TSMC
Annual Report 2001

Plain-text annual report

TSMC SPOKESPERSON Name: Harvey Chang Title: Senior Vice President &CFO Tel: 886-3-578-0221 Fax: 886-3-578-1545 Email: spokesperson@tsmc.com.tw Acting Spokesperson Name: J.H. Tzeng Title: Public Relations Department Manager Tel: 886-3-567-3338 Fax: 886-3-567-0121 Email: jhtzeng@tsmc.com.tw AUDITORS Company: T N SOONG & CO Auditors: S. C. Huang, Edward Way Address: 12F, No. 156, Sec. 3, Min-Sheng E. Rd. Taipei, Taiwan 105, R.O.C. Tel: 886-2-2545-9988 Fax: 886-2-2545-9966 Website: http://www.andersen.com.tw STOCK TITLE TRANSFER Company: China Trust Commercial Bank Transfer Agency Department Address: 5F, No. 83, Sec. 1, Chung-Ching S. Rd. Taipei, Taiwan 100, R.O.C. Tel: 886-2-2361-3033 Fax: 886-2-2311-6723 Website: http://www.chinatrust.com.tw ADR DEPOSITARY BANK Company: Citibank, N.A. Depositary Receipts Services Address: 20F, No. 111 Wall Street, Zone 7 New York, NY10005, U.S.A. Tel: 1-212-657-2770 Fax: 1-212-825-5398 Email: citibank@em.fcnbd.com Website: http://www.citibank.com/adr TSMC WEBSITE: http://www.tsmc.com MAJOR FACILITIES Corporate Headquarters & FAB 2, FAB 5 No. 121, Park Ave. 3 Science-Based Industrial Park Hsin-Chu, Taiwan 300-77, R.O.C. Tel: 886-3-578-0221 Fax: 886-3-578-1546 FAB 3 No. 9, Creation Rd. 1 Science-Based Industrial Park Hsin-Chu, Taiwan 300-77, 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 Shan-Hwa, Tainan, Taiwan 741, R.O.C. Tel: 886-6-505-2000 Fax: 886-6-505-2058 FAB 7 No. 6, Creation Rd. 2 Science-Based Industrial Park Hsin-Chu, Taiwan 300-77, R.O.C. Tel: 886-3-578-5112 Fax: 886-3-578-2038 FAB 8 No. 25, Li-Hsin Rd. Science-Based Industrial Park Hsin-Chu, Taiwan 300-77, R.O.C. Tel: 886-3-567-8888 Fax: 886-3-566-2051 FAB 12 No. 6, Li-Hsin Rd. 6 Science-Based Industrial Park Hsin-Chu, Taiwan 300-77, R.O.C. Tel: 886-3-563-6688 Fax: 886-3-563-7000 TSMC North America No. 2585, Junction Avenue San Jose, CA 95134, U.S.A. Tel: 1-408-382-8000 Fax: 1-408-382-8008 TSMC Europe B.V. World Trade Center, Strawinskylaan 1145 1077 XX Amsterdam, The Netherlands Tel: 31-20-305-9900 Fax: 31-20-305-9911 TSMC Japan K.K. 21F, Queen's Tower C, 2-3-5, Minato Mirai Nishi-ku, Yokohama, Kanagawa, 220-6221, Japan Tel: 81-45-682-0670 Fax: 81-45-682-0673 TSMC Shanghai Representative Office Suite 4605, Plaza 66, 1266 Nanjing W. Rd. Shanghai, China Postcode: 200040 Tel: 86-21-6288-3558 Fax: 86-21-6288-2528 TABLE OF CONTENTS LETTER TO THE SHAREHOLDERS A BRIEF INTRODUCTION TO TSMC 1. Company Profile 2. Organization 3. Capital and Shares 4. Issuance of Corporate Bonds 5. Preferred Shares 6. Issuance of American Depositary Shares 7. Employee Stock Option 8. Merge and Acquisition 9. TSMC Education and Culture Foundation OPERATIONAL HIGHLIGHTS 1. Business Activities 2. Marketing and Sales 3. Personnel Growth over the Last Two Years 4. Employee Relations 5. Environmental Protection Measures 6. Important Contracts 7. Litigation Proceedings 8. Notes on Board and Shareholders 9. Acquisition or Disposition of Real Estate FINANCING PLANS AND IMPLEMENTATION 1. Preferred A Shares 2. Corporate Bond FINANCIAL INFORMATION 1. Condensed Balance Sheet 2. Condensed Statements of Income 3. Financial Analysis 4. 2001 Condensed Interim Balance Sheet by Quarterly 5. 2001 Condensed Interim Statement of Income by Quarterly 6. Auditors' Opinion 7. Supervisors' Report 8. Review and Analysis of Financial Status and Operating Results 9. Financial Statements and Independent Auditors' Report 10.Consolidated Financial Statements 11.Financial Forecast and Results from 2000 to 2001 SPECIFIC NOTES 1. Affiliates Information 2. Internal Control System Execution Status 3. Dissenting Comment 4. Private Placement Securities 5. Balance of TSMC Common Shares/ADR Acquired, Disposed of and Held by Subsidiaries 6. Other Necessary Supplement 7. US GAAP Financial Information 3 6 6 8 13 17 18 19 20 20 21 23 23 27 32 32 33 34 36 36 37 38 38 38 40 42 43 44 45 46 47 47 48 49 85 128 129 129 178 179 179 179 179 180 2 T S M C A n n u a l R e p o r t 2 0 0 1 LETTER TO THE SHAREHOLDERS Dear Shareholders, The global IC market was contracted by over 30 percent in 2001, making it the worst-ever downturn in the history of the semiconductor industry. By continuously providing the most advanced manufacturing technologies and services to support our customers, TSMC was able to weather the downturn better than most other companies in the industry. We did experience a bottom earlier during 2001, but our monthly sales increased steadily during the second half of the year. In the end, while others in the foundry industry suffered losses in 2001, we still outperformed the overall semiconductor industry. We came up with a profit exceeding NT$14,483 million and also strengthened our leadership in the foundry business by gaining significant market shares. Now we are pleased to report the following achievements. Technology Advancement Through 2001, TSMC persisted in helping our customers enhance their competitiveness in their markets by providing s t a t e - o f-the-art manufacturing technologies. While maintaining our leadership in the mainstream 0.18um and 0.15um process technologies and volume production capability, we also started to provide customers with manufacturing services of the advanced 0.13um process technology. In addition, in the next generation 90nm technology development, we have not only completed the basic module design in 2001, but also formed strategic alliances with IDM customers as well as library, IP, and design service companies to increase future compatibility. Capital Expense and Capacity Responding to the downturn and the decline of orders in 2001, TSMC slowed the pace of its capital investment. As a result, capital expense for 2001 totaled US$2.2 billion, a decrease of 40 percent from previous capital expense in 2000. The bulk of our investments were dedicated to increasing the capacity of our 0.18um, 0.15um and 0.13um processes. The company's utilization rate also remained well ahead of our competitors. As a result, TSMC is emerging from the downturn to a stronger market position than the position it held at the close of 2000. Fab 12 is the center of future technology development at TSMC. The Company reached volume production on a 0.13um all-layer copper process in a full-scale 12-inch production plant (Fab 12) in 2001, making us the first dedicated foundry to achieve this goal. In addition, TSMC also completed a comprehensive study on the impact of high-speed railway vibrations in the vicinity of the Tainan Science- Based Industrial Park. The study confirmed that given proper plant engineering resources, such vibrations would not pose a threat to the quality of output at our production facilities in Tainan. As a result, the construction of our second 12-inch facility (Fab 14) that had been temporarily suspended due to concerns over the vibration issue was subsequently resumed. Morris Chang, Chairman and CEO T S M C A n n u a l R e p o r t 2 0 0 1 3 Sales and Marketing Maintaining a strong partnership with existing customers, expanding the scope of our foundry services and attracting new customers have consistently been TSMC's primary goals. During 2001, dozens of first-time customers decided to form partnership with us, bringing our total customer base up to around 400. Our customers participate in a significant and wide range of the integrated circuit market; market segments include computers, communication and consumer electronics. The broad cross-distribution of our customer base and the market segments have also helped us better adapt the ups and downs of global economy. On a geographic basis, sales from North America accounted for 68 percent of TSMC's 2001 revenue. Sales from the Asia Pacific region (excluding Japan) accounted for 16 percent of revenue, while Japan and Europe accounted for 10 percent and 6 percent of revenue respectively. In 2001, TSMC also set up an office in Shanghai to commence our company's entry in the emerging semiconductor market in China. This initiative should put TSMC to a competitive position in the fast growing market in Mainland China. Revenues and Net Profits 2001 was a difficult year for the semiconductor industry globally. Nevertheless, with our strong core competence in technology and our commitment to service innovation, TSMC outperformed the IC industry and ended the year with revenues totaled NT$125,888 million and net profits totaled NT$14,483 million. Earnings per share for 2001 were NT$0.83. Recognition and Awards In 2001, our performance in business management and our commitment to technology, quality and services continued to receive recognition both at home and abroad. In its annual corporate survey for 2001, the Common Wealth Magazine ranked TSMC as Taiwan's number one company for the fifth consecutive year. TSMC was also ranked first in the corporate surveys conducted by Far Eastern Economic Review, CFO Asia and Asiamoney. From left to right - Rick Tsai, President and COO Morris Chang, Chairman and CEO F.C. Tseng, Deputy CEO 4 T S M C A n n u a l R e p o r t 2 0 0 1 Future Outlook 2002 Production Plan* The global semiconductor industry remains cyclical. However, we are Quantity: thousand pcs 8" wafer confident in maintaining a healthy growth in 2002. The dedicated foundry industry, which was created by our company, will keep playing an increasingly important role and at the same time growing at a rate that is expected to surpass that of the overall IC industry. In the future, we will also strive to maintain our leadership in advanced technology development and customer partnerships. Greater efforts will be devoted to establish a new semiconductor "Virtually Integrated Value Chain" that combines our silicon foundry expertise with the expertise 875 526 507 552 398 294 171 of our customers, equipment suppliers, design services partners, and Fab 2 Fab 3 Fab 5 Fab 6 Fab 7 Fab 8 Fab 12 packaging and testing service providers. It is our goal to further strengthen the bonds of partnership with these entities and to achieve * TSMC only: 3,324 thousand pcs 8" wafers; total TSMC managed capacity: 3,987 thousand pcs, including WaferTech, VIS, and SSMC a win-win situation for all of us. Acknowledgement Once again, we would like to thank all of our customers, suppliers, shareholders and employees for their continued support and dedication. These are the people who have made it possible for TSMC to steady its steps and continue its march towards success in solid strides. We would like to take this opportunity to offer our deepest appreciation to all of you out there. 2002 Sales Plan by Technology Quantity: thousand pcs 8" wafer Morris Chang, Chairman and CEO F. C. Tseng, Deputy CEO Rick Tsai, President and COO >=0.50 um 14% 0.35 um 13% 0.25 um 28% 0.18 um 21% 0.15 um 18% <=0.13 um 6% T S M C A n n u a l R e p o r t 2 0 0 1 5 A BRIEF INTRODUCTION TO TSMC 1. Company Profile Founded on February 21, 1987, Taiwan Semiconductor Manufacturing Company (TSMC) is the world's largest dedicated integrated circuit (IC) foundry. Based in the Hsin-Chu Science-Based Industrial Park, known as Ta i w a n ' s Silicon Valley, TSMC is listed on both the Taiwan Stock Exchange (TSE) and the New York Stock Exchange (NYSE) under the symbol TSM. TSMC is the first dedicated IC foundry in the world, and remains the industry leader. The goal of the Company was straightforward from its very inception, namely, to provide advanced IC manufacturing services to its customers. TSMC's charter prevents it from designing, manufacturing or marketing IC products under its own brand name, making it a true partner with and not a competitor to its customers. TSMC's success in the foundry industry has served as an inspiration for many companies, enhancing significant acceleration in technological innovation in general. With TSMC as the driving force of change since 1987, the number of global fabless IC companies has grown s u b s t a n t i a l l y. What was once only a concept, a "pure play" of the foundry industry, has played a vital role in technology advancement and generated billions of dollars in revenues. As the semiconductor industry faces constant consolidation and ever rising costs of IC fab construction, dedicated foundry companies like TSMC are expected to become an important source of IC manufacturing worldwide. As a leader in the foundry sector, TSMC has built its reputation by offering cutting-edge technologies, advanced wafer production processes, and unparalleled manufacturing efficiency. From the very beginning, TSMC has consistently produced the foundry industry's leading technologies, including 0.18um, 0.15um and 0.13um complementary metal oxide semiconductor (CMOS) logic processes. TSMC now offers the foundry industry's most comprehensive set of technology processes, including CMOS logic, mixed-signal/radio frequency, flash, high-density embedded memory, BiCMOS and silicon germanium (SiGe) BiCMOS. To further enhance its organizational efficiency, TSMC Fab 3 and 4 were consolidated in the first quarter of 2002. Fab 1, which TSMC had previously leased from Taiwan's Ministry of Economic Affairs and Industrial Technology Research Institute since the inception of the Company will be decommissioned on March 31, 2002. However, most of the processes in Fab 1 had been moved to other TSMC facilities to ensure continuing high-quality customer service. TSMC operates one 6-inch wafer fab (Fab 2), five 8-inch fabs (Fab 3, 5, 6, 7 and 8), and one 12-inch fab (Fab 12). The Company also has substantial capacity commitments to its subsidiary Wa f e r Tech in the United States; its affiliate Vanguard International Semiconductor Corporation (VIS) in Hsin-Chu; and its joint venture partner Philips S e m i c o n d u c t o r, known as Systems on Silicon Manufacturing Company (SSMC) in Singapore. TSMC is currently constructing another 12-inch manufacturing facility, Fab 14, in Tainan, which is expected to begin production in 2003. Total installed annual capacity in 2002 is approximately 4 million 8-inch equivalent wafers. Another one of TSMC's major objectives is to be its customers' "Virtual Fab". That is, to provide its customers with the benefits of an in-house fabrication plant without the associated expense or organizational complexity. Its intent is to make foundry services as transparent to customers as possible. To that end, TSMC launched the industry's first "e-foundry" service in 2000 that continued in 2001 to extend much of its structure of customer service onto the Internet to provide customers with a real-time and "personalized" view into our manufacturing operations. 6 T S M C A n n u a l R e p o r t 2 0 0 1 T S M C A n n u a l R e p o r t 2 0 0 1 7 As a responsible corporate citizen, TSMC takes both community service and employee relations seriously. For example, TSMC's award-winning Culture and Education Foundation supports activities in Taiwan that promote education programs, social services, art and cultural activities both in the Company's immediate communities and in the c o u n t r y. The Foundation also strives to upgrade quality of life for Taiwan's society through long-term community development efforts. 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. TSMC's Chairman and CEO Dr. Morris Chang has been at the forefront to lead this unique task force and has received both national as well as international recognition for his achievements. In 2001, both Time Magazine and CNN named Dr. Chang one of the 25 most influential global executives. In addition, the Common Wealth Magazine also ranked Dr. Chang number one among "The Most Admired Entrepreneurs in Taiwan" for the fourth consecutive year. In 2000, Dr. Chang received the first-ever Robert N. Noyce Medal from the Institute of Electrical and Electronics Engineers (IEEE) for his vision and leadership in pioneering the silicon integrated circuit foundry industry. 2. Organization 2-1 Organization Chart & Function Description Supervisors Shareholders' Meeting Board of Directors Chairman & CEO Deputy CEO President & COO Research & Development Chief Information Officer Chief Technology Officer Worldwide Marketing & Sales Human Resources Quality & Reliability Material Management & Risk Management Operations I Operations II Chief Financial Officer & Spokesperson General Counsel Marketing Business Operation TSMC North America TSMC Europe TSMC Japan Asia Business Internal Audit 8 T S M C A n n u a l R e p o r t 2 0 0 1 ● Research & Development: Advanced technology research & development, mask operation, and design services ● Chief Information Officer: Company-wide information infrastructure and e-Business strategy ● Chief Technology Officer: Exploratory technology development and intellectual property strategy ● Worldwide Marketing & Sales, include: Marketing - Strategy, technology and services marketing Business Operation - Business plan, customer service, and supply chain management Regional Operations- Business development & account services for North America, Europe, Japan and Asian regions ● Human Resources: Human resources management and organization development ● Quality & Reliability: Quality and reliability management ● Material Management & Risk Management: Purchasing, warehousing, industrial safety, import & export, logistic support, and environmental protection ● Operations I: Manufacturing operations, product engineering, and back-end operation ● Operations II: New fab planning, manufacturing technology integration, production control, industrial engineering, and operation efficiency ● Internal Audit: Internal audit & process compliance ● Chief Financial Officer : Finance and accounting operation, including investor relations, treasurer, tax, assets management, financial and management accounting ● Spokesperson: Corporate representative to the public and press ● General Counsel: Corporate legal affairs, contracts, patent affairs, and intellectual property management 2-2 Directors & Supervisors Title / Name Date Elected Term Shareholding (Year) When Elected Current Shareholding Spouse & Minor Shareholding (Note 1) (Note 1) Education & Experience Shares % Shares % Shares % Chairman Morris Chang 04/14/2000 3 45,109,604 0.59 81,160,464 0.45 82,432 0.00 Ph.D., Electrical Engineering, Standford University Chairman, TSMC Remark Current Managers are spouse or Position within 2 degrees of with Other Company consanguinity to each other Title Name Relation Note 2 - - - Director 04/14/2000 A.P.M. van der Poel 3 1,295,885,897 16.89 2,322,227,527 12.81 - - B.S., Electronic Engineering, Note 2 - - - Eindhoven Technical University Chairman & CEO, Philips Semiconductors International B.V. 04/14/2000 3 1,295,885,897 16.89 2,322,227,527 12.81 - - B.A., Business Ecnonmics, - - - - Erasmus University Chief Financial Officer, Philips Semiconductors International B.V. Director J.C. Lobbezoo (Forward) Koninklijke Philips Electronics N.V. Representative of Legal Entity Koninklijke Philips Electronics N.V. Representative of Legal Entity T S M C A n n u a l R e p o r t 2 0 0 1 9 Director P.J. Zeven Director Chintay Shih Director Stan Shih Director F.C. Tseng Supervisor Robbert Brakel Supervisor George C. Shiu Supervisor S.J. Paul Chien 04/14/2000 3 1,295,885,897 16.89 2,322,227,527 12.81 - - Nijerode School of Business Note 2 - - - President & CEO of Philips Taiwan / Chairman of Assembleon Taiwan 04/14/2000 3 1,158,545,600 15.10 1,630,474,915 8.99 - - Ph.D., Electrical Engineering, Note 2 - - - 04/14/2000 3 984,000 0.01 3,023,328 0.02 - Princeton University President, Industrial Technology Research Institute - M.S., Electronical Engineering, National Chiao Tung University Chairman & CEO, The Acer Group 04/14/2000 3 12,032,090 0.16 26,556,877 0.15 89,290 0.00 Ph.D., Electrical Engineering, Note 2 - - - National Cheng-Kung University Deputy CEO, TSMC 04/14/2000 3 1,295,885,897 16.89 2,322,227,527 12.81 - - Post Doctorate Controllers Programme (RC), - - - - Koninklijke Philips Electronics N.V. Representative of Legal Entity Development Fund, Executive Yuan Representative of Legal Entity Note 2 - - - Chi Cherng Investment Co., Ltd. Representative of Legal Entity 04/14/2000 3 1,158,545,600 15.10 1,630,474,915 8.99 - 04/14/2000 3 641,500 0.01 1,407,168 0.01 - Free University of Amsterdam V.P. & Financial Controller ASIA Pacific of Philips Semiconductors - Ph.D. Candidate in Economics, John Hopkins University Deputy Executive Secretary, Development Fund, Executive Yuan - M.S. and Engineer Degree in Chemical Engineering, Massachusetts Institute of Technology President, Vanguard International Semiconductor Corp. Note 2 - - - Koninklijke Philips Electronics N.V. Representative of Legal Entity Development Fund, Executive Yuan Representative of Legal Entity Note 2 - - - Hsin Ruey Investment Co., Ltd. Representative of Legal Entity Note 1: Per the actual reported number of shares on 02/28/2002 Note 2: Current Position with Other Company Morris Chang Chairman of: Vanguard International Semiconductor Corp. A.P.M. van der Poel Director of: Koninklijke Philips Electronics N.V. Director of: TSMC Europe B. V. TSMC Japan K. K. TSMC International Investment Ltd. TSMC Development Inc. TSMC Technology Inc. WaferTech, LLC Goldman Sachs Group, Inc. P.J. Zeven Chairman of: Philips Electronic Building Elements Industries (Taiwan) Ltd. Assembleon Taiwan Ltd. Philips Electronics Industries (Taiwan) Ltd. Philips (Taiwan) Ltd. Philips Lighting (Taiwan) Ltd. EBT Technology Incorporation Chintay Shih Director of: Vanguard Intermational Semiconductor Corp. Stan Shih Chairman of: Acer Incorporated Benq Corporation F.C. Tseng Director of: TSMC North America TSMC Japan K. K. TSMC Partners, Ltd. Kung Cherng Investment Co., Ltd. Chi Cherng Investment Co., Ltd. Vanguard International Semiconductor Corp. George Shiu Director of: Powerchip Semiconductor Corp. S.J. Paul Chien Director of: Powerchip Semiconductor Corp. Vanguard International Semiconductor Corp. 2-3 Information regarding the Legal Entity Shareholders as Directors and Supervisors of the Company As of 02/28/2002 Name of Legal EntityShareholders Shareholders who owned more than ten percent outstanding shares or the top ten Shareholders of Legal Entity Koninklijke Philips Electronics N.V. Shareholders who owned more than ten percent outstanding shares: None Top ten shareholders: Unavailable in accordance with the regulations of the Netherlands Development Fund, Executive Yuan Development Fund Chi Cherng Investment Co., Ltd. TSMC, Kung Cherng, Chi Hsin, Po Cherng, Hsin Ruey and Cherng Huei Investment Co., Ltd. Hsin Ruey Investment Co., Ltd. TSMC, Kung Cherng, Chi Hsin, Po Cherng, Chi Cherng and Cherng Huei Investment Co., Ltd. 10 T S M C A n n u a l R e p o r t 2 0 0 1 2-4 Information of Directors & Supervisors Not an employee of the Company; nor a director, supervisor or employee of the affiliated companies of the Company With experience for more than five years in business, finance, legal or areas required by the business of the Company Not a spouse to nor having relationship within two degrees of lineal consanguinity with any person specified in columns 2 and 3 Not a shareholder of natural person directly or indirectly owning more than 1% of the Company's outstanding shares nor one of the Company's top 10 shareholders of natural person Not a director, supervisor or employee of a shareholder of legal entity of the company directly or indirectly owning more than 5% of the Company's outstanding shares nor one of the Company's top 5 shareholders of legal entity Not a director, supervisor, manager or shareholder holding more than 5% of the outstanding shares of certain companies or institutions which have financial or business relationship with the Company Not an owner, partner, director, supervisor, manager of any sole proprietor, partnership, company or institution and his/her spouse, or the specialist and his/her spouse, which provided finance, commerce, legal consultation and services to the Company or its affiliated companies within one year Chairman Morris Chang Director A.P.M. van der Poel Director J.C. Lobbezoo Director P. J. Zeven Director Chintay Shih Director Stan Shih Director F. C. Tseng Supervisor Robbert Brakel Supervisor George C. Shiu Supervisor S.J. Paul Chien V V V V V V V V V V V "V" indicates meeting conditions specified above 2-5 Executive Officers V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V V Title Name Date Effective Shareholding (Note 1) % Spouse & Minor Education & Experience Shareholding % (Note 1) Chairman & CEO Morris Chang 03/03/1998 81,160,464 0.45 82,432 0.00 Deputy CEO F.C. Tseng 08/07/2001 26,556,877 0.15 89,290 0.00 Ph.D., Electrical Engineering, Standford University Chairman, TSMC Ph.D., Electrical Engineering, National Cheng-Kung University President, TSMC President, Vanguard International Semiconductor Corp. President & COO Rick Tsai 08/07/2001 17,309,467 0.10 - - Ph.D., Materials Science, Cornell University Quincy Lin 05/13/1997 17,499,626 0.10 1,824,186 0.01 Executive V.P., Worldwide Marketing and Sales, TSMC President, Vanguard International Semiconductor Corp. Ph.D., Business Administration, University of Kentucky V.P., Corporate Sales and Marketing, TSMC Harvey Chang 02/03/1998 5,190,622 0.03 - - MBA, Wharton School, University of Pennsylvania Chairman, China Securities Investment Trust Corp. President, China Development Corp. Senior Vice President & CIO Senior Vice President & CFO (Forward) Current Position with Other Company Managers are spouse or within 2 degrees of consanguinity to each other Title Name Relation Note 2 Note 2 Note 2 Note 2 Note 2 - - - - - - - - - - - - - - - T S M C A n n u a l R e p o r t 2 0 0 1 11 Senior Vice President Senior Vice President S.Y. Chiang 11/07/2000 7,220,170 0.04 - - Ph.D., Electrical Engineering, Standford University V.P., Research and Development, TSMC Manager, Hewlett Packard Kenneth Kin 08/07/2001 1,150,000 0.01 - - Ph.D., Nuclear Engineering and Applied Physics, Vice President Y.C. Huang 08/15/1995 11,950,389 0.07 - Vice President J. B. Chen 09/05/2000 4,635,849 0.03 37,826 Columbia University V.P., IBM Corporation - MBA, Saginaw Valley State University V.P., Corporate Services, TSMC 0.00 Master, Physics, National Tsing Hua University V.P., Tainan Sites Operation, TSMC. President, TSMC-Acer Semiconductor Manufacturing Corp. Vice President Ping Yang 08/07/2001 4,764,313 0.03 114,627 0.00 Vice President C.C. Wei 03/03/1998 3,970,931 0.02 880 0.00 Ph.D., Electrical Engineering, University of Lllinois, Champaign-Urbana V.P., U.S. Subsidiary, TSMC North America Ph.D., Electrical Engineering, Yale University V.P., South sites operation, TSMC Senior V.P., Chartered Semiconductor Manufacturing Ltd. Vice President S.H. Lee 08/11/1998 3,478,946 0.02 Vice President Mark Liu 05/11/1999 7,223,793 0.04 Vice President John T. Yue 11/09/1999 2,813,611 0.02 Vice President Genda Hu 08/11/2000 502,111 0.00 Vice President Chung-Shih Hsu 03/06/2001 491,940 0.00 CTO Chenming Hu 08/07/2001 670,000 0.00 - - - - - - - Master, Management, Standford University Regional V.P., Lucent Technologies, Asia Pacific Ltd. - Ph.D., Electrical Engineering and Computer Science, University of California, Berkeley V.P., Fab. 12 Sites Operation, TSMC President, Worldwide Semiconductor Manufacturing Corp. - Ph.D., Physics, Standford University Director, Advanced Micro Devices Inc. - Ph.D., Electrical Engineering, Princeton University V.P., Advanced Technology Development, TSMC General Diector, Electonic Research and Service Organization - Ph.D., Physics, Columbia University V.P., Vanguard International Semiconductor Corp. - Ph.D., Electrical Engineering and Computer Science, University of California, Berkeley Founder and Chairman, Celestry Design Technologies, Inc. Vice President M.C. Tzeng 08/07/2001 2,902,271 0.02 367,046 0.00 Master, Applied Chemistry, Chung Yaun University Senior Director, Fab 2 Operation, TSMC - - Note 2 - - - - - - - Note 2 - - - - - - - - - - - - - - - - - - - - - - - - - Note 2 CTO Chenming Brother - - - Hu - - - V.P. Genda Hu Brother - - - - - - Vice President Richard Thurston 02/08/2002 - - - - J.D., Rutgers School of Law, State University of New Jersey Note 2 Partner, Kelt Capital Ventures, LP. Note 1: As of 02/28/2002 Note 2: Current Position with Other Company Morris Chang Chairman of: Vanguard International Semiconductor Corp. Director of: TSMC Europe B. V. TSMC Japan K. K. TSMC International Investment Ltd. TSMC Development Inc. TSMC Technology Inc. WaferTech, LLC Goldman Sachs Group, Inc. F.C. Tseng Director of: Rick Tsai Director of: TSMC North America TSMC Japan K. K. TSMC Partners, Ltd. Kung Cherng Investment Co., Ltd. Chi Cherng Investment Co., Ltd. Vanguard International Semiconductor Corp. TSMC North America TSMC Europe B. V. TSMC Japan K. K. TSMC Partners, Ltd. Cherng Huei Investment Co., Ltd. Hsin Ruey Investment Co., Ltd. WaferTech, LLC Vanguard International Semiconductor Corp. 12 T S M C A n n u a l R e p o r t 2 0 0 1 Quincy Lin Director of: TSMC Europe B. V. TSMC Partners, Ltd. Po Cherng Investment Co., Ltd. Shin-Easu Handotai Taiwan W. K. Technology Fund IV Harvey Chang Director of: TSMC Partners, Ltd. Chi Hsin Investment Co., Ltd. Systems on Silicon Manufacturing Company Pte. Ltd. Fubon Financial Holding Co., Ltd. Supervisor of: TSMC Japan K. K. Vanguard International Semiconductor Corp. Y.C. Huang Director of: United Industrial Gases Co., Ltd. C.C. Wei Director of: Systems on Silicon Manufacturing Company Pte. Ltd. Genda Hu Director of: Hontung Venture Capital Co., Ltd. Richard Thurston Director of: TSMC Partners, Ltd. IT Pizza, Inc. IP Net Fusion, Inc. JAVA and Cha, Ltd. QED Soft, Inc. 3. Capital and Shares 3-1 History of Capitalization Month / Price Par Authorized Authorized Year Value Shares Amount Issued Shares Issued Amount 02/1987 10 1,000 5,510,000 5,510,000,000 1,377,500 1,377,500,000 Cash Founding 12/1988 10 1,000 5,510,000 5,510,000,000 2,204,000 2,204,000,000 Cash offering 11/1989 10 1,000 5,510,000 5,510,000,000 3,306,000 3,306,000,000 Cash offering 07/1990 - 1,000 5,510,000 5,510,000,000 3,360,797 3,360,797,000 Capitalization of Profits Sources of Capital Non-Monetary Date of Approval & Approval Document No. Unit: Share / NT$ Capital Expansion None None None - 02/21/1987 (76) Ko Chu She Tzu No. 065 12/19/1988 (77) Yuan Ching Tzu No. 15501 11/24/1989 (78) Yuan Ching Tzu No. 12823 07/23/1990 (79) Yuan Ching Tzu No. 08171 12/1990 10 1,000 5,510,000 5,510,000,000 3,911,797 3,911,797,000 Cash offering None 12/21/1990 (79) Yuan Ching Tzu No. 14632 10 10 10 10 10 07/1991 12/1991 12/1992 08/1993 07/1994 06/1995 05/1996 07/1997 07/1998 07/1999 11/1999 06/2000 - 10 10 - - - - - - - - - 551,000,000 5,510,000,000 391,179,700 3,911,797,000 Par value change from NT$1000 to NT$10 07/18/1991 (80) Yuan Ching Tzu No. 08651 551,000,000 5,510,000,000 473,829,700 4,738,297,000 Cash offering None 12/06/1991 (80) Yuan Ching Tzu No. 14252 551,000,000 5,510,000,000 551,000,000 5,510,000,000 Cash offering:NT$ 582,171,120 Capitalization of Profits:NT$189,531,880 780,000,000 7,800,000,000 608,304,000 6,083,040,000 Capitalization of Profits 780,000,000 7,800,000,000 780,000,000 7,800,000,000 Capitalization of Profits 10 3,000,000,000 30,000,000,000 1,439,000,000 14,390,000,000 Capitalization of Profits 10 3,000,000,000 30,000,000,000 2,654,200,000 26,542,000,000 Capitalization of Profits 10 8,500,000,000 85,000,000,000 4,081,300,000 40,813,000,000 Capitalization of Profits 10 8,500,000,000 85,000,000,000 6,047,175,967 60,471,759,670 Capitalization of Profits 10 9,100,000,000 91,000,000,000 7,548,483,035 75,484,830,350 Capitalization of Profits 10 9,100,000,000 91,000,000,000 7,670,881,717 76,708,817,170 Conversion of ECB 10 17,800,000,000 178,000,000,000 9,990,849,423 99,908,494,230 Capitalization of Profits: NT$21,320,311,040 Capital Surplus: NT$ 1,879,366,020 - - - - - - - - - - 12/30/1992 (81) Yuan Ching Tzu No. 17304 08/27/1993 (82) Yuan Ching Tzu No. 11830 07/21/1994 (83) Yuan Ching Tzu No. 09791 06/30/1995 (84) Yuan Shang Tzu No. 09473 05/29/1996 (85) Yuan Shang Tzu No. 08703 07/11/1997 (86) Yuan Shang Tzu No. 13347 07/13/1998 (87) Yuan Shang Tzu No. 016805 07/09/1999 (88) Yuan Shang Tzu No. 014308 11/24/1999 (88) Yuan Shang Tzu No. 025112 06/05/2000 (89) Yuan Shang Tzu No. 011645 06/2000 220 10 17,800,000,000 178,000,000,000 10,105,849,423 101,058,494,230 Cash offering for ADR None 06/30/2000 (89) Yuan Shang Tzu No. 013893 08/2000 12/2000 07/2001 - 10 - 10 17,800,000,000 178,000,000,000 11,689,364,587 116,893,645,870 Merger from WSMC & TSMC-ACER 10 17,800,000,000 178,000,000,000 12,989,364,587 129,893,645,870 Cash offering for Preferred A Share 10 24,600,000,000 246,000,000,000 18,132,553,051 181,325,530,510 Capitalization of Profits - None - 08/11/2000 (89) Yuan Shang Tzu No. 018254 12/18/2000 (89) Yuan Shang Tzu No. 027775 07/19/2001 (90) Yuan Shang Tzu No. 018039 3-2 Capital & Shares Authorized Capital Unit: Share Type of Stock Issued Shares Reserved Shares Total Listed Non-Listed Total Un-issued Shares for Convertible Bond Common Share 16,832,553,051 - 16,832,553,051 Preferred A Share - 1,300,000,000 1,300,000,000 5,089,845,631 1,377,601,318 24,600,000,000 T S M C A n n u a l R e p o r t 2 0 0 1 13 3-3 Status of Shareholders Stock: Common share Government Agency Financial Institution Other Legal Entity Foreign Institution & Natural Person Domestic Natural Person Total As of 03/09/2002 Number of Shareholders 8 123 894 1,579 375,918 378,522 Shareholding 1,880,345,616 778,589,766 2,073,053,964 8,754,280,980 3,346,282,725 16,832,553,051 Holding Percentage 11.17% 4.62% 12.32% 52.01% 19.88% 100.00% Stock: Preferred A share As of 03/09/2002 Government Agency Financial Institution Other Legal Entity Foreign Institution & Natural Person Domestic Natural Person Total Number of Shareholders Shareholding 0 0 0 0 1 1,299,925,653 0 0 59 60 74,347 1,300,000,000 Holding Percentage 0.00% 0.00% 99.99% 0.00% 0.01% 100.00% 3-4 Distribution of Common Shares and Preferred A Shares Stock: Common share As of 03/09/2002 Class of Shareholding (Unit: Share) Number of Shareholders Shareholding Holding Percentage 1 - 999 1,000 - 5,000 5,001 - 10,000 10,001 - 15,000 15,001 - 20,000 20,001 - 30,000 30,001 - 40,000 40,001 - 50,000 50,001 - 100,000 100,001 - 200,000 200,001 - 400,000 400,001 - 600,000 600,001 - 800,000 800,001 - 1,000,000 Over 1,000,001 Total 91,795 199,218 42,351 13,876 7,930 7,237 3,773 2,415 4,568 2,406 1,288 448 264 147 806 378,522 37,284,426 450,285,580 308,668,401 171,722,602 138,887,220 177,887,129 129,977,682 108,842,797 321,672,757 337,853,330 357,000,188 220,288,745 183,620,547 130,617,572 0.22% 2.67% 1.83% 1.02% 0.83% 1.06% 0.77% 0.65% 1.91% 2.01% 2.12% 1.31% 1.09% 0.78% 13,757,944,075 16,832,553,051 81.73% 100.00% Stock: Preferred A share As of 03/09/2002 Class of Shareholding (Unit: Share) Number of Shareholders Shareholding Holding Percentage 1 - 999 1,000 - 5,000 5,001 - 10,000 15,001 - 20,000 Over 1,000,001 Total 44 12 1 2 1 60 12,556 23,650 6,473 31,668 1,299,925,653 1,300,000,000 0.01% 99.99% 100% 14 T S M C A n n u a l R e p o r t 2 0 0 1 3-5 Net Worth, Earnings, Dividends and Market Price Per Share Item 2000 2001 2002 (Jan.~Feb.) Market Price Per Share Highest Market Price Lowest Market Price Average Market Price Net Worth Per Share Before Distribution After Distribution Earnings Per Share 222.0 74.5 146.3 21.28 14.74 105.5 43.6 77.7 15.7 Note 1 92.5 80.0 86.9 15.94 Note 1 Weighted Average Shares (Thousand Shares) 11,400,882 16,832,554 16,832,554 Earnings Per Share Earnings Per Share (Note 2) Dividends Per Share Cash Dividends Stock Dividends Dividends from Retained Earnings Dividends from Capital Surplus Accumulated Undistributed Dividend Return on Investment Price / Earning Ratio (Note 3) Price / Dividend Ratio (Note 4) Cash Dividend Yield Rate (Note 5) 5.71 3.96 0.83 0.24 - Note 1 Note 1 2.555 0.245 - 25.62 - - 4.000 Note 1 - - 93.61 Note 1 Note 1 - - 362.19 Note 1 Note 1 Note 1: Subject to change after shareholders' meeting resolution Note 2: Retroactive adjustment for capitalizations of unappropriation earnings and bonus to employees Note 3: Price / Earning ratio = Average market price / Earnings per share Note 4: Price / Dividend ratio = Average market price / Cash dividends per share Note 5: Cash dividend yield rate = Cash dividends per share / Average market price 3-6 Dividend Policy a. TSMC shall distribute dividend, per resolution of the shareholders' meeting, according to the principles stated below: i. Except distribution of reserve in accordance with item (ii) below, TSMC 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, TSMC may 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 TSMC may be distributed by way of cash dividend and/or stock dividend. Since TSMC 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. T S M C A n n u a l R e p o r t 2 0 0 1 15 ii. 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 TSMC in the previous year, or considering the financial, business or operational factors of TSMC, TSMC 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. TSMC will distribute dividend in accordance with the principles above mentioned in the next three years. Since TSMC is at the growing stage, retained earnings therefore will primarily be kept for future investment. Distribution of earnings is expected to be mostly in the form of stock divided in the next three years. b. The proposal for distribution of 2001 profits was adopted at the Meeting of the Board of Directors as follows: i. Stock dividends to common shares: Totaling NT$16,832,553,060. Each shareholder of common shares will be entitled to receive a stock dividend of 100 common shares for each 1,000 common shares held by such s h a r e h o l d e r, subject to the record date to be determined, after being approved at the Regular Shareholders' Meeting of the year and by the competent authority, by the Board of Directors. ii. Cash dividends to Preferred A shares: Cash dividends of NT$455,000,000 will be distributed on a record date to be determined, after being approved at the Regular Shareholders' Meeting of the year, by the Board of Directors. 3-7 Impact to business performance and EPS resulted from 2002 stock dividend distribution Paid in Capital (shares at beginning of year) Dividend Plan Cash Dividend (per share) Item Stock Dividend from Retained Earnings (share/per share) Stock Dividend from Capital Surplus (share/per share) Business Performance Income from Operations % Change of Income from Operation (YOY) Net Income % Change of Net Income (YOY) Earnings Per Share % Change of EPS (YOY) Pro Forma EPS & P/E Ratio If Retained Earnings Pro Forma Earnings Per Share % Change Average Return on Investment (Reciprocal of Average P/E Ratio) Distributed in Cash Dividend Pro Forma Average Return on Investment (%) If Capital Surplus not Pro Forma Earnings Per Share Distributed in Stock Dividend Pro Forma Average Return on Investment (%) If Retained Earnings Pro Forma Earnings Per Share Distributed in Cash Dividend & Pro Forma Average Return on Investment (%) Capital Surplus not Distributed in Stock Dividend 2002 18,132,553,051 - 0.1 - N/A N/A N/A N/A 16 T S M C A n n u a l R e p o r t 2 0 0 1 4. Issuance of Corporate Bonds 4-1 Corporate Bonds Issuance Domestic Unsecured Bond (I) Domestic Unsecured Bond (II) Domestic Unsecured Bond (III) Domestic Unsecured Bond (IV) Domestic Unsecured Bond (V) Issuing Date Denomination 03/04/1998 NT$1,000,000 11/18/1998 - 12/01/1998 10/21/1999 12/04/2000 - 12/15/2000 01/10/2002 - 01/24/2002 NT$1,000,000 NT$1,000,000 NT$ 1,000,000 NT$10,000,000 NT$1,000,000 NT$5,000,000 Issuance & Listing ROC OTC Securities Exchange ROC OTC Securities Exchange ROC OTC Securities Exchange ROC OTC Securities Exchange ROC OTC Securities Exchange Offering Price Total Amount Coupon Rate Tenor Guarantor Trustee Underwriter Legal Counsel Auditor Repayment Outstanding Par Par Par Par Par NT$4,000,000,000 NT$6,000,000,000 NT$10,000,000,000 NT$15,000,000,000 NT$15,000,000,000 7.71% p.a. 7.12% p.a. Tranche A: 5.67% p.a. Tranche B: 5.95% p.a. Tranche A: 5.25% p.a. Tranche B: 5.36% p.a. Tranche A: 2.60% p.a. Tranche B: 2.75% p.a. Tranche C: 3.00% p.a. 5 years Maturity: 03/04/2003 5 years Maturity: 11/18/2003 - 12/01/2003 Tranche A: 3 years Maturity: 10/21/2002 Tranche B: 5 years Marturity: 10/21/2004 Tranche A: 5 years Maturity: 12/04/2005 - 12/15/2005 Tranche B: 7 years Marturity: 12/04/2007 - 12/14/2007 Marturity: 01/10/2009 - 01/24/2009 Tranche A: 5 years Maturity: 01/10/2007 - 01/22/2007 Tranche B: 7 years Tranche C: 10 years Marturity: 01/10/2012 - 01/24/2012 N/A N/A The International Commercial Bank of China The International Commercial Bank of China N/A TC Bank N/A The International Commercial Bank of China Citibank Securities (Taiwan) Grand Cathay Securities Grand Cathay Securities N/A N/A TC Bank N/A Lee & Li Lee & Li Lee & Li Eluvzy International Law Office Yan-an International Law Office TN Soong & Co TN Soong & Co TN Soong & Co TN Soong & Co TN Soong & Co Bullet NT$4,000,000,000 Bullet - Bullet Bullet Bullet NT$10,000,000,000 NT$15,000,000,000 NT$15,000,000,000 N/A N/A N/A N/A Redemption or Early Repayment Clause Covenants Credit Rating Other Rights of Bondholders Amounts Converted into or Exchanged for Common Shares, ADRs or Other Securities as of 02/28/2002 Conversion Right N/A Dilution Effect and Other Adverse Effects on Existing Shareholders Custodian N/A N/A TSMC exercised the right to call back this bond two years after the respective issuance date N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A TSMC's Domestic Unsecured Bond III has received a rating of "twAA" from Taiwan Ratings Corporation on 09/20/1999 TSMC's Domestic Unsecured Bond IV has received a rating of "twAA" from Taiwan Ratings Corporation on 11/08/2000 TSMC's Domestic Unsecured Bond V has received a rating of "twAA" from Taiwan Ratings Corporation on 12/03/2001 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A T S M C A n n u a l R e p o r t 2 0 0 1 17 4-2 Convertible Bond: Not Applicable 4-3 Exchangeable Bond: Not Applicable 4-4 Bond with Warrants: Not Applicable 5. Preferred Share 5-1 Preferred A Share Par Value Issuing Price Number of Shares Issued Total Issued Amount Item Issuing Date: 11/29/2000 NT$10 NT$10 1,300,000,000 NT$13,000,000,000 Right and Obligation Dividend Cash Dividend of 3.5% p.a. Distribution while Liquidation Up to Total Issue Amount (NT$13,000,000,000) Voting Right Others Same as Common Share Shareholders Fixed Rate for Cash Dividend Only, and Not Entitled for Stock Dividend. Outstanding Shares Redeemed/Converted - Balance NT$13,000,000,000 Condition for Redemption/Conversion Redemption at Maturity (Note) Market Price High Low Average Miscellaneous Conversion Amount up to Printing Date of the Annual Report/Cash Subscription N/A (Un-Listed) None Issuing/Conversion No Conversion into Common Share Impact/Dilution on Existing Shareholders and Preferred A Share Shareholders None Note: Tenor=2.5 years 5-2 Preferred Share with Warrant: Not Applicable 18 T S M C A n n u a l R e p o r t 2 0 0 1 6. Issuance of American Depositary Shares (ADSs) Issuing Date 10/08/1997 11/20/1998 01/12/1999 - 01/14/1999 07/15/ 1999 08/23/1999 - 09/09/1999 02/22/2000 - 03/08/2000 Issuance & Listing NYSE NYSE NYSE NYSE NYSE NYSE Total Amount (US$) 594,720,000 184,554,440 35,500,000 296,499,641 158,897,088.5 379,134,598.8 Offering Price per ADS (US$) 24.78 15.26 Units Issued 24,000,000 12,094,000 17.75 2,000,000 24.516 12,094,000 28.964 5,486,000 57.79 6,560,000 Underlying Securities TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders (Pursuant to ADR Conversion Sale Program) TSMC Common Shares from Selling Shareholders (Pursuant to ADR Conversion Sale Program) Common Shares Represented 120,000,000 60,470,000 10,000,000 60,470,000 27,430,000 32,800,000 Rights and Obligations of ADS Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Trustee N/A N/A N/A N/A N/A N/A Depositary Bank Custodian Bank Citibank, N.A. - New York Citibank, N.A. - Taipei Branch Citibank, N.A. - New York Citibank, N.A. - Taipei Branch Citibank, N.A. - New York Citibank, N.A. - Taipei Branch Citibank, N.A. - New York Citibank, N.A. - Taipei Branch Citibank, N.A. - New York Citibank, N.A. - Taipei Branch Citibank, N.A. - New York Citibank, N.A. - Taipei Branch ADSs Outstanding (Note ) 24,000,000 46,222,650 48,222,650 71,407,859 76,893,859 83,453,859 Apportionment of the expenses for the issuance and the maintenance All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to the issuance of ADSs were borne by the selling shareholders, while the maintenance expenses such as annual listing fees and accountant fees were borne by TSMC All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to the issuance of ADSs were borne by the selling shareholders, while the maintenance expenses such as annual listing fees and accountant fees were borne by TSMC All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to the issuance of ADSs were borne by the selling shareholders, while the maintenance expenses such as annual listing fees and accountant fees were borne by TSMC All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to the issuance of ADSs were borne by the selling shareholders, while the maintenance expenses such as annual listing fees and accountant fees were borne by TSMC All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to the issuance of ADSs were borne by the selling shareholders, while the maintenance expenses such as annual listing fees and accountant fees were borne by TSMC All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to the issuance of ADSs were borne by the selling shareholders, while the maintenance expenses such as annual listing fees and accountant fees were borne by TSMC Please See the Deposit Agreement and the Custody Agreement for Details Terms and Conditions in the Deposit Agreement and the Custody Agreement Agreement for Details Please See the Deposit Agreement and the Custody Closing Price per ADS 2001 01/01/2002 - 02/28/2002 (Forward) Please See the Deposit Agreement and the Custody Agreement and the Custody Agreement for Details Please See the Deposit Agreement for Details Please See the Deposit Agreement and the Custody Agreement and the Custody Agreement for Details Please See the Deposit Agreement for Details High Low Average High Low Average US$ 25.25 US$ 8.85 US$ 17.36 US$ 19.50 US$ 16.01 US$ 17.62 T S M C A n n u a l R e p o r t 2 0 0 1 19 Issuing Date 04/17/2000 06/07/2000 - 06/15/2000 05/14/2001 - 06/11/2001 06/12/2001 11/27/2001 02/07/2002 Issuance & Listing NYSE NYSE NYSE NYSE NYSE NYSE Total Amount (US$) 224,640,000 1,167,873,850 240,999,660 297,649,640 320,600,000 1,001,650,000 Offering Price per ADS (US$) 56.16 35.75 20.63 20.63 16.03 16.75 Units Issued 4,000,000 32,667,800 11,682,000 14,428,000 20,000,000 59,800,000 Underlying Securities TSMC Common Shares from Selling Shareholders Cash Offering TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders (Pursuant to ADR Conversion Sale Program) TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders Common Shares Represented 20,000,000 163,339,000 58,410,000 72,140,000 100,000,000 299,000,000 Rights and Obligations of ADS Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Same as those of Common Share Holders Trustee N/A N/A N/A N/A N/A N/A Depositary Bank Custodian Bank Citibank, N.A. - New York Citibank, N.A. - Taipei Branch Citibank, N.A. - New York Citibank, N.A. - Taipei Branch Citibank, N.A. - New York Citibank, N.A. - Taipei Branch Citibank, N.A. - New York Citibank, N.A. - Taipei Branch Citibank, N.A. - New York Citibank, N.A. - Taipei Branch Citibank, N.A. - New York Citibank, N.A. - Taipei Branch ADSs Outstanding (Note) 87,453,859 144,608,739 156,290,739 170,718,739 259,006,235 318,806,235 Apportionment of the expenses for the issuance and the maintenance All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to the issuance of ADSs were borne by the selling shareholders, while the maintenance expenses such as annual listing fees and accountant fees were borne by TSMC All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to the issuance of ADSs were borne by TSMC and the selling shareholders, while the maintenance expenses such as annual listing fees and accountant fees were borne by TSMC All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to the issuance of ADSs were borne by the selling shareholders, while the maintenance expenses such as annual listing fees and accountant fees were borne by TSMC Terms and Conditions in The Deposit Agreement and the Custody Agreement Agreement for Details Please See the Deposit Agreement and the Custody Agreement and the Custody Agreement and the Custody Please See the Deposit Please See the Deposit Agreement for Details Agreement for Details All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to the issuance of ADSs were borne by the selling shareholders, while the maintenance expenses such as annual listing fees and accountant fees were borne by TSMC Please See the Deposit Agreement and the Custody Agreement for Details All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to the issuance of ADSs were borne by the selling shareholders, while the maintenance expenses such as annual listing fees and accountant fees were borne by TSMC All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to the issuance of ADSs were borne by the selling shareholders, while the maintenance expenses such as annual listing fees and accountant fees were borne by TSMC Please See the Deposit Agreement and the Custody Agreement and the Custody Agreement for Details Please See the Deposit Agreement for Details Closing Price per ADS 2001 High Low Average 01/01/2002~02/28/2002 High Low Average US$ 25.25 US$ 8.85 US$ 17.36 US$ 19.50 US$ 16.01 US$ 17.62 Note : TSMC has in aggregate issued 204,811,800 ADSs since 1997, which, if taking into consideration of stock dividend distributed over the periods, would amount to 319,269,235 ADSs. As of 02/28/2002, total number of outstanding ADSs was 318,806,235 after 463,000 ADSs were redeemed. Stock dividend distributed in 1998, 1999, 2000 and 2001 was 45%, 23%, 28% and 40% respectively. 7. Employee Stock Option: Not Applicable 8. Merge and Acquisition in 2001: Not Applicable 20 T S M C A n n u a l R e p o r t 2 0 0 1 9. Corporate Citizen: the TSMC Education and Culture Foundation TSMC takes pride in its role as an exemplary corporate citizen and its commitment to Taiwan's social and cultural development. In an attempt to identify and meet the ever-rising diversity of societal needs through a formal vehicle, TSMC established the TSMC Education and Culture Foundation (TSMC Foundation) in 1998. The Foundation's mission is guided by the following three principles. Commitment to Education TSMC Foundation established three educational grant programs to help incubate emerging talents in high t e c h n o l o g y, corporate management and intellectual property rights. They are: (1) The TSMC Undergraduate International Exchange Program Scholarship, (2) the TSMC Intellectual Property Scholarship and TSMC Visiting Chair Professorship and (3) The International MBA (IMBA) program. The first two programs offer major universities in Taiwan grants for scholarships, lectures and faculty study programs. The third program was newly established in 2001 in collaboration with National Chengchi University's existing IMBA program that aimed to foster the cultivation of international business leaders. Contribution to Communities TSMC Foundation supports community service in both Hsin-Chu and Tainan City, Taiwan, where TSMC's facilities are located. The Foundation provides funding and also works hand in hand with volunteers to build a better community for both our employees and our neighbors. The Foundation focuses its attention on art and cultural activities, environmental protection issues, health care programs, athletic events, as well as other programs to help enhance the quality of life in those communities. One of the highlights of the TSMC Foundation's activities in 2001 was the conservation of historic monuments. In Hsin-Chu City, the Foundation sponsored research projects that helped conserve a temple that stood as a historic monument and also the publication of Hsin-Chu Historic Sites and Hsin-Chu Historic Map , both edited by the Bureau of Culture of Hsin-Chu City, to help attract tourists to see the historic side of the city. In 2001, the TSMC Foundation also teamed up with the Red Cross of the Republic of China (Taiwan) to sponsor a program entitled the "Training and Service of Home Care for Solitary Senior Citizens", underwriting the training of some 480 home caretakers in the next three years. Through this program, the Foundation succeeded in putting forth a model that demonstrated how resources from private sectors, volunteer groups and government agencies could join hands in servicing senior citizens' living by themselves. Sponsorship of National Art and Cultural Activities In 2001, TSMC Foundation made generous contributions to the establishment of the Taipei Contemporary Art Museum, a concrete gesture that aimed to foster and promote Taiwanese contemporary arts. In addition, the Foundation was also a major sponsor to "319 Towns in Taiwan", an important national cultural revival project launched by the Common Wealth Magazine in 2001. The goal of the project was to encourage citizens to target and explore some of the 319 towns in Taiwan to experience local cultures personally and to help revive them collectively. Four travel books on these 319 towns in Taiwan were published, serving also as documentation of the much recognized and appreciated revival project. T S M C A n n u a l R e p o r t 2 0 0 1 21 22 T S M C A n n u a l R e p o r t 2 0 0 1 OPERATIONAL HIGHLIGHTS 1. Business Activities 1-1 Business Scope TSMC manufactures semiconductor chips for the world's integrated circuit (IC) companies. The Company focuses solely on the IC Foundry business, neither manufactures nor markets any branded products of its own. TSMC excels in every aspect of the IC foundry business, coupling industry-leading process technologies in state-of-the-art, high- volume wafer manufacturing facilities with unmatched transparency to create world-class customer responsiveness. TSMC has also developed an industry-leading service organization featuring sophisticated design services, mask making, and wafer probing capabilities, as well as third-party alliances that match the Company and its customers with leading developers of electronic design automation (EDA) tools, libraries, intellectual property cores and assembly and testing services. As TSMC's capabilities have expanded, customers have come to rely on TSMC to manufacture chips used across the entire IC application spectrum, including leading-edge microprocessors, graphics chips, wireless IC communications platforms and programmable logic devices. By its own estimates, TSMC produced about six to seven percent of the world's supply of ICs in 2001. TSMC's rich portfolio of customers includes nearly every leading integrated device manufacturer (IDM) and hundreds of highly innovative fabless semiconductor companies. 1-2 Research and Development Plans R&D Mission and Vision Semiconductor technology is one of TSMC's core competencies. TSMC's R&D mission is to provide our customers with the world's leading technology platforms and system-on-a-chip (SoC) solutions for state-of-the-art IC applications. This enables the Company to offer a broad spectrum of leading edge processes, e.g., 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 our customers use them as platforms for the next generation of computing, graphics, communications (network and wireless), industrial and consumer electronics applications. Through its innovative and aggressive R&D work, TSMC not only strives to excel in semiconductor technology, but also helps facilitate that technology to benefit of mankind. TSMC's research and development commitment is to continue to stay ahead of the International Te c h n o l o g y Roadmap for Semiconductors (ITRS), extend semiconductor technology as far as the laws of physics allow, and explore the possibilities inherent in new technologies for future generations of integrated circuits. It is anticipated that only a handful of IC manufacturing companies worldwide, including TSMC, will have the R&D capability necessary to support these goals in the future. TSMC continues to strengthen its global leadership through strategically appropriate partnerships, alliances, and collaborative activities with world leaders in both the academic and commercial sectors to develop new technologies, intellectual property (IP), process equipment, materials, and computer-aided design tools. As the sole Ta i w a n e s e member of International SEMATECH, TSMC hosted the first International SEMATECH board meeting in Taiwan in 2001, clearly demostrating its reputation as the foundry industry R&D l e a d e r. The highly strategic nature of our collaborative efforts was also raised to a new level in 2001, when TSMC established global alliance in the 90nm technology generation and set up world-class 90nm ASIC/SoC technology platforms. To date, companies participating in this effort include leading integrated device manufacturers in Europe, Japan, Taiwan, and the United States. T S M C A n n u a l R e p o r t 2 0 0 1 23 R&D Organization and Investment R&D Expense The success model of TSMC's has attracted the finest domestic and overseas Amount: NT$K researchers and technologists to join the Company's R&D task force, whose collective efforts continue to increase the relative strength and capability of the Company's R&D team. Already one of the highest-quality and largest- 10,649,019 applied semiconductor research teams in the world, TSMC increased its R&D 7,203,591* staff by over 25 percent between 2000 and 2001. The Company also expanded its research scope and manpower investment in exploratory research for technologies beyond conventional silicon CMOS and bipolar technologies, such as in 3D structures and novel memory devices for future 1,589,777 SoC applications. A CTO office was established in 2001 to strengthen overall long term R&D focus as well as to extend technology limits. 2000 2001 Jan. 1 - Feb. 28, 2002 To supplement its R&D talents and skills, TSMC increased its R&D expenditure *The number of R&D expenditure has been in 2001 by 47 percent to over NT$10.6 billion. For 2002, this investment is reclassified to conform to 2001 classification. expected to exceed NT$9.7 billion. TSMC has increased significantly its R&D capital investments in 2001 and 2002 for exploratory research and 90nm- and 65nm-generation technology development. A brand-new billion-dollar (US$) 12-inch-wafer R&D pilot line (part of the multi-billion dollar Fab 12) was established in 2001. It has an extensive set of advanced and critical R&D tools for the development of 90nm and 65nm generations, e.g., the industry's first 12-inch high-NA 193nm scanners, high- k gate dielectric, advanced silicide, Cu, and ultra-low-k interconnect dielectric tools, etc. An exploratory materials pilot line was established in 2001 to research novel and exotic materials. TSMC has also established a new characterization lab for low-k dielectrics and other materials; an advanced lithography center; and a process/material simulation lab that extends its fundamental and exploratory works in semiconductor technology. TSMC valued highly its development partnerships with and investment in key process tool and materials vendors. These initiatives allow TSMC to evaluate new materials and tools and accelerate manufacturing cost reduction. The same initiatives have also led to a variety of intellectual property developments for TSMC, strengthening its leadership in process and manufacturing technologies as well. Through close collaboration with vendors, TSMC is able to excel in equipment and materials sciences, providing advanced platforms for technology innovation and production efficiency. R&D Accomplishments in 2001 One of TSMC's business philosophies is "Unceasing Innovation". Reflecting its commitment to that value, TSMC was awarded 598 US patents and 861 ROC patents in IC process technology in 2001. TSMC also continued to accelerate the introduction of new technologies with high speed, maintaining its track record of releasing one technology generation per year. TSMC's R&D organization posted many outstanding accomplishments in 2001. Notably, we demonstrated the feasibility of 90nm CMOS logic for SoC and MPU applications. Featuring sub-8 picosecond transistor gate delays and 1.26um2 and smaller SRAM bit cells, this new process is destined to become a leading SoC platform in the industry. Furthermore, several breakthroughs were made in demonstrating spin-on and chemical vapor deposition-based low-k processes with dielectric constants below 2.5 for the 90nm technology node. In addition, high-k gate dielectric materials were investigated intensively for better device performance. TSMC has enjoyed an acclaimed reputation for delivering the industry's broadest spectrum of leading-edge processes. This fact was further evidenced in 2001, as TSMC became the only foundry and one of only two companies worldwide to manufacture customer products in volume using a 0.13um CMOS logic process. 24 T S M C A n n u a l R e p o r t 2 0 0 1 Our 0.13um process portfolio covers the entire spectrum of SoC applications with a family of high-performance, low p o w e r, and baseline processes. The high-performance, low-voltage technology is ideal for processor applications (such as microprocessors, network processors, and media processors). The low-power technology is among the best available for battery/wireless applications, such as cell phones, while the core or standard logic technology is a cost- effective option for many industrial and consumer electronics uses. The TSMC 0.13um process also features the most aggressive design rules in the world, including low-voltage and high-performance transistors with gate lengths of less than 70nm. Combining these fast transistors with advanced eight-layer copper and low-k interconnects, this technology is capable of supporting greater than 10-giga-bit-per-second (Gbps) network processors, multi-GHz microprocessors, and other high performance applications. Spectrum of New Processes It is worth noting that all of these developments cited below were achieved despite a sharp industry downturn in 2001. Numerous new process technology options were also introduced in this year. a. 0.13um Mixed-Signal/RF Technology TSMC R&D released the industry's first 0.13um mixed-signal/RF CMOS process in 2001. This process features a rich set of modular digital, analog, and RF devices (supporting 0.13um core, low power and low voltage technologies) and precision passive components, such as varactors, poly-si resistors, high-Q MIM capacitors and inductors. The process allows designers to combine logic with base-band, analog and RF features in a single SoC platform for Bluetooth and other communication applications. b. SiGe RF BiCMOS Technology TSMC released the foundry's first 0.35um SiGe RF BiCMOS technology in 2001 and is now developing next generation 0.18um SiGe RF BiCMOS technology. It features high performance and compatibility with TSMC's baseline CMOS logic processes, combined with precision RF passive components such as high-Q metal-insulator- metal capacitors and inductors, and provides RF, analog, and baseband features in a single chip for high speed, low power, low noise, wired and wireless communication. c. 0.18um CMOS Image Sensor Process TSMC's color CMOS image sensor (CIS) process is by far the most advanced technology in the industry. Based on TSMC's existing 0.80um to 0.25um production technology, the industry's first 0.18um CIS process offers a competitive pixel size (3.0um pitch) in an integrated technology including color filters and micro-lenses. d. Embedded Memory Technology During 2001, TSMC aggressively scaled its embedded memory technologies for SoC integration. These value-added technologies are fully compatible with their respective core logic 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 0.13um-generation 6T SRAM cell is as small as 2.14um2, with compiler performance capable of greater than 1GHz. We also demonstrated a 1.27um2 6T SRAM cell for our 90nm node in 2001. These cells are also available for stand-alone SRAM devices with high speed, high bit density or low power consumption. Through our collaboration with Mosys, TSMC delivered 0.25um, 0.18um and 0.15um 1TRAM memory cells to volume production with very good results in 2001. Generic and ultra-low-power 1TRAM technologies were also verified on multiple versions of TSMC's 0.13um triple-oxide logic processes with excellent yield results. As a consequence, TSMC became the first foundry to successfully manufacture 0.13um 1TRAM products. T S M C A n n u a l R e p o r t 2 0 0 1 25 e. Flash/Embedded Flash Technology In 2001, TSMC successfully completed product qualification for its 0.25um embedded Flash technology with a mixed signal option, and successfully entered mass production. A series of Flash and EEPROM-emulator IP blocks were verified to support a variety of applications ranging from one-time-programmability (OTP) to high-endurance and high-temperature long-term data retention requirements. TSMC's 0.18um embedded flash, with a mixed- signal/RF option, was made available at the end of 2001. f. First 12-inch Production Wafers In 2001, TSMC's R&D organization played a leading role in the delivery of the foundry industry's first 12-inch 0.15um and 0.13um CMOS logic prototype wafers from the Fab 6 12-inch pilot line in Tainan, as well as the production of 12-inch 0.15um wafers from Fab 12 in Hsin-Chu. R&D is also actively involved in qualifying 0.13um production wafers, scheduled for Fab12 delivery in early 2002. The organization is also actively involved in finalizing the equipment set for the Company's second dedicated 12-inch facility, Fab 14 in Tainan. g. State-of-the-art Mask Technology TSMC supports one of the largest in-house mask fabrication capabilities in the world. Our mask shops are known for excellent quality and cycle time to meet aggressive R&D, prototyping and production requirements. All of our facilities feature state-of-the-art E-beam mask writers and inspection tools for both R&D and production use, including advanced optical-proximity-correction (OPC) and phase-shift mask (PSM) technology for 0.13um, and 90nm logic processes. R&D Plans for 2002 Moving forward, TSMC will continue to increase its R&D personnel and investment while accelerating its R&D activities. One of TSMC's key focus areas in R&D will be the qualification of 90nm logic/mixed signal technology platforms and related embedded memory for SoC applications. In addition, the Company will continue development of its 12-inch equipment set. Other research and development projects will include new 65nm logic technology, 90nm mixed-signal/RF, 0.13um embedded memory, 0.18um SiGe BiCMOS, 0.18um color image sensors, and 0.35um high-voltage process modules. TSMC plans to continue to work closely with International SEMATECH and photolithography equipment suppliers to ensure timely development of 157nm scanners, EUV scanners, and E-beam projection technology to support process development of sub-90nm technology. By integrating advanced mask and lithography in-house, TSMC can extend its leadership in micro-patterning technology and manufacturing yield, as well as shorten development and manufacturing cycle time. In addition, TSMC's R&D team will also engage in exploratory work on processes beyond the 65nm generation, including geometries as low as 50nm and 35nm. Exploratory work is already under way on new transistors and process technologies such as SOI, 3D structures, MRAM, and strained-layer CMOS. Attention is being focused on developing advanced high-k gate insulators and extreme low-k (k<=2.0) interconnect insulator materials. With its highly competent and dedicated R&D team and its long-lasting 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 SoC processes for its customers. 26 T S M C A n n u a l R e p o r t 2 0 0 1 2. Marketing and Sales 2-1 Achievements in 2001 According to industry analysts, 2001 was the worst year in the history of the IC market, registering a decline of 32 percent. The confluence of global economic recession, significant excess inventories, weaker demand for electronic equipment, and excess IC manufacturing capacity appears to be the cause. Despite these factors, TSMC performed better than both the overall semiconductor industry and its competitors in the IC foundry industry. The global IC industry slowed considerably at the beginning of 2001, prompting TSMC to quickly adjust its expansion plans, reduce operating costs and expand the availability of advanced processes to maintain its operating margins. As part of this cost reduction strategy, TSMC restructured operations to improve efficiency but did not lay off any employees - a unique achievement in 2001 when most IC companies cut costs by downsizing. By keeping our most valuable resource - the skill and experience of our employees - TSMC has preserved its ability to respond to the anticipated recovery in 2002. On capacity expansion, In 2001, TSMC strategically added to its advanced process capacity for geometries of 0.18um and below. This was accomplished by upgrading facilities that had been tuned to 0.35um and 0.25um processes. To further bolster deliveries to customers, the Company continued the construction of its two 12-inch facilities, Fab12 in Hsin-Chu and Fab14 in Tainan, Taiwan, and its joint venture fab with Philips in Singapore, System-on-Semiconductor Manufacturing Company (SSMC). SSMC entered production in mid-2001, followed by Fab 12 at the end of 2001. Cleanroom construction for Fab 14 is expected to be completed in the second half of 2002. In summary, the Company's superior performance can be attributed to three major factors. First, TSMC sustained strong partnerships with its diverse customer base worldwide through its focus on services. Second, TSMC extended its leadership in 0.18um, 0.15um and 0.13um processes and expanded its advanced process manufacturing capacity at multiple 8-inch and 12-inch fabs. Third, TSMC embarked upon a program to set an accelerating pace of introducing new technologies in anticipation of a stronger and immediate demand for its most advanced processes and options. In a year when the overall IC industry was marked by a sharp downturn, and in particular the foundry market, TSMC's strategy succeeded in maintaining profit while gaining significant shares at the same time. The company estimates that, on a revenue basis, its share of the dedicated foundry market reached 53 percent in 2001, up from 48 percent in 2000. 2-2 Market Outlook Analysts' predictions of the overall IC market growth for 2002 range from a decline of seven percent to an increase of 23 percent. The general consensus forecast for the logic IC market is a growth of approximately ten percent. However, fabless IC companies, which comprised 66 percent of TSMC's business in 2001, are expected by industry analysts to grow at nearly twice that rate. TSMC continues to diversify its customer base while supporting growth for fabless IC companies. Major and long- term customer prospects have also begun to emerge from the ranks of IDMs. With their established customer bases and strong product portfolios, these companies can contribute 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 its memory manufacturing services to a very small percentage of sales revenue. Taking into consideration the highly T S M C A n n u a l R e p o r t 2 0 0 1 27 focused development of its logic technologies and the high volatility of memory markets in the industry's history, TSMC will still maintain the policy in 2002, even as it works to expand its share of the emerging markets for embedded memories and SoC products. In 2001, TSMC's customer base increased in almost every market, including graphics, broadband communications, digital consumer electronics, and wireless communications. Many of these markets are high growth segments demanding advanced manufacturing technologies. New customers utilized large volumes of wafers in 2001 and are expected to benefit TSMC increasingly over the next several years as these markets continue to grow. End market leaders such as Altera, ATI, Broadcom, Nvidia, Qualcomm and VIA drive TSMC's demand from the fabless segment, while leading IDMs such as Motorola and Philips were also significant customers. Through 2002, TSMC will continue to target marketing efforts to engage customers in similar high growth segments of logic component markets. TSMC believes that foundry services will play an increasingly important role in the IC industry worldwide. By definition, fabless companies have all their ICs manufactured by foundries. IDMs are expected to increase their business relationships with foundries while moving forward. Industry forecasts predict that by 2005, more than 20 percent of worldwide IC production will come from foundries, and increasing to more than 30 percent by 2010. As design automation and IP integration tools improve, product development risks will decrease, facilitating system companies to shift their IC needs directly to foundries. TSMC will continue to be a leader in reducing the barriers to entry for these companies. At the level of supply chain, TSMC leads the trend toward "disintegration", whereby fables, IDM and system companies focus on their core competencies, shifting manufacturing and other services to partners with expertise in foundries, EDA tools, reusable IP, library development, design services and other areas. Enabled by the Internet, seamless business processes increases the speed at which this trend accelerates, allowing customers and third parties to work directly with TSMC in a highly transparent operating environment. As TSMC continues to grow, it will also continue its positive influence in other supply chain partners to expand support for the foundry model. For example, leading equipment and material suppliers, such as Applied Materials, ASML, Komatsu, Shinetsu, Taisil, and To k y o Electron, have already begun expanding their technology and service programs targeted to major foundries. At the technological level, consumer demand for lower cost and higher performance is expected to encourage our customers to integrate more functionality into their device designs and in turn accelerate the demand for our advanced technologies. TSMC plans to maintain high average selling prices (ASPs) for wafers by migrating production capacity to increasingly advanced technologies. TSMC's competitive landscape is evolving and dynamic. TSMC's current major competitors in the foundry industry include UMC and Chartered Semiconductor, the number two and three foundry service providers. Anticipating strong growth of foundry business, new entrants are emerging. TSMC believes that the anticipated high growth of the foundry business will continue to attract new competitors. However, the current leaders are best positioned to benefit from fast growth. Moving into 2002, TSMC will focus on the following technologies: Advanced Technologies for SoC During 2001, TSMC delivered the foundry industry's first 0.13um process technology into production and became the only foundry company manufacturing customer products in volume at this node. With advanced features including copper interconnects and low-k dielectrics, the process is the most advanced available to designers today. By the end of 2001, TSMC had delivered 33 fully functional 0.13um devices to its customers and acknowledged more than 60 production tapeouts. Several customers were in volume production and nearly 100 Cybershuttle prototype tapeouts 28 T S M C A n n u a l R e p o r t 2 0 0 1 were recorded. The Company expects a smooth ramp to high volume production for its 0.13um process in 2002 and beyond, when the process will represent a significant portion of overall sales. TSMC has also made significant inroads into what it expects will be the next-generation SoC platform, the 90nm process node. Pointing to industry reports that the semiconductor industry will likely rally around only a few processes at this node, TSMC announced in 2001 an initiative to align first-tier technology companies to its 90nm process. The alignment is expected to result in nearly identical manufacturing steps carrying the minimum requirement of a common set of design rules, common electrical parameters, and identical transistor characteristics. The Company believes that by aligning with a single, open 90nm semiconductor manufacturing process, the IC industry can efficiently and rapidly build single-chip systems, accelerating innovation across multiple market segments. TSMC has already reached several agreements with IDMs and major fabless companies in Europe, Japan and the US by the end of 2001, and expects to begin initial production of its 90nm technology later in 2002. In addition, the move to a standardized process technology also proved to have a number of other benefits for the i n d u s t r y. By standardizing, developers of intellectual property can focus their attention on rapid delivery of an increasing variety of drop-in, reusable IP products. Similarly, designers of libraries - the primary building blocks of today's ICs - can also target at this single process, eliminating the expense of supporting multiple processes that often provide only moderate returns on their investments. In support of its SoC platform initiative, TSMC has dedicated significant resources to the accelerated development of technology options for its 0.13um and 90nm processes. Such options include mixed-signal/radio frequency (MS/RF), embedded flash, embedded SRAM, and single-transistor SRAM modules, all of which can be integrated into standard CMOS logic for complex SoC applications. MS/RF Pushes the Roadmap Envelope TSMC's 0.13um MS/RF process leads the industry by several quarters, and is fully compatible with its logic process. It has attracted numerous advanced designs for the communications market, even as the segment experienced a severe downturn in general in 2001. We expect the communications market to regain momentum, precipitating another round of high growth and therefore high-volume use of MS/RF silicon. TSMC will accelerate the development of its MS/RF process for the 90nm generation, providing significant competitive advantages to its customers in the communications arena. Embedded Memory Processes As an indicator of the strength of the SoC trend, TSMC gained significant business among customers requiring embedded memory in 2001. TSMC's 0.25um and 0.18um technology processes support embedded flash ( E m b F l a s hT M), embedded single transistor SRAM (Emb1TRAMT M) and embedded 6T/8T SRAMs. TSMC was the first foundry to bring FlashIPTM and 32-bit RISC intellectual property (IP) cores together in a high performance, integrated customer product. The higher density embedded memory allows designers to integrate more memory into the same silicon real estate, significantly increasing performance and functionality. These benefits are increasingly important for computer, communications, consumer and automotive applications. Special Logic Processes In addition to its advanced CMOS logic processes, TSMC has developed a variety of specialty processes, including SiGe BiCMOS, CMOS image sensor, color filter, and high voltage processes. TSMC became the first foundry to offer SiGe BiCMOS process, providing high performance and low power consumption for communications applications including cellular phones and optical networking. TSMC's development of a 0.35um enhanced version CMOS image sensor process was finished in the third quarter of 2001, while a 0.25um CMOS image sensor process was qualified at the end of 2000 and entered volume production T S M C A n n u a l R e p o r t 2 0 0 1 29 in the first quarter of 2001. The Company is now engaging in the development of a 0.18um CMOS image sensor process, which is expected to be completed by the end of 2002 and enter mass production in 2003. TSMC's 8-inch color filter processes were also available at the end of 2001. In the realm of high-voltage technology, the development of 0.35um 1-layer-poly, 4-layer-metal CMOS high voltage and liquid-crystal-on-silicon (LCOS) processes was completed at the end of 2001 and will enter production in the beginning of 2002. Premier Foundry Design Services To facilitate customers' time-to-market, TSMC continues its tradition of providing unrivaled design services through its Design Service Alliance (DSA). Several alliance groups are included under the DSA umbrella, namely, IP, Library, EDA, and Design Center third-party partners. TSMC raised the bar on IP quality in 2001 when it announced a Five Star IP Alliance Program. Under this program, IP vendors receive a one-star ranking if their IP is verified in TSMC silicon; a three-star ranking if it is implemented in a customer product; and a five-star ranking if it includes testability structures such as industry-standard JTAG or BIST, allowing designers to test the IP used in their SoC designs easily. TSMC's Library Alliance similarly challenged the industry by providing the broadest portfolio of library elements for TSMC's 0.25um, 0.18um and 0.13um process technologies. At the end of 2001, TSMC had enlisted library developers to provide more than 100 high-value library elements for its 0.13um process. TSMC's EDA Alliance was similarly busy, developing strategic thrusts with the leading EDA companies. Chief among its developments in 2001 was the release of a design reference flow and a variety of design kits allowing designers to quickly and easily port mixed-signal and RF designs to TSMC silicon using EDA tools from key vendors. TSMC's Design Center Alliance was also expanded to include 29 members total throughout Asia, Europe and the U.S. Backend Services a. Bumping Service Highly integrated SoC designs increasingly require improved packaging technologies. Flip-chip packaging reduces overall device size, allows higher I/O counts and enhances overall performance. At the IC manufacturing level, this requires a new approach to I/O integration and solder bumping. TSMC is the only dedicated foundry to offer in- house bumping services for flip-chip applications. A turnkey packaging service is also available, featuring solder bumping, post-bumping wafer sorting, I/O pad redistribution, ground-up design, SPICE model, and back-end assembly subcontract management. Greatly simplified logistics and shortest possible cycle time were achieved due to this one-stop service. TSMC's bumping process was fully qualified in 2001 with advanced technology partners. The bumping facility has a capacity of 15,000 wafers per month. TSMC's solder bumping services are also available on 0.13um CyberShuttle prototyping services to qualify customer designs. For 2002, TSMC will continue to focus on ways to further improve its integrated flip-chip capabilities for advanced products. b. Testing Service TSMC's testing capabilities were advanced on both the engineering and manufacturing fronts in 2001. With the development of an integrated manufacturing execution system providing up to 12-inch wafer sorting, TSMC has embarked upon a new manufacturing planning system that is expected to elevate manufacturing efficiency, delivery and quality. The new system is targeted for implementation in 2002. 30 T S M C A n n u a l R e p o r t 2 0 0 1 2-3 Customer Applications Produced by TSMC's high quality processes, the advanced ICs are designed and marketed by our customers for a diverse range of end-product applications, including PCs, servers, computer peripherals, Internet appliances, wired and wireless networking and communication systems, consumer electronics, automotive and industrial equipment. TSMC is committed to installing sufficient capacity for customers' increasing demands from every application segment. 2-4 Major Materials Status Major Materials Major Suppliers Market Status Procurement Strategy Wafer MEMC (production plant: U.S.A. and Taiwan) SITIX (production plant: U.S.A. and Japan) S.E.H. (production plant: Japan, Malaysia and Taiwan) Wacker (production plant: Germany and Singapore) Chemical Merck-Kanto (TPS) Tai-Young High Tech (TYS) Photoresist T.O.K. S.E.H. Sumitomo AZ/Clariant Specialty gas TAIYO TOYO SANSO AIR PRODUCT AIR LIQUID BOC These four wafer suppliers combined provide more than 70 percent of the world's wafer capacity. Each supplier has multiple manufacturing sites, including Asia, Europe and U.S.A. to meet customer and market demand. These two companies are worldwide major bulk chemical suppliers. The chemical raw materials of these two suppliers are imported from Japan or Taiwan local producers, primarily to support the Taiwan market. These four companies are worldwide major photoresist suppliers. These four suppliers are mutual competitors in Taiwan market; they all provide JIT service. These four companies are worldwide major specialty gas suppliers. These four suppliers are competitors. There are other suppliers trying to penetrate the Taiwan market, which will enable TSMC to get better commercial terms in future. TSMC's suppliers of silicon wafer are required to pass stringent quality certification procedures. For risk management, we procure wafers from multiple sources to ensure an adequate supply for volume manufacturing. TSMC maintains competitive price and service agreements with its wafer suppliers and may extend this relationship with key suppliers to include strategic and collaborative agreements. 6.TSMC reviews the quality, delivery, cost and service performance of its wafersuppliers, responding dynamically to these reviews. An annual physical quality system audit for each wafer supplier ensures that TSMC's quality specifications are maintained. TSMC's chemicals suppliers have localized many of their operations to be close to our major manufacturing centers. Because of this, inventory and quality control has improved significantly. An annual physical quality system audit for chemical suppliers ensures that TSMC's quality specifications for chemicals are maintained. TSMC provides a three-month rolling demand forecast to its photoresist suppliers, to provide them with adequate time to prepare these complex materials. TSMC monitors photoresist materials status through the monthly inventory reports provided by suppliers. A monthly physical inventory check at the supplier's warehouse confirms material availability. In addition, TSMC conducts an annual physical quality system audit for each supplier to ensure photoresist quality, supply, and availability. TSMC's four major specialty gas suppliers are located in Japan, the UK and U.S.A., providing sufficient geographic dispersion to minimize supply risk. These four suppliers compete against each other in Taiwan market, ensuring competitive pricing and quality service. Local inventory service ensures that TSMC's demands can be fulfilled; this is backed by monthly inventory reporting and monitoring. In addition, TSMC conducts yearly physical quality system audits for each supplier to ensure specialty gas quality and supply availability. 2-5 Production over the Last Two Years Year 2000 2001 Capacity 3,263,236 4,378,925 Unit: Capacity and Quantity (8" wafer)/Amount (NT$K) Wafers Quantity 3,467,270 2,234,163 Amount 76,545,082 83,741,166 T S M C A n n u a l R e p o r t 2 0 0 1 31 2-6 Net Sales over the Last Two Years Sales Quantity & Amount Year 2001 2000 Local Export Local Export Unit : Quantity (8" wafer)/Amount (NT$K) Major Product Wafer Package Other Total Quantity Amount Quantity Amount Quantity Amount Quantity Amount 539,347 28,267,693 1,544,899 80,969,736 651,604 29,999,959 2,662,803 122,595,893 19,209 1,241,470 55,022 3,556,057 18,418 1,143,289 75,264 4,672,092 12,523 3,067,248 35,871 8,785,799 7,911 1,536,839 32,331 6,280,347 571,079 32,576,411 1,635,792 93,311,592 677,933 32,680,088 2,770,398 133,548,332 3. Personnel Growth over the Last Two Years Year Number of Employees Average Average Percentage by Education Direct Engineer Admin. Manager Total Age Years of Ph.D. MS/MA BS/BA College High Others Total Labor 2000 7370 5739 2001 6807 5322 02/28/ 2002 6625 5267 503 455 453 1024 14636 1092 13676 1083 13428 29 29 30 Service 3.2 4.1 4.3 School 2.2% 23.7% 14.6% 26.3% 33.1% 0.1% 100.0% 2.3% 24.2% 15.0% 25.9% 32.5% 0.1% 100.0% 2.4% 24.4% 14.9% 25.9% 32.3% 0.1% 100.0% 4. Employee Relations TSMC believes that the future growth of the Company lies largely in the dedication of its employees, and therefore strives continuously and consistently to create an environment that supports both personal challenge and career development. As a result, TSMC has maintained one of the highest employee retention rates in the industry. TSMC's efforts in employee relations have been widely recognized. In 2001, TSMC was the only Taiwanese company awarded with the "Best Employers in Asia" from a regional study conducted by Asian Wall Street Journal and F a r Eastern Economic Review. In a "Performance Management" study of high performing Asian Companies conducted by McKinsey & Company, Inc., TSMC also received high ratings. Recruiting TSMC remains organizationally lean and efficient, allowing it to focus continually on the quality and productivity of its people in preparation to meet future challenges in the industry. The downturn of 2001 has resulted in hiring freezes and employee layoffs across many semiconductor companies. While implementing a general hiring freeze to control and manage cost in 2001, TSMC still continued its strategic recruiting for key talents. A total of 450 key talents were recruited in 2001, 300 of them were brand new graduates from various colleges who were among the very best in each of their graduating classes. Development Programs TSMC fosters a "continuous learning" culture and places strong emphases on employees' growth and development to ensure that all of them are given the opportunities to maximize their potentials. In 2001, TSMC upgraded the "Performance Management & Development" (PMD) process to another level with e-PMD, which included the feature of on-line tracking of "Individual Development Plan" for every employee. TSMC also conducted more than 1,400 training programs with 37,000 participants in 2001. In addition, more than 55,000 participants have benefited from the newly launched e-learning system. To support organizational 32 T S M C A n n u a l R e p o r t 2 0 0 1 development, TSMC also provided tailor-made workshops on the bases of specific requirements from individual work teams. A total of 52 organizational development workshops were conducted in 2001. To ensure professional c o m p e t e n c y, each key function also designed their respective learning roadmaps for professional employees to facilitate individual development planning. Compensation TSMC's Total Compensation Program is designed to attract and retain the right kind of talents, motivate them to perform to their maximum potential, and accomplish the Company's annual as well as long-term objectives. The program is also designed to reward high performance employees at every level with competitive compensation, with higher proportion in variable rewards for higher-level positions. The Company believes in "pay by performance" instead of creating an entitlement mindset. The Company's Total Compensation Program consists of Cash Compensation and Profit Sharing, the former includes Base Salary and Quarterly Incentive Bonus in cash, and the latter is delivered in the form of Stock Grants. a. Base Salary Base salary is scaled on employee's responsibilities, competencies, and level of contribution. Salaries are reviewed annually while increases are based on market practice, internal equity, individual responsibility and performance. b. Quarterly Incentive Bonus Quarterly Incentive Bonus equivalent to half month's base salary is granted to employees when the Company meets or exceeds its quarterly financial targets. c. Profit Sharing Eight percent of the Company's annual distributable income (net of legal reserve) is reserved for the Profit Sharing Plan for employees. This is awarded in the form of new issues of common shares to all employees, hence making every TSMC employee a shareholder of the Company. The size of individual awards is determined the individual's level of responsibility, and most importantly his/her performance and contribution. The value of the plan constitutes a very significant portion of the total compensation, especially for managers and executives. The Company encourages employees to hold the stocks and earn under the program, and therefore their long-term incentive is directly tied to creating shareholder value. Benefits TSMC provides a highly competitive benefit plan that covers both our employees and their families. Besides competitive medical and insurance coverage, TSMC also provides facilities including on-site sports and health facilities, clinics, canteens, coffee bars, convenience stores, bookstores, laundry services, child care center, dormitories, etc. Through our very active Employee Welfare Committee, a variety of activities were planned throughout the year. Highlights in 2001 included the favorite Sports Day and the Spring Concert, each bringing more than 10,000 employees and their families together in great team and community spirit. 5. Environmental Protection Measures TSMC has always had its own rigorous principles of Environmental, Safety and Health (ESH) Po l i c y. It has been in complete compliance with Taiwan Environmental Protection Administration (EPA) regulations and has also maintained international environmental standards. The Company has always contributed significant resources into ESH improvement programs and these efforts have not only led to recognition from the government but also have earned TSMC two national awards. They are the "Energy Conservation Excellence Award" from the Ministry of Economic Affairs, and the "Pollution Control Equipment Maintenance Outstanding Performance Plant Award" from the Industry Development Bureau. T S M C A n n u a l R e p o r t 2 0 0 1 33 Moreover, TSMC has also observed international environmental measures over the years. With the ISO (International Organization for Standardization) 14001 as the international standard for environmental management, TSMC is proud to report that its Fabs 1, 2, 3, 4, 5 and 7 have been ISO 14001-certified since 1996, while Fab 6 and 8 received ISO 14001 certification in 2001. In addition, TSMC's Fab 1, 2, 3, 4 and 5 were also OHSAS (Occupational Health and Safety Assessment Series) 18001-certified in 2000, making TSMC Taiwan's first semiconductor industry to receive OHSAS certification. Subsequently, the Company's Fab 6, 7 and 8 also received OHSAS 18001 certification in 2001. TSMC's ESH improvement programs in 2001 included the following: Energy Conservation TSMC's continuous energy conservation and improvement programs include clean-room HEPA velocity reduction, process exhaust reduction, and lighting management. Water Pollution Control TSMC continues to make efficiency improvements to our plants' wastewater treatment facilities that result in significantly cleaner effluent than the current wastewater quality standards. For example, we have set up a new wastewater recovery system and modified existing systems to improve the water recovery ratio. Air Pollution Control TSMC not only installed air pollution prevention facilities to meet new environmental standards, but also implemented backup facilities in 2001 to reduce environmental impact in case of equipment failure. Waste Management Recycling has been an ever-ongoing goal. In 2001, TSMC received the EPA approval to recycle calcium fluoride sludge, waste solvent and sulfuric acid. TSMC was the first to publish a Corporate Environmental Report (CER) in Taiwan's semiconductor industry in April 2000. In 2001, TSMC added new safety and health sections to the content and published the first "TSMC Environmental, Safety and Health (ESH) Annual Report". TSMC believes that its Corporate ESH Report is a very important component of the corporation's social commitment, and hopes the report also serves as a communication channel to all interested parties. TSMC is fully aware of its commitment and responsibility in environmental protection to the society and will continue to channel significant resources into its environmental protection measurements and relevant company polices. Other Disclosures TSMC has always worked in complete compliance with Taiwan's EPA regulations and received no citations or penalties for non-compliance or hazardous incidents from 2001 until February 28, 2002. Nevertheless, TSMC plans to invest approximately NT$399 million in additional improvements to its pollution control equipment for manufacturing facilities over the next three years. 6. Important Contracts Technology Cooperation Agreement Term of Agreement: 07/09/1997 - 07/08/2007 Contracting Party: Philips Electronics N.V. (now renamed Koninklijke Philips Electronics N.V.) (Philips) Summary: Under this agreement, TSMC is obliged to pay to Philips royalties at a fixed percentage of net sales for certain products. 34 T S M C A n n u a l R e p o r t 2 0 0 1 Building and Equipment Leasing Agreement (Fab 1) Term of Agreement: 04/01/1997 - 03/31/2002 Contracting Party: Ministry of Economic Affairs Summary: Under this agreement, TSMC leases certain buildings and equipment from the Ministry of Economic Affairs. Land and Public Facility Leasing Agreement (Fab 1) Term of Agreement: 04/01/1997 - 03/31/2002 Contracting Party: Industrial Technology Research Institute (ITRI) Summary: Under this agreement, TSMC leases certain land and public facilities from ITRI. Foundry Related Agreements Term of Agreement: 1995 - 2004 Contracting Parties: More than 10 companies in Asia, Europe, and the U.S.A. Summary: Under these agreements, TSMC guarantees a pre-determined capacity for a set number of years to customers who deposit certain fees with TSMC. Manufacturing Agreement Term of Agreement: 02/16/1996 - 12/31/2005, automatically renewed for one year unless terminated with a six- month prior written notice by TSMC. Contracting Party: WaferTech, LLC Summary: Under this agreement, TSMC has the right to purchase the entire calculated installed capacity of WaferTech, LLC during the production period. Shareholders Agreement Term of Agreement: Effective as of 03/30/1999 and may be terminated as provided in the agreement. Contracting Parties: Philips Electronics N. V. (now renamed 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 percent of the shares. Philips and TSMC are committed to purchasing a certain percentage of SSMC's capacity. Technology Cooperation Agreement Term of Agreement: 03/30/1999 - 03/29/2009 Contracting Party: Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) Summary: Under this agreement, TSMC shall transfer its certain process technologies to SSMC and SSMC shall pay TSMC remuneration at a certain percentage of the net selling prices of its products. Technology Transfer Agreement Term of Agreement: 06/27/2000 - 06/26/2010 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. Manufacturing Agreement Term of Agreement: 02/14/2000 - 12/13/2005 Contracting Party: Vanguard International Semiconductor Corporation (VIS) Summary: Under this agreement, VIS shall reserve a certain capacity to manufacture certain TSMC devices required by TSMC's customers, at prices as agreed upon by the parties involved. T S M C A n n u a l R e p o r t 2 0 0 1 35 Patent License Agreement Term of Agreement: 10/26/2001 - 12/31/2006 Contracting Party: A U.S. based company Summary: Under this agreement, the parties have entered into cross license arrangements for certain semiconductor patents. TSMC shall pay license fees to the said company. 7. Litigation Proceedings Antidumping Investigation Against SRAMs Micron Technology Inc. (Micron) filed a petition for antidumping investigation against SRAMs from Korea and Taiwan in February 1997. Following the U.S. International Trade Commission's (ITC) 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 the ITC's determination to the U.S. Court of International Trade (CIT). In June 2000, ITC, pursuant to CIT's second remand order, voted that SRAMs from Taiwan are not causing or threatening to cause injury to the U.S. industry, which decision was later affirmed by CIT. Micron then appealed to the U.S. Court of Appeals for the Federal Circuit (CAFC). In September 2001, CAFC upheld CIT's decision. ITC appealed in November 2001 requesting CAFC to review its decision, which was subsequently denied by CAFC in December 2001. ITC and Micron are entitled to appeal the CAFC's decision to the U.S. Supreme Court by March 4, 2002. If both ITC and Micron do not appeal by that time, the entire SRAM antidumping investigation will be terminated. 8. Notes on Board and Shareholders Articles of Incorporation TSMC's Articles of Incorporation have been drafted and revised based on the Company Law and other relevant regulations of the Republic of China (for more details, please refer to http://www.tsmc.com). To accommodate the need for capitalization of 2000 profits, it was resolved at the Regular Shareholders' Meeting of May 15, 2001 that TSMC's Articles of Incorporation be revised to raise the authorized capital from NT$178 billion to NT$246 billion. Shareholders' Meeting Meetings of TSMC's shareholders include Regular Shareholders' Meeting and Special Shareholders' Meeting. The Regular Shareholders' Meeting is convened by the Board of Directors in accordance with the Company Law of the Republic of China and generally held in Hsin-Chu, Taiwan, where TSMC's head office is located, within six months after the end of each fiscal year. Special Shareholders' Meeting may be convened by resolution of the Board of Directors whenever it deems necessary. Under certain circumstances, Special Shareholders' Meeting may be convened by shareholders or supervisors in accordance with the law. For a public company such as TSMC, notice in writing of shareholders' meetings, stating the place, time and purpose thereof, must be sent to each shareholder at least thirty days (in the case of regular meetings) or fifteen days (in the case of special meetings) prior to the date of each meeting. Shareholders' meetings of TSMC are conducted in accordance with TSMC's "Rules and Procedures of Shareholders' Meeting" and relevant laws, rules and regulations (for more details, please refer to http://www.tsmc.com). In accordance with the "Rules and Procedures of Shareholders' Meeting", the agenda of the shareholders' meeting is set by the Board of Directors if the Meeting is convened by the Board of Directors and the Meeting shall proceed in accordance with the agenda. However, shareholders may make special motion during the shareholders' meeting. When a shareholder present at the shareholders' meeting wishes to speak, a Speech Note should be filled out with 36 T S M C A n n u a l R e p o r t 2 0 0 1 summary of the speech, the shareholder's number (or the number of Attendance Card) and the name of the shareholder. TSMC's 2001 Regular Shareholders' Meeting was held at the Auditorium in the Activity Center of Hsin-Chu Science- Based Industrial Park on May 15, 2001, in which the shareholders present in person or by proxy resolved to accept the 2000 Business Report and Financial Statements, approve the proposal for the distribution of 2000 profits, the capitalization of 2000 profits, and the revision of the Articles of Incorporation of TSMC. Board of Directors TSMC's directors and supervisors are elected in accordance with the Company Law of the Republic of China and TSMC's "Rules for Election of Directors and Supervisors" (for more details, please refer to www.tsmc.com). Other than those provided in the Company Law of the Republic of China, TSMC does not have special provisions for nominating directors or supervisors by any shareholder. During 2001 and the period from January 1, 2002 to February 28, 2002, five regular meetings and three special meetings of TSMC's Board of Directors were held and the following resolutions were passed: Approving 2000 Business Report and Financial Statements, the proposal for distribution of 2000 profits, 2001 normal capital expenditure, capital expenditure for setting up a solder bumping line, the revision of Articles of Incorporation, the convention of 2001 Regular Shareholders' Meeting and the agenda thereof, TSMC's sponsoring the issuance of ADRs by certain shareholders, the appointment of Dr. C.S. Hsu as Vice President, 2001 Financial Forecast, the increase of investment in TSMC Japan K.K., the sale of all TSMC's shareholding in Taiwan Semiconductor Te c h n o l o g y Corporation to Amkor Technology Inc., the semi-annual Financial Statements for the first half of 2001, the appointment of Dr. F.C. Tseng as Deputy Chief Executive Officer, the appointment of Dr. Rick Tsai as President & Chief Operating Officer, the appointment of Dr. Kenneth L. Kin as Senior Vice President, the appointment of Dr. Chenming Hu as Chief Technology Officer, the promotion of Mr. M.C. Tzeng as Vice President, and the revision of TSMC's 2001 Financial Forecast; authorizing the Chairman to decide, within the limit of NT$15 billion, the issuance of Corporate Bond in the domestic market; approving the second revision of 2001 Financial Forecast, 2001 Business Report and Financial Statements, the proposal for distribution of 2001 profits, the convention of 2002 Regular Shareholders' Meeting and the agenda thereof, 2002 normal capital appropriation, capital appropriation for expanding the capacity for the advanced processes and conducting Fab 12's mechanical and electrical related constructions, increase of investment in TSMC Development, Inc. and WaferTech, LLC, and the appointment of Dr. Richard L. Thurston as Vice President and General Counsel, etc. 9. Acquisition or Disposition of Real Estate 9-1 Amount of acquisition real estate up to NT$300 million or 20% of paid in capital As of 02/28/2002 Unit: NT$K Name of Real Estate Acquisition Date Price Vendor Relationship with Co. Purpose Fab6 Gas System & Piping Stepper Stepper Stepper EBO Process Hook-Up, SP2 Process Hook-Up, SP2 01/31/2001 07/31/2001 07/31/2001 11/30/2001 06/30/2001 03/16/2001 01/31/2001 382,619 334,959 315,860 339,744 411,886 471,171 461,021 SAN FU ASML ASML ASML Toshiba Zhurong Tungkai None None None None None None None For in house For in house For in house For in house For in house For in house For in house 9-2 Amount of disposition real estate up to NT$300 million or 20% of paid in capital: None T S M C A n n u a l R e p o r t 2 0 0 1 37 FINANCING PLANS AND I M P L E M E N T A T I O N 1. Preferred A Shares 1-1 Financing Plans a. Source of Funds Issuance Preferred A Shares Issuing Date 11/29/2000 Tenor 2.5 Years Rate 3.50% Outstanding 1,300,000,000 Shares b. Use of Funds Project Use of Proceeds Complete Amount Expending Plan Date 2001 Q1 Q2 Q3 Q4 Unit: NT$K 2002 Q1 Fab 12 Procurement of 03/31/2002 13,000,000 825,000 1,650,000 2,475,000 3,300,000 4,750,000 Equipment c. Date of posting on TSE's Web Site: 09/22/2000 (Approval date by the Securities and Futures Commission) 1-2 Status of Implementation & Benefits a. As of Dec. 31, 2001, complete 63.64% compares with expending plan. b. Commenced Pilot Run in 2001 and expect to benefit starting 2002. 2. Corporate Bond 2-1 Financing Plans a. Source of Funds Issuance Issuing Date Tenor Coupon Rate (or YTM) Outstanding Corporate Bond 01/10/2002 - 01/24/2002 Class A: 5 years Class B: 7 years Class C: 10 years Class A: 2.6% p.a. Class B: 2.75% p.a. Class C: 3.00% p.a. Class A: NT$ 2.5 billion Class B: NT$ 8.0 billion Class C: NT$ 4.5 billion b. Use of Funds Project Use of Proceeds Complete Amount Expending Plan Date 2002 2003 Q1 Q2 Q3 Q4 Q1 Q2 Fab 14 Procurement of 06/30/2003 15,000,000 1,017,000 629,000 833,000 799,000 369,000 11,353,000 Equipment Unit: NT$K c. Date of posting on TSE's Web Site: 12/17/2001 (Approval date by the Securities and Futures Commission) 2-2 Status of Implementation & Benefits: Commencing from 2002 and expect to benefit starting 2003. 38 T S M C A n n u a l R e p o r t 2 0 0 1 T S M C A n n u a l R e p o r t 2 0 0 1 39 40 T S M C A n n u a l R e p o r t 2 0 0 1 FINANCIAL INFORMATION T S M C A n n u a l R e p o r t 2 0 0 1 41 1. Condensed Balance Sheet Financial analysis from 1997-2001 Item 1997 1998 1999 2000 2001 Current assets 23,790,795 26,378,422 38,770,670 85,950,586 63,652,726 Long-term stock investments 19,220,371 17,537,765 28,208,643 33,422,010 32,869,391 Unit: NT$K 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 61,697,723 73,636,209 89,566,029 207,005,370 215,499,242 3,804,923 6,554,817 4,877,392 14,594,492 23,713,325 10,088,672 8,138,796 14,469,329 41,188,662 25,210,619 10,250,285 8,276,867 14,684,480 41,814,102 * 20,009,357 25,025,206 20,000,000 29,000,000 24,000,000 9,001,390 6,872,545 6,183,565 9,030,097 9,333,990 40,813,000 60,471,760 76,708,817 129,893,646 181,325,531 62,082 164,219 11,831,411 55,285,821 57,128,433 28,641,292 24,162,113 33,320,615 76,924,173 37,507,410 8,820,919 9,010,971 11,785,153 24,866,848 * - Unrealized loss on long-term investment - - - (71,564) Cumulative transaction adjustments (101,981) (727,426) (101,981) (278,377) 1,228,701 Total Assets Total Liabilities Before distribution After distribution Total Equity Before distribution After distribution 108,513,812 124,107,213 161,422,734 340,972,458 335,734,684 39,099,419 40,036,547 40,652,894 79,218,759 58,544,609 39,261,032 40,174,618 40,868,045 79,844,199 * 69,414,393 84,070,666 120,769,840 261,753,699 277,190,075 69,252,780 83,932,595 120,554,689 261,128,259 * *Subject to change after shareholders' meeting resolution 42 T S M C A n n u a l R e p o r t 2 0 0 1 2. Condensed Statement of Income Financial analysis from 1997-2001 Item 1997 1998 1999 2000 2001 Unit: NT$K (Except EPS: NT$) Net sales Gross profit* Income from operations Non-operating Income Non-operating Expense Interest revenue Interest expense Income from operations of 43,935,627 50,233,008 73,131,206 166,228,420 125,888,003 20,134,920 20,336,042 32,215,693 75,996,839 36,381,051 15,489,780 16,202,245 25,916,619 60,541,105 17,342,286 857,713 1,024,981 1,249,706 5,409,307 2,891,557 830,390 501,434 546,490 287,295 3,056,460 2,112,818 9,575,128 566,020 808,616 1,575,460 1,365,919 981,388 1,415,527 1,858,197 1,951,830 continued segments-before tax 15,517,103 13,648,622 24,109,865 63,837,594 10,658,715 Income from operations of continued segments-after tax Income from operations of discontinued segments Extraordinary gain (loss) Cumulative effect of changes in accounting principles Earnings per share Capitalized interest 17,960,075 15,344,203 24,559,884 65,106,194 14,483,174 - - - - - - - - - - - - - - - 4.40 ** 1.83 *** 255,054 2.54 ** 1.56 *** 661,414 3.24 ** 2.49 *** 305,312 5.71 ** 3.96 *** 0.83 ** 72,903 207,297 Certain accounts of 1997 through 2000 hae been reclassified to conform to 2001 classifications * ** Based on weighted average shares outstanding in each year ***Retroactive adjustment for capitalization of unappropriated earnings and bonus to employees T S M C A n n u a l R e p o r t 2 0 0 1 43 3. Financial Analysis Financial analysis from 1997-2001 Capital Debts ratio(%) 1997 36.03 1998 32.26 1999 25.18 2000 23.23 2001 17.44 Structure Analysis Long-term fund to fixed assets (%) 144.94 148.16 157.17 140.46 139.76 Liquidity Analysis Current ratio (%) 235.82 324.11 267.95 208.68 252.48 Quick ratio (%) 185.78 273.86 233.95 178.13 211.92 Times interest earned (times) Operating Average collection turnover(times) Performance Average collection days 20.04 6.22 8.91 5.90 58.68 61.85 Analysis Average inventory turnover (times) 6.12 6.82 Average inventory turnover days 59.69 53.49 Average payment turnover (times) Fixed assets turnover (times) Total assets turnover (times) Profitability Return on total assets (%) 2.37 0.71 0.41 20.35 Analysis Return ratio on stockholders' equity (%) 29.56 Operating income to capital stock(%) Profit before tax to capital stock (%) Profit after tax to net sales (%) Net worth per share (NTD) 37.95 38.02 40.88 2.53 0.68 0.40 14.04 19.99 26.79 22.57 30.55 Earnings per share (NTD) 1.27 1.08 Dividends per share (NTD) Cash dividends (NTD) Stock dividends (NTD) 14.83 7.18 50.82 9.96 36.66 3.02 0.82 0.45 18.19 23.98 33.79 31.43 33.58 15.74 1.73 2.30 34.02 7.70 47.42 10.77 33.90 2.69 0.80 0.49 24.12 31.43 46.61 49.15 39.17 21.28 3.96 2.80 5.84 5.32 68.61 9.19 39.70 2.88 0.58 0.37 4.76 5.37 9.56 5.88 11.50 15.70 0.83 4.00 2.30 2.80 4.00 Cash flow Cash flow ratio (%) 201.55 417.00 273.50 213.17 284.27 Cash flow adequacy ratio (%) 97.96 102.04 106.00 106.03 105.73 Cash flow reinvestment ratio (%) 16.28 21.65 19.31 22.47 16.00 Leverage Operating leverage Financial leverage *Subject to change after shareholders' meeting resolution **The calculation formula of financial analysis was listed as follows : 1. Capital Structure Analysis 2.15 1.04 2.69 1.06 2.47 1.06 2.34 1.03 2.34 1.13 4. Profitability Analysis (1) Debts ratio = Total Liabilities / Total Assets (1) Return on total assets = {Net Income + Interest Expenses * (1 - Effective tax rate )} / (2) Long-term fund to fixed assets = (Shareholders' Equity + Long-term Liabilities)/ Average Total Assets 2. Liquidity Analysis (1) Current ratio (2) Quick ratio Net Properties = Current Assets / Current Liabilities = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities (3) Times interest earned = Earnings before Interest and Taxes / Interest Expenses 3. Operating Performance Analysis (1) Average collection turnover = Net Sales / Average Trade Receivables (2) Average collection days = 365 / Receivables Turnover rate (3) Average inventory turnover = Cost of Sales / Average Inventory (4) Average inventory turnover days = 365 / Inventory Turnover rate (5) Average payment turnover = Cost of Sales / Average Trade Payables (6) Fixed assets turnover (7) Total assets turnover = Net Sales / Net Properties = Net Sales / Total Assets (2) Return ratio on stockholders' equity = Net Income / Average Shareholders' Equity (3) Profit after tax to net sales = Net Income / Net Sales (4) Earnings per share = (Net Income - Preferred Stock Dividend) / Weighted Average Number of Shares Outstanding 5. Cash flow (1) Cash flow ratio = Net Cash Provided by Operating Activities / Current Liabilities (2) Cash flow adequacy ratio = Five-year sum of cash from operations / Five-year sum of capital (3) Cash flow reinvestment ratio = (Cash Provided by Operating Activities - Cash Dividends) / expenditures, inventory additions, and cash dividends (Gross Plant + Investment + Other Assets + Working Capital) 6. Leverage (1) Operating leverage (2) Financial leverage = (Net Sales - Variable Cost) / Income from Operations = Income from Operations / (Income from Operations - Interest Expenses) 44 T S M C A n n u a l R e p o r t 2 0 0 1 4. 2001 Condensed Interim Balance Sheet by Quarterly March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001 Unit:NT$K ASSEETS Amount % Amount % Amount % Amount % Current assets 73,631,544 22 64,793,235 19 54,110,594 Long-term investments 33,064,544 10 34,718,514 10 33,950,449 Fixed assets Other assets 211,037,780 62 216,594,103 64 219,577,703 19,959,232 6 21,949,461 7 25,924,873 16 10 66 8 63,652,726 19 32,869,391 10 215,499,242 64 23,713,325 7 TOTAL ASSETS 337,693,100 100 338,055,313 100 333,563,619 100 335,734,684 100 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Long-term liabilities Other liabilities Total liabilities 29,863,304 29,000,000 8,810,582 9 8 3 28,854,509 29,000,000 9,216,070 8 9 3 23,073,125 29,000,000 9,323,880 7 8 3 25,210,619 24,000,000 9,333,990 7 7 3 67,673,886 20 67,070,579 20 61,397,005 18 58,544,609 17 SHAREHOLDERS' EQUITY Capital stock Capital surplus 129,893,646 39 181,325,531 54 181,325,531 55,285,821 16 55,285,821 16 55,285,821 Retained earnings: 85,344,547 25 33,599,624 10 34,836,301 Cummulative translation adjustments (13,180) Unrealized loss on long-term investment (491,620) - - (32,118) 805,876 - - (167,908) 886,869 55 17 10 - - 181,325,531 54 57,128,433 17 37,507,410 11 - 1,228,701 - 1 Total Shareholders' Equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 270,019,214 80 270,984,734 80 272,166,614 82 277,190,075 83 337,693,100 100 338,055,313 100 333,563,619 100 335,734,684 100 T S M C A n n u a l R e p o r t 2 0 0 1 45 5. 2001 Condensed Interim Statement of Income by Quarterly Q1 Q2 Q3 Q4 Total Amount % Amount % Amount % Amount % Amount % Unit:NT$K (Except EPS:NT$) GROSS SALES 40,226,483 26,694,430 28,191,557 33,451,349 128,563,819 SALES RETURNS AND ALLOWANCES NET SALES COST OF SALES GROSS PROFIT (705,737) (396,681) (1,251,665) (321,733) (2,675,816) 39,520,746 100 26,297,749 100 26,939,892 100 33,129,616 100 125,888,003 100 OPERATING EXPENSES 4,221,116 10 4,714,140 18 4,873,671 26,043,096 66 21,299,201 81 20,124,129 13,477,650 34 4,998,548 19 6,815,763 75 25 18 22,040,526 67 89,506,952 71 11,089,090 33 36,381,051 29 5,229,838 16 19,038,765 15 9,256,534 24 284,408 1 1,942,092 7 5,859,252 18 17,342,286 14 INCOME FROM OPERATIONS NON-OPERATING INCOME Interest 445,307 1 430,365 2 302,913 1,365,919 1 Insurance compensation 14,864 - - - 1,037 27,403 116,113 - - - 214,835 71,148 73,847 - 64,554 524,725 1 574,918 2 662,743 1,522,366 4 1,232,975 5 1,926,187 447,936 328,706 52,670 2,351,678 1 1 - 6 420,425 2 529,618 4,114 70,832 - - 113,906 235,382 1,728,346 7 2,805,093 10 2,690,011 1 1 - - 2 7 2 - - 187,334 630,099 136,181 175,557 1 2 - - 860,835 234,732 430,071 1,129,171 2 2,891,557 1,748,103 5 6,429,631 553,851 248,894 139,163 2 1 - 8 1,951,830 695,620 498,047 9,575,128 1 - - 2 5 2 1 - 8 7,429,581 19 (869,020) (3) (200,258) (1) 4,298,412 13 10,658,715 8 Premium income Other Total Non-Operating Income NON-OPERATING EXPENSES Equity in net loss of investee companies -net Interest Foreign exchange loss-net Other Total Non-Operating Expenses INCOME BEFORE INCOME TAX INCOME TAX BENEFIT 990,793 2 1,181,422 4 1,436,935 5 215,309 1 3,824,459 3 NET INCOME 8,420,374 21 312,402 1 1,236,677 5 4,513,721 14 14,483,174 12 EARNINGS PER SHARE 0.71 (0.20) 0.06 0.26 0.83 46 T S M C A n n u a l R e p o r t 2 0 0 1 6. Auditors' Opinion from 1997 to 2001 Year 1997 1998 1999 2000 2001 CPA S.C. Huang, Edward Way S.C. Huang, Edward Way S.C. Huang, Edward Way S.C. Huang, Edward Way S.C. Huang, Edward Way Audit Opinion An Unqualified Opinion An Unqualified Opinion An Unqualified Opinion An Unqualified Opinion An Unqualified Opinion 12F, No. 156, Sec. 3, Min-Sheng E. Rd., Taipei, Taiwan, R.O.C. Tel : 886-2-2545-9988 7. Supervisors' Report The Board of Directors have prepared and submitted to us the Company's 2001 Business Report, Financial Statements, and proposal for allocating profits. The CPAs of T. N. SOONG & CO. were retained to audit the Financial Statements and have submitted a report relating thereto. The above Business Report, Financial 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 Robbert Brakel Supervisor George C. Shiu Supervisor S. J. Paul Chien March 11, 2002 T S M C A n n u a l R e p o r t 2 0 0 1 47 8. Review and Analysis of Financial Position and Operating Results (1) Liquidity analysis Item Current ratio Quick ratio (2) Analysis of Operating Result Item GROSS SALES Dec. 31, 2001 Dec. 31, 2000 252.48% 211.92% 208.68% 178.13% Change % 20.99 18.96 Unit: NT$K 2001 2000 Change Amount Change % 128,563,819 169,223,128 (40,659,309) SALES RETURNS AND ALLOWANCES (2,675,816) (2,994,708) 318,892 NET SALES COST OF SALES GROSS PROFIT 125,888,003 166,228,420 (40,340,417) (89,506,952) (90,231,581) 724,629 36,381,051 75,996,839 (39,615,788) OPERATING EXPENSES (19,038,765) (15,455,734) (3,583,031) INCOME FROM OPERATIONS 17,342,286 60,541,105 (43,198,819) NON-OPERATING INCOME Interest Insurance compensation Premium income Technical service income Gain on sales of property, plant and equipment Gain on sales of short-term investments Foreign exchange gain- net Equity in net income of investee companies - net Other 1,365,919 860,835 234,732 55,077 52,376 - - - 322,618 1,575,460 1,623,832 8,115 23,557 62,921 104,643 828,025 779,326 295,295 (209,541) (762,997) 226,617 31,520 (10,545) (104,643) (828,025) (779,326) 27,323 Total Non-operating Income 2,891,557 5,301,174 (2,409,617) NON-OPERATING EXPENSE Equity in net loss of investee companies -net (6,429,631) - (6,429,631) Interest Foreign exchange loss-net (1,951,830) (1,858,197) (695,620) - (93,633) (695,620) Loss on sales and provision for loss on property, plant, and equipment Loss on sales of long-term investments Amortization of bond issue cost Other (234,862) (102,978) (12,504) (147,703) (99,220) (135,642) 136.71 (32,658) (14,610) 20,154 (133,093) Total Non-operating Expense (9,575,128) (2,004,685) (7,570,443) INCOME BEFORE INCOME TAX 10,658,715 63,837,594 (53,178,879) -83.30 INCOME TAX BENEFIT 3,824,459 1,268,600 2,555,859 201.47 NET INCOME 14,483,174 65,106,194 (50,623,020) -77.75 48 T S M C A n n u a l R e p o r t 2 0 0 1 -24.03 -10.65 -24.27 -0.80 -52.13 23.18 -71.35 -13.30 -46.99 2792.57 - -16.76 -100.00 - - 9.25 -45.45 - 5.04 - - -61.71 910.97 377.64 9. Financial Statements & Independent Auditors' Report English Translation of a Report Originally Issued in Chinese Independent Auditors' Report January 18, 2002 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, 2001 and 2000, 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 Regulations for Auditing of Financial Statements by Certified Public Accountants, and 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, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with the Guidelines for Securities Issuers' Financial Reporting and accounting principles generally accepted in the Republic of China. We have also audited the consolidated financial statements of Taiwan Semiconductor Manufacturing Company Ltd. as of and for the years ended December 31, 2001 and 2000, and have expressed an unqualified opinion on such financial statements. 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. T S M C A n n u a l R e p o r t 2 0 0 1 49 English Translation of Financial Statements Originally Issued in Chinese BALANCE SHEETS December 31, 2001 and 2000 (In Thousand New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS 2001 2000 Amount % Amount % Cash and cash equivalents (Notes 2 and 3) $33,403,706 10 $35,664,440 11 Receivable from related parties (Note 12) Notes receivable Accounts receivable Allowance for doubtful receivables (Note 2) Allowance for sales returns and others (Note 2) Inventories - net (Notes 2 and 4) Deferred income tax assets (Notes 2 and 11) Prepaid expenses and other current assets (Notes 2 and 12) Total Current Assets 523,861 176,582 19,957,636 (1,100,492) (2,581,551) 8,504,418 2,347,000 2,421,566 63,652,726 LONG-TERM INVESTMENTS (Notes 2 and 5) 32,869,391 PROPERTY, PLANT AND EQUIPMENT (Notes 2, 6 and 12) Cost Buildings Machinery and equipment Office equipment Total cost Accumulated depreciation Advance payments and construction in progress Net Property, Plant and Equipment GOODWILL (Note 2) OTHER ASSETS Deferred income tax assets (Notes 2 and 11) Deferred charges - net (Notes 2 and 7) Refundable deposits (Note 14) Assets leased to others (Note 2) Miscellaneous Total Other Assets 52,527,184 242,347,119 4,754,183 299,628,486 (140,224,640) 56,095,396 215,499,242 2,961,317 16,175,070 3,239,723 772,912 555,053 9,250 20,752,008 - - 6 - (1) 2 1 1 19 10 16 72 1 89 (42) 17 64 1 5 1 - - - 6 994,815 125,175 30,335,314 (946,734) - - 9 - (2,204,167) (1) 10,967,935 8,122,000 2,891,808 85,950,586 33,422,010 46,307,643 210,461,923 3,672,927 260,442,493 3 2 1 25 10 14 62 1 77 (94,332,168) (28) 40,895,045 207,005,370 12 61 3,309,707 6,559,293 3,122,610 967,985 625,647 9,250 11,284,785 1 2 1 - - - 3 TOTAL ASSETS $335,734,684 100 $340,972,458 100 The accompanying notes are an integral part of the financial statements. 50 T S M C A n n u a l R e p o r t 2 0 0 1 LIABILITIES AND SHAREHOLDERS' EQUITY Amount % Amount % 2001 2000 CURRENT LIABILITIES Payable to related parties (Note 12) Accounts payable Payable to contractors and equipment suppliers Accrued expenses and other current liabilities (Note 15) Lease obligation Current portion of bonds (Note 8) Total Current Liabilities NONCURRENT LIABILITIES Bonds - net of current portion (Note 8) Guarantee deposits (Note 14) Accrued pension cost (Notes 2 and 10) Deferred gain on sale-leaseback (Note 2) Total Noncurrent Liabilities Total Liabilities SHAREHOLDERS' EQUITY (Notes 2 and 9) Capital stock - $10 par value` Authorized: 24,600,000 thousand shares in 2001 and 17,800,000 thousand shares in 2000 Issued: $2,082,606 1,123,894 12,367,319 4,636,800 - 5,000,000 25,210,619 24,000,000 7,210,972 1,854,853 268,165 33,333,990 58,544,609 Preferred - 1,300,000 thousand shares 13,000,000 Common - 16,832,554 thousand shares in 2001 and 11,689,365 thousand shares in 2000 168,325,531 Capital surplus Retained earnings: Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Cumulative translation adjustments Unrealized loss on long-term investment 57,128,433 17,180,067 349,941 19,977,402 1,228,701 - 1 - 4 1 - 1 7 7 2 1 - 10 17 4 50 17 5 - 6 1 - $4,346,578 7,989,953 24,392,400 4,409,731 50,000 - 1 3 7 1 - - 41,188,662 12 29,000,000 7,086,379 1,509,535 434,183 38,030,097 79,218,759 8 2 1 - 11 23 13,000,000 4 116,893,646 34 55,285,821 16 10,689,323 1,091,003 65,143,847 (278,377) (71,564) 3 1 19 - - Total Shareholders' Equity 277,190,075 83 261,753,699 77 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $335,734,684 100 $340,972,458 100 T S M C A n n u a l R e p o r t 2 0 0 1 51 English Translation of Financial Statements Originally Issued in Chinese STATEMENTS OF INCOME For the Years Ended December 31, 2001 and 2000 (In Thousand New Taiwan Dollars, Except Earnings Per Share) 2001 2000 Amount % Amount % GROSS SALES (Notes 2, 12 and 16) SALES RETURNS AND ALLOWANCES (Note 2) NET SALES COST OF SALES (Note 12) GROSS PROFIT OPERATING EXPENSES (Note 12) Research and development General and administrative Marketing Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME Interest Insurance compensation Premium income (Notes 2 and 15) Technical service income (Note 12) Gain on sales of property, plant and equipment (Note 2) Gain on sales of short-term investments (Note 2) Foreign exchange gain - net (Note 2) Equity in net income of investee companies - net (Notes 2 and 5) Other (Note 12) Total Non-Operating Income NON-OPERATING EXPENSES Equity in net loss of investee companies - net (Notes 2 and 5) Interest (Notes 6 and 15) Foreign exchange loss - net (Notes 2 and 15) Loss on sales of and provision for loss on property, plant and equipment (Note 2) Loss on sale of long-term investments (Note 2) Amortization of bond issue cost (Note 2) Other Total Non-Operating Expenses INCOME BEFORE INCOME TAX INCOME TAX BENEFIT (Notes 2 and 11) NET INCOME EARNINGS PER SHARE $128,563,819 (2,675,816) 125,888,003 89,506,952 36,381,051 10,649,019 6,048,665 2,341,081 19,038,765 17,342,286 1,365,919 860,835 234,732 55,077 52,376 - - - 322,618 2,891,557 6,429,631 1,951,830 695,620 234,862 102,978 12,504 147,703 9,575,128 10,658,715 3,824,459 100 71 29 8 5 2 15 14 1 1 - - - - - - - 2 5 2 - - - - - 7 9 3 $14,483,174 12 Based on weighted-average number of common shares outstanding - 16,832,554 thousand shares in 2001 and 11,400,882 thousand shares in 2000 $0.83 Based on 16,417,270 thousand shares The accompanying notes are an integral part of the financial statements. 100 54 46 5 3 2 10 36 1 1 - - - - 1 - - 3 - 1 - - - - - 1 38 1 39 $169,223,128 (2,994,708) 166,228,420 90,231,581 75,996,839 7,203,591 5,299,135 2,953,008 15,455,734 60,541,105 1,575,460 1,623,832 8,115 23,557 62,921 104,643 828,025 779,326 295,295 5,301,174 - 1,858,197 - 99,220 - 32,658 14,610 2,004,685 63,837,594 1,268,600 $65,106,194 $5.71 $3.96 52 T S M C A n n u a l R e p o r t 2 0 0 1 English Translation of Financial Statements Originally Issued in Chinese STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 2001 and 2000 (In Thousand New Taiwan Dollars) CAPITAL STOCK ISSUED CAPITAL SURPLUS (Note 2) RETAINED EARNINGS (Note 9) LOSS ON 0000CUMULATIVE UNREALIZED Preferred Stock Common Stock Additional From Excess on Shares Shares From (Thousand) Amount (Thousand) Amount Consolidation Paid-In Capital Long-term Foreign Bond Investment Investment Properties Donation Total Gain on Sale of Legal Reserve Special Reserve Unappropriated INVESTMENT 00ADJUSTMENTS SHAREHOLDERS Earnings Total (NOTE 2) 000000(NOTE 2) EQUITY LONG-TERM000TRANSLATION TOTAL $- 7,670,882 $76,708,817 $- $- $472,300 $11,289,998 $69,058 $55 $11,831,411 $8,258,359 $- $25,062,256 $33,320,615 $- 000($1,091,003) $120,769,840 BALANCE, JANUARY 1, 2000 Appropriations of prior year's earnings Legal reserve Special reserve Bonus to employees - stock Stock dividends - 25.55% Bonus to directors and supervisors Capital Transferred from capital surplus - 2.45% Issuance of shares on June 8, 2000 Issuance of shares for the merge on June 30, 2000 - - - - - - - - - Issuance of preferred stocks 1,300,000 on November 29, 2000 13,000,000 - - - - - - - - - - - - 172,121 1,721,208 1,959,910 19,599,103 - - 187,937 1,879,366 115,000 1,150,000 - - - - - - - - - - - - - 23,172,550 1,583,515 15,835,152 22,329,129 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 5,502 (231,583) - - - - - - - (1,879,366) - - - - - - - - - - - - - - - - - - - 58,178 - - - - - - - - - - - - - - - - - - - - - - - - (1,879,366) 23,172,550 22,329,129 - - 58,178 5,502 (231,583) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 467,443 4,674,426 - - 4,675,746 46,757,459 - - - - - - - - - - - - - - - - - - - - - 1,803,168 - - - - - - - - - - - - - - - - - - - - - - - - - 162 - - - - - - - - - - - - - - - - - - - - - - 39,282 - - - - - - - - - - - - - - - - - - - - - - 1,803,168 39,282 162 - - 2,430,964 - (2,430,964) 1,091,003 (1,091,003) - - - 0000000000000- - 0000000000000- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (1,721,208) (1,721,208) - 0000000000000- (19,599,103) (19,599,103) - 0000000000000- (215,151) (215,151) - 0000000000000- (215,151) - - - - - 0000000000000- - - 0000000000000- 24,322,550 (135,077) (135,077) - 0000000000000- 38,029,204 - - - 0000000000000- 13,000,000 65,106,194 65,106,194 - 0000000000000- 65,106,194 (58,178) (58,178) - 0000000000000- (5,502) (5,502) - 0000000000000- 231,583 231,583 - 0000000000000- - - - - - - - (71,564) 0000000000000- (71,564) - 0000000812,626 812,626 (4,674,426) (4,674,426) - 0000000000000- (41,137) (41,137) - 0000000000000- (41,137) (46,757,459) (46,757,459) - 0000000000000- - (584,303) (584,303) - 0000000000000- (584,303) 14,483,174 14,483,174 - 0000000000000- 14,483,174 (1,803,168) (1,803,168) - 0000000000000- (39,282) (39,282) - 0000000000000- (162) (162) - 0000000000000- - - - - - - - 71,564 0000000000000- 71,564 -0000001,507,078 1,507,078 - - - - - - - - - - - - - - - - - - - - - - - 6,490,744 - (6,490,744) (741,062) 741,062 - - - 0000000000000- - 0000000000000- 1,300,000 13,000,000 11,689,365 116,893,646 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) 000000(278,377) 261,753,699 Net income in 2000 Gain on sales of property, plant and equipment Gain on sales of property, plant and equipment from investees Adjustment arising from changes in shareholders' equity of investees Unrealized loss on l- ong-term investment from investees Translation adjustments BALANCE, DECEMBER 31, 2000 Appropriations of prior year's earnings Legal reserve Special reserve Bonus to employees - stock Cash dividends paid for preferred stocks Stock dividends - 40% Bonus to directors and supervisors Net income in 2001 Reclassification of the accumulated deficits from the merged company Gain on sales of property, plant and equipment Gain on sales of property, plant and equipment from investees Reversal of the unrealized loss on long-term investments Translation adjustments BALANCE, DECEMBER 31, 2001 1,300,000 $13,000,000 16,832,554 $168,325,531 $24,132,297 $23,172,550 $246,381 $9,410,632 $166,518 $55 $57,128,433 $17,180,067 $349,941 $19,977,402 $37,507,410 $-00000$1,228,701 $277,190,075 The accompanying notes are an integral part of the financial statements. T S M C A n n u a l R e p o r t 2 0 0 1 53 English Translation of Financial Statements Originally Issued in Chinese STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001 and 2000 (In Thousand New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income Net income of the merged companies Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred income taxes Equity in net loss (income) of investee companies - net Loss on sales of long-term investments - net Loss on sales of and provision for loss on property, plant and equipment - net Accrued pension cost Allowance for doubtful receivables Allowance for sales returns and others Changes in operation assets and liabilities: Decrease (increase) in: Receivable from related parties Notes receivable Accounts receivable Inventories - net Prepaid expenses and other current assets Forward exchange contract receivable Increase (decrease) in: Payable to related parties Accounts payable Forward exchange contract payable Accrued expenses and other current liabilities 2001 2000 $14,483,174 $65,106,194 - (135,077) 48,875,754 33,051,197 (3,840,777) (1,059,841) 6,429,631 (779,326) 102,978 182,486 345,318 153,758 377,384 - 13,823 360,673 490,835 965,503 470,954 (51,407) (538,201) 96,364 10,377,678 (14,268,429) 2,463,517 (2,985,133) 359,342 49,480 729,775 7,108 (2,263,972) (6,866,059) 218,165 (201,096) 3,552,646 2,379,105 76,168 736,885 Net Cash Provided by Operating Activities 71,666,308 87,800,269 CASH FLOWS FROM INVESTING ACTIVITIES Decrease in short-term investments Acquisitions of: Property, plant and equipment Long-term investments Proceeds from sales of: Property, plant and equipment Long-term investments (Forward) - 236,250 (68,002,448) (79,270,461) (4,563,682) (11,866,583) 298,231 162,334 219,233 - 54 T S M C A n n u a l R e p o r t 2 0 0 1 Increase in deferred charges Decrease (increase) in refundable deposits Cash inflow from the merged companies 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 Lease obligation Long-term bank loans Increase in guarantee deposits Bonus paid to directors and supervisors Cash dividends paid on preferred shares Net Cash Provided by (Used in) Financing Activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2001 2000 ($1,465,703) ($1,089,730) 195,073 - (770,733) 1,412,404 (73,376,195) (91,129,620) - - - - 9,000,000 37,322,550 (12,635,000) (5,479,288) (50,000) - - (7,550,000) 124,593 (584,303) (41,137) 1,900,663 (215,151) - (550,847) 22,343,774 (2,260,734) 19,014,423 CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 35,664,440 16,650,017 CASH AND CASH EQUIVALENTS, END OF THE YEAR $33,403,706 $35,664,440 SUPPLEMENTAL INFORMATION Interest paid (excluding the amounts of $207,297 and $72,903 capitalized in 2001 and 2000, respectively) Income tax paid Noncash investing and financing activities: Effect of exchange rate changes on cash and cash equivalents Current portion of long-term liabilities Cash paid for acquisitions of property, plant and equipment: $1,980,399 $2,366,026 $16,318 $- $1,258,395 $1,009,264 $5,000,000 $50,000 Total acquisitions $55,977,367 $89,963,658 Decrease (increase) in payables to contractors and equipment suppliers 12,025,081 (10,693,197) $68,002,448 $79,270,461 The accompanying notes are an integral part of the financial statements. T S M C A n n u a l R e p o r t 2 0 0 1 55 English Translation of Financial Statements Originally Issued in Chinese NOTES TO FINANCIAL STATEMENTS (Amounts in Thousand New Taiwan Dollars, Unless Specified Otherwise) 1. GENERAL Taiwan Semiconductor Manufacturing Company Ltd (the "Company"), a Republic of China corporation, is engaged mainly in the manufacture, sale, packaging, and testing of integrated circuits and other semiconductor devices, and the manufacture and design of masks. TSMC was incorporated as a venture among the Government of the Republic of China, acting through the Development Fund of the Executive Yuan; Philips Electronics N.V. and certain of its affiliates (Philips); and certain other private investors. In September 1994, its shares were listed on the Taiwan Stock Exchange. In October 1997, TSMC listed its shares of stock on the New York Stock Exchange in the form of American Depositary Shares. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The financial statements have been prepared in conformity with accounting principles generally accepted in the Republic of China. The significant accounting principles adopted by the Company are as follows: Cash and cash equivalents Government bonds acquired under agreements that provide for their repurchase within less than three months from date of purchase are classified as cash equivalents. 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 titles of products and risks of ownerships are transferred to customers, primarily upon shipment. Allowance and related provisions for sales returns and others are provided based on experience; such provisions are deducted from sales and 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 policy decisions are accounted for using the equity method. The difference between the investment cost and the Company's proportionate equity in the net assets of the investee on the date of acquisition is amortized over five years using the straight-line method. Such amortization and the Company's proportionate share in the net income or net loss of investee companies are recognized as components of "Equity in net income or net loss in investee companies - net" account. When the Company subscribes to additional investee shares at a percentage different from its existing equity interest, the resulting carrying amount of the investment in equity investee differs from the amount of Company's proportionate share in the investee's net equity. The Company records such difference as an adjustment to "Capital surplus" and the "Long-term investments" accounts, respectively. In the event an investee offsets its capital surplus, excluding reserve from asset revaluation, against its accumulated deficit, which is recorded as a debit to the "Capital surplus" account and a credit to "Retained earnings" account, the 56 T S M C A n n u a l R e p o r t 2 0 0 1 Company also records the entry by its proportionate share of the investee capital surplus that was generated subsequent to its acquisition of investee interest, excluding reserve from asset revaluation. If an investee's functional currency is a foreign currency, "Cumulative translation adjustments" would result from the process of translating the investees' financial statements into the functional currency of the Company. Other stock investments are accounted using the cost method. These investments are stated at cost less declines in market value of listed stocks or declines 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 an 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 using the weighted-average method. The Company's proportionate share in the gains from sales of property, plant and equipment, net of the applicable income tax, included as its share in the net income or net loss of equity-accounted investee companies for the current year is reclassified to capital surplus from retained earnings. Such amount is reclassified back to retained earnings when the Company subsequently disposes the related investment. Also, if an investee company has unrealized loss on its own long-term investment which is evaluated using the lower-of-cost-or-market method, the Company recognizes that unrealized loss in proportion to the Company's equity interest and is recorded in an account that is a component of its own shareholders' equity. Gain or loss 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 the 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 gains or losses arose from sales by the investee companies or majority-owned subsidiaries to the Company, such gains or losses are deferred in proportion to the ownership percentage until realized through transactions with third parties. Property, plant and equipment and assets leased to others Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. Major additions, renewals, betterment, and interest expenses incurred during the construction period are capitalized. Maintenance and repairs are expensed currently. P r o p e r t y, 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 market value of the property 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 computed using 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. T S M C A n n u a l R e p o r t 2 0 0 1 57 Upon sale or disposal of an item 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 reclassified to capital surplus at the end of the year (before the relevant regulation was amended). Goodwill Goodwill arising from the business combinations is amortized using the straight-line method over 10 years. Deferred charges These consist of software and system design costs, technology know-how, bond issue costs and technology license fee. These are amortized as follows: software and system design costs - three years, technology know-how - five years, bond issue costs - the term of the bonds, and technology license fee - the term of the contract or economic useful lives of the related technology. 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 on the sale of 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 estimated useful life or leasing period. Income tax The Company adopted inter-period income tax allocation method. Deferred income taxes are recognized for the tax effects of taxable 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 is, according to the classification of its related asset or liability, 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 is 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 (forward contracts), entered into for purpose other than trading are recorded as follows: the differences in the New Taiwan dollar amounts translated using the spot rates and the amounts translated using the contracted forward rates are amortized over the terms of the forward contracts using the straight-line method. At the balance sheet dates, the receivables or payables arising from forward contracts are restated using the prevailing spot rates and the resulting differences are recognized in income. Also, the receivables and payables related to the forward contract are netted out and the resulting net amount is presented as either an asset or liability. The Company enters into interest rate swap transactions to manage interest rate fluctuations on liabilities. These transactions are accounted for on an accrual basis, in which cash settlement receivable or payable is recorded as an adjustment to interest income or expenses. 58 T S M C A n n u a l R e p o r t 2 0 0 1 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. Other foreign-currency transactions Other foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Gains or losses caused by the application of different foreign exchange rates when cash in foreign currency is converted into New Taiwan dollars, or when foreign-currency receivables and payables are settled, 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 based on prevailing exchange rates and any resulting gains or losses are credited or charged to income. Reclassifications Certain accounts in 2000 have been reclassified to conform to 2001 classifications. 3. CASH AND CASH EQUIVALENTS Cash and bank deposits Government bonds acquired under repurchase agreements 4. INVENTORIES - NET Finished goods Work in process Raw materials Supplies and spare parts Less - allowance for losses 2001 $31,678,047 1,725,659 $33,403,706 2000 $35,053,733 610,707 $35,664,440 2001 $1,618,635 6,685,094 521,680 870,780 9,696,189 (1,191,771) $8,504,418 2000 $1,606,368 8,422,401 423,444 1,083,348 11,535,561 (567,626) $10,967,935 T S M C A n n u a l R e p o r t 2 0 0 1 59 5. LONG-TERM INVESTMENTS Shares of stock Equity method: TSMC International Investment Vanguard International Semiconductor TSMC Partners Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) TSMC - North America Emerging Alliance Fund Kung Cherng Investment Cherng Huei Investment Po Cherng Investment Chi Hsin Investment Hsin Ruey Investment Chi Cherng Investment TSMC - Japan TSMC - Europe Cost method: Traded Amkor Technology Taiwan Mask Corp. Non-traded United Technology Hon Tung Venture Capital Shin-Etsu Handotai Taiwan Company Ltd. W.K. Technology Fund IV Taiwan Semiconductor Technology Funds Horizon Ventures Crimson Asia Capital 2001 2000 % of % of Carrying Owner- Carrying Owner- Value ship Value ship $19,987,814 3,377,526 3,032,376 2,907,967 786,062 741,617 177,812 166,639 164,724 158,252 157,352 156,694 80,156 10,147 100 25 100 32 100 99 25 25 25 25 25 25 100 100 $23,678,522 5,615,075 535,162 935,870 666,924 - 158,752 138,200 136,984 139,000 128,100 130,794 37,803 9,594 31,905,138 32,310,780 280,748 32,129 193,584 150,000 105,000 50,000 - 811,461 125,701 27,091 152,792 - 2 11 10 7 2 - - - - 32,129 146,250 120,000 105,000 50,000 500,000 953,379 93,304 64,547 157,851 $32,869,391 $33,422,010 100 25 100 32 100 - 25 25 25 25 25 25 100 100 - 2 10 10 7 4 19 - - 60 T S M C A n n u a l R e p o r t 2 0 0 1 The equity in net income or (net loss) of subsidiaries and investee companies consisted of the following: TSMC International Investment Vanguard International Semiconductor TSMC Partners SSMC TASMC Others 2001 ($4,855,844) (2,236,940) 2,357,405 (1,722,080) - 27,828 ($6,429,631) 2000 $138,589 597,812 494,966 (473,661) (331,330) 352,950 $779,326 The carrying values of equity-accounted investments and the related equity in net income or net loss were based on audited of financial statements in the same periods. Information on the long-term investments is as follows: Market value of traded stocks Equity in the net assets of unlisted stocks Net asset value of funds 2001 $7,055,888 29,124,386 152,792 2000 $8,729,639 27,597,593 157,851 6. PROPERTY, PLANT AND EQUIPMENT Accumulated depreciation consisted of the following: Buildings Machinery and equipment Office equipment 2001 $15,181,445 122,659,129 2,384,066 2000 $9,816,698 82,775,965 1,739,505 $140,224,640 $94,332,168 Information on the status of the construction of the Company's manufacturing facilities as of December 31, 2001 is as follows: Manufacturing Plant Fab 6 Fab 7 Fab 8 Fab 12 - 1st stage Fab 14 - 1st stage Estimated Cost Accumulated Expenditures Expected or Actual Date of Start of Operations $76,889,000 $69,986,000 5,930,500 28,322,100 38,280,800 9,711,000 2,867,500 11,355,300 28,988,700 8,449,600 March 2000 March 2001 March 2001 April 2002 June 2003 T S M C A n n u a l R e p o r t 2 0 0 1 61 Interest expense (before deducting capitalized amounts $207,297 in 2001 and $72,903 in 2000) for the years ended December 31, 2001 and 2000 were $2,159,127 and $1,931,100, respectively. The interest rates used for purposes of calculating the capitalized amount were 5.283% in 2001 and 6.468% to 6.620% in 2000. As of December 31, 2001, properties with an aggregate net book value of about $1,378,184 were mortgaged as collateral for long-term loans. 7. DEFERRED CHARGES - NET Software and system design costs Technology license fee Technology know-how Bond issue costs Others 8. BONDS Domestic unsecured bonds: 2001 $2,073,752 996,578 103,500 33,091 32,802 2000 $1,420,528 1,442,292 157,500 45,595 56,695 $3,239,723 $3,122,610 2001 2000 Repayable in March 2003, 7.71% annual interest payable semi-annually $4,000,000 $4,000,000 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 15,000,000 $29,000,000 Future minimum principal payments under the Company's bonds arrangements as of December 31, 2001 are as follows: Year of Repay 2002 2003 2004 2005 2006 and thereafter Less - current portion Amount $5,000,000 4,000,000 5,000,000 10,500,000 4,500,000 29,000,000 (5,000,000) $24,000,000 On November 6, 2001, the board of directors approved the issuance of domestic unsecured bonds with an aggregate principal amount of $15,000,000. The issuance of the domestic unsecured bond has been approved by the Securities and Futures Commission of ROC (SFC). As of January 18, 2002, the issuance is still in process. 62 T S M C A n n u a l R e p o r t 2 0 0 1 9. SHAREHOLDERS' EQUITY The Company has issued 259,006 thousand American Depositary Shares (ADS) as of December 31, 2001. The number of common shares represented by the ADSs is 1,295,031 thousand shares. The SFC has, on January 4, 2002, approved the Company's sponsorship of the offer by certain existing shareholders of up to 350,000 thousand common shares in the form of ADSs. The decision to sponsor the offering of common shares in the form of ADSs was approved by the Board of Directors on December 3, 2001. The offering is still in process as of January 18, 2002. Capital surplus except for that arising from the application of the equity method of accounting, pursuant to ROC Company Law, can only be used to offset a deficit or transferred to capital (as a stock dividend). Such transfer from capital surplus to capital can only be made once a year at a specific percentage. An amendment to the ROC Company Law issued on November 14, 2001, limited the nature of the capital surplus that can be used to offset a deficit or transferred to capital (as a stock dividend) to those that arise from donations (donated capital) and those attributable to the excess of the issue price over the par value of capital stock issued. The Company's Articles of Incorporation provide that the following shall be appropriated from annual net income (less any deficit): a. 10% legal reserve; b. Special reserve in accordance with relevant laws or regulations; c. Bonuses to directors and supervisors and to employees equal to 1% and at least 1% of the remainder, respectively; d. Dividends to holders of preferred shares equal to a 3.5% annual rate, based on the period during which the preferred shares have been outstanding; e. The appropriation of the remaining balance after the above shall be decided at the shareholder's meeting; These appropriations of net income shall be resolved by the shareholders in the following year and given effect in the financial statements of that year. Dividends are distributed in cash and/or in the form of shares of stock. Since the Company is in a capital-intensive industry, distribution of profits shall be made preferably by way of stock dividend. The total of cash dividend paid (in any given year) should not exceed 50% of total dividends paid and/or distributed. The aforementioned appropriation for legal reserve shall be made until the reserve equals the aggregate par value of the Company's outstanding capital stock. The reserve can only be used to offset a deficit; or, when its balance has reached 50% of the aggregate par value of the outstanding capital stock of the Company, 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. As of December 31, 2001, prior year's accumulated deficit in the amount of $1,803,168 from WSMC is included in the unappropriated retained earnings. T S M C A n n u a l R e p o r t 2 0 0 1 63 Under the Integrated Income Tax System that became effective on January 1, 1998, 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 1,300,000 thousand unlisted Series A - preferred shares to certain investors. The foregoing preferred shares will be redeemed within thirty months from their issuance. The terms and conditions in respect to the issuance of the preferred shares provides that, until the shares are redeemed, their holders: a. Are entitled to receive cumulative cash dividends at an annual rate of 3.5%. b. Are not entitled to receive any stock dividends (whether declared out of unappropriated earnings or capital surplus). c. Have priority over the holders of common shares to the assets of the Company available for distribution to shareholders upon liquidation or dissolution of the Company. However, the preemptive rights to the assets shall not exceed the issue value of the shares. d Have voting rights similar to that of the holders of common shares. e. Have no right to convert their shares into common shares. 10. 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 contributes at an amount equal to 2% of salaries every month to a Pension Fund (the "Fund"). The Fund is administered by a pension fund monitoring committee (the "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 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 2001 2000 $417,967 95,920 (43,968) 8,300 $478,219 $739 1,024,525 1,025,264 1,407,014 2,432,278 $376,689 91,234 (26,675) 8,300 $449,548 $- 763,879 763,879 1,550,009 2,313,888 (Forward) 64 T S M C A n n u a l R e p o r t 2 0 0 1 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 11. INCOME TAX BENEFIT (835,583) 1,596,695 - (157,691) 415,849 - (661,099) 1,652,789 - (165,991) 22,737 - $1,854,853 $1,509,535 5.0% 5.0% 5.0% $131,894 $- $- 6.0% 6.0% 6.0% $95,932 $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: Income tax expense base on "income before income tax" at statutory rate ($2,664,679) ($12,760,503) Tax-exempt income Temporary difference Income tax expense - current before tax credit 1,089,000 (993,679) 7,770,000 (49,497) ($2,569,358) ($5,040,000) 2001 2000 The statutory rate for 2001 and 2000 were 25% and 20%, respectively. b. Income tax benefits consist of: Income tax expense - current before tax credits Additional 10% on the unappropriated earnings Income tax credits Other income tax Income tax for the current year Net change in deferred income tax assets (liabilities) for the period Investment tax credits Temporary differences Valuation allowance Adjustment of prior years' taxes 2001 2000 ($2,569,358) ($5,040,000) (319,000) 2,888,358 (16,318) (16,318) (88,024) 5,128,024 - - 144,925 (1,874,945) 3,146,369 (388,671) 5,570,797 (1,678,791) - 189,693 $3,824,459 $1,268,600 T S M C A n n u a l R e p o r t 2 0 0 1 65 c. Deferred income tax assets and liabilities consisted of: Current: Investment tax credits Less - valuation allowance Noncurrent: Investment tax credits Temporary differences Less - valuation allowance 2001 2000 $2,347,000 - $2,347,000 $8,422,000 (300,000) $8,122,000 $21,710,461 $15,490,536 (2,493,755) 19,216,706 (3,041,636) $16,175,070 (618,810) 14,871,726 (8,312,433) $6,559,293 The effective tax rates for deferred income tax as of December 31, 2001 and 2000 were 17.56% and 7.54%, respectively. d. Integrated income tax information: The balances of the imputation credit account (ICA) as of December 31, 2001 and 2000 were $9,365 and $5,888, respectively. The tax credit ratio computed as of December 31, 2001 was 0.02% while the tax credit on earnings as of December 31, 2000 on dividend distributed in 2001 was 0.01%. 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 2001 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, 2001 and 2000 included the earnings generated up to December 31, 1997 of $4,827. f. Unused investment tax credits arising from purchase of machinery and equipment, and research and development expenditures as of December 31, 2001 will expire as follows: Year of Expiry 2002 2003 2004 2005 g. The income from the following projects and services is exempt from income tax: Expansion of first and second manufacturing plants-modules A and B, third manufacturing plant and fourth manufacturing plant, and construction of fifth manufacturing plant Expansion of the seventh manufacturing plant 66 T S M C A n n u a l R e p o r t 2 0 0 1 Amount $4,487,894 5,500,778 10,720,895 3,347,894 $24,057,461 Tax-Exemption Period 1999 to 2002 1998 to 2001 h. The tax authorities have examined income tax returns of TSMC through 1999, excluding 1998. However, TSMC is contesting the assessment of the tax authority for 1992, 1993, 1996 and 1997. 12. RELATED PARTY TRANSACTIONS The Company engages in business transactions with the following related parties: a. Industrial Technology Research Institute (ITRI); the Chairman of the Company is one of the director of ITRI b. Philips Electronics N.V. (Philips); 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 Technology, a subsidiary of TSMC-BVI f. WAFERTECH, LLC, an indirect subsidiary of TSMC-BVI The transactions with the aforementioned parties, in addition to those disclosed in other notes, are summarized as follows: For the year Sales Philips and its affiliates VIS ITRI SSMC WAFERTECH, LLC Purchase WAFERTECH, LLC VIS SSMC Rental expense - ITRI Manufacturing expenses 2001 2000 Amount % Amount % $2,389,257 1,177,094 114,546 48,972 3,111 $3,732,980 $6,797,817 3,801,975 42,984 $10,642,776 2 1 - - - 3 37 22 - 59 $5,289,927 17,012 198,146 - 30,816 $5,535,901 $13,296,633 6,572,110 - $19,868,743 3 - - - - 3 37 19 - 56 $161,604 11 $161,575 14 Technical assistance fee - Philips $2,418,276 100 $2,137,175 86 (Forward) T S M C A n n u a l R e p o r t 2 0 0 1 67 Marketing expenses Commission TSMC - North America $1,028,725 42 $994,686 34 TSMC - Japan TSMC - Europe Service Charge TSMC - North America Sales of property, plant and equipment 194,696 124,384 118,648 8 5 5 165,087 143,461 118,852 $1,466,453 60 $1,422,086 VIS WAFERTECH, LLC Non-operating income SSMC WAFERTECH, LLC VIS Others At end of the year Receivables VIS Philips and its affiliates ITRI WAFERTECH, LLC SSMC TSMC Technology Prepaid expense and other current asset Advance rent - ITRI Payables WAFERTECH, LLC VIS Philips and its affiliates TSMC - North America TSMC - Europe TSMC - Japan TSMC Technology SSMC 5 5 4 48 37 - 37 3 - - - 3 16 65 6 2 9 2 $268,871 24,645 $293,516 $95,284 4,612 467 - $100,363 $320,179 116,499 37,383 25,251 20,671 3,878 79 7 86 3 - - - 3 61 22 7 5 4 1 $87,189 - $87,189 $152,347 1,749 5,604 38 $159,738 $159,890 643,604 56,078 20,361 89,154 25,728 $523,861 100 $994,815 100 $42,664 2 $42,664 6 $817,616 548,472 499,331 136,443 54,601 15,355 10,318 470 39 26 24 7 3 1 - - $1,487,181 1,808,964 797,375 166,063 66,343 16,165 4,487 - 34 42 18 4 2 - - - $2,082,606 100 $4,346,578 100 Sales to related parties are based on normal selling prices and collection terms, except for disposal of properties and technical service, which were in accordance with the related contracts. The amount payable to WAFERTECH, LLC represents the costs of finished goods purchased by TSMC. The costs of finished goods purchased were calculated in accordance with the related contractual agreements. 68 T S M C A n n u a l R e p o r t 2 0 0 1 13. SIGNIFICANT 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 under such agreement amounts to $161,604. The Company leases the land where its 2nd through 14th manufacturing facilities are located from the Science-Based Industrial Park Administration. The related agreements will expire on various dates from March 2008 to December 2020 and have annual rentals aggregating $208,716. The agreements can be renewable upon their expiration. Future annual minimum rentals under the aforementioned leases are as follows: Year 2002 2003 2004 2005 2006 2007 and thereafter Amount $249,117 208,716 208,716 208,716 208,716 1,789,500 $2,873,481 14. SIGNIFICANT COMMITMENTS AND CONTINGENCY AS OF DECEMBER 31, 2001 The Company's commitments and contingency as of December 31, 2001 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 technical cooperation agreement with ITRI, the Company shall reserve and allocate up to 35% of certain 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, the Company shall allocate a portion of its production output for sale to certain major customers from whom guarantee deposits of US$205,949 thousand had been received as of December 31, 2001. 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 T S M C A n n u a l R e p o r t 2 0 0 1 69 authorized capital at about S$1.2 billion, and, (c) allow the Company to invest in 32% of SSMC's capital. As of December 31, 2001, the aggregate amount of investments from these parties has not reached S$1.2 billion. The Company and Philips committed to buy a specific percentage of the production capacity of SSMC. If any party defaults on the agreement and the capacity utilization of SSMC falls below a specific percentage of its total capacity, the defaulting party should compensate SSMC for all related unavoidable costs. f. Provision of technical services to SSMC under a Technical Cooperation Agreement (the "Agreement") entered into on May 12, 1999. The Company receives compensation for such services computed at a specific percentage of net selling prices of specific products sold by SSMC. The Agreement remains in force for ten years and is automatically renewed for successive periods of five years unless pre-terminated by either party under certain conditions. g. The Company provides a guarantee for loans of US$268,000 thousand, US$40,000 thousand and US$440,000 thousand obtained by TSMC Development, Inc., TSMC- North America and WAFERTECH, LLC, respectively. h. 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. i. 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 a discount to the selling prices as agreed by the parties. The Company paid $1,200,000 thousand to VIS as Security Bond. VIS shall return portions of the Bond without any interest to the Company upon the purchase of wafers by the Company. The contract will remain in force for five years. j. Under a patent license agreement, the Company has entered into a cross license arrangement for certain semiconductor patents with a US-based company for a term starting from October 26, 2001 through December 31, 2006. TSMC shall pay royalty fees to the such company. k. Unused letter of credits as of December 31, 2001 were $1,200 thousand. l. As of December 31, 2001, unused credit lines for short-term loans were NT$6,430,000 thousand and US$300,000 thousand. m. As of December 31, 2001, unused credit lines for long-term loans were NT$3,000,000 thousand and US$37,750 thousand. 15. ADDITIONAL DISCLOSURES Following are the additional disclosures required by the SFC for TSMC and investees: a. Financing provided: Please see Table 1 attached; b. Endorsement/guarantee provided: Please see Table 2 attached; c. Marketable securities held: Please see Table 3 attached; 70 T S M C A n n u a l R e p o r t 2 0 0 1 d. Marketable securities acquired and disposed of at costs or prices of at least NT$100 million or 20% of the paid-in capital: Please see Table 4 attached; e. Acquisition of individual real estates at costs of at least NT$100 million or 20% of the paid-in capital: Please see Table 5 attached; f. Disposal of individual real estates at prices of at least NT$100 million or 20% of the paid-in capital: None; g. Total purchase from or sale to related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 6 attached; h. Receivable from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 7 attached; i. Names, locations, and related information of investees on which the Company exercises significant influence: Please see Table 8 attached; j. Financial instrument transactions: 1) Derivative financial instruments The relevant information on the derivative financial instruments entered into by the Company is as follows: a) Open forward exchange contracts as of December 31, 2001 Currency Contract Amount (Thousand) Fair Value (Thousand) Settlement Date Maturity (Thousand) Sell Sell US$ US$ US$17,912 NT$618,206 Jan. 2002 NT$620,600 US$783,000 NT$26,985,688 Jan. 2001~Mar.2002 NT$27,013,402 Payables from forward exchange contracts (shown in the balance sheet as part of "Other current liabilities" account) as of December 31, 2001 aggregated to $397,117. Net exchange loss for the year ended December 31, 2001 was $1,872,979. The net assets or liabilities that have been hedged by the above forward exchange contracts are as follows: Accounts receivable Accounts payable Time deposits b) Interest rate swaps Amount (Thousand) US$518,984 US$169,664 US$707,416 The Company has entered into interest rate swap contracts to hedge exposure to rising interest rates on its floating rate long-term 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 $2,000,000 1,000,000 1,000,000 1,000,000 Interest expenses on these transactions for the year ended December 31, 2001 were $473,413. T S M C A n n u a l R e p o r t 2 0 0 1 71 c) Option contracts The Company has entered into foreign currency option contracts to hedge risks of exchange rate fluctuations arising from its anticipated U.S. dollar cash receipts from its export sales or Japanese Yen obligations related to its importation of machinery and equipment. Outstanding option contracts as of December 31, 2001 were as follows: Contract Currency Contract Amount (Thousand) Carrying Value Fair Value (Thousand) Strike Price Maturity Put option sell EUR EUR 293,000 ($39,500) ($252,833) 0.8940 ~ 0.9340(EUR/US$) Jan. ~ Feb., 2002 For the year ended December 31, 2001, the Company realized premium income of $328,254 and premium expense of $93,522. d) Transaction risk i) 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. ii) Market price risk. All derivative financial instruments are intended as hedges for fluctuations in currency exchange rates on the Company foreign currency denominated receivables or payables and interest rate fluctuations on its floating rate long-term loans. Gains or losses from forward exchange contracts are likely to be offset by gains or losses from receivables and payables. Interest rate risks are also controlled as the expected cost of capital is fixed. Thus, market price risks from exchange rate and interest rate fluctuations are minimal. iii) Liquidity and cash flow requirements. The cash flow requirements on the derivative instruments are limited to the net differences between the spot rates and contracted forward rates at settlement dates (for forward contracts); and amounts payable arising from the differences in the rates (for interest rate swap contracts). Also, 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. Management believes that the foregoing requirements are not material. 2) Fair value of financial instruments Non-derivative financial instruments Assets Cash and cash equivalents Receivable from related parties Notes and Accounts receivable Long-term investments Pledged deposits Refundable deposits Liabilities Payable to related parties Accounts payable (Forward) 72 T S M C A n n u a l R e p o r t 2 0 0 1 2001 2000 Carrying Amount Fair Value Carrying Amount Fair Value $33,403,706 $33,403,706 $35,664,440 $35,664,440 523,861 523,861 994,815 994,815 20,134,218 20,134,218 30,460,489 30,460,489 32,869,391 36,333,066 33,422,010 36,485,083 25,356 772,912 25,356 772,912 46,856 46,856 967,985 967,985 2,082,606 2,082,606 4,346,578 4,346,578 1,123,894 1,123,894 7,989,953 7,989,953 Payables to contractors and equipment suppliers 12,367,319 12,367,319 24,392,400 24,392,400 Bonds Guarantee deposits 29,000,000 29,703,063 29,000,000 29,035,803 7,210,972 7,210,972 7,086,379 7,086,379 Derivative financial instruments Forward exchange contracts (buy) Forward exchange contracts (sell) Interest rate swaps Option - - 1,984,740 1,978,998 28,031,119 27,603,894 20,802,311 20,788,804 26,969 (343,088) 1,601 234,017 (39,500) (252,833) - (456,068) Fair values of financial instruments were determined as follows: a) Short-term financial instruments -- carrying values. b) Long-term investments -- market value for listed companies and net equity value for the others. c) Refundable deposits and guarantees deposits -- carrying values. d) Long-term bank loans -- based on forecasted cash flows discounted at interest rates of similar long-term liabilities. 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. e) Derivative financial instruments -- based on the quotations from banks. 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 does not equal the fair value of the Company. 16. SEGMENT FINANCIAL INFORMATION a. Export sales Area America Asia Europe 2001 2000 $63,896,732 23,874,375 7,523,873 $81,686,803 42,906,968 11,360,517 $95,294,980 $135,954,288 The export sales information is presented by billed regions. b. The Company only has one customer that accounts for at least 10% of its total sales. The sales to such customer amounted to $21,789,769 in 2001 representing 17% of its total sales. The sales, however, to such customer amounted to only $10,307,244 in 2000 representing only 6% of total sales. T S M C A n n u a l R e p o r t 2 0 0 1 73 TABLE 1 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES FINANCING PROVIDED For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Financing Name Counter-Party Financial Statement Account Financing Limit for Each Borrowing Company Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) Interest Rate Financing Reasons Allowance for Bad Debt Collateral Item Value Transaction Amount Financing Company's Financing Amount Limits (US$ in Thousand) 1 2 TSMC-BVI TSMC Technology Other receivables - US$14,662 US$14,662 7.75% VIS VIS Holding Prepaid expenses (Note 2) $1,232 $- - Operating capital Prepayments for product development $- - - $- - - $- - US$779,968 (Note 1) $4,400,000 (Note 3) Note 1: Not exceeding the issued capital of the Company. Note 2: Not exceeding 10% of the issued capital of VIS for each transaction entity, and also limited to 30% of the issued capital of each transaction entity. Note 3: Not exceeding 20% of the issued capital of VIS. TABLE 2 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES ENDORSEMENT/GUARANTEE PROVIDED For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Endorsement/ Guarantee Provider Counter-Party Name Limits on Each Counter-party's Endorsement/ Guarantee Amounts Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) Nature of Relationship (Note 2) Value of Collateral Property, Plant and Equipment (Note 3) Ratio of Accumulated Amount of Collateral to Net Equity of the Latest Financial Statement Maximum Collateral/Guarantee Amounts Allowable (Note 1) 0 TSMC TSMC Development Inc. TSMC - North America WAFERTECH, LLC 3 2 3 (Note 4) $9,379,732 (US$268,000) 1,399,960 (US$40,000) 15,399,560 (US$440,000) $9,379,732 (US$268,000) 1,399,960 (US$40,000) 15,399,560 (US$440,000) Note 1: 30% of the issued capital of the Company. Note 2: The No. 2 represents a subsidiary in which TSMC holds directly over 50% of the equity interest. The No. 3 represents an investee in which TSMC holds directly and indirectly over 50% of the equity interest. $54,397,659 $- - - 3.38% 0.51% 5.56% Note 3:Promissory notes for collateral. Note 4:Not exceeding 10% of the issued capital of the Company, and also limiting to the issued capital of the transaction entity, unless otherwise approved by Board of directors. 74 T S M C A n n u a l R e p o r t 2 0 0 1 TABLE 3 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES MARKETABLE SECURITIES HELD December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: TSMC Stock TSMC - North America TSMC - Europe TSMC - Japan VIS TSMC-BVI TSMC Partners SSMC Emerging Alliance Fund Taiwan Mask Corp. United Technology Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Hon Tung Ventures Capital Amkor Technology Certificate Po Cherng Investment Chi Hsin Investment Kung Cherng Investment Chi Cherng Investment Hsin Ruey Investment Cherng Huei Investment Equity Crimson Asia Capital Fund Horizon Ventures Fund Held Company Name: Chi Cherng Investment Stock TSMC (Forward) Subsidiary Subsidiary Subsidiary Investee Subsidiary Subsidiary Investee Subsidiary - - - - - - Investee Investee Investee Investee Investee Investee - - Long-term investment 11,000 $786,062 Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment - 6 556,133 779,968 300 301 - 7,782 16,783 10,500 5,000 15,000 505 - - - - - - - - 10,147 80,156 3,377,526 19,987,814 3,032,376 2,907,967 741,617 32,129 193,584 105,000 50,000 150,000 280,748 164,724 158,252 177,812 156,694 157,352 166,639 27,091 125,701 100 100 100 25 100 100 32 99 2 11 7 2 10 - 25 25 25 25 25 25 N/A N/A $786,062 10,147 80,156 6,584,620 19,987,814 3,032,376 2,907,967 741,617 183,658 274,107 118,726 64,855 139,086 287,610 164,724 158,252 177,812 156,694 157,352 166,639 27,091 125,701 Major shareholder Short-term investment 3,023 98,282 - 253,173 T S M C A n n u a l R e p o r t 2 0 0 1 75 Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: Chi Cherng Investment Certificate Po Cherng Investment Chi Hsin Investment Hsin Ruey Investment Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment Kung Cherng Investment Major shareholder Long-term investment Cherng Huei Investment Major shareholder Long-term investment Held Company Name: Kung Cherng Investment 6,000 6,000 6,000 6,000 6,000 $98,834 94,951 94,411 106,687 99,983 Major shareholder Short-term investment 6,758 226,819 Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment 6,000 6,000 6,000 6,000 6,000 98,834 94,951 94,017 94,411 99,983 Major shareholder Short-term investment 4,240 187,508 Cherng Huei Investment Major shareholder Long-term investment Held Company Name: Po Cherng Investment Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment 6,000 6,000 6,000 6,000 6,000 94,951 94,017 94,411 106,687 99,983 Kung Cherng Investment Major shareholder Long-term investment Cherng Huei Investment Major shareholder Long-term investment Held Company Name: Cherng Huei Investment Stock TSMC Certificate Po Cherng Investment Chi Hsin Investment Chi Cherng Investment Hsin Ruey Investment Stock TSMC Certificate Chi Hsin Investment Chi Cherng Investment Hsin Ruey Investment Stock TSMC Certificate Po Cherng Investment Chi Hsin Investment Chi Cherng Investment Hsin Ruey Investment Major shareholder Short-term investment 4,917 198,896 Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment 6,000 6,000 6,000 6,000 6,000 98,834 94,951 94,017 94,411 106,687 15 15 15 15 15 - 15 15 15 15 15 - 15 15 15 15 15 - 15 15 15 15 15 $98,834 94,951 94,411 106,687 99,983 565,937 98,834 94,951 94,017 94,411 99,983 355,058 Pledge 150 thousand shares 94,951 94,017 94,411 106,687 99,983 411,724 Pledge 1,600 thousand shares 98,834 94,951 94,017 94,411 106,687 Kung Cherng Investment Major shareholder Long-term investment Held Company Name: Chi Hsin Investment Stock TSMC (Forward) 76 T S M C A n n u a l R e p o r t 2 0 0 1 Major shareholder Short-term investment 3,561 138,747 - 298,220 Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: Chi Hsin Investment Certificate Po Cherng Investment Chi Cherng Investment Hsin Ruey Investment Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment Kung Cherng Investment Major shareholder Long-term investment Cherng Huei Investment Major shareholder Long-term investment Held Company Name: Hsin Ruey Investment 6,000 6,000 6,000 6,000 6,000 $98,834 94,017 94,411 106,687 99,983 Stock TSMC Certificate Po Cherng Investment Chi Hsin Investment Chi Cherng Investment Major shareholder Short-term investment 1,407 98,996 Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment 6,000 6,000 6,000 6,000 6,000 98,834 94,951 94,017 106,687 99,983 Kung Cherng Investment Major shareholder Long-term investment Cherng Huei Investment Major shareholder Long-term investment 15 15 15 15 15 - 15 15 15 15 15 97 97 $98,834 94,017 94,411 106,687 99,983 117,836 98,834 94,951 94,017 106,687 99,983 US$65,203 US$45,766 Held Company Name: TSMC-BVI Stock InveStar Semiconductor Development Fund Inc. InveStar Semiconductor Development Fund (II) Inc. TSMC Development Inc. TSMC Technology Inc. 3DFX Interactive Inc. Held Company Name: VIS Bond fund Qiung Ban Yuan Da Duo Li #2 THE TP ROC Stock Subsidiary of TSMC-BVI Subsidiary of TSMC-BVI Subsidiary of TSMC-BVI and its chairman is also TSMC's chairman Subsidiary of TSMC-BVI and its chairman is also TSMC's chairman - - - - VIS Associates Inc. Subsidiary Long-term investment PowerChip Semiconductor Inc. Etron Technology Inc. Walsin Technology Inc. Investee Investee Investee Long-term investment Long-term investment Long-term investment (Forward) Long-term investment 45,000 US$65,203 Long-term investment 45,000 US$45,766 Long-term investment Long-term investment 1 1 US$201,231 100 US$201,231 US$1,591 100 US$1,591 Long-term investment 68 US$297 Short-term investment Short-term investment Short-term investment 28,409 26,278 25,923 41,070 202,185 5,617 34,551 40,000 350,000 350,000 902,999 2,651,216 275,766 414,481 - - - - 100 9 3 10 US$30 401,960 352,465 355,763 902,999 3,263,269 281,864 358,864 T S M C A n n u a l R e p o r t 2 0 0 1 77 Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: VIS MEGIC Corporation Form Factor, Inc. United Technology Co., Ltd. Held Company Name: VIS Associates Inc. Stock VIS Investment Holding, Inc. Equity Silicon Valley Equity Fund Silicon Valley Equity Fund II ABN AMRO Bank Equity Certificate Fund Grand Palace Trust Investee Investee Investee Long-term investment Long-term investment Long-term investment 16,500 267 3,357 $177,000 64,360 38,716 9 1 2 $188,581 64,360 54,872 Subsidiary of VIS Associates Inc. Long-term investment 68 US$891 100 US$891 - - - - Long-term investment Long-term investment - - US$7,894 US$5,705 Short-term investment 23,168 US$10,047 35 14 - US$7,894 US$5,705 US$11,319 Long-term investment - US$2,800 100 US$2,800 Held Company Name: VIS Investment Holding, Inc. Stock VIS Micro, Inc. Held Company Name: TSMC Development Stock WAFERTECH, LLC Held Company Name: TSMC Partners ADR TSMC Investee Long-term investment 200 US$258 100 US$258 Long-term investment - US$226,541 99 US$226,541 Investee of TSMC Development and its chairman is also chairman of TSMC Parent Company Short-term investment 495 US$7,357 Held Company Name: InveStar Semiconductor Development Fund Inc. Stock Silicon Image, Inc. Marvell Technology Group Ltd. Silicon Labo Ratories Chang Yi Technology Divio Capella Microsystems, Inc. Equator Technologies, Inc. Empower Tel Networks, Inc. Ubicom, Inc. Global Test Corp. Chip Strate Ritch Tech APE Fu Ding Technology (Forward) - - - - - - - - - - - - - 78 T S M C A n n u a l R e p o r t 2 0 0 1 Short-term investment Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 297 3,413 15 1,668 30 542 133 317 861 Long-term investment 13,268 Long-term investment Long-term investment Long-term investment 6,660 1,023 2,750 US$520 US$3,350 US$472 US$1,643 US$3 US$135 US$90 US$344 US$172 US$5,672 US$2,142 US$326 US$1,518 - - - - - - - - - - - - - - US$8,726 US$1,236 US$123,797 US$519 US$672 US$3 US$135 US$90 US$344 US$172 US$10,126 US$2,073 US$1,743 US$1,336 Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: InveStar Semiconductor Development Fund Inc. Preferred stock Integrated Memory Logic, Inc. Divio (Next wave) SiRF Technology Inc. Rise Capella Microsystems, Inc. Sensory, Inc. Equator Technologies, Inc. Light Speed Semiconductor Corporation Empower Tel Networks, Inc. Ubicom, Inc. RapidStream Tropian, Inc. Sonics, Inc. Pico Turbo, Inc. Atheros, Inc. NanoAmp Solutions, Inc. Formfactor, Inc. Monolithic Power Systems, Inc. Memsic, Inc. Reflectivity, Inc. Signia Match Lab, Inc. HINT Corporation Creosys, Inc. Incentia Design Systems, Inc. Bond Rise - - - - - - - - - - - - - - - - - - - - - - - - - - Long-term investment 1,831 Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 667 306 600 1,383 1,404 443 2,252 3,840 1,056 2,056 1,758 3,082 1,050 1,607 541 267 2,521 2,727 1,064 3,000 1,875 1,000 1,500 286 US$1,809 US$500 US$1,333 US$1,500 US$1,298 US$1,250 US$1,338 US$3,064 US$5,128 US$1,361 US$1,050 US$2,334 US$3,082 US$1,250 US$3,593 US$853 US$2,000 US$2,000 US$1,500 US$2,000 US$1,500 US$1,500 US$1,000 US$1,500 US$500 Long-term investment - US$300 Held Company Name: InveStar Semiconductor Development Fund (II) Inc. Stock HPL Aquisition Corporation Richtek Technology Corporation Chang Yi Technology Preferred stock Procoat Technology Omega Band, Inc. Memsic, Inc. OEpic, Inc. Equator Technologies, Inc. NanoAmp Solutions, Inc. RapidStream, Inc. Signia Technologies, Inc. (Forward) - - - - - - - - - - - Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 187 480 487 2,500 1,389 2,289 2,696 770 250 246 500 US$1,124 US$1,001 US$1,139 US$869 US$1,250 US$1,560 US$2,500 US$1,501 US$1,000 US$1,057 US$750 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$3,055 US$2,233 US$1,858 US$1,500 US$1,660 US$857 US$864 US$764 US$14,296 US$2,433 US$7,286 US$2,388 US$3,082 US$1,300 US$9,025 US$1,900 US$3,600 US$4,938 US$2,894 US$2,000 US$3,900 US$1,500 US$1,000 US$1,500 US$500 US$300 US$2,669 US$987 US$139 US$857 US$1,250 US$2,489 US$3,023 US$1,501 US$1,000 US$1,057 US$750 T S M C A n n u a l R e p o r t 2 0 0 1 79 Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: InveStar Semiconductor Development Fund (II) Inc. Advanced Analogic Technology, Inc. Y-MEDIA Corporation Monlithic Power Systems, Inc. Ralink Technology, Inc. Sonics, Inc. Newport Opticom, Inc. Silicon Data, Inc. Capella Microsystems, Inc. Angstron Systems, Inc. Tropain, Inc. SIRF Technology, Inc. Match Lab, Inc. OEpic, Inc. Bond Omega Band, Inc. Pico Turbo, Inc. Held Company Name: Emerging Alliance Fund Stock - - - - - - - - - - - - - - - Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 948 281 674 1,833 3,082 1,157 500 800 1,567 1,464 20 313 - N/A N/A US$1,261 US$1,500 US$1,515 US$1,500 US$3,082 US$1,204 US$250 US$1,000 US$750 US$2,000 US$131 US$250 US$- US$192 US$295 Global Investment Holding Inc. Investee Long-term investment 10,000 $100,000 Preferred stock Quake Technologies, Inc. Pixim, Inc. Newport Opticom, Inc. NetLogic Microsystems, Inc. Quickilver Technology, Inc. Ikanos Communication, Inc. Litchfield Communications - - - - - - - Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 467 833 962 602 3,320 1,741 3,799 US$1,000 US$2,500 US$1,000 US$1,850 US$3,500 US$1,500 US$1,000 - - - - - - - - - - - - - - - 6 1 3 6 1 29 3 6 US$1,261 US$1,500 US$1,515 US$1,767 US$3,082 US$1,204 US$250 US$1,000 US$750 US$2,000 US$131 US$250 US$- US$192 US$295 $100,000 US$1,000 US$2,500 US$1,000 US$1,850 US$3,500 US$1,500 US$1,000 80 T S M C A n n u a l R e p o r t 2 0 0 1 TABLE 4 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID- IN CAPITAL For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Counter- Party Nature of Relationship Beginning Balance Acquisition Disposal Ending Balance Shares (Thousand) Amount Shares (Thousand) Amount (US$ in Thousand) Shares (Thousand) Amount Carrying Value Gain (Loss) on Disposal Shares (Thousand) Amount (US$ in Thousand) (Note 1) Subsidiary - $- - $837,045 Emerging Alliance Fund Long-term investment SSMC Investee 90 935,870 211 3,553,862 - - $- - $- - $- - - $741,617 301 2,907,967 - - - - - - - - - - 50,000 500,000 - - 50,000 395,748 (Note2) 500,000 (104,252) - - - - - - - - 505 280,748 10,000 100,000 - - - - - - - - 505 280,748 10,000 100,000 - US$4,000 - US$1,000 US$4,000 (US$3,000) - - 23,750 464,077 17,500 597,783 - - - - 41,070 902,999 - - - - - - - - - - 35,548 500,000 7,139 100,263 100,000 263 28,409 400,000 40,874 550,000 14,951 201,482 200,000 1,482 25,923 350,000 49,017 650,000 22,739 302,698 300,000 2,698 26,278 350,000 2,048 300,000 2,048 302,386 300,000 2,386 31,397 450,000 31,397 452,789 450,000 2,789 - - - - T S M C A n n u a l R e p o r t 2 0 0 1 81 Marketable Securities Type and Name Financial Statement Account Company Name: TSMC Stock Emerging Alliance Fund Long-term investment Systems on Silicon Manufacturing Company (SSMC) Taiwan Semiconductor Technology Long-term investment Amkor Technology Amkor Technology Long-term investment Amkor Technology Company Name: Emerging Alliance Fund Stock Global Investment Holding, Inc. Long-term investment Global Ivestment Holding,Inc. Convertible Commercial Paper VM Labs, Inc. Long-term investment VM Labs, Inc. Company Name: VIS Stock VIS Associates Inc. Long-term investment Subsidiary Bond Fund Qiung Ban THE TP ROC Yuan Da Duo Li #2 NITC FUBON JU-I (Forward) Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment - - - - - Marketable Securities Type and Name Financial Statement Account Counter- Party Nature of Relationship Beginning Balance Acquisition Disposal Ending Balance Shares (Thousand) Amount Shares (Thousand) Amount (US$ in Thousand) Shares (Thousand) Amount Carrying Value Gain (Loss) on Disposal Shares (Thousand) Amount (US$ in Thousand) (Note 1) Capital Save Income Home Run Short-term investment Short-term investment - - Company Name: VIS Associates Inc. ABN AMRO Bank Equity Certificates Short-term investment - - - - - - - - - - 15,295 200,000 15,295 201,139 200,000 1,139 51,811 650,000 51,811 656,159 650,000 6,159 - - - - 223,168 US$10,047 - - - - 23,168 US$10,047 Company Name: InveStar Semiconductor Development Fund. Inc. Stocks Centillium Tec. Corp Marvell Technology Group Ltd. Short-term investment Short-term investment Preferred Stocks Lara Networks, Inc. Short-term investment - - - - - - Company Name: InveStar Semiconductor Development Fund (II) Inc. 165 US$660 4,665 US$4,579 1,544 US$772 - - - - - - 165 US$7,474 US$660 US$6,814 - - 1,252 US$38,094 US$1,229 US$36,865 3,413 US$3,350 1,544 US$8,170 US$772 US$7,398 - - Sonic, Inc. Long-term investment - - - - 3,082 US$3,082 - - - - 3,082 US$3,082 Note 1: The ending balance included the recognition of the investment income (loss) by the equity method and the accumulated translation adjustment. Note 2: Disposal price included $115,000 in cash and the agreed exchange 505 thousand shares of Amkor Technology. The market value for the shares of Amkor Technology on the disposal day worth $280,748. TABLE 5 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES ACQUISITION OF INDIVIDUAL REAL ESTATE AT COSTS OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Property Transaction Date Transaction Amount Payment Term Counter-Party Nature of Relationship Prior Transaction of Related Counter-party Price Reference Owner Relationship Transfer Date Amount Purpose of Acquisition Other Terms - - N/A N/A N/A N/A Public bidding N/A N/A N/A N/A Public bidding Manufacturing purpose Manufacturing purpose None None TSMC Fab 12 and office Jan. 10, 2001 $345,000 Depend on the progress of the construction China Construction Co, Ltd. Fu Tsu . Depend on the progress of the Construction construction Co, Ltd Jan. 29, 2001 476,200 82 T S M C A n n u a l R e p o r t 2 0 0 1 TABLE 6 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES TOTAL PURCHASE FROM OR SALE TO RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Related Party Nature of Relationship Transaction Details Abnormal Transaction Note/Accounts Payable or Receivable Note Purchase/Sale Amount % to Total* Payment Terms Unit Price Payment Terms Ending Balance % to Total Company Name: TSMC Phillips and its affiliates VIS ITRI WAFERTECH, LLC Major shareholder Sales $2,389,257 Investee Sales 1,177,094 The company's chairman is one of its directors Indirect investee of the subsidiary (TSMC-BVI) Sales 114,546 Purchase 6,797,817 VIS Investee Purchase 3,801,975 2 1 - 37 22 Net 30 days from invoice date Net 45 days from monthly closing date Net 45 days from monthly closing date Net 30 days from monthly closing date Net 45 days from monthly closing date None None $116,499 None None 320,179 None None 37,383 None None (817,616) None None (548,472) 22 61 7 39 26 *Percentage for sales is of gross sales and percentage for purchase is of the total purchases of material and finished goods. TABLE 7 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Related Party Nature of Relationship Ending Balance Turnover Rate Overdue Amounts Received Allowance for Amount Action Taken in Subsequent Period Bad Debts Company Name: TSMC VIS Investee Phillips and its affiliates Major shareholder $320,179 116,499 N/A $52,668 Accelerate demand on account receivables 58 days 20,820 Accelerate demand on account receivables $92,345 80,559 - - T S M C A n n u a l R e p o r t 2 0 0 1 83 TABLE 8 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND INVESTEES NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Investee Company Location Investor Company: TSMC Main Businesses and Products Original Investment Amount Balance as of December 31, 2001 Dec. 31, 2001 Dec. 31, 2000 Shares (Thousand) Percentage of Ownership Carrying Value Net Income (Loss) of the Investee Investment Gain (Loss) Note TSMC - North America San Jose, California, U.S.A Marketing and engineering support TSMC - Europe Amsterdam, The Netherlands Marketing and engineering support TSMC - Japan Yokohama, Japan VIS Hsin-Chu, Taiwan Marketing and engineering support IC Design and manufacturing $333,718 $333,718 11,000 2,960 2,960 83,760 35,142 - 6 6,503,640 6,503,640 556,133 100 100 100 25 $786,062 $4,560 $4,560 Subsidiary 10,147 420 420 Subsidiary 80,156 (183) (183) Subsidiary 3,377,526 (8,692,423) (2,236,940) Investee TSMC - BVI Tortola, British Virgin Islands Investment 24,165,780 24,159,958 779,968 100 19,987,814 (4,855,844) (4,855,844) Subsidiary Po Cherng Investment Taipei, Taiwan Investment Chi Hsin Investment Taipei, Taiwan Investment Kung Cherng Investment Taipei, Taiwan Investment Chi Cherng Investment Taipei, Taiwan Investment Hsin Ruey Investment Taipei, Taiwan Investment Cherng Huei Investment Taipei, Taiwan Investment TSMC Partners Tortola, British Virgin Islands Investment 100,000 100,000 100,000 100,000 100,000 100,000 10,350 100,000 100,000 100,000 100,000 100,000 100,000 10,350 SSMC Singapore Manufacturing the wafer 4,986,344 1,432,482 Emerging Alliance Fund Cayman Islands Investment 837,045 - - - - - - - 300 301 - 25 25 25 25 25 25 164,724 158,252 177,812 156,694 157,352 166,639 110,960 27,740 Investee 77,008 76,241 103,603 117,006 113,755 19,252 Investee 19,060 Investee 25,901 Investee 29,251 Investee 28,439 Investee 100 3,032,377 2,357,405 2,357,405 Subsidiary 32 99 2,907,967 (5,381,499) (1,722,080) Investee 741,617 (127,249) (126,612) Subsidiary 84 T S M C A n n u a l R e p o r t 2 0 0 1 10. Consolidated Financial Statements English Translation of a Report Originally Issued in Chinese Independent Auditors' Report January 18, 2002 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, 2001, and 2000, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Regulations for Auditing of Financial Statements by Certified Public Accountants, and 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 consolidated financial position of Taiwan Semiconductor Manufacturing Company Ltd. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with the Guidelines for Securities Issuers' Financial Reporting and accounting principles generally accepted in the Republic of China. 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. T S M C A n n u a l R e p o r t 2 0 0 1 85 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 (In Thousand New Taiwan Dollars, Except Par Value) A S S E T S CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Short-term investments (Notes 2, 5 and 10) Receivable from related parties (Note 16) Notes receivable Accounts receivable Allowance for doubtful receivables (Note 2) Allowance for sales returns and others (Note 2) Inventories - net (Notes 2 and 6) Deferred income tax assets (Notes 2 and 15) Prepaid expenses and other current assets (Notes 16, 17 and 19) Total Current Assets 2001 Amount $37,556,295 1,398,071 494,732 176,582 19,957,636 (1,100,492) (2,581,551) 9,828,328 2,350,147 2,721,421 70,801,169 LONG-TERM INVESTMENTS (Notes 2, 7 and 20) 11,599,150 PROPERTY, PLANT AND EQUIPMENT (Notes 2, 8, 16 and 11) 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 Deferred income tax assets (Notes 2 and 15) Deferred charges - net (Notes 2 and 9) Refundable deposits (Note 18) Assets leased to others (Note 2) Miscellaneous Total Other Assets 877,371 60,523,505 280,023,690 6,062,496 347,487,062 (155,948,960) 59,749,530 251,287,632 11,437,572 16,245,828 3,769,750 784,089 555,053 37,452 21,392,172 % 10 - - - 5 - (1) 3 1 1 19 3 - 17 76 2 95 (42) 16 69 3 5 1 - - - 6 2000 Amount $38,840,217 1,502,098 948,726 125,175 30,335,314 (946,734) (2,458,323) 12,785,723 8,178,016 3,034,624 92,344,836 10,663,804 829,239 53,874,708 241,995,862 4,865,610 301,565,419 % 11 1 - - 8 - (1) 3 2 1 25 3 - 15 65 1 81 (103,884,879) (28) 47,067,352 244,747,892 13 66 11,530,973 6,629,805 3,335,665 979,067 625,647 28,290 11,598,474 3 2 1 - - - 3 TOTAL ASSETS $366,517,695 100 $370,885,979 100 The accompanying notes are an integral part of the consolidated financial statements. 86 T S M C A n n u a l R e p o r t 2 0 0 1 LIABILITIES AND SHAREHOLDERS' EQUITY Amount % Amount % 2001 2000 CURRENT LIABILITIES Short-term bank loans (Note 10) Payable to related parties (Note 16) Accounts payable Payable to contractors and equipment suppliers (Note 20) Income tax payable (Notes 2 and 15) Current portion of bonds (Note 12) Accrued expenses and other current liabilities (Note 19) Total Current Liabilities LONG-TERM LIABILITIES Long-term bank loans (Notes 11) Bonds - net of current portion (Note 12) Total Long-term Liabilities OTHER LIABILITIES Guarantee deposits (Note 18) Accrued pension cost (Notes 2 and 14) Deferred gain on sale-leaseback (Note 2) Miscellaneous Total Other Liabilities MINORITY INTEREST IN SUBSIDIARIES (Note 2) $6,269,181 1,048,273 1,397,879 12,867,236 81,483 5,000,000 6,665,000 33,329,052 22,399,360 24,000,000 46,399,360 7,212,688 1,856,617 268,165 141,498 9,478,968 120,240 2 - - 4 - 1 2 9 6 7 13 2 - - - 2 - $3,833,841 2,606,339 8,507,827 25,550,273 3,298 - 6,923,414 1 1 2 7 - - 2 47,424,992 13 23,339,367 29,000,000 52,339,367 7,086,379 1,511,277 434,183 14,356 9,046,195 321,726 6 8 14 2 - - - 2 - Total Liabilities 89,327,620 24 109,132,280 29 SHAREHOLDERS' EQUITY (Notes 2 and 13) Capital stock - $10 par value Authorized: 24,600,000 thousand shares in 2001 and 17,800,000 thousand shares in 2000 Issued: Preferred - 1,300,000 thousand shares 13,000,000 Common - 16,832,554 thousand shares in 2001 and 11,689,365 thousand shares in 2000 Capital surplus Retained earnings: Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Cumulative translation adjustments Unrealized loss on long-term investments Total Shareholders' Equity 168,325,531 57,128,433 17,180,067 349,941 19,977,402 1,228,701 - 3 46 16 5 - 6 - - 13,000,000 116,893,646 55,285,821 10,689,323 1,091,003 65,143,847 (278,377) (71,564) 3 32 15 3 - 18 - - 71 277,190,075 76 261,753,699 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $366,517,695 100 $370,885,979 100 T S M C A n n u a l R e p o r t 2 0 0 1 87 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, 2001 and 2000 (In Thousand New Taiwan Dollars, Except Consolidated Earnings Per Share) 2001 2000 Amount % Amount % GROSS SALES (Notes 2, 16 and 20) $128,560,708 $169,192,312 SALES RETURNS AND ALLOWANCES (Note 2) (2,675,816) (2,994,708) NET SALES 125,884,892 100 166,197,604 100 COST OF SALES (Note 16) GROSS PROFIT OPERATING EXPENSES (Notes 16 and 20) Research and development General and administrative Marketing Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME (Note 20) Gain on sales of short-term investments- net (Note 2) Interest Royalty income (Note 18) Insurance compensation-net Premium income-net (Notes 2 and 19) Gain on sales of long-term investments - net Technical service income (Notes 16 and 18) Gain on sales of property, plant and equipment Foreign exchange gain - net (Note 2) Other Total Non-Operating Income NON-OPERATING EXPENSES (Note 20) Equity in net losses of investee companies - net (Notes 2 and 7) Interest (Notes 2, 8, and 19) Foreign exchange loss - net (Notes 2 and 19) Loss on sales of and provision for loss on property, 92,228,098 33,656,794 10,649,019 7,939,839 2,290,139 20,878,997 12,777,797 1,619,062 1,486,656 1,301,606 860,835 234,732 105,439 55,077 52,376 - 759,793 6,475,576 3,959,020 3,144,042 695,620 235,629 73 27 9 6 2 17 10 1 1 1 1 - - - - - 1 5 3 3 - - 87,609,670 78,587,934 7,203,591 7,408,121 2,681,534 17,293,246 61,294,688 1,060,919 1,679,736 524,194 1,623,832 8,115 15,144 138,514 62,921 828,025 178,403 6,119,803 187,179 2,717,035 - 114,768 53 47 4 4 2 10 37 1 1 - 1 - - - - - - 3 - 2 - - plant and equipment (Forward) 88 T S M C A n n u a l R e p o r t 2 0 0 1 Amortization of issuance costs of bonds (Note 2) Other Total Non-Operating Expenses $12,504 420,053 8,466,868 INCOME BEFORE INCOME TAX (Note 20) 10,786,505 INCOME TAX BENEFIT (Notes 2 and 15) INCOME BEFORE MINORITY INTEREST 3,740,678 14,527,183 MINORITY INTEREST IN LOSS (INCOME) OF SUBSIDIARIES (44,009) - - 6 9 3 12 - $32,658 461,327 3,512,967 63,901,524 1,167,884 65,069,408 36,786 - - 2 38 1 39 - (Notes 2 and 20) NET INCOME CONSOLIDATED EARNINGS PER SHARE Based on weighted-average number of common shares outstanding - 16,832,554 thousand shares in 2001 and 11,400,882 thousand shares in 2000 Based on 16,417,270 thousand shares $14,483,174 12 $65,106,194 39 $0.83 $5.71 $3.96 The accompanying notes are an integral part of the consolidated financial statements. T S M C A n n u a l R e p o r t 2 0 0 1 89 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 2001 and 2000 (In Thousand New Taiwan Dollars) CAPITAL STOCK ISSUED Preferred Stock Common Stock Shares Shares Subscribe From (Thousand) Amount (Thousand) Amount Capital Consolidation CAPITAL SURPLUS (Note 2) Additional From Excess on Paid-In Capital Long-term Foreign Bond Investment Investment Gain on Disposal of Properties Donation Total Legal Reserve Special Unappropriated INVESTMENT ADJUSTMENTS SHAREHOLDERS Reserve Earnings Total (NOTE 2) (NOTE 2) EQUITY RETAINED EARNINGS (Note 13) LONG-TERM TRANSLATION TOTAL UNREALIZED LOSS ON CUMULATIVE $- 8,520,882 $85,208,817 $13,118,025 $12,120,000 $- $472,300 $11,289,998 $69,058 $55 $23,951,411 $8,258,359 $- $23,124,011 $31,382,370 000000000000$- ($1,090,106) $152,570,517 - - - - 172,121 1,721,208 1,959,910 19,599,103 - - 187,937 1,879,366 - - - - - - - - - - - - 300,000 3,000,000 (13,118,025) 12,000,000 - - - - - - - - - - - - - - - - - - - 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) - - - 23,172,550 (1,790,871) - - - - - - - - - - - - - - - 2,430,964 - (2,430,964) - 0000000000000- 1,091,003 (1,091,003) - 0000000000000- 1,803,168 1,803,168 0000000000000- (897) 4,346,552 (1,721,208) (1,721,208) 0000000000000- (19,599,103) (19,599,103) 0000000000000- (215,151) (215,151) 0000000000000- - - - - 0000000000000- -00000000000000 - 0000000000000- - - 0000000000000- 65,106,194 65,106,194 0000000000000- (58,178) (58,178) 0000000000000- (5,502) (5,502) 0000000000000- 231,583 231,583 0000000000000- - 0000000(71,564) - 0000000000000- 812,626 812,626 1,300,000 13,000,000 11,689,365 116,893,646 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 0000000(71,564) (278,377) 261,753,699 - - - - - - - 1,803,168 - - - - - - - - - - - - - - - - - - - - - - - - - 162 - - - - - - - - - - - - - - - - - - - - - - 39,282 - - - - - - - - - - - - - - - - - - - - - - 1,803,168 39,282 162 - - 6,490,744 - (6,490,744) - 0000000000000- (741,062) 741,062 - 0000000000000- (4,674,426) (4,674,426) 0000000000000- (41,137) (41,137) 0000000000000- (46,757,459) (46,757,459) 0000000000000- (584,303) (584,303) 0000000000000- 14,483,174 14,483,174 0000000000000- (1,803,168) (1,803,168) 0000000000000- (39,282) (39,282) 0000000000000- (162) (162) 0000000000000- - 0000000071,564 - 0000000000000- 1,507,078 1,507,078 1,300,000 $13,000,000 16,832,554 $168,325,531 $- $24,132,297 $23,172,550 $246,381 $9,410,632 $166,518 $55 $57,128,433 $17,180,067 $349,941 $19,977,402 $37,507,410 000000000000$- $1,228,701 $277,190,075 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - BALANCE, JANUARY 1, 2000 Appropriations of prior year's earnings Legal reserve Special reserve Bonus to employees - stock Stock dividends - 25.55% Bonus to directors and supervisors Capital Transferred from capital surplus - 2.45% Issuance of shares January 28, 2000 Issuance of shares on June 8, 2000 Issuance of shares for the merge on June 30,2000 - - - - - - - - - - - - - - - - - Issuance of preferred stocks 1,300,000 on November 29, 2000 13,000,000 115,000 1,150,000 433,515 4,335,152 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 467,443 4,674,426 - - 4,675,746 46,757,459 - - - - - - - - - - - - - - Net income in 2000 Gain on sales of property, plant and equipment Gain on sales of property, plant and equipment from Investees Adjustment arising from changes in shareholders' equity of investees Unrealized loss on long- term investment Translation adjustments BALANCE, DECEMBER 31, 2000 Appropriations of prior year's earnings Legal reserve Special reserve Bonus to employees - stock Cash dividends paid for preferred stock Stock dividends - 40% Bonus to directors and supervisors Net income in 2001 Reclassification of the accumulated deficits from the merged company Gain on sales of property, plant and equipment Gain on sales of property, plant and equipment from investees Reversal of the unrealized loss on long-term investments Translation adjustments BALANCE, DECEMBER 31, 2001 - - - - - - - - - - - - - - - - - - - - - - The accompanying notes are an integral part of the consolidated financial statements 90 T S M C A n n u a l R e p o r t 2 0 0 1 - - - - - - - - - - - (215,151) - 1,881,975 24,322,550 - - - - - - 13,000,000 65,106,194 - - - (71,564) - - - - - - - - - - - - - - (41,137) - (584,303) 14,483,174 - - - 71,564 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, 2001 and 2000 (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 - net Loss on sales of and provision for loss on property, plant and equipment - net Reversal of provision for losses on short-term investment Accrued pension cost Allowance for doubtful receivables Allowance for sales returns and others Minority interest in income (loss) of subsidiaries Changes in operating assets and liabilities: Decrease (increase) in: Receivable from related parties Notes receivable Accounts receivable Inventories - net Prepaid expenses and other current assets Forward exchange contract receivable Increase (decrease) in: Payable to related parties Notes payable Accounts payable Income tax payable Forward exchange contract payable Accrued expenses and other current liabilities Net Cash Provided by Operating Activities (Forward) 2001 2000 $14,483,174 $65,106,194 55,323,040 (3,788,154) 3,959,020 (105,439) 183,253 (13,146) 345,340 153,758 123,228 44,009 453,994 (51,407) 10,377,678 2,957,395 202,303 49,480 (1,558,066) - (7,109,948) 78,185 218,165 (508,150) 75,817,712 41,446,137 (956,118) 187,179 (15,144) 51,847 - 370,276 524,532 1,679,309 (36,786) (737,105) 38,959 (15,467,155) (4,033,836) 351,988 (113,730) 2,334,247 (4,303) 3,174,958 (151,828) (987,604) 2,024,180 94,786,197 T S M C A n n u a l R e p o r t 2 0 0 1 91 CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in short-term investments Decrease in pledged time deposits 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 (increase) in other assets Decrease in minority interest in subsidiaries Increase in consolidated debit Cash inflow from the merged companies Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of: Short-term bank loans Long-term bonds Capital stock Payments on: Short-term bank loans Commercial paper Long-term bank loans Increase in guarantee deposits Decrease in lease obligation Bonus paid to directors and supervisors and cash dividends paid on preferred stocks Increase in issuance cost of financing Net Cash Provided by (Used in) Financing Activities 2001 2000 $117,173 - ($524,154) 3,161,693 (70,201,205) (5,120,580) (103,761,905) (2,956,758) 301,416 559,137 (1,805,250) 194,978 (9,162) (249,166) (1,019,227) - 364,875 49,376 (1,793,209) (915,559) 77,451 (7,165,656) (8,221,266) 736,594 (77,231,886) (120,948,518) 2,435,340 - - - - (940,007) 126,309 (51,286) (625,440) (47,689) 897,227 - 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 NET INCREASE (DECREASE) CASH AND CASHEQUIVALENTS (516,947) 9,203,959 EFFECT OF EXCHANGES IN FOREING EXCHANGE RATE (766,975) 118,576 CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 38,840,217 29,517,682 CASH AND CASH EQUIVALENTS, END OF THE YEAR $37,556,295 $38,840,217 SUPPLEMENTAL INFORMATION Interest paid (excluding the amounts capitalized of NT$507,094 thousand $3,468,112 $4,036,210 and NT$541,078 thousand in 2001 and 2000, respectively) Income tax paid Noncash investing and financing activities: $20,767 $96,523 Effect of exchanges in foreign exchange rate on $1,258,395 $1,009,264 cash and cash equivalents (Forward) 92 T S M C A n n u a l R e p o r t 2 0 0 1 Current portion of long-term liabilities Cash paid for acquisition of property, plant and equipment: Total acquisitions Decrease (increase) in payables to contractors and equipment suppliers 2001 $5,001,116 2000 $51,055 $57,518,168 12,683,037 $113,996,068 (10,234,163) $70,201,205 $103,761,905 SUPPLEMENTAL INFORMATION OF THE MERGERS: TSMC had merged with Worldwide Semiconductor Manufacturing Corp. (WSMC) and had acquired TSMC- A c e r 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 TASMC (Fair 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 WSMC (Book Value) $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 The accompanying notes are an integral part of the consolidated financial statements. T S M C A n n u a l R e p o r t 2 0 0 1 93 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousand New Taiwan Dollars, Unless Specified Otherwise) 1. GENERAL Taiwan Semiconductor Manufacturing Company Limited (TSMC), a Republic of China corporation, is engaged mainly in the manufacture, sale, packaging, testing and design of integrated circuits and other semiconductor devices, and the manufacture masks. TSMC was incorporated as a venture among the Government of the ROC, acting through the Development Fund of the Executive Yuan; Philips Electronics N.V. and certain of its affiliates (Philips); and certain other private investors. In September 1994, its shares were listed on the Taiwan Stock Exchange. In October 1997, TSMC listed its shares of stock on the New York Stock Exchange in the form of American Depositary Shares. TSMC has five direct wholly-owned subsidiaries, namely, TSMC-North America, Taiwan Semiconductor Manufacturing Company Europe B.V (TSMC-Europe), TSMC-Japan, TSMC International Investment, TSMC Partners, a 99.5% owned subsidiary, Emerging Alliance Fund and several 25% owned affiliates - Po Cherng Investment, Chi Hsin Investment, Kung Cherng Investment, Chi Cherng Investment, Hsin Ruey Investment and Cherng Huei Investment. 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., (incorporated in 2000). TSMC Development Inc. has a subsidiary, WaferTech, LLC, which has been 57% owned since its formation, increased to 68% owned in 1998; TSMC Development Inc. acquired an additional 29% and 2% at a purchase price of US$474,640 thousand and US$19,530 thousand in December 2000, and June 2001, respectively, thereby increasing its proportionate interest to 99% as of December 31, 2001. The following diagram presents information regarding the relationship and ownership percentages among TSMC and its subsidiaries as of December 31, 2001: TSMC 100% 100% 100% 100% 100% 25% 99% TSMC-North America TSMC-Japan TSMC-International TSMC-Europe TSMC-Partners America Investment Po Cheng Investment etc. Emerging Alliance Fund 100% 100% 97% 97% TSMC-Technology TSMC-Development InveStar InveStar (II) 99% WaferTech 94 T S M C A n n u a l R e p o r t 2 0 0 1 T S M C-North America, TSMC-Europe and TSMC-Japan are engaged mainly in marketing and engineering support activities. Emerging Alliance Fund, TSMC Partners and Po 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 engaged in the foundry business. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The Company consolidates the accounts of all majority (directly and indirectly) owned subsidiaries. The consolidated financial statements included, as of and for the year ended December 31, 2000 and 2001, the accounts of TSMC, TSMC-North America, TSMC-Europe, TSMC-Japan, TSMC Partners, Emerging Alliance Fund, 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., TSMC Development Inc. (including WaferTech, LLC) and TSMC Technology Inc. All significant inter-company accounts and transactions have been eliminated. Minority interests in Emerging Alliance Fund, InveStar, InveStar (II) and Wa f e r Tech are presented separately in the consolidated financial statements. Cash and cash equivalents Government bonds acquired under repurchase agreements that provide for their repurchase with less than three months from date of purchase 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 using the specific identification method. Allowance for doubtful receivable Allowance for doubtful receivables is provided based on a review of the collectibility of accounts receivable. Sales and Allowance for sales returns and others Sales are recognized when titles of products and risks of ownerships are transferred to customers, primarily upon shipment. Allowance and related provisions for sales returns and others are provided based on experience; such provisions are deducted from sales and related costs are deducted from cost of sales. Inventories Inventories are stated at the lower of cost or market value. Inventories are recorded at standard costs, and adjusted to approximate weighted average cost at the end of each period. 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 policy decisions are accounted for using the equity method. The difference between the investment cost and the Company's proportionate equity in the net assets of the investee on the date of acquisition is amortized over five years using the straight-line method. Such amortization and the Company's proportionate share in the net income or net loss of investee companies are recognized as components of "Equity in net income or net loss in investee companies - net" account. When the Company subscribes to additional investee shares at a percentage different from its existing equity interest, the resulting carrying amount of the investment in equity investee differs from the amount of Company's proportionate share in the investee's net equity. The Company records such difference as an adjustment to "Capital surplus" and the "Long-term investments" accounts, respectively. T S M C A n n u a l R e p o r t 2 0 0 1 95 In the event an investee offsets its capital surplus, excluding reserve from asset revaluation, against its accumulated deficit, which is recorded as debit to the "Capital surplus" account and a credit to "Retained earnings" account, the Company also records the entry by its proportionate share of the investee capital surplus that was generated subsequent to its acquisition of investee interest, excluding reserve from asset revaluation. Other stock investments are accounted using the cost method. These investments are stated at cost less declines in market value of listed stocks or declines 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 an 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. Investment in convertible notes and stock purchase warrants are carried at cost. The costs of investments sold are determined using 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 reclassified into capital surplus from retained earnings. When the Company subsequently disposes such investment in shares of stock, such capital surplus shall be reclassified back retained 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 should recognize that unrealized loss in proportion to the Company's equity interest and record in an account as a component of shareholders' equity. Gains or losses on transactions with investee companies accounted using the equity method are eliminated in proportion to the Company's ownership percentage while those with majority-owned subsidiaries are eliminated entirely in consolidation. Property, plant and equipment and assets leased to others Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. Major additions, renewals, betterment and interest expenses 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 market value of the property 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 computed using the straight-line method over estimated service lives which range as follows: Land improvements - 20 years, buildings - 10 to 20 years, machinery and equipment - 5 to 10 years, office equipment - 3 to 7 years. Upon sale or disposal of an item 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 reclassified to capital surplus at the end of the year (before the relevant regulation was amended). 96 T S M C A n n u a l R e p o r t 2 0 0 1 Consolidated debits Consolidated debits include the goodwill 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 10 years. Deferred charges Deferred charges consist of software and system design costs, technology know-how, bond and financing issue costs, and technology license fee. These are amortized as follows: software and system design costs - three years, technology know-how - five years, bond issue costs - the term of the bonds; financing costs - term related line of credit, and technology license fee - the term of the contract or economic useful lives of the related technology. Pension costs Net periodic pension costs are recorded on the basis of actuarial calculations. Unrecognized net transaction obligation and unrecognized net gain are 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 the term of the lease, and (b) capital lease - adjustment of depreciation over the estimate useful lives or term of the lease; whichever is shorter. Income tax The Company adopted inter-period income tax allocation method. Deferred income tax assets 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 is, according to the classification of its related asset or liability, be classified as current or non-current. However, if a deferred asset or liability cannot be related to an asset or liability in the financial statements, then it is classified as current or non-current based on the expected reversal date of temporary differences. Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax provision. Income taxes (10%) on unappropriated earnings of TSMC are recorded as expenses in the year when the shareholders have resolved that the earnings shall be retained. Derivative financial instruments Foreign currency forward exchange contracts (forward contracts), entered into for purposes other than trading are recorded as follows: The differences in the New Taiwan dollar amounts translated using the spot rates and the amounts translated using the contracted forward rates are amortized over the terms of the forward contracts using the straight-line method. At the balance sheet dates, the receivables or payables arising from forward contracts are restated using the prevailing spot rates and the resulting differences are recognized in income. Also, the receivables and payables related to the forward contract are netted out and the resulting net amount is presented as either an asset or liability. The Company enters into interest rate swap transactions to manage exposures to changes in interest rates on existing liabilities. These transactions are accounted for on an accrual basis, in which cash settlement receivable or payable is recorded as an adjustment to interest income or expenses. 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. The amount paid or received (or premiums) for the call or put T S M C A n n u a l R e p o r t 2 0 0 1 97 options are amortized using the straight-line method over the terms of the contracts. Other foreign-currency transactions Other foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Gains or losses caused by the application of different foreign exchange rates when cash in foreign currency is converted into New Taiwan dollars, or when foreign-currency receivables and payables are settled, credited or charged to income in the year of conversion or settlement. At year-end, the balances of foreign-currency assets and liabilities are restated based on prevailing exchange rates and any resulting gains or losses are credited or charged to income. Translation of foreign-currency financial statements ROC Financial Accounting Standards (FAS) No. 14, "Accounting for Foreign-Currency Transactions," applies to foreign operations where the local currency of each foreign subsidiary is its functional currency. The financial statements of such 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 adjustment is recorded as a separate component of shareholders' equity. Reclassifications Certain accounts in 2000 have been reclassified to conform to 2001 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 aquisition of TASMC was completed as of January 1, 2000 are as follows: Net sales Net income Earnings per share Based on weighted-average number of shares outstanding - 16,729,401 thousand shares in 2000 The individual operating results of TASMC before the mergers on June 30, 2000 are as follows: Net sales Net loss 2000 $170,132,350 65,050,836 $3.89 $3,934,746 (55,358) 98 T S M C A n n u a l R e p o r t 2 0 0 1 3. SIGNIFICANT ELIMINATING ENTRIES The details of transactions with companies included in the consolidated financial statements are as follows: Company TSMC Account Amount Transaction Entity Payable to related parties $817,616 WaferTech, LLC 136,443 TSMC-North America 54,601 15,355 10,318 25,251 3,878 TSMC-Europe TSMC-Japan TSMC-Technology WaferTech, LLC TSMC-Technology 3,111 WaferTech, LLC 6,797,817 WaferTech, LLC Receivable from related parties Sales Purchase Marketing expenses - 1,028,725 TSMC-North America commissions Marketing expenses - service charges Notes receivable Interest receivable Royalty income Interest revenue Notes receivable Accounts payable Deferred revenue Royalty income Interest revenue Accounts receivable Deferred revenue Sales Royalty income TSMC International Investment TSMC Partners TSMC- Technology 4. CASH AND CASH EQUIVALENTS Cash and bank deposits Government bonds acquired under repurchase agreements 194,696 124,384 118,648 TSMC-Japan TSMC-Europe TSMC-North America 349,990 181,352 TSMC-Technology TSMC-Technology 1,223,373 TSMC-Technology 26,269 TSMC-Technology 11,344,120 TSMC International Investment 6,888 TSMC-North America 10,079,712 TSMC International Investment 1,220,256 TSMC International Investment 712,046 TSMC International Investment 7,960 28,395 57,501 14,473 WaferTech, LLC WaferTech, LLC WaferTech, LLC WaferTech, LLC 2001 $35,830,636 1,725,659 $37,556,295 2000 $38,229,510 610,707 $38,840,217 T S M C A n n u a l R e p o r t 2 0 0 1 99 5. SHORT-TERM INVESTMENTS Listed stocks Market value 2001 $1,398,071 $6,917,133 2000 $1,502,098 $6,117,525 The market values of listed stocks as of December 31, 2001 and 2000 were based on average closing price in December 2001 and 2000, respectively. 6. INVENTORIES - NET Finished goods Work in process Raw materials Supplies and spare parts Less - allowance for losses 7. LONG-TERM INVESTMENTS 2001 $1,790,305 7,374,752 744,719 1,110,323 11,020,099 (1,191,771) $9,828,328 2000 $1,762,287 9,455,492 770,884 1,364,686 13,353,349 (567,626) $12,785,723 2001 2000 Carrying Value %of Owner- Ship Carrying Value % of Owner- Ship Common stocks Accounted for by equity method: Vanguard International Semiconductor (VIS) $3,377,526 (Publicly traded) Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) (non-traded) Accounted for by cost Method: Traded Amkor Technology Taiwan Mask Non-traded Global Test Corp. United Technology Hong Tung Venture Capital Shin-Etsu Handotai Taiwan Company Ltd. Global Investment Holding ChipStrate Technology (Forward) $2,907,967 6,285,493 280,748 32,129 179,951 193,584 150,000 105,000 107,270 69,658 25 32 - 2 10 11 10 7 6 9 $5,615,075 $935,870 6,550,945 - 32,129 175,731 146,250 120,000 105,000 - 69,551 25 32 - 2 10 10 10 7 - 9 100 T S M C A n n u a l R e p o r t 2 0 0 1 Programmable Microelectronics APE W.K. Technology Fund IV Richtek Technology, Inc. EmpowerTel Networks 3Dfx Interactive Ubicom, Inc. (Scenix) Capella Microsystems EquatorTechnologies Divio Taiwan Semiconductor Technology Preferred stocks (all non-traded) Sonics EmpowerTel Networks Tropian, Inc Atheros Communications Menolithic Power System Quickilver Technology LightSpeed Semiconductor Memsic Equator Technologies Pixim OEpic Capella Microsystems Signia Newport Opticom RapidStream Formfactor Reflectivity NanoAmp Solutions NetLogic Microsystems Integrated Memory Logic Match Lab Y-MEDIA Rise Technology Creosys Ikanos Communication Ralink Technology SiRF Technology Ubicom, Inc. (Scenix) Advanced Angalogic Technology OmegaBand (Seagull) Pico Turbo (Forward) 59,296 46,748 50,000 45,015 12,031 10,396 6,028 4,740 3,151 105 - 1,355,850 231,397 179,480 151,688 125,754 123,037 122,497 107,251 107,088 99,358 87,498 87,497 80,441 78,748 77,124 73,754 69,998 69,998 64,838 64,748 63,318 61,249 52,499 52,498 52,498 52,498 52,498 51,248 47,636 44,131 43,749 43,749 4 6 2 10 1 - 2 2 - - - 7 7 5 2 18 29 1 20 2 3 6 8 20 15 6 1 6 3 1 10 10 2 2 8 3 7 1 2 2 6 7 49,619 46,677 50,000 9,975 - 9,826 5,697 345 2,978 - 4 6 4 9 - - 2 - - - 500,000 19 1,323,778 116,752 169,634 77,209 - 66,158 - 101,368 82,689 93,908 - 24,809 42,949 49,619 - 69,708 66,158 66,158 61,281 - 59,845 49,619 - 49,619 49,619 - - 44,105 45,023 - 41,349 41,349 7 7 5 - 17 - 6 24 2 - - 8 22 - 6 1 6 3 - 10 11 - 2 8 - - 1 2 - 14 9 T S M C A n n u a l R e p o r t 2 0 0 1 101 Sensory HINT Corporation Litchfield Quake Technology Procoat Technology Angstron System Divio Incentia Design Systems Silicon Data, Inc. T-Span System Lara Networks Inc. FabCentric Convertible notes (all non-traded) Rise Technology Pico Turbo OmegaBand FabCentric Signia Technologies Advanced Analogic Technology Funds BIAM Global Opportunity Fund Horizon Ventures Crimson Asia Capital Warrant OEpic Less - allowance for losses 43,749 34,999 34,999 34,999 30,000 26,249 17,500 17,499 8,750 - - - 4 5 6 1 10 7 4 2 2 - - - 41,349 33,079 - - - - 16,540 16,539 - 45,829 75,151 8,270 2,868,509 1,705,685 10,500 10,323 6,730 - - - 27,553 908,944 125,701 27,091 1,061,736 9 11,599,150 - - - - - - - - - - - 9,924 - - 8,270 16,540 41,349 76,083 959,561 93,304 64,547 1,117,412 - 10,773,903 (110,099) $11,599,150 $10,663,804 6 5 - - - - 4 2 - 3 7 - - - - - - - - - - - The equity in net income or (net loss) of investee companies consisted of the following: VIS SSMC TASMC 2001 ($2,236,940) (1,722,080) - ($3,959,020) 2000 $597,812 (473,661) (311,330) ($187,179) 102 T S M C A n n u a l R e p o r t 2 0 0 1 The carrying values of equity-accounted investments and the related equity in net income or net loss were based on audited of financial statements in the same periods. Information on the long-term investments is as follows: Market value of traded stocks Equity in the net assets of non-traded stocks Net asset value of funds 8. PROPERTY, PLANT AND EQUIPMENT Accumulated depreciation consisted of the following: Land improvements Buildings Machinery and equipment Office equipment 2001 $7,056,942 8,286,549 1,202,453 2001 $108,770 16,604,096 136,033,250 3,202,844 $155,948,960 2000 $8,729,639 5,466,227 1,007,313 2000 $64,006 10,692,112 90,956,200 2,172,561 $103,884,879 Information on the status of the expansion or construction of TSMC's manufacturing facilities as of December 31, 2001 is as follows: EstimatedAccumulatedExpected or Actual CostExpendituresOperations Start Date Fab 6 Fab 7 Fab 8 Fab 12 - 1st stage Fab 14 - 1st stage $76,889,000 5,930,500 28,322,100 38,280,800 9,711,000 $69,986,000 2,867,500 11,355,300 28,988,700 8,449,600 Manufacturing Plant March 2000 March 2001 March 2001 April 2002 June 2003 Interest expense (before deducting capitalized amounts of NT$507,094 thousand and NT$541,078 thousand in 2001 and 2000, respectively) for the years ended December 31, 2001 and 2000 were NT$3,651,136 thousand and NT$3,258,113 thousand, respectively. The interest rates used for purpose of calculating the capitalized amount were 2.54% to 5.283% in 2001 and 6.62% to 7.663% in 2000. 9. DEFERRED CHARGES - NET Software and system design costs Technology license fee Bond and financing issue costs Technology know-how Others 2001 $2,073,802 996,578 150,142 103,500 445,728 $3,769,750 2000 $1,420,635 1,442,292 142,881 157,500 172,357 $3,335,665 T S M C A n n u a l R e p o r t 2 0 0 1 103 10. SHORT-TERM BANK LOANS 2001 2000 Secured loan in NT dollars NT$ 107,100 thousand, repayable by October 2002, annual interest at 3.2%~3.8% $107,100 NT$ 329,375 thousand, repayable by October 2001, annual interest at 5.8% Secured loan in US dollars: US$6,942 thousand, repayable by December 2001, annual interest of 9.25% Unsecured loan: US$ 82,000 thousand, repayable by March 2002, annual interest at 2.679% US$5,500 thousand, repayable by June 2002, annual interest at 3.188% US$21,565 thousand, repayable by October 2002, annual interest at 2.590% US$46,000 thousand, repayable by October 2002, annual interest at 2.548% US$21,000 thousand, repayable by May 2002, annual interest at 2.33% US$70,000 thousand, repayable by March 2001, annual interest at 7.53% US$29,000 thousand, repayable by January, 2001, annual interest at 7.05% - - 2,869,918 192,495 754,735 1,609,954 734,979 - - $6,269,181 $- 329,375 229,645 - - - - - 2,315,530 959,291 $3,833,841 Unused credit lines as of December 31, 2001 aggregated approximately NT$17,941,000 thousand (including NT$6,571,900 thousand and US$324,836 thousand). As of December 31, 2001, the NT$107,100 thousand loan is secured by short-term investment with carrying amount of NT$71,400 thousand. 11. LONG-TERM BANK LOANS Secured loan: US$440,000 thousand, repayable by February 2001 2000 2005, annual interest at 2.578% $15,399,560 $- US$438,000 thousand, repayable by March 2005, annual interest at 7.663% Unsecured loan: US$200,000 thousand, repayable by December 2003, annual interest at 2.54% and 6.91% in 2001 and 2000, - 14,488,602 respectively 6,999,800 US$46,000 thousand, repayable by October 2002, annual interest at 7.36% US$21,564 thousand, repayable by October 2002, annual interest at 7.41% - - $22,399,360 6,615,800 1,521,634 713,331 $23,339,367 104 T S M C A n n u a l R e p o r t 2 0 0 1 Unused credit lines for long-term bank loans as of December 31, 2001 aggregated approximately NT$4,321,000 thousand (including NT$3,000,000 thousand and US$37,750 thousand). Future minimum principal payments under the Company's loan arrangements as of December 31, 2001 are as follows: Year 2003 2004 2005 Amount $6,999,800 - 15,399,560 $22,399,360 As of December 31, 2001, the US$440,000 thousand loan is secured by the total assets of WaferTech, LLC with carrying amount of approximately NT$28,378,000 thousand (US$811,000 thousand). In addition, a portion of the unused credit line for long-term bank loans is secured by properties owned by TSMC with carrying value of approximately NT$1,378,000 thousand. 12. BONDS Domestic unsecured bonds: Repayable in March 2003, 7.71% annual interest 2001 2000 payable semi-annually $4,000,000 $4,000,000 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 15,000,000 $29,000,000 Future minimum principal payments under the Company's bonds arrangements as of December 31, 2001 are as follows: Year of Repay 2002 2003 2004 2005 2006 and thereafter Less - current portion Amount $5,000,000 4,000,000 5,000,000 10,500,000 4,500,000 29,000,000 (5,000,000) $24,000,000 On November 6, 2001, the board of directors approved the issuance of domestic unsecured bonds with an aggregate principal amount of NT$15,000,000 thousand. The issuance of the domestic unsecured bond has been approved by the Securities and Futures Commission of ROC (SFC). As of January 18, 2002, the issuance is still in process. T S M C A n n u a l R e p o r t 2 0 0 1 105 13. SHAREHOLDERS' EQUITY As of December 31, 2001, the Company has issued 259,006 thousand American Depositary Shares (ADS) that are listed on the New York Stock Exchange. The number of common shares represented by the ADSs is 1,295,031 thousand shares. The SFC has, on January 4, 2002, approved the Company's sponsorship of the offer by certain existing shareholders of up to 350,000 thousand common shares in the form of ADSs. The decision to sponsor the offering of common shares in the form of ADSs was approved by the Board of Directors on December 3, 2001. The offering is still in process as of January 18, 2002. Capital surplus except for that arising from the application of the equity method of accounting, pursuant to ROC Company Law, can only be used to offset a deficit or transferred to capital (as a stock dividend). Such transfer from capital surplus to capital can only be made once a year at a specific percentage. An amendment to the ROC Company Law issued on November 14, 2001, limited the nature of the capital surplus that can be used to offset a deficit or transferred to capital (as a stock dividend) to those that arise from donations (donated capital) and those attributable to the excess of the issue price over the par value of capital stock issued. The Company's Articles of Incorporation provide that the following shall be appropriated from annual net income (less any deficit): a. 10% legal reserve; b. Special reserve in accordance with relevant laws or regulations; c. Bonuses to directors and supervisors and to employees equal to 1% and at least 1% of the remainder, respectively; d. Dividends to holders of preferred shares equal to a 3.5% annual rate, based on the period during which the preferred shares have been outstanding; e.The appropriation of the remaining balance after the above shall be decided at the shareholder's meeting; Dividends are distributed in cash and/or in the form of shares of stock. Since the Company is in a capital-intensive industry, distribution of profits shall be made preferably by way of stock dividend. The total of cash dividend paid (in any given year) should not exceed 50% of total dividends paid and/or distributed. These appropriations of net income shall be resolved by the shareholders in the following year and given effect in the financial statements of that year. The aforementioned appropriation for legal reserve shall be made until the reserve equals the aggregate par value of the Company's outstanding capital stock. The reserve can only be used to offset a deficit; or, when its balance has reached 50% of the aggregate par value of the outstanding capital stock of the Company, 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. As of December 31, 2001, prior year's accumulated deficit in the amount of NT$1,803,168 thousand from WSMC is included in the unappropriated retained earnings. Under the Integrated Income Tax System that became effective on January 1, 1998, 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 106 T S M C A n n u a l R e p o r t 2 0 0 1 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 1,300,000 thousand unlisted Series A - preferred shares to certain investors in November 29, 2000. The following are the rights of the preferred share holders and other terms and conditions: a. Are entitled to receive cumulative cash dividends at an annual rate of 3.5%. b. Are not entitled to receive any stock dividends (whether declared out of unappropriated earnings or capital surplus). c. Have priority over the holders of common shares to the assets of the Company available for distribution to shareholders upon liquidation or dissolution of the Company. However, the preemptive rights to the assets shall not exceed the issue value of the shares. d. Have voting rights similar to that of the holders of common shares. e. Have no right to convert their shares into common shares. f. Will be redeemed within thirty months from their issuance. The terms and conditions in respect to the issuance of the preferred shares provides that, until the shares are redeemed, their holders 14. PENSION PLAN TSMC has a 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 makes monthly contributions, equal to 2% of salaries to a pension fund (the "Fund"). The Fund is administered by a pension fund monitoring committee and deposited in the committee's name in the Central Trust of China. In addition, the Company accrues unfunded pension cost. The changes in the fund and accrued pension costs are summarized as follows: a. Components of pension cost Service cost Interest cost Projected return on plan assets Amortization b. The details of the benefit obligation and reconciliation of the fund status of the plan and accrued pension cost is as follows Benefit obligation Vested benefit obligation Nonvested benefit obligation Accumulated benefit obligation Additional benefits based on future salaries Projected benefit obligation (Forward) 2001 2000 $417,967 95,920 (43,968) 8,300 $478,219 $739 1,024,525 1,025,264 1,407,014 2,432,278 $376,689 91,234 (26,675) 8,300 $449,548 $- 763,879 763,879 1,550,009 2,313,888 T S M C A n n u a l R e p o r t 2 0 0 1 107 Fair value of plan assets Funded status Unrecognized net transitional obligation Unrecognized net gain 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 15. INCOME TAX (835,583) 1,596,695 (157,691) 415,849 $1,854,853 5.0% 5.0% 5.0% $131,894 $- $- (661,099) 1,652,789 (165,991) 22,737 $1,509,535 6.0% 6.0% 6.0% $95,932 $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: Income tax expense on "income before income tax" at statutory rate Tax-exempt income Temporary differences Income tax expense - current before tax credits b. Income tax benefits consist of: Income tax expense - current before tax credits Additional 10% on the unappropriated earnings Income tax credits Other income tax Income tax for the current year Net change in deferred income tax assets (liabilities) for the year Investment tax credits Temporary differences Valuation allowance Adjustment of prior years' taxes 2001 2000 ($2,699,626) 1,089,000 (986,598) ($2,597,224) 2001 ($2,597,224) (322,292) 2,888,358 (16,318) (47,476) 3,044,170 (1,918,009) 2,661,993 - $3,740,678 ($12,787,660) 7,770,000 (49,497) ($5,067,157) 2000 ($5,067,157) (88,024) 5,128,024 - (27,157) 3,146,369 (462,230) (1,678,791) 189,693 $1,167,884 108 T S M C A n n u a l R e p o r t 2 0 0 1 c. Deferred income tax assets (liabilities) consisted of: 2001 2000 Current: Investment tax credit Temporary differences Less - valuation allowance Noncurrent: Investment tax credits Temporary differences Less - valuation allowance $2,347,000 3,147 2,350,147 - $2,350,147 $21,710,461 (2,363,913) 19,346,548 (3,100,720) $16,245,828 $8,422,000 56,016 8,478,016 (300,000) $8,178,016 $12,591,291 (498,773) 12,092,518 (5,462,713) $6,629,805 The effective rates for deferred income tax of TSMC were 17.56% and 7.54% as of December 31, 2001 and 2000, respectively, and 34%~41% and 32%~54% for TSMC's subsidiaries as of December 31, 2001 and 2000, respectively. d. Integrated income tax information: The balances of the imputation credit account (ICA) as of December 31, 2001 and 2000 were $9,365 thousand and $5,888 thousand, respectively. The tax credit ratio computed as of December 31, 2001 was 0.02% while the tax credit on earnings as of December 31, 2000 on dividend distributed in 2001 was 0.01%. 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 2001 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, 2001 and 2000 included the earnings generated up to December 31, 1997 of $4,827 thousand. f. Unused investment tax credits arising from purchase of machinery and equipment, and research and development expenditures as of December 31, 2001 will expire as follows: Year of Expiry 2002 2003 2004 2005 Amount $4,487,894 5,500,778 10,720,895 3,347,894 $24,057,461 T S M C A n n u a l R e p o r t 2 0 0 1 109 g. The income from the following expansion and construction of TSMC's manufacturing plants is exempt from income tax: Expansion of Fab1 and Fab2-modules A and B, Fab3 and Fab4, and construction of Fab5 Expansion of Fab7 Tax-Exemption Period 1999 to 2002 1998 to 2001 h. The tax authorities have examined income tax returns of TSMC through 1999, excluding 1998. However, TSMC is contesting the assessment of the tax authority for 1992, 1993, 1996 and 1997. 16. RELATED PARTY TRANSACTIONS The Company engaged in business transactions with the following related parties: a. Industrial Technology Research Institute (ITRI), the Chairman of TSMC is one of the directors of ITRI. b. Philips Electronics N.V., (Philips), a major shareholder of TSMC. c. Investees of TSMC Vanguard International Semiconductor Corporation (VIS) Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) The transactions with the aforementioned parties, in addition to those disclosed in other notes, are summarized as follows: For the year Sales Philips and its affiliates VIS ITRI SSMC Purchase VIS SSMC Rental expense - ITRI Manufacturing expenses Technical service fee - Philips Sales of property, plant and equipment - VIS Non-operating income SSMC VIS Others -(Forward) 110 T S M C A n n u a l R e p o r t 2 0 0 1 2001 2000 Amount % Amount % $2,389,257 1,177,094 114,546 48,972 $3,729,869 $3,801,975 $42,984 $3,844,959 $161,604 2 1 - - 3 22 - 22 11 $2,418,276 100 $268,871 85 $95,284 467 - $95,751 1 - - 3 $5,289,927 17,012 198,146 - $5,505,085 $6,572,110 $- $6,572,110 $161,575 $2,137,175 $87,189 $152,347 5,604 38 $157,989 3 - - - 3 19 - 19 14 86 37 3 - - 3 At end of the year Receivables VIS Philips and its affiliates ITRI SSMC Prepaid expense and other current asset Advance rent - ITRI Payables VIS Philips and its affiliates SSMC $320,179 116,499 37,383 20,671 65 24 7 4 $159,890 643,604 56,078 89,154 17 68 6 9 $494,732 100 $948,726 100 $42,664 2 $42,664 6 $548,472 499,331 470 52 48 - $1,808,964 797,375 - 69 31 - $1,048,273 100 $2,606,339 100 Sales to related parties are based on regular selling prices and collection terms, except for sales of properties and technical service fee, which were in accordance with the related contracts. 17. SIGNIFICANT LONG-TERM OPERATING 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 under such agreement amounts to $161,604 thousand. TSMC leases the land where its 2nd through 14th manufacturing facilities are located from the Science-Based Industrial Park Administration. The related agreements will expire on various dates from March 2008 to December 2020 and have annual rentals aggregating NT$208,716 thousand. The agreements can be renewable upon their expiration. TSMC-North America, a subsidiary, leases its office premises and certain equipment under a non-cancelable operating agreement, which will expire in September 2020. TSMC-Europe entered into a lease agreement covering its office premise, which will expire in 2004. Annual rental currently totaled to $101,395 thousand. Future annual minimum rentals under the aforementioned leases are as follows: Year 2002 2003 2004 2005 2006 2007 and thereafter Amount $347,699 310,111 312,924 311,195 314,180 2,218,404 $3,814,513 T S M C A n n u a l R e p o r t 2 0 0 1 111 18. SIGNIFICANT COMMITMENTS AND CONTINGENCY AS OF DECEMBER 31, 2001 The commitments and contingency of the Company and its subsidiaries as of December 31, 2001 are as follows: a. Under a Technical Cooperation Agreement with Philips, as amended on May 12, 1997, TSMC shall pay technical assistance fees as 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 once 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 of to 30% of TSMC production capacity. c. Under a Technical Cooperation Agreement with ITRI, TSMC shall reserve and allocate up to 35% of certain 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$205,949 thousand had been received as of December 31, 2001. 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 S$1.2 billion, and, (c) allow TSMC to invest in 32% of SSMC's capital. As of December 31, 2001, the aggregate amount of investments from these parties has not reached S$1.2 billion. TSMC and Philips committed to buy a specific percentage of the production capacity of SSMC. If any party defaults on the agreement and the capacity utilization of SSMC falls below a specific percentage of its total capacity, the defaulting party should compensate SSMC for all related unavoidable costs. f. Provision of technical services to SSMC under a Technical Cooperation Agreement (the "Agreement") entered into on May 12, 1999. TSMC should receive compensation for such services computed at a specific percentage of net selling prices of specific products sold by SSMC. The Agreement remains in force for ten years and is automatically renewed once 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. TSMC entered into a Manufacturing Agreement with Vanguard International Semiconductor Corp. ("VIS"). VIS agrees to reserve specific capacity to manufacture for TSMC certain devices on logic or other technologies required by TSMC's customers, at a discount to the selling prices as agreed by the parties. TSMC paid $1,200,000 thousand to VIS as Security Bond. VIS shall return portions of the Bond without any interest to TSMC upon the purchase of wafers by TSMC. The contract will remain in force for five years. i. Under a management agreement, InveStar Capital In. (ISC) of the Cayman Islands, provides investment and administrative services to TSMC. ISC should receive quarterly, starting from October 1, 1996, a management fee of 2% each year of total weighted average paid-in capital and capital surplus of TSMC, excluding retained earnings and losses. 112 T S M C A n n u a l R e p o r t 2 0 0 1 j. Under a patent license agreement, TSMC has entered into a cross license arrangement for certain semiconductor patents with a US-based company for a term starting from October 26, 2001 through December 31, 2006. TSMC shall pay royalty fees to the such company. k. WaferTech, subsidiary, had recorded a reserve of US$ 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. Payment of the settlement amount will be made in four installments throughout fiscal year 2000. The remaining accrued serve of US$5,250 thousand is sufficient for payments to the other construction contractors, in the year of 2002. l. In 1996, Wa f e r Tech adopted an Executive Incentive Plan, which was amended in 1997. Under the 1997 amendment, the Board of Directors approved the Senior Executive Incentive Plan and the Employee Incentive Plan ("Plan") under which officers, key employees and nonemployee directors may be granted option rights. However, WaferTech is a limited liability company and does not have shares of stock. Thus, each option right granted under the Plan provides grantees rights to buy ownership interests in Wa f e r Tech. The Plans also provides for approximately 6% of the total ownership interests to be available for grant, represented by 15.15 million-option rights. For option rights granted to date, the option purchase price exceeded fair value as of the date of the grant. While Wa f e r Tech may grant employees option rights that are exercisable at different times or within different periods, it has generally granted option rights which are exercisable on a cumulative basis in annual instalments of 25% each on the first, second, third, and fourth anniversaries of the date of grant. The following table summarizes information about the Plans: Balance, January 1, 2000 Additional option rights authorized Options granted Option price > fair market value Options exercised Options cancelled Balance, December 31, 2000 Options granted Option price > fair market value Options exercised Options cancelled Balance, December 31, 2001 Option Rights Available For Grant 4,154,597 1,650,000 (3,203,302) - 1,180,871 3,782,166 - - 825,906 4,608,072 Outstanding Rights Option Number of Option Rights 8,226,080 - 3,203,302 (3,411,867) (1,180,871) 6,836,644 - (2,949,358) (825,906) 3,061,380 Exercise Price (US$) 0.78 - 1.86 0.74 1.09 1.23 - 1.02 1.27 1.43 These options will expire if not exercised at specific dates between May 2006 to December 2010. m.Wa f e r Tech has received a tax assessment from State of Washington Department of Revenue assessing approximately US$6,900 thousand in additional taxes related to State's sales and use tax. The tax amount resulted from a difference in interpretation of the current tax code and WaferTech intends to appeal the assessment. As of December 31, 2001, Wa f e r Tech has recorded a reserve that management believes is sufficient to address any exposure from potential tax. n. TSMC-North America started a stock appreciation right program from December 1, 2000 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 T S M C A n n u a l R e p o r t 2 0 0 1 113 of each period. This expense is recognized ratably over the vesting period and adjusted based on period fluctuations in the stock. As of December 31, 2001, TSMC-North America has recorded compensation expense and related accrued liabilities of approximately US$3,900 thousand. o. Unused letter of credits as of December 31, 2001 were $1,200 thousand. 19. ADDITIONAL DISCLOSURES Following are the additional disclosures required by the SFC for TSMC and subsidiaries: a. Financing provided: Please see Table 1 attached; b. Endorsement/guarantee provided: Please see Table 2 attached; c. Marketable securities held: Please see Table 3 attached; d. Marketable securities acquired and disposed of at costs or prices of at least NT$100 million or 20% of the paid-in capital: Please see Table 4 attached; e. Acquisition of individual real estate at costs of at least NT$100 million or 20% of the paid-in capital: Please see Table 5 attached; f. Disposal of individual real estates at prices of at least NT$100 million or 20% of the paid-in capital: None; g. Total purchase from or sale to related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 6 attached; h. Receivable from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 7 attached; i. Names, locations, and related information of investee on which the Company exercises significant influences: Please see table 8 attach. j. Financial instrument transactions: 1) Derivative financial instruments The relevant information on the derivative financial instruments entered into by TSMC is as follows: a) Open forward exchange contracts as of December 31, 2001 Contract Currency Sell Sell US$ US$ Contract Amount (Thousand) US$17,912 Fair Value (Thousand) Settlement Date Maturity NT$618,206 Jan. 2002 NT$620,600 US$783,000 NT$26,985,688 Jan. 2002-Mar.2002 NT$27,013,402 Payables from forward exchange contracts (shown in the balance sheet as part of "Other current liabilities" account) as of December 31, 2001 aggregated to $397,117 thousand. Net exchange loss for the year ended December 31, 2001 was $1,943,601 thousand. 114 T S M C A n n u a l R e p o r t 2 0 0 1 The net assets or liabilities that have been hedged by the above forward exchange contracts are as follows: Accounts receivable Accounts payable Time deposits b) Interest rate swaps Amount (Thousand) US$518,984 US$169,664 US$707,416 TSMC has entered into interest rate swap contracts to hedge exposure to rising interest rates on its floating rate long-term 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 (Thousand) $2,000,000 1,000,000 1,000,000 1,000,000 Interest expenses on these transactions for the year ended December 31, 2001 were $473,413 thousand. c) Option contracts TSMC has entered into foreign currency option contracts to hedge risks of exchange rate fluctuations arising from its anticipated U.S. dollar cash receipts from its export sales or Japanese Yen obligations related to its importation of machinery and equipment. Outstanding option contracts as of December 31, 2001 were as follows: Contract Currency Contract Amout (Thousand) Carrying Value (Thousand) Fair Value (Thousand) Strike Price Maturity Put option sell EUR EUR293,000 ($39,500) ($252,833) 0.8940-0.9340 Jan.-Feb., 2002 (EUR/US$) For the year ended December 31, 2001, TSMC realized premium income of $328,254 thousand and premium expense of $93,522 thousand. 2) 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: All derivative financial instruments are intended as hedges for fluctuations in currency exchange rates on the Company foreign currency denominated receivables or payables and interest rate fluctuations on its floating rate long-term loans. Gains or losses from forward exchange contracts are likely to be offset by gains or losses from receivables and payables. Interest rate risks are also controlled as the expected cost of capital is fixed. Thus, market price risks from exchange rate and interest rate fluctuations are minimal. T S M C A n n u a l R e p o r t 2 0 0 1 115 c) Liquidity and cash flow: The cash flow requirements on the derivative instruments are limited to the net differences between the spot rates and contracted forward rates at settlement dates (for forward contracts); and amounts payable arising from the differences in the rates (for interest rate swap contracts). Also, 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. Management believes that the foregoing requirements are not material. 3) Fair value of financial instruments Non-derivative financial instruments Assets Cash and cash equivalents Short-term investments Receivables from related parties Notes and accounts receivable Long-term investments Refundable deposits Pledged time deposits Liabilities Short-term bank loans Payable to related parties Accounts payable December 31, 2001 December 31, 2000 Carrying Amount Fair Value Carrying Amount Fair Value $37,556,295 $37,556,295 $38,840,217 $38,840,217 1,398,071 6,917,133 1,502,098 6,117,525 494,732 494,732 948,726 948,726 20,134,218 20,134,218 30,460,489 30,460,489 11,599,150 16,545,944 10,663,804 15,203,179 784,089 26,183 784,089 26,183 979,067 979,067 10,768 10,768 6,269,181 6,269,181 3,833,841 3,833,841 1,048,273 1,048,273 2,606,339 2,606,339 1,397,879 1,397,879 8,507,827 8,507,827 Payable to contractor and equipment suppliers 12,867,236 12,867,236 25,550,273 25,550,273 Long-term liabilities(including current portion) 22,402,445 22,402,445 23,393,738 23,393,738 Bonds (include current portion) 29,000,000 29,703,063 29,000,000 29,035,803 Guarantee deposits 7,212,688 7,212,688 7,086,379 7,086,379 Derivative financial instruments Forward exchange contracts (buy) Forward exchange contracts (sell) Interest rate swaps Option - - 2,820,220 2,887,126 28,031,119 27,603,894 20,802,311 20,788,804 26,969 (343,088) 1,601 234,017 (39,500) (252,833) - (456,068) 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 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. Bonds payable are 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 does not equal the fair value of the Company. 116 T S M C A n n u a l R e p o r t 2 0 0 1 20. SEGMENT FINANCIAL INFORMATION a. Geographic information: Overseas Taiwan Adjustments and Elimination Consolidated 2001 Sales to unaffiliated customers $- $125,884,892 $- $125,884,892 Transfers between geographic areas 8,152,070 3,111 (8,155,181) - 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 2000 $8,152,070 $125,888,003 ($8,155,181) $125,884,892 ($1,224,832) $36,381,055 ($1,499,429) $33,656,794 (20,878,997) 6,475,576 (8,466,868) $10,786,505 ($44,009) $73,433,656 $303,954,097 ($22,469,208) $354,918,545 11,599,150 $366,517,695 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 gain Identifiable assets Long-term investments Total assets b. Gross export sales Area America Asia Europe 14,451,231 $166,228,420 ($14,482,047) $166,197,604 $3,970,099 $75,996,839 ($1,379,004) $78,587,934 (17,293,246) 6,119,803 (3,512,967) $63,901,524 $36,786 $63,810,250 $320,273,323 ($23,861,398) $360,222,175 10,663,804 $370,885,979 2000 $81,655,987 42,906,968 11,360,517 $135,923,472 2001 $63,893,621 23,874,375 7,523,873 $95,291,869 The export sales information is presented by billed regions. c Major customer The customer with the sales amounted over 10% of the Company's total sales is as following: Customer A 2001 Amount $21,789,769 % 17 2000 Amount $10,307,244 % 6 T S M C A n n u a l R e p o r t 2 0 0 1 117 TABLE 1 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES FINANCING PROVIDED For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Financing Counter-Party Name Financial Statement Account Financing Limit for Each Borrowing Company Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) Interest Rate Financing Reasons Allowance for Bad Debt Collateral Item Value Transaction Amount 1 2 TSMC-BVI TSMC Technology Other receivables - US$14,662 US$14,662 7.75% VIS VIS Holding Prepaid expenses (Note 2) $1,232 $- - $- - - $- - - $- - Operating capital Prepayments for product development Note 1: Not exceeding the issued capital of the Company. Note 2: Not exceeding 10% of the issued capital of VIS for each transaction entity, and also limited to 30% of the issued capital of each transaction entity. Note 3: Not exceeding 20% of the issued capital of VIS. Financing Company's Financing Amount Limits (US$ in Thousand) US$779,968 (Note 1) $4,400,000 (Note 3) TABLE 2 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES ENDORSEMENT/GUARANTEE PROVIDED For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Endorsement/ Guarantee Provider Counter-Party Name Limits on Each Counter-party's Endorsement/ Guarantee Amounts Maximum Balance for the Period (US$ in Thousand) Nature of Relationship (Note 2) Ending Balance Value of Ratio of (US$ in Thousand) Collateral Property, Accumulated Amount Plant and Equipment (Note 3) of Collateral to Net Equity of the Latest Financial Statement 0 TSMC TSMC Development Inc. TSMC - North America WAFERTECH, LLC (Note 4) 3 2 3 $9,379,732 (US$268,000) 1,399,960 (US$40,000) 15,399,560 (US$440,000) $9,379,732 (US$268,000) 1,399,960 (US$40,000) 15,399,560 (US$440,000) $- - - 3.38% 0.51% 5.56% Maximum Collateral/Guarantee Amounts Allowable (Note 1) $54,397,659 Note 1: 30% of the issued capital of the Company. Note 2: The No. 2 represents a subsidiary in which TSMC holds directly over 50% of the equity interest. The No. 3 represents an investee in which TSMC holds directly and indirectly over 50% of the equity interest. Note 3:Promissory notes for collateral. Note 4:Not exceeding 10% of the issued capital of the Company, and also limiting to the issued capital of the transaction entity, unless otherwise approved by Board of directors. 118 T S M C A n n u a l R e p o r t 2 0 0 1 TABLE 3 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES MARKETABLE SECURITIES HELD December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Marketable Securities Type and Name Relationship with the Company Financial Statement Account Shares (Thousand) December 31, 2001 Note Carrying Value(US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: TSMC Stock TSMC - North America TSMC - Europe TSMC - Japan VIS TSMC-BVI TSMC Partners SSMC Emerging Alliance Fund Taiwan Mask Corp. United Technology Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Hon Tung Ventures Capital Amkor Technology Certificate Po Cherng Investment Chi Hsin Investment Kung Cherng Investment Chi Cherng Investment Hsin Ruey Investment Cherng Huei Investment Equity Crimson Asia Capital Fund Horizon Ventures Fund Held Company Name: Chi Cherng Investment Stock TSMC (Forward) Long-term investment 11,000 $786,062 Subsidiary Subsidiary Subsidiary Investee Subsidiary Subsidiary Investee Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Subsidiary Long-term investment - - - - - - Investee Investee Investee Investee Investee Investee - - Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment - 6 556,133 779,968 300 301 - 7,782 16,783 10,500 5,000 15,000 505 - - - - - - - - 10,147 80,156 3,377,526 19,987,814 3,032,376 2,907,967 741,617 32,129 193,584 105,000 50,000 150,000 280,748 164,724 158,252 177,812 156,694 157,352 166,639 27,091 125,701 100 100 100 25 100 100 32 99 2 11 7 2 10 - 25 25 25 25 25 25 N/A N/A $786,062 10,147 80,156 6,584,620 19,987,814 3,032,376 2,907,967 741,617 183,658 274,107 118,726 64,855 139,086 287,610 164,724 158,252 177,812 156,694 157,352 166,639 27,091 125,701 Major shareholder Short-term investment 3,023 98,282 - 253,173 T S M C A n n u a l R e p o r t 2 0 0 1 119 Marketable Securities Type and Name Relationship with the Company Financial Statement Account Shares (Thousand) December 31, 2001 Carrying Value(US$ in Thousand) Percentage of Ownership Note Market Value or Net Asset Value (US$ in Thousand) Held Company Name: Chi Cherng Investment Certificate Po Cherng Investment Chi Hsin Investment Hsin Ruey Investment Kung Cherng Investment Cherng Huei Investment Held Company Name: Kung Cherng Investment Stock TSMC Certificate Po Cherng Investment Chi Hsin Investment Chi Cherng Investment Hsin Ruey Investment Cherng Huei Investment Held Company Name: Po Cherng Investment Stock TSMC Certificate Chi Hsin Investment Chi Cherng Investment Hsin Ruey Investment Kung Cherng Investment Cherng Huei Investment Held Company Name: Cherng Huei Investment Stock TSMC Certificate Po Cherng Investment Chi Hsin Investment Chi Cherng Investment Hsin Ruey Investment Kung Cherng Investment Held Company Name: Chi Hsin Investment Stock TSMC (Forward) Major shareholder Major shareholder Major shareholder Major shareholder Major shareholder Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 6,000 6,000 6,000 6,000 6,000 $98,834 94,951 94,411 106,687 99,983 Major shareholder Short-term investment 6,758 226,819 Major shareholder Major shareholder Major shareholder Major shareholder Major shareholder Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 6,000 6,000 6,000 6,000 6,000 98,834 94,951 94,017 94,411 99,983 15 15 15 15 15 - 15 15 15 15 15 $98,834 94,951 94,411 106,687 99,983 565,937 98,834 94,951 94,017 94,411 99,983 Major shareholder Short-term investment 4,240 187,508 - 355,058 Major shareholder Major shareholder Major shareholder Major shareholder Major shareholder Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 6,000 6,000 6,000 6,000 6,000 94,951 94,017 94,411 106,687 99,983 15 15 15 15 15 94,951 94,017 94,411 106,687 99,983 Major shareholder Short-term investment 4,917 198,896 - 411,724 Major shareholder Major shareholder Long-term investment Long-term investment Major shareholder Major shareholder Major shareholder Long-term investment Long-term investment Long-term investment 6,000 6,000 6,000 6,000 6,000 98,834 94,951 94,017 94,411 106,687 15 15 15 15 15 98,834 94,951 94,017 94,411 106,687 Major shareholder Short-term investment 3,561 138,747 - 298,220 Pledge 150 thou- sand shares Pledge 1,600 thou- sand shares 120 T S M C A n n u a l R e p o r t 2 0 0 1 Marketable Securities Type and Name Relationship with the Company Financia Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value(US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: Chi Hsin Investment Certificate Po Cherng Investment Chi Cherng Investment Hsin Ruey Investment Kung Cherng Investment Cherng Huei Investment Held Company Name: Hsin Ruey Investment Stock TSMC Certificate Po Cherng Investment Chi Hsin Investment Chi Cherng Investment Kung Cherng Investment Cherng Huei Investment Held Company Name: TSMC-BVI Stock InveStar Semiconductor Development Fund Inc. InveStar Semiconductor Development Fund (II) Inc. TSMC Development Inc. Major shareholder Major shareholder Major shareholder Major shareholder Major shareholder Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Major shareholder Short-term investment Major shareholder Major shareholder Major shareholder Major shareholder Major shareholder Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 6,000 6,000 6,000 6,000 6,000 1,407 6,000 6,000 6,000 6,000 6,000 $98,834 94,017 94,411 106,687 99,983 98,996 98,834 94,951 94,017 106,687 99,983 Subsidiary of TSMC-BVI Long-term investment 45,000 US$65,203 Subsidiary of TSMC-BVI Long-term investment 45,000 US$45,766 15 15 15 15 15 - 15 15 15 15 15 97 97 $98,834 94,017 94,411 106,687 99,983 117,836 98,834 94,951 94,017 106,687 99,983 US$65,203 US$45,766 Subsidiary of TSMC-BVI Long-term investment and its chairman is also TSMC's chairman 1 1 US$201,231 100 US$201,231 US$1,591 100 US$1,591 TSMC Technology Inc. Subsidiary of TSMC-BVI Long-term investment and its chairman is also TSMC's chairman 3DFX Interactive Inc. Held Company Name: VIS Bond fund Qiung Ban Yuan Da Duo Li #2 THE TP ROC Stock VIS Associates Inc. PowerChip Semiconductor Inc. Etron Technology Inc. Walsin Technology Inc. MEGIC Corporation Form Factor, Inc. United Technology Co., Ltd. (Forward) - - - - Subsidiary Investee Investee Investee Investee Investee Investee Long-term investment 68 US$297 Short-term investment Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 28,409 26,278 25,923 41,070 202,185 5,617 34,551 16,500 267 3,357 400,000 350,000 350,000 902,999 2,651,216 275,766 414,481 177,000 64,360 38,716 - - - - 100 9 3 10 9 1 2 US$30 401,960 352,465 355,763 902,999 3,263,269 281,864 358,994 188,581 64,360 54,872 T S M C A n n u a l R e p o r t 2 0 0 1 121 Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: VIS Associates Inc. Stock VIS Investment Holding, Inc. Subsidiary of Long-term investment 68 US$891 100 US$891 VIS Associates Inc - - - - Long-term investment Long-term investment Short-term investment - - US$7,894 US$5,705 23,168 US$10,047 35 14 - US$7,894 US$5,705 US$11,339 Long-term investment - US$2,800 100 US$2,800 Investee Long-term investment 200 US$258 100 US$258 Investee of TSMC Long-term investment - US$226,541 99 US$226,541 Development and its chairman is also chairman of TSMC Equity Silicon Valley Equity Fund Silicon Valley Equity Fund II ABN AMRO Bank Equity Certificate Fund Grand Palace Trust Held Company Name: VIS Investment Holding, Inc. Stoc VIS Micro, Inc. Held Company Name: TSMC Development Stock WaferTech, LLC Held Company Name: TSMC Partners ADR TSMC Parent Company Short-term investment 495 US$7,357 Held Company Name: InveStar Semiconductor Development Fund Inc. Stock Silicon Image, Inc. Marvell Technology Group Ltd. Silicon Labo Ratories Chang Yi Technology Divio Capella Microsystems, Inc. Equator Technologies, Inc. Empower Tel Networks, Inc. Ubicom, Inc. Global Test Corp. Chip Strate Ritch Tech APE Fu Ding Technology (Forward) - - - - - - - - - - - - - Short-term investment Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 297 3,413 15 1,668 30 542 133 317 861 13,268 6,660 1,023 2,750 US$520 US$3,350 US$472 US$1,643 US$3 US$135 US$90 US$344 US$172 US$5,672 US$2,142 US$326 US$1,518 122 T S M C A n n u a l R e p o r t 2 0 0 1 - - - - - - - - - - - - - - US$8,726 US$1,236 US$123,797 US$519 US$672 US$3 US$135 US$90 US$344 US$172 US$10,126 US$2,073 US$1,743 US$1,336 Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: InveStar Semiconductor Development Fund Inc. Preferred stock Integrated Memory Logic, Inc. Divio (Next wave) SIRF Technology Inc. Rise Capella Microsystems, Inc. Sensory, Inc. Equator Technologies, Inc. Light Speed Semiconductor Corporation Empower Tel Networks, Inc. Ubicom, Inc. RapidStream Tropian, Inc. Sonics, Inc. Pico Turbo, Inc. Atheros, Inc. NanoAmp Solutions, Inc. Formfactor, Inc. Monolithic Power Systems, Inc. Memsic, Inc. Reflectivity, Inc. Signia Match Lab, Inc. HINT Corporation Creosys, Inc. Incentia Design Systems, Inc. Bond Rise - - - - - - - - - - - - - - - - - - - - - - - - - - Held Company Name: InveStar SemiconductorDevelopment Fund (II) Inc. Stock HPL Aquisition Corporation Richtek Technology Corporation Chang Yi Technology Preferred stock Procoat Technology Omega Band, Inc. Memsic, Inc. OEpic, Inc. Equator Technologies, Inc. NanoAmp Solutions, Inc. RapidStream, Inc. Signia Technologies, Inc. (Forward) - - - - - - - - - - - Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 1,831 US$1,809 667 306 600 1,383 1,404 443 2,252 3,840 1,056 2,056 1,758 3,082 1,050 1,607 541 267 2,521 2,727 1,064 3,000 1,875 1,000 1,500 286 US$500 US$1,333 US$1,500 US$1,298 US$1,250 US$1,338 US$3,064 US$5,128 US$1,361 US$1,050 US$2,334 US$3,082 US$1,250 US$3,593 US$853 US$2,000 US$2,000 US$1,500 US$2,000 US$1,500 US$1,500 US$1,000 US$1,500 US$500 Long-term investment - US$300 Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 187 480 487 2,500 1,389 2,289 2,696 770 250 246 500 US$1,124 US$1,001 US$139 US$869 US$1,250 US$1,560 US$2,500 US$1,501 US$1,000 US$1,057 US$750 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$3,055 US$2,233 US$1,858 US$1,500 US$1,660 US$857 US$864 US$764 US$14,296 US$2,433 US$7,286 US$2,388 US$3,082 US$1,300 US$9,025 US$1,900 US$3,600 US$4,938 US$2,894 US$2,000 US$3,900 US$1,500 US$1,000 US$1,500 US$500 US$300 US$2,669 US$987 US$139 US$857 US$1,250 US$2,489 US$3,023 US$1,501 US$1,000 US$1,057 US$750 T S M C A n n u a l R e p o r t 2 0 0 1 123 Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: InveStar Semiconductor Advanced Analogic Technology, Inc. Held Company Name: Development Fund (II) Inc. Y-MEDIA Corporation Monlithic Power Systems, Inc. Ralink Technology, Inc. Sonics, Inc. Newport Opticom, Inc. Silicon Data, Inc. Capella Microsystems, Inc. Angstron Systems, Inc. Tropain, Inc. SIRF Technology, Inc. Match Lab, Inc. OEpic, Inc. Bond Omega Band, Inc. Pico Turbo, Inc. Held Company Name: Emerging Alliance Fund Stock - - - - - - - - - - - - - - - Long-term investment 948 US$1,261 Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 281 674 1,833 3,082 1,157 500 800 1,567 1,464 20 313 - N/A N/A US$1,500 US$1,515 US$1,500 US$3,082 US$1,204 US$250 US$1,000 US$750 US$2,000 US$131 US$250 US$- US$192 US$295 Global Investment Holding Inc. Investee Long-term investment 10,000 $100,000 Preferred stock Quake Technologies, Inc. Pixim, Inc. Newport Opticom, Inc. NetLogic Microsystems, Inc. Quickilver Technology, Inc. Ikanos Communication, Inc. Litchfield Communications - - - - - - - Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 467 833 962 602 3,320 1,741 3,799 US$1,000 US$2,500 US$1,000 US$1,850 US$3,500 US$1,500 US$1,000 - - - - - - - - - - - - - - - 6 1 3 6 1 29 3 6 US$1,261 US$1,500 US$1,515 US$1,767 US$3,082 US$1,204 US$250 US$1,000 US$750 US$2,000 US$131 US$250 US$- US$192 US$295 $100,000 US$1,000 US$2,500 US$1,000 US$1,850 US$3,500 US$1,500 US$1,000 124 T S M C A n n u a l R e p o r t 2 0 0 1 TABLE 4 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Marketable Securities Type and Name Financial Statement Account Counter -Party Nature of Relationship Company Name: TSMC Stock Beginning Balance Acquisition Disposal Ending Balance Shares (Thousand) Amount Shares (T h o u s a n d ) Amount (US$ in T h o u s a n d ) Shares (T h o u s a n d ) Amount (US$ in T h o u s a n d ) Carrying Gain (Loss) Value on Disposal ( T h o u s a n d ) Shares Amount (US$ in T h o u s a n d ) (Note 1) Emerging Alliance Fund Long-term investment Emerging Alliance Systems on Silicon Manufacturing Long-term investment Fund SSMC Subsidiary Investee - 90 $- - $837,045 935,870 211 3,553,862 - - $- - $- - $- - - $741,617 3012,907,967 Company (SSMC) Taiwan Semiconductor Technology Long-term investment Amkor Technology Amkor Technology Long-term investment Amkor Technology - - Company Name: Emerging Alliance Fund Stock Global Investment Holding, Inc. Long-term investment Global Investment Investee Convertible Commercial Paper VM Labs, Inc. Long-term investment Holding, Inc. VM Labs, Inc. - 50,000 500,000 - - 50,000 - - - - - - 505 280,748 10,000 100,000 - US$4,000 Long-term investment Subsidiary 23,750 464,077 17,500 597,783 395,748 (Note 2) - - 500,000 (104,252) - - - - - - 505 280,748 10,000 100,000 US$1,000 US$4,000(US$3,000) - - - - - 41,070 902,999 - - - - Company Name: VIS Stock VIS Associates Inc. Bond Fund Qiung Ban THE TP ROC Yuan Da Duo Li #2 NITC FUBON JU-I Capital Save Income Home Run Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Company Name: VIS Associates Inc. ABN AMRO Bank Equity Certificates Short-term investment Company Name: InveStar Semiconductor Development Fund Inc. Stocks Centillium Tec. Corp Short-term investment Marvell Technology Group Ltd. Short-term investment Preferred Stocks Lara Networks, Inc. Short-term investment Company Name: InveStar Semiconductor Development Fund (II) Inc. Sonic, Inc. Long-term investment - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 35,548 40,874 49,017 500,000 550,000 650,000 2,048 300,000 31,397 15,295 51,811 450,000 200,000 650,000 7,139 14,951 22,739 2,048 31,397 15,295 51,811 100,263 201,482 302,698 302,386 452,789 201,139 656,159 100,000 200,000 300,000 300,000 450,000 200,000 650,000 263 1,482 2,698 2,386 2,789 1,139 6,159 28,409 400,000 25,923 350,000 26,278 350,000 - - - - - - - - 23,168 US$10,047 - - - - 23,168US$10,047 165 US$660 4,665 US$4,579 1,544 US$772 - - - - - - 165 US$7,474 US$660 US$6,814 - - 1,252 US$38,094 US$1,229 US$36,865 3,413 US$3,350 1,544 US$8,170 US$772 US$7,398 - - - - 3,082 US$3,082 - - - - 3,082 US$3,082 Note 1: The ending balance included the recognition of the investment income (loss) by the equity method and the accumulated translation adjustment. Note 2: Disposal price included $115,000 in cash and the agreed exchange 505 thousand shares of Amkor Technology. The market value for the shares of Amkor Technology on the disposal day worth $280,748. T S M C A n n u a l R e p o r t 2 0 0 1 125 TABLE 5 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES ACQUISITION OF INDIVIDUAL REAL ESTATE AT COSTS OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Property Transaction Date Transaction Amount Payment Term Counter-Party Nature of Relationship Prior Transaction of Related Counter-party Price Reference Owner Relationship Transfer Date Amount Purpose of Acquisition Other Terms TSMC Fab 12 and office Jan. 10, 2001 $345,000 Depend on the progress of the construction China Construction Co, Ltd. Jan. 29, 2001 476,200 Fu Tsu Depend on the progress of the Construction construction Co, Ltd - - N/A N/A N/A N/A Public bidding N/A N/A N/A N/A Public bidding Manufacturing purpose Manufacturing purpose None None TABLE 6 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES TOTAL PURCHASE FROM OR SALE TO RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Transaction Details Abnormal Transaction Note/Accounts Payable or Receivable Related Party Nature of Relationship Transaction Details Abnormal Transaction Note/Accounts Payable or Receivable Note Purchase/Sale Amount % to Total (Note 1) Payment Terms Unit Price Payment Terms Ending Balance % to Total Company Name: TSMC Phillips and its affiliates VIS ITRI WAFERTECH, LLC Major shareholder Sales $2,389,257 Investee Sales 1,177,094 The company's chairman is one of its directors Indirect investee of the subsidiary (TSMC-BVI) Sales 114,546 Purchase 6,797,817 VIS Investee Purchase 3,801,975 2 1 - 37 22 Net 30 days from invoice date Net 45 days from monthly closing date Net 45 days from monthly closing date Net 30 days from monthly closing date Net 45 days from monthly closing date None None $116,499 None None 320,179 None None 37,383 None None (817,616) None None (548,472) 22 61 7 39 26 Note 1: Percentage for sales is of gross sales and percentage for purchases is of the total purchases of material and finished goods. 126 T S M C A n n u a l R e p o r t 2 0 0 1 TABLE 7 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Related Party Nature of Relationship Ending Balance Turnover Rate Overdue Amounts Received Allowance for Amount Action Taken in Subsequent Period Bad Debts Company Name: TSMC VIS Investee Phillips and its affiliates Major shareholder $320,179 116,499 N/A $52,668 Accelerate demand on account receivables 58 days 20,820 Accelerate demand on account receivables $92,345 80,559 - - TABLE 8 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2001 Dec. 31, 2001 Dec. 31, 2000 Shares Percentage of Carrying Value Net Income (Loss) of the Investee Investment Gain (Loss) Note (Thousand) Ownership Investor Company: TSMC TSMC - North America San Jose, California, U.S.A Marketing and engineering support TSMC - Europe Amsterdam, The Netherlands Marketing and engineering support TSMC - Japan Yokohama, Japan VIS Hsin-Chu, Taiwan Marketing and engineering support IC Design and manufacturing $333,718 $333,718 11,000 100 $786,062 $4,560 $4,560 Subsidiary 2,960 2,960 83,760 35,142 - 6 100 100 10,147 420 420 Subsidiary 80,156 (183) (183) Subsidiary 6,503,640 6,503,640 556,133 25 3,377,526 (8,692,423) (2,236,940) Investee TSMC - BVI Tortola, British Virgin Islands Investment 24,165,780 24,159,958 779,968 100 19,987,814 (4,855,844) (4,855,844) Subsidiary Po Cherng Investment Taipei, Taiwan Investment Chi Hsin Investment Taipei, Taiwan Investment Kung Cherng Investment Taipei, Taiwan Investment Chi Cherng Investment Taipei, Taiwan Investment Hsin Ruey Investment Taipei, Taiwan Investment Cherng Huei Investment Taipei, Taiwan Investment TSMC Partners Tortola, British Virgin Islands Investment 100,000 100,000 100,000 100,000 100,000 100,000 10,350 100,000 100,000 100,000 100,000 100,000 100,000 10,350 - - - - - - 25 25 25 25 25 25 164,724 158,252 177,812 156,694 157,352 166,639 110,960 27,740 Investee 77,008 76,241 103,603 117,006 113,755 19,252 Investee 19,060 Investee 25,901 Investee 29,251 Investee 28,439 Investee 300 100 3,032,377 2,357,405 2,357,405 Subsidiary SSMC Singapore Manufacturing the wafer 4,986,344 1,432,482 Emerging Alliance Fund Cayman Islands Investment 837,045 - 301 - 32 99 2,907,967 (5,381,499) (1,722,080) Investee 741,617 (127,249) (126,612) Subsidiary T S M C A n n u a l R e p o r t 2 0 0 1 127 11. Financial Forecast and Operation Results from 2000 to 20001 Year 2001 Unit: NT$K Item 2001 Financial Forecast 2001 Financial Statement 2001 Financial (Reviewed by CPA) (Audited by CPA) Forecast* Original First Revised Second Revised Amount Complete % Net Sales Cost of Sales Gross Profit 149,038,964 121,893,177 125,562,194 125,888,003 101,052,405 88,276,165 88,990,120 89,506,952 47,986,559 33,617,012 36,572,074 36,381,051 100.26% 100.58% 99.48% None Operating Expenses 18,610,914 19,336,062 18,909,731 19,038,765 100.68% Income from Operations 29,375,645 14,280,950 17,662,343 17,342,286 98.19% Non - Operating Income 1,560,592 2,476,136 2,691,210 2,891,557 107.44% Non - Operating Expenses 8,744,087 10,716,002 11,000,597 9,575,128 Income before Income Tax 22,192,150 6,041,084 9,352,956 10,658,715 Net Income 25,737,275 10,988,558 13,203,313 14,483,174 87.04% 113.96% 109.69% *Reasons for penalty charged by TSE, OTC and SFC, if any. Year 2000 Unit: NT$K Item 2000 Financial Forecast 2000 Financial Statement 2000 Financial (Reviewed by CPA) (Audited by CPA) Forecast* Original Amount Complete % Net Sales Cost of Sales Gross Profit Operating Expenses Income from Operations Non - Operating Income Non - Operating Expenses Income before Income Tax Net Income 164,868,568 166,228,420 93,196,686 71,671,882 13,473,921 58,197,961 6,837,681 2,155,271 62,880,371 64,002,300 92,303,675 73,924,745 13,383,640 60,541,105 5,409,307 2,112,818 63,837,594 65,106,194 *Reasons for penalty charged by TSE, OTC and SFC , if any. 100.82% 99.04% 103.14% 99.33% 104.03% 79.11% 98.03% 101.52% 101.72% None 128 T S M C A n n u a l R e p o r t 2 0 0 1 SPECIFIC NOTES 1. Affiliates Information (1) TSMC Affiliated Companies Chart Unit: Shares, % Taiwan Semiconductor Manufacturing Company, Ltd. TSMC, North America TSMC, Europe B.V. TSMC, Japan K.K. Shareholding: 100% Shareholding: 100% Shareholding: 100% TSMC International Investment Ltd. Shareholding: 100% TSMC Partners, Ltd. Shareholding: 100% Emerging Alliance Fund Shareholding: 99% TSMC Development, Inc. Shareholding: 100% TSMC Technology, Inc. Shareholding: 100% InveStar Semiconductor Development Fund (1) Shareholding: 97% InveStar Semiconductor Development Fund (2) Shareholding: 97% WaferTech, LLC Shareholding: 99% Vanguard Int'l Semiconductor Corp. Shareholding: 25% Vanguard Association Inc. Shareholding: 100% VIS Investment Holding Shareholding: 100% Kung Cherng 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% T S M C A n n u a l R e p o r t 2 0 0 1 129 (2) TSMC Affiliated Companies December 31, 2001 Company Date of Incorporation Place of Registration Paid-in Capital Business Activities Unit : NT(US, NLG, JPY) $K TSMC, North America Jan. 18, 1988 San Jose, California, USA US$11,000 TSMC, Europe B.V. Mar. 4, 1994 Amsterdam, The Netherlands NLG 200 TSMC, Japan K.K. Sep. 10, 1997 Yokohama, Japan JPY 300,000 Marketing & Engineering support Marketing & Engineering support Marketing & Engineering support TSMC Int'l Investment Ltd. Apr. 9, 1996 Tortola, British Virgin Islands US$779,968 Investment TSMC Partners, Ltd. Mar. 26, 1998 Tortola, British Virgin Islands US$300 Investment TSMC Development, Inc. Feb. 16, 1996 Delaware, USA US$734,583 Investment TSMC Technology, Inc. Feb. 20, 1996 Delaware, USA US$0.001 Investment InveStar Semiconductor DevelopmentFund Inc. InveStar Semiconductor Development Fund (II) Inc. Emerging Alliance Fund Wafertech, LLC Sep. 10, 1996 Cayman Islands US$46,350 Investment Aug. 25, 2000 Cayman Islands US$46,350 Investment Jan. 1, 2001 Jun. 3, 1996 Cayman Islands US$25,050 Investment Washington, USA US$769,927 Wafer Manufacturing Po Cherng Investment Co., Ltd. Jul. 6, 1998 Chi Hsin Investment Co., Ltd. Jul. 6, 1998 Cherng Huei Investment Co., Ltd. Jul. 10, 1998 Hsin Ruey Investment Co., Ltd. Jul. 13, 1998 Kung Cherng Investment Co., Ltd. Jul. 14, 1998 Chi Cherng Investment Co., Ltd. Jul. 15, 1998 Taipei, Taiwan Taipei, Taiwan Taipei, Taiwan Taipei, Taiwan Taipei, Taiwan Taipei, Taiwan NT$400,000 Investment NT$400,000 Investment NT$400,000 Investment NT$400,000 Investment NT$400,000 Investment NT$400,000 Investment Vanguard Int'l Semiconductor Corp. Dec. 5, 1994 Hsin-Chu, Taiwan NT$22,000,000 IC Design & Manufacturing VIS Associates Inc. Sep. 24, 1996 Tortola, British Virgin Islands US$41,070 IC Related Investment VIS Investment Holding, Inc. Nov. 16, 1996 Delaware, USA US$6,750 IC Related Investment Note: Foreign exchange rate on the reporting date is shown below: US$1 = NT$34.999 NLG1 = NT$14.08 JPY1 = NT$0.2667 130 T S M C A n n u a l R e p o r t 2 0 0 1 (3) Business Scope of TSMC and its Affiliated Companies TSMC and its affiliates work together to provide dedicated foudry services to our customers around the world. In addition, few of TSMC's affiliate companies are focused on conducting investment business. In general, TSMC and its affiliates give each other support in technology, capacity, marketing and services with an aim to create the maximum synergy, enabling TSMC to provide our worldwide customers with the best dedicated foundry services worldwide. The ultimate goal of this strategy is to ensure TSMC's leading position in the global IC market. (4) TSMC Shareholders Representing Both Holding Companies and Subordinates December 31, 2001 Reasoning Name Shareholding (Note 2) Date of Incorporation Place of Registration Paid-in Capital Business Activities Unit: NT$K, except Shareholding (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). T S M C A n n u a l R e p o r t 2 0 0 1 131 (5) Rosters of Directors, Supervisors, and Presidents of TSMC's Affiliated Companies December 31, 2001 Company Title Name TSMC, North America TSMC, Europe B. V. Director Director F.C. Tseng Rick Tsai President Edward C. Ross Director Director Director Director Morris Chang Rick Tsai Quincy Lin Hans Richard Rohrer President Hans Richard Rohrer TSMC, Japan K.K. Chairman Sachiaki Nagae Director Director Director Director Morris Chang F.C. Tseng Rick Tsai Makoto Onodera Supervisor Harvey Chang TSMC International Investment Ltd. Director Morris Chang President F.C. Tseng Shareholding Amount - - Unit : NT$, except shareholding % - - (TSMC holds 11,000,000 shares) (100%) - - - - - - - - - - (TSMC holds 200 shares) (100%) - - - - - (TSMC holds 6,000 shares) - - (TSMC holds 779,968,244shares) - - - - - - (TSMC holds 300,000 shares) - - - - - - - (100%) - - (100%) - - - - - - (100%) - - (TSMC International Investment Ltd. Holds 734,583,200,000 shares) (100%) - - (TSMC International Investment Ltd. Holds 1,000shares) Director Director Director Director Director Director Chairman President Chairman President F.C. Tseng Rick Tsai Quincy Lin Steve Tso Richard L. Thurston Harvey Chang Morris Chang Morris Chang Morris Chang Morris Chang TSMC Partners, Ltd. TSMC Development, Inc. TSMC Technology, Inc. InveStar Semiconductor Development Fund Inc. InveStar Semiconductor Development Fund Inc. (II) LDC Emerging Alliance Fund WaferTech, LLC Director Kenneth Tai - Director Kenneth Tai 375,000 Shares (TSMC International Investment Ltd. holds 45,000,000 shares) NIL Director Director Director President NIL Morris Chang Rick Tsai Steve Tso Steve Tso (TSMC International Investment Ltd. holds 45,000,000 shares) TSMC's Investment US$24,925,000) Common Share 328,125 - - - - - (100%) - (97%) (0.8%) (97%) (99.5%) 0.13% - - - (Forward) 132 T S M C A n n u a l R e p o r t 2 0 0 1 (TSMC Development, Inc. holds 253,901,734 Preferred Shares) (99.8%) Unit : NT$, except shareholding Company Title Name Shareholding Amount Po Cherng Investment Co., Ltd. Director Quincy Lin (Representative of Chi Hsin Investment Co., Ltd.) (Chi Hsin's investment NT$60,000,000) 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) (TSMC's investment NT$99,999,960) Cherng Huei Investment Co., Ltd. Director Rick Tsai (Representative of Hsin Ruey Investment Co., Ltd.) (Hsin Ruey's investment NT$60,000,040) (TSMC's investment NT$99,999,960) Hsin Ruey Investment Co., Ltd. Director Rick Tsai (Representative of Cherng Huei Investment Co., Ltd.) (Cherng Huei's investment NT$ 60,000,000) (TSMC's investment NT$99,999,960) Kung Cherng Investment Co., Ltd. Director F.C.Tseng (Representative of Chi Cherng Investment Co., Ltd) (Chi Cherng's investment NT$ 60,000,040) (TSMC's investment NT$99,999,960) Chi Cherng Investment Co., Ltd Director F.C.Tseng (Representative of Kung Cherng Investment Co., Ltd.) (Kung Cherng's investment NT$ 60,000,000) Vanguard International Semiconductor Corporation Chairman Morris Chang (TSMC's investment NT$99,999,960) 3,240,448 shares % (15%) (25%) (15%) (25%) (15%) (25%) (15%) (25%) (15%) (25%) (15%) (25%) 0.15% Director Director Director Director Director Director Director Director Director Liu, Bor-Hong (Representative of The Development Fund, Executive Yuan, R.O.C.) Liou, Ming-Jong (Representative of The Development Fund, Executive Yuan, R.O.C. Shih, Chin-Tay (Representative of The Development Fund, Executive Yuan, R.O.C.) Rick Tsai (Representative of TSMC) F.C.Tseng (Representative of TSMC) Paul Chien (Representative of TSMC) Robert Hsieh (Representative of TSMC) (The Development Fund holds 639,713,750 shares) (29.08%) (TSMC holds 556,133,496 shares) (25.28%) Wu, Quintin Y.G. (Representative of USI Far East Corp.) (USI Far East Corp. holds 150,178,533 shares) Chiao, Yu-Heng (Representative of Walsin Lihwa Corp.) (Walsin Lihwa Corp. holds 53,827,741 shares) Supervisor Yeh, Huey-Ching (Representative of The Development Fund, Executive Yuan, R.O.C.) Supervisor Harvey Chang (Representative of TSMC) Supervisor Chow, Sidney H. (Representative of Maw Chong Investment Co.,Ltd.) (Maw Chong Investment Co.,Ltd. holds 38,392,356 shares) President Paul Chien 2,478,229 shares (6.83%) (2.45%) (1.75%) 0.11% VIS Associates Inc. Director Director Director Morris Chang (Representative of VIS) Robert Hsieh (Representative of VIS) Paul Chien (Representative of VIS) VIS Investment Holding, Inc. Director Morris Chang (Representative of VIS Associates Inc.) Director Director Robert Hsieh (Representative of VIS Associates Inc.) Paul Chien (Representative of VIS Associates Inc.) (VIS holds 41,070,000 shares) (100%) (VIS Associates Inc. holds 6,750,000 shares) (100%) T S M C A n n u a l R e p o r t 2 0 0 1 133 (6) Operational Highlights for TSMC Affiliated Companies December 31, 2001 Company Paid-in Capital Assets Liabilities Net Worth Net Sales* TSMC, North America 384,989 1,887,121 960,342 926,779 1,145,285 TSMC, Europe B.V. TSMC, Japan K.K. 2,816 80,010 65,280 93,273 55,133 13,117 10,147 125,654 80,156 200,133 Unit: NT$K, except EPS ($) Income Net Income* (net of tax) from Operation* EPS* (net of tax) 34,330 11,700 9,530 4,561 420 0.41 N.A. (183) (30.57) TSMC Int'l Investment Ltd. 27,298,109 21,673,328 11,345,238 10,328,090 (2,369,743) (4,302,390) (2,923,831) (6.38) TSMC Partners, Ltd. 10,500 13,363,198 10,330,821 3,032,377 TSMC Development, Inc. 25,709,677 16,411,548 9,368,658 7,042,890 - - (13,021) 1,928,783 642,928 (4,220) (3,975,344) TSMC Technology, Inc. 0.035 256,444 547,005 (290,561) 1,404,261 92,540 58,435 N.A. N.A. InveStar Semiconductor Development Fund Inc. InveStar Semiconductor Development Fund(II) Inc. 1,622,204 2,482,957 132,441 2,350,516 1,924,964 1,504,419 1,508,582 32.55 1,622,204 1,652,409 2,593 1,649,816 97,998 24,227 24,227 0.52 Wafertech, LLC 26,946,683 28,378,704 20,818,792 7,559,912 6,650,318 (2,009,756) (2,607,717) 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. Emerging Alliance Fund, LP 400,000 400,000 400,000 400,000 400,000 400,000 876,734 713,191 54,294 658,896 119,054 113,010 110,960 633,142 133 633,009 78,283 77,405 77,008 723,241 56,686 666,555 167,452 116,311 113,755 640,136 10,728 629,408 711,380 133 711,247 636,779 10,001 626,778 73,106 78,537 75,063 72,976 117,006 76,937 76,241 74,944 103,603 745,343 0 745,343 5,600 (25,551) (127,249) Vanguard Int'l Semiconductor Corp. 22,000,000 28,464,864 15,072,105 13,392,759 9,110,492 (4,714,841) (8,692,423) VIS Associates Inc. 1,437,409 994,040 91,042 902,998 (125,309) (194,178) (194,178) VIS Investment Holding, Inc. 236,243 34,497 3,325 31,172 20,558 261 636 N.A. 2.77 1.93 2.84 2.93 1.91 2.59 N.A. (3.95) (4.73) 9.43 *For the year ended December 31, 2001 134 T S M C A n n u a l R e p o r t 2 0 0 1 Taiwan Semiconductor Manufacturing Company Ltd., and Vanguard International Semiconductor Corporation Combined Financial Statements as of December 31, 2001 Representation Letter The combined balance sheet as of December 31, 2001 and the combined statement of income for the year ended December 31, 2001 of TA I WAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND V A N G UA R D I N T E R N ATIONAL SEMICONDUCTOR CORPORATION were in conformity with the requirements on public companies and their affiliates, taken as a whole, of Securities and Futures Committee (SFC) in the Republic of China (ROC), the ROC regulations governing the preparation of financial statements of public companies and accounting principles generally accepted in the Republic of China. The accounting records underlying the combined balance sheet and the combined statement of income accurately and fairly reflect, in reasonable detail, the transactions of the Taiwan Semiconductors Manufacturing Company, Ltd., its consolidated affiliates and Vanguard 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 T S M C A n n u a l R e p o r t 2 0 0 1 135 English Translation of a Report Originally Issued in Chinese Independent Auditors' Report The Board of Directors and Shareholders Taiwan Semiconductor Manufacturing Company Ltd. We have reviewed the combined balance sheet as of December 31, 2001 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 were made in accordance with the Guidelines for the Review of Combined Financial Statements of Affiliates. It is substantially less in scope than an examination in accordance with 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 not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the combined balance sheet and the combined statement of income referred to above in order for them to be in conformity with "Regulations Governing the Preparation of Affiliates' Combined Operating Report, Combined Financial Statements and Relationship Report" in the Republic of China, and the ROC regulation governing the preparation of financial statements of public company and the ROC generally accepted accounting principles. T N Soong & Co A Member Firm of Andersen Worldwide, S.C. Taipei, Taiwan The Republic of China January 18, 2002 Notice to Readers The combined financial statements were not prepared with a view to comply 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. 136 T S M C A n n u a l R e p o r t 2 0 0 1 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION COMBINED BALANCE SHEET December 31, 2001 (In Thousand New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Short-term investments (Notes 2, 5 and 10) 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-net (Notes 2 and 6) Deferred income tax assets (Notes 2 and 16) Prepaid expenses and other current assets (Notes 17 and 20) Total Current Assets LONG-TERM INVESTMENTS (Notes 2, 7 and 21) PROPERTY, PLANT AND EQUIPMENT (Notes 2, 8, 12, 17 and 18) 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 DEBITS (Note 2) OTHER ASSETS Deferred income taxes assets (Notes 2 and 16) Deferred charges - net (Notes 2 and 9) Refundable deposits Assets leased to others (Note 2) Miscellaneous Total Other Assets Amount $40,522,659 2,498,071 174,607 176,582 20,486,089 (1,127,995) (2,659,592) 10,955,840 2,700,422 2,975,813 76,702,496 12,746,162 877,371 68,402,999 313,488,096 6,335,976 389,104,442 (183,581,965) 60,092,310 265,614,787 11,437,572 18,992,893 3,863,875 787,347 555,053 38,594 24,237,762 % 10 1 - - 5 - (1) 3 1 1 20 3 - 18 80 2 100 (47) 15 68 3 5 1 - - - 6 TOTAL ASSETS $390,738,779 100 The accompanying notes are an integral part of the combined financial statements. T S M C A n n u a l R e p o r t 2 0 0 1 137 LIABILITIES AND SHAREHOLDERS' EQUITY Amount % CURRENT LIABILITIES Short-term bank loans (Note 10) Commercial paper (Note 11) 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 12 and 13) Accrued expenses and other current liabilities (Note 20) Total Current Liabilities LONG-TERM LIABILITIES Long-term bank loans (Note 12) Bonds (Note 13) Total Long-term Liabilities OTHER LIABILITIES Guarantee deposits (Note 19 and 20) Accrued pension costs (Notes 2 and 15) Deferred gain on sale-leaseback (Note 2) Miscellaneous Total Other Liabilities MINORITY INTEREST IN AFFILIATES (Note 2) $6,849,364 1,270,000 553,305 1,744,553 12,999,508 81,483 8,286,000 7,303,209 2 - - 1 3 - 2 2 39,087,422 10 27,941,360 25,850,000 53,791,360 7,964,078 2,156,367 268,165 154,003 10,542,613 10,127,309 7 7 14 2 1 - - 3 2 Total Liabilities 113,548,704 29 SHAREHOLDERS' EQUITY (Notes 2 and 14) Capital stock - $10 par value Authorized: 24,600,000 thousand shares Issued:Preferred - 1,300,000 thousand shares Common - 16,832,554 thousand shares Capital surplus Retained earnings: Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Cumulative translation adjustments Total Shareholders' Equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY The accompanying notes are an integral part of the combined financial statements. 13,000,000 168,325,531 57,128,433 17,180,067 349,941 19,977,402 1,228,701 3 43 15 4 - 5 1 277,190,075 $390,738,779 71 100 138 T S M C A n n u a l R e p o r t 2 0 0 1 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD., AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION COMBINED STATEMENT OF INCOME For the Year Ended December 31, 2001 (In Thousand New Taiwan Dollars, Except Combined Earnings Per Share) GROSS SALES (Notes 2, 17 and 21) SALES RETURNS AND ALLOWANCES (Note 2) NET SALES COST OF SALES (Note 17) GROSS PROFIT OPERATING EXPENSES (Notes 17 and 21) Research and development General and administrative Marketing Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME (Notes 17 and 21) Interest Gain on sales of short-term investments - net (Note 2) Royalty income (Note 19) Insurance compensation - net Premium income (Notes 2 and 20) Gain on sales of long-term investments - net Technology service income (Notes 17 and 19) Gain on sales of property, plant, and equipment Other Total Non-Operating Income NON-OPERATING EXPENSES (Note 21) Interest (Notes 2, 8 and 20) Losses on inventories (Note 2) Equity in net loss of investee companies - net (Notes 2 and 7) Loss on sales of and impairment loss on property, plant and equipment, and non-operating properties Foreign exchange loss - net (Note 2) Loss on write-down of royalty Amortization of issuance costs of bonds (Note 2) Other (Forward) Amount % $133,248,102 (3,040,708) 130,207,394 100 99,823,070 30,384,324 11,280,348 8,486,544 2,378,757 22,145,649 8,238,675 1,690,311 1,635,978 1,301,606 860,835 234,732 110,623 55,077 52,376 641,251 6,582,789 3,873,923 2,871,739 1,915,342 1,192,335 704,749 144,125 12,504 415,562 77 23 9 6 2 17 6 1 1 1 1 - - - - 1 5 3 2 1 1 1 - - - T S M C A n n u a l R e p o r t 2 0 0 1 139 Total Non-Operating Expenses INCOME BEFORE INCOME TAX (Note 21) INCOME TAX BENEFIT (Notes 2 and 16) INCOME BEFORE MINORITY INTEREST MINORITY INTEREST IN LOSS OF AFFILIATES (Note 2 and 21) COMBINED NET INCOME COMBINED EARNINGS PER SHARE Amount $11,130,279 3,691,185 4,341,019 8,032,204 6,450,970 % 8 3 3 6 5 $14,483,174 11 Based on weighted-average shares outstanding of 16,832,554 thousand shares $0.83 The accompanying notes are an integral part of the combined financial statements. 140 T S M C A n n u a l R e p o r t 2 0 0 1 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, Unless Specified Otherwise) 1. GENERAL Taiwan Semiconductor Manufacturing Company Ltd. (TSMC), a corporation incorporated in the Republic of China, and Vanguard International Semiconductor Corporation (VIS), TSMC's 25% owned affiliate are engaged mainly in the: (a) research, manufacture, sale, packaging, testing and computer-aided design of integrated circuits and other semiconductor devices; and, (b) manufacture of masks. Notice to Readers: The combined financial statements include the consolidated accounts of TSMC plus the accounts of VIS, not a consolidated subsidiary 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. In September 1994, TSMC's shares were listed on the Taiwan Stock Exchange. On October 8, 1997, TSMC listed its shares of stock on the New York Stock Exchange in the form of American Depositary Shares (ADSs). VIS's shares were listed on the Republic of China (ROC) Over-the-Counter Securities Exchange starting March 25, 1998. TSMC has five direct wholly-owned subsidiaries, namely, TSMC-North America, Taiwan Semiconductor Manufacturing Company Europe B.V (TSMC-Europe), TSMC-Japan, TSMC International Investment, TSMC Partners, a 99.5% owned subsidiary, Emerging Alliance Fund; and several 25% owned investment holding affiliates - Po Cherng Investment, Chi Hsin Investment, Kung Cherng Investment, Chi Cherng Investment, Hsin Ruey Investment and Cherng Huei Investment. 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. TSMC Development Inc. has a subsidiary, WaferTech, LLC, which has been 57% owned since its formation in 1996, increased to 68% owned in 1998; TSMC Development Inc. acquired an additional 29% equity interest for US$474,640 and 2% equity interest for US$19,530 thousand in December 2000 and June 2001, respectively, thereby increasing its equity interest to 99% as of December 31, 2001. T S M C-North America, TSMC-Europe and TSMC-Japan are engaged mainly in marketing and engineering support activities. TSMC Partners, Emerging Alliance Fund and the investment holding affiliates are engaged in investments. TSMC International Investment and its subsidiaries invests in companies the business operations of which primaily focus on the design, manufacture and related semiconductor business Wa f e r Tech, LLC. is engaged in the foundry business and subsidiaries of VIS are engaged in marketing, research, development and investment. T S M C A n n u a l R e p o r t 2 0 0 1 141 The following diagram presents information regarding the relationship and ownership percentages among TSMC, VIS and their affiliates as of December 31, 2001: TSMC 25% VIS 100% 100% 100% 100% 100% 25% 99% TSMC-North America TSMC-Japan TSMC International Investment TSMC-Europe TSMC Partners Po Cherng Investment etc. Emerging Alliance Fund 100% Vanguard 100% TSMC- 100% TSMC- 97% 97% InveStar InveStar (II) Associates Inc. Technology Development 99% WAFERTECH 100% VIS Investment Holding Inc. 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 InveStar, InveStar (II), WaferTech, Emerging Alliance Fund (a new entity in 2001) are presented separately in the combined financial statements. The total assets and/or revenues of investment of VIS in VIS Associates Inc. and its subsidiaries are less than 10% of those of Company and, therefore, TSMC is not required to, and did not prepare the combined financial statement. Cash and cash equivalents Government bonds acquired under repurchase agreements that provide for their repurchase with less than three months from date of purchase 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 using the specific identification method. Allowance for doubtful receivables Allowance for doubtful receivables are provided based on a review of the collectibility of accounts receivable. 142 T S M C A n n u a l R e p o r t 2 0 0 1 Sales and Allowance for sales returns and others Sales are recognized when titles of products and risks of ownerships are transferred to customers, primarily upon shipment. Allowance and related provisions for sales returns and others are provided based on experience; such provisions are deducted from sales and related costs are deducted from cost of sales. Inventories Inventories are stated at the lower of cost or market value. Inventories are recorded at standard costs, which are adjusted to approximate weighted average cost at the end of each period. 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 policy decisions are accounted for using the equity method. The difference between the investment cost and the Company's proportionate equity in the net assets of the investee on the date of acquisition is amortized over five years using the straight-line method. Such amortization and the Company's proportionate share in the net income or net loss of investee companies are recognized as components of "Equity in net income or net loss in investee companies - net" account. When the Company subscribes to additional investee shares at a percentage different from its existing equity interest, the resulting carrying amount of the investment in equity investee differs from the amount of Company's proportionate share in the investee's net equity. The Company records such difference as an adjustment to "Capital surplus" and the "Long-term investments" accounts, respectively. In the event an investee offsets its capital surplus, excluding reserve from asset revaluation, against its accumulated deficit, which is recorded as a debit to the "Capital surplus" account and a credit to "Retained earnings" account, the Company also records the entry by its proportionate share of the investee capital surplus that was generated subsequent to its acquisition of investee interest, excluding reserve from asset revaluation. Other stock investments are accounted using the cost method. These investments are stated at cost less declines in market value of listed stocks or other than temporary declines in value of unlisted stock. 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 an increase in the number of stocks held on the ex-dividend date. Investments in foreign mutual funds are stated at the lower of cost or net asset value (NAV). Write-downs of cost and write-ups to original acquisition cost resulting from subsequent recovery in NAV are debited or credited to shareholders' equity. Investment in convertible notes and stock purchase warrants are carried at cost. The costs of investments sold are determined using the weighted average method. T S M C A n n u a l R e p o r t 2 0 0 1 143 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 reclassified into capital surplus from retained earnings. Such capital surplus is reclassified back to retained earnings when the Company subsequently disposes such investment. Also, if an investee company has unrealized loss on its own long-term investment which is evaluated by lower-of-cost-or- market method, the Company recognizes that unrealized loss in proportion to the Company's equity interest and record in an account as a component of shareholders' equity. Gains or losses on transactions with investee companies accounted using the equity method are eliminated in proportion to the Company's ownership percentage while those with majority-owned subsidiaries are eliminated entirely in consolidation. Property, plant and equipment and leased assets Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. Major additions, renewals, betterment and interest expenses incurred during the construction period are capitalized. Maintenance and repairs are expensed currently. P r o p e r t y, 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 market value of the property 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 computed using the straight-line method over these estimated service lives: Land improvements - 20 years; Buildings - 5 to 20 years; machinery and equipment - 5 to 10 years; office and other equipment - 2 to 7 years. Upon sale or disposal of an item 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 reclassified to capital surplus at the end of the year (before the relevant regulation was amended). Combined debits Combined 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. The combined debits are amortized using the straight-line method over 10 years. Deferred charges Deferred charges consist of technology, patent, software and system design costs, technology know-how, bond and financing issue cost and technology license fee. These are amortized as follows: Technology - ten years, patent - two to ten years, software and system design costs and technology know-how - three to five years, bond and financing issue costs - the term of the bonds and the related line of credit, and technology license fee - the term of the contract or economic useful lives of the related technology. Pension costs Net periodic pension costs are recorded on the basis of actuarial calculations. Unrecognized net transition obligation and unrecognized net gain of TSMC are amortized over 25 years, and unrecognized net transition asset of VIS is amortized 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 the term of the lease, and (b) capital lease - adjustment of depreciation over the estimated useful lives or term of the lease; whichever is shorter. 144 T S M C A n n u a l R e p o r t 2 0 0 1 Income tax The Company adopted the inter-period income tax allocation method. 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 is, according to the classification of its related asset or liability, classified as current or non-current. However, if a deferred asset or liability cannot be related to an asset or liability in the financial statements, then, it is classified as current or non-current based on the expected reversal date of temporary differences. Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax provision. Income taxes (10%) on unappropriated earnings of TSMC and VIS are recorded as expense in the year when the shareholders have resolved that the earnings shall be retained. Derivative financial instruments Foreign currency forward exchange contracts (forward contracts), entered into for purposes other than trading are recorded as follows: the differences in the New Taiwan dollar amounts translated using the spot rates and the amounts translated using the contracted forward rates are amortized over the terms of the forward contracts using the straight-line method. At the balance sheet dates, the receivables or payables arising from forward contracts are restated using the prevailing spot rates and the resulting differences are recognized in income. Also, the receivables and payables related to the forward contract are netted out and the resulting net amount is presented as either an asset or liability. The foreign currency amount of forward contracts, entered into for the purposes of hedging foreign currency firm commitments, are recorded as receivable or payable at spot rate on the contract date. The difference between the foreign currency amount computed using the spot rate and the foreign currency amount computed using the forward rate at the inception dates of the contracts are amortized over the term of the forward contract using the straight-line method. At the balance sheet dates, the foreign currency amount of the forward contract are remeasured using prevailing rates. The difference arising from the re-measurement is deferred and included as adjustment to the transaction price when the commitments are realized. The receivables and/or payables related to the forward contract are netted out and the resulting net amount is presented as either an asset or liability. The foreign exchange difference arising from the settlement of the forward contract is presented as the adjustment to the transaction price when the commitment are realized. The Company enters into interest rate swap transactions to manage exposures to changes in interest rates on existing liabilities. These transactions are accounted for on an accrual basis, in which cash settlement receivable or payable is recorded as an adjustment to interest income or expenses. 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. The amount paid or received (or premiums) for the call or put options are amortized using the straight-line method over the terms of the contracts. Other foreign-currency transactions Other foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Gains or losses caused by the application of different foreign exchange rates when cash in foreign currency is converted into New Taiwan dollars, or when foreign-currency receivables and payables are settled, credited or charged to income in the year of conversion or settlement. At year-end, the balances of foreign-currency assets and liabilities are restated based on prevailing exchange rates and any resulting gains or losses are credited or charged to income. T S M C A n n u a l R e p o r t 2 0 0 1 145 Translation of foreign - currency financial statements ROC Financial Accounting Standards (FAS) No. 14, "Accounting for Foreign-Currency Transactions," applies to foreign operations, with the local currency of each foreign subsidiary is its functional currency. The financial statements of such 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 adjustment is recorded as a separate component of shareholders' equity. 3. SIGNIFICANT ELIMINATING ENTRIES Company TSMC Account Payable to related parties Receivable from related parties Sales Purchase Marketing expenses - commissions Marketing expenses - service charge Non-operating income Gain on sales of properties TSMC- International Investment TSMC Partners TSMC - Technology Royalty income Notes receivable Interest receivable Interest revenue Notes receivable Deferred revenue Royalty income Interest income Accounts payable Sales Deferred revenue Royalty income Accounts receivable Amount $817,616 548,472 136,443 54,601 $15,355 10,318 320,179 25,251 3,878 Transaction Entity WAFERTECH, LLC VIS TSMC-North America TSMC-Europe TSMC-Japan TSMC-Technology VIS WAFERTECH, LLC TSMC-Technology 1,177,094 VIS 3,111 WAFERTECH, LLC 6,797,817 3,801,975 1,028,725 194,696 124,384 118,648 467 268,871 WAFERTECH, LLC VIS TSMC-North America TSMC-Japan TSMC-Europe TSMC-North America VIS VIS 1,223,373 TSMC-Technology 349,990 181,352 26,269 TSMC-Technology TSMC-Technology TSMC-Technology 11,344,120 10,079,712 TSMC International Investment TSMC International Investment 1,220,256 TSMC International Investment 712,046 TSMC International Investment 6,888 57,501 28,395 14,473 7,960 TSMC-North America WAFERTECH, LLC WAFERTECH, LLC WAFERTECH, LLC WAFERTECH, LLC 146 T S M C A n n u a l R e p o r t 2 0 0 1 4. CASH AND CASH EQUIVALENTS Cash and bank deposits Government bonds acquired under repurchase agreements 5. SHORT TERM INVESTMENTS Listed stocks Mutual funds Market value 6. INVENTORIES - NET Finished goods Work in process Raw materials Supplies and spare parts Less - allowance for losses 7. LONG-TERM INVESTMENTS Common stocks Accounted for equity method: VIS Associates Inc. Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) Accounted for cost method: Traded Powerchip Semiconductor Corporation Amkor Technology Etron Technology Inc. Taiwan Mask (Forward) $38,677,000 1,845,659 $40,522,659 $1,398,071 1,100,000 $2,498,071 $8,027,321 $2,668,580 10,245,430 810,558 1,409,049 15,133,617 (4,177,777) $10,955,840 C a r r y i n g Value % of O w n e r Ship $902,999 100 2,907,967 25 3,810,966 2,651,216 280,748 275,766 32,129 9 - 3 2 T S M C A n n u a l R e p o r t 2 0 0 1 147 Non-traded Walsin Advanced Electronics United Technology Global Test Corp. Megic Hong Tung Venture Capital Global Investment Holding Shin-Etsu Handotai Taiwan ChipStrate Technology Programmable Microelectronics APE W.K. Technology Fund IV Richtek Technology, Inc. EmpowerTel Networks 3Dfx Interactive Ubicom, Inc. (Scenix) Capella Microsystems Equator Technologies Divio Preferred stocks (all non-traded) Sonics EmpowerTel Networks Tropian, Inc. Formfactor Atheros Communications Monolithic Power System Quickilver Technology LightSpeed Semiconductor Memsic Equator Technologies Pixim OEpic Capella Microsystems Signia Newport Opticom RapidStream Reflectivity NanoAmp Solutions NetLogic Microsystems Integrated Memory Logic Match Lab Y-MEDIA Rise Technology Creosys Ikanos Communication (Forward) 148 T S M C A n n u a l R e p o r t 2 0 0 1 414,481 232,300 179,951 177,000 150,000 107,270 105,000 69,658 59,296 46,748 50,000 10 13 10 9 10 6 7 9 4 6 2 45,015 10 12,031 10,396 6,028 4,740 3,151 105 4,913,029 231,397 179,480 151,688 134,358 125,754 123,037 122,497 107,251 107,088 99,358 87,498 87,497 80,441 78,748 77,124 73,754 69,998 64,838 64,748 63,318 61,249 52,499 52,498 52,498 52,498 1 - 2 2 - - 7 7 5 2 2 18 29 1 20 2 3 6 8 20 15 6 6 3 1 10 10 2 2 8 3 Ralink Technology SiRF Technology Ubicom, Inc. (Scenix) Advanced Angalogic Technology OmegaBand (Seagull) Pico Turbo Sensory HINT Corporation Litchfield Quake Technology Procoat Technology Angstron System Divio Incentia Design Systems Silicon Data, Inc. Convertible note (all non-traded) Rise Technology Pico Turbo OmegaBand (Seagull) Funds Crimson Asia Capital Horizon Ventures BIAM Global Opportunity Fund Warrant OEpic The equity in net losses of subsidiaries and investee companies consisted of following: VIS Associates Inc. SSMC 52,498 51,248 47,636 44,131 43,749 43,749 43,749 34,999 34,999 34,999 7 1 2 2 6 7 4 5 6 1 30,000 10 26,249 17,500 17,499 8,750 2,932,869 10,500 10,323 6,730 27,553 27,091 125,701 908,944 1,061,736 9 $12,746,162 7 4 2 2 - - - - - - - ($193,262) (1,722,080) ($1,915,342) The carrying values of equity-accounted investments and the related equity in net income or net loss were based on audited of financial statements in the same period. Information on long-term investments is as follows: Market value of traded stocks Equity in the net assets of unlisted stocks Net asset value of funds $4,017,454 9,856,355 1,202,453 T S M C A n n u a l R e p o r t 2 0 0 1 149 8. PROPERTY, PLANT, AND EQUIPMENT Accumulated depreciation consists of the following: Land improvements Buildings Machinery and equipment Office and other equipment $108,770 20,123,652 159,908,115 3,441,428 $183,581,965 Information on the status of the construction of the manufacturing facilities of TSMC as of December 31, 2001 is as follows: Manufacturing Plant TSMC's Fab 6 TSMC's Fab 7 TSMC's Fab 8 TSMC's Fab 12 - 1st stage TSMC's Fab 14 - 1st stage Estimated Cost $76,889,000 5,930,500 28,322,100 38,280,800 9,711,000 Accumulated Expenditures $69,986,000 2,867,500 11,355,300 28,988,700 8,449,600 Expected or Actual Date of Start of Operations March 2000 March 2001 March 2001 April 2002 June 2003 Interest expense (gross of capitalized amount of NT$537,713 thousand), for the years ended December 31, 2001 was NT$4,411,636 thousand. The interest rates used for purposes of calculating the capitalized amount were 2.54% to 6.755%. 9. DEFERRED CHARGES - NET Software and system design costs Technology licensing fee Technology know - how Bond and financing issue costs Others $2,162,419 996,578 103,500 155,650 445,728 $3,863,875 150 T S M C A n n u a l R e p o r t 2 0 0 1 10. SHORT-TERM BANK LOANS Secured loan in NT dollars: NT$ 107,100 thousand, repayable by October 2002,annual interest at 3.2%~3.8% $107,100 Unsecured loan: NT$ 20,000 thousand, repayable by January 2002, annual interest 2.85% US$16,006 thousand, repayable by January to June 2001, annual interest 2.38%-2.9% US$ 82,000 thousand, repayable by March 2002, annual interest at 2.679% US$5,500 thousand, repayable by June 2002, annual interest at 3.188% US$21,565 thousand, repayable by October 2002, annual interest at 2.590% US$46,000 thousand, repayable by October 2002, annual interest at 2.548% US$21,000 thousand, repayable by May 2002, annual interest at 2.33% 20,000 560,183 2,869,918 192,495 754,735 1,609,954 734,979 $6,849,364 Unused credit lines as of December 31, 2001 aggregated approximately NT$25,099,000 thousand (consisting of NT$13,729,900 thousand and US$324,836 thousand). The NT$107,100 thousand loan is secured by short-term investment with carrying amount of NT$71,400 thousand. 11. COMMERCIAL PAPER These instruments, which bear annual interest retes ranging from 3.35% to 4.45%, are secured by bank guaranty and payable between March 2002 to June 2002. T S M C A n n u a l R e p o r t 2 0 0 1 151 12. LONG-TERM BANK LOANS Unsecured loan: US$200,000 thousand, repayable by December 2003, annual interest at 2.54% Secured loan: US$440,000 thousand, repayable by February 28, 2005, annual interest at 2.578% Loans for facility and importation of equipment - repayable in semi-annual installments starting from November 1999 to June 2004,floating interest 4%~ 6.35% Loans for importation of equipment - repayable in semi-annual installments starting from October 2000 to October 2005, interest at3.95~ 6.42% Loans for importation of equipment - repayable in quarterly installments starting from January 2003 to July 2007, interest at6.475%~6.765% Loans for importation of equipment - repayable in semi-annual installments starting from February 2000 to February 2005, interest at6.225%~6.765% Loans for importation of equipment - repayable in semi-annual installments starting from July 1999 to July 2004, interest at6.35%~6.64% Loans for importation of equipment - repayable in semi-annual installments starting from February 1998 to February 2003,interest at 6.475%~6.765% Loans for import of equipment - repayable in semi-annual installments starting from May 1997 to May 2002, interest at floating rate 6.475%~6.765% Commercial paper - guaranteed by the bank, repayable in May 2004, interest at 2.41%. Less-current portion $6,999,800 15,399,560 3,900,000 2,920,000 330,000 256,000 220,000 112,000 40,000 300,000 30,477,360 (2,536,000) $27,941,360 Future minimum principal payments under the Company's loan arrangements as of December 31, 2001 are as follows: Year 2002 2003 2004 2005 2006 and thereafter Amount $2,536,000 9,518,800 2,021,333 16,272,893 128,334 $30,477,360 As of December 31, 2001, the US$440,000 thousand loan is secured by the assets of WaferTech, LLC with carrying amount of approximately NT$28,378,000 thousand (US$811,000 thousand). In addition, a portion of the unused credit line is secured by properties owned by TSMC with carrying value of approximately NT$1,378,000 thousand. Properties of VIS with carryihg value of NT$7,520,540 thousand have been pledged or mortgaged as collateral mainly for long-term debts. The bonds and loan agreements require, among other things, the maintenance of specific financial ratios. As of December 31, 2001, certain financial ratios were not in compliance with the agreements. The agreements also require the Corporation to either issue capital stock for cash (in which case, the board of directors need to approve it by February 1, 2002) or obtain additional financing with the concurrence of the bank syndicate before June 2002. Unused credit lines for long-term bank loans as of December 31, 2001 aggregated approximately NT$4,391,000 thousand (consisting of NT$3,070,000 thousand and US$37,750 thousand). 152 T S M C A n n u a l R e p o r t 2 0 0 1 13. 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 Domestic secured bonds: Repayable in annual installments from November 6, 2000 to November 6, 2003, interest at 6.59%,guaranteed by financial institution. Repayable in annual installments from November 15, 2005 to November 15, 2006, interest at 3.5%~3.6%, guaranteed by financial institution. Less-current portion $4,000,000 10,000,000 15,000,000 1,500,000 1,100,000 31,600,000 (5,750,000) $25,850,000 Future minimum principal payments under the Company's bonds arrangements as of December 31, 2001 are as follows: Year 2002 2003 2004 2005 2006 and thereafter Less-current portion Amount $5,750,000 4,750,000 5,000,000 11,050,000 5,050,000 31,600,000 (5,750,000) $25,850,000 On November 6, 2001, the board of directors of TSMC approved the issuance of domestic unsecured bonds with an aggregate principal amount of NT$15,000,000 thousand. The issuance of the domestic unsecured bond has been approved by the Securities and Futures Commission of ROC (SFC). As of January 18, 2002, the issuance is still in process. VIS issued first bond amounting to NT$1,500,000 thousand in 6.59% annual interest rate guaranteed by the financial institution that is repayable in annual installments from November 6, 2000 to November 6, 2003. The second bond amounting to NT$1,100,000 thousand in 3.5%~3.6% annual interest rate is repayable in annual installment from November 15, 2005 to November 15, 2006, and current portion is NT$750,000 thousand. T S M C A n n u a l R e p o r t 2 0 0 1 153 14. SHAREHOLDERS' EQUITY TSMC has issued 259,006 thousand American Depositary Shares (ADS) as of December 31, 2001. The number of common shares represented by the ADSs is 1,295,031 thousand shares. The SFC has, on January 4, 2002, approved TSMC's sponsorship of the offer by certain existing shareholders of up to 350,000 thousand common shares in the form of ADSs. The decision to sponsor the offering of common shares in the form of ADSs was approved by the Board of Directors on December 3, 2001. The offering is still in process as of January 18, 2002. Capital surplus except for that arising from the application of the equity method of accounting, pursuant to ROC Company Law, can only be used to offset a deficit or transferred to capital (as a stock dividend). Such transfer from capital surplus to capital can only be made once a year at a specific percentage. An amendment to the ROC Company Law issued on November 14, 2001, limited the nature of the capital surplus that can be used to offset a deficit or transferred to capital (as a stock dividend) to those that arise from donations (donated capital) and those attributable to the excess of the issue price over the par value of capital stock issued (paid-in 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 in accordance with relevant laws or regulations; c. Bonuses to directors and supervisors and to employees equal to 1% and at least 1% of the remainder, respectively; d. Dividends to holders of preferred shares equal to a 3.5% annual rate, based on the period during which the preferred shares have been outstanding; e. The appropriation of the remaining balance after the above shall be decided at the shareholder's meeting; Dividends are distributed in cash and/or in the form of shares of stock. Since the Company is in a capital-intensive industry, distribution of profits shall be made preferably by way of stock dividend. The total of cash dividend paid (in any given year) should not exceed 50% of total dividends paid and/or distributed. These appropriations of net income shall be resolved by the shareholders in the following year and given effect in the financial statements of that year. The aforementioned appropriation for legal reserve is made until the reserve equals the aggregate par value of TSMC's outstanding capital stock. The reserve can only be used to offset a deficit; or, when its balance has reached 50% of the aggregate par value of TSMC'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. As of December 31, 2001, prior year's accumulated deficit in the amount of NT$1,803,168 thousand from WSMC is included in the unappropriated retained earnings. Under the Integrated Income Tax System that became effective on January 1, 1998, ROC resident shareholders are allowed a tax credit for the income tax paid by the Company on earnings generated starting January 1, 1998. An 154 T S M C A n n u a l R e p o r t 2 0 0 1 Imputation Credit Account (ICA) is maintained by TSMC and VIS 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. TSMC issued 1,300,000 thousand unlisted Series A - preferred shares to certain investors in November 29, 2000. The following are the rights of the preferred share holders and other terms and conditions: a. Are entitled to receive cumulative cash dividends at an annual rate of 3.5%. b. Are not entitled to receive any stock dividends (whether declared out of unappropriated earnings or capital surplus). c. Have priority over the holders of common shares to the assets of the Company available for distribution to shareholders upon liquidation or dissolution of the Company. However, the preemptive rights to the assets shall not exceed the issue value of the shares. d. Have voting rights similar to that of the holders of common shares. e. Have no right to convert their shares into common shares. f. Will be redeemed within thirty months from their issuance. The holders will have the foregoing rights and TSMC's related obligation would remain the same, until the shares are actually redeemed by TSMC 15. PENSION PLAN TSMC and its affiliates have pension plans for all regular employees, which provide benefits based on length of service and average monthly salary for the final six months prior to retirement. These companies make monthly contributions, equal to 2% of salaries to a pension fund (the "Fund"). The Fund is administered by the pension fund monitoring committee (the "Committee") and deposited in the committee's name in the Central Trust of China. The pension cost of VIS is accrued at an amount that is equal to 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. The details of the benefit obligation and reconciliation of the fund status of the plan and accrued pension cost is as follows: 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 (Forward) $469,542 109,144 (50,438) 3,461 $531,709 $739 1,122,768 1,123,507 1,568,428 2,691,935 (956,069) 1,735,866 - T S M C A n n u a l R e p o r t 2 0 0 1 155 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. Payments from pension fund 16. INCOME TAX 7,170 (157,691) 569,258 - $2,154,603 5% 5% 5% $148,465 $- 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: Income tax expense on "income before income tax" at statutory rate Tax-exempt income Temporary differences Income tax expense - current before tax credits b. Income tax benefits consists of: Income tax expense - current before tax credits Income tax credits Additional 10% on the unappropriated earnings Other income tax Net change in deferred income tax assets (liabilities) for the year Investment tax credits Loss carried forward Temporary differences Valuation allowance c. Deferred income tax assets (liabilities) consisted of : Current Investment tax credits Loss carried forward Temporary differences Less-valuation on allowance Noncurrent Investment tax credits Loss carried forward Temporary differences Less-valuation allowance 156 T S M C A n n u a l R e p o r t 2 0 0 1 ($922,796) 1,107,147 (2,781,575) ($2,597,224) ($2,597,224) 2,928,317 (362,251) (16,318) (47,476) 2,457,899 1,525,241 (682,267) 1,087,622 $4,341,019 $2,979,032 257,591 3,147 3,239,770 (539,348) $2,700,422 $22,704,199 3,156,253 (1,184,204) 24,676,248 (5,683,355) $18,992,893 The effective tax rates for deferred income tax of TSMC and its affiliates as of December 31, 2001 were 17.56%, and 25%-41%, respectively. d. Integrated income tax information: Balances of the imputation credit account TSMC VIS $9,365 $6,158 TSMC and VIS's expected creditable ratio as of December 31, 2001 were 0.02% and 0%, 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 2001 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, 2001 included the earnings generated up to December 31, 1997 of NT$4,827 thousand. Unused investment tax credits arising from purchase of machinery and equipment, and research and development expenditures as of December 31, 2001 will expire as follows: Year of Expiry 2002 2003 2004 2005 2006 Loss Carried Forward $1,030,365 5,694,914 2,380,345 - 4,549,750 $13,655,374 Tax Credits $5,119,926 6,032,425 11,097,088 3,433,792 - $25,683,231 The income from the following expansion and construction of TSMC's manufacturing plants is exempt from income tax: Expansion of Fab1 and Fab2-modules A and B, Fab3 and Fab4, and construction of Fab5 Expansion of Fab7 VIS's first expansion of manufacturing plant Tax-Exemption Period 1999 to 2002 1998 to 2001 2000 to 2003 The tax authorities have examined income tax returns of TSMC through 1999, excluding 1998. However, TSMC is contesting the assessment of the tax authority for 1992, 1993, 1996 and 1997. The tax authorities have examined income tax returns of VIS through 1998. T S M C A n n u a l R e p o r t 2 0 0 1 157 17. RELATED PARTY TRANSACTIONS TSMC and VIS engage in business transactions with the following related parties: a. Industrial Technology Research Institute (ITRI), the Chairman of TSMC is one of the directors of ITRI. 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 Corporation (PSC), VIS is one of the directors of PSC. h. Walsin Advanced Electronics (WAE), VIS is one of the directors of WAE. The transactions with the aforementioned parties in addition to those disclosed in other notes, are summarized as follows: During the year Sales Philips and its affiliates ITRI WAE SSMC Purchase PSC SSMC Rental expenses - ITRI Manufacturing expenses Technical service fee - Philips WAE ITRI PSC General and administrative expenses - ITRI Marketing expenses VIS Micro ITRI Non-operating income SSMC PSC (Forward) 158 T S M C A n n u a l R e p o r t 2 0 0 1 Amount % $2,398,257 114,546 67,664 48,972 $2,620,439 $69,770 42,984 $112,754 2 - - - 2 1 - 1 $161,604 11 $2,418,276 100 123,949 13,016 550 - - - $2,555,791 100 $147 $20,427 124 $20,551 $95,284 1,090 - 1 - 1 1 - WAE Other equipment WLC At end of the year Receivable Philips and its affiliates ITRI SSMC PSC Prepayments and other current assets ITRI (rental) Payable Philips and its affiliates ITRI WAE VIS Micro SSMC PSC 100 $96,474 $2,292 $116,499 37,383 20,671 54 - 1 - 67 21 12 - $174,607 100 $42,664 1 $499,331 90 33,034 17,889 2,532 470 49 6 3 1 - - $553,305 100 Transactions with related parties are based on normal prices and collection or payment terms except that VIS Micro perform research and development and marketing activities for VIS and VIS pays actual expenses incurred related to such undertakings plus a 5% mark-up and sales of technical service which were in accordance with the related contracts. 18. SIGNIFICANT LONG-TERM OPERATING 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 under such agreement amounts to NT$161,604 thousand. TSMC leases the land where its 2nd through 14th manufacturing facilities are located from the Science-Based Industrial Park Administration. The related agreements will expire on various dates from March 2008 to December 2020 and have annual rentals aggregating NT$208,716 thousand. The agreements can 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 covering its office premise, which will expire in 2004; Annual rental currently is NT$101,395 thousand. VIS leases the sites of its manufacturing plant and parking lot from the Hsinchu Science-Based Industrial Pa r k Administration under agreements which will expire on April 2010 and June 2015, but renewable upon expiration. Annual rentals aggregated to NT$23,812 thousand. T S M C A n n u a l R e p o r t 2 0 0 1 159 VIS also leases machinery and equipment from Comdisco Trade Inc. under operating lease agreements through November 2002, December 2002 and December 2003, respectively. Annual rentals aggregated to NT$271,655 thousand (US$7,762 thousand). Future annual minimum rentals under the aforementioned leases are as follows: Year 2002 2003 2004 2005 2006 2007 and thereafter Amount $643,166 346,723 336,736 335,007 337,992 2,366,328 $4,365,952 19. SIGNIFICANT COMMITMENTS AND CONTINGENCY AS OF DECEMBER 31, 2001 The significant commitments and contingency as of December 31, 2001 are as follows: a. Under a Technical Cooperation Agreement with Philips, as amended on May 12, 1997, TSMC shall pay technical assistance fees as 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 of up to 30% of TSMC's production capacity. c. Under a Technical Cooperation Agreement with ITRI, TSMC shall reserve and allocate up to 35% of certain 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$205,949 thousand had been received as of December 31, 2001. 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 S$1.2 billion, and, (c) allow TSMC to invest in 32% of SSMC's capital. As of December 31, 2001, the aggregate amount of investments from these parties has not reached S$1.2 billion. TSMC and Philips committed to buy a specific percentage of the production capacity of SSMC. If any party defaults on the agreement and the capacity utilization of SSMC falls below a specific percentage of its total capacity, the defaulting party should compensate SSMC for all related unavoidable costs. f. Provision of technical services to SSMC under a Technical Cooperation Agreement (the "Agreement") entered into on May 12, 1999. TSMC receives compensation for such services computed at a specific percentage of net selling prices of specific products sold by SSMC. The Agreement remains in force for ten years and is automatically renewed once for successive periods of five years unless pre-terminated by either party under certain conditions. 160 T S M C A n n u a l R e p o r t 2 0 0 1 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 once for successive periods of two years unless pre-terminated by either party under certain conditions. h. Under a patent license agreement, TSMC has entered into a cross license arrangement for certain semiconductor patents with a US-based company for a term starting from October 26, 2001 through December 31, 2006. TSMC shall pay royalty fees to the such company. i. VIS shall pay royalties under various patent/license agreements as follows: 1) ITRI - at a specific percentage of sales of certain products for five years from November 11, 1994. 2) LUCENT Technologies, Inc. -(a) at a specific amount in three installments within three years and a percentage of net sales of certain products for three years from January 1998; (b) 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. j. In 1996, Wa f e r Tech 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 Wa f e r Tech. 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 Wa f e r Tech 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 instalments of 25% each on the first, second, third, and fourth anniversaries of the date of grant. The following table summarizes information about the Plans: Balance, January 1, 2001 Options granted Option price > fair market value Options exercised Options cancelled Balance, December 31, 2001 Option Rights Available For Grant Outstanding Option Rights Number of Option Rights Exercise Price (US$) 3,782,166 6,836,644 - - 825,906 4,608,072 - (2,949,358) (825,906) 3,061,380 1.23 - 1.02 1.27 1.43 These options will expire if not exercised at specific dates between May 2006 to December 2010. T S M C A n n u a l R e p o r t 2 0 0 1 161 k. Under a management agreement, InveStar Capital Inc. (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. l. Wa f e r Tech had recorded a reserve of US$ 16,000 thousand for a litigation arising from a charge by certain contractors that Wa f e r Tech 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. The remaining accrued reserve of US$5,250 thousand is sufficient for payments to the other construction contractors in the year of 2002. m.WaferTech, was assessed by the Department of Revenue of the State of Washington for deficiency excise taxes of approximately US$6,900 thousand. Wa f e r Tech, intends to appeal the assessment. As of December 31, 2001, WaferTech has recorded a reserve that management believes is sufficient to address any exposure related to this tax assessment. n. TSMC-North America started a stock appreciation right program from December 1, 2000, 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 fluctuations of the stock in a period. As of December 31, 2001, TSMC North - America has recorded compensation expense and has related accrued liability of approximately US$3,900 thousand. o. Unused letter of credits as of December 31, 2001 were NT$21,962 thousand (consisting of NT$1,200 thousand, US$177 thousand and JPY¥54,619 thousand). 20. ADDITIONAL DISCLOSURES The following are the additional disclosures required by the SFC for TSMC and its affiliates: a. Financing provided: Please see Table 1 attached; b. Endorsement guarantee provided: Please see Table 2 attached; c. Marketable Securities held: Please see Table 3 attached; d. Marketable securities acquired and disposed of at costs or prices of at least NT$100 million or 20% of the paid-in capital: Please see Table 4 attached; e. Acquisition of individual real estates at costs of at least NT$100 million or 20% of the paid-in capital: Please see Table 5 attached; f. Disposal of individual real estates at prices of at least NT$100 million or 20% of the paid-in capital: None; g. Total purchase from or sale to related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 6 attached; h. Receivable from related parties amounting to at least NT$100 million or 20% of the paid-in capital: Please see Table 7 attached; 162 T S M C A n n u a l R e p o r t 2 0 0 1 i. Names, locations, and related information of investees on which the Company exercises significant influence: Please see Table 8 attached. j. Financial instrument transactions: The relevant information on derivative financial instruments entered into by TSMC, VIS and their affiliates are as follows: 1) Open forward exchange contracts as of December 31, 2001: Contract Currency Contract Amount (Thousand) Fair Value (Thousand) Settlement Date Maturity Amount (Thousand) TSMC Sell Sell VIS Sell US$ US$ US$ US$17,912 NT$618,206 Jan. 2002 NT$620,600 US$783,000 NT$26,985,688 Jan.2002~Mar.2002 NT$27,013,402 US$1,000 (NT$549) Jan. 2002 NT$34,452 The net payable from forward exchange contracts (shown in the balance sheet as part of "Other current liabilities" account) as of December 31, 2001 aggregated to NT$400,378 thousand. Net exchange loss for the year ended December 31, 2001 was NT$1,929,325 thousand. The net assets or liabilities that have been hedged by the above forward exchange contracts are as follows: Accounts receivable Accounts payable Time deposits 2) Interest rate swaps Amount (Thousands) US$525,425 US$169,664 US$707,416 TSMC has entered into interest rate swap contracts 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 (Thousand) NT$2,000,000 NT$1,000,000 NT$1,000,000 NT$1,000,000 Interest expense on these transactions for the years ended December 31, 2001 was NT$473,413 thousand. T S M C A n n u a l R e p o r t 2 0 0 1 163 3) Option contracts TSMC has entered into foreign currency option contracts to hedge risks of exchange rate fluctuations arising from its anticipated U.S. dollar cash receipts from its export sales or Japanese Yen obligations related to its importation of machinery and equipment. Open option contracts as of December 31, 2001 were as follows: Contract Currency (Thousand) (Thousand) (Thousand) Strike Price Maturity Contract Amount Carrying Value Fair Value Put option sell EUR EUR293,000 ($39,500) ($252,833) 0.8940~0.9340 Jan. ~Feb., 2002 (US$/EUR) For the year ended December 31, 2001, TSMC realized premium income of NT$328,254 thousand and premium expenses of NT$93,522 thousand. 4) Cross Currency SWAP VIS enters into currency SWAP contracts with the bank to hedge exposure on foreign currency exchange rate fluctuations on various foreign currency transactions of VIS. Open currency SWAP contracts as of December 31, 2001 were as follows: Currency Contract Amount (Thousand) Fair Value (Thousand) Settlement Date US$ US$5,000 (NT$2,712) Jan. 2002 VIS Sell 5) 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. All derivative financial instruments are intended as hedges for fluctuations in currency exchanges rates on the Company's foreign currency denominated receivables, payables and purchase commitments, and interest rate fluctuations on its floating rate long-term loans and. Gains or losses from forward exchange contracts are likely to be offset by gains or losses on foreign currency denominated receivables or payables while those gains or losses on forward contracts used to hedge firm commitments are included in the measurement of the related transaction when the hedged transaction occurs. Interest rate risks are also managed as the expected interest expense on long-term loans is fixed. Thus, market price risks on exchange rate and interest rate fluctuations are minimal. c) Liquidity and cash flow requirements: The cash flow requirements on the derivative instruments are limited to the net differences between the spot rates and contracted forward rates at settlement dates (for forward contracts); and foreign currency purchase commitments arising from the different foreign currency demand (for cross currency swap contracts); and amounts receivable/payable arising from the differences in the rates on interest rate swap contracts. Also, 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. Management believes that the foregoing requirements are not material. 164 T S M C A n n u a l R e p o r t 2 0 0 1 6) Fair value of financial instruments Non-derivative financial instruments Assets Cash and cash equivalents Pledged time deposits Short-term investments Receivables from related parties Accounts receivable Long-term investments Refundable deposits Liabilities Short-term bank loans Commercial paper payable Payable to related parties Notes and accounts payable Payable to contractor and equipment suppliers Long-term bank loans (including current portion) Bonds (including current portion) Guarantee deposits Derivative financial instruments Forward exchange contracts (sell) Interest rate swaps Option Currency swap Fair values of financial instruments were determined as follows: a) Short-term financial instruments - carrying values. b) Short-term investments - market values. Carrying Amount Fair Value $40,522,659 $40,522,659 36,183 2,498,071 174,607 20,662,671 12,746,162 787,347 6,849,364 1,270,000 553,305 1,744,553 12,999,508 30,480,445 31,600,000 7,964,078 28,031,667 26,969 (39,500) 2,713 36,183 8,027,321 174,607 20,662,671 15,076,262 787,347 6,849,364 1,270,000 553,305 1,744,553 12,999,508 30,480,445 32,193,224 7,964,078 27,603,345 (343,088) (252,833) (2,712) 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. Bonds payable are 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. T S M C A n n u a l R e p o r t 2 0 0 1 165 21. SEGMENT FINANCIAL INFORMATION a. Geographic information: Overseas Domestic Adjustments and Elimination Combined 2001 Sales to unaffiliated customers $- $130,207,394 $- $130,207,394 Transfers between geographic areas 8,152,070 4,791,101 (12,943,171) - 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 b. Gross export sales Area America Asia Europe $8,152,070 $134,998,495 ($12,943,171) $130,207,394 ($1,224,832) $33,295,718 ($1,686,562) $30,384,324 (22,145,649) 6,582,789 (11,130,279) $3,691,185 $6,450,970 $73,433,656 $327,894,422 ($23,335,461) $377,992,617 12,746,162 $390,738,779 $65,131,432 23,929,350 7,811,281 $96,872,063 The export sales information is presented by billed regions. c. Major customer The customer with the sales amounted over 10% of the Company's total sales is as following: Customer A Amount $21,789,769 % 17 166 T S M C A n n u a l R e p o r t 2 0 0 1 TABLE 1 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION FINANCING PROVIDED For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Financing Counter-Party Name Financial Statement Account Financing Limit for Each Borrowing Company Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) Interest Rate Financing Allowance for Bad Debt Reasons Collateral Item Value Transaction Amount 1 2 TSMC-BVI TSMC Technology Other receivables - US$14,662 US$14,662 7.75% VIS VIS Holding Prepaid expenses (Note 2) $1,232 $- - $- - Operating capital Prepayments for product development - $- - - $- - Note 1: Not exceeding the issued capital of the Company. Note 2: Not exceeding 10% of the issued capital of VIS for each counterparty, and also limited to 30% of the issued capital of each counterparty. Note 3: Not exceeding 20% of the issued capital of VIS. Financing Company's Financing Amount Limits (US$ in Thousand) US$779,968 (Note 1) $4,400,000 (Note 3) TABLE 2 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION ENDORSEMENT/GUARANTEE PROVIDED For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Endorsement/ Guarantee Provider Counter-Party Name Limits on Each Counter-party's Endorsement/ Guarantee Amounts Maximum Balance for the Period (US$ in Thousand) Nature of Relationship (Note 2) Ending Balance (US$ in Thousand) Value of Collateral Property, Plant and Equipment (Note 3) Ratio of Accumulated Amount of Collateral to Net Equity of the Latest Financial Statement Maximum Collateral/Guarantee Amounts Allowable (Note 1) 0 TSMC TSMC Development Inc. TSMC - North America WAFERTECH, LLC 3 2 3 (Note 4) $9,379,732 (US$268,000) 1,399,960 (US$40,000) 15,399,560 (US$440,000) $9,379,732 (US$268,000) 1,399,960 (US$40,000) 15,399,560 (US$440,000) $- - - $54,397,659 3.38% 0.51% 5.56% Note 1: 30% of the issued capital of the Company. Note 2: The No. 2 represents a subsidiary in which TSMC holds directly over 50% of the equity interest. The No. 3 represents an investee in which TSMC holds directly and indirectly over 50% of the equity interest. Note 3:Promissory notes for collateral. Note 4:Not exceeding 10% of the issued capital of the Company, and also limiting to the issued capital of the transaction entity, unless otherwise approved by Board of directors. T S M C A n n u a l R e p o r t 2 0 0 1 167 TABLE 3 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION MARKETABLE SECURITIES HELD December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Long-term investment 11,000 $786,062 Subsidiary Subsidiary Subsidiary Investee Subsidiary Subsidiary Investee Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Subsidiary Long-term investment - - - - - - Investee Investee Investee Investee Investee Investee - - Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment - 6 556,133 779,968 300 301 - 7,782 16,783 10,500 5,000 15,000 505 - - - - - - - - 10,147 80,156 3,377,526 19,987,814 3,032,376 2,907,967 741,617 32,129 193,584 105,000 50,000 150,000 280,748 164,724 158,252 177,812 156,694 157,352 166,639 27,091 125,701 100 100 100 25 100 100 32 99 2 11 7 2 10 - 25 25 25 25 25 25 N/A N/A $786,062 10,147 80,156 6,584,620 19,987,814 3,032,376 2,907,967 741,617 183,658 274,107 118,726 64,855 139,086 287,610 164,724 158,252 177,812 156,694 157,352 166,639 27,091 125,701 Major shareholder Short-term investment 3,023 98,282 - 253,173 Held Company Name: TSMC Stock TSMC - North America TSMC - Europe TSMC - Japan VIS TSMC-BVI TSMC Partners SSMC Emerging Alliance Fund Taiwan Mask Corp. United Technology Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Hon Tung Ventures Capital Amkor Technology Certificate Po Cherng Investment Chi Hsin Investment Kung Cherng Investment Chi Cherng Investment Hsin Ruey Investment Cherng Huei Investment Equity Crimson Asia Capital Fund Horizon Ventures Fund Held Company Name: Chi Cherng Investment Stock TSMC (Forward) 168 T S M C A n n u a l R e p o r t 2 0 0 1 Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: Chi Cherng Investment Certificate Po Cherng Investment Chi Hsin Investment Hsin Ruey Investment Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment Kung Cherng Investment Major shareholder Long-term investment Cherng Huei Investment Major shareholder Long-term investment Held Company Name: Kung Cherng Investment 6,000 6,000 6,000 6,000 6,000 $98,834 94,951 94,411 106,687 99,983 Major shareholder Short-term investment 6,758 226,819 Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment 6,000 6,000 6,000 6,000 6,000 98,834 94,951 94,017 94,411 99,983 Cherng Huei Investment Major shareholder Long-term investment Held Company Name: Po Cherng Investment 15 15 15 15 15 - 15 15 15 15 15 $98,834 94,951 94,411 106,687 99,983 565,937 98,834 94,951 94,017 94,411 99,983 Major shareholder Short-term investment 4,240 187,508 - 355,058 Pledge 150 thousand shares Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment 6,000 6,000 6,000 6,000 6,000 94,951 94,017 94,411 106,687 99,983 15 15 15 15 15 94,951 94,017 94,411 106,687 99,983 Kung Cherng Investment Major shareholder Long-term investment Cherng Huei Investment Major shareholder Long-term investment Held Company Name: Cherng Huei Investment Major shareholder Short-term investment 4,917 198,896 - 411,724 Pledge 1,600 thousand shares Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment 6,000 6,000 6,000 6,000 6,000 98,834 94,951 94,017 94,411 106,687 15 15 15 15 15 98,834 94,951 94,017 94,411 106,687 Kung Cherng Investment Major shareholder Long-term investment Held Company Name: Chi Hsin Investment Stock TSMC (Forward) Major shareholder Short-term investment 3,561 138,747 - 298,220 T S M C A n n u a l R e p o r t 2 0 0 1 169 Stock TSMC Certificate Po Cherng Investment Chi Hsin Investment Chi Cherng Investment Hsin Ruey Investment Stock TSMC Certificate Chi Hsin Investment Chi Cherng Investment Hsin Ruey Investment Stock TSMC Certificate Po Cherng Investment Chi Hsin Investment Chi Cherng Investment Hsin Ruey Investment Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: Chi Hsin Investment Certificate Po Cherng Investment Chi Cherng Investment Hsin Ruey Investment Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment Kung Cherng Investment Major shareholder Long-term investment Cherng Huei Investment Major shareholder Long-term investment Held Company Name: Hsin Ruey Investment 6,000 6,000 6,000 6,000 6,000 $98,834 94,017 94,411 106,687 99,983 Stock TSMC Certificate Po Cherng Investment Chi Hsin Investment Chi Cherng Investment Major shareholder Short-term investment 1,407 98,996 Major shareholder Long-term investment Major shareholder Long-term investment Major shareholder Long-term investment 6,000 6,000 6,000 6,000 6,000 98,834 94,951 94,017 106,687 99,983 Kung Cherng Investment Major shareholder Long-term investment Cherng Huei Investment Major shareholder Long-term investment Held Company Name: TSMC-BVI Stock InveStar Semiconductor Development Fund Inc. InveStar Semiconductor Development Fund (II) Inc. TSMC Development Inc. TSMC Technology Inc. 3DFX Interactive Inc. Held Company Name: VIS Bond fund Qiung Ban Yuan Da Duo Li #2 THE TP ROC Stock Subsidiary of TSMC-BVI Subsidiary of TSMC-BVI Subsidiary of TSMC-BVI and its chairman is also TSMC's chairman Subsidiary of TSMC-BVI and its chairman is also TSMC's chairman - - - - Long-term investment 45,000 US$65,203 Long-term investment 45,000 US$45,766 Long-term investment Long-term investment 1 1 US$201,231 100 US$201,231 US$1,591 100 US$1,591 Long-term investment 68 US$297 Short-term investment Short-term investment Short-term investment 28,409 26,278 25,923 41,070 202,185 5,617 34,551 400,000 350,000 350,000 902,999 2,651,216 275,766 414,481 VIS Associates Inc. Subsidiary Long-term investment PowerChip Semiconductor Inc. Etron Technology Inc. Walsin Technology Inc. Investee Investee Investee Long-term investment Long-term investment Long-term investment (Forward) 170 T S M C A n n u a l R e p o r t 2 0 0 1 15 15 15 15 15 - 15 15 15 15 15 97 97 $98,834 94,017 94,411 106,687 99,983 117,836 98,834 94,951 94,017 106,687 99,983 US$65,203 US$45,766 - - - - 100 9 3 10 US$30 401,960 352,465 355,763 902,999 3,263,269 281,864 358,994 Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: VIS MEGIC Corporation Form Factor, Inc. United Technology Co., Ltd. Held Company Name: VIS Associates Inc. Stock VIS Investment Holding, Inc. Equity Silicon Valley Equity Fund Silicon Valley Equity Fund II ABN AMRO Bank Equity Certificate Fund Grand Palace Trust Investee Investee Investee Long-term investment Long-term investment Long-term investment 16,500 267 3,357 $177,000 64,360 38,716 9 1 2 $188,581 64,360 54,872 Subsidiary of VIS Associates Inc. Long-term investment 68 US$891 100 US$891 - - - - Long-term investment Long-term investment - - US$7,894 US$5,705 Short-term investment 23,168 US$10,047 35 14 - US$7,894 US$5,705 US$11,319 Long-term investment - US$2,800 100 US$2,800 Held Company Name: VIS Investment Holding, Inc. Stock VIS Micro, Inc. Held Company Name: TSMC Development Stock WAFERTECH, LLC Held Company Name: TSMC Partners ADR TSMC Investee Long-term investment 200 US$258 100 US$258 Long-term investment - US$226,541 99 US$226,541 Investee of TSMC Development and its chairman is also chairman of TSMC Parent Company Short-term investment 495 US$7,357 Held Company Name: InveStar Semiconductor Development Fund Inc. Stock Silicon Image, Inc. Marvell Technology Group Ltd. Silicon Labo Ratories Chang Yi Technology Divio Capella Microsystems, Inc. Equator Technologies, Inc. Empower Tel Networks, Inc. Ubicom, Inc. Global Test Corp. Chip Strate Ritch Tech APE Fu Ding Technology (Forward) - - - - - - - - - - - - - Short-term investment Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 297 3,413 15 1,668 30 542 133 317 861 Long-term investment 13,268 Long-term investment Long-term investment Long-term investment 6,660 1,023 2,750 US$520 US$3,350 US$472 US$1,643 US$3 US$135 US$90 US$344 US$172 US$5,672 US$2,142 US$326 US$1,518 - - - - - - - - - - - - - - US$8,726 US$1,236 US$123,797 US$519 US$672 US$3 US$135 US$90 US$344 US$172 US$10,126 US$2,073 US$1,743 US$1,336 T S M C A n n u a l R e p o r t 2 0 0 1 171 Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: InveStar Semiconductor Development Fund Inc. Preferred stock Integrated Memory Logic, Inc. Divio (Next wave) SiRF Technology Inc. Rise Capella Microsystems, Inc. Sensory, Inc. Equator Technologies, Inc. Light Speed Semiconductor Corporation Empower Tel Networks, Inc. Ubicom, Inc. RapidStream Tropian, Inc. Sonics, Inc. Pico Turbo, Inc. Atheros, Inc. NanoAmp Solutions, Inc. Formfactor, Inc. Monolithic Power Systems, Inc. Memsic, Inc. Reflectivity, Inc. Signia Match Lab, Inc. HINT Corporation Creosys, Inc. Incentia Design Systems, Inc. Bond Rise - - - - - - - - - - - - - - - - - - - - - - - - - - Long-term investment 1,831 Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 667 306 600 1,383 1,404 443 2,252 3,840 1,056 2,056 1,758 3,082 1,050 1,607 541 267 2,521 2,727 1,064 3,000 1,875 1,000 1,500 286 US$1,809 US$500 US$1,333 US$1,500 US$1,298 US$1,250 US$1,338 US$3,064 US$5,128 US$1,361 US$1,050 US$2,334 US$3,082 US$1,250 US$3,593 US$853 US$2,000 US$2,000 US$1,500 US$2,000 US$1,500 US$1,500 US$1,000 US$1,500 US$500 Long-term investment - US$300 Held Company Name: InveStar Semiconductor Development Fund (II) Inc. Stock HPL Aquisition Corporation Richtek Technology Corporation Chang Yi Technology Preferred stock Procoat Technology Omega Band, Inc. Memsic, Inc. OEpic, Inc. Equator Technologies, Inc. NanoAmp Solutions, Inc. RapidStream, Inc. Signia Technologies, Inc. (Forward) 172 T S M C A n n u a l R e p o r t 2 0 0 1 - - - - - - - - - - - Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 187 480 487 2,500 1,389 2,289 2,696 770 250 246 500 US$1,124 US$1,001 US$139 US$869 US$1,250 US$1,560 US$2,500 US$1,501 US$1,000 US$1,057 US$750 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - US$3,055 US$2,233 US$1,858 US$1,500 US$1,660 US$857 US$864 US$764 US$14,296 US$2,433 US$7,286 US$2,388 US$3,082 US$1,300 US$9,025 US$1,900 US$3,600 US$4,938 US$2,894 US$2,000 US$3,900 US$1,500 US$1,000 US$1,500 US$500 US$300 US$2,669 US$987 US$139 US$857 US$1,250 US$2,489 US$3,023 US$1,501 US$1,000 US$1,057 US$750 Marketable Securities Type and Name Relationship with the Company Financial Statement Account December 31, 2001 Note Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Held Company Name: InveStar Semiconductor Development Fund (II) Inc. Advanced Analogic Technology, Inc. Y-MEDIA Corporation Monlithic Power Systems, Inc. Ralink Technology, Inc. Sonics, Inc. Newport Opticom, Inc. Silicon Data, Inc. Capella Microsystems, Inc. Angstron Systems, Inc. Tropain, Inc. SIRF Technology, Inc. Match Lab, Inc. OEpic, Inc. Bond Omega Band, Inc. Pico Turbo, Inc. Held Company Name: Emerging Alliance Fund Stock - - - - - - - - - - - - - - - Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 948 281 674 1,833 3,082 1,157 500 800 1,567 1,464 20 313 - N/A N/A US$1,261 US$1,500 US$1,515 US$1,500 US$3,082 US$1,204 US$250 US$1,000 US$750 US$2,000 US$131 US$250 US$- US$192 US$295 Global Investment Holding Inc. Investee Long-term investment 10,000 $100,000 Preferred stock Quake Technologies, Inc. Pixim, Inc. Newport Opticom, Inc. NetLogic Microsystems, Inc. Quickilver Technology, Inc. Ikanos Communication, Inc. Litchfield Communications - - - - - - - Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 467 833 962 602 3,320 1,741 3,799 US$1,000 US$2,500 US$1,000 US$1,850 US$3,500 US$1,500 US$1,000 - - - - - - - - - - - - - - - 6 1 3 6 1 29 3 6 US$1,261 US$1,500 US$1,515 US$1,767 US$3,082 US$1,204 US$250 US$1,000 US$750 US$2,000 US$131 US$250 US$- US$192 US$295 $100,000 US$1,000 US$2,500 US$1,000 US$1,850 US$3,500 US$1,500 US$1,000 T S M C A n n u a l R e p o r t 2 0 0 1 173 Marketable Securities Type and Name Financial Statement Account Company Name: TSMC Stock Emerging Alliance Fund Long-term investment Systems on Silicon Manufacturing Company (SSMC) Taiwan Semiconductor Technology Long-term investment Amkor Technology Amkor Technology Long-term investment Amkor Technology Company Name: Emerging Alliance Fund Stock Global Investment holding, Inc. Long-term investment Global Ivestment holding,Inc. Convertible Commercial Paper VM Labs, Inc. Long-term investment VM Labs, Inc. TABLE 4 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID- IN CAPITAL For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Counter- Party Nature of Relationship Beginning Balance Acquisition Disposal Ending Balance Shares (Thousand) Amount Shares (Thousand) Amount (US$ in Thousand) Shares (Thousand) Amount Carrying Gain (Loss) on Disposal Value Shares (Thousand) Amount (US$ in Thousand) (Note 1) Subsidiary - $- - $837,045 Emerging Alliance Fund Long-term investment SSMC Investee 90 935,870 211 3,553,862 - - $- - $- - $- - - $741,617 301 2,907,967 - - - - 50,000 500,000 - - 50,000 395,748 (Note2) 500,000 (104,252) - - - - - - - - 505 280,748 10,000 100,000 - - - - - - - - 505 280,748 10,000 100,000 - US$4,000 - US$1,000 US$4,000 (US$3,000) - - Company Name: VIS Stock VIS Associates Inc. Long-term investment Subsidiary - 23,750 464,077 17,500 597,783 - - - - 41,070 902,999 Bond Fund Qiung Ban THE TP ROC Yuan Da Duo Li #2 NITC FUBON JU-I (Forward) Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment - - - - - - - - - - 174 T S M C A n n u a l R e p o r t 2 0 0 1 - - - - - - - - - - 35,548 500,000 7,139 100,263 100,000 263 28,409 400,000 40,874 550,000 14,951 201,482 200,000 1,482 25,923 350,000 49,017 650,000 22,739 302,698 300,000 2,698 26,278 350,000 2,048 300,000 2,048 302,386 300,000 2,386 31,397 450,000 31,397 452,789 450,000 2,789 - - - - Marketable Securities Type and Name Financial Statement Account Counter- Party Nature of Relationship Beginning Balance Acquisition Disposal Ending Balance Shares (Thousand) Amount Shares (Thousand) Amount (US$ in Thousand) Shares (Thousand) Amount Carrying Gain (Loss) on Disposal Value Shares (Thousand) Amount (US$ in Thousand) (Note 1) Capital Save Income Home Run Short-term investment Short-term investment - - Company Name: VIS Associates Inc. ABN AMRO Bank Equity Certificates Short-term investment - - - - - - - - - - 15,295 200,000 15,295 201,139 200,000 1,139 51,811 650,000 51,811 656,159 650,000 6,159 - - - - 223,168 US$10,047 - - - - 23,168 US$10,047 Company Name: InveStar Semiconductor Development Fund. Inc. Stocks Centillium Tec. Corp Marvell Technology Group Ltd. Short-term investment Short-term investment Preferred Stocks Lara Networks, Inc. Short-term investment - - - - - - Company Name: InveStar Semiconductor Development Fund (II) Inc. 165 US$660 4,665 US$4,579 1,544 US$772 - - - - - - 165 US$7,474 US$660 US$6,814 - - 1,252 US$38,094 US$1,229 US$36,865 3,413 US$3,350 1,544 US$8,170 US$772 US$7,398 - - Sonic, Inc. Long-term investment - - - - 3,082 US$3,082 - - - - 3,082 US$3,082 Note 1: The ending balance included the equity in net income (net loss) recognized by the equity method and the accumulated translation adjustment. Note 2: Disposal price included $115,000 in cash and the 505 thousand shares of Amkor Technology. The market value for the shares of Amkor Technology on the disposal day worth $280,748. TABLE 5 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION ACQUISITION OF INDIVIDUAL REAL ESTATES AT COSTS OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Property Transaction Date Transaction Amount Payment Term Counter-Party Nature of Relationship Prior Transaction of Related Counter-party Price Reference Owner Relationship Transfer Date Amount Purpose of Acquisition Other Terms TSMC Fab 12 and office Jan. 10, 2001 $345,000 Depend on the progress of the construction China Construction Co, Ltd. Jan. 29, 2001 476,200 Fu Tsu . Depend on the progress of the Construction construction Co, Ltd - - N/A N/A N/A N/A Public bidding Manufacturing None purpose N/A N/A N/A N/A Public bidding Manufacturing None purpose T S M C A n n u a l R e p o r t 2 0 0 1 175 TABLE 6 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION TOTAL PURCHASE FROM OR SALE TO RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL For the Year Ended December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Related Party Nature of Relationship Transaction Details Abnormal Transaction Note/Accounts Payable or Receivable Note Purchase/Sale Amount % to Total* Payment Terms Unit Price Payment Terms Ending Balance % to Total Company Name: TSMC Phillips and its affiliates VIS ITRI WAFERTECH, LLC Major shareholder Sales $2,389,257 Investee Sales 1,177,094 The chairman of TSMC is a director of ITRI Indirect investee of a subsidiary (TSMC-BVI) Sales 114,546 Purchase 6,797,817 VIS Investee Purchase 3,801,975 2 1 - 37 22 Net 30 days from invoice date Net 45 days from monthly closing date Net 45 days from monthly closing date Net 30 days from monthly closing date Net 45 days from monthly closing date None None $116,499 None None 320,179 None None 37,383 None None (817,616) None None (548,472) 22 61 7 39 26 *Percentage for sales is of gross sales and percentage for purchase is of the total purchases of material and finished goods. TABLE 7 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Related Party Nature of Relationship Ending Balance Turnover Rate Overdue Amounts Received Allowance for Amount Action Taken in Subsequent Period Bad Debts Company Name: TSMC VIS Investee $320,179 N/A $52,668 Accelerate demand on account receivables Phillips and its affiliates Major shareholder 116,499 58 days 20,820 Accelerate demand on account receivables $92,345 80,559 - - 176 T S M C A n n u a l R e p o r t 2 0 0 1 TABLE 8 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE December 31, 2001 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2001 Dec. 31, 2001 Dec. 31, 2000 Shares (Thousand) Percentage of Carrying Value Ownership Net Income (Loss) of the Investee Investment Gain (Loss) Note Investor Company: TSMC TSMC - North America San Jose, California, U.S.A Marketing and engineering support $333,718 $333,718 11,000 TSMC - Europe Amsterdam, The Netherlands Marketing and engineering support 2,960 2,960 TSMC - Japan Yokohama, Japan VIS Hsin-Chu, Taiwan Marketing and engineering support IC design and manufacturing 83,760 35,142 100 100 100 $786,062 $4,560 $4,560 Subsidiary 10,147 420 420 Subsidiary 80,156 (183) (183) Subsidiary - 6 6,503,640 6,503,640 556,133 25 3,377,526 (8,692,423) (2,236,940) Investee TSMC - BVI Tortola, British Virgin Islands Investment 24,165,780 24,159,958 779,968 100 19,987,814 (4,855,844) (4,855,844) Subsidiary Po Cherng Investment Taipei, Taiwan Investment Chi Hsin Investment Taipei, Taiwan Investment Kung Cherng Investment Taipei, Taiwan Investment Chi Cherng Investment Taipei, Taiwan Investment Hsin Ruey Investment Taipei, Taiwan Investment Cherng Huei Investment Taipei, Taiwan Investment TSMC Partners Tortola, British Virgin Islands Investment 100,000 100,000 100,000 100,000 100,000 100,000 10,350 100,000 100,000 100,000 100,000 100,000 100,000 10,350 SSMC Singapore Wafer manufacturing 4,986,344 1,432,482 Emerging Alliance Fund Cayman Islands Investment 837,045 - - - - - - - 300 301 - 25 25 25 25 25 25 164,724 158,252 177,812 156,694 157,352 166,639 110,960 27,740 Investee 77,008 76,241 103,603 117,006 113,755 19,252 Investee 19,060 Investee 25,901 Investee 29,251 Investee 28,439 Investee 100 3,032,377 2,357,405 2,357,405 Subsidiary 32 99 2,907,967 (5,381,499) (1,722,080) Investee 741,617 (127,249) (126,612) Subsidiary T S M C A n n u a l R e p o r t 2 0 0 1 177 2. Internal Control System Execution Status 2-1 Statement of Internal Control Taiwan Semiconductor Manufacturing Company Limited Statement of Internal Control (Translation) TSMC has conducted a self-assessment of internal controls for the period of January 1, 2001 to December 31, 2001 based on TSMC's internal control system. The results are as follows: Date: February 8, 2002 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, i.e. (i) efficient and effective operations (including profit, efficiency and the safeguard of assets, etc.), (ii) reliability of financial reports, and (iii) 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, 2001 to December 31, 2001 is effective and provide a reasonable assurance of achieving the abovementioned goals. 6. This Statement of Internal Control will be a prominent feature of TSMC's annual report and prospectus, and will be released to the public. Should any statement herein involve forgery, concealment or any other illegality, Articles 20, 32, 171 and 174 of the Security Transaction Law shall apply. 7. This Statement of Internal Control has been approved by TSMC's Board of Directors at the meeting of February 8, 2002 with 7 directors present at the meeting and 0 director disagreeing with this Statement of Internal Control. Morris Chang Rick Tsai Chairman of the Board & CEO President & COO Taiwan Semiconductor Manufacturing Company Limited 178 T S M C A n n u a l R e p o r t 2 0 0 1 2-2 Under specified circumstances, Securities & Futures Commission may request the Company to engage CPA to examine the Company's internal control system and disclose the CPA's audit report: Not Applicable 3. Major contents of record or written statements made by any director or supervisor which specified his/her dissent to important resolutions passed by the Board of Directors during 2001 or the period from January 1, 2002 to February 28, 2002: None 4. Private Placement Securities: Not Applicable 5. Balance of TSMC Common Shares/ ADR acquired, disposed of and held by subsidiaries Name of Paid-in Fund Percentage Transaction Acquisition Disposal Subsidiary Capital Source of Ownership Date No. of Shares Amount No. of Shares Amount As of 02/28/2002 Unit: NT$K; Share; % Investment Balance as of 02/28/2002 Income No. of Shares (Loss) Amount Balance of Balance of Balance of Pledged Guarantee Financing Shares Provided by Provided by TSMC TSMC Kung Cherng 400,000 Retained 25% Year 2001 1,930,934 Investment Co., Ltd. earnings Year 2002 - Chi Cherng 400,000 Retained 25% Year 2001 863,808 Investment Co., Ltd. earnings Year 2002 - Chi Hsin 400,000 Retained 25% Year 2001 1,017,504 Investment Co., Ltd. earnings Year 2002 - Po Cherng 400,000 Retained 25% Year 2001 1,525,715 Investment Co., Ltd. earnings Year 2002 - Cherng Huei 400,000 Retained 25% Year 2001 1,719,056 Investment Co., Ltd. earnings Year 2002 - Hsin Ruey 400,000 Retained 25% Year 2001 402,048 Investment Co., Ltd. earnings Year 2002 - TSMC US$300 Retained 100% Year 2001 197,886 Partners, Ltd. earnings Year 2002 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6,758,269 226,819 6,758,269 226,819 3,023,328 98,282 3,023,328 98,282 3,561,264 138,747 3,561,264 138,747 1,100,000 94,084 45,442 4,240,004 187,508 300,000 26,706 13,440 3,940,004 174,242 1,100,000 94,084 49,589 4,916,696 198,896 300,000 26,706 14,571 4,616,696 186,761 - - - - - - - - - - - - 1,407,168 98,996 1,407,168 98,996 692,601 US$7,357 692,601 US$7,357 - - - - - - - - - - - - - - - - - - - - - 6. Other Necessary Supplement Any Events in 2001 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 T S M C A n n u a l R e p o r t 2 0 0 1 179 180 T S M C A n n u a l R e p o r t 2 0 0 1 US GAAP FINANCIAL INFORMATION Please be advised that our 2001 full annual report that includes complete US GAAP reconciled financial statements and footnotes will be available when we file Form 20-F with the SEC. Our Form 20-F, or our 2001 full annual report, can be found at the SEC and on TSMC's website no later than June 30, 2002. T S M C A n n u a l R e p o r t 2 0 0 1 181 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 (In Thousand New Taiwan Dollars) ASSETS CURRENT ASSETS Cash and cash equivalents Short-term investments Receivable from related parties Notes receivable Accounts receivable Allowance for doubtful receivables Allowance for sales returns and others Inventories - net Deferred income tax assets Prepaid expenses and other current assets Total Current Assets 2001 Amount 2000 Amount $37,556,295 $38,840,217 1,398,071 494,732 176,582 19,957,636 (1,100,492) (2,581,551) 9,828,328 2,350,147 2,721,421 1,502,098 948,726 125,175 30,335,314 (946,734) (2,458,323) 12,785,723 8,178,016 3,034,624 70,801,169 92,344,836 LONG-TERM INVESTMENTS 11,599,150 10,663,804 PROPERTY, PLANT AND EQUIPMENT 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 877,371 829,239 60,523,505 53,874,708 280,023,690 241,995,862 6,062,496 4,865,610 347,487,062 301,565,419 (155,948,960) (103,884,879) 59,749,530 47,067,352 251,287,632 244,747,892 CONSOLIDATED DEBITS 11,437,572 11,530,973 OTHER ASSETS Deferred income tax assets Deferred charges - net Refundable deposits Assets leased to others Miscellaneous Total Other Assets 16,245,828 3,769,750 784,089 555,053 37,452 6,629,805 3,335,665 979,067 625,647 28,290 21,392,172 11,598,474 TOTAL ASSETS UNDER R.O.C. GAAP $366,517,695 $370,885,979 (Forward) 182 T S M C A n n u a l R e p o r t 2 0 0 1 U.S. GAAP Adjustments : - Restatement of marketable securities to market - trading - Technology transfer in payment of capital stock - Goodwill - Effect of U.S. GAAP adjustments on deferred income tax - Effects of the adjustments on equity investments - Unrealized gain on long-term investments - TSMC - Investee - Impairment loss - Depreciation - Treasury stock TOTAL ASSETS UNDER U.S. GAAP 2001 2000 3,936,191 (103,500) 3,304,949 (157,500) 36,026,327 46,817,264 (2,639) (1,476,433) 168,926 499,302 (2,513) (842,477) 40,183 (14,063) (10,916,070) (10,916,070) 1,455,476 (2,115,695) 27,471,885 - (1,285,762) 36,944,011 $393,989,580 $407,829,990 T S M C A n n u a l R e p o r t 2 0 0 1 183 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 (In Thousand New Taiwan Dollars) LIABILITIES CURRENT LIABILITIES Short-term bank loans Payable to related parties Accounts payable Payable to contractors and equipment suppliers Income tax payable Current portion of bonds Accrued expenses and other current liabilities Total Current Liabilities LONG-TERM LIABILITIES Long-term bank loans Bonds - net of current portion Total Long-term Liabilities OTHER LIABILITIES Guarantee deposits Accrued pension cost Deferred gain on sale-leaseback Miscellaneous Total Other Liabilities 2001 Amount 2000 Amount $6,269,181 $3,833,841 1,048,273 1,397,879 2,606,339 8,507,827 12,867,236 25,550,273 81,483 5,000,000 6,665,000 33,329,052 3,298 - 6,923,414 47,424,992 22,399,360 24,000,000 46,399,360 23,339,367 29,000,000 52,339,367 7,212,688 1,856,617 268,165 141,498 9,478,968 7,086,379 1,511,277 434,183 14,356 9,046,195 MINORITY INTEREST IN SUBSIDIARIES 120,240 321,726 TOTAL LIABILITIES UNDER R.O.C. GAAP $89,327,620 $109,132,280 U.S. GAAP Adjustments - Bonuses to employees, directors and supervisors - Derivative financial instruments - Pension expenses 1,201,437 962,215 48,360 2,212,012 5,258,730 443,838 49,079 5,751,647 TOTAL LIABILITIES UNDER U.S. GAAP $91,539,632 $114,883,927 Mandatorily redeemable preferred stock $13,000,000 $13,000,000 184 T S M C A n n u a l R e p o r t 2 0 0 1 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 (In Thousand New Taiwan Dollars, Except Par Value) SHAREHOLDERS' EQUITY Capital stock - $10 par value 2001 Amount 2000 Amount Authorized: 17,800,000 thousand shares in 2000 and 24,600,000 thousand shares in 2001 Issued: Preferred - 1,300,000 thousand shares $13,000,000 $13,000,000 Common -11,689,365 thousand shares in 2000 and 16,832,554 thousand shares in 2001 Capital surplus Retained earnings: Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Cumulative translation adjustments Unrealized loss on long-term investments 168,325,531 116,893,646 57,128,433 55,285,821 17,180,067 349,941 19,977,402 1,228,701 - 10,689,323 1,091,003 65,143,847 (278,377) (71,564) TOTAL SHAREHOLDERS' EQUITY UNDER R.O.C. GAAP $277,190,075 $261,753,699 U.S. GAAP Adjustments - Bonuses to employees, directors and supervisors - Pension expenses - Restatement of marketable securities to market - Trading - Available-for-sale - Technology transfer in payment of capital stock - Effects of the adjustments on equity investments - Unrealized gain on long-term investment from an investee - Impairment loss - Depreciation - Treasury stock - Goodwill - Derivative financial instruments - Mandatorily redeemable preferred stock - Effect of U.S. GAAP adjustments on deferred income tax TOTAL SHAREHOLDERS' EQUITY UNDER U.S. GAAP (1,201,437) (5,258,730) (48,360) (49,079) 3,936,191 168,926 (103,500) (1,476,433) 499,302 3,304,949 40,183 (157,500) (842,477) (14,063) (10,916,070) (10,916,070) 1,455,476 (2,115,695) 36,026,327 (962,215) - (1,285,762) 46,817,264 (443,838) (13,000,000) (13,000,000) (2,639) (2,513) 12,259,873 18,192,364 $289,449,948 $279,946,063 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY UNDER U.S. GAAP $393,989,580 $407,829,990 T S M C A n n u a l R e p o r t 2 0 0 1 185 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2001 and 2000 (In Thousand New Taiwan Dollars) GROSS SALES 2001 Amount 2000 Amount $128,560,708 $169,192,312 SALES RETURNS AND ALLOWANCES (2,675,816) (2,994,708) NET SALES COST OF SALES GROSS PROFIT OPERATING EXPENSES Research and development General and administrative Marketing Total Operating Expenses 125,884,892 166,197,604 92,228,098 87,609,670 33,656,794 78,587,934 10,649,019 7,939,839 2,290,139 7,203,591 7,408,121 2,681,534 20,878,997 17,293,246 INCOME FROM OPERATIONS 12,777,797 61,294,688 NON-OPERATING INCOME Gain on sales of short-term investments- net Interest Royalty income Insurance compensation - net Premium income - net Gain on sales of long-term investments - net Technical service income Gain on sales of property, plant and equipment Foreign exchange gain - net Other Total Non-Operating Income NON-OPERATING EXPENSES Equity in net losses of investee companies - net Interest Foreign exchange loss - net Loss on sales of and provision for loss on property, plant and equipment Amortization of issuance costs of bonds Other Total Non-Operating Expenses 186 T S M C A n n u a l R e p o r t 2 0 0 1 1,619,062 1,486,656 1,301,606 860,835 234,732 105,439 55,077 52,376 - 759,793 6,475,576 3,959,020 3,144,042 695,620 235,629 12,504 420,053 8,466,868 1,060,919 1,679,736 524,194 1,623,832 8,115 15,144 138,514 62,921 828,025 178,403 6,119,803 187,179 2,717,035 - 114,768 32,658 461,327 3,512,967 INCOME BEFORE INCOME TAX 2001 2000 10,786,505 63,901,524 INCOME TAX BENEFIT 3,740,678 1,167,884 INCOME BEFORE MINORITY INTEREST 14,527,183 65,069,408 MINORITY INTEREST IN LOSS (INCOME) OF SUBSIDIARIES (44,009) 36,786 NET INCOME UNDER R.O.C. GAAP $14,483,174 $65,106,194 U.S. GAAP Adjustments - Pension expenses - Restatement of marketable securities to fair value - trading - Bonus to employees - Accrual - Adjustment to fair market value - Income (loss) from equity investments - Impairment loss - Depreciation - Gain on sales of treasury stock - Derivative financial instruments - Amortization of goodwill - Technology transfer in payment of capital stock - Amortization of compensation expense - U.S. GAAP income tax adjustment NET INCOME UNDER U.S. GAAP 719 587,401 21,366 2,092,506 (1,201,437) (5,258,730) (25,208,512) (23,290,096) (633,955) 135,849 - (10,916,070) 1,455,476 (95,031) (518,377) - (230,054) (434,145) (10,790,937) (5,395,468) 54,000 (107,500) (126) (36,458,279) ($21,975,105) 54,000 (143,333) (1,677) (43,365,852) $21,740,342 T S M C A n n u a l R e p o r t 2 0 0 1 187 

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