with both internal and 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 needs. In 2001, TSMC is expected to present the high-performance and broadest portfolio of VDSM SoC (Very deep sub-micron system-on-a-chip) libraries and key IP in the sub-100 nm area 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. 16 4. Employee Relations With over 14,000 employees worldwide, TSMC places priority on developing employees and gaining their commitment. We are focused on our commitment to our employees, and our guiding principles include caring for employees and shareholders (and being a good corporate citizen) as well as fostering a dynamic and fun work environment. Our ability to attract, develop and retain a very high level of engineering and support talent worldwide has earned TSMC the honor of being the most reputable company from Commonwealth magazine for the past four years. In addition, TSMC was once again recognized by the Taiwan government as one of Taiwan's Best Organizations for its commitment to employee welfare, employee programs and employee benefits. TSMC's employee relation record is one of outstanding harmony. For year 2000, our main areas of focus were on recruitment, development programs, compensation, and benefits. (1) Recruitment Being the largest IC foundry in the world, TSMC is a preferred employer within its industry. This reputation is clearly evident in Taiwan, where the company was recently voted "favorite enterprise/employer" in a recent university student poll. TSMC prides itself in attracting and recruiting highly skilled and qualified talent from around the world. In year 2000, in addition to 3,100 people joined TSMC family from merging companies, we have also recruited around 6,000 new hires. After a stringent selection process, we had hired 2,500 engineers and professional employees out of 35,000 candidates and another 3,500 technicians out of 15,000 candidates. (2) Development Programs TSMC subscribes to a philosophy of continuous learning and professional growth. To this end, we have earned several industry accolades for our extensive and unique training programs. In 2000, over 1,500 training courses were offered, with total enrollment reaching 43,000. These programs included customized workshops that were delivered to a variety of TSMC organizations globally to enhance inter-team collaboration and synergy. We launched several new programs in 2000, including an "e-learning" initiative for new engineers; an improved management development programs focusing on developing business and leadership skills for section managers and above; and two companywide performance management and development programs. These programs, known as "Directing Your Self Development", for all associates and "Developing Your Staff", for managers, are designed to develop employees and liberate talents. Besides, to help newly joined employees from merging companies integrate into TSMC family, a customized culture orientation was provided. Also in year 2000, a new learning center was set up with a capacity of 500 participants. I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 17 (3) Compensation (Profit Sharing) The Company has stock-based compensation plans, whereby every employee becomes a shareholder of TSMC. Through TSMC's profit sharing system, employee goals are aligned with those of TSMC; every employee is committed to and shares in the company's success. (4) Benefits In addition to competitive salaries, one of the ways TSMC compensates its employees is through its comprehensive benefits and welfare programs. In year 2000, we have added new services to enhance work life balance. Such services include on-site clinics, bookstores, coffee bars and art exhibition galleries. In addition, to foster a warm TSMC community, TSMC sponsors social clubs and organizes various family activities throughout the year including Family Day, Sports Day, concerts and art performances. 5. Personnel Growth over the Last Two Years Number of Employees Average Average Percentage by Education Year Direct Engineer Admin. Manager* Total Age Years of Ph.D. MS/MA BS/BA College High Others Total Labor Service School 1999 3,675 2,765 316 704 7,460 2000 7,370 5,739 503 1,024 14,636 29 29 3.8 3.2 2.3% 23.1% 15.9% 22.5% 36.1% 0.1% 100.0% 2.2% 23.7% 14.6% 26.3% 33.1% 0.1% 100.0% * Starting from year 2000, employee category has been re-defined. "Manager" does not include employees without management responsibility. The number of employees of 1999 has been reclassified to conforn to 2000 classification. 6. Environmental Protection Measures TSMC is proud of its well-deserved reputation as a company with strong awareness for the environment in the IC industry. Our industry-leading environmental policies have received international recognition and our reporting and disclosure policies are regarded as a model for the industry. TSMC Fab 1, 2, 3, 4 and 7 have been ISO14001 certified since 1996. Fab 5 received the certification in 2000. In addition to ISO14001, TSMC's Fab 1, 2, 3, 4 and 5 are also Occupational Health and Safety Assessment Series (OHSAS) 18001 certified. This is the first OHSAS certification ever given to a company in the semiconductor industry in Taiwan. Based on the principles of TSMC's Environmental, Safety and Health (ESH) Policy, TSMC has devoted a significant amount of time and effort on ESH improvement programs in 2000. These efforts have not only led to recognition from the government but also earned TSMC the award of "Industrial Excellence" by the Ministry of Economic Affairs, and "Pollution Control Equipment Maintenance Outstanding Performance Plant" by the Industry Development Bureau. TSMC's Environmental, Safety and Health improvement programs in year 2000 include: 18 (1) Perfluorocompound (PFC) emission reduction To support the PFC reduction target set by Taiwan Semiconductor Industry Association (TSIA), TSMC has teamed up a PFC reduction work group to reduce the usage of CF4 and NF3, and to survey replacement chemicals and abatement technologies. (2) Water pollution prevention In addition to already meeting wastewater quality standards, TSMC continues to make efficiency improvements to our plants' wastewater treatment facilities above and beyond wastewater quality standards. For example, we set up a new wastewater recovery system and modified existing systems to improve the water recovery ratio. (3) Air pollution prevention TSMC not only installed air pollution prevention facilities to meet new environmental standards, but also plans to set up backup facilities in 2001 to reduce the environmental impact in case of equipment failure. (4) Waste management Recycling has been our ongoing goal. In 2000, TSMC received EPA approval to recycle IPA, N-Methyl-2-Pyrrolidinone and photo-resist, thereby reducing materials waste. (5) Environmental Impact Assessment (EIA) The completion in year 2000 of an Environmental Impact Assessment for TSMC's Tainan site (Fab 15~Fab 18), as well as for Fab 8 and Fab 12, was a major accomplishment. Taiwan EPA's approval of the EIA for these sites is essential for future expansion. A world-class ESH design will be built-in as we expand new fabs. After very deliberate planning, the first edition of TSMC's Environmental Annual Report was published in April 2000. Corporate Environmental Reporting (CER) is becoming an important part of our corporation's social responsibility. TSMC's Environmental Annual Report, the first such report in Taiwan semiconductor industry, represents TSMC's proactive approach to environmental protection. We hope this report serves as a positive communication channel to all interested parties. Other Disclosures The following disclosure is made in accordance with Taiwan SEC regulations: In years 1999 and 2000, TSMC received three citations from local Taiwan Environmental Protection Administration (EPA). Conditions warranting the citations included (1) accidental discharge of effluent to storm water sewage system in the South Site; (2) lack of operating permit for chlorine in Fab 6; and (3) failure to post proper labeling of a toxic chemical bottle in the test lab in Fab 8. Since the responsibility for labeling of such bottles does not legally rest with TSMC, the Company has responded with a petition to EPA. The total fine for these citations was NT$280,000 and the Company immediately corrected all deficiencies. TSMC expects to invest another NT$1.839 billion on the improvement of pollution control equipment throughout our manufacturing facilities over the next three years. I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 19 7. Important Contracts (1) Technology Cooperation Agreement Term of Agreement: 7/9/1997 - 7/8/2007 Contracting Party: Philips Electronics N.V. (now renamed as Koninklijke Philips Electronics N.V.) ("Philips") Summary: Under this agreement, TSMC is obliged to pay to Philips royalty at a fixed percentage of net sales for certain products. (2) Submicron Technology Licensing Agreement Term of Agreement: 11/20/1990 - 12/31/2000 Contracting Party: Industrial Technology Research Institute ("ITRI") Summary: Under this agreement, TSMC is obliged to pay a licensing fee of NT$129.4 million to ITRI 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. (3) Building and Equipment Leasing Agreement (FAB 1) Term of Agreement: 4/1/1997 - 3/31/2002 Contracting Party: Ministry of Economic Affairs Summary: Under this agreement, TSMC leases certain buildings and equipment from the Ministry of Economic Affairs. (4) Land and Public Facility Leasing Agreement (FAB 1) Term of Agreement: 4/1/1997 - 3/31/2002 Contracting Party: Industrial Technology Research Institute ("ITRI") Summary: Under this agreement, TSMC leases certain land and public facilities from ITRI. (5) Foundry Related Agreements Term of Agreement: 1995 - 2004 Contracting Parties: More than 10 companies in the U.S.A., Europe, and Asia. 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 2000, more than ten companies had signed foundry related agreements with TSMC. (6) Manufacturing Agreement Term of Agreement: three years, upon commencement of production at WaferTech, LLC Contracting Party: 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. 20 (7) Shareholders Agreement Term of Agreement: May be terminated as provided in the Agreement Contracting Party: Philips Electronics N. V. (now renamed as Koninklijke Philips Electronics N.V.) ("Philips") and EDB Investments Pte Ltd. ("EDBI") Summary:Under this agreement, TSMC, Philips and EDBI agreed to form a joint venture "Systems on Silicon 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. (8) Technology Cooperation Agreement Term of Agreement: 3/30/1999 - 3/29/2009 Contracting Party: Systems on Silicon Manufacturing Company Pte Ltd. ("SSMC") 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. (9) Technology Transfer Agreement Term of Agreement: 6/27/2000 - 6/26/2010 Contracting Party: National Semiconductor Corporation ("NS") Summary:Under this Agreement, TSMC shall transfer its process technologies to NS and NS shall pay license fees to TSMC. (10) Manufacturing Agreement Term of Agreement: 2/14/2000 - 2/13/2005 Contracting Party: Vanguard International Semiconductor Corporation ("VIS") Summary:Under this Agreement, VIS shall reserve its certain capacity to manufacture for TSMC certain devices on logic or other technologies required by TSMC's customers, at discounted actual setting prices as agreed by the parties. 8. Litigation Proceedings Antidumping Investigation Against SRAMs Micron Technology Inc. filed a petition for the antidumping investigation against SRAMs from Korea and Taiwan in February 1997. 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 subsequently appealed U.S. International Trade Commission's final determination to the U.S. Court of International Trade. In June 2000, U.S. International Trade Commission, pursuant to U.S. Court of International Trade's second remand order, voted that SRAMs from Taiwan were not causing or threatening to cause injury to the U.S. industry, which decision was later affirmed by U.S. Court of International Trade. Micron has appealed to the U.S. Court of Appeals for the Federal Circuit. 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. I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 21 22 Business and Financial Plans Business and Financial Plans 1. Production and Sales Plans for 2001 Sales Plan by Technology Production Plan* Quantity:(Thousand pcs 8" wafer) >=0.50µm 20.8% 0.35µm 23.7% 0.25µm 33.6% <=0.18µm 21.9% 700- 600- 500- 400- 300- 200- 100- 0- 133 654 537 548 528 468 487 446 7 Fab1O Fab2O Fab3O Fab4O Fab5O Fab6O Fab7O Fab8O Fab12 *TSMC only: 3,808 thousand pcs 8" wafers; total TSMC managed capacity: 4,463 thousand pcs, including VIS, WaferTech, and SSMC 2. Year 2001 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 Name of Real Estate or Company Nature Quantity Location Dated Price Purpose Taiwan Semiconductor Technology Corporation Long-term Investment Common Share: 50,000,000 Linkou Q2 2001 N/A Strategical Adjustment of Long-term Investment Amount of acquiring real estate/long-term investment up to NT$300 million or 20% of paid in Capital Name of Real Estate or Nature Quantity Location Date Price Funding Source Purpose Company Buildings Real estate 325,174M2 Hsinchu & Tainan Starting from NT$4,846 Retained earnings or Increase capacity Q1,2001 million Bank borrowing to enhance competitiveness System on Silicon Long-term Common share: Singapore Starting from US$146 Retained earnings or Increase capacity Manufacturing Company investment 292,352 Q1,2001 million Bank borrowing to enhance Pte.Ltd. competitiveness Emerging Alliance L.P. Long-term 99.5% of Cayman Island Starting from US$29.85 Retained earnings Diversify long- investment Interest Q1,2001 million term investment and locate strategic technology partners I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 23 3. Research and Development Plans (1) R&D mission and vision TSMC's R&D mission is to provide the world's best and most competitive, cost-effective, and pervasive technology platforms for state-of-the-art integrated circuit (IC) applications. Through our innovative and aggressive R&D work, we strive not only to excel in semiconductor technology, but by extension, to contribute to the use of technology to expand human understanding and experience. TSMC has an acclaimed reputation for delivering the industry's broadest spectrum of leading-edge processes, including logic, mixed-signal/RF, embedded memory, color image sensor, and high-voltage process technologies. These state-of-the-art processes are rapidly transferred to volume production, where they are used by our customers as platforms for the next generation of computing, communications (network and wireless), industrial and consumer electronics applications. The Company has established particularly effective leadership in CMOS logic processes, including CPU, high- performance, low-power, and core logic with embedded memory and other options for system-on- chip (SOC) design. Significantly, in year 2000, TSMC became the first foundry to license its advanced logic processes to an integrated device manufacturer (IDM), an achievement that reverses many years of technology licensing by the foundry industry. Our research and development commitment is to continue to stay ahead of the ITRS (International Technology Roadmap for Semiconductors) roadmap in the new millenium. This in itself is a feat that is expected to be accomplished by only a handful of IC manufacturing companies worldwide. (2) R&D organization and investment The success of TSMC's dedicated foundry model has attracted to it tremendous overseas and domestic talents and skills, thereby continuing to increase the relative strength of our R&D organization. To supplement that strength, our R&D expense in year 2000 was more than NT$5.1 billion, an increase of approximately 115 percent over 1999. For 2001, our total R&D investment is expected to exceed NT$9.7 billion. TSMC's R&D organization has strong development partnerships with key equipment and materials vendors. These partnerships have proved invaluable in the R&D Expense 5,131,497 2,390,538 6000 - 5500 - 5000 - 4500 - 4000 - 3500 - 3000 - 2500 - 2000 - 1500 - 1000 - 500 - development of new processes as well as the execution 1999O 2000 of new manufacturing techniques aimed at reducing production costs. TSMC also maintains a vital presence in global semiconductor consortia, making significant contributions in the areas of equipment, material and silicon-based IC process development. For example, 24 TSMC actively participates in both the NGL (Next Generation Lithography) organization and the 157nm Consortium, helping to secure a leading position in photolithography and related manufacturing techniques for the development of processes below the 0.10µm generation. Not insignificantly, TSMC is also the sole Taiwanese member of International Sematech - a feat that speaks directly for the value of TSMC's reputation as the foundry industry R&D leader. (3) Year 2000 R&D accomplishments "Unceasing Innovation" is one of our 10 corporate values at TSMC. In the IC process technology area, TSMC was awarded 523 US patents and 524 ROC patents in 2000, reflecting our commitment to that value. We also continued to rapidly accelerate the introduction of new technologies, maintaining our track record of releasing one technology generation per year. TSMC's R&D organization posted many outstanding accomplishments in year 2000, the most significant of which was the release to production of our cutting-edge 0.13µm logic process, which features advanced copper interconnects and low-k dielectrics for superior quality and performance. This milestone was achieved fully one year ahead of the ITRS roadmap for production release of 0.13µm technology. Our 0.13µm process portfolio covers the entire spectrum of SOC applications with a family of high-performance, low-power, and baseline processes. The high-performance, low-voltage technology is ideal for processor applications (e.g., microprocessors, network processors, media processors, etc.) The low-power technology is among the best available for battery/wireless applications (e.g., cell phones), while the core or standard ASIC-logic technology is a cost-effective option for many industrial and consumer electronics uses. The TSMC 0.13µm process also features the most aggressive design rules in the world, including low-voltage and high-performance transistors with gate lengths of less than 0.07µm. Combining these fast transistors with advanced eight-layer copper and low-k interconnects, this technology is capable of supporting greater than 1.5GHz microprocessors and other high performance applications. In 2000, TSMC was clearly recognized as a world leader in the use of copper and CVD-based low-K materials for the 0.13µm technology node. These important technologies allow customers to realize fast chip speed and lower power consumption, while demonstrating much better mechanical and chemical properties for increased manufacturing yield, higher quality, and improved integration with wire bond packaging techniques. In the course of our 0.13µm development work, TSMC was also the first to demonstrate 193nm step-and-scan photolithographic tools and processes for 0.13µm production. (4) Spectrum of Processes It is worth noting that all of these developments were achieved shortly after releasing our industry-leading 0.15µm generation logic technology platform to production in early 2000. Concurrently, TSMC R&D was hard at work developing a number of additional processes for our customers. Among the processes introduced in year 2000 are: I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 25 High-voltage logic In the high voltage/low power area, TSMC enriched its existing portfolio of 1µm 16V and 40V processes by introducing 0.6µm and 0.5µm versions of these processes, as well as a 0.8µm 200V LDMOS version, in 2000. These processes are fully compatible with TSMC generic logic and mixedsignal processes for mixed 5V and high voltage system integration. 0.18µm mixed-signal/RF technology TSMC R&D released the industry's first 0.18µm mixed-signal/RF CMOS process in 2000, combining RF, analog, and base-band features in a single chip to provide a platform for developers of cutting-edge Bluetooth and other communication applications. It has a rich set of modular digital, analog devices and precision passive components, such as, high-Q metal- insulator-metal capacitors and inductors. 0.25µm CMOS image sensor process TSMC's new color image sensor process is the most advanced in the industry, capable of resolutions greater than 3.3M pixels for state-of-the-art camera-on-a-chip applications. The new image sensors enhance our existing portfolio of production 0.8µm, 0.6µm, 0.5µm, and 0.35µm color image sensor processes. These image sensors are further enhanced by color filters with micro-lenses to double the sensitivity. Embedded memory technology During the past year, TSMC has aggressively scaled its embedded memory technologies for SOC integration. These value-added technologies are fully compatible with their respective corelogic technology platforms and are supported by compilers, design kits, and test structures for fast time-to-volume. Our embedded 6T SRAM cells are available in a variety of density, performance, and standby leakage variations. For example, the cell size for our 0.13µm 6T SRAM cell is less than 2.45µm 2, with compiler performance capable of greater than 1GHz.These cells are also available for stand-alone SRAM devices with high speed, high bit density or low power consumption. Leading 0.25µm flash technology In 2000, our 0.25µm flash technology was released for both stand-alone and embedded applications. At the same time, our 0.22µm EEPLD technology was transferred to production, becoming the first true 2.5-volt EEPLD technology in the world. 26 TSMC, the leading foundry in Copper Interconnect technology. The first 300mm production wafers In 2000, TSMC's R&D organization played a key role in the delivery of thefoundry industry's first production 300mm wafers, from our 300mm pilot line in Fab 6.The organization is still actively involved in finalizing the equipment set for our first two dedicated 300mm facilities, Fab 12 in Hsinchu and Fab 14 in Tainan. State-of-the-art mask production. TSMC has one of the largest in-house mask fabrication capabilities any where. Our mask shops are known for excellent quality and cycle time to support aggressive R&D, prototyping and production requirements. Our facilities all have state-of-the-art E-beam mask writers and inspection tools to support both R&D and production use, including advanced optical-proximity- correction (OPC) and phase-shift mask (PSM) technology for use in the 0.15µm, 0.13µm, and 0.1µm logic processes and future technology generations. (5) Year 2001 plans Going forward, we will continue to increase our R&D investment in personnel and capital while accelerating our R&D activities. The key focus of TSMC's R&D organization will include 0.10µm logic/mixed signal technology platforms and related embedded memory for SOC applications. In addition, we will continue development of our production 300mm equipment set. Other development projects will include new 0.13µm Mixed-Signal/RF, 0.13µm embedded memory, 0.18µm silicon germanium (SiGe) BiCMOS, 0.18µm color image sensors, and 0.35µm high-voltage process modules, as well as exploration of new transistors and process technologies. TSMC R&D began its full-scale 0.10µm development work in 2000 and is today well down the development path. In addition, we are engaged in exploratory work on processes in support of the 0.07µm generation and beyond, including geometries as low as 0.05µm. Specific attention is being paid to the development of advanced high-k gate insulators, and extreme low-k (k<=2) interconnect insulator materials. When TSMC Fab 12 is ready for volume production in late 2001, it will feature an R&D facility capable of taking the company well beyond 0.10µm generation. With its skilled and dedicated R&D team and an ongoing commitment to investment in the most advanced equipment and materials, TSMC is confident it will continue to deliver the world's best and most cost-effective system-on-a-chip processes for our customers. I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 27 4. Financing Plans 4-1 Capital Increase for Expansion Plans for 2001 Item Amount(NT$M) Objectives Fab 14 - Construction 5,724 Scheduled to produce 12" wafers Fab 12 - Construction 33,507 Scheduled to produce 12" wafers Fab 8 Fab 7 Fab 6 4,237 Increase 8" wafer output capacity to 57K pcs/month by the end of 2001 2,277 Increase 8" wafer output capacity to 45K pcs/month by the end of 2001 7,926 Increase 8" wafer output capacity to 42K pcs/month by the end of 2001 Fab 1 ~ Fab 5 4,334 Upgrade product mix 300MM pilot line 1,112 Exercise advanced module & integration Replacement and Others 12,380 Maintain technology superiority and competitiveness * Capital expenditures will be funded by internally generated cash flow or/and external funding activities 71,497 4-2 Previous Financing Plans and Implementation Projects Gross funds raised Planned use of funds Implementation status June 7, 2000 23,000,000 ADRs November 29, 2000 1,300,000,000 preferred shares December 4, 2000 - December 15, 2000 NT$15billion corporate bond US$822,250,000 Procurement of equipment for Fab 6 On schedule - 77.22% completed NT$13,000,000,000 Procurement of equipment for Fab 12 Will commence implementation in Q1, 2001 NT$15,000,000,000 Procurement of equipment for Fab 8 Will commence implementation in Q1, 2001 28 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: Commitment to Education To help develop the 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. Furthermore, TSMC Foundation endowed Tsing-hua University toward the construction of Taiwan's first college of technology management to foster more talents for Taiwan's high-tech industry. Contributions to Communities TSMC Foundation supports community services in Hsinchu 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. In order to provide a safe learning environment, TSMC Foundation made a contribution to restore the Da-ping Elementary School in Hsinchu County after the devastating earthquake of September 21,1999. 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 national population that participate in national arts and cultural activities through TSMC Foundation's sponsorship. The sponsorships of "Leonardo da Vinci" Exhibition at the National Museum of History and "U Theatre - The Sound of Ocean" Tournament Performance in Taiwan , are some of the highlights. Conservation of historic monuments in Taiwan was also an important mission in 2000. TSMC Foundation helped maintain the Sage pavilion in Lung-tan and supported the restoration of former U.S. Consulate in Taipei. I n 2 0 0 0 , T S M C d e l i v e r e d f o u n d r y ' s f i r s t 3 0 0 m m c u s t o m e r w a f e r s . 29 TSMC Fab 6 All financial information discussed in this Annual Report is derived from the unconsolidated financial statements included herein that were prepared on the basis of generally accepted accounting principles in the Republic of China ("ROC GAAP") which differs significantly, in certain respects, from generally accepted accounting principles in the United States ("US GAAP") and certain other countries. Consolidated financial statements are also included herein. TSMC will file an Annual Report on Form 20-F with the United States Securities and Exchange Commission (the "US SEC') prior to June 30, 2001 which will include consolidated financial statements that include a reconciliation of certain items to US GAAP, as required by applicable US SEC regulations and the listing requirements of the New York Stock Exchange. 31 1. Brief Balance Sheets Financial analysis from 1996 to 2000 Item 1996 1997 1998 1999 2000 Unit: NT$K Current assets 16,529,359 23,790,795 26,378,422 38,770,670 85,950,586 Long-term stock investments 12,608,506 19,220,371 17,537,765 28,208,643 33,422,010 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 41,978,952 61,697,723 73,636,209 89,566,029 207,005,370 2,018,827 3,804,923 6,554,817 4,877,392 14,594,492 5,357,895 10,088,672 8,138,796 14,469,329 41,188,662 5,926,138 10,250,285 8,276,867 14,684,480 * 5,720,000 20,009,357 25,025,206 20,000,000 29,000,000 9,943,809 9,001,390 6,872,545 6,183,565 9,030,097 26,542,000 40,813,000 60,471,760 76,708,817 129,893,646 59,086 62,082 164,219 11,831,411 55,285,821 25,523,456 28,641,292 24,162,113 33,320,615 76,924,173 10,684,213 8,820,919 9,010,971 11,785,153 * 73,135,644 108,513,812 124,107,213 161,422,734 340,972,458 21,021,704 39,099,419 40,036,547 40,652,894 79,218,759 21,589,947 39,261,032 40,174,618 40,868,045 * 52,113,940 69,414,393 84,070,666 120,769,840 261,753,699 51,545,697 69,252,780 83,932,595 120,554,689 * * Subject to change after shareholders' meeting resolution 2. Brief Statements of Income Financial analysis from 1996 to 2000 Item Net sales Gross profit* 1996 1997 1998 1999 2000 Unit: NT$K(ExceptEPS: NT$) 39,400,179 43,935,627 50,233,008 73,131,206 166,228,420 21,411,531 20,134,920 20,336,042 32,215,693 73,924,745 Income from operations 18,235,246 15,489,780 16,202,245 25,916,619 60,541,105 Interest revenue Interest expense Profit before tax Net profit Earnings per share 653,462 277,161 501,434 546,490 566,020 981,388 808,616 1,415,527 1,575,460 1,858,197 18,972,932 15,517,103 13,648,622 24,109,865 63,837,594 19,400,689 17,960,075 15,344,203 24,559,884 65,106,194 7.31** 1.97*** 4.40** 1.83*** 2.54** 1.56*** 3.24** 2.49*** 5.71** - Capitalized interest 181,168 255,054 661,414 305,312 72,903 * Certain accounts of 1996 through 1999 have been reclassified to conform to 2000 classifications ** Based on weighted average shares outstanding in each year *** Retroactive adjustment for capitalizations of unappropriated earnings and bonus to employees 32 3. Financial Analysis Financial analysis from 1996 to 2000 Item 1996 1997 1998 1999 2000 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 28.74 137.77 36.03 144.94 32.26 148.16 25.18 157.17 23.23 140.46 308.50 247.77 42.40 235.82 185.78 20.04 324.11 273.86 8.91 267.95 233.95 14.83 208.68 178.13 34.02 8.80 41.00 7.24 50.43 0.94 0.54 32.40 45.28 68.70 71.48 49.24 19.63 1.97** 8.00 - 8.00 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 7.18 50.82 9.96 36.66 0.82 0.45 18.19 23.98 33.79 31.43 33.58 15.74 1.83** 5.00 - 5.00 1.56** 4.50 - 4.50 2.49** 2.30 - 2.30 7.87 46.38 11.01 33.14 0.80 0.49 24.12 31.43 46.61 49.15 39.17 21.28 5.71 2.80 *** 2.80 452.74 113.70 28.21 201.55 97.96 16.28 417.00 102.04 21.65 273.50 106.00 19.31 213.74 106.15 22.53 1.79 1.02 2.15 1.04 2.69 1.06 2.47 1.06 2.34 1.03 * Certain accounts of 1996 through 1999 have been reclassified to conform to 2000 classifications ** Retroactive adjustment for capitalizations of unappropriated earnings and bonus to employees *** Subject to change after shareholders' meeting resolution 33 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 Weighted average shares 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 1998 1999 2000 173.00 56.50 100.80 13.90 11.12 171.00 68.00 117.10 15.74 12.07 222.00 74.50 146.30 21.28 - 6,047,176,000 7,572,598,000 11,400,882,000 2.54 1.56 - 4.50 - 3.24 2.49 - 1.56 - 5.71 - * 2.555 0.245 39.69 36.14 25.62 - 0 - 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 34 5. Auditors' Opinion from 1996 to 2000 Year 1996 1997 1998 1999 2000 12F, No.156, Sec. 3, Min-Sheng E. Rd., Taipei, Taiwan, R.O.C. Tel: 886-2-2545-9988 CPA Audit 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 S.C. Huang, Edward Way An Unqualified Opinion S.C. Huang, Edward Way An Unqualified Opinion 6. Supervisors' Report The Board of Directors have prepared and submitted to us the Company's 2000 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 S. J. Paul Chien March 9, 2001 35 7. Review and Analysis of Financial Position and Operating Results (1) Liquidity Analysis Item Current ratio Quick ratio (2) Analysis of Operating Result Dec. 31, 2000 Dec. 31, 1999 208.68% 178.13% 267.95% 233.95% Change% -22.12% -23.86% Unit:NT$K Item 2000 1999 Chage Amount Change% GROSS SALES SALES RETURNS AND ALLOWANCES 169,223,128 (2,994,708) 74,036,935 (905,729) 95,186,193 (2,088,979) 128.57% 230.64% NET SALES COST OF SALES GROSS PROFIT 166,228,420 73,131,206 93,097,214 127.30% (92,303,675) (40,915,513) (51,388,162) 125.60% 73,924,745 32,215,693 41,709,052 129.47% OPERATING EXPENSES (13,383,640) (6,299,074) (7,084,566) 112.47% INCOME FROM OPERATIONS 60,541,105 25,916,619 34,624,486 133.60% NON-OPERRATING INCOME Insurance compensation Interest Foreign exchange gain-net Equity in earnings of investee companies-net Technology service income Premium income Gain on sales of short-term investments Gain on disposal of properties Reversal of allowance for losses on short-term investment Other 1,623,832 1,575,460 184,607 808,616 828,025 779,326 138,514 116,248 104,643 62,921 688 179,650 0 0 0 63,809 29,041 4,310 120,766 38,557 1,439,225 779.62% 94.83% 766,844 828,025 779,326 138,514 52,439 82.18% 75,602 260.33% 58,611 1359.88% (120,078) -99.43% 141,093 365.93% Total Non-Operating Icome 5,409,307 1,249,706 4,159,601 332.85% NNO-OPERATING EXPENSES Interest Premium expenses Loss on disposal of properties Bond issue cost (1,858,197) (1,415,527) (108,133) (99,220) (32,658) (86,746) (35,810) (114,839) (442,670) (21,387) 31.27% 24.65% (63,410) 177.07% 82,181 -71.56% Equity in net losses of investee companies-net (1,191,891) 1,191,891 -100.00% Loss on disposal of short-term investments Foreign exchange loss-net Other (75,366) (81,436) (54,845) (14,610) Total Non-Operation Expenses (2,112,818) (3,056,460) 75,366 -100.00% 81,436 40,235 943,642 -100.00% -73.36% -30.87% INCOME BEFORE INCOME TAX 63,837,594 24,109,865 39,727,729 164.78% INCOME TAX BENEFIT 1,268,600 450,019 818,581 181.90% NET INCOME 65,106,194 24,559,884 40,546,310 165.09% 36 8. Financial Statements & Independent Auditors' Report English Translation of a Report Originally Issued in Chinese The Board of Directors and Shareholders Taiwan Semiconductor Manufacturing Company Ltd. We have audited the accompanying balance sheets of Taiwan Semiconductor Manufacturing Company Ltd. as of December 31, 2000 and 1999, 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 Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Republic of China. 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, 2000 and 1999, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the Republic of China. T N SOONG & CO Taiwan, ROC A member firm of Andersen Worldwide S. C. January 29, 2001 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. 37 English Translation of Financial Statements Originally Issued in Chinese BALANCE SHEETS December 31, 2000 and 1999 (In Thousand New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS 2000 1999 Amount % Amount % Cash and cash equivalents (Notes 2 and 4) $35,664,440 11 $16,650,017 10 Short-term investments (Note 2) Receivable from related parties (Note 14) Notes receivable Accounts receivable Allowance for doubtful receivables (Note 2) Allowance for sales returns and others (Note 2) Inventories (Notes 2 and 5) Deferred income tax assets (Notes 2 and 13) Prepaid expenses and other current assets (Notes 2,14, 15 and 17) Total Current Assets - 994,815 125,175 30,335,314 (946,734) (2,204,167) 10,967,935 8,122,000 2,891,808 85,950,586 LONG-TERM INVESTMENTS (Notes 2 and 6) 33,422,010 PROPERTY, PLANT AND EQUIPMENT(Notes 2, 7 and 14) Cost Buildings Machinery and equipment Office equipment Total cost Accumulated depreciation Advance payments and construction in progress Net Properties GOODWILL (Note 2) OTHER ASSETS Leased assets (Note 2) Deferred charges - net (Notes 2 and 8) Deferred income tax assets (Notes 2 and 13) Refundable deposits Miscellaneous Total Other Assets - - - 9 - (1) 3 2 1 25 10 14 62 1 77 236,250 468,903 164,134 13,380,253 (422,202) (706,886) 4,529,714 2,329,000 2,141,487 38,770,670 28,208,643 21,337,655 102,672,163 1,939,392 125,949,210 - - - 8 - - 3 2 1 24 17 13 64 1 78 46,307,643 210,461,923 3,672,927 260,442,493 (94,332,168) (28) (57,969,725) (36) 40,895,045 207,005,370 12 61 21,586,544 89,566,029 14 56 3,309,707 625,647 3,122,610 6,559,293 967,985 9,250 11,284,785 1 - 1 2 - - 3 - - 578,544 4,273,252 16,346 9,250 4,877,392 - - - 3 - - 3 TOTAL ASSETS $340,972,458 100 $161,422,734 100 The accompanying notes are an integral part of the financial statements. 38 LIABILITIES AND SHAREHOLDERS’ EQUITY Amount % Amount % 2000 1999 CURRENT LIABILITIES Payable to related parties (Note 14) Accounts payable Payables to contractors and equipment suppliers Income tax payable (Notes 2 and 13) Lease obligation payable (Notes 2 and 9) $4,346,578 7,989,953 24,392,400 - 50,000 Accrued expenses and other current liabilities (Note 17) 4,409,731 1 3 7 - - 1 $1,916,526 2,525,086 6,958,098 146,300 - 2,923,319 Total Current Liabilities 41,188,662 12 14,469,329 1 2 4 - - 2 9 12 3 1 - 16 25 - 7 5 - 16 - (1) 75 20,000,000 5,185,362 998,203 - 26,183,565 40,652,894 8 2 1 - 11 23 34 4 16 3 1 19 - - NONCURRENT LIABILITIES Long-term bonds (Note 10) Guarantee deposits Accrued pension cost (Notes 2 and 12) Deferred gain on sale-lease back (Note 2) Total Noncurrent Liabilities Total Liabilities SHAREHOLDERS’ EQUITY (Note 2 and 11) Capital stock - $10 par value Authorized: 17,800,000 thousand shares in 2000 and 9,100,000 thousand shares in 1999 Issued: Common - 11,689,365 thousand shares 29,000,000 7,086,379 1,509,535 434,183 38,030,097 79,218,759 in 2000 and 7,670,882 thousand shares in1999 116,893,646 Preferred - 1,300,000 thousand shares Capital surplus Retained earnings: Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Unrealized loss on long-term investment Cumulative translation adjustments Total Shareholders’ Equity 13,000,000 55,285,821 10,689,323 1,091,003 65,143,847 (71,564) (278,377) 76,708,817 48 - 11,831,411 8,258,359 - 25,062,256 - (1,091,003) 261,753,699 77 120,769,840 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $340,972,458 100 $161,422,734 100 39 English Translation of Financial Statements Originally Issued in Chinese STATEMENTS OF INCOME For the Years Ended December 31, 2000 and 1999 (In Thousand New Taiwan Dollars, Except Earnings Per Share) 2000 1999 Amount % Amount % GROSS SALES (Notes 2, 14 and 18) SALES RETURNS AND ALLOWANCES $169,223,128 (2,994,708) $74,036,935 (905,729) NET SALES COST OF SALES (Note 14) GROSS PROFIT OPERATING EXPENSES (Note 14) General and administrative Marketing Research and development Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME Insurance compensation Interest Foreign exchange gain - net (Notes 2 and 17) Equity in earnings of investee companies - net (Notes 2 and 6) Technology service income (Note 14) Premium income (Notes 2 and 17) Gain on sales of short-term investments Gain on disposal of properties Reversal of allowance for losses on short-term investment Other (Note 14) Total Non-Operating Income NON-OPERATING EXPENSES Interest (Notes 7and 17) Premium expenses(Notes 2 and 17) Loss on disposal of properties Bond issue cost Equity in net losses of investee companies - net (Notes 2 and 6) Loss on disposal of short-term investments Foreign exchange loss - net (Notes 2 and 17) Other Total Non-Operating Expenses INCOME BEFORE INCOME TAX INCOME TAX BENEFIT (Notes 2 and 13) NET INCOME 166,228,420 100 73,131,206 100 92,303,675 73,924,745 5,299,135 2,953,008 5,131,497 13,383,640 56 44 3 2 3 8 40,915,513 32,215,693 2,097,835 1,810,701 2,390,538 6,299,074 56 44 3 2 4 9 60,541,105 36 25,916,619 35 1,623,832 1,575,460 828,025 779,326 138,514 116,248 104,643 62,921 688 179,650 5,409,307 1,858,197 108,133 99,220 32,658 - - - 14,610 2,112,818 1 1 1 - - - - - - - 3 1 - - - - - - - 1 184,607 808,616 - - - 63,809 29,041 4,310 120,766 38,557 1,249,706 1,415,527 86,746 35,810 114,839 1,191,891 75,366 81,436 54,845 3,056,460 1 1 - - - - - - - - 2 2 - - - 2 - - - 4 63,837,594 1,268,600 $65,106,194 38 1 39 24,109,865 450,019 $24,559,884 33 1 34 EARNINGS PER SHARE Based on common stock weighted-average number of shares outstanding - 11,400,882 thousand shares in 2000 and 7,572,598 thousand shares in 1999 $5.71 Based on 9,863,489 thousand shares The accompanying notes are an integral part of the financial statements. $3.24 $2.49 40 English Translation of Financial Statements Originally Issued in Chinese STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 2000 and 1999 (In Thousand New Taiwan Dollars) CAPITAL STOCK ISSUED CAPITAL SURPLUS (Note 2) RETAINED EARNINGS (Note 11) Common Stock Prefered Stock Additional From Excess on Gain on UNREALIZED LOSS ON CUMULATIVE LONG-TERM TRANSLATION TOTAL Shares Shares From Paid-In Long-term Foreign Bond Disposal of Legal Special Unappropriated INVESTMENT ADJUSTSMENTS SHARHOLDERS' (Thousand) Amount (Thousand) Amount Consolidation Capital Investment Investment Properties Donation Total Reserve Reserve Earnings Total (NOTE 2) (NOTE 2) EQUITY $ - $ - $ - $99,128 $ - $65,036 $55 $164,219 $6,724,240 $ - $17,437,873 $24,162,113 $ - ($727,426) $84,070,666 BALANCE, JANUARY 1, 1999 6,047,176 $60,471,760 Appropriations of prior year’s earnings Legal reserve - - Bonus to employees - stock 110,457 1,104,566 Stock dividends - 23% 1,390,850 13,908,505 Bonus to directors & supervisors Net income in 1999 - - - - Conversion of foreign bonds 122,399 1,223,986 Gain on disposal of properties Gain on disposal of property from investees Adjustment arising from changes in ownership percentage in investees Translation adjustments - - - - - - - - BALANCE, DECEMBER 31, 1999 7,670,882 76,708,817 Appropriations of prior year’s earnings Legal reserve Special reserve - - - - Bonus to employees - stock 172,121 1,721,208 Stock dividends - 25.55% 1,959,910 19,599,103 Bonus to directors and supervisors - - Capital Transferred from capital surplus - 2.45% 187,937 1,879,366 Issuance of shares on June 8, 2000 115,000 1,150,000 Issuance of shares for the mergers on June 30, 2000 1,583,515 15,835,152 - - - - - - - - - - - - - - - - - - - - Issuance of preferred stocks on November 29, 2000 Net income in 2000 Gain on disposal of properties Gain on disposal of property from investees Adjustment arising from changes in ownership percentage in investees Unrealized loss on long-term investment from investees Translation adjustments - - - - - - - - - - - - - - 1,300,000 13,000,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 22,329,129 - - - - - - - - - - - - - - - - - - - - - - - - 23,172,550 - - - - - - - - - - - - - - - 246,218 126,954 - - - - - - 11,289,998 - - - - - - - - - - 4,022 - - - - - - - - - - - - - - - - - - 11,289,998 4,022 246,218 126,954 - 1,534,119 - - - - - - - - - 472,300 11,289,998 69,058 55 11,831,411 8,258,359 - - - - - - - - - - - 5,502 (231,583) - - - - - - - (1,879,366) - - - - - - - - - - - - - - - - - - - 58,178 - - - - - - - - - - - - - - - - - - - - - - - - (1,879,366) 23,172,550 22,329,129 - - 58,178 5,502 (231,583) - - 2,430,964 - - - - - - - - - - - - - - (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) - - - - 25,062,256 33,320,615 - - - - - - - - - - - - (2,430,964) 1,091,003 (1,091,003) - - - - - - - - - - - - - - - (1,721,208) (1,721,208) (19,599,103) (19,599,103) (215,151) (215,151) - - - - (135,077) (135,077) - - 65,106,194 65,106,194 (58,178) (58,178) (5,502) (5,502) 231,583 231,583 - - - - - - - - - - - - - - - - - - - - - - - - - - - - ( 71,564) - - - - - - - - - - - - (138,071) 24,559,884 12,513,984 - - 126,954 (363,577) (363,577) (1,091,003) 120,769,840 - - - - - - - - - - - - - - - - - (215,151) - 24,322,550 38,029,204 13,000,000 65,106,194 - - - (71,564) - 812,626 812,626 BALANCE, DECEMBER 31, 2000 11,689,365 $116,893,646 1,300,000 $13,000,000 $22,329,129 $23,172,550 $246,219 $9,410,632 $127,236 $55 $55,285,821 $10,689,323 $1,091,003 $65,143,847 $76,924,173 ($71,564) ($278,377) $261,753,699 The accompanying notes are an integral part of the financial statements. 41 English Translation of Financial Statements Originally Issued in Chinese STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000 and 1999 (In Thousand New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income Net income from the dissolved company before the merger Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred income taxes Equity in net losses or earnings of investee companies - net Gain on sale of long-term investments Loss on disposal of properties - net Accretion in redemption value of bonds Accrued pension cost Allowance for doubtful receivables Allowance for sales returns and others Changes of operating assets and liabilities: Decrease (increase) in: Short-term investments Forward exchange contract receivable Receivable from related parties Notes receivable Accounts receivable Inventories Prepaid expenses and other current assets Increase (decrease) in: Payable to related parties Accounts payable Income tax payable Forward exchange contract payable Accrued expenses and other current liabilities 2000 1999 $65,106,194 $24,559,884 (135,077) - 33,051,197 18,041,320 (1,059,841) (383,686) (779,326) 1,191,891 - 13,823 - 360,673 490,835 965,503 (9,881) 31,854 585,614 249,483 139,112 264,913 236,250 7,108 (538,201) 96,364 5,425,077 (2,633) (234,396) (129,266) (14,268,429) (5,443,998) (2,985,133) (840,937) 729,775 (1,289,994) 3,552,646 2,379,105 (146,300) 76,168 883,185 1,557,429 477,215 (629,208) 102,784 1,336,588 Net Cash Provided by Operating Activities 88,036,519 44,999,165 (Forward) 42 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Properties Long-term investments Proceeds from sale of: Properties Long-term investments Decrease (increase) in refundable deposits Increase in deferred charges Cash of TASMC and WSMC as of July 1,2000 Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of : Long-term bonds Capital stock Payments on: Short-term bank loans Commercial paper Long-term bank loans Increase (decrease) in guarantee deposits Bonus paid to directors and supervisors Net Cash Provided by Financing Activities 2000 1999 ($79,270,461) ($29,842,159) (11,866,583) (12,105,618) 219,233 - (770,733) 36,824 16,106 5,572 (1,089,730) (433,187) 1,412,404 - (91,365,870) (42,322,462) 9,000,000 37,322,550 (12,635,000) (5,479,288) (7,550,000) 1,900,663 (215,151) 9,450,634 - - - (2,692,938) (938,463) (138,071) 22,343,774 5,681,162 NET INCREASE IN CASH AND CASH EQUIVALENTS 19,014,423 8,357,865 CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 16,650,017 8,292,152 CASH AND CASH EQUIVALENTS, END OF THE YEAR $35,664,440 $16,650,017 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 debt Cash paid for acquisitions of properties Total acquisitions Payables to contractors and equipment suppliers Conversion of bonds into common stocks $2,366,026 $1,300,591 $- $540,873 $1,009,264 ($66,376) $50,000 $- $89,963,658 $33,619,158 (10,693,197) (3,776,999) $79,270,461 $29,842,159 $- $12,513,984 43 SUPPLEMENTAL INFORMATION OF THE MERGERS: The Company had merged with Worldwide Semiconductor Manufacturing Corp. (WSMC) and had acquired TSMC-Acer Semiconductor Manufacturing Corp. (TASMC) by issuing new shares. The balance sheets as of June 30, 2000 of WSMC and TASMC were as follows: Cash Inventories Other current assets Properties - net Other assets Current liabilities Long-term liabilities Other liabilities Net assets acquired TASMC WSMC (Fair Value) (Book Value) Total $736,594 1,647,845 2,308,391 $675,810 1,805,243 3,150,257 19,846,708 40,512,706 7,335,526 5,101,000 $1,412,404 3,453,088 5,458,648 60,359,414 12,436,526 (16,699,147) (12,454,686) (29,153,833) (2,000,000) (4,950,000) (6,950,000) (654,863) (23,498) (678,361) 12,521,054 33,816,832 46,337,886 Cancellation of stocks of the dissolved companies (8,173,605) - (8,173,605) Issuance of stocks from the surviving company (4,335,152) (11,500,000) (15,835,152) Capital surplus $12,297 $22,316,832 $22,329,129 The accompanying notes are an integral part of the financial statements. 44 English Translation of Financial Statements Originally Issued in Chinese 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 on the Taiwan Stock Exchange. On October 8, 1997, the Company sold shares of stock in the New York Stock Exchange in the form of American Depositary Receipts (ADRs). TSMC had acquired TSMC-Acer Semiconductor Manufacturing Corp. (TASMC). It also merged with Worldwide Semiconductor Manufacturing Corporation (WSMC) with TSMC as the surviving company. TASMC and WSMC were subsequently dissolved. The acquisition of TASMC and the merger with WSMC took effect on June 30, 2000, and, on that date, the Company issued a total of 1,583,515 thousand common shares to the former shareholders of TASMC and WSMC. The additional shares issued were based on the agreed exchange ratio of three point nine TASMC shares and two WSMC shares for every share of TSMC. Also, the holders of the additional shares have the same rights and the obligation as the holders of the other issued common stock of the Company. TASMC was incorporated on March 31, 1990, and commenced operations in January 1992. TASMC is engaged mainly in the research, development, design, manufacturing, packaging, testing and sale of dynamic random- access memory (DRAM) semiconductor devices, other memory integrated circuits and logic integrated circuits. WSMC, was incorporated on March 6, 1996 and commenced operations from December 1, 1998. WSMC is engaged mainly in the manufacture of semiconductor products. 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. The significant accounting principles adopted by the Company are as follows: Cash equivalents Government bonds acquired under repurchase agreements 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 are 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 and the related provision for sales returns and others are provided based on experience. Such provisions are accounted for as reduction 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. 45 Long-term investments Investments in shares of stock of companies wherein the Company exercises significant influence on their operating and financial decisions are accounted for by equity method. The difference between the investment cost and the Company’s proportionate share in the net assets of the investee on 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 “Equity in net earnings or losses in investee companies” account. The increase in the Company’s proportionate share in the net assets of its investee company resulting from its subscription to additional shares of stock, issued by such investee company, at the rate not proportionate to its existing equity ownership in such investee companies, is credited to a capital surplus account while any decrease in the Company’s proportionate share in the net asset of investee company is debited against the existing balance of the similar capital surplus account with the difference debited against unappropriated retained earnings. If an investee company’s losses are covered by additional paid-in capital that is soured from an increase in the value of assets upon reappraisal after the long-term investment was made, then the Company shall calculate such amount in accordance with its ownership percentage and debit the “Additional paid-in capital” account and credit the “Retained earnings” account; no journal entries shall be made for other types of loss coverage increase in asset values upon reappraisal. Other stock investments are accounted for by cost method. These investments 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. Cash dividends are recognized as income in the year received but are accounted for as reduction in the carrying value of the long-term investment if the dividends are received in the same year that the related investments are acquired. 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 of the NAV are debited or credited to shareholders’ equity. The costs of investments sold are determined by the weighted-average method. The Company’s proportionate share in the gains from disposal of properties, net of the applicable income tax, included as part of its share in the earnings or losses of investee companies accounted for under the equity method for the current year is 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 retain earnings. Also, if an investee company has unrealized loss on long-term investment which is evaluated by lower-of-cost-or-market method, the Company shall recognize that unrealized loss in proportion to the Company’s equity interest and recorded in an account as a component of shareholders’ equity. 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 transaction with a third party. The entire amount of the gains or losses on sales to majority-owned subsidiaries are deferred until such gains or losses are realized through the subsequent sale of the related products to third parties. On the other hand, if the unrealized gains or losses arose from a sale by the investee companies or majority-owned subsidiaries to the Company, an adjustment should be made in accordance with ownership percentage. Property, plant and equipment and rental assets Property, plant and equipment and rental assets are stated at cost less accumulated depreciation. Major additions, renewals and betterment, and interest expense incurred during the construction period are capitalized. Maintenance and repairs are expensed currently. Property, plant and equipment covered by agreements qualifying as capital leases are carried at the lower of the 46 present value of all minimum future rental payments, or the leased property’s 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. Depreciation is provided on the straight-line method over these estimated service lives: Buildings - 10 to 20 years; machinery and equipment - 5 to 10 years; and 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. Goodwill Goodwill arisen from the business merger is amortized by the straight-line method over 10 years. Deferred charges Deferred charges, consisting of technology, software and system design costs, technology know how, issuance costs of bonds, and short-term credit instruments, are amortized over three years, five years, the contract period of credit instruments, and the contract valid period or economic useful lives, respectively. Pension costs Net periodic pension costs are recorded on the basis of actuarial calculations. Unrecognized net transition obligation is amortized over 25 years. Deferred gain on sale-leaseback The gain resulting from the sale of leased property is deferred. Such deferred gain is then amortized as follows: (a) operating lease - adjustment of rental expenses over leasing period, and (b) capital lease - adjustment of depreciation over the estimate useful life or leasing period. Income tax The Company adopted inter-period tax allocation. Deferred income taxes are recognized for the tax effects of temporary differences, unused tax credits, and operating loss carry forwards. 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, it should be classified as current or non-current based on the expected reversal date of temporary difference. Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision. Income taxes (10%) on unappropriated earnings generated starting January 1, 1998 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 are recorded in New Taiwan dollars as assets or liabilities at spot rates on the inception dates of the contracts. The difference 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 on the inception dates of the forward contracts. Premiums or discounts are amortized by the straight-line method over the terms of the forward contracts are either deferred or recognized as income. At the balance sheet dates, the receivables or payables arising from forward contracts are restated at the prevailing spot rates, and the resulting differences are recognized in income. 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. Under interest rate swap contracts, the Company pays an amount equal to the interest rates based on notional principal amount and receives a specified variable-rate of interest also based on the same notional principal amount; with the notional amounts of the contracts are not exchanged. The net amounts paid or received under the contracts are reported as adjustments to interest income or expense. The notional amounts of the foreign currency option contracts entered into for hedging purposes are not 47 recognized as either assets or liabilities 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 period-end, the balances of foreign-currency assets and liabilities are restated at prevailing exchange rates, and the resulting differences are recorded as exchange gain or loss in current income. Reclassifications Certain accounts in 1999 have been reclassified to conform to 2000 classifications. Mergers The acquisition of TASMC effective on July 1, 2000 was accounted under the Statement of Financial Accounting Standards No. 25 “Business Combination - Purchase Method”. On the other hand, the merger with WSMC was accounted for as pooling of interest with the results of operations of WSMC included in the statement of income for the year ended December 31, 2000. Pro forma net sales, net income and earnings per share of the Company on the assumption that the acquisition of TASMC and the merger with WSMC were completed as of January 1, 1999 are as follows: Net sales Net income Earnings per share 2000 1999 $170,163,166 $87,015,703 65,050,836 17,714,691 Based on weighted-average number of shares outstanding - 11,616,455 and 11,029,303 thousand shares in 2000 and 1999 $5.60 $1.61 The individual operating results of the three companies before the mergers on June 30, 2000 are as follows: For the six months ended June 30, 2000 Net sales Net income (loss) For the year ended December 31, 1999 Net sales Net income (loss) The Company TASMC WSMC $60,089,632 $3,934,746 $4,844,501 23,458,253 (55,358) 135,077 73,131,206 24,559,884 10,655,995 3,228,502 (6,127,604) (1,032,890) 3. The restated financial information of the Company on the assumption that the merger with WSMC had occurred as of December 31, 1999 is as follows: 48 BALANCE SHEETS December 31, 1999 ASSETS CURRENT ASSETS Cash and cash equivalents Short-term investments Receivables-net Inventories Deferred income tax assets Pledged time deposits Prepaid expenses and other current assets Total Current Assets LONG-TERM INVESTMENTS PROPERTY, PLANT AND EQUIPMENT-NET OTHER ASSETS Deferred income tax assets Deferred charges - net Refundable deposits Miscellaneous Total Other Assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term bank loan Commercial paper Payable to related parties Accounts payable Payable to contractors and equipment suppliers Income tax payable Accrued expenses and other current liabilities Total Current Liabilities NONCURRENT LIABILITIES Long-term bank loan Long-term bonds Total Noncurrent Liabilities OTHER LIABILITIES Accrued pension cost Guarantee deposits and other liabilities Total Other Liabilities Total Liabilities SHAREHOLDERS’ EQUITY Capital stock Subscribed capital Capital surplus Legal reserve Unappropriated earning Cumulative translation adjustments Total Shareholders’ Equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Amount $28,505,434 266,890 13,940,578 5,791,791 2,498,455 3,161,000 2,578,883 56,743,031 28,240,267 118,942,185 $6,794,609 2,317,245 54,903 105,137 9,271,894 $213,197,377 $5,026,631 94,797 1,922,911 2,871,065 6,958,098 146,300 7,596,561 24,616,363 9,791,000 20,000,000 29,791,000 1,012,045 5,207,781 6,219,826 60,627,189 85,208,817 13,118,025 22,013,734 8,258,359 25,062,256 (1,091,003) 152,570,188 $213,197,377 49 STATEMENTS OF INCOME For the Year Ended December 31, 1999 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 Reversal of allowance for losses on short-term investment Premium income Gain on disposal of investments Rental income Other Total Non-Operating Income NON-OPERATING EXPENSES Interest Equity in net losses of investee companies - net Loss on disposal of properties Foreign exchange loss - net Bond issue cost Premium expenses Loss on disposal of short-term investments Other Total Non-Operating expenses INCOME BEFORE INCOME TAX INCOME TAX BENEFIT NET INCOME 4. CASH AND CASH EQUIVALENTS Cash and bank deposits Government bonds acquired under repurchase agreements $76,359,708 45,640,417 30,719,291 2,326,662 1,976,623 3,090,790 7,394,075 23,325,216 1,026,003 184,607 120,766 63,809 29,041 3,667 111,272 1,539,165 1,954,366 1,191,891 164,351 119,141 114,839 86,746 75,366 80,706 3,787,406 21,076,975 2,450,019 $23,526,994 2000 1999 $35,053,733 $16,575,032 610,707 74,985 $35,664,440 $16,650,017 50 5. INVENTORIES Finished goods Work in process Raw materials Supplies and spare parts Allowance for losses 6. LONG-TERM INVESTMENTS 2000 1999 $1,606,368 8,422,401 423,444 1,083,348 11,535,561 (567,626) $653,347 3,618,693 320,685 718,344 5,311,069 (781,355) $10,967,935 $4,529,714 2000 1999 % of % of Carrying Owner- Carrying Owner- Value ship Value ship Shares of stock Equity method TSMC International Investment Vanguard International Semiconductor TSMC - North America $23,678,522 5,615,075 666,924 TSMC - Europe TSMC - Japan TASMC Systems on Silicon Manufacturing Company Pte. Ltd. (SSMC) Po Cherng Investment Chi Hsin Investment Kung Cherng Investment Chi Cherng Investment Hsin Ruey Investment Cherng Huei Investment TSMC Partners Cost method Listed Taiwan Mask Non-listed TASMC-preferred stocks Taiwan Semiconductor Technology United Industrial Gases Co., Ltd. Shin-Etsu Handotai Taiwan Company Ltd. W.K. Technology Fund IV Hon Tung Venture Capital (Forward) 100 25 100 100 100 - 32 25 25 25 25 25 25 $10,078,880 5,010,897 255,025 25,956 10,168 3,630,193 360,177 103,017 103,012 102,773 102,770 103,003 103,005 100 25 100 100 100 32 32 25 25 25 25 25 25 100 9,968 100 9,594 37,803 - 935,870 136,984 139,000 158,752 130,794 128,100 138,200 535,162 32,310,780 19,998,844 32,129 - 500,000 146,250 105,000 50,000 120,000 953,379 2 - 19 10 7 4 10 32,129 4,854,742 500,000 146,250 105,000 50,000 80,000 5,768,121 2 28 19 11 7 4 10 51 Funds Crimson Asia Capital Horizon Ventures Subscription to shares of stock of TSMC International Investment 64,547 93,304 157,851 - $33,422,010 - - - 34,534 31,744 66,278 2,375,400 $28,208,643 - - - Equity in net earnings or losses of investee companies in 2000 and 1999 were as follows: TSMC International Investment Vanguard International Semiconductor Others 2000 1999 $138,589 ($1,007,218) 597,812 42,925 (527,823) 343,150 $779,326 ($1,191,891) The carrying values of investments accounted for by equity method and the related investment income and losses for the years ended December 31, 2000 were based on audited financial statements of the investees in the same period except for TSMC - Japan in 1999. Information on the long-term investments is as follows: Market value of listed stocks Equity in the net assets of unlisted stocks Net asset value of funds 7. PROPERTY, PLANT AND EQUIPMENT Accumulated depreciation consisted of the following: Buildings Machinery and equipment Office equipment 2000 1999 $8,729,639 $19,753,642 27,597,593 20,177,278 157,851 66,278 2000 1999 $9,816,698 82,775,965 1,739,505 $7,441,342 49,369,894 1,158,489 $94,332,168 $57,969,725 Information on the status of the construction of the Company’s manufacturing facilities as of December 31, 2000 is as follows: Manufacturing Plant Fab 6 Fab 7 Fab 8 Fab 12 - 1st stage Fab 14 - 1st stage Estimated Cost Accumulated Expenditures $76,889,000 $67,565,100 22,540,400 28,314,300 38,280,800 9,711,000 11,121,100 15,217,800 21,372,000 7,946,600 Expected or Actual Date of Starting Operations March 2000 March 2001 March 2001 November 2001 May 2002 Interest expense capitalized for the years ended December 31, 2000 and 1999 were $72,903 and $305,312, respectively. 52 As of December 31, 2000, properties with an aggregate net book value of about $7,171,081 were mortgaged as collateral for long-term bank loans. 8. DEFERRED CHARGES - NET Technology Software and system design costs Technology know how Bond issue costs Others 9. LEASE OBLIGATION PAYABLE Lease payable - repayable by June 30, 2001 Current portion 10. LONG-TERM BONDS Domestic unsecured bonds: 2000 1999 $1,442,292 1,420,528 157,500 45,595 56,695 $- 541,306 - 37,238 - $3,122,610 $578,544 2000 $50,000 (50,000) $- 2000 1999 Repayable in March 2003, 7.71% annual interest payable semi-annually $4,000,000 $4,000,000 Repayable in November 2003, 7.12% annual interest payable annually, prepaid in November 2000 - 6,000,000 Repayable in October 2002 and 2004, 5.67% and 5.95% annual interest payable annually, respectively 10,000,000 10,000,000 Repayable in December 2005 and 2007, 5.25% and 5.36% annual interest payable annually, respectively 15,000,000 - $29,000,000 $20,000,000 11. 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 provide that the following shall be appropriated from the annual net income (less any deficit): a. 10% legal reserve; b. Special reserve according to the relevant laws or the regulating authorities; c. Bonuses to directors and supervisors and to employees equal to 1% and at least 1% of the remainder, respectively. d. Dividends to shareholders of preferred stock equal to 3.5% annual rate, based on outstanding period. 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 aggregate par value of 53 the Company’s outstanding capital stock. The reserve can only be used to offset a deficit; or, when it has reached 50% of the aggregate par value of the Company’s outstanding capital stock, up to 50% thereof can be distributed as stock dividend. Pursuant to existing regulations promulgated by the Securities and Futures Commission, a special reserve equivalent to the debit balance of any account shown in the shareholder equity section of the balance sheets, other than the deficit, shall be made from unappropriated retained earnings. The special reserve shall be adjusted accordingly based on the debit balance of such accounts as at year-end. Under the Integrated Income Tax System that became effective on January 1, 1998, non-corporate and ROC- resident shareholders are allowed a tax credit for the income tax paid by the Company on earnings generated starting January 1, 1998. 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 company issued nonpublic 1,300,000 thousand preferred stock - Series A to certain investors. The following are the rights of the holders of the preferred shares and other terms and conditions. a. Entitled to receive cumulative cash dividends at an annual rate of 3.5%. b. Not be entitled participating any additional shares of stock upon transfer of unappropriated earnings and capital surplus to stock. c. Have priority over the holders of common shares to the assets of the Corporation available for distribution to stockholders upon liquidation or dissolution of the Corporation; however, the preemptive rights to the assets shall not excess the issue value of the shares. d. Have voting rights similar to that of the holders of common stock. e. No right to convert their shares into common stock. The preferred shares will be redeemed within thirty months from its issuance. The holders will have the foregoing rights and the Company’s related obligations will remain the same until the preferred shares are actually redeemed by the Company. 12. 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 final six months of employment. The Company makes monthly contributions, equal to 2% of salaries, to a pension fund that 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 (Forward) 2000 1999 $376,689 $248,378 91,234 (26,675) 8,300 78,961 (22,317) 8,300 $449,548 $313,322 54 b. Reconciliation of the fund status of the plan and accrued pension cost 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 cost c. Actuarial assumptions Discount rated used in determining present values Future salary increase rate Expected rate of return plan on assets d. Contributions to pension fund e. Funds transferred from TASMC and WSMC f. Payments from pension fund 13. INCOME TAX BENEFIT $- 763,879 763,879 1,550,009 2,313,888 (661,099) 1,652,789 - $- 428,257 428,257 975,345 1,403,602 (364,994) 1,038,608 - (165,991) (174,291) 22,737 - $1,509,535 135,448 - $999,765 6.0% 6.0% 6.0% 6.5% 6.0% 6.5% $95,932 $67,227 $173,339 $- $1,458 $3,591 a. A reconciliation of income tax expense - current before tax credits and income tax expense on income before income tax at statutory rate is shown below: 2000 1999 Income tax expense on "income before income tax" at statutory rate (20%) ($12,760,503) ($4,821,973) Tax-exempt income Temporary difference Assess additional income tax on the unappropriated earning Income tax expense - current b. Income tax credits as of December 31, 2000 and 1999 consist of: Income tax expense - current before tax credits Tax credits Net change in deferred income tax assets (liabilities) for the period Investment tax credits Temporary differences Valuation allowance Adjustment of prior years' taxes 7,770,000 (49,497) (88,024) 3,434,802 (221,129) - ($5,128,024) ($1,608,300) 2000 1999 ($5,128,024) ($1,608,300) 5,128,024 1,587,000 - (21,300) 3,146,369 (388,671) 1,798,325 (111,139) (1,678,791) (1,303,500) 189,693 $1,268,600 87,633 $450,019 55 c. Deferred income tax assets and liabilities as of December 31, 2000 and 1999 consisted of: Current Investment tax credits Valuation allowance Noncurrent Investment tax credits Valuation allowance Temporary differences Depreciation 2000 1999 $8,422,000 $2,329,000 (300,000) - $8,122,000 $2,329,000 $15,490,536 $5,806,891 (8,312,433) (1,303,500) 238,879 197,268 (857,689) $6,559,293 (427,407) $4,273,252 d. Integrated income tax information: The balances of the imputation credit account (ICA) as of December 31, 2000 and 1999 were $5,888 and $1,497, respectively. The expected and actual creditable ratio for 2000 and 1999 is 0.009%. 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 2000 may be adjusted according to the difference between the expected and actual imputation credit allowed under the regulation. e. The unappropriated retained earnings as of December 31, 2000 and 1999 included the earnings generated up to December 31, 1997 of $4,827 and $752,612, respectively. The effective tax rates for deferred income tax as of December 31, 2000 and 1999 were 7.54% and 5.9%, respectively. Unused investment tax credits arising from investments in machinery and equipment, and research and development expenditures as of December 31, 2000 will expire as follows: Year of Expiry 2000 2001 2002 2003 2004 The income from the following projects and services are exempt from income tax: Amount $2,899,245 4,015,461 4,800,268 5,738,563 6,458,999 $23,912,536 Tax-Exemption Period Expansion of second manufacturing plant and computer-aided design services, and construction of third manufacturing plant 1996 to 1999 Expansion of first and second manufacturing plants - modules A and B, third manufacturing plant, and construction of fourth manufacturing plant 1997 to 2000 Expansion of first and second manufacturing plants-modules A and B, third manufacturing plant and fourth manufacturing plant, and construction of fifth manufacturing plant 1999 to 2002 Income tax returns through 1996 have been examined and cleared by the tax authorities. 56 14. RELATED PARTY TRANSACTIONS The Company engages in business transactions with the following related parties: a. Industrial Technology Research Institute (ITRI); the Company's chairman is one of its director b. Philips Electronics N.V., a major shareholder c. Subsidiaries TSMC International Investment (TSMC - BVI) TSMC - North America TSMC - Europe TSMC - Japan d. Investees Vanguard International Semiconductor Corporation (VIS) Systems on Silicon Manufacturing Company Pte.Ltd. (SSMC) e. TSMC-ACER Semiconductor Manufacturing Corp. (TASMC), a merged company f. WaferTech, LLC, an indirect subsidiary of TSMC-BVI g. TSMC Technology, a subsidiary of TSMC-BVI The transactions with the aforementioned parties in addition to those disclosed in other notes, are summarized as follows: 2000 1999 Amount % Amount % For the period Sales ITRI Philips and its affiliates VIS TASMC WaferTech Purchase WaferTech TASMC VIS Rental expense - ITRI $198,146 5,289,927 17,012 - 30,816 $5,535,901 $13,296,633 - 6,572,110 $19,868,743 $161,575 Manufacturing expenses Technical assistance fee - Philips $2,137,175 General and administrative expenses Consulting fee - VIS $- (Forward) - 3 - - - 3 37 - 19 56 14 86 - $132,507 2,864,149 48,473 22,246 59,438 $3,126,813 $4,636,780 808,926 381,989 $5,827,695 $161,488 - 4 - - - 4 40 7 3 50 54 $862,398 100 $20,400 - 57 Marketing expenses Commission - TSMC - North America TSMC - Europe TSMC - Japan Service Charge - TSMC - North America Sale of Properties WaferTech VIS Non-operating income SSMC (mainly technical service income) VIS Others At end of period Receivable ITRI Philips and its affiliates TSMC - Japan VIS WaferTech TSMC Technology SSMC TASMC Rental prepayment - ITRI Payable Philips and its affiliates TSMC - North America TSMC - Europe TSMC - Japan VIS WaferTech TSMC Technology TASMC $994,686 143,461 165,087 118,852 $1,422,086 $- 87,189 $87,189 $152,347 5,604 1,787 $159,738 $56,078 643,604 - 159,890 20,361 25,728 89,154 - 34 5 5 4 48 - 37 37 3 - - 3 6 65 - 16 2 2 9 - $692,927 87,414 81,951 99,087 $961,379 $350,969 - $350,969 $- - - $- $18,458 133,245 17,550 25,674 198,163 47,343 5,353 23,117 38 5 4 5 52 100 - 100 - - - - 4 28 4 6 42 10 1 5 $994,815 $42,664 100 6 $468,903 $42,541 100 2 $797,375 166,063 66,343 16,165 1,808,964 1,487,181 4,487 - 18 4 2 - 42 34 - - $305,756 125,637 13,422 13,189 184,741 730,483 3,832 539,466 16 6 1 1 10 38 - 28 $4,346,578 100 $1,916,526 100 Sales to related parties are based on regular selling prices and collection terms, except for disposal of properties and technical service, which were in accordance with the underlying contracts. Payable to WaferTech includes those arising from purchases of finished goods and compensation for violation of manufacturing agreement. As there were no comparable sales of properties and purchases, they were in accordance with contracts. 58 15. LONG-TERM OPERATING LEASES The Company leases from ITRI the land, building and certain machinery and equipment of its first manufacturing facility under agreements that will expire in March 2002. The annual rent and other related charges under such agreement amount to $170,656. The agreements can be renewed upon their expiration. The Company leases the land where its second through fourteen manufacturing facilities are located from the Science-Based Industrial Park Administration. These agreements will expire on various dates from March 2008 to November 2019 and have annual rentals aggregating $172,000. The agreements can also be renewable upon their expiration. Future annual minimum rentals under the aforementioned leases are as follows: Year 2001 2002 2003 2004 2005 2006-2019 Amount $342,657 214,664 172,000 172,000 172,000 1,488,431 $2,561,752 16. COMMITMENTS AS OF DECEMBER 31, 2000 The Company's commitments as of December 31,2000 are as follows: 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, as defined in the agreement, of certain products. The agreement shall remain in force up to July 9, 2007 and thereafter be automatically renewed for successive periods of three years. Under the amended agreement, the fee is subject to deduction by the amounts the Company pays to any third party for settling any licensing/infringement issue after the first five-year period 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 themselves 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, 2000 as amended. In addition, 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. d. 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 full price of the products less certain costs. Later, TSMC Development, Inc. transferred its rights under the agreement to WaferTech, LLC. e. 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$213,865 thousand had been received as of December 31, 2000. f. Under a Shareholders Agreement entered into with Philips and EDB Investments Pte. Ltd. dated March 30, 1999, the parties agreed to: (a) form a joint venture company to be named Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) for the purpose of constructing an integrated circuit foundry in Singapore, (b) set SSMC's total authorized capital at about US$1.2 billion, and, (c) allow the Company to invest 32% of SSMC's 59 capital. The Company and Philips committed to buy a certain percentage of the production capacity of SSMC. If any party defaults on the agreement and the capacity utilization of SSMC falls below a certain percentage of its total capacity, the defaulting party should compensate SSMC for all related unavoidable costs. g. Under a Technical Cooperation Agreement with SSMC entered into on May 12, 1999, SSMC shall compensate TSMC for technology service provided to SSMC. The compensation shall be a certain percentage of net selling prices of certain products sold by SSMC. The agreement will remain in force for ten years and be automatically renewed for successive periods of five years unless predetermined by either party under certain conditions. h. The Company provides guarantee for loans of US$268,000 thousand and US$40,000 thousand obtained by TSMC Development, Inc. and TSMC - North America. i. Under a Technical Transfer Agreement with National Semiconductor Corporation (“National”) entered into on June 27, 2000, TSMC shall receive payments for the technology transferred to National. The agreement will remain in force for ten years. After expiration, this agreement will be automatically renewed for successive periods of two years unless pre-terminated by either party under certain conditions. j. The Company entered into a Manufacturing Agreement with Vanguard International Semiconductor Corp. (“VIS”). VIS agrees to reserve certain capacity to manufacture for the Company certain devices on logic or other technologies required by the Company's customers, at discounted actual setting prices as agreed by the parties. The Company shall pay NT$1,200,000 thousands to VIS as Security Bond (which was paid on July 7, 2000). VIS shall return certain amount of the Bond without any interest to the Company for some wafers ordered by the Company. The contract will remain in force for five years. k. Unused credit lines as of December 31, 2000 are approximately $ 250,338. 17. ADDITIONAL DISCLOSURES The following are the additional disclosure requirements for TSMC and affiliates pursuant to SFC requirements: a. Financing provided to other parties: Please see table 1 attached. b. Collateral provided to other parties: Please see table 2 attached. c. Marketable Securities held: Please see table 3 attached. d. Balance of marketable securities acquired and disposed of, exceeding NTD 100 million or 20% of the issued capital: Please see table 4 attached. e. Acquisition of properties exceeding NTD 100 million or 20% of issued capital: Please see table 5 attached. f. Disposal of properties exceeding NTD 100 million or 20% of issued capital: None. g. Transaction of purchase or sales with related parties amounting to more than NTD 100 million or 20% of the issued capital: Please see table 6 attached. h. Receivable from related parties amounting to more than NTD 100 million or 20% of the issued capital: Please see table 7 attached. i. Information regarding names and locations etc. of investees on which the Company exercises significant influences: Please see table 8 attached. j. Transactions of derivative financial instruments: The relevant information on the derivative financial instruments entered into by the Company is as follows: 1) Outstanding forward exchange contracts as of December 31, 2000 and 1999: 60 Contract Amount Fair Value Currency (Thousands) (Thousands) Settlement Date Maturity Amount US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ 60,000 NTD 1,978,998 Jan. 2001 NTD 1,989,006 106,993 156,875 365,000 25,000 81,367 16,000 30,000 NTD 3,582,959 Jan. to Feb. 2001 NTD 3,553,080 NTD 5,100,386 Jan. 2001 NTD 5,091,560 NTD 12,105,459 Jan. to Dec. 2001 NTD 12,032,465 JPY 2,472,080 Jul. 2000 NTD 879,154 JPY 8,303,350 Jan. to Jul. 2000 NTD 2,564,297 NLG NTD 34,926 941,847 Jan. 2000 Jan. 2000 NTD NTD 497,159 947,880 2000 Buy Sell Sell Sell 1999 Buy Sell Sell Sell Receivables from forward exchange contracts (shown in the balance sheet as part of “Other current assets” account) as of December 31, 2000 and 1999 aggregated to $49,480 and $19,144 respectively, and payables from forward exchange contracts (shown in the balance sheet as part of “Other current liabilities” account) aggregated to $178,952 and $102,784 as of December 31, 2000 and 1999. Net exchange losses and gains for the years ended December 31, 2000 and 1999 were $266,393 and $105,859, respectively. The net assets or liabilities that have been hedged by the above forward exchange contracts are as follows: Accounts receivable Payable to contractors and equipment suppliers Guarantee deposits 2) Interest rate swaps Amount(Thousand) 2000 1999 US$ US$ 813,685 571,332 JPY 21,237,708 EUR 62,480 US$ 375,749 US$ 151,392 - US$ 764,765 The Company has entered into interest rate swap transactions to hedge exposure to rising interest rates on its floating rate long-term bank loans. These significant 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 expenses on these transactions for the years ended December 31, 2000 and 1999 were $113,683 and $112,213, respectively. 3) Option contracts Outstanding option contracts as of December 31, 2000 and 1999 were as follows: 61 Contract Currency (Thousands) Value Fair Value Strike Price Maturity Contract Amount Carrying 2000 Put option sell Call option sell Call option sell Put option buy 1999 EUR US$ US$ US$ EUR 525,537 US$ 203,500 US$ US$ 20,000 15,000 $- ($189,735) 0.8870~0.9680 (US$/EUR) May 2001 - - - (264,885) 107.77~110.5 (US$/JPY) Mar 2001 (1,485) 32.42 (US$/NTD) 37 110~110.5 (US$/JPY) Jan. 2001 Feb. 2001 Call option sell Call option sell US$ US$ US$ 100,000 US$ 60,000 3,911 3,035 3,911 3,035 0.9785~0.9940 (US$/EUR) Jan. 2000 106.6 (US$/JPY) Jan. 2000 For the years ended December 31, 2000 and 1999, the Company realized premium income of $116,248 and $63,809 on foreign currency options written and incurred premium expenses of $108,133 and $86,746 on foreign currency options bought. 4) Transaction risk a) Credit risk. The banks, which are the counter-parties to the foregoing derivative financial instruments, are reputable financial institutions. Management believes its exposures related to the potential default by those counter parties are low. b) Market price risk. The Company is exposed to market risks arising from changes in currency exchange rates due to U.S. dollar-denominated accounts receivable, Yen-dominated accounts payable, Euro-denominated accounts payables, and U.S. dollar-denominated debt related to its importation of materials and machinery and equipment and long-term bank loans. The Company enters into forward contracts and option contracts to manage its exposures. The Company uses interest rate swap contracts with banks to principally manage the risks arising from the changes in interest rates of its obligations. It enters into financial derivative contracts based on analysis of specific and known economic exposures and by policy prohibits entering into such contracts for trading purposes. Its hedging strategy is to use financial instruments having negative correlation to fair value of the hedged items as hedging instruments and periodically evaluates the effectiveness of these instruments' as hedges of its interest rate exposures. c) Liquidity and cash flow requirements. The cash flow requirements with respect to the Company's derivative financial instruments are as follows: (i) forward contracts - the net differences between the spot rates and contracted forward rates, (ii) options - the exercise price but the options may not have to be exercised at all in cases where the strike price is higher than the related market price at exercise dates, and (iii) interest rate swap agreements - equal to the net difference between the interest receivable and payables under the agreements. 5) Fair value of financial instruments Non-derivative financial instruments Assets Cash and cash equivalents Short-term investments Receivable from related parties Accounts and notes receivable Long-term investments (Forward) 2000 Carrying Amount Fair Value 1999 Carrying Amount Fair Value $35,664,440 $35,664,440 $16,650,017 $16,650,017 - - 994,815 994,815 236,250 468,903 241,850 468,903 30,460,489 30,460,489 13,544,387 13,544,387 33,422,010 36,485,083 28,208,643 39,997,198 62 Pledge time deposit Refundable deposits Liabilities Payable to related parties Accounts payable 46,856 967,985 46,856 967,985 8,710 16,346 8,710 16,346 4,346,578 7,989,953 4,346,578 7,989,953 1,916,526 2,525,086 6,958,098 1,916,526 2,525,086 6,958,098 Payable to contractors and equipment suppliers 24,392,400 24,392,400 Long-term bonds Guarantee deposits Derivative financial instruments Forward exchange contracts (buy) Forward exchange contracts (sell) Interest rate swaps Option 29,000,000 29,035,803 20,000,000 20,013,774 7,086,379 7,086,379 5,185,362 5,185,362 1,984,740 1,978,998 784,875 760,906 20,802,311 20,788,804 3,998,698 3,998,108 1,601 - 234,017 (456,068) 7,488 6,946 7,488 6,946 Fair values of financial instruments were determined as follows: a) Short-term financial instruments — carrying values. b) Short-term investments — market values. c) Long-term investments — market value for listed companies and net equity value for the others. d) Refundable deposits and guarantees deposits — carrying values. e) Long-term bank loans — based on forecasted cash flows discounted at interest rates of similar long-term liabilities. Long-term bonds payable is discounted at present value. Fair values of other long-term liabilities are also their carrying values as they use floating interest rates. f) Derivative financial instruments — based on outright forward rates and interest rate in each contract. The fair values of non-financial instruments were not included in the fair values disclosed above. Accordingly, the sum of the fair values of the financial instruments listed above are not equal the fair value of the company. 18. SEGMENT FINANCIAL INFORMATION a. Export sales Area America Asia Europe 2000 1999 $81,686,803 $38,084,870 42,906,968 11,360,517 16,493,721 4,778,646 $135,954,288 $59,357,237 The export sales information is presented by billed regions. b. The Company has no single customer that accounts for at least 10% of its total sales. 63 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES FINANCING PROVIDED TO OTHER PARTIES For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 1 No. Financing Transaction Accounts Limitation Maximum Ending Interest Financing Allowance Mortgage Transaction Amount Provider Entity on Financing Balance for Balance Rate Reasons for Bad Company Name the Period (Thousand) Debt 1 TSMC- BVI TSMC Technology Other receivables - USD13,887 USD13,887 7.75% Operating capital $- 2 VIS VIS Prepaid (Note 2) $6,122 $1,232 - Prepayments - America expenses for product development Item Value Amount Limited on Financing - - $- - $- USD779,788 (Note 1) 5,706 $4,400,000 (Note 3) Note 1: Not exceeding the issued capital of the Company Note 2: Not exceeding 10% of the issued capital of VIS for each transaction entity, and also limiting to 30% of the issued capital of each transaction entity. Note 3: Not exceeding 20% of the issued capital of VIS. TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES COLLATERAL PROVIDED TO OTHER PARTIES For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 2 No. Collateral Transaction Entity Limitation Maximum Provider Name Name 0 TSMC TSMC Development Inc. TSMC - North America Nature of the Relationship (Note 3) 3 2 on Collateral Balance for the Period (US in Thousand) Ending Balance (US in Amount of % of Accumulated Amount Limited Properties Amount of Collateral on Collateral Guaranteed on Net Equity of (Note 1) Thousand) by Collateral the Latest Financial Statement (Note 2) $8,865,172 $8,865,172 $8,865,172 3.39% $38,968,094 (USD268,000) (USD268,000) 1,323,160 1,323,160 1,323,160 0.51% (USD40,000) (USD40,000) Note 1: 30% of the issued capital of the Company. Note 2: Not exceeding 10% of the issued capital of the Company, and also limiting to the issued capital of the transaction entity with the exception of approval from BOD. Note 3: The number 2 represent subsidiary that directly holds exceeding 50% of the issued. The number 3 represents the investee that has over 50% of the common stocks holds by the parent company and subsidiary. 64 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES MARKETABLE SECURITIES HELD December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 3 Marketable Securities Name & Type Nature of the Relationship Account December 31, 2000 Note Shares Carrying % of Market Value (Thousand) Value (US in Owner- or Net Asset ship Value (US in Thousand) Thousand) Held Company Name: TSMC TSMC-North America - Stock Subsidiary Long-term investment 11,000 $666,924 TSMC-Europe - Stock Subsidiary Long-term investment TSMC-Japan - Stock Subsidiary Long-term investment - 2 9,594 37,803 100 100 100 $666,924 9,594 37,803 VIS - Stock Investee Long-term investment 556,133 5,615,075 25 8,642,314 TSMC-BVI - Stock Subsidiary Long-term investment 779,788 23,678,522 100 23,678,522 Po Cherng Investment - Certificate Chi Hsin Investment - Certificate Investee Investee Long-term investment Long-term investment Kung Cherng Investment - Certificate Investee Long-term investment Chi Cherng Investment - Certificate Hsin Ruey Investment - Certificate Investee Investee Long-term investment Long-term investment Cherng Huei Investment - Certificate Investee Long-term investment TSMC Partners, Ltd. - Stock Subsidiary Long-term investment SSMC - Stock Investee Long-term investment - - - - - - 300 90 136,984 139,000 158,752 130,794 128,100 138,200 25 25 25 25 25 25 136,984 139,000 158,752 130,794 128,100 138,200 535,162 100 535,162 935,870 Taiwan Mask Corp. - Stock United Industrial Gases Co., Ltd. - Stock - - Long-term investment 6,887 32,129 Long-term investment 10,058 146,250 Shin-Etsu Handotai Taiwan Co., Ltd. - Stock - Long-term investment 10,500 105,000 W.K. Technology Fund IV - Stock Taiwan Semiconductor Technology Corp. - Stock Hon Tung Ventures Capital - Stock Crimson Asia Capital Fund - Equity Horizon Ventures Fund - Equity (Forward) - - - - - Long-term investment 5,000 50,000 Long-term investment 50,000 500,000 Long-term investment 12,000 120,000 Long-term investment Long-term investment - - 64,547 93,304 N/A N/A 32 2 10 7 4 19 10 935,870 87,325 155,041 105,476 81,059 434,385 125,927 64,547 93,304 65 Marketable Securities Name & Type Nature of the Relationship Account December 31, 2000 Note Shares Carrying % of Market Value (Thousand) Value (US in Owner- or Net Asset ship Value (US in Thousand) Thousand) Held Company Name: Chi Cherng Investmen TSMC - Stock Major shareholder Short-term investment 2,160 98,282 Po Cherng Investment - Certificate Major shareholder Long-term investment 6,000 82,191 Chi Hsin Investment - Certificate Major shareholder Long-term investment 6,000 83,400 Hsin Ruey Investment - Certificate Major shareholder Long-term investment 6,000 76,860 Kung Cherng Investment - Certificate Major shareholder Long-term investment 6,000 95,251 Cherng Huei Investment - Certificate Major shareholder Long-term investment 6,000 82,920 - 15 15 15 15 15 184,451 82,191 83,400 76,860 95,251 82,920 Held Company Name: Kung Cherng Investment TSMC - Stock Major shareholder Short-term investment 4,827 226,819 - 412,317 4,827 thousands shares-pledged Po Cherng Investment - Certificate Major shareholder Long-term investment 6,000 82,191 Chi Hsin Investment - Certificate Major shareholder Long-term investment 6,000 83,400 Chi Cherng Investment - Certificate Major shareholder Long-term investment 6,000 78,476 Hsin Ruey Investment - Certificate Major shareholder Long-term investment 6,000 76,860 Cherng Huei Investment - Certificate Major shareholder Long-term investment 6,000 82,920 15 15 15 15 15 82,191 83,400 78,476 76,860 82,920 Held Company Name: Po Cherng Investment TSMC - Stock Major shareholder Short-term investment 3,814 $236,150 - $325,790 2,814 thousands shares-pledged Chi Hsin Investment - Certificate Major shareholder Long-term investment 6,000 83,400 Chi Cherng Investment - Certificate Major shareholder Long-term investment 6,000 78,476 Hsin Ruey Investment - Certificate Major shareholder Long-term investment 6,000 76,861 Kung Cherng Investment - Certificate Major shareholder Long-term investment 6,000 95,251 Cherng Huei Investment - Certificate Major shareholder Long-term investment 6,000 82,920 15 15 15 15 15 83,400 78,476 76,861 95,251 82,920 (Forward) 66 Marketable Securities Name & Type Nature of the Relationship Held Company Name: Cherng Huei Investment Account December 31, 2000 Note Shares Carrying % of Market Value (Thousand) Value (US in Owner- or Net Asset ship Value (US in Thousand) Thousand) TSMC - Stock Major shareholder Short-term investment 4,298 243,391 - 367,074 3,297 thousands shares-pledged Po Cherng Investment - Certificate Major shareholder Long-term investment 6,000 82,191 Chi Hsin Investment - Certificate Major shareholder Long-term investment 6,000 83,400 Chi Cherng Investment - Certificate Major shareholder Long-term investment 6,000 78,476 Hsin Ruey Investment - Certificate Major shareholder Long-term investment 6,000 76,860 Kung Cherng Investment - Certificate Major shareholder Long-term investment 6,000 95,251 15 15 15 15 15 82,191 83,400 78,476 76,860 95,251 Held Company Name: Chi Hsin Investment TSMC - Stock Major shareholder Short-term investment 2,544 138,747 - 217,270 2,543 thousands shares-pledged Po Cherng Investment - Certificate Major shareholder Long-term investment 6,000 82,191 Chi Cherng Investment - Certificate Major shareholder Long-term investment 6,000 78,476 Hsin Ruey Investment - Certificate Major shareholder Long-term investment 6,000 76,860 Kung Cherng Investment - Certificate Major shareholder Long-term investment 6,000 95,251 Cherng Huei Investment - Certificate Major shareholder Long-term investment 6,000 82,920 Held Company Name: Hsin Ruey Investment TSMC - Stock Major shareholder Short-term investment 1,006 85,850 Po Cherng Investment - Certificate Major shareholder Long-term investment 6,000 82,191 Chi Hsin Investment - Certificate Major shareholder Long-term investment 6,000 83,400 Chi Cherng Investment - Certificate Major shareholder Long-term investment 6,000 78,476 Kung Cherng Investment - Certificate Major shareholder Long-term investment 6,000 95,251 Cherng Huei Investment - Certificate Major shareholder Long-term investment 6,000 82,920 (Forward) 15 15 15 15 15 - 15 15 15 15 15 82,191 78,476 76,860 95,251 82,920 85,936 82,191 83,400 78,476 95,251 82,920 67 Marketable Securities Name & Type Nature of the Relationship Account December 31, 2000 Note Shares Carrying % of Market Value (Thousand) Value (US in Owner- or Net Asset ship Value (US in Thousand) Thousand) Held Company Name: TSMC-BVI InveStar Semiconductor Subsidiary of Long-term investment 45,000 USD53,602 97 USD53,995 Development Fund Inc. - Stock TSMC-BVI InveStar Semiconductor Development Fund (II) Inc.- Stock Subsidiary of TSMC-BVI Long-term investment 13,950 USD14,046 97 USD14,046 TSMC Development Inc.- Stock Subsidiary of Long-term investment 1 USD648,332 100 USD648,332 TSMC-BVI and its chairman is also TSMC’s chairman TSMC Technology Inc.- Stock Subsidiary of Long-term investment 1 (USD5,285) 100 (USD5,285) TSMC-BVI and its chairman is also TSMC’s chairman 3DFX. Interactive Inc. - Stock - Long-term investment 68 USD297 - USD84 Held Company Name: VIS VIS Associates Inc. - Stock Subsidiary Long-term investment 23,570 $464,077 100 $464,077 PowerChip Semiconductor Inc.- Stock Investee Long-term investment 168,488 2,651,216 Etron Technology Inc. - Stock - Long-term investment 5,590 310,132 Walsin Technology Inc. - Stock Investee Long-term investment 31,410 414,481 MEGIC Corporation - Stock Form Factor Inc. - Stock United Industrial Gases Co., Ltd. - Stock - - - Long-term investment 16,500 177,000 Long-term investment 267 64,360 Long-term investment 2,313 29,250 9 3 10 15 1 2 3,315,837 278,118 414,481 177,000 64,360 29,250 Held Company Name: VIS Associates Inc. VIS Investment Holding, Inc. - Stock Subsidiary of Long-term investment 67,500 USD871 100 USD871 VIS Associates Inc. Silicon Valley Equity Fund - Equity Silicon Valley Equity Fund II - Equity Grand Palace Trust Fund - Equity - - - Long-term investment Long-term investment Long-term investment - - - USD9,448 USD3,326 35 16 USD9,448 USD3,326 - 100 - (Forward) 68 Marketable Securities Name & Type Nature of the Relationship Account December 31, 2000 Note Shares Carrying % of Market Value (Thousand) Value (US in Owner- or Net Asset ship Value (US in Thousand) Thousand) Held Company Name: VIS Investment Holding, Inc. VIS Micro Inc. - Stock VIS America. - Stock Investee Investee Long-term investment 200 USD237 Long-term investment 6,500 USD627 100 100 USD237 USD627 Held Company Name: TSMC Development WaferTech, LLC- Equity Investee of TSMC Long-term investment - USD623,957 97 USD623,957 Development and its chairman is also chairman of TSMC Held Company Name: TSMC Partners TSMC - ADR Parent Company Short-term investment 495 USD7,357 - USD8,916 Held Company Name: InveStar Semiconductor Development Fund Inc. Silicon Image, Inc. - Stock Sage, Inc. - Stock Centillium Tec. Corp. - Stock Marvell Technology Group Ltd. - Stock Silicon Labo Ratories - Stock Chang Yi Technology - Stock Capella Microsystems, Inc. - Stock Equator Technologies, Inc. - Stock Scenix Semiconductor Inc. - Stock Global Test Corp. - Stock Chip strate - Stock Ritch Tech - Stock APE Fu Ding Technology - Stock Integrated Memory Logic, Inc. - Preferred Stock Divio (Next wave) - Preferred Stock (Forward) - - - - - - - - - - - - - - - Short-term investment Short-term investment Short-term investment 411 140 165 USD720 USD506 USD650 - - - USD2,237 USD2,065 USD3,671 Short-term investment 4,665 USD4,579 - USD102,347 Short-term investment 15 USD482 Long-term investment 1,113 USD1,500 Long-term investment Long-term investment Long-term investment 42 133 861 USD10 USD90 USD172 Long-term investment 11,292 USD5,559 Long-term investment 6,660 USD2,142 Long-term investment 790 USD313 Long-term investment 2,750 USD1,518 Long-term investment 1,831 USD1,809 Long-term investment 667 USD500 - - - - - - - - - - - USD219 USD1,500 USD10 USD260 USD172 USD9,242 USD2,190 USD302 USD1,411 USD2,559 USD2,233 69 Marketable Securities Name & Type Nature of the Relationship Account December 31, 2000 Note Shares Carrying % of Market Value (Thousand) Value (US in Owner- or Net Asset ship Value (US in Thousand) Thousand) Held Company Name: InveStar Semiconductor Development Fund Inc. SiRF Technology Inc. - Preferred Stock Rise - preferred Stock Capella Microsystems, Inc. - Preferred Stock Sensory, Inc. - Preferred Stock - - - - Long-term investment 306 USD1,333 Long-term investment 600 USD1,500 Long-term investment 1,383 USD1,298 Long-term investment 1,404 USD1,250 Equator Technologies, Inc. -Preferred Stock - Long-term investment 443 USD1,338 Long-term investment 2,252 USD3,064 - - - - - - USD1,771 USD1,500 USD1,383 USD1,250 USD864 USD5,639 Light Speed Semiconductor Corporation - Preferred Stock Empower Tel Networks, Inc. - Preferred Stock Lara Technology, Inc. - Preferred Stock Scenix Semiconductor Inc. - Preferred Stock RapidSteam - Preferred Stock Tropian, Inc (Premier R.F., Inc.) - Preferred Stock Sonics, Inc. - Preferred Stock Pico Turbo, Inc - Preferred Stock T-Span Systems Corporation - Preferred Stock NanoAmp Solutions, Inc. - Preferred Stock Formfactor, Inc. - Preferred Stock Monolithic Power Systems, Inc - Preferred Stock Memsic, Inc - Preferred Stock Reflectivity, Inc. - Preferred Stock Signia - Preferred Stock Match Lab, Inc. - Preferred Stock HINT Corporation - Preferred Stock Creosys, Inc. - Preferred Stock (Forward) - - - - - - - - - - - - - - - - - - 70 Long-term investment 3,840 USD5,128 - USD14,980 Long-term investment 1,544 USD772 - USD10,034 Long-term investment 1,056 USD1,361 Long-term investment 2,056 USD1,050 Long-term investment 1,758 USD2,334 Long-term investment 2,686 USD3,530 Long-term investment 1,050 USD1,250 Long-term investment 1,266 USD1,385 Long-term investment 541 USD853 Long-term investment 267 USD2,000 Long-term investment 2,521 USD2,000 Long-term investment 3 USD1,500 Long-term investment 1,064 USD2,000 Long-term investment 3,000 USD1,500 Long-term investment 1,875 USD1,500 Long-term investment 1,000 USD1,000 Long-term investment 1,500 USD1,500 - - - - - - - - - - - - - - - USD2,919 USD7,286 USD7,498 USD4,110 USD1,250 USD3,653 USD1,900 USD2,747 USD2,000 USD1,500 USD2,000 USD1,500 USD1,500 USD1,000 USD1,500 Marketable Securities Name & Type Nature of the Relationship Account December 31, 2000 Note Shares Carrying % of Market Value (Thousand) Value (US in Owner- or Net Asset ship Value (US in Thousand) Thousand) Held Company Name: InveStar Semiconductor Development Fund (II) Inc. Incentia Design Systems, Inc. - Preferred Stock Rise - Bond Lara Networks, Inc. - Preferred Stock Seagull Semiconductor, Inc. - Preferred Stock Memsic, Inc. - Preferred Stock OEpic - Preferred Stock FabCentric, Inc. - Preferred Stock Equator Technologies, Inc. - Preferred Stock NanAmp Solutions, Inc. - Preferred Stock RapidStream, Inc. - Preferred Stock FabCentric, Inc. - Bond Signia Technologies, Inc. - Bond - - - - - - - - - - - - Long-term investment Long-term investment 286 N/A USD500 USD300 Long-term investment 188 USD1,500 Long-term investment 1,389 USD1,250 Long-term investment 1,818 USD1,000 Long-term investment Long-term investment 600 500 USD750 USD250 Long-term investment 770 USD1,501 Long-term investment 250 USD1,000 Long-term investment 246 USD1,057 Long-term investment Long-term investment N/A N/A USD250 USD500 Advanced Analogic Technology, Inc. - Bond - Long-term investment N/A USD1,250 - - - - - - - - - - - - - USD500 USD300 USD1,500 USD1,250 USD1,000 USD750 USD250 USD1,501 USD1,000 USD1,057 USD250 USD500 USD1,250 71 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES BALANCE OF MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF EXCEEDING NTD 100 MILLION OR 20% OF THE ISSUED CAPITAL For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 4 Marketable Securities Type Account Transaction Nature of the Beginning Balance Acquisition Disposal Ending Balance and Name Entity Relationship Shares Amount Shares Amount Share Amount Carrying Gain Shares Amount (Thousand) (Thousand) (Thousand) Value (Loss) (Thousand) Company Name: TSMC Taipei Bank Stock The Wan Pao 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 The GP ROC Bond Fund Flemings Taiwan Bond Fund National Investment Taiwan Bond Fund National Investment Bond Fund United Bond Fund President Investment Bond Fund VIS Stock TSMC-BVI Stock SSMC Stock (Forward) Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment 72 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 8,750 $236,250 - $- 8,750 $288,719 $236,250 $52,469 - - - - - - - - - - - - - - - - - - - - - - - - - - 18,207 230,000 18,207 231,644 230,000 1,644 25,495 323,000 25,495 326,273 323,000 3,273 26,382 300,000 26,382 302,604 300,000 2,604 24,468 300,000 24,468 302,748 300,000 2,748 25,484 300,000 25,484 302,523 300,000 2,523 28,222 332,000 28,222 333,627 332,000 1,627 57,900 630,000 57,900 633,522 630,000 3,522 26,842 340,000 26,842 341,476 340,000 1,476 25,593 330,000 25,593 332,564 330,000 2,564 25,556 300,000 25,556 301,955 300,000 1,955 2,956 410,000 2,956 411,752 410,000 1,752 30,054 330,000 30,054 331,605 300,000 1,605 46,405 600,000 46,405 603,210 600,000 3,210 - - - - - - - - - - - - - - $- - - - - - - - - - - - - - VIS Investee 556,133 5,010,897 - - TSMC-BVI Subsidiary 464,788 12,454,280 315,000 10,409,490 SSMC Investee 26 360,177 64 989,690 - - - - - - - - - - - - 556,133 5,615,075 23,678,522 779,788 (Note 1) 90 935,870 Marketable Securities Type Account Transaction Nature of the Beginning Balance Acquisition Disposal Ending Balance and Name Entity Relationship Shares Amount Shares Amount Share Amount Carrying Gain Shares Amount (Thousand) (Thousand) (Thousand) Value (Loss) (Thousand) TSMC-North America Stock Long-term investment TSMC- North America Subsidiary 1,000 255,025 10,000 308,130 - - - - 11,000 666,924 - - - - - - - - 984 50,509 4,682 219,376 839 172,270 43,066 129,204 4,827 226,819 642 88,519 3,603 206,936 430 88,166 59,306 28,860 3,814 236,150 642 88,732 4,288 239,512 632 119,571 84,853 34,718 4,298 243,391 642 87,157 2,439 124,547 537 110,211 72,957 37,254 2,544 138,747 Company Name: Kung Cherng Investment TSMC Stock Short-term investment Company Name: Po Cherng Investment TSMC Stock Short-term investment Company Name: Cherng Huei Investment TSMC Stock Short-term investment Company Name: Chi Hsin Investment TSMC Stock Company Name: TSMC-BVI TSMC Development Inc. Stock InveStar Semiconductor Development Fund (II) Inc. Stock Short-term investment Long-term investment Long-term investment Company Name: TSMC Development TSMC Development Subsidiary Subsidiary InveStar Semiconductor Development Fund (II) Inc. 1 - USD42,018 - USD315,000 - 13,950 USD13,995 WAFERTECH, LLC Stock Long-term investment WAFERTECH, Subsidiary LLC - USD401,464 - USD226,105 Company Name: TSMC Partners TSMC ADR Short-term investment - - 302 USD3,703 193 USD3,654 Company Name: InveStar Semiconductor Development Fund Inc. Empower Tel Networks, Inc. Stock Global Test Corp. Stock (Forward) Long-term investment Long-term investment Empower Tel Networks, Inc. Global Test Corp. Investee 3,087 USD1,878 752 USD3,250 Investee 7,500 USD2,281 3,792 USD3,278 - - - - - - - - - - - - - - - - - - - - - - - - 1 USD648,332 13,950 USD14,046 - USD623,957 495 USD7,357 3,840 USD5,128 11,292 USD5,559 73 Marketable Securities Type Account Transaction Nature of the Beginning Balance Acquisition Disposal Ending Balance and Name Entity Relationship Shares Amount Shares Amount Share Amount Carrying Gain Shares Amount (Thousand) (Thousand) (Thousand) Value (Loss) (Thousand) Company Name: VIS The GP Bond Fund Kwang Hua Bond Fund Ta Chong Investment Bond Fund National Investment Bond Fund First Global Investment Trust Wan Tai Bond Fund Money Mgmt Fund Grand Cathay Bond Fund - - - - - - - - - - - - - - Company Name: VIS Associates Inc. Silicon Valley Equity Fund II Stock Long-term investment Asia Tech Management LLC. - - - - - - - - - - - - - - - - - - - - - - - - 58,761 $750,000 58,761 $761,731 $750,000 $11,731 42,671 550,000 42,671 558,584 550,000 8,584 16,199 180,000 16,199 182,393 180,000 2,393 3,921 550,000 3,921 558,516 550,000 8,516 45,921 550,000 45,921 558,212 550,000 8,212 31,415 400,000 31,415 404,997 400,000 4,997 21,446 240,000 21,446 242,656 240,000 2,656 - USD3,400 - - - - - - - - - - - - - - - - - - - USD3,326 (Note 3) Note 1: Acquire 75,000 thousands shares of stocks and including the beginning balance of prepayment for stocks. Note 2: The ending balance included the recognition of the investment income (loss) by the equity method and the accumulated translation adjustment. Note 3: The ending balance included the movement of net asset value of trust fund. TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES ACQUISITION OF PROPERTIES EXCEEDING NTD 100 MILLION OR 20% OF ISSUED CAPITAL For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 5 Company Name: TSMC Properties Transaction Transaction Payment Term Transaction Nature of the Former Transaction Detail when Reference Purpose of Other Date Amount Entity Relationship Transacting with Related Parties of Price Acquisition Commitments Owner Relationship Transfer Amount Determined Date Fab 6 Feb. 16, 2000 ~ $3,254,412 Depend on the progress Fu Tsu - N/A N/A N/A N/A Public bidding Manufacturing None and office Dec. 31, 2000 of the construction Construction purpose Co. Ltd. 74 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES TRANSACTION OF PURCHASE OR SALES WITH RELATED PARTIES AMOUNTING TO MORE THAN NTD 100 MILLION OR 20% OF THE ISSUED CAPITAL For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 6 Company Name: TSMC Transaction Nature of the Entity Relationship Transaction Detail Abnormal Notes,Accounts Note Purchase Amount % Collection Terms or Sales ITRI It’s director is TSMC’s chairman Sales $198,146 Phillips and its Major shareholder Sales 5,289,927 affiliates - 3 WAFERTECH, LLC Indirect Investee of the subsidiary (TSMC-BVI) Purchase 13,296,633 37 Net 45 days from monthly closing date Net 30 days from invoice date Net 30 days from monthly closing date Transaction Payable or Unit Price Collection Terms Receivables Ending Balance % None None $56,078 6 None None 643,604 65 None None (1,487,181) (34) VIS Investee Purchase 6,572,110 19 Net 45 days from monthly closing date None None (1,808,964) (42) TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES RECEIVABLE FROM RELATED PARTIES AMOUNTING TO MORE THAN NTD 100 MILLION OR 20% OF THE ISSUED CAPITAL December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 7 Company Name: TSMC Transaction Entity Nature of the Relationship Ending Turnover Overdue Amounts Received Allowance Balance Amount Management from Dec. 31, 2000 Up-to-Date for Bad Debts Phillips and its affiliates Major shareholder $643,604 27days $175,828 Accelerate demand on $193,403 account receivables VIS Investee 159,890 N/A 10,080 Accelerate demand on - account receivables $- - 75 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES INFORMATION REGARDING NAMES,LOCATIONS AND OTHERS OF INVESTEE ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCES December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 8 Investee Company Name: TSMC Location Businesses Activity Original Investment Amount Balance as of Dec. 31, 2000 Dec. 31, Dec. 31, Shares % Carrying 2000 1999 (Thousand) Value Net Income Recognized Note (Loss) of the Gain (Loss) on Investee Recognized TSMC-North America San Jose, Marketing and $333,718 $25,588 11,000 100 $666,924 $131,107 $131,107 Subsidiary California, U.S.A engineering support TSMC-Europe Amsterdam, Marketing and 2,960 2,960 - 100 9,594 (14,668) (14,668) Subsidiary The Netherlands engineering support TSMC-Japan Yokohama, Marketing and 35,142 7,440 2 100 37,803 2,261 2,261 Subsidiary Japan engineering support VIS Hsin-Chu, IC Design and 6,503,640 6,503,640 556,133 25 5,615,075 2,573,745 597,812 Investee Taiwan manufacturing TSMC-BVI Tortola, British Investment 24,159,958 13,750,468 779,788 100 23,678,522 138,589 138,589 Subsidiary Virgin Islands Po Cherng Investment Taipei, Taiwan Investment 100,000 100,000 Chi Hsin Investment Taipei, Taiwan Investment 100,000 100,000 Kung Cherng Investment Taipei, Taiwan Investment 100,000 100,000 Chi Cherng Investment Taipei, Taiwan Investment 100,000 100,000 Hsin Ruey Investment Taipei, Taiwan Investment 100,000 100,000 Cherng Huei Investment Taipei, Taiwan Investment 100,000 100,000 - - - - - - 25 136,984 135,869 33,967 Investee 25 139,000 143,951 35,988 Investee 25 158,752 223,915 55,979 Investee 25 130,794 112,094 28,023 Investee 25 128,100 100,391 25,098 Investee 25 138,200 140,781 35,195 Investee TSMC Partners Tortola, British Investment 10,350 10,350 300 100 535,162 494,966 494,966 Subsidiary Virgin Islands SSMC Singapore Manufacture 1,432,482 442,792 90 32 935,870 (1,480,190) (473,661) Investee of wafer 76 9. Consolidted Financial Statements English Translation of a Report Originally Issued in Chinese Independent Auditors' Report The Board of Directors and the Shareholders Taiwan Semiconductor Manufacturing Company Ltd. We have audited the accompanying consolidated balance sheets of Taiwan Semiconductor Manufacturing Company Ltd. and subsidiaries as of December 31, 2000, and 1999, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Republic of China. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Taiwan Semiconductor Manufacturing Company Ltd. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the Republic of China. As stated in Note 2, to the consolidated financial statements, the merger with TASMC and Worldwide Semiconductor Manufacturing Corp. effective on June 30, 2000 resulted in a change in reporting entity. The consolidated financial statements of Taiwan Semiconductor Manufacturing Company Ltd. and subsidiaries for the year then ended December 31, 1999, have been restated to make reporting entity consistently. T N SOONG & CO Taiwan, ROC A member firm of Andersen Worldwide S. C. January 29, 2001 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. 77 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 (Note 2) (In Thousand New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Pledged time deposits (Note 20) Short-term investments (Notes 2, 5 and 20) Receivable from related parties (Note 18) Notes receivable Accounts receivable Allowance for doubtful receivables (Note 2) Allowance for sales returns and others (Note 2) Inventories (Notes 2 and 6) Deferred income tax assets (Notes 2 and 17) Prepaid expenses and other current assets (Notes 18 ,19 and 22) Total Current Assets LONG-TERM INVESTMENTS (Notes 2, 7 and 23) PROPERTY, PLANT AND EQUIPMENT (Notes 2, 8, 17, 18 and 20) Cost Land and land improvements Buildings Machinery and equipment Office equipment Total cost Accumulated depreciation Advance payments and construction in progress Net Property, plant and equipment CONSOLIDATED DEBITS (Note 2) OTHER ASSETS Rental assets (Note 2) Deferred charges - net (Notes 2 and 9) Deferred income tax assets (Notes 2 and 17) Refundable deposits Pledged time deposits (Note 20) Miscellaneous Total Other Assets 2000 1999 Amount % Amount $38,840,217 - 2,351,560 948,726 125,175 30,335,314 (946,734) (2,458,323) 12,785,723 8,178,016 3,034,624 93,194,298 9,814,342 829,239 53,874,708 241,995,862 4,865,610 301,565,419 (103,884,879) 47,067,352 244,747,892 11,530,973 625,647 3,335,665 6,629,805 979,067 - 28,290 11,598,474 11 - 1 - - 8 - (1) 3 2 1 25 3 - 15 65 1 81 (28) 13 66 3 - 1 2 - - - 3 $29,517,682 3,161,000 965,397 340,938 210,980 14,240,095 (422,202) (706,886) 7,104,042 2,616,618 2,629,973 59,657,637 16,164,676 783,809 33,929,572 148,580,088 3,637,083 186,930,552 (65,409,688) 28,539,044 150,059,908 - - 2,380,792 7,006,697 59,371 693 105,740 9,553,293 % 13 1 - - - 6 - - 3 1 1 25 7 - 14 63 2 79 (28) 13 64 - - 1 3 - - - 4 TOTAL ASSETS $370,885,979 100 $235,435,514 100 78 LIABILITIES AND SHAREHOLDERS' EQUITY Amoun % Amount 2000 1999 CURRENT LIABILITIES Short-term bank loans (Notes 10 and 20) Commercial paper payable (Note 11) Payable to related parties (Note 18) Accounts payable Payables to contractors and equipment suppliers Income tax payable (Notes 2 and 17) Current portion of long term liabilities (Notes 12 and 20) Accrued expenses and other current liabilities (Note 22) Total Current Liabilities LONG-TERM LIABILITIES Long-term bank loans (Notes 13, and 20) Long-term bonds (Notes 2 and 14) Total Long-term Liabilities OTHER LIABILITIES Guarantee deposits Accrued pension cost (Notes 2 and 16) Deferred gain on sale lease-back (Note 2) Obligation under capital lease (Note 12) Other noncurrent liabilities Total Other Liabilities MINORITY INTEREST IN SUBSIDIARIES (Notes 2) $3,833,841 - 2,606,339 8,507,827 25,550,273 3,298 51,055 6,872,359 47,424,992 23,339,367 29,000,000 52,339,367 7,086,379 1,511,277 434,183 3,316 11,040 9,046,195 321,726 1 - 1 2 7 - - 2 13 6 8 14 2 - - - - 2 - $5,026,631 94,797 1,036,348 3,273,894 12,593,712 155,127 1,001 4,208,917 26,390,427 22,743,462 20,000,000 42,743,462 5,185,362 1,013,840 - 4,368 3,370 6,206,940 7,524,168 % 2 - 1 1 5 - - 2 11 10 8 18 2 1 - - 3 3 Total Liabilities 109,132,280 29 82,864,997 35 SHAREHOLDERS' EQUITY (Notes 2 and 15) Capital stock - $10 par value Authorized : 17,800,000 thousand shares in 2000 and 9,100,000 thousand shares in 1999 Issued: Common - 11,689,365 thousand shares in 2000 and 8,520,882 thousand shares in 1999 Preferred - 1,300,000 thousand shares Subscribed capital Capital surplus Retained earnings: Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Unrealized loss on long-term investment Cumulative translation adjustments Total Shareholders' Equity 116,893,646 13,000,000 - 55,285,821 10,689,323 1,091,003 65,143,847 (71,564) (278,377) 261,753,699 32 3 - 15 3 - 18 - - 71 85,208,817 - 13,118,025 23,951,411 8,258,359 - 23,124,011 - (1,090,106) 152,570,517 36 - 5 10 4 - 10 - - 65 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $370,885,979 100 $235,435,514 100 The accompanying notes are an integral part of the consolidated financial statements. (Please refer to the issued auditor's report by Andersen on January 29, 2001) 79 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2000 and 1999 (Note 2) (In Thousand New Taiwan Dollars, Except Consolidated Earnings Per Share) 2000 1999 Amount % Amount % GROSS SALES (Notes 2, 17and 23) SALES RETURNS AND ALLOWANCES NET SALES COST OF SALES (Note 18) GROSS PROFIT OPERATING EXPENSES (Note 23) General and administrative (Note 18) Marketing Research and development Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME (Note 23) Interest Insurance compensation Gain on sale of short-term investments - net Foreign exchange gain - net (Notes 2 and 22) Premium income (Notes 2 and 22) Technology service income (Note 18) Gain on disposal of property, plant and equipment Gain on sales of long-term investments Reversal of allowance for losses on short-term investments Other Total Non-Operating Income NON-OPERATING EXPENSES (Note 23) Interest (Notes 2, 8,18 and 22) Equity in net losses of investee companies - net (Notes 2 and 7) Premium expenses (Notes 2 and 22) Loss on disposal of property, plant and equipment Bond issue cost Permanent loss on long-term investments Foreign exchange loss - net (Note 2) Other Total Non-Operating Expenses INCOME BEFORE INCOME TAX (Note 23) INCOME TAX BENEFIT (Notes 2 and 17) INCOME BEFORE MINORITY INTEREST MINORITY INTEREST IN LOSS OF SUBSIDIARIES (Notes 2 & 23) NET INCOME EARNINGS PER SHARE Based on common stock weighted-average number $169,192,312 (2,994,708) 166,197,604 89,681,764 76,515,840 8,807,156 1,282,499 5,131,497 15,221,152 61,294,688 1,679,736 1,623,832 1,060,919 828,025 640,442 138,514 62,921 15,144 688 177,715 6,227,936 2,717,035 187,179 108,133 114,768 32,658 - - 461,327 3,621,100 63,901,524 1,167,884 65,069,408 36,786 $65,106,194 of shares outstanding - 11,400,882 thousand shares in 2000 and 8,349,682 Thousand shares in 1999 $5.71 Based on 10,656,033 thousand shares The accompanying notes are an integral part of the consolidated financial statements. (Please refer to the issued auditor's report by Andersen on January 29, 2001) 100 54 46 5 1 3 9 37 1 1 1 - - - - - - - 3 2 - - - - - - - 2 38 1 39 - 39 100 61 39 4 2 4 10 29 2 - - - - - - - - - 2 3 1 - - - - - - 4 27 3 30 1 31 $77,298,726 (993,624) 76,305,102 46,237,403 30,067,699 2,845,299 1,861,621 3,090,790 7,797,710 22,269,989 1,114,530 184,607 48,575 - 63,809 - 4,310 67,772 140,137 58,587 1,682,327 2,417,021 288,500 86,746 164,384 114,839 31,568 119,141 101,803 3,324,002 20,628,314 2,382,782 23,011,096 515,898 $23,526,994 $2.82 $2.21 80 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. English Translation of Financial Statements Origianlly Issued in Chinese STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND SUBSIDIARIES For the Years Ended December 31, 2000 and 1999 (Note 2) (In Thousand New Taiwan Dollars) CAPITAL STOCK ISSUED CAPITAL SURPLUS (Note 2) RETAINED EARNINGS (Note 15) Common Stock Prefered Stock Additional From Excess on Gain on UNREALIZED LOSS ON CUMULATIVE LONG-TERM TRANSLATION TOTAL Shares Shares Subscribe From Paid-In Long-term Foreign Bond Disposal of Legal Special Unappropriated Total INVESTMENT ADJUSTSMENTS SHARHOLDERS' (Thousand) Amount (Thousand) Amount Capital Consolidation Capital Investment Investment Properties Donation Total Reserve Reserve Earnings (Note 2) (Note 2) EQUITY $7,120,000 $- $99,128 $- $65,036 $55 $7,284,219 $6,724,240 $- $16,532,518 $23,256,758 $- ($727,426) $96,285,311 - - - - - - 13,118,025 - - - - - - - - - - 5,000,000 - - - - - - - 13,118,025 12,120,000 - - - - - - - - - - - - (13,118,025) 12,000,000 BALANCE, JANUARY 1, 1999 6,647,176 $66,471,760 Appropriations of prior year's earnings 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 - - Issuance of shares on April 15, 1999 250,000 2,500,000 Subscribed Capital Net income in 1999 - - - - Conversion of foreign bonds 122,399 1,223,986 Gain on disposal of properties Gain on disposal of property from investees Adjustment arising from changes in ownership percentage in investees Translation adjustments - - - - - - - - BALANCE, DECEMBER 31, 1999 8,520,882 85,208,817 Appropriations of prior year' s earnings Legal reserve Special reserve - - - - Bonus to employees - stock 172,121 1,721,208 Stock dividends - 25.55% 1,959,910 19,599,103 Bonus to directors and supervisors - - Capital Transferred from capital surplus - 2.45% 187,937 1,879,366 Issuance of shares on January 28, 2000 300,000 3,000,000 Issuance of shares on June 8, 2000 115,000 1,150,000 Issuance of shares for the mergers on June 30, 2000 (Note 1) 433,515 4,335,152 - - - - - - - - - - - - - - - - - - - - - - - $- - - - - - - - - - - - - - - - - - - - - - - Issuance of preferred stocks on November 29, 2000 Net income in 2000 Gain on disposal of properties Gain on disposal of property from investees Adjustment arising from changes in ownership percentage in investees Unrealized loss on long-term investment from investees Translation adjustments - - - - - - - - - - - - - - 1,300,000 13,000,000 - - - - - - - - - - - - - - - - - - - - - - 23,172,550 (1,790,871) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 246,218 126,954 - - - - - - - - 11,289,998 - - - - - - - - - - - - 4,022 - - - - - - - - - - - - - - - - - - - 5,000,000 - - 11,289,998 4,022 246,218 126,954 - 1,534,119 - - - - - - - - - - - 472,300 11,289,998 69,058 55 23,951,411 8,258,359 - - - - - - - - - - - - 5,502 (231,583) - - - - - - - (1,879,366) - - - - - - - - - - - - - - - - - - - - - 58,178 - - - - - - - - - - - - - - - - - - - - - - - - - (1,879,366) 12,000,000 23,172,550 (1,790,871) - - 58,178 5,502 (231,583) - - 2,430,964 - - - - - - - - - - - - - - - (1,534,119) - (1,104,566) (1,104,566) (13,908,505) (13,908,505) (138,071) (138,071) - - - - 23,526,994 23,526,994 - - (4,022) (4,022) (246,218) (246,218) - - - - 23,124,011 31,382,370 - - - - - - - - - - - - - - (2,430,964) 1,091,003 (1,091,003) - - - - - - - - - - - - - - - - (1,721,208) (1,721,208) (19,599,103) (19,599,103) (215,151) (215,151) - - - - - - 1,803,168 1,803,168 - - 65,106,194 65,106,194 (58,178) (58,178) (5,502) (5,502) 231,583 231,583 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ( 71,564) - - - - - - - - - - - - - - (138,071) 7,500,000 13,118,025 23,526,994 12,513,984 - - 126,954 (362,680) (362,680) (1,090,106) 152,570,517 - - - - - - - - - - - - (215,151) - 1,881,975 24,322,550 (897) 4,346,552 - - - - - - 13,000,000 65,106,194 - - - (71,564) - 812,626 812,626 BALANCE, DECEMBER 31, 2000 11,689,365 $116,893,646 1,300,000 $13,000,000 $- $22,329,129 $23,172,550 $246,219 $9,410,632 $127,236 $55 $55,285,821 $10,689,323 $1,091,003 $65,143,847 $76,924,173 ($71,564) ($278,377) $261,753,699 The accompanying notes are an integral part of the financial statements. (Please refer to the issued auditor's report by Andersen on January 29, 2001) 81 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000 and 1999 (Note 2) (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 taxes Equity in net losses of investee companies - net Gain on sales of long-term investments Loss on disposal of property, plant and equipment - net Accretion in redemption value of bonds Permanent loss of long-term investments Accrued pension cost Allowance for doubtful receivables Allowance for sales returns and others Transfer property into expense Changes in operating assets and liabilities: Decrease (increase) in: Short-term investments Forward exchange contract receivable Receivable from related parties Notes receivable Accounts receivable Inventories Prepaid expenses and other current assets Increase (decrease) in : Payable to related parties Notes payable Accounts payable Income tax payable Forward exchange contract payable Accrued expenses and other current liabilities Minority interest in subsidiaries Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Pledge time deposits Decrease in restricted cash Acquisitions of: Property, plant and equipment Long-term investments Proceeds from sales of: Property, plant, and equipment Long-term investments Increase in deferred charges Decrease (increase) in refundable deposits Decrease in other assets Decrease in minority interest in subsidiaries (Forward) 2000 1999 $65,106,194 $23,526,994 41,446,137 (956,118) 187,179 (15,144) 51,847 - - 370,276 524,532 1,679,309 - (1,373,616) (113,730) (737,105) 38,959 (15,467,155) (4,033,836) 351,988 2,334,247 (4,303) 3,174,958 (151,828) (987,604) 2,024,180 (36,786) 93,412,581 25,197,866 (2,481,758) 288,500 (67,772) 160,427 585,614 31,568 260,425 148,603 402,068 39,130 5,049,694 - (273,194) (176,112) (6,215,651) (2,765,251) (1,278,128) 878,411 - 985,875 (622,297) 6,108 2,137,160 (515,898) 45,302,382 3,161,693 - (2,290,000) 7,255 (103,761,905) (2,107,296) (51,459,113) (10,057,902) 364,875 49,376 (1,793,209) (915,559) 77,451 (15,386,922) 413,096 150,015 (1,179,300) 61,416 13,470 (1,660,815) 82 Cash of TASMC and WSMC as of July 1, 2000 Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of : Short-term bank loans Long-term bonds Long-term bank loans Capital stock Payments on: Short-term bank loans Commercial paper Short-term marketable security Long-term bank loans Increase(decrease) in guarantee deposits Decrease in obligations under capital lease Bonus paid to directors and supervisors Issuance cost of financing Decrease in other liabilities Net Cash Provided by Financing Activities 2000 1999 736,594 (119,574,902) - (66,001,878) - 9,000,000 - 39,204,525 (8,592,790) (4,241,048) - (2,648,853) 2,978,984 (1,052) (215,151) (118,335) - 35,366,280 2,917,409 9,450,634 7,997,586 20,618,025 - - (253,445) (938,463) - (138,071) (63,275) (71,951) 39,518,449 NET INCREASE CASH AND CASH EQUIVALENTS EFFECT OF EXCHANGE RATE CHANGES 9,203,959 18,818,953 118,576 (173,144) CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 29,517,682 10,871,873 CASH AND CASH EQUIVALENTS, END OF THE YEAR $38,840,217 $29,517,682 SUPPLEMENTAL INFORMATION Interest paid (excluding amounts capitalized) Income tax paid Noncash investing and financing activities - Effect of exchange rate changes on cash and cash equivalents Current portion of long-term debt Cash paid for acquisition of property, plant and equipment: Total acquisitions Payable to contractors and equipment suppliers Conversion of bonds into common stocks and capital surplus (Forward) $4,036,210 $96,523 $2,441,840 $594,098 $1,009,264 $51,055 ($66,376) $1,001 $113,996,068 (10,234,163) $103,761,905 $- $56,857,625 (5,398,512) $51,459,113 $12,513,984 83 SUPPLEMENTAL INFORMATION OF THE MERGERS: TSMC had merged with Worldwide Semiconductor Manufacturing Corp. (WSMC) and had acquired TSMC-Acer Semiconductor Manufacturing Corp. (TASMC) by issuing new shares. The balance sheets as of June 30, 2000 of WSMC and TASMC were as follows: Cash Inventories Other current assets Property, plant and equipment - net Other assets Current liabilities Long-term liabilities Other liabilities Net assets acquired Cancellation of stocks of the dissolved companies Issuance of stocks from the surviving company Capital surplus The accompanying notes are an integral part of the consolidated financial statements. (Please refer to the issued financial report by Andersen on January 29, 2001) TASMC (Fair Value) WSMC (Book Value) $736,594 1,647,845 2,308,391 19,846,708 7,335,526 (16,699,147) (2,000,000) (654,863) 12,521,054 (8,173,605) (4,335,152) $12,297 $675,810 1,805,243 3,150,257 40,512,706 5,101,000 (12,454,686) (4,950,000) (23,498) 33,816,832 - (11,500,000) $22,316,832 Total $1,412,404 3,453,088 5,458,648 60,359,414 12,436,526 (29,153,833) (6,950,000) (678,361) 46,337,886 (8,173,605) (15,835,152) $22,329,129 84 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousand New Taiwan Dollars, Except Per Share Amounts and Unless Specified Otherwise) 1. GENERAL Taiwan Semiconductor Manufacturing Company Ltd. (TSMC) 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. TSMC's shares are listed and traded on the Taiwan Stock Exchange. On October 8, 1997, TSMC sold shares of stock in the New York Stock Exchange in the form of American Depositary Receipts (ADRs). TSMC had acquired TSMC-Acer Semiconductor Manufacturing Corp. (TASMC). It also merged with Worldwide Semiconductor Manufacturing Corporation (WSMC) with TSMC as the surviving company. TASMC and WSMC were subsequently dissolved. The acquisition of TASMC and the merger with WSMC took effect on June 30, 2000, and, on that date, TSMC issued a total of 1,583,515 thousand common shares to the former shareholders of TASMC and WSMC. The additional shares issued were based on the agreed exchange ratio of three point nine TASMC shares and two WSMC shares for every share of TSMC. Also, the holders of the additional shares issued have the same rights and the obligation as the holders of the previously issued common stock of TSMC. TASMC was incorporated on March 31, 1990, and commenced operations in January 1992. TASMC was engaged mainly in the research, development, design, manufacturing, packaging, testing and sale of dynamic random-access memory (DRAM) semiconductor devices, other memory integrated circuits and logic integrated circuits. WSMC, was incorporated on March 6, 1996 and commenced operations on December 1, 1998. WSMC was engaged mainly in the manufacture of the semiconductor products. TSMC has 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 affiliated - Po Cherng Investment, Chi Hsin Investment, Kung Cherng Investment, Chi Cherng Investment, Hsin Ruey Investment, and Cherng Huei Investment. As of December 31, 2000, TSMC International Investment has two wholly owned subsidiaries-TSMC Development, Inc. and TSMC Technology Inc., and two 97%-owned subsidiaries-InveStar Semiconductor Development Fund, Inc. and, InveStar Semiconductor Development Fund (II), Inc. (new investee in the year of 2000). TSMC Development Inc. in turn has 97%-owned subsidiary, WaferTech, LLC. The following diagram presents information of relations and percentage of holding shares among TSMC, and its subsidiaries as of December 31, 2000: 85 TSMC 100% 100% 100% 100% 100% 25% TSMC- North America TSMC-Japan TSMC International Investment TSMC-Europe TSMC Partners Po Cherng Investment etc. 100% TSMC- Technology 100% TSMC- Development 97% 97% InveStar InveStar (II) 97% WAFERTECH TSMC-North America, TSMC-Europe and TSMC-Japan are engaged mainly in marketing and engineering support activities. TSMC Partners and Kung Cherng Investment etc. are engaged in investments. TSMC International Investment and its subsidiaries are engaged in investing in affairs focused on the design, manufacture, and other related business of semiconductors. WaferTech, LLC. is a foundry. 2. SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies, which conform to generally accepted accounting principles in the Republic of China, are summarized as follows: Consolidation The consolidated financial statements include the accounts of TSMC and its eleven subsidiaries identified in Note 1 above (hereinafter, referred to individually or collectively as "Company"). All significant inter-company accounts and transactions have been eliminated. The reporting entities for the consolidated financial statements as of and for the year ended December 31, 2000 included TSMC, TSMC-North America, TSMC-Europe, TSMC-Japan, TSMC Partners, Po Cherng Investment, Chi Hsin Investment, Kung Cherng Investment, Chi Cherng Investment, Hsin Ruey Investment, Cherng Huei Investment, TSMC International Investment and its subsidiaries, InveStar Semiconductor Development Fund, Inc and InveStar Semiconductor Development Fund, (II) Inc. (Incremental investment in 2000), TSMC Development Inc. (including WAFERTECH, LLC) and TSMC Technology Inc. As stated in Note 1, TSMC had acquired TASMC and merged with WSMC on June 30, 2000. In view of the changes in reporting entities, the consolidated financial statements of the year ended December 31, 1999 have been restated. The restatement of consolidated balance sheets, income statements, statements of changes in shareholders' equity and statements of cash flows was carried out by including all assets and liabilities of WSMC. All minority interests have been eliminated. Also, the income statements was restated by including the income and expense of WSMC. The minority interest in loss is added to the consolidated net income. Minority interests in InveStar I, InveStar II and WaferTech are presented separately in consolidated financial statements. Cash equivalents Government bonds acquired under repurchase agreements with original maturity of less than three months and commercial paper are classified as cash equivalents. 86 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 are 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. Allowance and the related provision for sales returns and others are provided based on experience. Such provisions are accounted for as reduction 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 of companies wherein the Company exercises significant influence on their operating and financial decisions are accounted for using equity method. The increase in the Company's proportionate share in the net assets of its investee companies resulting from its subscription to additional shares of stock, issued by such investee companies, at the rate not proportionate to its existing equity ownership in such investee companies, is credited to a capital surplus account while any decrease in the Company's proportionate share in the net asset of investee company is debited against the existing balance of the similar capital surplus account with the difference debited against unappropriated retained earnings. If an investee company's losses are covered by additional paid-in capital that is sourced from an increase in the value of assets upon reappraisal after the long-term investment was made, then the Company shall calculate such amount in accordance with its ownership percentage and debit the "Additional paid-in capital" account and credit the "Retained earnings" account; no journal entries shall be made for other types of loss coverage increase in asset values upon reappraisal. Other stock investments are accounted by the cost method. These investments 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. Cash dividends are recognized as income in the year received but are accounted for as reduction in the carrying value of the long-term investment if the dividends are received in the same year that the related investments are acquired. Stock dividends 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 of the NAV are debited or credited to shareholders' equity. Convertible notes and stock warrants are carried at cost. The costs of investments sold are determined by the weighted-average method. The Company's proportionate share in the gains from disposal of property, plant and equipment, net of the applicable income tax, included as part of its share in the earnings or losses of investee companies accounted for using the equity method for the current year is 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 retain earnings. Also, if an investee company has unrealized loss on long-term investment which is evaluated by lower-of-cost-or-market method, the Company shall recognize that unrealized loss in proportion to the Company's equity interest and recorded in an account as a component of shareholders' equity. Gains or losses on transactions with investee companies wherein the Company owned at least 20% of the 87 outstanding common stock but less than a controlling interest are deferred in proportion to ownership percentage until realized through a transaction with a third party. The entire amount of the gains or losses on sales to majority-owned subsidiaries are deferred until such gains or losses are realized through the subsequent sale of the related products to third parties. On the other hand, if the unrealized gains or losses arose from a sale by the investee companies or majority-owned subsidiaries to the Company, an adjustment should be made in accordance with ownership percentage. Property, plant and equipment and rental assets Property, plant and equipment and rental assets are stated at cost less accumulated depreciation. Major additions, renewals and betterment, and interest expense incurred during the construction period are capitalized. Maintenance and repairs are expensed currently. Property, plant and equipment covered by agreements qualifying as capital leases are carried at the lower of the present value of all minimum future rental payments, or the leased property's market value at the inception date of the lease, whichever is lower. The periodic rental payment made by the Company includes the purchase price of the leased property, and the interest expense. Depreciation is provided on the straight-line method over these estimated service lives: buildings - 10 to 50 years; machinery and equipment - 5 to 10 years; and office equipment - 3 to 7 years. Upon sale or disposal of property, plant and equipment, 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. Consolidated Debits Consolidated debits arose from the business merger and 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. Consolidated debits are amortized by the straight-line method over 5 to 15 years. Deferred charges Deferred charges, consisting of technology, software and system design costs, bond issuance costs, credit instruments and technology know how, are amortized over three years, five years, the term of credit instruments, and the term of the contract valid period or economic useful lives, respectively. Pension costs Net periodic pension costs are recorded on the basis of actuarial calculations. Unrecognized net transition obligation and unrecognized net gain are amortized over 25 years, respectively. Deferred gain on sale-leaseback The gain resulting from the sale of leased property is deferred. Such deferred gain is then amortized as follows: (a) operating lease - adjustment of rental expenses over leasing period, and (b) capital lease - adjustment of depreciation over the estimate useful life or leasing period. Income tax The Company adopted inter-period tax allocation. Deferred income taxes are recognized for the tax effects of temporary differences, unused tax credits, and operating loss carry forwards. 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, it should be classified as current or non-current based on the expected reversal date of temporary difference. Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax provision. Income taxes (10%) on unappropriated earnings generated starting January 1, 1998 are recorded as expense in the year when the shareholders have resolved that the earnings shall be retained. 88 Derivative financial instruments Foreign currency forward exchange contracts are recorded in New Taiwan dollars as assets or liabilities at spot rates on the inception dates of the contracts. The difference 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 on the inception dates of the forward contracts. Premiums or discounts are amortized by the straight- line method over the terms of the forward contracts are either deferred or recognized as income. At the balance sheet dates, the receivables or payables arising from forward contracts are restated at the prevailing spot rates, and the resulting differences are recognized in income. 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. Under interest rate swap contracts, the Company pays an amount equal to the interest rates based on notional principal amount and receives a specified variable-rate of interest also based on the same notional principal amount; with the notional amounts of the contracts are not exchanged. The net amounts paid or received under the contracts are reported as adjustments 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 paid on options bought are recognized as assets and amounts received on options written 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 period-end, the balances of foreign-currency assets and liabilities are restated at prevailing exchange rates, and the resulted differences are recorded as exchange gain or loss in current income. Translation of foreign-currency financial statements The financial statements of the foreign subsidiaries are translated into New Taiwan dollars at the following exchange rates: assets and liabilities-current rate; shareholders' equity-historical rates; income and expenses- weighted average rate during the year. The resulting translation adjustments recorded as a separate component of shareholders' equity Reclassifications Certain accounts in 1999 have been reclassified to conform to 2000 classifications. Mergers The acquisition of TASMC was accounted for under the Statement of Financial Accounting Standards No. 25 "Business Combination - Purchase Method". On the other hand, the merger with WSMC was accounted for as pooling of interest with the results of operations of WSMC included in the statement of income for the year ended December 31, 2000. Pro forma net sales, net income and earnings per share of TSMC on the assumption that the acquisition of TASMC was completed as of January 1, 1999 are as follows: Net sales Net income Earnings per share Based on weighted-average number of shares outstanding - 11,616,455 and 11,089,548 thousand shares in 2000 and 1999 2000 1999 $170,132,350 $86,130,100 65,050,836 17,084,089 $5.60 $1.54 89 The individual operating results of TASMC before the mergers on June 30, 2000 are as follows: Net sales Net loss Six Months Year Ended Ended June 30, 2000 December 31, 2000 $3,934,746 (55,358) 10,655,995 (6,127,604) 3. SIGNIFICANT ELIMINATING ENTRIES The details of transactions with companies included in the consolidated financial statements are as follows: Company Account Amount Transaction Entity TSMC Payable to related parties $166,063 TSMC-North America 66,343 16,165 TSMC-Europe TSMC-Japan 1,487,181 WAFERTECH, LLC 4,487 TSMC-Technology 25,728 20,361 TSMC-Technology WAFERTECH, LLC 370,762 WSMC 30,816 WAFERTECH, LLC 13,296,633 WAFERTECH, LLC Receivable from related parties Sales Purchase General administration expenses 14,095 TSMC-Technology Marketing expenses - Commissions Marketing expenses -service charges Deferred revenue Accounts receivable Accounts payable WSMC TSMC International Investment Interest receivable Notes receivable Interest revenue 994,686 143,461 165,087 118,852 5,837 1,670 768,677 TSMC-North America TSMC-Europe TSMC-Japan TSMC-North America WAFERTECH, LLC TASMC TASMC 128,594 330,790 TSMC-Technology TSMC-Technology 24,181 TSMC-Technology TSMC Partners Deferred revenue 10,791,704 TSMC International Investment Royalty income Notes receivable 491,733 TSMC International Investment 11,313,018 TSMC International Investment TSMC - Technology Deferred revenue Licensing fee Sales Other receivable 40,962 13,323 63,727 17,669 WAFERTECH, LLC WAFERTECH, LLC WAFERTECH, LLC WAFERTECH, LLC 90 4. CASH AND CASH EQUIVALENTS Cash and bank deposits Government bonds acquired under repurchase agreements Commercial paper 5. SHORT-TERM INVESTMENTS Listed stocks Mutual funds Less - allowance for losses 6. INVENTORIES Finished goods Work in process Raw materials Supplies and spare parts Less - allowance for losses 7. LONG-TERM INVESTMENTS 2000 1999 $38,229,510 $29,442,697 610,707 - - 74,985 $38,840,217 $29,517,682 2000 1999 $1,502,098 959,561 2,461,659 (110,099) $927,856 37,541 965,397 - $2,351,560 $965,397 2000 1999 $1,762,287 9,455,492 770,884 1,364,686 $905,626 5,924,555 632,732 969,797 13,353,349 8,432,710 (567,626) (1,328,668) $12,785,723 $7,104,042 2000 1999 % of % of Carrying Owner- Carrying Owner- Value Ship Value Ship $5,615,075 - 935,870 6,550,945 25 - 32 $5,010,897 3,630,193 360,177 9,001,267 25 32 32 Common Stocks Equity method Vanguard International Semiconductor TASMC Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) (Forward) 91 Cost Method Listed Taiwan Mask Non-listed Taiwan Semiconductor Technology United Industrial Gases Co.,Ltd Shin-Etsu Handotai Taiwan W.K. Technology Fund IV Hong Tung Venture Capital 3Dfx Interactive Programmable Microelectronics Capella Microsystems Equator Technologies Global Test ChipStrate Technology Ritch Technology Scenix Semiconductor APE Preferred stocks TASMC Programmable Microelectronics Lara Technology Marvell Technology Integrated Memory Logic Divio Integrated Micromachines SiRF Technology Rise Technology Capella Microsystems Sensory Flow Wise Networks Equator Technologies LightSpeed Semiconductor Centillium Technology Scenix Semiconductor Lara Networks Inc. RapidStream Tropian, Inc. (Premier R. F.) Krypton Isolation Pico Turbo Sonics 3Dfx Interactive NanoAmp Solutions T-Span System Memsic Monolithic Power System (Forward) 32,129 500,000 146,250 105,000 50,000 120,000 9,826 49,619 345 2,978 2 19 10 7 4 10 - 4 - - 183,896 10 70,854 10,338 5,697 50,222 1,337,154 - - - - 59,845 16,540 - 44,105 49,619 42,949 41,349 - 93,908 101,368 - 45,023 75,151 69,708 77,209 - 41,349 116,752 - 61,281 45,829 82,689 66,158 9 9 2 6 - - - - 10 4 - 1 2 8 6 - 2 6 - 2 7 6 5 - 9 7 - 3 3 24 17 32,129 500,000 146,250 105,000 50,000 80,000 - - - - 71,613 32,927 7,407 5,407 - 1,030,733 4,854,742 47,092 83,197 139,055 23,546 15,698 4,709 41,860 47,092 12,040 39,244 15,697 42,011 68,562 23,546 66,277 - 32,965 31,395 39,244 39,244 31,395 9,326 26,537 15,698 47,088 62,790 2 19 11 7 4 10 - - - - 5 2 1 - - 28 3 6 10 2 1 - 3 3 1 3 1 3 5 2 5 - 2 2 3 3 2 - 2 1 3 4 92 Formfactor Reflectivity Signia Empower Tel Networks Match Lab HINT Corporation Creosys Incentia Design Systems Seagull Semiconductor Oepic FabCentric Convertible note Integrated Memory Logic Sonics Rise FabCentric Signia Technologies Advanced Analogic Technology Funds Crimson Asia Capital Horizon Ventures Warrant Flow Wise Networks Cumulative translation adjustments Allowance for losses 66,158 66,158 49,619 169,634 49,619 33,079 49,619 16,539 41,349 24,809 8,270 1,705,685 - - 9,924 8,270 16,540 41,349 76,083 64,547 93,304 157,851 - 9,827,718 (13,376) - 1 6 22 7 11 5 8 2 14 - - - - - - - - - - - - - 62,790 62,790 47,090 - - - - - - - - 6,032,720 31,395 23,546 9,419 - - - 64,360 34,534 31,744 66,278 6 16,195,364 - (30,688) 4 4 3 - - - - - - - - 2 2 1 - - - - - - - - The carrying values of investments accounted for using the equity method and the related investment income and losses for the years ended December 31, 2000 and 1999 were based on audited financial statements of the investee for the same period. Equity in losses of investee companies in 2000 and 1999 were as follows: $9,814,342 $16,164,676 VIS SSMC TASMC Information on the long-term investments is as follows: Market value of listed stocks Equity in the net assets of unlisted stocks Net asset value of funds 2000 1999 $597,812 (473,661) (311,330) ($527,823) (75,978) 315,301 ($187,179) ($288,500) 2000 1999 $8,729,639 $19,762,968 5,466,227 157,851 8,351,897 66,278 93 As of December 31, 2000, the unexercised stock warrants for purchase of shares are as follows: Stock Shares (Maximum) Exercise Price Per Share (US$) Exercise Period Common Stocks Empower Tel Networks, Inc Ubicom, Inc Capella Microsystems, Inc. HINT Corporation Preferred Stocks SiRF Technology, Inc Sonics, Inc Sonics, Inc Sonics, Inc Ubicom, Inc Formfactor, Inc Integrated Memory Logics, Inc Integrated Memory Logics, Inc Match Lab, Inc 317,307 90,980 500,000 15,000 5,556 450,000 30,000 30,000 45,490 66,666 746,268 333,333 625,000 8. PROPERTY, PLANT AND EQUIPMENT Accumulated depreciation consisted of the following: Land improvements Buildings Machinery and equipment Office equipment 1.625 01/29/1999-01/29/2009 0.20 0.25 0.25 6.00 1.00 1.50 1.50 2.00 7.50 0.67 1.50 0.80 03/22/1999-12/23/2003 - 03/17/2000-03/17/2005 01/16/1998-01/16/2003 09/25/1998-09/27/2001 11/30/1999-11/29/2002 03/14/2000-03/14/2002 12/23/1998-12/23/2003 07/30/1999-07/30/2004 12/20/1999-12/20/2004 12/20/1999-12/20/2004 01/14/2000-01/14/2005 2000 1999 $64,006 10,692,112 90,956,200 2,172,561 $33,691 8,131,392 55,576,499 1,668,106 $103,884,879 $65,409,688 Information on the status of the construction of TSMC's manufacturing facilities as of December 31, 2000 is as follows: Manufacturing Plant Estimated Cost Accumulated Expected or Actual Date of Expenditures the Starting of Operations Fab 6 Fab 7 Fab 8 Fab 12 - 1st stage Fab 14 - 1st stage $76,889,000 $67,565,100 22,540,400 28,314,300 38,280,800 9,711,000 11,121,100 15,217,800 21,372,000 March 2000 March 2001 March 2001 November 2001 7,946,600 May 2002 Interest expense capitalized for the years ended December 31, 2000 and 1999 were $541,078 and $845,246 respectively. 94 9. DEFERRED CHARGES - NET Technology Software and system design costs Technology know how Bond issue costs Patent Others 10. SHORT-TERM BANK LOANS Loan in NT Dollars: 2000 1999 $1,442,292 $1,636,596 1,420,635 625,306 157,500 142,881 - 172,357 - 37,238 18,105 63,547 $3,335,665 $2,380,792 2000 1999 Secured loan, repayable by October 2001 and June 2000, annual interest of 5.8% and 0.75%~7.39% in the years of 2000 and 1999, respectively $329,375 $2,037,629 Unsecured loan, repayable by June 2000, annual interest of 0.75%~7.93% - 2,989,002 Loan in US Dollars: Unsecured and loan secured by mortgage, US$105,942 thousand, repayable by December 2001, annual interest of 7.53% ~ 9.25% 3,504,466 - $3,833,841 $5,026,631 Unused credit lines as of December 31, 2000 aggregated about NT$470,625 and US$41,000 thousand. 11. COMMERCIAL PAPERS PAYABLE Repayable by March 2000, annual interest of 4.40%~5.51% Less - unamortized discount 12. OBLIGATION UNDER CAPITAL LEASE Repayable through between June 30, 2001 and 2003 Current portion 1999 $95,000 (203) $94,797 2000 1999 $54,371 (51,055) $3,316 $5,369 (1,001) $4,368 95 13. LONG-TERM BANK LOANS 2000 1999 Bank loans in US Dollars: Unsecured and loan mortgage,US$705,564 thousand in 2000 and US$192,500 thousand in 1999, repayable by March 2005, annual interest of 6.91% ~ 7.663% and 6.76% ~ 6.83% in 2000 and 1999, respectively. $23,339,367 $12,952,462 Bank loans in NT Dollars: Repayable by March 2001, interest, 6.68%~7.21%, paid in 2000. - 9,791,000 $23,339,367 $22,743,462 Unused credit lines for long-term bank loans as of December 31, 2000 aggregated to US $62,436 thousand. 14. LONG-TERM BONDS Domestic unsecured bonds: 2000 1999 Repayable in March 2003, 7.71% annual interest payable semi-annually $4,000,000 $4,000,000 Repayable in November 2003, 7.12% annual interest payable annually, redeemed in November 2000 - 6,000,000 Repayable in October 2002 and 2004, 5.67% and 5.95% annual interest payable annually, respectively 10,000,000 10,000,000 Repayable in December 2005 and 2007, 5.25% and 5.36% annual interest payable annually, respectively 15,000,000 - $29,000,000 $20,000,000 15. SHAREHOLDERS' EQUITY According to ROC Company Law, capital surplus can only be used to offset a deficit or transferred to capital. TSMC's Articles of Incorporation provide that the following shall be appropriated from the annual net income (less any deficit): a. 10% legal reserve; b. Special reserve according to the relevant laws or the regulating authorities; c. Bonus to directors and supervisors and to employees equal to 1% and at least 1% of the remainder, respectively; d. Dividends to shareholders of preferred stock equal to 3.5% annual rate, based on outstanding period; e. These appropriations and the disposition of the remaining net income should be resolved by the shareholders in the following year and given effect to in the financial statements of that year. TSMC issued nonpublic 1,300,000 thousand preferred stock - Series A to certain investors. The following are the rights of the holders of the preferred stock and other terms and conditions: a. Entitled to receive cumulative cash dividends at an annual rate of 3.5%. b. Not be entitled to participate in any additional shares of stock upon transfer of unappropriated earnings and capital surplus to stock. c. Have priority over the holders of common shares to the assets of the Company available for distribution to stockholders upon liquidation or dissolution of the Company; however, the preemptive rights to the assets shall not excess the issue value of the shares. d. Have voting rights similar to that of the holders of common stock. 96 e. No right to convert their shares into common stock. The preferred shares will be redeemed within thirty months from its issuance. The holders will have the foregoing rights and TSMC's related obligations will remain the same until the preferred shares are actually redeemed by TSMC. The aforementioned appropriation for legal reserve shall be made until the reserve equals aggregate par value of TSMC's outstanding capital stock. The reserve can only be used to offset a deficit; or, when it has reached 50% of the aggregate par value of TSMC's outstanding capital stock, up to 50% thereof can be distributed as stock dividend. The Company shall record a special reserve of $1,091,003 from unappropriated retained earnings equivalent to the net debit balance of any item, other than a deficit, in the shareholders' equity as of December 31, 1999. The special reserve will be adjusted in proportion to the change in the net debit balance of any item in the shareholders' equity. Under the Integrated Income Tax System that became effective on January 1, 1998, resident shareholders are allowed a tax credit for the income tax paid by the Company on earnings generated starting January 1, 1998. 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. 16. PENSION PLAN TSMC and its subsidiaries have pension plans for all regular employees, which provides benefits based on length of service and average monthly salary for the final six months of employment. TSMC and its subsidiaries makes monthly contributions, equal to 2% of salaries to a pension fund that 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 of TSMC and its subsidiaries are summarized as follows: a. Components of pension cost Service cost Interest cost Projected return on plan assets Amortization b. Reconciliation of the fund status of the plan and accrued pension cost Benefit obligation Vested benefit obligation Non-vested 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 cost (Forward) 2000 1999 $376,689 91,234 (26,675) 8,300 $449,548 $272,228 80,694 (22,931) 9,114 $339,105 $- 763,879 763,879 1,550,009 2,313,888 (661,099) 1,652,789 - (165,991) 22,737 - $1,509,535 $128 447,148 447,276 1,008,650 1,455,926 (390,655) 1,065,271 - (179,348) 127,684 - $1,013,607 97 c. Actuarial assumptions Discount rated used in determining present values Future salary increase rate Expected rate of return plan on assets d. Contributions to pension fund e. Funds transferred from TASMC and WSMC f. Payments from pension fund 17. INCOME TAX 2000 1999 6.0% 6.0% 6.0% 6.5% 6.0% 6.5% $95,932 $83,053 $173,339 $- $1,458 $3,591 a. A reconciliation of income tax expense - current before tax credits and income tax expense on income before income tax at statutory rate is shown below: 2000 1999 Income tax expense on "income before income tax" at statutory rate ($12,787,660) ($4,889,210) Tax-exempt income Temporary difference Assessed additional income tax on the unappropriated earning Income tax expense - current b. Income tax credits as of December 31, 2000 and 1999 consisted of: Income tax expense - current before tax credits Tax credits Net change in deferred income tax assets (liabilities) for the period Investment tax credits Temporary differences Others Valuation allowance Adjustment of prior years' taxes c. Deferred income tax assets (liabilities) consisted of the following: Current Investment tax credit Accrued liabilities and others Valuation allowance (Forward) 7,770,000 (49,497) (88,024) 3,434,802 (221,129) - ($5,155,181) ($1,675,537) 2000 1999 ($5,155,181) ($1,675,537) 5,128,024 1,587,000 (27,157) (88,537) 3,146,369 3,798,325 (388,671) (73,559) (111,139) - (1,678,791) (1,303,500) 189,693 87,633 $1,167,884 $2,382,782 2000 1999 $8,422,000 $2,329,000 56,016 (300,000) 287,618 - $8,178,016 $2,616,618 98 Noncurrent Investment tax credit Loss carried forward Interest expense Deferred revenue Organization cost Depreciation Others Valuation allowance d. Integrated income tax information: Balances of the imputation credit account TSMC WSMC Expected and actual creditable ratio TSMC WSMC $12,591,291 $8,769,605 - 45,008 46,077 - (857,689) 267,831 981,149 201,798 43,753 65,006 (305,358) (205,699) 12,092,518 9,550,254 (5,462,713) (2,543,557) $6,629,805 $7,006,697 2000 1999 $5,888 $- 2000 (Expect) $1,497 $2,116 1999 (Actual) 0.009% 0.006% - - 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 2000 may be adjusted according to the difference between the expected and actual imputation credit allowed under the regulation. e. The unappropriated retained earnings as of December 31, 2000 and 1999 included the earnings generated up to December 31, 1997 of $4,827 and $799,298, respectively. The effective tax rates for deferred income tax of TSMC as of December 31, 2000 and 1999 were 7.54% and 5.9%, respectively. Its subsidiaries were 32~54% and 32%~40%, respectively. WSMC was 20% for the year ended 1999. Unused investment tax credits arising from investments in machinery and equipment, and research and development expenditures as of December 31, 2000 will expire as follows: Year of Expiry 2001 2002 2003 2004 Tax credits 4,015,461 4,800,268 5,738,563 6,458,999 $21,013,291 99 The income from the following projects and services are exempt from income tax: Tax-Exemption Period Expansion of second manufacturing plant and computer-aided design services, and construction of third manufacturing plant Expansion of first and second manufacturing plants-modules A and B, third manufacturing plant, and construction of fourth manufacturing plant 1996 to 1999 1997 to 2000 Expansion of first and second manufacturing plants-modules A and B, third manufacturing plant and fourth manufacturing plant, and construction of fifth manufacturing plant 1999 to 2002 TASMC is entitled to an income tax exemption for a period of four years for the income generated. TASMC decided to commence such tax exemption from January 1, 1998 to December 31, 2000. Income tax returns for TSMC through 1996, TASMC and WSMC through 1997, have been examined and cleared by the tax authorities. However, TASMC is contesting the assessment of tax authority for 1995, 1996, and 1997. 18. RELATED PARTY TRANSACTIONS The Company engaged in business transactions with the following related parties: Industrial Technology Research Institute (ITRI); the Company's chairman is one of its director. a. b. Philips Electronics N.V., (Philips), a major shareholder. c. Vanguard International Semiconductor Corporation (VIS), an investee. d. Systems on Silicon Manufacturing Company Pte Ltd. (SSMC), an investee. e. Winbond Electronics Corporation (Winbond ); a director. f. Taisil Electronic Materials Corporation (Taisil); a director before March 6, 1999. g. Syntek Design Technology Corporation (Syntek Design); a director. The transactions with the foregoing parties, in addition to those disclosed in other notes, are summarized as follows: For the period Sales ITRI Philips and its affiliates VIS Winbond Taisil Purchase VIS Syntek Design Rental expense - ITRI Manufacturing expenses Technical assistance fee - Philips Technology - Winbond (Forward) 2000 1999 Amount % Amount % $198,146 5,289,927 17,012 - - $5,505,085 $6,572,110 - $6,572,110 $161,575 $2,137,175 - $2,137,175 - 3 - - - 3 19 - 19 14 3 - 3 $132,507 2,864,149 48,473 625,246 58,877 $3,729,252 $381,989 30,820 $412,809 - 4 - 1 - 5 3 - 3 $161,488 54 $862,398 300,000 $1,162,398 2 1 3 100 General and administrative expenses Consulting fee - VIS Disposal of properties - VIS Non-operating income SSMC(mainly technical service income) VIS Others $- $87,189 $152,347 5,604 38 $157,989 - 37 3 - - 3 $20,400 $- $- - - $- - - - - - - Under a technology development and transfer contract with Winbond in January 1997, Winbond agreed to transfer technology and provide related information and other consultant services to WSMC. WSMC agreed to pay compensation for technology development and transfer amounting to NT$800 thousand in accordance with the progress of the construction of buildings and technology development and transfer. As of December 31, 1999, WSMC has paid the entire license fee. Research and development expenses Winbond At end of period Receivable ITRI Philips and its affiliates VIS SSMC TASMC Winbond Other Rental Prepayment - ITRI Payable Philips and its affiliates VIS TASMC Syntek Design $- - $3,531 - $56,078 643,604 159,890 89,154 - - - $948,726 $42,664 $797,375 1,808,964 - - 6 68 17 9 - - - 100 6 31 69 - - $18,458 133,245 25,674 5,353 23,117 131,927 3,164 $340,938 $42,541 $305,757 184,741 539,466 6,385 5 39 8 1 7 39 1 100 2 29 18 52 1 $2,606,339 100 $1,036,349 100 Sales to related parties are based on regular selling prices and collection terms, expect for disposal of properties and technical service, which were in accordance with the underlying contracts. 19. LONG-TERM LEASES TSMC leases from ITRI the land, building and certain machinery and equipment of its first manufacturing facility under agreements that will expire in March 2002. The annual rent and other related charges under such agreement amount to $170,656. The agreements can be renewed upon their expiration. TSMC leases the lands where its second through fourteen manufacturing facilities are located from the Science- Based Industrial Park Administration. These agreements will expire on various dates from March 2008 to November 2019 and have annual rentals aggregating $172,000. The agreements can also be renewable upon their expiration. TSMC-North America leases its office premises and certain equipment under a non-cancelable operating agreement, which will expire in September 2020. TSMC Europe entered into an office lease agreement premise, which will expire in 2004; annual rental is $57,379. 101 Future annual minimum rentals under the aforementioned leases are as follows: Year 2001 2002 2003 2004 2005 2006-2020 Amount $433,792 308,386 268,387 271,116 269,068 1,990,581 $3,541,330 20. PLEDGED OR MORTGAGED ASSETS Certain assets had been pledged or mortgaged as collateral for short and long-term loan, derivative financial instruments, letter of credit, customs duties, and guarantee deposits for foreign workers are as follows: Cash - for revolving credit agreement Short-term investments Properties (net) - for bank loans 2000 1999 $- $3,161,693 937,428 - 7,171,081 46,343,950 $8,108,509 $49,505,643 Other than the collateral stated above, all of WaferTech LLC,'s assets (in US$1,243,996 thousand) is secured for the long-term bank loans under the credit facility. 21. COMMITMENTS AS OF DECEMBER 31, 2000 The commitments as of December 31,2000 are as follows: a. Under a Technical Cooperation Agreement with Philips, as amended on May 12, 1997, TSMC shall pay technical assistance fee at a percentage of net sales, as defined in the agreement, of certain products. The agreement shall remain in force up to July 9, 2007 and thereafter be automatically renewed for successive periods of three years. Under the amended agreement, the fee is subject to deduction by the amounts TSMC pays to any third party for settling any licensing/infringement issue after the first five-year period 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 themselves each year up to 30% of TSMC's production capacity. c. Under a Submicron Technology License Agreement with ITRI, TSMC 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, 2000 as amended. In addition, under a technical cooperation agreement with 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 designated by the MOEA. d. Under several foundry agreements, TSMC shall allocate a portion of its production output for sale to certain major customers from whom guarantee deposits of US$213,865 thousand had been received as of December 31, 2000. e. Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. dated March 30, 1999, the parties agreed to: (a) form a joint venture company to be named Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) for the purpose of constructing an integrated circuit foundry in Singapore, (b) set SSMC's total authorized capital at about US$1.2 billion, and, (c) allow TSMC to invest 32% of SSMC's capital. 102 TSMC and Philips committed to buy a certain percentage of the production capacity of SSMC. If any party defaults on the agreement and the capacity utilization of SSMC falls below a certain percentage of its total capacity, the defaulting party should compensate SSMC for all related unavoidable costs. f. Under a Technical Cooperation Agreement with SSMC entered into on May 12, 1999, SSMC shall compensate TSMC for technology service provided to SSMC. The compensation shall be a certain percentage of net selling prices of certain products sold by SSMC. The agreement will remain in force for ten years and be automatically renewed for successive periods of five years unless predetermined by either party under certain conditions. g. Under a Technical Transfer Agreement with National Semiconductor Corporation ("National") entered into on June 27, 2000, TSMC shall receive payments for the technology transferred to National. The agreement will remain in force for ten years. After expiration, this agreement will be automatically renewed for successive periods of two years unless pre-terminated by either party under certain conditions. h. TSMC entered into a Manufacturing Agreement with Vanguard International Semiconductor Corp. ("VIS"). VIS agrees to reserve certain capacity to manufacture for TSMC certain devices on logic or other technologies required by TSMC's customers, at discounted actual setting prices as agreed by the parties. VIS shall return certain amount of the Bond without any interest to TSMC for some wafers ordered by TSMC. The contract will remain in force for five years. i. Under a management agreement, InveStar capital Inc. and InveStar capital Inc. II., (ISC) of the Cayman Islands provides investment and administrative services to TSMC. ISC should receive quarterly, starting 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. j. WaferTech had recorded a reserve of US$16,000 thousand for a litigation arising from a charge by certain contractors that Wafertech caused the contractors to incur additional labor and material costs outside the contracts. The reserve is reflected in accrued construction and equipment payable 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 US$10,750 thousand. Payment of the settlement amount will be made in four installments throughout fiscal year 2000. The remaining accrued reserve of US$5,250 thousand is sufficient for payments to the other construction contractors. k. In 1996, WaferTech adopted an Executive Incentive Plan, which was amended in 1997. Under the 1997 amendment, the Board of Directors approved the Senior Executive Incentive Plan and the Employee Incentive Plan ("Plan") under which officers, key employees and nonemployee directors may be granted option rights. However, WaferTech is a limited liability company and does not have shares of stock. Thus, each option right granted under the Plan provides grantees rights to buy ownership interests in WaferTech. The Plans also provides for approximately 6% of the total ownership interests to be available for grant, represented by 15.15 million-option rights. For option rights granted to date, the option purchase price exceeded fair value as of the date of the grant. While WaferTech may grant employees option rights that are exercisable at different times or within different periods, it has generally granted option rights which are exercisable on a cumulative basis in annual installments of 25% each on the first, second, third, and fourth anniversaries of the date of grant. 103 The following table summarizes information about the Plans: Outstanding Option Rights Option Rights Number of Exercise price Balance, December 31, 1998 Options granted Option price > fair market value Options exercised Options cancelled Balance, December 31, 1999 Additional option rights authorized Options granted Option price > fair market value Options exercised Options cancelled Available for Grant Option Rights 6,400,252 7,099,748 (3,084,305) 3,084,305 - (1,119,323) 838,650 (838,650) 4,154,597 1,650,000 8,226,080 - (3,203,302) 3,203,302 - 1,180,871 (3,411,867) (1,180,871) Balance, December 31, 2000 3,782,166 6,836,644 These options will expire if not exercised at specific dates between May 2006 to December 2010. (US$) $0.74 0.86 0.74 0.74 0.78 - 1.86 0.74 1.09 1.23 l. WaferTech, LLC was assessed by the Department of Revenue of the State of Washington deficiency excise taxes of approximately US$8,800 thousand. WaferTech, LLC intends to appeal the assessment. As of December 31, 2000, WaferTech, has recorded a reserve that management believes is sufficient to address any exposure related to this tax assessment. m. TSMC-North America started a stock appreciation right program whereby the employees received cash bonuses based on the appreciation of the quoted market price of the shares of stock of TSMC. Compensation expenses are recorded based on the difference between the grant price and market price at the end of each period. This expense is recognized ratably over the vesting period and adjusted based on period fluctuations in the stock. In view of depreciation of the stock from December 1 to December 31, 2000, TSMC-North America did not have any compensation expense or liability related to this program. n. As of TSMC provided a guarantee for loans of US$268,000 thousand and US$40,000 thousand obtained by TSMC Development, Inc. and TSMC-North America. o. Unused credit lines for TSMC as of December 31, 2000 were approximately $250,338. 22. ADDITIONAL DISCLOSURES The followings are the additional disclosure requirements for TSMC and affiliates pursuant to SFC requirements: a. Financing provided to other parties: Please see table 1 attached. b. Collateral provided to other parties: Please see table 2 attached. c. Marketable Securities held: Please see table 3 attached. d. Balance of marketable securities acquired and disposed of, exceeding 100 million or 20% of the issued capital: Please see table 4 attached. e. Acquisition of properties exceeding 100 million or 20% of the issued capital: Please see table 5 attached. f. Disposal of properties exceeding 100 million or 20% of the issued capital: None. g. Transaction of purchase or sales with related parties amounting to more than 100 million or 20% of the issued capital: Please see table 6 attached. h. Receivables from related parties amounting to more than 100 million or 20% of the issued capital: Please see table 7 attached. 104 i. Information regarding names, locations and others of investee on which the Company exercises significant influences: Please see table 8 attached. j. Transactions of derivative financial instruments: The relevant information on the derivative financial instruments entered into by the Company and subsidiaries are as follows: 1) Outstanding forward exchange contracts as of December 31, 2000: Contract Amount Currency (Thousand) Fair Value (Thousand) Settlement Date (Thousand) Maturity Amount Buy Buy Buy Sell Sell Sell US$ EUR JPY US$ US$ US$ US$ EUR JPY US$ US$ US$ 60,000 28,968 42,772 106,993 156,875 365,000 NTD 1,978,998 Jan. 2001 NTD 1,989,006 US$ 27,080 Jan. to Sep. 2001 US$ 26,823 374 US$ NTD 3,582,959 Jan. 2001 Jan. to Feb. 2001 NTD 5,100,386 Jan. 2001 374 US$ NTD 3,553,080 NTD 5,091,560 NTD 12,105,459 Jan. to Dec. 2001 NTD12,032,465 Receivables from forward exchange contracts (shown in the balance sheet as part of "Other current assets" account) as of December 31, 2000 aggregated to $119,227 and payables from forward exchange contracts (shown in the balance sheet as part of "Other current liabilities" account) aggregated to $180,256 as of December 31, 2000. Net exchange gains for the year ended December 31, 2000 was $266,393 . The net assets or liabilities that have been hedged by the above forward exchange contracts are as follows: Accounts receivable Payable to contractors and equipment suppliers Amount (Thousand) 2000 US$ US$ JPY EUR 813,685 571,332 21,237,708 62,480 2) Interest rate swaps TSMC has entered into interest rate swap transactions to hedge exposure to rising interest rates on its floating rate long-term bank loans. These significant 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 expenses on these transactions for the years ended December 31, 2000 was $113,683. 3) Option contracts Outstanding option contracts as of December 31, 2000 were as follows: Contract Amount Carrying Contract Currency (Thousands) Value Fair Value Strike Price Maturity Put option sell EUR Call option sell US$ Call option sell US$ Put option buy US$ EUR US$ US$ US$ 525,537 203,500 20,000 15,000 $- ($189,735) 0.8870~0.9680(US$/EUR) May 2001 - - - (264,885) 107.77~110.5(US$/JPY) Mar. 2001 (1,485) 32.42(US$/NTD) 37 110~110.5(US$/JPY) Jan. 2001 Feb.2001 105 For the year ended December 31, 2000, TSMC realized premium income of $116,248 on foreign currency options written and incurred premium expenses of $108,133 on foreign currency options bought. 4) Transaction risk a) Credit risk. The banks, which are the counter-parties to the foregoing derivative financial instruments, are reputable financial institutions. Management believes its exposures related to the potential default by those counter parties are low. b) Market price risk. The Company is exposed to market risks arising from changes in currency exchange rates due to U.S. dollar-denominated accounts receivable, Yen-dominated accounts payable, Euro- denominated accounts payables, and U.S. dollar-denominated debt related to its importation of materials and machinery and equipment and long-term bank loans. The Company enters into forward contracts and option contracts to manage its exposures. The Company uses interest rate swap contracts with banks to principally manage the risks arising from the changes in interest rates of its obligations. It enters into financial derivative contracts based on analysis of specific and known economic exposures and by policy prohibits entering into such contracts for trading purposes. Its hedging strategy is to use financial instruments having negative correlation to fair value of the hedged items as hedging instruments and periodically evaluates the effectiveness of these instruments as hedges of its interest rate exposures. c) Liquidity and cash flow requirements. The cash flow requirements with respect to the Company's derivative financial instruments are as follows: (i) forward contracts - the net differences between the spot rates and contracted forward rates, (ii) options - the exercise price but the options may not have to be exercised at all in cases where the strike price is higher than the related market price at exercise dates, and (iii) interest rate swap agreements - equal to the net difference between the interest receivables and payables under the agreements. 5) Fair value of financial instruments December 31, 2000 December 31, 1999 Carrying/ Notional Carrying/ Notional Amount Fair Value Amount Fair Value Nonderivative financial instruments Assets Cash and cash equivalents Short-term investments Receivables from related parties $38,840,217 $38,840,217 $29,517,682 $29,517,682 2,351,560 2,351,560 948,726 948,726 965,397 340,938 965,397 340,938 Accounts and notes receivable 27,055,432 27,055,432 13,321,987 13,321,987 Long-term investments Refundable deposits Pledge time deposits Liabilities 9,814,342 14,353,717 16,164,676 28,181,143 979,067 979,067 59,371 59,371 - - 3,161,693 3,161,693 Short-term bank loan Commercial paper payable Payable to related parties Accounts payable Payable to contractor and equipment suppliers Long-term liabilities (including current portion) Long-term bonds Guarantee deposits 3,833,841 - 2,606,339 8,507,827 3,833,841 - 2,606,339 8,507,827 5,026,631 94,797 1,036,349 3,273,894 5,026,631 94,797 1,036,349 3,273,894 25,550,273 25,550,273 12,593,712 12,593,712 23,390,422 29,000,000 7,086,379 23,390,422 29,035,803 7,086,379 23,390,422 20,000,000 5,185,362 22,748,831 20,222,611 5,185,362 (Forward) 106 Derivative financial instruments Forward exchange contracts (buy) Forward exchange contracts (sell) Interest rate swaps Option 2,820,220 20,802,311 1,601 - 2,887,126 20,788,804 234,017 (456,068) 2,372,219 3,998,698 7,488 6,946 2,306,638 3,998,108 7,488 6,946 Fair values of financial instruments were determined as follows: a) Short-term financial instruments - carrying values. b) Short-term investments - market values. c) Long-term investments - market value for listed companies and net equity value for the others. d) Refundable deposits and guarantees deposits - carrying values. e) Long-term liabilities - based on forecasted cash flows discounted at interest rates of similar long-term liabilities. Long-term bonds payable is discounted at present value. Fair values of other long-term liabilities are also their carrying values as they use floating interest rates. f) Derivative financial instruments - based on outright forward rates and interest rate in each contract. The fair values of non-financial instruments were not included in the fair values disclosed above. Accordingly, the sum of the fair values of the financial instruments listed above are not equal the fair value of the Company. 23. SEGMENT FINANCIAL INFORMATION a. Geographic information: Overseas Domestic Elimination Consolidated Adjustments and 2000 Sales to unaffiliated customers $- $166,197,604 $- $166,197,604 Transfers between geographic areas 14,451,231 30,816 (14,482,047) - Total sales Gross profit Operating expenses Non-operating income Non-operating expenses Income before income tax Minority interest loss Identifiable assets Long-term investments Total assets (Forward) $14,451,231 $166,228,420 ($14,482,047) $166,197,604 $3,970,099 $73,924,745 ($1,379,004) $76,515,840 (15,221,152) 6,227,936 (3,621,100) $63,901,524 $36,786 $64,659,712 $320,273,323 ($23,861,398) $361,071,637 9,814,342 $370,885,979 107 1999 Sales to unaffiliated customers $5,193,000 $71,112,102 $- $76,305,102 Transfers between geographic areas 975,431 4,696,218 (5,671,649) - 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 $6,168,431 $75,808,320 ($5,671,649) $76,305,102 $5,670,076 $30,069,272 ($5,671,649) $30,067,699 (7,797,710) 1,682,327 (3,324,002) $20,628,314 $515,898 $34,807,935 $185,054,075 ($591,172) $219,270,838 16,164,676 $235,435,514 2000 1999 $81,655,987 $38,418,426 42,906,968 11,360,517 16,744,842 4,778,646 $135,923,472 $59,941,914 The export sales information is presented by billed regions. c. TSMC and subsidiaries has no single customer that accounts for at least 10% of its total sales. 108 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES FINANCING PROVIDED TO OTHER PARTIES For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 1 No. Financing Transaction Accounts Limitation Maximum Ending Interest Financing Allowance Mortgage Transcation Amount Provider Entry Company Name Entry on Financing Balance for Balance Rate Reasons for Bad the Period (Thousand) Debt Item Value Amount Limited on Financing 2 VIS VIS America Prepaid expenses (Note 1) $6,122 $1,232 - Prepayments for product development - - $- $5,706 $4,400,000 (Note 2) Note 1: Not exceeding 10% of the issued capital of VIS for each transaction entity, and also limiting to 30% of the issued capital of each transaction entity. Note 2: Not exceeding 20% of the issued capital of VIS. TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES COLLATERAL PROVIDED TO OTHER PARTIES For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 2 No. Collateral Transcation Entity Limitation Maximum Provider Name Name 0 TSMC TSMC Development Inc. TSMC - North America Note 1: 30% of the issued capital of TSMC. Nature of the Relationship (Note 3) 3 2 on Collateral Balance for the Period (US in Thousand) Ending Balance (US in Amount of % of Accumulated Amount Limited Properties Amount of Collateral on Collateral Guaranteed on Net Equity of the (Note 1) Thousand) by Collateral Latest Financial Statement (Note 2) $8,865,172 $8,865,172 $8,865,172 3.39% $38,968,094 (USD268,000) (USD268,000) 1,323,160 1,323,160 1,323,160 0.51% (USD40,000) (USD40,000) Note 2: Not exceeding 10% of the issued capital of the Company, and also limiting to the issued capital of the transaction entity with the exception of approval from BOD. Note 3: The number 2 represent subsidiary that directly holds exceeding 50% of the issued. The number 3 represents the investee that has over 50% of the common stocks holds by the parent company and subsidiary. 109 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES MARKETABLE SECURITIES HELD December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 3 Marketable Securities Name & Type Nature of the Relationship Held Company Name: TSMC VIS - Stock SSMC - Stock Taiwan Mask Corp. - Stock United Industrial Gases Co., Ltd. - Stock Investee Investee - - W.K. Technology Fund IV - Stock Taiwan Semiconductor Technology Corp. - Stock Hon Tung Ventures Capital - Stock Crimson Asia Capital Fund - Equity Horizon Ventures Fund - Equity - - - - - Held Company Name: Chi Cherng Investment Account December 31, 2000 Note Shares Carrying % of Market Value (Thousand) Value (US in Owner- or Net Asset ship Value (US in Thousand) Thousand) Long-term investment 556,133 $5,615,075 25 $8,642,314 Long-term investment 90 935,870 Long-term investment 6,887 32,129 Long-term investment 10,058 146,250 Long-term investment 5,000 50,000 Long-term investment 50,000 500,000 Long-term investment 12,000 120,000 Long-term investment Long-term investment - - 64,547 93,304 N/A N/A 32 2 10 7 4 19 10 Shin-Etsu Handotai Taiwan Co., Ltd. - Stock - Long-term investment 10,500 105,000 TSMC - Stock Major shareholder Short-term investment 2,160 98,282 Held Company Name: Kung Cherng Investment TSMC - Stock Major shareholder Short-term investment 4,827 226,819 Held Company Name: Po Cherng Investment TSMC - Stock Major shareholder Short-term investment 3,814 236,150 Held Company Name: Cherng Huei Investment TSMC - Stock Major shareholder Short-term investment 4,298 243,391 - - - - (Forward) 110 935,870 87,325 155,041 105,476 81,059 434,385 125,927 64,547 93,304 184,451 412,317 4,827 thousands shares-pledged 325,790 2,814 thousands shares-pledged 367,074 3,297 thousands shares-pledged Marketable Securities Name & Type Nature of the Relationship Account December 31, 2000 Note Shares Carrying % of Market Value (Thousand) Value (US in Owner- or Net Asset ship Value (US in Thousand) Thousand) Held Company Name: Chi Hsin Investment TSMC - Stock Major shareholder Short-term investment 2,544 138,747 Held Company Name: Hsin Ruey Investment TSMC - Stock Major shareholder Short-term investment 1,006 85,850 Held Company Name: TSMC-BVI 3DFX. Interactive Inc. - Stock - Long-term investment 68 USD297 - - - 217,270 2,543 thousands shares-pledged 85,936 USD84 Held Company Name: VIS VIS Associates Inc. - Stock Subsidiary Long-term investment 23,570 $464,077 100 $464,077 PowerChip Semiconductor Inc.- Stock Investee Long-term investment 168,488 2,651,216 Etron Technology Inc. - Stock - Long-term investment 5,590 310,132 Walsin Technology Inc. - Stock Investee Long-term investment 31,410 414,481 MEGIC Corporation - Stock Form Factor Inc. - Stock United Industrial Gases Co., Ltd. - Stock - - - Long-term investment 16,500 177,000 Long-term investment 267 64,360 Long-term investment 2,313 29,250 9 3 10 15 1 2 3,315,837 278,118 414,481 177,000 64,360 29,250 Held Company Name: TSMC Partners TSMC - ADR Parent Company Short-term investment 495 USD7,357 - USD8,916 Held Company Name: InveStar Semiconductor Development Fund Inc. Silicon Image, Inc. - Stock Sage, Inc. - Stock Centillium Tec. Corp. - Stock Marvell Technology Group Ltd. - Stock Silicon Labo Ratories - Stock Programmable Microelectronics - Stock Capella Microsystems, Inc. - Stock (Forward) - - - - - - - Short-term investment Short-term investment Short-term investment 411 140 165 USD720 USD506 USD650 - - - USD2,237 USD2,065 USD3,671 Short-term investment 4,665 USD4,579 - USD102,347 Short-term investment 15 USD482 Long-term investment 1,113 USD1,500 Long-term investment 42 USD10 - - - USD219 USD1,500 USD10 111 Marketable Securities Name & Type Nature of the Relationship Account December 31, 2000 Note Shares Carrying % of Market Value (Thousand) Value (US in Owner- or Net Asset ship Value (US in Thousand) Thousand) Equator Technologies, Inc. - Stock Scenix Semiconductor Inc. - Stock Global Test Corp. - Stock Chip strate - Stock Ritch Tech - Stock APE Fu Ding Technology - Stock Integrated Memory Logic, Inc. - Preferred Stock Divio (Next wave) - Preferred Stock SiRF Technology Inc. - Preferred Stock Rise - preferred Stock - - - - - - - - - - Long-term investment Long-term investment 133 861 USD90 USD172 Long-term investment 11,292 USD5,559 Long-term investment 6,660 USD2,142 Long-term investment 790 USD313 Long-term investment 2,750 USD1,518 Long-term investment 1,831 USD1,809 Long-term investment 667 USD500 Long-term investment 306 USD1,333 Long-term investment 600 USD1,500 Capella Microsystems, Inc. - Preferred Stock - Long-term investment 1,383 USD1,298 Sensory, Inc. - Preferred Stock - Long-term investment 1,404 USD1,250 Equator Technologies, Inc. - Preferred Stock - Long-term investment 443 USD1,338 - - - - - - - - - - - - - - USD260 USD172 USD9,242 USD2,190 USD302 USD1,411 USD2,559 USD2,233 USD1,771 USD1,500 USD1,383 USD1,250 USD864 USD5,639 Light Speed Semiconductor Corporation - Preferred Stock Empower Tel Networks, Inc. - Preferred Stock Lara Technology, Inc. - Preferred Stock - - - Long-term investment 2,252 USD3,064 Long-term investment 3,840 USD5,128 - USD14,980 Long-term investment 1,544 USD772 - USD10,034 Scenix Semiconductor Inc. - Preferred Stock - Long-term investment 1,056 USD1,361 RapidSteam - Preferred Stock Tropian, Inc (Premier R.F., Inc.) - Preferred Stock Sonics, Inc. - Preferred Stock Pico Turbo, Inc - Preferred Stock T-Span Systems Corporation - Preferred Stock NanoAmp Solutions, Inc. - Preferred Stock Formfactor, Inc. - Preferred Stock Monolithic Power Systems, Inc - Preferred Stock (Forward) - - - - - - - - 112 Long-term investment 2,056 USD1,050 Long-term investment 1,758 USD2,334 Long-term investment 2,686 USD3,530 Long-term investment 1,050 USD1,250 Long-term investment 1,266 USD1,385 Long-term investment 541 USD853 Long-term investment 267 USD2,000 Long-term investment 2,521 USD2,000 - - - - - - - - - USD2,919 USD7,286 USD7,498 USD4,110 USD1,250 USD3,653 USD1,900 USD2,747 USD2,000 Marketable Securities Name & Type Nature of the Relationship Account December 31, 2000 Note Shares Carrying % of Market Value (Thousand) Value (US in Owner- or Net Asset ship Value (US in Thousand) Thousand) Memsic, Inc - Preferred Stock Reflectivity, Inc. - Preferred Stock Signia - Preferred Stock Match Lab, Inc. - Preferred Stock HINT Corporation - Preferred Stock Creosys, Inc. - Preferred Stock Incentia Design Systems, Inc. - Preferred Stock Rise - Bond - - - - - - - - Long-term investment 3 USD1,500 Long-term investment 1,064 USD2,000 Long-term investment 3,000 USD1,500 Long-term investment 1,875 USD1,500 Long-term investment 1,000 USD1,000 Long-term investment 1,500 USD1,500 Long-term investment Long-term investment 286 N/A USD500 USD300 Held Company Name: InveStar Semiconductor Development Fund (II) Inc. Lara Networks, Inc. - Preferred Stock - Long-term investment 188 USD1,500 Seagull Semiconductor, Inc. - Preferred Stock- Long-term investment 1,389 USD1,250 Memsic, Inc. - Preferred Stock OEpic - Preferred Stock FabCentric, Inc. - Preferred Stock - - - Long-term investment 1,818 USD1,000 Long-term investment Long-term investment 600 500 USD750 USD250 Equator Technologies, Inc. - Preferred Stock - Long-term investment 770 USD1,501 NanAmp Solutions, Inc. - Preferred Stock RapidStream, Inc. - Preferred Stock FabCentric, Inc. - Bond Signia Technologies, Inc. - Bond - - - - Long-term investment 250 USD1,000 Long-term investment 246 USD1,057 Long-term investment Long-term investment N/A N/A USD250 USD500 Advanced Analogic Technology, Inc. - Bond - Long-term investment N/A USD1,250 - - - - - - - - - - - - - - - - - - - USD1,500 USD2,000 USD1,500 USD1,500 USD1,000 USD1,500 USD500 USD300 USD1,500 USD1,250 USD1,000 USD750 USD250 USD1,501 USD1,000 USD1,057 USD250 USD500 USD1,250 113 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES BALANCE OF MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF EXCEEDING 100 MILLION OR 20% OF THE ISSUED CAPITAL For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 4 Marketable Securities Type Account Transaction Nature of the Beginning Balance Acquisition Disposal Ending Balance and Name Entity Relationship Shares Amount Shares Amount Share Amount Carrying Gain Shares Amount (Thousand) (Thousand) (US in (Thousand) (US in Value (Loss) (Thousand) (US in Thousand) Thousand) Thousand) Company Name: TSMC Taipei Bank Stock The Wan Pao 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 Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment President Home Run Bond Fund Short-term Grand Cathay Bond Fund The GP ROC Bond Fund Flemings Taiwan Bond Fund National Investment Taiwan Bond Fund National Investment Bond Fund United Bond Fund investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment President Investment Bond Fund Short-term - - - - - - - - - - - - - - - - - - - - - - - - - - - - 8,750 $236,250 - $- 8,750 $288,719 $236,250 $52,469 - - - - - - - - - - - - - - - - - - - - - - - - - - 18,207 230,000 18,207 231,644 230,000 1,644 25,495 323,000 25,495 326,273 323,000 3,273 26,382 300,000 26,382 302,604 300,000 2,604 24,468 300,000 24,468 302,748 300,000 2,748 25,484 300,000 25,484 302,523 300,000 2,523 28,222 332,000 28,222 333,627 332,000 1,627 57,900 630,000 57,900 633,522 630,000 3,522 26,842 340,000 26,842 341,476 340,000 1,476 25,593 330,000 25,593 332,564 330,000 2,564 25,556 300,000 25,556 301,955 300,000 1,955 2,956 410,000 2,956 411,752 410,000 1,752 30,054 330,000 30,054 331,605 300,000 1,605 46,405 600,000 46,405 603,210 600,000 3,210 - - - - - - - - - - - - - - $- - - - - - - - - - - - - - investment Long-term investment Long-term investment VIS Stock SSMC Stock (Forward) 114 VIS Investee 556,133 5,010,897 - - SSMC Investee 26 360,177 64 989,690 - - - - - - - - 556,133 5,615,075 90 935,870 Marketable Securities Type Account Transaction Nature of the Beginning Balance Acquisition Disposal Ending Balance and Name Entity Relationship Shares Amount Shares Amount Share Amount Carrying Gain Shares Amount (Thousand) (Thousand) (US in (Thousand) (US in Value (Loss) (Thousand) (US in Thousand) Thousand) Thousand) Company Name: Kung Cherng Investment TSMC Stock Short-term investment Company Name: Po Cherng Investment TSMC Stock Short-term investment Company Name: Cherng Huei Investment TSMC Stock Short-term investment Company Name: Chi Hsin Investment TSMC Stock Company Name: TSMC Partners TSMC ADR Short-term investment Short-term investment - - - - - - - - - - 984 $50,509 4,682 $219,376 839 $172,270 $43,066 $129,204 4,827 $226,819 642 88,519 3,603 206,936 430 88,166 59,306 28,860 3,814 236,150 642 88,732 4,288 239,512 632 119,571 84,853 34,718 4,298 243,391 642 87,157 2,439 124,547 537 110,211 72,957 37,254 2,544 138,747 302 USD3,703 193 USD3,654 Company Name: InveStar Semiconductor Development Fund Inc. Empower Tel Networks, Inc. Stock Long-term Empower Tel Investee 3,087 USD1,878 752 USD3,250 investment Networks, Inc. - - - - - - - - - - - - 495 USD7,357 3,840 USD5,128 11,292 USD5,559 Global Test Corp. Stock Long-term investment Company Name: VIS The GP Bond Fund Kwang Hua Bond Fund Ta Chong Investment Bond Fund National Investment Bond Fund First Global Investment Trust Wan Tai Bond Fund Money Mgmt Fund Grand Cathay Bond Fund - - - - - - - Global Test Investee 7,500 USD2,281 3,792 USD3,278 Corp. - - - - - - - - - - - - - - - - - - - - - - - - - - - - 58,761 750,000 58,761 761,731 750,000 11,731 42,671 550,000 42,671 558,584 550,000 8,584 16,199 180,000 16,199 182,393 180,000 2,393 3,921 550,000 3,921 558,516 550,000 8,516 45,921 550,000 45,921 558,212 550,000 8,212 31,415 400,000 31,415 404,997 400,000 4,997 21,446 240,000 21,446 242,656 240,000 2,656 - - - - - - - - - - - - - - Note 1: The ending balance included the recognition of the investment income (loss) by the equity method and the accumulated translation adjustment. 115 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES ACQUISITION OF PROPERTIES EXCEEDING 100 MILLION OR 20% OF ISSUED CAPITAL For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 5 Company Name: TSMC Properties Transaction Transaction Payment Term Transaction Nature of the Former Transaction Detail when Reference Purpose of Other Date Amount Entity Relationship Transacting with Related Parties of Price Acquisition Commitments Owner Relationship Transfer Amount Determined Date Fab 6 Feb. 16, 2000 ~ $3,254,412 Depend on the progress Fu Tsu - N/A N/A N/A N/A Public bidding Manufacturing None and office Dec. 31, 2000 of the construction Construction Co. Ltd. purpose TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES TRANSACTION OF PURCHASE OR SALES WITH RELATED PARTIES AMOUNTING TO MORE THAN 100 MILLION OR 20% OF THE ISSUED CAPITAL For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 6 Company Name: TSMC Transcation Nature of the Entity Relationship Transaction Detail Abnormal Notes, Accounts Note Purchase Amount % Collection Terms or Sales Transaction Payable or Unit Collection Price Terms Receivables Ending Balance % ITRI It’s director is Sales $198,146 - Net 45 days from None None $56,078 6 TSMC’s chairman monthly closing date Phillips and its Major shareholder Sales 5,289,927 3 Net 30 days from None None 643,604 68 affiliates VIS Investee Purchase 6,572,110 19 invoice date Net 45 days from monthly closing date None None (1,808,964) (69) 116 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES RECEIVABLE FROM RELATED PARTIES AMOUNTING TO MORE THAN 100 MILLION OR 20% OF THE ISSUED CAPITAL December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 7 Company Name: TSMC Transaction Entity Nature of the Relationship Ending Turnover Overdue Amounts Received Allowance Balance Amount Management from Dec. 31, 2000 Up-to-Date for Bad Debts Phillips and its affiliates Major shareholder $643,604 27days $175,828 Accelerate demand on $193,403 account receivables VIS Investee 159,890 N/A 10,080 Accelerate demand on - account receivables $- - 117 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES INFORMATION REGARDING NAMES, LOCATIONS AND OTHERS OF INVESTEE ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCES December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 8 Company Name: TSMC Investee Location Businesses Activity Original Investment Amount Balance as of Dec. 31, 2000 Dec. 31, Dec. 31, Shares % Carrying 2000 1999 (Thousand) Value Net income Investment Note Gain (Loss) (Loss) of the Investee VIS Hsin-Chu, IC Design and $6,503,640 $6,503,640 556,133 25 $5,615,075 $2,573,745 $597,812 Investee Taiwan manufacturing SSMC Singapore Manufacture 1,432,482 442,792 90 32 935,870 (1,480,190) (473,661) Investee of wafer 118 Special 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. TSMC Int'l TSMC Partners, Ltd. Kung Cherng Vanguard Int'l Shareholding: 100% Shareholding: 100% Shareholding: 100% Shareholding: 100% Shareholding: 100% Investment Ltd. TSMC TSMC InveStar Semiconductor InveStar Semiconductor Development, Inc. Technology, Inc. Development Fund (I) Development Fund (2) Shareholding: 100% Shareholding: 100% Shareholding: 97% Shareholding: 97% WaferTech, LLC Shareholding: 97% Semiconductor Corp. Shareholding:25% Vanguard Association Inc. Shareholding:100% VIS Investment Holding Shareholding:100% VIS Micro. VIS America Shareholding:100% Shareholding:100% Investment Co., Ltd. Shareholding:25% Po Cherng: 15% Chi Cherng: 15% Chi Hsin: 15% Cherng Huei : 15% Hsin Ruey: 15% Chi Cherng Investment Co., Ltd. Shareholding: 25% Po Cherng: 15% Kung Cherng: 15% Chi Hsin: 15% Cherng Huei: 15% Hsin Ruey: 15% Chi Hsin Investment Co., Ltd. Shareholding: 25% Po Cherng: 15% Kung Cherng: 15% Chi Cherng: 15% Cherng Huei: 15% Hsin Ruey: 15% Po Cherng Investment Co., Ltd. Shareholding: 25% Kung Cherng: 15% Chi Cherng: 15% Chi Hsin: 15% Cherng Huei: 15% Hsin Ruey: 15% Cherng Huei Investment Co., Ltd. Shareholding: 25% Po Cherng: 15% Kung Cherng: 15% Chi Hsin: 15% Chi Cherng: 15% Hsin Ruey: 15% Hsin Ruey Investment Co., Ltd. Shareholding: 25% Po Cherng: 15% Kung Cherng: 15% Chi Hsin: 15% Chi Cherng: 15% Cherng Huei 15% 119 (2) TSMC Affiliated Companies December 31, 2000 Company Date of Place of Registration Paid-in Capital Business Activities Incorporation Unit: NT(US, NLG, JPY) $K Jan. 18, 1988 San Jose, California, USA US$ 11,000 Marketing & Engineering support Mar. 4, 1994 Amsterdam, The Netherlands NLG 200 Marketing & Engineering support TSMC, North America TSMC, Europe B.V. TSMC, Japan K.K. TSMC Int'l Investment Ltd. TSMC Partners, Ltd. TSMC Development, Inc. TSMC Technology, Inc. Sep. 10, 1997 Yokohama, Japan Apr. 9, 1996 Tortola, British Virgin Islands Mar. 26, 1998 Tortola, British Virgin Islands Feb. 16, 1996 Delaware, USA Feb. 20, 1996 Delaware, USA InveStar Semiconductor Development Fund Inc. Sep. 10, 1996 Cayman Island InveStar Semiconductor Development Fund(II) Inc. Aug. 25, 2000 Cayman Island 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. Jun. 3, 1996 Washington, USA Jul. 6, 1998 Taipei, Taiwan Jul. 6, 1998 Taipei, Taiwan Jul. 10, 1998 Taipei, Taiwan Jul. 13, 1998 Taipei, Taiwan Jul. 14, 1998 Taipei, Taiwan Jul. 15, 1998 Taipei, Taiwan JPY US$ US$ US$ US$ US$ US$ US$ NT$ NT$ NT$ NT$ NT$ NT$ 120,000 Marketing & Engineering support 779,788 Investment 300 Investment 734,403 Investment 0.001 Investment 46,350 Investment 14,369 Investment 769,927 Wafer Manufacturing 400,000 Investment 400,000 Investment 400,000 Investment 400,000 Investment 400,000 Investment 400,000 Investment Vanguard Int'l Semiconductor Corp. Dec. 5, 1994 Hsin-Chu, Taiwan NT$ 22,000,000 IC Design & Manufacturing VIS Associates Inc. VIS Investment Holding, Inc. VIS Micro, Inc. Sep. 24, 1996 Tortola, British Virgin Islands Nov. 16, 1996 Delaware, USA Nov. 21, 1996 San Jose, California, USA Vanguard International Semiconductor- America Apr. 24, 1996 San Jose, California, USA US$ US$ US$ US$ 23,570 IC Related Investment 6,750 IC Related Investment 200 Marketing & Engineering support 6,500 IC Design & Manufacturing NOTE: Foreign exchange rate on the reporting date is shown below: US$1 = NT$33.079 NLG1 = NT$13.9 JPY1 = NT$0.2892 120 (3) Business Scope of TSMC and its Affiliated Companies TSMC and its affiliates work together to provide dedicated foundry services to our customers around the world. In addition, few of TSMC's affiliate companies are focused on conducting investment businesses. In general, TSMC and its affiliates give each other support in technology, capacity, marketing and services with an aim to create the maximum synergy, enabling TSMC to provide our worldwide customers with the best dedicated foundry services worldwide. The ultimate goal of this strategy is to ensure TSMC's leading position in the global IC market. (4) TSMC Shareholders Representing Both Holding Comapnies and Subordinates December 31, 2000 Unit: NT$K, except Shareholding Reasoning Name Shareholding (Note 2 ) Date of Incorporation Place of Registration Paid-in Capital Business Activities (Note 1) 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 shareholders holding more than 50% shares of the company. Note 1 The same legal and natural persons apply a company name and a personal name, respectively. Note 2 It shows the shareholdings to the holding company (excluding the holdings to the subordinates). 121 (5) Rosters of Directors, Supervisors, and Presidents of TSMC's Affiliated Companies December 31, 2000 Company Title Name Shareholding Unit: NT$, except Shareholding TSMC, North America Director F.C.Tseng Director Rick Tsai President Edward C. Ross TSMC, Europe B. V. Director Morris Chang Director Rick Tsai Director Quincy Lin Director Hans Richard Rohrer President Hans Richard Rohrer TSMC, Japan K. K. Chairman Sachiaki Nagae Director Morris Chang Director F.C.Tseng Director Rick Tsai Director Makoto Onodera Supervisor Harvey Chang TSMC International Director Morris Chang Investment Ltd. President F.C.Tseng TSMC Partners, Ltd. Director F.C.Tseng Director Rick Tsai Director Quincy Lin Director Steve Tso Director K.C. Chen Director Harvey Chang Amount - - % - - (TSMC holds 11,000,000 shares ) (100%) - - - - - - - - - - (TSMC holds 200 shares ) (100%) - - - - - (TSMC holds 2,400 shares ) - - (TSMC holds 779,968,244 shares ) - - - - - - - - - - - (100%) - - (100%) - - - - - - (TSMC holds 300,000 shares ) (100%) TSMC Development, Inc. Chairman Morris Chang President Morris Chang - - - - (TSMC International Investment Ltd. holds 734,403,200,000 shares) (100%) TSMC Technology, Inc. Chairman Morris Chang President Morris Chang - - - - (TSMC International Investment Ltd. holds 1,000 shares) (100%) (Forward) 122 Company Title Name Shareholding Unit: NT$, except Shareholding InveStar Semiconductor Director Kenneth Tai Development Fund Inc. InveStar Semiconductor Amount - % - (TSMC International Investment Ltd. holds 45,000,000 shares) (97%) Development Fund Inc. (II) Director Kenneth Tai - - LDC (TSMC International Investment Ltd. holds 13,950,000 shares) (97%) WaferTech, LLC Director Morris Chang Director Jerald Fishman Director Rodney Smith Director Jimmy Lee Director Rick Tsai Director Ronald C. Norris Director Steve Tso President Steve Tso Common Share 590,625 Common share 33,334 Common share 75,000 Common share 75,000 - - - - 0.23% 0.01% 0.03% 0.03% - - - - (TSMC Development, Inc. holds 250,646,584 Preferred Shares) (97.98%) 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 Director Rick Tsai (Representative of Hsin Ruey Investment Co., Ltd.) (Hsin Ruey's investment NT$60,000,040) Investment Co., Ltd. (TSMC's investment NT$99,999,960) Hsin Ruey Investment Co., Ltd. Director Rick Tsai (Representative of Cherng Huei Investment Co., Ltd.) (Cherng Huei's investment NT$60,000,000) (TSMC's investment NT$99,999,960) Kung Cherng Director F.C.Tseng (Representative of Chi Cherng Investment Co., Ltd) (Chi Cherng's investment NT$60,000,040) Investment Co., Ltd. (TSMC's investment NT$99,999,960) 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%) (25%) (15%) (25%) (15%) (25%) (15%) (25%) (15%) (25%) (15%) (25%) 0.15% Vanguard International Chairman Morris Chang Semiconductor Corporation Director Liu, Bor-Hong (Representative of The Development Fund, Executive Yuan, R.O.C.) 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.) (Forward) (TSMC's investment NT$99,999,960) 3,240,448 shares (The Development Fund holds 639,713,750 shares) (29.08%) 123 Unit: NT$, except Shareholding Company Title Name Shareholding Amount Vanguard International Director Rick Tsai (Representative of TSMC) (TSMC holds 556,133,496 shares) Semiconductor Corporation Director F.C.Tseng (Representative of TSMC) Director Paul Chien (Representative of TSMC) Director Robert Hsieh (Representative of TSMC) Director Wu, Quintin Y.G. (Representative of USI Far East Corp.) (USI Far East Corp. holds 155,978,533 shares) Director Chiao, Yu-Heng (Representative of Walsin Lihwa Corp.) (Walsin Lihwa Corp. holds 58,827,741 shares) Supervisor Yeh, Huey-Ching (Representative of The Development Fund, Executive Yuan, R.O.C.) Supervisor K. C. Chen (Representative of TSMC) % (25.28%) (7.09%) (2.67%) Supervisor Chow, Sidney H.(Representative of Maw Chong Investment Co.,Ltd.) (Maw Chong Investment Co.,Ltd. holds 42,992,356 shares) (1.95%) President Paul Chien 2,478,229 shares 0.00% VIS Associates Inc. Director Morris Chang (Representative of VIS) Director Robert Hsieh (Representative of VIS) Director Paul Chien (Representative of VIS) VIS Investment Holding, Inc. Director Morris Chang (Representative of VIS Associates Inc.) Director Robert Hsieh (Representative of VIS Associates Inc.) Director Paul Chien (Representative of VIS Associates Inc.) VIS Micro, Inc. Director Robert Hsieh (Representative of VIS Investment Holding, Inc.) Director Paul Chien (Representative of VIS Investment Holding, Inc.) Director Stephen Pletcher (Representative of VIS Investment Holding, Inc.) Vanguard International Director Rick Tsai (Representative of VIS Investment Holding, Inc.) Semiconductor- America Director Paul Chien (Representative of VIS Investment Holding, Inc.) Director Nun-Sian Tsai (Representative of VIS Investment Holding, Inc.) Director Stephen Pletcher (Representative of VIS Investment Holding, Inc.) (VIS holds 23,570,000 shares) (100%) (VIS Associates Inc. holds 6,750,000 shares) (100%) (VIS Investment Holding, Inc. holds 200,000 shares) (100%) (VIS investment Holding, Inc. holds 6,500,000 shares) (100%) 124 (6) Operational Highlights for TSMC Affiliated Companies December 31, 2000 Unit: NT$K, except EPS($) Company Paid-in Capital Assets Liabilities Net Worth Net Sales* Income from Net Income* EPS* Operation* (net of tax) (net of tax) TSMC, North America 363,869 1,794,126 1,127,202 666,924 1,104,857 197,564 131,107 11.92 TSMC, Europe B.V. TSMC, Japan K.K. 2,780 34,704 47,214 37,620 9,594 96,409 68,394 30,591 37,803 164,001 8,764 8,389 (14,668) N.A. 2,261 942.23 TSMC Int'l Investment Ltd. 25,794,615 34,992,260 11,313,738 23,678,522 240,424 240,079 138,589 0.30 TSMC Partners, Ltd. 9,923 11,559,563 11,024,401 535,162 2,559 2,532 494,966 1,649.89 TSMC Development, Inc. 24,293,323 30,319,876 8,873,708 21,446,168 0 (879) (258,770) N.A. TSMC Technology, Inc. 0.033 210,091 693,187 (483,097) 615,401 51,896 (121,520) N.A. InveStar Semiconductor Development Fund Inc. InveStar Semiconductor Development Fund(II) Inc. 1,533,212 2,101,401 275,106 1,826,295 861,148 621,341 615,978 13.29 475,296 478,798 215 478,583 - - 3,101 0.22 Wafertech, LLC 25,468,409 41,150,153 20,255,685 20,894,467 13,071,741 568,893 (168,294) Po Cherng Investment Co., Ltd. 400,000 699,483 151,546 547,936 137,030 136,749 135,869 Chi Hsin Investment Co., Ltd. 400,000 557,084 1,083 556,001 144,212 143,971 143,951 Cherng Huei Investment Co., Ltd. 400,000 730,345 177,545 552,800 142,152 141,910 140,781 Hsin Ruey Investment Co., Ltd. 400,000 512,485 83 512,402 113,509 113,271 100,391 Kung Cherng Investment Co., Ltd. 400,000 636,089 1,083 635,006 224,167 223,649 223,915 Chi Cherng Investment Co., Ltd. 400,000 523,317 142 523,175 111,736 111,493 112,094 Vanguard Int'l Semiconductor Corp. 22,000,000 39,696,661 17,645,880 22,050,781 19,345,762 2,939,078 2,573,745 VIS Associates Inc. 737,741 785,117 19,588 765,530 364,497 9,763 7,091 VIS Investment Holding, Inc. 211,275 244,491 19,588 224,903 371,617 17,446 14,773 VIS Micro, Inc. 6,260 11,542 3,798 7,744 29,307 1,396 863 Vanguard International Semiconductor- America * For the year ended December 31, 2000 203,450 232,206 15,674 216,532 342,309 16,300 14,087 N.A. 3.40 3.60 3.52 2.51 5.60 2.80 1.17 0.30 2.19 4.32 2.17 125 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD., AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 Representation Letter The combined financial statements of Taiwan Semiconductor Manufacturing Company Ltd., and Vanguard International Semiconductor Corporation for the period January 1, 2000 to December 31, 2000 were prepared in conformity with "Regulations Governing the Preparation of Affiliates' Combined Operating Report, Combined Financial Statements and Relationship Report" in the Republic of China, the ROC regulations governing the preparation of financial statements of public companies and accounting standards generally accepted in the Republic of China. The accounting records underlying the combined balance sheet and the combined statement of income accurately and faily reflect, in reasonable detail, the transactions of the Taiwan Semiconductors Manufacturing Company, Ltd., its consolidated subsidiaries and Vaguard International Semiconductor Corporation. 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 126 English Translation of a Report Originally Issued in Chinese The Board of Directors and Shareholders Taiwan Semiconductor Manufacturing Company Ltd. We have reviewed combined balance sheets as of December 31, 2000 and the related combined statement of income for the year then ended of Taiwan Semiconductor Manufacturing Company Ltd. and Vanguard International Semiconductor Corporation. Our reviews was 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 auditing standards generally accepted in the Republic of China, the objective of which is the expression of an opinion regarding the combined balance sheet and the combined statement of income taken as a whole. Accordingly, we do nont express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the combined balance sheet and the combined statement of income refered 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, and the ROC regulation governing the preparation of financial statements of public company and the ROC generally accepted accounting principles. T N Soong & Co Taiwan, ROC A Member Firm of Andersen Worldwide S.C. January, 29 2001 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. 127 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION COMBINED BALANCE SHEET December 31, 2000 (In Thousand New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Pledged time deposits (Note 19) Short-term investments (Notes 2, 5 and 19) Receivables from related parties (Note 17) Notes receivable Accounts receivable Allowance for doubtful receivables (Note 2) Allowance for sales returns and others (Note 2) Inventories (Notes 2 and 6) Deferred income tax assets (Notes 2 and 16) Prepaid expenses and other current assets (Notes 17 and 21) Total Current Assets LONG-TERM INVESTMENTS (Notes 2 and 22) PROPERTY, PLANT AND EQUIPMENT (Notes 2, 8, 17 and 19) Cost Land and land improvements Buildings Machinery and equipment Office and other equipment Total cost Accumulated depreciation Advance payments and construction in progress Net property, plant and equipment COMBINED DEBIT (Note 2) OTHER ASSETS Leased assets Deferred charges - net (Notes 2 and 9) Deferred income taxes assets (Notes 2 and 16) Refundable deposits Miscellaneous Total Other Assets TOTAL ASSETS Amount % $44,718,006 11 10,000 2,351,560 788,836 158,502 32,086,793 (1,030,286) (2,628,901) 15,541,195 8,677,463 3,497,394 104,170,562 8,309,783 829,239 61,572,769 274,176,958 5,581,180 342,160,146 - 1 - - 8 - (1) 4 2 1 26 2 - 15 68 1 84 (126,277,454) (31) 47,895,602 263,778,294 11,571,460 625,647 4,878,588 8,627,357 41,410 40,654 14,213,656 12 65 3 1 1 2 - - 4 $402,043,755 100 128 LIABILITIES AND SHAREHOLDERS' EQUITY Amount % CURRENT LIABILITIES Short-term bank loans (Notes 10 and 19) Payable to related parties (Note 17) Accounts payable Payable to contractors and equipment suppliers Income tax payable (Notes 2 and 16) Current portion of long-term debt (Notes 11, 12 and 13) Accrued expenses and other current liabilities (Note 21) Total Current Liabilities LONG-TERM LIABILITIES Long-term bank loans (Notes 12 and 19) Long-term bonds (Notes 2 and 13) Total Long-term Liabilities OTHER LIABILITIES Guarantee deposits (Note 21) Accrued pension costs (Notes 2 and 15) Deferred gain on sale-leaseback (Note 2) Obligation under capital lease (Note 11) Other noncurrent liabilities Total Other Liabilities MINORITY INTEREST IN AFFILIATES (Note 2) $4,630,978 958,105 9,528,743 26,107,865 3,298 3,369,055 7,967,651 52,565,695 31,117,367 30,500,000 61,617,367 7,086,429 1,774,107 434,183 3,316 11,040 9,309,075 16,797,919 1 - 2 7 - 1 2 13 7 8 15 3 - - - - 3 4 Total Liabilities 140,290,056 35 SHAREHOLDER'S EQUITY (Notes 2 and 14) Capital stock - $10 par value Authorized: 17,800,000 thousand shares Issued: Common - 11,689,365 thousand shares Preferred - 1,300,000 thousand shares Capital surplus Retained earnings: Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Unrealized loss on long-term investments Cumulative translation adjustments Total Shareholder's Equity TOTAL LABILITIES AND SHAREHOLDERS' EQUITY The accompanying notes are an integral part of the combined financial statements. 116,893,646 13,000,000 55,285,821 10,689,323 1,091,003 65,143,847 (71,564) (278,377) 261,753,699 $402,043,755 29 3 14 3 - 16 - - 65 100 129 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION COMBINED STATEMENTS OF INCOME For the Year Ended December 31, 2000 (In Thousand New Taiwan Dollars, Except combined Earnings Per Share) GROSS SALES SALES RETURNS AND ALLOWANCES NET SALES (Notes 2,17 and 22) COST OF SALES (Note 17) GROSS PROFIT OPERATING EXPENSES (Notes 17 and 22) General and administrative Marketing Research and development Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME(Note 22) Insurance compensation Interest Gain on sale of short-term investments - net Foreign exchange gain - net (Notes 2 and 21) Premium income (Notes 2 and 21) Technology service income Gain on sale of long-term investments Gain on disposal of property, plant and equipment Other Total Non-Operating Income NON-OPERATING EXPENSES(Note 22) Interest (Notes 2, 8, 17 and 21) Equity in net losses of investee companies - net (Notes 2 and 7) Loss on disposal of property, plant and equipment Premium expense Employee separatrion benefits Bond issue cost Other Total Non-Operating Expenses INCOME BEFORE INCOME TAX ( Note 22) INCOME TAX BENEFIT (Notes 2 and 16) INCOME BEFORE MINORITY INTEREST MINORITY INTEREST IN LOSS OF AFFILIATES(Note 22) COMBINED NET INCOME COMBINED EARNINGS PER SHARE Amount % $182,260,420 (3,347,516) 178,912,904 97,826,450 81,086,454 9,415,130 1,506,380 5,771,904 16,693,414 64,393,040 1,981,554 1,872,028 1,108,008 844,281 640,442 132,910 121,969 89,426 209,270 6,999,888 3,653,435 1,110,218 119,102 108,133 85,776 32,658 $661,974 5,771,296 65,621,632 1,370,909 66,992,541 (1,886,347) $65,106,194 100 55 45 5 1 3 9 36 1 1 1 1 - - - - - 4 2 1 - - - 1 4 36 1 37 (1) 36 Based on weighted-average shares outstanding of 11,400,882 thousand shares in 2000 $5.71 The accompanying notes are an integral part of the combined financial statements. 130 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (Amounts in Thousand New Taiwan Dollars, Except Per Share and Unless Specified Otherwise) 1. GENERAL Taiwan Semiconductor Manufacturing Company Ltd. (TSMC), corporation incorporated in the Republic of China, and Vanguard International Semiconductor Corporation (VIS), TSMC's 25% owned affiliated are 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. Notice to Readers: The combined financial statements include the consolidated accounts of TSMC plus the accounts of VIS, not a 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. TSMC's shares are listed and traded on the Taiwan Stock Exchange. On October 8, 1997, TSMC sold shares of stock in the New York Stock Exchange in the form of American Depositary Receipts (ADRs). VIS's shares are traded on the Republic of China (ROC) Over-the-Counter Securities Exchange starting March 25, 1998. TSMC had acquired TSMC-Acer Semiconductor Manufacturing Corp. (TASMC). It also merged with Worldwide Semiconductor Manufacturing Corporation (WSMC) with TSMC as the surviving company. TASMC and WSMC were subsequently dissolved. The acquisition of TASMC and the merger with WSMC took effect on June 30, 2000, and, on that date, TSMC issued a total of 1,583,515 thousand common shares to the former shareholders of TASMC and WSMC. The additional shares issued were based on the agreed exchange ratio of three point nine TASMC shares and two WSMC shares for every share of TSMC. Also, the holders of the additional shares issued have the same rights and the obligation as the holders of the previously issued common stock of TSMC. TSMC has 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 has 25% indirectly wholly-owned subsidiaries Po Cherng Investment, Chi Hsin Investment, Kung Cherng Investment, Chi Cherng Investment, Hsin Ruey Investment, and Cherng Huei Investment (Collectively referred to as the "investment companies"). TSMC-North America, TSMC-Europe and TSMC-Japan are engaged mainly in marketing and engineering support activieies. TSMC Partners and the investment companies are engaged in investments. TSMC International Investment and its subsidiaries are engaged in investing in affairs focused on the design, manufacture, and other related business of semiconductors. WaferTech, LLC. is a foundry, and VIS's subsidiaries are engaged in marketing, research, development and investment. The following diagram presents information of relations and percentage of holding shares among TSMC, VIS and their affiliates as of December 31, 2000. 131 TSMC 25% 100% 100% 100% 100% 100% 25% VIS TSMC-North Ameria TSMC-Japan TSMC International Investment TSMC-Europe TSMC Partners Kung Cherng Investment etc. 100% Vanguard Associations Inc. 100% VIS Investment Holding Inc. 100% 100% 97% 97% TSMC- Technology TSMC- Development InveStar InveStar (II) 97% WAFERTECH 100% 100% VIS-Micro VIS-America 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Combination The combined financial statements include the accounts of TSMC and the aforementioned affiliates (hereinafter, referred to individually or collectively as "Company"). All significant inter-company accounts and transactions have been eliminated. Minority interests in the affiliates, including InveStar, InveStar(II), WaferTech, VIS are presented separately in the financial statements. The total assets and/or revenues of VIS's investment in VIS Associates Inc. and its subsidiaries are less than 10% of those of Corporation and, therefore, TSMC is not required to, and did not prepare combined financial statement. As stated in Note 1, TASMC, a affiliate in 1999, was dissolved by merged with TSMC on June 30, 2000, therefore, its accounts is not include in the combined financial statements. Cash equivalents Government bonds acquired under repurchase agreements, with original maturity 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 are 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 and the related provision for sales returns and others are provided based on experience. Such provision is accounted for as reduction 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. 132 Long-term investments Investments in shares of stock in which the Company exercises significant influences on the investee companies are accounted for using equity method. The increase in the Company's proportionate share in the net assets of its investee company resulting from its subscription to additional shares of stock, issued by such investee company, at the rate not proportionate to its existing equity ownership in such investee companies, is credited to a capital surplus account while any decrease in the Company's proportionate share in the net asset of investee companies is debited against the existing balance of the similar capital surplus account with the difference debited against unappropriated retained earnings. Other stock investments are accounted by the cost method. These investments 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. Cash dividends are recognized as income in the year received but are accounted for as reduction in the carrying value of the long-term investment if the dividends are received in the same year that the related investments are acquired. 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. The costs of investments sold are determined by the weighted average method. The Company's proportionate share in the gains from disposal of property, plant and equipment, net of the applicable income tax, included as part of its share in the earnings or losses of investee companies accounted for using the equity method for the current year is 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 retain earnings. Also, if an investee company has unrealized loss on long-term investment which is evaluated by lower-of-cost-or-market method, the Company shall recognize that unrealized loss in proportion to the Company's equity interest and recorded in an account as a component of shareholders' equity. 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 arose from transactions involving sales by the affiliate to the parent, an adjustment should be made in accordance with ownership percentage. Property, plant and equipment and rental assets Property, plant and equipment and rental assets are stated at cost less accumulated depreciation. Major additions, renewals and betterment, and interest expense incurred during the construction period are capitalized. Maintenance and repairs are expensed currently. Property, plant and equipment covered by agreements qualifying as capital leases are carried at the lower of the present value of all minimum future rental payments, or the leased property's market value at the inception date of the lease. The periodic rental payment made by the Company includes the purchase price of the leased property, and the interest expense. Depreciation is provided on the straight-line method over these estimated service lives: buildings - 5 to 55 years; machinery and equipment - 5 to 10 years; and office and other equipment - 2 to 7 years. Upon sale or disposal of property, plant and equipment, 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. Combined debits Combined debits arosen from the business merger and the difference between the investment cost and the 133 Company's proportionate share in the net asset of the investee companies at the date of acquisition. The combined debits are amortized using the straight-line methos over 5 to 15 years. Deferred charges Deffered charges, cosisting of technology, software and system design costs, bond issuance costs, credit instruments and technology know how, are amortized over three years, five years, the term of credit instruments, and the term of the contract valid period or economic useful lives, respectively. Pension costs Net periodic pension costs are recorded on the basis of actuarial caculations. Unrecognized net transition obligation and unrecognized net gain are amortized over 25 years, and unrecognized net transition asset is amoritized over 26 years. Deferred gain on sale-leaseback The gain resulting from the sale of leased property is deferred. Such deferred gain is then amortized as follows: (a) operating lease - adjustment of rental expenses over leasing period, and (b) capital lease - adjustment of depreciation over the estimate useful life or leasing period. Income tax The Company adopted inter-period tax allocation. Deferred income taxes are recognized for the tax effects of temporary differences, unused tax credits, and operating loss carry forwards. 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, it should be classified as current or non-current based on the expected reversal date of temporary difference. Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax provision. Income taxes (10%) on unappropriated earnings generated starting January 1, 1998 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 are recorded in New Taiwan dollars as assets or liabilities at spot rates on the inception dates of the contracts. The difference 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 on the inception dates of the forward contracts. Premiums or discounts are amortized by the straight- line method over the terms of the forward contracts. Such amortization is recognized as income. At the balance sheet dates, the receivables or payables arising from forward contracts are restated at the prevailing spot rates, and the resulting differences are recognized in income. 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. Under interest rate swap contracts, the Company pays an amount equal to the interest rates based on notional principal amount and receives a specified variable-rate of interest also based on the same notional principal amount; with the notional amounts of the contracts are not exchanged. The net amounts paid or received under the contracts are reported as adjustments 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 paid on options bought are recognized as assets and amounts received on options written 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 134 foreign-currency receivables and payables are settled, are credited or charged to income in the year of conversion or settlement. Translation of financial statements of foreign companies The financial statements of the foreign subsidiaries are translated into New Taiwan dollars at the following exchange rates: assets and liabilities-current rate; shareholders' equity-historical rates; income and expenses- weighted average rate during the year. The resulting translation adjustments recorded as a separate component of shareholders' equity. Mergers The acquisition of TASMC was accounted under the Statement of Financial Accounting Standards No. 25 "Business Combination - Purchase Method". On the other hand, the merger with WSMC was accounted for as pooling of interest with the results of operations of WSMC included in the statement of income for the year ended December 31, 2000. 3. SIGNIFICANT ELIMINATING ENTRIES Company TSMC Account Amount Transaction Entity Payable to related parties $1,808,964 VIS 1,487,181 WAFERTECH, LLC 166,063 TSMC-North America 66,343 TSMC-Europe 16,165 TSMC-Japan 4,487 TSMC-Technology Receivable from related parties 159,890 VIS Sales 25,728 TSMC-Technology 20,361 WAFERTECH, LLC 370,762 WSMC 30,816 WAFERTECH, LLC 17,012 VIS Purchase 13,296,633 WAFERTECH, LLC 6,572,110 VIS General and administrative expenses - premium 14,095 TSMC-Technology Marketing expenses - service charges 118,852 TSMC-North America Marketing Expenses - commissions 994,686 TSMC-North America 143,461 TSMC-Europe 165,087 TSMC-Japan Deferred revenue 5,837 WAFERTECH, LLC Gain on disposal of properties Non-operating income Accounts receivable Accounts payable Interest receivable Notes receivable Interest revenue 2,240 VIS 5,604 VIS 1,670 TASMC 768,677 TASMC 128,594 TSMC-Technology 330,790 TSMC-Technology 24,181 TSMC-Technology WSMC TSMC International Investment (Forward) 135 TSMC - Partners TSMC - Technology Deferred revenue Royalty revenue Notes receivable Deferred revenue Licensing fee Sales Other receivable 10,791,704 TSMC International Investment 491,733 TSMC International Investment 11,313,018 TSMC International Investment 40,962 WAFERTECH, LLC 13,323 WAFERTECH, LLC 63,727 WAFERTECH, LLC 17,669 WAFERTECH, LLC 4. CASH AND CASH EQUIVALENTS Cash and bank deposits Government bonds acquired under repurchase agreements 5. SHORT TERM INVESTMENTS Listed stocks Mutual funds Less-allowance for losses 6. INVENTORIES Finished goods Work in process Raw materials Supplies and spare parts Less-allowance for losses 7. LONG-TERM INVESTMENTS Shares of stocks Equity method VIS Associates Inc. System on Silicon Manufacturing Pte Ltd. (SSMC) (Forward) 136 2000 $43,194,039 1,523,967 $44,718,006 2000 $1,502,098 959,561 2,461,659 (110,099) $2,351,560 2000 $2,174,015 11,468,169 932,576 1,681,850 16,256,610 (715,415) $15,541,195 2000 Carrying % of Value OwnerShip 464,077 935,870 1,399,947 100 32 Cost Method Listed Powerchip Semiconductor Corporation Etron Technology Inc. Taiwan Mask Non-listed Taiwan Semiconductor Technology Walsin Advanced Electronics Global Test Megic United Industrial Gases Co., Ltd. Hong Tung Venture Capital Shin-Etsu Handotai Taiwan ChipStrate Technology Form Factor Inc. APE W.K. Technology Fund IV Programmable Microelectronics Ritch Technology 3Dfx Interactive Scenix Semiconductor Equator Technologies Capella Microsystems Preferred stocks Empower Tel Networks Sonics LightSpeed Semiconductor Equator Technologies Memsic Tropian, Inc. (Premier R. F.) Lara Networks Inc. RapidStream Monolithic Power System Formfactor Reflectivity NanoAmp Solutions Integrated Memory Logic Rise Technology Match Lab Signia Creosys Scenix Semiconductor T-Span System SiRF Technology Capella Microsystems Sensory Pico Turbo (Forward) 2,651,216 310,132 32,129 500,000 414,481 183,896 177,000 175,500 120,000 105,000 70,854 64,360 50,222 50,000 49,619 10,338 9,826 5,697 2,978 345 4,983,593 169,634 116,752 101,368 93,908 82,689 77,209 75,151 69,708 66,158 66,158 66,158 61,281 59,845 49,619 49,619 49,619 49,619 45,023 45,829 44,105 42,949 41,349 41,349 9 3 2 19 10 10 15 12 10 7 9 1 6 4 4 9 - 2 - - 7 7 6 2 24 5 7 6 17 1 6 3 10 2 11 22 8 2 3 1 8 6 9 137 Seagull Semiconductor HINT Corporation Oepic Divio Incentia Design Systems FabCentric Convertible note Advanced Analogic Technology Signia Technologies Rise FabCentric Funds Crimson Asia Capital Horizon Ventures Cumulative translation adjustments 41,349 33,079 24,809 16,540 16,539 8,270 1,705,685 41,349 16,540 9,924 8,270 76,083 64,547 93,304 157,851 8,323,159 (13,376) $8,309,783 14 5 - 4 2 - - - - - - - - The carrying values of investments accounted for using the equity method and the related investment losses for the year ended December 31 2000 were based on audited financial statements in the same year. Equity in net losses were as follows: VIS Associate SSMC TASMC Information on long-term investments is as follows: Market value of listed stocks Equity in the net assets of unlisted stocks Net asset value of funds 8. PROPERTY, PLANT AND EQUIPMENT Accumulated depreciation consists of the following: Land improvements Buildings Machinery and equipment Office and other equipment 2000 $325,227 473,661 311,330 $1,110,218 2000 $3,681,280 7,506,791 157,851 2000 $64,006 13,542,134 109,889,527 2,781,787 $126,277,454 138 Information on the status of the construction of the manufacturing facilities of TSMC, VIS as of December 31, 2000 is as follows: Manufacturing Plant Estimated Cost Accumulated Expenditures Expected Date of Start of Operations TSMC's Fab 6 TSMC's Fab 7 TSMC's Fab 8 $76,889,000 22,540,400 28,314,300 $67,565,100 March 2000 11,121,100 March 2001 15,217,800 March 2001 TSMC's Fab 12 - 1st stage 38,280,800 21,372,000 November 2001 TSMC's Fab 14 - 1st stage VIS's Fab 2 9,711,000 6,912,000 7,946,600 May 2002 260,448 January 2003 Interest expense capitalized for the year ended December 31, 2000 was $614,817. 9. DEFERRED CHARGES - NET Software and system design costs Technology licensing fee Patent Technology know how Bond issue costs Others 10. SHORT-TERM LOANS Loan for import of materials, US$ 24,098 thousand, repayable by October 2001, annual interest 7.13%-7.48% Secured loan, repayable by October 2000, annual interest of 5.8% Loan secured by mortgage and credit, US$ 105,942 thousand, repayable by December 2001, annual interest 7.53%~9.25% Unused credit lines as of December 31, 2000 were $8,079,625 and US$41,000 thousand. 11. OBLIGATION UNDER CAPITAL LEASE Repayable through between June 30, 2001 and 2003 Current portion 2000 $1,550,539 2,172,095 675,302 157,500 150,795 172,357 $4,878,588 2000 $797,137 329,375 3,504,466 $4,630,978 2000 $54,371 (51,055) $3,316 139 12. LONG-TERM BANK LOANS Loans secured by mortgage-US$ 705,564 thousand repayable by March 2005, interest at 6.91% ~ 7.663% in 2000 Loans for facility and import of equipment-Repayable in semi-annual installments Starting from November 1999 to June 2004, floating Interest 6.35% Loans for import of equipment-Repayable in semi-annual installments Starting from October 2000 to October 2005, Interest at 6.42% Loans for import equipment-Repayable in semi-annual installments starting from February 2000 to February 2005, Interest at 6.505% ~ 6.765% Loans for import of equipment-Repayable in semi-annual installments starting from July 1999 to July 2004, Interest at 6.63% ~ 6.765% Loans for import of equipment-Repayable in semi-annual installments starting from February 1998 to February 2003, interest at 6.755% ~ 6.765% Loans for import of equipment-Repayable in semi-annual installments starting from May 1997 to May 2002, interest at 6.755%~6.765% Loans for import of equipment-Repayable in semi-annual installments starting from January 2003 to July 2007, Interest at floating rate 6.755%~6.765% Current portion 2000 $23,339,367 5,460,000 3,640,000 328,000 292,000 184,000 112,000 330,000 33,685,367 (2,568,000) $31,117,367 Bonds and loan agreements require, except for foreign currency loan, among other things, the maintenance of specific financial ratios. As of December 31, 2000, the company was in compliance with those ratios. Unused credit lines as of December 31, 2000 were $ 70,000 and US$ 62,436 thousand. 13. LONG-TERM BONDS Domestic unsecured bonds: Repayable in March 2003, 7.71% annual interest payable semi-annually. Repayable in October 2002 and 2004, 5.67% and 5.95% annual interest payable annually, respectively. Repayable in December 2005 and 2007, 5.25% and 5.36% annual interest payable annually, respectively. Repayable in annual installments from November 6, 2000 to November 6, 2003, interest at 6.59%, guaranteed by financial instruments. Current portion 14. SHAREHOLDERS' EQUITY 2000 4,000,000 10,000,000 15,000,000 2,250,000 31,250,000 (750,000) $30,500,000 According to the ROC Company Law, capital surplus can only be used to offset a deficit or transferred to capital. TSMC's Articles of Incorporation provide that the following shall be appropriated from the annual net income (less any deficit): a. 10% legal reserve; 140 b. Special reserve according to t he relevant laws or the regulating authorities; c. Bonus to directors and supervisors and to employees equals to 1% and at least 1% of the remainder, respectively; d. Dividends to shareholders of preferred stock equal to 3.5% annual rate, based on outstanding period; e. These appropriations and the disposition of the remaining net income should 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 aggregate par value of TSMC's outstanding capital stock. The reserve can only be used to offset a deficit; or, when it has reached 50% of the aggregate par value of TSMC's outstanding capital stock, up to 50% thereof can be distributed as stock dividend. TSMC issued nonpublic 1,300,000 thousand preferred stock - Series A to certain investors. The following are the rights and obligations of the holders of the preferred stock and other terms and conditions. a. Entitled to receive cumulative cash dividends at an annual rate of 3.5%. b. Not be entitled participating any additional shares of stock upon transfer of unappropriated earnings and capital surplus to stock. c. Have priority over the holders of common shares to the assets of the Corporation available for distribution to stockholders upon liquidation or dissolution of TSMC Corporation; however, the preemptive rights to the assets shall not excess the issue value of the shares. d. Have voting rights similar to that of the holders of common stock. e. No right to convert their shares into common stock. The preferred shares will be redeemed within thirty months from its issuance. The holders will have the foregoing rights and TSMC's related obligations will remain the same until the preferred shares are actually redeemed by TSMC. VIS's Articles of Incorporation provide that the following shall be appropriated from the annual net income after deducting any deficit and 10% legal reserve: a. Special reserve; b. 1% as bonus to directors and supervisors; c. At least 1% of the remainder as bonus to employees. These appropriations and the disposition of the remaining net income should 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 aggregate par value of outstanding capital stock. The reserve can only be used to offset a deficit; or, when it has reached 50% of the aggregate par value of outstanding capital stock, up to 50% thereof can be distributed as stock dividend. The Company shall record a special reserve of $1,091,003 from unappropriated retained earnings equivalent to the net debit balance of any item, other than a deficit, in the shareholders' equity as of December 31, 1999. The special reserve will be adjusted in proportion to the change in the net debit balance of any item in the shareholders' equity. Pursuant to existing regulations promulgated by the Securities and Futures Commission, a special reserve equivalent to the debit balance of any account shown in the shareholders' equity section of the balance sheets, other than the deficit, shall be made from unappropriated retained earnings. The special reserve shall be adjusted accordingly based on the debit balance of such accounts as at year-end. Under the Integrated Income Tax System that became effective on January 1, 1998, resident shareholders are allowed a tax credit for the income tax paid by the Company on earnings generated starting January 1, 1998. 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. 141 15. PENSION PLAN TSMC and its affiliates has a pension plan for all regular employees, which provides benefits based on length of service and average monthly salary for the final six months prior to retirement. The companies make monthly contributions, equal to 2% of salaries to a pension fund is administered by the pension fund monitoring committee and deposited in the committee's name in the Central Trust of China. VIS's pension cost accrues at a percentage (currently 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 b. Reconciliation of the fund status of the plan and accrued pension cost 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 assets Unrecognized net transitional obligation Unrecognized net gain Additional liability Accrued pension cost 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. Funds transferred from TASMC and WSMC f. Payments from pension fund 16. INCOME TAX 2000 $434,590 104,711 (32,397) 5,594 $512,498 $- 830,688 830,688 1,703,596 2,534,284 (760,627) 1,773,657 - 7,511 (165,991) 157,189 - $1,772,366 6% 6% 6% $144,417 $173,339 $1,458 a. A reconciliation of income tax expense - current before tax credits and income tax expense on income before income tax at statutory rate is shown below: 142 Income tax expense on "income before income tax" at statutory rate (20%) Tax-exempt income Temporary difference Permanent difference Assess additional income tax on the unappropriated earning Income tax expense - current b. Income tax credits as of December 31, 2000 consists of: Income tax expense - current before tax credits Tax credits Net change in deferred income tax assets (liabilities) for the period Investment tax credits Loss carried forward Temporary differences Others Valuation allowance Adjustment of prior years' taxes c. Deferred income tax assets (liabilities) consisted of the following: Current Investment tax credits Loss carried forward Accrued liabilities and others Valuation allowance Noncurrent Investment tax credits Loss carried forward Interest expense Depreciation Deferred revenue Others Valuation allowance d. Integrated income tax information: Balances of the imputation credit account TSMC VIS 2000 ($13,261,804) 7,902,733 (176,027) 43,995 (88,024) ($5,579,127) 2000 ($5,579,127) 5,551,970 (27,157) 3,151,627 43,800 (234,704) (73,559) (1,678,791) 189,693 $1,370,909 2000 $9,139,156 67,478 56,016 9,262,650 (585,187) $8,677,463 $14,086,176 1,821,125 45,008 (56,033) 46,077 (589,858) 15,352,495 (6,725,138) $8,627,357 2000 $5,888 $610 143 TSMC and VIS's expected and actual creditable ratio as of December 31, 2000 were 0.009% and 7.18%, 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 2000 may be adjusted according to the difference between the expected and actual imputation credit allowed under the regulation. e. The unappropriated retained earnings of TSMC as of December 31, 2000 included the earnings generated up to December 31, 1997 of $4,827. The effective tax rates for deferred income tax of TSMC and its affiliates as of December 31, 2000 were 7.54%, and 20%~40%, respectively. Unused investment tax credits arising from investments in machinery and equipment, and research and development expenditures as of December 31, 2000 will expire as follows: Year 2001 2002 2003 2004 Loss Carried Forward Tax Credits 337,390 1,030,365 5,694,914 2,380,345 4,732,617 5,468,790 6,266,645 6,757,280 $9,443,014 $23,225,332 The income from the following projects and services are exempt from income tax: Tax-Exemption Period TSMC's expansion of first manufacturing plant, second manufacturing plant - modules A and B, third manufacturing plant, and fourth manufacturing plant 1997 to 2000 TSMC's expansion of first manufacturing plant,second manufacturing plants- modules A and B, third manufacturing plant and fourth manufacturing plant, and fifth manufacturing plant VIS's original investment VIS's first expansion of manufacturing plant 1999 to 2002 1995 to 2000 2000 to 2003 TASMC is entitled to an income tax exemption for a period of four years for the income generated. TASMC decided to commence such tax exemption from January 1, 1998 to December 31, 2000. The tax authorities have examined income tax returns of TSMC through 1996 and income tax returns of VIS, WSMC and TASMC through 1997. However, TASMC is contesting the assessment of tax authority for the years of 1995 to 1997. 17. RELATED PARTY TRANSACTIONS TSMC and VIS have business transactions with the following related parties: a. Industrial Technology Research Institute (ITRI), the Company's chairman is one of its directors. 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 Associates Inc.) e. VIS Micro, an investee of VIS's subsidiary (VIS Associates Inc.) f. Walsin Lihwa Corporation (WLC), a shareholder and director of VIS g. Powerchip Semiconductor Corpporation (PSC), an investee of VIS h. Walsin Advanced Electronics (WAE), an investee of VIS. 144 The transactions with the foregoing parties in addition to those disclosed in other notes, are summarized as follows: During the year Sales Philips and its affiliates ITRI PSC Purchase PSC Rental expenses ITRI Manufacturing expenses Philips WAE ITRI WLC PSC General and administrative expenses ITRI Marketing expenses VIS Micro ITRI Research and development expenses PSC VIS America ITRI Purchase of machinery and equipment WLC VIS America Non-operating income SSMC PSC Others (Forward) 2000 Amount % $5,289,927 198,146 162 $5,488,235 $379,405 3 - - 3 1 $161,575 14 $2,137,175 403,245 23,905 1,893 1,722 $2,567,940 $14 $26,604 95 $26,699 $9,082 5,706 28 $14,816 $1,303 3,340 $4,643 $152,347 $255 38 $152,640 3 1 - - 4 - 12 - 12 - - - - - - - 3 - - 3 145 At end of year Receivable ITRI Philips and its affiliates SSMC Prepayments and other current assets ITRI(rental) VIS America Payable Philips and its affiliates WAE ITRI PSC VIS Micro $56,078 643,604 89,154 $788,836 $42,664 1,232 $43,896 $797,375 118,754 21,192 18,419 2,365 $958,105 7 82 11 100 1 - 1 83 12 3 2 - 100 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. The research and development agreement between VIS and VIS America has expired in January 2000. 18. LONG-TERM LEASES TSMC leases from ITRI the land, building and certain machinery and equipment of its first manufacturing facility under agreements that will expire in March 2002. The annual rental and other related charges under such agreement amount to $170,656. The agreements can be renewed upon their expiration. TSMC leases the lands where its second through fourteen manufacturing facilities are located from the Science- Based Industrial Park Administration. These agreements will expire on various dates from March 2008 to November 2019 and have annual rentals aggregating $172,000. The agreements can also be renewable upon their expiration. 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 aggregated to $45,677. VIS also leases machinery and equipment from Condisco Trade Inc. under operating lease agreements through September 2001, June 2002, November and December 2002 respectively. Annual rentals aggregated to $292,540 (US$8,263 thousand and NT$ 19,200). TSMC-North America leases its office premises and certain equipment under a non-cancelable operating agreement, which will expire in September 2020. TSMC Europe entered into an office lease agreement premise, which will expire in 2004; annual rental is $57,379. 146 Future annual minimum rentals under the aforementioned leases are as follows: Year 2001 2002 2003 2004 2005 2006-2020 Amount $772,009 608,317 314,064 316,793 314,745 2,429,353 $4,755,281 19. PLEDGED OR MORTGAGED ASSETS Certain assets pledged or mortgaged as collateral for short and long-term loans, derivative financial instruments, letter of credit, customs duties, and guarantee deposits for foreign workers are as follows: Pledged time deposits Short-term investments Properties (net) 2000 $10,000 937,428 16,389,623 $17,337,051 All of WAFERTECH,LLC's assets (US$1,243,996 thousand) is secured for the long-term bank loans under the credit facility. 20. COMMITMENTS AS OF DECEMBER 31, 2000 The commitments as of December 31,2000 are as follows: a. Under a Technical Cooperation Agreement with Philips, as amended on May 12, 1997, TSMC shall pay technical assistance fee at a percentage of net sales, as defined in the agreement, of certain products. The agreement shall remain in force up to July 9, 2007 and thereafter be automatically renewed for successive periods of three years. Under the amended agreement, the fee is subject to deduction by the amounts TSMC pays to any third party for settling any licensing/infringement issue after the first five-year period 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 themselves each year up to 30% of TSMC's production capacity. c. Under a Submicron Technology License Agreement with ITRI, TSMC 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, 2000 as amended. In addition, under a technical cooperation agreement with 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 designated by the MOEA. d. Under several foundry agreements, TSMC shall allocate a portion of its production output for sale to certain major customers from whom guarantee deposits of US$213,865 thousand had been received as of December 31, 2000. e. Under a Shareholders Agreement entered into with Philips and EDB Investments Pte. Ltd. dated March 30, 1999, the parties agreed to: (a) form a joint venture company to be named Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) for the purpose of constructing an integrated circuit foundry in Singapore, (b) set SSMC's total authorized capital at about US$1.2 billion, and, (c) allow TSMC to invest 32% of SSMC's capital. 147 TSMC and Philips committed to buy a certain percentage of the production capacity of SSMC. If any party defaults on the agreement and the capacity utilization of SSMC falls below a certain percentage of its total capacity, the defaulting party should compensate SSMC for all related unavoidable costs. f. Under a Technical Cooperation Agreement with SSMC entered into on May 12, 1999, SSMC shall compensate TSMC for technology service provided to SSMC. The compensation shall be a certain percentage of net selling prices of certain products sold by SSMC. The agreement will remain in force for ten years and be automatically renewed for successive periods of five years unless pre-terminated by either party under certain conditions. g. Under a Technical Transfer Agreement with National Semiconductor Corporation ("National") entered into on June 27, 2000, TSMC shall receive payments for the technology transferred to National. The agreement will remain in force for ten years. After expiration, this agreement will be automatically renewed for successive periods of two years unless pre-terminated by either party under certain conditions. h. 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. - (1) at a specific percentage of net sales of certain products for five years from January 1996; (2) 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; (3) at a specific amount and a specific percentage of net sales of certain products within two years from January 1998. 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) NEC Corporation - at a specific amount in six installments from February 1999 to 2003. 6) MITSUBISHI Corporation - at specific amount and a specific percentage of net sales of certain products within five years from August 1999. i. Under a management agreement, InveStar Capital Inc. and InveStar Capital Inc. II., (ISC) of the Cayman Islands provides investment and administrative services to InveStar Semiconductor Development Fund, Inc. and InveStar Semiconductor Development Fund, Inc(II). ISC should received quarterly, starting from October 1, 1996 and August 24, 2000 respectively, a management fee of 2% each year of total weighted average paid- in capital and capital surplus of InveStar Semiconductor Development Fund, Inc. and InveStar Semiconductor Development Fund, Inc.(II), excluding retained earnings and losses. j. WaferTech, LLC. had recorded a reserve of US$16,000 thousand for a litigation arising from a charge by certain contractors that WaferTech, LLC. caused the contractors to incur additional labor and material costs outside the contracts. The reserve is reflected in accrued construction and equipment payable with the offset to construction in progress. On January 19, 2000, WaferTech entered into a settlement agreement with one of the construction contractors and paid US$10,750 thousand. The remaining accrued reserve of US$5,250 thousand is sufficient for payments. k. In 1996, WaferTech, LLC adopted an Executive Incentive Plan, which was amended in 1997. Under the 1997 amendment, the Board of Directors approved the Senior Executive Incentive Plan and the Employee Incentive Plan (hereafter referred to as the Plans) under which officers, key employees and nonemployee directors may be granted option rights appreciation rights and/or performance units. As WaferTech is a limited liability company and does not have shares of stock. Thus, each option right granted pursuant to the Plans provides grantees rights to buy ownership interests in WaferTech. The Plans also provides for approximately 6% of the total ownership interests to be available for grant, represented by 15.15 million option rights. For option rights granted to date, the option purchase price was equal to or exceeded the fair value at the date of the grant. While WaferTech may grant employees option rights that are exercisable at different times or within different periods, it has generally granted option rights which are exercisable on a cumulative basis in annual installments of 25% each on the first , second, third, and fourth anniversaries of the date of grant. 148 The following table summarizes information about the Plans: Outstanding Option Rights Option Rights Number of Exercise Price Available For Grant Option Rights (US$) Balance, December 31, 1999 4,154,597 8,226,080 Additional option rights authorized 1,650,000 - Options granted Option price > fair market value Options exercised Options cancelled Balance, December 31, 2000 (3,203,302) 3,203,302 - 1,180,871 (3,411,867) (1,180,871) 3,782,166 6,836,644 $0.78 - 1.86 0.74 1.09 1.23 These options will expire if not exercised at specific dates between May 2006 to December 2010. l. WaferTech, LLC was assessed by the Department of Revenue of the State of Washington deficiency excise taxes of approximately US$8,800 thousand. WaferTech, LLC intends to appeal the assessment. As of December 31, 2000, WaferTech, has recorded a reserve that management believes is sufficient to address any exposure related to this tax assessment. m. TSMC-North America started a stock appreciation right program whereby the employees received cash bonuses based on the appreciation of the quoted market price of the shares of stock of TSMC. Compensation expenses are recorded based on the difference between the grant price and market price at the end of each period. This expense is recognized ratably over the vesting period and adjusted based on period fluctuations in the stock. In view of the depreciation of the stock from December 1 to December 31, 2000, TSMC-North America did not have any compensation expense or liability related to this program. n. TSMC provided a guarantee for loans of US$268,000 thousand and US$40,000 thousand obtained by TSMC Development, Inc. and TSMC-North America. o. The unused credit lines for TSMC as of December 31, 2000 was $250,338. VIS was US$6,494 thousand, JPY376,170 thousand and EUR175 thousand. 21. FINANCIAL INSTRUMENTS The following are the additional disclosure requirements for TSMC and its affiliates pursuant to SFC requirements: a. Financing provided to other parties: Please see table 1 attached. b. Collateral provided to other parties: Please see table 2 attached. c. Marketable Securities held: Please see table 3 attached. d. Balance of marketable securities acquired and disposed of, exceeding 100 million or 20% of the issued capital: Please see table 4 attached. e. Acquisition of properties exceeding 100 million or 20% of issued capital: Please see table 5 attached. f. Disposal of properties exceeding 100 million or 20% of issued capital: None. g. Transaction of purchase or sales with related parties amounting to more than 100 million or 20% of the issued capital: Please see table 6 attached. h. Receivable from related parties amounting to more than 100 million or 20% of the issued capital: Please see table 7 attached. i. Information regarding names, locations and others of investee on which the Company exercises significant influences: Please see table 8 attached. j. Transactions of derivative financial instruments: The relevant information on the derivative financial instruments entered into by TSMC and its affiliates are as follows: 149 1) Outstanding forward exchange contracts as of December 31, 2000 and 1999: Contract Amount Currency (Thousand) Fair Value (Thousand) Settlement Date (Thousand) Maturity Amount Buy Buy Buy Sell Sell Sell Sell US$ EUR JPY US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ US$ 60,000 28,968 42,772 106,993 156,875 365,000 43,000 NTD 1,978,998 Jan. 2001 NTD 1,989,006 US$ US$ 27,080 Jan. to Sep. 2001 374 Jan. 2001 US$ US$ 26,823 374 NTD 3,582,959 Jan. to Feb. 2001 NTD 3,553,080 NTD 5,100,386 Jan. 2001 NTD 5,091,560 NTD 12,105,459 Jan. to Dec. 2001 NTD 12,032,465 NTD 1,413,083 Jan to Mar. 2001 NTD 1,407,809 Receivables from forward exchange contracts (shown in the balance sheet as part of "Other current assets" account) as of December 31, 2000 aggregated to $119,227 and payables from forward exchange contracts (shown in the balance sheet as part of "Other current liabilities" account) aggregated to $192,677 as of December 31, 2000. Net exchange gains for the year ended December 31, 2000 was $198,035. The net assets or liabilities that have been hedged by the above forward exchange contracts are as follows: Accounts receivable Payable to contractors and equipment suppliers Amount (Thousand ) 2000 US$ US$ 868,522 571,332 JPY 21,237,708 EUR 62,480 2) Interest rate swaps TSMC has entered into interest rate swap transactions to hedge exposure to rising interest rates on its floating rate long-term bank loans. These significant transactions are summarized as follows: Contract Date April 28, 1998 April 29, 1998 June 26, 1998 June 26, 1998 Period Amount (Thousand) 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 NTD 2,000,000 NTD 1,000,000 NTD 1,000,000 NTD 1,000,000 Interest expense on these transactions for the years ended December 31, 2000 was $113,683. 3) Option contracts Outstanding option contracts as of December 31, 2000 were as follows: Contract Currency (Thousand) Value Fair Value Strike Price Maturity Contract Amount Carrying Put option sell EUR EUR 525,537 $- ($189,735) 0.8870~0.9680(US$/EUR) May 2001 Call option sell US$ Call option sell US$ Put option buy US$ US$ US$ US$ 203,500 20,000 15,000 - - - (264,885) 107.77~110.5(US$/JPY) Mar. 2001 (1,485) 32.42(US$/NTD) 37 110~110.5(US$/JPY) Jan. 2001 Feb. 2001 For the year ended December 31, 2000, TSMC recognized premium income of $116,248 on foreign currency options written and incurred premium expenses of $108,133 on foreign currency options bought. 150 4) Transaction risk a) Credit risk. The banks, which are the counter-parties to the foregoing derivative financial instruments, are reputable financial institutions. Management believes its exposures related to the potential default by those counter parties are low. b) Market price risk. The Company is exposed to market risks arising from changes in currency exchange rates due to U.S. dollar-denominated accounts receivable, Yen-dominated accounts payable, Euro- denominated accounts payables, and U.S. dollar-denominated debt related to its importation of materials and machinery and equipment and long-term bank loans. The Company enters into forward contracts and option contracts to manage its exposures. The Company uses interest rate swap contracts with banks to principally manage the risks arising from the changes in interest rates of its obligations. It enters into financial derivative contracts based on analysis of specific and known economic exposures and by policy prohibits entering into such contracts for trading purposes. Its hedging strategy is to use financial instruments having negative correlation to fair value of the hedged items as hedging instruments and periodically evaluates the effectiveness of these instruments as hedges of its interest rate exposures. c) Liquidity and cash flow requirements. The cash flow requirements with respect to the Company's derivative financial instruments are as follows: (i) options - the exercise price but the options may not have to be exercised at all in cases where the strike price is higher than the related market price at exercise dates, and (ii) interest rate swap agreements - equal to the net difference between the interest receivable and payables under the agreements. 5) Fair value of financial instruments Non-derivative financial instruments Assets Cash and cash equivalents Pledge time deposits Short-term investments Receivables from related parties Accounts receivable Long-term investments Refundable deposits Liabilities Short-term bank loans Payable to related parties Accounts payable Payable to contractor and equipment suppliers Long-term bank loans (including current portion) Long-term bonds Guarantee deposits Derivative financial instruments Forward exchange contracts (buy) Forward exchange contracts (sell) Interest rate swaps Option December 31, 2000 Carrying/ Notional Amount Fair Value $44,718,006 $44,718,006 100,00 2,351,560 788,836 28,586,108 8,309,783 41,410 4,630,978 958,105 9,528,743 26,107,865 34,489,738 30,500,000 7,086,429 10,000 2,351,560 788,836 28,586,108 11,345,922 41,410 4,630,978 958,105 9,528,743 26,107,865 34,489,738 30,500,000 7,086,429 2,820,220 2,887,126 22,224,708 22,201,887 1,601 - 234,017 (456,068) 151 Fair values of financial instruments were determined as follows: a) Short-term financial instruments -- carrying values. b) Short-term investments -- market values. c) Long-term investments -- market value for listed companies and net equity value for the others. d) Refundable deposits and guarantees deposits - - carrying values. e) Long-term liabilities -- based on forecasted cash flows discounted at interest rates of similar long-term liabilities. Long-term bonds payable is discounted at present value. Fair values of other long-term liabilities are also their carrying values as they use floating interest rates. f) Derivative financial instruments -- based on outright forward rates and interest rate in each contract. The fair values of non-financial instruments were not included in the fair values disclosed above. Accordingly, the sum of the fair values of the financial instruments listed above are not equal the fair value of the Company. 22. SEGMENT FINANCIAL INFORMATION a. Geographic information: Overseas Domestic Elimination Combined Adjustment and 2000 Sales to unaffiliated customers $- $178,929,916 ($17,102) $178,912,904 Transfers between geographic areas 14,451,231 6,644,266 (21,095,497) - Total sales Gross profit Operating expenses Non-operating income Non-operating expenses Income before income tax Minority interest gain Identifiable assets Long-term investments Total assets b. Gross export sales Area America Asia Europe $14,451,231 $185,574,182 ($21,112,509) $178,912,904 $3,970,099 $78,336,085 ($1,219,730) $81,086,454 (16,693,414) 6,999,888 (5,771,296) $65,621,632 $1,886,347 $64,659,712 $354,919,052 ($25,844,792) $393,733,972 8,309,783 $402,043,755 2000 $84,606,754 44,921,269 12,596,580 $142,124,603 The export sales information of TSMC is presented by billed regions. c. No single customer accounts for more than 10% of total sales. 152 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION FINANCING PROVIDED TO OTHER PARTIES For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 1 No. Financing Transaction Accounts Limitation Maximum Ending Interest Financing Allowance Mortgage Transaction Amount Provider Entity on Financing Balance for Balance Rate Reasons for Bad Company Name the Period (Thousand) Debt Item Value Amount Limited on Financing 2 VIS VIS Prepaid (Note 1) $6,122 $1,232 - Prepayments $- - - $5,706 $4,400,000 America expenses for product development (Note 2) Note 1: Not exceeding 10% of the issued capital of VIS for each transaction entity, and also limiting to 30% of the issued capital of each transaction entity. Note 2: Not exceeding 20% of the issued capital of VIS. TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION COLLATERAL PROVIDED TO OTHER PARTIES For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 2 No. Collateral Transaction Entity Limitation Maximum Provider Name Name 0 TSMC TSMC Development Inc. TSMC - North America Note 1: 30% of the issued capital of TSMC. Nature of the Relationship (Note 3) 3 2 on Collateral Balance for the Period (US in Thousand) Ending Balance (US in Amount of % of Accumulated Amount Limited Properties Amount of Collateral on Collateral Guaranteed on Net Equity of the (Note 1) Thousand) by Collateral Latest Financial Statement (Note 2) $8,865,172 $8,865,172 $8,865,172 3.39% $38,968,094 (USD268,000) (USD268,000) 1,323,160 1,323,160 1,323,160 0.51% (USD40,000) (USD40,000) Note 2: Not exceeding 10% of the issued capital of the Company, and also limiting to the issued capital of the transaction entity with the exception of approval from BOD. Note 3: The number 2 represent subsidiary that directly holds exceeding 50% of the issued. The number 3 represents the investee that has over 50% of the common stocks holds by the parent company and subsidiary. 153 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION MARKETABLE SECURITIES HELD December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 3 Marketable Securities Name & Type Nature of the Relationship Account December 31, 2000 Note Shares Carrying % of Market Value (Thousand) Value (US in Owner- or Net Asset ship Value (US in Thousand) (Note 1) Thousand) Held Company Name: TSMC SSMC - Stock Taiwan Mask Corp. - Stock United Industrial Gases Co., Ltd. - Stock - - Shin-Etsu Handotai Taiwan Co., Ltd. - Stock - W.K. Technology Fund IV - Stock Taiwan Semiconductor Technology Corp. - Stock Hon Tung Ventures Capital - Stock Crimson Asia Capital Fund - Equity Horizon Ventures Fund - Equity Held Company Name: TSMC-BVI 3DFX. Interactive Inc. - Stock Held Company Name: VIS - - - - - - Investee Long-term investment 90 $935,870 Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 6,887 10,058 10,500 5,000 50,000 12,000 - - 32,129 146,250 105,000 50,000 500,000 120,000 64,547 93,304 32 2 10 7 4 19 10 N/A N/A $935,870 87,325 155,041 105,476 81,059 434,385 125,927 64,547 93,304 Long-term investment 68 USD297 - USD84 VIS Associates Inc. - Stock Subsidiary Long-term investment 23,570 464,077 100 464,077 PowerChip Semiconductor Inc.- Stock Investee Long-term investment 168,488 2,651,216 Etron Technology Inc. - Stock - Long-term investment Walsin Technology Inc. - Stock Investee Long-term investment MEGIC Corporation - Stock Form Factor Inc. - Stock United Industrial Gases Co., Ltd. - Stock - - - Long-term investment Long-term investment Long-term investment 5,590 31,410 16,500 267 2,313 310,132 414,481 177,000 64,360 29,250 9 3 10 15 1 2 3,315,837 278,118 414,481 177,000 64,360 29,250 Note 1: The percentage of ownership in the ended of the year are equal to the highest point of interim ownership percentage. 154 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION BALANCE OF MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF EXCEEDING 100 MILLION OR 20% OF THE ISSUED CAPITAL For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 4 Marketable Securities Type Account Transaction Nature of the Beginning Balance Acquisition Disposal Ending Balance and Name Entity Relationship Shares Amount Shares Amount Share Amount Carrying Gain Shares Amount (Thousand) (Thousand) (Thousand) Value (Loss) (Thousand) (Note 1) Company Name: TSMC Taipei Bank Stock The Wan Pao 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 Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment President Home Run Bond Fund Short-term Grand Cathay Bond Fund The GP ROC Bond Fund Flemings Taiwan Bond Fund National Investment Taiwan Bond Fund National Investment Bond Fund United Bond Fund investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment President Investment Bond Fund Short-term System on Silicon Manufacturing Company (SSMC) Stock investment Long-term investment (Forward) - - - - - - - - - - - - - - - - - - - - - - - - - - - - 8,750 $236,250 - $- 8,750 $288,719 $236,250 $52,469 - - - - - - - - - - - - - - - - - - - - - - - - - - 18,207 230,000 18,207 231,644 230,000 1,644 25,495 323,000 25,495 326,273 323,000 3,273 26,382 300,000 26,382 302,604 300,000 2,604 24,468 300,000 24,468 302,748 300,000 2,748 25,484 300,000 25,484 302,523 300,000 2,523 28,222 332,000 28,222 333,627 332,000 1,627 57,900 630,000 57,900 633,522 630,000 3,522 26,842 340,000 26,842 341,476 340,000 1,476 25,593 330,000 25,593 332,564 330,000 2,564 25,556 300,000 25,556 301,955 300,000 1,955 2,956 410,000 2,956 411,752 410,000 1,752 30,054 330,000 30,054 331,605 300,000 1,605 46,405 600,000 46,405 603,210 600,000 3,210 - - - - - - - - - - - - - - $- - - - - - - - - - - - - - SSMC Investee 26 360,177 64 989,690 - - - - 90 935,870 155 Marketable Securities Type Account Transaction Nature of the Beginning Balance Acquisition Disposal Ending Balance and Name Entity Relationship Shares Amount Shares Amount Share Amount Carrying Gain Shares Amount (Thousand) (Thousand) (Thousand) Value (Loss) (Thousand) (Note 1) Company Name: VIS The GP Bond Fund Kwang Hua Bond Fund Ta Chong Investment Bond Fund National Investment Bond Fund First Global Investment Trust Wan Tai Bond Fund Money Mgmt Fund Grand Cathay Bond Fund - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 58,761 $750,000 58,761 $761,731 $750,000 $11,731 42,671 550,000 42,671 558,584 550,000 8,584 16,199 180,000 16,199 182,393 180,000 2,393 3,921 550,000 3,921 558,516 550,000 8,516 45,921 550,000 45,921 558,212 550,000 8,212 31,415 400,000 31,415 404,997 400,000 4,997 21,446 240,000 21,446 242,656 240,000 2,656 - - - - - - - $- - - - - - - Note 1: The ending balance included the recognition of the investment income (loss) by the equity method and the accumulated translation adjustment. 156 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION ACQUISITION OF PROPERTIES EXCEEDING NTD 100 MILLION OR 20% OF ISSUED CAPITAL For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 5 Company Name: TSMC Properties Transaction Transaction Payment Term Transaction Nature of the Former Transaction Detail when Reference Purpose of Other Date Amount Entity Relationship Transacting with Related Parties of Price Acquisition Commitments Owner Relationship Transfer Amount Determined Date Fab 6 Feb. 16, 2000 ~ $3,254,412 Depend on the progress Fu Tsu - N/A N/A N/A N/A Public bidding Manufacturing None and office Dec. 31, 2000 of the construction Construction Co. Ltd. purpose TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION TRANSACTION OF PURCHASE OR SALES WITH RELATED PARTIES AMOUNTING TO MORE THAN NTD 100 MILLION OR 20% OF THE ISSUED CAPITAL For the Year Ended December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 6 Transaction Nature of the Entity Relationship Company Name: TSMC Transaction Detail Abnormal Notes, Accounts Note Purchase Amount % Collection Terms or Sales Transaction Payable or Unit Collection Price Terms Receivables Ending Balance % ITRI Its director is Sales $198,146 - Net 45 days from None None $56,078 7 TSMC’s chairman monthly closing date Phillips and its Major shareholder Sales 5,289,927 3 Net 30 days from None None 643,604 82 affiliates Company Name: VIS invoice date PSC Investee Purchase 379,405 - Net 45 days from monthly closing date None None (18,419) (2) 157 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANUGARD INTERNATIONAL SEMICONDUCTOR CORPORATION RECEIVABLE FROM RELATED PARTIES AMOUNTING TO MORE THAN 100 MILLION OR 20% OF THE ISSUED CAPITAL December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 7 Company Name: TSMC Transaction Entity Nature of the Relationship Ending Turnover Overdue Amounts Received Allowance Balance Amount Management from Dec. 31, 2000 Up-to-Date for Bad Debts Phillips and its affiliates Major shareholder $643,604 27days $175,828 Accelerate demand on $193,403 $- account receivables 158 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION INFORMATION REGARDING NAMES,LOCATIONS AND OTHERS OF INVESTEE ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCES December 31, 2000 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Table 8 Company Name: TSMC Investee Location Businesses Activity Original Investment Amount Balance as of Dec. 31, 2000 Dec. 31, Dec. 31, Shares % Carrying 2000 1999 (Thousand) Value Net income Investment Note Gain (Loss) (Loss) of the Investee SSMC Singapore Manufacture $1,432,482 $442,792 90 32 $935,870 ($1,480,190) ($473,661) Investee of wafer 159 2. Dividend Policy 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 may be distributed in total after taking into consideration financial, business and operational factors. 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 at the developmental stage of its business, distribution of profits shall be made preferably by way of stock dividend. Distribution of profits may also be made by way of cash dividend; provided however, the ratio for cash dividend shall not exceed 50% of total distribution. 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 earnings will be distributed based on the aforementioned policy for the coming three years. The Company is in the stage of growth and most earnings is to be retained for re-investment purpose. Distribution of earnings is expected to be mostly in the form of stock dividend for the coming three years. 160 3. Statement of Internal Control Taiwan Semiconductor Manufacturing Co., Ltd. Statement of Internal Control (Translation) Date: March 6, 2001 TSMC has conducted a self-assessment of internal controls for the period of January 1, 2000 to December 31, 2000, 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, 2000 to December 31, 2000 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 March 6, 2001 with 7 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. 161 4. Other Necessary Supplement Any Events in 2000 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 of R. O. C.: None 162 

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