Edgar Filing: TAIWAN SEMICONDUCTOR MANUFACTURING CO LTD

Form 6-K

1934 Act Registration No. 1-14700

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

For the month of April 2003

Taiwan Semiconductor Manufacturing Company Ltd.

(Translation of Registrant’s Name into English)

No.121 Park Avenue III

Science-Based Industrial Park

Hsin-chu, Taiwan

(Address of Principal Executive Offices)

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

Form 20-F X Form 40-F

(Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

Yes No X

(If “Yes” is marked, indicated below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82: .)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Taiwan Semiconductor Manufacturing Company Ltd.

Date: April 29, 2003	By	/S/ Harvey Chang
		Harvey Chang Senior Vice President & Chief Financial Officer

Taiwan Semiconductor Manufacturing Company Ltd.

Financial Statements as of December 31, 2002 and 2001

Together with Independent Auditors’ Report

English Translation of a Report Originally Issued in Chinese

Independent Auditors’ Report

January 16, 2003

The Board of Directors and Shareholders

Taiwan Semiconductor Manufacturing Company Ltd.

We have audited the accompanying balance sheets of Taiwan Semiconductor Manufacturing Company Ltd. as of December 31, 2002 and 2001, and the related statements of income, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Regulations for Auditing of Financial Statements by Certified Public Accountants, and auditing standards generally accepted in the Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Taiwan Semiconductor Manufacturing Company Ltd. as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with the Guidelines for Securities Issuers’ Financial Reporting and accounting principles generally accepted in the Republic of China.

As disclosed in Note 3 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 30, “Accounting for Treasury Stock” (SFAS 30) on January 1, 2002. SFAS 30 requires a parent company to record stock held by its subsidiary as treasury stock. The adoption of SFAS 30 resulted in the decrease of long-term investments and simultaneous increase of the book value of treasury stock by NT$1,923,492 thousand as of December 31, 2002. Furthermore, net income increased by NT$25,909 thousand for the year ended December 31, 2002.

We have also audited the consolidated financial statements of Taiwan Semiconductor Manufacturing Company Ltd. as of and for the years ended December 31, 2002 and 2001, and have expressed a modified unqualified opinion and an unqualified opinion on such financial statements, respectively.

T N Soong & Co

An Associate Member Firm of Deloitte Touche Tohmatsu

Effective April 22, 2002

(Formerly a Member Firm of Andersen Worldwide, SC)

Taipei, Taiwan

The Republic of China

Notice to Readers

The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdiction. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China.

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

BALANCE SHEETS

December 31, 2002 and 2001

(In Thousand New Taiwan Dollars, Except Par Value)

	2002					2001
ASSETS	Amount			%		Amount			%

CURRENT ASSETS
Cash and cash equivalents (Notes 2 and 4)	$	61,656,795		16		$	33,403,706		10
Receivables from related parties (Note 16)		10,183,488		3			523,861		—
Notes receivable		60,240		—			176,582		—
Accounts receivable		9,495,447		3			19,957,636		6
Allowance for doubtful receivables (Note 2)		(929,864	)	—			(1,100,492	)	—
Allowance for sales returns and others (Note 2)		(2,363,067	)	(1	)		(2,581,551	)	(1	)
Inventories—net (Notes 2 and 5)		10,340,336		3			8,504,418		2
Deferred income tax assets (Notes 2 and 12)		3,320,000		1			2,347,000		1
Prepaid expenses and other current assets (Notes 2, 16 and 19)		2,984,030		1			2,421,566		1

Total Current Assets		94,747,405		26			63,652,726		19


LONG-TERM INVESTMENTS (Notes 2, 3, 6 and 18)		34,978,495		9			32,869,391		10


PROPERTY, PLANT AND EQUIPMENT (Notes 2, 7 and 16)
Cost
Buildings		68,488,180		18			52,527,184		16
Machinery and equipment		303,334,232		82			242,347,119		72
Office equipment		5,697,828		2			4,754,183		1

		377,520,240		102			299,628,486		89
Accumulated depreciation		(188,447,604	)	(51	)		(140,224,640	)	(42	)
Advance payments and construction in progress		28,119,627		8			56,095,396		17

Net Property, Plant and Equipment		217,192,263		59			215,499,242		64


GOODWILL (Note 2)		2,612,926		1			2,961,317		1


OTHER ASSETS
Deferred charges—net (Notes 2, 8 and 18)		9,792,490		3			3,239,723		1
Deferred income tax assets (Notes 2 and 12)		9,712,567		2			16,175,070		5
Refundable deposits (Notes 16 and 18)		543,469		—			772,912		—
Idle assets (Note 2)		339,400		—			—		—
Assets leased to others (Note 2)		87,246		—			555,053		—
Miscellaneous		9,250		—			9,250		—

Total Other Assets		20,484,422		5			20,752,008		6

TOTAL ASSETS	$	370,015,511		100		$	335,734,684		100


	2002					2001
LIABILITIES AND SHAREHOLDERS’ EQUITY	Amount			%		Amount			%

CURRENT LIABILITIES
Payable to related parties (Note 16)	$	2,466,998		1		$	2,082,606		1
Accounts payable		4,849,234		1			1,123,894		—
Payable to contractors and equipment suppliers		14,004,383		4			12,367,319		4
Accrued expenses and other current liabilities (Notes 2, 6, 10 and 19)		5,839,488		1			4,636,800		1
Current portion of bonds (Note 9)		4,000,000		1			5,000,000		1

Total Current Liabilities		31,160,103		8			25,210,619		7


LONG-TERM LIABILITIES
Bonds—net of current portion (Note 9)		35,000,000		10			24,000,000		7
Other long-term payables (Notes 10 and 18)		4,281,665		1			—		—
Accrued pension cost (Notes 2 and 11)		2,210,542		1			1,854,853		1
Guarantee deposits (Note 18)		1,395,066		—			7,210,972		2
Deferred gain on sales and leaseback (Note 2)		114,928		—			268,165		—

Total Long-term Liabilities		43,002,201		12			33,333,990		10

Total Liabilities		74,162,304		20			58,544,609		17


SHAREHOLDERS’ EQUITY (Notes 2 and 13)
Capital stock—$10 par value
Authorized: 24,600,000 thousand shares
Issued:
Preferred—1,300,000 thousand shares		13,000,000		4			13,000,000		4
Common—18,622,887 thousand shares in 2002 and 16,832,554 thousand shares in 2001		186,228,867		50			168,325,531		50
Capital surplus:
Merger and others (Note 2)		56,961,753		15			57,128,433		17
Treasury stock (Note 3)		43,036		—			—		—
Retained earnings:
Appropriated as legal reserve		18,641,108		5			17,180,067		5
Appropriated as special reserve		—		—			349,941		—
Unappropriated earnings		22,151,089		6			19,977,402		6
Unrealized loss on long-term investments (Note 2)		(194,283	)	—			—		—
Cumulative translation adjustments (Note 2)		945,129		—			1,228,701		1
Treasury stock (at cost)—42,001 thousand shares (Notes 2, 3 and 14)		(1,923,492	)	—			—		—

Total Shareholders’ Equity		295,853,207		80			277,190,075		83


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	370,015,511		100		$	335,734,684		100

The accompanying notes are an integral part of the financial statements.

(With T N Soong & Co. report dated January 16, 2003)

English Translation of Financial Statements Orginally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

STATEMENTS OF INCOME

For the Years Ended December 31, 2002 and 2001

(In Thousand New Taiwan Dollars, Except Earnings Per Share)

	2002				2001
	Amount			%	Amount			%
GROSS SALES (Notes 2 and 16)	$	164,805,296			$	128,563,819
SALES RETURNS AND ALLOWANCES (Note 2)		(3,843,967	)			(2,675,816	)


NET SALES		160,961,329		100		125,888,003		100

COST OF SALES (Note 16)		108,994,184		68		89,506,952		71


GROSS PROFIT		51,967,145		32		36,381,051		29


OPERATING EXPENSES (Note 16)
Research and development		11,725,035		7		10,649,019		8
General and administrative		5,164,907		3		6,048,665		5
Marketing		900,897		1		2,341,081		2

Total Operating Expenses		17,790,839		11		19,038,765		15


INCOME FROM OPERATIONS		34,176,306		21		17,342,286		14


NON-OPERATING INCOME
Interest (Note 2)		1,008,147		1		1,365,919		1
Gain on sales of property, plant and equipment (Note 2)		273,998		—		52,376		—
Technical service income (Notes 16 and 18)		204,350		—		55,077		—
Insurance compensation—net		—		—		860,835		1
Amortization of premium income from option contracts—net (Notes 2 and 19)		—		—		234,732		—
Other (Note 16)		276,398		—		322,618		—

Total Non-operating Income		1,762,893		1		2,891,557		2


NON-OPERATING EXPENSES
Investment loss recognized by equity method—net (Notes 2 and 6)		5,716,510		4		6,429,631		5
Interest (Notes 2, 7 and 19)		2,119,935		1		1,951,830		2
Amortization of premium expense from option contracts—net (Notes 2 and 19)		419,513		—		—		—

(Forward)

English Translation of Financial Statements Originally Issued in Chinese

	2002					2001
	Amount			%		Amount		%
Loss on sales of and provision for loss on property, plant and equipment (Note 2)	$	221,955		—		$	234,862	—
Foreign exchange loss—net (Notes 2 and 19)		120,568		—			695,620	—
Casualty loss—net (Note 2)		119,485		—			—	—
Amortization of bond issuance cost (Note 2)		18,523		—			12,504	—
Loss on sales of long-term investments (Note 2)		2,403		—			102,978	—
Other		87,852		—			147,703	—

Total Non-operating Expenses		8,826,744		5			9,575,128	7


INCOME BEFORE INCOME TAX		27,112,455		17			10,658,715	9

INCOME TAX BENEFIT (EXPENSE) (Notes 2 and 12)		(5,502,164	)	(4	)		3,824,459	3


NET INCOME	$	21,610,291		13		$	14,483,174	12

	Before Income Tax		After Income Tax		Before Income Tax		After Income Tax
EARNINGS PER SHARE (Note 15)
Basic earnings per share	$	1.43	$	1.14	$	0.55	$	0.75

Diluted earnings per share	$	1.43	$	1.14	$	0.55	$	0.75

The pro forma net income and earnings per share, on the assumption that the stock of parent company held by its subsidiary is treated as an investment instead of the treasury stock, are shown as follows (Note 14):

	Before Income Tax		After Income Tax
NET INCOME	$	27,086,546	$	21,584,382

EARNINGS PER SHARE
Basic earnings per share	$	1.43	$	1.13

Diluted earnings per share	$	1.43	$	1.13

The accompanying notes are an integral part of the financial statements.

(With T N Soong & Co. report dated January 16, 2003)

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2002 and 2001

(In Thousand New Taiwan Dollars)

	CAPITAL STOCK ISSUED						CAPITAL SURPLUS (Notes 2 and 13)
	Preferred Stock			Common Stock			From Merger		Additional Paid-in Capital		From Long-term Investments			Excess on Foreign Bond Investment		Gain on Sales of Properties			Donation		Treasury Stock		Total
	Shares (Thousand)	Amount		Shares (Thousand)	Amount
	Shares (Thousand)	Amount		Shares (Thousand)	Amount
BALANCE, JANUARY 1, 2001	1,300,000	$	13,000,000	11,689,365	$	116,893,646	$	22,329,129	$	23,172,550	$	246,219		$	9,410,632	$	127,236		$	55	$	—	$	55,285,821
Appropriations of prior year’s earnings
Legal reserve	—		—	—		—		—		—		—			—		—			—		—		—
Special reserve	—		—	—		—		—		—		—			—		—			—		—		—
Bonus to employees—stock	—		—	467,443		4,674,426		—		—		—			—		—			—		—		—
Cash dividends paid for preferred stocks	—		—	—		—		—		—		—			—		—			—		—		—
Stock dividends—40%	—		—	4,675,746		46,757,459		—		—		—			—		—			—		—		—
Remuneration to directors and supervisors	—		—	—		—		—		—		—			—		—			—		—		—
Net income in 2001	—		—	—		—		—		—		—			—		—			—		—		—
Reclassification of the accumulated deficits from the merged company	—		—	—		—		1,803,168		—		—			—		—			—		—		1,803,168
Gain on sales of property, plant and equipment	—		—	—		—		—		—		—			—		39,282			—		—		39,282
Gain on sales of property, plant and equipment from investees	—		—	—		—		—		—		162			—		—			—		—		162
Reversal of the unrealized loss on long-term investments	—		—	—		—		—		—		—			—		—			—		—		—
Translation adjustments	—		—	—		—		—		—		—			—		—			—		—		—

BALANCE, DECEMBER 31, 2001	1,300,000		13,000,000	16,832,554		168,325,531		24,132,297		23,172,550		246,381			9,410,632		166,518			55		—		57,128,433
Appropriations of prior year’s earnings
Legal reserve	—		—	—		—		—		—		—			—		—			—		—		—
Special reserve	—		—	—		—		—		—		—			—		—			—		—		—
Bonus to employees—stock	—		—	107,078		1,070,783		—		—		—			—		—			—		—		—
Cash dividends paid for preferred stocks	—		—	—		—		—		—		—			—		—			—		—		—
Stock dividends—10%	—		—	1,683,255		16,832,553		—		—		—			—		—			—		—		—
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	—		—	—		—		—		—		—			—		(166,518	)		—		—		(166,518	)
Transfer of the capital surplus from gain on sales of property, plant and equipment of investees to retained earnings	—		—	—		—		—		—		(162	)		—		—			—		—		(162	)
Unrealized loss on long-term investments from subsidiaries	—		—	—		—		—		—		—			—		—			—		—		—
Translation adjustments	—		—	—		—		—		—		—			—		—			—		—		—
Reclassification of stocks of a parent company held by subsidiaries from long-term investments to treasury stock	—		—	—		—		—		—		—			—		—			—		—		—
Capital surplus resulted from sales of treasury stock	—		—	—		—		—		—		—			—		—			—		43,036		43,036

BALANCE, DECEMBER 31, 2002	1,300,000	$	13,000,000	18,622,887	$	186,228,867	$	24,132,297	$	23,172,550	$	246,219		$	9,410,632	$	—		$	55	$	43,036	$	57,004,789

	RETAINED EARNINGS (Note 13)											UNREALIZED LOSS ON LONG-TERM INVESTMENTS (Note 2)			CUMULATIVE TRANSLATION ADJUSTMENTS (Note 2)			TREASURY STOCK (Notes 2, 3 and 14)			TOTAL SHAREHOLDERS’ EQUITY
	Legal Reserve		Special Reserve			Unappropriated Earnings			Total


BALANCE, JANUARY 1, 2001	$	10,689,323	$	1,091,003		$	65,143,847		$	76,924,173		($	71,564	)	($	278,377	)	$	—		$	261,753,699
Appropriations of prior year’s earnings
Legal reserve		6,490,744		—			(6,490,744	)		—			—			—			—			—
Special reserve		—		(741,062	)		741,062			—			—			—			—			—
Bonus to employees—stock		—		—			(4,674,426	)		(4,674,426	)		—			—			—			—
Cash dividends paid for preferred stocks		—		—			(41,137	)		(41,137	)		—			—			—			(41,137	)
Stock dividends—40%		—		—			(46,757,459	)		(46,757,459	)		—			—			—			—
Remuneration to directors and supervisors		—		—			(584,303	)		(584,303	)		—			—			—			(584,303	)
Net income in 2001		—		—			14,483,174			14,483,174			—			—			—			14,483,174
Reclassification of the accumulated deficits from the merged company		—		—			(1,803,168	)		(1,803,168	)		—			—			—			—
Gain on sales of property, plant and equipment		—		—			(39,282	)		(39,282	)		—			—			—			—
Gain on sales of property, plant and equipment from investees		—		—			(162	)		(162	)		—			—			—			—
Reversal of the unrealized loss on long-term investments		—		—			—			—			71,564			—			—			71,564
Translation adjustments		—		—			—			—			—			1,507,078			—			1,507,078

BALANCE, DECEMBER 31, 2001		17,180,067		349,941			19,977,402			37,507,410			—			1,228,701			—			277,190,075
Appropriations of prior year’s earnings
Legal reserve		1,448,317		—			(1,448,317	)		—			—			—			—			—
Special reserve		—		(349,941	)		349,941			—			—			—			—			—
Bonus to employees—stock		—		—			(1,070,783	)		(1,070,783	)		—			—			—			—
Cash dividends paid for preferred stocks		—		—			(455,000	)		(455,000	)		—			—			—			(455,000	)
Stock dividends—10%		—		—			(16,832,553	)		(16,832,553	)		—			—			—			—
Remuneration to directors and supervisors		—		—			(133,848	)		(133,848	)		—			—			—			(133,848	)
Net income in 2002		—		—			21,610,291			21,610,291			—			—			—			21,610,291
Transfer of the capital surplus from gain on sales of property, plant and equipment to retained earnings		12,724		—			153,794			166,518			—			—			—			—
Transfer of the capital surplus from gain on sales of property, plant and equipment of investees to retained earnings		—		—			162			162			—			—			—			—
Unrealized loss on long-term investments from subsidiaries		—		—			—			—			(194,283	)		—			—			(194,283	)
Translation adjustments		—		—			—			—			—			(283,572	)		—			(283,572	)
Reclassification of stocks of a parent company held by subsidiaries from long-term investments to treasury stock		—		—			—			—			—			—			(1,923,492	)		(1,923,492	)
Capital surplus resulted from sales of treasury stock		—		—			—			—			—			—			—			43,036

BALANCE, DECEMBER 31, 2002	$	18,641,108	$	—		$	22,151,089		$	40,792,197		($	194,283	)	$	945,129		($	1,923,492	)	$	295,853,207

The accompanying notes are an integral part of the financial statements.

(With T N Soong & Co. report dated January 16, 2003)

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2002 and 2001

(In Thousand New Taiwan Dollars)

	2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	21,610,291		$	14,483,174
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		57,621,462			48,875,754
Deferred income taxes		5,489,503			(3,840,777	)
Investment loss recognized by equity method—net		5,716,510			6,429,631
Loss on sales of long-term investments—net		2,403			102,978
Loss (gain) on sales of and provision for loss on property, plant and equipment—net		(52,043	)		182,486
Accrued pension cost		355,689			345,318
Allowance for doubtful receivables		(170,628	)		153,758
Allowance for sales returns and others		(218,484	)		377,384
Changes in operation assets and liabilities:
Decrease (increase) in:
Receivable from related parties		(9,659,627	)		470,954
Notes receivable		116,342			(51,407	)
Accounts receivable—net		10,462,189			10,377,678
Inventories—net		(1,835,918	)		2,463,517
Prepaid expenses and other current assets		(148,120	)		359,342
Forward exchange contract receivable		(199,609	)		49,480
Increase (decrease) in:
Payable to related parties		384,392			(2,263,972	)
Accounts payable		3,725,340			(6,866,059	)
Forward exchange contracts payable		(379,579	)		218,165
Accrued expenses and other current liabilities		1,467,988			(201,096	)

Net Cash Provided by Operating Activities		94,288,101			71,666,308


CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of:
Property, plant and equipment		(54,443,595	)		(68,002,448	)
Long-term investments		(10,187,730	)		(4,563,682	)
Proceeds from sales of:
Property, plant and equipment		494,805			298,231
Long-term investments		1,402			162,334
Increase in deferred charges		(5,724,583	)		(1,465,703	)
Decrease in refundable deposits		229,443			195,073

Net Cash Used in Investing Activities		(69,630,258	)		(73,376,195	)

(Forward)

English Translation of Financial Statements Originally Issued in Chinese

	2002			2001
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of bonds	$	10,000,000		$	—
Payments on lease obligation		—			(50,000	)
Increase (decrease) in guarantee deposits		(5,815,906	)		124,593
Remuneration paid to directors and supervisors		(133,848	)		(584,303	)
Cash dividends paid for preferred stocks		(455,000	)		(41,137	)

Net Cash Provided by (Used in) Financing Activities		3,595,246			(550,847	)


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		28,253,089			(2,260,734	)

CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR		33,403,706			35,664,440


CASH AND CASH EQUIVALENTS, END OF THE YEAR	$	61,656,795		$	33,403,706

SUPPLEMENTAL INFORMATION
Interest paid (excluding capitalized interest of NT$165,857 thousand and NT$207,297 thousand in 2002 and 2001, respectively)	$	1,771,682		$	1,980,399

Income tax paid	$	12,661		$	16,318

Noncash investing and financing activities:
Reclassification of stocks of a parent company held by subsidiaries from long-term investments to treasury stocks	$	1,923,492		$	—

Effect of exchange rate changes on cash and cash equivalents	($	142,438	)	$	1,258,395

Current portion of bonds	$	4,000,000		$	5,000,000

Cash paid for acquisitions of property, plant and equipment:
Total acquisitions	$	56,080,659		$	55,977,367
Decrease (increase) in payables to contractors and equipment suppliers		(1,637,064	)		12,025,081

	$	54,443,595		$	68,002,448

Cash paid for acquisitions of deferred charges:
Total acquisition	$	10,401,176		$	1,465,703
Other long-term payable (including current portion)		(4,676,593	)		—

	$	5,724,583		$	1,465,703

The accompanying notes are an integral part of the financial statements.

(With T N Soong & Co. report dated January 16, 2003)

English Translation of Financial Statements Originally Issued in Chinese

TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LTD.

NOTES TO FINANCIAL STATEMENTS

(Amounts in Thousand New Taiwan Dollars, Unless Specified Otherwise)

1. GENERAL

Taiwan Semiconductor Manufacturing Company Ltd. (the “Company” or “TSMC”), a Republic of China corporation, was incorporated as a venture among the Government of the Republic of China, acting through the Development Fund of the Executive Yuan; Philips Electronics N.V. and certain of its affiliates (Philips); and certain other private investors. In September 1994, its shares were listed on the Taiwan Stock Exchange. In October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange in the form of American Depositary Shares.

TSMC is engaged mainly in the manufacturing, selling, packaging, and testing and designing of integrated circuits and other semiconductor devices, and the manufacturing of masks.

2. SIGNIFICANT ACCOUNTING POLICIES

Cash and cash equivalents

Government bonds acquired under agreements that provide for their repurchase within less than three months from date of purchase are classified as cash equivalents.

Allowance for doubtful receivables

Allowance for doubtful receivables are provided based on a review of the collectibility of accounts receivables.

Sales and sales returns and allowances

Sales are recognized when titles of products and risks of ownerships are transferred to customers, primarily upon shipment. Allowance and related provisions for sales returns and others are estimated based on historical experience. Such provisions are deducted from sales in the year the products are sold and the estimated related costs are deducted from cost of sales.

Inventories

Inventories are stated at the lower of cost (standard cost and adjusted to approximate weighted-average cost at the end of each period) or market value. Market value represents net realizable value for finished goods and work in process, and replacement value for raw materials, supplies and spare parts.

Long-term investments

Investments in shares of stock of companies wherein the Company exercises significant influence on the operating and financial policy decisions are accounted for using the equity method. The Company’s proportionate share in the net income or net loss of investee companies are recognized as components of the “Investment income/loss recognized by equity method—net” account. The Company adopted Statements of Financial Accounting Standards No. 30, “Accounting for Treasury Stock” (SFAS 30) on January 1, 2002. SFAS 30 requires a parent company to record stock held by its subsidiary as treasury stock. The recorded value of treasury stock is based upon the carrying values of the short/long-term investments on the subsidiaries’ books as of January 1, 2002.

When the Company subscribes to additional investee shares at a percentage different from its existing equity interest, the resulting carrying amount of the investment in equity investee differs from the amount of Company’s proportionate share in the investee’s net equity. The Company records such difference as an adjustment to “capital surplus” as well as the “long-term investments” accounts. In the event an investee has an accumulated deficit, it will record an offset to its capital surplus, excluding the reserve for asset revaluation, through retained earnings. The Company will also record a corresponding entry equivalent to its proportionate share of the investee capital surplus, excluding the reserve for asset revaluation, that was generated subsequent to any acquisition of equity interest in the investee. If an investee’s functional currency is a foreign currency, “cumulative translation adjustments” would result from the process of translating the investees’ financial statements into the functional currency of the Company.

Other stock investments are accounted for using the cost method. Cash dividends are recognized as income in the year received but are accounted for as reduction in the carrying values of the long-term investments if the dividends are received in the same year that the related investments are acquired. Stock dividends are recognized neither as investment income nor increase of long-term investment but recorded only as an increase in the number of shares held. An allowance is recognized for any decline in the market value of investments using quoted market prices with the corresponding amount debited to shareholders’ equity. A reversal of the allowance will result from a subsequent recovery of the market value. The carrying values of investments with no quoted market price are reduced to reflect another than temporary decline in their values with the related impairment loss charged to income.

Investments in foreign mutual funds are stated at the lower of aggregate cost or net asset value (NAV). An allowance is recognized when the cost of the funds are lower than their net asset values, with the corresponding amount debited to shareholders’ equity. A reversal of the allowance will result from a subsequent recovery of the net asset value.

The costs of investments sold are determined using the weighted-average method.

If an investee company has an unrealized loss on a long-term investment evaluated using the lower-of-cost-or-market method, the Company recognizes a corresponding unrealized loss in proportion to its equity interest and records the amount as a component of its own shareholders’ equity.

Gain or loss on transactions with investee companies wherein the Company owned at least 20% of the outstanding common stock but less than a controlling interest are deferred in proportion to the ownership percentage until realized through a transaction with a third party. The entire amount of the gains or losses on sales to majority-owned subsidiaries are deferred until such gains or losses are realized through the subsequent sale of the related products to third parties. Gains or losses from sales by investee companies to the Company are deferred in proportion to the ownership percentage until realized through transactions with third parties.

Property, plant and equipment, assets leased to others and idle assets

Property, plant and equipment and assets leased to others are stated at cost less accumulated depreciation. Idle assets are stated at the lower of book value or net realized value. Significant additions, renewals, betterments and interest expense incurred during the construction period are capitalized. Maintenance and repairs are expensed in the period incurred. Property, plant and equipment covered by agreements qualifying as capital leases are carried at the lower of the present value of future minimum rent payments, or the market value of the property at the inception date of the lease. The lessee’s periodic rent payment includes the purchase price of the leased property and the interest expense.

Depreciation is computed using the straight-line method over these estimated service lives: Buildings—10 to 20 years; machinery and equipment—5 years; and office equipment—3 to 5 years.

Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to income in the period of disposal.

Goodwill

Goodwill represents the excess of fair market value of identifiable net assets acquired and consideration paid in connection with a business combination. The amount is amortized using the straight-line method over the estimated useful life of 10 years.

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/loss are amortized over 25 years.

Deferred gain on sales and leaseback

The gain on the sale of property by the Company that it simultaneously leased back is deferred. This deferred gain on sales and leaseback transactions is amortized as follows: (a) operating leases—adjustment of rental expenses over the term of the leases and (b) capital leases—adjustment of depreciation expenses over the estimated useful life or term of the lease; whichever is shorter.

Casualty loss

Casualty loss consists of the accrued loss caused by the earthquake on March 31, 2002 less the estimated insurance compensation.

Income tax

The Company uses an inter-period tax allocation method for income tax. Deferred income tax assets and liabilities are recognized for the tax effects of temporary differences, unused tax credits, and operating loss carry forwards. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. A deferred tax asset or liability is, according to the classification of its related asset or liability, classified as current or non-current. However, if a deferred tax asset or liability does not relate to an asset or liability in the financial statements, then it is classified as current or non-current based on the expected length of time before it is realized.

Any tax credit arising from the purchase of machinery, equipment and technology, research and development expenditures, personnel training, investments in important technology-based enterprise are recognized using the current method.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

As of January 1, 1998, income taxes on unappropriated earnings of 10% are expensed in the year of shareholder approval which is usually the year subsequent to the year incurred.

Derivative financial instruments

The Company enters into foreign currency forward contracts to manage currency exposures in cash flow and in foreign currency-denominated assets and liabilities. The differences in the New Taiwan dollar amounts translated using the current rate and the amounts translated using the contracted forward rates are amortized over the terms of the forward contracts using the straight-line method. At the balance sheet dates, the receivables or payables arising from forward contracts are restated using the prevailing current rate and the resulting differences are recognized in income. Also, the receivables and payables related to the forward contract are netted with the resulting amount presented as either an asset or liability.

The Company enters into interest rate swap transactions to manage exposures from changes in interest rates on existing liabilities. These transactions are accounted for on an accrual basis, in which the cash settlement receivable or payable is recorded as an adjustment to interest income or expense.

The notional amount of foreign currency option contracts entered into for hedging purposes are not recognized as an asset or liability on the contract dates. The premiums paid or received for the call or put options are amortized to income on a straight-line basis over the term of the related contract.

Foreign-currency transactions

Foreign-currency transactions are recorded in New Taiwan dollars at the current rate of exchange in effect when the transaction occurs. Gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in a foreign currency are recognized in current operations. At year-end, foreign-currency assets and liabilities are revalued at the prevailing exchange rate with the resulting gain or loss recognized in current operations.

3. NEW ACCOUNTING PRONOUNCEMENTS

In accordance with the Statement of Financial Accounting Standards No. 30, “Accounting for Treasury Stock” (SFAS 30) and other relevant regulations from Securities and Futures Commission (SFC), the Company is required to reclassify its common stock held by subsidiaries from short/long-term investments to treasury stock. The reclassification is based on the carrying value of NT$2,115,695 thousand as recorded by the Company’s subsidiaries as of January 1, 2002. The adoption of SFAS 30 resulted in the decrease of long-term investments and the increase of treasury stock by NT$1,923,492 thousand as of December 31, 2002, and an increase in net income for the year ended December 31, 2002 by NT$25,909 thousand.

4. CASH AND CASH EQUIVALENTS

	2002		2001
Cash and bank deposits	$	58,917,928	$	31,678,047
Government bonds acquired under repurchase agreements		2,738,867		1,725,659

	$	61,656,795	$	33,403,706

5. INVENTORIES—NET

	2002			2001
Finished goods	$	3,610,547		$	1,618,635
Work in process		7,227,129			6,685,094
Raw materials		389,164			521,680
Supplies and spare parts		693,526			870,780

		11,920,366			9,696,189
Less—allowance for losses		(1,580,030	)		(1,191,771	)

	$	10,340,336		$	8,504,418

6. LONG-TERM INVESTMENTS

	2002			2001
	Carrying Value		% of Owner- ship	Carrying Value		% of Owner- ship
Shares of stock

Equity method
TSMC International Investment	$	22,265,157	100	$	19,987,814	100
TSMC Partners		3,753,733	100		3,032,376	100
Systems on Silicon Manufacturing Company Pte Ltd. (SSMC)		3,136,115	32		2,907,967	32
Vanguard International Semiconductor (VIS)		2,415,297	25		3,377,526	25
Emerging Alliance Fund		767,239	99		741,617	99
Ya-Shin Technology		341,250	100		—	—
TSMC—North America		173,601	100		786,062	100
TSMC—Japan		94,258	100		80,156	100
Chi Cherng Investment		41,894	36		156,694	25
Hsin Ruey Investment		39,815	36		157,352	25
TSMC—Europe		13,670	100		10,147	100
Kung Cherng Investment		—	—		177,812	25
Cherng Huei Investment		—	—		166,639	25
Po Cherng Investment		—	—		164,724	25
Chi Hsin Investment		—	—		158,252	25

		33,042,029			31,905,138

Prepayment for subscribed stocks VIS		849,360			—

		849,360			—

Cost method
Traded
Amkor Technology		280,748	—		280,748	—
Monolithic System Tech.		104,289	2		—	—
Taiwan Mask Corp.		32,129	2		32,129	2
Non-traded
United Technology		193,584	11		193,584	11
Shin-Etsu Handotai Taiwan Company Ltd.		105,000	7		105,000	7
Hon Tung Venture Capital		83,916	10		150,000	10
W.K. Technology Fund IV		50,000	2		50,000	2

		849,666			811,461

Funds
Horizon Ventures		195,452	—		125,701	—
Crimson Asia Capital		41,988	—		27,091	—

		237,440			152,792

	$	34,978,495		$	32,869,391

On January 8, 2003, the Company’s investee company, VIS issued 600,000 thousand shares of common stock at a discounted price of NT$7 per share. The Company prepaid NT$849,360 thousand at the end of 2002 for the share subscription and paid an additional NT$766,815 thousand in January 2003. In this round of equity offering, the Company purchased a total of 230,882 thousand shares of VIS stocks. As a result, its ownership in VIS increased from 25% to 28%.

The Company’s investees, Hsin Ruey Investment, Chi Hsin Investment and Kung Cherng Investment were merged at the end of October 2002, with Hsin Ruey Investment as the surviving company. In addition, the Company’s investees, Chi Cherng Investment, Cherng Huei Investment and Po Cherng Investment were also merged at the end of October 2002. Chi Cherng Investment is the surviving company of the merger. The Company’s ownership is approximately 36% in Hsin Ruey Investment and approximately 36% in Chi Cherng Investment subsequent to the merger.

The Company established Ya Shin Technology (“Ya Shin”) in November 2002 and subsequently signed a merger agreement with Global UniChip Corp. (“Global UniChip”) in December 2002. The merger was effective on January 4, 2003 and Global UniChip is the surviving company. The Company holds 52% of Global UniChips’ shares after the completion of the merger.

The carrying value of the investments accounted for using the equity method and the related investment gains or losses were determined based on the audited financial statements of the investees in the respective year. The investment gains or losses of the investee companies consisted of the following:

	2002			2001
TSMC International Investment	($	4,714,203	)	($	4,855,844	)
SSMC		(1,155,076	)		(1,722,080	)
VIS		(821,771	)		(2,236,940	)
TSMC Partners		993,292			2,357,405
Others		(18,752	)		27,828

	($	5,716,510	)	($	6,429,631	)

The market values and net asset values of the long-term investments is as follows:

	2002		2001
Market value of traded stocks	$	4,792,108	$	7,055,888
Equity in the net assets of non-traded stocks		33,880,022		29,124,386
Net asset value of funds		237,440		152,792

7. PROPERTY, PLANT AND EQUIPMENT

Accumulated depreciation consisted of the following:

	2002		2001
Buildings	$	22,289,909	$	15,181,445
Machinery and equipment		163,208,908		122,659,129
Office equipment		2,948,787		2,384,066

	$	188,447,604	$	140,224,640

The status of construction of the Company’s manufacturing facilities at December 31, 2002 is as follows:

Manufacturing Plant	Estimated Costs		Accumulated Expenditures		Expected or Actual Date of Starting Operations
Fab 6	$	93,932,000	$	87,054,700	March 2000
Fab 12 Phase 1		80,318,400		47,095,400	March 2002
Fab 14 Phase 1		30,411,000		22,169,900	June 2003

Interest expense (before deducting capitalized amounts of NT$165,857 thousand in 2002 and NT$207,297 thousand in 2001) for the years ended December 31, 2002 and 2001 were NT$2,285,792 thousand and NT$2,159,127 thousand, respectively. The interest rate used for purposes of calculating the capitalized amounts was 5.283% in 2002 and 2001.

8. DEFERRED CHARGES—NET

	2002		2001
Technology license fees	$	6,519,286	$	996,578
Software and system design costs		3,167,366		2,073,752
Technology know-how		49,500		103,500
Bond issuance costs		45,908		33,091
Other		10,430		32,802

	$	9,792,490	$	3,239,723

9. BONDS

	2002		2001
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	$	4,000,000	$	4,000,000
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		5,000,000		10,000,000

(Forward)

	2002		2001
Issued December 4 to 15, 2000 and payable in December 2005 and 2007 in two equal payments, 5.25% and 5.36% annual interest payable annually, respectively	$	15,000,000	$	15,000,000
Issued January 10 to 24, 2002 and payable in January 2007, 2009 and 2012 in three equal payments, 2.6%, 2.75% and 3% annual interest payable annually, respectively		15,000,000		—

	$	39,000,000	$	29,000,000

Future principal payments under the Company’s bonds arrangements as of December 31, 2002 are as follows:

Year of Repayment	Amount
2003	$	4,000,000
2004		5,000,000
2005		10,500,000
2006		—
2007		7,000,000
2008 and thereafter		12,500,000

	$	39,000,000

10. OTHER LONG-TERM PAYABLES

The Company entered into several license arrangements for certain semiconductor patents. The future payments to be paid under the agreements as of December 31, 2002 are as follows:

Year	Amount
2003	$	1,157,299
2004		1,226,805
2005		987,009
2006		469,189
2007		486,566
2008 and thereafter		1,112,096

		5,438,964
Less—current portion		(1,157,299	)

	$	4,281,665

11. PENSION PLAN

The Company has a pension plan for all regular employees that provide benefits based on length of service and average monthly salary for the six month period prior to retirement.

The Company contributes an amount equal to 2% of salaries every month to a Pension Fund (the “Fund”). The Fund is administered by a pension fund monitoring committee (the “Committee”) and deposited in the Committee’s name in the Central Trust of China.

The changes in the fund and accrued pension cost are summarized as follows:

Components of pension cost

	2002			2001
Service cost	$	442,294		$	417,967
Interest cost		121,552			95,920
Projected return on plan assets		(45,102	)		(43,968	)
Amortization		1,681			8,300

Net pension cost	$	520,425		$	478,219

Reconciliation of the fund status of the plan and accrued pension cost

	2002			2001
Benefit obligation
Vested benefit obligation	$	21,294		$	739
Nonvested benefit obligation		1,604,027			1,024,525

Accumulated benefit obligation		1,625,321			1,025,264
Additional benefits based on future salaries		1,300,712			1,407,014

Projected benefit obligation		2,926,033			2,432,278
Fair value of plan assets		(1,014,086	)		(835,583	)

Funded status		1,911,947			1,596,695
Unrecognized net transitional obligation		(149,391	)		(157,691	)
Unrecognized net gain		445,759			415,849
Accrued pension liabilities		2,227			—

Accrued pension cost	$	2,210,542		$	1,854,853

Actuarial assumptions

Discount rated used in determining present values		3.75	%		5.0	%
Future salary increase rate		3.00	%		5.0	%
Expected rate of return on plan assets		3.75	%		5.0	%

d. Contributions to pension fund	$	164,720		$	131,894


e. Payments from pension fund	$	5,360		$	—

12. INCOME TAX BENEFIT (EXPENSE)

A reconciliation of income tax expense on income before income tax at the statutory rate and current income tax expense before tax credits is shown below:

	2002			2001
Income tax expense based on “income before income tax” at statutory rate of 25%	($	6,778,114	)	($	2,664,679	)
Tax-exempt income		2,526,500			1,089,000
Temporary and permanent differences		(452,684	)		(993,679	)

Current income tax expense—before tax credits	($	4,704,298	)	($	2,569,358	)

Income tax benefit (expense) consists of:

	2002			2001
Current income tax expense before tax credits	($	4,704,298	)	($	2,569,358	)
Additional 10% on unappropriated earnings		(162,938	)		(319,000	)
Income tax credits		4,867,236			2,888,358
Other income tax		(12,661	)		(16,318	)

Income tax paid in current year		(12,661	)		(16,318	)
Net change in deferred income tax assets (liabilities)
Investment tax credits		2,510,192			144,925
Temporary differences		(1,072,086	)		(1,874,945	)
Valuation allowance		(6,927,609	)		5,570,797

Income tax benefit (expense)	($	5,502,164	)	$	3,824,459

Deferred income tax assets (liabilities) consist of the following:

	2002			2001
Current
Investment tax credits	$	3,320,000		$	2,347,000

Noncurrent
Investment tax credits	$	23,247,653		$	21,710,461
Temporary differences		(3,565,841	)		(2,493,755	)
Valuation allowance		(9,969,245	)		(3,041,636	)

	$	9,712,567		$	16,175,070

Integrated income tax information:

The balances of the imputation credit account (ICA) as of December 31, 2002 and 2001 were NT$6,650 thousand and NT$9,365 thousand, respectively.

The expected and actual credible ratio for 2002 and 2001 was 0.03% and 0.04%, respectively.

The imputation credit allocated to each shareholder shall be based on the balance in the ICA on the date of distribution of dividends; thus the expected creditable ratio for 2002 may be adjusted according to the difference between the expected and actual imputation credit allowed under the regulation.

The unappropriated retained earnings as of December 31, 2002 and 2001 included earnings generated through December 31, 1997 was NT$0 and NT$4,827 thousand, respectively.

As of December 31, 2002, investment tax credits consisted of the following:

Regulation	Items	Total Creditable Amounts		Remaining Creditable Amounts		Expiry Year
Statute for Upgrading Industries	Purchase of machinery and equipment	$	4,237,050	$	—	2002
			4,767,347		4,767,347	2003
			8,180,857		8,180,857	2004
			3,110,906		3,110,906	2005
			5,335,558		2,775,029	2006

		$	25,631,718	$	18,834,139

Statute for Upgrading Industries	Research and development expenditures	$	562,158	$	—	2002
			671,546		671,546	2003
			1,974,320		1,974,320	2004
			3,111,472		3,111,472	2005
			1,540,000		1,540,000	2006

		$	7,859,496	$	7,297,338

Statute for Upgrading Industries	Personnel training	$	8,822	$	—	2002
			16,104		16,104	2003
			43,264		43,264	2004
			28,886		28,886	2005

		$	97,076	$	88,254

Statute for Upgrading Industries	Reputation setting	$	10,133	$	—	2002
			319		319	2003

		$	10,452	$	319

Statute for Upgrading Industries	Investments in important technology based enterprises	$	2,878	$	—	2002
			5,420		5,420	2003
			201,372		201,372	2004
			138,864		138,864	2005
			1,947		1,947	2006

		$	350,481	$	347,603

Income from the following expansion and construction of the Company’s manufacturing plants is exempt from income tax:

		Tax-Exemption Period
Expansion of Fab 1 and Fab 2—modules A and B, Fab 3 and Fab 4, and construction of Fab 5		1999 to 2002
Construction of Fab 6		2001 to 2004

The tax authorities have examined income tax returns of the Company through 1999. However, the Company is contesting the assessment of the tax authority for 1992, 1993, 1996 and 1997.

13. SHAREHOLDERS’ EQUITY

The Company has issued 369,019 thousand American Depositary Shares (ADS) on the New York Stock Exchange as of December 31, 2002. The number of common shares represented by the ADSs is 1,845,097 thousand shares (one ADS represents five common shares).

Capital surplus can only be used to offset a deficit under the ROC Company Law. However, the components of capital surplus generated from donations (donated capital) and the excess of the issue price over the par value of capital stock (including the stock issued for new capital, mergers, and the purchase of treasury stock) can be transferred to capital as stock dividends.

The Company’s Articles of Incorporation provide that the following shall be appropriated from annual net income (less any deficit):

10% legal reserve;

Special reserve in accordance with relevant laws or regulations;

Remuneration to directors and supervisors and bonus to employees equal to 0.3% and at least 1% of the remainder, respectively. Individuals who receive bonus to employees may include employees of affiliated companies and are approved by the board of directors or a representative of the board of directors.

Dividends to holders of preferred shares equal to a 3.5% annual rate, based on the period which the preferred shares have been outstanding;

The appropriation of the remaining balance after the above shall be decided at the shareholders’ meeting;

Dividends are distributed in cash, shares of common stock or a combination of cash and common stock. Distribution of profits are preferably made in the form of stock dividend. The total of cash dividends paid in any given year should not exceed 50% of total dividends distributed.

These appropriations of net income shall be approved by the shareholders in the following year and given effect in the financial statements of that year.

The bonus to employees and the remuneration to directors and supervisors appropriated from the earnings of 2001 were approved in the shareholders’ meeting on May 7, 2002:

	Amounts		Shares (Thousand)
Bonus to employees—in stock	$	1,070,783	107,078
Remuneration to directors and supervisors—in cash		133,848	—

	$	1,204,631

The shares distributed as a bonus to employees represent 0.64% of the Company’s total outstanding common shares as of December 31, 2001.

The above appropriation of the earnings is consistent with the resolution of the meeting of board of directors dated on March 26, 2002. If the above distributable earnings were both paid in cash, and charged against income of 2001, the basic EPS after income tax for the year ended December 31, 2001 would be decreased from NT$0.83 to NT$0.76.

As of January 16, 2003, the appropriation of the earnings of 2002 has not been yet resolved by the board of directors.

The above information associated with the appropriation of bonus to employees and remuneration to directors and supervisors is available at Market Observation System website.

The aforementioned appropriation for legal reserve shall be made until the reserve equals the aggregate par value of the Company’s outstanding capital stock. The reserve can only be used to offset a deficit; or distribute as stock dividend when the balance is 50% of the aggregate par value of the outstanding capital stock of the Company up to the half amount of the reserve balance.

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), other than the deficit, shall be made from unappropriated retained earnings pursuant to existing regulations promulgated by the Securities and Futures Commission. The special reserve is allowed to be appropriated when the debit balance of such accounts are reversed.

The gain on sales or disposal of property, plant and equipment generated prior to 2000, less the applicable income tax, was reclassified to capital surplus as of each year-end. A gain in the amount of NT$39,282 thousand, less applicable income tax, was recognized and transferred to the capital surplus at the end of 2001 prior to the amended regulations. To comply with the amended regulations, the aforementioned capital surplus was transferred to retained earnings upon the approval of the shareholders’ meeting on May 7, 2002. The shareholders also approved the accumulated capital surplus of NT$127,236 thousand generated from gains prior to 2000 to be transferred to retained earnings, after appropriating the required 10% legal reserve.

Under the Integrated Income Tax System that became effective on January 1, 1998, ROC resident shareholders are allowed a tax credit for the income tax paid by the Company on earnings generated as of January 1, 1998. An Imputation Credit Account (ICA) is maintained by the Company for such income tax and the tax credit allocated to each shareholder.

On June 25, 2002, the SFC approved the Company’s Employee Stock Option Plan (“the Plan”). The Plan provides qualified employees with 100,000 thousand units of option rights with each unit representing 1 common share of stock. The option rights are valid for 10 years and exercisable at certain percentages subsequent to the second anniversary of issuance. Under the terms of the Plan, stock options are granted at an exercise price equal to the closing price of TSMC’s common shares listed on Taiwan stock exchange at the date of grant. As of December 31, 2002, there were 19,726 thousand shares granted at a weighted average price of approximately NT$53.

The Company issued 1,300,000 thousand shares of unlisted Series A—preferred stock to certain investors on November 29, 2000. The following are the rights of the preferred shareholders and other terms and conditions:

Preferred shareholders

are entitled to receive cumulative cash dividends at an annual rate of 3.5%.

are not entitled to receive any common stock dividends (whether declared out of unappropriated earnings or capital surplus).

have priority over the holders of common shares to the assets of the Company available for distribution to shareholders upon liquidation or dissolution, however, the preemptive rights to the assets shall not exceed the issue value of the shares.

have voting rights similar to that of the holders of common shares.

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.

14. TREASURY STOCK (COMMON STOCK)

(Shares in Thousand)

Purpose of Purchase	Beginning Shares	Increase	Decrease	Ending Shares
Year ended December 31, 2002

Reclassification of stocks held by subsidiaries from short/long-term investment to treasury stocks	39,270	3,818	1,087	42,001

On January 1, 2002, the Company reclassified its capital stock held by its subsidiaries with book value of NT$2,115,695 thousand from long-term investments to treasury stock. Proceeds from the sale of treasury stock for the year ended December 31, 2002 were NT$96,501 thousand. As of December 31, 2002, the book value and market value of the treasury stock was NT$1,923,492 thousand and NT$2,048,164 thousand, respectively. Capital stock held by a subsidiary as an investment is recorded as treasury stock with the holder having the same rights as other common shareholders.

15. EARNINGS PER SHARE

Earnings per share (EPS) is computed as follows:

	Amounts (Numerator)						Share (Denominator) (Thousand)	EPS (Dollars)
	Before Income Tax			After Income Tax			Share (Denominator) (Thousand)	Before Income Tax		After Income Tax
December 31, 2002
Income	$	27,112,455		$	21,610,291
Less—preferred stock dividends		(455,000	)		(455,000	)

Basic earnings per share
Income available to common shareholders	$	26,657,455		$	21,155,291		18,580,700	$	1.43	$	1.14

Diluted earnings per share
Income available to common shareholders	$	26,657,455		$	21,155,291		18,580,700	$	1.43	$	1.14

December 31, 2001
Income	$	10,658,715		$	14,483,174
Less—preferred stock dividends		(455,000	)		(455,000	)

Basic earnings per share
Income available to common shareholders	$	10,203,715		$	14,028,174		18,622,887	$	0.55	$	0.75

Diluted earnings per share
Income available to common shareholders	$	10,203,715		$	14,028,174		18,622,887	$	0.55	$	0.75

The potential common shares from the employee stock option plan (see Note 13) are not included in the denominator of the diluted earning-per-share computation as such shares are not dilutive using the treasury stock method under the Statement of Financial Accounting Standards No. 24, “Earning Per Share”.

The average number of shares outstanding for EPS calculation has been adjusted retroactively for issuance of stock dividends and stock bonuses. The retroactive adjustment caused the basic EPS before income tax and after income tax for the year ended December 31, 2001 to decrease from NT$0.61 and NT$0.83 to NT$0.55 and NT$0.75, respectively.

16. RELATED PARTY TRANSACTIONS

The Company engages in business transactions with the following related parties:

Industrial Technology Research Institute (ITRI); the Chairman of the Company is a director of ITRI

Philips Electronics N.V. (Philips); a major shareholder

Subsidiaries

TSMC—North America

TSMC—Europe

TSMC—Japan

Investees

VIS

SSMC

Indirect subsidiaries

TSMC Technology

WAFERTECH, LLC.

The transactions with the aforementioned parties, in addition to those disclosed in other notes, are summarized as follows:

	2002			2001
	Amount		%	Amount		%
For the years
Sales
TSMC—North America	$	94,433,401	57	$	—	—
Philips and its affiliates		2,909,008	2		2,389,257	2
ITRI		94,409	—		114,546	—
VIS		92,119	—		1,177,094	1
SSMC		7,018	—		48,972	—
WAFERTECH, LLC		1,152	—		3,111	—

	$	97,537,107	59	$	3,732,980	3

Purchase
WAFERTECH, LLC		9,955,154	41		6,797,817	37
VIS		3,469,198	14		3,801,975	22
SSMC		2,751,297	11		42,984	—

	$	16,175,649	66	$	10,642,776	59

Rental expense—ITRI	$	40,401	3	$	161,604	11

Manufacturing expenses
Technical assistance fee—Philips	$	2,849,517	100	$	2,418,276	100

(Forward)

	2002			2001
	Amount		%	Amount			%
Marketing expenses
Commission
TSMC—Japan	$	208,226	23	$	194,696		8
TSMC—Europe		132,086	15		124,384		5
TSMC—North America		—	—		1,028,725	</