4 Annual Report 2003 LETTER TO SHAREHOLDERS Dear Shareholders, US$5.87 billion, an increase of 26%, while net income grew to In 2003, as the world semiconductor industry showed signs of recovering from a cyclical slowdown which began in late 2000, Taiwan Semiconductor Manufacturing Company (TSMC) produced the highest revenues in its history, surpassing the previous record set in 2000. TSMC also recorded its second highest net income in history. Throughout 2003, TSMC continued to demonstrate its leadership in three important areas for sustainable profitability and future growth: advanced technology, manufacturing efficiency and cus- tomer service. For example: ● TSMC became the first foundry with multiple low-k, 0.13 um products in commercial production. ● Many customers engaged TSMC on 90 nm process with specific products under design. US$1.37 billion, a 120% increase. Quarterly sales grew steadily from NT$39,325 million in the first quarter to a record high NT$57,780 million in the fourth quarter. Our recovery in revenue growth preceded and surpassed that of the world semiconductor industry and helped TSMC maintain its global leadership of the foundry segment of the semiconductor market. R&D Successes Continue to Achieve Technology Leadership TSMC's continued to sustain technological leadership in the indus- try, especially in the development of 90 nm process technology. Among our many achievements during 2003 are: ● TSMC launched the industry's first production of 90 nm copper ● Cumulative product tape-outs using 0.13 um process were close and low-k dielectrics on 12-inch wafers. to 400 by year-end. ● TSMC generated around 17% of wafer sales from 0.13 um prod- ● TSMC served more than 200 active customers and produced over ucts. 3,000 products in its fabs. ● TSMC's capability of integrating design and backend services with Enhanced Capacity and Capital Expansion its core manufacturing strength provided a total solution to its Addressed Customer Needs customers. Total installed capacity on an 8-inch equivalent basis surpassed 4 million wafers in 2003, compared with 3.54 million wafers in Financial Strength and Results 2002. The percentage of this capacity devoted to advanced TSMC achieved strong financial results in 2003. Revenue totaled process production (90 nm, 0.13 um, 0.15 um and 0.18 um) NT$201,904 million, an increase of 25% from the previous year. reached 51%, compared with 36% in 2002. TSMC's first 12-inch Net income was NT$47,259 million, an increase of 119% com- wafer plant, Fab 12, reached volume production with nearly pared with 2002 results, while earnings per share were NT$2.33, 28,000 12-inch wafers commercially produced in fourth quarter an increase of 122%. In US dollar terms, revenue for 2003 was of 2003. Annual Report 2003 5 Capital expenditure for 2003 totaled NT$37.25 billion (US$1.1 bil- corporate strategy, corporate governance, board communications, lion), a decrease of 32% from 2002 and a decrease of 45% from shareholder value, investor relations, and social responsibility. 2001. Most of the expenditure was devoted to expansion of advanced process production capacity. During 2004, the Company Other Corporate Developments plans to continue to invest in the future through significant invest- Among other items of interest, the Company concluded two sec- ment in production capacity expansion, mostly in 0.13 um and 90 ondary offerings of ADSs during 2003: (1) an 88 million ADS nm copper processes located at its 12-inch wafer fabrication facili- offering in July represented shares held mainly by Executive Yuan's ties, Fab 12 and Fab 14. Development Fund, and (2) a 100 million ADS offering in Recognition and Awards for Outstanding Electronics N.V. Each TSMC ADS represents five common shares of November represented shares held by Koninklijke Philips Achievements TSMC. In December 2003, the Executive Yuan of the Republic of China gave TSMC's Research and Development team an exceptional Late in the year, TSMC, TSMC North America, and WaferTech filed recognition - "The 2003 Outstanding Scientific and Technological a complaint in US District Court of Northern California against Worker Award". This award, considered the highest honor for Semiconductor Manufacturing International Corporation (SMIC), technology development in Taiwan, recognizes TSMC's leading SMIC (Shanghai), and SMIC Americas alleging that SMIC has 0.13 um low-k, copper system-on-chip (SoC) technology. In infringed multiple patents and misappropriated trade secrets. The announcing its unanimous decision, the Award Steering suit also asks for injunctive relief along with monetary damages. Committee noted that the development of this advanced semicon- The complaint alleges that SMIC improperly obtained TSMC trade ductor process has not only made significant contribution to the secrets and infringed TSMC patents. Management intends vigor- Taiwan economy, but has also set a leading example of the suc- ously to protect its patents and trade secrets to maintain share- cessful implementation of Taiwan's "Silicon Island" policy through holder value. advanced Research and Development. A Bright and Promising Outlook TSMC continues to garner recognition and awards from around We believe that the world semiconductor industry is likely to the world. Among the numerous media surveys conducted in expand at a compounded annual growth rate of close to 10% 2003 (e.g., Asiamoney, Euromoney, FinanceAsia, Far Eastern within this decade. While global semiconductor revenue in 2003 Economic Review, IR Magazine, The Asset Magazine, Institutional is estimated to have grown by about 16%, revenue in 2004 is Investor, and CommonWealth Magazine), TSMC stood out as a poised to increase 26%. The value of the foundry segment's out- corporate role model. The awards that TSMC received in 2003 put is likely to have increased from 16% of world IC markets in included areas of overall management, financial management, 2001 to 21% in 2003. Industry drivers such as outsourcing, 6 Annual Report 2003 demand for capital efficiency, and the increased complexity of advanced integrated circuits continue to favor TSMC. With unwavering focus on its core competencies, management is confident that TSMC will remain the leader of the industry for years to come. 2004 Production Plan* Quantity: thousand pcs 8-inch equivalent wafer by fab 2004 Sales Plan by Technology <0.13 um 18% 0.15 um 13% 0.18 um 25% 0.25 um 17% 0.35 um 13% >0.50 um 14% Fab2 Fab3 Fab5 Fab6 Fab7 Fab8 Fab12 Fab14 * TSMC only: 4,110 thousand pcs 8-inch equivalent wafers; total TSMC managed capacity: 4,613 thousand pcs 8-inch equivalent wafers, including WaferTech and SSMC F. C. Tseng, Deputy CEO Morris Chang, Chairman and CEO Rick Tsai, President and COO Morris Chang, Chairman and CEO F. C. Tseng, Deputy CEO Rick Tsai, President and COO Annual Report 2003 7 A BRIEF INTRODUCTION TO TSMC 1. Company Profile TSMC's establishment of a dedicated integrated circuit (IC) foundry on February 21, 1987 at Hsinchu Science-Based Industrial Park, Taiwan, was the first of its kind in the world. The common shares of TSMC are listed on the Taiwan Stock Exchange (TSE); the deposi- tary receipts of the common shares are listed on the New York Stock Exchange (NYSE) under the symbol TSM. TSMC is the world's largest dedicated semiconductor foundry, pro- viding the industry's leading process technology and the foundry industry's largest portfolio of process-proven library, IP, design tools and reference flows. In the year 2003, TSMC operated one 6-inch wafer fab (Fab 2), five 8-inch wafer fabs (Fab 3, 5, 6, 7, and 8), and one12-inch fab (Fab 12), while another 12-inch fab (Fab 14) had completed facility construction by the year-end. The Company also has capacity commitments in its subsidiary WaferTech in the United States, and in 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 4 million 8-inch equivalent wafers by the end of 2003. TSMC views its role as a responsible corporate citizen seriously. The Company is committed to community service and maintaining strong stakeholder relationships. Sound corporate governance is rooted in a strong Board of Directors (the Board) comprised of experienced businessmen and distinguished scholars. The Board reinforces the financial integrity and management soundness of TSMC. There are three independ- ent board members among a total of nine directors. They are Sir Peter L. Bonfield, Professor Lester C. Thurow, and Mr. Stan Shih. In addition, Professor Michael E. Porter is an independent supervisor. TSMC's Audit Committee, established in 2002, oversees the integri- ty of TSMC's financial and audit systems, while the Compensation Committee, established in June 2003, reviews and recommends on issues related to employee and executive compensation. 1.1 Core Values ● Integrity- Integrity is a fundamental value of the Company. This commitment to integrity can best be illustrated by our strong cor- porate governance efforts as well as the demand of honesty and uprightness for all TSMC employees as established in its ethics policy and procedures. ● Customer Orientation- Superior customer service distinguishes TSMC from its peers. Our premium service results in premium competitiveness to customers and signficant return to sharehold- ers. ● Innovation- Everyone at TSMC has the potential and capability to innovate. We demand and encourage that from our employ- ees. The spirit of innovation is applied to every aspect of the Company’s business, from the way we think to the way we act. ● Commitment- Commitment is the driving force that makes things happen. TSMC asks of its entire staff their personal com- mitments to their job and to the Company. The welfare of our employees is best served when the welfare of the Company is ensured by all that we do. 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 cus- tomers, to forge a most powerful force in the semiconductor industry. To realize our vision, we must be: (1) a technology leader, competitive with any industry leaders, (2) the manufacturing leader, (3) the most reputable and service-oriented foundry, and the great- est total-benefits provider. Annual Report 2003 9 1.3 Corporate Recognition Awards honoring TSMC in 2003 included: 2.2 Market Analysis After a deep IC industry recession in 2001 and 2002, IC revenues ● Most Admired Company in Taiwan (CommonWealth Magazine, grew about 16% in 2003 to US$140 billion, out of the total October 2003 - for the seventh consecutive year); worldwide semiconductor revenue of US$166 billion. Fabless and ● Best Managed Company in Taiwan (Euromoney, December 2003); Integrated Device Manufacturers (IDM) market shares remained ● Best Managed Company, Best Corporate Strategy, Best Focus on constant between 2002 and 2003, with fabless contributing 15% Shareholder Value, Best Financial Management, Best Corporate of total IC revenues. IC foundry, a manufacturing sub-segment of Governance, and Best Investor Relations in Taiwan (Asiamoney, the IC industry that serves fabless companies as well as IDM, had a December 2003); total revenue of US$14 billion in 2003, up 30% from a year ago. ● Best Managed Company, Best Financial Management, Best Corporate Governance, Most Committed to Shareholder Value, Analysts estimated about 20% of global IC production came from and Best Investor Relations (FinanceAsia, 2003); foundries in 2003. According to IC Insights, a market research ● Best Board Communications in Asia, and Best Investor Relations company, the largest geographic segment of the dedicated by a Taiwan Company (IR Magazine, 2003); foundry market is North America; 60% of the dedicated foundry ● Best Corporate Governance in Taiwan (The Asset Magazine, revenue came from companies based in North America in 2003. 2003); The second largest market segment is Asia Pacific, which account- ● Best Corporate Governance in Asia for a Semiconductors and ed for 23% of the dedicated foundry revenue in 2003. European- Semiconductor Equipment Company (Asiamoney, September based companies accounted for 9%, and companies based in 2003), and Japan contributed 8%. ● Best Investor Relations in Taiwan: The Buy Side View (Institutional Investor, 2003). 2. Market Overview 2.1 TSMC Achievements In 2003, TSMC maintained its leading position in the dedicated 2.3 Industry Growth Forecast TSMC believes the semiconductor industry will grow at an average annual rate of about 10% for the next ten years. TSMC believes the IC industry recovery will continue in 2004 with growth at an above-trend rate of 26%. Associated with the faster growth fabless segment, when combined with the IDM outsourcing trend, dedi- foundry segment of the semiconductor industry, with an estimated cated foundries are expected to generate a stronger business market share of 53%, about twice that of its closest competitor. demand than that of the industry average. TSMC achieved this result in the face of fierce competition from both established competitors and new entrants to the business. A key contributor to TSMC’s strong position is its lead in advanced process technologies, with 62% of TSMC’s revenues in 2003 com- ing from geometries of 0.18 um-and-below manufacturing processes. Working closely with its customers, TSMC took the lead in volume production of many products designed with its 0.13 um FSG and low-k processes. TSMC also introduced advanced process design reference flows to streamline customers’ advanced process designs by providing tested solutions to many design issues. The reference flows, together with a comprehensive IP and library pro- gram, help customers to cut costs and increase productivity before products go into production. Because they reduce barriers to new designs, they also decrease customers’ time to market. Other key contributors to TSMC’s success in 2003 were its contin- ued progress in Research and Development (R&D) program and its unwavering focus on Customer Service. 10 Annual Report 2003 2.4 Foundry Market Outlook: Opportunities and Threats TSMC believes foundry services will play an increasingly important role as the IC industry continues to consolidate worldwide. Industry analysts forecast that by 2005, 23% of global IC produc- tion will come from foundries. Confident of near-future demand, TSMC has accelerated its capaci- ty expansion. Besides continued ramping up and expansion of Fab 12, TSMC’s first 300 mm production fab, the Company is in the midst of bringing Fab 10 (200 mm fab in Shanghai) and Fab 14 (300 mm fab in Tainan) into production by the fourth quarter of 2004. The threat of excess capacity and falling wafer prices, how- ever, may return over the next couple of years. To capitalize on opportunities, to minimize competitive threats, and to reduce risk, TSMC will continue focusing on high-growth segments of the industry. Moreover, TSMC is committed to staying ahead of other foundry vendors with advanced process development and services. TSMC’s emphasis on the development and introduction of technologies and support services in 2003 included the following: ● Advanced Technologies (0.13 um, 90 nm, and low-k) ● Mixed-Signal and Radio Frequency (MS/RF) Technologies ● Embedded Memory Processes ● Special Logic Processes (CMOS Image Sensor, Color Filter, High Voltage, Liquid Crystal on Silicon) ● Premium Foundry Design Services ● Mask Services ● Backend Services (Bumping, Flip-Chip Assembly, Testing) 2.5 China Project In September 2002, TSMC submitted an application to the Taiwan Government requesting permission to invest in a semiconductor fabrication plant in China. At the end of February 2003, the Government granted a “Phase I” approval for TSMC to begin the investment process. In August 2003, TSMC established TSMC (Shanghai) Company Limited in China. The purpose of the investment is to enable TSMC to become a key participant in the Mainland China domestic semiconductor market. TSMC plans to equip the plant initially with used tools and machinery relocated from existing TSMC fabs. We expect to begin installing the tools and machinery after Phase II approval is obtained. Annual Report 2003 11 3. Organization 3.1 Organization Chart Supervisors Shareholders' Meeting Board of Directors Chairman & CEO Deputy CEO President & COO China Project Research & Development Chief Information Officer Chief Technology Officer Human Resources Quality & Reliability Corporate Planning World-Wide Marketing & Sales Materials Management & Risk Management Operations I Operations II Chief Financial Officer & Spokesperson General Counsel Internal Auditing Marketing Pricing & Business Process Customer Service Asia / Pacific Business TSMC Europe TSMC Japan TSMC North America 12 Annual Report 2003 3.2 Function Description China Project ● China Development Strategy Research & Development ● Advanced technology research and development, mask operations, 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 Corporate Planning ● Production planning and control Worldwide Marketing & Sales ● Marketing – strategy, technology, and services marketing ● Pricing and Business Process – pricing and business management ● Customer Service – customer loyalty and solution effectiveness ● Regional Operations – business development and account services for North America, Europe, Japan, and Asian regions Materials Management & Risk Management ● Purchasing, warehousing, industrial safety, import and 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 engineer- ing, and operational efficiency Chief Financial Officer & Spokesperson ● Finance and accounting services, including investor relations, treasury, tax, assets management, financial and accounting management ● Corporate spokesperson General Counsel ● Corporate legal affairs, contracts, patent and other intellectual property matters Internal Audit ● Internal audit and process compliance Annual Report 2003 13 3.3 Directors & Supervisors Date Elected Term Expires Date First Elected Shareholding when Elected Current Shareholding (Note 1) Spouse & Minor Shareholding (Note 1) Shares % Shares % Shares % TSMC Shareholding by Nominee Arrangement (Shares) (Note 1) 06/03/2003 06/02/2006 12/10/1986 91,669,112 0.49% 102,383,349 0.51% 97,929 0.00% Koninklijke Philips Electronics N.V. Representatives: (Note 6) 06/03/2003 06/02/2006 12/10/1986 2,554,450,279 13.72% 2,258,806,301 11.15% - - Title Name Chairman Morris Chang Director J. C. Lobbezoo Director Scott McGregor Director F. C. Tseng Director Stan Shih Development Fund, Executive Yuan Representatives: (Note 6) Director Chintay Shih Director Sir Peter Leahy Bonfield Director Lester Carl Thurow Director Rick Tsai Koninklijke Philips Electronics N.V. Representatives: (Note 6) Supervisor Robbert Brakel 06/03/2003 06/02/2006 05/13/1997 30,356,889 0.16% 33,809,219 0.17% 106,076 0.00% 06/03/2003 06/02/2006 04/14/2000 2,225,077 0.01% 1,181,883 0.01% 12,869 0.00% 06/03/2003 06/02/2006 12/10/1986 1,793,522,406 9.63% 1,504,718,198 7.42% - - 06/03/2003 06/02/2006 05/07/2002 0 0.00% 0 0.00% 0 0.00% 06/03/2003 06/02/2006 05/07/2002 0 0.00% 0 0.00% 0 0.00% 06/03/2003 06/02/2006 06/03/2003 19,491,738 0.10% 20,807,456 0.10% 06/03/2003 06/02/2006 12/10/1986 2,554,450,279 13.72% 2,258,806,301 11.15% 0 - - 0.00% - - Development Fund, Executive Yuan Representatives: (Note 6) 06/03/2003 06/02/2006 12/10/1986 1,793,522,406 9.63% 1,504,718,198 7.42% Supervisor Susan Chang (Note 5) Supervisor Michael E. Porter 06/03/2003 06/02/2006 05/08/2002 0 0.00% 0 0.00% 0 0.00% Note 1: As of 02/29/2004 Note 2: Chi Cherng Investment Co., Ltd. and Hsin Ruey Investment Co., Ltd. each received NT$4,911,262 for serving as a director and a supervisor, respectively, in 2002. The two companies stepped down TSMC's Board in June 2003. The 2002 Board compensation was subsequently distributed after being approved by 2003 Regular Shareholders' Meeting. Note 3: Koninklijke Philips Electronics N.V. was paid NT$20,159,494 in the aggregate for the services of its representative directors and supervisor. Note 4: The Development Fund was paid NT$9,822,524 in the aggregate for the services of its representative director and supervisor. Note 5: Ms. Susan Chang replaced Mr. George Shiu on April 1, 2003. Note 6: Information on Directors and Supervisors that are Representatives of Juridical Person Shareholders. Directors / Supervisors That are Representatives of Juridical Person Shareholders Juridical Person Shareholders Top Ten Shareholders of Juridical Person Shareholders, or Shareholders Owning More than 10% of Juridical Person Shareholders Director: J. C. Lobbezoo Director: Scott McGregor Supervisor: Robbert Brakel Director: Chintay Shih Supervisor: Susan Chang 14 Annual Report 2003 Koninklijke Philips Electronics N.V. Top Ten Shareholders: Not Available Shareholders Owned More than 10% Shares: None Development Fund, Executive Yuan Not Applicable 0 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 & CEO, TSMC Director and/or President of TSMC subsidiary companies Supervisor, Industrial Technology Research Institute M.A., Business Economics, Erasmus University M.S., Computer Science/Computer Engineering, Stanford University Senior Vice President and General Manager, Santa Cruz Operation, Inc. Executive Vice President & Chief Financial Officer, Philips Semiconductors B.V. Chairman, Systems on Silicon Manufacturing Company Pte Ltd. Director, FEI Company President & Chief Executive Officer, Philips Semiconductors B.V. Ph.D., Electrical Engineering, National Cheng-Kung University President, TSMC President, Vanguard International Semiconductor Corp. Deputy CEO, TSMC Director and/or President of TSMC subsidiary companies Chairman of Global Unichip Corp. Honorary EE Ph.D., National Chiao Tung University Master of Electronic Engineering, National Chiao Tung University Chairman, CEO, Co-Founder, Acer Group Chairman & CEO, Acer Group Director, Applied Materials, Inc. Managing Director, Industrial Technology Research Institute Ph.D., Electrical Engineering, Princeton University President, Industrial Technology Research Institute Engineering, Loughborough University of Technology CEO and Chairman of the Executive Committee, British Telecommunications PLC Ph.D., Economics, Harvard University Dean, Sloan School of Management, M.I.T. Managing Director & Special Advisor, Industrial Technology Research Institute Director, Industrial Technology Investment Corporation Director, Vanguard International Semiconductor Corp. Senior Non-Executive Director, AstraZeneca Group PLC, London Director, L.M. Ericsson, Sweden Director, Mentor Graphics Corporation Inc., Oregon, USA Vice President, 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, Analog Devices Inc. Director, E*Trade Ph.D., Material Science, Cornell University Executive Vice President, Worldwide Marketing and Sales, TSMC President, Vanguard International Semiconductor Corp. President & COO, TSMC Director of TSMC subsidiary companies Drs., Business Economics, Free University of Amsterdam Post Doctorate Controllers Programme (RC), Free University of Amsterdam Vice President & Financial Controller, Asia Pacific of Philips Semiconductors CFO & Director, Philips Taiwan, Ltd. Director, Philips Electronic Industries (Taiwan) Ltd. Director, Philips Electronic Building Elements Industries (Taiwan) Ltd. M.A., Economics, National Taiwan University Director General, Department of National Treasury, Ministry of Finance Deputy Director, General Bureau of Monetary Affairs, Ministry of Finance Ph.D., Business Economics, Harvard University Administrative Deputy-Minister, Ministry of Finance Managers Are Spouse or Within Second-degree Relative of Consanguinity to Each Other Title Name Relation - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - The Aggregate Compensation Paid and Benefits in Kind Granted in 2003 (NT$) (Note 2) 5,031,264 (Note 3) - - 5,031,262 120,000 (Note 4) 120,000 4,719,451 4,719,451 69,333 (Note 3) - (Note 4) 90,000 Bishop William Lawrence University Professor, Harvard Business School Director, Inforte Corporation Director, Parametric Technology Corporation Director, Thermo-Electron Corporation -- -- -- 189,186 Annual Report 2003 15 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 applicability to TSMC Board Members are shown below in detail. Independence Criteria of Directors and 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 Criteria 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 natu- ral person shareholders Not a spouse nor first- or second-degree relative to any person specified in columns 3 and 4 Chairman Morris Chang Director Peter Leahy Bonfield Director Lester Carl Thurow Director Stan Shih Director J. C. Lobbezoo Director Scott McGregor Director Chintay Shih Director F. C. Tseng Director Rick Tsai Supervisor Robbert Brakel Supervisor Susan Chang 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" indicates meeting conditions specified above.p Board of Directors Composition TSMC's Board of Directors consists of nine distinguished members. Responsibilities The Company's management is legally responsible, among other Their outstanding careers and breadth of experiences cover the things, for day-to-day operations, preparation of financial state- high-technology industry, finance, business, as well as manage- ments, fund raising, and investments. The activities of the Board ment sectors. Three of the nine members on the Board -- Sir Peter do not supersede or alter those responsibilities. The Board's pri- L. Bonfield, former CEO of British Telecommunications, Professor mary duty is to fulfill its oversight responsibilities for the overall Lester C. Thurow of M.I.T., and Mr. Stan Shih, Chairman of Acer business and affairs of TSMC. Also, in conjunction with the Group -- are independent directors. A complete list of TSMC's Company's staff, the Board monitors regulatory activities, such as directors, their qualifications and experiences can be found on amendments to Taiwan's laws, amendments to the U.S. SEC Rules pages 14-15. 16 Annual Report 2003 and Regulations, and changes to the Taiwan Stock Exchange and New York Stock Exchange listing requirements. 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 share- holders of juridical person Not a director, supervisor, manager or shareholder hold- ing more than 5% of the out- standing shares of certain companies or institutions that have financial or business relationship with the Company Criteria Not an owner, partner, direc- tor, supervisor, manager of any sole proprietor, partnership, company or institution and his/her spouse, or the special- ist and his/her spouse, that provides finance, commerce, legal consultation and services to the Company or affiliated companies within one year Not a juridical person or its representative as defined in Article 27 of Company Law 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 Annual Report 2003 17 3.4 Management Team Title Name Date Effective Shareholding (Note 1) % Spouse & Minor Shareholding (Note 1) % TSMC Shareholding by Nominee Arrangement (Shares) (Note 1) Education & Selected Past Positions 03/03/1998 (see page 14) (see page 14) (see page 14) (see page 15) 08/07/2001 (see page 14) (see page 14) (see page 14) (see page 15) 08/07/2001 (see page 14) (see page 14) (see page 14) (see page 15) Chairman & Chief Executive Officer Morris Chang Deputy Chief Executive Officer F. C. Tseng President & Chief Operating Officer Rick Tsai (Note 3) Senior Vice President & Chief Information Officer Quincy Lin (Note 3) Senior Vice President Research & Development Shang-Yi Chiang (Note 3) Senior Vice President Worldwide Marketing & Sales Kenneth Kin (Note 3) Vice President Materials Management & Risk Management J. B. Chen (Note 3) Vice President Research & Development Ping Yang (Note 3) Vice President Operations I C. C. Wei (Note 3) Vice President Operations II Mark Liu (Note 3) Vice President Corporate Marketing Genda Hu (Note 3) Chief Technology Officer Chenming Hu (Note 3) Vice President Operations I M. C. Tzeng (Note 3) 05/13/1997 22,533,767 0.11% 1,797,353 0.01% 11/07/2000 10,389,909 0.05% 0 0.00% 08/07/2001 1,902,515 0.01% 0 0.00% 09/05/2000 5,366,881 0.03% 44,936 0.00% 08/07/2001 4,705,812 0.02% 0 0.00% 03/03/1998 3,588,721 0.02% 1,045 0.00% 05/11/1999 7,963,995 0.04% 0 0.00% 08/11/2000 1,378,508 0.01% 0 0.00% 08/07/2001 1,667,238 0.01% 0 0.00% 08/07/2001 3,575,094 0.02% 542,969 0.00% Vice President & General Counsel Richard Thurston (Note 3) 02/08/2002 834,309 0.00% 0 0.00% Vice President Worldwide Customer Service Chiam Wu (Note 3) Vice President, CFO & Spokesperson Lora Ho (Note 3) Vice President Human Resources P. H. Chang Senior Director Internal Auditing Jan Kees van Vliet Senior Director Corporate Planning Organization L. C. Tu 05/07/2002 577,000 0.00% 0 0.00% 09/08/2003 1,788,520 0.01% 154,004 0.00% 02/17/2004 470,285 0.00% 0 0.00% 10/15/2003 293,566 0.00% 0 0.00% 01/01/2002 6,279,701 0.03% 1,000,000 0.00% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Ph.D., Business Administration, University of Kentucky, USA Vice President, Corporate Sales and Marketing, TSMC Ph.D., Electrical Engineering, Stanford University, USA Vice President, Research and Development, TSMC Department Manager, Device Research and Applications, Hewlett-Packard Company Ph.D., Nuclear Engineering and Applied Physics, Columbia University, USA Vice President, Worldwide Sales & Services, IBM M.S., Physics, National Tsing Hua University Vice President, Tainan Site Operation, TSMC President, TSMC-Acer Semiconductor Manufacturing Corp. 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. 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 Ph.D., Electrical Engineering and Computer Science, University of California, Berkeley, USA M.S., Applied Chemistry, Chung Yuan University Senior Director, Fab 2 Operation, TSMC 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 M.S., Materials Science and Engineering, Oregon State University, USA Group Vice President, Applied Materials, Inc. Vice Chairman, Applied Materials Taiwan, Ltd. EMBA, National Taiwan University Senior Director, Accounting, TSMC Vice President, TI-Acer Semiconductor Manufacturing Corp. Ph.D., Materials Science, Purdue University Senior Director, Material Management, TSMC Vice President, Worldwide Semiconductor Manufacturing Corp. M.S., Management Science and Engineering, Delft University, Netherlands Senior Director, Pricing & Business Process, TSMC Controlling Officer, Philips Taiwan EMBA, Tulane University, USA Senior Director, Fab 5 Operation, TSMC Note 1: As of 02/29/2004 Note 2: TSMC granted options to certain of its officers as a result of their voluntary selection to exchange part of their profit sharing for stock options. Note 3: The aggregate compensation paid and benefits in kind granted to President in 2003: NT$23,243 thousand dollars; to all Vice Presidents: NT$164,348 thousand dollars. 18 Annual Report 2003 Managers are Spouse or Within Second-degree Relative of Consanguinity to Each Other Title Name Relation Number of Employee Stock Option Granted (Note 2) Selected Current Positions (see page 15) (see page 15) (see page 15) Director of TSMC subsidiary companies Director of Shin-Etsu Handotai Taiwan Director of W.K. Technology Fund IV Director of Powertech Technology Inc. Director of International Sematech - Director of United Industrial Gases Co., Ltd. Director of Global Unichip Corp. Director of TSMC (Shanghai) Company Ltd. Director of VisEra Technology Company, Ltd. Director of System on Silicon Manufacturing Company Pte Ltd. Director of Hontung Venture Capital Co., Ltd. CTO Chenming Hu Brother - - Vice President Genda Hu Manager M. J. Tzeng Brother Brother Director of TSMC Partners, Ltd. Director of System on Silicon Manufacturing Company Pte Ltd. - Director and/or Supervisor of TSMC subsidiary companies Supervisor of Global Unichip Corporation Supervisor of VisEra Technology Company, Ltd. - - - 615,000 0 615,000 0 0 298,476 0 0 206,019 615,000 0 0 0 65,262 0 0 0 0 0 Annual Report 2003 19 Information on Net Change in Shareholding and Net Change in Shares Pledged by Directors, Supervisors, Management and Shareholders of 10% Shareholdings or More: Title Name Chairman & CEO Morris Chang Director & Supervisor Koninklijke Philips Electronics N.V. Representatives: J. C. Lobbezoo Scott McGregor Robbert Brakel Director & Deputy CEO F. C. Tseng Director Stan Shih Director & Supervisor Development Fund, Executive Yuan Representatives: Chintay Shih Susan Chang Director Sir Peter Leahy Bonfield Director Lester Carl Thurow Director & President & COO Rick Tsai Supervisor Michael E. Porter Senior Vice President & CIO Quincy Lin Senior Vice President Shang-Yi Chiang Senior Vice President Kenneth Kin Vice President J. B. Chen Vice President Ping Yang Vice President C. C. Wei Vice President Mark Liu Vice President Genda Hu CTO Chenming Hu Vice President M. C. Tzeng Vice President & General Counsel Richard Thurston Vice President Chiam Wu Vice President, CFO & Spokesperson Lora Ho Vice President P. H. Chang Senior Director Jan Kees van Vliet Senior Director L. C. Tu 2003 01/01/2004 ~ 02/29/2004 Net Change in Shareholding Net Change in Shares Pledged (Note 1) Net Change in Shareholding Net Change in Shares Pledged (Note 1) Unit: Share 10,714,237 (295,643,978) 3,802,330 (1,253,194) 0 0 0 0 (288,804,208) (1,182,720,000) 0 0 0 0 0 0 (350,000) 0 0 0 0 1,395,718 (1,000,000) (310,000) 0 2,538,615 1,745,894 554,343 (90,639) (363,744) 64,399 69,625 512,000 708,603 70,538 604,309 267,354 0 (55,000) 0 0 0 0 0 0 (30,000) (170,000) (90,000) 0 (250,000) (50,000) 0 0 0 0 0 0 (140,000) 0 0 0 (20,000) 0 404,507 (Note 2) 0 (Note 2) (10,000) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Not applicable Not applicable 0 (Note 3) 0 (Note 3) 189,449 (Note 2) (192,229) (Note 2) 0 (Note 2) 0 (Note 2) 0 (5,000) 0 0 Note 1: 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. Note 2: Net change in shareholding or share pledged from 04/01/2003 to 12/31/2003. Note 3: Net change in shareholding or share pledged from 02/17/2004 to 02/29/2004. 20 Annual Report 2003 Stock Trade with Related Party: None Stock Pledge with Related Party: None 3.5 TSMC Long-Term Investments Ownership Ownership by TSMC (1) Direct/Indirect Ownership by Directors, Supervisors, and Management (2) Total Ownership (1) + (2) As of 12/31/2003 Shares % Shares Shares % Long-Term Investment Equity Method: 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. 787,015,726 TSMC (Shanghai) Company Ltd. Not Applicable (Note 3) Emerging Alliance Fund LLC Not Applicable (Note 3) TSMC North America Global UniChip Corp. TSMC Japan K.K. VisEra Technology Company Ltd. 11,000,000 39,040,000 6,000 5,100,000 100.0 100.0 32.0 28.1 100.0 99.5 100.0 47.3 100.0 25.0 % - - - 48 (Note 1) - - 573,396 987,968,244 300,000 955,660 789,167,714 28.2 (Note 2) 1,576,183,440 - - - 1,428,000 - 3,340,000 - - - 1.7 - 16.4 Not Applicable (Note 3) Not Applicable (Note 3) 11,000,000 40,468,000 6,000 8,440,000 Chi Cherng Investment Co., Ltd. Not Applicable (Note 3) 35.7 Not Applicable (Note 3) 64.3 (Note 4) Not Applicable (Note 3) Hsin Ruey Investment Co., Ltd. Not Applicable (Note 3) 35.7 Not Applicable (Note 3) 64.3 (Note 5) Not Applicable (Note 3) TSMC Europe B.V. Cost Method: Non-Publicly Traded 200 100.0 - - 200 United Industrial Gases Co. Ltd. Shin-Etsu Handotai Taiwan Company Ltd. Hontung Venture Capital Co., Ltd. W.K. Technology Fund IV 16,782,937 10,500,000 8,391,608 5,000,000 10.5 Not Available (Note 6) Not Available (Note 6) 7.0 Not Available (Note 6) Not Available (Note 6) 10.5 Not Available (Note 6) Not Available (Note 6) 1.9 Not Available (Note 6) Not Available (Note 6) 16,782,937 10,500,000 8,391,608 5,000,000 Funds: Horizon Ventures Crimson Asia Capital Not Applicable (Note 3) 12.1 Not Applicable (Note 3) Not Available (Note 6) Not Applicable (Note 3) Not Applicable (Note 3) 1.0 Not Applicable (Note 3) Not Available (Note 6) Not Applicable (Note 3) Note 1: Share interest held by Koninklijke Philips Electronics N.V. Note 2: Include 27.8% owned by Development Fund, Executive Yuan. Note 3: Not applicable: These firms do not issue shares. TSMC's investment is measured as a percentage of ownership interest. Note 4: Ownership interest held by Hsin Ruey Investment Co., Ltd. Note 5: Ownership interest held by Chi Cherng Investment Co., Ltd. Note 6: Not available: Not all information is available to TSMC as of the report date. 100.0 100.0 80.0 56.3 100.0 99.5 100.0 49.0 100.0 41.4 100.0 100.0 100.0 10.5 7.0 10.5 1.9 12.1 1.0 Annual Report 2003 21 4. Capital & Shares 4.1 History of Capitalization Price Par Value Authorized Paid-in 1,000 1,000 1,000 - 1,000 - 10 10 - - - - - - - - - 220 - 10 - - 10 - 1,000 1,000 1,000 1,000 1,000 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 Shares Amount Shares Amount 5,510,000 5,510,000,000 1,377,500 1,377,500,000 5,510,000 5,510,000,000 2,204,000 2,204,000,000 5,510,000 5,510,000,000 3,306,000 3,306,000,000 5,510,000 5,510,000,000 3,360,797 3,360,797,000 5,510,000 5,510,000,000 3,911,797 3,911,797,000 551,000,000 5,510,000,000 391,179,700 3,911,797,000 551,000,000 5,510,000,000 473,829,700 4,738,297,000 551,000,000 5,510,000,000 551,000,000 5,510,000,000 780,000,000 7,800,000,000 608,304,000 6,083,040,000 780,000,000 7,800,000,000 780,000,000 7,800,000,000 3,000,000,000 30,000,000,000 1,439,000,000 14,390,000,000 3,000,000,000 30,000,000,000 2,654,200,000 26,542,000,000 8,500,000,000 85,000,000,000 4,081,300,000 40,813,000,000 8,500,000,000 85,000,000,000 6,047,175,967 60,471,759,670 9,100,000,000 91,000,000,000 7,548,483,035 75,484,830,350 9,100,000,000 91,000,000,000 7,670,881,717 76,708,817,170 17,800,000,000 178,000,000,000 9,990,849,423 99,908,494,230 17,800,000,000 178,000,000,000 10,105,849,423 101,058,494,230 17,800,000,000 178,000,000,000 11,689,364,587 116,893,645,870 17,800,000,000 178,000,000,000 12,989,364,587 129,893,645,870 24,600,000,000 246,000,000,000 18,132,553,051 181,325,530,510 24,600,000,000 246,000,000,000 19,922,886,745 199,228,867,450 24,600,000,000 246,000,000,000 18,622,886,745 186,228,867,450 24,600,000,000 246,000,000,000 20,266,618,984 202,666,189,840 Month/ Year 02/1987 12/1988 11/1989 07/1990 12/1990 07/1991 12/1991 12/1992 08/1993 07/1994 06/1995 05/1996 07/1997 07/1998 07/1999 11/1999 06/2000 06/2000 08/2000 12/2000 07/2001 07/2002 06/2003 07/2003 22 Annual Report 2003 Sources of Capital Founding Cash Offering Cash Offering Capitalization of Profits Cash Offering Par Value Change from NT$1000 to NT$10 Cash Offering Cash Offering: NT$582,171,120 Capitalization of Profits: NT$189,531,880 Capitalization of Profits Capitalization of Profits Capitalization of Profits Capitalization of Profits Capitalization of Profits Capitalization of Profits Capitalization of Profits Conversion of ECB Capitalization of Profits: NT$21,320,311,040 and Capital Surplus: NT$1,879,366,020 Cash Offering (ADR) Merger with WSMC & TSMC-ACER Cash Offering (Preferred Stock) Capitalization of Profits Capitalization of Profits Redemption of Preferred Stock Capitalization of Profits Remark Capital Increase by Assets other than Cash Date of Approval & Approval Document No. As of 02/29/2004 Unit: Share/NT$ No No No No No - No No No No No No No No No No No No No No No No No 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 06/13/2003 Yuan Shang Tzu No. 0920014915 07/31/2003 Yuan Shang Tzu No. 0920019932 Annual Report 2003 23 4.2 Capital & Shares Type of Stock Authorized Capital Issued Shares Listed Non-Listed Total Unissued Shares Unit: Share Total Common Stock 20,266,618,984 - 20,266,618,984 4,333,381,016 24,600,000,000 4.3 Status of Shareholders Stock: Common Share As of 07/13/2003 (last record date) Government Agencies Financial Institutions Other Juridical Persons Foreign Institutions & Natural Persons Domestic Natural Persons Total Number of Shareholders 11 111 926 1,678 460,148 462,874 Shareholding 2,083,527,549 851,692,281 2,531,089,749 10,394,212,662 4,406,096,743 20,266,618,984 Holding Percentage (%) 10.28 4.20 12.49 51.29 21.74 100.00 Ownership 37,183,805 548,490,691 396,009,934 291,719,407 187,866,492 272,755,629 184,061,814 131,883,081 410,407,274 421,442,338 428,118,359 242,173,792 217,457,595 181,989,096 16,315,059,677 20,266,618,984 As of 07/13/2003 (last record date) Ownership (%) 0.18 2.71 1.95 1.44 0.93 1.35 0.91 0.65 2.03 2.08 2.11 1.19 1.07 0.90 80.50 100.00 4.4 Distribution Profile of Shareholder Ownership Stock: Common Share Shareholder Ownership (Unit: Share) Number of Shareholders 102,322 235,994 57,046 24,427 10,919 11,310 5,325 2,955 5,986 3,051 1,553 497 316 204 969 462,874 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 24 Annual Report 2003 4.5 Major Shareholders Stock: Common Share No. Shareholders As of 07/13/2003 (last record date) Total Shares Owned Ownership (%) 2,758,806,301 13.61 1 2 3 4 5 6 7 8 9 Koninklijke Philips Electronics N.V. ADR-Taiwan Semiconductor Manufacturing Company, Ltd. Development Fund, Executive Yuan Philips Electronics Industries (Taiwan), Ltd. The Growth Fund of America, Inc. JPMorgan Chase Bank, Taipei Branch Emerging Markets Growth Fund, Inc. Merrill Lynch International, Ltd. JPMorgan Chase Bank, Taipei Branch in Custody for Europacific Growth Fund 1,992,704,837 1,937,004,198 1,609,316,837 537,748,200 239,307,334 235,998,612 209,107,322 JPMorgan Chase Bank, Taipei Branch in Custody for The New Perspective Fund, Inc. 205,108,992 10 Morgan Stanley and Co. International Ltd. 167,839,972 4.6 Other Share Information Net Worth, Earnings, Dividends and Market Price Per Common Share 9.83 9.56 7.94 2.65 1.18 1.16 1.03 1.01 0.83 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 2002 97.5 34.9 67.4 15.19 13.93 Unit: NT$, except Weight Average Shares and Return on Investment 2003 01/01/2004 - 02/29/2004 72.5 40.1 56.4 16.24 (Note 1) 68.5 61.5 65.0 (Note 2) (Note 1) Weighted Average Shares (thousand shares) 18,580,700 20,231,739 20,237,308 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 shareholder's 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 1.14 1.05 2.33 (Note 1) (Note 2) (Note 1) - 0.60 (Note 1) (Note 1) 0.80 1.40 (Note 1) - - 59.12 - - - - 24.21 94.03 (Note 1) 0.01 (Note 1) (Note 1) (Note 1) - (Note 2) (Note 1) (Note 1) Annual Report 2003 25 4.7 Dividend Policy Except as otherwise specified in its Articles of Incorporation, TSMC bution generally had been made by way of stock dividend. However, the Board of Directors has recommended a distribution of cash divi- shall not pay dividends when there is no profit for a particular fiscal dends in addition to stock dividends from year 2003 profit. The pro- year. The ratio for cash dividend shall not exceed 50% of the total dis- posal will be discussed and brought to a vote at the Company's tribution. Profits may be distributed by way of cash dividend, stock Regular Shareholders' Meeting scheduled for May 11, 2004. dividend, or a combination of cash and stock. In the past, profit distri- 4.8 Distribution of Profit The Board adopted a proposal for 2003 profit distribution at its Meeting on Feb. 17, 2004. The proposed profit distribution will be effected upon the approval of shareholders at the Regular Shareholders' Meeting on May 11, 2004. Proposal to Distribute 2003 Profits Bonus to Directors & Supervisors Cash Dividends to Preferred A Shareholders Cash Dividends to Common Shareholders (NT$0.60 per share) Stock Dividends to Common Shareholders (NT$1.40 per share at par value) (Note 1) Employees' Profit Sharing (in cash) Employees' Profit Sharing (in stock) (Note 2) Employee Profit Sharing in Stock as % of the sum of Stock Dividends to Common Shareholders and Employee Profit Sharing in Stock Note 1: Equivalent to underlying number of shares: 2,837,326,658 Note 2: Equivalent to underlying number of shares: 272,651,363 NT$127,805,326 NT$184,493,151 NT$12,159,971,390 NT$28,373,266,580 NT$681,628,401 NT$2,726,513,630 8.77% According to the Company's Articles of Incorporations, when allocating net profits for each fiscal year, the Company, after setting aside regula- torily-required legal capital reserves, shall set aside 0.3% of the balance as bonus to directors and supervisors, and not less than 1% as bonus to employees of this Corporation. 2002 profit distribution set aside as Directors & Supervisors Compensation, and Employee Profit Sharing. Board Resolution (March 4, 2003) Amount (NT$) Amount (NT$) Actual Result Underlying Number of Shares Dilution Rate % (on Common Shares Outstanding as of December 31, 2003) Directors & Supervisors Compensation (Cash) Employee Profit Sharing (Common Share) 58,484,489 58,484,489 - 1,539,012,990 1,539,012,990 153,901,299 Total 1,597,497,479 1,597,497,479 - - 0.76% - The EPS of 2002 and 2003 might have varied if "Directors & Supervisors Compensation" and "Employee Profit Sharing" had been subject to dif- ferent accounting treatments. Accounting Treatments Treatment as Profit Distribution Treatment as Expenses (Employee Profit Sharing expensed at par value) 4.9 Impact to 2004 Business Performance, EPS and ROE Resulting from Stock Dividend Distribution: Not Applicable TSMC is not required by Taiwan law to provide 2004 financial forecast (see "Guidelines for Disclosure of Financial Forecast by Public Companies"). 26 Annual Report 2003 2002 EPS NT$1.14 NT$1.05 2003 EPS NT$2.33 NT$2.15 4.10 Buyback of Treasury Stock during the period January 1, 2003 to February 29, 2004: None 5. Issuance of Corporate Bonds 5.1 Corporate Bonds Issuance Issuing Date Denomination Offering Price Total Amount Coupon Rate Tenure Guarantor Trustee Underwriter Legal Counsel Auditor Repayment Outstanding Redemption or Early Repayment Clause Covenants Credit Rating As of 02/29/2004 Domestic Unsecured Bond (III) Domestic Unsecured Bond (IV) Domestic Unsecured Bond (V) 10/21/1999 NT$1,000,000 Par 12/04/2000 - 12/15/2000 01/10/2002 - 01/24/2002 NT$ 1,000,000 NT$10,000,000 Par NT$1,000,000 NT$5,000,000 Par NT$10,000,000,000 NT$15,000,000,000 NT$15,000,000,000 Tranche A: 5.67% p.a. Tranche B: 5.95% p.a. Tranche A: 5.25% p.a. Tranche B: 5.36% p.a. Tranche A: 3 years Maturity: 10/21/2002 Tranche B: 5 years Maturity: 10/21/2004 Tranche A: 5 years Maturity: 12/04/2005 - 12/15/2005 Tranche B: 7 years Maturity: 12/04/2007 - 12/14/2007 Tranche A: 2.60% p.a. Tranche B: 2.75% p.a. Tranche C: 3.00% p.a. Tranche A: 5 years Maturity: 01/10/2007 - 01/22/2007 Tranche B: 7 years Maturity: 01/10/2009 - 01/24/2009 Tranche C: 10 years Maturity: 01/10/2012 - 01/24/2012 None TC Bank None The International Commercial Bank of China None TC Bank Grand Cathay Securities Not Applicable Not Applicable Lee & Li Eluvzy International Law Office Yan-an International Law Office TN Soong & Co TN Soong & Co TN Soong & Co Bullet Bullet Bullet NT$5,000,000,000 NT$15,000,000,000 NT$15,000,000,000 None None None Customary Covenants Customary Covenants Customary Covenants TSMC's Domestic Unsecured Bond III received a rating of "twAA" from Taiwan Ratings Corporation on 09/20/1999 TSMC's Domestic Unsecured Bond IV received a rating of "twAA" from Taiwan Ratings Corporation on 11/08/2000 TSMC's Domestic Unsecured Bond V received a rating of "twAA" from Taiwan Ratings Corporation on 12/03/2001 Other Rights of Bondholders Conversion Right None None Not Applicable Not Applicable Amount of Converted or Exchanged Common Shares, ADRs or Other Securities as of 02/29/2004 Dilution Effect and Other Adverse Effects on Existing Shareholders Custodian None None 5.2 Convertible Bond: None 5.3 Exchangeable Bond: None 5.4 Bond with Warrants: None None None None Not Applicable None None 6. Preferred Shares 6.1 Preferred Share: None 6.2 Preferred Share with Warrant: None Annual Report 2003 27 7. Issuance of American Depositary Shares Issuing Date 10/08/1997 11/20/1998 01/12/1999 ~ 01/14/1999 07/15/1999 08/23/1999 ~ 09/09/1999 02/22/2000 ~ 03/08/2000 04/17/2000 Issuance & Listing NYSE NYSE NYSE NYSE NYSE NYSE NYSE Total Amount (US$) 594,720,000 184,554,440 35,500,000 296,499,641 158,897,089 379,134,599 224,640,000 Offering Price per ADS (US$) 24.78 15.26 17.75 24.516 28.964 57.79 56.16 Units Issued 24,000,000 12,094,000 2,000,000 12,094,000 5,486,000 6,560,000 4,000,000 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 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 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 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 24,000,000 46,222,650 48,222,650 71,407,859 76,893,859 83,453,859 87,453,859 All fees and expenses such as underwriting fees, legal fees, listing fees and other expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 Closing Price per ADS (US$) 2003 High Low US$12.9218.86 US$ 5.93.35 Average US$ 9.2112.25 01/01/2004 - 02/29/2004 High Low US$11.63 US$10.30 Average US$10.9028 Note: TSMC has in aggregate issued 410,517,000 ADSs since 1997, which, if taking into consideration of stock dividend distributed over the period, would amount to 586,375,207 ADSs. As of February 29, 2004, total number of outstanding ADSs was 585,865,498 after 509,709 ADSs were redeemed. Stock dividend distributed in 1998, 1999, 2000, 2001, 2002 and 2003 was 45%, 23%, 28%, 40%,10% and 8% respectively. 28 Annual Report 2003 06/07/2000 ~ 06/15/2000 NYSE 05/14/2001 ~ 06/11/2001 06/12/2001 11/27/2001 02/07/2002 ~ 02/08/2002 11/21/2002 ~ 12/19/2002 07/14/2003 ~ 07/21/2003 11/14/2003 NYSE NYSE NYSE NYSE NYSE NYSE NYSE 1,167,873,850 240,999,660 297,649,640 320,600,000 1,001,650,000 160,097,914 908,514,880 1,077,000,000 35.75 20.63 20.63 16.03 16.75 8.73 10.40 10.77 32,667,800 11,682,000 14,428,000 20,000,000 59,800,000 18,348,000 87,357,200 100,000,000 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 TSMC Common Shares from Selling Shareholders TSMC Common Shares from Selling Shareholders (Pursuant to ADR Conversion Sale Program) 163,339,000 58,410,000 72,140,000 100,000,000 299,000,000 91,740,000 436,786,000 500,000,000 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 Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable 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 144,608,739 156,290,739 170,718,739 259,006,235 318,806,235 369,019,413 485,898,166 585,898,166 All fees and expenses such as underwriting fees, legal fees, listing fees and other expenses related to issuance of ADSs were borne by TSMC and 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, 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 expens- es related to issuance of ADSs were borne by the selling sharehold- ers, while maintenance expenses such as annual listing fees and accountant fees were borne by TSMC 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 Annual Report 2003 29 8. Status of Employee Stock Option Plan (ESOP) 8.1 Issuance of Employee Stock Options ESOP Granted Approval Date by the Securities and Futures Commission Issue (Grant) Date Number of Options Granted Percentage of Shares Exercisable to Outstanding Common Shares First Grant 06/25/2002 08/22/2002 18,909,700 0.09330% Second Grant 06/25/2002 11/08/2002 1,085,000 0.00535% Third Grant 06/25/2002 03/07/2003 6,489,514 0.03202% Fourth Grant 06/25/2002 06/06/2003 23,090,550 0.11393% Fifth Grant 10/29/2003 12/03/2003 842,900 0.00416% As of 02/29/2004 Sixth Grant 10/29/2003 02/19/2004 15,720 0.00008% Option Duration 10 years 10 years 10 years 10 years 10 years 10 years Source of Option Shares New Common Share New Common Share New Common Share New Common Share New Common Share New Common Share Vesting Schedule Shares Exercised Value of Shares Exercised (NT$) Shares Unexercised Original Grant Price Per Share Percentage of Shares Unexercised to Outstanding Common Shares Impact to Shareholders' Equity 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 2nd Year: up to 50% 3rd Year: up to 75% 4th Year: up to 100% 0 0 18,909,700 NT$53.0 0.09330% 0 0 1,085,000 NT$51.0 0.00535% 0 0 6,489,514 NT$41.6 0.03202% 0 0 23,090,550 NT$58.5 0.11393% 0 0 842,900 NT$66.5 0.00416% 0 0 15,720 NT$63.5 0.00008% Dilution to Shareholders' Equity is limited Dilution to Shareholders' Equity is limited Dilution to Shareholders' Equity is limited Dilution to Shareholders' Equity is limited Dilution to Shareholders' Equity is limited Dilution to Shareholders' Equity is limited 8.2 ESOP Granted to Management Team and to Top 10 Employees with an Individual Grant Value over NT$30,000,000 Title Name Number of Options Granted % of Shares Exercisable to Outstanding Common Shares Shares Exercised Exercised Exercise Price Per Share Value of Shares Exercised (NT$) Shares Unexercised % of Shares Exercised to Outstanding Common Shares Unexercised Original Grant Price Per Share Value of Shares Unexercised (NT$) Chairman & Chief Executive Officer Morris Chang (Note) 615,000 0.00303% President & Chief Operating Officer Rick Tsai (Note) Senior Vice President Vice President Vice President Kenneth Kin (Note) C. C. Wei (Note) Mark Liu (Note) 615,000 0.00303% 298,476 0.00147% 206,019 0.00102% 615,000 0.00303% Vice President & General Counsel Richard Thurston (Note) 65,262 0.00032% Other Employees - 3,421,829 0.01688% - - - - - - - - - - - - - - - - - - - - - - - - - - - - 615,000 41.6 615,000 41.6 298,476 41.6 206,019 41.6 615,000 41.6 65,262 41.6 3,421,829 58.5 - - - - - - - As of 02/29/2004 % of Shares Unexercised to Outstanding Common Shares 0.00303% 0.00303% 0.00147% 0.00102% 0.00303% 0.00032% 0.01688% Note: TSMC granted options to certain of its officers (as listed above) as a result of their voluntary selection to exchange part of their profit sharing for stock options. 9. Status of Mergers and Acquisitions: None 30 Annual Report 2003 10. Corporate Governance Maintaining the highest standards of corporate governance has been an integral part of TSMC's core values since its founding. TSMC advocates and upholds operational transparency and respect for shareholder rights. TSMC believes that a sound and effective Board of Directors is the hub of successful corporate governance. TSMC established an Audit Committee in 2002 and a Compensation Committee in 2003. During 2003, TSMC was rec- ognized by FinanceAsia, Asiamoney and The Asset Magazine as having the best corporate governance of any Taiwan Corporation, and recognized by Asiamoney as having the best corporate gover- nance of any semiconductor company in Asia. 10.1 Audit Committee The Audit Committee assists the Board in fulfilling its financial oversight responsibilities, which include reviewing the Company's financial reports, the Company's auditing and accounting policies and procedures, and the Company's systems of internal control. TSMC's Audit Committee is empowered by its Charter to conduct any study or investigation it deems appropriate to discharge its responsibilities. It has direct access to TSMC's internal auditors, the Company's outside independent auditors, and any employees of the Company. The Committee is authorized to retain and oversee special legal, accounting or other consultants it deems appropriate to fulfill its charter purposes. As of March 2004, there were four members on the Audit Committee: three independent directors and a supervisor of TSMC. The Committee meets at least four times a year. The Audit Committee convened four regular meetings and two special meet- ings in 2003. 10.2 Compensation Committee The Compensation Committee assists the Board in discharging its responsibilities related to compensation and benefit policies, plans and programs of TSMC, and evaluation and compensation of TSMC's executives, directors and supervisors. As of March 2004, five members comprised the Compensation Committee: three of whom are independent directors serving as voting members of the Committee, and two other non-voting direc- tors. The Compensation Committee convened two regular meetings in 2003. Annual Report 2003 31 10.3 Taiwan Corporate Governance Implementation as Required by SFC Item 1. Shareholding Structure & Shareholders' Rights (1) The way of handling shareholder suggestions or disputes (2) The Company's possession of major shareholder's list and the list of ultimate owners of these major shareholders (3) Risk Management Mechanism and Fire Wall between the Company and its affiliates 2. Composition and Responsibilities of the Board of Directors (1) Independent Directors (2) Regular evaluation of external auditors' independency 3. Composition and Responsibilities of Supervisors (1) Independent Supervisor(s) (2) Communication channel with employees or shareholders 4. Communication channel with stakeholders 5. Information Disclosure (1) Establishment of corporate website to disclose information regarding the Company's financials, business and corporate governance status (2) Other information disclosure channels (e.g. English website, appointing responsible people to handle information collection and disclosure, appointing spokesperson, webcasting investor conference) 6. Operations of the Company's audit committee and other committees of the Board of Directors 7. If the Company has established corporate governance policies based on TSE Corporate Governance Best Practice Principles, please describe discrepancy between the policies and their implementation. 8. Other important information to facilitate better understanding of the Company's corporate governance practices (e.g. directors' and supervisors' training records, directors' and supervi- sors' attendance of the board of director's meetings, the implementation of risk management policies and risk evaluation measures, the implementation of consumers/customers protec- tion policies, the implementation of directors recusing themselves in case of conflicts of interests situations, purchasing insurance for directors and supervisors, and social responsibili- ties.) 32 Annual Report 2003 Implementation Status Reason for Non-Implementation TSMC has designated relevant departments, such as Investor Relations, Public Relations, Legal, etc., to handle shareholder's suggestions or disputes. TSMC tracks the shareholdings of directors, supervisors, officers, and shareholders holding more than 10% of the outstanding shares of TSMC. TSMC has established relevant guidelines in its "Internal Control System" policy and procedures. Sir Peter Leahy Bonfield, Prof. Lester Carl Thurow, and Mr. Stan Shih are independent directors of TSMC. The Audit Committee regularly evaluates the independency of external auditors. Prof. Michael E. Porter is an independent supervisor of TSMC. The employees and managers of relevant departments regularly report and present Company infor- mation to the Independent Supervisors; all Supervisors have access to Company employees or man- agers for information they need. TSMC designates relevant departments to communicate with stakeholders on a case by case basis. TSMC discloses information through its website www.tsmc.com. TSMC has designated relevant departments (e.g. Investor Relations, Public Relations, etc.) 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 is the first Taiwan company that webcasts live investor conferences. TSMC's Board of Directors has established an Audit Committee and a Compensation Committee. Please refer to "Corporate Governance" section on page 31 of this Annual Report for the details. For the status of TSMC's corporate governance, please refer to "Corporate Governance" section on page 31 of this Annual Report. 1. From time to time, TSMC provides to directors and supervisors information concerning regulatory requirements and developments as related to director's and supervisors' activities. TSMC management also regularly present Company's business and other information to directors and supervisors. 2. The Board convened four regular meetings and one special meeting in 2003. Meeting attendance was as follows: Name of Directors/Supervisors Directors: Morris Chang Peter L. Bonfield Lester C. Thurow Stan Shih Jan Lobbezoo Jaap van Oost Scott McGregor (appointed in September 1, 2003 to replace Jaap van Oost) Chintay Shih F. C. Tseng Rick Tsai (elected in June 3, 2003) Supervisors: Michael E. Porter Robbert Brakel Susan Chang (appointed in April 1, 2003 to replace George C. Shiu) Number of Meetings of Board of Directors Attended in 2003 5 5 5 4 5 2 3 5 5 4 1 5 1 3. TSMC conducts risk management and risk evaluation pursuant to the internal policies established in accordance with relevant laws and regulations. 4. TSMC's directors recuse themselves from voting on matters in which their interests conflict with TSMC's. 5. TSMC maintains D&O Insurance for its directors, supervisors, and officers. 6. TSMC established the "TSMC Education and Culture Foundation" in 1998 to perform its social responsibilities. Annual Report 2003 33 11. Social Responsibility Information 11.1 TSMC Education and Culture Foundation TSMC established the ''TSMC Education and Culture Foundation" (TSMC Foundation) in 1998, and in 2002 appointed Dr. F. C. Tseng, Deputy CEO of TSMC, as Chairman of the Foundation. The compa- ny is dedicated to becoming the leading Taiwan corporate citizen in its commitment to society. TSMC Foundation participates in the country's vibrant social and cultural growth by sponsoring and developing cultural and educational activities. Last year, in addition to existing projects, the Foundation started several new initiatives. Promotion of Science Education--from corporate sponsorship to employee participation To increase public interest in science, TSMC Foundation has spon- sored a permanent exhibition, "The World of the Integrated Circuits," in the National Museum of Natural Science since 1997. In 2003, the Foundation completely renovated and strengthened the exhibition, with the content fully updated to reflect the most advanced, state-of-the-art technology in the semiconductor indus- try. Through more interactive presentations, the exhibition explains the basic ideas and development of semiconductor IC technology. Visitors will experience the ways in which semiconductor products have changed daily life. To expand TSMC's commitment beyond financial assistance and content design, along with the opening of the new exhibition, the Company initiated a volunteer program for TSMC employees to participate directly in our sponsorship. Employees and their family members serve as guides to the exhibi- tion during the weekend. More than 200 employees have joined the volunteer program this year. Sponsorship of Esthetics Education and National Arts Activities TSMC Foundation continued to support the Esthetics Education Program launched in 2002, designed to promote esthetic experi- ences for elementary school students in the rural areas. By expos- ing students to fine arts at a young age, TSMC hopes to expand their creativity and cultivate their interest in art. The Foundation also sponsored major national art and cultural events, which include: Taiwan and Scandinavian Film Festivals, The Joy of Calligraphy, and the Taipei Museum of Contemporary Art. Commitment to Education To encourage talented students in pursuing interests in high tech- nology, management, and intellectual property rights, TSMC Foundation is committed to support related academic programs in leading universities. The Foundation provided TSMC Scholarships and sponsored the TSMC Hall for College of Technology Management in National Tsing-hua University, as well as TSMC Lectures in Technology Law in National Chiao-tung University. 34 Annual Report 2003 In 2003, the Foundation extended its collaboration with the IMBA program of National Cheng-chi University to foster the cultivation of international business leaders. Contribution to Site Communities TSMC devotes significant resources to community development. The Foundation focuses on art and cultural activities, environmen- tal protection initiatives, athletic events, as well as other programs to improve the quality of community life. In 2003, the Foundation launched TSMC Hsinchu Art Festival, and sponsored the National Cheng Kung University Culture and Art Festival in Tainan. Recognitions & Awards TSMC Foundation received, for the sixth consecutive year, the Annual Gold Medal of the Wen-Hsin Award by the Council for Culture Affairs. Taiwan's CommonWealth Magazine ranked TSMC No. 1 in Corporate Citizens for the fourth consecutive year. 11.2 Other Social Issues Health and Safety Performance TSMC offers comprehensive health care and employee assistance programs throughout all of its operating sites. Employees have access to the services of on-site physician consultation, dental clin- ic, 24-hour nursing service, annual physical check-ups, and a series of on-site fitness services and programs. All employees have access to the Company’s web-based wellness information and health pro- grams. During the outbreak of SARS, TSMC formed a SARS prevention committee, which implemented comprehensive preventive meas- ures. As a result, operations and productivity were not impaired. Social and Environmental Impacts of TSMC's Suppliers In 2003, TSMC conducted “Life Cycle Assessment (LCA)” for 150 mm and 200 mm wafer process to evaluate their environmental impact on the manufacturing process and supply chain. TSMC is committed to achieving the highest standard of health and safety. In 2003, there were no severe work-related injuries, and the incidence of mild injuries significantly dropped compared with the previous year. Policies and Procedures Relating to Adherence to Health and Safety TSMC believes its health and safety actions should not only meet relevant environmental, safety and health, and legal requirements, but also be benchmarked against recognized international prac- tices. The Company’s goals are to prevent incidents, improve employee safety and health, protect property, prevent pollution, and use all resources effectively. In 2003, TSMC continued its efforts on Environmental Accounting, Life Cycle Assessment, Green Procurement, Job Safety Observation, Employee Health Promotion and Contractor Responsible Care. TSMC actively incorporates the concept of risk management in new building design and process development. In order to mini- mize potential operational losses, the Company regularly evaluates and enhances seismic protection while installing measures aimed to reduce the interruption of electricity supply. Equal Opportunity TSMC believes in equal opportunity, and values the diversity that its staff contributes. Recruitment is carried out via open selection based on candidate merit, and matching the needs of each posi- tion to ensure selection of the best talents irrespective of race, gender, age, religion, nationality and political affiliation. Supplier Selection Process and Criteria Regarding Social and Environmental Issues TSMC conducted “Green Procurement” evaluation of seventeen major suppliers who provide raw materials and package materials. Fifteen suppliers met the requirements, including ISO 14001 certi- fication and material declaration of prohibited and restricted sub- stances. TSMC has also received “Green Partner Program” certifica- tion from SONY Company, recognizing TSMC’s outstanding envi- ronmental performances. Social and Environmental Impacts of TSMC's Outsourced Operations and Contractors TSMC promoted a ''Responsible Care Program'' to assist contractors to enhance the Company’s Environmental, Safety and Health (ESH) management system. An annual meeting was held to gather inputs from suppliers and deliver TSMC ESH performance expecta- tions to them. Based on the content of Voluntary Protection Program (VPP), TSMC has developed “ESH Auditing Manual” used for major contractors’ auditing. Annual Report 2003 35 OPERATIONAL HIGHLIGHTS 1. Business Activities 1.1 TSMC Business Scope TSMC excels in all aspects of its business. This excellence includes process technologies, wafer manufacturing and logistics, capacity utilization, customer services, as well as a wide range of support services including design services, mask manufacturing, wafer probing, and in-house bumping and testing. The essence of our foundry business is customer success. TSMC continually strives to provide the overall best value to its customers. 1.3 Net Sales over the Last Two Years 1.2 Customer Applications Over the past 17 years, nearly five hundred customers worldwide have relied on TSMC to manufacture chips used across the entire spectrum of electronic applications. A non-exhaustive list of appli- cations includes computers and peripherals, information appli- ances, wired and wireless communications systems, automotive and industrial equipment, as well as consumer electronics such as DVD, digital TVs, game consoles, and digital still cameras (DSC). The innovative evolution of end products drives our customers to utilize TSMC's technologies and services, while concurrently pro- pelling TSMC to further its technology development. Sales Quantity & Amount Year Major Product Wafer Package Other Total Sales Quantity & Amount Year Major Product Wafer Package Other Total Local Quantity 734,922 175 14,771 749,868 2003 Amount 24,704,913 18,960 2,211,759 26,935,632 2002 Unit: Quantity (8-inch equivalent wafer) / Amount (NT$ thousand) Export Quantity 2,895,843 66,238 37,963 Amount 156,792,897 5,094,196 13,081,616 3,000,044 174,968,709 Local Export Quantity 486,036 85 13,268 499,389 Amount 17,552,160 13,407 1,603,118 19,168,685 Quantity 2,137,078 51,903 36,415 Amount 125,580,978 3,521,966 12,689,700 2,225,396 141,792,644 1.4 Production over the Last Two Years Annual Report 2003 37 1.4 Production over the Last Two Years Unit: Capacity / Quantity (8-inch equivalent wafer) / Amount (NT$ thousand) Year 2003 2002 Wafers Capacity 4,013,855 3,890,893 Quantity 3,588,871 2,833,818 Amount 108,043,471 90,745,812 2. Customers TSMC's global customers have diverse product specialties, and enjoy prominent standing in various business segments of the semiconductor industry. Fabless segment customers include Altera Corporation, ATI Technologies, Broadcom Corporation, nVidia Corporation, Qualcomm Inc. and VIA Technologies 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 2003. No other cus- tomer had business with TSMC that amounted to 10% or more of Company revenue in 2003. 2.1 Customer Service TSMC is a service-oriented company and believes customer service is the critical factor in enhancing customer loyalty. Also, customer loyalty leads to higher levels of customer retention and expansion of relationships. TSMC's goal is to maintain its position as the most advanced and largest technology and foundry service provider. TSMC believes that achieving this goal will help retain existing cus- tomers, attract new customers, and strengthen their partnership relationship with TSMC. 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 collabo- ration, and logistic collaboration. They are collectively branded as e-foundry sm. 2.2 Customer Satisfaction TSMC conducts regular reviews and surveys to ensure that cus- tomers' needs are adequately addressed. Improvement plans and customer feedback are integral parts of this business process. 2.3 Market Expansion/Penetration TSMC continues to diversify its customer base while supporting growth of existing customers. Among all active customers in 2003, more than 40 were new. TSMC's customers also gained market share in a number of end applications in computers, wired com- munications, wireless communications, and consumer electronics. 38 Annual Report 2003 3. Raw Material Supply Major Materials Major Suppliers Market Status Procurement Strategy Wafer MEMC S.E.H. SUMCO Siltronic (formerly named Wacker) Each supplier has multiple manufac- turing sites, including USA, Asia and Europe, to meet customer and mar- ket demands. There are four suppliers combined provide over 80% of the world's wafer capacity. TSMC's suppliers of silicon wafer are required to pass stringent quality certification proce- dures. TSMC procure wafers from multiple sources to ensure adequate supplies for volume man- ufacturing and to reinforce risk management. TSMC maintains competitive price and service agreements with its wafer suppliers and when necessary includes strategic and collab- orative agreements with key suppliers. TSMC reviews quality, delivery, cost and serv- ice performance of its wafer suppliers and reflects the reviews in TSMC's orders accord- ingly. An annual audit of each wafer supplier's physical quality system ensures TSMC maxi- mum quality maintenance. Both suppliers have localized many of their operations closer to TSMC's major manufac- turing centers, improving inventory and quali- ty control significantly. TSMC audits the suppliers' physical quality to maintain specifications and ensure quality control. TSMC provides a three-month forecast of rolling demand to its photoresist suppliers to give them adequate preparation time. TSMC monitors suppliers' inventory status through their respective monthly inventory reports. TSMC's IQC personnel conduct monthly physi- cal inventory checks at suppliers' warehouses to confirm material quality and availability. TSMC conducts annual audits of each suppli- er's physical quality system to ensure quality, supply, and availability of photoresist. Chemicals Merck-Kanto (TPS) Tai-Young High Tech (TYS) Photoresist AZ/Clariant S.E.H. Sumitomo T.O.K. These two companies are major bulk chemical suppliers worldwide. The chemical raw materials of these two suppliers are imported from Japan or Taiwan local producers, pri- marily to support the Taiwan market. These four companies are worldwide major photoresist suppliers. These four suppliers are competitors in the Taiwan market. They all store stock in Taiwan and provide just in time service. Specialty Gases Air Products Air Liquide BOC TAIYO TOYO SANSO These four companies are worldwide major specialty gas suppliers. These four suppliers are competitors; their products are mutually replace- able. Other domestic suppliers are available and ready to penetrate the Taiwan market, thus facilitating TSMC to secure better commercial terms in the future. TSMC's four major specialty gas suppliers are located in Japan, USA and the UK, providing sufficient geographic dispersion to minimize supply risk. Products of four suppliers are mutually replaceable, ensuring competitive pricing and quality service. TSMC requires each supplier to provide monthly inventory reports as a measure to monitor and ensures steady provisions. TSMC conducts annual audits of each suppli- er's physical quality system to ensure quality and supply availability of special gases. Annual Report 2003 39 4. Employees made up 2.1% of TSMC's employees at the managerial and profes- sional levels. By the end of February 2004, there were 1,675 man- Attracting and retaining the right talent is one of the key objectives agers and 5,922 professionals. of TSMC's human resource strategy. TSMC's total workforce, by the end of 2003, reached 16,066 in number, representing an increase TSMC's staff are well educated: 2.5% of employees hold PhD's, of 7.6% from the end of 2002. New staff in 2003 consisted of 111 26.3% Masters, 16.3% university bachelors, 24.5% college managers, 1,719 professionals and 2,005 technicians. By the end degrees, and 30.4% are high school graduates. of February 2004, TSMC's total workforce reached 16,529. The following table shows the TSMC personnel structure from In 2003, there were 1,627 managers and 5,697 professionals. Of 2001 until February 29, 2004. the 1,627 managers, 11.6% was female. Non-Taiwan nationals TSMC Personnel Structure by Job Title Manager Professional Assistant Engineer/Clerical Technician Total 2001 1,286 4,600 982 6,801 2002 1,465 5,077 914 7,482 13,669 14,938 2003 As of 02/29/2004 1,627 5,697 816 7,926 16,066 1,675 5,922 822 8,110 16,529 TSMC Personnel Structure by Gender, Age and Service Year Male Female Gender Average Age Average Service Year 2001 42.1% 57.9% 29.8 4.1 2002 42.2% 57.8% 30.0 4.2 2003 As of 02/29/2004 43.2% 56.8% 30.3 4.6 43.9% 56.1% 30.4 4.5 4.1 Human Capital TSMC strives to create an environment that provides favorable 4.3 Employee Satisfaction TSMC conducts an annual Employee Satisfaction Survey to deter- workplace facilities, offers personal challenges, and supports mine levels of employee involvement and engagement. As an indi- career development. TSMC also endorses professional know-how, cator of employee satisfaction, TSMC has been recognized as positive attitude, affirmative values, honest behavior and genuine "2003 Best Employer in Asia" and "Best Employer in Taiwan" in a commitment to succeed as part of its human capital base. There survey conducted by Hewitt Associates, Asia Wall Street Journal, were no labor disputes that caused the company financial losses and Far Eastern Economic Review. from January 1, 2003 until February 29, 2004. To foster a dynamic and fulfilling work environment, TSMC has 4.2 People Development Continuous learning is the cornerstone of TSMC's employee devel- launched a series of company wide employee relations programs, such as Zest-for-Life@TSMC, in 2003. These programs include opment strategy. TSMC provides its employees with a range of annual sports day, family day, engineer festival, Employee technical, professional and management training programs, and Assistance Programs (EAPs), and many others. promotes ''On-the-Job-Training'' (OJT) initiatives for new employ- ees. Since its launch in 2002, the Individual Development Plan (IDP) program has become an effective tool to enhance organiza- 4.4 Compensation The Company's compensation program consists of cash compen- tional learning in the aspects of employees' personal development sation and profit sharing. Cash compensation includes monthly as well as business needs. salary and a quarterly variable cash incentive bonus. The profit 40 Annual Report 2003 sharing program appropriates a certain portion of the Company's earnings available to common stockholders for distribution to 5.2 R&D Accomplishments in 2003 Reflecting its commitment to innovation, TSMC was awarded 418 employees to reward their contributions and to encourage them US patents and 260 ROC patents in 2003. With many key patent for continuous efforts while linking employees' interests with that disclosures and patents awarded over the past years, TSMC now of shareholders. The amount and format of distribution depend on has a rich and strong patent portfolio, as well as other significant recommendation by the Compensation Committee to the Board of intellectual property assets. Our intellectual capital is a key to Directors, and are subject to resolution by annual shareholders' maintaining our technology leadership and independence, in addi- meeting. Individual rewards are based on each employee's job tion to being able to enjoy certain cross license and royalty bene- responsibility, contribution and performance. fits. To align with respective local market practices, the Company grant- In 2003, TSMC's R&D has qualified an industry-leading manufac- ed stock options to overseas employees based on "Employee Stock turable 90 nm CMOS logic process with advanced Cu/low-k inter- Option Program." The options are granted for a period of ten years connects at the 300 mm Fab 12. TSMC also demonstrated the fea- with a vesting schedule of 50% upon completion of a two-year sibility of a 65 nm CMOS logic platform featuring gate length in period, 75% after three years, and 100% after four years. the range of 35-45 nm and extreme low-k dielectric. A 6T-SRAM 5. Innovation design with industry-leading cell size has been functionally proven with the 65 nm baseline process. 5.1 R&D Organization and Investment TSMC has one of the highest-quality semiconductor Research and TSMC continued to engage in and expand exploratory research activities such as strained-Si processes, FinFET devices, SOI technol- Development teams in the world. TSMC increased R&D staff by ogy, MRAM and semi-insulating substrate for RFIC. These activities over 7.5% in 2003 to further strengthen long-term R&D and tech- cover long-term, potentially high-payoff, and over-the-horizon nology leadership. R&D expenditure in 2003 increased to NT$12.7 technologies. Publications in 2003 noted several novel innovations billion, a 11% increase over 2002. among those exploratory activities, such as sub-25 nm FinFET devices, a new Tri-gate ''Omega FET'', and innovative strained Si TSMC continued to expand the capacity of its 300 mm R&D pilot techniques on bulk and SOI. line in 2003 to accommodate its growing R&D development activi- ties, such as 90 nm, 65 nm, and 45 nm platform technologies, related derivative technologies, and other exploratory research pro- 5.3 Spectrum of New Technologies Anticipating and leading the IC industry recovery in 2003, TSMC grams. We also added additional modeling simulation capabilities developed a rich mix of new process technologies. In addition to for R&D, such as an advanced optical proximity correction (OPC) the qualification of 90 nm logic SoC platform technology in 300 simulation center, and a molecular quantum material simulation mm and the demonstration of competitive SRAM bit cell in 65 nm, lab. TSMC maintains strong relationships with key process tool and other new process technology options introduced were: material vendors in exploring new materials and processes. R&D Expense Amount: NT$ thousand ● Mixed-Signal/RF Technology TSMC completed technology qualification of 0.13 um MS/RF and offered customers this technology for mass production with excellent product performance. TSMC also completed the charac- terization of 90 nm mixed signal technology for baseband analog devices. ● Silicon Germanium BiCMOS Technology TSMC developed a foundry-based 0.18 um versatile SiGe BiCMOS technology. This integrated technology offers the opportunity for microwave power amplifier applications as well as single chip solution for high performance, low power, low noise, wired and wireless applications. TSMC also successfully developed a stacked Metal Insulator Metal (MIM) capacitor technology with twice the unit capacitance while keeping the same RF and analog perform- 2002 2003 01/01/2004~02/29/2004 ance as a single MIM capacitor. Annual Report 2003 41 ● 0.18 um CMOS Image Sensor Process ● Design Services TSMC's 0.18 um high performance CMOS image sensor TSMC announced the Reference Flow 4.0 in Design Automation process entered volume production with strong growth in Conference in 2003. TSMC's Reference Flow addressed various demand. It features high performance and full compatibility issues for chip designs based on advanced process technology. It with TSMC's 0.18 um CMOS logic and embedded memory also set a new industry trend for the foundry to provide solutions processes. It provides a SoC platform for consumer and indus- for advanced design methodology. TSMC offered the industry's trial applications such as DSC, mobile phone, security and first multiple-Vt library along with the design flow. Multiple-Vt other image sensor markets. ● Embedded High Density Memory Technology library significantly lowers the standby current while maintaining the high performance advantage over the single Vt methodology. TSMC successfully manufactured 0.13 um 1TRAM products. A version with a shrunk cell size called 1TQ has been demonstrat- 5.4 R&D Plans for 2004 Moving forward, TSMC's R&D focus will be on Nexsys sm 65 nm, 45 ed and technology qualification is underway. The 0.13 um nm-logic/mixed signal technology platforms, and related embed- embedded memory using MIM capacitor with high-k dielectric ded memory for SoC applications in 300 mm wafers. Intense was proven with high yield and the pre-qualification results efforts will be devoted to demonstrate superior transistor perform- have passed reliability criteria. ● Flash/Embedded Flash Technology ance featuring strong strained Si and manufacturability of 6T SRAM with sub-0.5 um2 cell size for the 65 nm node. The pioneer- ing work on 45 nm should also bear new fruit in 2004, particularly TSMC's 0.18 um embedded Flash technology has been verified in the areas of high-k gate dielectric, metal gate, and extreme-low- with good yield and excellent data retention performance from k interconnect. customer's product. Also, a self-aligned Flash was launched with 32Mb density and achieved risk production. This offers a Other development projects include 90 nm mixed signal/RF for competitive solution for the next generation embedded Flash communication applications and embedded 1T MIM memory for applications. Meanwhile, TSMC's 0.13 um embedded Flash high-density applications, 0.13 um embedded Flash IP develop- technology creates the synergy of devices between 0.18 um ment and 1TQ SRAM release for production, 0.15 um CMOS and 0.13 um technologies. TSMC has demonstrated fully func- image sensor technology aiming at new pixel structure develop- tional 8Mb Flash IP in 0.13 um. ment for high-end imaging applications, 0.25 um high-voltage process modules, as well as low power, low cost, customized SiGe ● Mask Technology RF BiCMOS technologies. Mask technology is an integral part of advanced lithography. TSMC mask facilities featured state-of-the-art E-beam mask TSMC's R&D team will explore process capabilities beyond the 45 writers and inspection tools for both R&D and production use. nm technology node, for geometries as small as 30 nm or below. This in-house mask technology R&D and production is strength Exploratory work continues on new transistors and process tech- of TSMC which also benefits our customers tremendously in nologies such as SOI, 3D structures, MRAM, strained-layer CMOS terms of technical excellence, quality, fast cycle time, and one- and semi-insulating substrate for RFIC. The goal is to extend stop service. In 2003, TSMC has successfully established high Moore's law by innovative work internally as well as to push the quality and cost-effective 90 nm generation mask making tech- envelope with industry leaders and academia in finding cost-effec- nology and mass production capability, as well as the mask tive solutions. technology for 65 nm generation. ● Lithography Process Technology TSMC plans to continue working closely with international consor- tia and photolithography equipment suppliers to ensure timely TSMC has successfully demonstrated the capability and feasibil- development of 193 high NA scanner, liquid immersion lithogra- ity of liquid immersion lithography technology with the collab- phy, EUV scanner and E-Beam Projection technology to support oration of tool vendors. This technology can extend the resolu- process development of 45 nm technology and beyond. TSMC will tion capability of 193 nm light source down to the 30 nm also continue to collaborate with mask inspection equipment sup- technology node without having to rely on high risk and pliers to develop aerial image inspection techniques in order to expensive 157 nm alternatives. maintain the leadership position in mask quality and cycle time to meet aggressive R&D, prototyping and production requirements. 42 Annual Report 2003 TSMC continues to invest heavily to expand R&D capabilities. TSMC plans to maintain its long-term lead over competitors in the foundry industry through a strong exploratory technology research program. With a highly competent and dedicated R&D team and its commitment to innovation, TSMC is confident in its ability to deliver the best and most cost-effective SoC technologies for its customers. 6. Efficiency 6.1 Yield Management Reducing the time to achieve yield maturity for new products is a very important goal to TSMC. TSMC has developed a comprehen- sive technology transfer methodology from R&D to production environment to shorten the new technology learning curve. TSMC has a proven record in delivering industry's best-yield performance to our customers. 6.2 Delivery Management TSMC has a proven record of providing customers with a consis- tent product delivered on time. To further strengthen our commit- ment to be more responsive to change, TSMC has re-engineered its demand fulfillment system as well as developed a state-of-the- art material planning system. 6.3 Cycle Time Management Delivering products with short demand fulfillment cycle time is key to our customers. To create this value to our customers, TSMC has developed a sophisticated manufacturing scheduling system as well as embarked on Lean manufacturing approach. 6.4 Inventory Management TSMC implemented a series of collaborative projects in 2003 to integrate information among Materials Management, Accounting, and Fab users through easy-to-access and powerful IT platform. The focuses are suppliers' related information integration and pro- ductivity enhancement of materials logistic, which contribute to a significant reduction in inventory levels and the risk of material shortage. The results have successfully enhanced the efficiency and effectiveness of the entire supply chain. 6.5 Knowledge Management TSMC has built the industry's leading, state-of-the-art knowledge management system. In addition to building a vast repository sys- tem for the capture of key knowledge, TSMC has developed a sophisticated expert system that embeds this knowledge into its engineering system. TSMC is the only Taiwan company that has been awarded the Most Admired Knowledge Enterprises (MAKE) award, the most prestigious award in the knowledge management community, in 2002 and 2003. 7. Quality TSMC commits itself to providing its customers with the best quali- ty wafers for their products. TSMC Quality and Reliability (Q&R) ensures best quality wafer manufacturing from technology devel- opment to production through qualification, failure analysis and reliability assurance. Wafer manufacturing quality starts from raw material supply management, real time in-process monitoring, to customer field quality performance. Wafer sort and assembly quali- ty are achieved through the same quality criteria, in-house as well as through subcontractor services. TSMC Q&R is also responsible to lead the company towards the ultimate goal of zero defect through continuous improvement programs in terms of cost con- sciousness, efficient systems and effective methodologies. Quality of raw materials, equipment, metrology calibration and methodol- ogy are areas of vital challenges that TSMC Q&R establishes the quality criteria to support timely and successful wafer production. On-line data availability, quality and reliability technical services accelerate customers' time to market requirements from the early design stage. Customer feedback indicates that products shipped from TSMC have either met or exceeded their field quality requirements in the marketplace. Also, in 2003, TSMC received certification, for the second consecutive year, of ISO/TS 16949 that meets the Automotive industry's quality requirement. 8. Environmental Protection 8.1 PFCs Emission and Air Quality Control TSMC has endorsed a Memorandum of Understanding (MOU) between Taiwan Semiconductor Industrial Association and ROC- Environmental Protection Administration (EPA) where TSMC is committed to reducing perfluorinated compounds (PFCs) emission to 10% below the average of 1997 and 1999 by 2010. Based on the MOU, TSMC has set up a PFCs reduction policy and implemen- tation roadmap. Moreover, the emission of volatile organic com- pounds, acid gases, and alkali gases are also well controlled in compliance with regulation. 8.2 Water Consumption and Conservation By improving water recovery rate and reducing water usage by Chemical Mechanical Polishing (CMP) process tool by adopting International Sematech's recommendations, TSMC was able to notably reduce the water quantity consumed in CMP process. Annual Report 2003 43 8.3 Energy Consumption and Conservation In 2003, TSMC's Fab12 received the "Energy Conservation Award" from the Ministry of Economic Affairs (MOEA), Taiwan. Major Summary: TSMC has the right to purchase the entire installed capacity of WaferTech during the production period. energy conservation accomplishments of Fab 12 include the fol- ● Shareholders' Agreement lowing: ● Installed heat recovery chiller for 35 oC warm water and saved about 36,000 Mega Watt - Hour (MWH) annually. Term of Agreement: Effective as of 03/30/1999 and may be ter- minated as provided in the agreement Contracting Parties: Philips Electronics N.V. (now renamed ● Adopted Variable Frequency Device (VFD) in Air Condition, Koninklijke Philips Electronics N.V.) (Philips) and EDB Investments Exhaust and Process Water systems and saved about 19,000 Pte Ltd. (EDBI) MWH annually. 8.4 Waste Disposal and Land Contamination Industrial waste that cannot be reused or recycled are either incin- Summary: 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 percent- erated or sent to designated landfills. Waste solvents and sludge age of SSMC's capacity. (CaF2) in TSMC were reused by cement plants as complementary fuel and raw material. Waste sulfuric acid was recycled for down- ● Technology Cooperation Agreement graded industrial use. A waste hydrogen fluoride recycling pro- Term of Agreement: 03/30/1999 - 03/29/2009 gram also began in 2003. Furthermore, based on the monitoring Contracting Party: Systems on Silicon Manufacturing Company results of soil and groundwater, all the lands of TSMC's Fabs are Pte Ltd. (SSMC) free from contamination, according to the standards set by the Summary: TSMC shall transfer certain of its process technologies Soil and Groundwater Pollution Remediation Act of EPA. to SSMC, and SSMC shall pay TSMC remuneration at a certain percentage of the net selling prices of its products. 8.5 Environmental Performance Starting in 2001, TSMC has been listed in the Dow Jones Sustainability Indexes (DJSI) components each year for its excellent achievements in corporate sustainability. ● Patent License Agreement Term of Agreement: 10/26/2001 - 12/31/2006 Contracting Party: A multinational company Summary: The parties have entered into cross license arrange- TSMC has also put significant effort on ESH improvement pro- ments for certain semiconductor patents. grams. Four national awards were received in 2003, including: (1) "Annual Environmental Protection Award for Enterprises" from the EPA, (2) "Outstanding Management of Waste Disposal, Reduction, ● Foundry Related Agreements Term of Agreement: 1995 - 2004 Recycling and Reuse" from the EPA, (3) "Energy Conservation Contracting Parties: Several multinational companies Award" from the MOEA, and (4) "Water Conservation Outstanding Summary: TSMC guarantees a pre-determined capacity for a set Performance Awards" from the Water Resources Agency. number of years to customers. In return, customers deposit a cer- tain amount of money with TSMC. 9. Important Contracts ● Technology Cooperation Agreement Term of Agreement: 07/09/1997 - 07/08/2007 ● Manufacturing Agreement Term of Agreement: 02/14/2000 - 02/13/2005 Contracting Party: Vanguard International Semiconductor Contracting Party: Philips Electronics N.V. (now renamed Corporation (VIS) Koninklijke Philips Electronics N.V.) (Philips) Summary: TSMC is obliged to pay Philips royalties at a fixed per- Summary: VIS shall reserve its certain capacity to manufacture for TSMC certain devices required by TSMC's customers, at prices as centage of net sales for certain products for cross licenses agreed by the parties. obtained through Philips. ● Manufacturing Agreement Term of Agreement: 02/16/1996 - 12/31/2005, automatically renewed for one year unless terminated with a six-month prior written notice by TSMC Contracting Party: WaferTech, LLC (WaferTech) ● Patent License Agreement Term of Agreement: 11/01/2002 - 10/31/2012 Contracting Party: A multinational company Summary: The parties have entered into cross license arrange- ments for certain semiconductor patents. TSMC shall pay license fees to the said company. 44 Annual Report 2003 ● Patent License Agreement Term of Agreement: 07/01/2002 - 06/30/2009 Contracting Party: A multinational company Summary: The parties have entered into cross license arrange- ments for certain semiconductor patents. TSMC shall pay license fees to the said company. ● Patent License Agreement Term of Agreement: 01/01/2001 - 12/31/2011 Contracting Party: A multinational company Summary: The parties have entered into cross license arrange- ments for certain semiconductor patents. TSMC shall pay license fees to the said company. ● Amended and Restated Joint Technology Cooperation Agreement Term of Agreement: 07/16/2001 - 12/31/2005 Contracting Parties: STMicroelectronics NV, Philips Semiconductors International B.V., Motorola, Inc. Summary: The parties have entered into a joint technology coop- eration arrangement for certain high-performance and advanced semiconductor technologies development. ● Technology Development and License Agreement Term of Agreement: 12/04/2003 - 12/03/2007 Contracting Party: A multinational company Summary: The parties agree to jointly develop certain advanced SOI process technologies and cross license related intellectual property rights. 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. 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 technolo- gies, designs, and manufacturing processes may infringe certain patents or other intellectual property rights. TSMC takes these matters seriously, investigates all such claims, and takes appropri- ate action as circumstances require. Late in the year, TSMC, TSMC North America, and WaferTech filed a complaint in US District Court of Northern California against Semiconductor Manufacturing International Corporation (SMIC), SMIC (Shanghai), and SMIC Americas alleging that SMIC has infringed multiple patents and misappropriated trade secrets. The suit also asks for injunctive relief along with monetary damages. The complaint alleges that SMIC improperly obtained TSMC trade secrets and infringed TSMC patents. Management intends vigor- ously to protect its patents and trade secrets to maintain share- holder value. Other than the matter(s) provided above, TSMC was not involved in any other material litigation in 2003 and is not currently involved in any material litigation. 11. Acquisition or Disposal of Property, Plant and Equipment 11.1 Acquisition of property, plant and equipment; in the amount no less than NT$300 million, or 20% of paid-in capital Company Property, Plant and Equipment Acquisition Date Total Price (thousand) Vendor Relationship with the Company Purpose TSMC Scanners 2003/01~2004/02 NT$9,148,805 ASML Electron-Beam Litho System Interbay System Fab14 MEP Fab14 Building & Plant 2003/03 2003/03 2003/06 2003/08 NT$419,093 Toshiba NT$547,803 SHINKO NT$369,400 Shihlin Electric NT$4,271,405 Fu Tsu Construction Fab14 Clean Room System & MEP 2003/08 NT$1,684,668 United Integrated Services Fab14 High Purify Gas 2003/08 NT$397,113 Confederate TSMC Shanghai Employee Dormitory 2003/12~2004/02 Rmb180,792 Shanghai Song-Jiang Technological Investment and Development Co., Ltd. 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 11.2 Disposal of property, plant and equipment up to NT$300 million or 20% of paid-in capital: None Annual Report 2003 45 FINANCING PLANS AND IMPLEMENTATION Corporate Bond 1. Financing Plans Source of Fund Issuance Issue Date Tenor Coupon Rate Outstanding Corporate Bond 01/10/2002 - 01/24/2002 Tranche A: 5 years Tranche A: 2.60% p.a. Tranche A: NT$ 2.5 billion Tranche B: 7 years Tranche B: 2.75% p.a. Tranche B: NT$ 8.0 billion Tranche C: 10 years Tranche C: 3.00% p.a. Tranche C: NT$ 4.5 billion Use of Fund Project Expansion Plan Fund Used from 2002 to 2003 (NT$ thousand) Future Fund Use (NT$ thousand) The proceeds of the bond finance a part of Fab 14 whose total 5,545,322 72,084,678 investment is expected to reach NT$77.63 billion. Approved by the Securities and Futures Commission and disclosed on the Taiwan Stock Exchange Market Observation Post System on December 17, 2001. 2. Status of Implementation & Benefits Project commenced in 2002 and production ramping-up will begin in the fourth quarter of 2004. Annual Report 2003 47 FINANCIAL STATUS, OPERATING RESULTS, AND RISK MANAGEMENT 1. Financial Position Item Current Assets Fixed Assets Other Assets Total Assets Current Liabilities Long-term Liabilities Total Liabilities Capital Stock Capital Surplus Retained Earnings 2003 2002 Variance Variance % Unit: NT$ thousand 158,526,272 94,747,405 63,778,867 188,286,752 217,192,263 11,638,485 23,097,348 (28,905,511) (11,458,863) 396,416,862 370,015,511 26,401,351 30,537,984 36,664,569 67,202,553 31,160,103 43,002,201 74,162,304 202,666,189 199,228,867 56,855,885 71,100,090 57,004,789 40,792,197 (622,119) (6,337,632) (6,959,751) 3,437,322 (148,904) 30,307,893 33,361,102 Total Shareholders' Equity 329,214,309 295,853,207 1.1 Variance Analysis for Deviation over 20% ● The increase in current assets was largely due to an increase in cash and accounts receivable which resulted from operating activities and an increase in short-term investments, mainly in government bonds. ● The decrease in other assets was primarily due to reclassification of deferred income tax from noncurrent portion to current portion. ● The increase in retained earnings was due to improved operating results in 2003. 1.2 Major Impact on Financial Position: There was no significant impact on financial position. 1.3 Future Plan on Financial Position: Not Applicable 67% -13% -50% 7% -2% -15% -9% 2% 0% 74% 11% Annual Report 2003 49 2. Operating Results Item Gross Sales 2003 2002 Variance Variance % Unit: NT$ thousand 206,157,918 164,805,296 41,352,622 Sales Returns and Allowances (4,253,577) (3,843,967) Net Sales Cost of Sales Gross Profit Operating Expense Operating Income Non-operating Income and Gains Non-operating Expense and Losses Income before Tax Tax Expense Net Income 201,904,341 160,961,329 129,012,704 108,994,184 72,891,637 20,244,060 52,647,577 2,665,799 4,285,101 51,967,145 17,790,839 34,176,306 1,762,893 8,826,744 51,028,275 27,112,455 (3,769,575) 47,258,700 (5,502,164) 21,610,291 (409,610) 40,943,012 20,018,520 20,924,492 2,453,221 18,471,271 902,906 (4,541,643) 23,915,820 1,732,589 25,648,409 25% 11% 25% 18% 40% 14% 54% 51% -51% 88% -31% 119% 2.1 Variance Analysis for Deviation over 20% ●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 non-operating income and gains: The increase was pri- marily due to investment income recognized in 2003. ●Decrease in non-operating expense and losses: The decrease was largely due to investment loss recognized in 2002, offset by lower interest expense as a result of lowered interest rate. ● Decrease in tax expense: The decrease was primarily due to income tax benefit that resulted from a change in a R.O.C. Tax Rule, partially offest by an increase of tax expense due to better operating results. 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, eco- nomic environment or other internal or exter- nal factors has changed or expects to have any significant change, explain the fact, influ- encing 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". 50 Annual Report 2003 2.4 Gross Profit Variance Analysis Gross Profit in 2003 Gross Profit in 2002 Variance Variance Owing to Price Difference Variance Owing to Cost Difference Variance Owing to Product Mix and Quantity Difference Unit: NT$ million 72,892 51,967 20,925 (16,196) Technology advancement caused price level to erode. (10,941) Cost increase was prima- rily due to advanced technology products mix improvement. 3. Cash Flow 48,062 1. Revenue from advanced tech- nology increased from 52% in 2002 to 62% in 2003. This mix improvement results in higher gross profit. 2. Wafer shipment grew 38% in 2003. This quantity difference results in higher gross profit. Unit: NT$ thousand Cash Balance as of December, 2002 Net Cash Provided by Operating Activities Net Cash Outflows from Investing and Financing Activities Cash Balance as of December, 2003 Remedy for Cash Shortfall Investment Plan Financing Plan 61,656,795 108,668,436 (72,037,229) 98,288,002 - - 3.1 Analysis of Cash Flow ● NT$108.7 billion net cash provided by operating activities: This pri- marily represents the sum of (1) profit from operating activities, and (2) non-cash charges such as depreciation and amortization expenses. ● NT$72.0 billion net cash outflows from investing and financing activities: This represents the sum of (1) NT$53.9 billion for investment activities mainly for capital expenditures and purchas- es of investments, and (2) NT$18.1 billion for financing activities mainly for the redemption of preferred shares and repayment of corporate bonds. 3.2 Remedy for Cash Shortfall and Liquidity Analysis: Because TSMC enjoys a cashflow surplus, remedial actions are not required. 3.3 Cash Flow Projection for Next Year: TSMC does not provide financial projections, including cash flow projections. Annual Report 2003 51 4. Major Capital Expenditure 4.1 Major Capital Expenditure and Source of Capital Project Production Equipment R&D Equipment Actual or Planned Source of Capital Owner's Equity/Bond Owner's Equity/Bond Actual or Planned Completion Date in 2003 Total Amount Accumulated as of December 31, 2003 The Execution of Major Capital Expenditure 2002 2003 2004 (Note) 2005 (Note) 2005 (Note) Completed 75,490,756 44,023,305 31,467,451 Completed 5,997,547 3,104,963 2,892,584 - - - - - - Note: Can not be reasonably estimated at the time of preparation. Unit: NT$ thousand 4.2 Estimated Possible Benefit It is estimated that TSMC production capacity may increase annually tices, all in compliance with the relevant rules and regulations issued by the Taiwan Securities and Futures Commission. TSMC by 500,000 8-inch equivalent wafers in 2004 and onwards, as a policies and procedures include “Policies and Procedures for result of the above capital expenditure investment. Financial Derivatives Transactions”, “Procedures for Lending Funds to Other Parties”, “Procedures for Acquisition or Disposal of Other Benefits (e.g. Product Quality, Anti-Pollution, Cost Assets”, and “Procedures for Endorsement and Guarantee”. The 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. 6. Risk Management 6.1 Environmental, Safety and Health (ESH) Risk financial transactions of a “derivative” nature that TSMC enters into are strictly for hedging purposes and not for any trading or speculative purpose. Covenants TSMC’s subsidiaries - TSMC Development, Inc., TSMC North America and WaferTech, LLC, have separately entered into loan facility agreements. In connection with those agreements, TSMC provides guarantees up to US$540 million in aggregate. Customary Borrower and/or Guarantor covenants exist in those and Emergencies and Natural Disasters agreements. TSMC is committed to maintaining a comprehensive risk manage- ment system dedicated to the safety, security, and protection of natural resources, people and assets. In order to deal with emer- gencies and natural disasters at each of its facilities, comprehensive plans and procedures have been developed focusing on loss pre- vention, emergency response, crisis management, and business recovery. TSMC has adopted the International Standard on 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. In order to limit its exposure to interest rate risks, TSMC finances its funding needs through issuance of long-term, fixed- Environmental Management System (ISO 14001) as its standard rate debt. for environmental management. All TSMC Fabs 2, 3, 5, 6, 7, 8 and 12 have been ISO 14001 and OHSAS 18001 certified. 6.2 Management of Financial Operations Existing internal policies and procedures with respect to high-risk/high-leveraged investment, lending/endorsement and guarantee for other parties, and financial derivatives transactions In order to manage financial risk, TSMC does not make high-risk or high-leveraged financial investments. To control various types of financial transactions, the Company has established internal poli- cies and procedures based on sound financial and business prac- Foreign Exchange Volatility The Company is exposed to foreign exchange risks for both rev- enues and procurement. Most of TSMC’s revenues derive from the export of its products (approximately 87% in 2003). Meanwhile, a substantial portion of the Company's procurement of equipment, tools and material is imported. TSMC hedges its foreign exchange exposure mainly through forward currency contracts. Inflation Inflation in Taiwan was approximately -0.28% in 2003. It did not have a significant impact on TSMC operations and profits. 52 Annual Report 2003 6.4 Political and Regulatory Environment TSMC’s management team monitors closely political and regulatory developments that could have an impact on TSMC business and operations. Political and regulatory developments did not have an adverse effect on TSMC during 2003. Since TSMC is also a NYSE listed company, TSMC is required to comply with the provisions of Sarbanes-Oxley Act and relevant reg- ulations that are applicable to non-US companies. Not only has TSMC taken measures to ensure compliance with applicable regu- latory requirements, TSMC will continue to monitor regulatory developments and implement changes as necessary for compli- ance. 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 has established a policy of ''Ethics and Business Conduct,'' and its management does not tolerate unethical behavior or compromise of its core values and principles. TSMC pays special attention to emergency preparedness for natu- ral and man-made disasters such as typhoons, earthquakes, and environmental contamination. We have established extensive con- tingency planning including the establishment of processes and procedures for creating emergency task forces as and when neces- sary. 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 appro- priate precautionary and/or recovery measures. Each task force's responsibility would be to ensure TSMC's ability to conduct busi- ness 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. Annual Report 2003 53 FINANCIAL INFORMATION 1. Condensed Balance Sheet Financial analysis from 1999-2003 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 1999 2000 2001 2002 2003 Unit: NT$ thousand 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 94,747,405 34,978,495 217,192,263 23,097,348 31,160,103 31,673,588 39,281,665 3,720,536 199,228,867 57,004,789 40,792,197 23,841,390 (194,283) 945,129 370,015,511 158,526,272 37,965,353 188,286,752 11,638,485 30,537,984 * 33,300,829 3,363,740 202,666,189 56,855,885 71,100,090 * (35) 225,408 396,416,862 40,652,894 40,868,045 79,218,759 79,844,199 58,544,609 59,133,457 74,162,304 74,675,789 67,202,553 * 120,769,840 120,554,689 261,753,699 261,128,259 277,190,075 276,601,227 295,853,207 295,339,722 329,214,309 * 2. Condensed Statement of Income Financial analysis from 1999-2003 Item 1999 2000 2001 2002 2003 Unit: NT$ thousand (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 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 2,119,935 201,904,341 72,891,637 52,647,577 2,665,799 4,285,101 819,377 1,576,343 24,109,865 63,837,594 10,658,715 27,112,455 51,028,275 24,559,884 24,559,884 3.24 1.44 305,312 ** *** 65,106,194 65,106,194 5.71 3.29 72,903 ** *** 14,483,174 14,483,174 0.83 0.69 207,297 ** *** 21,610,291 21,610,291 1.14 1.05 165,857 ** *** 47,258,700 47,258,700 2.33 ** 138,668 * Certain accounts of 1999 through 2000 have been reclassified to conform to 2001, 2002 & 2003 classifications ** Based on weighted average shares outstanding in each year ***Retroactive adjustment for capitalization of unappropriated earnings and bonus to employees 56 Annual Report 2003 3. Financial Analysis Financial analysis from 1999-2003 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) (Note1) 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) FINANCIAL INFORMATION 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 1.44 2.30 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 3.29 2.80 - - 2.30 273.50 106.00 19.31 2.47 1.06 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 0.69 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 1.05 1.00 - 1.00 302.59 122.72 17.88 3.88 1.07 2003 16.95 192.53 519.11 478.38 30.67 9.14 39.92 12.14 30.06 14.41 1.07 0.51 12.67 15.12 25.98 25.18 63.90 23.41 16.24 2.33 0.80 - 0.80 355.85 145.42 17.71 3.21 1.03 1,032,167 2,477,021 3,715,200 6,232,338 5,221,718 - 23,557 55,077 204,350 209,764 33,240,484 75,996,839 36,381,051 51,967,145 72,891,637 Sales and Marketing Costs (NT$K) (Note2) 1,403,900 2,420,409 2,175,747 1,140,424 1,193,520 Effective Tax Rate (%) Working Capital (NT$K) 5.90 7.54 17.56 16.55 18.27 24,301,341 44,761,924 38,442,107 63,587,302 127,988,288 Capital Expenditure (NT$K) 29,842,159 79,720,461 68,002,448 54,443,595 37,247,465 Note 1: Retroactive adjustment for capitalization of unappropriated earnings and bonus to employees. Note 2: Certain accounts of 1999 through 2002 have been reclassified to conform to 2003 classifications. *The calculation formula of financial analysis was listed as follows: 1. Capital Structure Analysis . (1) Debts ratio (2) Long-term fund to fixed assets = Total Liabilities / Total Assets = (Shareholders' Equity + Long-term Liabilities) / Net Properties 2. Liquidity Analysis (1) Current ratio (2) Quick ratio (3) Times interest earned 3. Operating Performance Analysis (1) Average collection turnover (2) Days sales outstanding (3) Average inventory turnover (4) Average inventory turnover days (5) Average payment turnover (6) Fixed assets turnover (7) Total assets turnover 4. Profitability Analysis (1) Return on total assets = Current Assets / Current Liabilities = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities = Earnings before Interest and Taxes / Interest Expenses = Net Sales / Average Trade Receivables = 365 / Receivables Turnover rate = Cost of Sales / Average Inventory = 365 / Inventory Turnover rate = Cost of Sales / Average Trade Payables = Net Sales / Net Properties = Net Sales / Total Assets = (Net Income + Interest Expenses * (1 - Effective tax rate )) / Average Total Assets (2) Return on equity (3) Cost to Revenue Ratio (4) Profit after tax to net sales (5) Earnings per share = Net Income / Average Shareholders' Equity = Cost of Goods Sold / Net Sales = Net Income / Net Sales = (Net Income - Preferred Stock Dividend) / Weighted Average Number of Shares Outstanding (6) Net worth per share = (Shareholders' Equity - Preferred Sock) / Number of shares outstanding 5. Cash flow (1) Cash flow ratio (2) Cash flow adequacy ratio = Net Cash Provided by Operating Activities / Current Liabilities = Five-year sum of cash from operations / Five-year sum of capital expenditures, inventory additions, and cash dividend (3) Cash flow reinvestment ratio = (Cash Provided by Operating Activities - Cash Dividends) / (Gross Plant + Investment + Other Assets + Working Capital) 6. Leverage (1) Operating leverage (2) Financial leverage = (Net Sales - Variable Cost) / Income from Operations = Income from Operations / (Income from Operations - Interest Expenses) Annual Report 2003 57 4. Condensed Interim Balance Sheet by Quarter ASSETS Current assets Long-term investments Fixed assets Other assets TOTAL ASSETS Unit: NT$ thousand March 31, 2003 Amount 102,985,369 34,146,618 205,593,938 20,536,967 % 28 9 57 6 June 30, 2003 Amount 111,019,415 35,121,987 195,794,289 20,916,798 % 30 10 54 6 September 30, 2003 % Amount December 31, 2003 % Amount 135,173,278 34,668,956 192,293,825 20,055,420 35 9 50 6 158,526,272 37,965,353 188,286,752 11,638,485 40 10 47 3 363,262,892 100 362,852,489 100 382,191,479 100 396,416,862 100 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Current liabilities Long-term liabilities Other liabilities Total liabilities SHAREHOLDERS' EQUITY Capital stock Capital surplus Retained earnings Cummulative translation adjustments Unrealized loss on long-term investment Treasury stock (at cost) Total Shareholders' Equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 20,347,149 39,281,200 3,750,077 63,378,426 199,228,867 56,839,890 45,150,064 882,749 (293,612) (1,923,492) 5 11 1 17 55 16 12 - - - 21,973,821 38,921,540 3,695,558 64,590,919 202,666,189 56,840,751 39,929,224 755,436 (7,981) (1,922,049) 299,884,466 83 298,261,570 6 11 1 18 56 16 11 - - (1) 82 27,186,837 38,660,493 3,372,728 69,220,058 202,666,189 56,847,417 55,097,739 5,921 (2,441) (1,643,404) 7 10 1 18 53 15 14 - - - 30,537,984 33,300,829 3,363,740 8 8 1 67,202,553 17 202,666,189 56,855,885 71,100,090 225,408 (35) (1,633,228) 51 14 18 - - - 312,971,421 82 329,214,309 83 363,262,892 100 362,852,489 100 382,191,479 100 396,416,862 100 58 Annual Report 2003 FINANCIAL INFORMATION 5. Condensed Interim Satement of Income by Quarter Q1 Q2 Q3 Q4 Total Amount % Amount % Amount % Amount % Amount % Unit: NT$ thousand (Except EPS: NT$) GROSS SALES 39,633,381 51,594,053 56,067,239 58,863,245 206,157,918 SALES RETURNS AND ALLOWANCES NET SALES COST OF SALES GROSS PROFIT OPERATING EXPENSES INCOME FROM OPERATIONS NON-OPERATING INCOME (308,068) (1,671,901) (1,189,968) (1,083,640) (4,253,577) 39,325,313 100 49,922,152 100 54,877,271 100 57,779,605 100 201,904,341 100 28,939,421 10,385,892 4,191,227 6,194,665 73 27 11 16 31,570,744 18,351,408 5,011,355 13,340,053 63 37 10 27 33,430,197 21,447,074 4,959,703 16,487,371 61 39 9 30 35,072,342 22,707,263 6,081,775 16,625,488 61 39 10 29 129,012,704 72,891,637 20,244,060 52,647,577 64 36 10 26 Interest 188,929 1 181,860 Investment income (loss) recognized by equity method-net Gain on disposal of property, plant and equipment Technical service income Gain on sales of investments Others (1,515,850) (4) 810,419 5,876 21,153 - 77,849 - - - - 289,920 55,374 - 67,221 Total Non-Operating Income (1,222,043) (3) 1,404,794 NON-OPERATING EXPENSES Interest Loss (gain) on impairment of property, plant and equipment and idle assets Foreign exchange loss-net Loss on disposal of property, plant and equipment Amortization of premium expense from option contracts-net Others Total Non-Operating Expenses 500,301 63,111 159,298 37,083 26,556 6,003 792,352 1 - 1 - - - 2 445,823 1,338,474 87,621 225,125 70,092 5,537 2,172,672 - 2 - - - - 2 1 3 - - - - 4 210,090 361,480 51,860 82,398 66,428 127,943 900,199 377,386 29,178 179,337 28,869 57,135 7,900 679,805 1 1 - - - - 2 1 - - - - - 1 238,498 1,135,375 91,148 50,839 48,389 18,600 1,582,849 252,833 (29,178) 329,457 82,395 - 4,765 640,272 - 3 - - - - 3 - - 1 - - - 1 819,377 1 791,424 438,804 209,764 114,817 291,613 2,665,799 1,576,343 1,401,585 755,713 373,472 153,783 24,205 4,285,101 - - - - - 1 1 1 - - - - 2 INCOME BEFORE INCOME TAX 4,180,270 11 12,572,175 25 16,707,765 31 17,568,065 31 51,028,275 25 INCOME TAX BENEFIT (EXPENSE) 177,597 - (842,208) (2) (1,539,250) (3) (1,565,714) (3) (3,769,575) (2) NET INCOME 4,357,867 11 11,729,967 23 15,168,515 28 16,002,351 28 47,258,700 23 EARNINGS PER SHARE AFTER TAX 0.23 0.56 0.75 0.79 2.33 Annual Report 2003 59 6. Auditors' Opinion from 1999 to 2003 Year 1999 2000 2001 2002 2003 CPA S. C. Huang, Edward Way S. C. Huang, Edward Way S. C. Huang, Edward Way S. C. Huang, Edward Way Andy Huang, Edward Way Audit Opinion An Unqualified Opinion An Unqualified Opinion An Unqualified Opinion A Modified Unqualified Opinion A Modified Unqualified Opinion Deloitte & Touche 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 has prepared and submitted to the Supervisors the Company's 2003 Business Report, Financial Statements, and proposal for allocation of profits. The CPA firm of Deloitte & Touche were retained to audit TSMC's Financial Statements. The auditors have submitted to the Board a report relating to the Financial Statements. The Business Report, Financial Statements, and profit alloca- tion proposal have been examined by and determined to be 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 Susan Chang Supervisor Michael E. Porter February 27, 2004 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 2003 until February 29, 2004: None 60 Annual Report 2003 FINANCIAL INFORMATION 9. Financial Statements & Independent Auditors' Report English Translation of a Report Originally Issued in Chinese INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Taiwan Semiconductor Manufacturing Company Ltd. We have audited the accompanying balance sheets of Taiwan Semiconductor Manufacturing Company Ltd. as of December 31, 2003 and 2002, 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 assur- ance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence support- ing the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant esti- mates 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, 2003 and 2002, 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 No. 30) on January 1, 2002. SFAS No. 30 requires a parent company to record stock held by its subsidiary as treasury stock. We have also audited the consolidated financial statements of Taiwan Semiconductor Manufacturing Company Ltd. as of and for the years ended December 31, 2003 and 2002, and have expressed a modified unqualified opinion on such financial statements. January 12, 2004 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, pro- cedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China. Annual Report 2003 61 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. BALANCE SHEETS DECEMBER 31, 2003 AND 2002 (In Thousand New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Short-term investments (Notes 2 and 5) Receivables from related parties (Note 18) Notes receivable Accounts receivable Allowance for doubtful receivables (Note 2) Allowance for sales returns and others (Note 2) Other financial assets Inventories-net (Notes 2 and 6) Deferred income tax assets (Notes 2 and 13) Prepaid expenses and other current assets (Notes 2 and 21) Total current assets LONG-TERM INVESTMENTS (Notes 2, 3, 7 and 20) Equity method Cost method Funds Prepayment for subscribed stocks Total long-term investments PROPERTY, PLANT AND EQUIPMENT (Notes 2, 8 and 18) 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, 9 and 20) Deferred income tax assets (Notes 2 and 13) Refundable deposits (Notes 18 and 20) Idle assets (Note 2) Assets leased to others (Note 2) Miscellaneous Total other assets TOTAL ASSETS The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche report dated January 12, 2004) 62 Annual Report 2003 2003 Amount $98,288,002 12,559,019 15,000,625 9,893 13,907,914 (1,016,022) (2,126,025) 1,081,742 10,907,158 8,322,000 1,591,966 158,526,272 37,262,237 432,500 270,616 - 37,965,353 71,277,031 332,252,225 6,180,495 409,709,751 (247,514,312) 26,091,313 188,286,752 2,264,536 7,947,331 1,070,596 177,379 94,296 84,347 - 9,373,949 % 25 3 4 - 4 - (1) - 3 2 - 40 10 - - - 10 18 84 1 103 (62) 6 47 1 2 - - - - - 2 2002 Amount $61,656,795 - 10,183,488 60,240 9,495,447 (929,864) (2,363,067) 969,669 10,340,336 3,320,000 2,014,361 94,747,405 33,042,029 849,666 237,440 849,360 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 - - - 9 18 82 2 102 (51) 8 59 1 3 2 - - - - 5 $396,416,862 100 $370,015,511 100 FINANCIAL INFORMATION LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Payables to related parties (Note 18) Accounts payable Payables to contractors and equipment suppliers Accrued expenses and other current liabilities (Notes 2, 11 and 21) Current portion of bonds (Note 10) Total current liabilities LONG-TERM LIABILITIES Bonds-net of current portion (Note 10) Other long-term payables (Notes 11 and 20) Total long-term liabilities OTHER LIABILITIES Accrued pension cost (Notes 2 and 12) Guarantee deposits (Note 20) Deferred gain on sales and leaseback (Note 2) Total other liabilities Total liabilities SHAREHOLDERS' EQUITY (Notes 2 and 15) Capital stock-$10 par value Authorized: 24,600,000 thousand shares Issued: 2003 2002 Amount % Amount % $4,500,140 6,083,876 7,117,884 7,836,084 5,000,000 30,537,984 30,000,000 3,300,829 33,300,829 2,600,251 763,489 - 3,363,740 1 2 2 2 1 8 7 1 8 1 - - 1 $2,466,998 4,849,234 14,004,383 5,839,488 4,000,000 31,160,103 35,000,000 4,281,665 39,281,665 2,210,542 1,395,066 114,928 3,720,536 1 1 4 1 1 8 10 1 11 1 - - 1 67,202,553 17 74,162,304 20 Common-20,266,619 thousand shares in 2003 and 18,622,887 thousand shares in 2002 Preferred-1,300,000 thousand shares Capital surplus: Merger and others (Note 2) Treasury stock (Note 3) Retained earnings: Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Others: Unrealized loss on long-term investments (Note 2) Cumulative translation adjustments (Note 2) Treasury stock (at cost)-40,597 thousand shares in 2003 and 42,001 thousand shares in 2002 (Notes 2, 3and 16) Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 202,666,189 - 56,802,829 53,056 20,802,137 68,945 50,229,008 (35) 225,408 (1,633,228) 329,214,309 $396,416,862 51 - 14 - 5 - 13 - - - 83 100 186,228,867 13,000,000 56,961,753 43,036 18,641,108 - 22,151,089 (194,283) 945,129 (1,923,492) 295,853,207 $370,015,511 50 4 15 - 5 - 6 - - - 80 100 Annual Report 2003 63 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (In Thousand New Taiwan Dollars, Except Earnings Per Share) 2003 2002 Amount % Amount % GROSS SALES (Notes 2 and 18) $206,157,918 $164,805,296 SALES RETURNS AND ALLOWANCES (Note 2) (4,253,577) (3,843,967) NET SALES 201,904,341 100 160,961,329 100 COST OF SALES (Notes 14 and 18) GROSS PROFIT OPERATING EXPENSES (Notes 14 and 18) Research and development General and administrative Marketing Total operating expenses INCOME FROM OPERATIONS NON-OPERATING INCOME AND GAINS Interest (Note 2) Investment income recognized by equity method-net (Notes 2 and 7) Gain on disposal of property, plant and equipment (Note 2) Technical service income (Notes 18 and 20) Gain on sales of investments Other (Note 18) Total non-operating income NON-OPERATING EXPENSES AND LOSSES Interest (Notes 2, 8, 10 and 21) Loss on impairment of property, plant and equipment and idle assets (Note 2) (Continued) 129,012,704 72,891,637 12,712,695 6,337,845 1,193,520 20,244,060 52,647,577 819,377 791,424 438,804 209,764 114,817 291,613 2,665,799 1,576,343 1,401,585 64 36 6 3 1 10 26 1 - - - - - 1 1 1 108,994,184 51,967,145 11,440,332 5,210,083 1,140,424 17,790,839 34,176,306 1,008,147 - 273,998 204,350 32,169 244,229 1,762,893 2,119,935 - 68 32 7 3 1 11 21 1 - - - - - 1 1 - 64 Annual Report 2003 FINANCIAL INFORMATION Foreign exchange loss-net (Notes 2 and 21) Loss on disposal of property, plant and equipment Amortization of premium expense from option contracts-net (Notes 2 and 21) Investment loss recognized by equity method-net (Notes 2 and 7) Casualty loss-net (Note 2) Other Total non-operating expenses INCOME BEFORE INCOME TAX INCOME TAX EXPENSE (Notes 2 and 13) NET INCOME Gain on Sales of Properties Donation EARNINGS PER SHARE (Note 17) Basic earnings per share Diluted earnings per share 2003 2002 Amount % Amount % $755,713 373,472 153,783 - - 24,205 Total 4,285,101 51,028,275 3,769,575 $47,258,700 - - - - - - 2 25 2 23 Special Reserve $120,568 221,955 419,513 5,716,510 119,485 108,778 8,826,744 27,112,455 5,502,164 $21,610,291 Total - - - 4 - - 5 17 4 13 2003 2002 Before After Before After Income Tax Income Tax Income Tax Income Tax $2.51 $2.51 $2.33 $2.33 $1.32 $1.32 $1.05 $1.05 The pro forma net income and earnings per share for the adoption of SFAS No. 30 ''Accounting for Treasury Stock'' is as follows (Notes 3 and 16): 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 Deloitte & Touche report dated January 12, 2004) $47,337,094 $21,584,382 $2.33 $2.33 $1.05 $1.05 (Concluded) Annual Report 2003 65 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, 2003 AND 2002 (In Thousand New Taiwan Dollars) Capital Stock Issued Capital Surplus Preferred stock Common stock Shares (thousand) Amount Shares (thousand) Amount From merger Additional paid-in capital From long-term investments Excess on foreign bond investments BALANCE, JANUARY 1, 2002 1,300,000 $13,000,000 16,832,554 $168,325,531 $24,132,297 $23,172,550 $246,381 $9,410,632 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 propety, plant and equipment of investees to retained earnings Unrealized loss on long-term investments from investees Translation adjustments Reclassification of stocks of a parent company held by sub- sidiaries 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) - - - - - - - - - - - - - - - - - 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 Redemption and retirement of preferred stock (1,300,000) (13,000,000) Appropriations of prior year's earnings Legal reserve Special reserve Bonus to employees-stock Cash dividends paid for preferred stocks Stock dividends-8% Remuneration to directors and supervisors Net income in 2003 Adjustment arising from changes in ownership percentage in investees Reversal of unrealized loss on long-term investment of investees Translation adjustments Sale of treasury stock BALANCE, DECEMBER 31, 2003 - - - - - - - - - - - - The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche report dated January 12, 2004) 66 Annual Report 2003 - - - - - - 153,901 1,539,013 - - 1,489,831 14,898,309 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (158,924) - - - - - - - - - - - - - - - - - - - - - - - - - - $- 20,266,619 $202,666,189 $24,132,297 $23,172,550 $87,295 $9,410,632 FINANCIAL INFORMATION Capital Surplus Retained Earnings Gain on sales of properties Donation Treasury stock Total Legal reserve Special reserve Unappropriated earnings Total Unrealized Loss on Long-term Investments Cumulative Translation Adjustments Treasury Stock Total Shareholders' Equity $166,518 $55 $- $57,128,433 $17,180,067 $349,941 $19,977,402 $37,507,410 $- $1,228,701 $- $277,190,075 - - - - - - - (166,518) - - - - - - - - - - - - - - - - - - 1,448,317 - (1,448,317) (349,941) 349,941 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (162) - - - (166,518) 12,724 - - - - - - - - - - - 43,036 43,036 55 43,036 57,004,789 18,641,108 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (158,924) - - 10,020 10,020 - 2,161,029 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (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 - - - - - - - - (194,283) - - - - - - - - - - - - - - - - - - - - - - (283,572) - - - - - - - - - - - - - - (455,000) - (133,848) 21,610,291 - - (194,283) (283,572) - - (1,923,492) (1,923,492) - 43,036 22,151,089 40,792,197 (194,283) 945,129 (1,923,492) 295,853,207 - (2,161,029) 68,945 (68,945) - - - - - - - - - (1,539,013) (1,539,013) (455,000) (455,000) (14,898,309) (14,898,309) (58,485) (58,485) 47,258,700 47,258,700 - - - - - - - - - - - - - - - - - 194,248 - - - - - - - - - - - - (719,721) - - - - - - - - - - - (13,000,000) - - - (455,000) - (58,485) 47,258,700 (158,924) 194,248 (719,721) - 290,264 300,284 $- $55 $53,056 $56,855,885 $20,802,137 $68,945 $50,229,008 $71,100,090 ($35) $225,408 ($1,633,228) $329,214,309 Annual Report 2003 67 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (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 (income) recognized by equity method-net Loss on impairment of property, plant, and equipment, and idle assets Loss (gain) on sales of investments Gain on disposal of property, plant and equipment-net Accrued pension cost Allowance for doubtful receivables Allowance for sales returns and others Changes in operating assets and liabilities: Decrease (increase) in: Receivables from related parties Notes receivable Accounts receivable-net Inventories-net Other financial assets Prepaid expenses and other current assets Increase (decrease) in: Payables to related parties Accounts payable Accrued expenses and other current liabilities 2003 2002 $47,258,700 $21,610,291 61,786,114 3,639,971 (791,424) 1,401,585 (79,149) (65,332) 389,709 86,158 (237,042) (4,817,137) 50,347 (4,412,467) (566,822) (112,073) 422,395 2,033,142 1,234,642 1,447,119 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) (248,952) (98,777) 384,392 3,725,340 1,088,409 Net cash provided by operating activities 108,668,436 94,288,101 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Short-term investments Long-term investments Property, plant and equipment Proceeds from sales of: Long-term investments Property, plant and equipment Increase in deferred charges Decrease in refundable deposits Decrease in other assets-miscellaneous (12,529,448) (3,006,374) (37,247,465) 476,405 177,307 (2,137,932) 366,090 9,250 - (10,187,730) (54,443,595) 1,402 494,805 (5,724,583) 229,443 - Net cash used in investing activities (53,892,167) (69,630,258) (Continued) 68 Annual Report 2003 FINANCIAL INFORMATION CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of (repayment on) bonds payable Redemption of preferred stock Decrease in guarantee deposits Remuneration paid to directors and supervisors Cash dividends paid for preferred stocks 2003 2002 ($4,000,000) (13,000,000) (631,577) (58,485) (455,000) $10,000,000 - (5,815,906) (133,848) (455,000) Net cash provided by (used in) financing activities (18,145,062) 3,595,246 NET INCREASE IN CASH AND CASH EQUIVALENTS 36,631,207 28,253,089 CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 61,656,795 33,403,706 CASH AND CASH EQUIVALENTS, END OF THE YEAR $98,288,002 $61,656,795 SUPPLEMENTAL INFORMATION Interest paid (excluding capitalized interest of NT$138,668 thousand and NT$165,857 thousand in 2003 and 2002, respectively) Income tax paid Noncash investing and financing activities: Reclassification of parent company stock held by subsidiaries from long-term investments to treasury stock Current portion of bonds Current portion of other long-term payables Reclassification of long-term investment to short-term investment The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche report dated January 12, 2004) $1,652,579 $2,500 $- $5,000,000 $1,591,972 $29,571 $1,771,682 $12,661 $1,923,492 $4,000,000 $1,157,299 $- (Concluded) Annual Report 2003 69 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; Koninklijke 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). On October 8, 1997, TSMC listed its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs). TSMC is engaged 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 The financial statements are presented in conformity with the Guidelines for Securities Issuers' Financial Reporting and accounting principles generally accepted in the Republic of China. Significant accounting policies are summarized as follows: Classification of Current and Non-current Assets and Liabilities Current assets are those expected to be converted to cash, sold or consumed within one year from the balance sheet date. Current liabilities are obligations due on demand within one year from the balance sheet date. Assets and liabilities that are not classified as current are non-current assets and liabilities, respectively. Cash Equivalents Government bonds under repurchase agreements acquired with maturities less than three months from the date of purchase are classified as cash equivalents. Short-term Investments Short-term investments consist of government bonds, money market funds, government bonds acquired under repurchase agreements, bond funds and listed stocks. The investments are carried at the lower of cost or market value. A decline in value is recorded as investment loss and cash dividends are recorded as investment income in the current period. An allowance for decline in value is provided when the aggregate carrying value of the investments exceeds the aggregate market value. A reversal of the allowance will result from a subsequent recovery of the carrying value. The cost of investments sold is accounted for using the weighted-average method. The market values of government bonds are determined using the daily-volume- weighted-average yield/price conversion. The market value of funds are determined using the net asset value of the funds, and the market value of listed stocks are determined using the average-closing price for the last month of the period. Allowance for Doubtful Receivables Allowance for doubtful receivables are provided based on a review of the collectibility of accounts receivables. The Company determines the amount of allowance for doubtful accounts by examining the historical collection experience and current trends in the credit quality of it's customers as well as it's internal credit policies. 70 Annual Report 2003 FINANCIAL INFORMATION Revenue Recognition and Allowance for Sales Returns and Others The four criteria used by the Company to recognize revenue are determining if there is a contractual arrangement, whether delivery or performance has occurred, whether the selling price is fixed or determinable and whether collectibility is reasonably assured. Allowance for sales returns and others is estimated based on historical experience and any known factors that would affect the allowance. Such provisions are deducted from sales in the year the products are sold and the estimated related costs are deducted from cost of sales. Sales are determined using the fair value taking into account related sales discounts agreed by the Company and its customers. Since the receivables from sales are collectible within one year and such transactions are frequent, the fair value of receivables is equivalent to the nominal amount of cash received. Inventories Inventories are stated at the lower of cost or market value. Inventories are recorded at standard cost and adjusted to the approximate weighted-average cost at the end of each period. Market value represents net realizable value for finished goods and work in process. Replacement value represents net realizable value for raw materials, supplies and spare parts. Scrap and slow-moving items are recognized in allowance for losses. Long-term Investments Investments in 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 is recognized as components of the "investment income/loss recognized by equity method-net" account. When acquiring shares of stock, the difference between the cost of investment and the Company's proportionate share of investee's net book value is amortized using straight-line method over five years, and is also recorded as a component of the "investment income/loss recognized by equity method- net". The Company 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 reclassify its capital stock held by its subsidiaries from short/long-term investments to treasury stock. 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 uses its capital surplus, excluding any reserve for asset revaluation, to offset its accumulated deficit, the Company will record a corresponding entry equivalent to its proportionate share of the investee's adjustment. If an investee's functional currency is a foreign currency, "cumulative translation adjustments" will result from the process of translating the investee's financial statements into the reporting currency of the Company. Investments in companies wherein the Company does not exercise significant influence are accounted for using the cost method. Cash dividends are recognized as income in the year received but are accounted for as a reduction in the carrying values of the investment if the dividends are received in the same year that the related investment is acquired. Stock dividends are recognized neither as investment income nor increase of the investment but are recorded only as an increase in the number of shares held. An allowance is recognized for any decline in the market value of investments with readily determinable fair market value with the corresponding amount recorded as an unrealized loss within of shareholders' equity. A reversal of the allowance will result from a subsequent recovery of the market value of such investments. The carrying values of investments whose fair market value is not readily determinable are reduced to reflect an other than temporary decline in their values with the related impairment loss charged to income. Annual Report 2003 71 Investments in foreign mutual funds are stated at the lower of aggregate cost or net asset value. An allowance is recognized when the cost of the funds is lower than its net asset values, with the corresponding amount recorded as a reduction 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. A loss is recognized on publicly-traded investments that are reclassified from long-term to short term investments when the market value is lower than the book value. If an investee company has an unrealized loss on its long-term investment using the lower-of-cost-or-market method, the Company will recognize a corresponding unrealized loss in proportion to its equity interest in the investee company and record the amount as a component of shareholders' equity. Gains or losses on sales from the Company to non-majority owned investee companies accounted for using the equity method are deferred in proportion to the Company's 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 on sales by investee companies to the Company are deferred in proportion to the Company's ownership percentages in the investee companies 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. When an impairment is determined, the related assets are stated at the lower of fair value or book value. Idle assets are stated at the lower of book value or net realizable value. Significant additions, renewals, betterments, and interest expense incurred during the construction period are capitalized. Maintenance and repairs are expensed in the period incurred. Interest expense incurred for the project during the purchase and construction period is also capitalized. Depreciation is computed using the straight-line method over the following 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 corresponding accounts, and any gain or loss is charged to income in the period of disposal. Goodwill Goodwill represents the excess of the consideration paid for companies acquired over the fair market value of identifiable net assets acquired. Goodwill is amortized using the straight-line method over the estimated life of 10 years. 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 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. Deferred Gain on Sale and Leaseback The gain on the sale of property that is simultaneously leased back is deferred by the Company and amortized as an adjustment of rental expenses over the term of the lease. 72 Annual Report 2003 FINANCIAL INFORMATION Casualty Loss Casualty losses resulted primarily from the March 31, 2002 earthquake and were recorded when incurred. Any insurance recoveries were recorded when probable up to the amount of the loss. Recoveries in excess of the amount of the loss were recorded when realized. 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 net operating loss carryforwards. 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 asset or liability does not relate to an asset or liability in the financial statements, then it is classified as either 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, and 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 of 10% are expensed in the year of shareholder approval which is the year subsequent to the year incurred. Foreign Currency Transactions Foreign currency transactions are recorded in New Taiwan dollars at the current rate of exchange in effect when the transaction occurs. Exchange gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in a foreign currency are recognized in current operations. At the end of each period, foreign-currency assets and liabilities are revalued at the prevailing exchange rate with the resulting gains or losses recognized in current operations. 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 on the contract date 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 and the resulting differences are 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. Any resulting gain or loss upon settlement is charged to income in the period of settlement. The Company enters into interest rate swap transactions to manage exposures to changes in interest rates on existing liabilities. These transactions are accounted for on an accrual basis, in which 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 and charged to income on a straight-line basis over the term of the related contract. Any resulting gain or loss upon settlement is charged to income in the period of settlement. Reclassification Certain accounts in the financial statements as of and for the year ended December 31, 2002 have been reclassified to conform to the financial statements as of and for the year ended December 31, 2003. Annual Report 2003 73 3. NEW ACCOUNTING PRONOUNCEMENTS In accordance with the SFAS 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 its subsidiaries from long-term investments to treasury stock. The reclassification is based on the carrying value recorded by the Company's subsidiaries as of January 1, 2002. The adoption of SFAS No. 30 resulted in a decrease of long-term investments and an 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. 4. CASH AND CASH EQUIVALENTS Cash and bank deposits Government bonds acquired under repurchase agreements 2003 $92,340,643 5,947,359 2002 $58,917,928 2,738,867 $98,288,002 $61,656,795 5. SHORT-TERM INVESTMENTS Government bonds Money market funds Government bonds acquired under repurchase agreements Bond funds Listed stocks Market value 6. INVENTORIES-NET Finished goods Work in process Raw materials Supplies and spare parts Less-allowance for losses 2003 $7,692,595 2,038,680 1,800,000 1,000,000 27,744 $12,559,019 $12,703,444 2003 $2,705,165 8,303,357 445,357 674,548 12,128,427 (1,221,269) 2002 $3,610,547 7,227,129 389,164 693,526 11,920,366 (1,580,030) $10,907,158 $10,340,336 74 Annual Report 2003 FINANCIAL INFORMATION 2002 2003 2001 2002 Carrying Value % of - Ownership Carrying Value % of - Ownership 7. LONG-TERM INVESTMENTS Shares of stock Equity method TSMC International Investment Ltd. (TSMC International) $22,654,743 TSMC Partners Ltd. (TSMC Partners) Vanguard International Semiconductor Corporation (VIS) Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) TSMC Shanghai Company Limited (TSMC Shanghai) Emerging Alliance Fund LLP (Emerging Alliance) TSMC North America (TSMC-North America) Global UniChip Corp. (GUC) TSMC Japan K.K. (TSMC-Japan) VisEra Technology Company Ltd. (VisEra) Chi Cherng Investment Ltd. (Chi Cherng) Hsin Ruey Investment Ltd. (Hsin Ruey) Taiwan Semiconductor Manufacturing Company Europe B.V. (TSMC-Europe) Ya Xin Technology (Ya Xin) Prepayment for subscribed stocks VIS Cost method Publicly traded stock Amkor Technology Monolithic System Tech. Taiwan Mask Corp. Non-publicly traded stock United Gas Co., Ltd. Shin-Etsu Handotai Taiwan Company Ltd. Hon Tung Venture Capital W.K. Technology Fund IV Funds Horizon Ventures Crimson Asia Capital 4,116,934 4,077,198 2,759,376 1,901,428 704,744 417,858 368,434 101,722 50,231 42,941 42,006 24,622 - 37,262,237 - - - - - 193,584 105,000 83,916 50,000 432,500 229,669 40,947 270,616 100 100 28 32 100 99 100 47 100 25 36 36 100 - - - - 11 7 10 2 - - $22,265,157 3,753,733 2,415,297 3,136,115 - 767,239 173,601 - 94,258 - 41,894 39,815 13,670 341,250 33,042,029 849,360 849,360 280,748 104,289 32,129 193,584 105,000 83,916 50,000 849,666 195,452 41,988 237,440 $37,965,353 $34,978,495 100 100 25 32 - 99 100 - 100 - 36 36 100 100 - 2 2 11 7 10 2 - - Annual Report 2003 75 On January 8, 2003, the Company's investee company, VIS issued 600,000 thousand shares of common stock at a price of NT$7 per share of which the Company purchased a total of 230,882 thousand shares. As a result, its ownership in VIS increased from 25% to 28%. The Company's investees, Hsin Ruey, Chi Hsin and Kung Cherng were merged on October 30, 2002, with Hsin Ruey as the surviving company. In addition, the Company's investees, Chi Cherng, Cherng Huei and Po Cherng were merged on October 30, 2002, with Chi Cherng as the surviving company. The mergers were accounted for as a pooling of interest. The Company's direct ownership is approximately 36% in Hsin Ruey and approximately 36% in Chi Cherng subsequent to the merger. The Company established Ya Xin in November 2002 and subsequently signed a merger agreement with GUC in December 2002. The merger was effective on January 4, 2003 and GUC is the surviving company. The Company established TSMC Shanghai in August 2003, which is wholly owned by the Company. In November 2003, the Company invested US$1,500 thousand in VisEra. The Company's ownership in VisEra is 25% as of December 31, 2003. The carrying value of 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 for the same period as the Company. The investment gains or (losses) of the investee companies consisted of the following: TSMC International TSMC North America TSMC Partners VIS SSMC Emerging Alliance Others 2003 $876,814 227,062 197,394 50,351 (310,821) (218,094) (31,282) $791,424 2002 ($4,714,203) 139,006 993,292 (821,771) (1,155,076) (142,151) (15,607) ($5,716,510) The aggregate market value of the publicly traded stocks accounted for using the cost method was zero and $465,389 thousand as of December 31, 2003 and 2002, respectively. 76 Annual Report 2003 8. PROPERTY, PLANT AND EQUIPMENT Accumulated depreciation consisted of the following: Buildings Machinery and equipment Office equipment FINANCIAL INFORMATION 2003 $29,384,609 214,296,129 3,833,574 $247,514,312 2002 $22,289,909 163,208,908 2,948,787 $188,447,604 Information on the status of the expansion or construction plans of the Company's manufacturing facilities as of December 31, 2003 is as follows: Construction/ Expansion Plan Fab 12 Phase 1 Fab 14 Phase 1 Estimated Complete Costs $85,364,800 67,047,200 Accumulated Expenditures $82,722,100 27,189,600 Actual Date of Starting Operations March 2002 - Expected Date of Starting Operations - 2nd half of 2004 at the earliest Interest expense (before deducting capitalized amounts of NT$138,668 thousand and NT$165,857 thousand for the year ended December 31, 2003 and 2002, respectively) were NT$1,715,011 thousand and NT$2,285,792 thousand for the year ended December 31, 2003 and 2002, respectively. The interest rates used for calculating the capitalized amounts was 2.8% and 5.283% for the year ended December 31, 2003 and 5.283% for the year ended December 31, 2002. 9. DEFERRED CHARGES-NET Technology license fees Software and system design costs Other 10. BONDS Domestic unsecured bonds: 2003 $5,084,684 2,718,270 144,377 $7,947,331 2002 $6,519,286 3,167,366 105,838 $9,792,490 2003 2002 Issued in March 1998 and payable in March 2003 in one lump sum payment, 7.71% annual interest payable semi-annually $- $4,000,000 Issued in October 1999 and payable in October 2002 and 2004 in two equal payments, 5.67% and 5.95% annual interest payable annually, respectively 5,000,000 5,000,000 Issued in December 2000 and payable in December 2005 and 2007 in two installments, 5.25% and 5.36% annual interest payable annually, respectively 15,000,000 15,000,000 Issued in January 2002 and payable in January 2007, 2009 and 2012 in three installments, 2.6%, 2.75% and 3.00% annual interest payable annually, respectively 15,000,000 15,000,000 $35,000,000 $39,000,000 Annual Report 2003 77 As of December 31, 2003, future principal payments for the Company's bonds are as follows: Year of Repayment 2004 2005 2007 2008 and thereafter Amount $5,000,000 10,500,000 7,000,000 12,500,000 $35,000,000 11. OTHER LONG-TERM PAYABLES The Company entered into several license arrangements for certain semiconductor-related patents. Future payments under the agreements as of December 31, 2003 are as follows: Year 2004 2005 2006 2007 2008 2009 and thereafter 12. PENSION PLAN Amount $1,591,972 1,279,139 458,703 475,692 271,824 815,471 $4,892,801 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 at 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 deposited in the Committee's name in the Central Trust of China. The changes in the plan assets and unfunded accrued pension cost for the years ended December 31, 2003 and 2002 are summarized as follows: a. Components of pension cost Service cost Interest cost Projected return on plan assets Amortization Net pension cost (Continued) 78 Annual Report 2003 2003 $502,116 109,671 (41,154) 2,409 $573,042 2002 $442,294 121,552 (45,102) 1,681 $520,425 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 (loss) Accrued pension liabilities FINANCIAL INFORMATION 2003 2002 $21,895 2,184,593 2,206,488 1,752,208 3,958,696 (1,207,264) 2,751,432 (141,091) (10,090) - $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 Unfunded accrued pension cost $2,600,251 $2,210,542 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 2003 3.25% 3.00% 3.25% 2003 $181,106 2003 $3,490 2002 3.75% 3.00% 3.75% 2002 $164,720 2002 $5,360 Annual Report 2003 79 13. INCOME TAX a. A reconciliation of income tax expense based on income before income tax at the statutory rate and current income tax expense before income tax credits is shown below: Income tax expense based on income before income tax at statutory rate (25%) Tax-exempt income Temporary and permanent differences 2003 2002 $12,757,069 (5,255,750) (728,904) $6,778,114 (2,526,500) 452,684 Current income tax expense before income tax credits $6,772,415 $4,704,298 b. Income tax expense consists of: Current income tax expense before income tax credits Additional 10% on the unappropriated earnings Income tax credits Other income tax Net change in deferred income tax liabilities (assets) Investment tax credits Temporary differences Valuation allowance c. Deferred income tax assets (liabilities) consist of the following: Current: Investment tax credits Noncurrent: Investment tax credits Temporary differences Valuation allowances (Continued) 80 Annual Report 2003 2003 $6,772,415 1,271,759 (7,917,070) 2,500 917,759 (80,390) 2,802,602 2002 $4,704,298 162,938 (4,867,236) 12,661 (2,510,192) 1,072,086 6,927,609 $3,769,575 $5,502,164 2003 2002 $8,322,000 $3,320,000 $17,327,894 (3,485,451) (12,771,847) $23,247,653 (3,565,841) (9,969,245) $1,070,596 $9,712,567 FINANCIAL INFORMATION d. Integrated income tax information: The balances of the imputation credit account as of December 31, 2003 and 2002 were NT$2,832 thousand and NT$6,650 thousand, respectively. The expected and actual creditable ratio for 2003 and 2002 was 0.01% and 0.08%, respectively. The imputation credits allocated to the shareholders are based on its balance as of the date of dividend distribution. The expected creditable ratio for 2003 may be adjusted when the distribution of the imputation credits are made. e. All retained earnings generated prior to December 31, 1997 were appropriated as of December 31, 2003 and 2002. f. As of December 31, 2003, investment tax credits consisted of the following: 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 $8,203,531 3,792,734 4,823,691 1,680,360 $3,938,319 3,792,734 4,823,691 1,680,360 $18,500,316 $14,235,104 $2,258,828 3,111,472 3,322,453 2,275,560 $2,258,828 3,111,472 3,322,453 2,275,560 $10,968,313 $10,968,313 $48,097 28,886 27,311 $48,097 28,886 27,311 $104,294 $104,294 Statute for Upgrading Investments in important Industries technology-based enterprises $203,319 138,864 $203,319 138,864 $342,183 $342,183 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2004 2005 g. The sales generated from the following expansion and construction of the Company's manufacturing plants are exempt from income tax: Construction of Fab 6 Construction of Fab 8-modules B Expansion of Fab 2-modules A and B, Fab 3 and Fab 4, Fab 5 and Fab 6 Tax-Exemption Period 2001 to 2004 2002 to 2005 2003 to 2006 h. The tax authorities have examined income tax returns of the Company through 2000. However, the Company is contesting the assessment of the tax authority for 1992, 1993, 1997 and 1998. The Company believes that the result of the contesting will have no significant unfavorable impact on the Company. Annual Report 2003 81 14. LABOR COST, DEPRECIATION AND AMORTIZATION EXPENSE 2002 Year Ended December 31, 2003 2001 Classified as Cost of Sales Classified as Operating Expense Total Labor cost Salary Labor and health insurance Pension Other Depreciation Amortization Labor cost Salary Labor and health insurance Pension Other Depreciation Amortization $7,392,295 $3,093,658 $10,485,953 476,687 379,845 273,780 55,699,522 1,385,594 239,067 190,507 159,569 2,298,375 2,399,724 715,754 570,352 433,349 57,997,897 3,785,318 $65,607,723 $8,380,900 $73,988,623 2002 Year Ended December 31, 2002 2001 Classified as Cost of Sales Classified as Operating Expense Total $6,443,740 $2,996,574 $9,440,314 427,992 349,279 187,490 51,070,254 2,161,467 216,154 177,267 147,079 2,354,408 2,035,333 644,146 526,546 334,569 53,424,662 4,196,800 $60,640,222 $7,926,815 $68,567,037 15. SHAREHOLDERS' EQUITY Capital, Capital Surplus and Retained Earnings The Company has issued a total of 585,898 thousand ADSs which were traded on the NYSE as of December 31, 2003. The total number of common shares represented by all issued ADSs is 2,929,491 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 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 stock as stock dividends. The Company's Articles of Incorporation provide that the following shall be appropriated from annual earnings if in excess of any cumulative deficit: a. 10% legal reserve; until the accumulated legal reserve has equaled the total paid-in capital of the Company; b. Special reserve in accordance with relevant laws or regulations; 82 Annual Report 2003 FINANCIAL INFORMATION c. Remuneration to directors and supervisors and bonus to employees equals to 0.3% and at least 1% of the remainder, respectively. Individuals eligible for the employee bonus may include employees of affiliated companies as approved by the board of directors or a representative of the board of directors; d. Dividends to holders of preferred shares at a 3.5% annual rate, based on the period which the preferred shares have been outstanding. Following the redemption of all of its issued and outstanding preferred shares in May 2003, the Company amended its Articles of Incorporation on June 3, 2003, to remove the provision for issuance of any future dividends to preferred shareholders as of that date; e. The appropriation of any remaining balance shall be approved by the shareholders. Dividends are distributed in shares of common stock or a combination of cash and common stock. Since the Company is in a capital- intensive industry and is currently in the growth stage of its operation, distributions of profits is made preferably in the form of stock dividend. The total of cash dividends paid in any given year may not exceed 50% of total dividends distributed in that year. Any appropriations of net income are recorded in the financial statement in the year of shareholder approval. The appropriation for legal reserve is 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 be distributed to capital stock as a stock dividend up to half of the reserve balance when the reserve balance has reached 50% of the aggregate par value of the outstanding capital stock of the Company. A special reserve equivalent to the debit balance of any account shown in the shareholder's equity section of the balance sheet (except for the recorded cost of treasury stock held by subsidiaries) shall be made from unappropriated retained earnings pursuant to existing regulations promulgated by the SFC. The special reserve is allowed to be appropriated when the debit balance of such accounts is reversed. The appropriations of the earnings of 2002 and 2001 were approved in the shareholders' meeting on June 3, 2003 and May 7, 2002, respectively. The appropriations and dividend per share are as follows: Appropriation of Earnings Dividend Per Share (NT$) For Fiscal Year 2002 For Fiscal Year 2001 For Fiscal Year 2002 For Fiscal Year 2001 Legal reserve Special reserve Bonus paid to employees-in stock Preferred stock dividend-in cash $2,161,029 $1,448,317 68,945 (349,941) 1,539,013 1,070,783 455,000 455,000 Common stock dividend-in stock 14,898,309 16,832,553 Remuneration to directors and supervisors-in cash 58,485 133,848 $19,180,781 $19,590,560 $- - - 0.35 0.80 - $- - - 0.35 1.00 - The above appropriation of the earnings in fiscal year 2002 and 2001 is consistent with the resolution of the meetings of board of directors on March 4, 2003 and March 26, 2002, respectively. If the above employee bonus and remuneration to directors and supervisors were paid in cash and charged against income for 2002 and 2001, the basic earnings per share for the years ended December 31, 2002 and 2001 would decrease from NT$1.14 to NT$1.05 and NT$0.83 to NT$0.76, respectively. The shares distributed as a bonus to employees represented 0.83% and 0.64% of the Company's total outstanding common shares as of December 31, 2002 and 2001, respectively. As of January 12, 2004, the board of directors has not resolved earnings appropriation for fiscal year 2003. Annual Report 2003 83 The above information associated with the appropriations of bonus to employees and remuneration to directors and supervisors is available at Market Observation System website. Under the Integrated Income Tax System that became effective on January 1, 1998, ROC resident shareholders are allowed a tax credit for their proportionate share of the income tax paid by the Company on earnings generated as of January 1, 1998. An imputation credit account is maintained by the Company for such income tax and the tax credit allocated to each shareholder. Employee Stock Option Plans On October 29, 2003 and June 25, 2002, the SFC approved the Company's Employee Stock Option Plans (the 2003 Plan and the 2002 Plan, respectively). The aforementioned plans provide qualified employees with 120,000 thousand and 100,000 thousand units of option rights, respectively, with each unit representing one common share of stock. The option rights of both plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of issuance. Under the terms of both plans, stock options are granted at an exercise price equal to the closing price of the Company's common shares listed on the TSE on the date of grant. Under the 2002 Plan, there were 51,485 thousand option rights that had never been granted, or had been granted but cancelled. These un-granted or cancelled option rights expired as of December 31, 2003. Information of outstanding stock option rights under 2003 and 2002 Plan is as follows: 2003 Plan 2002 Plan Number of Outstanding Stock Option Rights (in Thousand) Range of Exercise Price (NT$) Number of Outstanding Stock Option Rights (in Thousand) Balance, January 1, 2003 Options granted Options cancelled Balance, December 31, 2003 - 66.5 66.5 - 843 (1) 842 19,369 32,031 (2,885) 48,515 Range of Exercise Price (NT$) 46.86-48.70 38.23-53.76 38.23-53.76 The aforementioned number of outstanding option rights and exercise prices have been adjusted, taken stock dividends into consideration, in accordance with both plans. Preferred Stock The Company issued 1,300,000 thousand shares of unlisted Series A-preferred stock to certain investors on November 29, 2000. All of the preferred stock was redeemed at par value and retired on May 29, 2003. Under the Company's Articles of Incorporation, as amended on June 3, 2003, the Company is no longer authorized to issue preferred stock. The following are the rights of the preferred shareholders and the related terms and conditions prior to redemption: 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 pre-emptive 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. 84 Annual Report 2003 16. TREASURY STOCK (COMMON STOCK) Purpose Year ended December 31, 2003 Reclassification of parent company stock held by subsidiaries from long-term investment Year ended December 31, 2002 Reclassification of parent company stock held by FINANCIAL INFORMATION Beginning Shares Dividend Sell (Shares in Thousand) Ending Shares 42,001 3,357 4,761 40,597 subsidiaries from long-term investment 39,270 3,818 1,087 42,001 Proceeds from the sale of treasury stock for the year ended December 31, 2003 and 2002 were NT$331,945 thousand and NT$96,501 thousand, respectively. As of December 31, 2003 and 2002, the book value of the treasury stock was NT$1,633,228 thousand and NT$1,923,492 thousand, respectively; the market value was NT$2,548,788 thousand and NT$2,048,164 thousand, respectively. The Company's 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. 17. EARNINGS PER SHARE Earnings per share (EPS) is computed as follows: Amounts (Numerator) 2002 2001 EPS (Dollars) Before Income Tax After Income Tax Share (Denominator) (Thousand) Before Income Tax After Income Tax Year ended December 31, 2003 Net Income Less-preferred stock dividends Basic earnings per share $51,028,275 $47,258,700 (184,493) (184,493) Income available to common shareholders 50,843,782 47,074,207 20,223,457 $2.51 $2.33 Effect of diluted securities-stock options - - 8,282 Diluted earnings per share Income available to common shareholders $50,843,782 $47,074,207 20,231,739 $2.51 $2.33 Year ended December 31, 2002 Income Less-preferred stock dividends $27,112,455 $21,610,291 (455,000) (455,000) Basic and diluted earnings per share Income available to common shareholders $26,657,455 $21,155,291 20,220,989 $1.32 $1.05 The potential common shares issuable under the employee stock option plans (see Note 15) are included in the denominator of the diluted EPS computation by using the treasury stock method under the SFAS No. 24, "Earnings Per Share", but such shares resulted in a non-dilutive per share amount for the year ended December 31, 2002. The average number of shares outstanding for the 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, 2002 to decrease from NT$1.43 to NT$1.32 and NT$1.14 to NT$1.05, respectively. Annual Report 2003 85 18. RELATED PARTY TRANSACTIONS The Company engages in business transactions with the following related parties: a. Industrial Technology Research Institute (ITRI); one of whose directors is the Chairman of the Company b. Philips; a major shareholder of the Company c. Subsidiaries TSMC-North America TSMC-Europe TSMC-Japan d. Investees VIS SSMC GUC e. Indirect subsidiaries WaferTech, LLC (WaferTech) TSMC Technology The transactions with the aforementioned parties in addition to those disclosed in other notes, are summarized as follows: 2002 2003 2001 2002 Amount % Amount % For the years Sales TSMC-North America Philips and its affiliates GUC ITRI SSMC VIS WaferTech Purchase WaferTech SSMC VIS Operating expense-rental ITRI $117,758,911 3,577,054 549,471 60,171 873 19 - $121,946,499 11,433,083 5,519,805 4,910,810 $21,863,698 $- Manufacturing expenses-technical assistance fee Philips $3,023,741 (Continued) 86 Annual Report 2003 57 2 - - - - - 59 36 17 15 68 - 3 $94,433,401 2,909,008 - 94,409 7,018 92,119 1,152 $97,537,107 9,955,154 2,751,297 3,469,198 $16,175,649 $40,401 $2,849,517 57 2 - - - - - 59 41 11 14 66 3 4 FINANCIAL INFORMATION 2002 2003 2001 2002 Amount % Amount % $215,202 154,262 $369,464 $15,125 $201,869 2,794 251 $204,914 $13,946,638 895,063 118,503 15,339 14,489 8,781 1,232 580 18 13 31 9 8 - - 8 93 6 1 - - - - - $208,226 132,086 $340,312 $- $126,061 1,635 - $127,696 $9,739,236 352,706 58,301 - 5,678 22,974 - 4,593 23 15 38 - 3 - - 3 96 3 1 - - - - - $15,000,625 100 $10,183,488 100 $1,579,568 1,184,642 1,034,074 634,647 28,150 16,026 12,241 10,792 $4,500,140 $150,840 35 27 23 14 1 - - - 100 85 $730,847 617,751 653,876 391,426 19,643 29,520 14,511 9,424 $2,466,998 $514,846 30 25 26 16 1 1 1 - 100 95 Marketing expenses-commission TSMC-Japan TSMC-Europe Sales of property, plant and equipment VIS Non-operating income and gain SSMC (technical service income mainly) WaferTech VIS At end of the year Receivables TSMC-North America Philips and its affiliates VIS GUC SSMC ITRI TSMC Technology Others Payables Philips and its affiliates WaferTech VIS SSMC TSMC-Japan TSMC-Europe TSMC-North America TSMC Technology Refundable deposits-VIS Except for WaferTech and TSMC-North America, 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 determined in accordance with the related contractual agreements. The selling prices to TSMC-North America are approximately 99% of the comparable selling prices to third parties. The payment terms of related parties are thirty days from the date of monthly closing or thirty days from the date of invoice, which is not significantly different from payment terms with third parties. Annual Report 2003 87 19. SIGNIFICANT LONG-TERM OPERATING LEASES The Company leases land from the Science-Based Industrial Park (SBIP) 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$230,449 thousand. The agreements can be renewed upon their expiration. Future remaining lease payments are as follows: Year 2004 2005 2006 2007 2008 2009 and thereafter Amount $230,449 230,449 230,449 230,449 206,406 1,586,361 $2,714,563 20. SIGNIFICANT COMMITMENTS AND CONTINGENCIES The significant commitments and contingencies as of December 31, 2003 are as follows: a. Under a Technical Cooperation Agreement with Philips, as amended on May 12, 1997, the Company shall pay technical assistance fees at a percentage of net sales (as defined in the agreement) with respect to certain products. The agreement shall remain in force through July 8, 2007 and may be automatically renewed for successive periods of three years thereafter. Under the amended agreement, starting from the fifth anniversary date of the amended agreement, the fees are subject to reduction by the amounts the Company pays to any third party for settling any licensing/infringement disputes, provided that the fees to be paid after reduction will not be below a certain percentage of the net sales. b. Subject to certain equity ownership and notification requirements, Philips and its affiliates can avail themselves each year of up to 30% of the Company's production capacity. c. Under a technical cooperation agreement with ITRI, the Company shall reserve and allocate up to 35% of certain of its production capacity for use by the Ministry of Economic Affairs (MOEA) or any other party designated by the MOEA. d. Under several foundry agreements, the Company shall reserve a portion of its production capacity for certain major customers who have made guarantee deposits to the Company. As of December 31, 2003, the Company has a total of US$22,557 thousand of guarantee deposits. 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, SSMC, for the purpose of constructing an integrated circuit foundry in Singapore, and allowed 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 commitment 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. The Company provides 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 certain products sold by SSMC. The Agreement shall remain in force for ten years and may be automatically renewed for successive periods of five years unless pre-terminated by either party under certain conditions. 88 Annual Report 2003 FINANCIAL INFORMATION g. The Company provided guarantees on loans amounting to US$60,000 thousand, US$40,000 thousand and US$440,000 thousand for TSMC Development, Inc. (TSMC Development), TSMC-North America and WaferTech, respectively. h. Under a Technology Transfer Agreement (TTA) 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 and will be automatically renewed for successive periods of two years thereafter unless either party gives notice for early termination under certain conditions. In January 2003, the Company and National entered into a Termination Agreement whereby the TTA was terminated for convenience. Under the termination agreement, the Company will be relieved of any further obligation to transfer any additional technology. In addition, the Company granted National an option to request additional technology transfers under the same terms and conditions as the terminated TTA through January 2008. i. The Company entered into a Manufacturing Agreement with 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 agreed upon by the parties. The Company paid NT$1,200,000 thousand to VIS as a guarantee deposit. VIS shall return portions of the guarantee deposit without any interest to the Company upon reaching certain levels of purchase commitment by the Company. The contract will remain in force for five years. As of December 31, 2003, the refundable deposit was NT$150,840 thousand. 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 deferred charges which is amortized and charged to cost of sales on a straight-line basis over the estimated life of the technology or the term of the contract, whichever is shorter. k. In November 2002, the Company entered into an Amended and Restated Joint Technology Cooperation Agreement with Philips, Motorola, Inc. and STMicroelectronics to jointly develop 90 nm to 65 nm advanced CMOS Logic and e-DRAM technologies. The Company also agreed to align 0.12 um CMOS Logic technology to enhance its foundry business opportunities. The Company will contribute process technologies and share a portion of the costs associated with this joint development project. l. In December 2003, the Company entered into a Technology Development and License Agreement with Motorola Inc., to jointly develop 65 nm SOI (silicon on insulator) technology and license related 90 nm SOI technology. The resultant works of the 65 nm SOI technology co-development project shall be jointly owned by the parties. In accordance with the agreement, the Company shall pay royalty to Motorola, Inc. and share a portion of the costs associated with this joint development project. m.The Company filed a lawsuit in the US District Court of Northern California in December 2003 against Semiconductor Manufacturing International Corporation and certain of its subsidiaries for patent infringement and trade secret misappropriation. The suit also asks for injunctive relief along with monetary damages. The case is in the process of being reviewed by the court and, the probable impact is still unable to be reasonably estimated. n. Amounts available under unused letter of credits as of December 31, 2003 were NT$6,480 thousand, EUR21 thousand and Singapore dollar 85 thousand. Annual Report 2003 89 21. ADDITIONAL DISCLOSURES Following are the additional disclosures required by the SFC for TSMC and investees: a. Financing provided: Please see Table 1 attached; b. Endorsement/guarantee provided: Please see Table 2 attached; c. Marketable securities held: Please see Table 3 attached; 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 Company entered into derivative financial instrument transactions for the year ended December 31, 2003 to manage exposures related to foreign-currency denominated receivables or payables, and interest rate fluctuations. Certain information on these contracts is as follows: a) Outstanding forward exchange contracts as of December 31, 2003: Financial Instruments Sell Buy Buy Maturity Period January 2004 to July 2004 January 2004 January 2004 Contract Amount (Nominal Amount) (in Thousand) US$1,805,000 (US$/NT$) EUR7,500 (EUR/US$) JPY748,405 (JPY/US$) As of December 31, 2003, receivables from forward exchange contracts (included in the "other financial assets" account) aggregate approximately NT$76,385 thousand, and payables from forward exchange contracts (included in the "other current liabilities" account) aggregate approximately NT$174,019 thousand. Net exchange gain for the year ended December 31, 2003 was NT$321,033 thousand. The assets and liabilities related to the above forward exchange contracts are as follows: Assets and Liabilities Time deposits Accounts and notes receivable Accounts payable Accounts payable 90 Annual Report 2003 As of December 31, 2003 (in Thousand) US$1,137,704 US$789,927 JPY889,850 EUR9,364 FINANCIAL INFORMATION b) Interest rate swaps The Company entered into interest rate swap contracts to manage exposures to floating interest rates on long-term liabilities. Net interest expense on these transactions for the year ended December 31, 2003 was NT$141,007 thousand. Outstanding contracts as of December 31, 2003 were as follows: Contract Date Period July 1, 1999 July 1, 1999 to June 28, 2004 September 19, 2003 September 22, 2003 to December 15, 2005 October 16, 2003 October 16, 2003 October 17, 2003 October 17, 2003 November 7, 2003 c) Option contracts October 20, 2003 to December 15, 2005 October 20, 2003 to December 15, 2005 October 21, 2003 to December 15, 2005 October 20, 2003 to December 15, 2005 November 11, 2003 to December 15, 2005 Amount (in Thousand) US$2,857 NT$500,000 NT$500,000 NT$500,000 NT$500,000 NT$500,000 NT$500,000 The Company entered into foreign currency option contracts to manage exchange rate fluctuations arising from its anticipated US dollar cash receipts on export sales or its Yen and European currency obligations for purchases of machinery and equipment. As of December 31, 2003, there were no outstanding option contracts. For the year ended December 31, 2003, the Company realized premium income of NT$50,273 thousand and premium expense of NT$204,056 thousand. d) Transaction risk i) Credit risk. Credit risk represents the positive net settlement amount of those contracts with positive fair values at the balance sheet date. The positive net settlement amount represents the loss incurred by the Company if the counter-parties breached the contracts. 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 minimal. iii)Liquidity and cash flow risk and uncertainty of amount and term of future cash demand. Annual Report 2003 91 As of December 31, 2003, the Company's future cash demand for outstanding forward exchange contracts, interest rate swaps and option contracts are as follows: Term Within one year Forward Exchange Contracts Inflow (In Thousand) Outflow (In Thousand) NT$61,230,306 US$1,821,340 EUR7,500 JPY748,405 The Company has sufficient operating capital to meet the above cash demand. The interest rate of the interest rate swaps has taken the Company's cost of capital into account. In addition, the exchange rates of forward foreign exchange contracts and option contracts are fixed. Therefore, there is no material fund raising risk and cash flow risk. 2) Fair value of financial instruments Non-derivative financial instruments Assets Cash and cash equivalents Short-term investments Receivables from related parties Notes and accounts receivable Other financial assets Long-term investments Refundable deposits Liabilities Payables to related parties Accounts payable Payables to contractors and equipment suppliers Bonds payable (includes current portion) Other long-term payable (includes current portion) Guarantee deposits Derivative financial instruments Forward exchange contracts (buy) Forward exchange contracts (sell) Interest rate swaps Option 2003 Carrying Amount Fair Value 2002 Carrying Amount Fair Value (In Thousand) (In Thousand) $98,288,002 12,559,019 15,000,625 13,917,807 1,081,742 37,965,353 177,379 4,500,140 6,083,876 7,117,884 35,000,000 4,892,801 763,489 $98,288,002 12,703,444 15,000,625 13,917,807 1,081,742 46,144,338 177,379 4,500,140 6,083,876 7,117,884 35,850,377 4,892,801 763,489 $61,656,795 - 10,183,488 9,555,687 969,669 34,978,495 543,469 2,466,998 4,849,234 14,004,383 39,000,000 5,438,964 1,395,066 $61,656,795 - 10,183,488 9,555,687 969,669 38,909,570 543,469 2,466,998 4,849,234 14,004,383 39,762,245 5,438,964 1,395,066 2,351 (99,984) - - 3,037 40,638 2,093 - 38,369 143,702 23,994 (50,273) 26,089 139,913 (164,342) (410,132) 92 Annual Report 2003 FINANCIAL INFORMATION Fair values of financial instruments were determined as follows: a) The carrying amounts reported in the balance sheets for cash and cash equivalents, notes and accounts receivable, other financial assets, accounts payable, payables to contractors and equipment suppliers are approximate to their fair values. b) Fair value of short-term and long-term investments is based on quoted market prices. If quoted market prices are unavailable, fair value is based on net asset value or book value of investment. c) Fair value of refundable deposits and guarantee deposits is based on carrying values. d) The fair value of bonds payable is the quoted market value. Fair value of other long-term payable is approximate to its carrying value. e) Fair value of derivative financial instruments is the estimated net receivable or (payable) if the contracts are terminated on the relevant balance sheet date. The fair values of some financial and 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. On February 27, 2003, the authority approved phase one of the foregoing project and permitted direct investment in establishing TSMC Shanghai. The Company entered into an investment related agreement with Shanghai Songjiang District People's Government on June 8, 2003. On August 4, 2003, TSMC Shanghai has been established and is 100% held by the Company. TSMC Shanghai is engaged mainly in the manufacturing and selling of integrated circuits. The Company invested US$56,000 thousand on October 8, 2003. 22. SEGMENT FINANCIAL INFORMATION a. Gross export sales Area America Asia and others Europe 2003 $103,600,081 63,349,186 11,706,059 2002 $86,045,821 49,916,588 9,216,429 $178,655,326 $145,178,838 The export sales information is based on amounts billed to customers within the region. b. Major customers representing at least 10% of net total sales: The Company only has one customer that accounts for at least 10% of its total sales. The sales to such customer amounted to $31,220,104 thousand and $32,769,054 thousand in 2003 and 2002 representing 15% and 20% of its total sales, respectively. The Company entered into an exclusive distribution agreement with TSMC–North America on January 1, 2002. Under the distributor agreement, TSMC–North America purchases inventory from the Company, and in turn, sells the inventory to third-party customers. Annual Report 2003 93 TABLE 1 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. FINANCING PROVIDED FOR THE YEAR ENDED DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Financing Name Counter-party Financial Statement Account Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) 1 2 TSMC International TSMC Technology Other receivables TSMC Development Other receivables TSMC Partners TSMC Development Other receivables $538,585 (US$15,851) $2,038,680 (US$60,000) $2,718,240 (US$80,000) $538,585 (US$15,851) $2,038,680 (US$60,000) $2,718,240 (US$80,000) Note 1: Not exceeding the issued capital of the Company. Note 2: Generally not exceeding the issued capital of the Company, unless approved by all members of the board. TABLE 2 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. ENDORSEMENT/GUARANTEE PROVIDED FOR THE YEAR ENDED DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Endorsement/ Guarantee Provider Counter-party Nature of Relationship (Note 2) Limits on Each Counter-party's Endorsement/ Guarantee Amounts Name 0 TSMC TSMC Development TSMC-North America WaferTech 3 2 3 Not exceed 10% of the net worth of TSMC, and also limiting to the total paid-in capital of the endorsement/ guarantee company, unless otherwise approved by Board of Directors. Note 1: 25% of the net worth of TSMC as of December 31, 2003. Note 2: The No. 2 represents a subsidiary in which TSMC holds directly over 50% of the equity interest. The No. 3 represents an investee in which TSMC holds directly and indirectly over 50% of the equity interest. 94 Annual Report 2003 FINANCIAL INFORMATION Interest Rate Transaction Amounts Reasons For Short-term Financing Allowance for Bad Debt Collateral Item Value Financing Limit for Each Borrowing Company Financing Company's Financing Amount Limits (US$ in Thousand) 4.25% 1.50% 1.50% $- Operating capital - - Operating capital Operating capital $- - - - - - $- N/A - - $33,569,117 (US$987,968) (Note 1) N/A (Note 2) Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) Value of Collateral Property, Plant and Equipment Ratio of Accumulated Amount of Collateral to Net Equity of the Latest Financial Statement Maximum Collateral/Guarantee Amounts Allowable (Note 1) $6,795,600 (US$200,000) 1,359,120 (US$40,000) 14,950,320 (US$440,000) $2,038,680 (US$60,000) 1,359,120 (US$40,000) 14,950,320 (US$440,000) $- - - 0.62% 0.41% 4.54% $82,303,577 Annual Report 2003 95 TABLE 3 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. MARKETABLE SECURITIES HELD DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account TSMC Liquidity fund BOA Funds GS Funds Bond fund JF Taiwan Bond Fund ABN AMRO Bond Fund Bond 2002 Government Bond Series A 2002 Government Bond Series E 1994 Government Bond Series C Bonds with Repurchase Agreement Stock Taiwan Mask Corp. TSMC-North America TSMC-Europe TSMC-Japan VIS TSMC International TSMC Partners SSMC Emerging Alliance GUC Vis Era United Gas Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Hon Tung Ventures Capital - - - - - - - - - Subsidiary Subsidiary Subsidiary Investee Subsidiary Subsidiary Investee Subsidiary Investee Investee - - - - Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 96 Annual Report 2003 FINANCIAL INFORMATION December 31, 2003 Shares/Units (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note 40,000 20,000 34,343 34,794 - - - - 7,094 11,000 - 6 787,016 987,968 300 382 - 39,040 5,100 16,783 10,500 5,000 8,392 $1,359,120 (US$40,000) 679,560 (US$20,000) 500,000 500,000 3,157,331 3,113,067 1,422,197 1,800,000 27,744 417,858 24,622 101,722 4,077,198 22,654,743 4,116,934 2,759,376 704,744 368,434 50,231 193,584 105,000 50,000 83,916 N/A N/A N/A N/A N/A N/A N/A N/A 2 100 100 100 28 100 100 32 99 47 25 11 7 2 10 $1,359,120 (US$40,000) 679,560 (US$20,000) 503,421 503,490 3,169,046 3,126,273 1,426,995 1,802,572 132,967 1,133,011 24,622 101,722 10,465,676 22,654,743 4,116,934 2,759,376 704,744 403,962 50,231 282,754 147,999 57,051 66,447 The treasury stocks in amounts of NT$ 715,153 thousand are deducted from the carrying value. (Continued) Annual Report 2003 97 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account Certificate Chi Cherng Investment Investee Long-term investment Hsin Ruey Investment Investee Long-term investment Equity Crimson Asia Capital Horizon Ventures TSMC-North America Chi Cherng Investment Stock TSMC Stock TSMC - - Long-term investment Long-term investment Parent company Long-term investment Parent company Short-term investment Certificate Hsin Ruey Investment Major shareholder Long-term investment Hsin Ruey Investment Stock TSMC Certificate Chi Cherng Investment Stock InveStar InveStar II TSMC Development TSMC Technology 3DFX Interactive Inc. Liquidity fund BOA Fund Stock WaferTech Parent company Short-term investment Major shareholder Long-term investment Subsidiary Subsidiary Subsidiary Subsidiary - Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment - Short-term investment Subsidiary Long-term investment Stock PLX Technology, Inc. Richtek Technology Corp. Programmable Microelectronics (Taiwan), Inc. Global Testing Corp. Chipstrate Technologies, Inc. Capella Microsystems, Inc. - - - - - - Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment TSMC International TSMC Development InveStar 98 Annual Report 2003 FINANCIAL INFORMATION December 31, 2003 Shares/Units (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note The treasury stocks in amounts of NT$458,564 thousand are deducted from the carrying value. The treasury stocks in amounts of NT$459,511 thousand are deducted from the carrying value. - - N/A N/A $42,941 42,006 40,947 229,669 13,101 715,153 13,735 458,564 - 902,033 13,761 459,511 - 902,909 45,000 51,300 1 1 68 US$46,403 US$36,901 US$537,716 (US$7,918) - 36 36 N/A N/A - - 64 - 64 97 97 100 100 - $501,505 501,517 40,947 229,669 822,491 862,340 902,033 863,957 902,909 US$46,403 US$36,901 US$537,716 (US$7,918) - 30,300 US$30,300 N/A US$30,300 - US$341,972 93 947 575 13,268 6,660 530 US$180 US$121 US$203 US$5,295 US$308 US$156 99 - 2 3 10 9 - US$341,972 US$786 US$5,799 US$203 US$5,295 US$308 US$156 (Continued) Annual Report 2003 99 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account Signia Technologies, Inc. Advanced Power Electronics Corp. Richtek Technology Corp. Preferred stock Integrated Memory Logic, Inc. SiRF Technology Holdings, Inc. Sensory, Inc. LightSpeed Semiconductor Corporation Tropian, Inc. Sonics, Inc. Atheros Communications, Inc. NanoAmp Solutions, Inc. Monolithic Power Systems, Inc. Memsic, Inc. Reflectivity, Inc. Match Lab, Inc. Oridus, Inc. (Creosys, Inc.) Incentia Design Systems, Inc. IP Unity Stock WatchGuard Technologies, Inc. RichTek Technology Corp. eChannel Option Holding, Inc. Elcos Microdisplay Technology, Ltd. Signia Technologies, Inc. Procoat Technology Programmable Microelectronics (Taiwan), Inc. Auden Technology MFG Co., Ltd. GeoVision, Inc. EoNex Technologies, Inc. Conwise Technology Co., Ltd. Eon Technology, Inc. Goyatek Technology, Inc. TrendChip Technologies Corp. Ralink Technologies, Inc. RichTek Technology Corp. Preferred stock Capella Microsystems, Inc. Memsic, Inc. Oepic, Inc. NanoAmp Solutions, Inc. Advanced Analogic Technology, Inc. Monolithic Power Systems, Inc. Sonics, Inc. Newport Opticom, 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 Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 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 InveStar II 100 Annual Report 2003 FINANCIAL INFORMATION December 31, 2003 Shares/Units (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note 701 2,750 1,671 1,831 306 1,404 2,252 1,758 2,686 1,607 541 2,521 2,727 1,064 1,875 1,500 286 1,008 5 465 358 270 351 4,165 177 953 287 55 2,800 2,800 2,088 2,000 1,833 785 419 2,289 4,997 250 948 804 3,082 1,157 US$206 US$1,376 US$204 US$1,221 US$1,333 US$312 US$329 US$1,916 US$3,530 US$3,593 US$853 US$2,000 US$1,500 US$1,192 US$375 US$300 US$92 US$494 US$30 US$346 US$251 US$27 US$101 US$1,940 US$50 US$834 US$132 US$3,048 US$979 US$965 US$727 US$861 US$791 US$583 US$122 US$1,560 US$1,317 US$1,000 US$1,261 US$1,946 US$3,082 US$402 4 5 3 12 1 5 2 3 5 - 3 12 12 5 9 8 2 2 - 1 6 1 2 10 1 4 1 6 14 8 8 5 5 2 3 10 8 1 2 4 5 9 US$206 US$1,376 US$10,235 US$1,221 US$1,333 US$312 US$329 US$1,916 US$3,530 US$3,593 US$853 US$2,000 US$1,500 US$1,192 US$375 US$300 US$92 US$494 US$30 US$2,848 US$251 US$27 US$101 US$1,940 US$834 US$1,151 US$132 US$3,048 US$979 US$965 US$727 US$861 US$791 US$4,804 US$122 US$1,560 US$1,317 US$1,000 US$1,261 US$1,946 US$3,082 US$402 (Continued) Annual Report 2003 101 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account Silicon Data, Inc. Reflectivity, Inc. Angstron Systems, Inc. Tropian, Inc. SiRF Technology, Inc. LeadTONE Wireless, Inc. Match Lab, Inc. Kilopass Technology, Inc. Fang Tek, Inc. Alchip Technologies Ltd. Elcos Microdisplay Technology, Ltd. - - - - - - - - - - - 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 Emerging Alliance Stock Global Investment Holding, Inc. Investee Long-term investment Preferred stock Quake Technologies, Inc. Pixim, Inc. Newport Opticom, Inc. NetLogic Microsystems, Inc. Ikanos Communication, Inc. Quicksilver Technology, Inc. Mosaic Systems, Inc. Accelerant Networks, Inc. Zenesis Technologies, Inc. Reflectivity, Inc. Iridigm Display, Co. XHP Microsystems, Inc. Axiom Microdevices, Inc. Optichron, Inc. Audience, Inc. Next IO, Inc. NuCORE Technology Inc. Bond fund Entrust KIRIN Entrust Phoenix TISC Ta-Hua E. Sun New Era Shenghua 1699 Jihsun Shenghua 5599 Mega Diamond Polar Ta-Hua GC Dollar Taiwan Security Overseas Fund - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment GUC 102 Annual Report 2003 FINANCIAL INFORMATION December 31, 2003 Shares/Units (Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note 2,000 1,596 1,567 1,464 20 433 313 3,887 5,556 2,125 2,667 US$750 US$1,500 US$500 US$1,595 US$131 US$131 US$63 US$2,000 US$2,000 US$1,700 US$3,500 10,000 $100,000 467 1,721 962 602 5,116 963 2,481 441 861 1,596 254 2,280 1,000 714 1,654 800 1,821 2,106 1,399 2,210 2,412 962 1,009 764 931 2,734 1,968 38 22 US$334 US$2,382 US$250 US$1,850 US$1,625 US$2,488 US$12 US$460 US$500 US$1,500 US$500 US$750 US$1,000 US$1,000 US$250 US$500 US$1,000 22,324 20,207 30,000 30,003 10,000 12,000 10,000 10,000 30,105 20,060 13,691 102,694 7 6 6 2 - 6 2 19 44 - - 6 1 3 6 1 3 4 6 1 4 5 1 6 5 6 2 3 2 - - - - - - - - - - - - US$750 US$1,500 US$500 US$1,595 US$131 US$131 US$63 US$2,000 US$2,000 US$1,700 US$3,500 $100,000 US$334 US$2,382 US$250 US$1,850 US$1,625 US$2,488 US$12 US$460 US$500 US$1,500 US$500 US$750 US$1,000 US$1,000 US$250 US$500 US$1,000 22,334 20,216 30,012 30,013 10,004 11,995 10,157 10,004 30,118 20,068 13,732 103,190 Annual Report 2003 103 TABLE 4 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Marketable Securities Type and Name Financial Statement Account Counter-Party Nature of Relationship TSMC Liquidity fund BOA Fund GS Fund Short-term investment BOA Short-term investment Goldman Sachs Bond fund JF Taiwan Bond Fund ABN AMRO Bond Fund ABN AMRO Select Bond Fund Bond Bonds with Repurchase Agreement 2002 Government Bond Series A 2002 Government Bond Series E 1994 Government Bond Series C Stock Emerging Alliance VIS Amkor Technology Monolithic System Tech. TSMC Partners ADR TSMC InveStar II Preferred stock Short-term investment Short-term investment Short-term investment JF Asset Management (Taiwan) Ltd. ABN AMRO ABN AMRO Short-term investment Short-term investment Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Short-term investment Several financial institutions BNP and several financial institutions BNP and several financial institutions Chung Shing Bills Finance Corp. and several financial institutions Emerging Alliance VIS - - - Elcos Microdisplay Technology, Ltd. Long-term investment Elcos Microdisplay Technology, Ltd. TSMC International GUC Liquidity fund BOA Fund Bond fund Short-term investment BOA Taiwan Securities Overseas Fund Short-term investment - - - - - - - - - - Subsidiary Investee - - - - - - Note 1: The ending balance included the recognition of the investment income (loss) by the equity method, the cumulative translation adjustments and unrealized loss on long-term investments recognized in proportion to the Company's ownership percentage in investees. Note 2: Including stock dividend of 61 thousand units 104 Annual Report 2003 FINANCIAL INFORMATION Beginning Balance Acquisition Disposal Ending Balance Shares/Units (Thousand) Amount (US$ in Thousand) Shares/Units (Thousand) Amount (US$ in Thousand) Shares/Units (Thousand) Amount Carrying Value (US$ in Thousand) Gain (Loss) on Disposal Shares/Units (Thousand) $- 120,000 $4,161,760 80,000 $2,785,760 $2,785,760 $- 40,000 (US$120,000) (US$80,000) 140,000 4,852,300 120,000 4,165,140 4,165,140 (US$140,000) (US$120,000) 34,343 97,782 81,744 500,000 1,400,000 879,000 - 62,988 81,744 - 902,881 881,719 - 900,000 879,000 - - - - - 109,545 - - - 1,800,000 3,157,331 3,113,067 1,422,197 174,030 766,815 - - - - - - - - - - - - - - - - - - - - - 505 470 301,209 152,681 280,748 104,289 20,461 48,392 823 (Note 2) US$8,407 US$7,357 US$1,050 - - 2,881 2,719 - - - - - - Amount (US$ in Thousand) (Note 1) $1,359,120 (US$40,000) 679,560 (US$20,000) 500,000 500,000 - 1,800,000 3,157,331 3,113,067 1,422,197 704,744 4,077,198 - - - 20,000 34,343 34,794 - - - - - - 787,016 - - - - - - - - - - - - - 677,471 505 470 - - - - - - - - 767,239 3,264,657 280,748 104,289 762 US$7,357 - - - - - - 2,667 US$3,500 - - - 87,300 US$87,300 57,000 US$57,000 US$57,000 22 102,694 - - - - - - 2,667 US$3,500 30,300 US$30,300 22 102,694 Annual Report 2003 105 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, 2003 (Amounts in Thousand New Taiwan Dollars) Company Name Types of Property Transaction Date Transaction Amount Payment Term Counter-party Fab 14 Fab 12 Fab 12 Fab 12 Fab 12 Fab 12 January 20, 2003 $180,665 By the construction progress United Integrated Services May 6, 2003 June 17, 2003 June 18, 2003 December 2, 2003 December 2, 2003 119,000 By the construction progress United Integrated Services 134,500 By the construction progress United Integrated Services 110,055 By the construction progress Liquid Air Far East Co. Ltd. 230,000 By the construction progress China Steel Structure Co. 285,000 By the construction progress Fu Tsu Construction Co. Ltd. TSMC 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, 2003 (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 GUC WaferTech SSMC VIS Investee Subsidiary Investee Investee Sales Sales Sales Purchases Purchases Purchases $117,758,911 3,577,054 549,471 11,433,083 5,519,805 4,910,810 57 2 - 36 17 15 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, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Related Party Nature of Relationship Ending Balance Turnover Rate TSMC TSMC-North America Subsidiary Philips and its affiliates Major shareholder $13,946,638 895,063 37 days 64 days 106 Annual Report 2003 FINANCIAL INFORMATION 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 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 Transaction Details Abnormal Transaction Note/Accounts Payable or Receivable Note Payment Terms Unit Price Payment Terms Ending Balance % to Total Net 30 days from invoice date Net 30 days from invoice date 30 days after monthly closing Net 30 days from invoice date Net 30 days from invoice date Net 30 days from invoice date None None None None None None None None None None None None $13,946,638 895,063 15,339 1,184,642 634,647 1,034,074 48 3 - 11 6 10 - - - - - - Overdue Amount Action Taken $3,907,505 - 97,618 Accelerate demand on account receivables Amounts Received in Subsequent Period Allowance for Bad Debts $4,831,330 40 $- - Annual Report 2003 107 TABLE 8 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2003 Net Income Investment December 31, 2003 December 31, 2002 Shares (Thousand) Percentage of Ownership Carrying Value (Note1) (Loss) of the Gain (Loss) Note Investee (Note 2) Investor Company: TSMC TSMC-North America TSMC-Europe TSMC-Japan San Jose, California, U.S.A. Amsterdam, The Netherlands Yokohama, Japan TSMC-Shanghai Shanghai, China VIS TSMC International Hsin-Chu, Taiwan Tortola, British Virgin Islands Chi Cherng Investment Taipei, Taiwan Hsin Ruey Investment Taipei, Taiwan TSMC Partners Tortola, British Virgin Islands Marketing and engineering support Marketing and engineering support Marketing and engineering support IC and other wafer equipment manufacturing and marketing IC design and manufacturing Investment Investment Investment Investment Emerging Alliance Cayman Islands Investment GUC VisEra Hsin-Chu, Taiwan Hsin-Chu, Taiwan IC research, development, manufacturing, testing and marketing Electronic spare parts manufacturing, material wholesaling and retailing $333,178 $333,178 11,000 15,749 83,760 1,890,952 2,960 83,760 - 8,119,816 31,445,780 6,503,640 31,445,780 300,000 300,000 10,350 300,000 300,000 10,350 1,179,690 409,920 1,005,660 341,250 (Note 3) - 6 - 787,016 987,968 - - 300 382 - 39,040 51,000 - 5,100 100 100 100 100 28 100 36 36 100 32 99 47 25 $417,858 $234,639 $227,062 Subsidiary 24,622 101,722 (13) 2,451 (13) Subsidiary 2,451 Subsidiary 1,901,428 (1,306) (1,306) Subsidiary 4,077,198 22,654,743 42,941 42,006 4,116,934 179,359 876,814 (840) (1,290) 199,401 50,351 Investee 876,814 Subsidiary 108 1,252 Investee Investee 197,394 Subsidiary 2,759,376 (971,314) (310,821) Investee 704,744 368,434 (219,190) (88,517) (218,094) Subsidiary (33,005) Investee 50,231 (3,076) (769) Investee SSMC Singapore Wafer manufacturing 6,408,190 6,408,190 Note 1: The treasury stock is deducted from the carrying value. Note 2: The unrealized gain or loss and the gain or loss on disposal of the stocks held by subsidiaries are excluded. Note 3: TSMC's investee, Ya Xin, merged with GUC in January 2003. GUC is the surviving company. 108 Annual Report 2003 FINANCIAL INFORMATION 10. Consolidated Financial Statements & Independent Auditors' Report English Translation of a Report Originally Issued in Chinese INDEPENDENT AUDITORS' REPORT January 12, 2004 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, 2003, and 2002, 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 assur- ance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence support- ing the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant esti- mates 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, 2003 and 2002, 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 accept- ed 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. Deloitte & Touche (T N Soong & Co and Deloitte & Touche (Taiwan) Established Deloitte & Touche Effective June 1, 2003) Taipei, Taiwan 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 juris- diction. The standards, procedures and practices to audit such consolidated financial statements are those generally accepted and applied in the Republic of China. Annual Report 2003 109 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 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 22) Notes receivable Accounts receivable Allowance for doubtful receivables (Note 2) Allowance for sales returns and others (Note 2) Other financial assets (Note 25) Inventories-net (Notes 2 and 7) Deferred income tax assets (Notes 2 and 16) Prepaid expenses and other current assets (Note 2) Total current assets LONG-TERM INVESTMENTS (Notes 2, 3, 8 and 20) Equity method Cost method Funds Prepayment for subscribed stocks Total long-term investments PROPERTY, PLANT AND EQUIPMENT (Notes 2, 9, 12 and 22) Cost Land and land improvements Buildings Machinery and equipment Office equipment Total cost Accumulated depreciation Advance payments and construction in progress Net property, plant and equipment GOODWILL (Note 2) OTHER ASSETS Deferred charges-net (Notes 2 and10) Deferred income tax assets (Notes 2 and 16) Refundable deposits (Notes 22 and 24) Idle assets (Note 2) Assets leased to others (Note 2) Miscellaneous Total other assets TOTAL ASSETS The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche report dated January 12, 2004) 110 Annual Report 2003 2003 Amount $102,988,896 13,611,536 1,052,175 9,893 28,495,269 (1,020,398) (2,135,843) 1,373,705 12,135,324 8,398,205 1,632,908 166,541,670 7,255,239 3,222,159 270,616 - 10,748,014 855,394 79,778,533 372,042,314 7,457,538 460,133,779 (275,013,069) 26,733,553 211,854,263 8,720,917 7,992,016 1,111,367 199,522 94,296 84,347 54,119 9,535,667 % 26 3 - - 7 - - - 3 2 - 41 2 1 - - 3 - 20 91 2 113 (68) 7 52 2 2 - - - - - 2 2002 Amount $67,790,204 170,012 439,659 60,240 19,530,702 (932,993) (2,372,515) 1,010,453 11,201,446 3,401,729 2,238,221 102,537,158 5,551,412 3,997,284 237,440 849,360 10,635,496 874,907 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 9,773,226 557,266 339,400 87,246 81,626 20,712,589 % 17 - - - 5 - (1) - 3 1 1 26 2 1 - - 3 - 20 88 2 110 (54) 7 63 3 3 2 - - - - 5 $407,400,531 100 $390,542,399 100 FINANCIAL INFORMATION 2003 2002 Amount % Amount % LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term bank loans (Note 11) Payables to related parties (Note 22) Accounts payable Payable to contractors and equipment suppliers Accrued expenses and other current liabilities (Note 25) Current portion of long-term liabilities (Notes 12, 13 and 14) Total current liabilities LONG-TERM LIABILITIES Long-term bank loans (Note 12) Long-term bonds payables (Note 13) Other long-term payables (Note 14) $407,736 3,248,289 6,438,604 7,232,103 8,820,776 5,000,000 31,147,508 8,800,302 30,000,000 3,300,829 - 1 2 2 2 1 8 2 7 1 Total long-term liabilities 42,101,131 10 OTHER LIABILITIES Accrued pension cost (Notes 2 and 15) Guarantee deposits (Note 24) Others Total other liabilities MINORITY INTEREST IN SUBSIDIARIES (Note 2) 2,601,450 763,889 1,483,245 4,848,584 88,999 1 - - 1 - $729,813 1,776,149 5,138,592 14,132,100 5,947,229 12,107,899 39,831,782 11,051,454 35,000,000 4,281,665 50,333,119 2,211,560 1,395,066 822,167 4,428,793 95,498 - - 1 4 2 3 10 3 9 1 13 1 - - 1 - Total liabilities 78,186,222 19 94,689,192 24 SHAREHOLDERS' EQUITY (Notes 2 and 18) Capital stock-$10 par value Authorized: 24,600,000 thousand shares Issued: Common-20,266,619 thousand shares in 2003 and 18,622,887 thousand shares in 2002 Preferred-1,300,000 thousand shares Capital surplus: Merger and others (Note 2) Treasury stock (Notes 3 and 20) Retained earnings: Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Others: Unrealized loss on long-term investments (Note 2) Cumulative translation adjustments (Note 2) Treasury stock (at cost)-40,597 thousand shares in 2003 and 42,001 thousand in 2002 (Notes 2, 3 and 20) Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 202,666,189 - 56,802,829 53,056 20,802,137 68,945 50,229,008 (35) 225,408 (1,633,228) 329,214,309 $407,400,531 50 - 14 - 5 - 12 - - - 81 100 186,228,867 13,000,000 56,961,753 43,036 18,641,108 - 22,151,089 (194,283) 945,129 (1,923,492) 295,853,207 $390,542,399 48 3 15 - 5 - 5 - - - 76 100 Annual Report 2003 111 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, 2003 AND 2002 (In Thousand New Taiwan Dollars, Except Consolidated Earnings Per Share) 2003 2002 Amount % Amount % GROSS SALES (Notes 2, 22 and 26) $207,279,137 $166,187,670 SALES RETURNS AND ALLOWANCES (Note 2) (4,282,325) (3,886,462) NET SALES 202,996,812 100 162,301,208 100 COST OF SALES (Notes 17 and 22) GROSS PROFIT OPERATING EXPENSES (Notes 22 and 26) Research and development General and administrative Marketing Total operating expenses INCOME FROM OPERATIONS NON-OPERATING INCOME AND GAINS (Note 26) Gain on sales of investments-net (Note 2) Interest (Notes 2 and 25) Gain on sales of property, plant and equipment (Note 2) Technical service income (Notes 22 and 23) Royalty income (Note 23) Other (Note 22) Total non-operating income and gains NON-OPERATING EXPENSES AND LOSSES (Note 26) Interest (Notes 2, 9 and 25) Loss on impairment of property, plant and equipment and idle assets (Note 2) (Continued) 128,113,334 74,883,478 12,712,695 8,199,965 2,670,237 23,582,897 51,300,581 3,538,081 888,107 438,809 209,764 - 594,551 5,669,312 1,891,009 1,506,199 63 37 6 4 2 12 25 2 1 - - - - 3 1 1 109,988,058 52,313,150 11,725,035 6,767,756 2,231,320 20,724,111 31,589,039 - 1,094,724 273,998 162,149 527,126 291,860 2,349,857 2,616,740 244,430 68 32 7 5 1 13 19 - 1 - - - - 1 2 - 112 Annual Report 2003 FINANCIAL INFORMATION % 1 - - - - - - - 3 25 2 23 - 23 2002 Amount % - 1 - 1 - - - - 4 16 3 13 - 13 $120,568 795,674 221,955 1,976,847 419,513 101,221 119,485 100,315 6,716,748 27,222,148 5,636,648 21,585,500 24,791 $21,610,291 Income Before Income Tax Foreign exchange loss-net (Notes 2 and 25) Loss on impairment of long-term investments (Note 2) Loss on sales of property, plant and equipment (Note 2) Investment loss recognized by equity method-net (Notes 2 and 8) Amortization of premium from option contracts-net (Notes 2 and 25) Loss on sales of investments-net (Note 2) Casualty loss-net (Note 2) Other Total non-operating expenses and losses INCOME BEFORE INCOME TAX (Note 26) INCOME TAX EXPENSE (Notes 2 and 16) INCOME BEFORE MINORITY INTEREST 2003 Amount $755,100 652,718 374,126 294,244 153,783 - - 164,069 5,791,248 51,178,645 3,922,957 47,255,688 MINORITY INTEREST IN LOSS OF SUBSIDIARIES (Notes 2 and 26) 3,012 CONSOLIDATED NET INCOME $47,258,700 Income Before Income Tax CONSOLIDATED EARNINGS PER SHARE (Note 21) Basic earnings per share Diluted earnings per share and Minority Consolidatd and Minority Consolidatd Interest Net Income Interest Net Income $2.52 $2.52 $2.33 $2.33 $1.32 $1.32 $1.05 $1.05 The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche report dated January 12, 2004) (Concluded) Annual Report 2003 113 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, 2003 AND 2002 (In Thousand New Taiwan Dollars) Capital Stock Issued Capital Surplus Preferred stock Common stock Shares (thousand) Amount Shares (thousand) Amount From merger Additional paid-in capital From long-term investments Excess on foreign bond investments BALANCE, JANUARY 1, 2002 1,300,000 $13,000,000 16,832,554 $168,325,531 $24,132,297 $23,172,550 $246,381 $9,410,632 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 propety, plant and equipment of investees to retained earnings Unrealized loss on long-term investments from investees Translation adjustments Reclassification of stocks of a parent company held by sub- sidiaries 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) - - - - - - - - - - - - - - - - - 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 Redemption and retirement of preferred stock (1,300,000) (13,000,000) Appropriations of prior year's earnings Legal reserve Special reserve Bonus to employees-stock Cash dividends paid for preferred stocks Stock dividends-8% Remuneration to directors and supervisors Net income in 2003 Adjustment arising from changes in ownership percentage in investees Reversal of unrealized loss on long-term investment of investees Translation adjustments Sale of treasury stock BALANCE, DECEMBER 31, 2003 - - - - - - - - - - - - The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche report dated January 12, 2004) 114 Annual Report 2003 - - - - - - - - - - - - - - - - - 153,901 1,539,013 - - 1,489,831 14,898,309 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (158,924) - - - - - - - - - - - - - - - $- 20,266,619 $202,666,189 $24,132,297 $23,172,550 $87,295 $9,410,632 FINANCIAL INFORMATION Capital Surplus Retained Earnings Gain on sales of properties Donation Treasury stock Total Legal reserve Special reserve Unappropriated earnings Total Unrealized Loss on Long-term Investments Cumulative Translation Adjustments Treasury Stock Total Shareholders' Equity $166,518 $55 $- $57,128,433 $17,180,067 $349,941 $19,977,402 $37,507,410 $- $1,228,701 $- $277,190,075 - - - - - - - (166,518) - - - - - - - - - - - - - - - - - - 1,448,317 - (1,448,317) (349,941) 349,941 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (162) - - - (166,518) 12,724 - - - - - - - - - - - 43,036 43,036 55 43,036 57,004,789 18,641,108 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (158,924) - - 10,020 10,020 - 2,161,029 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (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 - - - - - - - - (194,283) - - - - - - - - - - - - - - - - - - - - - - (283,572) - - - - - - - - - - - - - - (455,000) - (133,848) 21,610,291 - - (194,283) (283,572) - - (1,923,492) (1,923,492) - 43,036 22,151,089 40,792,197 (194,283) 945,129 (1,923,492) 295,853,207 - (2,161,029) 68,945 (68,945) - - - - - - - - - (1,539,013) (1,539,013) (455,000) (455,000) (14,898,309) (14,898,309) (58,485) (58,485) 47,258,700 47,258,700 - - - - - - - - - - - - - - - - - 194,248 - - - - - - - - - - - - (719,721) - - - - - - - - - - - (13,000,000) - - - (455,000) - (58,485) 47,258,700 (158,924) 194,248 (719,721) - 290,264 300,284 $- $55 $53,056 $56,855,885 $20,802,137 $68,945 $50,229,008 $71,100,090 ($35) $225,408 ($1,633,228) $329,214,309 Annual Report 2003 115 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, 2003 AND 2002 (In Thousand New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Consolidated net income Adjustments to reconcile consolidated net income to net cash provided by operating activities: Depreciation and amortization Deferred income taxes Investment loss recognized by equity method-net Loss on impairment of property, plant and equipment, and idle assets Loss on impairment of long-term investments Loss (gain) on sales of long-term investments-net Gain on sales of property, plant and equipment-net Accrued pension cost Allowance for doubtful receivables Allowance for sales returns and others Minority interest in loss of subsidiaries Changes in operating assets and liabilities: Decrease (increase) in: Receivable from related parties Notes receivable Accounts receivable Inventories-net Other financial assets Prepaid expenses and other current assets Increase (decrease) in: Payable to related parties Accounts payable Accrued expenses and other current liabilities 2003 2002 $47,258,700 $21,610,291 69,161,317 3,665,383 294,244 1,506,199 652,718 (78,694) (64,683) 389,890 87,405 (236,672) (3,012) (612,516) 50,347 (8,964,567) (933,878) (347,161) 605,001 1,472,140 1,300,012 834,941 65,000,873 5,421,020 1,976,847 244,430 795,674 170,831 (52,043) 355,705 (167,499) (209,036) (24,791) 55,073 116,342 426,934 (1,373,118) (162,642) (330,819) 727,876 3,740,713 184,564 Net cash provided by operating activities 116,037,114 98,507,225 CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) of short-term investments (13,026,055) 1,184,419 Acquisitions of: Long-term investments Property, plant and equipment Proceeds from sales of: Long-term investments Property, plant, and equipment Increase in deferred charges Decrease in refundable deposits (Continued) 116 Annual Report 2003 (1,412,335) (37,870,907) 505,702 177,312 (2,138,087) 357,744 (3,192,427) (55,235,458) 53,048 495,878 (5,724,583) 226,823 FINANCIAL INFORMATION Decrease in other assets Increase (decrease) in minority interest in subsidiaries 2003 $4,610 (3,487) 2002 $2,711 49 Net cash used in investing activities (53,405,503) (62,189,540) CASH FLOWS FROM FINANCING ACTIVITIES Payments on: Short-term bank loans Long-term bank loans Long-term bonds Decrease in guarantee deposits Cash dividends paid for preferred stocks Redemption of preferred stock Remuneration paid to directors and supervisors Proceeds from issuance of long-term bonds Increase in issuance costs of financing (309,807) (8,915,557) (4,000,000) (631,177) (455,000) (13,000,000) (58,485) - - (5,539,368) (4,397,306) - (5,817,622) (455,000) - (133,848) 10,000,000 (3,002) Net cash used in financing activities (27,370,026) (6,346,146) NET INCREASE IN CASH AND CASH EQUIVALENTS 35,261,585 29,971,539 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (62,893) 262,370 CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 67,790,204 37,556,295 CASH AND CASH EQUIVALENTS, END OF THE YEAR $102,988,896 $67,790,204 SUPPLEMENTAL INFORMATION Interest paid (excluding amounts capitalized of NT$139,516 thousand and NT$213,686 thousand in 2003 and 2002, respectively) Income tax paid Noncash investing and financing activities: Current portion of long-term liabilities Current portion of other long-term payables Reclassification of long-term investments to short-term investment Reclassification of parent company stock held by subsidiaries from long-term investments to treasury stock The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche report dated January 12, 2004) $1,982,594 $218,954 $5,000,000 $1,591,972 $140,984 $2,301,765 $165,121 $12,107,899 $1,157,299 $43,640 $- $1,923,492 (Concluded) Annual Report 2003 117 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 (R.O.C.) corporation, was incorporated as a venture among the Government of the R.O.C., acting through the Development Fund of the Executive Yuan; Koninklijke 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). On October 8, 1997, TSMC listed its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs). TSMC is engaged 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: TSMC International Investment Ltd. (TSMC International), TSMC North America (TSMC- North America), Taiwan Semiconductor Manufacturing Company Europe B.V. (TSMC-Europe), TSMC Japan K.K. (TSMC-Japan), TSMC Shanghai Company Limited (TSMC Shanghai, a newly established entity in 2003), and TSMC Partners, Ltd. (TSMC Partners). In addition, TSMC has the following consolidating subsidiaries: A 99.5% owned subsidiary, Emerging Alliance Fund, L.P. (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) and 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 99.996% owned subsidiary, WaferTech, LLC (WaferTech). The following diagram presents information regarding the relationship and ownership percentages among TSMC and its consolidated subsidiaries as of December 31, 2003: TSMC 100% 100% 100% 100% 100% 100% 36% 36% 99.5% TSMC- North America TSMC- Japan TSMC International TSMC-Europe TSMC Partners TSMC Shanghai Chi Cherng 64% 64% Hsin Ruey Emerging Alliance 100% 100% 97% 97% TSMC Technology TSMC Development InveStar InveStar II 99.996% WaferTech 118 Annual Report 2003 FINANCIAL INFORMATION 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 Shanghai is engaged in integrated circuits and other wafer equipment manufacturing and marketing. TSMC Partners, Chi Cherng and Hsin Ruey are engaged in investments. 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 technology companies. WaferTech is engaged in the manufacturing, selling, testing and designing of integrated circuits and other semiconductor devices. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements are presented in conformity with the Guidelines for Securities Issuers' Financial Reporting and Accounting Principles generally accepted in the R.O.C. Significant accounting policies are summarized as follows: Consolidation TSMC consolidates the accounts of all majority (directly and indirectly) owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The consolidated financial statements include, as of and for the years ended December 31, 2003 and 2002, the accounts of TSMC, TSMC-North America, TSMC-Europe, TSMC-Japan, TSMC Shanghai, TSMC Partners, Emerging Alliance, Chi Cherng, Hsin Ruey and TSMC International and its subsidiaries, InveStar, InveStar II, TSMC Development (including WaferTech) and TSMC Technology. Ya Xin Technology, Inc. (Ya Xin), one of the consolidated entities in 2002, was dissolved after merging with Global UniChip Corp. (GUC) on January 4, 2003. Therefore, Ya Xin is not a consolidated entity in the consolidated financial statements of 2003. The Company's consolidated financial statements of 2002 are not restated due to Ya Xin is not material to the Company. TSMC and the foregoing subsidiaries are hereinafter referred to collectively as the ''Company''. Minority interests in WaferTech (0.004% in 2003 and 0.006% in 2002), Emerging Alliance (0.5%), InveStar (3%) and InveStar II (3%) are presented separately in the consolidated financial statements. Classification of Current and Non-current Assets and Liabilities Current assets are those expected to be converted to cash, sold or consumed within one year from the balance sheet date. Current liabilities are obligations due on demand within one year from the balance sheet date. Assets and liabilities that are not classified as current are non-current assets and liabilities, respectively. Cash Equivalents Government bonds under repurchase agreements acquired with maturities less than three months from date of purchase are classified as cash equivalents. Short-term Investments Short-term investments consist of government bonds, money market funds, government bonds acquired under repurchase agreements, bond funds and listed stocks. The investments are carried at the lower of cost or market value. Cash dividends are recorded as investment income in the current period. An allowance for decline in value is provided and is charged to current period earnings when the aggregate carrying value of the investments exceeds the aggregate market value. A reversal of the allowance is recorded for a subsequent recovery of the market value. The cost of investments sold is accounted for using the weighted-average method. The market values of government bonds are determined using the average of bid and ask prices of the government bonds. The market value of funds is determined using the net asset value of the funds, and the market value of listed stocks is determined using the average-closing price of the listed stocks for the last month of the period. Allowance for Doubtful Receivables Allowances for doubtful receivables are provided based on a review of the collectibility of accounts receivables. The Company determines the amount of allowance for doubtful accounts by examining the historical collection experience and current trends in the credit quality of its customers as well as its internal credit policies. Annual Report 2003 119 Revenue Recognition and Allowance for Sales Returns and Others The Company recognizes net sales when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title and acceptance, if applicable, have occurred, as well as the price is fixed or determinable and the collectibility is reasonably assured. An allowance is provided for any sales return and pricing discounts. Allowance for sales returns and pricing discounts is estimated based on historical experience and any known factors that would affect the allowance. Such provisions are deducted from sales in the year the products are sold and the estimated related costs are deducted from cost of sales. Sales are determined using the fair value taking into account related sales discounts agreed to by the Company and its customers. Sales agreements typically provide that payment is due 30 days from the invoice date for majority of the customers and 30 to 45 days after the end of the month in which the sales occur for some customers. Since the receivables from sales are collectible within one year and such transactions are frequent, the fair value of receivables is equivalent to the nominal amount of cash received. Inventories Inventories are stated at the lower of cost or market value. Inventories are recorded at standard cost and adjusted to the approximate weighted-average cost at the end of each period. Market value represents net realizable value for finished goods and work in process. Replacement value represents net realizable value for raw materials, supplies and spare parts. The Company assesses the impact of changing technology on its inventory on-hand and write-off inventories that are considered obsolete. Ending inventories are evaluated for estimated excess quantities and obsolescence based on demand forecast within a specific time horizon, generally 180 days or less. Scrap and slow-moving items are recognized in the allowance for losses. Long-term Investments Investments in companies wherein the Company exercises significant influence on the operating and financial policy decisions are accounted for using the equity method of accounting. The Company's proportionate share in the net income or net loss of investee companies is recognized as components of the ''Investment income/loss recognized by equity method-net'' account. When equity investments are made, the difference, if any, between the cost of investment and the Company's proportionate share of investee's net book value is amortized using the straight-line method over five years and is recorded as a component of the ''investment income/loss recognized by equity method-net'' account. The Company adopted Statements of Financial Accounting Standards (SFAS) No. 30, ''Accounting for Treasury Stock'' on January 1, 2002. SFAS No. 30 requires the parent company to reclassify its capital stock held by its subsidiary from long-term investments to treasury stock. 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 the 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 long-term investments with the corresponding amount charged to capital surplus. In the event an investee uses its capital surplus (excluding any reserve for asset revaluation) to offset its accumulated deficit, the Company records a corresponding entry equivalent to its proportionate share of the investee's adjustment. Investments in companies wherein the Company does not exercise significant influence are recorded at historical cost. 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 recorded as an increase in the number of shares held and do not affect investment income or the carrying amount of the investment. An allowance is recognized for any decline in the market value of investments with readily ascertainable fair market value with the corresponding amount recorded as an unrealized loss, a component of shareholders' equity. A reversal of the allowance will result from a subsequent recovery of the market value of such investments. The market value of such investment is determined using the average-closing price of the listed stocks for the last month of the period. The carrying values of investments whose fair market values are not readily ascertainable are reduced to reflect an other-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. An allowance is recognized when the cost of the funds is lower than their net asset values, with the corresponding amount recorded as a reduction to shareholders' equity. A reversal of the allowance will result from a subsequent recovery of the net asset value. 120 Annual Report 2003 FINANCIAL INFORMATION Investments in convertible notes are carried at cost. The costs of investments sold are determined using the weighted-average method. When investments in publicly-traded stocks are reclassified from long-term to short-term investments, the Company recognizes a loss to the extent, if any, that the market value of such investments is lower than the carrying value. If an investee company recognizes an unrealized loss on its long-term investment using the lower-of-cost-or-market method, the Company also recognizes a corresponding unrealized loss in proportion to its equity interest in the investee company and records the amount as a component of its shareholders' equity. Gains or losses on sales from the Company to investee companies accounted for using the equity method are deferred in proportion to the Company's ownership percentage in the investee companies 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 on sales by investee companies to the Company are deferred in proportion to the Company's ownership percentages in the investee companies 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. When an impairment is determined, the related assets are stated at the lower of fair value or book value. Idle assets are stated at the lower of book value or net realizable value. Significant additions, renewals, betterments, and interest expense incurred during the construction period are capitalized. Maintenance and repairs are expensed in the period incurred. Interest expense incurred for the project during the purchase and construction period is also capitalized. Depreciation is computed using the straight-line method over the following estimated service lives: land improvements-20 years; buildings-10 to 20 years; machinery and equipment-5 to 10 years; and office equipment-3 to 7 years. Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the corresponding accounts, with any gain or loss charged to income in the period of disposal. Goodwill Goodwill represents the excess of the consideration paid for acquisitions over the fair market value of identifiable net assets acquired and acquisition costs. Goodwill is amortized using the straight-line method over the estimated life of 10 years. Deferred Charges Deferred charges consist of technology license fees, software and system design costs and other charges. The amounts are amortized as follows: software and system design costs-3 or 5 years, technology license fees-the shorter of the estimated life of the technology or the term of the technology transfer contract. Pension Costs TSMC records net periodic pension costs on the basis of actuarial calculations. Unrecognized net transition obligation and unrecognized net gains or losses are amortized over 25 years. Casualty Loss Casualty losses are recorded when incurred. Any insurance recoveries are recorded up to the amount of the loss when such recoveries are probable. Recoveries in excess of the amount of the loss are recorded when realized. Annual Report 2003 121 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 net 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 classified as current or non-current in accordance with the classification of its related asset or liability. However, if a deferred tax asset or liability does not relate to an asset or liability in the financial statements, it is classified as current or non-current based on the expected length of time before it is realized. Any tax credits arising from purchases of machinery, equipment and technology, research and development expenditures, personnel training, and investments in important technology-based enterprises are recognized using the current method. Adjustments to 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 earnings from foreign consolidating subsidiaries) of 10% are expensed in the year of shareholder approval which is usually the year subsequent to the year incurred. Foreign-Currency Transactions Foreign currency transactions are recorded in New Taiwan dollars at the current rate of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in a foreign currency are recognized in current operations. At the end of each period, assets and liabilities denominated in foreign currencies are revalued at the prevailing exchange rate with the resulting gains or losses recognized in current operations. Derivative Financial Instruments The Company enters into foreign currency forward contracts to manage its 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 on the contract date are amortized over the terms of the forward contracts using the straight-line method. At the end of each period, the receivables or payables arising from forward contracts are restated using the prevailing spot rate at the balance sheet date with the resulting differences charged to income. In addition, the receivables and payables related to forward contracts are netted with the resulting amount presented as either an asset or a liability. Any resulting gains or losses upon settlement are charged to income in the period of settlement. The Company enters into interest rate swap transactions to manage its exposures to 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 and charged to income on a straight-line basis over the term of the related contract. Any resulting gains or losses upon settlement are charged to income in the period of settlement. Translation of Foreign-Currency Financial Statements ROC SFAS No. 14, ''Accounting for Foreign-Currency Transactions,'' applies to foreign subsidiaries that use the local foreign currency as their 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. Reclassification Certain accounts in the consolidated financial statements as of and for the year ended December 31, 2002 have been reclassified to conform to the consolidated financial statements as of and for the year ended December 31, 2003. 122 Annual Report 2003 FINANCIAL INFORMATION 3. NEW ACCOUNTING PRONOUNCEMENTS In accordance with the ROC SFAS 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 long-term investments to treasury stock. The reclassification is based on the carrying value recorded by the Company's subsidiaries as of January 1, 2002. The adoption of SFAS No. 30 resulted in a decrease in long-term investments and an increase in treasury stock by NT$1,923,492 thousand as of December 31, 2002, and an increase in consolidated net income for the year ended December 31, 2002 by NT$25,909 thousand. 4. SIGNIFICANT ELIMINATION ENTRIES Significant transactions and balances with subsidiaries that have been eliminated upon consolidation are as follows: Company Account TSMC Payables to related parties Receivables from related parties Sales Purchases Marketing expenses-commissions Other non-operating income TSMC International Other receivables Other receivables Interest receivable Interest receivable Deferred revenue Interest income Interest income TSMC Partners Other receivables Other receivables Interest receivable Deferred revenue Interest income Interest income TSMC Technology Accounts receivable Management service income Technical service income Amount $1,184,642 16,026 28,150 12,241 10,792 13,946,638 1,232 117,758,911 11,433,083 215,202 154,262 2,794 2,038,680 339,780 198,805 1,787 670,970 14,343 1,810 10,427,786 2,718,240 2,382 9,188,559 174,579 2,414 2,194 25,112 13,229 Transaction Entity WaferTech TSMC-Europe TSMC-Japan TSMC-North America TSMC Technology TSMC-North America TSMC Technology TSMC-North America WaferTech TSMC-Japan TSMC-Europe WaferTech TSMC Development TSMC Technology TSMC Technology TSMC Development TSMC Technology TSMC Technology TSMC Development TSMC International TSMC Development TSMC Development TSMC International TSMC International TSMC Development WaferTech WaferTech WaferTech Annual Report 2003 123 5. CASH AND CASH EQUIVALENTS Cash and bank deposits Government bonds acquired under repurchase agreements 2003 $97,041,537 5,947,359 2002 $65,051,337 2,738,867 6. SHORT-TERM INVESTMENTS Government bonds Money market funds Government bonds acquired under repurchase agreements Bond funds Listed stocks Market value 7. INVENTORIES-NET Finished goods Work in process Raw materials Supplies and spare parts Less-allowance for losses $102,988,896 $67,790,204 2003 $7,692,595 3,068,213 1,800,000 1,000,000 50,728 $13,611,536 2002 $- - - - 170,012 $170,012 $14,054,511 $2,455,582 2003 $2,892,529 9,089,169 465,745 1,052,075 13,499,518 (1,364,194) 2002 $3,837,245 7,611,344 518,196 970,960 12,937,745 (1,736,299) $12,135,324 $11,201,446 124 Annual Report 2003 8. LONG-TERM INVESTMENTS Shares of stock Equity method: Publicly traded stocks Vanguard International Semiconductor Corporation (VIS) Non-publicly traded stocks Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) GUC VisEra Technology Company Ltd. (VisEra) Prepayment for subscribed stocks VIS Cost method: Common stocks Publicly traded stocks RichTek Technology Corp. Amkor Technology Inc. Monolithic System Technology, Inc. Taiwan Mask Corp. Non-publicly traded stocks United Gas Co., Ltd. Global Testing Corp. Shin-Etsu Handotai Taiwan Co., Ltd. Global Investment Holding, Inc. EoNex Technologies, Inc. Hong Tung Venture Capital Procoat Technology Co., Ltd. W.K. Technology Fund IV Advanced Power Electronics Corp. Conwise Technology Co., Ltd. EON Technology, Inc. TrendChip Technologies, Corp. Auden Technology Mfg. Co., Ltd. Ralink Technologies, Inc. Goyatek Technology, Inc. ChipStrate Technology, Inc. Signia Technologies, Inc. Programmable Microelectronics (Taiwan) Corp. eChannel Option Holding, Inc. (Continued) FINANCIAL INFORMATION 2002 2003 2001 2002 Carrying Value % of - Ownership Carrying Value % of - Ownership $4,077,198 2,759,376 368,434 50,231 7,255,239 - 26,728 - - - 193,584 179,905 105,000 104,144 103,580 83,916 65,922 50,000 46,761 33,268 32,788 29,262 28,341 26,889 24,689 10,451 10,442 8,612 8,515 28 32 47 25 5 - - - 11 10 7 6 6 10 10 2 5 14 8 5 4 5 8 9 6 4 6 $2,415,297 3,136,115 - - 5,551,412 849,360 46,986 280,748 104,289 32,129 193,584 179,882 105,000 100,000 70,305 83,916 67,490 50,000 46,743 67,039 33,606 29,992 38,819 - 62,104 10,426 - 59,358 - 25 32 - - - 9 - 2 2 11 10 7 6 6 10 12 2 6 14 9 5 4 - 8 9 - 4 - Annual Report 2003 125 2002 2003 2001 2002 Carrying Value % of Ownership Carrying Value % of Ownership $5,306 4,477 917 - 1,183,497 224,646 142,436 134,092 122,086 119,306 118,920 103,964 84,548 80,932 67,956 67,956 62,946 62,859 57,763 55,206 49,753 44,741 42,844 41,480 33,978 33,978 33,978 25,484 25,483 22,139 16,996 16,989 16,989 16,989 16,781 15,630 14,866 11,340 11,172 10,618 10,193 - 1 1 - 10 15 16 - 5 - 23 4 3 19 44 4 1 - 3 1 8 2 12 5 6 2 7 6 15 6 1 3 4 2 1 11 1 2 5 8 $- 4,518 - 104 1,667,038 229,787 146,262 137,135 124,868 150,620 - 106,344 82,153 87,845 69,506 - 64,397 65,005 - 52,707 50,878 43,094 43,824 62,868 - - - 34,753 26,353 63,288 26,065 17,639 - 17,569 56,856 35,138 60,818 35,138 46,534 21,720 15,639 - 2 - - 10 15 16 3 5 - 23 4 3 18 - 4 1 - 2 1 7 2 12 - - - 7 6 15 7 2 - 4 2 1 11 1 3 5 8 Capella Microsystems, Inc. GeoVision, Inc. eLCOS Microdisplay Technology, Ltd. Divio, Inc. Preferred stocks Non-publicly traded stocks Sonics, Inc. Reflectivity, Inc. Monolithic Power Systems, Inc. Atheros Communications, Inc. Tropian, Inc. eLCOS Microdisplay Technology, Ltd. Memsic, Inc. Quicksilver Technology Pixim, Inc. Kilopass Technology, Inc. Fang Tek, Inc. NanoAmp Solutions, Inc. NetLogic Microsystems, Inc. Alchip Technologies, Ltd. Ikanos Communications, Inc. SiRF Technology Holdings, Inc. OEpic Inc. Advanced Analogic Technologies, Inc. Integrated Memory Logic, Inc. Axiom Microdevices Inc. Optichron Inc. NuCORE Technology, Inc. Silicon Data, Inc. XHP Microsystem, Inc. Newport Opticom Inc. Angstron Systems, Inc. Iridigm Display, Co. NextIO, Inc. Zenesis Technologies, Inc. IP Unity Accelerant Networks, Inc. Match Lab, Inc. Quake Technologies, Inc. LightSpeed Semiconductor Corp. Sensory, Inc. Oridus, Inc. (Continued) 126 Annual Report 2003 FINANCIAL INFORMATION 2002 2003 2001 2002 Carrying Value % of Ownership Carrying Value % of Ownership $8,495 4,462 4,134 3,126 408 - - - - - - - - - 2,038,662 - 229,669 40,947 270,616 2 6 3 2 6 - - - - - - - - - - - - $- 8,270 23,667 17,377 17,569 69,506 52,130 35,138 35,138 34,753 24,675 17,377 15,639 3,370 2,329,412 834 195,452 41,988 237,440 - 6 12 2 6 1 6 6 - 5 2 4 12 1 - - - Audience, Inc. LeadTONE Wireless, Inc. Capella Microsystems, Inc. Incentia Design Systems, Inc. Mosaic Systems FormFactor, Inc. Ralink Technologies, Inc. Litchfield Communications Spreadtrum Communications, Inc. HiNT Corp. Equator Technologies, Inc. Divio, Inc. Signia Technologies, Inc. eBest!, Inc. Convertible notes eBest!, Inc. Funds Horizon Ventures Crimson Asia Capital The carrying value of 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 for the same period as the Company. The investment gains (losses) of the investee companies consisted of the following: $10,748,014 $10,635,496 SSMC VIS Others 2003 ($310,821) 50,351 (33,774) 2002 ($1,155,076) (821,771) - ($294,244) ($1,976,847) The aggregate market value of the publicly traded stocks accounted for using the cost method was $510,995 thousand and $500,351 thousand as of December 31, 2003 and 2002, respectively. On January 8, 2003, TSMC's investee company, VIS, issued 600,000 thousand shares of common stock at a price of NT$7 per share of which TSMC purchased a total of 230,882 thousand shares. As a result, its ownership in VIS increased from 25% to 28%. In November 2003, TSMC purchased a 25% ownership in VisEra for US$1,500 thousand. TSMC established Ya Xin in November 2002 and subsequently signed a merger agreement with GUC in December 2002. The merger was effective on January 4, 2003 and GUC is the surviving company. As of December 31, 2003, TSMC holds a 47% ownership interest in GUC. Annual Report 2003 127 9. PROPERTY, PLANT AND EQUIPMENT As of December 31, 2003 and 2002, accumulated depreciation consisted of the following: Land improvements Buildings Machinery and equipment Office equipment 2003 $154,062 31,665,779 238,392,296 4,800,932 2002 $127,341 24,140,506 181,998,606 3,834,706 $275,013,069 $210,101,159 Information on the status of expansion or construction plans of TSMC's manufacturing facilities as of December 31, 2003 is as follows: Construction/ Expansion Plan Estimated Complete Costs Accumulated Expenditures Fab 12 Phase 1 Fab 14 Phase 1 $85,364,800 67,047,200 $82,722,100 27,189,600 Actual Date of Starting Operations March 2002 - Expected Date of Starting Operations - 2nd half of 2004 at the earliest For the years ended December 31, 2003 and 2002, interest expense (before deducting capitalized amounts of NT$139,516 thousand and NT$213,686 thousand in 2003 and 2002, respectively) were NT$2,030,525 thousand and NT$2,830,426 thousand, respectively. The interest rates used for the purpose of calculating the capitalized amount were 1.770% to 5.283% in 2003 and 2.070% to 5.283% in 2002. 10. DEFERRED CHARGES-NET Technology license fees Software and system design costs Others 2003 $5,084,684 2,719,199 188,133 $7,992,016 2002 $6,519,334 3,167,366 187,125 $9,873,825 128 Annual Report 2003 11. SHORT-TERM BANK LOANS Unsecured loan in US dollars: US$12,000 thousand and US$21,000 thousand as of December 31, 2003 and 2002, respectively; annual interest at 1.52% and 1.82% in 2003 and 2002, respectively FINANCIAL INFORMATION 2003 2002 $407,736 $729,813 As of December 31, 2003, TSMC provided NT$1,359,120 thousand (US$40,000 thousand) guarantee for the benefit of TSMC-North America for the above loan. Unused credit lines as of December 31, 2003 aggregated approximately US$38,000 thousand. 12. LONG-TERM BANK LOANS Secured loan: US$199,000 thousand and US$318,000 thousand as of December 31, 2003 and 2002, respectively, repayable by February 2005, repaid US$119,000 thousand in 2003; annual floating interest at 1.8275% and 2.078% in 2003 and 2002, respectively Unsecured loan: US$60,000 thousand, repayable by December 2006, annual interest at 1.56% US$200,000 thousand, repaid in December 2003, annual interest at 2.0375% 2003 2002 $6,761,622 $11,051,454 2,038,680 - - 6,950,600 $8,800,302 $18,002,054 As of December 31, 2003, TSMC provided NT$16,989,000 thousand (US$500,000 thousand) guarantee for the benefit of TSMC Development and WaferTech for the secured loan above. In addition, all assets of WaferTech with carrying amount of approximately NT$18,876,007 thousand (US$555,536 thousand) are pledged for the secured loan. WaferTech is required to be in compliance with certain financial covenants beginning December 31, 2002 under the secured loan agreement above. As of December 31, 2003, WaferTech was in compliance with all such financial covenants. Under the unsecured loan agreement above, the Company is required to be in compliance with certain financial covenants which, if violated, could result in the payment of this obligation becoming due prior to the originally scheduled maturity date. The Company was in compliance with these financial covenants as of December 31, 2003. Unused credit lines for long-term bank loans as of December 31, 2003 aggregated approximately US$241,000 thousand. As of December 31, 2003, future minimum principal payments under the Company's long-term bank loan arrangements are as follows: Year 2005 2006 Amount $6,761,622 2,038,680 $8,800,302 Annual Report 2003 129 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, 2.60%, 2.75% and 3% annual interest payable annually, respectively As of December 31, 2003, future principal payments for TSMC's bonds are as follows: Year of Repayment 2004 2005 2007 2008 and thereafter 2003 2002 $- $4,000,000 5,000,000 5,000,000 15,000,000 15,000,000 15,000,000 15,000,000 $35,000,000 $39,000,000 Amount $5,000,000 10,500,000 7,000,000 12,500,000 $35,000,000 14. OTHER LONG-TERM PAYABLES TSMC entered into several license arrangements for certain semiconductor-related patents. Future minimum payments under the agreements as of December 31, 2003 are as follows: Amount $1,591,972 1,279,139 458,703 475,692 271,824 815,471 $4,892,801 Year 2004 2005 2006 2007 2008 2009 and thereafter 130 Annual Report 2003 FINANCIAL INFORMATION 15. PENSION PLAN TSMC has a defined benefit 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. TSMC contributes at 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 the amounts in the Fund are deposited in the Committee's name with the Central Trust of China. For the years ended December 31, 2003 and 2002, 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 unfunded accrued pension cost 2003 $502,116 109,671 (41,154) 2,409 $573,042 2002 $442,294 121,552 (45,102) 1,681 $520,425 2003 2002 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 (loss) Unfunded 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 $21,895 2,185,792 2,207,687 1,752,208 3,959,895 (1,207,264) 2,752,631 (141,091) (10,090) $2,601,450 2003 3.25% 3.00% 3.25% $181,106 $3,490 $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 2002 3.75% 3.00% 3.75% $164,720 $5,360 Annual Report 2003 131 16. INCOME TAX a. A reconciliation of income tax expense based on income before income tax and minority interest at the statutory rate of 25% and current income tax expense before income tax credits is as follows: 2003 2002 Income tax expense based on income before income tax and minority interest at the statutory rate Tax-exempt income Temporary and permanent differences 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 Net change in deferred income tax liabilities (assets) Net operating loss Investment tax credits Temporary differences Valuation allowance Adjustment of prior years' taxes Income tax expense c. Deferred income tax assets (liabilities) consist of the following: $12,881,547 (5,255,750) (732,681) $6,893,116 2003 $6,893,116 1,273,482 (7,917,070) 7,988 (535,725) 917,759 300,848 2,982,501 58 $3,922,957 $6,881,352 (2,526,500) 519,490 $4,874,342 2002 $4,874,342 179,362 (4,867,236) 29,160 (1,733,990) (2,510,192) 5,910,152 3,755,050 - $5,636,648 2003 2002 $8,322,000 385,221 (309,016) $8,398,205 $8,388,063 17,327,894 (8,956,987) (15,647,603) $3,320,000 81,729 - $3,401,729 $7,852,338 23,247,653 (8,352,647) (12,974,118) $1,111,367 $9,773,226 Current Investment tax credits Temporary differences Valuation allowance Noncurrent Net operating loss Investment tax credits Temporary differences Valuation allowance 132 Annual Report 2003 FINANCIAL INFORMATION d. Integrated income tax information: The balances of TSMC's imputation credit account as of December 31, 2003 and 2002 were NT$2,832 thousand and NT$6,650 thousand, respectively. The expected and actual creditable ratio for 2003 and 2002 was 0.01% and 0.08%, respectively. The imputation credit allocated to the shareholders is based on its balance as of the date of dividend distribution. The expected creditable ratio may be adjusted when the distribution of the imputation credits are made. e. All retained earnings generated prior to December 31, 1997 were appropriated as of December 31, 2003 and 2002. f. As of December 31, 2003, TSMC's investment tax credits consisted of the following: Regulation Items Total Creditable Amounts Remaining Creditable Amounts Expiry Year Statute for Upgrading Purchases of machinery and Industries equipment Statute for Upgrading Research and development Industries expenditures Statute for Upgrading Personnel training Industries Statute for Upgrading Investments in important Industries technology-based enterprises $8,203,531 3,792,734 4,823,691 1,680,360 $3,938,319 3,792,734 4,823,691 1,680,360 $18,500,316 $14,235,104 $2,258,828 3,111,472 3,322,453 2,275,560 $2,258,828 3,111,472 3,322,453 2,275,560 $10,968,313 $10,968,313 $48,097 28,886 27,311 $104,294 $203,319 138,864 $342,183 $48,097 28,886 27,311 $104,294 $203,319 138,864 $342,183 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2004 2005 g. As of December 31, 2003, the net operating loss carryforwards were generated from WaferTech, TSMC Development and TSMC Technology and will expire at various dates through 2023. h. The sales attributable to the following expansion and construction of TSMC's manufacturing plants are exempt from income tax for the following periods: Construction of Fab 6 Construction of Fab 8-module B Expansion of Fab 2-modules A and B, Fab 3 and Fab 4, Fab 5 and Fab 6 Tax-Exemption Periods 2001 to 2004 2002 to 2005 2003 to 2006 i. The tax authorities have examined income tax returns of TSMC through 2000. However, TSMC is contesting the assessment by the tax authority for 1992, 1993, 1997 and 1998. TSMC believes that any additional assessment will not have a material adverse effect on TSMC. Annual Report 2003 133 2002 For the Year Ended December 31, 2003 2001 17. LABOR COST, DEPRECIATION AND AMORTIZATION EXPENSE Labor cost Salary Labor and health insurance Pension Other Depreciation Amortization Classified as Cost of Sales $9,014,068 476,687 379,845 339,500 61,988,138 1,385,594 Classified as Operating Expense $4,647,912 245,357 193,718 304,398 2,398,768 3,367,462 Total $13,661,980 722,044 573,563 643,898 64,386,906 4,753,056 Labor cost Salary Labor and health insurance Pension Other Depreciation Amortization $73,583,832 $11,157,615 $84,741,447 For the Year Ended December 31, 2002 Classified as Cost of Sales 2002 Classified as Operating Expense 2001 Total $7,831,036 427,992 349,279 291,439 57,404,004 2,161,950 $4,195,974 220,527 185,457 348,707 2,493,369 2,938,670 $12,027,010 648,519 534,736 640,146 59,897,373 5,100,620 $68,465,700 $10,382,704 $78,848,404 18. SHAREHOLDERS' EQUITY Capital, Capital Surplus and Retained Earnings TSMC has issued 585,898 thousand ADSs which are traded on the NYSE as of December 31, 2003. The total number of common shares represented by all issued ADSs is 2,929,491 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 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 distributed as stock dividends. TSMC's Articles of Incorporation provide that the following shall be appropriated from annual earnings to the extent that the annual earnings exceed any accumulated deficit: a. 10% legal reserve; until the amount of total legal reserve equals TSMC's total paid-in capital; b. Special reserve in accordance with relevant laws or regulations; c. Remunerations to directors and supervisors and bonuses to employees equal to 0.3% and at least 1% of the remainder, respectively. Individuals eligible for the employee bonuses may include employees of affiliated companies as approved by the board of directors or a representative of the board of directors; 134 Annual Report 2003 FINANCIAL INFORMATION d. Dividends to holders of preferred shares at a 3.5% annual rate, based on the period which the preferred shares have been outstanding. Following the redemption of all of its issued and outstanding preferred shares in May 2003, TSMC amended its Articles of Incorporation on June 3, 2003 to remove the provision for issuance of any future dividends to preferred shareholders as of that date; e. The appropriation of any remaining balance shall be approved by the shareholders. Dividends may be distributed in shares of common stock or a combination of cash and common stock. Distributions of profits are usually made in the form of a stock dividend. The total of cash dividends paid in any given year may not exceed 50% of total dividends distributed in that year. Any appropriations of net income are recorded in the financial statement in the year of shareholder approval. The appropriation for legal reserve is made until the reserve equals the aggregate par value of TSMC's outstanding capital stock. The reserve can only be used to offset an accumulated deficit or be distributed as a stock dividend up to 50% of the reserve balance when the reserve balance has reached 50% of the aggregate par value of the outstanding capital stock of TSMC. A special reserve equivalent to the debit balance of any account shown in the shareholder's equity section of the balance sheet (except for the recorded cost of treasury stock held by subsidiaries) shall be made from unappropriated retained earnings pursuant to existing regulations promulgated by the ROC SFC. The special reserve is allowed to be appropriated when the debit balance of such account is reversed. The appropriations of earnings for 2002 and 2001 were approved in the shareholders' meeting on June 3, 2003 and May 7, 2002, respectively. The appropriations and dividends per share are as follows: Legal reserve Special reserve Bonus paid to employees-in stock Preferred stock dividend-in cash Common stock dividend-in stock Remuneration to directors and supervisors-in cash Appropriation of Earnings Dividend Per Share (NT$) For Fiscal Year 2002 For Fiscal Year 2001 For Fiscal Year 2002 For Fiscal Year 2001 $2,161,029 $1,448,317 68,945 1,539,013 455,000 (349,941) 1,070,783 455,000 14,898,309 16,832,553 58,485 133,848 $19,180,781 $19,590,560 $- - - 0.35 0.80 - $- - - 0.35 1.00 - The above appropriation of earnings for 2002 and 2001 is consistent with the resolution of the meetings of board of directors on March 4, 2003 and March 26, 2002, respectively. If the above employee bonus and remuneration to directors and supervisors had been paid in cash and charged against income for 2002 and 2001, the basic earnings per share for the years ended December 31, 2002 and 2001 would decrease from NT$1.14 to NT$1.05 and NT$0.83 to NT$0.76, respectively. The shares distributed as a bonus to employees represented 0.83% and 0.64% of TSMC's total outstanding common shares as of December 31, 2002 and 2001, respectively. As of January 12, 2004, the board of directors had not resolved earnings appropriation for fiscal year 2003. The above information associated with the appropriations of bonus to employees and remuneration to directors and supervisors is available at Market Observation System website. Under the Integrated Income Tax System that became effective on January 1, 1998, ROC resident shareholders are allowed a tax credit for their proportionate share of the income tax paid by the TSMC on earnings generated as of January 1, 1998. An imputation credit account is maintained by TSMC for such income tax and the tax credit allocated to each shareholder. Annual Report 2003 135 Preferred Stock TSMC issued 1,300,000 thousand shares of unlisted Series A-preferred stock to certain investors on November 29, 2000. All of the preferred stock was redeemed at par value and retired on May 29, 2003. Under TSMC's Articles of Incorporation, as amended on June 3, 2003, TSMC is no longer authorized to issue preferred stock. The preferred shareholders had the following rights and related terms and conditions prior to redemption: 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 TSMC available for distribution to shareholders upon liquidation or dissolution; however, the pre-emptive 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 TSMC's related obligations remain the same until the preferred shares are redeemed by the TSMC. 19. STOCK-BASED COMPENSATION PLANS Stock Option Plans On October 29, 2003 and June 25, 2002, the SFC approved TSMC's Employee Stock Option Plans (the 2003 Plan and the 2002 Plan, respectively). The maximum number of units authorized to be granted under the 2003 Plan and the 2002 Plan was 120,000 thousand and 100,000 thousand, respectively, with each unit representing one common share of stock. The option rights may be granted to qualified employees of TSMC and its subsidiaries, including TSMC-North America and WaferTech. The option rights of both plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date. Under the terms of both plans, stock option rights are granted at an exercise price equal to the closing price of TSMC's common shares listed on the TSE on the date of grant. Under the 2002 Plan, there were 51,485 thousand option rights that were never been granted, or had been granted but cancelled. These un-granted or cancelled option rights expired as of December 31, 2003. Information of outstanding stock option rights under the 2003 Plan and the 2002 Plan is as follows: 2003 Plan 2002 Plan Number of Outstanding Stock Option Rights (In Thousands) Range of Exercise Price (NT$) Number of Outstanding Stock Option Rights (In Thousands) Balance, January 1, 2003 Options granted Options cancelled Balance, December 31, 2003 - 66.5 66.5 - 843 (1) 842 19,369 32,031 (2,885) 48,515 Range of Exercise Prices (NT$) 46.86-48.70 38.23-53.76 38.23-53.76 For the 2002 Plan, the number of outstanding option rights and their exercise prices have been adjusted to reflect the issuance of stock dividends in accordance with the 2002 Plan. 136 Annual Report 2003 FINANCIAL INFORMATION 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 WaferTech Plans) under which officers, key employees and non-employee directors may be granted stock option rights. The WaferTech Plans provide for 15,150 thousand option rights available for grant. For option rights granted to date, the option purchase price was equal to or exceeded the fair market value at the date of grant. As of December 31, 2003, 672 thousand stock options remain outstanding. The options will expire if not exercised at specified dates ranging from May 2006 and June 2011. No options were granted during the years ended December 31, 2003 and 2002 as a result of the implementation of the Stock Option Buyback Program as described below. WaferTech Stock Option Buyback Program In December 2000, WaferTech implemented a Stock Option Buyback Program (Buyback). The Buyback program provides employees with the right to sell back to WaferTech all vested stock options and outstanding ownership interests granted under the WaferTech Plans. 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, 2003, WaferTech has repurchased 3,253 thousand outstanding ownership interests at a cost of US$19,519 thousand, and 6,913 thousand vested stock option rights at a cost of US$34,483 thousand. As of December 31, 2003, 164 thousand stock options are vested and may be sold back to WaferTech, and US$2,681 thousand was accrued in connection with the Buyback program. Stock Appreciation Rights In December 2000, WaferTech and TSMC-North America implemented a stock appreciation rights program (Appreciation). The Appreciation plan is designed to provide employees with a long-term incentive plan that tracks the appreciation of TSMC common stock through Stock Appreciation Rights (SARs). SARs provide each participant the right to receive, upon exercise, an amount in cash from WaferTech and TSMC-North America that is the excess of the market price of TSMC common stock on TSE on the date of exercise over the exercise price. As of December 31, 2003, WaferTech and TSMC-North America accrued US$1,735 thousand and US$3,032 thousand, respectively, in connection with the Appreciation. During 2002, benefits under the Appreciation plan for TSMC-North America were replaced by the stock option plans aforementioned. Accordingly, TSMC-North America does not intend to provide additional Appreciation plan benefits subsequent to the adoption of the stock option plans. 20. TREASURY STOCK (COMMON STOCK) Purpose of Purchase Year ended December 31, 2003 Reclassification of parent company stock held by subsidiaries from long-term investment Year ended December 31, 2002 Reclassification of parent company stock held by Beginning Shares Dividend Distributed Share Sold Ending Shares (Shares in Thousand) 42,001 3,357 4,761 40,597 subsidiaries from long-term investment 39,270 3,818 1,087 42,001 Proceeds from the sale of treasury stock for the years ended December 31, 2003 and 2002 were NT$331,945 thousand and NT$96,501 thousand, respectively. As of December 31, 2003 and 2002, the book value of the treasury stock was NT$1,633,228 thousand and NT$1,923,492 thousand, respectively; the market value was NT$2,548,788 thousand and NT$2,048,164 thousand, respectively. TSMC's 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. Annual Report 2003 137 21. EARNINGS PER SHARE Earnings per share (EPS) is computed as follows: Amounts (Numerator) EPS (Dollars) Income Before Income Tax and Minority Interest Consolidated Net Income Share (Denominator) (Thousand) Income Before Income Tax and Minority Interest 2001 Consolidated Net Income Year ended December 31, 2003 Income Less-preferred stock dividends Basic earnings per share $51,178,645 $47,258,700 (184,493) (184,493) Income available to common shareholders 50,994,152 47,074,207 20,223,457 $2.52 $2.33 Effect of diluted securities-stock options - - 8,282 Diluted earnings per share Income available to common shareholders $50,994,152 $47,074,207 20,231,739 $2.52 $2.33 Year ended December 31, 2002 Income Less-preferred stock dividends Basic and diluted earnings per share $27,222,148 $21,610,291 (455,000) (455,000) Income available to common shareholders $26,767,148 $21,155,291 20,220,989 $1.32 $1.05 The potential common shares issuable under the employee stock option plans (see Note 19) are included in the denominator of the diluted EPS computation by using the treasury stock method under SFAS No. 24, ''Earnings Per Share''; however, such shares resulted in a non-dilutive per share amount for the year ended December 31, 2002. The average number of shares outstanding for the EPS calculation has been adjusted retroactively for issuance of stock dividends and stock bonuses. The retroactive adjustment caused the basic and diluted EPS before income tax and after income tax for the year ended December 31, 2002 to decrease from NT$1.43 to NT$1.32 and NT$1.14 to NT$1.05, respectively. 22. RELATED PARTY TRANSACTIONS Except as disclosed elsewhere in the financial statements, the following is a summary of significant related party transactions: a. Industrial Technology Research Institute (ITRI), the Chairman of TSMC serves as one it its directors b. Philips, a major shareholder of TSMC c. Investees of TSMC VIS SSMC GUC 138 Annual Report 2003 The transactions with the aforementioned parties, in addition to those disclosed in other notes, are summarized as follows: 2002 2003 2001 2002 Amount % Amount % FINANCIAL INFORMATION For the year ended Sales Philips and its affiliates GUC ITRI SSMC VIS Purchase SSMC VIS Operating expense-Rental ITRI Manufacturing expenses-Technical assistance fees Philips Sales of property, plant and equipment VIS Non-operating income and gains SSMC (primarily technical service income, see Note 24f) VIS At December 31 Receivables Philips and its affiliates VIS GUC SSMC ITRI Payables Philips and its affiliates VIS SSMC Refundable deposits-VIS (see Note 24h) $3,577,054 549,471 60,171 873 19 $4,187,588 $5,519,805 4,910,810 $10,430,615 $- $3,023,741 $15,125 $201,869 251 $202,120 $895,063 118,503 15,339 14,489 8,781 2 - - - - 2 17 15 32 - 3 3 4 - 4 85 11 2 1 1 $2,909,008 - 94,409 7,018 92,119 $3,102,554 $2,751,297 3,469,198 $6,220,495 $40,401 $2,849,517 $- $126,061 - $126,061 $352,706 58,301 - 5,678 22,974 2 - - - - 2 11 14 25 - 4 - 6 - 6 80 13 - 2 5 $1,052,175 100 $439,659 100 $1,579,568 1,034,074 634,647 $3,248,289 $150,840 49 32 19 100 76 $730,847 653,876 391,426 $1,776,149 $514,846 41 37 22 100 92 Sales to related parties are based on normal selling prices and collection terms, except for sales of property, plant and equipment and technical assistance fees, which were in accordance with the related contracts. Annual Report 2003 139 23. SIGNIFICANT LONG-TERM 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$230,449 thousand. The agreements can be renewed upon their expiration. TSMC-North America leases its office premises and certain equipment under non-cancelable operating agreements. TSMC-Europe and TSMC-Japan entered into lease agreements for their office premises. The leases will expire between 2005 and 2010. Current annual rent payments aggregate to NT$118,787 thousand. The agreements can be renewed upon their expiration. As of December 31, 2003, future remaining lease payments are as follows: Year 2004 2005 2006 2007 2008 2009 and thereafter Amount $349,236 350,120 349,867 339,249 318,379 1,797,827 $3,504,678 24. SIGNIFICANT COMMITMENTS AND CONTINGENCIES The significant commitments and contingencies of the Company as of December 31, 2003 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, with respect to certain products. The agreement shall remain in force through July 8, 2007 and may be automatically renewed for successive periods of three years thereafter. Under the amended agreement, starting from the fifth anniversary date of the amended agreement, the fees are subject to reduction by the amounts TSMC pays to any third party for settling any licensing/infringement disputes, provided that the fees to be paid after reduction will not be below a certain percentage of the net sales. 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 reserve a portion of its production capacity for certain major customers that have guarantee deposits with TSMC. As of December 31, 2003, TSMC has a total of US$22,557 thousand of guarantee deposits. 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, SSMC, for the purpose of constructing an integrated circuit foundry in Singapore. As of December 31, 2003, TSMC's equity interest in SSMC was 32%. TSMC and Philips are committed to buy specific percentages of the production capacity of SSMC. If any party defaults on the commitment 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 sales of certain products sold by SSMC. The Agreement shall remain in force for ten years and may be automatically renewed for successive periods of five years unless pre- terminated by either party under certain conditions. 140 Annual Report 2003 FINANCIAL INFORMATION g. Under a Technology Transfer Agreement (TTA) with National Semiconductor Corporation (National) entered into on June 27, 2000, TSMC shall receive payments for the licensing of certain technology to National. The agreement was to remain in force for ten years and could be automatically renewed for successive periods of two years thereafter unless either party gives notice for early termination under certain conditions. In January 2003, TSMC and National entered into a Termination Agreement whereby the TTA was terminated for convenience. Under the termination agreement, TSMC is relieved of further obligation to transfer additional technology. In addition, TSMC granted National an option to request the transfer of certain technologies under the same terms and conditions as the terminated TTA. The option will expire in January 2008. h. TSMC entered into a Manufacturing Agreement with VIS. VIS agrees to reserve certain production capacity for TSMC and agrees to manufacture certain logic devices or other products for TSMC's customers at prices agreed upon by TSMC and VIS. TSMC paid NT$1,200,000 thousand to VIS as a guarantee deposit for the capacity reservation. VIS shall return portions of the guarantee deposit without any interest to TSMC upon reaching certain purchase commitments by TSMC. The contract will remain in force for five years. As of December 31, 2003, the refundable deposit was NT$150,840 thousand. i. Beginning in 2001, TSMC entered into several licensing arrangements for certain semiconductor patents. The terms of the contracts range from five to ten years with payments to be made in the form of royalties over the term of the related contracts. TSMC has recorded the related amounts as a liability with the corresponding amounts recorded as deferred charges which are amortized and charged to the cost of sales on a straight-line basis over the estimated life of the technology or the term of the contract, whichever is shorter. j. In November 2002, TSMC entered into an Amended and Restated Joint Technology Cooperation Agreement with Philips, Motorola, Inc. and STMicroelectronics to jointly develop 90-nanometer to 65-nanometer advanced CMOS Logic and e-DRAM technologies. TSMC also agreed to align 0.12 micron CMOS Logic technology to enhance its foundry business opportunities. TSMC will contribute process technologies and share a portion of the costs associated with this joint development project. k. In December 2003, TSMC entered into a Technology Development and License Agreement with Motorola Inc. to jointly develop 65 nm SOI (silicon on insulator) technology. TSMC will also license related 90 nm SOI technology from Motorola. Any intellectual properties arising out of the co-development project shall be jointly owned by the parties. In accordance with the agreement, TSMC will pay royalties to Motorola, Inc. and will share a portion of the costs associated with the joint development project. l. In December 2003, the Company filed a lawsuit in the US District Court of Northern California against Semiconductor Manufacturing International Corporation and certain of its subsidiaries for patent infringement and trade secret misappropriation. The suit also asks for injunctive relief along with monetary damages. The case is in the process of being reviewed by the court. The probable outcome cannot be reasonably estimated. m. Under an agreement signed with a certain company, TSMC Shanghai has the obligation to purchase certain assets within a specified period at the price agreed upon by both parties. TSMC Shanghai will compensate the other party in case of a breach of the agreement. n. Amounts available under unused letters of credit as of December 31, 2003 were NT$6,480 thousand, US$1,294 thousand, EUR21 thousand and Singapore dollar $85 thousand. Among the unused letters of credit, TSMC-North America has an outstanding irrevocable standby letter of credit with a financial institution for US$1,294 thousand. The standby letter of credit was entered into as security to the landlord of TSMC-North America's office spaces in San Jose, California. In the event TSMC-North America defaults under this lease agreement, the landlord will draw on the standby letter of credit up to the amount of the default, but not to exceed the amount of the standby letter of credit. The standby letter of credit expires in October, 2004, and is renewable on an annual basis. Annual Report 2003 141 25. ADDITIONAL DISCLOSURES Following are the additional disclosures required by the SFC for the Company and its investees: a. Financing provided: Please see Table 1 attached; b. Endorsement/guarantee provided: Please see Table 2 attached; c. Marketable securities held: Please see Table 3 attached; d. Marketable securities acquired or 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 properties 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 properties at prices of at least NT$100 million or 20% of the paid-in capital: None; g. Total purchases from or sales to related parties of at least NT$100 million or 20% of the capital: Please see Table 6 attached; h. Receivable from related parties amounting to at least NT$100 million or 20% of the capital: Please see Table 7 attached; i. Names, locations, and related information of investee on which the Company exercises significant influence: Please see Table 8 attached; j. Financial instrument transactions: 1) Derivative financial instruments The Company entered into derivative financial instruments transactions for the year ended December 31, 2003 to manage exposures related to foreign-currency denominated receivables or payables, and interest rate fluctuations. Certain information on these contracts is as follows: a) Outstanding forward exchange contracts as of December 31, 2003 Financial Instruments Sell Buy Buy Maturity Period January 2004 to July 2004 January 2004 January 2004 Contract Amount (Nominal) (In Thousand) US$1,805,000 (US$/NT$) EUR7,500 (EUR/US$) JPY748,405 (JPY/US$) As of December 31, 2003, receivables from forward exchange contracts (included in the ''other financial assets'' account) aggregate NT$76,385 thousand, and payables from forward exchange contracts (included in the ''other current liabilities'' account) aggregate NT$174,019 thousand. Net exchange gain for the year ended December 31, 2003 was NT$321,033 thousand. As of December 31, 2003, the underlying assets and liabilities related to the above forward exchange contracts are as follows: Assets and Liabilities Time deposits Accounts and notes receivable Accounts payable Accounts payable 142 Annual Report 2003 (In Thousand) US$1,137,704 US$789,927 JPY889,850 EUR9,364 FINANCIAL INFORMATION b) Interest rate swaps The Company entered into interest rate swap contracts to manage related interest rates on its long-term loans. Net interest expense on these transactions for the year ended December 31, 2003 was NT$141,007 thousand. Outstanding contracts as of December 31, 2003 were as follows: Contract Date Period July 1, 1999 September 19, 2003 October 16, 2003 October 16, 2003 October 17, 2003 October 17, 2003 November 7, 2003 c) Option contracts July 1, 1999 to June 28, 2004 September 22, 2003 to December 15, 2005 October 20, 2003 to December 15, 2005 October 20, 2003 to December 15, 2005 October 21, 2003 to December 15, 2005 October 20, 2003 to December 15, 2005 November 11, 2003 to December 15, 2005 Contract Amount (In Thousand) US$2,857 NT$500,000 NT$500,000 NT$500,000 NT$500,000 NT$500,000 NT$500,000 The Company entered into foreign currency option contracts to manage exchange rate fluctuations arising from its anticipated US dollar cash receipts on export sales or its Yen and European currency obligations for purchases of machinery and equipment. As of December 31, 2003, there were no outstanding option contracts. For the year ended December 31, 2003, the Company realized premium income of NT$50,273 thousand and premium expense of NT$204,056 thousand. d) Transaction risk i) Credit risk. Credit risk represents the positive net settlement amount of those contracts with positive fair values at the balance sheet date. The positive net settlement amount represents the loss incurred by the Company if the counter-parties breached the contracts. 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 minimal. iii)Liquidity and cash flow risk and uncertainty of amount and term of future cash demand. As of December 31, 2003, the Company's future cash demand for outstanding forward exchange contracts, interest rate swaps and option contracts are as follows: Term Within one year Forward Exchange Contracts Inflow (In Thousand) Outflow (In Thousand) NT$61,230,306 US$1,821,340 EUR7,500 JPY748,405 Annual Report 2003 143 The Company has sufficient operating capital to meet the above cash demand. The interest rate of the interest rate swaps has taken the Company's cost of capital into account. In addition, the exchange rates of forward foreign exchange contracts and option contracts are fixed. Therefore, there is no material fund raising risk and cash flow risk. December 31, 2003 December 31, 2002 Carrying Amount Fair Value Carrying Amount Fair Value 2) Fair value of financial instruments Non-derivative financial instruments Assets Cash and cash equivalents Short-term investments Receivables from related parties Notes and accounts receivables Other financial assets Long-term investments Refundable deposits Liabilities $102,988,896 13,611,536 1,052,175 28,505,162 1,373,705 10,748,014 199,522 $102,988,896 14,054,511 1,052,175 28,505,162 1,373,705 17,815,445 199,522 407,736 3,248,289 6,438,604 7,232,103 8,800,302 35,850,377 5,649,461 763,889 $67,790,204 170,012 439,659 19,590,942 1,010,453 10,635,496 557,266 729,813 1,776,149 5,138,592 14,132,100 18,002,054 39,000,000 5,616,220 1,395,066 $67,790,204 2,455,582 439,659 19,590,942 1,010,453 12,750,029 557,266 729,813 1,776,149 5,138,592 14,132,100 18,002,054 39,762,245 5,616,220 1,395,066 Short-term bank loans Payables to related parties Accounts payable Payable to contractors and equipment suppliers Long-term bank loans (includes current portion) Bonds payable (includes current portion) Other long-term payables (includes current portion and other liabilities-others) Guarantee deposits 407,736 3,248,289 6,438,604 7,232,103 8,800,302 35,000,000 5,649,461 763,889 Derivative financial instruments Forward exchange contracts (buy) Forward exchange contracts (sell) Interest rate swaps Options 2,351 (99,984) - - 3,037 40,638 2,093 - 38,369 143,702 23,994 (50,273) 26,089 139,913 (164,342) (410,132) Fair values of financial instruments were determined as follows: a) The carrying amounts reported in the balance sheets for cash and cash equivalents, notes and accounts receivable, other financial assets, accounts payable, payables to contractors and equipment suppliers are approximate to their fair values. b) Fair value of short-term and long-term investments is based on quoted market prices. If quoted market prices are unavailable, fair value is based on net asset value or book value of investment. c) Fair value of refundable deposits and guarantee deposits is based on carrying values. d) The fair value of long-term bank loans is its carrying value with the floating interest rate. The fair value of bonds payable is the quoted market value. Fair value of other long-term payables approximates the carrying value. e) Fair value of derivative financial instruments is the estimated net receivable or (payable) if the contracts are terminated on the relevant balance sheet date. The fair values of some financial and non-financial instruments are 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. 144 Annual Report 2003 FINANCIAL INFORMATION 3) Investment in Mainland China: TSMC filed an investment project with the Investment Commission of MOEA to establish a foundry in Mainland China. On February 27, 2003, the authority approved phase one of the aforementioned project and permitted direct investment in mainland China. Subsequently, TSMC entered into an investment related agreement with Shanghai Songjiang District People's Government on June 8, 2003. On August 4, 2003, TSMC Shanghai, a wholly-owned subsidiary of TSMC, was established. TSMC Shanghai is engaged mainly in the manufacturing and selling of integrated circuits. TSMC made a capital investment in TSMC Shanghai in the amount of US$56,000 thousand on October 8, 2003. 26. SEGMENT FINANCIAL INFORMATION a. Geographic information: Overseas Taiwan Adjustments and Elimination Consolidated 2003 Sales to unaffiliated customers Transfers between geographic areas $118,851,382 11,494,868 $84,145,430 117,758,911 $- (129,253,779) $202,996,812 - Total sales $130,346,250 $201,904,341 ($129,253,779) $202,996,812 Gross profit Operating expenses Non-operating income and gains Non-operating expenses and losses Income before income tax Minority interest loss Identifiable assets Long-term investments Total assets 2002 Sales to unaffiliated customers Transfers between geographic areas $2,392,944 $72,891,637 ($401,103) $52,276,269 $358,451,509 ($14,075,261) $74,883,478 (23,582,897) 5,669,312 (5,791,248) $51,178,645 $3,012 $396,652,517 10,748,014 $407,400,531 $95,774,432 9,537,846 $66,526,776 94,434,553 $- (103,972,399) $162,301,208 - Total sales $105,312,278 $160,961,329 ($103,972,399) $162,301,208 Gross profit Operating expenses Non-operating income and gains Non-operating expenses and losses Income before income tax Minority interest loss Identifiable assets Long-term investments Total assets b. Gross export sales ($19,865) $51,967,145 $365,870 $75,840,416 $336,405,063 ($32,338,576) $52,313,150 (20,724,111) 2,419,467 (6,786,358) $27,222,148 $24,791 $379,906,903 10,635,496 $390,542,399 The export sales information is determined based on billed regions. Gross export sales for the years ended December 31, 2003 and 2002 were NT$59,868,104 thousand and NT$48,795,235 thousand, respectively. There were no export sales to a region that accounted for more than 10% of the Company's total sales. c. Major customer The Company only has one customer that accounts for more than 10% of its total sales. The sales to such customer amounted to NT$31,220,104 thousand and NT$32,769,054 thousand in 2003 and 2003, representing 15% and 20% of its total sales, respectively. Annual Report 2003 145 TABLE 1 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES FINANCING PROVIDED FOR THE YEAR ENDED DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Financing Name Counter-party Financial Statement Account Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) 1 2 TSMC International TSMC Technology Other receivables TSMC Development Other receivables TSMC Partners TSMC Development Other receivables $538,585 (US$15,851) $2,038,680 (US$60,000) $2,718,240 (US$80,000) $538,585 (US$15,851) $2,038,680 (US$60,000) $2,718,240 (US$80,000) Note 1: Not exceeding the issued capital of the Company. Note 2: Generally not exceeding the issued capital of the Company, unless approved by all members of the board. TABLE 2 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES ENDORSEMENT/GUARANTEE PROVIDED FOR THE YEAR ENDED DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Endorsement/ Guarantee Provider Name Counter-party Nature of Relationship (Note 2) Limits on Each Counter-party's Endorsement/ Guarantee Amounts 0 TSMC TSMC Development TSMC-North America WaferTech 3 2 3 Not exceed 10% of the net worth of TSMC, and also limiting to the total paid-in capital of the endorsement/ guarantee company, unless otherwise approved by Board of Directors. Note 1: 25% of the net worth of TSMC as of December 31, 2003. Note 2: The No. 2 represents a subsidiary in which TSMC holds directly over 50% of the equity interest. The No. 3 represents an investee in which TSMC holds directly and indirectly over 50% of the equity interest. 146 Annual Report 2003 FINANCIAL INFORMATION Interest Rate Transaction Amounts Reasons for Short-term Financing Allowance for Bad Debt Collateral Item Value Financing Limit for Each Borrowing Company Financing Company's Financing Amount Limits (US$ in Thousand) 4.25% 1.50% 1.50% $- Operating capital - - Operating capital Operating capital $- - - - - - $- N/A - - $33,569,117 (US$987,968) (Note 1) N/A (Note 2) Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) Value of Collateral Property, Plant and Equipment Ratio of Accumulated Amount of Collateral to Net Equity of the Latest Financial Statement Maximum Collateral/Guarantee Amounts Allowable (Note 1) $6,795,600 (US$200,000) 1,359,120 (US$40,000) 14,950,320 (US$440,000) $2,038,680 (US$60,000) 1,359,120 (US$40,000) 14,950,320 (US$440,000) $- - - 0.62% 0.41% 4.54% $82,303,577 Annual Report 2003 147 TABLE 3 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES MARKETABLE SECURITIES HELD DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account TSMC Government bonds 2002 Government Bond Series A 2002 Government Bond Series E 1994 Government Bond Series C Bonds with Repurchase Agreement Money market funds BOA Funds GS Funds Bond funds JF Taiwan Bond Fund ABN AMRO Bond Fund Stock Taiwan Mask Corp. TSMC-North America TSMC-Europe TSMC-Japan VIS TSMC International TSMC Partners SSMC Emerging Alliance GUC VisEra United Gas Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Hon Tung Ventures Capital - - - - - - - - - Subsidiary Subsidiary Subsidiary Investee Subsidiary Subsidiary Investee Subsidiary Investee Investee - - - - Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 148 Annual Report 2003 FINANCIAL INFORMATION December 31, 2003 Shares/Units (In Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note - - - - 40,000 20,000 34,343 34,794 7,094 11,000 - 6 787,016 987,968 300 382 - 39,040 5,100 16,783 10,500 5,000 8,392 $3,157,331 3,113,067 1,422,197 1,800,000 1,359,120 (US$40,000) 679,560 (US$20,000) 500,000 500,000 27,744 417,858 24,622 101,722 4,077,198 22,654,743 4,116,934 2,759,376 704,744 368,434 50,231 193,584 105,000 50,000 83,916 N/A N/A N/A N/A N/A N/A N/A N/A 2 100 100 100 28 100 100 32 99 47 25 11 7 2 10 $3,169,046 3,126,273 1,426,995 1,802,572 1,359,120 (US$40,000) 679,560 (US$20,000) 503,421 503,490 132,967 1,133,011 24,622 101,722 10,465,676 22, 654,743 4,116,934 2,759,376 704,744 403,962 50,231 282,754 147,999 57,051 66,447 Treasury stock of NT$715,153 thousand is deducted from the carrying value. (Continued) Annual Report 2003 149 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account TSMC-North America Chi Cherng Hsin Ruey TSMC International Certificate Chi Cherng Hsin Ruey Equity Crimson Asia Capital Horizon Ventures Stock TSMC Stock TSMC Certificate Hsin Ruey Stock TSMC Certificate Chi Cherng Stock InveStar InveStar II TSMC Development TSMC Technology 3DFX Interactive Inc. Money market fund BOA Fund TSMC Development Stock WaferTech Investee Long-term investment Investee Long-term investment - - Long-term investment Long-term investment Parent company Long-term investment Parent company Short-term investment Major shareholder Long-term investment Parent company Short-term investment Major shareholder Long-term investment Subsidiary Subsidiary Subsidiary Subsidiary - Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment - Short-term investment Subsidiary Long-term investment InveStar Stock PLX Technology, Inc. RichTek Technology Corp. Programmable Microelectronics (Taiwan), Inc. Global Testing Corp. Chipstrate Technologies, Inc. Capella Microsystems, Inc. Signia Technologies, Inc. - - - - - - - Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 150 Annual Report 2003 FINANCIAL INFORMATION December 31, 2003 Shares/Units (In Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note Treasury stock of NT$458,564 thousand is deducted from the carrying value. Treasury stock of NT$459,511 thousand is deducted from the carrying value. - - N/A N/A $42,941 42,006 40,947 229,669 13,101 715,153 13,735 458,564 - 902,033 13,761 459,511 - 902,909 45,000 51,300 1 1 68 US$46,403 US$36,901 US$537,716 (US$7,918) - 36 36 N/A N/A - - 64 - 64 97 97 100 100 - $501,505 501,517 40,947 229,669 822,491 862,340 902,033 863,957 902,909 US$46,403 US$36,901 US$537,716 (US$7,918) - 30,300 US$30,300 N/A US$30,300 - US$341,972 93 947 575 13,268 6,660 530 701 US$180 US$121 US$203 US$5,295 US$308 US$156 US$206 99 - 2 3 10 9 - 4 US$341,972 US$786 US$5,799 US$203 US$5,295 US$308 US$156 US$206 (Continued) Annual Report 2003 151 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account Advanced Power Electronics Corp. RichTek Technology Corp. Preferred stock Integrated Memory Logic, Inc. SiRF Technology Holdings, Inc. Sensory, Inc. LightSpeed Semiconductor Corporation Tropian, Inc. Sonics, Inc. Atheros Communications, Inc. NanoAmp Solutions, Inc. Monolithic Power Systems, Inc. Memsic, Inc. Reflectivity, Inc. Match Lab, Inc. Oridus, Inc. (Creosys, Inc.) Incentia Design Systems, Inc. IP Unity Stock WatchGuard Technologies, Inc. RickTek Technology Corp. eChannel Option Holding, Inc. Elcos Microdisplay Technology, Ltd. Signia Technologies, Inc. Procoat Technology Programmable Microelectronics (Taiwan), Inc. Auden Technology MFG Co., Ltd. GeoVision, Inc. EoNex Technologies, Inc. Conwise Technology Co., Ltd. Eon Technology, Inc. Goyatek Technology, Inc. TrendChip Technologies Corp. Ralink Technologies, Inc. RickTek Technology Corp. Preferred stock Capella Microsystems, Inc. Memsic, Inc. Oepic, Inc. NanoAmp Solutions, Inc. Advanced Analogic Technology, Inc. Monolithic Power Systems, Inc. Sonics, Inc. Newport Opticom, Inc. Silicon Data, 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 Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 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 InveStar II 152 Annual Report 2003 FINANCIAL INFORMATION December 31, 2003 Shares/Units (In Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note 2,750 1,671 1,831 306 1,404 2,252 1,758 2,686 1,607 541 2,521 2,727 1,064 1,875 1,500 286 1,008 5 465 358 270 351 4,165 177 953 287 55 2,800 2,800 2,088 2,000 1,833 785 419 2,289 4,997 250 948 804 3,082 1,157 2,000 US$1,376 US$204 US$1,221 US$1,333 US$312 US$329 US$1,916 US$3,530 US$3,593 US$853 US$2,000 US$1,500 US$1,192 US$375 US$300 US$92 US$494 US$30 US$346 US$251 US$27 US$101 US$1,940 US$50 US$834 US$132 US$3,048 US$979 US$965 US$727 US$861 US$791 US$583 US$122 US$1,560 US$1,317 US$1,000 US$1,261 US$1,946 US$3,082 US$402 US$750 5 3 12 1 5 2 3 5 - 3 12 12 5 9 8 2 2 - 1 6 1 2 10 1 4 1 6 14 8 8 5 5 2 3 10 8 1 2 4 5 9 7 US$1,376 US$10,235 US$1,221 US$1,333 US$312 US$329 US$1,916 US$3,530 US$3,593 US$853 US$2,000 US$1,500 US$1,192 US$375 US$300 US$92 US$494 US$30 US$2,848 US$251 US$27 US$101 US$1,940 US$834 US$1,151 US$132 US$3,048 US$979 US$965 US$727 US$861 US$791 US$4,804 US$122 US$1,560 US$1,317 US$1,000 US$1,261 US$1,946 US$3,082 US$402 US$750 (Continued) Annual Report 2003 153 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account Reflectivity, Inc. Angstron Systems, Inc. Tropian, Inc. SiRF Technology, Inc. LeadTONE Wireless, Inc. Match Lab, Inc. Kilopass Technology, Inc. Fang Tek, Inc. Alchip Technologies Ltd. Elcos Microdisplay Technology, Ltd. - - - - - - - - - - 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 Emerging Alliance Stock Global Investment Holding, Inc. Investee Long-term investment Preferred stock Quake Technologies, Inc. Pixim, Inc. Newport Opticom, Inc. NetLogic Microsystems, Inc. Ikanos Communication, Inc. Quicksilver Technology, Inc. Mosaic Systems, Inc. Accelerant Networks, Inc. Zenesis Technologies, Inc. Reflectivity, Inc. Iridigm Display, Co. XHP Microsystems, Inc. Axiom Microdevices, Inc. Optichron, Inc. Audience, Inc. Next IO, Inc. NuCORE Technology Inc. Bond funds Entrust KIRIN Entrust Phoenix TISC Ta-Hua E. Sun New Era Shenghua 1699 Jihsun Shenghua 5599 Mega Diamond Polar Ta-Hua GC Dollar Taiwan Security Overseas Fund - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment GUC 154 Annual Report 2003 FINANCIAL INFORMATION December 31, 2003 Shares/Units (In Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note 1,596 1,567 1,464 20 433 313 3,887 5,556 2,125 2,667 US$1,500 US$500 US$1,595 US$131 US$131 US$63 US$2,000 US$2,000 US$1,700 US$3,500 10,000 $100,000 467 1,721 962 602 5,116 963 2,481 441 861 1,596 254 2,280 1,000 714 1,654 800 1,821 2,106 1,399 2,210 2,412 962 1,009 764 931 2,734 1,968 38 22 US$334 US$2,382 US$250 US$1,850 US$1,625 US$2,488 US$12 US$460 US$500 US$1,500 US$500 US$750 US$1,000 US$1,000 US$250 US$500 US$1,000 22,324 20,207 30,000 30,003 10,000 12,000 10,000 10,000 30,105 20,060 13,691 102,694 6 6 2 - 6 2 19 44 - - 6 1 3 6 1 3 4 6 1 4 5 1 6 5 6 2 3 2 - - - - - - - - - - - - US$1,500 US$500 US$1,595 US$131 US$131 US$63 US$2,000 US$2,000 US$1,700 US$3,500 $100,000 US$334 US$2,382 US$250 US$1,850 US$1,625 US$2,488 US$12 US$460 US$500 US$1,500 US$500 US$750 US$1,000 US$1,000 US$250 US$500 US$1,000 22,334 20,216 30,012 30,013 10,004 11,995 10,157 10,004 30,118 20,068 13,732 103,190 Annual Report 2003 155 TABLE 4 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Marketable Securities Type and Name Financial Statement Account Counter-Party Nature of Relationship TSMC Money market funds BOA Fund Short-term investment BOA GS Fund Short-term investment Goldman Sachs Bond funds JF Taiwan Bond Fund ABN AMRO Bond Fund ABN AMRO Select Bond Fund Government bonds Short-term investment Short-term investment Short-term investment JF Asset Management (Taiwan) Ltd. ABN AMRO ABN AMRO Bonds with Repurchase Agreement Short-term investment Several financial institutions 2002 Government Bond Series A Short-term investment 2002 Government Bond Series E Short-term investment 1994 Government Bond Series C Short-term investment Stock Emerging Alliance VIS Amkor Technology Monolithic System Tech. TSMC Partners ADR TSMC InveStar II Preferred stock Long-term investment Long-term investment Long-term investment Long-term investment Short-term investment BNP and several financial institutions BNP and several financial institutions Chung Shing Bills Finance Corp. and several financial institutions Emerging Alliance VIS - - - Elcos Microdisplay Technology, Ltd. Long-term investment Elcos Microdisplay Technology, Ltd. TSMC International Money market fund GUC BOA Fund Bond funds Short-term investment Taiwan Securities Overseas Fund Short-term investment BOA - - - - - - - - - - Subsidiary Investee - - - - - - Note 1: The ending balance included the recognition of the investment income (loss) by the equity method, the cumulative translation adjustments and unrealized loss on long-term investments recognized in proportion to the Company's ownership percentage in investees. Note 2: Including stock dividend of 61 thousand units. 156 Annual Report 2003 FINANCIAL INFORMATION Beginning Balance Acquisition Disposal Ending Balance Shares/Units (Thousand) Amount (US$ in Thousand) Shares/Units (Thousand) Amount (US$ in Thousand) Shares/Units (Thousand) Amount (US$ in Thousand) Carrying Value (US$ in Thousand) Gain (Loss) on Disposal (US$ in Thousand) Shares/Units (Thousand) $- 120,000 $4,161,760 80,000 $2,785,760 (US$120,000) 140,000 4,852,300 120,000 4,165,140 (US$140,000) $2,785,760 (US$80,000) 4,165,140 (US$120,000) 34,343 97,782 81,744 500,000 1,400,000 879,000 - 62,988 81,744 - 902,881 881,719 - 900,000 879,000 - - - - - 109,545 - - - 1,800,000 3,157,331 3,113,067 1,422,197 174,030 766,815 - - - - - - - - - - - - - - - - - - - - - 505 470 301,209 152,681 280,748 104,289 20,461 48,392 823 (Note 2) US$8,407 US$7,357 US$1,050 $- - - 2,881 2,719 - - - - - - Amount (US$ in Thousand) (Note 1) $1,359,120 (US$40,000) 679,560 (US$20,000) 500,000 500,000 - 1,800,000 3,157,331 3,113,067 1,422,197 704,744 4,077,198 - - - 40,000 20,000 34,343 34,794 - - - - - - 787,016 - - - - - - - - - - - - - 677,471 505 470 - - - - - - - - 767,239 3,264,657 280,748 104,289 762 US$7,357 - - - - - - 2,667 US$3,500 - - - 87,300 US$87,300 57,000 US$57,000 US$57,000 22 102,694 - - - - - - 2,667 US$3,500 30,300 US$30,300 22 102,694 Annual Report 2003 157 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, 2003 (Amounts in Thousand New Taiwan Dollars) Company Name Types of Property Transaction Date Transaction Amount Payment Term Counter-party Fab 14 Fab 12 Fab 12 Fab 12 Fab 12 Fab 12 January 20, 2003 $180,665 By the construction progress United Integrated Services May 6, 2003 June 17, 2003 June 18, 2003 December 2, 2003 December 2, 2003 119,000 By the construction progress United Integrated Services 134,500 By the construction progress United Integrated Services 110,055 By the construction progress Liquid Air Far East Co. Ltd. 230,000 By the construction progress China Steel Structure Co. 285,000 By the construction progress Fu Tsu Construction Co. Ltd TSMC 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, 2003 (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 GUC WaferTech SSMC VIS Investee Subsidiary Investee Investee Sales Sales Sales Purchases Purchases Purchases $117,758,911 3,577,054 549,471 11,433,083 5,519,805 4,910,810 57 2 - 36 17 15 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, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Related Party Nature of Relationship Ending Balance Turnover Rate TSMC TSMC-North America Subsidiary Philips and its affiliates Major shareholder $13,946,638 895,063 37 days 64 days 158 Annual Report 2003 FINANCIAL INFORMATION 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 Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Public bidding Manufacturing purpose Transaction Details Abnormal Transaction Note/Accounts Payable or Receivable Payment Terms Unit Price Payment Terms Ending Balance % to Total Net 30 days from invoice date Net 30 days from invoice date 30 days after monthly closing Net 30 days from invoice date Net 30 days from invoice date Net 30 days from invoice date None None None None None None None None None None None None $13,946,638 895,063 15,339 1,184,642 634,647 1,034,074 48 3 - 11 6 10 Other Terms None None None None None None Note - - - - - - Overdue Amount Action Taken $3,907,505 - 97,618 Accelerate demand on account receivables Amounts Received in Subsequent Period Allowance for Bad Debts $4,831,330 40 $- - Annual Report 2003 159 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, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Investee Company Location Main Businesses and Products Original Investment Amount Balance as of December 31, 2003 Net Income Investment December 31, 2003 December 31, 2002 Shares (Thousand) Percentage of Ownership Carrying Value (Note1) (Loss) of the Gain (Loss) Note Investee (Note 2) Investor Company: TSMC TSMC-North America TSMC-Europe TSMC-Japan San Jose, California, U.S.A. Amsterdam, The Netherlands Yokohama, Japan TSMC Shanghai Shanghai, China VIS TSMC International Chi Cherng Hsin Ruey TSMC Partners Hsin-Chu, Taiwan Tortola, British Virgin Islands Taipei, Taiwan Taipei, Taiwan Tortola, British Virgin Islands Marketing and engineering support Marketing and engineering support Marketing and engineering support IC and other wafer equipment manufacturing and marketing IC design and manufacturing Investment Investment Investment Investment Emerging Alliance Cayman Islands Investment GUC VisEra Hsin-Chu, Taiwan Hsin-Chu, Taiwan IC research, development, manufacturing, testing and marketing Electronic spare parts manufacturing, material wholesaling and retailing $333,178 $333,178 11,000 15,749 83,760 1,890,952 2,960 83,760 - 8,119,816 31,445,780 6,503,640 31,445,780 300,000 300,000 10,350 300,000 300,000 10,350 1,179,690 409,920 1,005,660 341,250 (Note 3) - 6 - 787,016 987,968 - - 300 382 - 39,040 51,000 - 5,100 100 100 100 100 28 100 36 36 100 32 99 47 25 $417,858 $234,639 $227,062 Subsidiary 24,622 101,722 (13) 2,451 (13) Subsidiary 2,451 Subsidiary 1,901,428 (1,306) (1,306) Subsidiary 4,077,198 22,654,743 42,941 42,006 4,116,934 179,359 876,814 (840) (1,290) 199,401 50,351 Investee 876,814 Subsidiary 108 1,252 Investee Investee 197,394 Subsidiary 2,759,376 (971,314) (310,821) Investee 704,744 368,434 (219,190) (88,517) (218,094) Subsidiary (33,005) Investee 50,231 (3,076) (769) Investee SSMC Singapore Wafer manufacturing 6,408,190 6,408,190 Note 1: The treasury stock is deducted from the carrying value. Note 2: The unrealized gain or loss and the gain or loss on disposal of the stocks held by subsidiaries are excluded. Note 3: TSMC's investee, Ya Xin, merged with GUC in January 2003. GUC is the surviving company. 160 Annual Report 2003 FINANCIAL INFORMATION 11. U.S. GAAP Financial Information Please be advised that our 2003 full annual report that includes complete U.S. GAAP reconciled financial statements and footnotes will be avaliable when we file Form 20-F with the U.S. SEC. Our Form 20-F, or our 2003 full annual report, can be found at the U.S. SEC and on TSMC's website no later than June 30, 2004. TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2003 (In Thousand New Taiwan Dollars) ASSETS CURRENT ASSETS Cash and cash equivalents Short-term investments Receivables from related parties Notes receivable Accounts receivable-net Other financial assets Inventories-net Deferred income tax assets Prepaid expenses and other current assets Total Current Assets LONG-TERM INVESTMENTS 2002 2003 $67,790,204 170,012 439,659 60,240 16,225,194 1,010,453 11,201,446 3,401,729 2,238,221 102,537,158 10,635,496 $102,988,896 13,611,536 1,052,175 9,893 25,339,028 1,373,705 12,135,324 8,398,205 1,632,908 166,541,670 10,748,014 PROPERTY, PLANT AND EQUIPMENT-NET 246,498,311 211,854,263 GOODWILL 10,158,845 8,720,917 OTHER ASSETS Deferred charges-net Deferred income tax assets Refundable deposits Idle assets Assets leased to others Miscellaneous Total Other Assets 9,873,825 9,773,226 557,266 339,400 87,246 81,626 20,712,589 7,992,016 1,111,367 199,522 94,296 84,347 54,119 9,535,667 TOTAL ASSETS UNDER ROC GAAP $390,542,399 $407,400,531 Annual Report 2003 161 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES RECONCILIATIONS OF TOTAL ASSETS DECEMBER 31, 2002 AND 2003 (In Thousand New Taiwan Dollars) TOTAL ASSETS UNDER ROC GAAP U.S. GAAP Adjustments: 2002 $390,542,399 - Adjustment of market value - trading securities 2,116,432 - Adjustment of long-term investments - U.S. GAAP adjustments on equity-method investees (1,414,756) - Adjustment to market value - available-for-sale securities - TSMC - Equity investees - Loss on impairment of assets - Reversal of depreciation of assets impaired under U.S. GAAP - Goodwill - Carrying value difference for 68% purchase of TASMC - Accumulated amortization - Effect of U.S. GAAP adjustments on deferred income tax - Consolidation of GUC - Consolidation of VisEra - Capital stock payment for technology transfer 18,611 7,083 (10,916,070) 2,910,952 52,212,732 (14,895,672) (4,061) - - (49,500) 29,985,751 2003 $407,400,531 448,730 (1,403,846) 379,665 130,706 (11,090,909) 4,435,842 52,212,732 (13,647,022) 37,802 773,038 175,523 - 32,452,261 TOTAL ASSETS UNDER U.S. GAAP $420,528,150 $439,852,792 162 Annual Report 2003 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2003 (In Thousand New Taiwan Dollars) LIABILITIES CURRENT LIABILITIES Short-term bank loans Payable to related parties Accounts payable Payables to contractors and equipment suppliers Accrued expenses and other current liabilities Current portion of long-term liabilities Total Current Liabilities LONG-TERM LIABILITIES Long-term bank loans Long-term bonds payables Other long-term payables Total Long-term Liabilities OTHER LIABILITIES Accrued pension cost Guarantee deposits Others Total Other Liabilities 2002 2003 $729,813 1,776,149 5,138,592 14,132,100 5,947,229 12,107,899 39,831,782 11,051,454 35,000,000 4,281,665 50,333,119 2,211,560 1,395,066 822,167 4,428,793 $407,736 3,248,289 6,438,604 7,232,103 8,820,776 5,000,000 31,147,508 8,800,302 30,000,000 3,300,829 42,101,131 2,601,450 763,889 1,483,245 4,848,584 TOTAL LIABILITIES UNDER ROC GAAP $94,593,694 $78,097,223 Annual Report 2003 163 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES RECONCILIATIONS OF TOTAL LIABILITIES DECEMBER 31, 2002 AND 2003 (In Thousand New Taiwan Dollars) TOTAL LIABILITIES UNDER ROC GAAP U.S. GAAP Adjustments: - Derivative financial instruments - Bonuses to employees, directors and supervisors - Accrued pension expense - Consolidation of GUC - Consolidation of VisEra 2002 $94,593,694 516,278 1,597,497 39,772 - - 2,153,547 2003 $78,097,223 (39,048) 3,530,225 40,263 323,340 24,830 3,879,610 TOTAL LIABILITIES UNDER U.S. GAAP $96,747,241 $81,976,833 MINORITY INTEREST IN SUBSIDIARIES UNDER ROC GAAP U.S. GAAP Adjustment: - Shareholders' equity MINORITY INTEREST IN SUBSIDIARIES UNDER U.S. GAAP $95,498 62,689 $158,187 $88,999 613,839 $702,838 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2003 (In Thousand New Taiwan Dollars, Except Par Value) SHAREHOLDERS' EQUITY Capital stock, $10 par value; Authorized-24,600,000 thousand shares Issued: Common stock-20,266,619 thousand shares in 2003 and 18,622,887 thousand shares in 2002 Preferred stock-1,300,000 thousand shares in 2002 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 2003 $186,228,867 13,000,000 57,004,789 18,641,108 - 22,151,089 (194,283) 945,129 (1,923,492) $202,666,189 - 56,855,885 20,802,137 68,945 50,229,008 (35) 225,408 (1,633,228) TOTAL SHAREHOLDERS' EQUITY UNDER ROC GAAP 295,853,207 329,214,309 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY UNDER ROC GAAP $390,542,399 $407,400,531 164 Annual Report 2003 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES RECONCILIATIONS OF SHAREHOLDERS' EQUITY DECEMBER 31, 2002 AND 2003 (In Thousand New Taiwan Dollars) TOTAL SHAREHOLDERS' EQUITY UNDER ROC GAAP U.S. GAAP Adjustments: - Adjustment to market value for trading securities - U.S. 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 U.S. GAAP - Effect of U.S. GAAP adjustments on deferred income tax - Goodwill - Carrying value difference for 68% purchase of TASMC - Accumulated amortization - Capital stock payment for technology transfer - Derivative financial instruments - Bonuses to employees, directors and supervisors - Accrued pension expense - Minority interest - Mandatory redeemable preferred stock TOTAL SHAREHOLDERS' EQUITY UNDER U.S. GAAP MANDATORY REDEEMABLE PREFERRED STOCK 2002 $295,853,207 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) 14,769,515 310,622,722 13,000,000 FINANCIAL INFORMATION 2003 $329,214,309 448,730 (1,403,846) 379,664 130,706 (11,108,126) 4,453,059 37,802 52,212,732 (13,647,022) - 39,048 (3,530,225) (40,263) (13,447) - 27,958,812 357,173,121 - TOTAL LIABILITY AND SHAREHOLDERS' EQUITY UNDER U.S. GAAP $420,528,150 $439,852,792 Annual Report 2003 165 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003 (In Thousand New Taiwan Dollars) GROSS SALES 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 AND GAINS Gain on sales of investments-net Interest Gain on sales of property, plant and equipment Technical service income Royalty income Other Total Non-Operating Income and Gains NON-OPERATING EXPENSES AND LOSSES Interest Loss on impairment of property, plant and equipment and idle assets Foreign exchange loss-net Loss on impairment of long-term investments Loss on sales of property, plant and equipment Investment loss recognized by equity method-net Amortization of premium from option contracts-net Loss on sales of investment-net Casualty loss-net Other Total Non-Operating Expenses and Losses INCOME BEFORE INCOME TAX INCOME TAX EXPENSE INCOME BEFORE MINORITY INTEREST MINORITY INTEREST IN LOSS OF SUBSIDIARIES CONSOLIDATED NET INCOME 2002 $166,187,670 (3,886,462) 162,301,208 (109,988,058) 52,313,150 11,725,035 6,767,756 2,231,320 20,724,111 31,589,039 - 1,094,724 273,998 162,149 527,126 291,860 2,349,857 2,616,740 244,430 120,568 795,674 221,955 1,976,847 419,513 101,221 119,485 100,315 6,716,748 27,222,148 (5,636,648) 21,585,500 24,791 $21,610,291 166 Annual Report 2003 2003 $207,279,137 (4,282,325) 202,996,812 (128,113,334) 74,883,478 12,712,695 8,199,965 2,670,237 23,582,897 51,300,581 3,538,081 888,107 438,809 209,764 - 594,551 5,669,312 1,891,009 1,506,199 755,100 652,718 374,126 294,244 153,783 - - 164,069 5,791,248 51,178,645 (3,922,957) 47,255,688 3,012 $47,258,700 FINANCIAL INFORMATION TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND SUBSIDIARIES RECONCILIATIONS OF NET INCOME FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003 (In Thousand New Taiwan Dollars) NET INCOME UNDER ROC GAAP U.S. GAAP Adjustments: - Adjustment to market value for trading securities - U.S. GAAP adjustments on equity-method investees - Reversal of depreciation on assets impaired under U.S. GAAP - Reversal of additional write-off under ROC GAAP - Income tax effect of U.S. 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 accrual - Pension expense - Stock-based compensation - Minority interest effect of U.S. GAAP adjustments NET INCOME UNDER U.S. GAAP Cumulative preferred dividends INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS UNDER U.S. GAAP 2002 $21,610,291 (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 (455,000) 2003 $47,258,700 (1,667,701) (70,567) 1,483,526 104,614 42,409 1,281,730 59,609 555,326 (3,530,225) (6,441,054) (490) (463,743) 49,241 (8,597,325) 38,661,375 (184,493) $14,078,912 $38,476,882 12. Financial Forecast and Operation Results from 2002 to 2003: Not Applicable TSMC is not required by Taiwan law to provide 2002 and 2003 financial forecast (see "Guidelines for Disclosure of Financial Forecast by Public Companies"). Annual Report 2003 167 SPECIAL NOTES 1. Affiliates Information (1) TSMC Affiliated Companies Chart Taiwan Semiconductor Manufacturing Company, Ltd. TSMC North America Shareholding: 100% TSMC Europe B.V. Shareholding: 100% TSMC Japan K.K. Shareholding: 100% TSMC International Investment Ltd. Shareholding: 100% TSMC Partners, Ltd. Shareholding: 100% Emerging Alliance Fund Shareholding: 99.5% TSMC Development, Inc. Shareholding: 100% TSMC Technology, Inc. Shareholding: 100% InveStar Semiconductor Development Fund (I) Shareholding: 97% InveStar Semiconductor Development Fund (II) Shareholding: 97% WaferTech, LLC Shareholding: 99.996% TSMC Shanghai Shareholding: 100% Global Unichip Corp. Shareholding: 47.32% VisEra Technology Co. Shareholding: 25% Chi Cherng Investment Co., Ltd. Shareholding: TSMC: 35.7% Hsin Ruey: 64.3% Hsin Ruey Investment Co., Ltd. Shareholding: TSMC: 35.7% Chi Cherng: 64.3% 168 Annual Report 2003 (2) TSMC Affiliated Companies DECEMBER 31, 2003 FINANCIAL INFORMATION Unit: NT(US, EUR, JPY) $K Company Date of Incorporation Place of Registration Capital Stock Business Activities TSMC North America Jan. 18, 1988 San Jose, California, USA US$11,000 Marketing & engineering support Taiwan Semiconductor Manufacturing Company Europe B.V. Mar. 04, 1994 Amsterdam, The Netherlands EUR90.76 Marketing & engineering support TSMC Japan K.K. TSMC (Shanghai) Company Limited TSMC International Investment Ltd. TSMC Technology, Inc. InveStar Semiconductor Development Fund, Inc. InveStar Semiconductor Development Fund, Inc.(II) LDC. TSMC Development, Inc. Wafertech, LLC TSMC Partners, Ltd. Emerging Alliance Fund, L.P. Hsin Ruey Investment Co., Ltd. Chi Cherng Investment Co., Ltd. Global Unichip Corporation Sep. 10, 1997 Yokohama, Japan JPY300,000 Marketing & engineering support Aug. 04, 2003 Shanghai, China RMB463,512 IC and other wafer equipment manufacturing and marketing Tortola, British Virgin Islands US$987,968 Investment Apr. 09, 1996 Feb. 20, 1996 Delaware, USA Sep. 10, 1996 Cayman Islands Aug. 25, 2000 Cayman Islands Feb. 16, 1996 Delaware, USA US$0.001 Investment US$46,350 Investment US$52,839 Investment US$0.001 Investment Jun. 03, 1996 Washington, USA US$892,566 Wafer manufacturing, testing and marketing Mar. 26, 1998 Tortola, British Virgin Islands US$300 Investment Jan. 10, 2001 Cayman Islands Jul. 13, 1998 Jul. 15, 1998 Taipei, Taiwan Taipei, Taiwan US$35,101 Investment NT$840,000 Investment NT$840,000 Investment Jan. 22, 1998 Hsin-Chu, Taiwan NT$825,000 IC research,development, manufacturing, testing and marketing Electronic spare parts manufacturing, material wholesaling and retailing VisEra Technology Company Ltd. Dec. 05, 2003 Hsin-Chu, Taiwan NT$204,000 (3) Business Scope of TSMC and its Affiliated Companies TSMC and its affiliates work together to provide dedicated foundry services to our customers around the world. In addition, several of TSMC's affiliate companies are focused on investing in companies involved in design, manufacture, and other related business in semiconductor industries. In general, TSMC and its affiliates provide cross support in technology, capacity, marketing and services with an aim to maximize the synergy within the group, enabling TSMC to provide its customers with the best dedicated foundry services worldwide. The ultimate goal of this strategy is to ensure TSMC's leading position in the global foundry market. (4) TSMC Shareholders Representing Both Holding Comapnies and Subordinates DECEMBER 31, 2003 Reasoning Name (Note1) Shareholding (Note 2) Shares Holding % Date of Incorporation Place of Registration Capital Business Activities Unit: NT$K, except Shareholding None The presumed interested parties representing both holding companies and subordinates include the company's Director, the shareholders conducting business on behavior of the company, and the shareholders holding more than 50% shares of the company. Note 1: The same legal and natural persons apply a company name and a personal name, respectively. Note 2: It shows the shareholdings to the holding company (excluding the holdings to the subordinates). Annual Report 2003 169 (5) Rosters of Directors, Supervisors, and Presidents of TSMC's Affiliated Companies DECEMBER 31, 2003 Company Title Name TSMC North America Taiwan Semiconductor Manufacturing Company Europe B.V. TSMC Japan K.K. TSMC (Shanghai) Company Limited Director Director President Director Director Director Director President Chairman Director Director Director Director Director Supervisor President Chairman Director Director Supervisor President F. C. Tseng Rick Tsai Edward C. Ross Morris Chang Rick Tsai Quincy Lin Kees den Otter Kees den Otter Sachiaki Nagae Morris Chang F. C. Tseng Rick Tsai Makoto Onodera Hisao Baba Lora Ho Hisao Baba F. C. Tseng C. C. Wei Y. C. Chao Lora Ho Y. C. Chao TSMC International Investment Ltd. TSMC Technology, Inc. Director President Morris Chang F. C. Tseng Chairman President Morris Chang Morris Chang InveStar Semiconductor Development Fund, Inc. Director Wendell Huang InveStar Semiconductor Development Fund,Inc. (II) LDC. Director Wendell Huang TSMC Development, Inc. Chairman President Morris Chang Morris Chang WaferTech, LLC TSMC Partners, Ltd. Chairman Director Director President Director Director Director Director Director Director Morris Chang Rick Tsai Steve Tso Steve Tso F. C. Tseng Rick Tsai Quincy Lin Steve Tso Richard L. Thurston Lora Ho (Continued) 170 Annual Report 2003 Unit : NT$, except shareholding Shareholding Amount - - - (TSMC holds 11,000,000 shares) - - - - - (TSMC holds 200 shares) - - - - - - - - (TSMC holds 6,000 shares) - - - - - (TSMC's investment US$56,000,000) - - (TSMC holds 987,968,244 shares) - - (TSMC International Investment Ltd. holds 1,000 shares) - (TSMC International Investment Ltd. holds 45,000,000 shares) - (TSMC International Investment Ltd. holds 51,300,000 shares) - - (TSMC International Investment Ltd. holds 1,000 shares) - - - - (TSMC Development, Inc. holds 293,636,833 Preferred shares) - - - - - - (TSMC holds 300,000 shares) % - - - (100%) - - - - - (100%) - - - - - - - - (100%) - - - - - (100%) - - (100%) - - (100%) - (97.09%) - (97.09%) - - (100%) - - - - (99.996%) - - - - - - (100%) Company Title Name Emerging Alliance Fund, L.P. Hsin Ruey Investment Co., Ltd. NIL Director NIL Rick Tsai (Representative of Chi Cherng Investment Co., Ltd.) Chi Cherng Investment Co., Ltd. Director F. C. Tseng (Representative of Hsin Ruey Investment Co., Ltd.) Global Unichip Corporation VisEra Technology Company Ltd. Chairman Director Director Supervisor President Director Supervisor President F. C. Tseng Ping Yang Jim Lai Lora Ho Jim Lai C. C. Wei Lora Ho N. S. Tsai FINANCIAL INFORMATION Unit : NT$, except shareholding Shareholding Amount (TSMC's investment US$34,925,000) (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$299,999,880) - - - - - (TSMC holds 39,040,000 shares) - - - (TSMC holds 5,100,000 shares) % (99.50%) (64.29%) (35.71%) (64.29%) (35.71%) - - - - - (47.32%) - - - (25%) (6) Operational Highlights for TSMC Affiliated Companies DECEMBER 31, 2003 Company Capital Stock Assets Liabilities Net Worth Net Sales Unit: NT$K, except EPS($) Income from Operation Net Income (net of tax) Basic EPS (net of tax) Note TSMC North America 373,758 16,301,874 15,067,729 1,234,145 1,847,704 234,535 159,522 14.50 Taiwan Semiconductor Manufacturing Company Europe B.V. TSMC Japan K.K. 3,869 95,340 57,388 123,337 32,766 21,616 24,622 101,721 TSMC (Shanghai) Company Limited 1,902,717 2,629,072 727,644 1,901,428 166,633 214,652 - 14,040 10,222 (1,306) TSMC International Investment Ltd. 33,569,185 33,753,498 11,098,755 22,654,743 1,035,940 1,035,940 (13) 2,451 (1,306) 876,814 (65.27) 408.48 N/A 0.89 TSMC Technology, Inc. 0.034 986,917 1,255,971 (269,054) 58,159 11,038 (8,239) (8,239.43) InveStar Semiconductor Development Fund, Inc. InveStar Semiconductor Development Fund, Inc. (II) LDC. TSMC Development, Inc. Wafertech, LLC TSMC Partners, Ltd. 1,574,880 1,647,509 11,471 1,636,038 663,654 100,746 158,913 3.43 1,795,364 1,292,541 1,108 1,291,433 33,652 (227,889) (224,683) (4.25) 0.034 12,302,981 6,804,077 5,498,904 - 30,327,595 18,876,007 7,596,057 11,279,950 11,097,686 10,193 13,305,493 9,188,559 4,116,934 (22,480) 742,283 (5,589) (26,965) 1,486 (1,002) (85,843) (3,084) 377,790 377,789.51 528,818 199,401 (219,190) (1,290) (840) (88,517) (3,076) N/A 664.67 N/A N/A N/A (1.20) (0.15) - 7,658 1,665 (824) 918,875 23,607 Emerging Alliance Fund, L.P. 1,192,645 708,286 Hsin Ruey Investment Co., Ltd. Chi Cherng Investment Co., Ltd. Global Unichip Corporation VisEra Technology Company Ltd. 840,000 840,000 825,000 204,000 1,405,450 1,405,002 1,182,439 225,754 - 1,200 787 328,779 24,830 708,286 1,404,250 1,404,215 853,660 200,924 * Based on US GAAP NOTE: Foreign exchange rate for balance sheet amounts are as follows: $1 USD=$33.978 NT $1 EUR=$42.63 NT $1 JPY=$0.3178 NT $1 RMB=$4.105 NT Foreign exchange rate for income statement amounts are as follows: $1 USD=$34.423 NT $1 EUR=$39.0 NT $1 JPY=$0.2974 NT $1 RMB=$4.159 NT * * * * Annual Report 2003 171 2. Combined Financial Statements & Independent Accountants' Report REPRESENTATION LETTER The combined balance sheet as of December 31, 2003 and the combined statement of income for the year ended December 31, 2003 of Taiwan Semiconductor Manufacturing Company Ltd., and affiliates are in conformity with the requirements on public companies and their affiliates, taken as a whole, of Securities and Futures Commission (SFC) in the Republic of China (ROC), the ROC regulations govern- ing 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 subsidiaries and affili- ates. There are no plans or intentions that may materially affect the carrying values or classifications of assets and liabilities. Very truly yours, TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. By MORRIS CHANG Chairman 172 Annual Report 2003 FINANCIAL INFORMATION English Translation of a Report Originally Issued in Chinese 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, 2003 and the related combined statement of income for the year then ended of Taiwan Semiconductor Manufacturing Company Ltd. and affiliates. Our review was made in accordance with the Guidelines for the Review of Combined Financial Statements of Affiliates. It is substantially less in scope than an examination in accordance with auditing stan- dards generally accepted in the Republic of China (ROC), the objective of which is the expression of an opinion regarding the combined balance sheet and the combined statement of income taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the combined balance sheet and the combined statement of income referred to above in order for them to be in conformity with ''Regulations Governing the Preparation of Affiliates' Combined Operating Report, Combined Financial Statements and Relationship Report'' in the ROC, and the ROC regulation governing the prepa- ration of financial statements of public company and the generally accepted accounting principles in the ROC. Deloitte & Touche (T N Soong & Co and Deloitte & Touche (Taiwan) Established Deloitte & Touche Effective June 1, 2003) Taipei, Taiwan Republic of China January 12, 2004 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 other- wise 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. Annual Report 2003 173 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND AFFILIATES COMBINED BALANCE SHEET (UNAUDITED) DECEMBER 31, 2003 (In Thousand New Taiwan Dollars, Except Par Value) ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) Short-term investments (Notes 2 and 5) Receivables from related parties (Note 21) Notes receivable Accounts receivable Allowance for doubtful receivables (Note 2) Allowance for sales returns and others (Note 2) Other financial assets (Note 24) Inventories-net (Notes 2 and 6) Deferred income tax assets (Notes 2 and 15) Prepaid expenses and other current assets (Note 2) Total current assets LONG-TERM INVESTMENTS (Notes 2, 7, and 19) Equity method Cost method Funds Total long-term investments PROPERTY, PLANT AND EQUIPMENT (Notes 2, 8, 11 and 21) Cost Land and land improvements Buildings Machinery and equipment Office equipment Total cost Accumulated depreciation Advance payments and construction in progress Net property, plant and equipment GOODWILL (Note 2) OTHER ASSETS Deferred charges-net (Notes 2 and 9) Deferred income tax assets (Notes 2 and 15) Refundable deposits (Notes 21 and 23) Idle assets (Note 2) Assets leased to others (Note 2) Miscellaneous Total other assets TOTAL ASSETS The accompanying notes are an integral part of the combined financial statements. 174 Annual Report 2003 2003 Amount $103,426,957 13,922,621 1,036,836 10,021 28,644,803 (1,020,398) (2,135,843) 1,389,123 12,195,066 8,398,205 1,650,709 167,518,100 6,836,574 3,222,159 270,616 10,329,349 855,394 79,778,533 372,186,920 7,458,561 460,279,408 (275,075,106) 26,890,519 212,094,821 8,685,388 8,163,414 1,111,367 200,390 94,296 84,347 67,620 9,721,434 % 26 3 - - 7 - - - 3 2 - 41 2 1 - 3 - 19 91 2 112 (67) 7 52 2 2 - - - - - 2 $408,349,092 100 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term bank loans (Note 10) Payables to related parties (Note 21) Accounts payable Payables to contractors and equipment suppliers Accrued expenses and other current liabilities (Note 24) Current portion of long-term liabilities (Notes 11 and 12) Total current liabilities LONG-TERM LIABILITIES Long-term bank loans (Note 11) Long-term bonds payables (Note 12) Other long-term payables (Note 13) Total long-term liabilities OTHER LIABILITIES Accrued pension cost (Notes 2 and 14) Guarantee deposits (Note 23) Others Total other liabilities MINORITY INTEREST IN AFFILIATES (Note 2) Total liabilities SHAREHOLDERS' EQUITY (Notes 2 and 17) Common stock-$10 par value Authorized: 24,600,000 thousand shares Issued: 20,266,619 thousand shares Capital surplus: Merger and others (Note 2) Treasury stock (Notes 3 and 19) Retained earnings: Appropriated as legal reserve Appropriated as special reserve Unappropriated earnings Others: Unrealized loss on long-term investments (Note 2) Cumulative translation adjustments (Note 2) Treasury stock (at cost)-40,597 thousand shares (Notes 2 and 19) Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY FINANCIAL INFORMATION 2003 Amount % $407,736 3,248,289 6,517,548 7,356,310 8,930,551 5,005,489 31,465,923 8,817,506 30,000,000 3,306,388 - 1 2 2 2 1 8 2 7 1 42,123,894 10 2,608,443 763,888 1,483,245 4,855,576 689,390 1 - - 1 - 79,134,783 19 202,666,189 56,802,829 53,056 20,802,137 68,945 50,229,008 (35) 225,408 (1,633,228) 50 14 - 5 - 12 - - - 329,214,309 $408,349,092 81 100 Annual Report 2003 175 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND AFFILIATES COMBINED STATEMENT OF INCOME (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 2003 (In Thousand New Taiwan Dollars, Except Combined Earnings Per Share) GROSS SALES (Notes 2, 21 and 25) SALES RETURNS AND ALLOWANCES (Note 2) 2003 Amount % $207,675,137 (4,285,314) NET SALES 203,389,823 100 128,363,461 75,026,362 12,864,899 8,241,084 2,700,103 23,806,086 51,220,276 3,540,249 894,381 438,809 209,764 595,959 5,679,162 63 37 6 4 2 12 25 2 1 - - - 3 COST OF SALES (Notes 16 and 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 AND GAINS (Note 25) Gain on sales of investments-net (Note 2) Interest (Notes 2 and 24) Gain on sales of property, plant and equipment (Note 2) Technical service income (Notes 21 and 22) Other (Note 21) Total non-operating income and gains (Continued) 176 Annual Report 2003 NON-OPERATING EXPENSES AND LOSSES (Note 25) Interest (Notes 2, 8 and 24) Loss on impairment of property, plant and equipment and idle assets (Note 2) Foreign exchange loss-net (Notes 2 and 24) Loss on impairment of long-term investments (Note 2) Loss on sales of property, plant and equipment (Note 2) Investment loss recognized by equity method-net (Notes 2 and 7) Amortization of premium from option contracts-net (Notes 2 and 24) Other Total non-operating expenses and losses INCOME BEFORE INCOME TAX (Note 25) INCOME TAX EXPENSE (Notes 2 and 15) INCOME BEFORE MINORITY INTEREST MINORITY INTEREST IN LOSS OF AFFILIATES (Notes 2 and 25) COMBINED NET INCOME COMBINED 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. FINANCIAL INFORMATION 2003 Amount % 1 1 1 - - - - - 3 25 2 23 - 23 $1,891,450 1,506,199 758,269 652,718 374,132 260,470 153,783 172,708 5,769,729 51,129,709 3,922,957 47,206,752 51,948 $47,258,700 Income Before Income Tax and Minority Combined Interest Net Income $2.52 $2.52 $2.33 $2.33 (Concluded) Annual Report 2003 177 English Translation of Financial Statements Originally Issued in Chinese TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Amounts in Thousand New Taiwan Dollars, Unless Specified Otherwise) 1. GENERAL Taiwan Semiconductor Manufacturing Company Ltd. (TSMC), a Republic of China (ROC) corporation, was incorporated as a venture among the Government of the ROC, acting through the Development Fund of the Executive Yuan; Koninklijke 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). On October 8, 1997, TSMC listed its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs). TSMC is engaged 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: TSMC International Investment Ltd. (TSMC International), TSMC North America (TSMC- North America), Taiwan Semiconductor Manufacturing Company Europe B.V. (TSMC-Europe), TSMC Japan K.K. (TSMC-Japan), TSMC Shanghai Company Limited (TSMC Shanghai; a newly established entity in 2003), and TSMC Partners Ltd. (TSMC Partners). In addition, TSMC has the following consolidating subsidiaries: A 99.5% owned subsidiary, Emerging Alliance Fund, L.P. (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) and 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 99.996% owned subsidiary, WaferTech, LLC (WaferTech). TSMC has two affiliates over which TSMC exercises significant influence: A 47% owned affiliate, Global UniChip Corporation (GUC), and a 25% owned affiliate, VisEra Technology Co., Ltd. (VisEra, a newly established entity in 2003). GUC signed a merger agreement with TSMC's 100% owned subsidiary, Ya Xin Technology, Inc. in December 2002. The merger was effective on January 4, 2003 and GUC is the surviv- ing company. The following diagram presents information regarding the relationship and ownership percentages among TSMC and its affiliates as of December 31, 2003: TSMC 100% 100% 100% 100% 100% 100% 36% 36% 99.5% 47% 25% TSMC- North America TSMC- Japan TSMC International TSMC-Europe TSMC Partners TSMC Shanghai Chi Cherng 64% 64% Hsin Ruey Emerging Alliance GUC VisEra 100% 100% 97% 97% TSMC Technology TSMC Development InveStar InveStar II 99.996% WaferTech 178 Annual Report 2003 FINANCIAL INFORMATION 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 Shanghai is engaged in integrated circuits and other wafer equipment manufacturing and marketing. TSMC Partners, Chi Cherng and Hsin Ruey are engaged in investments. 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 technology companies. WaferTech is engaged in the manufacturing, selling, testing and designing of integrated circuits and other semi- conductor devices. GUC is engaged in the designing, developing, manufacturing, testing and marketing of integrated circuits. VisEra is engaged in electronic spare parts manufacturing, material wholesaling and retailing activities. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The combined financial statements are presented in conformity with the ''Regulations Governing the Preparation of Affiliates' Combined Operating Report, Combined Financial Statements and Relationship Report'' in ROC and the ROC regulations governing the preparation of financial statements of public companies and generally accepted accounting principles in the ROC. Significant accounting policies are summarized as follows: Combination All significant inter-company balances and transactions have been eliminated in combined financial statements. The combined financial statements include, as of and for the year ended December 31, 2003, the accounts of all majority (directly and indirectly) owned sub- sidiaries of TSMC, and the accounts of GUC and VisEra that TSMC exercised significant influence on. Vanguard International Semiconductor Corporation (VIS), which was a combined entity in 2002, was already terminated the significant controlled relationship with TSMC, the combined financial statements as of and for the year ended December 31, 2003 do not include the accounts of VIS. TSMC and the foregoing's affiliates are hereinafter referred to collectively as the ''Company''. Minority interests in the forementioned affiliates are presented separately in the combined financial statements. Classification of Current and Non-current Assets and Liabilities Current assets are those which expected to be converted to cash, sold or consumed within one year from the balance sheet date. Current liabilities are obligations due on demand within one year from the balance sheet date. Assets and liabilities that are not classified as current are non-current assets and liabilities, respectively. Cash Equivalents Government bonds under repurchase agreements acquired with maturities less than three months from date of purchase are classified as cash equivalents. Short-term Investments Short-term investments consist of government bonds, money market funds, government bonds acquired under repurchase agreements, bond funds and listed stocks. The investments are carried at the lower of cost or market value. Cash dividends are recorded as invest- ment income in the current period. An allowance for decline in value is provided and is charged to current period earnings when the aggregate carrying value of the investments exceeds the aggregate market value. A reversal of the allowance is recorded for a subse- quent recovery of the market value. The cost of investments sold is accounted for using the weighted-average method. The market values of government bonds are determined using the average of bid and ask prices of the government bonds. The market value of funds is determined using the net asset value of the funds, and the market value of listed stocks is determined using the aver- age-closing price of the listed stocks for the last month of the period. Annual Report 2003 179 Allowance for Doubtful Receivables Allowances for doubtful receivables are provided based on a review of the collectibility of accounts receivables. The Company determines the amount of allowance for doubtful accounts by examining the historical collection experience and current trends in the credit quality of its customers as well as its internal credit policies. Revenue Recognition and Allowance for Sales Returns and Others The Company recognizes net sales when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title and acceptance, if applicable, have occurred, as well as the price is fixed or determinable and the collectibility is reasonably assured. An allowance is provided for any sales return and pricing discounts. Allowance for sales returns and pricing discounts is estimated based on historical experience and any known factors that would affect the allowance. Such provisions are deducted from sales in the year the products are sold and the estimated related costs are deducted from cost of sales. Sales are determined using the fair value taking into account related sales discounts agreed to by the Company and its customers. Sales agreements typically provide that payment is due 30 days from invoice date for majority of the customers and 30 to 45 days after the end of the month in which the sales occur for some customers. Since the receivables from sales are collectible within one year and such transactions are frequent, the fair value of receivables is equivalent to the nominal amount of cash received. Inventories Inventories are stated at the lower of cost or market value. Inventories are recorded at standard cost and adjusted to the approximate weighted-average cost at the end of each period. Market value represents net realizable value for finished goods and work in process. Replacement value represents net realizable value for raw materials, supplies and spare parts. The Company assesses the impact of changing technology on its inventory on-hand and write-off inventories that are considered obsolete. Ending inventories are evaluated for estimated excess quantities and obsolescence based on demand forecast within a specific time horizon, generally 180 days or less. Scrap and slow-moving items are recognized in the allowance for losses. Long-term Investments Investments in companies wherein the Company exercises significant influence on the operating and financial policy decisions are accounted for using the equity method of accounting. The Company's proportionate share in the net income or net loss of investee companies is recognized as components of the ''Investment income/loss recognized by equity method-net'' account. When equity invest- ments are made, the difference, if any, between the cost of investment and the Company's proportionate share of investee's net book value is amortized using the straight-line method over five years and is recorded as a component of the ''investment income/loss recog- nized by equity method-net'' account. When the Company subscribes to additional investee shares at a percentage different from its existing equity interest, the resulting carry- ing amount of the investment in the 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 long-term investments with the corresponding amount charged to capital surplus. In the event an investee uses its capital surplus (excluding any reserve for asset revaluation) to offset its accumulated deficit, the Company records a corresponding entry equivalent to its proportionate share of the investee's adjustment. Investments in companies wherein the Company does not exercise significant influence are recorded at historical cost. 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 recorded as an increase in the number of shares held and do not affect investment income or the carrying amount of the investment. An allowance is recognized for any decline in the market value of investments with readily ascertainable fair market value with the corresponding amount recorded as an unrealized loss, a component of shareholders' equity. A reversal of the allowance will result from a subsequent recovery of the market value of such investments. The market value of such investment is determined using the average-closing price of the listed stocks for the last month of the period. The carrying values of investments whose fair market values are not readily ascertainable are reduced to reflect an other-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. An allowance is recognized when the cost of the funds is lower than their net asset values, with the corresponding amount recorded as a reduction to shareholders' equity. A reversal of the allowance will result from a subsequent recovery of the net asset value. 180 Annual Report 2003 FINANCIAL INFORMATION The costs of investments sold are determined using the weighted-average method. When investments in publicly-traded stocks are reclassified from long-term to short-term investments, the Company recognizes a loss to the extent, if any, that the market value of such investments is lower than the carrying value. If an investee company recognizes an unrealized loss on its long-term investment using the lower-of-cost-or-market method, the Company also recognizes a corresponding unrealized loss in proportion to its equity interest in the investee company and records the amount as a component of its shareholders' equity. Gains or losses on sales from the Company to investee companies accounted for using the equity method are deferred in proportion to the Company's ownership percentage in the investee companies 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 sub- sequent sale of the related products to third parties. Gains or losses on sales by investee companies to the Company are deferred in proportion to the Company's ownership percentages in the investee companies 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. When an impairment is determined, the related assets are stated at the lower of fair value or book value. Idle assets are stated at the lower of book value or net realizable value. Significant additions, renewals, betterments, and interest expense incurred during the construction period are capital- ized. Maintenance and repairs are expensed in the period incurred. Interest expense incurred for the project during the purchase and construction period is also capitalized. Depreciation is computed using the straight-line method over the following estimated service lives: land improvements-20 years; build- ings-10 to 20 years; machinery and equipment-2 to 10 years; and office equipment-3 to 7 years. Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the corre- sponding accounts, with any gain or loss charged to income in the period of disposal. Goodwill Goodwill represents the excess of the consideration paid for acquisitions over the fair market value of identifiable net assets acquired and acquisition costs. Goodwill is amortized using the straight-line method over the estimated life of 10 years. Deferred Charges Deferred charges consist of software and system design costs, technology license fees and other charges. The amounts are amortized as follows: software and system design costs-2 or 5 years, technology license fees-the shorter of the estimated life of the technology or the term of the technology transfer contract. Pension Costs TSMC and GUC record net periodic pension costs on the basis of actuarial calculations. TSMC and GUC amortize unrecognized net gains or losses and unrecognized net transition obligation over 25 years and 15 years, respectively. 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 net 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 classi- fied as current or non-current in accordance with the classification of its related asset or liability. However, if a deferred tax asset or liabil- ity does not relate to an asset or liability in the financial statements, it is classified as current or non-current based on the expected length of time before it is realized. Any tax credits arising from purchases of machinery, equipment and technology, research and development expenditures, personnel training, and investments in important technology-based enterprises are recognized using the current method. Annual Report 2003 181 Adjustments to 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 earnings from foreign consolidating subsidiaries) of 10% are expensed in the year of shareholder approval which is usually the year subsequent to the year incurred. Foreign-Currency Transactions Foreign currency transactions are recorded in New Taiwan dollars at the current rate of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in a foreign currency are recognized in current operations. At the end of each period, assets and liabilities denominated in foreign currencies are revalued at the prevailing exchange rate with the resulting gains or losses recognized in current operations. Derivative Financial Instruments The Company enters into foreign currency forward contracts to manage its 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 on the contract date are amortized over the terms of the forward contracts using the straight-line method. At the end of each period, the receivables or payables arising from forward contracts are restated using the prevail- ing spot rate at the balance sheet date with the resulting differences charged to income. In addition, the receivables and payables relat- ed to forward contracts are netted with the resulting amount presented as either an asset or a liability. Any resulting gains or losses upon settlement are charged to income in the period of settlement. The Company enters into interest rate swap transactions to manage its exposures to 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 and charged to income on a straight-line basis over the term of the related contract. Any resulting gains or losses upon settlement are charged to income in the period of settle- ment. Translation of Foreign-Currency Financial Statements ROC SFAS No. 14, ''Accounting for Foreign-Currency Transactions,'' applies to foreign subsidiaries that use the local foreign currency as their 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. 182 Annual Report 2003 3. SIGNIFICANT ELIMINATION ENTRIES Significant transactions and balances with affiliates that have been eliminated upon combination are as follows: FINANCIAL INFORMATION Account Amount Transaction Entity Payables to related parties $1,184,642 16,026 28,150 12,241 10,792 Receivables from related parties 13,946,638 Company TSMC TSMC International TSMC Partners Sales Purchases Marketing expenses-commissions Other non-operating income Other receivables Other receivables Interest receivable Interest receivable Deferred revenue Interest income Interest income Other receivables Other receivables Interest receivable Deferred revenue Interest income Interest income 1,232 15,339 117,758,911 549,471 11,433,083 215,202 154,262 2,794 2,038,680 339,780 198,805 1,787 670,970 14,343 1,810 10,427,786 2,718,240 2,382 9,188,559 174,579 2,414 2,194 25,112 13,229 TSMC Technology Accounts receivable Management service income Technical service income WaferTech TSMC-Europe TSMC-Japan TSMC-North America TSMC Technology TSMC-North America TSMC Technology GUC TSMC-North America GUC WaferTech TSMC-Japan TSMC-Europe WaferTech TSMC Development TSMC Technology TSMC Technology TSMC Development TSMC Technology TSMC Technology TSMC Development TSMC International TSMC Development TSMC Development TSMC International TSMC International TSMC Development WaferTech WaferTech WaferTech Annual Report 2003 183 4. CASH AND CASH EQUIVALENTS Cash and bank deposits Government bonds acquired under repurchase agreements 5. SHORT-TERM INVESTMENTS Government bonds Money market funds Government bonds acquired under repurchase agreements Bond funds Listed stocks Market value 6. INVENTORIES-NET Finished goods Work in process Raw materials Supplies and spare parts Less-allowance for losses 2003 $97,479,598 5,947,359 $103,426,957 2003 $7,692,595 3,068,213 1,800,000 1,311,085 50,728 $13,922,621 $14,366,355 2003 $2,896,769 9,155,981 465,745 1,052,075 13,570,570 (1,375,504) $12,195,066 184 Annual Report 2003 7. LONG-TERM INVESTMENTS Shares of stock Equity method: Publicly traded stocks VIS Non-publicly traded stocks Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) Cost method: Common stocks Publicly traded stocks RichTek Technology Corp. Non-publicly traded stocks United Gas Co., Ltd. Global Testing Corp. Shin-Etsu Handotai Taiwan Co., Ltd. Global Investment Holding, Inc. EoNex Technologies, Inc. Hong Tung Venture Capital Procoat Technology Co., Ltd. W.K. Technology Fund IV Advanced Power Electronics Corp. Conwise Technology Co., Ltd. EON Technology, Inc. TrendChip Technologies, Corp. Auden Technology Mfg. Co., Ltd. Ralink Technologies, Inc. Goyatek Technology, Inc. ChipStrate Technology, Inc. Signia Technologies, Inc. Programmable Microelectronics (Taiwan) Corp. eChannel Option Holding, Inc. Capella Microsystems, Inc. GeoVision, Inc. eLCOS Microdisplay Technology, Ltd. Preferred stocks Non-publicly traded stocks Sonics, Inc. Reflectivity, Inc. Monolithic Power Systems, Inc. Atheros Communications, Inc. Tropian, Inc. eLCOS Microdisplay Technology, Ltd. (Continued) FINANCIAL INFORMATION 2002 2003 2001 Carrying Value % of Ownership $4,077,198 2,759,376 6,836,574 26,728 193,584 179,905 105,000 104,144 103,580 83,916 65,922 50,000 46,761 33,268 32,788 29,262 28,341 26,889 24,689 10,451 10,442 8,612 8,515 5,306 4,477 917 1,183,497 224,646 142,436 134,092 122,086 119,306 118,920 28 32 5 11 10 7 6 6 10 10 2 5 14 8 5 4 5 8 9 6 4 6 - 1 1 10 15 16 - 5 - Annual Report 2003 185 2002 2002 2003 2001 2001 Carrying Value % of Ownership $103,964 84,548 80,932 67,956 67,956 62,946 62,859 57,763 55,206 49,753 44,741 42,844 41,480 33,978 33,978 33,978 25,484 25,483 22,139 16,996 16,989 16,989 16,989 16,781 15,630 14,866 11,340 11,172 10,618 10,193 8,495 4,462 4,134 3,126 408 2,038,662 229,669 40,947 270,616 $10,329,349 23 4 3 19 44 4 1 - 3 1 8 2 12 5 6 2 7 6 15 6 1 3 4 2 1 11 1 2 5 8 2 6 3 2 6 - - Memsic, Inc. Quicksilver Technology Pixim, Inc. Kilopass Technology, Inc. Fang Tek, Inc. NanoAmp Solutions, Inc. NetLogic Microsystems, Inc. Alchip Technologies, Ltd. Ikanos Communication, Inc. SiRF Technology Holdings, Inc. OEpic Inc. Advanced Analogic Technologies, Inc. Integrated Memory Logic, Inc. Axiom Microdevices Inc. Optichron Inc. NuCORE Technology, Inc. Silicon Data, Inc. XHP Microsystem, Inc. Newport Opticom Inc. Angstron Systems, Inc. Iridigm Display, Co. NextIO, Inc. Zenesis Technologies, Inc. IP Unity Accelerant Networks, Inc. Match Lab, Inc. Quake Technologies, Inc. LightSpeed Semiconductor Corp. Sensory, Inc. Oridus, Inc. Audience, Inc. LeadTONE Wireless, Inc. Capella Microsystems, Inc. Incentia Design Systems, Inc. Mosaic Systems Funds Horizon Ventures Crimson Asia Capital 186 Annual Report 2003 The carrying value of 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 for the same period as the Company. The investment gains (losses) of the investee companies consisted of the following: FINANCIAL INFORMATION SSMC VIS 2003 ($310,821) 50,351 ($260,470) The aggregate market value of the publicly traded stocks accounted for using the cost method was $510,995 thousand as of December 31, 2003. On January 8, 2003, TSMC's investee company, VIS, issued 600,000 thousand shares of common stock at a price of NT$7 per share of which TSMC purchased a total of 230,882 thousand shares. As a result, its ownership in VIS increased from 25% to 28%. 8. PROPERTY, PLANT AND EQUIPMENT Accumulated depreciation consisted of the following: Land improvements Buildings Machinery and equipment Office equipment 2003 $154,062 31,665,779 238,453,889 4,801,376 $275,075,106 Information on the status of expansion or construction plans of the Company's manufacturing facilities as of December 31, 2003 is as follows: Construction/ Expansion Plan Fab 12 Phase 1 Fab 14 Phase 1 Estimated Complete Costs Accumulated Expenditures Actual Date of Starting Operations Expected Date of Starting Operations Three in one construction (Note 23n) 202,719 154,630 $85,364,800 $82,722,100 March 2002 67,047,200 27,189,600 - - - 2nd half of 2004 at the earliest May 2004 For the year ended December 31, 2003, interest expense (before deducting capitalized amounts of NT$139,516 thousand in 2003) was NT$2,030,966 thousand. The interest rates used for the purposes of calculating the capitalized amount were between 1.770% and 5.283% in 2003. Annual Report 2003 187 9. DEFERRED CHARGES-NET Technology license fees Software and system design costs Others 10. SHORT-TERM BANK LOANS Unsecured loan in US dollars: US$12,000 thousand, annual interest at 1.52% 2003 $5,084,684 2,764,305 314,425 $8,163,414 2003 $407,736 As of December 31, 2003, TSMC provided NT$1,359,120 thousand (US$40,000 thousand) guarantee for the benefit of TSMC North America for the above loan. Unused credit lines as of December 31, 2003 aggregated approximately US$38,000 thousand. 11. LONG-TERM BANK LOANS Secured loan: US$199,000 thousand, repayable by February 2005, annual floating interest at 1.8275% Science Park Administration (SPA), repayable by October 2008, annual interest is zero Unsecured loan: US$60,000 thousand, repayable by December 2006, annual interest at 1.56% Current portion 2003 $6,761,622 22,693 2,038,680 8,822,995 (5,489) $8,817,506 As of December 31, 2003, TSMC provided NT$16,989,000 thousand (US$500,000 thousand) guarantee for the benefit of TSMC Development and WaferTech's US$ secured loan above. In addition, all assets of WaferTech with carrying amount of approximately NT$18,876,007 thousand (US$555,536 thousand) are pledged for the US$ secured loan. WaferTech is required to be in compliance with certain financial covenants beginning December 31, 2002 under the US$ secured loan agreement above. As of December 31, 2003, WaferTech was in compliance with all such financial covenants. Under the unsecured loan agreement above, the Company is required to be in compliance with certain financial covenants which, if violated, could result in the payment of this obligation becoming due prior to the originally scheduled maturity date. The Company was in compliance with these financial covenants as of December 31, 2003. As of December 31, 2003, NT$17,250 thousand of time deposits of GUC is pledged for the aforementioned loan from SPA. Unused credit lines for long-term bank loans as of December 31, 2003 aggregated approximately US$241,000 thousand. As of December 31, 2003, future minimum principal payments under the Company's long-term bank loan arrangements are as follows: Year 2004 2005 2006 2007 2008 188 Annual Report 2003 Amount $5,489 6,767,111 2,044,169 4,137 2,089 $8,822,995 12. BONDS Domestic unsecured bonds: 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, 2.60%, 2.75% and 3% annual interest payable annually, respectively As of December 31, 2003, future principal payments for TSMC's bonds are as follows: Year of Repayment 2004 2005 2007 2008 and thereafter FINANCIAL INFORMATION 2003 $5,000,000 15,000,000 15,000,000 $35,000,000 Amount $5,000,000 10,500,000 7,000,000 12,500,000 $35,000,000 13. OTHER LONG-TERM PAYABLES Other long-term payables consist primarily of license arrangements entered by TSMC for certain semiconductor-related patents. Future minimum payments under the agreements as of December 31, 2003 are as follows: Year 2004 2005 2006 2007 2008 2009 and thereafter Amount $1,603,090 1,284,698 458,703 475,692 271,824 815,471 $4,909,478 Annual Report 2003 189 14. PENSION PLAN TSMC and GUC have defined benefit plans for all regular employees that provide benefits based on length of service and average monthly salary for the six-month and one-month period prior to retirement, respectively. TSMC and GUC contribute at an amount equal to 2% of salaries paid every month to a Pension Fund (the Fund). The Fund is adminis- tered by a pension fund monitoring committee (the Committee) and the amounts in the Fund are deposited in the Committee's name with the Central Trust of China. For the year ended December 31, 2003, 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 unfunded 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 loss Unfunded 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 190 Annual Report 2003 2003 $505,554 110,094 (41,261) 2,657 $577,044 $27,856 2,190,233 2,218,089 1,762,504 3,980,593 (1,212,553) 2,768,040 (144,064) (15,533) $2,608,443 3.25%-3.50% 3.00%-5.00% 2.75%-3.25% $183,012 $3,490 15. INCOME TAX a. A reconciliation of income tax expense based on income before income tax and minority interest at the statutory rate and current income tax expense before income tax credits is as follows: FINANCIAL INFORMATION Income tax expense based on income before income tax and minority interest at the statutory rate Tax-exempt income Temporary and permanent differences 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 Net change in deferred income tax liabilities (assets) Net operating loss Investment tax credits Temporary differences Valuation allowance Adjustment of prior years' taxes Income tax expense c. Deferred income tax assets (liabilities) consist of the following: Current Investment tax credits Temporary differences Net operating loss Valuation allowance Noncurrent Net operating loss Investment tax credits Temporary differences Valuation allowance 2003 $12,881,547 (5,255,750) (732,518) $6,893,279 2003 $6,893,279 1,273,482 (7,917,070) 7,988 (520,780) 872,403 (2,388,217) 5,701,814 58 $3,922,957 2003 $8,339,288 387,285 3,093 (331,461) $8,398,205 $8,438,732 17,414,604 (6,267,041) (18,474,928) $1,111,367 Annual Report 2003 191 d. Integrated income tax information: The balance of TSMC's imputation credit account as of December 31, 2003 was NT$2,832 thousand. The expected creditable ratio for 2003 was 0.01%. The amount of imputation credit allocated to the shareholders is based on its balance as of the date of dividend distribution. The expected creditable ratio may be adjusted when the distribution of the imputation credits are made. e. All retained earnings generated prior to December 31, 1997 were appropriated as of December 31, 2003. f. As of December 31, 2003, the Company's investment tax credits consisted of the following: Regulation Items Total Creditable Amounts Remaining Creditable Amounts Expiry Year Statute for Upgrading Purchases of machinery and $8,205,151 $3,939,939 Industries equipment 3,792,734 4,823,863 1,680,360 3,792,734 4,823,863 1,680,360 $18,502,108 $14,236,896 Statute for Upgrading Research and development $2,274,496 $2,274,496 Industries expenditures Statute for Upgrading Personnel training Industries 3,131,141 3,342,245 2,322,213 3,131,141 3,342,245 2,322,213 $11,070,095 $11,070,095 $48,097 28,886 27,357 378 $48,097 28,886 27,357 378 $104,718 $104,718 Statute for Upgrading Investments in important Industries technology-based enterprises $203,319 138,864 $203,319 138,864 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 As of December 31, 2003, the net operating loss carryforwards were generated from WaferTech, TSMC Development, TSMC Technology and GUC, and will expire at various dates from 2008 to 2023. $342,183 $342,183 192 Annual Report 2003 FINANCIAL INFORMATION g. The sales attributable to the following expansion and construction of TSMC's manufacturing plants are exempt from income tax for the following period: Construction of Fab 6 Construction of Fab 8-modules B Expansion of Fab 2-modules A and B, Fab 3 and Fab 4, Fab 5 and Fab 6 Tax-Exemption Period 2001 to 2004 2002 to 2005 2003 to 2006 h. The tax authorities have examined income tax returns of TSMC through 2000. However, TSMC is contesting the assessment by the tax authority for 1992, 1993, 1997 and 1998. TSMC believes that any additional assessment would not have a material adverse effect on TSMC. 16. LABOR COST, DEPRECIATION AND AMORTIZATION EXPENSE 2002 For the Year Ended December 31, 2003 2001 Classified as Cost of Sales Classified as Operating Expense Total Labor cost Salary Labor and health insurance Pension Other Depreciation Amortization $9,023,743 $4,744,710 $13,768,453 477,299 380,210 339,547 61,990,348 1,385,961 251,547 197,355 305,127 2,423,189 3,418,395 728,846 577,565 644,674 64,413,537 4,804,356 $73,597,108 $11,340,323 $84,937,431 17. SHAREHOLDERS' EQUITY Capital, Capital Surplus and Retained Earnings TSMC has issued 585,898 thousand ADSs, which are traded on the NYSE as of December 31, 2003. The total number of common shares represented by all issued ADSs is 2,929,491 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 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 distributed as stock dividends. TSMC's Articles of Incorporation provide that the following shall be appropriated from annual earnings to the extent that the annual earnings exceed any accumulated deficit: a. 10% legal reserve; until the amount of total legal reserve equals TSMC's total paid-in capital; b. Special reserve in accordance with relevant laws or regulations; Annual Report 2003 193 c. Remunerations to directors and supervisors and bonuses to employees equal to 0.3% and at least 1% of the remainder, respectively. Individuals eligible for the employee bonuses may include employees of affiliated companies as approved by the board of directors or a representative of the board of directors; d. Dividends to holders of preferred shares at a 3.5% annual rate, based on the period which the preferred shares have been outstand- ing. Following the redemption of all of its issued and outstanding preferred shares in May 2003, TSMC amended its Articles of Incorporation on June 3, 2003 to remove the provision for issuance of any future dividends to preferred shareholders as of that date; e. The appropriation of any remaining balance shall be approved by the shareholders. Dividends may be distributed in shares of common stock or a combination of cash and common stock. Distributions of profits are usually made in the form of a stock dividend. The total of cash dividends paid in any given year may not exceed 50% of total dividends distrib- uted in that year. Any appropriations of net income are recorded in the financial statement in the year of shareholder approval. The appropriation for legal reserve is made until the reserve equals the aggregate par value of TSMC's outstanding capital stock. The reserve can only be used to offset an accumulated deficit or be distributed as a stock dividend up to 50% of the reserve balance when the reserve balance has reached 50% of the aggregate par value of the outstanding capital stock of TSMC. A special reserve equivalent to the debit balance of any account shown in the shareholder's equity section of the balance sheet (except for the recorded cost of treasury stock held by subsidiaries) shall be made from unappropriated retained earnings pursuant to existing regulations promulgated by the ROC Securities and Futures Commission (SFC). The special reserve is allowed to be appropriated when the debit balance of such account is reversed. The appropriations of earnings for 2002 were approved in the shareholders' meeting on June 3, 2003. The appropriations and dividends per share are as follows: Legal reserve Special reserve Bonus paid to employees-in stock Preferred stock dividend-in cash Common stock dividend-in stock Remuneration to directors and supervisors-in cash Appropriation of Earnings Dividend Per Share (NT$) $2,161,029 68,945 1,539,013 455,000 14,898,309 58,485 $19,180,781 - - - 0.35 0.80 - The above appropriation of earnings for 2002 is consistent with the resolution of the March 4, 2003 board of directors meeting. If the above employee bonus and remuneration to directors and supervisors had been paid in cash and charged against income for 2002, the basic earnings per share for the year ended December 31, 2002 would decrease from NT$1.14 to NT$1.05. The shares distributed as a bonus to employees represented 0.83% of TSMC's total outstanding common shares as of December 31, 2002. As of January 12, 2004, the board of directors had not resolved the earnings appropriation for fiscal year 2003. The above information associated with the appropriations of bonus to employees and remuneration to directors and supervisors is avail- able at Market Observation System website. Under the Integrated Income Tax System that became effective on January 1, 1998, ROC resident shareholders are allowed a tax credit for their proportionate share of the income tax paid by the TSMC on earnings generated as of January 1, 1998. An imputation credit account is maintained by TSMC for such income tax and the tax credit allocated to each shareholder. 194 Annual Report 2003 FINANCIAL INFORMATION Preferred Stock TSMC issued 1,300,000 thousand shares of unlisted Series A-preferred stock to certain investors on November 29, 2000. All of the pre- ferred stock was redeemed at par value and retired on May 29, 2003. Under TSMC's Articles of Incorporation, as amended on June 3, 2003, TSMC is no longer authorized to issue preferred stock. The preferred shareholders had the following rights and the related terms and conditions prior to redemption: 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 TSMC available for distribution to shareholders upon liquidation or dissolution; however, the pre-emptive 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 TSMC's related obligations remain the same until the preferred shares are redeemed by the TSMC. 18. STOCK-BASED COMPENSATION PLANS On October 29, 2003 and June 25, 2002, the SFC approved TSMC's Employee Stock Option Plans (the 2003 Plan and the 2002 Plan, respectively). The maximum number of units authorized to be granted under the 2003 Plan and the 2002 Plan was 120,000 thousand and 100,000 thousand, respectively, with each unit representing one common share of stock. The option rights may be granted to quali- fied employees of TSMC and its subsidiaries, including TSMC-North America and WaferTech. The option rights of both plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date. Under the terms of both plans, stock option rights are granted at an exercise price equal to the closing price of TSMC's common shares listed on the TSE on the date of grant. Under the 2002 Plan, there were 51,485 thousand option rights that were never been granted, or had been granted but can- celled. These un-granted or cancelled option rights expired as of December 31, 2003. Information of outstanding stock option rights under the 2003 Plan and the 2002 Plan is as follows: 2003 Plan 2002 Plan Number of Outstanding Stock Option Rights (In Thousands) Range of Exercise Prices (NT$) Number of Outstanding Stock Option Rights (In Thousands) Balance, January 1, 2003 Options granted Options cancelled Balance, December 31, 2003 - 66.5 66.5 - 843 (1) 842 19,369 32,031 (2,885) 48,515 Range of Exercise Prices (NT$) 46.86-48.70 38.23-53.76 38.23-53.76 For the 2002 Plan, the number of outstanding option rights and their exercise prices have been adjusted to reflect the issuance of stock dividends in accordance with the 2002 Plan. 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 WaferTech Plans) under which officers, key employees and non-employee directors may be granted stock option rights. The WaferTech Plans provide for 15,150 thousand option Annual Report 2003 195 rights available for grant. For option rights granted to date, the option purchase price was equal to or exceeded the fair market value at the date of grant. As of December 31, 2003, 672 thousand stock options remain outstanding. The options will expire if not exercised at specified dates ranging from May 2006 and June 2011. No options were granted during the years ended December 31, 2003 as a result of the implementation of the Stock Option Buyback Program as described below. WaferTech Buyback Program In December 2000, WaferTech implemented a Stock Option Buyback Program (Buyback). The Buyback program provides employees with the right to sell back to WaferTech all vested stock options and outstanding ownership interests granted under the WaferTech Plans. 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, 2003, WaferTech has repurchased 3,253 thousand outstanding ownership interests at a cost of US$19,519 thousand, and 6,913 thousand vested stock option rights at a cost of US$34,483 thousand. As of December 31, 2003, 164 thousand stock options are vested and may be sold back to WaferTech, and US$2,681 thousand was accrued in connection with the Buyback program. Stock Appreciation Rights In December 2000, WaferTech and TSMC-North America implemented a stock appreciation rights program (Appreciation). The Appreciation plan is designed to provide employees with a long-term incentive plan that tracks the appreciation of TSMC common stock through Stock Appreciation Rights (SARs). SARs provide each participant the right to receive, upon exercise, an amount in cash from WaferTech and TSMC-North America that is the excess of the market price of TSMC common stock on TSE on the date of exercise over the exercise price. As of December 31, 2003, WaferTech and TSMC-North America accrued US$1,735 thousand and US$3,032 thou- sand, respectively, in connection with the Appreciation. During 2002, benefits under the Appreciation plan for TSMC-North America were replaced by the stock option plans as described in Note 17. Accordingly, TSMC-North America does not intend to provide addition- al Appreciation plan benefits subsequent to the adoption of the stock option plans. 19. TREASURY STOCK (COMMON STOCK) Purpose of Purchase Year ended December 31, 2003 Reclassification of parent company stock held by subsidiaries from long-term investment Beginning Shares Dividend Distributed Share Sold Ending Shares (Shares in Thousand) 42,001 3,357 4,761 40,597 Proceeds from the sale of treasury stock for the year ended December 31, 2003 were NT$331,945 thousand. As of December 31, 2003, the book value of the treasury stock was NT$1,633,228 thousand and the market value was NT$2,548,788 thousand. TSMC's 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. 196 Annual Report 2003 FINANCIAL INFORMATION 20. EARNINGS PER SHARE Earnings per share (EPS) is computed as follows: Amounts (Numerator) EPS (Dollars) Income Before Income Tax and Minority Interest Combined Net Income Share (Denominator) (Thousand) Income Before Income Tax and Minority Interest 2001 Combined Net Income Year ended December 31, 2003 Income Less-preferred stock dividends Basic earnings per share $51,129,709 $47,258,700 (184,493) (184,493) Income available to common shareholders 50,945,216 47,074,207 20,223,457 $2.52 $2.33 Effect of diluted securities-stock options - - 8,282 Diluted earnings per share Income available to common shareholders $50,945,216 $47,074,207 20,231,739 $2.52 $2.33 The potential common shares issuable under the employee stock option plans (see Note 18) are included in the denominator of the diluted EPS computation by using the treasury stock method under SFAS No. 24, ''Earnings Per Share''; such shares resulted in a dilutive per share amount for the year ended December 31, 2003. 21. RELATED PARTY TRANSACTIONS Except as disclosed elsewhere in the financial statements, the following is a summary of significant related party transactions: a. Industrial Technology Research Institute (ITRI), the Chairman of TSMC serves as one it its directors b. Philips, a major shareholder of TSMC c. Investees of TSMC VIS SSMC Annual Report 2003 197 The transactions with the aforementioned parties, in addition to those disclosed in other notes, are summarized as follows: 2002 2001 2003 Amount % For the year ended Sales Philips and its affiliates ITRI SSMC VIS Purchase SSMC VIS Manufacturing expenses-technical assistance fees Philips Sales of property, plant and equipment VIS Non-operating income and gains SSMC (primarily technical service income, see Note 23f) VIS At December 31 Receivables Philips and its affiliates VIS SSMC ITRI Payables Philips and its affiliates VIS SSMC Refundable deposits-VIS (see Note 23h) $3,577,054 60,171 873 19 $3,638,117 $5,519,805 4,910,810 $10,430,615 $3,023,741 $15,125 $201,869 251 $202,120 $895,063 118,503 14,489 8,781 2 - - - 2 17 15 32 3 3 4 - 4 86 11 2 1 $1,036,836 100 $1,579,568 1,034,074 634,647 $3,248,289 $150,840 49 32 19 100 76 Sales to related parties are based on normal selling prices and collection terms, except for sales of property, plant and equipment and technical assistance fees, which were in accordance with the related contracts. 198 Annual Report 2003 FINANCIAL INFORMATION 22. SIGNIFICANT LONG-TERM LEASES TSMC leases land from the SPA 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$230,449 thousand. The agreements can be renewed upon their expiration. TSMC-North America leases its office premises and certain equipment under non-cancelable operating agreements. TSMC-Europe and TSMC-Japan entered into lease agreements for their office premises. The leases will expire between 2005 and 2010. Current annual rent payments aggregate to NT$118,787 thousand. The agreements can be renewed upon their expiration. GUC leases land from the SPA. The agreement will expire in December 2021 and has annual rent payment of NT$1,892 thousand. As of December 31, 2003 future remaining lease payments are as follows: Year 2004 2005 2006 2007 2008 2009 and thereafter Amount $351,128 352,012 351,759 341,141 320,271 1,822,420 $3,538,731 23. SIGNIFICANT COMMITMENTS AND CONTINGENCIES The significant commitments and contingencies of the Company as of December 31, 2003 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, with respect to certain products. The agreement shall remain in force through July 8, 2007 and may be automatically renewed for successive periods of three years thereafter. Under the amended agreement, starting from the fifth anniversary date of the amended agreement, the fees are subject to reduction by the amounts TSMC pays to any third party for settling any licensing/infringement disputes, provided that the fees to be paid after reduction will not be below a certain percentage of the net sales. 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 reserve a portion of its production capacity for certain major customers that have guarantee deposits with TSMC. As of December 31, 2003, TSMC has a total of US$22,557 thousand of guarantee deposits. 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, SSMC, for the purpose of constructing an integrated circuit foundry in Singapore. As of December 31, 2003, TSMC's equity interest in SSMC was 32%. TSMC and Philips are committed to buy specific percentages of the production capacity of SSMC. If any party defaults on the commitment 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. Annual Report 2003 199 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 sales of certain products sold by SSMC. The Agreement shall remain in force for ten years and may be automatically renewed for successive periods of five years unless pre-termi- nated by either party under certain conditions. g. Under a Technology Transfer Agreement (TTA) with National Semiconductor Corporation (National) entered into on June 27, 2000, TSMC shall receive payments for licensing of certain technology to National. The agreement was to remain in force for ten years and could be automatically renewed for successive periods of two years thereafter unless either party gives notice for early termination under certain conditions. In January 2003, TSMC and National entered into a Termination Agreement whereby the TTA was terminat- ed for convenience. Under the termination agreement, TSMC is relieved of further obligation to transfer additional technology. In addition, TSMC granted National an option to request the transfer of certain technologies under the same terms and conditions as the terminated TTA. The option will expire in January 2008. h. TSMC entered into a Manufacturing Agreement with VIS. VIS agrees to reserve certain production capacity for TSMC and agrees to manufacture certain logic devices or other products for TSMC's customers at prices agreed upon by TSMC and VIS. TSMC paid NT$1,200,000 thousand to VIS as a guarantee deposit for the capacity reservation. VIS shall return portions of the guarantee deposit without any interest to TSMC upon reaching certain purchase commitment by TSMC. The contract will remain in force for five years. As of December 31, 2003, the refundable deposit was NT$150,840 thousand. i. Beginning in 2001, TSMC entered into several licensing arrangements for certain semiconductor patents. The terms of the contracts range from five to ten years with payments to be made in the form of royalties over the term of the related contracts. TSMC has recorded the related amounts as a liability with the corresponding amounts recorded as deferred charges which are amortized and charged to the cost of sales on a straight-line basis over the estimated life of the technology or the term of the contract, whichever is shorter. j. In November 2002, TSMC entered into an Amended and Restated Joint Technology Cooperation Agreement with Philips, Motorola, Inc. and STMicroelectronics to jointly develop 90-nanometer to 65-nanometer advanced CMOS Logic and e-DRAM technologies. TSMC also agreed to align 0.12 micron CMOS Logic technology to enhance its foundry business opportunities. TSMC will contribute process technologies and share a portion of the costs associated with this joint development project. k. In December 2003, TSMC entered into a Technology Development and License Agreement with Motorola Inc. to jointly develop 65nm SOI (silicon on insulator) technology. TSMC will also license related 90nm SOI technology from Motorola. Any intellectual properties arising out of the co-development project shall be jointly owned by the parties. In accordance with the agreement, TSMC will pay roy- alties to Motorola, Inc. and share a portion of the costs associated with the joint development project. l. In December 2003, the Company filed a lawsuit in the US District Court of Northern California against Semiconductor Manufacturing International Corporation and certain of its subsidiaries for patent infringement and trade secret misappropriation. The suit also asks for injunctive relief along with monetary damages. The case is in the process of being reviewed by the court. The probable outcome cannot be reasonably estimated. m.Under an agreement with a certain company, TSMC Shanghai has the obligation to purchase certain assets within a specific period at the price agreed upon by both parties. TSMC Shanghai will compensate the other party in case of a breach of the agreement. n. GUC, DAVICOM Semiconductor Inc and AMIC Technology Inc entered into a joint construction project for offices and facilities (three in one construction). Under the joint construction project, GUC is required to pay NT$202,719 thousand. o. Amounts available under unused letters of credit as of December 31, 2003 were NT$6,480 thousand, US$1,294 thousand, EUR21 thousand and Singapore dollar $85 thousand. Among the unused letters of credit, TSMC-North America has an outstanding irrevoca- ble standby letter of credit with a financial institution for US$1,294 thousand. The standby letter of credit was entered into as security to the landlord of TSMC-North America's office spaces in San Jose, California. In the event TSMC-North America defaults under this lease agreement, the landlord will draw on the standby letter of credit up to the amount of the default, but not to exceed the amount of the standby letter of credit. The standby letter of credit expires in October, 2004, and is renewable on an annual basis. 200 Annual Report 2003 FINANCIAL INFORMATION 24. ADDITIONAL DISCLOSURES Following are the additional disclosures required by the SFC for the Company and its investees: a. Financing provided: Please see Table 1 attached; b. Endorsement/guarantee provided: Please see Table 2 attached; c. Marketable securities held: Please see Table 3 attached; d. Marketable securities acquired or 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 properties 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 properties at prices of at least NT$100 million or 20% of the paid-in capital: None; g. Total purchases from or sales to related parties of at least NT$100 million or 20% of the capital: Please see Table 6 attached; h. Receivable from related parties amounting to at least NT$100 million or 20% of the capital: Please see Table 7 attached; i. Names, locations, and related information of investee on which the Company exercises significant influence: Please see Table 8 attached; j. Financial instrument transactions: 1) Derivative financial instruments The Company entered into derivative financial instruments transactions for the year ended December 31, 2003 to manage expo- sures related to foreign-currency denominated receivables or payables, and interest rate fluctuations. Certain information on these contracts is as follows: a) Outstanding forward exchange contracts as of December 31, 2003 Financial Instruments Sell Buy Buy Maturity Period January 2004 to July 2004 January 2004 January 2004 Contract Amount (Nominal) (In Thousand) US$1,805,000 (US$/NT$) EUR7,500 (EUR/US$) JPY748,405 (JPY/US$) As of December 31, 2003, receivables from forward exchange contracts (included in the ''other financial assets'' account) aggre- gate NT$76,385 thousand, and payables from forward exchange contracts (included in the ''other current liabilities'' account) aggregate NT$174,019 thousand. Net exchange gain for the year ended December 31, 2003 was NT$321,033 thousand. Annual Report 2003 201 As of December 31, 2003, the underlying assets and liabilities related to the above forward exchange contracts are as follows: Assets and Liabilities Time deposits Accounts and notes receivable Accounts payable Accounts payable b) Interest rate swaps (In Thousand) US$1,137,704 US$789,927 JPY889,850 EUR9,364 The Company entered into interest rate swap contracts to manage related interest rates on its long-term loans. Net interest expense on these transactions for the year ended December 31, 2003 was NT$141,007 thousand. Outstanding contracts as of December 31, 2003 were as follows: Contract Date Period July 1, 1999 September 19, 2003 October 16, 2003 October 16, 2003 October 17, 2003 October 17, 2003 November 7, 2003 c) Option contracts July 1, 1999 to June 28, 2004 September 22, 2003 to December 15, 2005 October 20, 2003 to December 15, 2005 October 20, 2003 to December 15, 2005 October 21, 2003 to December 15, 2005 October 20, 2003 to December 15, 2005 November 11, 2003 to December 15, 2005 Contract Amount (In Thousand) US$2,857 NT$500,000 NT$500,000 NT$500,000 NT$500,000 NT$500,000 NT$500,000 The Company entered into foreign currency option contracts to manage exchange rate fluctuations arising from its anticipated US dollar cash receipts on export sales or its Yen and European currency obligations for purchases of machinery and equipment. As of December 31, 2003, there were no outstanding option contracts. For the year ended December 31, 2003, the Company realized premium income of NT$50,273 thousand and premium expense of NT$204,056 thousand. 202 Annual Report 2003 FINANCIAL INFORMATION d) Transaction risk i) Credit risk. Credit risk represents the positive net settlement amount of those contracts with positive fair values at the balance sheet date. The positive net settlement amount represents the loss incurred by the Company if the counter-parties breached the contracts. The banks, which are the counter-parties to the foregoing derivative financial instruments, are reputable finan- cial 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 minimal. iii)Liquidity and cash flow risk and uncertainty of amount and term of future cash demand. As of December 31, 2003, the Company's future cash demand for outstanding forward exchange contracts, interest rate swaps and option contracts are as follows: Term Within one year Forward Exchange Contracts Inflow (In Thousand) Outflow (In Thousand) NT$61,230,306 US$1,821,340 EUR7,500 JPY748,405 The Company has sufficient operating capital to meet the above cash demand. The interest rate of the interest rate swaps has taken the Company's cost of capital into account. In addition, the exchange rates of forward foreign exchange contracts and option contracts are fixed. Therefore, there is no material fund raising risk and cash flow risk. Annual Report 2003 203 2) Fair value of financial instruments Non-derivative financial instruments Assets Cash and cash equivalents Short-term investments Receivables from related parties Notes and accounts receivable Other financial assets Long-term investments Refundable deposits Liabilities Short-term bank loans Payables to related parties Accounts payable Payables to contractors and equipment suppliers Long-term bank loans (includes current portion) December 31, 2003 Carrying Amount Fair Value $103,426,957 $103,426,957 13,922,621 1,036,836 28,654,824 1,389,123 10,329,349 200,390 407,736 3,248,289 6,517,548 7,356,310 8,822,995 14,366,355 1,036,836 28,654,824 1,389,123 17,361,252 200,390 407,736 3,248,289 6,517,548 7,356,310 8,822,995 Bonds payable (includes current portion) 35,000,000 35,850,377 Other long-term payables (includes current portion and other liabilities-others) Guarantee deposits 5,666,138 763,888 5,666,138 763,888 Derivative financial instruments Forward exchange contracts (buy) Forward exchange contracts (sell) Interest rate swaps Options 2,351 (99,984) - - 3,037 40,638 2,093 - Fair values of financial instruments were determined as follows: a) The carrying amounts reported in the balance sheets for cash and cash equivalents, notes and accounts receivable, other finan- cial assets, accounts payable, payables to contractors and equipment suppliers are approximate to their fair values. b) Fair value of short-term and long-term investments is based on quoted market prices. If quoted market prices are unavailable, fair value is based on net asset value or book value of investment. c) Fair value of refundable deposits and guarantee deposits is based on carrying values. d) The fair value of long-term bank loans is its carrying value with the floating interest rate. The fair value of bonds payable is the quoted market value. Fair value of other long-term payables approximates the carrying value. 204 Annual Report 2003 FINANCIAL INFORMATION e) Fair value of derivative financial instruments is the estimated net receivable or (payable) if the contracts are terminated on the relevant balance sheet date. The fair values of some financial and non-financial instruments are 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: TSMC filed an investment project with the Investment Commission of MOEA to establish a foundry in Mainland China. On February 27, 2003, the authority approved phase one of the aforementioned project and permitted direct investment in mainland China. Subsequently, TSMC entered into an investment related agreement with Shanghai Songjiang District People's Government on June 8, 2003. On August 4, 2003, TSMC Shanghai, a wholly-owned subsidiary of TSMC, was established. TSMC Shanghai is engaged mainly in the manufacturing and selling of integrated circuits. TSMC made a capital investment in TSMC Shanghai in the amount of US$56,000 thousand on October 8, 2003. 25. SEGMENT FINANCIAL INFORMATION a. Geographic information: 2003 Overseas Taiwan Adjustments and Elimination Combined Sales to unaffiliated customers Transfers between geographic areas $119,640,412 11,494,868 $83,749,411 118,308,382 $- $203,389,823 (129,803,250) - Total sales $131,135,280 $202,057,793 ($129,803,250) $203,389,823 Gross profit Operating expenses Non-operating income and gains Non-operating expenses and losses Income before income tax Minority interest loss Identifiable assets Long-term investments Total assets b. Gross export sales $2,476,145 $72,951,581 ($401,364) $75,026,362 (23,806,086) 5,679,162 (5,769,729) $51,129,709 $51,948 $52,276,269 $359,859,703 ($14,116,229) $398,019,743 10,329,349 $408,349,092 The export sales information is determined based on billed regions. Gross export sales for the year ended December 31, 2003 were NT$60,633,527 thousand. There were no export sales to a region that accounted for more than 10% of the Company's total sales. c. Major customer The Company only has one customer that accounts for more than 10% of its total sales. The sales to such customer amounted to NT$31,220,104 thousand in 2003, representing 15% of its total sales. Annual Report 2003 205 TABLE 1 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND AFFILIATES FINANCING PROVIDED FOR THE YEAR ENDED DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Financing Name Counter-party Financial Statement Account Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) 1 2 TSMC International TSMC Technology Other receivables TSMC Development Other receivables TSMC Partners TSMC Development Other receivables $538,585 (US$15,851) 2,038,680 (US$60,000) 2,718,240 (US$80,000) $538,585 (US$15,851) 2,038,680 (US$60,000) 2,718,240 (US$80,000) Note 1: Not exceeding the issued capital of the Company. Note 2: Generally not exceeding the issued capital of the Company, unless approved by all members of the board. TABLE 2 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND AFFILIATES ENDORSEMENT/GUARANTEE PROVIDED FOR THE YEAR ENDED DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) No. Endorsement/ Guarantee Provider Counter-party Nature of Relationship (Note 2) Name Limits on Each Counter-party's Endorsement/ Guarantee Amounts 0 TSMC TSMC Development TSMC-North America WaferTech 3 2 3 Not exceed 10% of the net worth of TSMC, and also limiting to the total paid-in capital of the endorsement/ guarantee company, unless otherwise approved by Board of Directors. Note 1: 25% of the net worth of TSMC as of December 31, 2003. Note 2: The No. 2 represents a subsidiary in which TSMC holds directly over 50% of the equity interest. The No. 3 represents an investee in which TSMC holds directly and indirectly over 50% of the equity interest. 206 Annual Report 2003 FINANCIAL INFORMATION Interest Rate Transaction Amounts Reasons for Short-term Financing Allowance for Bad Debt Collateral Item Value Financing Limit for Each Borrowing Company Financing Company's Financing Amount Limits (US$ in Thousand) 4.25% 1.50% 1.50% $- Operating capital - - Operating capital Operating capital $- - - - - - $- N/A - - $33,569,117 (US$987,968) (Note 1) N/A (Note 2) Maximum Balance for the Period (US$ in Thousand) Ending Balance (US$ in Thousand) Value of Collateral Property, Plant and Equipment Ratio of Accumulated Amount of Collateral to Net Equity of the Latest Financial Statement Maximum Collateral/Guarantee Amounts Allowable (Note 1) $6,795,600 (US$200,000) 1,359,120 (US$40,000) 14,950,320 (US$440,000) $2,038,680 (US$60,000) 1,359,120 (US$40,000) 14,950,320 (US$440,000) $- - - 0.62% 0.41% 4.54% $82,303,577 Annual Report 2003 207 TABLE 3 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND AFFILIATES MARKETABLE SECURITIES HELD DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account TSMC Government bonds 2002 Government Bond Series A 2002 Government Bond Series E 1994 Government Bond Series C Bonds with Repurchase Agreement Money market funds BOA Funds GS Funds Bond funds JF Taiwan Bond Fund ABN AMRO Bond Fund Stock Taiwan Mask Corp. TSMC-North America TSMC-Europe TSMC-Japan VIS TSMC International TSMC Partners SSMC Emerging Alliance GUC VisEra United Gas Co., Ltd. Shin-Etsu Handotai Taiwan Co., Ltd. W.K. Technology Fund IV Hon Tung Ventures Capital - - - - - - - - - Subsidiary Subsidiary Subsidiary Investee Subsidiary Subsidiary Investee Subsidiary Investee Investee - - - - Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 208 Annual Report 2003 FINANCIAL INFORMATION December 31, 2003 Shares/Units (In Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note - - - - 40,000 20,000 34,343 34,794 7,094 11,000 - 6 787,016 987,968 300 382 - 39,040 5,100 16,783 10,500 5,000 8,392 $3,157,331 3,113,067 1,422,197 1,800,000 1,359,120 (US$40,000) 679,560 (US$20,000) 500,000 500,000 27,744 417,858 24,622 101,722 4,077,198 22,654,743 4,116,934 2,759,376 704,744 368,434 50,231 193,584 105,000 50,000 83,916 N/A N/A N/A N/A N/A N/A N/A N/A 2 100 100 100 28 100 100 32 99 47 25 11 7 2 10 $3,169,046 3,126,273 1,426,995 1,802,572 1,359,120 (US$40,000) 679,560 (US$20,000) 503,421 503,490 132,967 1,133,011 24,622 101,722 10,465,676 22, 654,743 4,116,934 2,759,376 704,744 403,962 50,231 282,754 147,999 57,051 66,447 Treasury stock of NT$715,153 thousand is deducted from the carrying value. (Continued) Annual Report 2003 209 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account TSMC-North America Chi Cherng Hsin Ruey TSMC International Certificate Chi Cherng Hsin Ruey Equity Crimson Asia Capital Horizon Ventures Stock TSMC Stock TSMC Certificate Hsin Ruey Stock TSMC Certificate Chi Cherng Stock InveStar InveStar II TSMC Development TSMC Technology 3DFX Interactive Inc. Money market fund BOA Fund TSMC Development Stock WaferTech Investee Long-term investment Investee Long-term investment - - Long-term investment Long-term investment Parent company Long-term investment Parent company Short-term investment Major shareholder Long-term investment Parent company Short-term investment Major shareholder Long-term investment Subsidiary Subsidiary Subsidiary Subsidiary - Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment - Short-term investment Subsidiary Long-term investment InveStar Stock PLX Technology, Inc. RichTek Technology Corp. Programmable Microelectronics (Taiwan), Inc. Global Testing Corp. Chipstrate Technologies, Inc. Capella Microsystems, Inc. Signia Technologies, Inc. - - - - - - - Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 210 Annual Report 2003 FINANCIAL INFORMATION December 31, 2003 Shares/Units (In Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note Treasury stock of NT$458,564 thousand is deducted from the carrying value. Treasury stock of NT$459,511 thousand is deducted from the carrying value. - - N/A N/A $42,941 42,006 40,947 229,669 13,101 715,153 13,735 458,564 - 902,033 13,761 459,511 - 902,909 45,000 51,300 1 1 68 US$46,403 US$36,901 US$537,716 (US$7,918) - 36 36 N/A N/A - - 64 - 64 97 97 100 100 - $501,505 501,517 40,947 229,669 822,491 862,340 902,033 863,957 902,909 US$46,403 US$36,901 US$537,716 (US$7,918) - 30,300 US$30,300 N/A US$30,300 - US$341,972 93 947 575 13,268 6,660 530 701 US$180 US$121 US$203 US$5,295 US$308 US$156 US$206 99 - 2 3 10 9 - 4 US$341,972 US$786 US$5,799 US$203 US$5,295 US$308 US$156 US$206 (Continued) Annual Report 2003 211 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account Advanced Power Electronics Corp. RichTek Technology Corp. Preferred stock Integrated Memory Logic, Inc. SiRF Technology Holdings, Inc. Sensory, Inc. LightSpeed Semiconductor Corporation Tropian, Inc. Sonics, Inc. Atheros Communications, Inc. NanoAmp Solutions, Inc. Monolithic Power Systems, Inc. Memsic, Inc. Reflectivity, Inc. Match Lab, Inc. Oridus, Inc. (Creosys, Inc.) Incentia Design Systems, Inc. IP Unity Stock WatchGuard Technologies, Inc. RickTek Technology Corp. eChannel Option Holding, Inc. Elcos Microdisplay Technology, Ltd. Signia Technologies, Inc. Procoat Technology Programmable Microelectronics (Taiwan), Inc. Auden Technology MFG Co., Ltd. GeoVision, Inc. EoNex Technologies, Inc. Conwise Technology Co., Ltd. Eon Technology, Inc. Goyatek Technology, Inc. TrendChip Technologies Corp. Ralink Technologies, Inc. RickTek Technology Corp. Preferred stock Capella Microsystems, Inc. Memsic, Inc. Oepic, Inc. NanoAmp Solutions, Inc. Advanced Analogic Technology, Inc. Monolithic Power Systems, Inc. Sonics, Inc. Newport Opticom, Inc. Silicon Data, 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 Short-term investment Short-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment Long-term investment 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 InveStar II 212 Annual Report 2003 FINANCIAL INFORMATION December 31, 2003 Shares/Units (In Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note 2,750 1,671 1,831 306 1,404 2,252 1,758 2,686 1,607 541 2,521 2,727 1,064 1,875 1,500 286 1,008 5 465 358 270 351 4,165 177 953 287 55 2,800 2,800 2,088 2,000 1,833 785 419 2,289 4,997 250 948 804 3,082 1,157 2,000 US$1,376 US$204 US$1,221 US$1,333 US$312 US$329 US$1,916 US$3,530 US$3,593 US$853 US$2,000 US$1,500 US$1,192 US$375 US$300 US$92 US$494 US$30 US$346 US$251 US$27 US$101 US$1,940 US$50 US$834 US$132 US$3,048 US$979 US$965 US$727 US$861 US$791 US$583 US$122 US$1,560 US$1,317 US$1,000 US$1,261 US$1,946 US$3,082 US$402 US$750 5 3 12 1 5 2 3 5 - 3 12 12 5 9 8 2 2 - 1 6 1 2 10 1 4 1 6 14 8 8 5 5 2 3 10 8 1 2 4 5 9 7 US$1,376 US$10,235 US$1,221 US$1,333 US$312 US$329 US$1,916 US$3,530 US$3,593 US$853 US$2,000 US$1,500 US$1,192 US$375 US$300 US$92 US$494 US$30 US$2,848 US$251 US$27 US$101 US$1,940 US$834 US$1,151 US$132 US$3,048 US$979 US$965 US$727 US$861 US$791 US$4,804 US$122 US$1,560 US$1,317 US$1,000 US$1,261 US$1,946 US$3,082 US$402 US$750 (Continued) Annual Report 2003 213 Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account Reflectivity, Inc. Angstron Systems, Inc. Tropian, Inc. SiRF Technology, Inc. LeadTONE Wireless, Inc. Match Lab, Inc. Kilopass Technology, Inc. Fang Tek, Inc. Alchip Technologies Ltd. Elcos Microdisplay Technology, Ltd. - - - - - - - - - - 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 Emerging Alliance Stock Global Investment Holding, Inc. Investee Long-term investment Preferred stock Quake Technologies, Inc. Pixim, Inc. Newport Opticom, Inc. NetLogic Microsystems, Inc. Ikanos Communication, Inc. Quicksilver Technology, Inc. Mosaic Systems, Inc. Accelerant Networks, Inc. Zenesis Technologies, Inc. Reflectivity, Inc. Iridigm Display, Co. XHP Microsystems, Inc. Axiom Microdevices, Inc. Optichron, Inc. Audience, Inc. Next IO, Inc. NuCORE Technology Inc. Bond funds Entrust KIRIN Entrust Phoenix TISC Ta-Hua E. Sun New Era Shenghua 1699 Jihsun Shenghua 5599 Mega Diamond Polar Ta-Hua GC Dollar Taiwan Security Overseas Fund - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment Short-term investment GUC 214 Annual Report 2003 FINANCIAL INFORMATION December 31, 2003 Shares/Units (In Thousand) Carrying Value (US$ in Thousand) Percentage of Ownership Market Value or Net Asset Value (US$ in Thousand) Note 1,596 1,567 1,464 20 433 313 3,887 5,556 2,125 2,667 US$1,500 US$500 US$1,595 US$131 US$131 US$63 US$2,000 US$2,000 US$1,700 US$3,500 10,000 $100,000 467 1,721 962 602 5,116 963 2,481 441 861 1,596 254 2,280 1,000 714 1,654 800 1,821 2,106 1,399 2,210 2,412 962 1,009 764 931 2,734 1,968 38 22 US$334 US$2,382 US$250 US$1,850 US$1,625 US$2,488 US$12 US$460 US$500 US$1,500 US$500 US$750 US$1,000 US$1,000 US$250 US$500 US$1,000 22,324 20,207 30,000 30,003 10,000 12,000 10,000 10,000 30,105 20,060 13,691 102,694 6 6 2 - 6 2 19 44 - - 6 1 3 6 1 3 4 6 1 4 5 1 6 5 6 2 3 2 - - - - - - - - - - - - US$1,500 US$500 US$1,595 US$131 US$131 US$63 US$2,000 US$2,000 US$1,700 US$3,500 $100,000 US$334 US$2,382 US$250 US$1,850 US$1,625 US$2,488 US$12 US$460 US$500 US$1,500 US$500 US$750 US$1,000 US$1,000 US$250 US$500 US$1,000 22,334 20,216 30,012 30,013 10,004 11,995 10,157 10,004 30,118 20,068 13,732 103,190 Annual Report 2003 215 TABLE 4 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND AFFILIATES MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Marketable Securities Type and Name Financial Statement Account Counter-Party Nature of Relationship TSMC Money market funds BOA Fund Short-term investment BOA GS Fund Short-term investment Goldman Sachs Bond funds JF Taiwan Bond Fund ABN AMRO Bond Fund ABN AMRO Select Bond Fund Government bonds Short-term investment Short-term investment Short-term investment JF Asset Management (Taiwan) Ltd. ABN AMRO ABN AMRO Bonds with Repurchase Agreement Short-term investment Several financial institutions 2002 Government Bond Series A Short-term investment 2002 Government Bond Series E Short-term investment 1994 Government Bond Series C Short-term investment Stock Emerging Alliance VIS Amkor Technology Monolithic System Tech. TSMC Partners ADR TSMC InveStar II Preferred stock Long-term investment Long-term investment Long-term investment Long-term investment Short-term investment BNP and several financial institutions BNP and several financial institutions Chung Shing Bills Finance Corp. and several financial institutions Emerging Alliance VIS - - - Elcos Microdisplay Technology, Ltd. Long-term investment Elcos Microdisplay Technology, Ltd. TSMC International Money market fund GUC BOA Fund Bond funds Short-term investment Taiwan Securities Overseas Fund Short-term investment BOA - - - - - - - - - - Subsidiary Investee - - - - - - Note 1: The ending balance included the recognition of the investment income (loss) by the equity method, the cumulative translation adjustments and unrealized loss on long-term investments recognized in proportion to the Company's ownership percentage in investees. Note 2: Including stock dividend of 61 thousand units. 216 Annual Report 2003 FINANCIAL INFORMATION Beginning Balance Acquisition Disposal Ending Balance Shares/Units (Thousand) Amount (US$ in Thousand) Shares/Units (Thousand) Amount (US$ in Thousand) Shares/Units (Thousand) Amount (US$ in Thousand) Carrying Value (US$ in Thousand) Gain (Loss) on Disposal (US$ in Thousand) Shares/Units (Thousand) $- 120,000 $4,161,760 80,000 $2,785,760 (US$120,000) 140,000 4,852,300 120,000 4,165,140 (US$140,000) $2,785,760 (US$80,000) 4,165,140 (US$120,000) 34,343 97,782 81,744 500,000 1,400,000 879,000 - 62,988 81,744 - 902,881 881,719 - 900,000 879,000 - - - - - 109,545 - - - 1,800,000 3,157,331 3,113,067 1,422,197 174,030 766,815 - - - - - - - - - - - - - - - - - - - - - 505 470 301,209 152,681 280,748 104,289 20,461 48,392 823 (Note 2) US$8,407 US$7,357 US$1,050 $- - - 2,881 2,719 - - - - - - Amount (US$ in Thousand) (Note 1) $1,359,120 (US$40,000) 679,560 (US$20,000) 500,000 500,000 - 1,800,000 3,157,331 3,113,067 1,422,197 704,744 4,077,198 - - - 40,000 20,000 34,343 34,794 - - - - - - 787,016 - - - - - - - - - - - - - 677,471 505 470 - - - - - - - - 767,239 3,264,657 280,748 104,289 762 US$7,357 - - - - - - 2,667 US$3,500 - - - 87,300 US$87,300 57,000 US$57,000 US$57,000 22 102,694 - - - - - - 2,667 US$3,500 30,300 US$30,300 22 102,694 Annual Report 2003 217 TABLE 5 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND AFFILIATES 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, 2003 (Amounts in Thousand New Taiwan Dollars) Company Name Types of Property Transaction Date Transaction Amount Payment Term Counter-party Fab 14 Fab 12 Fab 12 Fab 12 Fab 12 Fab 12 January 20, 2003 $180,665 By the construction progress United Integrated Services May 6, 2003 June 17, 2003 June 18, 2003 December 2, 2003 December 2, 2003 119,000 By the construction progress United Integrated Services 134,500 By the construction progress United Integrated Services 110,055 By the construction progress Liquid Air Far East Co. Ltd. 230,000 By the construction progress China Steel Structure Co. 285,000 By the construction progress Fu Tsu Construction Co. Ltd TSMC TABLE 6 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND AFFILIATES 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, 2003 (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 GUC WaferTech SSMC VIS Investee Subsidiary Investee Investee Sales Sales Sales Purchases Purchases Purchases $117,758,911 3,577,054 549,471 11,433,083 5,519,805 4,910,810 57 2 - 36 17 15 TABLE 7 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND AFFILIATES RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Company Name Related Party Nature of Relationship Ending Balance Turnover Rate TSMC TSMC-North America Subsidiary Philips and its affiliates Major shareholder $13,946,638 895,063 37 days 64 days 218 Annual Report 2003 FINANCIAL INFORMATION 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 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 Transaction Details Abnormal Transaction Note/Accounts Payable or Receivable Note Payment Terms Unit Price Payment Terms Ending Balance % to Total Net 30 days from invoice date Net 30 days from invoice date 30 days after monthly closing Net 30 days from invoice date Net 30 days from invoice date Net 30 days from invoice date None None None None None None None None None None None None $13,946,638 895,063 15,339 1,184,642 634,647 1,034,074 48 3 - 11 6 10 - - - - - - Overdue Amount Action Taken $3,907,505 - 97,618 Accelerate demand on account receivables Amounts Received in Subsequent Period Allowance for Bad Debts $4,831,330 40 $- - Annual Report 2003 219 TABLE 8 TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD. AND AFFILIATES NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE DECEMBER 31, 2003 (Amounts in Thousand New Taiwan Dollars, Unless Otherwise Specified) Investee Company Location Investor Company: TSMC Main Businesses and Products Original Investment Amount December 31, 2003 December 31, 2002 TSMC-North America San Jose, California, U.S.A. TSMC-Europe Amsterdam, The Netherlands TSMC-Japan Yokohama, Japan Marketing and engineering support Marketing and engineering support Marketing and engineering support TSMC Shanghai Shanghai, China VIS Hsin-Chu, Taiwan IC and other wafer equipment manufacturing and marketing IC design and manufacturing TSMC International Tortola, British Virgin Islands Investment Chi Cherng Hsin Ruey TSMC Partners Taipei, Taiwan Taipei, Taiwan Tortola, British Virgin Islands Investment Investment Investment SSMC Singapore Wafer manufacturing Emerging Alliance GUC VisEra Cayman Islands Hsin-Chu, Taiwan Hsin-Chu, Taiwan Investment IC research, development, manufacturing, testing and marketing Electronic spare parts manufacturing, material wholesaling and retailing Note 1: The treasury stock is deducted from the carrying value. Note 2: The unrealized gain or loss and the gain or loss on disposal of the stocks held by subsidiaries are excluded. Note 3: TSMC's investee, Ya Xin Technology, Inc., merged with GUC in January 2003. GUC is the surviving company. $333,178 $333,178 15,749 83,760 1,890,952 8,119,816 31,445,780 300,000 300,000 10,350 6,408,190 1,179,690 409,920 2,960 83,760 - 6,503,640 31,445,780 300,000 300,000 10,350 6,408,190 1,005,660 341,250 (Note 3) 51,000 - 220 Annual Report 2003 FINANCIAL INFORMATION Balance as of December 31, 2003 Shares (Thousand) Percentage of Ownership Carrying Value (Note1) Net Income (Loss) of the Investee Investment Gain (Loss) Note (Note 2) 11,000 - 6 - 787,016 987,968 - - 300 382 - 39,040 5,100 100 100 100 100 28 100 36 36 100 32 99 47 25 $417,858 $234,639 $227,062 Subsidiary 24,622 101,722 1,901,428 4,077,198 22,654,743 42,941 42,006 4,116,934 2,759,376 704,744 368,434 (13) 2,451 (1,306) 179,359 876,814 (840) (1,290) 199,401 (971,314) (219,190) (88,517) (13) Subsidiary 2,451 Subsidiary (1,306) Subsidiary 50,351 876,814 108 1,252 Investee Subsidiary Investee Investee 197,394 Subsidiary (310,821) Investee (218,094) (33,005) Subsidiary Investee 50,231 (3,076) (769) Investee Annual Report 2003 221 3. Internal Control System Execution Status 3.1 Taiwan Semiconductor Manufacturing Company Limited Statement of Internal Control System (Translation) Date: February 17, 2004 TSMC has conducted a self-assessment of internal controls for the period of January 1, 2003 to December 31, 2003. The results are as follows: 1. TSMC acknowledges that the Board of Directors and management personnel are responsible for establishing, performing, and main- taining 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, performance, and safeguard of assets, etc.), (2) reliability of financial reports, and (3) compliance with applicable laws and 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 envi- ronment 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 meas- ures 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 system 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 self-assessment, TSMC is of the opinion that the aforementioned Internal Control System (includes subsidiary gov- ernance), 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, 2003 to December 31, 2003. 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 February 17, 2004 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 222 Annual Report 2003 FINANCIAL INFORMATION 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 of record or written statements made by any director or supervisor which specified his/her dissent to important resolutions passed by the Board of Directors during 2003 or the period from January 1, 2003 to March 12, 2004: None 5. Private Placement Securities: None 6. Balance of TSMC Common Shares/ADR Acquired, Disposed of and Held by Subsidiaries Unit: NT$ thousand / US$ thousand Paid-in Capital Fund Source Percentage of Ownership Transaction Date Acquisition (Note 3) Disposal Shares Amount Shares Amount Investment Income (Loss) Balance as of Period End Shares Amount Balance of Pledged Shares Balance of Guarantee Provided by TSMC Balance of Financing Provided by TSMC Name of Subsidiary (Note 1) Chi Cherng Investment Co., Ltd. Hsin Ruey Investment Co., Ltd. TSMC Partners, Ltd. (Note 1) 840,000 Retained 36% Year 2003 1,017,442 earnings Year 2004 (Note 2) - 840,000 Retained 36% Year 2003 1,019,349 earnings Year 2004 (Note 2) - US$300 Retained 100% Year 2003 60,948 earnings Year 2004 (Note 2) - TSMC US$11,000 Retained 100% Year 2003 1,015,380 North America earnings Year 2004 (Note 2) - - - - - - - - - 20,000 - 20,000 - 939 - 939 - 217 13,735,471 458,564 - 13,735,471 458,564 217 13,761,218 459,511 - 13,761,218 459,511 822,809 US$8,407 US$1,050 - - - - - - - 606,890 146,337 40,707 9,268 7,578 13,100,748 1,279 12,954,411 715,153 707,164 - - - - - - - - - - - - - - - - - - - - - - - - Note 1: TSMC Partners, Ltd. Shares are in ADRs. Each ADR represents five TSMC common shares. Note 2: As of 02/29/2004 Note 3: Stock dividend distributed in 2003. Annual Report 2003 223 7. Major Decisions of Shareholders' Meetings and Board Meetings Review of Shareholder Meetings TSMC's 2003 Regular Shareholders' Meeting was held at the Auditorium of the Activity Center of the Hsinchu Science Park on June 3, 2003. At the meeting, shareholders present in person or by proxy passed following resolutions: (1) Acceptance of the 2002 business report and financial statements; (2) Distribution of 2002 profits; (3) Capitalization of 2002 profits; (4) Revisions to Articles of Incorporation; (5) Revisions to Procedures for Acquisition or Disposal of Assets; (6) Revisions to Policies and Procedures for Financial Derivative Transactions; (7) Revisions to Procedures for Lending Funds to Other Parties; (8) Revisions to Procedures for Endorsement and Guarantee; (9) Election of nine directors and three supervisors; and (10) Release the directors elected from non-competition limitation. Review of Board Meetings During the 2003 calendar year, and the period from January 1, 2004 to March 12, 2004, the Board held five regular meetings and one special meeting. Major resolutions passed at these meetings are summarized below: (1) The 2002 business report and financial statements; (2) Distribution of 2002 profits; (3) Convening the 2003 Annual Shareholders' Meeting; (4) Redemption and cancellation of TSMC's 1,300,000,000 Preferred A shares, and reduction of the paid-in capital by NT$13,000,000,000; (5) 2003 R&D project and sustaining capital appropriation; (6) Revisions to TSMC's 2002 Employee Stock Options Plan; (7) Election of Dr. Morris Chang as the Chairman of the Board of Directors; (8) The change of TSMC's registered address; (9) The establishment of a Compensation Committee; (10) TSMC's sponsorship of the issuance of ADRs by the Development Fund and certain other shareholders; (11) The 2003 semi-annual financial statement; (12) The Compensation Committee Charter; (13) TSMC's 2003 Employee Stock Options Plan; (14) The promotion of Ms. Lora Ho as Vice President and Chief Financial Officer; (15) The appointment of Mr. James Chen as Controller; (16) TSMC's sponsorship of the issuance of ADRs by Koninklijke Philips Electronics N.V.; (17) The 2003 business report and financial statements; (18) Distribution of 2003 profits; (19) 2004 R&D project and sustaining capital appropriation; (20) Convening the 2004 Annual Shareholders' Meeting; and (21) The promotion of Mr. P. H. Chang as Vice President, etc. 8. Legal Penalties Regulatory authorities' legal penalties to the Company, and the Company's resulting punishment on its employees: None 9. Other Necessary Supplement Any events in 2003 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 224 Annual Report 2003