TSMC
Annual Report 2002

Plain-text annual report

i T a w a n S e m i c o n d u c t o r M a n u f a c t u r i n g C o m p a n y , L t d . A n n u a l R e p o r t 2 0 0 2 121, 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 http://www.tsmc.com Taiwan Semiconductor Manufacturing Company, Ltd. Morris Chang, Chairman TSE: 2330 NYSE: TSM Taiwan Semiconductor Manufacturing Company, Ltd. Annual Report 2002 (cid:127) Taiwan Stock Exchange Market Observation Post System: http://mops.tse.com.tw (cid:127) TSMC annual report is available at http://www.tsmc.com/english/tsmcinfo/c0203.htm Printed on March 12, 2003 TSMC SPOKESPERSON Name: Harvey Chang Title: Senior Vice President & CFO Tel: 886-3-563-6688 Fax: 886-3-563-7000 Email: spokesperson@tsmc.com.tw Acting Spokesperson Name: J.H. Tzeng Title: Public Relations Department Manager Tel: 886-3-563-6688 Fax: 886-3-567-0121 Email: jhtzeng@tsmc.com.tw AUDITORS Company: T N SOONG & CO Auditors: S. C. Huang, Edward Way Address: 12F, 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.tns.com.tw STOCK TITLE TRANSFER Company: China Trust Commercial Bank Transfer Agency Department Address: 5F, 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 DEPOSITARY BANK (ADR) Company: Citibank, N.A. Depositary Receipts Services Address: 111 Wall Street New York, NY10005, U.S.A. Website: http://www.citibank.com/adr ADR Shareholder Information Toll Free: 1-877-248-4237 Outside USA: 1-816-843-4281 Email: citibank@em.fcnbd.com TSMC's depositary receipts of the common shares are listed on New York Exchange (NYSE) under the symbol TSM. The information relating to TSM is available at http://www.nyse.com and http://mops.tse.com.tw TSMC WEBSITE: http://www.tsmc.com MAJOR FACILITIES Corporate Headquarters & FAB 2, FAB 5 121, 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 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 1, Nan-Ke North Rd. Science-Based Industrial Park Shan-Hwa, Tainan, Taiwan 741-44, R.O.C. Tel: 886-6-505-2000 Fax: 886-6-505-2057 FAB 7 6, Creation Rd. 2 Science-Based Industrial Park Hsin-Chu, Taiwan 300-77, R.O.C. Tel: 886-3-578-5112 Fax: 886-3-577-3628 FAB 8 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 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 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 3 7 7 8 9 18 22 23 24 26 26 26 30 32 32 34 34 35 36 38 39 39 40 41 41 43 43 43 44 44 44 47 47 47 48 51 52 52 53 54 55 56 56 56 57 103 154 161 162 162 166 214 215 215 215 216 216 216 LETTER TO THE SHAREHOLDERS A BRIEF INTRODUCTION TO TSMC Company Profile Market Overview Organization Capital & Shares Issuance of Corporate Bonds Preferred Shares Issuance of American Depositary Shares Status of Employee Stock Option Plan (ESOP) Status of Mergers and Acquisitions Corporate Governance Social Responsibility Information OPERATIONAL HIGHLIGHTS Business Activities Customers Raw Material Supply Employees Innovation Efficiency Quality Environmental Protection & Expenditures Important Contracts Litigation Proceedings Acquisition or Disposal of Property, Plant and Equipment FINANCING PLANS AND IMPLEMENTATION Preferred A Shares Corporate Bond FINANCIAL STATUS, OPERATING RESULTS, AND RISK MANAGEMENT Financial Position Operating Results Cash Flow Major Capital Expenditure Long-Term Investment Risk Management FINANCIAL INFORMATION Condensed Balance Sheet Condensed Statement of Income Financial Analysis Condensed Interim Balance Sheet by Quarter Condensed Interim Statement of Income by Quarter Auditors' Opinions Supervisors' Report Financial Difficulties Financial Statements & Independent Auditors' Report Consolidated Financial Statements & Independent Auditors' Report US GAAP Financial Information Financial Forecast and Operation Results from 2001 to 2002 SPECIAL NOTES Affiliates Information Combined Financial Statements & Independent Accountants' Report Internal Control System Execution Status Major Issues on Record or Written Statements made by Any Director or Supervisor which Specified his/her Dissent to Important Resolutions Passed by the Board of Directors Private Placement Securities Balance of TSMC Common Shares/ADR Acquired, Disposed of and Held by Subsidiaries Major Decisions of Shareholder Meetings and Board Meetings Legal Penalties Other Necessary Supplement LETTER TO THE SHAREHOLDERS Dear Shareholders, TSMC ("the Company") achieved financial results in 2002 better than those obtained by most semiconductor companies. TSMC also gained market share and continued technology leadership. We are pleased to report on these achievements below in detail: Financial Results TSMC closed its 2002 books with revenue of NT$160,961 million and net income after tax of NT$21,610 million. Earnings per share (EPS) for the year 2002 was NT$1.14 on a fully diluted basis. Compared with one year ago, these results represent a 27.9% growth rate in net sales, 49.2% growth rate in net income after tax, and 52% growth rate in EPS. Marketing & Sales TSMC has gained market share in the dedicated foundry segment of the semiconductor manufacturing sector continuously since 2000. By the estimates of IC Insights, TSMC's market share of the foundry segment reached 56% in 2002, after 53% in 2001, and 49% in 2000. TSMC had active business dealings with more than 200 customers in the past year. Technology Advancement TSMC kept its technology development at the forefront of the semiconductor industry in 2002. TSMC's 0.13um process technology is in volume production with high yields. The Company also implemented 90 nanometer process technology in a 300 mm facility (Fab 12) with the successful production of 8M SRAM with good yield. Other R&D accomplishments worthy of note include: silicon germanium (SiGe) RF BiCMOS process, 0.18 um CMOS Image Sensor Process, and 0.13um Embedded Memory technology. Exploratory research currently undertaken by TSMC includes: FinFET transistors; strained silicon and silicon-on-insulator (SOI) application; and Magnetic RAM (MRAM). TSMC 2 Annual Report 2002 TSMC 3 Annual Report 2002 2003 Production Plan* Quantity: thousand pcs 8-inch wafer 795 676 675 482 430 Capacity and Capital Expenditures .Acknowledgement TSMC production capacity, expressed in the unit of 8-inch equivalent wafers, was 3.9 million wafers in 2002. Thirty-six percent of the production capacity was capable of advanced technologies (e.g. 0.18um, 0.15um and 0.13um). This is an improvement over 2001 when the advanced technology capacity represented only 22% of the annual production capacity of 4.4 million wafers. Capital expenditure in 2002 amounted to approximately NT$54.4 billion (equivalent to US$1.6 billion), 20% lower than a year ago. The majority of the expenditure was for the ramp up of Fab 12 We would like to extend our deepest appreciation to our customers, shareholders, and employees for their continued support and dedication. We close this letter with sincere wishes for your good health and prosperity in 2003. 221 242 production capacity and infrastructure development for new 300mm fabs. With Fab 12 (Phase I) in commercial production, and Fab 14 (Phase I) ready for equipment installation, TSMC should be able to ramp up production capacity promptly along with market demand. Fab 2 Fab 3 Fab 5 Fab 6 Fab 7 Fab 8 Fab 12 * TSMC only: 3,521 thousand pcs 8-inch wafers Total TSMC managed capacity: 4,363 thousand pcs 8-inch wafers including WaferTech, VIS, and SSMC 2003 Sales Plan by Technology Quantity: thousand pcs 8-inch wafer >=0.50 um 18% 0.35 um 12% 0.25 um 21% 0.18 um 22% 0.15 um 13% <=0.13 um 14% TSMC 4 Annual Report 2002 Recognition & Awards TSMC's superior performance continues to attract recognition and credit from around the world. Among the numerous media surveys conducted in 2002 (e.g. Asiamoney, Euromoney, FinanceAsia, IR Magazine, CommonWealth Magazine, etc), TSMC continued to stand out as a corporate role model. The awards that TSMC received in 2002 covered areas ranging from overall management, financial management, investor relationship, quality management, to social responsibility. TSMC also received the Corporate Innovation Award from IEEE in June 2002. Outlook We are confident that the world semiconductor industry continues to be one of the higher growth industries. TSMC believes that the world semiconductor industry will register a moderate growth rate in 2003 over 2002. We believe that the foundry segment is likely to report a higher growth rate than that of the industry as a whole. TSMC subscribes to the view that the value of foundry output could account for about 30% world IC markets by 2010; up from 16% in 2001. Morris Chang, Chairman and CEO F.C. Tseng, Deputy CEO Rick Tsai, President and COO Rick Tsai, President and COO Morris Chang, Chairman and CEO F.C. Tseng, Deputy CEO TSMC 5 Annual Report 2002 A BRIEF INTRODUCTION TO TSMC 1. Company Profile TSMC was founded on February 21, 1987 at Hsinchu Science-Based Industrial Park, Taiwan. The common shares of TSMC are listed on Taiwan Stock Exchange (TSE); the depositary receipts of the common shares are listed on New York Stock Exchange (NYSE) under the symbol TSM. The establishment of a dedicated integrated circuit (IC) foundry by TSMC was the first of its kind in the world. TSMC remains the world's largest dedicated IC foundry to this day. TSMC's charter prevents it from designing, manufacturing, or marketing IC products under its own brand name. This makes TSMC a desirable partner, free from potential conflict of business with its customers. TSMC operates one 6-inch wafer fab (Fab 2), five 8-inch wafer fabs (Fab 3, 5, 6, 7, and 8), and two 12-inch fabs (Fab 12 and 14). The Company also has capacity commitments in its subsidiary WaferTech in the United States, its affiliate Vanguard International Semiconductor Corporation (VIS) in Taiwan, and a joint venture (with Philips Semiconductor) under the name of Systems on Silicon Manufacturing Company (SSMC) in Singapore. The total installed annual capacity of TSMC and affiliates amounted to 3.9 million 8-inch equivalent wafers by the end of 2002. TSMC views its role as a responsible corporate citizen seriously. The Company is committed to community service and maintaining strong stakeholder relationships. TSMC's Board of Directors (the "Board") is comprised of experienced businessmen and distinguished scholars. The Board upholds the financial integrity and management soundness of TSMC. Sir Peter Bonfield (formerly CEO and Chairman of Executive Committee, British Telecommunications) and Professor Lester Thurow of M.I.T., joined TSMC as independent directors in 2002. In addition, Professor Michael Porter became a Supervisor. An Audit Committee was established to oversee the integrity of TSMC's financial and audit systems. 1.1 Core Values Integrity- Integrity is a fundamental value of the Company. This commitment to integrity can best be illustrated by our strong corporate governance efforts as well as the demand of honesty and uprightness for all TSMC employees. Customer Orientation- TSMC believes that superior customer service has been what distinguished the Company from its peers in the dedicated IC foundry segment of the semiconductor industry. All in all, TSMC believes that premium service results in premium return to shareholders. Innovation- TSMC believes in the potential and capability in everyone to innovate. Future emphasis will be to apply the spirit of innovation to every aspect of the Company's business, from the way we think to the way we act. Commitment- TSMC believes that commitment is the driving force that makes things happen. TSMC asks its entire staff their personal commitments to their jobs and to the Company. TSMC believes that the welfare of the employees is best served when the welfare of the Company is duly taken care of. 1.2 Statement of Company Vision Our vision is to be the most advanced, innovative and largest provider of foundry services, and in partnership with our customers, to forge a most powerful force in the semiconductor industry. To realize our vision, we must be: (1) a technology leader, competitive with industry leaders, (2) the manufacturing leader, (3) the most reputable and service-oriented; and the greatest total-benefits provider. TSMC 6 Annual Report 2002 TSMC 7 Annual Report 2002 1.3 Corporate Recognition The awards that honored TSMC in 2002 include: • Most Popular Company in Taiwan (Global Views Monthly, June 2002); • Most Admired Company in Taiwan (CommonWealth Magazine, October 2002- for the sixth consecutive year); • Best Taiwan Company (Euromoney, December 2002); • Best Managed Company & Best Investor Relations (Asiamoney, December 2002); and • Corporate Innovation Award (IEEE, June 2002). 2. Market Overview 2.1 TSMC Achievements TSMC not only maintained its leading position but also gained market share in the dedicated foundry segment of the semiconductor industry in 2002. The Company further solidified its leadership in manufacturing processes for geometries of 0.18um-and-below. In addition, TSMC embarked on a number of programs to introduce new technologies in anticipation of the upcoming System-on-a-Chip (SoC) era. 2.2 Market Analysis IC foundry is a manufacturing sub-segment of the IC industry. The total revenue of the dedicated IC foundry segment amounted to US$8.4 billion in 2002, up 20% from a year ago. According to IC Insights, an IC market research company, the largest geographic segment of the dedicated foundry market is the North America market; 63% of the dedicated foundry revenue came from companies based in North America in 2002. The second largest market segment is the Asia Pacific market. The companies based in this region accounted for 23% of the dedicated foundry revenue in 2002. This percentage is followed by 9% revenue contribution from companies based in Europe, and 5% revenue contribution from companies based in Japan. IC Insights estimated that in 2002, TSMC had a 56% market share of the dedicated foundry segment of the semiconductor industry. 2.3 Industry Growth Forecast TSMC believes that the semiconductor industry will grow at a rate of about 8-10% in the coming decade. We expect that the dedicated foundry segment will grow at a higher rate. The business associated with the faster growth fabless segment, when combined with the IDM outsourcing trend, are expected to generate a stronger business demand for dedicated foundries than that of the industry average. 2.4 Foundry Market Outlook: Opportunities and Threats TSMC believes that foundry services will play an increasingly important role in the IC industry as the industry continues to consolidate worldwide. Industry analysts forecast that by 2005, about 25% of global IC production will come from foundries. However, falling wafer average selling prices caused by excess capacity is a threat facing the IC industry. To capitalize on opportunities, to minimize competitive threats, and to reduce risk, TSMC will continue focusing on the high growth segments. Moreover, TSMC is committed to stay ahead of other foundry businesses in terms of advanced process development and services. TSMC's emphasis on the development and introduction of technologies and support services in 2003 includes the following: • Advanced Technologies (0.13um, 90nm on 300mm) for SoC; • MS/RF Technologies; • Embedded Memory Processes; • Special Logic Processes (CMOS Image Sensor, Color Filter, High Voltage, Liquid Crystal on Silicon); • Premier Foundry Design Services; and • Backend Services (In-House Bumping, Testing) 2.5 China Project In September 2002, TSMC submitted to the Taiwan Government an application to invest in a semiconductor fabrication plant in China. TSMC plans to equip the plant initially with used tools and machinery to be relocated from TSMC fabs. At the end of February 2003, the Government granted a "Phase I" approval for TSMC to begin the investment process. We expect to begin installing the tools and machinery after the Government's Phase II approval is obtained. TSMC earlier had entered into a Memorandum of Understanding (MOU) with the Songjiang Municipal Government. The MOU calls for TSMC to build a semiconductor complex at the outskirts of Shanghai under the two major preconditions: (1) TSMC must first receive all relevant Taiwan government approvals; and (2) there must be sufficient market demand for the plant's output. The purpose for the investment is to enable TSMC to become a key participant in the Mainland China domestic semiconductor market. 3. Organization 3.1 Organization Chart 3.2 Function Description China Project • China development strategy Research & Development • Advanced technology research & development, mask operation, and design services Chief Information Officer • Company-wide information infrastructure, e-Business strategy, information systems development and operation Chief Technology Officer • Exploratory technology development and patent affairs management Human Resources • Human resources management and organizational development Quality & Reliability • Quality and reliability management Internal Audit • Internal audit and process compliance Worldwide Marketing & Sales • Marketing - strategy, technology and services marketing • Business Operation - business plan and supply chain management • Customer Service - customer loyalty and solution effectiveness • Regional Operations - business development & account services for North America, Europe, Japan, and Asian regions Material Management & Risk Management • Purchasing, warehousing, industrial safety, import & export, logistic support, and environmental protection Operations I • Manufacturing operations (Fab 2, 3, 5, 6, 7, and 8), product engineering, and back-end operations Operations II • Manufacturing operations (Fab 12 and 14), new fab planning, manufacturing technology integration, production control, industrial engineering, and operational efficiency General Counsel • Corporate legal affairs, contracts, patent and other intellectual property matters Chief Financial Officer & Spokesperson • Finance and accounting services, including investor relations, treasury, tax, assets management, financial and management accounting • Corporate spokesperson TSMC 8 Annual Report 2002 TSMC 9 Annual Report 2002 3.3 Directors & Supervisors Title Name Chairman Morris Chang Director Lester Carl Thurow Director F.C. Tseng Date Elected Term Due Shareholding when Elected Current Shareholding (Note 1) Spouse & Minor Shareholding (Note 1) 04/14/2000 June 2003 45,109,604 0.59% 91,669,112 0.46% Shares % Shares % Shares 90,675 0 0 % 0.00% 0.00% 0.00% Director Peter Leahy Bonfield 05/07/2002 June 2003 0 0 0.00% 0.00% 0 0 0.00% 0.00% 05/07/2002 June 2003 04/14/2000 June 2003 12,032,090 0.16% 30,356,889 0.15% 98,219 0.00% Koninklijke Philips Electronics N.V. Representatives: (Note 2) 04/14/2000 June 2003 1,295,885,897 16.89% 2,554,450,279 12.82% Director A.P.M. van der Poel Director J. C. Lobbezoo Director Jaap van Oost Development Fund, Executive Yuan Representatives: (Note 2) Director Chintay Shih Chi Cherng Investment Co., Ltd. Representative: (Note 2) Director Stan Shih Koninklijke Philips Electronics N.V. Representatives: (Note 2) Supervisor Robbert Brakel Development Fund, Executive Yuan Representatives: (Note 2) Supervisor George C. Shiu Hsin Ruey Investment Co., Ltd. Representative: (Note 2) Supervisor Michael E. Porter 04/14/2000 June 2003 1,158,545,600 15.10% 1,793,522,406 9.00% 04/14/2000 June 2003 984,000 0.01% 12,738,029 0.06% 04/14/2000 June 2003 1,295,885,897 16.89% 2,554,450,279 12.82% 04/14/2000 June 2003 1,158,545,600 15.10% 1,793,522,406 9.00% 04/14/2000 June 2003 641,500 0.01% 12,761,869 0.06% - - - - - - - - - - - - TSMC Shareholding by Nominee Arrangement (Share) 0 0 0 0 0 0 0 0 0 0 Education & Selected Past Positions Selected Current Positions Ph.D., Electrical Engineering, Stanford University Chairman, Industrial Technology Research Institute President & COO, General Instrument Corporation Chairman of Vanguard International Semiconductor Corp. Chairman and/or Director of TSMC subsidiary companies Engineering, Loughborough University of Technology CEO and Chairman of the Executive Committee, British Telecommunications Plc Ph.D., Economics, Harvard University Dean of Sloan School of Management, M.I.T. Senior Non-Executive Director of AstraZeneca Group Plc, London Director of L.M. Ericsson, Sweden Director of Mentor Graphics Corporation Inc., Oregon, USA Vice President of the British Quality Foundation Member of the Citigroup International Advisory Board Jerome and Dorothy Lemelson Professor of Management and Economics, Sloan School of Management, M.I.T. Director of Analog Devices Inc. Ph.D., Electrical Engineering, National Cheng-Kung University President, TSMC President, Vanguard International Semiconductor Corp. President and/or Director of TSMC subsidiary companies Chairman of Global Unichip Corp. Director of Vanguard International Semiconductor Corp. - - B.S., Electronic Engineering, Eindhoven Technical University Director of Koninklijke Philips Electronics N. V. Executive Vice President Koninklijke Philips Electronics N. V. B.A., Business Economics, Erasmus University Chief Financial Officer, Philips Semiconductors B.V. B.S., Economics, Erasmus University, Rotterdam President & CEO, Philips Taiwan - - Ph.D., Electrical Engineering, Princeton University Director of Vanguard International Semiconductor Corp. President, Industrial Technology Research Institute - - M.S., Electrical Engineering, National Chiao Tung University Chairman, CEO, Co-Founder, The Acer Group Chairman of Acer Group Director of Applied Materials, Inc. - - Post Doctorate Controllers Programme (RC), Free University of Amsterdam Vice President & Financial Controller Asia Pacific of Philips Semiconductors - - Ph.D., Candidate in Economics, John Hopkins University Deputy Executive Secretary, Development Fund, Executive Yuan Director of Powerchip Semiconductor Corp. - - Ph.D., Business Economics, Harvard University Bishop William Lawrence University Professor, Harvard Business School Managers Are Spouse or Within Second-degree Relative of Consanguinity to Each Other Title Name Relation - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Cash Compensation in 2002 (NT$) 13,504,802 67,742 67,742 13,504,798 54,019,192 0 0 0 26,769,596 120,000 13,384,798 120,000 54,019,192 0 26,769,596 120,000 13,384,798 67,742 Note 1: As reported on 02/28/2003 Note 2: Information on Directors & Supervisors that are Representatives of Juridical Person Shareholders Directors / Supervisors that are Representative of Juridical Person Shareholders Director : A.P.M. van der Poel Director : J. C. Lobbezoo Director : Jaap van Oost Supervisor : Robbert Brakel Director : Chintay Shih Supervisor : George C. Shiu Juridical Person Shareholders Koninklijke Philips Electronics N.V. Top Ten Shareholders of Juridical Person Shareholders, or Shareholders Owning More than 10% of Juridical Person Shareholders Top Ten Shareholders : Not Available Shareholders Owned More than 10% Shares: None Development Fund, Executive Yuan Not Applicable Director : Stan Shih Chi Cherng Investment Co., Ltd. Supervisor : Michael E. Porter Hsin Ruey Investment Co., Ltd. Chi Cherng is beneficially owned 100% by TSMC. TSMC has a 35.71% ownership interest in Chi Cherng, the balance of the 64.29% ownership interest is held by the TSMC subsidiary Hsin Ruey Investment Co., Ltd. Hsin Ruey is beneficially owned 100% by TSMC. TSMC has a 35.71% ownership interest in Hsin Ruey, the balance of the 64.29% ownership interest is held by the TSMC subsidiary Chi Cherng Investment Co., Ltd. TSMC 10 Annual Report 2002 TSMC 11 Annual Report 2002 Independence Analysis of Board Members Of the nine directors, seven are non-management members. Two (Messrs Peter Bonfield, Lester Thurow ) out of these seven members are not shareholders and are also independent from any major shareholders of TSMC. Messrs Peter Bonfield, Lester Thurow, and Stan Shih meet the requirement of independency of directors under NYSE proposed rulings. Independence Analysis of Board Members Under Taiwan SFC Criteria Taiwan SFC provides a set of criteria to determine the independence of Board Members. The specific criteria, and their applicability on TSMC Board Members are shown below in details. Independence Criteria of Directors & Supervisors Name Over five years of experience in business, finance, legal or areas required by the Company Not an employee of the Company, nor a director, supervisor or employee of affiliated companies Not a spouse nor first- or second- degree relative to any person specified in columns 3 and 4 Not a natural person shareholder directly or indirectly owning more than 1% of the Company's outstanding shares, nor one of the Company's top ten natural person shareholders Not a juridical person or its representative as defined in Article 27 of Company Law Criteria Not a director, supervisor or employee of a shareholder of juridical person of the Company directly or indirectly owning more than 5% of the Company's outstanding shares nor one of the Company's top five shareholders of juridical person Not a director, supervisor, manager or shareholder holding more than 5% of the outstanding shares of certain companies or institutions that 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, that provides finance, commerce, legal consultation and services to the Company or affiliated companies within one year Chairman Morris Chang Director Peter Leahy Bonfield Director Lester Carl Thurow Director A.P.M. van der Poel Director Jan Lobbezoo Director Jaap van Oost Director Chintay Shih Director Stan Shih Director F. C. Tseng Supervisor Robbert Brakel Supervisor George C. Shiu Supervisor Michael E. Porter 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 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 Note 1 V Note 2 "V" indicates meeting conditions specified above. Note 1: Stan Shih represents the juridical person shareholder- Chi Cherng Investment Co., Ltd. that is a TSMC affiliated company. Note 2: Michael Porter represents the juridical person shareholder- Hsin Ruey Investment Co., Ltd. that is a TSMC affiliated company. Board of Directors Composition TSMC's Board of Directors consists of nine distinguished members. Their outstanding careers and breadth of experience cover the high-technology industry, finance, business, as well as management sectors. Two independent directors, Sir Peter Bonefield, former CEO of British Telecommunications, and Professor Lester Thurow of M.I.T., joined the TSMC Board in 2002. A complete list of TSMC's directors, their qualifications and experiences can be found on page 10-11. The Board convened four regular meetings and two special meetings in 2002. During each Board meeting, TSMC's senior managers presented progress reports and important business issues as required by Taiwan law. The following table summarizes the attendance of each Board member. Name of Director Morris Chang F.C. Tseng Peter L. Bonfield (Appointed on May 7, 2002) Lester C. Thurow (Appointed on May 7, 2002) A.P.M. van der Poel Jan Lobbezoo Paul Zeven Jaap van Oost (Appointed on November 1, 2002 to replace Paul Zeven.) Stan Shih Chintay Shih Number of Meetings of Board Directors Attended in 2002 6 6 3 3 4 4 3 1 5 6 Responsibilities The Company's management is legally responsible, inter alia, for day-to-day operations, preparation of financial statements, fund raising, and investments. The activities of the Board do not supersede or alter those responsibilities. The Board's primary duty is to fulfill its oversight responsibilities for the overall business and affairs of TSMC. Also, in conjunction with the Company's staff, the Board monitors regulatory activities, such as amendments to Taiwan's laws, amendments to the U.S. SEC Rules and Regulations, and changes to the New York Stock Exchange's listing requirements. CEO's Appointment and Responsibility TSMC's Board appoints the Chief Executive Officer (CEO) who is responsible for the Company's operation and policy implementation. The CEO performs his duties in accordance with TSMC's Articles of Incorporation, applicable laws, and regulations. Training Provided to Directors From time to time, the company provides to TSMC directors and supervisors information from the Company concerning regulatory limitations on conflicts of interest, stock trading as well as various other requirements under applicable laws and regulations. TSMC management also arranges, periodically, orientation and training sessions for directors and supervisors. For example, in 2002, in addition to the orientation provided to new directors and supervisor, at the request of the ROC Securities and Futures Commission, TSMC also provided its directors with materials on the legal obligations and liabilities of directors of ROC listed companies. TSMC 12 Annual Report 2002 TSMC 13 Annual Report 2002 3.4 Management Team Title Name Date Effective Shareholding (Note 1) % Spouse & Minor Shareholding (Note 1) % Education & Selected Past Positions Selected Current Positions Managers are Spouse or Within Second-degree Relative of Consanguinity to Each Other Title Name Relation TSMC Shareholding by Nominee Arrangement (Share) Number of Employee Stock Option Granted Chairman & Chief Executive Officer Morris Chang 03/03/1998 see page 10 Deputy Chief Executive Officer F.C. Tseng 08/07/2001 see page 10 see page 11 see page 11 President & Chief Operating Officer Rick Tsai 08/07/2001 19,591,738 0.10% 0 0.00% Ph.D., Material Science, Cornell University, USA Executive Vice President, Worldwide Marketing and Sales, TSMC President, Vanguard International Semiconductor Corp. 05/13/1997 19,995,152 0.10% 2,006,603 0.01% Ph.D., Business Administration, University of Kentucky, USA Vice President, Corporate Sales and Marketing , TSMC 02/03/1998 6,394,499 0.03% 0 0.00% MBA, Wharton School, University of Pennsylvania, USA Chairman, China Securities Investment Trust Corp. President, China Development Corp. 11/07/2000 8,674,015 0.04% 0 0.00% Ph.D., Electrical Engineering, Stanford University, USA Vice President, Research and Development, TSMC Department Manager, Device Research and Applications, Hewlett-Packard Company 08/07/2001 1,458,172 0.01% 0 0.00% Ph.D., Nuclear Engineering and Applied Physics, Columbia University, USA Vice President, Worldwide Sales & Services, IBM - - 09/05/2000 5,466,520 0.03% 41,608 0.00% Master, Physics, National Tsing Hua University Vice President, Tainan Site Operation, TSMC President, TSMC-Acer Semiconductor Manufacturing Corp. 08/07/2001 5,069,556 0.03% 0 0.00% 03/03/1998 3,574,322 0.02% 968 0.00% Ph.D., Electrical Engineering, University of Illinois, Champaign-Urbana, USA Vice President, U.S. Subsidiary, TSMC North America Director, Device and Flow Design, Semiconductor Process and Device Center, Texas Instruments Incorporated Ph.D., Electrical Engineering, Yale University, USA Vice President, South Site Operation, TSMC Senior Vice President, Chartered Semiconductor Manufacturing Ltd. 08/11/1998 4,294,842 0.02% 0 0.00% Master, Management, Stanford University, USA Regional Vice President, Lucent Technologies, Asia Pacific Ltd. 05/11/1999 7,959,370 0.04% 0 0.00% 08/11/2000 839,508 0.00% 0 0.00% Ph.D., Electrical Engineering and Computer Science, University of California, Berkeley, USA Vice President, South Site Operation, TSMC President, Worldwide Semiconductor Manufacturing Corp. Ph.D., Electrical Engineering, Princeton University, USA General Director, Electronic Research and Service Organization, Industrial Technology Research Institute President, Taiwan Semiconductor Industry Association 03/06/2001 760,782 0.00% 0 0.00% Ph.D., Physics, Columbia University, USA Senior Vice President, Winbond Electronics Corp. Vice President, Vanguard International Semiconductor Corp. Senior Vice President & Chief Information Officer Quincy Lin Senior Vice President Chief Financial Officer & Spokesperson Harvey Chang Senior Vice President Research & Development Shang-Yi Chiang Senior Vice President Worldwide Marketing & Sales Kenneth Kin Vice President Material Management & Risk Management J. B. Chen Vice President Research & Development Ping Yang Vice President Operations I C.C. Wei Vice President Human Resources Swee-Huat Lee Vice President Operations II Mark Liu Vice President Corporate Marketing Genda Hu Vice President Business Operation Chung-Shih Hsu Chief Technology Officer Chenming Hu Vice President Operations I M.C. Tzeng see page 11 see page 11 Director of TSMC subsidiary companies Director of Vanguard International Semiconductor Corp. Director of TSMC subsidiary companies Director of Shin-Etsu Handotai Taiwan Director of W. K. Technology Fund IV Director of Powertech Technology Inc. Director and/or Supervisor of TSMC subsidiary companies Director of System on Silicon Manufacturing Company Pte Ltd. Director of Fubon Financial Holding Co., Ltd. Supervisor of Vanguard International Semiconductor Corp. Director of United Industrial Gases Co., Ltd. Director of Global Unichip Corp. - - Director of System on Silicon Manufacturing Company Pte Ltd. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Director of Hontung Venture Capital Co., Ltd. CTO Chenming Hu Brother - - - - 08/07/2001 958,635 0.00% 0 0.00% Ph.D., Electrical Engineering and Computer Science, University of California, Berkeley, USA Co-Chairman, Celestry Design Technologies, Inc. Vice President Genda Hu Brother 08/07/2001 3,504.556 0.02% 502,750 0.00% Master, Applied Chemistry, Chung Yuan University Senior Director, Fab 2 Operation, TSMC - Manager M.J. Tzeng Brother Vice President & General Counsel Richard Thurston (Note 2) 02/08/2002 250,000 0.00% 0 0.00% J.D., Rutgers School of Law, State University of New Jersey, USA Ph.D., History, University of Virginia, USA Partner, Haynes Boone, LLP. Vice President Corporate Staff, Assistant General Counsel, Texas Instruments Incorporated Director of TSMC Partners, Ltd. 05/07/2002 309,646 0.00% 0 0.00% M.S., Materials Science and Engineering, Oregon State University, USA Group Vice President, Applied Materials, Inc. Vice Chairman, Applied Materials Taiwan, Ltd. - Vice President Worldwide Customer Service Chiam Wu (Note 2) Note 1: As of 02/28/2003 Note 2: Appointed in 2002 TSMC 14 Annual Report 2002 - - - - - - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 - - - - - - - - - - - - - - - - - - TSMC 15 Annual Report 2002 Information on Net Change in Shareholding and Net Change in Shares Pledged by Directors, Supervisors, Management and Shareholders of 10% Shareholdings or More: Unit: Share Stock Trade with Related Party: None Stock Pledge with Related Party: None 2002 01/01/2003 ~ 02/28/2003 Net Change in Shareholding Net Change in Shares Pledged (Note) Net Change in Shareholding Net Change in Shares Pledged (Note) 3.5 TSMC Long-Term Investments Ownership Title Name Chairman & CEO Morris Chang Director Peter Leahy Bonfield Director Lester Carl Thurow Director & Supervisor Koninklijke Philips Electronics N.V. Representatives: A.P.M. van der Poel J. C. Lobbezoo Jaap van Oost Robbert Brakel Director & Supervisor Development Fund, Executive Yuan Representative: Chintay Shih George C. Shiu Director Chi Cherng Investment Co., Ltd. Representative: Stan Shih Supervisor Hsin Ruey Investment Co., Ltd. Representative: Michael E. Porter Director & Deputy CEO F.C. Tseng President & COO Rick Tsai Senior Vice President & CIO Quincy Lin Senior Vice President & CFO Harvey Chang Senior Vice President S.Y. Chiang Senior Vice President Kenneth Kin Vice President J. B. Chen Vice President Ping Yang Vice President C.C. Wei Vice President Swee-Huat Lee Vice President Mark Liu Vice President Genda Hu Vice President Chung-Shih Hsu CTO Chenming Hu Vice President M.C. Tzeng Vice President & General Counsel Richard Thurston Vice President Chiam Wu 1,956,648 0 0 232,222,752 0 0 0 0 12,011,491 107,520,000 9,714,701 11,354,701 2,544,012 1,040,271 0 0 0 0 0 0 0 0 0 0 0 0 (130,000) 0 0 0 0 0 0 0 0 0 2,495,526 490,000 188,000 167,877 0 1,413,845 1,040,000 368,172 30,671 305,243 0 0 0 (576,609) (512,000) 105,896 777,577 364,397 259,842 288,635 88,285 250,000 255,422 0 0 0 0 0 0 0 0 0 0 (60,000) (81,000) 0 0 0 (75,000) (27,000) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Long-Term Investment Equity Method: Ownership by TSMC (1) Direct/Indirect Ownership by Directors, Supervisors, and Management (2) Shares % Shares As of 12/31/2002 Total Ownership (1) + (2) Shares % TSMC International Investment Ltd. 987,968,244 TSMC Partners, Ltd. Systems on Silicon Manufacturing Co. Pte Ltd. 300,000 382,264 Vanguard International Semiconductor Corp. 556,133,496 (Note 2) Emerging Alliance Fund Not Applicable (Note 4) Ya-Xin Technology Co., Ltd. TSMC - North America TSMC - Japan 34,125,000 11,000,000 6,000 100.0% 100.0% 32.0% 25.3% 99.5% 100.0% 100.0% 100.0% % - - - - 987,968,244 300,000 955,660 573,396 48.0% (Note 1) 649,827,621 29.5% (Note 3) 1,205,961,117 - - - - - - - - Not Applicable (Note 4) 34,125,000 11,000,000 6,000 Chi Cherng Investment Co., Ltd. Not Applicable (Note 4) 35.7% Not Applicable (Note 4) 64.3% (Note 5) Not Applicable (Note 4) Hsin Ruey Investment Co., Ltd. Not Applicable (Note 4) 35.7% Not Applicable (Note 4) 64.3% (Note 6) Not Applicable (Note 4) TSMC - Europe Cost Method: Traded Amkor Technology Monolithic System Tech. Taiwan Mask Corp. Non - Traded United Industrial Gases Co. Ltd. Shin-Etsu Handotai Taiwan Company Ltd. Hontung Venture Capital W.K. Technology Fund IV Funds: Horizon Ventures Crimson Asia Capital 200 100.0% - - 200 505,050 470,346 0.3% Not Available (Note 7) Not Available (Note 7) 1.6% Not Available (Note 7) Not Available (Note 7) 505,050 470,346 8,793,780 2.1% Not Available (Note 7) Not Available (Note 7) 8,793,780 16,782,937 10,500,000 8,391,608 5,000,000 10.8% Not Available (Note 7) Not Available (Note 7) 7.0% Not Available (Note 7) Not Available (Note 7) 10.5% Not Available (Note 7) Not Available (Note 7) 1.9% Not Available (Note 7) Not Available (Note 7) 16,782,937 10,500,000 8,391,608 5,000,000 Not Applicable (Note 4) 12.1% Not Applicable (Note 4) Not Available (Note 7) Not Applicable (Note 4) Not Applicable (Note 4) 1.0% Not Applicable (Note 4) Not Available (Note 7) Not Applicable (Note 4) 100.0% 100.0% 80.0% 54.8% 99.5% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 0.3% 1.6% 2.1% 10.8% 7.0% 10.5% 1.9% 12.1% 1.0% Note 1: Share interest held by Koninklijke Philips Electronics N.V. Note 2: Did not include prepaid investment of NT$849,360,442 and an additional investment of NT$766,815,168 made in January, 2003. As a result, TSMC's ownership in Vanguard increased from 25.3% to 28.1%. Note 3: 29.1% owned by Development Fund, Executive Yuan Note 4: Not applicable: These firms do not issue shares. TSMC's investment is measured as a percentage of ownership interest Note 5: Ownership interest held by Hsin Ruey Investment Co., Ltd. Note 6: Ownership interest held by Chi Cherng Investment Co., Ltd. Note 7: Not available: Not all information is available to TSMC as of the report date Note: This refers to the creation of security interest over TSMC shares in favor of creditors, usually in connection with a shareholder's own financing activities. TSMC 16 Annual Report 2002 TSMC 17 Annual Report 2002 4. Capital & Shares 4.1 History of Capitalization Month Year Price Par Value Shares Amount Shares Amount Sources of Capital Authorized Paid-in Remark Capital Increase by Assets other than Cash 02/1987 1,000 1,000 5,510,000 5,510,000,000 1,377,500 1,377,500,000 Founding 12/1988 1,000 1,000 5,510,000 5,510,000,000 2,204,000 2,204,000,000 Cash Offering 11/1989 1,000 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 12/1990 1,000 1,000 5,510,000 5,510,000,000 3,911,797 3,911,797,000 Cash Offering 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 - - - - - - - - - 06/2000 220 08/2000 12/2000 07/2001 07/2002 - 10 - - 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 551,000,000 5,510,000,000 391,179,700 3,911,797,000 Par Value Change from NT$1000 to NT$10 551,000,000 5,510,000,000 473,829,700 4,738,297,000 Cash Offering 551,000,000 5,510,000,000 551,000,000 5,510,000,000 Cash Offering: NT$ 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 3,000,000,000 30,000,000,000 1,439,000,000 14,390,000,000 Capitalization of Profits 3,000,000,000 30,000,000,000 2,654,200,000 26,542,000,000 Capitalization of Profits 8,500,000,000 85,000,000,000 4,081,300,000 40,813,000,000 Capitalization of Profits 8,500,000,000 85,000,000,000 6,047,175,967 60,471,759,670 Capitalization of Profits 9,100,000,000 91,000,000,000 7,548,483,035 75,484,830,350 Capitalization of Profits 9,100,000,000 91,000,000,000 7,670,881,717 76,708,817,170 Conversion of ECB 17,800,000,000 178,000,000,000 9,990,849,423 99,908,494,230 Capitalization of Profits: NT$21,320,311,040 and Capital Surplus: NT$1,879,366,020 17,800,000,000 178,000,000,000 10,105,849,423 101,058,494,230 Cash Offering (ADR) 17,800,000,000 178,000,000,000 11,689,364,587 116,893,645,870 Merger with WSMC & TSMC-ACER 17,800,000,000 178,000,000,000 12,989,364,587 129,893,645,870 Cash Offering (Preferred Stock) 24,600,000,000 246,000,000,000 18,132,553,051 181,325,530,510 Capitalization of Profits 24,600,000,000 246,000,000,000 19,922,886,745 199,228,867,450 Capitalization of Profits NO NO NO NO NO - NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO As of 02/28/2003 Unit: Share/NT$ Date of Approval & Approval Document No. 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 12/21/1990 (79) Yuan Ching Tzu No. 14632 07/18/1991 (80) Yuan Ching Tzu No. 08651 12/06/1991 (80) Yuan Ching Tzu No. 14252 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 06/30/2000 (89) Yuan Shang Tzu No. 013893 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 07/15/2002 Yuan Shang Tzu No. 0910016373 4.2 Capital & Shares Type of Stock Issued Shares Listed Non-Listed Total Un-issued Shares Reserved Shares for Convertible Bond Authorized Capital Unit: Share Total Common Stock Preferred Stock 18,622,886,745 - 18,622,886,745 - 1,300,000,000 1,300,000,000 3,299,511,937 1,377,601,318 24,600,000,000 TSMC 18 Annual Report 2002 4.3 Status of Shareholders Stock: Preferred A Share As of 05/22/2002 (last record date) Government Agencies Financial Institutions Other Juridical Person Foreign Institutions & Natural Persons Domestic Natural Persons Number of Shareholders Shareholding Holding Percentage (%) Stock: Common Share 0 0 0.00 0 0 0.00 1 1,299,925,653 99.99 0 0 0.00 Total 60 59 74,347 1,300,000,000 0.01 100.00 As of 06/25/2002 (last record date) Government Agencies Financial Institutions Other Juridical Person Foreign Institutions & Natural Persons Domestic Natural Persons Number of Shareholders 8 122 939 1,645 422,284 Total 424,998 Shareholding 1,932,597,885 911,277,493 2,431,203,807 9,253,781,911 4,094,025,649 18,622,886,745 Holding Percentage (%) 10.38 4.89 13.06 49.69 21.98 100.00 4.4 Distribution Profile of Shareholder Ownership Stock: Preferred A Share As of 05/22/2002 (last record date) Shareholder Ownership (Unit: Share) Number of Shareholders Total Shares Owned Ownership % 1 ~ 999 1,000 ~ 5,000 5,001 ~ 10,000 15,001 ~ 20,000 Over 1,000,001 Total Stock: Common Share 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% 100.00% As of 06/25/2002 (last record date) Shareholder Ownership (Unit: Share) Number of Shareholders Total Shares Owned Ownership % 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 78,780 230,933 53,869 21,686 10,221 9,884 5,146 2,737 5,496 2,889 1,524 484 304 172 873 424,998 30,354,269 520,123,773 372,134,973 257,132,644 175,093,734 237,005,623 177,173,376 122,672,028 379,510,296 398,759,920 420,357,320 236,762,227 210,068,996 153,878,778 0.16% 2.79% 2.00% 1.38% 0.94% 1.27% 0.95% 0.66% 2.04% 2.14% 2.26% 1.27% 1.13% 0.83% 14,931,858,788 18,622,886,745 80.18% 100.00% TSMC 19 Annual Report 2002 As of 05/22/2002 (last record date) TSMC's dividend policy is set forth in its Articles of Incorporation. Except as otherwise specified in the Articles of Incorporation, TSMC 4.7 Dividend Policy 4.5 Major Shareholders Stock: Preferred A Share No. Shareholders Stock: Common Share No. Shareholders Total Shares Owned Ownership % As of 06/25/2002 (last record date) Total Shares Owned Ownership % 2,554,450,279 13.72% 1 Philips Electronic Building Elements Industries (Taiwan), Ltd. 1,299,925,653 99.99% 1 2 3 4 5 6 7 8 9 Koninklijke Philips Electronics N.V. Development Fund, Executive Yuan ADR-Taiwan Semiconductor Manufacturing Company, Ltd. Philips Electronics Industries (Taiwan), Ltd. JPMorgan Chase Bank, Taipei Branch Emerging Markets Growth Fund, Inc. The Growth Fund of America, Inc. JPMorgan Chase Bank, Taipei Branch in Custody for Europacific Growth Fund Merrill Lynch International, Ltd. 1,793,522,406 1,753,357,072 1,490,108,183 440,684,965 309,023,000 267,644,209 248,499,234 JPMorgan Chase Bank, Taipei Branch in Custody for The New Perspective Fund, Inc. 221,462,384 10 Directorate General of Postal Remittances and Savings Banks 163,681,017 4.6 Other Share Information Net Worth, Earnings, Dividends and Market Price Per Share 9.63% 9.42% 8.00% 2.37% 1.66% 1.44% 1.33% 1.19% 0.88% Item Market Price Per Share Highest Market Price Lowest Market Price Average Market Price Net Worth Per Share Before Distribution After Distribution Earnings Per Share 2001 105.5 43.6 77.7 15.70 15.67 Weighted Average Shares (thousand shares) 16,832,554 0.83 0.75 - 4.00 - - 93.61 - - Earnings Per Share Earnings Per Share (Note 3) 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 4) Price / Dividend Ratio (Note 5) Cash Dividend Yield Rate (Note 6) Note 1: Pending shareholders' meeting resolution Note 2: Financials of the period not yet finalized Note 3: Retroactive adjustment for stock dividends and bonus to employees Note 4: Price / Earning Ratio = Average Market Price / Earnings Per Share Note 5: Price / Dividend Ratio = Average Market Price / Cash Dividends Per Share Note 6: Cash Dividend Yield Rate = Cash Dividends Per Share / Average Market Price TSMC 20 Annual Report 2002 2002 01/01/2003 - 02/28/2003 97.5 34.9 67.4 15.19 (Note 1) 18,580,700 1.14 (Note 1) - 1.00 - - 59.12 (Note 1) (Note 1) 50.5 40.2 45.1 (Note 2) (Note 2) 18,580,886 (Note 2) (Note 2) (Note 2) (Note 2) (Note 2) - (Note 2) (Note 2) (Note 2) shall not pay dividends when there is no profit for a particular fiscal year. TSMC profits may be distributed by way of cash dividend, stock dividend, or a combination of cash and stock. Since TSMC is in a capital-intensive industry, profit distribution generally has been made by way of stock dividend. The ratio for cash dividend shall not exceed 50% of the total distribution. 4.8 Distribution of Profit The Board adopted the proposal for 2002 profit distribution at its Meeting on March 4, 2003. The proposed profit distribution will be effected upon the shareholders approval at the Regular Shareholder Meeting in June 2003. Directors & Supervisors Compensation Cash Dividends to Preferred A Shareholders Stock Dividends to Common Shareholders (Note 1) Employee Profit Sharing (Note 2) Employee Profit Sharing as % of the sum of Stock Dividends to Common Shareholders and Employee Profit Sharing Note 1: Equivalent to underlying number of shares: 1,489,830,940 Note 2: Equivalent to underlying number of shares: 153,901,299 Proposal to Distribute 2002 Profits NT$58,484,489 NT$455,000,000 NT$14,898,309,400 NT$1,539,012,990 9.36% 2001 profit distribution set aside as Directors & Supervisors Compensation, and Employee Profit Sharing. Board Resolution (March 26, 2002) Amount (NT$) Amount (NT$) Actual Result Underlying Number of Shares Dilution Rate % (on Common Shares Outstanding as of December 31, 2002) Directors & Supervisors Compensation (Cash) Employee Profit Sharing (Common Share) 133,847,984 133,847,984 - 1,070,783,880 1,070,783,880 107,078,388 Total 1,204,631,864 1,204,631,864 - - 0.57 - The EPS of 2001, 2002 may vary if "Directors & Supervisors Compensation" and "Employee Profit Sharing" were subject to different accounting treatments: Accounting Treatments Treatment as Profit Distribution Treatment as Expenses (Employee Profit Sharing expensed at par value) 2001 EPS NT$ 0.83 NT$ 0.76 2002 EPS NT$ 1.14 NT$ 1.05 4.9 Impact to 2003 Business Performance, EPS, and ROE Resulting from Stock Dividend Distribution: Not Applicable TSMC is not required by Taiwan law to provide a 2003 financial forecast (see "Guidelines for Disclosure of Financial Forecast by Public Companies"). 4.10 Buyback of Treasury Stock during the period January 1, 2002 to February 28, 2003: None TSMC 21 Annual Report 2002 5. Issuance of Corporate Bonds 5.1 Corporate Bonds 5.2 Convertible Bonds: None As of 02/28/2003 5.3 Exchangeable Bonds: None Issuance Issuing Date Denomination Offering Price Total Amount Coupon Rate Tenure Guarantor Trustee Underwriter Domestic Unsecured Bond (I) Domestic Unsecured Bond (III) Domestic Unsecured Bond (IV) Domestic Unsecured Bond (V) 03/04/1998 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 Par Par Par Par NT$4,000,000,000 NT$10,000,000,000 NT$15,000,000,000 NT$15,000,000,000 7.71% p.a. TrancheA: 5.67% p.a. TrancheB: 5.95% p.a. TrancheA: 5.25% p.a. TrancheB: 5.36% p.a. 5 years Maturity: 03/04/2003 TrancheA: 3 years Maturity: 10/21/2002 TrancheB: 5 years Maturity: 10/21/2004 TrancheA: 5 years Maturity: 12/04/2005- 12/15/2005 TrancheB: 7 years Maturity: 12/04/2007- 12/14/2007 TrancheA: 2.60% p.a. TrancheB: 2.75% p.a. TrancheC: 3.00% p.a. TrancheA: 5 years Maturity: 01/10/2007- 01/22/2007 TrancheB: 7 years Maturity: 01/10/2009- 01/24/2009 TrancheC: 10 years Maturity: 01/10/2012- 01/24/2012 No The International Commercial Bank of China Citibank Securities (Taiwan) No TC Bank No The International Commercial Bank of China No TC Bank Grand Cathay Securities Private Placement Private Placement Legal Counsel 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 5.4 Bonds with Warrants: None 6. Preferred Shares 6.1 Preferred A Share Issue Date: 11/29/2000 Par Value Issue Price Number of Shares Issued Total Issue Amount As of 02/28/2003 NT$10 NT$10 1,300,000,000 NT$13,000,000,000 Rights and Obligations Dividend Cash Dividend of 3.5% p.a. ; Cumulative Distribution upon Liquidation Up to Total Issue Amount (NT$13,000,000,000) Voting Right Others Same as Common Share Not Entitled for Stock Dividend Auditor Repayment Outstanding Redemption or Early Repayment Clause Covenants Credit Rating Bullet Bullet Bullet Bullet Outstanding Shares Redeemed/Converted No NT$4,000,000,000 NT$5,000,000,000 NT$15,000,000,000 NT$15,000,000,000 Balance NT$13,000,000,000 No No No No Condition for Redemption/Conversion Redemption at Maturity (May 29, 2003) at Par Customary Covenants Customary Covenants Customary Covenants Customary Covenants Not Rated TSMC's Domestic Unsecured Bond III has received a rating of "twAA" from Taiwan Ratings Corporation on 09/20/1999 TSMC's Domestic Unsecured Bond IV has received a rating of "twAA" from Taiwan Ratings Corporation on 11/08/2000 TSMC's Domestic Unsecured Bond V has received a rating of "twAA" from Taiwan Ratings Corporation on 12/03/2001 Market Price High Low Average Not traded Conversion/ Subscription Rights Conversion/Subscription as of the Date of the Annual Report Printed None Issue/Conversion/Subscription No Conversion into Common Shares Other Rights of Bondholders Conversion Right No No No No Impact/Dilution on Existing Shareholders and Preferred A Share Shareholders Dividend Right of Preferred Share is Preferred to that of Common Share Amount of Converted or Exchanged Common Shares, ADRs or Other Securities as of 02/28/2003 Not Applicable Not Applicable Not Applicable Not Applicable 6.2 Preferred Share with Warrant: None Dilution Effect and Other Adverse Effects on Existing Shareholders Custodian No No No No No No No No TSMC 22 Annual Report 2002 TSMC 23 Annual Report 2002 7. Issuance of American Depositary Shares Issuing Date 10/08/1997 11/20/1998 01/12/1999 ~ 01/14/1999 07/15/1999 08/23/1999 ~ 09/09/1999 02/22/2000 ~ 03/08/2000 04/17/2000 06/07/2000 ~ 06/15/2000 05/14/2001 ~ 06/11/2001 06/12/2001 11/27/2001 02/07/2002 ~ 02/08/2002 11/21/2002 ~ 12/19/2002 Issuance & Listing NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE NYSE Total Amount (US$) 594,720,000 184,554,440 35,500,000 296,499,641 158,897,089 379,134,599 224,640,000 1,167,873,850 240,999,660 297,649,640 320,600,000 1,001,650,000 160,097,914 Offering Price per ADS (US$) 24.78 15.26 17.75 24.516 28.964 57.79 56.16 35.75 20.63 20.63 16.03 16.75 8.73 Units Issued 24,000,000 12,094,000 2,000,000 12,094,000 5,486,000 6,560,000 4,000,000 32,667,800 11,682,000 14,428,000 20,000,000 59,800,000 18,348,000 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) TSMC Common Shares from Selling Shareholders Cash Offering and 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 TSMC Common Shares from Selling Shareholders (Pursuant to ADR Conversion Sale Program) Common Shares Represented Rights and Obligations of ADS Holders 120,000,000 60,470,000 10,000,000 60,470,000 27,430,000 32,800,000 20,000,000 163,339,000 58,410,000 72,140,000 100,000,000 299,000,000 91,740,000 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 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 Same as those of Common Share Holders Trustee Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Depositary Bank Custodian Bank ADSs Outstanding (Note) Apportionment of expenses for the issuance and maintenance 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 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 Citibank, N.A.- New York Citibank, N.A.- Taipei Branch 24,000,000 46,222,650 48,222,650 71,407,859 76,893,859 83,453,859 87,453,859 144,608,739 156,290,739 170,718,739 259,006,235 318,806,235 369,019,413 All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to issuance of ADSs were borne by the selling shareholders, while 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 issuance of ADSs were borne by the selling shareholders, while 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 issuance of ADSs were borne by the selling shareholders, while 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 issuance of ADSs were borne by the selling shareholders, while 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 issuance of ADSs were borne by the selling shareholders, while 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 issuance of ADSs were borne by the selling shareholders, while 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 issuance of ADSs were borne by the selling shareholders, while 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 issuance of ADSs were borne by the selling shareholders, while 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 issuance of ADSs were borne by the selling shareholders, while 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 issuance of ADSs were borne by the selling shareholders, while 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 issuance of ADSs were borne by the selling shareholders, while 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 issuance of ADSs were borne by the selling shareholders , while 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 issuance of ADSs were borne by the selling shareholders , while maintenance expenses such as annual listing fees and accountant fees were borne by TSMC Terms and Conditions in the Deposit Agreement and Custody Agreement See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details See Deposit Agreement and Custody Agreement for Details Closing Price per ADS (US$) 2002 01/01/2003 - 02/28/2003 High Low Average High Low Average 18.86 5.35 12.25 8.30 6.45 7.28 Note: TSMC has in aggregate issued 223,159,800 ADSs since 1997, which, if taking into consideration of stock dividend distributed over the period, would amount to 369,496,454 ADSs. As of February 28, 2003, total number of outstanding ADSs was 369,019,413 after 477,041 ADSs were redeemed. Stock dividend distributed in 1998, 1999, 2000, 2001 and 2002 was 45%, 23%, 28%,40% and 10% respectively. TSMC 24 Annual Report 2002 TSMC 25 Annual Report 2002 8. Status of Employee Stock Option Plan (ESOP) 10.2 Audit Committee 8.1 Issuance of Employee Stock Option ESOP Granted 2002 - First Grant 2002 - Second Grant As of 02/28/2003 The Board established an Audit Committee on August 6, 2002 to assist the Board in fulfilling its oversight responsibilities. The Audit Committee reviews various matters, including: the Company's financial reports; the Company's auditing and accounting policies and procedures; and the Company's systems of internal control. Approval Date by the Securities and Futures Commission Issue (Grant) Date Number of Shares Issued 06/25/2002 08/22/2002 18,909,700 Percentage of Issued Shares to Outstanding Common Shares 0.10154% Option Duration Source of Option Shares Vesting Schedule Shares Exercised Value of Shares Exercised (NT$) Shares Unexercised Grant Price Per Unexercised Share 10 years New Common Share 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 0 0 18,909,700 NT$53 Percentage of Shares Unexercised to Outstanding Common Shares 0.10154% 06/25/2002 11/08/2002 1,085,000 0.00583% 10 years New Common Share 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 0 0 1,085,000 NT$51 0.00583% Impact to Shareholders' Equity Dilution to Shareholders' Equity is Limited Dilution to Shareholders' Equity is Limited TSMC's Audit Committee is empowered to conduct any study or investigation which it deems appropriate to discharge its responsibilities. It has direct access to TSMC's internal auditors, the Company's outside independent auditors, as well as any employee of the Company. The Committee is authorized to retain and oversee special legal, accounting, or other consultants it deems appropriate fulfilling for its charter purposes. The Audit Committee, by its charter, shall consist of 3~5 members. As of March 2003, four members comprised the Audit Committee: two of whom are directors, and the other two are supervisors of TSMC. The Committee meets at least four times a year. The Chairman of the Committee, when necessary, can call additional meetings. Audit Committee membership, rules and regulations may be changed from time to time in order to comply with changing rules and regulations of applicable government agencies. The Audit Committee held its first meeting on November 5, 2002. Meeting attendance was as follows: Name of Member Peter L. Bonfield (Designated on August 6, 2002) Lester C. Thurow (Designated on August 6, 2002) Michael E. Porter (Designated on August 6, 2002) Robbert Brakel (Designated on August 6, 2002) Number of Meetings of Audit Committee Attended In 2002 1 1 1 1 1 8.2 ESOP Granted to Management Team and to Top Ten Employees with an Individual Grant Value Number of Meetings Held in 2002 over NT$30,000,000: None 9. Status of Mergers and Acquisitions TSMC acquired 52% of the shares of Global Unichip Corporation (GUC), a SoC design service company, through a merger of a wholly owned subsidiary of TSMC, Ya-Xin Technology Co., Ltd., and GUC in January 2003. TSMC's ownership in GUC was subsequently diluted to 47.3% in February 2003 after a capital call. 10. Corporate Governance Maintaining the highest possible standards of corporate governance has been an integral part of TSMC's core values since its founding. TSMC upholds and advocates operational transparency and respect for shareholder rights. TSMC believes that a sound and efficient Board of Directors is the hub of successful corporate governance. In order to strengthen the structure and responsibilities of the Board in general, and to reinforce TSMC's commitment to good corporate governance practices in particular, during 2002, TSMC invited outside professionals to either join the Board (e.g. Sir Peter Bonfield, and Professor Lester Thurow) or to act as a Supervisor (e.g. Professor Michael Porter). TSMC also established an Audit Committee comprising of independent directors and supervisors. During 2002, TSMC was recognized by Finance Asia as having the best Corporate Governance of any Taiwan Corporation. 10.1 Summary of Articles of Incorporation To fulfill the requirements of the ROC Company Law and regulatory requirements, the following sections of TSMC's Articles of Incorporation have been drafted and revised as needed: I - General Provisions - Capital Stock - Directors and Supervisors Section Section II Section III Section IV - Management of the Corporation Section V - Financial Reports Section VI - Supplementary Provisions The last revision of these Articles of Incorporation was made at TSMC's Shareholder Meeting on May 7, 2002. Detailed information regarding these Articles of Incorporation is available at the Company's website www.tsmc.com. 10.3 Shareholder Meetings Meetings of TSMC's shareholders include both regular meetings and special meetings. The Board, in accordance with the ROC Company Law, shall convene a regular shareholder meeting within six months of the end of each fiscal year. Generally, the shareholder meetings are held in Hsinchu, Taiwan, where TSMC's head office is located. Shareholders or supervisors may convene special shareholder meetings in accordance with relevant laws. The Board may also convene special shareholder meetings as needed. Notices of shareholder meetings must be in writing, setting forth the location, time and purpose of the meeting and shall 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. Voting Rights TSMC shareholders have one vote for each share held of record. Except as otherwise provided by relevant laws, shareholders may adopt a resolution by a simple majority of the total issued and outstanding shares that are represented at a shareholder meeting where a majority of the total issued and outstanding shares are present in person or by proxy. The election of directors and supervisors at a shareholder meeting is by cumulative voting. Ballots for the election of directors are cast separately from those for the election of supervisors. Holders of Preferred A Shares have the same voting rights as holders of common shares. Other Rights of Shareholders & Procedures for Exercising Shareholders' Rights Under the ROC Company Law, dissenting shareholders are entitled to appraisal rights in the event of merger, spin-off, or certain other major corporate actions. A shareholder may exercise appraisal rights by serving written notice on TSMC prior to the related shareholder meeting and/or by raising an objection at the shareholder meeting. In addition to appraisal rights, shareholders may also bring other actions such as for the annulment of resolutions, or derivative actions in accordance with relevant laws and regulations. Procedures of Putting Proposals at Shareholder Meetings The Board proposes the agenda for shareholder meetings in accordance with the ROC Company Law and TSMC's "Rules and Procedures of Shareholder Meeting" (the "Rules"). Shareholders may also propose special motions during shareholder meetings in accordance with the Rules. Ways that Shareholders Nominate Directors to Board and Supervisors TSMC's directors and supervisors are elected in accordance with the ROC Company Law and TSMC's "Rules for Election of Directors and Supervisors". Except as provided in the Company Law, TSMC does not adopt special provisions for nominating directors or supervisors by any shareholder. TSMC 26 Annual Report 2002 TSMC 27 Annual Report 2002 10.4 Taiwan Corporate Governance Implementation as Required by SFC Item 1. Corporate Governance Structure & Principles (1) Does the Company have Corporate Governance Model and cover all governance principles? (2) Does the Company have good Internal Control System and implement it effectively? 2. Share Structure & Shareholders' Rights (1) Does the Company have Shareholder Meeting Rules? (2) Does the Company appoint responsible people to handle shareholder suggestions or disputes? (3) Does the Company have Principal Shareholder List? (4) Does the Company disclose major shareholders' share transaction activities? (5) Does the Company and its affiliates have Risk Management Mechanism and Fire Wall? 3. Board Structure & Independency (1) Does the Company have two or more independent directors? (2) Does the Company's board have Audit Committee? (3) Are Chairman and President different persons, and not connected by marriage or relationship of first-degree relative? 4. Responsibilities of Board & Management (1) Does the Company have board meeting rules? (2) Does the Company have any functional committees? (3) Does the board regularly evaluate the independency of external auditors? (4) Does the Company have responsibility insurance for directors? (5) Does the Company provide training to directors? (6) Does the Company have risk management policy and risk measures and implement it? 5. Supervisor's Composition, Responsibilities, and Independency (1) Does the Company have one or more independent supervisor? (2) Does the supervisor have communication channel with employees, shareholders, and stakeholders? (3) Does the Company have supervisor meeting or meeting rules? (4) Does the Company have responsibility insurance for supervisors? (5) Does the Company provide training to supervisors? 6. Stakeholders Relationship (1) Does the Company have communication channel with stakeholders? (2) Does the Company deem its social responsibility important? Implemented or Not Implementation Status Reason for Non-Implementation Improvement Plans Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Please refer to "Corporate Governance" section on page 26 of this Annual Report. TSMC has established a thorough internal control system. TSMC implements its internal control through the "Internal Control System" and "Internal Audit Program". TSMC has established "Rules and Procedures of Shareholder Meeting" based on the relevant rules and regulations of Taiwan. TSMC has designated relevant departments to handle shareholder's suggestions or disputes. TSMC keeps track of shareholdings of directors, supervisors, officers, and shareholders holding more than 10% of the outstanding shares of TSMC. TSMC regularly discloses major shareholders' transaction activities according to the relevant laws and regulations of Taiwan. TSMC has established relevant guidelines in its "Internal Control System". Sir Peter Leahy Bonfield, Prof. Lester Carl Thurow, and Mr. Stan Shih meet the requirement of independency of directors under NYSE proposed rulings. They meet all of the board independency criteria under Taiwan SFC except that the directorship of Stan Shih arises from being the Representative of juridical person shareholder Chi Cherng Investment Co., Ltd. Also refer to page 12 "Independency Analysis of Board Members Under Taiwan SFC Criteria" for details. TSMC's Board of Directors established an Audit Committee on August 6, 2002. There is no family relationship between TSMC's Chairman and president. TSMC's Board of Directors has established an Audit Committee. The Audit Committee regularly evaluates the independency of external auditors. TSMC has Directors & Officers Liability Insurance (D&O Insurance) for its directors. Please refer to "Corporate Governance" section on page 26 of this Annual Report. TSMC has risk management policy and risk measures under various internal policies and internal audit system. One of TSMC's Supervisors, Prof. Michael Porter, meets the requirement of independency under NYSE proposed rulings. Prof. Michael Porter meets all of the independency criteria set by Taiwan SFC except that his appointment arises from being the Representative of a juridical person shareholder Hsin Ruey Investment Co., Ltd. Also refer to page 12 "Independency Analysis of Board Members Under Taiwan SFC Criteria" for details. TSMC has bought D&O Insurance for its supervisors. Please refer to "Corporate Governance" section on page 26 of this Annual Report. TSMC has designated relevant departments to communicate with stakeholders. TSMC established the "TSMC Education and Culture Foundation" in 1998 to perform its social responsibilities. This is a new Taiwan regulatory requirement. Rules will be adopted in accordance with relevant regulations. This is a new Taiwan regulatory requirement. A formal channel will be established after consultation with SFC. This is a new Taiwan regulatory requirement. A formal channel will be established after consultation with SFC. (3) Are directors actually disqualified from voting during the meetings of board of directors on the matters in which his interest conflicts Yes TSMC's Board has adopted this principle as a practice. with TSMC's? (4) Does the Company have consumer or client protection policy and its implementation status? Not Applicable TSMC does not sell consumer goods. 7. Information Disclosure (1) Does the Company appoint responsible people to handle information collection and disclosure? (2) Does the Company have spokesperson? (3) Does the Company have corporate website to disclose financial and corporate governance information? Yes Yes Yes TSMC has designated relevant departments to handle the collection and disclosure of information as required by relevant laws and regulations of Taiwan and other jurisdictions. TSMC has designated a spokesperson as required by relevant regulation. TSMC discloses its information through its website www.tsmc.com.tw. TSMC 28 Annual Report 2002 TSMC 29 Annual Report 2002 11. Social Responsibility Information 11.1 TSMC Education and Culture Foundation 11.2 Other Social Issues Health and Safety Performance Being both ISO 14001 and OHSAS 18001 certified since 1996, TSMC has gained the highest recognition in health-and-safety TSMC believes that corporations can and should assume a more active role towards the society beyond their financial contributions. In management and practice. TSMC offers comprehensive health care and employee assistance programs throughout all of its operating this connection, the TSMC Education and Culture Foundation (the "TSMC Foundation") was established in 1998 as a formal vehicle to sites. Health care programs include on-site physician consultation, and 24-hour on site service nursing. In addition, on-site fitness facilitate education and culture development in Taiwan. facilities as well as annual physical check-ups are available for all employees. Dr. F.C. Tseng, Deputy CEO of TSMC, was appointed Chairman of the Foundation in 2002. The Foundation's activities in the past year Policies and Procedures Relating to Adherence to Health and Safety TSMC believes that its health and safety actions should not only meet relevant ESH legal requirements, but also be benchmarked against recognized international practices. The Company's goals are to prevent incidents, improve employee safety and health, protect property, prevent pollution, and above all use all resources effectively. Equal Opportunity Employees are recruited in line with the Company's operating needs and strategic directions. TSMC believes in equal opportunity and values the diversity that its staff contributes. Recruitment is carried out via open selection based on merits of the candidates and matching needs of each position to ensure selection of the best talents irrespective of race, gender, age, lifestyle, religion, nationality and political affiliation. Supplier Selection Process and Criteria Regarding Social and Environmental Parts TSMC established an ESH Performance Evaluation System and linked it to the procurement system. This set-up helps the Company's procurement policy to achieve a balance between quality, price and ESH. In 2002, TSMC also established a "Green Procurement Procedure" to evaluate suppliers' environmental performances for supplier selection. The procedure requires suppliers to establish Environmental Management System (EMS) and disclose hazardous substances content in their products. Social and Environmental Impacts of TSMC's Outsourced Operations or Contractors TSMC communicates regularly with its suppliers on ESH issues and encourages their improvements on ESH constantly. TSMC also conducts periodical random audits to its suppliers and waste treatment contractors to assure that the required environmental compliances are strictly adhered to. Social and Environmental Impacts of TSMC's Suppliers A life cycle assessment (LCA) study for TSMC was conducted in 2002. The functional unit is defined as per 8-inch wafer produced; and the system boundary is investigated from internal data of TSMC to major suppliers and contractors. The study collected and calculated data from energies, raw materials, and pollutants from silica, wafer production, wafer processing, and major chemicals needed, i.e., from cradle to gate. included: Commitment to Education The highlight of the year is TSMC Esthetics Education Program. Dr. F. C. Tseng led the Foundation to launch a project to promote esthetics education for elementary school students in rural Taiwan. By offering exposure to the fine arts at a young age, the Foundation hopes to enable children to develop talents, creativity, and enhance art appreciation skills. TSMC Foundation continued in 2002 three educational grant programs to National Tsing Hua University to help incubate emerging talents in high technology, corporate management, and intellectual property rights. The collaboration with the IMBA program of National Chengchi University also extended into 2002 to foster the cultivation of international business leaders. Contribution to the Communities in which TSMC has fab operation TSMC Foundation renders extensive services in communities where TSMC's facilities are located. The Foundation provides funding to build a better community for both TSMC employees and neighbors. The Foundation focuses on art and cultural activities, environmental protection issues, athletic events, as well as other programs to help enhance the quality of life. Sponsorship of National Arts and Cultural Activities Major national art and cultural events sponsored by TSMC Foundation in 2002 include: (1) The Taipei House Project- the restoration of the former American Ambassador's Residence into a film exchange gateway for Taiwan's movie industry, (2) The World of Heavenly Khan- Treasure of T'ang Dynasty Exhibition- In addition to exhibition sponsorships, the Foundation also hosted trips to visit the exhibitions by students of elementary and junior high schools in the vicinity of TSMC fab sites. Social Wellness and Other Programs TSMC Foundation extended its sponsorship for the second year to support the training of 480 home caretakers by Red Cross of the Republic of China (Taiwan), in the interest of servicing self-care living by senior citizens. TSMC Foundation was also a major sponsor to an important student volunteer program with the purpose to promote student volunteer works in the community services of 319 towns in Taiwan. Recognitions & Awards TSMC Foundation received the Annual Gold Medal of the Wen-Hsin Award by the Council for Cultural Affairs for the fifth consecutive year. CommonWealth Magazine ranked TSMC No. 1 in Corporate Citizens for the third consecutive year. The Foundation also received Taipei Cultural Award from the Culture Bureau, Taipei City Government, as a tribute to the Foundation's educational and cultural services for the city. Foundation Chairman Dr. FC Tseng welcoming the first group of the students to join TSMC Esthetic Education Trip. Chairman Morris Chang congratulating on the opening of Taipei House, the former American Ambassador's Residence. Dr. Tseng accepting the Taipei Culture Award from Taipei City Mayor Ma on behalf of TSMC Foundation. TSMC 30 Annual Report 2002 TSMC 31 Annual Report 2002 OPERATIONAL HIGHLIGHTS 1. Business Activities 1.1 TSMC Business Scope TSMC's business focus is on IC foundry and associated services. The Company excels in every aspect of its business, namely, process technologies, wafer manufacturing, capacity utilization, customer services, as well as a wide range of support services including design services, mask manufacturing, wafer probing, in-house bumping and testing. Over the past 16 years, customers worldwide have relied on TSMC to manufacture chips that are used across the entire spectrum of electronic applications. 1.2 Customer Applications TSMC's customers sell the advanced IC chips to a diverse range of electronic end products, including PCs, servers, computer peripherals, information appliances, wired and wireless communications systems, automotive and industrial equipment, and also consumer electronics such as DVD players, game consoles and digital still cameras (DSC). The innovative evolution of end product applications drives the customers to utilize TSMC's technologies and service, and simultaneously steers TSMC to further its technology development as well. 1.3 Net Sales over the Last Two Years Unit: Quantity (8-inch wafer) / Amount (NT$K) Sales Quantity & Amount Year 2002 Major Product Wafer Package Other Total Local Export Quantity Amount Quantity Amount 486,036 17,552,160 2,137,078 125,580,978 85 13,407 13,268 1,603,118 51,903 36,415 3,521,966 12,689,700 499,389 19,168,685 2,225,396 141,792,644 Sales Quantity & Amount Year 2001 Major Product Wafer Package Other Total Local Export Quantity Amount Quantity Amount 539,347 28,267,693 1,544,899 80,969,736 19,209 12,523 1,241,470 3,067,248 55,022 35,871 3,556,057 8,785,799 571,079 32,576,411 1,635,792 93,311,592 1.4 Production over the Last Two Years Unit: Capacity / Quantity (8-inch wafer) / Amount (NT$K) Year 2001 2002 Wafers Capacity Quantity (Note 1) Amount (Note 2) 4,378,925 3,890,893 2,234,163 2,833,818 83,741,166 90,745,812 Note 1: Wafer out Note 2: Total Manufacturing Cost = Wafer out x Actual Unit Cost TSMC 32 Annual Report 2002 TSMC 33 Annual Report 2002 2. Customers 4. Employees TSMC conducts regular reviews and surveys to ensure that customers needs are adequately addressed. Improvement plans and feedback to customers are integral parts of this business process. TSMC Personnel Structure by Gender, Age and Service Year TSMC's customers are globally based, have diverse product specialties, and enjoy prominent standing in the various business segments of the semiconductor industry. Fabless segment customers include those such as Altera Corporation, Broadcom Corporation, NVIDIA Corporation, Qualcom Incorporated and VIA Technology Inc. Examples of IDM customers include Analog Devices Inc., Motorola Inc., and Philips Electronics N.V.. TSMC's business with NVIDIA Corporation amounted to over 10% of TSMC's revenue in 2002. No other customer has business with TSMC that amounted to 10% or more of Company revenue in 2002. 2.1 Customer Service TSMC has declared itself a service-oriented company in the belief that customer service is the critical factor in enhancing customer loyalty. TSMC believes that customer loyalty leads to higher levels of customer retention and expansion of relationships. It is TSMC's goal to become the most advanced and largest technology and foundry service provider. TSMC also believes that achieving this goal will attract, serve, and retain customers, meanwhile to enhance customer loyalty and partnership. To facilitate customer interaction and information access on a real time basis, TSMC has established a range of internet based services covering applications in design collaboration, engineering collaboration, and logistic collaboration. They are collectively branded as e-foundry sm. 2.2 Customer Satisfaction 2.3 Market Expansion/Penetration TSMC continued to diversify its customer base while supporting growth of existing customers. Among all active customers in 2002, over 30 of them were new. TSMC's customers also gained market share in a number of end applications, include computer, wired communications, wireless communications, and consumer electronics. 3. Raw Material Supply Major Materials Major Suppliers Market Status Wafer MEMC SUMCO S.E.H. Wacker These four suppliers provide over 80% of the world's wafer capacity from multiple manufacturing sites, including USA, Asia and Europe. Chemicals Merck-Kanto These two companies are major global bulk chemical suppliers. Tai-Young High Tech The chemical raw materials of these two suppliers are either imported from Japan or, sourced from local Taiwan producers. Photoresist T.O.K. S.E.H. Sumitomo AZ/Clariant These four companies are worldwide major photoresist suppliers. They all store stock in Taiwan and provide just in time service. Specialty Gases TAIYO TOYO SANSO These four companies are worldwide major specialty gas suppliers. AIR PRODUCT AIR LIQUID BOC TSMC 34 Annual Report 2002 Attracting and retaining the right talent is one of the key objectives of TSMC's human resource strategy. TSMC's total workforce, by the end of 2002, reached 14,938 in number. New staff in 2002 consisted of 110 managers, 500 professionals and 700 technicians. Gender-wise, female employees made up 57.8% of TSMC's total staff and 13% of its managerial personnel. Nationality-wise, 4.5% of TSMC's employees at the professional and managerial levels are non-Taiwan nationals. TSMC's staff are highly educated: 3% of employees hold Ph.D.'s, 25% Masters, 15% university bachelors, 26% college degrees, and 31% high school graduates. The following table shows the TSMC personnel structure from 2000 until February 28, 2003. TSMC Personnel Structure by Job Title Manager Professional Assistant Engineer/Clerical Technician Total 2000 1,249 4,950 1,063 7,360 2001 1,286 4,600 982 6,801 14,622 13,669 Male Female Gender Average Age Average Service Year 4.1 Human Capital 2000 41.7% 58.3% 28.9 3.2 2001 42.1% 57.9% 29.8 4.1 2002 As of 02/28/2003 1,465 5,077 914 7,482 14,938 1,477 4,978 904 7,343 14,702 2002 As of 02/28/2003 42.2% 57.8% 30.0 4.2 42.4% 57.6% 30.2 4.5 TSMC strives to create an environment that provides favorable work set-ups, offers personal challenges, and supports career development. As a result, TSMC maintained a relatively high retention rate among its highly educated workforce. TSMC also endorses professional know-how, positive attitude, affirmative values, honest behavior and genuine commitment to succeed as part of its human capital base. There have been no major labor disputes or financial losses as a result of labor disputes from January 1, 2002 until February 28, 2003. 4.2 People Development Continuous learning is the cornerstone of TSMC's employee development strategy. TSMC implemented the individual employee development plan initiative (IDP) in 2002. Each IDP is customized to meet the employees' personal development aspirations as well as duty-oriented needs. 4.3 Employee Satisfaction TSMC conducts annual Employee Satisfaction Survey to determine improvement or degradation in employee involvement and engagement. As another indicia of employee satisfaction, TSMC has been recognized as "Best Employer in Asia" in the regional Hewitt Associates, Asia Wall Street Journal, and Far Eastern Economic Review. 4.4 Compensation The Company's compensation program consists of cash compensation and profit sharing. Cash compensation includes base salary and quarterly cash incentive bonus; and profit sharing is awarded in the form of stock grants. TSMC 35 Annual Report 2002 Profit Sharing • 0.18um CMOS Image Sensor Process This is a variable incentive compensation for TSMC employees, which is designed to link employees' interest directly with that of the TSMC released 0.18um high performance CMOS Image Sensor Process. It was compatible with TSMC's 0.18um CMOS logic process shareholders. The total budget for each year's profit sharing plan is based on the distributable net income for the year. Individual and embedded memory process, thus providing a SoC platform for consumer and industrial imaging applications. rewards are based on each employee's job responsibility, contribution, and performance. The value of profit sharing constitutes a significant portion of the employees' total compensation. The more senior in responsibility, the greater proportion of their total compensation is dependent on the variable profit sharing plan, especially for managers and executives. Eight percent of the Company's 2001 distributable net income (net of legal reserve), in the form of 107,078,388 common shares, was approved by the shareholders for employee profit sharing awarded in July 2002. • Embedded Memory Technology TSMC successfully manufactured 0.13um 1TRAM products. • Flash/Embedded Flash Technology TSMC released an embedded Flash technology for very stringent automotive applications. Additionally, TSMC served the smart card market segment by extending 0.25um embedded Flash technology. For 0.18um embedded Flash technology, TSMC also demonstrated To align with respective market practices, our overseas employees do not participate in the profit sharing plan, instead they participate 8 M IP block in both 2.5V and 1.8V operations. in our ESOP. The options are granted for a period of 10 years with a vesting schedule of 50% in second year, 75% in third year and 100% in fourth year. 5. Innovation 5.1 R&D Organization and Investment TSMC believes that its R&D team is among the highest-quality and largest-applied semiconductor research teams in the world. TSMC increased its process R&D staff by over 12% in 2002. The personnel engaged in exploratory technologies increased three-fold in order to strengthen long-term R&D focus. R&D expenditure increased in 2002 by 10% to NT$ 11.7 billion. TSMC started in Fab12 a 300mm RD pilot line in 2002 to extend the R&D of 90nm and future technology generations. Also established in 2002 were: a new characterization lab for advanced materials; an advanced lithography center; and a process/material simulation lab that extends its fundamental and exploratory work in semiconductor technology. TSMC also has developed strong relationships with key process tool and materials vendors. 5.2 R&D Accomplishments in 2002 Reflecting its commitment to innovation, TSMC was awarded 462 US patents and 552 ROC patents in 2002. TSMC's R&D also • State-of-the-art Mask Technology TSMC mask work facilities featured state-of-the-art E-beam mask writers and inspection tools for both R&D and production use. • Design Services TSMC enriched its advanced libraries/IP portfolio for 0.13um and 90nm process technologies. TSMC also further strengthened design services by launching the on-line technical information service - DocuFastsm. The Docufast service allows customers to download a set of TSMC technical documents that are well managed to ensure consistency and comprehensiveness. 5.4 R&D Plans for 2003 Moving forward in 2003, TSMC's R&D focus will be on Nexsys 90nm logic/mixed signal technology platforms and related embedded memory for SoC applications in 300mm wafers; 65nm logic technology; 0.13um embedded memory; 0.18um color image sensors; 0.25um high-voltage process modules, as well as low power, low cost, customized SiGe RF BiCMOS technologies and support process. TSMC plans to continue to work closely with international consortia and photolithography equipment suppliers to ensure timely development of 193 high NA scanner, EUV scanner, E-Beam Projection technology and "liquid immersion lithography" to support process development of sub-90nm technology. TSMC's R&D team will also explore processes beyond the 65nm generation, including geometries as small as 40nm and 30nm. Exploratory work is already under way on new transistors and process technologies such as SOI, 3D structures, MRAM, and strained-layer CMOS. The new focus will be on developing advanced high-k gate insulators and extreme low-k interconnect insulator materials. demonstrated an industry-leading 90nm CMOS logic process. We believe that this new process can become a leading SoC platform As companies worldwide have reduced their investments in advancing semiconductor technologies, TSMC plans to maintain its long- in the industry. Several breakthroughs were also made in demonstrating spin-on and chemical vapor deposition-based low-k term lead over competitors in the foundry segment of the semiconductor industry through a strong exploratory technology research processes with dielectric constants below 2.5 for future technology nodes. program. With its highly competent and dedicated R&D team, and its commitment to innovate, TSMC is confident of its ability to deliver TSMC conducts exploratory technology research in several important areas, including new device structures, strained Si, SOI, and novel nonvolatile memory. For example, TSMC published several novel designs of transistors known as FinFETs that achieve higher performance and lower leakage than traditional transistors, meeting the stringent leakage and speed projections of the International Technology Roadmap. We believe that these devices should be able to meet the needs of most applications in 2010. 5.3 Spectrum of New Technologies New process technology options were introduced in 2002: • 0.13um Mixed-Signal/RF Technology TSMC delivered more than 30 customer products within this technology field. • Silicon Germanium RF BiCMOS Technology TSMC succeeded in developing 0.18um SiGe RF BiCMOS technology. This process is compatible with TSMC's baseline 0.18um CMOS logic processes and, when combined with other features, can develop in a single chip for high speed, low power, low noise, wired and wireless applications. the best and most cost-effective SoC processes for its customers. TSMC 36 Annual Report 2002 TSMC 37 Annual Report 2002 6. Efficiency 6.1 Supply Chain Integration/Collaboration One goal of TSMC is to be the most efficient partner of a customer's global supply chain integration and collaboration. Accordingly, since 2001, TSMC has initiated an enterprise supply chain management program to improve operational efficiency and increase customer satisfaction. TSMC expects that this program will reduce significantly a customer's response time demand and to improve delivery schedule accuracy. 6.2 Inventory Management 7. Quality TSMC is committed to provide to its customers the best quality wafers for their products. TSMC Q&R ensures best quality wafer manufacturing from technology development to production through reliability evaluation, failure analysis, and qualification. Wafer manufacturing quality starts from material supply management, real time in-process monitoring, to customer feedback. TSMC Q&R also helps to steer the company towards the ultimate goal of zero defect through continuous improvement programs in terms of cost conscious, and efficient systems and effective methodologies. Customers' feedback suggests that products shipped have either met or exceeded their field quality requirements in the marketplace. Also, in 2002, TSMC was the industry's first company to receive certification of the latest ISO automotive specification requirements - ISO/TS16949:2002. TSMC implemented a series of collaborative projects in 2002 to integrate information among Materials Management Division, IT Divisions, Accounting, and Fab users. We believe that the results have successfully enhanced the efficiency and effectiveness of the entire supply chain. 8. Environmental Protection & Expenditures Two major noteworthy projects are Supply On-Line and Materials Planning Management System (MPMS). The former focuses on 8.1 Air Quality and PFC Emission integrating suppliers' related information and to make the information accessible to suppliers. This has resulted in a significant reduction TSMC's air pollution prevention facilities meet rigorous environmental standards. For example, TSMC has achieved a lower than legal standard in inventory levels. The latter stresses improving demand forecasts, resulting in significant improvement in raw material service levels, emission rate in terms of volatile organic compounds, acid gases, and alkali gases. Since 1993, TSMC has also phased out ozone-depleting thus reducing the risk of material shortage. 6.3 Value from Key Process in the Form of Time Saving and Cost Savings Major TSMC business process re-engineering projects include: Demand Fulfillment Process Re-engineer key order fulfillment processes to improve TSMC overall responsiveness to customers' demands and management of the supply chain. Customer Service and Satisfaction Process Reconstruct the process flow for customer service by providing integrated service and offering active and effective solutions to meet customer demands. Technology Deployment Process Establish a process flow from new technology development to volume production that results in more effective cost performance and faster product-to-market time. Recruiting and Development Process substances in all manufacturing processes. TSMC has endorsed a memorandum by the Taiwan Semiconductor Industrial Association to reduce, until 2010, perfluorinated compounds (PFCs) emission a value of 10% compared with the averages of 1997 through 1999. 8.2 Water Consumption TSMC successfully weathered through the 2002 drought through a series of water conservation measures. TSMC has also set priority to improve water recovery ratio and to reduce water usage by process tools. 8.3 Energy Consumption and Conservation TSMC's Fab 8 won the "Energy Conservation Award" by the Ministry of Economic Affairs (MOEA), Taiwan in 2002. 8.4 Waste Disposal and Land Contamination TSMC's industrial waste that cannot be reused or recycled is treated with incineration methods. In 2002, a small portion of general industrial waste was sent to landfills environmentally certified (2,000 tons). All lands on which are located TSMC's fabs are free from contamination, according to the standards set out by Soil and Groundwater Pollution Remediation Act of Taiwan's Environmental Protection Agency (EPA). This process is being re-engineered to ensure that we enhance our effectiveness in recruiting and developing the right talents, so that we have the right organizational capabilities and high performance culture to optimize TSMC's growth potential. 8.5 Environmental Performance TSMC enforces a rigorous ESH Policy that complies with Taiwan's EPA regulations, and we believe, complies with most international environmental standards. There was only one non-compliance reportable incident in 2002. In that case, TSMC accidentally discharged a small amount of diesel oil into a storm sewer. TSMC took remedial actions and was fined by Hsinchu City Environmental Protection Bureau (EPB) for about NT$ 60,000. TSMC has contributed significant resources to ESH improvement programs. These efforts earned TSMC four national awards in 2002: (1) "Annual Environmental Protection Award for Enterprises" from the EPA, (2) "National Award for Outstanding Achievements in Operation and Maintenance for Pollution Control Facilities" from the Industry Development Bureau, (3) "Energy Conservation Award" from the MOEA, and (4) "Water Conservation Outstanding Performance Awards" from the Water Resources Agency. In addition, TSMC was also one of the Dow Jones Sustainability Indexes (DJSI) components in 2001 and 2002. Components of the DJSI are selected among companies worldwide on exceptional corporate sustainability achievements. DJSI provides a linkage between companies implementing sustainability principles and investors wishing to profit from these companies' superior performance and favorable risk/return profiles. TSMC 38 Annual Report 2002 TSMC 39 Annual Report 2002 9. Important Contracts • Technology Cooperation Agreement Term of Agreement: 07/09/1997 - 07/08/2007 • Patent License Agreement Term of Agreement: 1/1/2001 - 12/31/2011 Contracting Party: A multinational company Summary: Under this agreement, the parties have entered into cross license arrangements for certain semiconductor patents. TSMC Contracting Party: Philips Electronics N.V. (now renamed Koninklijke Philips Electronics N.V.) (Philips) shall pay license fees to the said company. Summary: Under this agreement, TSMC is obliged to pay to Philips royalties at a fixed percentage of net sales for certain products. • Manufacturing Agreement • Amended and Restated Joint Technology Cooperation Agreement Term of Agreement: 7/16/2001-12/31/2005 Term of Agreement: 02/16/1996 - 12/31/2005, automatically renewed for one year unless terminated with a six-month prior written Contracting Party: STMicroelectronics NV, Philips Semiconductors International B.V., Motorola, Inc. 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 Summary: Under this agreement, the parties have entered into a joint technology cooperation arrangement for certain high- performance and advanced semiconductor technologies development. production period. • Shareholders' Agreement Term of Agreement: Effective as of 03/30/1999 and may be terminated as provided in the agreement. Contracting Party: 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% 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 10. Litigation Proceedings To protect its intellectual capital, trade secrets, and other assets, TSMC may initiate as appropriate, litigation against former employees and third parties. Also, as is the case for many companies in the high-technology industry, TSMC receives from time to time communications from third parties asserting that TSMC's technologies, designs, and manufacturing processes may infringe certain patents or other intellectual property rights. TSMC takes these matters seriously. TSMC investigates all such claims and takes action as is appropriate under the circumstances. TSMC was not involved in any material litigation in 2002 and is not currently involved in any material litigation. 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 11. Acquisition or Disposal of Property, Plant and Equipment remuneration at a certain percentage of the net selling prices of its products. 11.1 Acquisition of property, plant and equipment; in the amount no less than NT$300 million, or 20% • Patent License Agreement Term of Agreement: 10/26/2001 - 12/31/2006 Contracting Party: A multinational company Summary: Under this agreement, the parties have entered into cross license arrangements for certain semiconductor patents. • Foundry Related Agreements Term of Agreement: 1995 - 2004 Contracting Parties: Several multinational companies Summary: Under these agreements, TSMC guarantees a pre-determined capacity for a set number of years to customers. In return, customers deposit certain money with TSMC. • Manufacturing Agreement Term of Agreement: 2/14/2000 - 2/13/2005 Contracting Party: Vanguard International Semiconductor Corporation (VIS) Summary: Under this agreement, VIS shall reserve its certain capacity to manufacture for TSMC certain devices required by TSMC's customers, at prices as agreed by the parties. • Patent License Agreement Term of Agreement: 11/1/2002 - 10/31/2012 Contracting Party: A multinational company of paid-in capital Property, Plant and Equipment Fab12 Plant & Office Fab12 Process Hook-Up, SP2 Acquisition Date 03/31/02 03/31/02 Total Price Vendor 2,331,870 Fu Tsu Construction 410,642 Marketech Fab12 Electrical Power Equip., GIS & Engineering 03/31/02 1,113,300 United Integrated Services Fab12 Cleanroom System 03/31/02 1,104,326 M+W Zander Fab12 Ultra Pure Water & Reclaim System, DI Water 03/31/02 392,193 Organo Fab12 Gas System & Piping Fab7 Cleanroom System Interbay System Scanners Scanners 03/31/02 01/01/2002 03/31/2002 03/31/2002 ~ 12/31/2002 01/31/2003 ~ 02/28/2003 482,438 Confederate Technology 307,457 M+W Zander 680,403 SHINKO 3,434,792 ASML 1,155,807 ASML Electronic Beam Operation 2002/06/30 364,334 KLA - TENCOR Unit: NT$K Relationship with the Company Purpose None None None None None None None None None None None in-house use in-house use in-house use in-house use in-house use in-house use in-house use in-house use in-house use in-house use in-house use Summary: Under this agreement, the parties have entered into cross license arrangements for certain semiconductor patents. TSMC 11.2 Disposal of property, plant and equipment up to NT$300 million or 20% of paid-in capital: None shall pay license fees to the said company. • Patent License Agreement Term of Agreement: 7/1/2002 - 6/30/2009 Contracting Party: A multinational company Summary: Under this agreement, the parties have entered into cross license arrangements for certain semiconductor patents. TSMC shall pay license fees to the said company. TSMC 40 Annual Report 2002 TSMC 41 Annual Report 2002 FINANCING PLANS AND IMPLEMENTATION 1. Preferred A Shares 1.1 Financing Plans Source of Fund Issuance Issuing Date Tenor Rate Outstanding Preferred A Shares 11/29/2000 2.5 Years 3.50% 1,300,000,000 Shares Use of Fund Project Project Amount (NT$K) Expansion Plan Fund Used in 2001 (NT$K) Fund Used in 2002 (NT$K) Fab 12 Equipment Procurement 32,700,000 8,250,000 24,450,000 Approved by the Securities and Futures Commission and disclosed on the Taiwan Stock Exchange Market Observation Post System on 09/22/2000. 1.2 Status of Implementation & Benefits Expansion plan completed as of 12/31/2002. 2. Corporate Bond 2.1 Financing Plans Source of Fund Issuance Issue Date Tenor Coupon Rate Outstanding Corporate Bond 01/10/2002 - 01/24/2002 Class A: 5 years Class B: 7 years Class C: 10 years Class A: 2.60% 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 Use of Fund Project Expending Plan Fund Used in 2002 (NT$K) Future Fund Use (NT$K) The proceeds of the bond finance a part of Fab 14 investment that is expected to amount to NT$77.63 billion in total. 3,278,000 74,352,000 Approved by the Securities and Futures Commission and disclosed on the Taiwan Stock Exchange Market Observation Post System on 12/17/2001. 2.2 Status of Implementation & Benefits Project commenced in 2002 and expected to last until 2004. TSMC 42 Annual Report 2002 TSMC 43 Annual Report 2002 FINANCIAL STATUS, OPERATING RESULTS, AND RISK MANAGEMENT 1. Financial Position 2002 2001 Variance Variance % Unit: NT$K Item Current Assets Fixed Assets Other Assets Total Assets Current Liabilities Long-term Liabilities Total Liabilities Capital Stock Capital Surplus 94,747,405 63,652,726 31,094,679 217,192,263 215,499,242 1,693,021 23,097,348 23,713,325 (615,977) 370,015,511 335,734,684 34,280,827 31,160,103 25,210,619 5,949,484 43,002,201 33,333,990 9,668,211 74,162,304 58,544,609 15,617,695 199,228,867 181,325,531 17,903,336 57,004,789 57,128,433 (123,644) Retained Earnings 40,792,197 37,507,410 3,284,787 Total Shareholders' Equity 295,853,207 277,190,075 18,663,132 1.1 Variance Analysis for Deviation over 20% • The increase in current assets was largely due to an increase in cash and cash equivalents, which in turn, resulted from operating activities and the issuance of corporate bonds. • The increase in current liabilities was primarily due to an increase in payables to vendors, contractors and equipment suppliers. • Long-term liabilities increased as a result of the issuance of corporate bonds. 1.2 Major Impact on Financial Position: There was no significant impact on financial position. 1.3 Future Plan on Financial Position: Not Applicable 2. Operating Results Item Gross Sales 2002 2001 Variance Variance % Unit: NT$K 164,805,296 128,563,819 36,241,477 Less: Sales Returns and Allowances (3,843,967) (2,675,816) (1,168,151) Net Sales Cost of Sales Gross Profit Operating Expense Operating Income 160,961,329 125,888,003 35,073,326 108,994,184 89,506,952 19,487,232 51,967,145 36,381,051 15,586,094 17,790,839 19,038,765 (1,247,926) 34,176,306 17,342,286 16,834,020 Non-operating Income 1,762,893 2,891,557 (1,128,664) Non-operating Expense 8,826,744 9,575,128 (748,384) Income Before Tax Tax Benefit (Expense) Income After Tax 27,112,455 10,658,715 16,453,740 (5,502,164) 3,824,459 (9,326,623) 21,610,291 14,483,174 7,127,117 49% 1% -3% 10% 24% 29% 27% 10% 0% 9% 7% 28% 44% 28% 22% 43% -7% 97% -39% -8% 154% -244% 49% TSMC 44 Annual Report 2002 TSMC 45 Annual Report 2002 2.1 Variance Analysis for Deviation over 20% 3. Cash Flow • Increase in net sales and gross profit: The increase was largely due to the increase in customer demand. The improved gross profit was primarily due to higher capacity utilization and improved product mix. • Increase in sales returns and allowances: The sales returns and allowances increased as a result of a more conservative provision on the potential sales returns & allowance. • Increase in cost of sales: The cost of sales increased as a result of higher sales activity. Cash Balance as of December, 2001 Net Cash Provided by Operating Activities Net Cash Outflows from Investing and Financing Activities Cash Balance as of December, 2002 Remedy for Cash Shortfall Investment Plan Financing Plan 33,403,706 94,288,101 (66,035,012) 61,656,795 - - Unit: NT$K • Reduction in non-operating income: The reduction was primarily due to inclusion in 2001 of a non-recurring insurance claim. In addition, interest income also decreased as the result of lowered interest rates. 3.1 Analysis of Cash Flow • Increase in income tax expense: The increase was caused by lower tax credits and higher taxable profit. 2.2 Reasons for changing the Company's major business; explain the variance resulting from the adjustment of selling prices or costs, the increase or decrease of quantity and the combination of production and selling, or the replacement of old products. If the Company's operation strategy, market situation, economic environment or other internal or external factors has changed or expects to have any significant change, explain the fact, influencing factors and the possible impact to the Company's future finance and responding proposal: Not Applicable 2.3 Planned selling quantities and its base for next year. Explain the major factors that keep the Company's forecast sales quantity to rise or decline: Please refer to "Letter To The Shareholders". 2.4 Gross Profit Variance Analysis Unit: NT$Million Gross Profit in 2001 Gross Profit in 2002 Variance Variance Owing to Price Difference Variance Owing to Cost Difference Variance Owing to Product Mix and Quantity Difference 36,381 51,967 15,586 (13,677) 1. Competition & excess capacity globally caused unfavorable price variance. 2. Technology advancement caused price level to erode. 11,583 17,680 Increased utilization from 51% in 2001 to 73% in 2002 resulted in cost savings due to efficient asset turnover. 1. Revenue from advanced technology increased from 32% in 2001 to 52% in 2002, this mix improvement results in higher Gross Profit. 2. Wafer shipment growth 24% in 2002, this quantity difference results in higher Gross Profit. • NT$94.2 billion net cash provided by operating activities: This represents the sum of (1) profit from operating activities, and (2) non cash charges such as depreciation and amortization expenses. • NT$66.0 billion net cash outflows from investing and financing activities: This represents the sum of (1) NT$69.6 billion for investment activities mainly for capital expenditures; offset by (2) NT$3.6 billion net cash inflow from financing activities (being the surplus of bond issue proceeds, less bond repayment and return/release of funds to customers). 3.2 Remedy for Cash Shortfall and Liquidity Analysis: Because TSMC enjoys a cashflow surplus, remedial actions are not required. 3.3 Cash Flow Projection for Next Year: TSMC does not provide financial projections, including cash flow projections. 4. Major Capital Expenditure 4.1 Major Capital Expenditure and Its Source of Capital Project Production Equipment R&D Equipment Actual or Planned Source of Capital Owner's Equity/Bond Owner's Equity/Bond Actual or Planned Completion Date in 2002 Total Amount The Execution of Major Capital Expenditure 2001 2002 2003 (Note) 2004 (Note) 2005 (Note) Unit: NT$K Completed 99,657,084 51,059,596 48,597,488 Completed 11,146,037 8,929,830 2,216,207 - - - - - - Note: Can not be reasonably estimated at the time of preparation. 4.2 Estimated Possible Benefit It is estimated that TSMC production capacity may be increased annualy by 500,000 8-inch equivalent wafers in 2003 and onwards, owing to the above capital expenditure investment. Other Benefits (e.g. Product Quality, Anti-Pollution, Cost Reduction and etc.): Please refer to "Operational Highlights". 5. Long-term Investment None of the current year investments exceeded 5% of the Company's capital. TSMC 46 Annual Report 2002 TSMC 47 Annual Report 2002 6. Risk Management 6.4 Political and Regulatory Environment 6.1 Environmental, Safety and Health (ESH) Risks and Emergencies and Natural Disasters TSMC is committed to maintaining a comprehensive risk management system dedicated to the safety, security, and protection of our people, our assets, as well as those of our vendors and customers. Dedicated processes and procedures exist for: (1) ESH Management; (2) Risk Analysis; and (3) Accident Prevention and Loss Minimization. TSMC's management team monitors closely political and regulatory developments which could have an impact on TSMC business and operations. Political and regulatory developments did not have an adverse effect on TSMC during 2002. Since TSMC is also a NYSE listed company, TSMC is required to comply with the provisions of Sarbanes-Oxley Act (and relevant regulations) that are applicable to non-US companies. Not only has TSMC taken measures to ensure compliance with applicable regulatory requirements, TSMC will continue to monitor regulatory developments and to implement changes as necessary for TSMC has adopted the International Standard on Environmental Management Systems (ISO 14001) as its standard for environmental compliance. management. TSMC Fabs 2, 3, 5, 6, 7, 8 and 12 all have been ISO 14001 certified. TSMC is also Taiwan's first semiconductor company 6.5 Contingent Plans for Events That May Have a Significant Adverse Impact on the Company's Business TSMC is dedicated to maintaining the highest degree of integrity, ethics, and fairness in managing and running its operations. TSMC management does not tolerate unethical behavior or compromise of its core values and principles. TSMC pays special attention to emergency preparedness for natural and man-made disasters such as typhoons, earthquakes, and environmental contamination. We have established extensive contingency planning including the establishment of processes and procedures for creating emergency task forces as and when necessary. In such a situation, contingency planning would include the preparation of a thorough analysis of the emergency, its impact, alternatives, and solutions for each possible scenario, and appropriate precautionary and/or recovery measures. Each task force's responsibility would be to ensure TSMC's ability to conduct business with as little personal harm, business disruption, and financial impact as possible under the circumstances. As of the date of this Annual Report, there are no reportable material contingencies. to receive OHSAS 18001 certification for Fabs 2, 3, 5, 6, 7, 8 and 12. In order to deal with emergencies and natural disasters at each of our facilities, TSMC has developed comprehensive plans and procedures focusing on loss prevention, emergency response, crisis management, and business recovery. We maintain specialized prevention and response teams trained both to handle emergencies and to work closely with government agencies should an emergency situation ever arise. 6.2 Management of Financial Operations Internal policies and procedures exist with respect to high-risk/high-leveraged investment, lending/endorsement and guarantee for other parties, financial derivatives transactions Because TSMC focuses on running its foundry manufacturing operations both effectively and efficiently, it does not engage in high-risk/ high-leveraged investments. To control and monitor various types of financial transactions, the Company has established internal policies and procedures based on sound financial and business practices, all in compliance with the relevant rules and regulations issued by the Taiwan Securities and Futures Commission. TSMC policies and procedures include "Policies and Procedures for Financial Derivatives Transactions", "Procedures for Lending Funds to Other Parties", "Procedures for Acquisition or Disposal of Assets," and "Procedures for Endorsement and Guarantee". The financial transactions of a derivative nature that TSMC enters into are strictly for hedging purposes and not for any trading or speculative purpose. Covenants Two of TSMC's subsidiaries, TSMC Development, Inc. and WaferTech, LLC, have entered into long-term syndicated loan facility agreements. In connection with those agreements, TSMC provides guarantees up to US$680 million in the aggregate. Customary Borrower and/or Guarantor covenants exist in those agreements. 6.3 Internal Management of Economic Risk Interest Rate Fluctuation TSMC's exposure to interest rate risks derives primarily from long-term debt obligations that are incurred in the normal course of business. The Company's policy is to limit its exposure to risks associated with rising interest rates and, therefore, TSMC finances its needs through long-term, fixed-rate debt. Foreign Exchange Volatility The Company is exposed to foreign exchange risks for both revenues and procurement. Most of TSMC's revenues derive from the export of its products (88% in 2002). A substantial portion of the Company's procurement of equipment, tools and material is imported. Therefore, in order to protect against reduction in value resulting from foreign exchange rate volatility, TSMC utilizes mainly forward currency contracts to hedge its foreign exchange exposure. Inflation Inflation in Taiwan was approximately -0.2% in 2002. It did not have a significant impact on TSMC operations and profits. TSMC 48 Annual Report 2002 TSMC 49 Annual Report 2002 FINANCIAL INFORMATION 50 TSMC Annual Report 2002 TSMC Annual Report 2002 51 1. Condensed Balance Sheet Financial Analysis from 1998-2002 Item Current assets Long-term investments 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 Unrealized loss on long-term investment Cumulative transaction adjustments Total Assets Total Liabilities Before distribution After distribution Total Equity Before distribution After distribution *Subject to change after shareholders' meeting resolution 1998 1999 2000 2001 26,378,422 17,537,765 73,636,209 6,554,817 8,138,796 8,276,867 25,025,206 6,872,545 60,471,760 164,219 24,162,113 9,010,971 - (727,426) 124,107,213 38,770,670 28,208,643 89,566,029 4,877,392 14,469,329 14,684,480 20,000,000 6,183,565 76,708,817 11,831,411 33,320,615 11,785,153 - (101,981) 161,422,734 85,950,586 33,422,010 207,005,370 14,594,492 41,188,662 41,814,102 29,000,000 9,030,097 129,893,646 55,285,821 76,924,173 24,866,848 (71,564) (278,377) 340,972,458 63,652,726 32,869,391 215,499,242 23,713,325 25,210,619 25,799,467 24,000,000 9,333,990 181,325,531 57,128,433 37,507,410 19,015,226 - 1,228,701 335,734,684 Unit: NT$K 2002 94,747,405 34,978,495 217,192,263 23,097,348 31,160,103 * 39,281,665 3,720,536 199,228,867 57,004,789 40,792,197 * (194,283) 945,129 370,015,511 40,036,547 40,174,618 40,652,894 40,868,045 79,218,759 79,844,199 58,544,609 59,133,457 74,162,304 * 84,070,666 83,932,595 120,769,840 120,554,689 261,753,699 261,128,259 277,190,075 276,601,227 295,853,207 * 2. Condensed Statement of Income Financial Analysis from 1998-2002 Item 1998 1999 2000 2001 2002 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 continued segments-before tax Income from operations of continued segments-after tax Net income Earnings per share Capitalized interest 50,233,008 20,336,042 16,202,245 1,024,981 287,295 566,020 981,388 73,131,206 33,240,484 25,916,619 1,249,706 3,056,460 808,616 1,415,527 166,228,420 75,996,839 60,541,105 5,409,307 2,112,818 1,575,460 1,858,197 125,888,003 36,381,051 17,342,286 2,891,557 9,575,128 1,365,919 1,951,830 160,961,329 51,967,145 34,176,306 1,762,893 8,826,744 1,008,147 2,119,935 13,648,622 24,109,865 63,837,594 10,658,715 27,112,455 15,344,203 15,344,203 2.54 0.98 661,414 ** *** 24,559,884 24,559,884 3.24 1.56 305,312 ** *** 65,106,194 65,106,194 5.71 3.58 72,903 ** *** 14,483,174 14,483,174 0.83 0.75 207,297 ** *** 21,610,291 21,610,291 1.14 ** 165,857 * Certain accounts of 1998 through 2000 have been reclassified to conform to 2001 & 2002 classifications ** Based on weighted average shares outstanding in each year ***Retroactive adjustment for capitalization of unappropriated earnings and bonus to employees 52 TSMC Annual Report 2002 3. Financial Analysis Financial Analysis from 1998-2002 Capital Structure Debts ratio(%) Analysis Long-term fund to fixed assets (%) Liquidity Analysis Current ratio (%) Operating Performance Analysis Profitability Analysis Quick ratio (%) Times interest earned (times) Average collection turnover (times) Days sales outstanding Average inventory turnover (times) Average inventory turnover days Average payment turnover (times) Fixed assets turnover (times) Total assets turnover (times) Return on total assets (%) Return on equity (%) Operating income to capital stock (%) Profit before tax to capital stock (%) Cost to Revenue Ratio (%) Profit after tax to net sales (%) Net worth per share (NTD) Earnings per share (NTD) (Note) Dividends per share (NTD) Cash dividends (NTD) Stock dividends (NTD) Cash flow Cash flow ratio (%) Leverage Others Cash flow adequacy ratio (%) Cash flow reinvestment ratio (%) Operating leverage Financial leverage Royalty Expense (NT$K) Royalty Revenue (NT$K) Gross Margin (NT$K) 1998 32.26 148.16 324.11 273.86 8.91 5.90 61.85 6.82 53.49 10.12 0.68 0.40 14.04 19.99 26.79 22.57 59.52 30.55 13.90 0.98 4.50 - 4.50 417.00 102.04 21.65 2.69 1.06 1999 25.18 157.17 267.95 233.95 14.83 7.18 50.82 9.96 36.66 12.08 0.82 0.45 18.19 23.98 33.79 31.43 54.55 33.58 15.74 1.56 2.30 - 2.30 273.50 106.00 19.31 2.47 1.06 2000 23.23 140.46 208.68 178.13 34.02 7.70 47.42 10.77 33.90 10.76 0.80 0.49 24.12 31.43 46.61 49.15 54.28 39.17 21.28 3.58 2.80 - 2.80 213.17 106.03 22.47 2.34 1.03 2001 17.44 139.76 252.48 211.92 5.84 5.32 68.61 9.19 39.70 11.52 0.58 0.37 4.76 5.37 9.56 5.88 71.10 11.50 15.70 0.75 4.00 - 4.00 284.27 105.73 16.00 6.14 1.13 2002 20.04 154.30 304.07 264.11 12.79 9.08 40.20 11.57 31.55 20.72 0.74 0.44 6.63 7.54 17.15 13.61 67.71 13.43 15.19 1.14 1.00 - 1.00 302.59 122.72 17.88 3.88 1.07 637,136 1,032,167 2,477,021 3,715,200 6,232,338 - - 23,557 55,077 204,350 20,336,042 33,240,484 75,996,839 36,381,051 51,967,145 900,897 16.55 Sales and Marketing Costs (NT$K) 809,302 1,810,701 2,953,008 2,341,081 Effective Tax Rate (%) Working Capital (NT$K) Capital Expenditure (NT$K) 9.50 18,239,626 28,066,471 Note: Retroactive adjustment for capitalization of unappropriated earnings and bonus to employees. *The calculation formula of financial analysis were listed as follows : 1. Capital Structure Analysis (1) Debts ratio (2) Long-term fund to fixed assets = (Shareholders' Equity + Long-term Liabilities) / Net Properties = Total Liabilities / Total Assets 2. Liquidity Analysis (1) Current ratio (2) Quick ratio (3) Times interest earned = Current Assets / Current Liabilities = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities = Earnings before Interest and Taxes / Interest Expenses 3. Operating Performance Analysis (1) Average collection turnover (2) Days sales outstanding (3) Average inventory turnover (4) Average inventory turnover days = 365 / Inventory Turnover rate (5) Average payment turnover (6) Fixed assets turnover (7) Total assets turnover = Net Sales / Average Trade Receivables = 365 / Receivables Turnover rate = Cost of Sales / Average Inventory = Cost of Sales / Average Trade Payables = Net Sales / Net Properties = Net Sales / Total Assets 5.90 7.54 17.56 24,301,341 44,761,924 38,442,107 63,587,302 29,842,159 79,720,461 68,002,448 54,443,595 (2) Return on equity =Net Income / Average Shareholders' Equity (3) Cost to Revenue Ratio =Cost of Goods Sold / Net Sales (4) Profit after tax to net sales =Net Income / Net Sales (5) Earnings per share =( Net Income - Preferred Stock Dividend ) / Weighted Average Number of Shares Outstanding (6) Net worth per share =( Shareholders' Equity - Preferred Stock ) / 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 expenditures, inventory additions, and cash dividends (3) Cash flow reinvestment ratio =( Cash Provided by Operating Activities - Cash Dividends ) / ( Gross Plant + Investment + Other Assets + Working Capital ) 6. Leverage (1) Operating leverage = ( Net Sales - Variable Cost ) / Income from Operations (2) Financial leverage = Income from Operations / ( Income from Operations - Interest Expenses ) 4. Profitability Analysis (1) Return on total assets = (Net Income + Interest Expenses * (1 - Effective tax rate ) ) / Average Total Assets TSMC Annual Report 2002 53 4. Condensed Interim Balance Sheet by Quarter 5. Condensed Interim Satement of Income by Quarter Unit: NT$K Unit: NT$K (Except EPS: NT$) ASSETS Current assets Long-term investments Fixed assets Other assets TOTAL ASSETS March 31, 2002 Amount 92,433,940 31,419,316 209,025,911 24,307,203 % 26 9 58 7 June 30, 2002 Amount 106,364,142 36,713,728 211,233,052 20,669,458 % 28 10 56 6 September 30, 2002 % Amount December 31, 2002 % Amount 100,404,633 36,348,928 217,505,497 23,183,673 26 10 58 6 94,747,405 34,978,495 217,192,263 23,097,348 26 9 59 6 357,186,370 100 374,980,380 100 377,442,731 100 370,015,511 100 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Current liabilities Long-term liabilities Other liabilities Total liabilities SHAREHOLDERS' EQUITY Capital stock Capital surplus Retained earnings Unrealized loss on long-term investment Cummulative translation adjustments Treasury stock (at cost) Total Shareholders' Equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 29,868,651 36,470,000 9,139,044 75,477,695 181,325,531 57,158,972 44,095,242 - 1,232,851 (2,103,921) 8 10 3 21 51 16 12 - - - 40,484,868 36,470,000 8,861,098 85,815,966 199,228,867 57,004,789 35,079,257 - (233,799) (1,914,700) 11 10 2 23 53 15 9 - - - 41,347,199 38,648,931 3,839,272 83,835,402 199,228,867 57,004,789 38,239,423 (68,960) 1,117,910 (1,914,700) 11 10 1 22 53 15 10 - - - 31,160,103 39,281,665 3,720,536 74,162,304 199,228,867 57,004,789 40,792,197 (194,283) 945,129 (1,923,492) 8 11 1 20 54 15 11 - - - 281,708,675 79 289,164,414 77 293,607,329 78 295,853,207 80 357,186,370 100 374,980,380 100 377,442,731 100 370,015,511 100 Q1 Q2 Q3 Q4 Total Amount % Amount % Amount % Amount % Amount % GROSS SALES 37,324,313 44,770,649 40,622,990 42,087,344 164,805,296 (1,534,598) (588,195) (787,973) (933,201) (3,843,967) 35,789,715 100 44,182,454 100 39,835,017 100 41,154,143 100 160,961,329 100 23,763,009 12,026,706 3,844,702 66 34 11 23 27,759,398 16,423,056 4,447,576 11,975,480 63 37 10 27 26,999,812 12,835,205 4,467,771 8,367,434 68 32 11 21 30,471,965 10,682,178 5,030,790 5,651,388 74 26 12 14 108,994,184 51,967,145 17,790,839 34,176,306 68 32 11 21 SALES RETURNS AND ALLOWANCES NET SALES COST OF SALES GROSS PROFIT OPERATING EXPENSES INCOME FROM OPERATIONS 8,182,004 NON-OPERATING INCOME Interest Gain on sales of property, plant and equipment Technical service income Others Total Non-operating Income NON-OPERATING EXPENSES Recognized loss on investment by equity method-net Interest Casualty loss Loss on sales of and provision for loss on property, plant and equipment Foreign exchange loss-net Amortization of premium of option contracts-net Others 214,746 254,581 13,806 148,897 632,030 946,289 541,343 104,828 91,224 60,847 - 51,656 Total Non-operating Expenses 1,796,187 INCOME BEFORE INCOME TAX 7,017,847 INCOME TAX EXPENSE NET INCOME (430,015) 6,587,832 - 1 - - 1 3 2 - - - - - 5 19 (1) 18 264,275 (3,766) 70,631 58,564 389,704 786,763 569,807 12,642 931 (414) - 9,018 1,378,747 10,986,437 (1,676,918) 9,309,519 1 - - - 1 2 1 - - - - - 3 291,187 4,665 58,292 19,353 373,497 1,821,121 522,667 - 26,954 40,821 291,721 7,189 2,710,473 1 - - - 1 5 1 - - - 1 - 7 25 (4) 21 6,030,458 (2,870,292) 3,160,166 15 (7) 8 237,939 18,518 61,621 49,584 367,662 2,162,337 486,118 2,015 102,846 19,314 127,792 40,915 2,941,337 3,077,713 (524,939) 2,552,774 0.13 1 - - - 1 5 1 - - - 1 - 7 7 1 6 1,008,147 273,998 204,350 276,398 1,762,893 5,716,510 2,119,935 119,485 221,955 120,568 419,513 108,778 8,826,744 27,112,455 (5,502,164) 21,610,291 1.14 1 - - - 1 4 1 - - - - - 5 17 (4) 13 EARNINGS PER SHARE AFTER TAX 0.39 0.45 0.17 54 TSMC Annual Report 2002 TSMC Annual Report 2002 55 6. Auditors' Opinion from 1998 to 2002 9. Financial Statements & Independent Auditors' Report Year 1998 1999 2000 2001 2002 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 English Translation of a Report Originally Issued in Chinese Independent Auditors' Report January 16, 2003 The Board of Directors and Shareholders Taiwan Semiconductor Manufacturing Company Ltd. T N Soong & Co 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 2002 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 Michael E. Porter March 11, 2003 8. Financial Difficulties The Company should disclose the financial impact to the Company if the Company and its affiliated companies incur any financial or cash flow difficulties from 2002 until February 28, 2003: None We have audited the accompanying balance sheets of Taiwan Semiconductor Manufacturing Company Ltd. as of December 31, 2002 and 2001, 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, 2002 and 2001, 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. As disclosed in Note 3 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 30, ''Accounting for Treasury Stock'' (SFAS 30) on January 1, 2002. SFAS 30 requires a parent company to record stock held by its subsidiary as treasury stock. The adoption of SFAS 30 resulted in the decrease of long-term investments and simultaneous increase of the book value of treasury stock by NT$1,923,492 thousand as of December 31, 2002. Furthermore, net income increased by NT$25,909 thousand for the year ended December 31, 2002. We have also audited the consolidated financial statements of Taiwan Semiconductor Manufacturing Company Ltd. as of and for the years ended December 31, 2002 and 2001, and have expressed a modified unqualified opinion and an unqualified opinion on such financial statements, respectively. T N Soong & Co An Associate Member Firm of Deloitte Touche Tohmatsu Effective April 22, 2002 (Formerly a Member Firm of Andersen Worldwide, SC) Taipei, Taiwan 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 any other jurisdiction. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China. 56 TSMC Annual Report 2002 TSMC Annual Report 2002 57 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. BALANCE SHEETS December 31, 2002 and 2001 (In Thousand New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Receivables 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 5) Deferred income tax assets (Notes 2 and 12) Prepaid expenses and other current assets (Notes 2, 16 and 19) Total Current Assets LONG-TERM INVESTMENTS (Notes 2, 3, 6 and 18) PROPERTY, PLANT AND EQUIPMENT (Notes 2, 7 and 16) Cost Buildings Machinery and equipment Office equipment Accumulated depreciation Advance payments and construction in progress Net Property, Plant and Equipment GOODWILL (Note 2) OTHER ASSETS Deferred charges - net (Notes 2, 8 and 18) Deferred income tax assets (Notes 2 and 12) Refundable deposits (Notes 16 and 18) Idle assets (Note 2) Assets leased to others (Note 2) Miscellaneous Total Other Assets 2002 2001 2002 2001 Amount % Amount % LIABILITIES AND SHAREHOLDERS' EQUITY Amount % Amount % $61,656,795 10,183,488 60,240 9,495,447 (929,864) (2,363,067) 10,340,336 3,320,000 2,984,030 94,747,405 34,978,495 68,488,180 303,334,232 5,697,828 377,520,240 (188,447,604) 28,119,627 217,192,263 2,612,926 9,792,490 9,712,567 543,469 339,400 87,246 9,250 20,484,422 16 3 - 3 - (1) 3 1 1 26 9 18 82 2 102 (51) 8 59 1 3 2 - - - - 5 $33,403,706 523,861 176,582 19,957,636 (1,100,492) (2,581,551) 8,504,418 2,347,000 2,421,566 63,652,726 32,869,391 52,527,184 242,347,119 4,754,183 299,628,486 (140,224,640) 56,095,396 215,499,242 2,961,317 3,239,723 16,175,070 772,912 - 555,053 9,250 20,752,008 10 - - 6 - (1) 2 1 1 19 10 16 72 1 89 (42) 17 64 1 1 5 - - - - 6 CURRENT LIABILITIES Payable to related parties (Note 16) Accounts payable Payable to contractors and equipment suppliers Accrued expenses and other current liabilities (Notes 2, 6, 10 and 19) Current portion of bonds (Note 9) Total Current Liabilities LONG-TERM LIABILITIES Bonds - net of current portion (Note 9) Other long-term payables (Notes 10 and 18) Accrued pension cost (Notes 2 and 11) Guarantee deposits (Note 18) Deferred gain on sales and leaseback (Note 2) Total Long-term Liabilities Total Liabilities SHAREHOLDERS' EQUITY (Notes 2 and 13) Capital stock - $10 par value Authorized: 24,600,000 thousand shares Issued: Preferred - 1,300,000 thousand shares Common - 18,622,887 thousand shares in 2002 and 16,832,554 thousand shares in 2001 Capital surplus: Merger and others (Note 2) Treasury stock (Note 3) Retained earnings: Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Unrealized loss on long-term investments (Note 2) Cumulative translation adjustments (Note 2) Treasury stock (at cost) - 42,001 thousand shares (Notes 2, 3 and 14) Total Shareholders' Equity $2,466,998 4,849,234 14,004,383 5,839,488 4,000,000 31,160,103 35,000,000 4,281,665 2,210,542 1,395,066 114,928 43,002,201 74,162,304 13,000,000 186,228,867 56,961,753 43,036 18,641,108 - 22,151,089 (194,283) 945,129 (1,923,492) 295,853,207 1 1 4 1 1 8 10 1 1 - - 12 20 4 50 15 - 5 - 6 - - - 80 $2,082,606 1,123,894 12,367,319 4,636,800 5,000,000 25,210,619 24,000,000 - 1,854,853 7,210,972 268,165 33,333,990 58,544,609 13,000,000 168,325,531 57,128,433 - 17,180,067 349,941 19,977,402 - 1,228,701 - 1 - 4 1 1 7 7 - 1 2 - 10 17 4 50 17 - 5 - 6 - 1 - 277,190,075 83 TOTAL ASSETS $370,015,511 100 $335,734,684 100 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $370,015,511 100 $335,734,684 100 The accompanying notes are an integral part of the financial statements. (With T N Soong & Co. report dated January 16, 2003) 58 TSMC Annual Report 2002 TSMC Annual Report 2002 59 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. STATEMENTS OF INCOME For the Years Ended December 31, 2002 and 2001 (In Thousand New Taiwan Dollars, Except Earnings Per Share) 2002 2001 Amount % Amount % GROSS SALES (Notes 2 and 16) $164,805,296 $128,563,819 SALES RETURNS AND ALLOWANCES (Note 2) (3,843,967) (2,675,816) NET SALES 160,961,329 100 125,888,003 100 COST OF SALES (Note 16) GROSS PROFIT OPERATING EXPENSES (Note 16) Research and development General and administrative Marketing Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME Interest (Note 2) Gain on sales of property, plant and equipment (Note 2) Technical service income (Notes 16 and 18) Insurance compensation - net Amortization of premium income from option contracts - net (Notes 2 and 19) Other (Note 16) Total Non-operating Income NON-OPERATING EXPENSES Investment loss recognized by equity method - net (Notes 2 and 6) Interest (Notes 2, 7 and 19) Amortization of premium expense from option contracts - net (Notes 2 and 19) Loss on sales of and provision for loss on property, plant and equipment (Note 2) (Forward) 108,994,184 51,967,145 11,725,035 5,164,907 900,897 17,790,839 34,176,306 1,008,147 273,998 204,350 - - 276,398 1,762,893 5,716,510 2,119,935 419,513 221,955 68 32 7 3 1 11 21 1 - - - - - 1 4 1 - - 89,506,952 36,381,051 10,649,019 6,048,665 2,341,081 19,038,765 17,342,286 1,365,919 52,376 55,077 860,835 234,732 322,618 2,891,557 6,429,631 1,951,830 - 234,862 71 29 8 5 2 15 14 1 - - 1 - - 2 5 2 - - Foreign exchange loss - net (Notes 2 and 19) Casualty loss - net (Note 2) Amortization of bond issuance cost (Note 2) Loss on sales of long-term investments (Note 2) Other Total Non-operating Expenses INCOME BEFORE INCOME TAX 2002 Amount $120,568 119,485 18,523 2,403 87,852 8,826,744 % - - - - - 5 2001 Amount % $695,620 - 12,504 102,978 147,703 9,575,128 3,824,459 - - - - - 7 9 3 Gain on Sales of Properties Donation Treasury Stock 27,112,455 Total Legal Reserve 17 Special Reserve Unappropriated 10,658,715 Earnings Total INCOME TAX BENEFIT (EXPENSE) (Notes 2 and 12) NET INCOME (5,502,164) $21,610,291 (4) 13 $14,483,174 12 EARNINGS PER SHARE (Note 15) Basic earnings per share Diluted earnings per share Before Income Tax $1.43 $1.43 After Income Tax $1.14 $1.14 Before Income Tax $0.55 $0.55 After Income Tax $0.75 $0.75 The pro forma net income and earnings per share, on the assumption that the stock of parent company held by its subsidiary is treated as an investment instead of the treasury stock, are shown as follows (Note 14): NET INCOME EARNINGS PER SHARE Basic earnings per share Diluted earnings per share The accompanying notes are an integral part of the financial statements. (With T N Soong & Co. report dated January 16, 2003) Before Income Tax $ 27,086,546 After Income Tax $ 21,584,382 $1.43 $1.43 $1.13 $1.13 60 TSMC Annual Report 2002 TSMC Annual Report 2002 61 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 2002 and 2001 (In Thousand New Taiwan Dollars) CAPITAL STOCK ISSUED CAPITAL SURPLUS (Notes 2 and 13) CAPITAL SURPLUS (Notes 2 and 13) RETAINED EARNINGS (Note 13) Preferred Stock Shares (Thousand) Amount Common Stock Shares (Thousand) Amount From Merger Additional Paid-in Capital From Long-term Investments Excess on Foreign Bond Investment Gain on Sales of Properties Donation Treasury Stock Total Legal Reserve Special Reserve Unappropriated Earnings Total UNREALIZED GAIN (LOSS) ON LONG-TERM INVESTMENTS (Note 2) CUMULATIVE TRANSLATION ADJUSTMENTS (Note 2) TREASURY STOCK (Notes 2, 3 and 14) TOTAL SHAREHOLDERS' EQUITY BALANCE, JANUARY 1, 2001 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) ($278,377) $- $261,753,699 Appropriations of prior year's earnings Legal reserve Special reserve Bonus to employees - stock Cash dividends paid for preferred stocks Stock dividends - 40% Remuneration 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 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 467,443 4,674,426 - - 4,675,746 46,757,459 - - - - - - - - - - - - - - - - - - - - - 1,803,168 - - - - - - - - - - - - - - - - - - - - - - - - - 162 - - - - - - - - - - - - - - - - - - - - - 39,282 - - - - - - - - - - - - - - - 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 Appropriations of prior year's earnings Legal reserve Special reserve Bonus to employees - stock Cash dividends paid for preferred stocks Stock dividends - 10% Remuneration to directors and supervisors Net income in 2002 Transfer of the capital surplus from gain on sales of property, plant and equipment to retained earnings Transfer of the capital surplus from gain on sales of property, plant and equipment of investees to retained earnings Unrealized loss on long-term investments from subsidiaries Translation adjustments Reclassification of stocks of a parent company held by subsidiaries from long-term investments to treasury stock Capital surplus resulted from sales of treasury stock - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 107,078 1,070,783 - - 1,683,255 16,832,553 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (162) - - - - - - - - - - - - - - - - - - - - - - - - (166,518) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,803,168 39,282 162 - - - - - - - - - (162) - - - 43,036 43,036 57,128,433 17,180,067 349,941 19,977,402 37,507,410 1,448,317 - (1,448,317) (349,941) 349,941 6,490,744 - (6,490,744) (741,062) 741,062 - - - - - - - - - - - - - - (4,674,426) (4,674,426) (41,137) (41,137) (46,757,459) (46,757,459) (584,303) (584,303) 14,483,174 14,483,174 (1,803,168) (1,803,168) (39,282) (39,282) (162) (162) - - - - - - - - - - - - - - - (1,070,783) (1,070,783) (455,000) (455,000) (16,832,553) (16,832,553) (133,848) (133,848) 21,610,291 21,610,291 153,794 166,518 162 162 - - - - - - - - - - - - - - - - - - 71,564 - - - - - - - - - - - (194,283) - - - - - - - - - - - 1,507,078 1,228,701 - - - - - - - - - - - - - (283,572) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (41,137) - (584,303) 14,483,174 - - - 71,564 1,507,078 277,190,075 - - - (455,000) - (133,848) 21,610,291 - - (194,283) (283,572) (1,923,492) (1,923,492) - 43,036 - - - - - - - - - - - - - - - - - - - - - - (166,518) 12,724 BALANCE, DECEMBER 31, 2002 1,300,000 $13,000,000 18,622,887 $186,228,867 $24,132,297 $23,172,550 $246,219 $9,410,632 $ - $55 $43,036 $57,004,789 $18,641,108 $- $22,151,089 $40,792,197 ($194,283) $945,129 ($1,923,492) $295,853,207 The accompanying notes are an integral part of the financial statements. (With T N Soong & Co. report dated January 16, 2003) 62 TSMC Annual Report 2002 TSMC Annual Report 2002 63 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2002 and 2001 (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 Investment loss recognized by equity method - net Loss on sales of long-term investments - net Loss (gain) 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 - net Inventories - net Prepaid expenses and other current assets Forward exchange contracts receivable Increase (decrease) in: Payable to related parties Accounts payable Forward exchange contracts payable Accrued expenses and other current liabilities Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES 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 in refundable deposits Net Cash Used in Investing Activities (Forward) 2002 2001 $21,610,291 $14,483,174 57,621,462 5,489,503 5,716,510 2,403 (52,043) 355,689 (170,628) (218,484) (9,659,627) 116,342 10,462,189 (1,835,918) (148,120) (199,609) 384,392 3,725,340 (379,579) 1,467,988 94,288,101 (54,443,595) (10,187,730) 494,805 1,402 (5,724,583) 229,443 (69,630,258) 48,875,754 (3,840,777) 6,429,631 102,978 182,486 345,318 153,758 377,384 470,954 (51,407) 10,377,678 2,463,517 359,342 49,480 (2,263,972) (6,866,059) 218,165 (201,096) 71,666,308 (68,002,448) (4,563,682) 298,231 162,334 (1,465,703) 195,073 (73,376,195) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of bonds Payments on lease obligation Increase (decrease) in guarantee deposits Remuneration paid to directors and supervisors Cash dividends paid for preferred stocks Net Cash Provided by (Used in) Financing Activities 2002 2001 $10,000,000 - (5,815,906) (133,848) (455,000) 3,595,246 $- (50,000) 124,593 (584,303) (41,137) (550,847) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 28,253,089 (2,260,734) CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 33,403,706 35,664,440 CASH AND CASH EQUIVALENTS, END OF THE YEAR $61,656,795 $33,403,706 SUPPLEMENTAL INFORMATION Interest paid (excluding capitalized interest of NT$165,857 thousand and NT$207,297 thousand in 2002 and 2001, respectively) Income tax paid Noncash investing and financing activities: Reclassification of stocks of a parent company held by subsidiaries from long-term investments to treasury stocks Effect of exchange rate changes on cash and cash equivalents Current portion of bonds Cash paid for acquisitions of property, plant and equipment: $1,771,682 $12,661 $1,923,492 ($142,438) $4,000,000 $1,980,399 $16,318 $- $1,258,395 $5,000,000 Total acquisitions $56,080,659 $55,977,367 Decrease (increase) in payable to contractors and equipment suppliers Cash paid for acquisitions of deferred charges: Total acquisition Other long-term payable (including current portion) The accompanying notes are an integral part of the financial statements. With T N Soong & Co. report dated January 16, 2003) (1,637,064) $54,443,595 $10,401,176 (4,676,593) $5,724,583 12,025,081 $68,002,448 $1,465,703 - $1,465,703 64 TSMC Annual Report 2002 TSMC Annual Report 2002 65 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. NOTES TO FINANCIAL STATEMENTS (Amounts in Thousand New Taiwan Dollars, Unless Specified Otherwise) 1. GENERAL Taiwan Semiconductor Manufacturing Company Ltd. (the ''Company'' or ''TSMC''), a Republic of China corporation, 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 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange in the form of American Depositary Shares. TSMC is engaged mainly in the manufacturing, selling, packaging, and testing and designing of integrated circuits and other semiconductor devices, and the manufacturing of masks. 2. SIGNIFICANT ACCOUNTING POLICIES 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 accounts receivables. Sales and sales returns and allowances 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 estimated based on historical experience. Such provisions are deducted from sales in the year the products are sold and the estimated related costs are deducted from cost of sales. Inventories Inventories are stated at the lower of cost (standard cost and adjusted to approximate weighted-average cost at the end of each period) 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 the operating and financial policy decisions are accounted for using the equity method. The Company's proportionate share in the net income or net loss of investee companies are recognized as components of the ''Investment income/loss recognized by equity method - net'' account. The Company adopted Statements of Financial Accounting Standards No. 30, ''Accounting for Treasury Stock'' (SFAS 30) on January 1, 2002. SFAS 30 requires a parent company to record stock held by its subsidiary as treasury stock. The recorded value of treasury stock is based upon the carrying values of the short/long-term investments on the subsidiaries' books as of January 1, 2002. 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'' as well as the ''long-term investments'' accounts. In the event an investee has an accumulated deficit, it will record an offset to its capital surplus, excluding the reserve for asset revaluation, through retained earnings. The Company will also record a corresponding entry equivalent to its proportionate share of the investee capital surplus, excluding the reserve for asset revaluation, that was generated subsequent to any acquisition of equity interest in the investee. 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 for using the cost method. Cash dividends are recognized as income in the year received but are accounted for as reduction in the carrying values of the long-term investments if the dividends are received in the same year that the related investments are acquired. Stock dividends are recognized neither as investment income nor increase of long-term investment but recorded only as an increase in the number of shares held. An allowance is recognized for any decline in the market value of investments using quoted market prices with the corresponding amount debited to shareholders' equity. A reversal of the allowance will result from a subsequent recovery of the market value. The carrying values of investments with no quoted market price are reduced to reflect another than temporary decline in their values with the related impairment loss charged to income. Investments in foreign mutual funds are stated at the lower of aggregate cost or net asset value (NAV). An allowance is recognized when the cost of the funds are lower than their net asset values, with the corresponding amount debited to shareholders' equity. A reversal of the allowance will result from a subsequent recovery of the net asset value. The costs of investments sold are determined using the weighted-average method. If an investee company has an unrealized loss on a long-term investment evaluated using the lower-of-cost-or-market method, the Company recognizes a corresponding unrealized loss in proportion to its equity interest and records the amount as 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. Gains or losses from sales by investee companies to the Company are deferred in proportion to the ownership percentage until realized through transactions with third parties. Property, plant and equipment, assets leased to others and idle assets Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. Idle assets are stated at the lower of book value or net realized value. Significant additions, renewals, betterments and interest expense incurred during the construction period are capitalized. Maintenance and repairs are expensed in the period incurred. Property, plant and equipment covered by agreements qualifying as capital leases are carried at the lower of the present value of future minimum rent payments, or the market value of the property at the inception date of the lease. The lessee's periodic rent 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 years; and office equipment - 3 to 5 years. Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to income in the period of disposal. Goodwill Goodwill represents the excess of fair market value of identifiable net assets acquired and consideration paid in connection with a business combination. The amount is amortized using the straight-line method over the estimated useful life of 10 years. 66 TSMC Annual Report 2002 TSMC Annual Report 2002 67 Deferred charges Deferred charges consist of software and system design costs, technology know-how, bond issuance costs, and technology license fees. The amounts are amortized as follows: Software and system design costs - 3 years, technology know-how - 5 years; bond issuance costs - the term of the bonds; technology license fee - the shorter of the estimated life of the technology or the term of the technology interest income or expense. The notional amount of foreign currency option contracts entered into for hedging purposes are not recognized as an asset or liability on the contract dates. The premiums paid or received for the call or put options are amortized to income on a straight-line basis over transfer contract. Pension costs Net periodic pension costs are recorded on the basis of actuarial calculations. Unrecognized net transition obligation and unrecognized net gain/loss are amortized over 25 years. Deferred gain on sales and leaseback The gain on the sale of property by the Company that it simultaneously leased back is deferred. This deferred gain on sales and leaseback transactions is amortized as follows: (a) operating leases - adjustment of rental expenses over the term of the leases and (b) capital leases - adjustment of depreciation expenses over the estimated useful life or term of the lease; whichever is shorter. Casualty loss Casualty loss consists of the accrued loss caused by the earthquake on March 31, 2002 less the estimated insurance compensation. Income tax The Company uses an inter-period tax allocation method for income tax. Deferred income tax assets and liabilities are recognized for the tax effects of temporary differences, unused tax credits, and operating loss carry forwards. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not 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 tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as current or non-current based on the the term of the related contract. Foreign-currency transactions Foreign-currency transactions are recorded in New Taiwan dollars at the current rate of exchange in effect when the transaction occurs. Gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in a foreign currency are recognized in current operations. At year-end, foreign-currency assets and liabilities are revalued at the prevailing exchange rate with the resulting gain or loss recognized in current operations. 3. NEW ACCOUNTING PRONOUNCEMENTS In accordance with the Statement of Financial Accounting Standards No. 30, ''Accounting for Treasury Stock'' (SFAS 30) and other relevant regulations from Securities and Futures Commission (SFC), the Company is required to reclassify its common stock held by subsidiaries from short/long-term investments to treasury stock. The reclassification is based on the carrying value of NT$2,115,695 thousand as recorded by the Company's subsidiaries as of January 1, 2002. The adoption of SFAS 30 resulted in the decrease of long- term investments and the increase of treasury stock by NT$1,923,492 thousand as of December 31, 2002, and an increase in net income for the year ended December 31, 2002 by NT$25,909 thousand. expected length of time before it is realized. 4. CASH AND CASH EQUIVALENTS Any tax credit arising from the purchase of machinery, equipment and technology, research and development expenditures, personnel Cash and bank deposits training, investments in important technology-based enterprise are recognized using the current method. Government bonds acquired under repurchase agreements Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax provision. As of January 1, 1998, income taxes on unappropriated earnings of 10% are expensed in the year of shareholder approval which is usually the year subsequent to the year incurred. Derivative financial instruments The Company enters into foreign currency forward contracts to manage currency exposures in cash flow and in foreign currency- denominated assets and liabilities. The differences in the New Taiwan dollar amounts translated using the current rate 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 current rate and the resulting differences are recognized in income. Also, the receivables and payables related to the forward contract are netted with the resulting amount presented as either an asset or liability. The Company enters into interest rate swap transactions to manage exposures from changes in interest rates on existing liabilities. These transactions are accounted for on an accrual basis, in which the cash settlement receivable or payable is recorded as an adjustment to 5. INVENTORIES - NET Finished goods Work in process Raw materials Supplies and spare parts Less - allowance for losses 2002 $58,917,928 2,738,867 2001 $31,678,047 1,725,659 $61,656,795 $33,403,706 2002 $3,610,547 7,227,129 389,164 693,526 11,920,366 (1,580,030) $10,340,336 2001 $1,618,635 6,685,094 521,680 870,780 9,696,189 (1,191,771) $8,504,418 68 TSMC Annual Report 2002 TSMC Annual Report 2002 69 6. LONG-TERM INVESTMENTS Shares of stock Equity method TSMC International Investment TSMC Partners Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) Vanguard International Semiconductor (VIS) Emerging Alliance Fund Ya-Shin Technology TSMC - North America TSMC - Japan Chi Cherng Investment Hsin Ruey Investment TSMC - Europe Kung Cherng Investment Cherng Huei Investment Po Cherng Investment Chi Hsin Investment Prepayment for subscribed stocks VIS Cost method Traded Amkor Technology Monolithic System Tech. Taiwan Mask Corp. Non-traded United Technology Shin-Etsu Handotai Taiwan Company Ltd. Hon Tung Venture Capital W.K. Technology Fund IV Funds Horizon Ventures Crimson Asia Capital 2002 2002 2001 2001 Carrying Value % of Owner Ship - Carrying Value % of Owner Ship $22,265,157 3,753,733 3,136,115 2,415,297 767,239 341,250 173,601 94,258 41,894 39,815 13,670 - - - - 100 100 32 25 99 100 100 100 36 36 100 - - - - $19,987,814 3,032,376 2,907,967 3,377,526 741,617 - 786,062 80,156 156,694 157,352 10,147 177,812 166,639 164,724 158,252 33,042,029 31,905,138 849,360 849,360 280,748 104,289 32,129 193,584 105,000 83,916 50,000 849,666 195,452 41,988 237,440 - - 280,748 - 32,129 193,584 105,000 150,000 50,000 811,461 125,701 27,091 152,792 - 2 2 11 7 10 2 - - $34,978,495 $32,869,391 100 100 32 25 99 - 100 100 25 25 100 25 25 25 25 - - 2 11 7 10 2 - - On January 8, 2003, the Company's investee company, VIS issued 600,000 thousand shares of common stock at a discounted price of NT$7 per share. The Company prepaid NT$849,360 thousand at the end of 2002 for the share subscription and paid an additional NT$ 766,815 thousand in January 2003. In this round of equity offering, the Company purchased a total of 230,882 thousand shares of VIS stocks. As a result, its ownership in VIS increased from 25% to 28%. The Company s investees, Hsin Ruey Investment, Chi Hsin Investment and Kung Cherng Investment were merged at the end of October 2002, with Hsin Ruey Investment as the surviving company. In addition, the Company s investees, Chi Cherng Investment, Cherng Huei Investment and Po Cherng Investment were also merged at the end of October 2002. Chi Cherng Investment is the surviving company of the merger. The Company s ownership is approximately 36% in Hsin Ruey Investment and approximately 36% in Chi Cherng Investment subsequent to the merger. The Company established Ya Shin Technology (''Ya Shin'') in November 2002 and subsequently signed a merger agreement with Global UniChip Corp. (''Global UniChip'') in December 2002. The merger was effective on January 4, 2003 and Global UniChip is the surviving company. The Company holds 52% of Global UniChips' shares after the completion of the merger. The carrying value of the investments accounted for using the equity method and the related investment gains or losses were determined based on the audited financial statements of the investees in the respective year. The investment gains or losses of the investee companies consisted of the following: TSMC International Investment SSMC VIS TSMC Partners Others The market values and net asset values of 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 7. PROPERTY, PLANT AND EQUIPMENT Accumulated depreciation consisted of the following: Buildings Machinery and equipment Office equipment 2002 ($4,714,203) (1,155,076) (821,771) 993,292 (18,752) 2001 ($4,855,844) (1,722,080) (2,236,940) 2,357,405 27,828 ($5,716,510) ($6,429,631) 2002 $4,792,108 33,880,022 237,440 2002 $22,289,909 163,208,908 2,948,787 2001 $7,055,888 29,124,386 152,792 2001 $15,181,445 122,659,129 2,384,066 $188,447,604 $140,224,640 70 TSMC Annual Report 2002 TSMC Annual Report 2002 71 The status of construction of the Company's manufacturing facilities at December 31, 2002 is as follows: 10. OTHER LONG-TERM PAYABLES Manufacturing Plant Fab 6 Fab 12 Phase 1 Fab 14 Phase 1 Estimated Costs Accumulated Expenditures Expected or Actual Date of Starting Operations $93,932,000 80,318,400 30,411,000 $87,054,700 47,095,400 22,169,900 March 2000 March 2002 June 2003 Interest expense (before deducting capitalized amounts of NT$165,857 thousand in 2002 and NT$207,297 thousand in 2001) for the years ended December 31, 2002 and 2001 were NT$2,285,792 thousand and NT$2,159,127 thousand, respectively. The interest rate used for purposes of calculating the capitalized amounts was 5.283% in 2002 and 2001. 2002 2001 The changes in the fund and accrued pension cost are summarized as follows: The Company entered into several license arrangements for certain semiconductor patents. The future payments to be paid under the agreements as of December 31, 2002 are as follows: Year 2003 2004 2005 2006 2007 2008 and thereafter Less - current portion 11. PENSION PLAN Amount $1,157,299 1,226,805 987,009 469,189 486,566 1,112,096 5,438,964 (1,157,299) $4,281,665 The Company has a pension plan for all regular employees that provide benefits based on length of service and average monthly salary for the six month period prior to retirement. The Company contributes 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. a. Components of pension cost Service cost Interest cost Projected return on plan assets Amortization Net pension cost 2002 $442,294 121,552 (45,102) 1,681 $520,425 2001 $417,967 95,920 (43,968) 8,300 $478,219 TSMC Annual Report 2002 73 8. DEFERRED CHARGES - NET Technology license fees Software and system design costs Technology know-how Bond issuance costs Other 9. BONDS Domestic unsecured bonds: 2002 $6,519,286 3,167,366 49,500 45,908 10,430 $9,792,490 2001 $996,578 2,073,752 103,500 33,091 32,802 $3,239,723 Issued on March 4, 1998 and payable on March 4, 2003 in one lump sum payment, 7.71% annual interest payable semi-annually Issued on October 21, 1999 and payable on October 21, 2002 and 2004 in two equal payments, 5.67% and 5.95% annual interest payable annually, respectively Issued December 4 to 15, 2000 and payable in December 2005 and 2007 in two equal payments, 5.25% and 5.36% annual interest payable annually, respectively $4,000,000 $4,000,000 5,000,000 10,000,000 15,000,000 15,000,000 Issued January 10 to 24, 2002 and payable in January 2007, 2009 and 2012 in three equal payments, 2.6%, 2.75% and 3% annual interest payable annually, respectively 15,000,000 - $39,000,000 $29,000,000 Future principal payments under the Company's bonds arrangements as of December 31, 2002 are as follows: Year of Repayment 2003 2004 2005 2006 2007 2008 and thereafter 72 TSMC Annual Report 2002 Amount $4,000,000 5,000,000 10,500,000 - 7,000,000 12,500,000 $39,000,000 b. Reconciliation of the fund status of the plan and accrued pension cost b. Income tax benefit (expense) consists of: 2002 2001 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 net transitional obligation Unrecognized net gain Accrued pension liabilities Accrued pension cost c. Actuarial assumptions Discount rated 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 $21,294 1,604,027 1,625,321 1,300,712 2,926,033 (1,014,086) 1,911,947 (149,391) 445,759 2,227 $2,210,542 3.75% 3.00% 3.75% $164,720 $5,360 $739 1,024,525 1,025,264 1,407,014 2,432,278 (835,583) 1,596,695 (157,691) 415,849 - $1,854,853 5.0% 5.0% 5.0% $131,894 $ - Current income tax expense before tax credits Additional 10% on unappropriated earnings Income tax credits Other income tax Income tax paid in current year Net change in deferred income tax assets (liabilities) Investment tax credits Temporary differences Valuation allowance Income tax benefit (expense) c. Deferred income tax assets (liabilities) consist of the following: Current Investment tax credits Noncurrent Investment tax credits Temporary differences Valuation allowance 2002 ($4,704,298) (162,938) 4,867,236 (12,661) (12,661) 2,510,192 (1,072,086) (6,927,609) ($5,502,164) 2001 ($2,569,358) (319,000) 2,888,358 (16,318) (16,318) 144,925 (1,874,945) 5,570,797 $3,824,459 2002 2001 $3,320,000 $2,347,000 $23,247,653 (3,565,841) (9,969,245) $21,710,461 (2,493,755) (3,041,636) $9,712,567 $16,175,070 12. INCOME TAX BENEFIT (EXPENSE) a. A reconciliation of income tax expense on income before income tax at the statutory rate and current income tax expense before tax credits is shown below: d. Integrated income tax information: The balances of the imputation credit account (ICA) as of December 31, 2002 and 2001 were NT$6,650 thousand and NT$9,365 thousand, respectively. Income tax expense based on ''income before income tax'' at statutory rate of 25% Tax-exempt income Temporary and permanent differences ($6,778,114) 2,526,500 (452,684) ($2,664,679) 1,089,000 (993,679) 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 2002 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, 2002 and 2001 included earnings generated through December 31, 1997 Current income tax expense - before tax credits ($4,704,298) ($2,569,358) was NT$0 and NT$4,827 thousand, respectively. 2002 2001 The expected and actual credible ratio for 2002 and 2001 was 0.03% and 0.04%, respectively. 74 TSMC Annual Report 2002 TSMC Annual Report 2002 75 f. As of December 31, 2002, investment tax credits consisted of the following: 13. SHAREHOLDERS EQUITY Regulation Items Total Creditable Amounts Remaining Creditable Amounts Expiry Year Statute for Upgrading Purchase of machinery and Industries equipment Statute for Upgrading Research and development Industries expenditures Statute for Upgrading Personnel training Industries Statute for Upgrading Reputation setting Industries Statute for Upgrading Investments in important Industries technology based enterprises $4,237,050 4,767,347 8,180,857 3,110,906 5,335,558 $- 4,767,347 8,180,857 3,110,906 2,775,029 $25,631,718 $18,834,139 $562,158 671,546 1,974,320 3,111,472 1,540,000 $- 671,546 1,974,320 3,111,472 1,540,000 $7,859,496 $7,297,338 $8,822 16,104 43,264 28,886 $97,076 $10,133 319 $10,452 $2,878 5,420 201,372 138,864 1,947 $- 16,104 43,264 28,886 $88,254 $- 319 $319 $- 5,420 201,372 138,864 1,947 $350,481 $347,603 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2002 2003 2004 2005 2002 2003 2002 2003 2004 2005 2006 The Company has issued 369,019 thousand American Depositary Shares (ADS) on the New York Stock Exchange as of December 31, 2002. The number of common shares represented by the ADSs is 1,845,097 thousand shares (one ADS represents five common shares). Capital surplus can only be used to offset a deficit under the ROC Company Law. However, the components of capital surplus generated from donations (donated capital) and the excess of the issue price over the par value of capital stock (including the stock issued for new capital, mergers, and the purchase of treasury stock) can be transferred to capital as stock dividends. 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. Remuneration to directors and supervisors and bonus to employees equal to 0.3% and at least 1% of the remainder, respectively. Individuals who receive bonus to employees may include employees of affiliated companies and are approved by the board of directors or a representative of the board of directors; d. Dividends to holders of preferred shares equal to a 3.5% annual rate, based on the period which the preferred shares have been outstanding; e. The appropriation of the remaining balance after the above shall be decided at the shareholders meeting. Dividends are distributed in cash, shares of common stock or a combination of cash and common stock. Distribution of profits are preferably made in the form of stock dividend. The total of cash dividends paid in any given year should not exceed 50% of total dividends distributed. These appropriations of net income shall be approved by the shareholders in the following year and given effect in the financial statements of that year. The bonus to employees and the remuneration to directors and supervisors appropriated from the earnings of 2001 were approved in the shareholders meeting on May 7, 2002: Bonus to employees - in stock Remuneration to directors and supervisors - in cash Amounts $1,070,783 133,848 $1,204,631 Shares (Thousand) 107,078 - The shares distributed as a bonus to employees represent 0.64% of the Company s total outstanding common shares as of December 31, 2001. The above appropriation of the earnings is consistent with the resolution of the meeting of board of directors dated on March 26, 2002. If the above distributable earnings were both paid in cash, and charged against income of 2001, the basic EPS after income tax for the g. Income from the following expansion and construction of the Company s manufacturing plants is exempt from income tax: year ended December 31, 2001 would be decreased from NT$0.83 to NT$0.76. Expansion of Fab 1 and Fab 2 - modules A and B, Fab 3 and Fab 4, and construction of Fab 5 Construction of Fab 6 1999 to 2002 2001 to 2004 The above information associated with the appropriation of bonus to employees and remuneration to directors and supervisors is available at Market Observation System website. h. The tax authorities have examined income tax returns of the Company through 1999. However, the Company is contesting the assessment of the tax authority for 1992, 1993, 1996 and 1997. 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 distribute as stock dividend when the balance is 50% of the aggregate par value of the outstanding capital stock of the Company up to the half amount of the reserve balance. Tax-Exemption Period As of January 16, 2003, the appropriation of the earnings of 2002 has not been yet resolved by the board of directors. 76 TSMC Annual Report 2002 TSMC Annual Report 2002 77 A special reserve equivalent to the debit balance of any account shown in the shareholder s equity section of the balance sheet (except 15. EARNINGS PER SHARE rnings per share (EPS) is computed as follows: for the recorded cost of treasury stock held by subsidiaries), other than the deficit, shall be made from unappropriated retained earnings pursuant to existing regulations promulgated by the Securities and Futures Commission. The special reserve is allowed to be appropriated when the debit balance of such accounts are reversed. The gain on sales or disposal of property, plant and equipment generated prior to 2000, less the applicable income tax, was reclassified to capital surplus as of each year-end. A gain in the amount of NT$39,282 thousand, less applicable income tax, was recognized and transferred to the capital surplus at the end of 2001 prior to the amended regulations. To comply with the amended regulations, the aforementioned capital surplus was transferred to retained earnings upon the approval of the shareholders meeting on May 7, 2002. The shareholders also approved the accumulated capital surplus of NT$127,236 thousand generated from gains prior to 2000 to be transferred to retained earnings, after appropriating the required 10% legal reserve. Under the Integrated Income Tax System that became effective on January 1, 1998, ROC resident shareholders are allowed a tax credit for the income tax paid by the Company on earnings generated as of January 1, 1998. An Imputation Credit Account (ICA) is maintained by the Company for such income tax and the tax credit allocated to each shareholder. On June 25, 2002, the SFC approved the Company's Employee Stock Option Plan (''the Plan''). The Plan provides qualified employees with 100,000 thousand units of option rights with each unit representing 1 common share of stock. The option rights are valid for 10 years and exercisable at certain percentages subsequent to the second anniversary of issuance. Under the terms of the plan, stock options are granted at an exercise price equal to the closing price of TSMC's common shares listed on Taiwan Stock Exchange at the date of grant. As of December 31, 2002, there were 19,726 thousand shares granted at a weighted average price of approximately NT$ 53. The Company issued 1,300,000 thousand shares of unlisted Series A - preferred stock to certain investors on November 29, 2000. The following are the rights of the preferred shareholders and other terms and conditions: Preferred shareholders a. are entitled to receive cumulative cash dividends at an annual rate of 3.5%. b. are not entitled to receive any common 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, 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. Earnings per share (EPS) is computed as follows: December 31, 2002 Income Less - preferred stock dividends Basic earnings per share Income available to common shareholders Diluted earnings per share Income available to common shareholders December 31, 2001 Income Less - preferred stock dividends Basic earnings per share Income available to common shareholders Diluted earnings per share Income available to common shareholders Amounts (Numerator) Before Income Tax After Income Tax Share (Denominator) (Thousand) EPS (Dollars) Before Income Tax After Income Tax $27,112,455 $21,610,291 (455,000) (455,000) $26,657,455 $21,155,291 18,580,700 $1.43 $1.14 $26,657,455 $21,155,291 18,580,700 $1.43 $1.14 $10,658,715 $14,483,174 (455,000) (455,000) $10,203,715 $14,028,174 18,622,887 $0.55 $0.75 $10,203,715 $14,028,174 18,622,887 $0.55 $0.75 The potential common shares from the employee stock option plan (see Note 13) are not included in the denominator of the diluted earning-per-share computation as such shares are not dilutive using the treasury stock method under the Statement of Financial e. have no right to convert their shares into common shares. The preferred shares are to be redeemed within thirty months from their Accounting Standards No. 24, ''Earning Per Share''. issuance. The preferred shareholders have the aforementioned rights and the Company s related obligations remain the same until the preferred shares are redeemed by the Company. The average number of shares outstanding for EPS calculation has been adjusted retroactively for issuance of stock dividends and stock bonuses. The retroactive adjustment caused the basic EPS before income tax and after income tax for the year ended December 31, 2001 to decrease from NT$0.61 and NT$0.83 to NT$0.55 and NT$0.75, respectively. 14. TREASURY STOCK (COMMON STOCK) Purpose of Purchase Year ended December 31, 2002 (Shares in Thousand) 16. RELATED PARTY TRANSACTIONS Beginning Shares Increase Decrease Ending Shares The Company engages in business transactions with the following related parties: a. Industrial Technology Research Institute (ITRI); the Chairman of the Company is a director of ITRI b. Philips Electronics N.V. (Philips); a major shareholder Reclassification of stocks held by subsidiaries from short/long-term investment to treasury stocks 39,270 3,818 1,087 42,001 On January 1, 2002, the Company reclassified its capital stock held by its subsidiaries with book value of NT$2,115,695 thousand from long-term investments to treasury stock. Proceeds from the sale of treasury stock for the year ended December 31, 2002 were NT$96,501 thousand. As of December 31, 2002, the book value and market value of the treasury stock was NT$1,923,492 thousand and NT$2,048,164 thousand, respectively. Capital stock held by a subsidiary as an investment is recorded as treasury stock with the holder having the same rights as other common shareholders. 78 TSMC Annual Report 2002 c. Subsidiaries TSMC - North America TSMC - Europe TSMC - Japan TSMC Annual Report 2002 79 d. Investees VIS SSMC e. Indirect subsidiaries TSMC Technology WAFERTECH, LLC. The transactions with the aforementioned parties, in addition to those disclosed in other notes, are summarized as follows: 2002 2001 Amount % Amount % $94,433,401 2,909,008 94,409 92,119 7,018 1,152 $97,537,107 $9,955,154 3,469,198 2,751,297 $16,175,649 $40,401 57 2 - - - - 59 41 14 11 66 3 $ - 2,389,257 114,546 1,177,094 48,972 3,111 $3,732,980 $6,797,817 3,801,975 42,984 $10,642,776 $161,604 - 2 - 1 - - 3 37 22 - 59 11 Non-operating income SSMC (technical service income mainly) WAFERTECH, LLC VIS At December 31 Receivables TSMC - North America Philips and its affiliates VIS ITRI SSMC Others 2002 2001 Amount % Amount % $126,061 1,635 - $127,696 3 - - 3 $9,739,236 96 352,706 58,301 22,974 5,678 4,593 3 1 - - - $95,284 4,612 467 $100,363 $- 116,499 320,179 37,383 20,671 29,129 3 - - 3 - 22 61 7 4 6 Prepaid expense and other current asset Prepaid rent - ITRI $ - - $42,664 2 $10,183,488 100 $523,861 100 Payables Philips and its affiliates VIS WAFERTECH, LLC SSMC TSMC - Europe TSMC - Japan TSMC - North America TSMC Technology $730,847 653,876 617,751 391,426 29,520 19,643 14,511 9,424 30 26 25 16 1 1 1 - $499,331 548,472 817,616 470 54,601 15,355 136,443 10,318 24 26 39 - 3 1 7 - $2,849,517 100 $2,418,276 100 $2,466,998 100 $2,082,606 100 $208,226 132,086 - - $340,312 $ - - $ - 23 15 - - 38 - - - $194,696 124,384 1,028,725 118,648 $1,466,453 $268,871 24,645 $293,516 8 5 42 5 60 79 7 86 Refundable deposits - VIS $514,846 95 $750,788 97 Sales to related parties are based on normal selling prices and collection terms. The payables to WAFERTECH represent the purchase of finished goods. The purchase prices of finished goods were calculated in accordance with the related contractual agreements. The Company has authorized its exclusive distributor, TSMC - North America, to promote semiconductor products in North America and South America starting January 2002. The selling prices to TSMC - North America are approximately 99% of those to third parties and are invoiced with thirty day payment terms, which is not significantly different from third parties. TSMC Annual Report 2002 81 For the years Sales TSMC - North America Philips and its affiliates ITRI VIS SSMC WAFERTECH, LLC Purchase WAFERTECH, LLC VIS SSMC Rental expense - ITRI Manufacturing expenses Technical assistance fee - Philips Marketing expenses Commission TSMC - Japan TSMC - Europe TSMC - North America Service Charge TSMC - North America Sales of property, plant and equipment VIS WAFERTECH, LLC (Forward) 80 TSMC Annual Report 2002 17. SIGNIFICANT LONG-TERM OPERATING LEASES g. The Company provided guarantee on loans amounting to US$200,000 thousand, US$40,000 thousand and US$440,000 thousand The Company leases land from the Science-Based Industrial Park Administration where its Fab 2 through Fab 14 manufacturing facilities for TSMC Development, Inc., TSMC- North America and WAFERTECH, LLC, respectively. reside. These agreements expire on various dates from March 2008 to December 2020 and have annual rent payments aggregating NT$225,576 thousand. The agreements can be renewed upon their expiration. Future remaining lease payments are as follows: Year 2003 2004 2005 2006 2007 2008 and thereafter 18. SIGNIFICANT COMMITMENTS AND CONTINGENCY AS OF DECEMBER 31, 2002 The Company's commitments and contingency as of December 31, 2002 are as follows: Amount $225,576 225,576 225,576 225,576 225,576 1,742,413 $2,870,293 h. Under a Technical Transfer Agreement with National Semiconductor Corporation (''National'') entered into on June 27, 2000, the Company shall receive payments for license of certain technology to National. The agreement will remain in force for ten years. After the initial expiration date, this agreement will be automatically renewed for successive periods of two years unless pre-terminated by either party under certain conditions. In January 2003, the agreement was amended such that National will discontinue making payments under the original terms and the Company will discontinue transferring any additional technology. The Company granted National the option to request additional technology transfers under the same terms and conditions of the original agreement through January 2008. i. The Company entered into a Manufacturing Agreement with Vanguard International Semiconductor Corp. (''VIS''). VIS agrees to reserve certain production capacity for the Company to manufacture certain logic devices or other technologies required by the Company's customers at selling prices as agreed by the parties. The Company paid NT$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. Starting from 2001, the Company entered into several license arrangements for certain semiconductor patents. The terms of the contracts range from five to ten years with payments to be paid in the form of royalties over the term of the related contracts. The Company has recorded the related amounts as a liability and a deferred charge to be amortized to cost of sales on a straight-line basis over the shorter of the estimated life of the technology or the term of the contract. k. Unused letter of credits as of December 31, 2002 were NT$6,480 thousand, 51,000 thousand, Euro 520 thousand and SG$85 a. Under a Technical Cooperation Agreement with Philips, as amended on May 12, 1997, the Company shall pay technical assistance thousand. fees as a percentage of net sales, as defined in the agreement, of certain products. The agreement shall remain in force up to July 8, l. As of December 31, 2002, unused credit lines for short-term loans were NT$7,930,000 thousand and US$337,500 thousand. 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 19. ADDITIONAL DISCLOSURES selling price. Following are the additional disclosures required by the SFC for TSMC and investees: b. Subject to certain equity ownership and notification requirements, Philips and its affiliates can avail themselves each year of up to a. Financing provided: Please see Table 1 attached; 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$39,810 thousand had been received as of December 31, 2002. e. Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March 30, 1999, the parties formed 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, and allow the Company to invest in 32% of SSMC's capital. 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. The Company provides 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. 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 estate 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 of which the Company exercises significant influence: Please see Table 8 attached; j. Financial instrument transactions: 1) Derivative financial instruments The relevant information for the derivative financial instruments entered into by the Company is as follows: 82 TSMC Annual Report 2002 TSMC Annual Report 2002 83 a) Forward exchange contracts as of December 31, 2002 c) Option contracts Currency Sell Buy Buy USD EUR JP Y Contract Amount (Thousand) $715,000 89,000 4,274,850 Fair Value (Thousand) Settlement Date Maturity (Thousand) NT$24,874,483 Jan. 2, 2003 - Feb. 24, 2003 NT$24,886,765 NT$3,231,707 Jan. 15, 2003 - Mar. 14, 2003 NT$1,249,159 Jan. 6, 2003 - Jan. 15, 2003 NT$3,234,260 NT$1,250,394 As of December 31, 2002, receivables from forward exchange contracts (shown in the balance sheets as part of ''other current assets'' account) aggregate to NT$199,609 thousand, and payables from forward exchange contracts (shown in the balance sheets as part of ''other current liabilities'' account) aggregate to NT$17,538 thousand. The net exchange gain for the year ended December 31, 2002 was NT$1,522,383 thousand. The net assets or liabilities hedged by the above forward exchange contracts are as follows: Accounts receivable Accounts payable Accounts payable b) Interest rate swaps Amount (Thousand) US$487,905 JP 4,287,733 EUR 49,026 The Company entered into foreign currency option contracts to hedge risks of exchange rate fluctuations arising from its anticipated U.S. dollar cash receipts on export sales and its European and Yen currency obligations for purchases of machinery and equipment. Outstanding option contracts as of December 31, 2002 were as follows: Type Contract Currency Contract Amount (Thousand) Carrying Value Fair Value (Thousand) Strike Price Maturity European Call option written European Call option written European Put option written USD USD EUR $230,000 $10,000 10,000 $- - - ($404,884) 32.78~33.22 (US$/NT$) Jan. 9, 2003 - Feb. 25, 2003 ($3,652) ($1,596) 119.2 (US$/JPY) Jan. 30, 2003 - Feb. 27, 2003 1.017 (US$/EUR) Jan. 30, 2003 - Feb. 27, 2003 For the year ended December 31, 2002, the Company recognized premium income of NT$228,030 thousand and premium expense of NT$647,543 thousand. 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 's 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 the hedged receivables and payables. Interest rate risks are also controlled as the expected cost of capital is fixed. Thus, market price risks are believed to be The Company entered into interest rate swap contracts to hedge exposures from rising interest rates on its floating rate long-term minimal. loans. Interest expense on these transactions for the year ended December 31, 2002 were NT$261,107 thousand. Outstanding contracts as of December 31, 2002 were as follows: Contract Date April 28, 1998 April 29, 1998 June 26, 1998 June 26, 1998 July 1, 1999 Period May 21, 1998 - May 21, 2003 May 21, 1998 - May 21, 2003 June 26, 1998 - June 26, 2003 July 6, 1998 - July 6, 2003 July 1, 1999 - June 28, 2004 Amount (Thousand) NT$2,000,000 NT$1,000,000 NT$1,000,000 NT$1,000,000 US$11,429 iii) Liquidity and cash flow requirements. The cash flow requirements on forward contracts are limited to the net differences between the current exchange rates and the contracted forward rates at the date of settlement. The cash flow requirements for interest rate swap contracts is limited to the amounts payable arising from the differences in the rates. In addition, options may not be exercised in the event the strike price is higher than the related market price at the exercise date. Management believes that the foregoing cash flow requirements are not material. 84 TSMC Annual Report 2002 TSMC Annual Report 2002 85 2) Fair value of financial instruments Non-derivative financial instruments Assets Cash and cash equivalents Receivables from related parties Notes and accounts receivable Long-term investments Refundable deposits Liabilities Payables to related parties Accounts payable Payable to contractors and equipment suppliers Bonds (includes current portion) Other long-term payables Guarantee deposits Derivative financial instruments Forward exchange contracts (buy) Forward exchange contracts (sell) Interest rate swaps Option 2002 2001 Carrying Amount Fair Value Carrying Amount Fair Value $61,656,795 $61,656,795 $33,403,706 $33,403,706 20. SEGMENT FINANCIAL INFORMATION a. Gross export sales Area America Asia and others Europe 2002 $86,045,821 49,916,588 9,216,429 $145,178,838 2001 $63,896,732 23,874,375 7,523,873 $95,294,980 The export sales information is based on amounts billed to customers with the region. b. Gross sales to major customer Customers with sales exceeding 10% of the total sales are as follows: Customers A Customers 2002 Amount $32,769,054 2001 Amount $21,789,769 % 20 % 17 7,210,972 7,210,972 The sales to A customer in 2002 were completed through TSMC - North America, due to the Company authorized its exclusive distributor through TSMC - North America, to promote semiconductor products in North America and South America starting January 2002. 10,183,488 9,555,687 34,978,495 543,469 2,466,998 4,849,234 14,004,383 39,000,000 4,281,665 1,395,066 10,183,488 9,555,687 38,909,570 543,469 2,466,998 4,849,234 14,004,383 39,762,245 4,281,665 1,395,066 523,861 20,134,218 32,869,391 772,912 2,082,606 1,123,894 12,367,319 29,000,000 - 523,861 20,134,218 36,333,066 772,912 2,082,606 1,123,894 12,367,319 29,703,063 - 38,369 143,702 (23,994) (50,273) 26,089 139,913 (164,342) (410,132) - (397,117) 26,969 (39,500) - (427,225) (343,088) (252,833) Fair values of financial instruments were determined as follows: a) Short-term financial instruments - carrying values. b) Long-term investments - market value for traded companies and net equity value for non-trade companies. c) Refundable deposits and guarantee deposits - carrying values. d) Long-term liabilities - based on forecasted cash flows discounted at interest rates of similar long-term liabilities. Bonds payable is discounted to present value. Fair values of other long-term liabilities are also their carrying values as they use floating interest rate. e) Derivative financial instruments - based on 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 represent the fair value of the Company as a whole. 3) Investment in Mainland China: The Company filed an investment project with the Investment Commission of MOEA to establish a foundry in mainland China. As of January 16, 2003, the foregoing project has not been approved by the authority. 86 TSMC Annual Report 2002 TSMC Annual Report 2002 87 TABLE 1 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. FINANCING PROVIDED For the Year Ended December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Financing Name Counter-party Financial Statement Account Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) Interest Rate Financing Reasons(Note1) Transaction Amounts Reasons for Short-term Financing Allowance for Bad Debt Collateral Item Value Financing Limit for Each Borrowing Company Financing Amount Limits (US$ in Thousand) 1 TSMC-BVI TSMC Other receivables Technology Inc. $536,372 (US$15,434) $536,372 (US$15,434) 4.25% 2 $- Operating capital $- - $- N/A $ 34,334,852 (US$987,968)(Note 2) Note 1: The No.2 represents short-term financing. Note 2: Not exceeding the issued capital of the Company. TABLE 2 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. ENDORSEMENT/GUARANTEE PROVIDED For the Year Ended December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Endorsement/ Guarantee Provider Name Counter-party Nature of Relationship(Note 2) Limits on Each Counter- party's Endorsement/ Guarantee Amounts Maximum Balance for the Period (US$ in Thousand) 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 (Note 4) 3 2 3 $9,313,804 (US$268,000) 1,390,120 (US$40,000) 15,291,320 (US$440,000) $6,950,600 (US$200,000) 1,390,120 (US$40,000) 15,291,320 (US$440,000) $- - - $59,768,660 2.37% 0.47% 5.21% Note 1: 30% of the issued capital of the Company. Note 2: The No. 2 represents a subsidiary in which TSMC holds directly over 50% of the equity interest. The No. 3 represents an investee in which TSMC holds directly and indirectly over 50% of the equity interest. Note 3: Promissory notes for collateral. Note 4: Not exceeding 10% of the issued capital of the Company, and also limited to the issued capital of the transaction entity, unless otherwise approved by Board of directors. 88 TSMC Annual Report 2002 TSMC Annual Report 2002 89 TABLE 3 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. MARKETABLE SECURITIES HELD December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Held Company Name Type and Name of Marketable Security Relationship with the Company Financial Statement Account December 31, 2002 Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note TSMC Stock TSMC - North America Subsidiary Long-term investment 11,000 $173,601 TSMC - Europe TSMC - Japan VIS TSMC-BVI Chi Cherng Investment Subsidiary Subsidiary Investee Subsidiary Investee Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Hsin Ruey Investment Investee Long-term investment - 6 13,670 94,258 556,133 2,415,297 987,968 22,265,157 - - 41,894 39,815 TSMC Partners Subsidiary Long-term investment 300 3,753,733 SSMC Emerging Alliance Fund Taiwan Mask Corp. United Technology Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Ya Shin Technology Hon Tung Ventures Capital Amkor Technology Monolithic System Tech. Crimson Asia Capital Horizon Ventures Investee Subsidiary - - - - Subsidiary - - - - - 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 382 - 8,794 16,783 10,500 5,000 34,125 8,392 505 470 N/A N/A 3,136,115 767,239 32,129 193,584 105,000 50,000 341,250 83,916 280,748 104,289 41,988 195,452 TSMC - North America Chi Cherng Investment Stock TSMC Stock TSMC Certificate Parent company Long-term investment 12,692 748,282 Parent company Short-term investment 12,738 459,285 Hsin Ruey Investment Major shareholder Long-term investment - 900,109 (Forward) 90 TSMC Annual Report 2002 The treasury stocks in amounts of NT$748,282 thousand are deducted from the carrying value. The carrying value does not include prepayment for subscribed stock of NT$849,360 thousand. The treasury stocks in amounts of NT$459,285 thousand are deducted from the carrying value. The treasury stocks in amounts of NT$460,233 thousand are deducted from the carrying value. The treasury stocks in amounts of NT$255,692 thousand are deducted from the carrying value. 100 100 100 25 100 36 36 100 32 99 2 11 7 2 100 10 - 2 N/A N/A - - 64 $921,883 13,670 94,258 4,326,719 22,265,157 501,179 500,048 3,940,495 3,136,115 767,239 160,574 280,931 137,355 59,866 341,250 71,216 89,866 214,949 41,988 195,452 610,434 612,636 900,109 TSMC Annual Report 2002 91 Held Company Name Type and Name of Marketable Security Relationship with the Company Financial Statement Account December 31, 2002 Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note Hsin Ruey Investment Stock TSMC Certificate Parent company Short-term investment 12,762 $460,233 TSMC-BVI Stock Chi Cherng Investment Major shareholder Long-term investment - 902,137 VIS InveStar Semiconductor Development Fund Inc. InveStar Semiconductor Development Fund (II) Inc. TSMC Development Inc. TSMC Technology Inc. 3DFX Interactive Inc. Stock VIS Associates, Inc. PowerChip Semiconductor, Inc. Etron Technology, Inc. Walsin Technology, Inc. MEGIC Corporation Form Factor, Inc. Subsidiary Subsidiary Subsidiary Subsidiary - Subsidiary 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 45,000 US$44,634 51,300 US$43,179 1 1 68 US$307,094 US$2,321 - 41,070 191,671 4,859 34,551 16,500 267 1,193,891 2,100,716 101,839 302,559 177,000 64,360 United Technology Co., Ltd. Investee Long-term investment 3,357 38,716 VIS Associates Inc. Stock VIS Investment Holding, Inc. Subsidiary Long-term investment Equity Silicon Valley Equity Fund Silicon Valley Equity Fund II Equity certificate ABN AMRO Bank Fund Grand Palace Trust - - - - Long-term investment Long-term investment Long-term investment Long-term investment 3,648 US$817 63 - - US$397 US$7,317 US$5,355 - 200 US$2,719 US$279 VIS Investment Holding, Inc. Stock VIS Micro, Inc. Subsidiary Long-term investment TSMC Development, Inc. Stock WAFERTECH, LLC Subsidiary Long-term investment - US$326,609 TSMC Partners InveStar Semiconductor ADR TSMC Stock Development Fund Inc. Marvell Technology Group Ltd. Silicon Laboratories WGRD Programmable Microelectronics, (Taiwan) Inc. Parent company Short-term investment 762 US$7,357 - - - - Short-term investment Short-term investment Short-term investment Long-term investment 3,413 9 104 1,580 US$3,350 US$287 US$625 US$1,566 (Forward) 92 TSMC Annual Report 2002 - 64 97 97 100 100 - 100 7 2 8 9 1 2 100 34 14 - 100 100 99 - - - - 4 $613,782 902,137 US$44,634 US$43,179 US$307,094 US$2,321 - 1,193,891 2,100,716 101,839 302,559 156,819 64,360 56,206 US$397 US$7,386 US$5,355 US$817 US$2,719 US$279 US$326,609 US$6,080 US$69,181 US$202 US$635 US$1,566 The amount is shown in the carrying value. TSMC Annual Report 2002 93 Held Company Name Type and Name of Marketable Security Relationship with the Company Financial Statement Account December 31, 2002 Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 Long-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 Divio Global Test Corp. Chipstrate Technologies, Inc. Richtek Technology Corporation Advanced Power Electronics, Corp. Preferred stock Integrated Memory Logic, Inc. Divio SiRF Technology, Inc. Capella Microsystems, Inc. Sensory, Inc. Equator Technologies, Inc. LightSpeed Semiconductor Corporation Tropian, Inc. Sonics, Inc. Atheros, Inc. NanoAmp Solutions, Inc. Formfactor, Inc. Monolithic Power Systems, Inc. Memsic, Inc. Reflectivity, Inc. Signia Technologies, Inc. Match Lab, Inc. HINT Corporation Ordius, Inc. (Creosys, Inc.) Incentia Design Systems, Inc. InveStar Semiconductor Development Fund (II) Inc. IP Unity Stock WGRD Procoat Technology Richtek Technology Corporation Programmable Microelectronics (Taiwan), Inc. Auden Technology MFG. Co., Ltd. Geo Vision, Inc. EoNex Technologies, Inc. Conwise Technology Co., Ltd. Yi Yang Technology Goyatek Technology Inc. Trendchip Technologies Corp. (Forward) 94 TSMC Annual Report 2002 30 13,268 6,660 1,023 2,750 1,831 667 306 300 1,404 300 2,252 1,758 2,686 1,607 541 267 2,521 2,727 1,064 3,000 1,875 1,000 1,500 286 1,008 105 3,500 845 487 953 180 40 2,800 2,800 1,740 2,000 US$3 US$5,176 US$300 US$346 US$1,345 US$1,809 US$500 US$1,333 US$481 US$625 US$258 US$1,339 US$2,334 US$3,530 US$3,593 US$853 US$2,000 US$2,000 US$1,500 US$1,192 US$300 US$1,500 US$1,000 US$450 US$500 US$1,636 US$630 US$1,942 US$1,006 US$140 US$1,117 US$129 US$2,024 US$1,930 US$967 US$1,787 US$864 - 12 1 1 3 - - - - - - - - - - - - - - - - - - - - - - 4 2 - 2 - - - - - - US$3 US$5,176 US$300 US$346 US$1,345 US$1,809 US$500 US$1,333 US$481 US$625 US$258 US$1,339 US$2,334 US$3,530 US$3,593 US$853 US$2,000 US$2,000 US$1,500 US$1,192 US$300 US$1,500 US$1,000 US$450 US$500 US$1,636 US$640 US$1,942 US$1,006 US$140 US$1,117 US$129 US$2,024 US$1,930 US$967 US$1,787 US$864 TSMC Annual Report 2002 95 Held Company Name Type and Name of Marketable Security Relationship with the Company Financial Statement Account December 31, 2002 Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note Preferred stock Memsic, Inc. Oepic, Inc. Equator Technologies, Inc. NanoAmp Solutions, Inc. Signia Technologies, Inc. Advanced Analogic Technology, Inc. Monolithic Power Systems, Inc. Ralink Technology, Inc. Sonics, Inc. Newport Opticom, Inc. Silicon Data, Inc. Reflectivity, Inc. Capella Microsystems, Inc. Angstron Systems, Inc. Tropian, Inc. SiRF Technology, Inc. LeadTONE, Inc. Match Lab, Inc. eBest!, Inc. Kilopass Technology, Inc. Bond eBest!, Inc. - - - - - - - - - - - - - - - - - - - - - Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 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 2,289 2,696 770 250 1,500 948 804 1,833 3,082 1,157 2,000 1,596 800 1,567 1,464 20 680 313 185 US$1,560 US$1,240 US$452 US$1,000 US$150 US$1,261 US$1,946 US$1,500 US$3,082 US$810 US$1,000 US$1,500 US$200 US$750 US$2,000 US$131 US$238 US$250 US$97 3,887 US$2,000 - US$24 Emerging Alliance Fund Stock 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. Ikanos Communication, Inc. Quicksilver Technology, Inc. Litchfield Communications Mosaic Systems Accelerant Networks Zenesis Technologies Reflectivity, Inc. Iridigm Display Spreadtrum XHP Microsystem - - - - - - - - - - - - - - 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 467 833 962 602 1,741 1,475 3,799 2,481 441 861 1,596 305 - 2,279 US$1,000 US$2,500 US$1,000 US$1,850 US$1,500 US$2,338 US$1,000 US$500 US$1,000 US$500 US$1,500 US$502 US$1,000 US$750 - - - - - - - - - - - - - - - - - - - - - 6 1 3 6 1 2 4 6 6 1 4 5 2 - 6 US$1,560 US$1,240 US$452 US$1,000 US$150 US$1,261 US$1,946 US$1,500 US$3,082 US$810 US$1,000 US$1,500 US$200 US$750 US$2,000 US$131 US$238 US$250 US$97 US$2,000 US$24 $100,000 US$1,000 US$2,500 US$1,000 US$2,932 US$1,500 US$2,338 US$1,000 US$500 US$1,000 US$500 US$1,500 US$502 US$1,000 US$750 Prepayment for subscribed stock 96 TSMC Annual Report 2002 TSMC Annual Report 2002 97 TABLE 4 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL For the Year Ended December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Acquiring on Type and Name of Marketable Financial Statement Selling Company Name Security Account Counter-party Nature of Relationship Beginning Balance Acquisition Disposal Ending Balance Shares Amount (US$ Shares Amount (US$ Shares Amount (US$ Carrying Gain (Loss) on Shares Amount (US$ (Thousand) in Thousand) (Thousand) in Thousand) (Thousand) in Thousand) Value(US$ in Disposal(US$ in (Thousand) in Thousand) Thousand) Thousand) (Note 1) TSMC TSMC - BVI TSMC Development Inc. VIS VIS Associates Inc. Stock SSMC TSMC-BVI Monolithic System Tech. Emerging Alliance Fund VIS Ya-Shin Technology Stock Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment SSMC TSMC-BVI Monolithic System Tech. Emerging Alliance Fund VIS Ya-Shin Technology TSMC Development Inc. Long-term investment TSMC Development Inc. InveStar Semiconductor Development Long-term investment InveStar Semiconductor Development Fund (II) Inc. Fund (II) Inc. WaferTech, LLC Bond fund Yuan Da Duo Li #2 Da-Hua THE TP ROC NITC JIHSUN Tung Yi Chian Pang Equity certificate ABN AMRO Bank Long-term investment WaferTech, LLC Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Long-term investment(Note 3) - - - - - - - Investee Subsidiary Investee Subsidiary Investee Subsidiary Subsidiary Subsidiary Subsidiary - - - - - - - 301 779,968 - - $2,907,967 19,987,814 - 741,617 81 208,000 470 - $1,421,846 7,280,000 104,289 168,615 556,133 3,377,526 121,338(Note 2) 849,360(Note 2) - 1 - 34,125 341,250 US$201,231 - US$208,000 45,000 US$45,766 6,300 US$6,300 - US$226,541 - US$120,000 - - - - - - - - - $- $ - $- - - - - - - - - - - - - - - - - - - - - - - - - 7,970 3,974 6,458 2,977 4,407 2,869 382 987,968 470 - 677,471 34,125 1 51,300 - - - - - - - $3,136,115 22,265,157 104,289 767,239 3,264,657 341,250 US$307,094 US$43,179 US$326,609 - - - - - - 26,278 - 25,923 - - 350,000 - 350,000 - - 28,409 400,000 33,108 70,860 - 3,814 43,630 - 450,000 850,000 - 580,000 550,000 - 59,386 70,860 25,923 3,814 43,630 28,409 807,970 853,974 356,458 582,977 554,407 402,869 800,000 850,000 350,000 580,000 550,000 400,000 23,168 US$10,047 1,194 US$536 20,714 US$14,806 US$9,766(Note4) US$5,706 3,648 US$817 Note 1: The ending balance included the recognition of the investment income (loss) by the equity method and the accumulated translation adjustment. Note 2: Prepayment for the subscribe stock Note 3: This equity certificate had been reclassified from short-term investment to long-term investment starting from July 2002. Note 4: The total book value for sale is US$9,100 thousand and with the unrealized loss on long-term investment is US$666 thousand. 98 TSMC Annual Report 2002 TSMC Annual Report 2002 99 TABLE 5 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. 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, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Types of Property Transaction Date Transaction Amount Payment Term Counter-party TSMC Fab 12 June 19, 2002 $263,000 By the construction progress Mandartech Interiors, Inc. July 11, 2002 August 6, 2002 137,402 By the construction progress UISC 124,775 By the construction progress Meissner & Wurst November 15, 2002 244,654 By the construction progress Fu Tsu Construction Co., Ltd. Fab 14 April 9, 2002 135,000 By the construction progress Fu Tsu Construction Co., Ltd. April 12, 2002 June 24, 2002 109,880 By the construction progress Great Construction System, Inc. 984,995 By the construction progress Fu Tsu Construction Co., Ltd. TABLE 6 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. 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, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Nature of Relationship Prior Transaction of Related Counter-party Owner Relationship Transfer Date Amount Price Reference Purpose of Acquisition - - - - - - - N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Other Terms None None None None None None None Company Name Related Party Nature of Relationship Transaction Details Transaction Details Abnormal Transaction Notes/Accounts Payable or Receivable Note Purchase/Sale Amount % to Total Payment Terms Unit Price Payment Terms Ending Balance % to Total TSMC TSMC - North America Subsidiary Philips and its affiliates Major shareholder WAFERTECH, LLC VIS SSMC Subsidiary Investee Investee Sales Sales Purchase Purchase Purchase ($94,433,401) (2,909,008) 9,955,154 3,469,198 2,751,297 (57) (2) 41 14 11 TABLE 7 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) 30 days from invoice date 30 days from invoice date (See Note 16) (See Note 16) $9,739,236 None None 30 days from monthly closing date (See Note 16) (See Note 16) 45 days from monthly closing date 30 days from invoice date None None None None 352,706 (617,751) (653,876) (391,426) 96 3 (25) (26) (16) Company Name TSMC Related Party Nature of Relationship Ending Balance Turnover Rate Amount Action Taken Overdue Amounts Received in Subsequent Period Allowance for Bad Debts TSMC - North America Philips and its affiliates Subsidiary Major shareholder $9,739,236 352,706 18 days 29 days $3,709,733 55,050 Accelerate demand on accounts receivable Accelerate demand on accounts receivable $2,155,511 69,090 $- - 100 TSMC Annual Report 2002 TSMC Annual Report 2002 101 TABLE 8 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Main Businesses and Products Original Investment Amount Balance as of December 31, 2002 Dec. 31, 2002 Dec. 31, 2001 Shares (Thousand) Percentage of Ownership Carrying Value (Note1) Net Income Investment (Loss) of the Investee Gain (Loss) (Note 2) Note Investee Company Location Investor Company: TSMC TSMC - North America TSMC - Europe TSMC - Japan San Jose, California, U.S.A. Amsterdam, The Netherlands Yokohama, Japan VIS Hsin-Chu, Taiwan TSMC - BVI Tortola, British Virgin Islands Marketing and engineering support Marketing and engineering support Marketing and engineering support IC Design and manufacturing Investment $333,178 $333,178 11,000 2,960 2,960 83,760 83,760 - 6 6,503,640 (Note3) 6,503,640 556,133 31,445,780 24,165,780 987,968 Chi Cherng Investment Taipei, Taiwan Hsin Ruey Investment Taipei, Taiwan TSMC Partners Tortola, British Virgin Islands Investment Investment Investment SSMC Singapore Manufacturing wafers Emerging Alliance Fund Cayman Islands Investment Ya-Shin Technology Taipei, Taiwan Electronic manufacturing 300,000 300,000 10,350 6,408,190 1,005,660 341,250 100,000 100,000 10,350 4,986,344 837,045 - - 300 382 - - 34,125 100 100 100 25 100 36 36 100 32 99 100 $173,601 $140,654 $139,021 Subsidiary 13,670 94,258 2,415,297 (Note 3) 22,265,157 41,894 39,815 3,753,733 3,136,115 767,239 341,250 (1,615) 1,615 Subsidiary 3,145 6,045 Subsidiary (3,250,831) (821,771) Investee (4,714,203) (4,714,203) Subsidiary 13,821 12,533 924,362 13,122 6,632 Investee Investee 993,292 Subsidiary (3,609,569) (1,155,076) Investee (142,865) (142,151) - - Subsidiary Subsidiary Note 1: The treasury stocks are not deducted from the carrying values. Note 2: The gain from sales of treasury stock, which was transferred to capital surplus, is not deducted from the investment gain (loss) was in amount of NT$43,036 thousand. Note 3: The amount has not included the prepayment for the subscribed shares of 121,338 shares with total amount of NT$849,360 thousand. 10. Consolidated Financial Statements & Independent Auditors' Report English Translation of a Report Originally Issued in Chinese Independent Auditors' Report January 16, 2003 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 (the "Company") as of December 31, 2002, and 2001, 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, 2002 and 2001, and the results of their operations and their cash flows for the years then ended, in conformity with the Guidelines for Securities Issuers' Financial Reporting and generally accepted accounting principles in the Republic of China. As disclosed in Note 3 to the financial statements, the Company adopted Statement of Financial Accounting Standards (''SFAS'') No. 30, ''Accounting for Treasury Stock'' on January 1, 2002. SFAS No. 30 requires a parent company to record stock held by its subsidiary as treasury stock. The adoption of SFAS No. 30 resulted in the decrease of long-term investments and simultaneous increase of the book value of treasury stock by NT$1,923,492 thousand as of December 31, 2002. Furthermore, net income increased by NT$25,909 thousand for the year ended December 31, 2002. T N Soong & Co An Associate Member Firm of Deloitte Touche Tohmatsu Effective April 22, 2002 (Formerly a Member Firm of Andersen Worldwide, SC) Taipei, Taiwan The Republic of China Notice to Readers The accompanying consolidated financial statements are intended only to present the consolidated 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 any other jurisdiction. The standards, procedures and practices to audit such consolidated financial statements are those generally accepted and applied in the Republic of China. 102 TSMC Annual Report 2002 TSMC Annual Report 2002 103 2002 2001 Amount % Amount % LIABILITIES AND SHAREHOLDERS' EQUITY $67,790,204 17 $37,556,295 10 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2002 and 2001 (In Thousand New Taiwan Dollars, Except Par Value) A SS E T S CURRENT ASS E T S Cash and cash equivalents (Notes 2 and 5) Short-term investments (Notes 2 and 6) Receivable from related parties (Note 20) Notes receivable Accounts receivable (Note 23) Allowance for doubtful receivables (Note 2) Allowance for sales returns and others (Note 2) Inventories - net (Notes 2 and 7) Deferred income tax assets (Notes 2 and 16) Prepaid expenses and other current assets (Notes 2, 20 and 23) Total Current Assets 170,012 439,659 60,240 19,530,702 (932,993) (2,372,515) 11,201,446 3,401,729 3,248,674 102,537,158 LO N G -TERM INVESTMENTS (Notes 2, 3, 8 and 18) 10,635,496 P R O P E R T Y, PLANT AND EQUIPMENT (Notes 2, 9 , 12 and 20) C o s t Land and land improvements B u i l d i n g s Machinery and equipment Office equipment Total cost Accumulated depreciation Advance payments and construction in progress Net Property, Plant and Equipment GOODWILL (Note 2) OTHER ASS E T S Deferred charges - net (Notes 2 and 10) Deferred income tax assets (Notes 2 and 16) Refundable deposits (Notes 20 and 22) Idle assets (Note 2) Assets leased to others (Note 2) M i s c e l l a n e o u s Total Other Assets 874,907 76,428,851 343,951,592 6,996,027 428,251,377 (210,101,159) 28,348,093 246,498,311 10,158,845 9,873,825 9,773,226 557,266 386,317 87,246 34,709 20,712,589 - - - 5 - (1) 3 1 1 26 3 - 20 88 2 110 (54) 7 63 3 3 2 - - - - 5 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 11,599,150 877,371 60,523,505 280,023,690 6,062,496 347,487,062 (155,948,960) 59,749,530 251,287,632 11,437,572 3,769,750 16,245,828 784,089 - 555,053 37,452 21,392,172 - - - 5 - (1) 3 1 1 19 3 - 17 76 2 95 (42) 16 69 3 1 5 - - - - 6 CURRENT LIABILITIES Short-term bank loans (Note 11) Payable to related parties (Note 20) Accounts payable (Note 23) Payable to contractors and equipment suppliers Accrued expenses and other current liabilities (Note 23) Current portion of long-term liabilities (Notes 12, 13 and 14) Total Current Liabilities LO N G -TERM LIABILITIES Long-term bank loans (Note 12) Long-term bonds payables (Note 13) Other long-term payables (Note 14) Total Long-term Liabilities OTHER LIABILITIES Accrued pension cost (Notes 2 and 15) Guarantee deposits (Note 22) Deferred gain on sales and leaseback (Note 2) O t h e r s Total Other Liabilities MINORITY INTEREST IN SUBSIDIARIES (Note 2) 2002 Amount $729,813 1,776,149 5,138,592 14,132,100 6,477,212 12,107,899 40,361,765 11,051,454 35,000,000 4,281,665 50,333,119 2,211,560 1,395,066 114,928 177,256 3,898,810 95,498 % - - 1 4 2 3 10 3 9 1 13 1 - - - 1 - 2001 Amount . $6,269,181 1,048,273 1,397,879 12,867,236 6,746,483 5,000,000 33,329,052 22,399,360 24,000,000 - % 2 - - 4 2 1 9 6 7 - 46,399,360 13 1,856,617 7,212,688 268,165 141,498 9,478,968 120,240 - 2 - - 2 - Total Liabilities 94,689,192 24 89,327,620 24 SHAREHOLDERS' EQUITY (Notes 2 and 17) Capital stock - $10 par value Authorized: 24,600,000 thousand shares Issued: Preferred - 1,300,000 thousand shares Common - 18,622,887 thousand shares in 2002 and 16,832,554 thousand shares in 2001 Capital surplus: Merger and others (Note 2) Treasury stock (Notes 3 and 18) Retained earnings: Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Unrealized loss on long-term investments (Note 2) Cumulative translation adjustments (Note 2) Treasury stock (at cost) - 42,001 thousand shares (Notes 2, 3 and 18) Total Shareholders' Equity 13,000,000 186,228,867 56,961,753 43,036 18,641,108 - 22,151,089 (194,283) 945,129 (1,923,492) 295,853,207 3 48 15 - 5 - 5 - - - 76 100 13,000,000 168,325,531 57,128,433 - 17,180,067 349,941 19,977,402 - 1,228,701 - 277,190,075 $366,517,695 3 46 16 - 5 - 6 - - - 76 100 TSMC Annual Report 2002 105 T O TAL ASS E T S $390,542,399 100 $366,517,695 100 T O TAL LIABILITIES AND SHAREHOLDERS' EQUITY $390,542,399 The accompanying notes are an integral part of the consolidated financial statements. (With T N Soong & Co. report dated January 16, 2003) 104 TSMC Annual Report 2002 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, 2002 and 2001 (In Thousand New Taiwan Dollars, Except Consolidated Earnings Per Share) G R O SS SALES (Notes 2, 20 and 24) $166,187,670 $128,560,708 Premium expense from option contracts - net (Notes 2 2002 2001 Amount % Amount % SALES RETURNS AND ALLOWANCES (Note 2) (3,886,462) (2,675,816) NET SALES COST OF SALES (Note 20) GROSS PROFIT OPERATING EXPENSES (Notes 20 and 24) Research and development General and administrative Marketing Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME (Note 24) Interest Royalty income (Note 22) Gain on sales of property, plant and equipment (Note 2) Technical service income (Notes 20 and 22) Gain on sales of short-term investments - net (Note 2) Insurance compensation - net Premium income from option contracts - net (Notes 2 and 23) Gain on sales of long-term investments - net (Note 2) Other (Note 20) Total Non-operating Income NON-OPERATING EXPENSES (Note 24) Interest (Notes 2, 9 and 23) Investment loss recognized by equity method - net (Notes 2 and 8) Permanent loss on long-term investments (Note 2) Loss on sales of and provision for loss on property, plant and equipment (Note 2) (Forward) 162,301,208 100 125,884,892 100 109,988,058 52,313,150 11,725,035 7,007,283 1,991,793 20,724,111 31,589,039 1,094,724 527,126 273,998 162,149 69,610 - - - 291,860 2,419,467 2,616,740 1,976,847 795,674 466,385 68 32 7 5 1 13 19 1 - - - - - - - - 1 2 1 1 - 92,228,098 33,656,794 10,649,019 7,939,839 2,290,139 20,878,997 12,777,797 1,486,656 1,301,606 52,376 55,077 1,619,062 860,835 234,732 105,439 759,793 6,475,576 3,144,042 3,959,020 - 235,629 73 27 9 6 2 17 10 1 1 - - 1 1 - - 1 5 3 3 - - and 23) Loss on sales of long-term investments - net (Note 2) Foreign exchange loss - net (Notes 2 and 23) Casualty loss - net (Note 2) Amortization of bond issuance costs (Note 2) Other Total Non-operating Expenses INCOME BEFORE INCOME TAX (Note 24) INCOME TAX BENEFIT(EXPENSE) (Notes 2 and 16) INCOME BEFORE MINORITY INTEREST MINORITY INTEREST IN LOSS (INCOME) OF SUBSIDIARIES (Notes 2 and 24) CONSOLIDATED NET INCOME 2002 Amount $419,513 170,831 120,568 119,485 18,523 81,792 6,786,358 27,222,148 (5,636,648) 21,585,500 24,791 $21,610,291 % - - - - - - 4 16 (3) 13 - 13 2001 Amount % $- - 695,620 - 12,504 420,053 8,466,868 10,786,505 3,740,678 - - - - - - 6 9 3 14,527,183 12 (44,009) $14,483,174 - 12 CONSOLIDATED EARNINGS PER SHARE (Note 19) Basic earnings per share Diluted earnings per share The accompanying notes are an integral part of the consolidated financial statements. (With T N Soong & Co. report dated January 16, 2003) Income Consolidated Income Consolidated Before Net Before Income Tax Income Income Tax $1.44 $1.44 $1.14 $1.14 $0.55 $0.55 Net Income $0.75 $0.75 106 TSMC Annual Report 2002 TSMC Annual Report 2002 107 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, 2002 and 2001 (In Thousand New Taiwan Dollars) CAPITAL STOCK ISSUED CAPITAL SURPLUS (Notes 2 and 17) CAPITAL SURPLUS (Notes 2 and 17) RETAINED EARNINGS (Note 17) Preferred Stock Shares (Thousand) Amount Common Stock Shares (Thousand) Amount From Merger Additional Paid-in Capital From Long-term Investments Excess on Foreign Bond Investment Gain on Sales of Properties Donation Treasury Stock Total Legal Reserve Special Reserve U n a p p r o p r i a t e d E a r n i n g s UNREALIZED GAIN(LOSS) ON ON LONG-TERM INVESTMENTS (Note 2) Total CUMULATIVE TRANSLATION ADJUSTMENTS (Note 2) TREASURY STOCK (Notes 2, 3 and 18) TOTAL SHAREHOLDERS' EQUITY BALANCE, JANUARY 1, 2001 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) ($278,377) $- $261,753,699 Appropriations of prior year's earnings Legal reserve Special reserve Bonus to employees - stock Cash dividends paid for preferred stocks Stock dividends - 40% Remuneration 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 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 467,443 4,674,426 - - 4,675,746 46,757,459 - - - - - - - - - - - - - - - - - - - - - 1,803,168 - - - - - - - - - - - - - - - - - - - - - - - - - 162 - - - - - - - - - - - - - - - - - - - - - - 39,282 - - - - - - - - - - - - - - - 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 Appropriations of prior year's earnings Legal reserve Special reserve Bonus to employees - stock Cash dividends paid for preferred stocks Stock dividends - 10% Remuneration to directors and supervisors Net income in 2002 Transfer of the capital surplus from gain on sales of property, plant and equipment to retained earnings Transfer of the capital surplus from gain on sales of property, plant and equipment of investees to retained earnings Unrealized loss on long-term investments Translation adjustments Reclassification of stocks of a parent company held by subsidiaries from long-term investments to treasury stock Capital surplus resulted from sales of treasury stock - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 107,078 1,070,783 - - 1,683,255 16,832,553 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (162) - - - - - - - - - - - - - - - - - - - - - - - - (166,518) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,803,168 39,282 162 - - - - - - - - - (162) - - - 43,036 43,036 57,128,433 17,180,067 349,941 19,977,402 37,507,410 1,448,317 - (1,448,317) (349,941) 349,941 6,490,744 - (6,490,744) (741,062) 741,062 - - - - - - - - - - - - - - (4,674,426) (4,674,426) (41,137) (41,137) (46,757,459) (46,757,459) (584,303) (584,303) 14,483,174 14,483,174 (1,803,168) (1,803,168) (39,282) (39,282) (162) (162) - - - - - - - - - - - - - - - (1,070,783) (1,070,783) (455,000) (455,000) (16,832,553) (16,832,553) (133,848) (133,848) 21,610,291 21,610,291 153,794 166,518 162 162 - - - - - - - - - - - - - - - - - - 71,564 - - - - - - - - - - - (194,283) - - - - - - - - - - - 1,507,078 1,228,701 - - - - - - - - - - - - - (283,572) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (41,137) - (584,303) 14,483,174 - - - 71,564 1,507,078 277,190,075 - - - (455,000) - (133,848) 21,610,291 - - (194,283) (283,572) (1,923,492) (1,923,492) - 43,036 - - - - - - - - - - - - - - - - - - - - - - (166,518) 12,724 BALANCE, DECEMBER 31, 2002 1,300,000 $13,000,000 18,622,887 $186,228,867 $24,132,297 $23,172,550 $246,219 $9,410,632 $ - $55 $43,036 $57,004,789 $18,641,108 $- $22,151,089 $40,792,197 ($194,283) $945,129 ($1,923,492) $295,853,207 The accompanying notes are an integral part of the consolidated financial statements. (With T N Soong & Co. report dated January 16, 2003) 108 TSMC Annual Report 2002 TSMC Annual Report 2002 109 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, 2002 and 2001 (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 Investment loss recognized by equity method - net Permanent loss on long-term investments Loss (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 investments - net Pension cost accrued 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 Forward exchange contracts receivable Prepaid expenses and other current assets Increase (decrease) in: Payable to related parties Accounts payable Forward exchange contract payables Accrued expenses and other current liabilities Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Decrease in short-term investments Acquisitions of: Long-term investments Property, plant and equipment Proceeds from sales of: Long-term investments Property, plant, and equipment (Forward) 110 TSMC Annual Report 2002 2002 2001 $21,610,291 $14,483,174 65,000,873 5,421,020 1,976,847 795,674 170,831 192,387 - 355,705 (167,499) (209,036) (24,791) 55,073 116,342 426,934 (1,373,118) (199,609) (330,819) 727,876 3,740,713 (379,579) 601,110 98,507,225 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 49,480 202,303 (1,558,066) (7,109,948) 218,165 (429,965) 75,817,712 1,184,419 117,173 (3,192,427) (55,235,458) 53,048 495,878 (5,120,580) (70,201,205) 559,137 301,416 Increase in deferred charges Decrease in refundable deposits Decrease (increase) in other assets Increase (decrease) in minority interest in subsidiaries Increase in goodwill Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of: Short-term bank loans Long-term bonds Payments on: Short-term bank loans Long-term bank loans Increase (decrease) in guarantee deposits Decrease in lease obligation Cash dividends paid for preferred stocks Remuneration paid to directors and supervisors Increase in issuance costs of financing Net Cash (Used in) Provided by Financing Activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2002 ($5,724,583) 226,823 2,711 49 - (62,189,540) - 10,000,000 (5,539,368) (4,397,306) (5,817,622) - (455,000) (133,848) (3,002) 6,346,146 2001 ($1,805,250) 194,978 (9,162) (249,166) (1,019,227) (77,231,886) 2,435,340 - - (940,007) 126,309 (51,286) (455,000) (170,440) (47,689) 897,227 29,971,539 (516,947) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 262,370 (766,975) CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 37,556,295 38,840,217 CASH AND CASH EQUIVALENTS, END OF THE YEAR $67,790,204 $37,556,295 SUPPLEMENTAL INFORMATION Interest paid (excluding the amounts capitalized of NT$213,686 thousand and NT$507,094 thousand in 2002 and 2001, respectively) Income tax paid Noncash investing and financing activities: Reclassification of a parent company stock held by subsidiaries from long-term investments to treasury stock Effect of exchange rate changes on cash and cash equivalents Current portion of long-term liabilities (Forward) $2,301,765 $165,121 $1,923,492 ($142,438) $12,107,899 $3,468,112 $20,767 $- $1,258,395 $5,001,116 TSMC Annual Report 2002 111 Cash paid for acquisition of property, plant and equipment: Total acquisition Decrease (increase) in payables to contractors and equipment suppliers $56,500,322 (1,264,864) $57,518,168 12,683,037 T S M C 2002 2001 The following diagram presents information regarding the relationship and ownership percentages among TSMC and its subsidiaries as of December 31, 2002: Cash paid for acquisition of deferred charges: Total acquisition Increase in other long-term payable (including current portion) The accompanying notes are an integral part of the consolidated financial statements. (With T N Soong & Co. report dated January 16, 2003) $55,235,458 $70,201,205 $10,401,176 (4,676,593) $1,805,250 - $5,724,583 $1,805,250 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousand New Taiwan Dollars, Unless Specified Otherwise) 1. GENERAL Taiwan Semiconductor Manufacturing Company Ltd. (TSMC), a Republic of China corporation, 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. On October 8, 1997, TSMC listed its shares of stock on the New York Stock Exchange in the form of American Depositary Shares. TSMC is engaged mainly in the manufacturing, selling, packaging, testing and designing of integrated circuits and other semiconductor devices, and the manufacturing of masks. TSMC has six direct wholly-owned subsidiaries, namely, TSMC North America (TSMC-North America), Taiwan Semiconductor Manufacturing Company Europe B.V (TSMC-Europe), TSMC Japan K. K. (TSMC-Japan), TSMC International Investment Ltd. (TSMC International), TSMC Partners Ltd. (TSMC Partners), Ya Xin Technology, Inc. (Ya Xin), a 99.5% owned subsidiary, Emerging Alliance Fund, LP (Emerging Alliance) and two 36% owned affiliates - Chi Cherng Investment Co., Ltd. (Chi Cherng, which is 36% owned by TSMC and 64% owned by Hsin Ruey Investment Co., Ltd.) and Hsin Ruey Investment Co., Ltd. (Hsin Ruey, which is 36% owned by TSMC and 64% owned by Chi Cherng) TSMC International has two wholly-owned subsidiaries-TSMC Development, Inc. (TSMC Development), TSMC Technology, Inc. (TSMC Technology), and two 97%-owned subsidiaries - InveStar Semiconductor Development Fund, Inc. (InveStar) and InveStar Semiconductor Development Fund, Inc. (II) LDC (InveStar II). TSMC Development has a 99.7% owned subsidiary, WaferTech, LLC (WaferTech). TSMC established Ya Xin in November 2002 and subsequently signed a merger agreement with Global UniChip Corp. (Global UniChip) in December 2002. The merger was effective on January 4, 2003 and Global UniChip is the surviving company. TSMC holds 52% of Global UniChips' shares after the completion of the merger. 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 1 0 0 % 3 6 % 3 6 % 9 9 . 5 % 1 0 0 % T S M C- North America T S M C- Japan T S M C I n t e r n a t i o n a l T S M C- E u r o p e TSMC Pa r t n e r s Chi Cherng Hsin Ruey E m e r g i n g Alliance Ya Xin 1 0 0 % 1 0 0 % 9 7 % 9 7 % T S M C Te c h n o l o g y T S M C D e v e l o p m e n t I n v e S t a r InveStar II 9 9 . 7 % Wa f e r Te c h T S M C-North America is engaged in the sales and marketing of integrated circuits and semiconductor devices. TSMC-Europe, TSMC- Japan, TSMC Development and TSMC Technology are engaged mainly in marketing and engineering support activities. TSMC Partners, Chi Cherng and Hsin Ruey are engaged in investments. Ya Xin is engaged in the design of integrated circuits. TSMC International is engaged in providing investment in companies involved in design, manufacture, and other related business in semiconductor industries. Emerging Alliance, InveStar and InveStar II are engaged in investing new start-up companies in the fields of high-technology. WaferTech is engaged in the manufacturing, selling, testing and in designing of integrated circuits and other semiconductor devices. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation TSMC consolidates the accounts of all majority (directly and indirectly) owned subsidiaries. The consolidated financial statements include, as of and for the years ended December 31, 2002 and 2001, the accounts of TSMC, TSMC-North America, TSMC- E u r o p e , T S M C-Japan, TSMC Partners, Emerging Alliance, Chi Cherng, Hsin Ruey, Ya Xin (a newly established entity in 2002) and TSMC International and its subsidiaries, InveStar, InveStar II, TSMC Development (including WaferTech) and TSMC Technology. TSMC and the foregoing subsidiaries are hereinafter referred to collectively as the "Company". All significant intercompany balances and transactions have been eliminated in these consolidated financial statements. TSMC's investees, Hsin Ruey, Chi Hsin Investment Co., Ltd. (Chi Hsin) and Kung Cherng Investment Co., Ltd. (Kung Cherng) were merged on October 30, 2002, with Hsin Ruey as the surviving company. In addition, TSMC's investees, Chi Cherng, Cherng Huei Investment Co., Ltd. (Cherng Huei) and Po Cherng Investment Co., Ltd. (Po Cherng) were merged on October 30, 2002 with Chi Cherng as the surviving company. Chi Hsin, Kung Cherng, Cherng Huei and Po Cherng were consolidated entities as of and for the year ended December 31, 2001. 112 TSMC Annual Report 2002 TSMC Annual Report 2002 113 Minority interests in Emerging Alliance (0.5%), InveStar (3%), InveStar II (3%) and Wa f e r Tech (0.3% in 2002 and 1% in 2001) are The costs of investments sold are determined using the weighted-average method. presented separately in the consolidated financial statements. Cash and cash equivalents If an investee company has an unrealized loss on a long-term investment evaluated using the lower- o f- c o s t - o r-market method, the Company recognizes a corresponding unrealized loss in proportion to its equity interest and records the amount as a component of its Government bonds acquired under agreements that provide for their repurchase within less than three months from date of purchase own shareholders' equity. are classified as cash equivalents. Short-term investments 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 p a r t y. The entire amount of the gains or losses on sales to majority-owned subsidiaries are deferred until such gains or losses are Short-term investments are carried at the lower of cost or market value. The costs of investments sold are determined by the specific realized through the subsequent sale of the related products to third parties. Gains or losses from sales by investee companies to the identification method. Allowance for doubtful receivables Company are deferred in proportion to the ownership percentage until realized through transactions with third parties. Property, plant and equipment, assets leased to others and idle assets Allowances for doubtful receivables are provided based on a review of the collectibility of accounts receivables. Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. Idle assets are stated at the Sales and sales returns and allowances 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 estimated based on historical experience. Such provisions are deducted from sales lower of book value or net realized value. Significant additions, renewals, betterments and interest expense incurred during the construction period are capitalized. Maintenance and repairs are expensed in the period incurred. Property, plant and equipment covered by agreements qualifying as capital leases are carried at the lower of the present value of future minimum rent 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 in the year the products are sold and the estimated related costs are deducted from cost of sales. leased property and the interest expense. Inventories Inventories are stated at the lower of cost or market value. Inventories are recorded at standard cost 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 Depreciation is computed using the straight-line method over these estimated service lives, which range as follows: Land improvements - 20 years; buildings - 10 to 20 years; machinery and equipment - 5 years; and office equipment - 3 to 7 years. Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to income in the period of disposal. Goodwill Investments in shares of stock of companies wherein the Company exercises significant influence on the operating and financial policy decisions are accounted for using the equity method. The Company's proportionate share in the net income or net loss of investee Goodwill represents the excess of the consideration paid for acquisitions over the fair market value of identifiable net assets acquired and the difference between the investment cost and the Company's proportionate share in the net assets of acquired investee companies are recognized as components of the "Investment income/loss recognized by equity method - net" account. The Company companies. Goodwill is amortized using the straight-line method over the estimated life of 10 years. adopted Statements of Financial Accounting Standards ("SFAS") No. 30, "Accounting for Treasury Stock" on January 1, 2002. SFAS No.30 requires a parent company to record stock held by its subsidiary as treasury stock. The recorded value of treasury stock is based on the Deferred charges carrying values of the short/long-term investments on the subsidiaries' books as of January 1, 2002. 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" as well as the "long-term investments" accounts. In Deferred charges consist of software and system design costs, technology know-how, bond issuance and financing costs, and technology license fees. The amounts are amortized as follows: Software and system design costs - 3 years, technology know-how - 5 years; bond issuance and financing costs - the term of the bonds or the related line of credit; technology license fee - the shorter of the estimated life of the technology or the term of the technology transfer contract. the event an investee has an accumulated deficit, it will record an offset to its capital surplus, excluding the reserve for asset revaluation, Pension costs through retained earnings. The Company will also record a corresponding entry equivalent to its proportionate share of the investee capital surplus, excluding the reserve for asset revaluation, that was generated subsequent to any acquisition of equity interest in the investee. Other stock investments are accounted for using the cost method. Cash dividends are recognized as income in the year received but are Net periodic pension costs are recorded on the basis of actuarial calculations. Unrecognized net transition obligation and unrecognized net gain/loss are amortized over 25 years. Deferred gain on sales and leaseback accounted for as reduction in the carrying values of the long-term investments if the dividends are received in the same year that the The gain on the sale of property that is simultaneously leased back is deferred by the Company. This deferred gain on sales and related investments are acquired. Stock dividends are recognized neither as investment income nor increase of long-term investment but leaseback transactions is amortized as follows: (a) operating leases - adjustment of rental expenses over the term of the leases and (b) recorded only as an increase in the number of shares held. An allowance is recognized for any decline in the market value of capital leases - adjustment of depreciation expenses over the estimated useful life of the property or the term of the lease; whichever is investments using quoted market prices with the corresponding amount debited to shareholders' equity. A reversal of the allowance will result from a subsequent recovery of the market value. The carrying values of investments with no quoted market price are reduced to reflect an other than temporary decline in their values with the related impairment loss charged to income. shorter. Casualty loss Investments in foreign mutual funds are stated at the lower of cost or net asset value (NAV). An allowance is recognized when the cost of the funds are lower than their net asset values, with the corresponding amount debited to shareholders' equity. A reversal of the allowance will result from a subsequent recovery of the net asset value. Investment in convertible notes and stock purchase warrants are carried at cost. Casualty loss consists of the accrued loss caused by the earthquake on March 31, 2002 less the estimated insurance compensation. Income tax The Company uses an inter-period tax allocation method for income tax. Deferred income tax assets and liabilities are recognized for the tax effects of temporary differences, unused tax credits, and operating loss carry forwards. Valuation allowances are provided to the 114 TSMC Annual Report 2002 TSMC Annual Report 2002 115 extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is, 4. SIGNIFICANT ELIMINATION ENTRIES Significant transactions and balances with subsidiaries that have been eliminated upon consolidation are as follows: according to the classification of its related asset or liability, classified as current or non-current. However, if a deferred tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as current or non-current based on the expected length of time before it is realized. Any tax credit arising from the purchase of machinery, equipment and technology, research and development expenditures, personnel training, investments in important technology-based enterprise are recognized using the current method. Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax provision. As of January 1, 1998, income taxes on unappropriated earnings (excluding the foreign consolidated entities) of 10% are expensed in the year of shareholder approval which is usually the year subsequent to the year incurred. Derivative financial instruments The Company enters into foreign currency forward contracts to manage currency exposures in cash flow and in foreign currency- denominated assets and liabilities. The differences in the New Taiwan dollar amounts translated using the spot rate 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 rate at the balance sheet date and the resulting differences are recognized in charged to income. Also, the receivables and payables related to the forward contract are netted with the resulting amount presented as either an asset or a liability. The Company enters into interest rate swap transactions to manage exposures from changes in interest rates on existing liabilities. These transactions are accounted for on an accrual basis, in which the cash settlement receivable or payable is recorded as an adjustment to interest income or expense. The notional amount of foreign currency option contracts entered into for hedging purposes are not recognized as an asset or liability on the contract dates. The premiums paid or received for the call or put options are amortized to income on a straight-line basis over the term of the related contract. Foreign-currency transactions Foreign-currency transactions are recorded in New Taiwan dollars at the current rate of exchange in effect when the transaction occurs. Gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in a foreign currency are recognized in current operations. At year-end, foreign-currency assets and liabilities are revalued at the prevailing exchange rate with the resulting gain or loss recognized in current operations. Translation of foreign-currency financial statements Company TSMC Account Payable to related parties Receivable from related parties Sales Purchases Marketing expenses - commissions Other revenue Notes receivable Interest receivable Royalty income Interest revenue Notes receivable Deferred revenue Royalty income Interest income Accounts receivable Deferred revenue Management service income Technical service income Deferred charges Administrative expense TSMC International TSMC Partners TSMC Technology WaferTech ROC Financial Accounting Standards (FAS) No. 14, "Accounting for Foreign-Currency Transactions," applies to foreign subsidiaries that use the local foreign currency as its functional currency. The financial statements of foreign subsidiaries are translated into New Taiwan 5. CASH AND CASH EQUIVALENTS dollars at the following exchange rates: assets and liabilities - current rate on balance sheet date; shareholders' equity - historical rate; income and expenses - weighted average rate during the year. The resulting translation adjustment is recorded as a separate component of shareholders' equity. Cash and bank deposits Government bonds acquired under repurchase agreements 3. NEW ACCOUNTING PRONOUNCEMENTS In accordance with the Statement of Financial Accounting Standards No.30, "Accounting for Treasury Stock" and other relevant regulations from Securities and Futures Commission (SFC), the Company is required to reclassify its common stock held by subsidiaries from short/long-term investments to treasury stock. The reclassification is based on the carrying value of NT$2,115,695 thousand as 6. SHORT-TERM INVESTMENTS recorded by the subsidiaries as of January 1, 2002. The adoption of SFAS No.30 resulted in the decrease of long-term investments and the increase of treasury stock by NT$1,923,492 thousand as of December 31, 2002, and an increase in net income for the year ended December 31, 2002 by NT$25,909 thousand. Listed stocks Market value Amount $617,751 29,520 19,643 14,511 9,424 9,739,236 4,545 94,433,401 1,152 9,955,154 208,226 132,086 1,635 347,530 188,842 455,778 26,660 10,666,619 9,398,140 607,669 345,620 4,986 13,356 27,331 14,758 31,278 34,563 Transaction Entity WaferTech TSMC-Europe TSMC-Japan TSMC-North America TSMC Technology TSMC-North America TSMC Technology TSMC-North America WaferTech WaferTech TSMC-Japan TSMC-Europe WaferTech TSMC Technology TSMC Technology TSMC Technology TSMC Technology TSMC International TSMC International TSMC International TSMC International WaferTech TSMC Development WaferTech TSMC Development TSMC Technology TSMC Technology 2002 $65,051,337 2,738,867 2001 $35,830,636 1,725,659 $67,790,204 $37,556,295 2002 $170,012 $2,455,582 2001 $1,398,071 $6,917,133 116 TSMC Annual Report 2002 TSMC Annual Report 2002 117 The market values of listed stocks as of December 31, 2002 and 2001 were based on the average closing price for the month of December 2002 and 2001, respectively. 7. INVENTORIES-NET Finished goods Work in process Raw materials Supplies and spare parts Less-allowance for losses 2002 2001 $3,837,245 7,611,344 518,196 970,960 12,937,745 (1,736,299) $11,201,446 $1,790,305 7,374,752 744,719 1,110,323 11,020,099 (1,191,771) $9,828,328 8. LONG-TERM INVESTMENTS Carrying Value % of Owner Ship Carrying Value % of Owner Ship 2002 2001 Shares of stock Equity method Publicly traded Vanguard International Semiconductor (VIS) $2,415,297 Non-publicly traded Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) Prepayment for subscribed stocks VIS Cost method Common stock Publicly traded stock Amkor Technology Monolithic System Tech. Taiwan Mask Non-publicly traded stock United Technology Global Testing Corp. (GTC) Shin-Etsu Handotai Taiwan Co., Ltd. Global Investment Holding Hong Tung Venture Capital EoNEX Technologies, Inc. Procoat Technology, Inc. Conwise Technology Corp. Ltd. Goyatek Technology, Inc. Programmable Microelectronics (Taiwan) Corp. W.K. Technology, Fund IV RichTek Technology Corp. (Forward) 118 TSMC Annual Report 2002 3,136,115 5,551,412 849,360 849,360 280,748 104,289 32,129 193,584 179,882 105,000 100,000 83,916 70,305 67,490 67,039 62,104 59,358 50,000 46,986 25 32 - - 2 2 11 10 7 6 10 6 12 14 8 4 2 9 $3,377,526 2,907,967 6,285,493 - - 280,748 - 32,129 193,584 179,951 105,000 107,270 150,000 - - - - 59,296 50,000 45,015 25 32 - - - - 2 11 10 7 6 10 - - - - 4 2 10 APE Auden Technology MFG. Co., Ltd. Yi Yang Technology TrendChip Technologies Corp. ChipStrate Technology, Inc. GeoVision, Inc. Divio, Inc. EmpowerTel Networks, Inc. 3DFX Interactive Ubicom, Inc. Capella Microsystems Equator Technologies, Inc. Preferred stock Non-publicly traded stock Sonics, Inc. Tropian, Inc. Reflectivity, Inc. Monolithic Power Systems, Inc. Atheros Communications, Inc. Memsic, Inc. Pixim, Inc. Quicksilver Technology FormFactor, Inc. Kilopass Technologies, Inc. NetLogic Microsystems NanoAmp Solutions, Inc. Newport Opticom, Inc. Integrated Memory Logic, Inc. Match Lab, Inc. IP Unity Ikanos Communication Ralink Technologies, Inc. SiRF Technology Holdings, Inc. LightSpeed Semiconductor Corp. Advanced Analogic Technology, Inc. OEpic, Inc. Accelerant Networks Litchfield Communications Quake Technologies, Inc. Spreadtrum HiNT Corp. Silicon Data, Inc. XHP Microsystem (Forward) 2002 2001 Carrying Value % of Owner Ship Carrying Value % of Owner Ship $46,743 38,819 33,606 29,992 10,426 4,518 104 - - - - - 6 4 9 5 9 2 - - - - - - $46,748 - - - 69,658 - 105 12,031 10,396 6,028 4,740 3,151 1,667,038 1,355,850 229,787 150,620 146,262 137,135 124,868 106,344 87,845 82,153 69,506 69,506 65,005 64,397 63,288 62,868 60,818 56,856 52,707 52,130 50,878 46,534 43,824 43,094 35,138 35,138 35,138 35,138 34,753 34,753 26,353 10 5 15 16 3 23 3 4 1 18 1 4 15 12 11 2 2 6 1 3 2 7 1 6 1 - 5 7 6 231,397 151,688 69,998 123,037 125,754 107,088 87,498 122,497 69,998 - 64,748 64,838 77,124 63,318 61,249 - 52,498 52,498 51,248 107,251 44,131 87,497 - 34,999 34,999 - 34,999 8,750 - 6 - - - 9 - - 1 - 2 2 - 7 5 6 18 2 20 3 29 1 - 1 3 15 10 10 - 3 7 1 1 2 6 - 6 1 - 5 2 - TSMC Annual Report 2002 119 2002 2001 Carrying Value % of Owner Ship Carrying Value % of Owner Ship Angstron Systems, Inc. Equator Technologies, Inc. Capella Microsystems, Inc. Sensory, Inc. Iridigm Display Mosaic Systems Zenesis Technologies Divio, Inc. Incentia Design Systems, Inc. Oridus, Inc. (CreOsys, Inc.) Signia Technologies, Inc. LeadTONE Wireless, Inc. eBest!, Inc. EmpowerTel Networks, Inc. RapidStream, Inc. Y-Media Corp. Rise Technology Company Ubicom, Inc. OmegaBand, Inc. (Seagull Semiconductor, Inc.) PicoTurbo, Inc. Procoat Technology, Inc. Convertible notes eBest!, Inc. PicoTurbo, Inc. Rise Technology Company OmegaBand, Inc.(Seagull Semiconductor, Inc.) Funds Horizon Ventures Crimson Asia Capital BIAM Global Opportunity Fund Warrant OEpic, Inc. $26,065 24,675 23,667 21,720 17,639 17,569 17,569 17,377 17,377 15,639 15,639 8,270 3,370 - - - - - - - - 2,329,412 834 - - - 834 195,452 41,988 - 237,440 - 7 2 12 5 2 6 4 4 2 8 12 6 1 - - - - - - - - - - - - - - - - $26,249 99,358 80,441 43,749 - - - 17,500 17,499 52,498 78,748 - - 179,480 73,754 52,499 52,498 47,636 43,749 43,749 30,000 2,868,509 - 10,323 10,500 6,730 27,553 125,701 27,091 908,944 1,061,736 9 $10,635,496 $11,599,150 7 2 8 4 - - - 4 2 8 20 - - 7 6 2 2 2 6 7 10 - - - - - - - - The carrying value of the investments accounted for using the equity method and the related investment losses were determined based on the audited financial statements of the investees in the same year. The investment losses of investee companies consist of the following: SSMC VIS 2002 $1,155,076 821,771 $1,976,847 The market values and net asset values of the Company's long-term investments are as follows: Market value of publicly traded stocks Equity in the net assets of non-publicly traded stocks Net asset value of funds 2002 $4,792,108 7,720,481 237,440 2001 $1,722,080 2,236,940 $3,959,020 2001 $7,056,942 8,286,549 1,202,453 On January 8, 2003, the Company's investee company, VIS, issued 600,000 thousand shares of common stock at a discounted price of NT$7 per share. The Company prepaid NT$849,360 thousand at the end of 2002 for the share subscription and paid an additional NT$766,815 thousand in January 2003. In this round of equity offering, the Company purchased a total of 230,882 thousand shares of VIS stocks. As a result, its ownership in VIS increased from 25% to 28%. 9. PROPERTY, PLANT AND EQUIPMENT Accumulated depreciation consisted of the following: Land improvements Buildings Machinery and equipment Office equipment 2002 $127,341 24,140,506 181,998,606 3,834,706 2001 $108,770 16,604,096 136,033,250 3,202,844 $210,101,159 $155,948,960 Information on the status of expansion or construction plans of TSMC's manufacturing facilities at December 31, 2002 is as follows: Manufacturing Plant Fab 6 Fab 12 Phase 1 Fab 14 Phase 1 Estimated Cost Accumulated Expenditures Expected or Actual Date of Starting Operations $93,932,000 $87,054,700 80,318,400 30,411,000 47,095,400 22,169,900 March 2000 March 2002 June 2003 Interest expense (before deducting capitalized amounts of NT$213,686 thousand and NT$507,094 thousand in 2002 and 2001, respectively) for the years ended December 31, 2002 and 2001 were NT$2,830,426 thousand and NT$3,651,136 thousand, respectively. The interest rates used for purpose of calculating the capitalized amount were 2.07% to 5.283% in 2002 and 2.54% to 5.283% in 2001. 120 TSMC Annual Report 2002 TSMC Annual Report 2002 121 10. DEFERRED CHARGES - NET Technology license fees Software and system design costs Bond issuance costs and financing costs Technology know-how Others 2002 $6,519,334 3,167,366 127,195 49,500 10,430 $9,873,825 2001 $996,578 2,073,802 150,142 103,500 445,728 $3,769,750 11. SHORT-TERM BANK LOANS Unsecured loan in US dollars: 2002 2001 US$21,000 thousand, refinanced in May 2002, repayable by May 2003, annual interest at 1.82% and 2.33% in 2002 and 2001, respectively $729,813 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% Secured loan in NT dollars: NT$107,100 thousand, repayable by October 2002, annual interest at 3.2% to 3.8% - - - - - $729,813 $734,979 2,869,918 192,495 754,735 1,609,954 107,100 $6,269,181 As of December 31, 2002, future minimum principal payments under the Company's long-term bank loan arrangements are as follows: Year 2003 2004 2005 13. BONDS Domestic unsecured bonds: Issued on March 4, 1998 and payable on March 4, 2003 in one lump sum payment, 7.71% annual interest payable semi-annually Issued on October 21, 1999 and payable on October 21, 2002 and 2004 in two equal payments, 5.67% and 5.95% annual interest payable annually, respectively Issued from December 4 to 15, 2000 and payable in December 2005 and 2007 in two equal payments, 5.25% and 5.36% annual interest payable annually, respectively Issued from January 10 to 24, 2002 and payable in January 2007, 2009 and 2012 in three equal payments, 2.6%, 2.75% and 3% annual interest payable annually, respectively Amount $6,950,600 - 11,051,454 $18,002,054 2002 2001 $4,000,000 $4,000,000 5,000,000 10,000,000 15,000,000 15,000,000 15,000,000 - $39,000,000 $29,000,000 As of December 31, 2002, future principal payments for the Company's bond arrangements are as follows: As of December 31, 2002, TSMC provided NT$1,390,120 thousand (US$40,000 thousand) guarantee for the above US$21,000 thousand loan. Year of Repayment Unused credit lines as of December 31, 2002 aggregated approximately NT$7,930,00 thousand and US$366,500 thousand. 12. LONG-TERM BANK LOANS Secured loan: US$440,000 thousand, repayable by February 2005, US$122,000 thousand repaid in 2002, annual floating interest at 2.078% and 2.578% in 2002 and 2001, respectively Unsecured loan: US$200,000 thousand, repayable by December 2003, annual interest at 2.0375% and 2.54% in 2002 and 2001, respectively 2002 2001 $11,051,454 $15,399,560 6,950,600 6,999,800 $18,002,054 $22,399,360 As of December 31, 2002, all of the loans above were guaranteed by TSMC. In addition, the property and equipment of WaferTech with carrying amount of approximately NT$29,053,508 thousand (US$836,000 thousand) is pledged for the secured loan. Under the unsecured loan, TSMC is required to maintain certain financial covenants which, if violated, could result in the payment of this obligation becoming due prior to the originally scheduled maturity date. These financial covenants require TSMC to, among other things; maintain minimum levels of working capital, earnings before interest, taxes, depreciation and amortization, and net worth. TSMC was in compliance with these financial covenants as of December 31, 2002. Unused credit lines for long-term bank loans as of December 31, 2002 aggregated approximately US$122,000 thousand. 122 TSMC Annual Report 2002 2003 2004 2005 2006 2007 2008 and thereafter Amount $4,000,000 5,000,000 10,500,000 - 7,000,000 12,500,000 $39,000,000 14. OTHER LONG-TERM PAYABLES TSMC entered into several license arrangements for certain semiconductor patents. Future payments under the agreements as of December 31, 2002 are as follows: Year 2003 2004 2005 2006 2007 2008 and thereafter Amount $1,157,299 1,226,805 987,009 469,189 486,566 1,112,096 5,438,964 TSMC Annual Report 2002 123 15. PENSION PLAN 16. INCOME TAX BENEFIT (EXPENSE) TSMC has pension plans for all regular employees that provide benefits based on length of service and average monthly salary for the six month period prior to retirement. TSMC contributes an amount equal to 2% of salaries paid every month to a Pension Fund (the "Fund"). The Fund is administered by a pension fund monitoring committee (the "Committee") and is deposited in the Committee's name in the Central Trust of China. 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 Net pension cost b. Reconciliation of the fund status of the plan and accrued pension cost 2002 $442,294 121,552 (45,102) 1,681 $520,425 2001 $417,967 95,920 (43,968) 8,300 $478,219 2002 2001 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 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 on plan assets d. Contributions to pension fund e. Payments from pension fund $21,294 1,607,272 1,628,566 1,300,712 2,929,278 (1,014,086) 1,915,192 (149,391) 445,759 $2,211,560 3.75% 3.00% 3.75% $164,720 $5,360 $739 1,026,289 1,027,028 1,407,014 2,434,042 (835,583) 1,598,459 (157,691) 415,849 $1,856,617 5.0% 5.0% 5.0% $131,894 $- a. A reconciliation of income tax expense on income before income tax at the statutory rate and current income tax expense on income before tax credits is shown below: 2002 2001 ($6,881,352) ($2,699,626) Income tax expense based on "income before income tax" at statutory rate Tax effect of: Tax-exempt income Temporary and permanent differences 2,526,500 (519,490) Current income tax expense before income tax credits ($4,874,342) b. Income tax benefit (expense) consists of: Current income tax expense before income tax credits Additional 10% tax on the unappropriated earnings Income tax credits Other income tax Income tax expense Net change in deferred income tax assets (liabilities) Net operating loss Investment tax credits Temporary differences Valuation allowance Income tax benefit (expense) c. Deferred income tax assets (liabilities) consist of the following: 2002 ($4,874,342) (179,362) 4,867,236 (29,160) (215,628) 1,733,990 2,510,192 (5,910,152) (3,755,050) ($5,636,648) 1,089,000 (986,598) ($2,597,224) 2001 ($2,597,224) (322,292) 2,888,358 (16,318) (47,476) 3,751,051 3,044,170 (1,918,009) (1,089,058) $3,740,678 Current Investment tax credits Temporary differences Noncurrent Net operating loss Investment tax credits Temporary differences Valuation allowance 2002 2001 $3,320,000 81,729 $3,401,729 $7,852,338 23,247,653 (8,352,647) (12,974,118) $2,347,000 3,147 $2,350,147 $6,118,348 21,710,461 (2,363,913) (9,219,068) The effective tax rate used in determining TSMC's deferred tax asset as of December 31, 2002 and 2001 was 25%; the effective tax rates for the subsidiaries are 34% to 41% as of December 31, 2002 and 2001. $9,773,226 $16,245,828 124 TSMC Annual Report 2002 TSMC Annual Report 2002 125 d. Integrated income tax information: 17. SHAREHOLDERS' EQUITY The balances of the imputation credit account (ICA) as of December 31, 2002 and 2001 were NT$6,650 thousand and NT$9,365 thousand, respectively. The expected and actual creditable ratio for 2002 and 2001 was 0.03% and 0.04%, 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 2002 may be adjusted according to the difference between the expected and actual imputation credit allowed under the regulation. TSMC has issued 369,019 thousand American Depositary Shares (ADS) on the New York Stock Exchange as of December 31, 2002. The number of common shares represented by the ADSs is 1,845,097 thousand shares (one ADS represents five common shares). Capital surplus can only be used to offset a deficit under the ROC Company Law. However, the components of capital surplus generated from donations (donated capital) and the excess of the issue price over the par value of capital stock (including the stock issued for new capital, mergers, and the purchase of treasury stock) can be transferred to capital as stock dividends. TSMC's Articles of Incorporation provide that the following shall be appropriated from annual net income (less any deficit): e. As of December 31, 2002 and 2001, the unappropriated retained earnings generated up to December 31, 1997, was NT$0 and a. 10% legal reserve; NT$4,827 thousand. f. As of December 31, 2002, TSMC's investment tax credits consisted of the following: Regulation Items Total Creditable Amounts Remaining Creditable Amounts Expire Year Statute for Upgrading Purchase of machinery and Industries equipment Statute for Upgrading Research and development Industries expenditures Statute for Upgrading Personnel training Industries Statute for Upgrading Reputation setting Industries Statute for Upgrading Industries Investments in important technology based enterprises $4,237,050 4,767,347 8,180,857 3,110,906 5,335,558 $- 4,767,347 8,180,857 3,110,906 2,775,029 $25,631,718 $18,834,139 $562,158 671,546 1,974,320 3,111,472 1,540,000 $- 671,546 1,974,320 3,111,472 1,540,000 $7,859,496 $7,297,338 $8,822 16,104 43,264 28,886 $97,076 $10,133 319 $10,452 $2,878 5,420 201,372 138,864 1,947 $- 16,104 43,264 28,886 $88,254 $- 319 $319 $- 5,420 201,372 138,864 1,947 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2002 2003 2004 2005 2002 2003 2002 2003 2004 2005 2006 g. The sales from the following expansion and construction of TSMC's manufacturing plants is exempt from income tax: Expansion of Fab 1 and Fab 2 - modules A and B, Fab 3 and Fab 4, and construction of Fab 5 Construction of Fab 6 1999 to 2002 2001 to 2004 Tax-Exemption Period $350,481 $347,603 b. Special reserve in accordance with relevant laws or regulations; c. Remuneration to directors and supervisors and bonus to employees equal to 0.3% and at least 1% of the remainder, respectively. Individuals who receive bonus to employees may include employees of affiliated companies and are approved by the board of directors or a representative of the board of directors; d. Dividends to holders of preferred shares equal to a 3.5% annual rate, based on the period which the preferred shares have been outstanding; e. The appropriation of the remaining balance after the above shall be decided at the shareholders' meeting. Dividends are distributed in cash, shares of common stock or a combination of cash and common stock. Distribution of profits is preferably made in the form of stock dividend. The total of cash dividends paid in any given year should not exceed 50% of total dividends distributed. These appropriations of net income shall be approved by the shareholders in the following year and given effect in the financial statements of that year. The bonus to employees and the remuneration to directors and supervisors appropriated from the earnings of 2001 were approved in the shareholders' meeting on May 7, 2002 as follows: Bonus to employees - in stock Remuneration to directors and supervisors - in cash Amounts $1,070,783 133,848 $1,204,631 Shares (Thousand) 107,078 - The shares distributed as a bonus to employees represent 0.64% of TSMC's total outstanding common shares as of December 31, 2001. The above appropriation of the earnings is consistent with the resolution of the meeting of board of directors dated on March 26, 2002. If the above distributable earnings were both paid in cash and charged against the income of 2001, the consolidated basic EPS for the year ended December 31, 2001 would decrease from NT$0.83 to NT$0.76. As of January 16, 2003, the appropriation of the earnings of 2002 has not yet been resolved by the board of directors. The above information associated with the appropriation of bonus to employees and remuneration to directors and supervisors is available at Market Observation System website. The aforementioned appropriation for legal reserve shall be 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 distribute as a dividend when the balance is 50% of the aggregate par value of the outstanding capital stock of TSMC up to the half amount of the reserve balance. A special reserve equivalent to the debit balance of any account shown in the shareholder's equity section of the balance sheets h. The tax authorities have examined income tax returns of the Company through 1999. However, the Company is contesting the (except for the recorded costs of treasury stocks held by subsidiaries), other than the deficit, shall be made from unappropriated assessment by the tax authority for 1992, 1993, 1996 and 1997. 126 TSMC Annual Report 2002 TSMC Annual Report 2002 127 retained earnings pursuant to existing regulations promulgated by the Securities and Futures Commission. The special reserve is allowed In 1996, WaferTech adopted an Executive Incentive Plan, which was amended in 1997. Under the 1997 amendment, the Board of to be appropriated when the debit balance of such accounts are reversed. The gain on sales or disposal of property, plant and equipment generated prior to 2000, less the applicable income tax, was reclassified to capital surplus as of each year-end. A gain in the amount of NT$39,282 thousand, less applicable income tax, was recognized and transferred to the capital surplus at the end of 2001 prior to the amended regulations. To comply with the amended regulations, the aforementioned capital surplus was transferred to retained earnings upon the approval of the shareholders' meeting on May 7, 2002. Directors approved the Senior Executive Incentive Plan and the Employee Incentive Plan (the "Plan II") under which officers, key employees and non-employee directors may be granted option rights. Plan II provides 15,150 thousand option rights. While WaferTech may grant employees option rights that are exercisable at different times or within different periods, it has generally granted option rights which are exercisable on a cumulative basis in annual installments of 25% each on the first, second, third, and fourth anniversaries of the date of grant. The shareholders also approved the accumulated capital surplus of NT$127,236 thousand generated from gains prior to 2000 be Information with respect to stock option rights activities under Plan II is as follows: transferred to retained earnings, after appropriating the required 10% legal reserve. Under the Integrated Income Tax System that became effective on January 1, 1998, ROC resident shareholders are allowed a tax credit for the income tax paid by TSMC on earnings generated as of January 1, 1998. An Imputation Credit Account (ICA) is maintained by TSMC for such income tax and the tax credit allocated to each shareholder. TSMC issued 1,300,000 thousand shares of unlisted Series A - preferred stock to certain investors on November 29, 2000. The following are the rights of the preferred shareholders and the related terms and conditions: Preferred shareholders a. are entitled to receive cumulative cash dividends at an annual rate of 3.5%. b. are not entitled to receive any common stock dividends (whether declared out of unappropriated earnings or capital surplus). c. have priority over the holders of common shares to the assets of the Company available for distribution to shareholders upon liquidation or dissolution, however, the preemptive rights to the assets shall not exceed the issue value of the shares. d. have voting rights similar to that of the holders of common shares. Balance, January 1, 2001 Options granted Options exercised Options cancelled Balance, December 31, 2001 Options granted Options exercised Options cancelled Balance, December 31, 2002 Option Rights Available For Grant Outstanding Option Rights Number of Option Rights Exercise Price (US$) 3,782 - 826 4,608 - 216 4,824 6,837 (2,949) (826) 3,062 (1,260) (216) 1,586 1.23 1.02 1.27 1.43 1.22 1.93 e. have no right to convert their shares into common shares. The preferred shares are to be redeemed within thirty months from their Options granted will expire if not exercised at specified dates between May 2006 and June 2011. issuance. The preferred shareholders have the aforementioned rights and the Company's related obligations remain the same until the In December 2000, WaferTech implemented a Stock Option Buyback Program ("Buyback") with its employees. The Buyback program preferred shares are redeemed by the Company. On June 25, 2002, the SFC approved TSMC's Employee Stock Option Plan (the "Plan I"). Plan I provides qualified employees and non- employees with 100,000 thousand units of option rights with each unit representing one common share of stock. The option rights are valid for 10 years and exercisable at certain percentages subsequent to the second anniversary of issuance. Under the terms of the plan, stock options are granted at an exercise price equal to the closing price of TSMC's common shares listed on the Taiwan Stock Exchange at the date of grant. At December 31, 2002, the maximum number of shares authorized to be granted by TSMC, TSMC-North America and Wa f e r Tech under this plan are 70,000 thousand, 16,000 thousand and 14,000 thousand option rights, respectively. The initial grant of options will be vested 50% two years after the grant date, 75% three years after the grant date and 100% four years after the grant date. Information with respect to stock option rights activities under Plan I is as follows: provides employees with the right to sell back all vested stock options and outstanding ownership interests granted under the program to WaferTech. The repurchase price for outstanding ownership interests is US$6. The repurchase price for vested stock options is US$6 less the exercise price of the option. As of December 31, 2002, the Company has repurchased 2,476 thousand outstanding ownership interests at a cost of US$15,466 thousand. 18. TREASURY STOCK (COMMON STOCK) Purpose of Purchase Beginning Shares Increase Decrease Ending Shares (Shares in Thousand) Option Rights Available For Grant Outstanding Option Rights Year ended December 31, 2002 Number of Option Rights Weighted Average Exercise Price (NT$) Reclassification of stocks held by subsidiaries from short/long-term investment to treasury stock 39,270 3,818 1,087 42,001 100,000 (19,726) - 357 80,631 - 19,726 - (357) 19,369 - 53 - 53 On January 1, 2002, TSMC reclassified its capital stock held by its subsidiaries with book value of NT$2,115,695 thousand from short/long-term investments to treasury stock. Proceeds from sales of treasury stock for the year ended December 31, 2002 were NT$96,501 thousand. The book value and market value of such treasury stock was NT$1,923,492 thousand and NT$2,048,164 thousand, respectively. Effective from January 1, 2002, capital stock held by a subsidiary as an investment is recorded as treasury stock with the holder having the same rights as other common shareholders. Option rights authorized Options granted Options exercised Options cancelled Balance, December 31, 2002 128 TSMC Annual Report 2002 TSMC Annual Report 2002 129 19. EARNINGS PER SHARE Earnings per share (EPS) is computed as follows: Amounts (Numerator) Income Before Income Tax Consolidated Net Income Share (Denominator) (Thousand) EPS (Dollars) Income Before Income Tax Consolidated Net Income Year ended December 31, 2002 Income Less - preferred stock dividends Basic earnings per share $27,222,148 $21,610,291 (455,000) (455,000) Income available to common shareholders $26,767,148 $21,155,291 18,580,700 $1.44 $1.14 Diluted earnings per share Income available to common shareholders $26,767,148 $21,155,291 18,580,700 $1.44 $1.14 Year ended December 31, 2001 Income Less - preferred stock dividends Basic earnings per share $10,786,505 $14,483,174 (455,000) (455,000) The potential common shares from the employee stock option plan (see Note 17) are not included in the denominator of the diluted e a r n i n g - p e r-share computation as such shares result in a non-dilutive per-share amount using the treasury stock method under the Statement of Financial Accounting Standards No. 24, "Earning Per Share". The average number of shares outstanding for EPS calculation has been adjusted retroactively for issuance of stock dividends and stock bonuses. The retroactive adjustment caused the basic EPS before income tax and after income tax for the year ended of December 31, 2001 to decrease from NT$0.61 and NT$0.83 to NT$0.55 and NT$0.75, respectively. 20. 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 its directors. b. Philips Electronics N.V., (Philips), a major shareholder of TSMC. c. Investees of TSMC VIS SSMC Income available to common shareholders $10,331,505 $14,028,174 18,622,887 $0.55 $0.75 Sales of property, plant and equipment Diluted earnings per share VIS Non-operating income Income available to common shareholders $10,331,505 $14,028,174 18,622,887 $0.55 $0.75 SSMC (technical service income mainly) The transactions with the aforementioned parties, in addition to those disclosed in other notes, are summarized as follows: 2002 2001 Amount % Amount % For the year ended Sales Philips and its affiliates ITRI VIS SSMC Purchase VIS SSMC Operating expense -Rental ITRI Manufacturing expenses -Technical service fee $2,909,008 94,409 92,119 7,018 $3,102,554 $3,469,198 2,751,297 $6,220,495 $40,401 2 - - - 2 14 11 25 - $2,389,257 114,546 1,177,094 48,972 $3,729,869 $3,801,975 42,984 $3,844,959 $161,604 Philips $2,849,517 100 $2,418,276 VIS At December 31 Receivables Philips and its affiliates VIS ITRI SSMC $- $126,061 - $126,061 $352,706 58,301 22,974 5,678 - 6 - 6 80 13 5 2 $268,871 $95,284 467 $95,751 $116,499 320,179 37,383 20,671 2 - 1 - 3 22 - 22 - 100 85 1 - 1 24 65 7 4 Prepaid expense and other current asset - Rent ITRI Payables Philips and its affiliates VIS SSMC Refundable deposits VIS $439,659 100 $494,732 100 $- $730,847 653,876 391,426 $1,776,149 $514,846 - 41 37 22 100 92 $42,664 $499,331 548,472 470 $1,048,273 $750,788 2 48 52 - 100 96 Sales to related parties are based on normal selling prices and collection terms, except for sales of property, plant and equipment and technical service fee, which were in accordance with the related contracts. 130 TSMC Annual Report 2002 TSMC Annual Report 2002 131 21. SIGNIFICANT LONG-TERM OPERATING LEASES TSMC leases land from the Science-Based Industrial Park Administration where its Fab 2 through Fab 14 manufacturing facilities reside. These agreements expire on various dates from March 2008 to December 2020 and have annual rent payments aggregating NT$225,576 thousand. The agreements can be renewed upon their expiration. TSMC-North America leases its office premises and certain equipment under non-cancelable operating agreements, which will expire in 2020. TSMC-Europe and TSMC-Japan entered into lease agreements for their office premises, which will expire in 2004. Current annual rent payments aggregate to NT$115,281 thousand. Future remaining lease payments are as follows: Year 2003 2004 2005 2006 2007 2008 and thereafter Amount $340,857 343,886 339,821 339,779 336,857 2,073,229 $3,774,429 22. SIGNIFICANT COMMITMENTS AND CONTINGENCIES The significant commitments and contingencies of the Company and its subsidiaries as of December 31, 2002 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 8, 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 h. Under a Technology Transfer Agreement with National Semiconductor Corporation ("National") entered into on June 27, 2000, TSMC shall receive payments for license of certain technology to National. The agreement will remain in force for ten years. After the initial expiration date, this agreement will be automatically renewed for successive periods of two years unless pre-terminated by either party under certain conditions. In January 2003, the agreement was amended such that National will discontinue making payments under the original terms and TSMC will discontinue transferring any additional technology. TSMC granted National the option to request additional technology transfers under the same terms and conditions of the original agreement through January 2008. i. TSMC entered into a Manufacturing Agreement with VIS. VIS agrees to reserve certain production capacity for TSMC to manufacture certain logic devices or other technologies required by TSMC's customers at selling prices as agreed by the parties. TSMC paid NT$1,200,000 thousand to VIS as a 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. j. In December 2000, TSMC-North America and WaferTech initiated stock appreciation right programs whereby the employees receive cash bonuses based on the appreciation of the quoted market price of the shares of stock of TSMC. At December 31, 2002, the exercise price of the stock appreciation right was higher than the market price of TSMC stock, therefore no compensation expense is recognized for the year ended December 31, 2002. k. WaferTech caused some contractors to incur additional labor and material costs outside the contracts. WaferTech recorded a reserve of US$3,000 thousand during 2002 for a litigation arising from a change by certain contractors. l. Unused letters of credit as of December 31, 2002 were NT$6,480 thousand, US$1,509 thousand, ￥51,000 thousand, Euro 520 thousand and S$85 thousand. 23. ADDITIONAL DISCLOSURES Following are the additional disclosures required by the SFC for the Company: 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 or disposed of at costs or prices of at least NT$100 million or 20% of paid-in capital: Please see Table 4 attached; e. Acquisition of individual real estate properties at costs of at least NT$100 million or 20% of paid-in capital: Please see Table 5 attached; f. Disposal of individual real estate properties at prices of at least NT$100 million or 20% of paid-in capital: None; g. Total purchases from or sales to related parties of at least NT$100 million or 20% of paid-in capital: Please see Table 6 attached; whom guarantee deposits of US$39,810 thousand had been received as of December 31, 2002. h. Receivable from related parties amounting to at least NT$100 million or 20% of paid-in capital: Please see Table 7 attached; e.Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March 30, 1999, the parties formed a joint venture company named Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) for the purpose of constructing an integrated circuit foundry in Singapore, and allow TSMC to invest in 32% of SSMC's capital. 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 is required to compensate SSMC for all related unavoidable costs. f. TSMC provides 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 for successive periods of five years unless pre- terminated by either party under certain conditions. g.Beginning in 2001, TSMC entered into several license arrangements for certain semiconductor patents. The terms of the contracts range from five to ten years with payments to be paid in the form of royalties over the term of the related contracts. TSMC has recorded the related amounts as a liability and a deferred charge to be amortized to cost of sales on a straight-line basis over the shorter of the estimated useful life of the technology or the term of the contract. 132 TSMC Annual Report 2002 i . Names, locations, and related information of investee on which the Company exercises significant influences: 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) Forward exchange contracts as of December 31, 2002 Currency Sell Buy Buy USD EUR J P Y Contract Amount (Thousand) $715,000 89,000 Fair Value (Thousand) Settlement Date Maturity (Thousand) NT$24,874,483 Jan. 2, 2003 - Feb. 24, 2003 NT$24,886,765 ￥4,274,850 NT$1,249,159 Jan.6, 2003 - Jan. 15, 2003 NT$3,231,707 Jan.15, 2003 - Mar. 14, 2003 NT$3,234,260 NT$1,250,394 TSMC Annual Report 2002 133 As of December 31, 2002, receivables from forward exchange contracts (included in "other current assets" account) aggregate to NT$199,609 thousand, and payables from forward exchange contracts (included in "other current liabilities" account) aggregate to rate swap contracts is limited to the amounts payable arising from the differences in the rates. In addition, options may not be exercised in the event the strike price is higher than the related market price at the exercise date. Management believes that the NT$17,538 thousand. The net exchange gain for the year ended December 31, 2002 was NT$1,522,383 thousand. foregoing cash flow requirements are not material. The net assets and liabilities hedged by the above forward exchange contracts are as follows: 2) Fair value of financial instruments Accounts receivable Accounts payable Accounts payable b) Interest rate swaps Amount (Thousand) US $487,905 JP ￥4,287,733 49,026 E UR The Company entered into interest rate swap contracts to hedge exposures from rising interest rates on its floating rate long-term loans. Interest expense on these transactions for the year ended December 31, 2002 were NT$261,107 thousand. Outstanding contracts as of December 31, 2002 were as follows: Contract Date April 28, 1998 April 29, 1998 June 26, 1998 June 26, 1998 July 1, 1999 c) Option contracts Period May 21, 1998 - May 21, 2003 May 21, 1998 - May 21, 2003 June 26, 1998 - June 26, 2003 July 6, 1998 - July 6, 2003 July 1, 1999 - June 28, 2004 Amount (Thousand) NT$2,000,000 NT$1,000,000 NT$1,000,000 NT$1,000,000 US$11,429 The Company entered into foreign currency option contracts to hedge risks of exchange rate fluctuations arising from its anticipated U.S. dollar cash receipts on export sales and its European and Yen currency obligations for purchases of machinery and equipment. Outstanding option contracts as of December 31, 2002 were as follows: Type Contract Currency Contract Amount (Thousand) Carrying Value Fair Value (Thousand) 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 Liabilities Short-term bank loans Payable to related parties Accounts payable December 31 2002 Carrying Amount Fair Value 2001 Carrying Amount Fair Value $67,790,204 $67,790,204 $37,556,295 $37,556,295 170,012 439,659 19,590,942 10,635,496 557,266 2,455,582 439,659 19,590,942 12,750,029 557,266 1,398,071 494,732 20,134,218 11,599,150 784,089 729,813 1,776,149 5,138,592 729,813 1,776,149 5,138,592 6,269,181 1,048,273 1,397,879 6,917,133 494,732 20,134,218 16,545,944 784,089 6,269,181 1,048,273 1,397,879 12,867,236 22,399,360 29,703,063 141,498 7,212,688 Payable to contractors and equipment suppliers 14,132,100 14,132,100 12,867,236 Long-term bank loans (includes current portion) Bonds (includes current portion) Other long-term liabilities (includes current portion and other liabilities - others) Guarantee deposits 18,002,054 39,000,000 5,616,220 1,395,066 18,002,054 39,762,245 5,616,220 1,395,066 22,399,360 29,000,000 141,498 7,212,688 Strike Price Maturity Derivative financial instruments European Call option written European Call option written European Put option written USD USD EUR $230,000 $10,000 10,000 $ - ($404,884) 32.78~33.22 (US$/NT$) Jan. 9, 2003 - Feb. 25, 2003 - - (3,652) (1,596) 119.2 (US$/JPY) Jan. 30, 2003 - Feb. 27, 2003 1.017 (US$/EUR) Jan. 30, 2003 - Feb. 27, 2003 For the year ended December 31, 2002, the Company recognized premium income of NT$228,030 thousand and premium expense Forward exchange contracts (buy) Forward exchange contracts (sell) Interest rate swaps Options $38,369 143,702 (23,994) (50,273) 26,089 139,913 (164,342) (410,132) - (397,117) 26,969 (39,500) - (427,225) (343,088) (252,833) of NT$647,543 thousand. 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 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 traded companies and net equity value for non-traded companies. Company's foreign currency denominated receivables or payables and interest rate fluctuations on its floating rate long-term loans. d) Refundable deposits, guarantee deposits and other long-term liabilities - carrying values. Gains or losses from forward exchange contracts are likely to be offset by gains or losses from the hedged receivables and payables. Interest rate risks are also controlled as the expected cost of capital is fixed. Thus, market price risks are believed to be minimal. iii) Liquidity and cash flow requirements. The cash flow requirements on forward contracts are limited to the net differences between e) Long-term bank loan - fair values of long-term bank loans are their carrying values as they use floating interest rate. f) Long-term liabilities - based on forecasted cash flows discounted at interest rates. Bonds payable is discounted to present value. Fair values of other long-term liabilities are also their carrying values as they use floating interest rate. the current exchange rates and the contracted forward rates at the date of settlement. The cash flow requirements for interest g) Derivative financial instruments - based on bank quotations. 134 TSMC Annual Report 2002 TSMC Annual Report 2002 135 The fair values of non-financial instruments were not included in the fair values disclosed above. Accordingly, the sum of the fair values b. Gross export sales of the financial instruments listed above does not represent the fair value of the Company and its subsidiaries as a whole. 3) Investment in Mainland China TSMC filed an investment project with the Investment Commission of MOEA to establish a foundry in mainland China. As of January 16, 2003, the foregoing project has not been approved by the authority. Area North Americas Asia and others Europe 2002 $95,139,355 42,020,560 9,358,802 2001 $63,893,621 23,874,375 7,523,873 $146,518,717 $95,291,869 24. SEGMENT FINANCIAL INFORMATION a. Geographic information: Overseas Taiwan Adjustments and Elimination Consolidated The customer with sales greater than 10% of the Company's total sales is as follows: The export sales information is presented by billed regions. c. Major customer 2002 Sales to unaffiliated customers Transfers between geographic areas $95,774,432 $66,526,776 $- $162,301,208 9,537,846 94,434,553 (103,972,399) - Total sales $105,312,278 $160,961,329 ($103,972,399) $162,301,208 Customers A Customer 2002 Amount $32,769,054 % 20 2001 Amount $21,789,769 % 17 Gross profit Operating expenses Non-operating income Non-operating expenses Income before income tax Minority interest loss Identifiable assets Long-term investments Total assets 2001 ($19,865) $51,967,145 ($365,870) $52,313,150 (20,724,111) 2,419,467 (6,786,358) $27,222,148 $24,791 $75,840,416 $336,405,063 ($32,338,576) $379,906,903 10,635,496 $390,542,399 Sales to unaffiliated customers Transfers between geographic areas $- $125,884,892 $- $125,884,892 8,152,070 3,111 (8,155,181) - Total sales $8,152,070 $125,888,003 ($8,155,181) $125,884,892 Gross profit Operating expenses Non-operating income Non-operating expenses Income before income tax Minority interest income Identifiable assets Long-term investments Total assets 136 TSMC Annual Report 2002 ($1,224,832) $36,381,055 ($1,499,429) $73,433,656 $303,954,097 ($22,469,208) $33,656,794 (20,878,997) 6,475,576 (8,466,868) $10,786,505 ($44,009) $354,918,545 11,599,150 $366,517,695 TSMC Annual Report 2002 137 TABLE 1 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES FINANCING PROVIDED For the Year Ended December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Financing Name Counter-party Financial Statement Account Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) 1 TSMC TSMC Other receivables International Technology, Inc. $536,372 (US$15,434) $536,372 (US$15,434) Interest Rate 4.25% Financing Reasons (Note1) Transaction Amounts Reasons for Short-term Financing Allowance for Bad Debt Collateral Item Value Financing Limit for Each Borrowing Company Financing Amount Limits (US$ in Thousand) 2 $- Operating capital $- - $- N/A $ 34,334,852 (US$987,968)(Note 2) Note 1: The No.2 represents short-term financing. Note 2: Not exceeding the issued capital of the Company. TABLE 2 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES ENDORSEMENT/GUARANTEE PROVIDED For the Year Ended December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Endorsement/ Guarantee Provider Name Counter-party Nature of Relationship (Note 2) 0 TSMC TSMC Development Inc. TSMC - North America WaferTech 3 2 3 Limits on Each Counter-party's Endorsement/ Guarantee Amounts (Note 4) Maximum Balance for the Period (US$ in Thousand) $9,313,804 (US$268,000) 1,390,120 (US$40,000) 15,291,320 (US$440,000) Note 1: 30% of the issued capital of the Company. Note 2: The No. 2 represents a subsidiary in which TSMC holds directly over 50% of the equity interest. The No. 3 represents an investee in which TSMC holds directly and indirectly over 50% of the equity interest. Note 3: Promissory notes for collateral. Note 4: Not exceeding 10% of the issued capital of the Company, and also limited to the issued capital of the transaction entity, unless otherwise approved by Board of directors. Ending Balance (US$ 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) $6,950,600 (US$200,000) 1,390,120 (US$40,000) 15,291,320 (US$440,000) $- - - $59,768,660 2.37% 0.47% 5.21% 138 TSMC Annual Report 2002 TSMC Annual Report 2002 139 TABLE 3 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES MARKETABLE SECURITIES HELD December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Held Company Name Type and Name of Marketable Security Relationship with the Company Financial Statement Account December 31, 2002 Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note TSMC Stock TSMC - North America Subsidiary Long-term investment 11,000 $173,601 TSMC - Europe TSMC - Japan VIS TSMC International Chi Cherng Investment Subsidiary Subsidiary Investee Subsidiary Investee Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Hsin Ruey Investment Investee Long-term investment - 6 556,133 987,968 - - 13,670 94,258 2,415,297 22,265,157 41,894 39,815 TSMC Partners Subsidiary Long-term investment 300 3,753,733 SSMC Emerging Alliance Taiwan Mask Corp. United Technology Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Ya Xin Technology Hon Tung Ventures Capital Amkor Technology Monolithic System Tech. Crimson Asia Capital Horizon Ventures Investee Subsidiary - - - - Subsidiary - - - - - 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 TSMC - North America Chi Cherng Investment Stock TSMC Stock TSMC Certificate Parent company Long-term investment Parent company Short-term investment 382 - 8,794 16,783 10,500 5,000 34,125 8,392 505 470 N/A N/A 12,692 12,738 3,136,115 767,239 32,129 193,584 105,000 50,000 341,250 83,916 280,748 104,289 41,988 195,452 748,282 459,285 Hsin Ruey Investment Major shareholder Long-term investment - 900,109 100 100 100 25 100 36 36 100 32 99 2 11 7 2 100 10 - 2 N/A N/A - - 64 $921,883 13,670 94,258 4,326,719 22,265,157 501,179 500,048 3,940,495 3,136,115 767,239 160,574 280,931 137,355 59,866 341,250 71,216 89,866 214,949 41,988 195,452 610,434 612,636 900,109 The treasury stocks in amounts of NT$748,282 thousand are deducted from the carrying value. The carrying value does not include prepayment for subscribed stock of NT$849,360 thousand. The treasury stocks in amounts of NT$459,285 thousand are deducted from the carrying value. The treasury stocks in amounts of NT$460,233 thousand are deducted from the carrying value. The treasury stocks in amounts of NT$255,692 thousand are deducted from the carrying value. (Forward) 140 TSMC Annual Report 2002 TSMC Annual Report 2002 141 Held Company Name Type and Name of Marketable Security Relationship with the Company Financial Statement Account December 31, 2002 Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note Hsin Ruey Investment Stock TSMC Certificate Parent company Short-term investment 12,762 $460,233 TSMC International Stock Chi Cherng Investment Major shareholder Long-term investment - 902,137 VIS InveStar Semiconductor Development Fund, Inc. InveStar Semiconductor Development Fund (II), Inc. TSMC Development, Inc. TSMC Technology, Inc. 3DFX Interactive, Inc. Stock VIS Associates, Inc. PowerChip Semiconductor, Inc. Etron Technology, Inc. Walsin Technology, Inc. MEGIC Corporation Form Factor, Inc. Subsidiary Long-term investment Subsidiary Long-term investment Subsidiary Subsidiary - Subsidiary 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 VIS Associates Inc. Stock VIS Investment Holding, Inc. Subsidiary Long-term investment United Technology Co., Ltd. Investee Long-term investment Equity Silicon Valley Equity Fund Silicon Valley Equity Fund II Equity certificate ABN AMRO Bank Fund Grand Palace Trust - - - - Long-term investment Long-term investment Long-term investment VIS Investment Holding, Inc. Stock TSMC Development, Inc. TSMC Partners InveStar Semiconductor VIS Micro, Inc. Stock WaferTech ADR TSMC Stock Development Fund Inc. Marvell Technology Group Ltd. Silicon Laboratories WGRD Programmable Microelectronics, (Taiwan) Inc. Subsidiary Long-term investment Subsidiary Long-term investment Parent company Short-term investment - - - - Short-term investment Short-term investment Short-term investment Long-term investment (Forward) 142 TSMC Annual Report 2002 45,000 51,300 1 1 68 41,070 191,671 4,859 34,551 16,500 267 3,357 63 - - US$44,634 US$43,179 US$307,094 US$2,321 - 1,193,891 2,100,716 101,839 302,559 177,000 64,360 38,716 US$397 US$7,317 US$5,355 - 200 - 762 3,413 9 104 1,580 US$2,719 US$279 US$326,609 US$7,357 US$3,350 US$287 US$625 US$1,566 - 64 97 97 100 100 - 100 7 2 8 9 1 2 100 34 14 - 100 100 99 - - - - 3 $613,782 902,137 US$44,634 US$43,179 US$307,094 US$2,321 - 1,193,891 2,100,716 101,839 302,559 156,819 64,360 56,206 US$397 US$7,386 US$5,355 US$817 US$2,719 US$279 US$326,609 US$6,080 US$69,181 US$202 US$635 US$1,566 The amount is shown in the carrying value. TSMC Annual Report 2002 143 Long-term investment 3,648 US$817 Held Company Name Type and Name of Marketable Security Relationship with the Company Financial Statement Account December 31, 2002 Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 Long-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 Divio, Inc. Global Test Corp. Chipstrate Technologies, Inc. Richtek Technology Holding Corp. Advanced Power Electronics, Corp. Preferred stock Integrated Memory Logic, Inc. Divio, Inc. SiRF Technology Holdings, Inc. Capella Microsystems, Inc. Sensory, Inc. Equator Technologies, Inc. LightSpeed Semiconductor Corporation Tropian, Inc. Sonics, Inc. Atheros Communications, Inc. NanoAmp Solutions, Inc. Formfactor, Inc. Monolithic Power Systems, Inc. Memsic, Inc. Reflectivity, Inc. Signia Technologies, Inc. Match Lab, Inc. HiNT Corporation Ordius, Inc. (Creosys, Inc.) Incentia Design Systems, Inc. InveStar Semiconductor Development Fund (II) Inc. IP Unity Stock WGRD Procoat Technology Richtek Technology Corporation Programmable Microelectronics (Taiwan), Inc. Auden Technology MFG. Co., Ltd. Geo Vision, Inc. EoNEX Technologies, Inc. Conwise Technology Co., Ltd. Yi Yang Technology Goyatek Technology Inc. Trendchip Technologies Corp. (Forward) 144 TSMC Annual Report 2002 30 13,268 6,660 1,023 2,750 1,831 667 306 300 1,404 300 2,252 1,758 2,686 1,607 541 267 2,521 2,727 1,064 3,000 1,875 1,000 1,500 286 1,008 105 3,500 845 487 953 180 40 2,800 2,800 1,740 2,000 US$3 US$5,176 US$300 US$346 US$1,345 US$1,809 US$500 US$1,333 US$481 US$625 US$258 US$1,339 US$2,334 US$3,530 US$3,593 US$853 US$2,000 US$2,000 US$1,500 US$1,192 US$300 US$1,500 US$1,000 US$450 US$500 US$1,636 US$630 US$1,942 US$1,006 US$140 US$1,117 US$129 US$2,024 US$1,930 US$967 US$1,787 US$864 - 10 9 6 6 12 4 1 8 5 1 3 3 5 3 3 1 12 12 4 8 9 6 8 2 2 - 12 3 1 4 2 6 14 9 8 5 US$3 US$5,176 US$300 US$346 US$1,345 US$1,809 US$500 US$1,333 US$481 US$625 US$258 US$1,339 US$2,334 US$3,530 US$3,593 US$853 US$2,000 US$2,000 US$1,500 US$1,192 US$300 US$1,500 US$1,000 US$450 US$500 US$1,636 US$640 US$1,942 US$1,006 US$140 US$1,117 US$129 US$2,024 US$1,930 US$967 US$1,787 US$864 TSMC Annual Report 2002 145 Held Company Name Type and Name of Marketable Security Relationship with the Company Financial Statement Account December 31, 2002 Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note Preferred stock Memsic, Inc. OEpic, Inc. Equator Technologies, Inc. NanoAmp Solutions, Inc. Signia Technologies, Inc. Advanced Analogic Technology, Inc. Monolithic Power Systems, Inc. Ralink Technology, Inc. Sonics, Inc. Newport Opticom, Inc. Silicon Data, Inc. Reflectivity, Inc. Capella Microsystems, Inc. Angstron Systems, Inc. Tropian, Inc. SiRF Technology Holdings, Inc. LeadTONE Wireless, Inc. Match Lab, Inc. eBest!, Inc. Kilopass Technology, Inc. Bond eBest!, Inc. 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 Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 2,289 2,696 770 250 1,500 948 804 1,833 3,082 1,157 2,000 1,596 800 1,567 1,464 20 680 313 185 3,887 - US$1,560 US$1,240 US$452 US$1,000 US$150 US$1,261 US$1,946 US$1,500 US$3,082 US$810 US$1,000 US$1,500 US$200 US$750 US$2,000 US$131 US$238 US$250 US$97 US$2,000 US$24 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. Ikanos Communication, Inc. Quicksilver Technology, Inc. Litchfield Communications Mosaic Systems Accelerant Networks Zenesis Technologies Reflectivity, Inc. Iridigm Display Spreadtrum XHP Microsystem - - - - - - - - - - - - - - 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 467 833 962 602 1,741 1,475 3,799 2,481 441 861 1,596 305 - 2,279 US$1,000 US$2,500 US$1,000 US$1,850 US$1,500 US$2,338 US$1,000 US$500 US$1,000 US$500 US$1,500 US$502 US$1,000 US$750 11 7 1 1 4 2 4 6 5 9 7 6 4 7 2 - 6 2 1 US$1,560 US$1,240 US$452 US$1,000 US$150 US$1,261 US$1,946 US$1,500 US$3,082 US$810 US$1,000 US$1,500 US$200 US$750 US$2,000 US$131 US$238 US$250 US$97 18 US$2,000 - 6 1 3 6 1 2 4 6 6 1 4 5 2 - 6 US$24 $100,000 US$1,000 US$2,500 US$1,000 US$2,932 US$1,500 US$2,338 US$1,000 US$500 US$1,000 US$500 US$1,500 US$502 US$1,000 US$750 Emerging Alliance (Forward) 146 TSMC Annual Report 2002 Prepayment for subscribed stock TSMC Annual Report 2002 147 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, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Acquiring on Selling Company Name Type and Name of Marketable Security Financial Statement Account Counter-party Nature of Relationship TSMC Stock SSMC TSMC International Monolithic System Tech. Emerging Alliance VIS Ya Xin Technology TSMC International Stock TSMC Development, Inc. VIS VIS Associates, Inc. TSMC Development Inc. InveStar Semiconductor Development Fund (II) Inc. WaferTech Bond fund Yuan Da Duo Li #2 Da-Hua THE TP ROC NITC JIHSUN Tung Yi Chian Pang Equity certificate ABN AMRO Bank Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment SSMC TSMC-BVI Monolithic System Tech. Emerging Alliance Fund, LP VIS Ya Xin Technology TSMC Development, Inc. InveStar Semiconductor Development Fund (II), Inc. Long-term investment WaferTech Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Long-term investment(Note 3) - - - - - - - Investee Subsidiary Investee Subsidiary Investee Subsidiary Subsidiary Subsidiary Subsidiary - - - - - - - Note 1: The ending balance included the recognition of the investment income (loss) by the equity method and the accumulated translation adjustment. Note 2: Prepayment for the subscribe stock. Note 3: This equity certificate had been reclassified from short-term investment to long-term investment starting from July 2002. Note 4: The total book value for sale is US$9,100 thousand and with the unrealized loss on long-term investment is US$666 thousand. Beginning Balance Acquisition Disposal Ending Balance Shares Amount (US$ Shares Amount (US$ Shares Amount (US$ Carrying Value Gain (Loss) on Shares Amount (US$ (Thousand) in Thousand) (Thousand) in Thousand) (Thousand) in Thousand) (US$ in Disposal(US$ in (Thousand) in Thousand) Thousand) Thousand) (Note 1) 301 779,968 - - $2,907,967 19,987,814 - 741,617 81 208,000 470 - $1,421,846 7,280,000 104,289 168,615 556,133 3,377,526 121,338(Note 2) 849,360(Note 2) - 1 - 34,125 341,250 US$201,231 - US$208,000 45,000 US$45,766 6,300 US$6,300 - US$226,541 - US$120,000 - - - - - - - - - $- - - - - - - - - 26,278 - 25,923 - - 350,000 - 350,000 - - 28,409 400,000 33,108 70,860 - 3,814 43,630 - 450,000 850,000 - 580,000 550,000 - 59,386 70,860 25,923 3,814 43,630 28,409 807,970 853,974 356,458 582,977 554,407 402,869 800,000 850,000 350,000 580,000 550,000 400,000 $ - $- - - - - - - - - - - - - - - - - 7,970 3,974 6,458 2,977 4,407 2,869 382 987,968 470 - 677,471 34,125 1 51,300 - - - - - - - $3,136,115 22,265,157 104,289 767,239 3,264,657 341,250 US$307,094 US$43,179 US$326,609 - - - - - - 23,168 US$10,047 1,194 US$536 20,714 US$14,806 US$9,766(Note 4) US$5,706 3,648 US$ 817 148 TSMC Annual Report 2002 TSMC Annual Report 2002 149 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, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Types of Property Transaction Date Transaction Amount Payment Term Counter-party TSMC Fab 12 June 19, 2002 $263,000 By the construction progress Mandartech Interiors, Inc. July 11, 2002 August 6, 2002 137,402 By the construction progress UISC 124,775 By the construction progress Meissner & Wurst November 15, 2002 244,654 By the construction progress Fu Tsu Construction Co., Ltd. Fab 14 April 9, 2002 135,000 By the construction progress Fu Tsu Construction Co., Ltd. April 12, 2002 June 24, 2002 109,880 By the construction progress Great Construction System, Inc. 984,995 By the construction progress Fu Tsu Construction Co., Ltd. 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, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Nature of Prior Transaction of Related Counter-party Relationship Owner Relationship Transfer Date Amount Price Reference Purpose of Acquisition - - - - - - - N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Other Terms None None None None None None None Company Name Related Party Nature of Relationship Transaction Details Purchase/Sale Amount % to Total TSMC TSMC - North America Subsidiary Philips and its affiliates Major shareholder WaferTech VIS SSMC Subsidiary Investee Investee Sales Sales Purchase Purchase Purchase $94,433,401 2,909,008 9,955,154 3,469,198 2,751,297 57 2 41 14 11 Transaction Details Payment Terms Abnormal Transaction Notes/Accounts Payable or Receivable Note Unit Price Payment Terms Ending Balance % to Total 30 days from invoice date 30 days from invoice date 30 days from monthly closing date 45 days from monthly closing date 30 days from invoice date None None None None None None None None None None $9,739,236 352,706 (617,751) (653,876) (391,426) 96 3 (25) (26) (16) 150 TSMC Annual Report 2002 TSMC Annual Report 2002 151 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, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Related Party Nature of Relationship Ending Balance Turnover Rate Amount Action Taken Overdue Amounts Received in Subsequent Period Allowance for Bad Debts TSMC - North America Philips and its affiliates Subsidiary Major shareholder $9,739,236 352,706 18 days 29 days $3,709,733 55,050 Accelerate demand on accounts receivable Accelerate demand on accounts receivable $2,155,511 69,090 $- - Company Name TSMC 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, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Investor Company TSMC Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2002 Net Income Investment Dec. 31, Dec. 31, Shares Percentage Carrying (Loss) of the Gain (Loss) Note 2002 2001 (Thousand) of Ownership Value (Note1) Investee (Note 2) TSMC - North America San Jose, California, U.S.A. Marketing and engineering support $333,178 $333,178 11,000 TSMC - Europe TSMC - Japan VIS Amsterdam, The Netherlands Marketing and engineering support Yokohama, Japan Hsin-Chu, Taiwan Marketing and engineering support IC Design and manufacturing TSMC International Tortola, British Virgin Islands Chi Cherng Investment Taipei, Taiwan Hsin Ruey Investment Taipei, Taiwan TSMC Partners Tortola, British Virgin Islands Investment Investment Investment Investment SSMC Emerging Alliance Ya Xin Technology Singapore Cayman Islands Taipei, Taiwan Manufacturing wafers Investment Electronic manufacturing Note 1: The treasury stocks are not deducted from the carrying values. Note 2: The gain from sales of treasury stock of NT$43,036 thousand, which was transferred to capital surplus, was not deducted from the investment gain (loss). Note 3: The amount has not included the prepayment for the subscribed shares of 121,338 shares with total amount of NT$849,360 thousand. 2,960 83,760 6,503,640 (Note3) 2,960 83,760 - 6 6,503,640 556,133 31,445,780 24,165,780 987,968 300,000 300,000 10,350 6,408,190 1,005,660 341,250 100,000 100,000 10,350 4,986,344 837,045 - - 300 382 - - 34,125 100 100 100 25 100 36 36 100 32 99 100 $173,601 $140,654 $139,021 Subsidiary 13,670 94,258 2,415,297 (Note 3) (1,615) 3,145 1,615 Subsidiary 6,045 Subsidiary (3,250,831) (821,771) Investee 22,265,157 (4,714,203) (4,714,203) Subsidiary 41,894 39,815 13,821 12,533 13,122 Investee 6,632 Investee 3,753,733 924,362 993,292 Subsidiary 3,136,115 (3,609,569) (1,155,076) Investee 767,239 341,250 (142,865) (142,151) Subsidiary - - Subsidiary 152 TSMC Annual Report 2002 TSMC Annual Report 2002 153 11. US GAAP Financial Information TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES Please be advised that our 2002 full annual report that includes complete US GAAP reconciled financial statements and footnotes will be avaliable when we file Form 20-F with the SEC. Our Form 20-F, or our 2002 full annual report, can be found at the SEC and on TSMC's website no later than June 30, 2003. TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES RECONCILIATIONS OF TOTAL ASSETS December 31, 2002 and 2001 (In Thousand New Taiwan Dollars) TOTAL ASSETS UNDER ROC GAAP US GAAP Adjustments : 2002 2001 $390,542,399 $366,517,695 CONSOLIDATED BALANCE SHEET December 31, 2002 and 2001 (In Thousand New Taiwan Dollars) ASSETS CURRENT ASSETS Cash and cash equivalents Short-term investments Receivable from related parties Notes receivable Accounts receivable - net Inventories - net Deferred income tax assets Prepaid expenses and other current assets Total Current Assets LONG-TERM INVESTMENTS PROPERTY, PLANT AND EQUIPMENT - NET GOODWILL OTHER ASSETS Deferred charges - net Deferred income tax assets Refundable deposits Idle assets - net Assets leased to others Miscellaneous Total Other Assets 2002 2001 - Effects of the US GAAP adjustments (1,414,756) (1,476,433) - Adjustment to market value - trading securities 2,116,432 3,936,191 - Adjustment of long-term investments - Equity investees - Adjustment to market value - available-for-sale securities - TSMC - Equity investees - Impairment loss - Reversal of depreciation of assets impaired under US GAAP - Goodwill - Carrying value difference for purchase of 68% TASMC - Accumulated amortization - Effect of US GAAP adjustments on deferred income tax - Capital stock payment for technology transfer - Treasury stock 18,611 7,083 (10,916,070) 2,910,952 52,212,732 (14,895,672) (4,061) (49,500) - 29,985,751 168,926 499,302 (10,916,070) 1,455,476 52,212,732 (16,186,405) (2,639) (103,500) (2,115,695) 27,471,885 TOTAL ASSETS UNDER US GAAP $420,528,150 $393,989,580 $67,790,204 170,012 439,659 60,240 16,225,194 11,201,446 3,401,729 3,248,674 102,537,158 10,635,496 246,498,311 10,158,845 9,873,825 9,773,226 557,266 386,317 87,246 34,709 20,712,589 $37,556,295 1,398,071 494,732 176,582 16,275,593 9,828,328 2,350,147 2,721,421 70,801,169 11,599,150 251,287,632 11,437,572 3,769,750 16,245,828 784,089 - 555,053 37,452 21,392,172 TOTAL ASSETS UNDER ROC GAAP $390,542,399 $366,517,695 154 TSMC Annual Report 2002 TSMC Annual Report 2002 155 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 2002 and 2001 (In Thousand New Taiwan Dollars, Except Par Value) LIABILITIES CURRENT LIABILITIES Short-term bank loans Payable to related parties Accounts payable Payables to contractors and equipment suppliers Accrued expenses and other current liabilitie Current portion of long-term liabilitie Total Current Liabilities LONG-TERM LIABILITIES Long-term bank loans Long-term bonds payable Other long-term payable Total Long-term Liabilities OTHER LIABILITIES Accrued pension cost Guarantee deposits Deferred gain on sales and leaseback Others Total Other Liabilities 2002 2001 $729,813 1,776,149 5,138,592 14,132,100 6,477,212 12,107,899 40,361,765 11,051,454 35,000,000 4,281,665 50,333,119 2,211,560 1,395,066 114,928 177,256 3,898,810 $6,269,181 1,048,273 1,397,879 12,867,236 6,746,483 5,000,000 33,329,052 22,399,360 24,000,000 - 46,399,360 1,856,617 7,212,688 268,165 141,498 9,478,968 TOTAL LIABILITIES UNDER ROC GAAP 94,593,694 89,207,380 RECONCILIATIONS OF TOTAL LIABILITIES As of and for the Years Ended December 31, 2002 and 2001 (In Thousand New Taiwan Dollars) TOTAL LIABILITIES UNDER ROC GAAP US GAAP Adjustments: - Derivative financial investments - Bonus to employees, directors and supervisors - Pension expenses 2002 $94,593,694 516,278 1,597,497 39,772 2,153,547 2001 $89,207,380 962,215 1,201,437 48,360 2,212,012 TOTAL LIABILITIES UNDER ROC GAAP $96,747,241 $91,419,392 MINORITY INTEREST IN SUBSIDIARIES UNDER ROC GAAP US GAAP Adjustment: - Shareholders' equity MINORITY INTEREST IN SUBSIDIARIES UNDER US GAAP 95,498 62,689 158,187 120,240 - 120,240 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 2002 and 2001 (In Thousand New Taiwan Dollars, Except Par Value) SHAREHOLDERS' EQUITY Capital stock, $10 par value Authorized - 24,600,000 thousand shares and Issued: Preferred stock - 1,300,000 thousand shares Common stock - 18,622,887 thousand shares Capital surplus Retained earnings Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Unrealized loss on long-term investments Cumulative translation adjustments Treasury stock 2002 2001 $13,000,000 186,228,867 57,004,789 18,641,108 - 22,151,089 (194,283) 945,129 (1,923,492) $13,000,000 168,325,531 57,128,433 17,180,067 349,941 19,977,402 - 1,228,701 - TOTAL SHAREHOLDERS' EQUITY UNDER ROC GAAP 295,853,207 277,190,075 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY UNDER ROC GAAP $390,542,399 $366,517,695 156 TSMC Annual Report 2002 TSMC Annual Report 2002 157 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES RECONCILIATIONS OF SHAREHOLDERS' EQUITY As of and for the Years Ended December 31, 2002 and 2001 (In Thousand New Taiwan Dollars) CONSOLIDATED STATEMENT OF INCOME For the Years Ended December 31, 2002 and 2001 (In Thousand New Taiwan Dollars) TOTAL SHAREHOLDERS' EQUITY UNDER ROC GAAP $295,853,207 $277,190,075 GROSS SALES 2002 2001 US GAAP Adjustments: - Adjustment to market value for trading securities - US GAAP adjustments on equity-method investees - Adjustment to market value - available-for-sale securities - TSMC - Equity-method investees - Loss on impairment of assets - Reversal of depreciation on assets impaired under US GAAP - Effect of US GAAP adjustments on deferred income tax - Goodwill - Carrying value difference from 68% purchase of TASMC - Accumulated amortization - Capital stock payment for technology transfer - Derivative financial instruments - Bonus to employees, directors and supervisors - Accrued pension expense - Treasury stock - Minority interest - Mandatory redeemable preferred stock 2,116,431 (1,414,756) 18,611 7,083 (10,916,070) 2,910,952 (4,061) 52,212,732 (14,895,672) (49,500) (516,278) (1,597,497) (39,772) - (62,688) (13,000,000) 14,769,515 3,936,191 (1,476,433) 168,926 499,302 (10,916,070) 1,455,476 (2,639) 52,212,732 (16,186,405) (103,500) (962,215) (1,201,437) (48,360) (2,115,695) - (13,000,000) 12,259,873 TOTAL SHAREHOLDERS' EQUITY UNDER US GAAP 310,622,722 289,449,948 MANDATORY REDEEMABLE PREFERRED STOCK 13,000,000 13,000,000 TOTAL LIABILITY AND SHAREHOLDERS' EQUITY UNDER US GAAP $420,528,150 $393,989,580 SALES RETURNS AND ALLOWANCES NET SALES COST OF SALES GROSS PROFIT OPERATING EXPENSES Research and development General and administrative Marketing Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME Interest income Royalty income Gain on sales of property, plant and equipment Technical service income Gain on sale of short-term investment - net Insurance compensation - net Premium income from option contracts - net Gain on sales of long-term investments - net Other Total Non-Operating Income NON-OPERATING EXPENSES Interest expense Investment loss recognized by equity method - net Permanent loss on long-term investments Loss on sales of and provision for loss on property, plant and equipment Premium expenses from option contracts - net Loss on sales of long-term investments - net Foreign exchange loss - net Casualty loss - net Amortization of bond issuance costs Other Total Non-Operating Expenses INCOME BEFORE INCOME TAX INCOME TAX BENEFIT (EXPENSE) INCOME BEFORE MINORITY INTEREST MINORITY INTEREST IN LOSS (INCOME) OF SUBSIDIARIES CONSOLIDATED NET INCOME 2002 $166,187,670 (3,886,462) 162,301,208 (109,988,058) 52,313,150 11,725,035 7,007,283 1,991,793 20,724,111 2001 $128,560,708 (2,675,816) 125,884,892 (92,228,098) 33,656,794 10,649,019 7,939,839 2,290,139 20,878,997 31,589,039 12,777,797 1,094,724 527,126 273,998 162,149 69,610 - - - 291,860 2,419,467 2,616,740 1,976,847 795,674 466,385 419,513 170,831 120,568 119,485 18,523 81,792 6,786,358 27,222,148 (5,636,648) 21,585,500 24,791 $21,610,291 1,486,656 1,301,606 52,376 55,077 1,619,062 860,835 234,732 105,439 759,793 6,475,576 3,144,042 3,959,020 - 235,629 - - 695,620 - 12,504 420,053 8,466,868 10,786,505 3,740,678 14,527,183 (44,009) $14,483,174 158 TSMC Annual Report 2002 TSMC Annual Report 2002 159 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES 12. Financial Forecast and Operation Results from 2001 to 2002 (Note) 2002 2001 $21,610,291 $14,483,174 Item Net Sales Cost of Sales Gross Profit Financial Forecast 2001 (Reviewed by CPA) Financial Statement 2001 (Audited by CPA) Original First Revised Second Revised Amount Achievement % Unit: NT$K Reasons for Penalty or Charged by TSE, OTC and SFC 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 Operating Expenses 18,610,914 19,336,062 18,909,731 19,038,765 Income from Operations 29,375,645 14,280,950 17,662,343 17,342,286 Non-operating Income 1,560,592 2,476,136 2,691,210 Non-operating Expenses 8,744,087 10,716,002 11,000,597 2,891,557 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 Note: 2002 financial forecast is not required according to regulations. (1,819,760) 61,677 1,455,476 (1,421) 1,290,733 54,000 445,938 (1,597,497) (6,911,423) 8,587 - - (62,689) (7,076,379) 14,533,912 587,401 (633,955) 1,455,476 (126) (10,790,937) 54,000 (518,377) (1,201,437) (25,208,512) 719 (95,031) (107,500) - (36,458,279) (21,975,105) 100.26% 100.58% 99.48% 100.68% 98.19% 107.44% 87.04% 113.96% 109.69% None RECONCILIATIONS OF NET INCOME For the Years Ended December 31,2002 and 2001 (In Thousand New Taiwan Dollars) NET INCOME UNDER ROC GAAP US GAAP Adjustments: - Adjustment to market value for trading securities - US GAAP adjustments on equity-method investees - Reversal of depreciation on assets impaired under US GAAP - Income tax effect of US GAAP adjustments - Amortization of goodwill - Amortization of capital stock payment for technology transfer - Adjustment to market value for derivative financial instruments - Bonuses to employees, directors and supervisors - Current year accrual - Fair market value adjustment of prior year accural - Pension expense - Gain on sales of treasury stock - Amortization of compensation expense - Minority interest effect of US GAAP adjustments NET INCOME UNDER US GAAP Cumulative preferred dividends (455,000) (455,000) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS UNDER US GAAP $14,078,912 ($22,430,105) 160 TSMC Annual Report 2002 TSMC Annual Report 2002 161 SPECIAL NOTES 1. Affiliates Information (1) TSMC Affiliated Companies Chart (2) TSMC Affiliated Companies December 31, 2002 Taiwan Semiconductor Manufacturing Company, Ltd. Company Date of Incorporation Place of Registration Paid-in Capital Business Activities Unit: Share, % Unit: NT(US, EUR, JPY) $K TSMC North America Jan. 18, 1998 San Jose, California, USA US$ 11,000 Marketing & Engineering support Taiwan Semiconductor Manufacturing Company Europe B.V. TSMC Japan K.K. Mar. 4, 1994 Sep. 10, 1997 Amsterdam, The Netherlands EUR 90.76 Marketing & Engineering support Yokohama, Japan JPY 300,000 Marketing & Engineering support 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% Ya Xin Technology Co. Shareholding: 100% Emerging Alliance Fund Shareholding: 99% Chi Cherng Investment Co., Ltd. Shareholding: 36% Hsin Ruey: 64% Vanguard Int'l Semiconductor Corp. Shareholding: 25% TSMC Development, Inc. Shareholding: 100% TSMC Technology, Inc. Shareholding: 100% InveStar Semiconductor Development Fund (I) Shareholding: 97% InveStar Semiconductor Development Fund (II) Shareholding: 97% Hsin Ruey Investment Co., Ltd. Shareholding: 36% Chi Cherng: 64% Vanguard Association Inc. Shareholding: 100% WaferTech, LLC Shareholding: 99% VIS Investment Holding Shareholding: 100% TSMC International Investment Ltd. Apr. 9, 1996 Tortola, British Virgin Islands US$ 987,968 Mar. 26, 1998 Feb. 16, 1996 Feb. 20, 1996 Tortola, British Virgin Islands Delaware, USA Delaware, USA US$ 300 US$ 942,583 US$ 0.001 Investment Investment Investment Investment TSMC Partners, Ltd. TSMC Development, Inc. TSMC Technology, Inc. InveStar Semiconductor Development Fund, Inc. InveStar Semiconductor Development Fund, Inc.(II) LDC. Emerging Alliance Fund, L.P. Wafertech, LLC Hsin Ruey Investment Co., Ltd. Chi Cherng Investment Co., Ltd. Ya Xin Technology Co., Ltd. Vanguard International Semiconductor Corp. VIS Associates, Inc. VIS Investment Holding, Inc. Sep. 10, 1996 Cayman Islands US$ 46,350 Investment Aug. 25, 2000 Jan. 10, 2001 Jun. 3, 1996 Jul. 13, 1998 Jul. 15, 1998 Nov. 20, 2002 Dec. 5, 1994 Sep. 24, 1996 Nov. 16, 1996 Cayman Islands Cayman Islands Washington, USA Taipei, Taiwan Taipei, Taiwan Taipei, Taiwan US$ 52,839 US$ 30,075 Investment Investment US$ 889,927 Wafer Manufacturing NT$ 840,000 NT$ 840,000 Investment Investment NT$ 341,250 Electronic Manufacturing Hsin-Chu, Taiwan NT$ 22,000,000 IC Design & Manufacturing Tortola, British Virgin Islands US$ 41,070 IC Related Investment Delaware, USA US$ 6,250 IC Related Investment Note: Foreign exchange rate on the reporting date is shown below: $1 USD= $34.753NT $1 EU= $36.34NT $1 JPY= $0.2925NT (3) Business Scope of TSMC and its Affiliated Companies TSMC and its affiliates work together to provide dedicated foundry services to our customers around the world. In addition, few of TSMC's affiliate companies are focused on conducting investment business. In general, TSMC and its affiliates give each other support in technology, capacity, marketing and services with an aim to create the maximum synergy, enabling TSMC to provide our worldwide customers with the best dedicated foundry services worldwide. The ultimate goal of this strategy is to ensure TSMC's leading position in the global IC market. (4) TSMC Shareholders Representing Both Holding Companies and Subordinates December 31, 2002 Reasoning Name (Note1) Shareholding (Note 2 ) Shares Holding % Date of Incorporation Place of Registration Paid-in Capital Business Activities Unit: NT$K, except Shareholding 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). None 162 TSMC Annual Report 2002 TSMC Annual Report 2002 163 (5) Rosters of Directors, Supervisors, and Presidents of TSMC's Affiliated Companies December 31, 2002 Company Title Name TSMC North America TSMC Europe B. V. TSMC Japan K.K. TSMC International Investment Ltd. TSMC Partners, Ltd. TSMC Development, Inc. TSMC Technology, Inc. Director Director President F.C.Tseng Rick Tsai Edward C. Ross Director Director Director Director President Morris Chang Rick Tsai Quincy Lin Kees den otter Kees den otter Chairman Director Director Director Director Supervisor President Sachiaki Nagae Morris Chang F.C.Tseng Rick Tsai Hisao Baba Harvey Chang Hisao Baba Director President Morris Chang F.C.Tseng Director Director Director Director Director Director F.C.Tseng Rick Tsai Quincy Lin Steve Tso Richard L. Thurston Harvey Chang Chairman President Morris Chang Morris Chang Chairman President Morris Chang Morris Chang InveStar Semiconductor Development Fund, Inc. Director Kenneth Tai InveStar Semiconductor Development Fund, Inc. (II) LDC. Director Kenneth Tai Emerging Alliance Fund, L.P. WaferTech, LLC NIL Director Director Director President NIL Morris Chang Rick Tsai Steve Tso Steve Tso Hsin Ruey Investment Co., Ltd. Director Rick Tsai (Representative of Chi Cherng Huei Investment Co., Ltd.) Chi Cherng Investment Co., Ltd. Director F.C.Tseng (Representative of Hsin Ruey Investment Co., Ltd.) (Forward) 164 TSMC Annual Report 2002 Unit : NT$, except Shareholding Shareholding Amount - - (TSMC holds 11,000,000 shares) - - - - - (TSMC holds 200 shares) - - - - - - - (TSMC holds 6,000 shares) - - (TSMC holds 987,968,244 shares) - - - - - - (TSMC holds 300,000 shares) - - (TSMC International Investment Ltd. Holds 942,583,200,000 shares) - - (TSMC International Investment Ltd. Holds 1,000 shares) 375,000 shares (TSMC International Investment Ltd. holds 45,000,000 shares) - (TSMC International Investment Ltd. holds 51,300,000 shares) (TSMC's investment US$ 29,925,000 ) - - - - (TSMC Development, Inc. holds 293,639,833 Preferred Shares) (Chi Cherng's investment NT$ 540,000,080 ) (TSMC's investment NT$299,999,880 ) (Hsin Ruey's investment NT$ 540,000,080 ) (TSMC's investment NT$299,999,880 ) % - - (100%) - - - - - (100%) - - - - - - - (100%) - - (100%) - - - - - - (100%) - - (100%) - - (100%) (0.81%) (97.09%) - (97.09%) (99.50%) - - - - (99.7%) (64.29%) (35.71%) (64.29%) (35.71%) Company Title Name Ya Xin Technology Co., Ltd. Chairman Director Director Supervisor F.C.Tseng Ping Yang Jim Lai Lora Ho Vanguard International Semiconductor Corporation VIS Associates, Inc. VIS Investment Holding, Inc. Chairman Director Director Director Director Director Director Director Director Director Supervisor Supervisor President Director Director Director Director Director Director Morris Chang Liu, Bor-Hong (Representative of The Development Fund, Executive Yuan, R.O.C.) Liou, Ming-Jong (Representative of The Development Fund, Executive Yuan, R.O.C.) Shih, Chin-Tay (Representative of The Development Fund, Executive Yuan, R.O.C.) Rick Tsai (Representative of TSMC) F.C.Tseng (Representative of TSMC) Paul Chien (Representative of TSMC) Robert Hsieh (Representative of TSMC) Wu, Quintin Y.G. (Representative of USI Far East Corp.) Chiao, Yu-Heng (Representative of Walsin Lihwa Corp.) Sheng-Chung Lin (Representative of The Development Fund, Executive Yuan, R.O.C.) Harvey Chang (Representative of TSMC) Paul Chien Morris Chang (Representative of VIS) Robert Hsieh (Representative of VIS) Paul Chien (Representative of VIS) Morris Chang (Representative of VIS Associates Inc.) Robert Hsieh (Representative of VIS Associates Inc.) Paul Chien (Representative of VIS Associates Inc.) (6) Operational Highlights for TSMC Affiliated Companies December 31, 2002 Unit : NT$, except Shareholding Shareholding Amount - - - - (TSMC's investment NT$341,250,000 ) 3,240,448 shares (The Development Fund holds 639,713,750 shares) % - - - - (100%) 0.15% (29.08%) (TSMC holds 556,133,496 shares) (25.28%) (USI Far East Corp. holds 135,460,533 shares) (Walsin Lihwa Corp. holds 53,827,741 shares) (6.16%) (2.45%) 2,478,229 shares ( VIS holds 41,070,000 shares) 0.11% (100%) (VIS Associates Inc. holds 62,500 shares) (100%) Paid-in Capital Assets Liabilities Net Worth Net Sales Income from Operation Net Income (net of tax) EPS (net of tax) Note Unit: NT$K, except EPS($) 382,283 11,662,710 10,993,449 669,261 1,341,031 221,589 3,298 87,750 32,124 105,725 18,454 11,467 13,670 94,258 142,373 199,821 6,423 9,515 140,654 (1,615) 3,145 TSMC International Investment Ltd. 34,334,860 33,777,434 11,512,277 22,265,157 (4,310,563) (4,917,956) (4,714,203) 10,426 13,580,421 32,757,594 12,208,328 0.035 809,318 9,639,926 6,965,411 1,076,191 3,940,495 5,242,917 (266,872) - - 550,655 (79) (21,810) 40,354 (9,078,729) 21,528 924,362 3,081.21 1,610,802 1,601,596 762 1,600,835 109,535 (563,921) (511,495) 1,836,314 1,545,813 1,045,210 767,239 180 - 1,545,633 767,239 12,122 7,978 30,927,641 22,812,680 11,899,859 10,912,822 9,807,065 840,000 840,000 341,250 1,407,320 1,416,358 341,250 7,151 13,034 - 22,000,000 26,419,326 14,435,497 1,427,306 1,196,359 217,206 16,272 2,468 2,468 1,400,169 1,403,324 341,250 1,193,829 1,193,891 13,804 (311,070) (27,197) (607,096) 9,520 7,789 - (315,153) (142,865) (837,532) 12,533 13,821 - 9,832 8,102 - 8,307,710 21,279 21,279 (4,214,677) (3,250,831) (337) 313 318,605 227 Company TSMC North America TSMC Europe B.V. TSMC Japan K.K. TSMC Partners, Ltd. TSMC Development, Inc. TSMC Technology, Inc. InveStar Semiconductor Development Fund, Inc. InveStar Semiconductor Development Fund, Inc. (II) LDC. Emerging Alliance Fund, LP Wafertech, LLC Hsin Ruey Investment Co., Ltd. Chi Cherng Investment Co., Ltd. Ya Xin Technology Co., Ltd. Vanguard International Semiconductor Corp. VIS Associates, Inc. VIS Investment Holding, Inc. * Based on US GAAP 12.79 N.A. 524.20 (5.04) N/A N/A (11.04) (5.96) N/A N/A 0.26 0.29 0.00 (1.48) 7.76 3.63 * * * * * TSMC Annual Report 2002 165 2. Combined Financial Statements & Independent Accountants' Report English Translation of a Report Originally Issued in Chinese Representation Letter The combined balance sheet as of December 31, 2002 and the combined statement of income for the year ended December 31, 2002 of Taiwan Semiconductor Manufacturing Co., Ltd. and Vanguard International Semiconductor Corporation are 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 Semiconductor Manufacturing Company, Ltd., its consolidated affiliates and Vanguard Independent Accountants' Report The Board of Directors and Shareholders Taiwan Semiconductor Manufacturing Company Ltd. We have reviewed the combined balance sheet as of December 31, 2002 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. International Semiconductor Corporation. There are no plans or intentions that may materially affect the carrying values or Accordingly, we do not express such an opinion. classifications of assets and liabilities. Very truly yours, 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 (ROC), and the ROC regulation governing the preparation of financial statements of public company and the ROC generally accepted accounting TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. principles. By MORRIS CHANG Chairman As disclosed in Note 3 to the financial statements, the Company adopted Statement of Financial Accounting Standards (''SFAS'') No. 30, ''Accounting for Treasury Stock'' on January 1, 2002. SFAS No. 30 requires a parent company to record stock held by its subsidiary as treasury stock. The adoption of SFAS No. 30 resulted in the decrease of long-term investments and simultaneous increase of the book value of treasury stock by NT$1,923,492 thousand as of December 31, 2002. Furthermore, net income increased by NT$25,909 thousand for the year ended December 31, 2002. T N Soong & Co An Associate Member Firm of Deloitte Touche Tohmatsu Effective April 22, 2002 (Formerly a Member Firm of Andersen Worldwide, SC) Taipei, Taiwan The Republic of China January 16, 2003 Notice to Readers The accompanying 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. 166 TSMC Annual Report 2002 TSMC Annual Report 2002 167 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION COMBINED BALANCE SHEET December 31, 2002 (In Thousand New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 5) Short-term investments (Notes 2 and 6) Receivables from related parties (Note 21) Notes receivable Accounts receivable (Note 24) Allowance for doubtful receivables (Note 2) Allowance for sales returns and others (Note 2) Inventories - net (Notes 2 and 7) Deferred income tax assets (Notes 2 and 17) Prepaid expenses and other current assets (Notes 21 and 24) Total Current Assets LONG-TERM INVESTMENTS (Notes 2, 3, 8 and 19) PROPERTY, PLANT AND EQUIPMENT (Notes 2, 9 and 13) 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 GOODWILL (Note 2) OTHER ASSETS Deferred income taxes assets (Notes 2 and 17) Deferred charges - net (Notes 2 and 10) Refundable deposits Idle assets - net (Note 2) Assets leased to others (Note 2) Miscellaneous Total Other Assets Amount $73,165,758 170,012 381,812 60,664 20,131,799 (1,016,923) (2,456,986) 12,970,416 3,412,940 3,470,885 110,290,377 11,349,920 874,907 84,376,642 377,256,106 7,744,848 470,252,503 (242,369,570) 29,157,931 257,040,864 10,158,845 13,153,131 9,921,646 45,245 386,317 87,246 34,709 23,628,294 % 18 - - - 5 - (1) 3 1 1 27 3 - 21 91 2 114 (59) 7 62 2 3 3 - - - - 6 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term bank loans (Note 11) Commercial paper (Note 12) Payable to related parties (Note 21) Accounts payable (Note 24) Payable to contractors and equipment suppliers Accrued expenses and other current liabilities (Note 24) Current portion of long-term debt (Notes 9, 13 , 14 and 15) Total Current Liabilities LONG-TERM LIABILITIES Long-term bonds payables (Note 14) Long-term bank loans (Note 13) Other long-term payables (Note 15) Obligation under capital lease (Notes 2 and 9) Total Long-term Liabilities OTHER LIABILITIES Accrued pension cost (Notes 2 and 16) Guarantee deposits (Note 23) Deferred gain on sale and leaseback (Note 2) Other Total Other Liabilities MINORITY INTEREST IN AFFILIATES (Note 2) Total Liabilities SHAREHOLDERS' EQUITY (Notes 2 and 18) Capital stock - $10 par value Authorized: 24,600,000 thousand shares Issued: Preferred - 1,300,000 thousand shares Common - 18,622,887 thousand shares Capital surplus Merger and others (Note 2) Treasury stock (Notes 3 and 19) Retained earnings: Appropriated as legal reserve Unappropriated earnings Unrealized loss on long-term investments (Note 2) Cumulative translation adjustments (Note 2) Treasury stock (at cost) - 42,001 thousand shares (Notes 2, 3 and 19) Total Shareholders' Equity Amount $1,283,000 1,080,000 1,167,437 5,786,264 14,414,639 7,205,454 15,572,189 46,508,983 36,100,000 16,384,413 4,281,665 290,416 57,056,494 2,550,918 1,399,846 114,928 177,256 4,242,948 8,806,668 116,615,093 13,000,000 186,228,867 56,961,753 43,036 18,641,108 22,151,089 (194,283) 945,129 (1,923,492) 295,853,207 % - - - 1 4 2 4 11 9 4 1 - 14 1 - - - 1 2 28 3 45 14 - 5 5 - - - 72 TOTAL ASSETS $412,468,300 100 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $412,468,300 100 The accompanying notes are an integral part of the combined financial statements. (With T N Soong & Co. review report dated January 16, 2003) 168 TSMC Annual Report 2002 TSMC Annual Report 2002 169 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, 2002 (In Thousand New Taiwan Dollars, Except Combined Earnings Per Share) GROSS SALES (Notes 2, 21 and 25) SALES RETURNS AND ALLOWANCES (Note 2) NET SALES COST OF SALES (Note 21) GROSS PROFIT OPERATING EXPENSES (Notes 21 and 25) Research and development General and administrative Marketing Total Operating Expenses INCOME FROM OPERATIONS NON-OPERATING INCOME (Notes 21 and 25) Interest Gain on reversal of inventory reserve (Note 2) Royalty income (Note 23) Gain on sales of property, plant and equipment (Note 2) Technical service income (Notes 21 and 23) Gain on sales of short-term investments - net (Note 2) Other Total Non-operating Income NON-OPERATING EXPENSES (Note 25) Interest (Notes 2, 9 and 24) Permanent loss on long-term investments (Note 2) Investment loss recognized by equity method - net (Notes 2 and 8) Loss on sales of and provision for loss on property, plant and equipment (Note 2) Premium expense from option contracts - net (Notes 2 and 24) (Forward) Amount % $171,038,907 (4,236,258) 166,802,649 100 118,054,595 48,748,054 11,890,880 7,237,899 2,225,936 21,354,715 27,393,339 1,146,375 793,424 527,126 278,896 162,149 99,215 295,835 3,303,020 3,095,841 907,596 836,221 531,626 419,513 71 29 7 5 1 13 16 1 1 - - - - - 2 2 1 1 - - Casualty loss - net (Note 2) Foreign exchange loss - net (Notes 2 and 24) Loss on sales of long-term investments - net (Note 2) Amortization of issuance costs of bonds (Note 2 ) Other Total Non-operating Expenses INCOME BEFORE INCOME TAX (Note 25) INCOME TAX EXPENSE (Notes 2 and 17) INCOME BEFORE MINORITY INTEREST MINORITY INTEREST IN LOSS OF AFFILIATES (Notes 2 and 25) COMBINED NET INCOME EARNINGS PER SHARE (Note 20) Basic earnings per share Diluted earnings per share The accompanying notes are an integral part of the combined financial statements. (With T N Soong & Co. review report dated January 16, 2003) Amount $119,485 106,045 80,405 18,523 81,792 6,197,047 24,499,312 (5,342,872) 19,156,440 2,453,851 $21,610,291 % - - - - - 4 14 (3) 11 2 13 Income Before Income Tax Combined Net Income $1.29 $1.29 $1.14 $1.14 170 TSMC Annual Report 2002 TSMC Annual Report 2002 171 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 Republic of China corporation, 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 (TSE). In October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange in the form of American Depositary Shares. The shares of Vanguard International Semiconductor Corporation (VIS), TSMC's 25% owned affiliate, have been listed on the Republic of China (ROC) Over-the-Counter Securities Exchange since March 25, 1998. TSMC is engaged mainly in the manufacturing, selling, packaging, testing and designing of integrated circuits and other semiconductor devices, and the manufacturing of masks. VIS is engaged mainly in the researching, designing, developing, manufacturing, packaging, testing and selling of memory integrated circuits, large scale integrated ICs, extra large scale integrated ICs and related parts. Notice to Readers The combined financial statements include the consolidated accounts of TSMC plus the accounts of VIS, which is not a consolidated subsidiary of TSMC. TSMC's consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States, would not include the assets, liabilities, shareholders' equity, revenues or expenses of VIS. TSMC-North America is engaged in the sales and marketing of integrated circuits and semiconductor devices. TSMC-Europe, TSMC- Japan, TSMC Development and TSMC Technology are engaged mainly in marketing and engineering support activities. TSMC Partners, Chi Cherng and Hsin Ruey are engaged in investments. Ya Xin is engaged in design of integrated circuits. TSMC International is engaged in providing investment in companies involved in design, manufacture, and other related business in semiconductor industries. Emerging Alliance, InveStar and InveStar II are engaged in investing in new start-up companies in the fields of high-technology. WaferTech is engaged in the manufacturing, selling, testing and designing of integrated circuits and other semiconductor devices. VIS' subsidiaries are mainly engaged in marketing, researching, developing and investing affairs. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Combination All significant intercompany balances and transactions have been eliminated in these combined financial statements. The combined financial statements include, as of and for the year ended December 31, 2002, the accounts of all majority (directly and indirectly) owned subsidiaries of TSMC and VIS (TSMC's 25% owned affiliate), whom TSMC exercises significant influence on. TSMC and the TSMC has six direct wholly-owned subsidiaries, namely, TSMC North America (TSMC-North America), Taiwan Semiconductor foregoing subsidiaries and affiliates are hereinafter referred to collectively as the "Company". Manufacturing Company Europe B.V (TSMC-Europe), TSMC Japan K. K. (TSMC-Japan), TSMC International Investment Ltd. (TSMC International), TSMC Partners Ltd. (TSMC Partners), Ya Xin Technology, Inc. (Ya Xin), a 99.5% owned subsidiary, Emerging Alliance Fund, LP (Emerging Alliance) and two 36% owned affiliates - Chi Cherng Investment Co., Ltd. (Chi Cherng, which is 36% owned by TSMC and The respective total assets and revenues of VIS Associates, Inc. and its subsidiaries, which are subsidiaries of VIS, are less than 10% of those of VIS; therefore, the accounts of these entities are not included in VIS' combined financial statements. 64% owned by Hsin Ruey Investment Co., Ltd.) and Hsin Ruey Investment Co., Ltd. (Hsin Ruey, which is 36% owned by TSMC and 64% Minority interests in the aforementioned affiliates are presented separately in the combined financial statements. owned by Chi Cherng). TSMC International has two wholly-owned subsidiaries - TSMC Development, Inc. (TSMC Development), TSMC Technology, Inc. (TSMC Technology), and two 97%-owned subsidiaries - InveStar Semiconductor Development Fund, Inc. (InveStar) and InveStar Semiconductor Development Fund, Inc. (II) LDC (InveStar II). TSMC Development has a 99.7% owned subsidiary, WaferTech, LLC (WaferTech). VIS has three direct and indirect wholly-owned subsidiaries, namely, VIS Associates, Inc., VIS Investment Holding, Inc. and VIS Micro, Inc. TSMC established Ya Xin in November 2002 and subsequently signed a merger agreement with Global UniChip Corp. (Global UniChip) in December 2002. The merger was effective on January 4, 2003 and Global UniChip is the surviving company. TSMC holds 52% of Global UniChips' shares after the completion of the merger. The following diagram presents information regarding the relationship and ownership percentages among TSMC, VIS and their affiliates as of December 31, 2002: TSMC 25% 100% 100% 100% 100% 100% 36% 36% 99.5% 100% VIS TSMC- North America TSMC- Japan TSMC International TSMC-Europe TSMC Partner Chi Cherng Hsin Ruey Emerging Alliance Ya Xin 100% 100% 97% 97% TSMC- Technology TSMC- Development 99.7% WaferTech InveStar InveStar II 100% Vanguard Associated Inc. 100% VIS Investment 100% VIS Micro Inc. 172 TSMC Annual Report 2002 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. 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 receivables. Sales and sales returns and allowances 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 estimated based on historical experience. Such provisions are deducted from sales in the year the products are sold and the estimated 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 cost 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. TSMC Annual Report 2002 173 Long-term investments Goodwill Investments in shares of stock of companies wherein the Company exercises significant influence on the operating and financial policy Goodwill represents the excess of the consideration paid for acquisitions over the fair market value of identifiable net assets acquired decisions are accounted for using the equity method. The Company's proportionate share in the net income or net loss of investee and the difference between the investment cost and the Company's proportionate share in the net assets of acquired investee companies are recognized as components of the "Investment income/loss recognized by equity method - net" account. The Company companies. Goodwill is amortized using the straight-line method over the estimated life of 10 years. adopted Statements of Financial Accounting Standards ("SFAS") No. 30, "Accounting for Treasury Stock" on January 1, 2002. SFAS No. 30 requires a parent company to record stock held by its subsidiary as treasury stock. The recorded value of treasury stock is based on the Deferred charges carrying values of the short/long-term investments on the subsidiaries' books as of January 1, 2002. 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" as well as the "long-term investments" accounts. In the event an investee has an accumulated deficit, it will record an offset to its capital surplus, excluding the reserve for asset revaluation, through retained earnings. The Company will also record a corresponding entry equivalent to its proportionate share of the investee capital surplus, excluding the reserve for asset revaluation that was generated subsequent to any acquisition of equity interest in the investee. Other stock investments are accounted for using the cost method. Cash dividends are recognized as income in the year received but are accounted for as reduction in the carrying values of the long-term investments if the dividends are received in the same year that the related investments are acquired. Stock dividends are recognized neither as investment income nor increase of long-term investment but recorded only as an increase in the number of shares held. An allowance is recognized for any decline in the market value of investments using quoted market prices with the corresponding amount debited to shareholders' equity. A reversal of the allowance will result from a subsequent recovery of the market value. The carrying values of investments with no quoted market price are reduced to reflect other than temporary declines in their values with the related impairment loss charged to income. Investments in foreign mutual funds are stated at the lower of cost or net asset value (NAV). An allowance is recognized when the cost of the funds are lower than their net asset values, with the corresponding amount debited to shareholders' equity. A reversal of the allowance will result from a subsequent recovery of the net asset value. Investment in convertible notes and stock purchase warrants are carried at cost. The costs of investments sold are determined using the weighted-average method. If an investee company has an unrealized loss on a long-term investment evaluated using the lower-of-cost-or-market method, the Company recognizes a corresponding unrealized loss in proportion to its equity interest and records the amount as 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 is deferred until such gains or losses are realized through the subsequent sale of the related products to third parties. Gains or losses from sales by investee companies to the Company are deferred in proportion to the ownership percentage until realized through transactions with third parties. Deferred charges consist of software and system design costs, technology know-how, bond issuance and financing costs, and technology license fees. The amounts are amortized as follows: Software and system design costs - 3 years, technology know-how - 5 years; bond issuance and financing costs - the term of the bonds and related line of credit; technology license fee - the shorter of the estimated life of the technology or the term of the technology transfer contract. Pension costs Net periodic pension costs are recorded on the basis of actuarial calculations. Unrecognized net transition obligation and unrecognized net gain are amortized over 25 years by TSMC and 26 years by VIS. Deferred gain on sales and leaseback The gain on the sale of property that it simultaneously leased back is deferred by the Company. This deferred gain on sales and leaseback transactions is amortized as follows: (a) operating leases - adjustment of rental expenses over the term of the leases and (b) capital leases - adjustment of depreciation expenses over the estimated useful life of the property or the term of the lease; whichever is shorter. Casualty loss Casualty loss consists of the accrued loss caused by the earthquake on March 31, 2002 less the estimated insurance compensation. Income tax The Company uses an inter-period tax allocation method for income tax. Deferred income tax assets and liabilities are recognized for the tax effects of temporary differences, unused tax credits, and operating loss carry forwards. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not 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 tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as current or non-current based on the expected length of time before it is realized. Any tax credit arising from the purchase of machinery, equipment and technology, research and development expenditures, personnel training, investments in important technology-based enterprise are recognized using the current method. Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax provision. As of January 1, 1998, income taxes on unappropriated earnings (excluding the foreign combined entity) of 10% are expensed in the year of shareholder approval which is usually the year subsequent to the year incurred. Property, plant and equipment, assets leased to others and idle assets Derivative financial instruments Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. Idle assets are stated at the lower of book value or net realized value. Significant additions, renewals, betterments and interest expense incurred during the construction period are capitalized. Maintenance and repairs are expensed in the period incurred. Property, plant and equipment covered by agreements qualifying as capital leases are carried at the lower of the present value of future minimum rent payments, or the market value of the property at the inception date of the lease. The lessee's periodic rent 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, which range as follows: Land improvements - 20 years, buildings - 5 to 20 years; machinery and equipment - 5 years; and office and other equipment - 2 to 7 years. The Company enters into foreign currency forward contracts to manage currency exposures in cash flow and in foreign currency- denominated assets and liabilities. The differences in the New Taiwan dollar amounts translated using the spot rate 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 rate at the balance sheet date and the resulting differences are recognized in charged to income. Also, the receivables and payables related to the forward contract are netted with the resulting amount presented as either an asset or a liability. The Company enters into currency swap contracts to manage exposures to changes in the foreign exchange rate on existing assets and liabilities. These transactions are accounted for on an accrual basis, in which a cash settlement receivable or payable is recorded as an Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts, adjustment to interest income or expenses. and any gain or loss is credited or charged to income in the period of disposal. 174 TSMC Annual Report 2002 TSMC Annual Report 2002 175 The Company enters into interest rate swap transactions to manage exposures from changes in interest rates on existing liabilities. These transactions are accounted for on an accrual basis, in which the cash settlement receivable or payable is recorded as an adjustment to interest income or expense. The notional amount of foreign currency option contracts entered into for hedging purposes are not recognized as an asset or liability on the contract dates. The premiums paid or received for the call or put options are amortized to income on a straight-line basis over the term of the related contract. Foreign-currency transactions Foreign-currency transactions are recorded in New Taiwan dollars at the current rate of exchange in effect when the transaction occurs. Gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in a foreign currency are recognized in current operations. At year-end, foreign-currency assets and liabilities are revalued at the prevailing exchange rate with the resulting gain or loss recognized in current operations. Translation of foreign-currency financial statements ROC Financial Accounting Standards (FAS) No. 14, "Accounting for Foreign-Currency Transactions," applies to foreign subsidiaries that use the local foreign currency as its functional currency. The financial statements of foreign subsidiaries are translated into New Taiwan dollars at the following exchange rates: assets and liabilities - current rate on balance sheet date; shareholders' equity - historical rate; income and expenses - weighted average rate during the year. The resulting translation adjustment is recorded as a separate component of shareholders' equity. 3. NEW ACCOUNTING PRONOUNCEMENTS In accordance with the Statement of Financial Accounting Standards No. 30, "Accounting for Treasury Stock" and other relevant regulations from Securities and Futures Commission (SFC), the Company is required to reclassify its common stock held by subsidiaries from short/long-term investments to treasury stock. The reclassification is based on the carrying value of NT$2,115,695 thousand as Company TSMC Account Payable to related parties Receivable from related parties Refundable deposits Sales Purchases Marketing expenses - commissions Other revenue Notes receivable Interest receivable Royalty income Interest revenue TSMC International (Forward) TSMC Annual Report 2002 176 Amount $653,876 617,751 29,520 19,643 14,511 9,424 9,739,236 58,301 4,545 514,846 94,433,401 92,119 1,152 9,955,154 3,469,198 208,226 132,086 1,635 347,530 188,842 455,778 26,660 Transaction Entity VIS WaferTech TSMC-Europe TSMC-Japan TSMC-North America TSMC Technology TSMC-North America VIS TSMC Technology VIS TSMC-North America VIS WaferTech WaferTech VIS TSMC-Japan TSMC-Europe WaferTech TSMC Technology TSMC Technology TSMC Technology TSMC Technology Company TSMC Partners TSMC Technology Account Notes receivable Deferred revenue Royalty income Interest income Accounts receivable Deferred revenue Management service income Technical service income WaferTech Deferred charges Administrative expense 5. CASH AND CASH EQUIVALENTS Cash and bank deposits Government bonds acquired under repurchase agreements 6. SHORT TERM INVESTMENTS Listed stocks Market value Amount Transaction Entity 10,666,619 9,398,140 607,669 345,620 4,986 13,356 27,331 14,758 31,278 34,563 TSMC International TSMC International TSMC International TSMC International WaferTech TSMC Development WaferTech TSMC Development TSMC Technology TSMC Technology 2002 $70,109,524 3,056,234 $73,165,758 2002 $170,012 $2,455,582 The market values of listed stocks as of December 31, 2002 were based on the average closing price for the month of December 2002. 7. INVENTORIES-NET Finished goods Work in process Raw materials Supplies and spare parts Less-allowance for losses 2002 $4,752,138 10,299,342 557,279 1,239,407 16,848,166 (3,877,750) $12,970,416 TSMC Annual Report 2002 177 8. LONG-TERM INVESTMENTS Shares of stock Equity method: Non-publicly traded stock Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) VIS Associates Inc. Cost method: Common stock Publicly traded stock Monolithic System Tech. Amkor Technology Taiwan Mask PowerChip Semiconductor, Inc. Etron Technology Inc. Non-publicly traded stock Walsin Advanced Electronics United Technology Global Testing Corp. (GTC) Megic Shin-Etsu Handotai Taiwan Co. Ltd. Global Investment Holding Hong Tung Venture Capital EoNEX Technologies, Inc. Procoat Technology, Inc. Conwise Technology Corp. Ltd. FormFactor, Inc. Goyatek Technology, Inc. Programmable Microelectronics (Taiwan) Corp. W.K. Technology, Fund IV RichTek Technology Corp. APE Auden Technology MFG. Co., Ltd. Yi Yang Technology TrendChip Technologies Corp. ChipStrate Technology, Inc. GeoVision, Inc. Divio, Inc. Preferred stock Non-publicly traded stock Sonics, Inc. Tropian, Inc. Reflectivity, Inc. Monolithic Power Systems, Inc. Atheros Communications, Inc. (Forward) 178 TSMC Annual Report 2002 2002 Carrying Value % of Owner Ship 2002 Carrying Value % of Owner Ship Memsic, Inc. Pixim, Inc. Quicksilver Technology FormFactor, Inc. Kilopass Technologies, Inc. NetLogic Microsystems NanoAmp Solutions, Inc. Newport Opticom, Inc. Integrated Memory Logic, Inc. Match Lab, Inc. IP Unity Ikanos Communication Ralink Technologies, Inc. SiRF Technology Holdings, Inc. LightSpeed Semiconductor Corp. Advanced Analogic Technology, Inc. OEpic, Inc. Accelerant Networks Litchfield Communications Quake Technologies, Inc. Spreadtrum HiNT Corp. Silicon Data, Inc. XHP Microsystem Angstron Systems, Inc. Equator Technologies, Inc. Capella Microsystems, Inc. Sensory, Inc. Iridigm Display Mosaic Systems Zenesis Technologies Divio, Inc. Incentia Design Systems, Inc. Oridus, Inc. (CreOsys, Inc.) Signia Technologies, Inc. LeadTONE Wireless, Inc. eBest!, Inc. Convertible note eBest!, Inc. (Forward) $3,136,115 1,217,065 4,353,180 104,289 280,748 32,129 2,513,378 216,852 302,559 232,300 179,882 177,000 105,000 100,000 83,916 70,305 67,490 67,039 64,360 62,104 59,358 50,000 46,986 46,743 38,819 33,606 29,992 10,426 4,518 104 4,979,903 229,787 150,620 146,262 137,135 124,868 32 100 2 - 2 7 2 8 13 10 9 7 6 10 6 12 14 1 8 4 2 9 6 4 9 5 9 2 - 10 5 15 16 3 $106,344 87,845 82,153 69,506 69,506 65,005 64,397 63,288 62,868 60,818 56,856 52,707 52,130 50,878 46,534 43,824 43,094 35,138 35,138 35,138 35,138 34,753 34,753 26,353 26,065 24,675 23,667 21,720 17,639 17,569 17,569 17,377 17,377 15,639 15,639 8,270 3,370 2,329,412 834 23 3 4 1 18 1 4 15 12 11 2 2 6 1 3 2 7 1 6 1 - 5 7 6 7 2 12 5 2 6 4 4 2 8 12 6 1 - TSMC Annual Report 2002 179 Funds Horizon Ventures Crimson Asia Capital Less - allowance for losses 2002 Carrying Value % of Owner Ship - - $195,452 41,988 237,440 (550,849) $11,349,920 The carrying value of the investments accounted for using the equity method and the related investment gains or losses were determined based on the audited financial statements of the investees in the same year. The investment gain and loss of investee companies consist of the following: SSMC VIS Associates Inc. The market values and net assets values of the Company's long-term investments are as follows: Market value of publicly traded stocks Equity in the net assets of non-publicly traded stocks Net asset value of funds 2002 ($1,155,076) 318,855 ($836,221) 2002 $2,667,944 8,644,956 237,440 On January 8, 2003, the Company's investee company, VIS, issued 600,000 thousand shares of common stock at a discounted price of NT$7 per share. The Company prepaid NT$849,360 thousand at the end of 2002 for the share subscription and paid an additional NT$ 766,815 thousand in January 2003. In this round of equity offering, the Company purchased a total of 230,882 thousand shares of VIS stocks. As a result, its ownership in VIS increased from 25% to 28%. 9. PROPERTY, PLANT AND EQUIPMENT Accumulated depreciation consists of the following: Land improvements Buildings Machinery and equipment Office and other equipment 2002 $127,341 28,383,157 209,774,513 4,084,559 $242,369,570 Information on the status of expansion or construction plans of TSMC's manufacturing facilities at December 31, 2002 is as follows: Manufacturing Plant Fab 6 Fab 12-Phase 1 Fab 14-Phase 1 180 TSMC Annual Report 2002 Estimated Cost Accumulated Expenditures Expected or Actual Date of Starting of Operations $93,932,000 $87,054,700 80,318,400 30,411,000 47,095,400 22,169,900 March 2000 March 2002 June 2003 Interest expense (before deducting capitalized amount of NT$ 3,332,138 thousand) for the year ended December 31, 2002 was NT$ 236,297 thousand. The interest rates used for purposes of calculating the capitalized amount were 2.07% to 6.59%. VIS has entered into agreements to lease certain equipment that qualify as capital leases and will expire in September 2005. Information on capital leases is summarized as follows: Total amount of equipment under capital lease Present value of obligation under capital lease Current portion Long-term portion 10. DEFERRED CHARGES - NET Technology license fees Software and system design costs Bond issuance costs and financing costs Technology know-how Others 11. SHORT-TERM BANK LOANS Unsecured loan in US dollars: US$21,000 thousand, refinanced in May 2002, annual interest at 1.82%, repayable by May 2003 Loans for importation of materials: US$7,285 thousand, repayable by January 2003, annual interest 1.83% - 2.14% Working capital loans: Repayable by April 2003, annual interest at 2.55% - 2.60% 2002 $530,674 $445,800 (155,384) $290,416 2002 $6,519,334 3,212,086 130,296 49,500 10,430 $9,921,646 2002 $729,813 253,187 300,000 $1,283,000 As of December 31, 2002, TSMC provided NT$1,390,120 thousand (US$40,000 thousand) guarantee for the above US$21,000 thousand loan. Unused credit lines as of December 31, 2002 aggregated approximately NT$14,070,000 thousand and US$366,500 thousand. 12. COMMERCIAL PAPER The instruments, which bear annual interest rates ranging from 1.95% to 2.10%, are secured by bank guaranty and are repayable from January 2003 to May 2003. TSMC Annual Report 2002 181 2002 14. BONDS 13. LONG-TERM BANK LOANS Secured loan: US$440,000 thousand, repayable by February 2005, US$122,000 thousand repaid in 2002, annual floating interest at 2.078% Unsecured loan: US$200,000 thousand, repayable by December 2003, annual interest at 2.0375% Loans for purchases of equipment and facility: Repayable in semi-annual installments from November 1999 to June 2004, annual floating interest at 3.00% to 4.00% Repayable in semi-annual installments from October 2000 to October 2005, annual floating interest at 2.89% to 3.95% Repayable in semi-annual installments from October 2004 to October 2007, annual interest at 4.03% to 4.25% Repayable in quarterly installments from January 2003 to July 2007, annual interest at 5.07% to 6.48% Repayable in semi-annual installments from February 2000 to February 2005, annual interest at 5.32% to 6.48% Repayable in semi-annual installments from July 1999 to July 2004, annual interest at 5.32% to 6.35% Repayable in semi-annual installments from December 2003 to December 2007, annual interest at 3.75% Repayable in semi-annual installments from December 2003 to December 2007, annual interest at 2.02% Repayable in semi-annual installments from February 1998 to February 2003, annual interest at 5.32% to 6.48% Commercial paper guaranteed by financial institutions: Repayable from May 2002 to May 2005, annual interest at 2.22% to 2.57% Repayable in May 2004, annual interest at 1.60% to 2.41% $11,051,454 6,950,600 2,340,000 2,200,000 400,000 330,000 184,000 148,000 111,000 88,865 40,000 1,750,000 300,000 $25,893,919 As of December 31, 2002, all of the US dollar loans above were guaranteed by TSMC. In addition, the property and equipment of WaferTech with carrying amount of approximately NT$29,053,508 thousand (US$836,000 thousand) is pledged for the secured loan. Under the unsecured loan, TSMC is required to maintain certain financial covenants which, if violated, could result in payment of this obligation becoming due prior to the originally scheduled maturity date. These financial covenants require TSMC to, among other things, maintain minimum levels of working capital, earnings before interest, taxes, depreciation and amortization, and net worth. TSMC was in compliance with these financial covenants as of December 31, 2002. Properties of VIS with carrying value of NT$8,218,845 thousand have been pledged as collateral for the loans for purchases of equipment and facility and commercial paper. The bonds (Note 14) and loan agreements of VIS require, among other things, the maintenance of certain financial ratios, including current ratio, debt ratio and net worth ratio. Among those specific ratios, VIS has failed to meet the net worth requirement as of December 31, 2002. The covenant violation can only be cured by raising additional capital or by approval by the banks. On January 8, 2003 VIS issued shares of capital stock for proceeds of NT$4,200,000 thousand to cure the covenant violation (Note 18). As of December 31, 2002, future minimum principal payments under the Company's long-term bank loan arrangements are as follows: Year 2003 2004 2005 2006 2007 and thereafter Amount $9,509,506 1,156,000 14,393,454 - 834,959 $25,893,919 Unused credit lines for long-term bank loans as of December 31, 2002 aggregated approximately NT$200,135 thousand and US$122,000 thousand. 182 TSMC Annual Report 2002 2002 $4,000,000 5,000,000 Domestic unsecured bonds Issued on March 4, 1998 and payable on March 4, 2003 in one lump sum payment, 7.71% annual interest payable semi-annually Issued on October 21, 1999 and payable on October 21,2002 and 2004 in two equal payments, 5.67% and 5.95% annual interest payable annually, respectively Issued from December 4 to 15, 2000 and payable in December 2005 and 2007 in two equal payments, 5.25% and 5.36% annual interest payable annually, respectively 15,000,000 Issued from January 10 to 24, 2002 and payable in January2007, 2009 and 2012 in three equal payments, 2.6%, 2.75% and 3% annual interest payable annually , respectively Domestic secured bonds Payable on November 15, 2005 and 2006 in two equal payments, 3.5% to 3.6% annual interest payable annually, guaranteed by financial institution Payable from November 6, 2000 to 2003 in four equal payments, 6.59% annual interest payable annually, guaranteed by financial institution As of December 31, 2002, future principal payments under the above bond arrangements are as follows: Year of Repayment 2003 2004 2005 2006 2007 2008 and thereafter 15,000,000 1,100,000 750,000 $40,850,000 Amount $4,750,000 5,000,000 11,050,000 550,000 7,000,000 12,500,000 $40,850,000 15. OTHER LONG-TERM PAYABLES TSMC entered into several license arrangements for certain semiconductor patents. Future payments under the agreements as of December 31, 2002 are as follows: Year 2003 2004 2005 2006 2007 2008 and thereafter Amount $1,157,299 1,226,805 987,009 469,189 486,566 1,112,096 $5,438,964 TSMC Annual Report 2002 183 a. A reconciliation of income tax expense on income before income tax at the statutory rate and current income tax expense on income before tax credits is shown below: 16. PENSION PLAN 17. INCOME TAX BENEFIT (EXPENSE) TSMC and VIS have pension plans for all regular employees, which provide benefits based on length of service and average monthly salary for the six month period prior to retirement. TSMC and VIS contribute an amount equal to 2% of salaries paid every month to Pension Funds (the "Funds"). The Funds are administered by pension fund monitoring committees (the "Committees") and are deposited in the Committees' names in the Central Trust of China. The pension cost of VIS is accrued at an amount equal to 6% of salaries. Income tax expense based on "income before income tax" at statutory rate The changes in the Funds and accrued pension cost are summarized as follows: 2002 Temporary and permanent differences Tax effect of: Tax-exempt income a. Components of pension cost Service cost Interest cost Projected return on plan assets Amortization Net pension cost b. Reconciliation of the fund status of the plan and accrued pension cost Benefit obligation Vested benefit obligation Nonvested benefit obligation Accumulated benefit obligation Additional benefits based on future salaries Projected benefit obligation Fair value of plan assets Funded status Unrecognized net transitional obligation Unrecognized net gain 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 $498,112 134,535 (51,596) (3,758) $577,293 $21,294 1,768,532 1,789,826 1,433,022 3,222,848 (1,154,754) 2,068,094 (142,562) 625,386 $2,550,918 3.75% 3.00% 3.75% $181,980 $5,360 Current income tax expense before income tax credits b. Income tax expense consists of: Current income tax expense before income tax credits Additional 10% tax on the unappropriated earnings Income tax credits Other income tax Income tax expense Net change in deferred income tax assets Investment tax credits Loss carryforward Temporary differences Valuation allowance Income tax expense c. Deferred income tax assets (liabilities) consists of the following: Current Investment tax credits Loss carryforward Temporary differences Valuation allowance Noncurrent Investment tax credits Loss carryforward Temporary differences Valuation allowance 2002 ($6,881,352) 2,526,500 (519,490) ($4,874,342) 2002 ($4,874,342) (179,362) 4,867,236 (29,160) (215,628) 2,041,014 2,588,736 (6,035,076) (3,721,918) ($5,342,872) 2002 $3,807,330 1,423,729 655,371 (2,473,490) $3,412,940 $23,916,915 10,667,199 (7,871,504) (13,559,479) $13,153,131 184 TSMC Annual Report 2002 TSMC Annual Report 2002 185 The effective tax rate used in determining the deferred tax asset of TSMC and its affiliates as of December 31, 2002 were 25% to 41%. d. Integrated income tax information: Balance of the imputation credit accounts TSMC VIS TSMC's and VIS's expected and actual creditable ratios for 2002 were 0.03% and nil, 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 2002 may be adjusted according to the difference between the expected and actual imputation credit allowed under the regulation. e. As of December 31, 2002, the unappropriated retained earnings generated up to December 31, 1997, was NT$0. f. As of December 31, 2002, TSMC's and VIS's investment tax credits consisted of the following: Regulation Items Total Creditable Amounts Remaining Creditable Amounts Expire Year Statute for Upgrading Loss carryforward Industries Statute for Upgrading Purchase of Industries machinery and equipment Statute for Upgrading Research and Industries development expenditures Statute for Upgrading Personnel training Industries Statute for Upgrading Reputation setting Industries (Forward) 186 TSMC Annual Report 2002 $257,591 1,423,729 595,086 1,142,696 1,077,079 $- 1,423,729 595,086 1,142,696 1,077,079 $4,496,181 $4,238,590 $4,691,585 5,017,733 8,532,858 3,210,161 5,410,244 $- 5,017,733 8,532,858 3,210,161 2,849,715 $26,862,581 $19,610,467 $737,991 866,375 1,996,224 3,198,606 1,540,000 $- 866,375 1,996,224 3,198,606 1,540,000 $8,339,196 $7,601,205 $10,161 18,033 45,552 30,880 $- 18,033 45,552 30,880 $104,626 $94,465 $10,457 803 $11,260 $- 803 $803 2002 2003 2004 2006 2007 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2002 2003 2004 2005 2002 2003 Regulation Items Total Creditable Amounts Remaining Creditable Amounts Expire Year 2002 $6,650 $7,396 Statute for Upgrading Industries Investments in important technology based enterprise $42,580 45,122 201,372 168,864 1,947 $- 45,122 201,372 168,864 1,947 2002 2003 2004 2005 2006 $459,885 $417,305 g. The sales from the following expansion and construction of TSMC's and VIS's manufacturing plants is exempt from income tax: TSMC: Expansion of Fab1 and Fab2-modules A and B, Fab3 and Fab4, and construction of Fab5 Construction of Fab 6 VIS: First expansion of manufacturing plant Tax-Exemption Period 1999 to 2002 2001 to 2004 2000 to 2003 h. The tax authorities have examined income tax returns of TSMC through 1999. However, TSMC is contesting the assessment by the tax authority for 1992, 1993, 1996 and 1997. The tax authorities have examined income tax returns of VIS through 1999. 18. SHAREHOLDERS' EQUITY TSMC has issued 369,019 thousand American Depositary Shares (ADS) on the New York Stock Exchange as of December 31, 2002. The number of common shares represented by the ADSs is 1,845,097 thousand shares (one ADS represents five common shares). Capital surplus can only be used to offset a deficit under the ROC Company Law. However, the components of capital surplus generated from donations (donated capital) and the excess of the issue price over the par value of capital stock (including the stock issued for new capital, mergers, and the purchase of treasury stock) can be transferred to capital as stock dividends. TSMC'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. Remuneration to directors and supervisors and bonus to employees equal to 0.3% and at least 1% of the remainder, respectively. Individuals who receive bonus to employees may include employees of affiliated companies and are approved by the board of directors or a representative of the board of directors; d. Dividends to holders of preferred shares equal to a 3.5% annual rate, based on the period which the preferred shares have been outstanding; e. The appropriation of the remaining balance after the above shall be decided at the shareholders' meeting. Dividends are distributed in cash, shares of common stock or a combination of cash and common stock. Distribution of profits is preferably made in the form of stock dividend. The total of cash dividends paid in any given year should not exceed 50% of total dividends distributed. These appropriations of net income shall be approved by the shareholders in the following year and given effect in the financial statements of that year. The bonus to employees and the remuneration to directors and supervisors appropriated from the earnings of 2001 were approved in the shareholders' meeting on May 7, 2002 as follows: TSMC Annual Report 2002 187 Bonus to employees - in stock Remuneration to directors and supervisors - in cash Amounts $1,070,783 133,848 $1,204,631 Shares (Thousand) 107,078 - The shares distributed as a bonus to employees represent 0.64% of TSMC's total outstanding common shares as of December 31, 2001. The above appropriation of the earnings is consistent with the resolution of the meeting of board of directors dated on March 26, 2002. If the above distributable earnings were both paid in cash and charged against the income of 2001, the basic combined EPS for the year ended December 31, 2001 would be decrease from NT$0.83 to NT$0.76. As of January 16, 2003, the appropriation of the earnings of 2002 has not yet been resolved by the board of directors. The above information associated with the appropriation of bonus to employees and remuneration to directors and supervisors is available at Market Observation System website. The aforementioned appropriation for legal reserve shall be made until the reserve equals the aggregate par value of TSMC's outstanding On June 25, 2002, the SFC approved TSMC's Employee Stock Option Plan (the "Plan I"). Plan I provides qualified employees and non- employees with 100,000 thousand units of option rights with each unit representing one common share of stock. The option rights are valid for 10 years and exercisable at certain percentages subsequent to the second anniversary of issuance. Under the terms of the plan, stock options are granted at an option price equals to the market price of TSMC on the TSE at the date of grant. At December 31, 2002, the maximum number of shares authorized to be granted by TSMC, TSMC-North America and WaferTech under this plan are 70,000 thousand, 16,000 thousand and 14,000 thousand option rights, respectively. The initial grant of options vests 50% two years after the grant date, 75% three years after the grant date and 100% four years after the grant date. Information with respect to stock option rights activities under Plan I is as follows: Option Rights Available For Grant Outstanding Option Rights Number of Option Rights Weighted Average Exercise Price (NT$) Option rights authorized Options granted Options exercised Options cancelled 100,000 (19,726) - 357 80,631 - 19,726 - (357) 19,369 - 53 - 53 capital stock. The reserve can only be used to offset a deficit; or distribute as a dividend when the balance is 50% of the aggregate par Balance, December 31, 2002 value of the outstanding capital stock of TSMC up to the half amount of the reserve balance. A special reserve equivalent to the debit balance of any account shown in the shareholder's equity section of the balance sheets (except for the recorded costs of treasury stocks held by subsidiaries), other than the deficit, shall be made from unappropriated retained earnings pursuant to existing regulations promulgated by the Securities and Futures Commission. The special reserve is allowed to be appropriated when the debit balance of such accounts are reversed. The gain on sales or disposal of property, plant and equipment generated prior to 2000, less the applicable income tax, was reclassified to capital surplus as of each year-end. A gain in the amount of NT$39,282 thousand, less applicable income tax, was recognized and transferred to the capital surplus at the end of 2001 prior to the amended regulations. To comply with the amended regulations, the aforementioned capital surplus was transferred to retained earnings upon the approval of the shareholders' meeting on May 7, 2002. The shareholders also approved the accumulated capital surplus of NT$127,236 thousand generated from gains prior to 2000 be transferred to retained earnings, after appropriating the required 10% legal reserve. Under the Integrated Income Tax System that became effective on January 1, 1998, ROC resident shareholders are allowed a tax credit for the income tax paid by TSMC on earnings generated as of January 1, 1998. An Imputation Credit Account (ICA) is maintained by TSMC for such income tax and the tax credit allocated to each shareholder. TSMC issued 1,300,000 thousand shares of unlisted Series A - preferred stock to certain investors on November 29, 2000. The following are the rights of the preferred shareholders and the related terms and conditions: Preferred shareholders a. Are entitled to receive cumulative cash dividends at an annual rate of 3.5%. b. Are not entitled to receive any common stock dividends (whether declared out of unappropriated earnings or capital surplus). In 1996, WaferTech adopted an Executive Incentive Plan, which was amended in 1997. Under the 1997 amendment, the Board of Directors approved the Senior Executive Incentive Plan and the Employee Incentive Plan (the "Plan II") under which officers, key employees and non-employee directors may be granted option rights. Plan II provides 15,150 thousand option rights. While WaferTech may grant employees option rights that are exercisable at different times or within different periods, it has generally granted option rights which are exercisable on a cumulative basis in annual installments of 25% each on the first, second, third, and fourth anniversaries of the date of grant. Information with respect to stock option rights activities under Plan II is as follows: Option Rights Available For Grant Outstanding Option Rights Number of Option Rights Exercise Price(US$) Balance, January 1, 2002 Options granted Options exercised Options cancelled Balance, December 31, 2002 4,608 - 216 4,284 3,062 (1,260) (216) 1,586 1.43 1.22 1.93 Options granted will expire if not exercised at specified dates between May 2006 and June 2011. In December 2000, WaferTech implemented a Stock Option Buyback Program ("Buyback") with its employees. The Buyback program provides employees with the right to sell back all vested stock options and outstanding ownership interests granted under the program to WaferTech. The repurchase price for outstanding ownership interests is US$6. The repurchase price for vested stock options is US$6 less the exercise price of the option. As of December 31, 2002, the Company has repurchased 2,476 thousand outstanding ownership c. Have priority over the holders of common shares to the assets of the Company available for distribution to shareholders upon interests at a cost of US$15,466 thousand. liquidation or dissolution, 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. The preferred shares are to be redeemed within thirty months from their issuance. The preferred shareholders have the aforementioned rights and the Company's related obligations remain the same until the preferred shares are redeemed by the Company. On February 20, 2001 and June 21, 2002, the SFC approved VIS's Employee Stock Option Plan ("2001 Plan" and "2002 Plan"). The 2001 Plan and 2002 Plan provide qualified employees with 16,000 thousand and 70,000 thousand units of option rights; with each unit representing ten and one common shares of stock, respectively. The option rights are valid for 10 years and exercisable at certain percentages subsequent to the second anniversary of issuance. There were 78,239 thousand units of option rights granted as of December 31, 2002. On January 8, 2003, VIS issued 600,000 thousand shares at a discounted price of NT$7 per share. As a result of the new capital stock issuance, the aggregate outstanding capital stock increased to 28,000,000 thousand shares with par value of NT$10 per share. 188 TSMC Annual Report 2002 TSMC Annual Report 2002 189 19. TREASURY STOCK (COMMON STOCK) The transactions with the aforementioned parties, in addition to those disclosed in other notes, are summarized as follows: Purpose of Purchase Beginning Shares Increase Decrease (Shares in Thousand) Ending Shares Year ended December 31, 2002 Reclassification of stocks held by subsidiaries from short/long-term investment to treasury stocks 39,270 3,818 1,087 42,001 On January 1, 2002, TSMC reclassified its capital stock held by its subsidiaries with book value of NT$2,115,695 thousand from short/long-term investments to treasury stock. Proceeds from sales of treasury stock for the year ended December 31, 2002 were NT$96,501 thousand. The book value and market value of such treasury stock was NT$1,923,492 thousand and NT$2,048,164 thousand, respectively. Effective from January 1, 2002, capital stock held by a subsidiary as an investment is recorded as treasury stock with the holder having the same rights as other common shareholders. 20. EARNINGS PER SHARE Earnings per share (EPS) is computed as follows: Amounts (Numerator) Income Before Income Tax Combined Net Income Share (Denominator) (Thousand) EPS (Dollars) Income Before Income Tax Combined Net Income December 31, 2002 Income Less - preferred stock dividends Basic earnings per share Income available to common shareholders Diluted earnings per share Income available to common shareholders $24,499,313 $21,610,291 (455,000) (455,000) $24,044,313 $21,155,291 18,580,700 $1.29 $1.14 $24,044,313 $21,155,291 18,580,700 $1.29 $1.14 The potential common shares from the employee stock option plan (see Note 17) are not included in the denominator of the diluted earning-per-share computation because such shares result in a non-dilutive per-share amount by using the treasury stock method under the Statement of Financial Accounting Standards No. 24, "Earning Per Share". 21. RELATED PARTY TRANSACTIONS The Company and its affiliates engaged in business transactions with the following related parties: a. Industrial Technology Research Institute (ITRI), the Chairman of TSMC and VIS is one of its directors b. Philips Electronics N.V., (Philips), a major shareholder of TSMC c. SSMC, an investee of TSMC d. VIS Micro, an investee of VIS's subsidiary (VIS Associates Inc.) e. Powerchip Semiconductor Corporation (PSC), VIS is one of its directors f. Walsin Advanced Electronics (WAE), VIS is one of its directors g. Megic Corporation (MC), an investee of VIS 190 TSMC Annual Report 2002 For the year ended Sales Philips and its affiliates ITRI SSMC Purchase SSMC Operating expense - rental ITRI Manufacturing expenses Philips - technical service fee WAE ITRI PSC Marketing expenses VIS Micro ITRI Non-operating income SSMC (technical service income mainly) PSC WAE MC At December 31 Receivables Philips and its affiliates ITRI SSMC MC (Forward) 2002 Amount % $2,909,008 94,409 7,018 $3,010,435 $2,751,297 $40,535 $2,849,517 181,258 872 760 $3,032,407 $21,010 130 $21,140 $126,061 3,682 340 46 $130,129 2 - - 2 2 - 3 - - - 3 1 - 1 4 - - - 4 $352,706 22,974 5,678 439 93 6 1 - TSMC Annual Report 2002 191 PSC Payables Philips and its affiliates SSMC WAE VIS Micro ITRI PSC 2002 Amount $15 % - $381,812 100 $730,847 391,426 43,111 1,242 711 100 63 33 4 - - - $1,167,437 100 Transactions with related parties are based on normal selling prices, collection and payment terms except for sales of property, plant and equipment and the technical service fee, which are in accordance with related contracts. In addition, VIS Micro performs certain research and development and marketing activities for VIS and is reimbursed by VIS on the actual expenses incurred plus a 5% mark-up. 22. SIGNIFICANT LONG-TERM OPERATING LEASES TSMC leases land from the Science-Based Industrial Park Administration where its Fab 2 through Fab 14 manufacturing facilities reside. These agreements expire on various dates from March 2008 to December 2020 and have annual rent payments aggregating NT$225,576 thousand. The agreements can be renewed upon their expiration. TSMC-North America leases its office premises and certain equipment under non-cancellable operating agreements, which will expire in 2020. TSMC-Europe and TSMC-Japan entered into lease agreements for their office premises, which will expire in 2004. Current annual rent payments aggregate to NT$115,281 thousand. VIS leases the sites of its manufacturing plant and parking lot from the Science-Based Industrial Park Administration under agreements which will expire in April 2010 and June 2015 and are renewable upon expiration. Annual rent payments aggregate to NT$23,812 thousand. VIS also leases machinery and equipment from GE Capital Taiwan Ltd. under operating lease agreements which will expire in December 2003. Annual rent payments aggregate to NT$12,710 thousand (US$366 thousand). Future remaining lease payments are as follows: Amount $377,379 367,698 363,633 363,591 360,669 2,197,341 Year 2003 2004 2005 2006 2007 2008 and thereafter 192 TSMC Annual Report 2002 23. COMMITMENTS AND CONTINGENCIES The commitments and contingencies of the Company and its subsidiaries as of December 31, 2002 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 8, 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$39,810 thousand had been received as of December 31, 2002. e. Under a Shareholders Agreement entered into with Philips and EDB Investments Pte Ltd. on March 30, 1999, the parties formed a joint venture company named Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) for the purpose of constructing an integrated circuit foundry in Singapore, and allow TSMC to invest in 32% of SSMC's capital. 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 is required to compensate SSMC for all related unavoidable costs. f. TSMC provides 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 for successive periods of five years unless pre-terminated by either party under certain conditions. g. Beginning in 2001, TSMC entered into several license arrangements for certain semiconductor patents. The terms of the contracts range from five to ten years with payments to be paid in the form of royalties over the term of the related contracts. TSMC has recorded the related amounts as a liability and a deferred charge to be amortized to cost of sales on a straight-line basis over the shorter of the estimated useful life of the technology or the term of the contract. h. Under a Technology Transfer Agreement with National Semiconductor Corporation ("National") entered into on June 27, 2000, TSMC shall receive payments for license of certain technology to National. The agreement will remain in force for ten years. After the initial expiration date, this agreement will be automatically renewed for successive periods of two years unless pre-terminated by either party under certain conditions. In January 2003, the agreement was amended such that National will discontinue making payments under the original terms and TSMC will discontinue transferring any additional technology. TSMC granted National the option to request additional technology transfers under the same terms and conditions of the original agreement through January 2008. i. VIS shall pay royalties under various patent and license agreements as follows: 1) ITRI - at a specific percentage of sales of certain products for five years starting from the commercial sale of certain products. 2) Texas Instruments Incorporated - at a specific percentage of net sales of certain products for ten years from January 1997. 3) NEC Corporation - at a specific amount in six installments from February 1999 to 2003. 4) MITSUBISHI Corporation - at a specific amount plus a specific percentage of net sales of certain products within five years from August 1999. $4,030,311 j. In December 2000, TSMC-North America and WaferTech initiated stock appreciation right programs whereby the employees receive cash bonuses based on the appreciation of the quoted market price of the shares of stock of TSMC. This expense is recognized ratably over the vesting period and adjusted based on period fluctuations in the stock. At December 31, 2002, the exercise price of the stock appreciation right is higher than the market price of TSMC stock; therefore no compensation expense is recognized for the year ended December 31, 2002. TSMC Annual Report 2002 193 k. WaferTech caused some contractors to incur additional labor and material costs outside the contracts. WaferTech recorded a The net assets and liabilities hedged by the above forward exchange contracts are as follows: reserve of US$3,000 thousand during 2002 for a litigation arising from a charge by certain contractors. l. Unused letters of credit as of December 31, 2002 were NT$6,480 thousand, US$5,502 thousand, 51,000 thousand, Euro 520 thousand and S$85 thousand. 24. 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 or disposed of at costs or prices of at least NT$100 million or 20% of paid-in capital: Please see Table 4 attached; e. Acquisition of individual real estate properties at costs of at least NT$100 million or 20% of paid-in capital: Please see Table 5 attached; f. Disposal of individual real estate properties at prices of at least NT$100 million or 20% of paid-in capital: None; g. Total purchases from or sales to related parties of at least NT$100 million or 20% of paid-in capital: Please see Table 6 attached; Accounts receivable Accounts payable Accounts payable b) Interest rate swaps Amount (Thousand) US $487,905 JP 4,466,733 EUR 49,026 The Company entered into interest rate swap contracts to hedge exposures from rising interest rates on its floating rate long-term loans. Interest expense on these transactions for the year ended December 31, 2002 were NT$261,107 thousand. Outstanding contracts as of December 31, 2002 were as follows: Contract Date April 28, 1998 April 29, 1998 June 26, 1998 June 26, 1998 July 1, 1999 c) Option contracts Period Amount (Thousand) May 21, 1998 - May 21, 2003 May 21, 1998 - May 21, 2003 June 26, 1998 - June 26, 2003 July 6, 1998 - July 6, 2003 July 1, 1999 - June 28, 2004 NT$2,000,000 NT$1,000,000 NT$1,000,000 NT$1,000,000 US$11,429 The Company entered into foreign currency option contracts to hedge risks of exchange rate fluctuations arising from its anticipated h. Receivable from related parties amounting to at least NT$100 million or 20% of paid-in capital: Please see Table 7 attached; and U.S. dollar cash receipts on export sales and its European and Yen currency obligations for purchases of machinery and equipment. i. Names, locations, and related information of investees on which the Company exercises significant influence: Please see Table 8 Outstanding option contracts as of December 31, 2002 were as follows: attached. j. Financial instrument transactions: 1) Derivative financial instruments The relevant information on derivative financial instruments entered into by TSMC and its affiliates are as follows: a) Forward exchange contracts as of December 31, 2002 Contract Currency Contract Amount (Thousand) Fair Value (Thousand) Settlement Date Maturity Amount (Thousand) TSMC Sell Buy Buy VIS Buy USD EUR J P Y $715,000 89,000 4,274,850 NT$24,874,483 Jan. 2, 2003 - Feb. 24, 2003 NT$3,231,707 Jan.15, 2003 - Mar. 14, 2003 NT$1,249,159 Jan.6, 2003 - Jan. 15, 2003 NT$24,886,765 NT$3,234,260 NT$1,250,394 USD $1,000 NT$1,198 Dec. 9, 2002 - Jan. 14, 2003 JP 122,760 As of December 31, 2002, receivables from forward exchange contracts (included in "other current assets" account) aggregate to NT$200,786 thousand, and payables from forward exchange contracts (included in "other current liabilities" account) aggregate to NT$17,538 thousand. The net exchange gain for the year ended December 31, 2002 was NT$1,557,942 thousand. 194 TSMC Annual Report 2002 Type Contract Currency Contract Amount (Thousand) Carrying Value Fair Value (Thousand) Strike Price Contract European Call option written European Call option written European Put option written USD USD EUR $230,000 $10,000 10,000 $ - ($404,884) 32.78~33.22 (US$/NT$) Jan. 9, 2003 - Feb. 25, 2003 - - (3,652) (1,596) 119.2 (US$/JPY) Jan. 30, 2003 - Feb. 27, 2003 1.017 (US$/EUR) Jan. 30, 2003 - Feb. 27, 2003 For the year ended December 31, 2002, TSMC recognized premium income of NT$228,030 thousand and premium expenses of NT$647,543 thousand. d) Cross currency swaps The Company enters into currency swap contracts with banks to hedge exposure on foreign currency exchange rate fluctuations on various foreign currency transactions. Outstanding currency swap contract as of December 31, 2002 is as follows: Currency US$ Contract Amount (Thousand) Fair Value (Thousand) Settlement Date US$1,000 NT$206 Dec. 26 2002 - Jan. 16, 2003 As of December 31, 2002, the prepayments from currency swap (included in "other current liabilities" account) aggregate to NT$97 thousand. The currency swap contract was used to hedge a US dollar accounts payable with a carrying value of NT$2,004 thousand. e) 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 exchanges rates on the TSMC Annual Report 2002 195 Company's foreign currency denominated receivables or payables, and interest rate fluctuations on its floating rate long-term loans. g) Derivative financial instruments - based on bank quotations. 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 managed as the expected interest expense on long-term loans is fixed. Thus, market prices are believed to be minimal. iii) Liquidity and cash flow requirements. The cash flow requirements on forward contracts are limited to the net differences between the current exchange rates and the contracted forward rates at the date of settlement. The cash flow requirements for interest rate swap contracts is limited to the amounts payable arising from the differences in the rates. In addition, options may not be exercised in the event the strike price is higher than the related market price at the exercise date. Management believes that the foregoing cash flow 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 represent the fair value of the Company. 3) Investment in Mainland China TSMC filed an investment project with the Investment Commission of MOEA to establish a foundry in mainland China. As of January 16, 2003, the foregoing project has not been approved by the authority. Carrying Amount Fair Value 25. SEGMENT FINANCIAL INFORMATION a. Geographic information: requirements are not material. 2) Fair value of financial instruments Non-derivative financial instruments Assets Cash and cash equivalents Short-term investments Receivable from related parties Accounts receivable Long-term investments Refundable deposits Liabilities Short-term bank loans Commercial paper Payable to related parties Notes and accounts payable Payable to contractors and equipment suppliers Bonds (includes current portion) Long-term bank loans (includes current portion) Other long-term payables (includes current portion) Guarantee deposits Derivative financial instruments Forward exchange contracts (sell) Forward exchange contracts (buy) Interest rate swaps Currency swaps Options Fair Values of financial instruments were determined as follows: a) Short-term financial instruments - carrying values. b) Short-term investments - market values. $73,165,758 $73,165,758 170,012 381,812 20,192,463 11,349,920 45,245 1,283,000 1,080,000 1,167,437 5,786,264 14,414,639 40,850,000 25,893,919 5,438,964 1,399,846 143,702 38,369 (23,994) 97 (50,273) 2,455,582 381,812 20,192,463 11,550,340 45,245 1,283,000 1,080,000 1,167,437 5,786,264 14,414,639 41,597,405 25,893,919 5,438,964 1,399,846 139,913 26,089 (164,342) 206 (410,132) c) Long-term investments - market value for traded companies and net equity value for non-traded companies. d) Refundable deposits, guarantee deposits and other long-term liabilities - carrying values. e) Long-term bank loan - Fair values of long-term bank loans are their carrying values as they use floating interest rate. f) Long-term liabilities - based on forecasted cash flows discounted at interest rates. Bonds payable is discounted to present value. Fair values of other long-term liabilities are also their carrying values as they use floating interest rates. 196 TSMC Annual Report 2002 Overseas Domestic Adjustments and Elimination Combined Sales to unaffiliated customers Transfers between geographic areas $95,774,432 9,537,846 $71,028,217 98,240,822 $- $166,802,649 (107,778,668) - Total sales $105,312,278 $169,269,039 ($107,778,668) $166,802,649 ($19,865) $48,639,761 $128,158 $48,748,054 (21,354,715) 3,303,020 (6,197,047) $24,499,312 $2,453,851 $75,840,416 $358,845,308 ($33,567,344) $401,118,380 Gross profit Operating expenses Non-operating income Non-operating expenses Income before income tax Minority interest income Identifiable assets Long-term investments Total assets b. Gross export sales Area North Americas Asia and others Europe The export sales information is presented by billed regions. c. Major customer Customers with sales greater than 10% of the total sales are as follows: Customers A Customer 11,349,920 $412,468,300 $96,254,239 42,167,270 9,464,008 $147,885,517 2002 Amount $32,769,054 % 20 TSMC Annual Report 2002 197 TABLE 1 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION FINANCING PROVIDED For the Year Ended December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Financing Name Counter-party Financial Statement Account Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) 1 TSMC TSMC Other receivables International Technology Inc. $536,372 (US$15,434) $536,372 (US$15,434) Interest Rate 4.25% Financing Reasons (Note1) Transaction Amounts Reasons for Short-term Financing Allowance for Bad Debt Collateral Item Value Financing Limit for Each Borrowing Company Financing Amount Limits (US$ in Thousand) 2 $- Operating capital $- - $- N/A $ 34,334,852 (US$987,968)(Note 2) Note 1: The No.2 represents short-term financing. Note 2: Not exceeding the issued capital of the Company. TABLE 2 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION ENDORSEMENT/GUARANTEE PROVIDED For the Year Ended December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Endorsement/ Guarantee Provider Name Counter-party Nature of Relationship (Note 2) 0 TSMC TSMC Development Inc. TSMC - North America WaferTech 3 2 3 Limits on Each Counter-party's Endorsement/ Guarantee Amounts (Note 4) Maximum Balance for the Period (US$ in Thousand) $9,313,804 (US$268,000) 1,390,120 (US$40,000) 15,291,320 (US$440,000) Note 1: 30% of the issued capital of the Company. Note 2: The No. 2 represents a subsidiary in which TSMC holds directly over 50% of the equity interest. The No. 3 represents an investee in which TSMC holds directly and indirectly over 50% of the equity interest. Note 3: Promissory notes for collateral. Note 4: Not exceeding 10% of the issued capital of the Company, and also limited to the issued capital of the transaction entity, unless otherwise approved by Board of directors. Ending Balance (US$ 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) $6,950,600 (US$200,000) 1,390,120 (US$40,000) 15,291,320 (US$440,000) $- - - $59,768,660 2.37% 0.47% 5.21% 198 TSMC Annual Report 2002 TSMC Annual Report 2002 199 TABLE 3 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIOANAL SEMICONDUCTOR CORPORATION MARKETABLE SECURITIES HELD December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Held Company Name Type and Name of Marketable Security Relationship with the Company Financial Statement Account December 31, 2002 Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note TSMC Stock TSMC - North America Subsidiary Long-term investment 11,000 $173,601 TSMC - Europe TSMC - Japan VIS TSMC International Chi Cherng Investment Subsidiary Subsidiary Investee Subsidiary Investee Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Hsin Ruey Investment Investee Long-term investment - 6 556,133 987,968 - - 13,670 94,258 2,415,297 22,265,157 41,894 39,815 TSMC Partners Subsidiary Long-term investment 300 3,753,733 SSMC Emerging Alliance Taiwan Mask Corp. United Technology Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Ya Xin Technology Hon Tung Ventures Capital Amkor Technology Monolithic System Tech. Crimson Asia Capital Horizon Ventures Investee Subsidiary - - - - Subsidiary - - - - - 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 TSMC - North America Chi Cherng Investmen Stock TSMC Stock TSMC Certificate Parent company Long-term investment Parent company Short-term investment 382 - 8,794 16,783 10,500 5,000 34,125 8,392 505 470 N/A N/A 12,692 12,738 3,136,115 767,239 32,129 193,584 105,000 50,000 341,250 83,916 280,748 104,289 41,988 195,452 748,282 459,285 Hsin Ruey Investment Major shareholder Long-term investment - 900,109 100 100 100 25 100 36 36 100 32 99 2 11 7 2 100 10 - 2 N/A N/A - - 64 $921,883 13,670 94,258 4,326,719 22,265,157 501,179 500,048 3,940,495 3,136,115 767,239 160,574 280,931 137,355 59,866 341,250 71,216 89,866 214,949 41,988 195,452 610,434 612,636 900,109 The treasury stocks in amounts of NT$748,282 thousand are deducted from the carrying value. The carrying value does not include prepayment for subscribed stock of NT$849,360 thousand. The treasury stocks in amounts of NT$459,285 thousand are deducted from the carrying value. The treasury stocks in amounts of NT$460,233 thousand are deducted from the carrying value. The treasury stocks in amounts of NT$255,692 thousand are deducted from the carrying value. (Forward) TSMC Annual Report 2002 200 TSMC Annual Report 2002 201 Held Company Name Type and Name of Marketable Security Relationship with the Company Financial Statement Account December 31, 2002 Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note Hsin Ruey Investment Stock TSMC Certificate Parent company Short-term investment 12,762 $460,233 TSMC International Stock Chi Cherng Investment Major shareholder Long-term investment - 902,137 VIS InveStar Semiconductor Development Fund, Inc. InveStar Semiconductor Development Fund (II), Inc. TSMC Development, Inc. TSMC Technology, Inc. 3DFX Interactive, Inc. Stock VIS Associates, Inc. PowerChip Semiconductor, Inc. Etron Technology, Inc. Walsin Technology, Inc. MEGIC Corporation Form Factor, Inc. Subsidiary Subsidiary Subsidiary Subsidiary - Subsidiary 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 VIS Associates Inc. Stock VIS Investment Holding, Inc. Subsidiary Long-term investment United Technology Co., Ltd. Investee Long-term investment Equity Silicon Valley Equity Fund Silicon Valley Equity Fund II Equity certificate ABN AMRO Bank Fund Grand Palace Trust - - - - Long-term investment Long-term investment Long-term investment VIS Investment Holding, Inc. Stock TSMC Development, Inc. TSMC Partners InveStar Semiconductor VIS Micro, Inc. Stock WaferTech ADR TSMC Stock Development Fund Inc. Marvell Technology Group Ltd. Silicon Laboratories WGRD Programmable Microelectronics, (Taiwan) Inc. Subsidiary Long-term investment Subsidiary Long-term investment Parent company Short-term investment - - - - Short-term investment Short-term investment Short-term investment Long-term investment (Forward) 202 TSMC Annual Report 2002 45,000 51,300 1 1 68 41,070 191,671 4,859 34,551 16,500 267 3,357 63 - - US$44,634 US$43,179 US$307,094 US$2,321 - 1,193,891 2,100,716 101,839 302,559 177,000 64,360 38,716 US$397 US$7,317 US$5,355 - 200 - 762 3,413 9 104 1,580 US$2,719 US$279 US$326,609 US$7,357 US$3,350 US$287 US$625 US$1,566 - 64 97 97 100 100 - 100 7 2 8 9 1 2 100 34 14 - 100 100 99 - - - - 3 $613,782 902,137 US$44,634 US$43,179 US$307,094 US$2,321 - 1,193,891 2,100,716 101,839 302,559 156,819 64,360 56,206 US$397 US$7,386 US$5,355 US$817 US$2,719 US$279 US$326,609 US$6,080 US$69,181 US$202 US$635 US$1,566 The amount is shown in the carrying value. TSMC Annual Report 2002 203 Long-term investment 3,648 US$817 Held Company Name Type and Name of Marketable Security Relationship with the Company Financial Statement Account December 31, 2002 Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note Divio, Inc. Global Testing Corp. Chipstrate Technologies, Inc. Richtek Technology Holding Corp. Advanced Power Electronics, Corp. Preferred stock Integrated Memory Logic, Inc. Divio, Inc. SiRF Technology Holdings, Inc. Capella Microsystems, Inc. Sensory, Inc. Equator Technologies, Inc. LightSpeed Semiconductor Corporation Tropian, Inc. Sonics, Inc. Atheros Communications, Inc. NanoAmp Solutions, Inc. Formfactor, Inc. Monolithic Power Systems, Inc. Memsic, Inc. Reflectivity, Inc. Signia Technologies, Inc. Match Lab, Inc. HiNT Corporation Ordius, Inc. (Creosys, Inc.) Incentia Design Systems, Inc. InveStar Semiconductor Development Fund (II) Inc. IP Unity Stock WGRD Procoat Technology Richtek Technology Corporation Programmable Microelectronics (Taiwan), Inc. Auden Technology MFG. Co., Ltd. Geo Vision, Inc. EoNEX Technologies, Inc. Conwise Technology Co., Ltd. Yi Yang Technology Goyatek Technology Inc. Trendchip Technologies Corp. (Forward) 204 TSMC Annual Report 2002 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 Long-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 30 13,268 6,660 1,023 2,750 1,831 667 306 300 1,404 300 2,252 1,758 2,686 1,607 541 267 2,521 2,727 1,064 3,000 1,875 1,000 1,500 286 1,008 105 3,500 845 487 953 180 40 2,800 2,800 1,740 2,000 US$3 US$5,176 US$300 US$346 US$1,345 US$1,809 US$500 US$1,333 US$481 US$625 US$258 US$1,339 US$2,334 US$3,530 US$3,593 US$853 US$2,000 US$2,000 US$1,500 US$1,192 US$300 US$1,500 US$1,000 US$450 US$500 US$1,636 US$630 US$1,942 US$1,006 US$140 US$1,117 US$129 US$2,024 US$1,930 US$967 US$1,787 US$864 - 10 9 6 6 12 4 1 8 5 1 3 3 5 3 3 1 12 12 4 8 9 6 8 2 2 - 12 3 1 4 2 6 14 9 8 5 US$3 US$5,176 US$300 US$346 US$1,345 US$1,809 US$500 US$1,333 US$481 US$625 US$258 US$1,339 US$2,334 US$3,530 US$3,593 US$853 US$2,000 US$2,000 US$1,500 US$1,192 US$300 US$1,500 US$1,000 US$450 US$500 US$1,636 US$640 US$1,942 US$1,006 US$140 US$1,117 US$129 US$2,024 US$1,930 US$967 US$1,787 US$864 TSMC Annual Report 2002 205 Held Company Name Type and Name of Marketable Security Relationship with the Company Financial Statement Account December 31, 2002 Shares (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note Preferred stock Memsic, Inc. OEpic, Inc. Equator Technologies, Inc. NanoAmp Solutions, Inc. Signia Technologies, Inc. Advanced Analogic Technology, Inc. Monolithic Power Systems, Inc. Ralink Technology, Inc. Sonics, Inc. Newport Opticom, Inc. Silicon Data, Inc. Reflectivity, Inc. Capella Microsystems, Inc. Angstron Systems, Inc. Tropian, Inc. SiRF Technology, Holdings, Inc. LeadTONE Wireless, Inc. Match Lab, Inc. eBest!, Inc. Kilopass Technology, Inc. Bond eBest!, Inc. Stock - - - - - - - - - - - - - - - - - - - - - Emerging Alliance 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 2,289 2,696 770 250 1,500 948 804 1,833 3,082 1,157 2,000 1,596 800 1,567 1,464 20 680 313 185 3,887 US$1,560 US$1,240 US$452 US$1,000 US$150 US$1,261 US$1,946 US$1,500 US$3,082 US$810 US$1,000 US$1,500 US$200 US$750 US$2,000 US$131 US$238 US$250 US$97 US$2,000 Long-term investment - US$24 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. Ikanos Communication, Inc. Quicksilver Technology, Inc. Litchfield Communications Mosaic Systems Accelerant Networks Zenesis Technologies Reflectivity, Inc. Iridigm Display Spreadtrum XHP Microsystem - - - - - - - - - - - - - - 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 467 833 962 602 1,741 1,475 3,799 2,481 441 861 1,596 305 - 2,279 US$1,000 US$2,500 US$1,000 US$1,850 US$1,500 US$2,338 US$1,000 US$500 US$1,000 US$500 US$1,500 US$502 US$1,000 US$750 11 7 1 1 4 2 4 6 5 9 7 6 4 7 2 - 6 2 1 US$1,560 US$1,240 US$452 US$1,000 US$150 US$1,261 US$1,946 US$1,500 US$3,082 US$810 US$1,000 US$1,500 US$200 US$750 US$2,000 US$131 US$238 US$250 US$97 18 US$2,000 - 6 1 3 6 1 2 4 6 6 1 4 5 2 - 6 US$24 $100,000 US$1,000 US$2,500 US$1,000 US$2,932 US$1,500 US$2,338 US$1,000 US$500 US$1,000 US$500 US$1,500 US$502 US$1,000 US$750 Prepayment for subscribed stock 206 TSMC Annual Report 2002 TSMC Annual Report 2002 207 TABLE 4 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCOTOR 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, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Acquiring on Selling Company Name Type and Name of Marketable Security Financial Statement Account Counter-party Nature of Relationship TSMC Stock SSMC TSMC International Monolithic System Tech. Emerging Alliance VIS Ya-Xin Technology TSMC International Stock TSMC Development Inc., Inc. VIS VIS Associates Inc. TSMC Development Inc. InveStar Semiconductor Development Fund (II) Inc. WaferTech Bond fund Yuan Da Duo Li #2 Da-Hua THE TP ROC NITC JIHSUN Tung Yi Chian Pang Equity certificate ABN AMRO Bank Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment SSMC TSMC-BVI Monolithic System Tech. Emerging Alliance Fund, LP VIS Ya-Xin Technology TSMC Development, Inc. InveStar Semiconductor Development Fund (II), Inc. Long-term investment WaferTech, Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Long-term investment(Note 3) - - - - - - - Investee Subsidiary Investee Subsidiary Investee Subsidiary Subsidiary Subsidiary Subsidiary - - - - - - - Note 1: The ending balance included the recognition of the investment income (loss) by the equity method and the accumulated translation adjustment. Note 2: Prepayment for the subscribe stock. Note 3: This equity certificate had been reclassified from short-term investment to long-term investment starting from July 2002. Note 4: The total book value for sale is US$9,100 thousand and with the unrealized loss on long-term investment is US$666 thousand. Beginning Balance Acquisition Disposal Ending Balance Shares Amount (US$ Shares Amount (US$ Shares Amount (US$ Carrying Value Gain (Loss) on Shares Amount (US$ (Thousand) in Thousand) (Thousand) in Thousand) (Thousand) in Thousand) (US$ in Disposal(US$ in (Thousand) in Thousand) Thousand) Thousand) (Note 1) 301 779,968 - - $2,907,967 19,987,814 - 741,617 81 208,000 470 - $1,421,846 7,280,000 104,289 168,615 556,133 3,377,526 121,338(Note 2) 849,360(Note 2) - 1 - 34,125 341,250 US$201,231 - US$208,000 45,000 US$45,766 6,300 US$6,300 - US$226,541 - US$120,000 - - - - - - - - - $- $ - $- - - - - - - - - - - - - - - - - 26,278 - 25,923 - - 350,000 - 350,000 - - 28,409 400,000 33,108 70,860 - 3,814 43,630 - 450,000 850,000 - 580,000 550,000 - 59,386 70,860 25,923 3,814 43,630 28,409 807,970 853,974 356,458 582,977 554,407 402,869 800,000 850,000 350,000 580,000 550,000 400,000 - - - - - - - - 7,970 3,974 6,458 2,977 4,407 2,869 382 987,968 470 - 677,471 34,125 1 51,300 - - - - - - - $3,136,115 22,265,157 104,289 767,239 3,264,657 341,250 US$307,094 US$43,179 US$326,609 - - - - - - 23,168 US$10,047 1,194 US$536 20,714 US$14,806 US$9,766(Note 4) US$5,706 3,648 US$ 817 208 TSMC Annual Report 2002 TSMC Annual Report 2002 209 TABLE 5 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCOTR CORPORATION 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, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Types of Property Transaction Date Transaction Amount Payment Term Counter-party TSMC Fab 12 June 19, 2002 $263,000 By the construction progress Mandartech Interiors, Inc. July 11, 2002 August 6, 2002 137,402 By the construction progress UISC 124,775 By the construction progress Meissner & Wurst November 15, 2002 244,654 By the construction progress Fu Tsu Construction Co., Ltd. Fab 14 April 9, 2002 135,000 By the construction progress Fu Tsu Construction Co., Ltd. April 12, 2002 June 24, 2002 109,880 By the construction progress Great Construction System, Inc. 984,995 By the construction progress Fu Tsu Construction Co., Ltd. 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, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Related Party Nature of Relationship Transaction Details Purchase/Sale Amount % to Total TSMC TSMC - North America Subsidiary Philips and its affiliates Major shareholder WaferTech VIS SSMC Subsidiary Investee Investee Sales Sales Purchase Purchase Purchase ($94,433,401) (2,909,008) 9,955,154 3,469,198 2,751,297 57 2 41 14 11 Nature of Relationship Prior Transaction of Related Counter-party Owner Relationship Transfer Date Amount Price Reference Purpose of Acquisition - - - - - - - N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Other Terms None None None None None None None Transaction Details Payment Terms Abnormal Transaction Notes/Accounts Payable or Receivable Note Unit Price Payment Terms Ending Balance % to Total 30 days from invoice date 30 days from invoice date 30 days from monthly closing date 45 days from monthly closing date 30 days from invoice date None None None None None None None None None None $9,739,236 352,706 (617,751) (653,876) (391,426) 96 3 (25) (26) (16) 210 TSMC Annual Report 2002 TSMC Annual Report 2002 211 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, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Related Party Nature of Relationship Ending Balance Turnover Rate Amount Action Taken Overdue Amounts Received in Subsequent Period Allowance for Bad Debts TSMC TSMC - North America Subsidiary Philips and its affiliates Major shareholder $9,739,236 352,706 18 days 29 days $3,709,733 55,050 Accelerate demand on accounts receivable Accelerate demand on accounts receivable $2,155,511 69,090 $- - TABLE 8 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND VANGUARD INTERNATIONAL SEMICONDUCOTR CORPORATION NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE December 31, 2002 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Investor Company TSMC Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2002 Net Income Investment Dec. 31, Dec. 31, Shares Percentage Carrying (Loss) of the Gain (Loss) Note 2002 2001 (Thousand) of Ownership Value (Note1) Investee (Note 2) TSMC - North America San Jose, California, U.S.A. Marketing and engineering support $333,178 $333,178 1,100 TSMC - Europe TSMC - Japan VIS Amsterdam, The Netherlands Marketing and engineering support Yokohama, Japan Hsin-Chu, Taiwan Marketing and engineering support IC Design and manufacturing TSMC International Tortola, British Virgin Islands Chi Cherng Investment Taipei, Taiwan Hsin Ruey Investment Taipei, Taiwan TSMC Partners Tortola, British Virgin Islands Investment Investment Investment Investment SSMC Singapore Manufacturing wafers Emerging Alliance Fund Cayman Islands Investment Ya-Xin Technology Taipei, Taiwan Electronic manufacturing Note 1: The treasury stocks are not deducted from the carrying values. Note 2: The gain from sales of treasury stock of NT$43,036 thousand, which was transferred to capital surplus, was not deducted from the investment gain (loss). Note 3: The amount has not included the prepayment for the subscribed shares of 121,338 shares with total amount of NT$849,360 thousand. 2,960 83,760 6,503,640 (Note3) 2,960 83,760 - 6 6,503,640 556,133 31,445,780 24,165,780 987,968 300,000 300,000 10,350 6,408,190 1,005,660 341,250 100,000 100,000 10,350 4,986,344 837,045 - - 300 382 - - 34,125 100 100 100 25 100 36 36 100 32 99 100 $173,601 $140,654 $139,021 Subsidiary 13,670 94,258 2,415,297 (Note 3) (1,615) 3,145 1,615 6,045 Subsidiary Subsidiary (3,250,831) (821,771) Investee 22,265,157 (4,714,203) (4,714,203) Subsidiary 41,894 39,815 13,821 12,533 13,122 Investee 6,632 Investee 3,753,733 924,362 993,292 Subsidiary 3,136,115 (3,609,569) (1,155,076) Investee 767,239 341,250 (142,865) (142,151) Subsidiary - - Subsidiary 212 TSMC Annual Report 2002 TSMC Annual Report 2002 213 3. Internal Control System Execution Status 3.1 Statement of Internal Control System Taiwan Semiconductor Manufacturing Company Limited Statement of Internal Control System (Translation) TSMC has conducted a self-check of internal controls for the period of January 1, 2002 to December 31, 2002. The results are as follows: 1. TSMC acknowledges that the Board of Directors and management personnel are responsible for establishing, performing, and maintaining an Internal Control System. The said system has already been duly established at TSMC. The purpose of the Internal Control System is to provide a reasonable assurance of the Company's (1) efficient and effective operations (including profit, 3.2 The Securities & Futures Commission may request companies to commission CPAs to audit the said internal control system. Disclosure of the audit report(s) is mandatory: Not Applicable 4. Major issues on 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 2002 or the period from January 1, 2003 to March 12, 2003: None 5. Private Placement Securities: Not Applicable performance, and safeguard of assets, etc.), (2) reliability of financial reports, and (3) compliance with applicable laws and 6. Balance of TSMC Common Shares/ADR Acquired, Disposed of and Held by Subsidiaries regulations. 2. TSMC also acknowledges that the Internal Control System possesses inherent constraints irrespective of the intended impeccability of the system design and therefore could only provide a reasonable assurance of the aforementioned goals. Due to the changes in environment and circumstances, the effectiveness of the internal control system may vary accordingly. Nevertheless, the Internal Control System is equipped with self-monitoring mechanisms. Should any flaws be recognized, the Company would enforce corrective measures immediately. 3. TSMC evaluates the effectiveness of its Internal Control System in accordance with the Guidelines for the Establishment of Internal Control System by Public Companies (the "Guidelines") set forth by the Securities and Futures Commission of the Ministry of Finance. The said Guidelines divide internal control into five components: (1) Control Environment, (2) Risk Assessments, (3) Control Operations, (4) Information and Communication, and (5) Monitoring. Each component comprises certain factors. More information regarding the said factors is available in the aforesaid Guidelines. 4. TSMC has assessed and evaluated the design and effectiveness in the design and performance of the aforementioned System. 5. On the basis of the check, TSMC is of the opinion that the aforementioned Internal Control System, including the efficiency and effectiveness of operations, reliability of financial reports, and compliance with applicable laws and regulations, is effective and provides a reasonable assurance of achieving the abovementioned goals during the period of January 1, 2002 to December 31, 2002. 6. The Statement of Internal Control System 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 Exchange Law shall apply. 7. This Statement of Internal Control System has been approved by TSMC's Board of Directors at the meeting of March 4, 2003 with nine directors present at the meeting and no director disagreeing with this Statement of Internal Control System. Taiwan Semiconductor Manufacturing Company Limited Morris Chang Chairman of the Board of Directors Rick Tsai President 214 TSMC Annual Report 2002 Name of Subsidiary (Note 1) Paid - in Capital Fund Source Percentage of Ownership Transaction Date Acquisition Disposal Amount Amount No. of Shares No. of Shares (Note 2) Investment Income (Loss) Balance as of 02/28/2003 No. of Shares Amount Balance of Pledged Shares Balance of Guarantee Provided by TSMC Balance of Financing Provided by TSMC Unit: NT$K; Share; % Chi Cherng 840,000 Retained 36% Year 2002 9,714,701 Investment Co., Ltd. earnings Year 2003 - Hsin Ruey 840,000 Retained 36% Year 2002 11,354,701 Investment Co., Ltd. earnings Year 2003 - TSMC US$300K Retained 100% Year 2002 69,260 Partners, Ltd. (Note 4) earnings Year 2003 - TSMC - US$11M Retained 100% Year 2002 1,153,841 North America earnings Year 2003 - - - - - - - - - - - - - - - - - - - - - - - - - - - 12,738,029 459,285 12,738,029 459,285 12,761,869 460,233 12,761,869 460,233 761,861 US$7,357K 761,861 US$7,357K 361,583 23,449 8,540 12,692,258 748,282 - - - 12,692,258 748,282 - - - - - - - - - - - - Note 1: Chi Cherng Investment Co., Ltd. merged with Po Cherng Investment Co., Ltd. and Cherng Huei Investment Co., Ltd. on October 30, 2002. Hsin Ruey Investment Co., Ltd. merged with Kung Cherng Investment Co., Ltd. and Chi Hsin Investment Co., Ltd. on October 30, 2002. Note 2: Shares Acquisition Breakdown From Merger (Note 3) Stock Dividend Chi Cherng Investment Co., Ltd. Hsin Ruey Investment Co., Ltd. Note 3: Stock Dividend for Merged Companies Po Cherng Investment Co., Ltd. Cherng Huei Investment Co., Ltd. Kung Cherng Investment Co., Ltd. Chi Hsin Investment Co., Ltd. 9,412,369 11,213,985 Stock Dividend 394,000 461,669 665,826 353,626 302,332 140,716 Total Shares 4,334,004 5,078,365 7,324,095 3,889,890 Note 4: TSMC Partners, Ltd. shares are in ADRs. Each ADR equals five TSMC common shares. TSMC Annual Report 2002 215 7. Major Decisions of Shareholder Meetings and Board Meetings Review of Shareholder Meetings TSMC's 2002 regular Shareholder Meeting was held at the Auditorium of the Activity Center of the Hsinchu Science-Based Industrial Park on May 7, 2002. At the meeting, shareholders present in person or by proxy passed following resolutions: (1) Acceptance of the 2001 business report and financial statements; (2) Distribution of 2001 profits; (3) Capitalization of 2001 profits; (4) Revision to TSMC's Articles of Incorporation; (5) Revision to TSMC's Rules and Procedures of Shareholder Meeting; and (6) Revision to TSMC's Rules for Election of Directors and Supervisors. In addition, Professor Lester Thurow and Sir Peter Bonfield were elected directors of TSMC. Review of Board Meetings During the 2002 calendar year, and the period from January 1, 2003 to March 12, 2003, the Board held five regular meetings and two special meetings. Major resolutions passed at these meetings are summarized below: (1) The 2001 business report and financial statements; (2) Distribution of 2001 profits; (3) Convening the 2002 Annual Shareholder Meeting; (4) 2002 capital appropriation; (5) An increase of investment in TSMC subsidiaries; (6) The appointment of Dr. Richard L. Thurston as Vice President and General Counsel; (7) An increase of the number of TSMC's directors from seven to nine; (8) The investment in EUV LLC; (9) Establishment of TSMC's 2002 Employee Stock Options Plan; (10) The appointment of Ms. Chiam Wu as Vice President; (11) Approval of the semi-annual financial statement; (12) TSMC's sponsorship of the issuance of ADRs by certain shareholders; (13) The establishment of an Audit Committee; (14) The subscription of new shares to be issued by Vanguard International Semiconductor Corporation; (15) The investment in a SoC design service company; (16) The 2002 business report and financial statements; (17) Distribution of 2002 profits; (18) Convening the 2003 Annual Shareholder Meeting; and (19) 2003 R&D project and sustaining capital appropriation, etc. Future Expected Outcomes of Board Meeting According to relevant laws and regulations, routine matters that need to be resolved by the Board every year include the following: (1) Approval of the Company's annual financial statements and business report; (2) Approval of proposal profit distribution; (3) Approval of capital appropriation; (4) Convening the Annual Shareholder Meeting; (5) Approval of the statement of internal control; and (6) Approval of semi-annual financial statements. Ad hoc motions may be submitted to the Board when necessary. 8. Legal Penalties Regulatory authorities' legal penalties to the Company, and the Company's resulting punishment of its employees: None. 9. Other Necessary Supplement Any events in 2002 that had significant impacts on shareholders' right or security prices as stated in Item 2 Paragraph 2 of Article 36 of Securities and Exchange Law of Taiwan: None. 216 TSMC Annual Report 2002 i T a w a n S e m i c o n d u c t o r M a n u f a c t u r i n g C o m p a n y , L t d . A n n u a l R e p o r t 2 0 0 2 121, 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 http://www.tsmc.com Taiwan Semiconductor Manufacturing Company, Ltd. Morris Chang, Chairman TSE: 2330 NYSE: TSM Taiwan Semiconductor Manufacturing Company, Ltd. Annual Report 2002 (cid:127) Taiwan Stock Exchange Market Observation Post System: http://mops.tse.com.tw (cid:127) TSMC annual report is available at http://www.tsmc.com/english/tsmcinfo/c0203.htm Printed on March 12, 2003 

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