Table of Contents
o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2007 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to |
o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Taiwan Semiconductor Manufacturing Company Limited (Translation of Registrant’s Name Into English) | Republic of China (Jurisdiction of Incorporation or Organization) |
Hsinchu Science Park
Hsinchu, Taiwan
Republic of China
(Address of Principal Executive Offices)
Name of Each Exchange | ||
Title of Each Class | on Which Registered | |
Common Shares, par value NT$10.00 each | The New York Stock Exchange, Inc.* |
None
(Title of Class)
None
(Title of Class)
* | Not for trading, but only in connection with the listing on the New York Stock Exchange, Inc. of American Depositary Shares representing such Common Shares |
-i-
Table of Contents
• | the volatility of the semiconductor and microelectronics industry; | ||
• | overcapacity in the semiconductor industry; | ||
• | the increased competition from other companies and our ability to retain and increase our market share; | ||
• | our ability to develop new technologies successfully and remain a technological leader; | ||
• | our ability to maintain control over expansion and facility modifications; | ||
• | our ability to generate growth and profitability; | ||
• | our ability to hire and maintain qualified personnel; | ||
• | our ability to acquire required equipment and supplies necessary to meet business needs; | ||
• | our reliance on certain major customers; | ||
• | the political stability of our local region; and | ||
• | general local and global economic conditions. |
Table of Contents
ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS |
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
ITEM 3. | KEY INFORMATION |
Year ended and as of December 31, | ||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2007 | |||||||||||||||||||
NT$ | NT$ | NT$ | NT$ | NT$ | US$ | |||||||||||||||||||
(in millions, except for percentages, | ||||||||||||||||||||||||
earnings per share and per ADS, and operating data) | ||||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||
R.O.C. GAAP | ||||||||||||||||||||||||
Net sales | 202,997 | 257,213 | 266,565 | 317,407 | 322,630 | 9,948 | ||||||||||||||||||
Cost of sales | (128,113 | ) | (141,394 | ) | (148,362 | ) | (161,597 | ) | (180,280 | ) | (5,559 | ) | ||||||||||||
Gross profit | 74,884 | 115,819 | 118,203 | 155,810 | 142,350 | 4,389 | ||||||||||||||||||
Operating expenses | (23,583 | ) | (27,337 | ) | (27,234 | ) | (28,545 | ) | (30,628 | ) | (944 | ) | ||||||||||||
Income from operations | 51,301 | 88,482 | 90,969 | 127,265 | 111,722 | 3,445 | ||||||||||||||||||
Non-operating income and gains(1) | 5,669 | 8,581 | 9,399 | 9,705 | 11,934 | 368 | ||||||||||||||||||
Non-operating expenses and losses(1) | (5,791 | ) | (5,097 | ) | (6,105 | ) | (3,608 | ) | (2,014 | ) | (62 | ) | ||||||||||||
Income before income tax and minority interest | 51,179 | 91,966 | 94,263 | 133,362 | 121,642 | 3,751 | ||||||||||||||||||
Income tax benefit (expense) | (3,923 | ) | 363 | (630 | ) | (7,774 | ) | (11,710 | ) | (361 | ) | |||||||||||||
Income before cumulative effect of changes in accounting principles | 47,256 | 92,329 | 93,633 | 125,588 | 109,932 | 3,390 | ||||||||||||||||||
Cumulative effect of changes in accounting principles | — | — | — | 1,607 | — | — | ||||||||||||||||||
Income before minority interest | 47,256 | 92,329 | 93,633 | 127,195 | 109,932 | 3,390 | ||||||||||||||||||
Minority interest in loss (income) of subsidiaries | 3 | (13 | ) | (58 | ) | (185 | ) | (755 | ) | (23 | ) | |||||||||||||
Net income attributable to shareholders of the parent | 47,259 | 92,316 | 93,575 | 127,010 | 109,177 | 3,367 | ||||||||||||||||||
Basic earnings per share(2) | 1.78 | 3.50 | 3.55 | 4.82 | 4.14 | 0.13 | ||||||||||||||||||
Diluted earnings per share(2) | 1.78 | 3.50 | 3.55 | 4.81 | 4.14 | 0.13 | ||||||||||||||||||
Basic earnings per ADS equivalent(2) | 8.89 | 17.49 | 17.76 | 24.08 | 20.72 | 0.64 |
-2-
Table of Contents
Year ended and as of December 31, | ||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2007 | |||||||||||||||||||
NT$ | NT$ | NT$ | NT$ | NT$ | US$ | |||||||||||||||||||
(in millions, except for percentages, | ||||||||||||||||||||||||
earnings per share and per ADS, and operating data) | ||||||||||||||||||||||||
Diluted earnings per ADS equivalent(2) | 8.89 | 17.49 | 17.75 | 24.06 | 20.70 | 0.64 | ||||||||||||||||||
Basic weighted average shares outstanding(2) | 26,470 | 26,391 | 26,349 | 26,375 | 26,347 | 26,347 | ||||||||||||||||||
Diluted weighted average shares outstanding(2) | 26,479 | 26,396 | 26,360 | 26,399 | 26,368 | 26,368 | ||||||||||||||||||
U.S. GAAP | ||||||||||||||||||||||||
Net sales | 203,600 | 260,035 | 267,028 | 317,979 | 323,221 | 9,967 | ||||||||||||||||||
Cost of sales(3) | (133,493 | ) | (154,785 | ) | (161,808 | ) | (179,175 | ) | (202,046 | ) | (6,230 | ) | ||||||||||||
Operating expenses(3) | (27,369 | ) | (32,191 | ) | (32,764 | ) | (37,050 | ) | (44,775 | ) | (1,381 | ) | ||||||||||||
Income from operations | 42,738 | 73,059 | 72,456 | 101,754 | 76,400 | 2,356 | ||||||||||||||||||
Income before income tax and minority interest | 42,441 | 76,838 | 75,983 | 106,647 | 85,973 | 2,651 | ||||||||||||||||||
Income tax expense | (3,881 | ) | (508 | ) | (483 | ) | (10,954 | ) | (14,012 | ) | (432 | ) | ||||||||||||
Cumulative effect of changes in accounting principles | — | — | — | 38 | — | — | ||||||||||||||||||
Net income | 38,661 | 76,253 | 75,418 | 95,711 | 71,658 | 2,210 | ||||||||||||||||||
Cumulative preferred dividends | (184 | ) | — | — | — | — | — | |||||||||||||||||
Income attributable to common shareholders | 38,477 | 76,253 | 75,418 | 95,711 | 71,658 | 2,210 | ||||||||||||||||||
Basic earnings per share(4) | 1.54 | 3.03 | 2.97 | 3.72 | 2.74 | 0.08 | ||||||||||||||||||
Diluted earnings per share(4) | 1.54 | 3.03 | 2.96 | 3.71 | 2.74 | 0.08 | ||||||||||||||||||
Basic earnings per ADS equivalent(4) | 7.70 | 15.15 | 14.83 | 18.58 | 13.70 | 0.42 | ||||||||||||||||||
Diluted earnings per ADS equivalent(4) | 7.70 | 15.15 | 14.82 | 18.56 | 13.69 | 0.42 | ||||||||||||||||||
Basic weighted average shares outstanding(4) | 24,971 | 25,170 | 25,434 | 25,757 | 26,149 | 26,149 | ||||||||||||||||||
Diluted weighted average shares outstanding(4) | 24,981 | 25,174 | 25,445 | 25,778 | 26,170 | 26,170 | ||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||
R.O.C. GAAP | ||||||||||||||||||||||||
Working capital(1) (5) | 136,121 | 120,574 | 177,179 | 213,457 | 201,116 | 6,202 | ||||||||||||||||||
Long-term investments(1) | 10,748 | 38,058 | 42,383 | 53,895 | 36,461 | 1,124 | ||||||||||||||||||
Properties | 211,854 | 258,911 | 244,823 | 254,094 | 260,252 | 8,025 | ||||||||||||||||||
Goodwill | 8,721 | 7,116 | 6,011 | 5,985 | 5,988 | 185 | ||||||||||||||||||
Total assets | 407,401 | 499,454 | 519,510 | 587,485 | 570,865 | 17,603 | ||||||||||||||||||
Long term bank borrowing | 8,800 | 1,915 | 663 | 654 | 1,722 | 53 | ||||||||||||||||||
Long-term bonds payable | 30,000 | 19,500 | 19,500 | 12,500 | 12,500 | 385 | ||||||||||||||||||
Guaranty deposit-in and other liabilities(5)(6) | 8,876 | 15,079 | 17,986 | 18,333 | 17,251 | 532 | ||||||||||||||||||
Total liabilities | 78,098 | 100,413 | 73,271 | 78,347 | 80,179 | 2,472 | ||||||||||||||||||
Capital stock | 202,666 | 232,520 | 247,300 | 258,297 | 264,271 | 8,149 | ||||||||||||||||||
Cash dividend on common shares | — | 12,160 | 46,504 | 61,825 | 77,489 | 2,389 | ||||||||||||||||||
Shareholders’ equity attributable to shareholders of the parent | 329,214 | 398,965 | 445,631 | 507,981 | 487,092 | 15,020 | ||||||||||||||||||
Minority interest in subsidiaries | 89 | 76 | 608 | 1,157 | 3,594 | 111 | ||||||||||||||||||
U.S. GAAP | ||||||||||||||||||||||||
Goodwill | 47,287 | 46,757 | 46,993 | 46,940 | 46,926 | 1,447 | ||||||||||||||||||
Total assets | 439,853 | 536,286 | 558,919 | 626,108 | 610,843 | 18,836 | ||||||||||||||||||
Total liabilities | 81,977 | 108,416 | 80,962 | 92,549 | 94,021 | 2,899 | ||||||||||||||||||
Capital Stock | 202,666 | 232,520 | 247,300 | 258,297 | 264,271 | 8,149 | ||||||||||||||||||
Mandatory redeemable preferred stock | — | — | — | — | — | — | ||||||||||||||||||
Shareholders’ equity attributable to common shareholders of the parent | 357,173 | 427,125 | 477,297 | 532,403 | 513,228 | 15,826 | ||||||||||||||||||
Minority interest in subsidiaries | 703 | 745 | 660 | 1,156 | 3,594 | 111 |
-3-
Table of Contents
Year ended and as of December 31, | ||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2007 | 2007 | |||||||||||||||||||
NT$ | NT$ | NT$ | NT$ | NT$ | US$ | |||||||||||||||||||
(in millions, except for percentages, | ||||||||||||||||||||||||
earnings per share and per ADS, and operating data) | ||||||||||||||||||||||||
Other Financial Data: | ||||||||||||||||||||||||
R.O.C. GAAP | ||||||||||||||||||||||||
Gross margin | 37 | % | 45 | % | 44 | % | 49 | % | 44 | % | 44 | % | ||||||||||||
Operating margin | 25 | % | 34 | % | 34 | % | 40 | % | 35 | % | 35 | % | ||||||||||||
Net margin | 23 | % | 36 | % | 35 | % | 40 | % | 34 | % | 34 | % | ||||||||||||
Capital expenditures | 37,871 | 81,095 | 79,879 | 78,737 | 84,001 | 2,590 | ||||||||||||||||||
Depreciation and amortization | 69,161 | 69,819 | 75,649 | 73,715 | 80,005 | 2,467 | ||||||||||||||||||
Cash provided by operating activities(1) | 116,037 | 153,523 | 157,225 | 204,997 | 183,766 | 5,667 | ||||||||||||||||||
Cash used in investing activities(1)(7) | (53,702 | ) | (148,359 | ) | (77,652 | ) | (119,724 | ) | (70,689 | ) | (2,180 | ) | ||||||||||||
Cash used in financing activities(7) | (27,073 | ) | (32,181 | ) | (57,969 | ) | (63,783 | ) | (135,410 | ) | (4,175 | ) | ||||||||||||
Net cash inflow (outflow) | 35,199 | (28,687 | ) | 22,181 | 21,353 | (22,851 | ) | (705 | ) | |||||||||||||||
Operating Data: | ||||||||||||||||||||||||
Wafer (200mm equivalent) shipment(8) | 3,700 | 5,008 | 5,622 | 7,215 | 8,005 | 8,005 | ||||||||||||||||||
Billing Utilization Rate(9) | 92 | % | 105 | % | 94 | % | 102 | % | 93 | %(10) | 93 | %(10) |
(1) | As a result of the adoption of the newly released R.O.C. Statements of Financial Accounting Standards No. 34, “Financial Instruments: Recognition and Measurement” (R.O.C. SFAS No. 34), and R.O.C. Statements of Financial Accounting Standards No. 36, “Financial Instruments: Disclosure and Presentation” (R.O.C. SFAS No. 36), the balances in 2004 and 2005 were reclassified to be consistent with the classification used in our consolidated financial statements for 2006 included herein. Amounts in 2004 reflect the reclassification of NT$2,565 million gains from non-operating expenses and losses to non-operating income and gains, NT$44 million from long-term investments to current investments in marketable financial instruments, and NT$372 million from cash used in investing activities to cash provided by operating activities. Amounts in 2005 reflect the reclassification of NT$2,331 million gains from non-operating expenses and losses to non-operating income and gains, NT$46 million from long-term investments to current investments in marketable financial instruments, and NT$212 million from cash used in investing activities to cash provided by operating activities. Balance in 2003 was not reclassified accordingly. See note 4 to our consolidated financial statements for additional details about these new accounting standards. | |
(2) | Retroactively adjusted for all subsequent stock dividends and employee stock bonuses. | |
(3) | Amounts in 2006 include share-based compensation expenses as a result of the adoption of U.S. Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, effective January 1, 2006. See note 30.i. to our consolidated financial statements for additional details about this new accounting standard. Amounts in 2003 and 2005 reflect the reclassification of NT$1,625 million and NT$159 million, respectively, from net non-operating expenses to operating expenses. Amounts in 2004 reflect the reclassification of NT$232 million from net non-operating income to operating expenses. | |
(4) | Retroactively adjusted for all subsequent stock dividends. | |
(5) | Amounts in 2003 reflect the reclassification of NT$727 million from current liabilities to long-term liabilities. | |
(6) | Consists of other long term payables and total other liabilities. | |
(7) | Amounts in 2003 reflect the reclassification of NT$300 million from cash used in investing activities to cash used in financing activities. | |
(8) | In thousands. | |
(9) | “Billing Utilization Rate” is equal to annual wafer shipment divided by annual capacity. | |
(10) | Capacity includes wafers committed by Vanguard. |
-4-
Table of Contents
NT dollars per U.S. dollar | ||||||||||||||||
Average(1) | High | Low | Period-End | |||||||||||||
2003 | 34.41 | 34.98 | 33.72 | 33.99 | ||||||||||||
2004 | 33.37 | 34.16 | 31.74 | 31.74 | ||||||||||||
2005 | 32.16 | 33.77 | 30.65 | 32.80 | ||||||||||||
2006 | 32.51 | 33.31 | 31.28 | 32.59 | ||||||||||||
2007 | 32.82 | 33.41 | 32.26 | 32.43 | ||||||||||||
October 2007 | 32.55 | 32.61 | 32.39 | 32.39 | ||||||||||||
November 2007 | 32.33 | 32.39 | 32.26 | 32.26 | ||||||||||||
December 2007 | 32.41 | 32.53 | 32.30 | 32.43 | ||||||||||||
January 2008 | 32.36 | 32.49 | 32.15 | 32.15 | ||||||||||||
February 2008 | 31.61 | 32.03 | 30.90 | 30.92 | ||||||||||||
March 2008 | 30.58 | 31.09 | 29.99 | 30.37 | ||||||||||||
April 2008 (through April 14, 2007) | 30.38 | 30.52 | 30.29 | 30.31 |
(1) | Annual averages calculated from month-end rates. |
-5-
Table of Contents
• | our future financial condition, results of operations and cash flow; | ||
• | general market conditions for financing activities by semiconductor companies; and | ||
• | social, economic, financial, political and other conditions in Taiwan and elsewhere. |
-6-
Table of Contents
-7-
Table of Contents
-8-
Table of Contents
-9-
Table of Contents
-10-
Table of Contents
• | The plan’s initial step occurred on March 12, 2007, when Philips sold approximately US$1.75 billion worth of our common shares over the Taiwan Stock Exchange through block trades to a few institutional investors in Taiwan. | ||
• | The plan’s second step was a sale by Philips in a public offering registered with the U.S. Securities and Exchange Commission of approximately US$2.56 billion worth of our common shares in the form of ADSs on May 18, 2007. It is the intention of TSMC and Philips that no further ADS offerings will be conducted in respect of Philips’ shareholding in TSMC. | ||
• | For the third step of the plan, we conducted a share repurchase program from November 14, 2007 to December 31, 2007, in the amount of approximately US$1.5 billion, and subsequently canceled 800 million common shares that had been repurchased. During the same period, Philips also disposed 800 million of our common shares by selling them in the open market. After the completion of this third step, Philips held approximately 5.1% of our total outstanding common shares as of February 29, 2008. | ||
• | Lastly, the plan’s fourth step calls for us to conduct, subject to maintaining our current annual cash dividend per share, additional share repurchase and cancellation programs between 2008 and 2010. Philips has informed us that it intends to tender its remaining equity interest in us at such time. Philips may also consider selling its remaining equity interest in us to specified long-term investors mutually agreeable to Philips and us. |
-11-
Table of Contents
ITEM 4. | INFORMATION ON THE COMPANY |
-12-
Table of Contents
-13-
Table of Contents
Current most | ||||||||||||||||||||||||
advanced technology | ||||||||||||||||||||||||
Year of | for volume | Monthly capacity(3)(4) | ||||||||||||||||||||||
Fab(1) | commencement | production(2) | 2003 | 2004 | 2005 | 2006 | 2007 | |||||||||||||||||
2 | 1990 | 0.45 | 42,977 | 47,584 | 47,584 | 50,506 | 51,685 | |||||||||||||||||
3(5) | 1995 | 0.18 | 71,600 | 83,300 | 83,300 | 89,900 | 90,500 | |||||||||||||||||
5 | 1997 | 0.15 | 37,800 | 42,500 | 42,500 | 51,500 | 55,800 | |||||||||||||||||
6 | 2000 | 0.13 | 63,500 | 73,000 | 73,000 | 83,400 | 94,000 | |||||||||||||||||
7(7) | 1995 | 0.35 | 11,800 | 13,400 | 13,400 | — | — | |||||||||||||||||
8 | 1998 | 0.15 | 63,500 | 76,500 | 76,500 | 83,500 | 89,400 | |||||||||||||||||
10 | 2004 | 0.18 | — | 500 | 15,600 | 32,000 | 31,000 | |||||||||||||||||
11 | 1998 | 0.15 | 30,000 | 32,500 | 33,500 | 35,500 | 35,500 | |||||||||||||||||
12 | 2001 | 0.055 | 31,797 | 60,300 | 106,875 | 131,175 | 160,755 | |||||||||||||||||
14 | 2004 | 0.055 | — | 6,750 | 46,125 | 79,650 | 133,279 | |||||||||||||||||
SSMC(6) | 2000 | 0.18 | 9,600 | 13,400 | 16,700 | 17,700 | 20,700 | |||||||||||||||||
Total | 362,574 | 449,734 | 555,084 | 654,831 | 762,619 |
(1) | Fab 2 produces 150mm wafers. Fabs 3, 5, 6, 8, 10, Fab 11 (WaferTech) and SSMC produce 200mm wafers. Fab 12 and Fab 14 produce 300mm wafers. Fabs 2, 3, 5, 8 and 12 are located in Hsinchu Science Park. Fab 6 and Fab 14 are located in the Tainan Science Park. WaferTech is located in the United States, SSMC is located in Singapore and Fab 10 is located in Shanghai. | |
(2) | In microns, as of year-end. | |
(3) | Estimated capacity in 200mm equivalent wafers as of year-end for the total technology range available for production. Actual capacity during each year will be lower as new production capacity is phased in during the course of the year. | |
(4) | Under an agreement with Vanguard, TSMC is required to use its best commercial efforts to maintain utilization of a fixed amount of reserved capacity and will not increase or decrease the stipulated quantity by more than 5,000 wafers per month. Please see “Item 7. Major Shareholders and Related Party Transaction — Related Party Transactions — Vanguard International Semiconductor Corporation” for a discussion of certain of the Vanguard contract terms. The amounts to be used at Vanguard are not included in our monthly capacity figures. | |
(5) | Fab 4, which commenced operation in 1999 with initial technology of 0.5 micron, was consolidated into Fab 3 during the fourth quarter of 2001. | |
(6) | Represents that portion of the total capacity that we had the option to utilize as of December 31, 2003, December 31, 2004, December 31, 2005, December 31, 2006 and December 31, 2007. This fab commenced production in September 2000. | |
(7) | Fab 7 was decommissioned in June 2006 as we integrated its manufacturing facility as a part of Fab 12’s operation. |
-14-
Table of Contents
• | ramping up production at Fab 12 (Phase III), Fab 14 (Phase II) and Fab 10; | ||
• | Fab 12 and Fab 14 facilities; | ||
• | capacity expansion for mask and back-end operations; and | ||
• | development of process technologies in 45-nanometer and below and other research and development projects. |
Year ended December 31, | ||||||||||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||||||||||
Customer Type | Net Sales | Percentage | Net Sales | Percentage | Net Sales | Percentage | ||||||||||||||||||
(in millions, except percentages) | ||||||||||||||||||||||||
Fabless semiconductor companies/systems companies | NT$ | 187,662 | 70.4 | % | NT$ | 229,168 | 72.2 | % | NT$ | 215,662 | 66.8 | % | ||||||||||||
Integrated device manufacturers | 78,903 | 29.6 | % | 88,239 | 27.8 | % | 106,968 | 33.2 | % | |||||||||||||||
Total | NT$ | 266,565 | 100.0 | % | NT$ | 317,407 | 100.0 | % | NT$ | 322,630 | 100.0 | % |
Year ended December 31, | ||||||||||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||||||||||
Region | Net Sales | Percentage | Net Sales | Percentage | Net Sales | Percentage | ||||||||||||||||||
(in millions, except percentages) | ||||||||||||||||||||||||
North America | NT$ | 205,255 | 77.0 | % | NT$ | 247,895 | 78.1 | % | NT$ | 247,832 | 76.8 | % | ||||||||||||
Asia | 40,785 | 15.3 | % | 43,167 | 13.6 | % | 45,128 | 14.0 | % | |||||||||||||||
Europe | 20,525 | 7.7 | % | 26,345 | 8.3 | % | 29,670 | 9.2 | % | |||||||||||||||
Total | NT$ | 266,565 | 100.0 | % | NT$ | 317,407 | 100.0 | % | NT$ | 322,630 | 100.0 | % |
-15-
Table of Contents
-16-
Table of Contents
Year ended December 31, | ||||||||||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||||||||||
Semiconductor Type | Net Sales | Percentage | Net Sales | Percentage | Net Sales | Percentage | ||||||||||||||||||
(in millions, except percentages) | ||||||||||||||||||||||||
CMOS | ||||||||||||||||||||||||
Logic | NT$199,657 | 74.9 | % | NT$240,278 | 75.7 | % | NT$234,354 | 72.6 | % | |||||||||||||||
Memory | 2,133 | 0.8 | % | 3,174 | 1.0 | % | 5,156 | 1.6 | % | |||||||||||||||
Mixed-Signal(1) | 63,442 | 23.8 | % | 71,734 | 22.6 | % | 80,247 | 24.9 | % | |||||||||||||||
BiCMOS(2) | 1,066 | 0.4 | % | 1,904 | 0.6 | % | 2,517 | 0.8 | % | |||||||||||||||
Others | 267 | 0.1 | % | 317 | 0.1 | % | 356 | 0.1 | % | |||||||||||||||
Total | NT$266,565 | 100.0 | % | NT$317,407 | 100.0 | % | NT$322,630 | 100.0 | % |
(1) | Mixed-signal semiconductors made with the CMOS process. | |
(2) | Mixed-signal and other semiconductors made with the BiCMOS process. |
-17-
Table of Contents
• | firmly established customer-oriented culture, which emphasizes close interaction with our customers on a multifaceted basis, from senior management, sales and marketing, customer service staff to product and line engineers in the fabs and research and development staff; | ||
• | ability to deliver ordered wafers of consistent quality, on time and in the desired quantities; | ||
• | responsiveness to customer’s requirements in terms of engineering change orders and special wafer handling; | ||
• | flexibility in manufacturing processes, order size requirements and design changes, attributable in part to our technical capability and ability to plan and manage effectively many production runs; | ||
• | ability to reduce customer costs through the sharing, to the extent permissible, of ever increasing silicon verification costs through our multi-project wafer service, which combines multiple designs on a single mask set; | ||
• | eFoundry™ service which features real-time on-line information exchange throughout product design, engineering and logistic phases, including WIP (work in progress) performance reports for both in-house and subcontracted activities, for the processes of handling, assembly and final testing, before the products are shipped to our customers; and | ||
• | Virtual fab™, which is a customer service program designed to make our manufacturing services as transparent and easy to deal with for our customers as their own in-house fabs, with well coordinated resource management. The Virtual fab™ provides customers with the benefits of in-house fabs, including confidentiality of proprietary information, quality of service and products, on-time delivery and flexibility in scheduling and capacity. |
-18-
Table of Contents
-19-
Table of Contents
-20-
Table of Contents
ITEM 4A. | UNRESOLVED STAFF COMMENTS |
ITEM 5. | OPERATING AND FINANCIAL REVIEWS AND PROSPECTS |
• | the worldwide demand for semiconductor products; | ||
• | pricing; | ||
• | the worldwide semiconductor production capacity as well as our production capacity; | ||
• | capacity utilization; |
-21-
Table of Contents
• | technology migration; and | ||
• | fluctuation in foreign currency exchange rate. |
Year ended December 31, | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
Percentage of total wafer | Percentage of total wafer | Percentage of total wafer | ||||||||||
Resolution | revenue(1) | revenue(1) | revenue(1) | |||||||||
£65 nanometer | — | — | 6 | % | ||||||||
90 nanometer | 9 | % | 23 | % | 26 | % | ||||||
0.13 micron | 36 | % | 26 | % | 23 | % | ||||||
0.15 micron | 9 | % | 10 | % | 9 | % | ||||||
0.18 micron | 24 | % | 22 | % | 20 | % | ||||||
0.25 micron | 10 | % | 8 | % | 7 | % | ||||||
0.35 micron | 6 | % | 6 | % | 5 | % | ||||||
³0.5 micron | 6 | % | 5 | % | 4 | % | ||||||
Total | 100 | % | 100 | % | 100 | % |
(1) | Percentages represent wafer revenue by technology as a percentage of total revenue from wafer sales, which exclude revenue not associated with wafer sales, such as revenue from testing and masks. Total wafer revenue excludes sales returns and allowances. |
-22-
Table of Contents
-23-
Table of Contents
• | significant under performance relative to historical or projected future operating results; | ||
• | significant changes in the manner of our use of the acquired assets or our overall business strategy; and | ||
• | significant unfavorable industry or economic trends. |
-24-
Table of Contents
• | significant decline in our stock price for a sustained period; and | ||
• | significant decline in our market capitalization relative to net book value. |
-25-
Table of Contents
For the year ended December 31, | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of sales | (55.7 | )% | (50.9 | )% | (55.9 | )% | ||||||
Gross profit | 44.3 | % | 49.1 | % | 44.1 | % | ||||||
Operating expenses | ||||||||||||
General and administrative | (3.4 | )% | (2.7 | )% | (2.8 | )% | ||||||
Sales and marketing | (1.6 | )% | (1.2 | )% | (1.2 | )% | ||||||
Research and development | (5.3 | )% | (5.1 | )% | (5.5 | )% | ||||||
Total operating expenses | (10.3 | )% | (9.0 | )% | (9.5 | )% | ||||||
Income from operations | 34.0 | % | 40.1 | % | 34.6 | % | ||||||
Non-operating income and gains | 3.5 | % | 3.0 | % | 3.7 | % | ||||||
Non-operating expenses and losses | (2.2 | )% | (1.1 | )% | (0.6 | )% | ||||||
Income before income tax and minority interest | 35.3 | % | 42.0 | % | 37.7 | % | ||||||
Income tax benefit (expense) | (0.2 | )% | (2.4 | )% | (3.6 | )% | ||||||
Income before cumulative effect of changes in accounting principles | 35.1 | % | 39.6 | % | 34.1 | % | ||||||
Cumulative effect of changes in accounting principles | — | 0.5 | % | — | ||||||||
Income before minority interest | 35.1 | % | 40.1 | % | 34.1 | % | ||||||
Minority interest in loss (income) of subsidiaries | 0.0 | % | (0.1 | )% | (0.3 | )% | ||||||
Net income | 35.1 | % | 40.0 | % | 33.8 | % |
For the Year Ended December 31, | ||||||||||||||||||||||||
% Change | % Change | |||||||||||||||||||||||
2005 | 2006 | from 2005 | 2007 | from 2006 | ||||||||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Net sales | 266,565 | 317,407 | 19.1 | % | 322,630 | 9,948 | 1.6 | % | ||||||||||||||||
Cost of sales | (148,362 | ) | (161,597 | ) | 8.9 | % | (180,280 | ) | (5,559 | ) | 11.6 | % | ||||||||||||
Gross profit | 118,203 | 155,810 | 31.8 | % | 142,350 | 4,389 | (8.6 | )% | ||||||||||||||||
Gross margin percentage | 44.3 | % | 49.1 | % | — | 44.1 | % | 44.1 | % | — |
-26-
Table of Contents
For the Year Ended December 31 | ||||||||||||||||||||||||
% Change | % Change | |||||||||||||||||||||||
2005 | 2006 | from 2005 | 2007 | from 2006 | ||||||||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Research and development | 14,017 | 16,076 | 14.7 | % | 17,946 | 553 | 11.6 | % | ||||||||||||||||
General and administrative | 9,085 | 8,717 | (4.1 | )% | 8,964 | 276 | 2.8 | % | ||||||||||||||||
Sales and marketing | 4,132 | 3,752 | (9.2 | )% | 3,718 | 115 | (0.9 | )% | ||||||||||||||||
Total operating expenses | 27,234 | 28,545 | 4.8 | % | 30,628 | 944 | 7.3 | % | ||||||||||||||||
Percentage of net sales | 10.3 | % | 9.0 | % | — | 9.5 | % | 9.5 | % | — | ||||||||||||||
Income from operations | 90,969 | 127,265 | 39.9 | % | 111,722 | 3,445 | (12.2 | )% | ||||||||||||||||
Operating Margin | 34.0 | % | 40.1 | % | — | 34.6 | % | 34.6 | % | — |
-27-
Table of Contents
For the Year Ended December 31 | ||||||||||||||||||||||||
% Change | % Change | |||||||||||||||||||||||
2005(1) | 2006(1) | from 2005 | 2007 | from 2006 | ||||||||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Non-operating income and gains | 9,399 | 9,705 | 3.3 | % | 11,934 | 368 | 23.0 | % | ||||||||||||||||
Non-operating expenses and losses | (6,105 | ) | (3,608 | ) | (40.9 | )% | (2,014 | ) | (62 | ) | (44.2 | )% | ||||||||||||
Net non-operating income (expenses) | 3,294 | 6,097 | 85.1 | % | 9,920 | 306 | 62.7 | % | ||||||||||||||||
(1) | As a result of the adoption of the newly released R.O.C. SFAS No. 34 and R.O.C. SFAS No. 36, the amounts for the fiscal year ended December 31, 2005 were reclassified for comparison purposes. Such reclassifications resulted in a change of non-operating income and gains from NT$7,068 million to NT$9,399 million for the year ended December 31, 2005, and in a change of non-operating expenses and losses from NT$3,773 million to NT$6,105 million for the year ended December 31, 2005. See note 4 to our consolidated financial statements for additional details about these new accounting standards. |
-28-
Table of Contents
For the Year Ended December 31 | ||||||||||||||||||||||||
% Change | % Change | |||||||||||||||||||||||
2005 | 2006 | from 2005 | 2007 | from 2006 | ||||||||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||
Income tax benefit (expense) | (630 | ) | (7,774 | ) | 1,132.8 | % | (11,710 | ) | (361 | ) | 50.6 | % | ||||||||||||
Cumulative effect of changes in accounting principles | — | 1,607 | —(1) | % | — | — | —(1) | % | ||||||||||||||||
Net income | 93,575 | 127,010 | 35.7 | % | 109,177 | 3,367 | (14.0 | )% | ||||||||||||||||
Net margin | 35.1 | % | 40.0 | % | — | 33.8 | % | 33.8 | % | — |
(1) | Not meaningful. |
-29-
Table of Contents
For the year ended December 31, | ||||||||||||||||
2005(1) | 2006 | 2007 | ||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Net cash provided by operating activities | 157,225 | 204,997 | 183,766 | 5,667 | ||||||||||||
Net cash used in investing activities | (77,652 | ) | (119,724 | ) | (70,689 | ) | (2,180 | ) | ||||||||
Net cash used in financing activities | (57,969 | ) | (63,783 | ) | (135,410 | ) | (4,175 | ) | ||||||||
Net increase/(decrease) in cash | 22,181 | 21,353 | (22,851 | ) | (705 | ) |
(1) | As a result of the adoption of the newly released R.O.C. SFAS No. 34 and SFAS No. 36, the amounts for the fiscal year ended December 31, 2005 were reclassified for comparison purposes. Such reclassifications resulted in a change of net cash provided by operating activities from NT$157,013 million to NT$157,225 million for the year ended December 31, 2005, and in a change of net cash used in investing activities from NT$77,440 million to NT$77,652 million for the year ended December 31, 2005. See note 4 to our consolidated financial statements for additional details about these new accounting standards. |
-30-
Table of Contents
• | ramping up production at Fab 12 (Phases II and III), Fab 14 (Phase II) and Fab 10; | ||
• | capacity expansion for mask operations; | ||
• | developing process technologies which include 32- and 45-nanometer nodes; and | ||
• | other research and development projects. |
-31-
Table of Contents
Long-term debt | ||||
NT$ | ||||
(in millions) | ||||
During 2008 | 281 | |||
During 2009 | 8,302 | |||
During 2010 | 947 | |||
During 2011 | 221 | |||
During 2012 and thereafter | 4,752 |
Payments Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Contractual Obligations | Total | 1 Year | 1-3 Years | 4-5 Years | 5 Years | |||||||||||||||
(in NT$ millions) | ||||||||||||||||||||
Long-Term Debt(1) | 14,503 | 281 | 9,249 | 4,872 | 101 | |||||||||||||||
Capital Lease Obligations(2) | 726 | 4 | 83 | 81 | 558 | |||||||||||||||
Operating Leases(3) | 4,463 | 557 | 1,004 | 623 | 2,279 | |||||||||||||||
Other Payments(4) | 13,083 | 3,673 | 1,080 | 422 | 7,908 | |||||||||||||||
Capital Purchase or other Purchase Obligations(5) | 36,831 | 35,736 | 1,092 | 3 | — | |||||||||||||||
Total Contractual Cash Obligations(6) | 69,606 | 40,251 | 12,508 | 6,001 | 10,846 |
(1) | Includes loan payable and bond payable but excludes relevant interest payments. | |
(2) | Capital lease obligations represent our commitment for leases of property, which are described in note 13 to our consolidated financial statements. | |
(3) | Operating lease obligations are described in note 27 to our consolidated financial statements. | |
(4) | Includes royalty and license payments, as well as payables for acquisition of property, plant and equipment, but excludes payments that vary based upon our net sales of certain products and our sales volume of certain other products. | |
(5) | Represents commitments for construction or purchase of equipment, raw material and other property or services. These commitments are not recorded on our balance sheet as of December 31, 2007, as we have not received related goods or taken title of the property. | |
(6) | Minimum pension funding requirement is not included since such amounts have not been determined. We made pension contributions of approximately NT$209 million in 2007 and we estimate that we will contribute approximately NT$204 million to the pension fund in 2008. See note 18 to our consolidated financial statements for additional details regarding our pension plan. |
-32-
Table of Contents
Year ended and as of December 31, | ||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||
(in NT$ millions) | ||||||||||||||||
Net income in accordance with: | ||||||||||||||||
R.O.C. GAAP | 93,575 | 127,010 | 109,177 | 3,367 | ||||||||||||
U.S. GAAP | 75,418 | 95,711 | 71,658 | 2,210 | ||||||||||||
Shareholders’ equity attributable to the shareholders of the parent in accordance with: | ||||||||||||||||
R.O.C. GAAP | 445,631 | 507,981 | 487,092 | 15,020 | ||||||||||||
U.S. GAAP | 477,297 | 532,403 | 513,228 | 15,826 |
-33-
Table of Contents
-34-
Table of Contents
-35-
Table of Contents
ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
-36-
Table of Contents
Years | ||||||||||
Term | with our | |||||||||
Name | Position with our company | Expires | company | |||||||
Morris Chang | Chairman | 2009 | 21 | |||||||
F.C. Tseng | Vice Chairman | 2009 | 21 | |||||||
Stan Shih | Director | 2009 | 8 | |||||||
Chintay Shih | Director (Representative of the National Development Fund) | 2009 | 11 | |||||||
Sir Peter Leahy Bonfield | Director | 2009 | 6 | |||||||
Lester Carl Thurow | Director | 2009 | 6 | |||||||
Carleton (Carly) S. Fiorina | Director | 2009 | 2 | |||||||
Rick Tsai | Director, President & Chief Executive Officer | 2009 | 18 | |||||||
Stephen Tso | Senior Vice President & Chief Information Officer | — | 11 | |||||||
Kenneth Kin(1) | Senior Vice President of Special Projects | — | 7 | |||||||
Mark Liu | Senior Vice President of Advanced Technology Business | — | 14 | |||||||
C.C. Wei | Senior Vice President of Mainstream Technology Business | — | 10 | |||||||
Richard Thurston | Vice President & General Counsel | — | 6 | |||||||
M.C. Tzeng | Vice President of Mainstream Technology Business | — | 21 | |||||||
Lora Ho | Vice President, Chief Financial Officer and Spokesperson | — | 9 | |||||||
P.H. Chang | Vice President of Corporate Human Resources | — | 8 | |||||||
W.J. Lo | Vice President of Research and Development | — | 4 | |||||||
Jason Chen | Vice President of Worldwide Sales and Marketing | — | 3 | |||||||
Fu-Chieh Hsu | Vice President of Design and Technology Platform | — | 2 | |||||||
Jack Sun | Vice President of Research and Development | — | 11 | |||||||
Y.P. Chin | Vice President of Advanced Technology Business | — | 21 | |||||||
N.S. Tsai | Vice President of Quality and Reliability | — | 19 |
(1) | On February 29, 2008, TSMC announced that it has approved the request of Dr. Kenneth Kin, former Senior Vice President of Worldwide Sales and Service, to retire at the end of this year. |
-37-
Table of Contents
-38-
Table of Contents
-39-
Table of Contents
Percentage of | ||||||||||||
Total | Number of | |||||||||||
Outstanding | Common Shares | |||||||||||
Number of Common | Common | Underlying | ||||||||||
Name of Shareholders | Shares Owned(2) | Shares | Stock Options(3) | |||||||||
Morris Chang, Chairman | 116,637,208 | 0.46 | % | 805,873 | ||||||||
F.C. Tseng, Vice Chairman | 36,602,589 | 0.14 | % | — | ||||||||
Stan Shih, Director | 1,465,534 | 0.01 | % | — | ||||||||
Chintay Shih, Director(1) | 1,637,228,303 | 6.39 | % | — | ||||||||
Lester Carl Thurow, Director | 0 | 0.00 | % | — | ||||||||
Sir Peter Leahy Bonfield, Director | 0 | 0.00 | % | — | ||||||||
Carleton (Carly) S. Fiorina, Director | 0 | 0.00 | % | — | ||||||||
Rick Tsai, Director, President & CEO | 31,261,025 | 0.12 | % | 805,873 | ||||||||
Stephen Tso, Senior Vice President & Chief Information Officer | 14,262,599 | 0.06 | % | 408,885 | ||||||||
Kenneth Kin, Senior Vice President | 6,030,912 | 0.02 | % | 391,112 | ||||||||
Mark Liu, Senior Vice President | 12,181,439 | 0.05 | % | 805,873 | ||||||||
C.C. Wei, Senior Vice President | 8,044,114 | 0.03 | % | 269,959 | ||||||||
Richard Thurston, Vice President & General Counsel | 3,360,833 | 0.01 | % | 85,517 | ||||||||
M.C. Tzeng, Vice President | 7,057,682 | 0.03 | % | — | ||||||||
Lora Ho, Vice President & CFO & Spokesperson | 5,681,674 | 0.02 | % | — | ||||||||
P.H. Chang, Vice President | 3,775,456 | 0.01 | % | — | ||||||||
W.J. Lo, Vice President | 2,095,378 | 0.01 | % | — | ||||||||
Jason Chen, Vice President | 1,782,270 | 0.01 | % | — | ||||||||
Fu-Chieh Hsu, Vice President | 1,350,874 | 0.01 | % | — | ||||||||
Jack Sun, Vice President | 5,070,698 | 0.02 | % | 124,542 | ||||||||
Y.P. Chin, Vice President | 5,694,537 | 0.02 | % | — | ||||||||
N.S. Tsai, Vice President | 1,969,556 | 0.01 | % | — |
(1) | Represents shares held by the National Development Fund of the Executive Yuan. | |
(2) | Except for the number of shares held by the National Development Fund of the Executive Yuan, the disclosed number of shares owned by the directors and executive officers does not include any common shares held in ADS form by such individuals as such individual ownership of ADSs has not been disclosed to shareholders or otherwise made public and each of these individuals owns less than one percent of all common shares outstanding as of February 29, 2008. | |
(3) | The stock options granted to our officers on March 7, 2003 under the 2002 Stock Option Plan all have an adjusted exercise price of NT$25.9 and all will expire on March 6, 2013 if not previously exercised. The options were granted to certain of our officers as a result of their voluntary selection to exchange part of their profit sharing to stock options. The number of common shares underlying stock options include additional shares due to stock dividends distributed in 2004, 2005, 2006 and 2007. |
-40-
Table of Contents
-41-
Table of Contents
As of December 31, | ||||||||||||
Function | 2005 | 2006 | 2007 | |||||||||
Managers | 2,077 | 2,313 | 2,520 | |||||||||
Professionals | 7,769 | 8,222 | 8,814 | |||||||||
Assistant Engineers/Clericals | 950 | 893 | 844 | |||||||||
Technicians | 10,700 | 10,818 | 10,842 | |||||||||
Total | 21,496 | 22,246 | 23,020 |
As of December 31, | ||||||||||||
Location of Facility and Principal Offices | 2005 | 2006 | 2007 | |||||||||
Hsinchu Science Park, Taiwan | 14,869 | 14,772 | 14,892 | |||||||||
Tainan Science Park, Taiwan | 4,543 | 5,035 | 5,360 | |||||||||
China | 860 | 1,180 | 1,457 | |||||||||
North America | 1,171 | 1,204 | 1,255 | |||||||||
Europe | 23 | 26 | 27 | |||||||||
Japan | 30 | 28 | 27 | |||||||||
Korea | 0 | 1 | 2 | |||||||||
Total | 21,496 | 22,246 | 23,020 |
-42-
Table of Contents
Common Shares Issuable under | ||||||||||||
2002 Employee Stock | ||||||||||||
Option Plan (December 31, | 2003 Employee Stock | 2004 Employee Stock | ||||||||||
Name | 2006 vesting) | Option Plan | Option Plan | |||||||||
Morris Chang | 805,873 | — | — | |||||||||
Rick Tsai | 805,873 | — | — | |||||||||
Mark Liu | 805,873 | — | — | |||||||||
Stephen Tso | 408,885 | — | — | |||||||||
Kenneth Kin | 391,112 | — | — | |||||||||
C.C. Wei | 269,959 | — | — | |||||||||
Jack Sun | 124,542 | — | — | |||||||||
Richard Thurston | 85,517 | — | — |
ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
-43-
Table of Contents
Percentage of Total | ||||||||
Number of Common | Outstanding Common | |||||||
Names of Shareholders | Shares Owned | Shares | ||||||
National Development Fund(1) | 1,637,228,303 | 6.4 | % | |||||
Capital Research Global Investors(2) | 1,365,596,200 | 5.2 | % | |||||
Philips | 1,311,490,224 | 5.1 | % | |||||
Directors and executive officers as a group(3) | 264,324,378 | 1.0 | % |
(1) | Excludes any common shares that may be owned by other funds controlled by the R.O.C. government. The National Development Fund was previously named Development Fund. One of our eight directors is a representative of the National Development Fund. | |
(2) | According to the Schedule 13G of Capital Research Global Investors (“CRGI”) filed with the Securities and Exchange Commission on February 11, 2008, CRGI beneficially owned 1,365,596,200 common shares as of February 11, 2008. We do not have further information with respect to CRGI’s ownership in us subsequent to CRGI’s Schedule 13G filed on February 11, 2008. | |
(3) | Excludes ownership of the National Development Fund. |
• | A technical cooperation agreement signed in 1987 between ITRI and TSMC whereby ITRI granted TSMC the license to use its metal-oxide-semiconductor technology and related patents and copyrights to manufacture silicon MOS wafers and agreed to provide certain associated assets and relevant technical assistance and information to us, in exchange for a limited license from us for certain improvements and refinements related to earlier research and development protects. The agreement also provides that the R.O.C. Ministry of Economic Affairs, or the entity designated by the R.O.C. Ministry of Economic Affairs, has an option to purchase up to 35% of certain of our capacity as agreed in the agreement on favorable terms and conditions, provided that the exercise of such option would not prejudice TSMC’s outstanding customer commitments. The original term of this agreement was for five years beginning January 1, 1987, is to be automatically renewed for successive periods of five years unless otherwise terminated by either party with one year prior notice. The agreement was automatically renewed in 1992, 1997, 2002, and on January 1, 2007. |
-44-
Table of Contents
• | A patent license agreement dated September 29, 2005 exists between ITRI and TSMC whereby ITRI grants TSMC the exclusive license to use certain patents in connection with semiconductor technology in exchange for a fixed royalty payment. The term of this agreement is from the effectiveness of the agreement to the end of the patent term for each of the patents concerned. | ||
• | From time to time, we provide foundry services to ITRI. In 2005 and 2006, we had total sales to ITRI of NT$90 million and NT$42 million, respectively, representing less than 1% of our net sales in each year. |
• | On December 31, 1986, we entered into a technology cooperation agreement with Philips pursuant to which Philips initially had provided us with certain process and technical information for the production of unencapsulated MOS integrated circuits in wafer form. This agreement was amended on May 12, 1997 and extended for ten years. The agreement was further modified on June 20, 2004 and extended to December 31, 2008 (the “Technology Cooperation Agreement”). Under the June 20, 2004 amendments, which took retroactive effect on January 1, 2004, we agreed with Philips to cross license certain patents to each other on a non-exclusive, royalty-free basis. In addition, Philips obtained coverage for TSMC under certain of its patent cross licensing arrangements with other companies (as identified in the agreement) and TSMC has been paying the agreed upon consideration. The Technology Cooperation Agreement will not be automatically renewed upon expiration. However, the patent cross license arrangement between TSMC and Philips will survive the expiration of Technical Cooperation Agreement and had been assigned by Philips to NXP. | ||
• | In 2005 and 2006, we had total sales to Philips and its affiliates of NT$3,299 million and NT$4,025 million, representing 1.2% and 1.3% of our total net sales in 2005 and 2006, respectively. Subsequent to the sale by Philips in September 2006 of an 80.1% equity interest in Philips Semiconductors to a consortium of private equity investors, Philips Semiconductors was renamed as NXP and ceased to be a related party of us. | ||
• | Effective January 1, 2006, we entered into a Joint Technology Cooperation Agreement with Philips, Freescale Semiconductor, Inc. and ST Microelectronics to jointly develop 45-nanometers and beyond advanced CMOS Logic and e-DRAM technologies. We will contribute process technologies and share a portion of the costs associated with this joint development project. This agreement was terminated on January 26, 2008. |
-45-
Table of Contents
-46-
Table of Contents
ITEM 8. | FINANCIAL INFORMATION |
-47-
Table of Contents
Cash Dividends | Stock dividends | Total shares issued | Outstanding common | |||||||||||||
Per Share | Per 100 shares | as stock dividends | shares at year end | |||||||||||||
NT$ | ||||||||||||||||
2003 | — | 8.00000 | 1,489,830,940 | 20,266,618,984 | ||||||||||||
2004 | 0.6037 | 14.08668 | 2,837,326,658 | 23,251,963,693 | ||||||||||||
2005 | 1.9998 | 4.99971 | 1,162,602,422 | 24,730,024,647 | ||||||||||||
2006 | 2.4991 | 2.99903 | (1) | 741,900,740 | (1) | 25,829,687,846 | ||||||||||
2007 | 2.9995 | 0.49991 | (2) | 129,148,440 | (2) | 25,627,103,715 |
(1) | 50% of the stock dividends were paid out of retained earnings and 50% were from capitalization of capital surplus. | |
(2) | 40% of the stock dividends were paid out of retained earnings and 60% were from capitalization of capital surplus. |
ITEM 9. | THE OFFER AND LISTING |
-48-
Table of Contents
Taiwan Stock Exchange | New York Stock Exchange(1) | |||||||||||||||||||||||
Closing price per | ||||||||||||||||||||||||
common share(2) | Closing price per ADS(2) | |||||||||||||||||||||||
Average daily | ||||||||||||||||||||||||
Trading volume | Average daily | |||||||||||||||||||||||
(in thousands of | Trading volume (in | |||||||||||||||||||||||
High | Low | shares)(2) | High | Low | thousands of ADSs)(2) | |||||||||||||||||||
(NT$) | (NT$) | (US$) | (US$) | |||||||||||||||||||||
2003 | 50.41 | 26.24 | 57,902 | 9.46 | 4.34 | 9,071 | ||||||||||||||||||
2004 | 48.29 | 33.30 | 57,467 | 8.52 | 5.57 | 7,673 | ||||||||||||||||||
2005 | 56.57 | 38.10 | 54,382 | 9.10 | 6.44 | 8,204 | ||||||||||||||||||
2006 | 64.63 | 49.49 | 42,198 | 10.75 | 7.64 | 9,711 | ||||||||||||||||||
First Quarter | 60.29 | 52.23 | 44,385 | 9.86 | 8.47 | 9,706 | ||||||||||||||||||
Second Quarter | 61.88 | 49.49 | 49,368 | 10.16 | 7.64 | 9,513 | ||||||||||||||||||
Third Quarter | 57.96 | 50.35 | 37,099 | 9.53 | 7.69 | 93,498 | ||||||||||||||||||
Fourth Quarter | 64.63 | 55.68 | 38,320 | 10.75 | 9.09 | 10,275 | ||||||||||||||||||
2007 | ||||||||||||||||||||||||
First Quarter | 67.77 | 60.25 | 64,727 | 11.10 | 9.72 | 12,712 | ||||||||||||||||||
Second Quarter | 70.9 | 63.29 | 53,964 | 11.23 | 9.83 | 15,178 | ||||||||||||||||||
Third Quarter | 73.0 | 59.0 | 60,868 | 11.74 | 9.11 | 14,674 | ||||||||||||||||||
Fourth Quarter | 65.0 | 58.5 | 67,916 | 10.78 | 9.27 | 12,835 | ||||||||||||||||||
October | 65.0 | 60.6 | 58,502 | 10.78 | 9.71 | 15,121 | ||||||||||||||||||
November | 64.2 | 58.5 | 64,796 | 10.50 | 9.27 | 13,535 | ||||||||||||||||||
December | 62.7 | 58.8 | 81,048 | 10.30 | 9.40 | 9,472 | ||||||||||||||||||
2008 | ||||||||||||||||||||||||
January | 60.5 | 49.6 | 69,659 | 9.57 | 7.99 | 17,272 | ||||||||||||||||||
February | 63.6 | 59.9 | 52,593 | 10.24 | 9.11 | 14,375 | ||||||||||||||||||
March | 67.4 | 59.9 | 66,525 | 11.10 | 9.63 | 20,636 | ||||||||||||||||||
April (through April 14, 2008) | 65.0 | 61.8 | 43,714 | 10.66 | 10.19 | 17,638 |
(1) | Trading in ADSs commenced on October 8, 1997 on the New York Stock Exchange. Each ADS represents the right to receive five common shares. | |
(2) | As adjusted for a “8.00000% stock dividend in July 2003”, a “NT$0.6037 cash dividend per share and a 14.08668% stock dividend in July 2004”, a “NT$1.9998 cash dividend per share and a 4.99971% stock dividend in July 2005”, a “NT$2.4991 cash dividend per share and a 2.99903% stock dividend in July 2006” and a “NT$2.9995 cash dividend per share and a 0.49991% stock dividend in July 2007”. |
ITEM 10. | ADDITIONAL INFORMATION |
-49-
Table of Contents
• | offerings by shareholders of outstanding shares; and | ||
• | offerings of new shares through a private placement approved at a shareholders’ meeting. |
-50-
Table of Contents
-51-
Table of Contents
-52-
Table of Contents
-53-
Table of Contents
• | dividends on or free distributions of shares; | ||
• | the exercise by holders of existing depositary receipts of their pre-emptive rights in connection with capital increases for cash; or | ||
• | if permitted under the deposit agreement and custody agreement, the deposit of common shares purchased by any person directly or through a depositary bank on the Taiwan Stock Exchange or the GreTai Securities Market (as applicable) or held by such person for deposit in the depositary receipt facility. |
-54-
Table of Contents
• | open a securities trading account with a local securities brokerage firm; | ||
• | remit funds; and | ||
• | exercise rights on securities and perform other matters as may be designated by the holder. |
• | the net payment indicated on the withholding tax voucher issued by the tax authority; | ||
• | the net investment gains as indicated on the holder’s certificate of tax payment; or | ||
• | the aggregate transfer price as indicated on the income tax return for transfer of tax-deferred dividend shares, whichever is applicable. |
-55-
Table of Contents
• | converted by bondholders, other than citizens of the PRC and entities organized under the laws of the PRC, into shares of R.O.C. companies; or | ||
• | subject to R.O.C. Financial Supervisory Commission approval, converted into depositary receipts issued by the same R.O.C. company or by the issuing company of the exchange shares, in the case of exchangeable bonds. |
-56-
Table of Contents
-57-
Table of Contents
• | an individual who is not an R.O.C. citizen, who owns ADSs and who is not physically present in the R.O.C. for 183 days or more during any calendar year; or | ||
• | a corporation or a non-corporate body that is organized under the laws of a jurisdiction other than the R.O.C. for profit-making purposes and has no fixed place of business or other permanent establishment in the R.O.C. |
-58-
Table of Contents
• | dealers in securities; | ||
• | traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; | ||
• | tax-exempt organizations; |
-59-
Table of Contents
• | life insurance companies; | ||
• | persons liable for alternative minimum tax; | ||
• | persons that actually or constructively own 10% or more of our voting stock; | ||
• | persons that hold common shares or ADSs as part of a straddle or a hedging or conversion transaction; or | ||
• | persons whose functional currency is not the U.S. dollar. |
• | a citizen or resident of the United States; | ||
• | a domestic corporation, or other entity subject to United States federal income tax as a domestic corporation; | ||
• | an estate whose income is subject to United States federal income tax regardless of its source; or | ||
• | a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust. |
-60-
Table of Contents
• | at least 75% of our gross income for the taxable year is passive income; or | ||
• | at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income. |
-61-
Table of Contents
• | any gain you realize on the sale or other disposition of your common shares or ADSs; and | ||
• | any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the common shares or ADSs during the three preceding taxable years or, if shorter, your holding period for the common shares or ADSs). |
• | the gain or excess distribution will be allocated ratably over your holding period for the common shares or ADSs, | ||
• | the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income, | ||
• | the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year, and | ||
• | the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year. |
-62-
Table of Contents
-63-
Table of Contents
Item 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
As of December 31, 2007 | ||||||||||||||||||||||||||||||||||||
Expected Maturity Dates | As of December 31, 2006 | |||||||||||||||||||||||||||||||||||
2012 and | Aggregate | Aggregate | ||||||||||||||||||||||||||||||||||
2008 | 2009 | 2010 | 2011 | thereafter | Total | Fair Value | Total | Fair Value | ||||||||||||||||||||||||||||
Long-term debt (in millions) | ||||||||||||||||||||||||||||||||||||
US$-denominated debt | ||||||||||||||||||||||||||||||||||||
Variable rate | — | — | US$ | 20 | — | — | US$20 | US$20 | US$20 | US$20 | ||||||||||||||||||||||||||
Average interest rate | — | — | 4.64 | % | — | — | 4.64%(2) | — | 5.43%(2) | — | ||||||||||||||||||||||||||
NT$-denominated debt | ||||||||||||||||||||||||||||||||||||
Variable rate | NT$ | 279 | NT$ | 302 | NT$ | 298 | NT$221 | NT$252 | NT$1,352 | NT$1,352 | — | — | ||||||||||||||||||||||||
Average interest rate | 2.93 | % | 2.89 | % | 2.82 | % | 2.88% | 2.90% | 2.88%(2) | — | ||||||||||||||||||||||||||
Fixed rate | NT$ | 2 | NT$ | 8,000 | — | — | NT$4,500 | NT$12,502 | NT$12,672(1) | NT$19,506 | NT$19,823(1) | |||||||||||||||||||||||||
Average interest rate | 0.00 | % | 2.75 | % | — | — | 3.00% | 2.84%(2) | — | 3.39%(2) | — |
(1) | Represents the present value of expected cash flow discounted using the interest rate TSMC may obtain for similar long-term debts. | |
(2) | Average interest rates under “Total” are the weighted average of the average interest rates of each year for loan outstanding. |
As of December 31, 2007 | As of | |||||||||||||||||||||||||||||||||||
Forward Exchange | Expected Maturity Dates | December 31, 2006 | ||||||||||||||||||||||||||||||||||
Contracts | 2012 and | Aggregate | Aggregate | |||||||||||||||||||||||||||||||||
(in millions) | 2008 | 2009 | 2010 | 2011 | thereafter | Total | Fair Value(1) | Total | Fair Value(1) | |||||||||||||||||||||||||||
(Sell US$/Buy NT$) Contract amount | US$ | 111 | 0 | 0 | 0 | 0 | US$111 | NT$5 | — | — | ||||||||||||||||||||||||||
Average contractual exchange rate (against NT dollars) | 32.49 | 0 | 0 | 0 | 0 | 32.49 | 0 | — | — | |||||||||||||||||||||||||||
(Buy NT$/Sell EUR$) Contract amount | EUR$ | 48 | 0 | 0 | 0 | 0 | EUR$48 | NT$(184) | — | — | ||||||||||||||||||||||||||
Average contractual exchange rate (against NT$ dollars) | 43.55 | 0 | 0 | 0 | 0 | 43.55 | 0 | — | — |
-64-
Table of Contents
As of December 31, 2007 | As of | |||||||||||||||||||||||||||||||||||
Foreign Exchange | Expected Maturity Dates | December 31, 2006 | ||||||||||||||||||||||||||||||||||
Contracts | 2012 and | Aggregate | Aggregate | |||||||||||||||||||||||||||||||||
(in millions) | 2008 | 2009 | 2010 | 2011 | thereafter | Total | Fair Value(1) | Total | Fair Value(1) | |||||||||||||||||||||||||||
(Buy JPY/Sell US$) Contract amount | 0 | 0 | 0 | 0 | 0 | 0 | 0 | US$0.3 | NT$(0.1) | |||||||||||||||||||||||||||
Average contractual exchange rate (against US dollars) | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 117.52 | — |
As of December 31, 2007 | As of | |||||||||||||||||||||||||||||||||||
Expected Maturity Dates | December 31, 2006 | |||||||||||||||||||||||||||||||||||
Aggregate | ||||||||||||||||||||||||||||||||||||
Cross Currency Swap | 2012 and | Aggregate | Fair | |||||||||||||||||||||||||||||||||
(in millions) | 2008 | 2009 | 2010 | 2011 | thereafter | Total | Fair Value(1) | Total | Value(1) | |||||||||||||||||||||||||||
(Sell US$/Buy NT$) Contract amount | US$975 | — | — | — | — | US$975 | NT$(28) | US$820 | (NT$33.85) | |||||||||||||||||||||||||||
Range of interest rate paid | 3.53%-5.6% | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Range of interest rate received | 0.02%-3.01% | — | — | — | — | — | — | — | — |
(1) | Fair value represents the amount of the receivable from or payable to the counter-parties if the contracts were terminated on the balance sheet date. |
ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
-65-
Table of Contents
ITEM 15. | CONTROLS AND PROCEDURES |
Taiwan Semiconductor Manufacturing Company Limited
-66-
Table of Contents
Deloitte & Touche
Taipei, Taiwan
The Republic of China
ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
ITEM 16B. | CODE OF ETHICS |
ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
-67-
Table of Contents
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In thousands) | ||||||||
Audit Fees | 59,570 | 82,399 | ||||||
Audit Related Fees | 4,813 | 811 | ||||||
Tax Fees | 964 | — | ||||||
Total | 65,347 | 83,210 | ||||||
ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
-68-
Table of Contents
(c) Total Number of | (d) Maximum Number (or | |||||||||||||||
Common Shares | Approximate Dollar Value) | |||||||||||||||
(a) Total Number of | (b) Average Price Paid | Purchased as Part of | of Common Shares that May | |||||||||||||
Common Shares | per Common | Publicly Announced | Yet Be Purchased Under the | |||||||||||||
Period | Purchased | Share | Plans or Programs | Plans or Programs | ||||||||||||
November, 2007 (from Nov. 14, 2007 to Nov. 30, 2007) | 209,601,000 | 60.32 | 209,601,000 | 590,399,000 | ||||||||||||
December, 2007 (from Dec. 1, 2007 to Dec. 31, 2007) | 590,399,000 | 60.68 | 590,399,000 | — | ||||||||||||
Total | 800,000,000 | 60.58 | 800,000,000 | — |
ITEM 17. | FINANCIAL STATEMENTS |
ITEM 18. | FINANCIAL STATEMENTS |
Page | ||
Consolidated Financial Statements of Taiwan Semiconductor Manufacturing Company Limited and Subsidiaries | ||
F-1 | ||
F-2 | ||
F-4 | ||
F-6 | ||
F-7 | ||
F-10 |
-69-
Table of Contents
ITEM 19. | EXHIBITS |
(a) | See Item 18 for a list of the financial statements filed as part of this annual report. | |||
(b) | Exhibits to this Annual Report: | |||
1.1 | Articles of Incorporation of Taiwan Semiconductor Manufacturing Company Limited, as amended and restated on May 7, 2007. | |||
2b.1 | The Company hereby agrees to furnish to the Securities and Exchange Commission, upon request, copies of instruments defining the rights of holders of long-term debt of the Company and its subsidiaries. | |||
3.1 | Rules for Election of Directors, as amended and restated on May 7, 2007. | |||
3.2(2) | Rules and Procedures of Shareholders’ Meetings, as amended and restated on May 7, 2002. | |||
4.1(2) | Land Lease with Southern Taiwan Science Park Administration (formerly Tainan Science Park Administration) relating to the fabs located in Tainan Science Park (effective August 1, 1997 to July 31, 2017) (in Chinese with English summary). | |||
4.2(3) | Land Lease with Southern Taiwan Science Park Administration (formerly Tainan Science Park Administration) relating to the fabs located in Tainan Science Park (effective May 1, 1998 to April 30, 2018) (in Chinese with English summary). | |||
4.3(3) | Land Lease with Southern Taiwan Science Park Administration (formerly Tainan Science Park Administration) relating to the fabs located in Tainan Science Park (effective November 1, 1999 to October 31, 2019) (in Chinese with English summary). | |||
4.4(3) | Land Lease with Hsinchu Science Park Administration relating to Fab 7 (effective December 4, 1989 to December 3, 2009) (in Chinese with English summary). | |||
4.5(2) | Land Lease with Hsinchu Science Park Administration relating to the Fab 7 (effective July 1, 1995 to June 30, 2015) (in Chinese with English summary). | |||
4.6(2) | Land Lease with Hsinchu Science Park Administration relating to Fab 8 (effective March 15, 1997 to March 14, 2017) (in Chinese with English summary). | |||
4.7(3) | Land Lease with Hsinchu Science Park Administration relating to Fab 12 (Phase I) (effective December 1, 1999 to November 30, 2019) (in Chinese with English summary). | |||
+4.8a(1) | Technology Cooperation Agreement between Taiwan Semiconductor Manufacturing Company Ltd. and Philips Electronics N.V., as amended and restated on June 30, 2004. | |||
4.9a(4) | Taiwan Semiconductor Manufacturing Company Limited 2002 Employee Stock Option Plan, as revised by the board of directors on March 4, 2003. | |||
4.9aa(5) | Taiwan Semiconductor Manufacturing Company Limited 2003 Employee Stock Option Plan. |
-70-
Table of Contents
4.9aaa(6) | Taiwan Semiconductor Manufacturing Company Limited 2004 Employee Stock Option Plan. | |||
4.9aaaa(1) | Taiwan Semiconductor Manufacturing Company Limited 2004 Employee Stock Option Plan, as revised on February 22, 2005. | |||
4.9b(4) | TSMC North America 2002 Employee Stock Option Plan, as revised on June 5, 2003. | |||
4.9bb(5) | TSMC North America 2003 Employee Stock Option Plan. | |||
4.9c(4) | Wafer Tech, LLC 2002 Employee Stock Option Plan, as revised on June 5, 2003. | |||
4.9cc(5) | Wafer Tech, LLC 2003 Employee Stock Option Plan. | |||
4.9ccc(6) | Wafer Tech, LLC 2004 Employee Stock Option Plan. | |||
4.9cccc(1) | Wafer Tech, LLC 2004 Employee Stock Option Plan, as revised on February 22, 2005. | |||
+4.10(7) | Shareholders Agreement, dated as of March 15, 1999, by and among EDB Investments Pte. Ltd., Koninklijke Philips Electronics N.V. and Taiwan Semiconductor Manufacturing Company Ltd.. | |||
4.11(9) | Land Lease with Hsinchu Science Park Administration relating to Fabs 2 and 5 and Corporate Headquarters (effective April 1, 1988 to March 31, 2008) (in Chinese with English summary). | |||
4.12(9) | Land Lease with Hsinchu Science Park Administration relating to Fabs 3 and 4 (effective May 16, 1993 to May 15, 2013) (in Chinese with English summary). | |||
4.13(8) | Land Lease with Hsinchu Science Park Administration relating to Fab 12 (Phase II) (effective May 1, 2001 to December 31, 2020) (English summary). | |||
4.14(8) | Land Lease with Southern Taiwan Science Park Administration relating to fabs located in Tainan Science Park (effective November 1, 2000 to October 31, 2020) (English summary). | |||
12.1 | Certification of Chief Executive Officer required by Rule 13a-14(a) under the Exchange Act. | |||
12.2 | Certification of Chief Financial Officer required by Rule 13a-14(a) under the Exchange Act. | |||
13.1 | Certification of Chief Executive Officer required by Rule 13a-14(b) under the Exchange Act. | |||
13.2 | Certification of Chief Financial Officer required by Rule 13a-14(b) under the Exchange Act. | |||
99.1 | Consent of Deloitte & Touche. |
(1) | Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2004, filed by TSMC on May 16, 2005. |
-71-
Table of Contents
(2) | Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2001, filed by TSMC on May 9, 2002. | |
(3) | Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 1999, filed by TSMC on June 29, 2000. | |
(4) | Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2002, filed by TSMC on June 23, 2003. | |
(5) | Previously filed in TSMC’s registration statement on Form S-8, filed by TSMC on October 20, 2003. | |
(6) | Previously filed in TSMC’s registration statement on Form S-8, filed by TSMC on January 6, 2005. | |
(7) | Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 1998, filed by TSMC on April 30, 1999. | |
(8) | Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2003, filed by TSMC on May 28, 2004. | |
(9) | Previously filed in TSMC’s registration statement on Form F-1, filed by TSMC on September 15, 1997. | |
+ | Contains portions for which confidential treatment has been requested. |
-72-
Table of Contents
(a) | See Item 18 for a list of the financial statements filed as part of this annual report. | |||
(b) | Exhibits to this Annual Report: | |||
1.1 | Articles of Incorporation of Taiwan Semiconductor Manufacturing Company Limited, as amended and restated on May 7, 2008. | |||
2b.1 | The Company hereby agrees to furnish to the Securities and Exchange Commission, upon request, copies of instruments defining the rights of holders of long-term debt of the Company and its subsidiaries. | |||
3.1 | Rules for Election of Directors, as amended and restated on May 7, 2007. | |||
3.2(2) | Rules and Procedures of Shareholders’ Meetings, as amended and restated on May 7, 2002. | |||
4.1(2) | Land Lease with Southern Taiwan Science Park Administration (formerly Tainan Science Park Administration) relating to the fabs located in Tainan Science Park (effective August 1, 1997 to July 31, 2017) (in Chinese with English summary). | |||
4.2(3) | Land Lease with Southern Taiwan Science Park Administration (formerly Tainan Science Park Administration) relating to the fabs located in Tainan Science Park (effective May 1, 1998 to April 30, 2018) (in Chinese with English summary). | |||
4.3(3) | Land Lease with Southern Taiwan Science Park Administration (formerly Tainan Science Park Administration) relating to the fabs located in Tainan Science Park (effective November 1, 1999 to October 31, 2019) (in Chinese with English summary). | |||
4.4(3) | Land Lease with Hsinchu Science Park Administration relating to Fab 7 (effective December 4, 1989 to December 3, 2009) (in Chinese with English summary). | |||
4.5(2) | Land Lease with Hsinchu Science Park Administration relating to the Fab 7 (effective July 1, 1995 to June 30, 2015) (in Chinese with English summary). | |||
4.6(2) | Land Lease with Hsinchu Science Park Administration relating to Fab. 8 (effective March 15, 1997 to March 14, 2017) (in Chinese with English summary). | |||
4.7(3) | Land Lease with Hsinchu Science Park Administration relating to Fab 12 (Phase I) (effective December 1, 1999 to November 30, 2019) (in Chinese with English summary). | |||
+4.8(1) | Technology Cooperation Agreement between Taiwan Semiconductor Manufacturing Company Ltd. and Philips Electronics N.V., as amended and restated on June 20, 2004. | |||
4.9a(4) | Taiwan Semiconductor Manufacturing Company Limited 2002 Employee Stock Option Plan, as revised by the board of directors on March 4, 2003. | |||
4.9aa(5) | Taiwan Semiconductor Manufacturing Company Limited 2003 Employee Stock Option Plan. | |||
4.9aaa(6) | Taiwan Semiconductor Manufacturing Company Limited 2004 Employee Stock |
Table of Contents
Option Plan. | ||||
4.9aaaa(1) | Taiwan Semiconductor Manufacturing Company Limited 2004 Employee Stock Option Plan, as revised on February 22, 2005. | |||
4.9b(4) | TSMC North America 2002 Employee Stock Option Plan, as revised on June 5, 2003. | |||
4.9bb(5) | TSMC North America 2003 Employee Stock Option Plan. | |||
4.9c(4) | WaferTech, LLC 2002 Employee Stock Option Plan, as revised on June 5, 2003. | |||
4.9cc(5) | Wafer Tech, LLC 2003 Employee Stock Option Plan. | |||
4.9ccc(6) | Wafer Tech, LLC 2004 Employee Stock Option Plan. | |||
4.9cccc(1) | Wafer Tech, LLC 2004 Employee Stock Option Plan, as revised on February 22, 2005. | |||
+4.10(7) | Shareholders Agreement, dated as of March 15, 1999, by and among EDB Investments Pte. Ltd., Koninklijke Philips Electronics N.V. and Taiwan Semiconductor Manufacturing Company Ltd.. | |||
4.11(9) | Land Lease with Hsinchu Science Park Administration relating to Fabs 2 and 5 and Corporate Headquarters (effective April 1, 1988 to March 31, 2008) (in Chinese with English summary). | |||
4.12(9) | Land Lease with Hsinchu Science Park Administration relating to Fabs 3 and 4 (effective May 16, 1993 to May 15, 2013) (in Chinese with English summary). | |||
4.13(8) | Land Lease with Hsinchu Science Park Administration relating to Fab 12 (Phase II) (effective May 1, 2001 to December 31, 2020) (English summary). | |||
4.14(8) | Land Lease with Southern Taiwan Science Park Administration relating to fabs located in Tainan Science Park (effective November 1, 2000 to October 31, 2020) (English summary). | |||
12.1 | Certification of Chief Executive Officer required by Rule 13a-14(a) under the Exchange Act. | |||
12.2 | Certification of Chief Financial Officer required by Rule 13a-14(a) under the Exchange Act. | |||
13.1 | Certification of Chief Executive Officer required by Rule 13a-14(b) under the Exchange Act. | |||
13.2 | Certification of Chief Financial Officer required by Rule 13a-14(b) under the Exchange Act. | |||
99.1 | Consent of Deloitte & Touche. | |||
(1) | Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2004, filed by TSMC on May 16, 2005. | |
(2) | Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended |
Table of Contents
December 31, 2001, filed by TSMC on May 9, 2002. | ||
(3) | Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 1999, filed by TSMC on June 29, 2000. | |
(4) | Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2002, filed by TSMC on June 23, 2003. | |
(5) | Previously filed in TSMC’s registration statement on Form S-8, filed by TSMC on October 20, 2003. | |
(6) | Previously filed in TSMC’s registration statement on Form S-8, filed by TSMC on January 6, 2005. | |
(7) | Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 1998, filed by TSMC on April 30, 1999. | |
(8) | Previously filed in TSMC’s annual report on Form 20-F for the fiscal year ended December 31, 2003, filed by TSMC on May 28, 2004. | |
(9) | Previously filed in TSMC’s registration statement on Form F-1, filed by TSMC on September 15, 1997. | |
+ | Contains portions for which confidential treatment has been requested. |
Table of Contents
TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LIMITED | ||||
By: | /s/ Lora Ho | |||
Name: | Lora Ho | |||
Title: | Vice President and Chief Financial Officer | |||
Table of Contents
Taiwan Semiconductor Manufacturing Company Limited
Deloitte & Touche
Taipei, Taiwan
The Republic of China
F-1
Table of Contents
(In Millions of New Taiwan or U.S. Dollars, Except Par Value)
December 31 | ||||||||||||||
Notes | 2006 | 2007 | ||||||||||||
NT$ | NT$ | US$ | ||||||||||||
(Note 3) | ||||||||||||||
ASSETS | ||||||||||||||
CURRENT ASSETS | ||||||||||||||
Cash and cash equivalents | 2, 5 | $ | 117,837.2 | $ | 94,986.5 | $ | 2,929.0 | |||||||
Financial assets at fair value through profit or loss | 2, 4, 6 | 1,206.9 | 1,632.4 | 50.3 | ||||||||||
Available-for-sale financial assets | 2, 4, 7 | 67,523.9 | 66,688.4 | 2,056.4 | ||||||||||
Held-to-maturity financial assets | 2, 8 | 8,510.8 | 11,526.9 | 355.4 | ||||||||||
Notes and accounts receivable, net | 2, 9 | 31,337.0 | 42,413.3 | 1,307.9 | ||||||||||
Receivables from related parties | 25 | 252.3 | 10.9 | 0.3 | ||||||||||
Other receivables from related parties | 25 | 256.9 | 243.6 | 7.5 | ||||||||||
Other financial assets | 4, 26 | 2,356.5 | 1,515.5 | 46.7 | ||||||||||
Inventories, net | 2, 10 | 21,430.7 | 23,862.3 | 735.8 | ||||||||||
Deferred income tax assets, net | 2, 19 | 8,014.0 | 5,572.3 | 171.8 | ||||||||||
Prepaid expenses and other current assets | 4 | 1,591.0 | 1,370.2 | 42.3 | ||||||||||
Total current assets | 260,317.2 | 249,822.3 | 7,703.4 | |||||||||||
LONG-TERM INVESTMENTS | 2, 4 , 7, 8, 11, 12 | |||||||||||||
Investments accounted for using equity method | 15,000.9 | 22,517.3 | 694.3 | |||||||||||
Available-for-sale financial assets | 6,648.5 | 1,400.7 | 43.2 | |||||||||||
Held-to-maturity financial assets | 28,973.5 | 8,697.7 | 268.2 | |||||||||||
Financial assets carried at cost | 3,272.3 | 3,845.6 | 118.6 | |||||||||||
Total long-term investments | 53,895.2 | 36,461.3 | 1,124.3 | |||||||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 2, 13, 25, 26 | 254,094.2 | 260,252.2 | 8,025.0 | ||||||||||
INTANGIBLE ASSETS | ||||||||||||||
Goodwill | 2 | 5,985.0 | 5,987.6 | 184.7 | ||||||||||
Deferred charges, net | 2, 14 | 5,936.9 | 7,923.6 | 244.3 | ||||||||||
Total intangible assets | 11,921.9 | 13,911.2 | 429.0 | |||||||||||
OTHER ASSETS | ||||||||||||||
Deferred income tax assets, net | 2, 19 | 5,802.1 | 7,313.3 | 225.5 | ||||||||||
Refundable deposits | 1,331.2 | 2,777.8 | 85.7 | |||||||||||
Others | 123.4 | 327.1 | 10.1 | |||||||||||
Total other assets | 7,256.7 | 10,418.2 | 321.3 | |||||||||||
TOTAL ASSETS | $ | 587,485.2 | $ | 570,865.2 | $ | 17,603.0 | ||||||||
F-2
Table of Contents
December 31 | ||||||||||||||
Notes | 2006 | 2007 | ||||||||||||
NT$ | NT$ | US$ | ||||||||||||
(Note 3) | ||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||
CURRENT LIABILITIES | ||||||||||||||
Financial liabilities at fair value through profit or loss | 2, 4, 6 | $ | 10.9 | $ | 249.3 | $ | 7.7 | |||||||
Notes and accounts payable | 7,934.4 | 11,574.9 | 356.9 | |||||||||||
Payable to related parties | 25 | 1,867.7 | 1,503.4 | 46.4 | ||||||||||
Income tax payable | 2, 19 | 7,946.5 | 11,126.1 | 343.1 | ||||||||||
Payables to contractors and equipment suppliers | 10,768.6 | 6,256.7 | 192.9 | |||||||||||
Accrued expenses and other current liabilities | 2, 17 | 11,328.3 | 17,714.8 | 546.2 | ||||||||||
Current portion of bonds payable and long-term liabilities | 15, 16 | 7,004.1 | 280.8 | 8.7 | ||||||||||
Total current liabilities | 46,860.5 | 48,706.0 | 1,501.9 | |||||||||||
LONG-TERM LIABILITIES | ||||||||||||||
Bonds payable | 15 | 12,500.0 | 12,500.0 | 385.4 | ||||||||||
Long-term bank loans | 16 | 654.0 | 1,722.2 | 53.1 | ||||||||||
Other long-term payables | 17, 28 | 8,703.3 | 9,410.0 | 290.2 | ||||||||||
Other payables to related parties | 25, 28 | 403.4 | — | — | ||||||||||
Obligations under capital leases | 2 | 612.9 | 652.3 | 20.1 | ||||||||||
Total long-term liabilities | 22,873.6 | 24,284.5 | 748.8 | |||||||||||
OTHER LIABILITIES | ||||||||||||||
Accrued pension cost | 2, 18 | 3,540.1 | 3,665.5 | 113.0 | ||||||||||
Guarantee deposits | 28 | 3,817.1 | 2,243.0 | 69.2 | ||||||||||
Deferred credits | 2, 25 | 1,177.1 | 1,236.9 | 38.1 | ||||||||||
Others | 78.7 | 43.8 | 1.4 | |||||||||||
Total other liabilities | 8,613.0 | 7,189.2 | 221.7 | |||||||||||
Total liabilities | 78,347.1 | 80,179.7 | 2,472.4 | |||||||||||
COMMITMENTS AND CONTINGENCIES | 28 | |||||||||||||
December 31 | ||||||||||||||
Notes | 2006 | 2007 | ||||||||||||
NT$ | NT$ | US$ | ||||||||||||
(Note 3) | ||||||||||||||
EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT | ||||||||||||||
Capital stock — NT$10 par value | ||||||||||||||
Authorized: 27,050,000 thousand shares in 2006 | ||||||||||||||
28,050,000 thousand shares in 2007 | ||||||||||||||
Issued: 25,829,688 thousand shares in 2006 | ||||||||||||||
26,427,104 thousand shares in 2007 | 258,296.9 | 264,271.1 | 8,149.0 | |||||||||||
Capital surplus | 2, 20 | 54,107.5 | 53,732.7 | 1,656.9 | ||||||||||
Retained earnings | 20 | 197,124.5 | 218,864.5 | 6,748.8 | ||||||||||
Unrealized gain on financial instruments | 2, 4 | 561.6 | 681.0 | 21.0 | ||||||||||
Cumulative translation adjustments | 2 | (1,191.1 | ) | (1,072.9 | ) | (33.1 | ) | |||||||
Treasury stock — 33,926 thousand shares in 2006 | ||||||||||||||
834,096 thousand shares in 2007 | 2, 22 | (918.1 | ) | (49,385.0 | ) | (1,522.8 | ) | |||||||
Total equity attributable to shareholders of the parent | 507,981.3 | 487,091.4 | 15,019.8 | |||||||||||
MINORITY INTEREST IN SUBSIDIARIES | 2 | 1,156.8 | 3,594.1 | 110.8 | ||||||||||
Total shareholders’ equity | 509,138.1 | 490,685.5 | 15,130.6 | |||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 587,485.2 | $ | 570,865.2 | $ | 17,603.0 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements. |
F-3
Table of Contents
(In Millions of New Taiwan or U.S. Dollars, Except Earnings Per Share that are in New Taiwan or U.S. Dollars)
Year Ended December 31 | ||||||||||||||||||
Notes | 2005 | 2006 | 2007 | |||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||||
(Note 3) | ||||||||||||||||||
NET SALES | 2, 25, 29 | $ | 266,565.1 | $ | 317,407.2 | $ | 322,630.6 | $ | 9,948.5 | |||||||||
COST OF SALES | 25 | 148,362.2 | 161,597.1 | 180,280.4 | 5,559.1 | |||||||||||||
GROSS PROFIT | 118,202.9 | 155,810.1 | 142,350.2 | 4,389.4 | ||||||||||||||
OPERATING EXPENSES | 25 | |||||||||||||||||
Research and development | 14,016.5 | 16,076.4 | 17,946.3 | 553.4 | ||||||||||||||
General and administrative | 9,085.5 | 8,716.7 | 8,963.8 | 276.4 | ||||||||||||||
Marketing | 4,132.3 | 3,752.3 | 3,718.2 | 114.6 | ||||||||||||||
Total operating expenses | 27,234.3 | 28,545.4 | 30,628.3 | 944.4 | ||||||||||||||
INCOME FROM OPERATIONS | 90,968.6 | 127,264.7 | 111,721.9 | 3,445.0 | ||||||||||||||
NON-OPERATING INCOME AND GAINS | ||||||||||||||||||
Interest income | 2, 4 | 2,806.2 | 4,542.1 | 5,651.7 | 174.3 | |||||||||||||
Equity in earnings of equity method investees, net | 2, 11 | 1,433.2 | 2,347.2 | 2,507.9 | 77.3 | |||||||||||||
Settlement income | 28 | 964.7 | 979.2 | 985.1 | 30.4 | |||||||||||||
Gain on settlement and disposal of financial instruments, net | 2, 4 | — | — | 633.1 | 19.5 | |||||||||||||
Technical service income | 25, 28 | 462.6 | 571.5 | 590.4 | 18.2 | |||||||||||||
Rental income | 2 | 0.9 | 224.3 | 378.6 | 11.7 | |||||||||||||
Subsidy income | 2 | 321.9 | 334.5 | 364.3 | 11.2 | |||||||||||||
Valuation gain on financial instruments, net | 2, 6 | — | — | 304.6 | 9.4 | |||||||||||||
Gain on disposal of property, plant and equipment and other assets | 2, 25 | 342.8 | 421.1 | 91.2 | 2.8 | |||||||||||||
Foreign exchange gain, net | 2, 4 | 2,610.0 | — | 80.9 | 2.5 | |||||||||||||
Others | 25 | 457.1 | 285.7 | 346.0 | 10.7 | |||||||||||||
Total non-operating income and gains | 9,399.4 | 9,705.6 | 11,933.8 | 368.0 | ||||||||||||||
NON-OPERATING EXPENSES AND LOSSES | ||||||||||||||||||
Provision for litigation loss | 28 | — | — | 1,008.6 | 31.1 | |||||||||||||
Interest expense | 4 | 1,413.4 | 890.6 | 842.2 | 26.0 | |||||||||||||
Loss on impairment of financial assets | 2 | 128.9 | 279.7 | 54.2 | 1.7 | |||||||||||||
Loss on disposal of property, plant and equipment | 2 | 60.1 | 241.4 | 6.2 | 0.2 | |||||||||||||
Valuation loss on financial instruments, net | 2, 4, 6 | 337.2 | 812.9 | — | — | |||||||||||||
Loss on settlement and disposal of financial instruments, net | 2, 4, 6 | 3,602.8 | 798.6 | — | — | |||||||||||||
Foreign exchange loss, net | 2 | — | 400.9 | — | — | |||||||||||||
Others | 562.3 | 184.0 | 102.5 | 3.1 | ||||||||||||||
Total non-operating expenses and losses | 6,104.7 | 3,608.1 | 2,013.7 | 62.1 | ||||||||||||||
INCOME BEFORE INCOME TAX | 94,263.3 | 133,362.2 | 121,642.0 | 3,750.9 | ||||||||||||||
INCOME TAX EXPENSE | 2, 19 | 630.6 | 7,773.7 | 11,709.6 | 361.1 | |||||||||||||
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES | 93,632.7 | 125,588.5 | 109,932.4 | 3,389.8 | ||||||||||||||
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES, NET OF TAX BENEFIT OF NT$82.1 MILLION | 4 | — | 1,606.7 | — | — | |||||||||||||
NET INCOME | $ | 93,632.7 | $ | 127,195.2 | $ | 109,932.4 | $ | 3,389.8 | ||||||||||
F-4
Table of Contents
(In Millions of New Taiwan or U.S. Dollars, Except Earnings Per Share that are in New Taiwan or U.S. Dollars)
Year Ended December 31 | ||||||||||||||||||
Notes | 2005 | 2006 | 2007 | |||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||||
(Note 3) | ||||||||||||||||||
ATTRIBUTABLE TO: | ||||||||||||||||||
Shareholders of the parent | $ | 93,575.0 | $ | 127,009.7 | $ | 109,177.1 | $ | 3,366.5 | ||||||||||
Minority interest | 2 | 57.7 | 185.5 | 755.3 | 23.3 | |||||||||||||
$ | 93,632.7 | $ | 127,195.2 | $ | 109,932.4 | $ | 3,389.8 | |||||||||||
BASIC EARNINGS PER SHARE | 2, 23 | |||||||||||||||||
Before income tax | $ | 3.58 | $ | 5.11 | $ | 4.59 | $ | 0.14 | ||||||||||
After income tax | $ | 3.55 | $ | 4.82 | $ | 4.14 | $ | 0.13 | ||||||||||
DILUTED EARNINGS PER SHARE | 2, 23 | $ | 3.57 | $ | 5.10 | $ | 4.58 | $ | 0.14 | |||||||||
Before income tax | $ | 3.55 | $ | 4.81 | $ | 4.14 | $ | 0.13 | ||||||||||
After income tax | ||||||||||||||||||
BASIC EARNINGS PER EQUIVALENT ADS | 2 | |||||||||||||||||
Before income tax | $ | 17.88 | $ | 25.54 | $ | 22.94 | $ | 0.71 | ||||||||||
After income tax | $ | 17.76 | $ | 24.08 | $ | 20.72 | $ | 0.64 | ||||||||||
DILUTED EARNINGS PER EQUIVALENT ADS | 2 | |||||||||||||||||
Before income tax | $ | 17.87 | $ | 25.51 | $ | 22.92 | $ | 0.71 | ||||||||||
After income tax | $ | 17.75 | $ | 24.06 | $ | 20.70 | $ | 0.64 | ||||||||||
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (THOUSANDS) | 2, 23 | 26,349,396, | 26,374,757 | 26,346,582 | ||||||||||||||
�� | ||||||||||||||||||
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (THOUSANDS) | 2, 23 | 26,359,727 | 26,398,858 | 26,368,250 | ||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements. | (Concluded) |
F-5
Table of Contents
(In Millions of New Taiwan Dollars, Except Dividends Per Share)
Equity Attributable to Shareholders of the Parent | ||||||||||||||||||||||||||||||||||||||||
Capital Stock | Unrealized | |||||||||||||||||||||||||||||||||||||||
(NT$10 Par Value) | Gain (Loss) | Cumulative | Minority | Total | ||||||||||||||||||||||||||||||||||||
Common Stock | Capital | Retained | on Financial | Translation | Treasury | Interest in | Shareholders’ | |||||||||||||||||||||||||||||||||
Shares | Amount | Surplus | Earnings | Instruments | Adjustments | Stock | Total | Subsidiaries | Equity | |||||||||||||||||||||||||||||||
(Thousands) | NT$ | NT$ | NT$ | NT$ | NT$ | NT$ | NT$ | NT$ | NT$ | |||||||||||||||||||||||||||||||
BALANCE, JANUARY 1, 2005 | 23,251,964 | $ | 232,519.6 | $ | 56,537.3 | $ | 113,730.0 | $ | — | $ | (2,226.4 | ) | $ | (1,595.2 | ) | $ | 398,965.3 | $ | 75.7 | $ | 399,041.0 | |||||||||||||||||||
Appropriations of prior year’s earnings | ||||||||||||||||||||||||||||||||||||||||
Bonus to employees — in cash | — | — | — | (3,086.2 | ) | — | — | — | (3,086.2 | ) | — | (3,086.2 | ) | |||||||||||||||||||||||||||
Bonus to employees — in stock | 308,622 | 3,086.2 | — | (3,086.2 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Cash dividends to shareholders — NT$2.00 per share | — | — | — | (46,504.1 | ) | — | — | — | (46,504.1 | ) | — | (46,504.1 | ) | |||||||||||||||||||||||||||
Stock dividends to shareholders — NT$0.50 per share | 1,162,602 | 11,626.0 | — | (11,626.0 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Bonus to directors and supervisors | — | — | — | (231.5 | ) | — | — | — | (231.5 | ) | — | (231.5 | ) | |||||||||||||||||||||||||||
Net income in 2005 | — | — | — | 93,575.0 | — | — | — | 93,575.0 | 57.7 | 93,632.7 | ||||||||||||||||||||||||||||||
Adjustment arising from changes in percentage of ownership in equity method investees | — | — | 71.4 | — | — | — | — | 71.4 | — | 71.4 | ||||||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | 1,585.7 | — | 1,585.7 | (51.8 | ) | 1,533.9 | |||||||||||||||||||||||||||||
Issuance of stock from exercising employee stock options | 6,837 | 68.4 | 202.5 | — | — | — | — | 270.9 | — | 270.9 | ||||||||||||||||||||||||||||||
Cash dividends received by subsidiaries from TSMC | — | — | 84.3 | — | — | — | — | 84.3 | — | 84.3 | ||||||||||||||||||||||||||||||
Treasury stock transactions — sales of parent company’s stock held by subsidiaries | — | — | 222.4 | — | — | — | 677.1 | 899.5 | — | 899.5 | ||||||||||||||||||||||||||||||
Increase in minority interests | — | — | — | — | — | — | — | — | 526.8 | 526.8 | ||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2005 | 24,730,025 | 247,300.2 | 57,117.9 | 142,771.0 | — | (640.7 | ) | (918.1 | ) | 445,630.3 | 608.4 | 446,238.7 | ||||||||||||||||||||||||||||
Appropriations of prior year’s earnings | ||||||||||||||||||||||||||||||||||||||||
Bonus to employees — in cash | — | — | — | (3,432.1 | ) | — | — | — | (3,432.1 | ) | — | (3,432.1 | ) | |||||||||||||||||||||||||||
Bonus to employees — in stock | 343,213 | 3,432.1 | — | (3,432.1 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Cash dividends to common shareholders — NT$2.50 per share | — | — | — | (61,825.1 | ) | — | — | — | (61,825.1 | ) | — | (61,825.1 | ) | |||||||||||||||||||||||||||
Stock dividends to common shareholders — NT$0.15 per share | 370,950 | 3,709.5 | — | (3,709.5 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Bonus to directors and supervisors | — | — | — | (257.4 | ) | — | — | — | (257.4 | ) | — | (257.4 | ) | |||||||||||||||||||||||||||
Capital surplus transferred to capital stock | 370,950 | 3,709.5 | (3,709.5 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Net income in 2006 | — | — | — | 127,009.7 | — | — | — | 127,009.7 | 185.5 | 127,195.2 | ||||||||||||||||||||||||||||||
Adjustment arising from changes in percentage of ownership in equity method investees | — | — | 187.1 | — | — | — | — | 187.1 | — | 187.1 | ||||||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | (550.4 | ) | — | (550.4 | ) | (126.2 | ) | (676.6 | ) | ||||||||||||||||||||||||||
Issuance of stock from exercising employee stock options | 14,550 | 145.6 | 429.7 | — | — | — | — | 575.3 | — | 575.3 | ||||||||||||||||||||||||||||||
Cash dividends received by subsidiaries from TSMC | — | — | 82.3 | — | — | — | — | 82.3 | — | 82.3 | ||||||||||||||||||||||||||||||
Valuation gain on available-for-sale financial assets | — | — | — | — | 386.0 | — | — | 386.0 | 2.1 | 388.1 | ||||||||||||||||||||||||||||||
Equity in the valuation gain on available-for-sale financial assets held by equity method investees | — | — | — | — | 175.6 | — | — | 175.6 | — | 175.6 | ||||||||||||||||||||||||||||||
Increase in minority interests | — | — | — | — | — | — | — | — | 487.0 | 487.0 | ||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2006 | 25,829,688 | 258,296.9 | 54,107.5 | 197,124.5 | 561.6 | (1,191.1 | ) | (918.1 | ) | 507,981.3 | 1,156.8 | 509,138.1 | ||||||||||||||||||||||||||||
Appropriations of prior year’s earnings | ||||||||||||||||||||||||||||||||||||||||
Bonus to employees — in cash | — | — | — | (4,572.8 | ) | — | — | — | (4,572.8 | ) | — | (4,572.8 | ) | |||||||||||||||||||||||||||
Bonus to employees — in stock | 457,280 | 4,572.8 | — | (4,572.8 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Cash dividends to shareholders — NT$3.00 per share | — | — | — | (77,489.1 | ) | — | — | — | (77,489.1 | ) | — | (77,489.1 | ) | |||||||||||||||||||||||||||
Stock dividends to shareholders — NT$0.02 per share | 51,659 | 516.6 | — | (516.6 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Bonus to directors and supervisors | — | — | — | (285.8 | ) | — | — | — | (285.8 | ) | — | (285.8 | ) | |||||||||||||||||||||||||||
Capital surplus transferred to capital stock | 77,489 | 774.9 | (774.9 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Net income in 2007 | — | — | 109,177.1 | — | — | — | 109,177.1 | 755.3 | 109,932.4 | |||||||||||||||||||||||||||||||
Adjustment arising from changes in percentage of ownership in equity method investees | — | — | (28.7 | ) | — | — | — | — | (28.7 | ) | 31.9 | 3.2 | ||||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | 118.2 | — | 118.2 | (99.3 | ) | 18.9 | |||||||||||||||||||||||||||||
Issuance of stock from exercising employee stock options | 10,988 | 109.9 | 327.0 | — | — | — | — | 436.9 | — | 436.9 | ||||||||||||||||||||||||||||||
Cash dividends received by subsidiaries from TSMC | — | — | 101.8 | — | — | — | — | 101.8 | — | 101.8 | ||||||||||||||||||||||||||||||
Valuation gain on available-for-sale financial assets | — | — | — | — | 241.8 | — | — | 241.8 | 19.5 | 261.3 | ||||||||||||||||||||||||||||||
Equity in the valuation loss on available-for-sale financial assets held by equity method investees | — | — | — | — | (122.4 | ) | — | — | (122.4 | ) | — | (122.4 | ) | |||||||||||||||||||||||||||
Treasury stock repurchased by the Company | — | — | — | — | — | — | (48,466.9 | ) | (48,466.9 | ) | — | (48,466.9 | ) | |||||||||||||||||||||||||||
Increase in minority interest | — | — | — | — | — | — | — | — | 1,729.9 | 1,729.9 | ||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2007 | 26,427,104 | $ | 264,271.1 | $ | 53,732.7 | $ | 218,864.5 | $ | 681.0 | $ | (1,072.9 | ) | $ | (49,385.0 | ) | $ | 487,091.4 | $ | 3,594.1 | $ | 490,685.5 | |||||||||||||||||||
BALANCE, DECEMBER 31, 2007 (IN MILLIONS OF US$ — Note 3) | $ | 8,149.0 | $ | 1,656.9 | $ | 6,748.8 | $ | 21.0 | $ | (33.1 | ) | $ | (1,522.8 | ) | $ | 15,019.8 | $ | 110.8 | $ | 15,130.6 | ||||||||||||||||||||
F-6
Table of Contents
(In Millions of New Taiwan or U.S. Dollars)
Year Ended December 31 | ||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Net income attributable to shareholders of the parent | $ | 93,575.0 | $ | 127,009.7 | $ | 109,177.1 | $ | 3,366.5 | ||||||||
Net income attributable to minority interest | 57.7 | 185.5 | 755.3 | 23.3 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 75,649.4 | 73,715.2 | 80,005.4 | 2,467.0 | ||||||||||||
Amortization of premium/discount of financial assets | 120.9 | 2.4 | (117.2 | ) | (3.6 | ) | ||||||||||
Loss on impairment of financial assets | 128.9 | 279.7 | 54.2 | 1.7 | ||||||||||||
Loss (gain) on disposal of available-for-sale financial assets, net | 150.1 | (90.8 | ) | (610.2 | ) | (18.8 | ) | |||||||||
Equity in earnings of equity method investees, net | (1,433.2 | ) | (2,347.2 | ) | (2,507.9 | ) | (77.3 | ) | ||||||||
Dividends received from equity method investees | 668.5 | 614.6 | 625.1 | 19.3 | ||||||||||||
Gain on disposal of investments accounted for using equity method | (0.6 | ) | — | — | — | |||||||||||
Gain on disposal of financial assets carried at cost, net | (14.7 | ) | (16.2 | ) | (264.5 | ) | (8.2 | ) | ||||||||
Gain on disposal of property, plant and equipment and other assets, net | (282.6 | ) | (179.7 | ) | (85.0 | ) | (2.6 | ) | ||||||||
Deferred income taxes | (3,353.0 | ) | 121.6 | 943.8 | 29.1 | |||||||||||
Loss on idle assets | 131.8 | 44.1 | — | — | ||||||||||||
Donation of idle assets | 7.2 | — | — | — | ||||||||||||
Net changes in operating assets and liabilities: | ||||||||||||||||
Decrease (increase) in: | ||||||||||||||||
Financial assets and liabilities at fair value through profit or loss | 72.8 | 340.2 | (187.1 | ) | (5.8 | ) | ||||||||||
Notes and accounts receivable, net | (10,601.0 | ) | 6,447.3 | (10,977.0 | ) | (338.5 | ) | |||||||||
Receivables from related parties | (101.9 | ) | 440.9 | 629.5 | 19.4 | |||||||||||
Other receivables from related parties | (88.0 | ) | 341.1 | 13.2 | 0.4 | |||||||||||
Other financial assets | (306.0 | ) | (738.7 | ) | 842.1 | 26.0 | ||||||||||
Inventories, net | (2,006.2 | ) | (3,702.4 | ) | (2,226.1 | ) | (68.6 | ) | ||||||||
Prepaid expenses and other current assets | 120.1 | (170.5 | ) | 290.4 | 9.0 | |||||||||||
Increase (decrease) in: | ||||||||||||||||
Notes and accounts payable | 2,088.6 | (1,487.1 | ) | 3,218.3 | 99.2 | |||||||||||
Payables to related parties | (1,629.2 | ) | (572.4 | ) | (375.7 | ) | (11.6 | ) | ||||||||
Income tax payable | 3,611.5 | 3,931.0 | 3,179.7 | 98.0 | ||||||||||||
Accrued expenses and other current liabilities | 181.7 | 862.4 | 913.9 | 28.2 | ||||||||||||
Accrued pension cost | 360.1 | 65.7 | 125.5 | 3.9 | ||||||||||||
Deferred credits | 117.3 | (99.3 | ) | 343.9 | 10.6 | |||||||||||
Net cash provided by operating activities | 157,225.2 | 204,997.1 | 183,766.7 | 5,666.6 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||
Acquisitions of: | ||||||||||||||||
Available-for-sale financial assets | (99,436.2 | ) | (119,291.7 | ) | (87,550.2 | ) | (2,699.7 | ) | ||||||||
Held-to-maturity financial assets | (14,199.1 | ) | (18,554.0 | ) | — | — | ||||||||||
Investments accounted for using equity method | (621.9 | ) | (2,613.0 | ) | (5,803.8 | ) | (179.0 | ) | ||||||||
Financial assets carried at cost | (456.9 | ) | (511.6 | ) | (911.3 | ) | (28.1 | ) | ||||||||
Property, plant and equipment | (79,878.7 | ) | (78,737.3 | ) | (84,001.0 | ) | (2,590.2 | ) | ||||||||
Proceeds from disposal or redemption of: | ||||||||||||||||
Available-for-sale financial assets | 102,577.8 | 91,620.4 | 94,908.7 | 2,926.6 | ||||||||||||
Held-to-maturity financial assets | 14,595.4 | 10,410.0 | 17,325.1 | 534.2 | ||||||||||||
Investments accounted for using equity method | 65.1 | — | — | — | ||||||||||||
Financial assets carried at cost | 76.1 | 126.5 | 410.5 | 12.7 | ||||||||||||
Property, plant and equipment and other assets | 480.7 | 518.7 | 60.5 | 1.9 | ||||||||||||
Increase in deferred charges | (856.0 | ) | (1,414.8 | ) | (3,059.2 | ) | (94.3 | ) | ||||||||
Decrease (increase) in refundable deposits | 0.8 | (1,224.5 | ) | (1,434.9 | ) | (44.2 | ) | |||||||||
Net cash paid for acquisition of subsidiaries | — | — | (404.4 | ) | (12.5 | ) | ||||||||||
Decrease (increase) in other assets | 0.7 | (52.1 | ) | (228.8 | ) | (7.1 | ) | |||||||||
Net cash used in investing activities | (77,652.2 | ) | (119,723.4 | ) | (70,688.8 | ) | (2,179.7 | ) | ||||||||
F-7
Table of Contents
(In Millions of New Taiwan or U.S. Dollars)
Year Ended December 31 | ||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Repayments of: | ||||||||||||||||
Short-term bank loans | $ | (54.5 | ) | $ | (328.5 | ) | $ | (89.7 | ) | $ | (2.8 | ) | ||||
Bonds payable | (10,500.0 | ) | — | (7,000.0 | ) | (215.8 | ) | |||||||||
Long-term bank loans | (1,337.4 | ) | (5.5 | ) | (196.2 | ) | (6.0 | ) | ||||||||
Increase in long-term bank loans | — | — | 653.0 | 20.1 | ||||||||||||
Increase (decrease) in guarantee deposits | 2,483.5 | 920.7 | (1,574.1 | ) | (48.5 | ) | ||||||||||
Cash dividends | (46,419.8 | ) | (61,742.7 | ) | (77,387.3 | ) | (2,386.3 | ) | ||||||||
Cash bonus paid to employees | (3,086.2 | ) | (3,432.1 | ) | (4,572.8 | ) | (141.0 | ) | ||||||||
Bonus to directors and supervisors | (231.5 | ) | (257.4 | ) | (285.8 | ) | (8.8 | ) | ||||||||
Proceeds from: | ||||||||||||||||
Exercise of employee stock options | 270.9 | 575.1 | 436.8 | 13.5 | ||||||||||||
Disposal of treasury stock | 899.5 | — | — | — | ||||||||||||
Repurchase of treasury stock | — | — | (45,413.4 | ) | (1,400.4 | ) | ||||||||||
Increase in minority interests | 6.8 | 487.0 | 19.0 | 0.5 | ||||||||||||
Net cash used in financing activities | (57,968.7 | ) | (63,783.4 | ) | (135,410.5 | ) | (4,175.5 | ) | ||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 21,604.3 | 21,490.3 | (22,332.6 | ) | (688.6 | ) | ||||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | 348.9 | (136.8 | ) | (518.1 | ) | (16.0 | ) | |||||||||
EFFECT OF FIRST INCLUSION FOR CONSOLIDATION OF CERTAIN SUBSIDIARIES | 228.1 | — | — | — | ||||||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 74,302.4 | 96,483.7 | 117,837.2 | 3,633.6 | ||||||||||||
CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 96,483.7 | $ | 117,837.2 | $ | 94,986.5 | $ | 2,929.0 | ||||||||
SUPPLEMENTAL INFORMATION | ||||||||||||||||
Interest paid | $ | 1,378.6 | $ | 951.5 | $ | 922.1 | $ | 28.4 | ||||||||
Income tax paid | $ | 341.7 | $ | 3,630.0 | $ | 7,585.7 | $ | 233.9 | ||||||||
INVESTING ACTIVITIES AFFECTING BOTH CASH AND NON-CASH ITEMS | ||||||||||||||||
Acquisition of property, plant and equipment | $ | 56,166.2 | $ | 80,675.3 | $ | 78,890.0 | $ | 2,432.6 | ||||||||
Decrease (increase) in payables to contractors and equipment suppliers | 24,361.7 | (1,702.5 | ) | 5,111.0 | 157.6 | |||||||||||
Increase in other long-term payables | (649.2 | ) | (235.5 | ) | — | — | ||||||||||
Cash paid | $ | 79,878.7 | $ | 78,737.3 | $ | 84,001.0 | $ | 2,590.2 | ||||||||
Repurchase of treasury stock | $ | — | $ | — | $ | 48,466.9 | $ | 1,494.6 | ||||||||
Increase in accrued expenses and other current liabilities | — | — | (3,053.5 | ) | (94.2 | ) | ||||||||||
Cash paid | $ | — | $ | — | $ | 45,413.4 | $ | 1,400.4 | ||||||||
NON-CASH FINANCING ACTIVITIES | ||||||||||||||||
Current portion of long-term liabilities | $ | 5.5 | $ | 7,004.1 | $ | 280.8 | $ | 8.7 | ||||||||
Current portion of other long-term payables (under accrued expenses and other current liabilities) | 869.1 | 617.9 | 3,735.9 | 115.2 | ||||||||||||
Current portion of other payables to related parties (under payables to related parties) | 694.0 | 688.6 | — | — |
F-8
Table of Contents
(In Millions of New Taiwan or U.S. Dollars)
Current assets | $ | 3,101.7 | ||
Property, plant and equipment | 2,339.6 | |||
Other assets | 436.7 | |||
Current liabilities | (1,937.4 | ) | ||
Long-term liabilities | (701.9 | ) | ||
Net amount | $ | 3,238.7 | ||
Purchase price for Xintec and Mutual-Pak | $ | 1,413.5 | ||
Less: Cash balance of Xintec and Mutual-Pak at acquisition | (1,009.1 | ) | ||
Net cash paid for acquisition of Xintec and Mutual-Pak | $ | 404.4 | ||
The accompanying notes are an integral part of the consolidated financial statements. | (Concluded) |
F-9
Table of Contents
1. | GENERAL | |
Taiwan Semiconductor Manufacturing Company Limited (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; Philips Electronics N.V. and certain of its affiliates (Philips); and certain other private investors. On September 5, 1994, its shares were listed on the Taiwan Stock Exchange (TSE). On October 8, 1997, TSMC listed some of its shares of stock on the New York Stock Exchange (NYSE) in the form of American Depositary Shares (ADSs). | ||
TSMC is engaged mainly in the manufacturing, selling, packaging, testing and computer-aided designing of integrated circuits and other semiconductor devices and the manufacturing of masks. | ||
2. | SIGNIFICANT ACCOUNTING POLICIES | |
The consolidated financial statements are presented in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the R.O.C. | ||
Significant accounting policies are summarized as follows: | ||
Principles of Consolidation | ||
The accompanying consolidated financial statements include the accounts of all directly and indirectly majority owned subsidiaries of TSMC, and the accounts of investees in which TSMC’s ownership percentage is less than 50% but over which TSMC has a controlling interest. All significant intercompany balances and transactions are eliminated upon consolidation. | ||
The consolidated entities were as follows: |
Percentage of Ownership | ||||||||||||
December 31, | December 31, | |||||||||||
Name of Investor | Name of Investee | 2006 | 2007 | Remark | ||||||||
TSMC | TSMC North America (TSMC-NA) | 100 | % | 100 | % | — | ||||||
TSMC Japan Limited (TSMC-Japan) | 100 | % | 100 | % | — | |||||||
TSMC Korea Limited (TSMC-Korea) | 100 | % | 100 | % | — | |||||||
Taiwan Semiconductor Manufacturing Company Europe B.V. (TSMC-Europe) | 100 | % | 100 | % | — | |||||||
TSMC International Investment Ltd. (TSMC International) | 100 | % | 100 | % | — | |||||||
TSMC Global, Ltd. (TSMC Global) | 100 | % | 100 | % | — | |||||||
TSMC (Shanghai) Company Limited (TSMC-Shanghai) | 100 | % | 100 | % | — | |||||||
Chi Cherng Investment Co., Ltd. (Chi Cherng) | 36 | % | 36 | % | TSMC and Hsin Ruey held in aggregate a 100% ownership of Chi Cherng. As of December 31, 2007, Chi Cherng held 17,032 thousand common shares in TSMC (approximately 0.06% of issued common shares). |
F-10
Table of Contents
Percentage of Ownership | ||||||||||||
December 31, | December 31, | |||||||||||
Name of Investor | Name of Investee | 2006 | 2007 | Remark | ||||||||
Hsin Ruey Investment Co., Ltd. (Hsin Ruey) | 36 | % | 36 | % | TSMC and Chi Cherng held in aggregate a 100% ownership of Hsin Ruey. As of December 31, 2007, Hsin Ruey held 17,064 thousand common shares in TSMC (approximately 0.06% of issued common shares). | |||||||
VentureTech Alliance Fund III, L.P. (VTAF III) | 98 | % | 98 | % | — | |||||||
VentureTech Alliance Fund II, L.P. (VTAF II) | 98 | % | 98 | % | — | |||||||
Emerging Alliance Fund, L.P. (Emerging Alliance) | 99.5 | % | 99.5 | % | — | |||||||
Global Unichip Corporation (GUC) | 38 | % | 37 | % | GUC became a consolidated entity of TSMC as GUC’s president was assigned by TSMC and TSMC has a controlling interest over the financial, operating and personnel hiring decisions of GUC. | |||||||
Xintec Inc. (Xintec) | — | 43 | % | TSMC obtained three out of five director positions in March 2007, and TSMC has a controlling interest over Xintec. | ||||||||
TSMC Partners, Ltd. (TSMC Partners) | 100 | % | 100 | % | — | |||||||
TSMC International | TSMC Technology, Inc. (TSMC Technology) | 100 | % | 100 | % | — | ||||||
TSMC Development, Inc. (TSMC Development) | 100 | % | 100 | % | — | |||||||
InveStar Semiconductor Development Fund, Inc. (ISDF) | 97 | % | 97 | % | — | |||||||
InveStar Semiconductor Development Fund, Inc. (II) LDC (ISDF II) | 97 | % | 97 | % | — | |||||||
TSMC Development | WaferTech, LLC (WaferTech) | 99.996 | % | 99.996 | % | — | ||||||
VTAF III | Mutual-Pak Technology Co., Ltd. (Mutual-Pak) | 13 | % | 51 | % | VTAF III acquired a controlling interest in Mutual-Pak in July 2007. | ||||||
VTAF III, VTAF II and Emerging Alliance | VentureTech Alliance Holdings, LLC (VTA Holdings) | — | 100 | % | Newly established. | |||||||
GUC | Global Unichip Corp.-North America (GUC-NA) | 100 | % | 100 | % | — | ||||||
Global Unichip Japan Co., Ltd. (GUC-Japan) | 100 | % | 100 | % | — | |||||||
TSMC Partners | TSMC Design Technology Canada, Inc. (TSMC Canada) | — | 100 | % | Newly established. |
F-11
Table of Contents
F-12
Table of Contents
F-13
Table of Contents
F-14
Table of Contents
F-15
Table of Contents
more likely than not below its carrying amount, an impairment loss is recognized. A subsequent reversal of such impairment loss is not allowed. | ||
Deferred charges consist of technology license fees, software and system design costs and other charges. The amounts are amortized over the following periods: Technology license fees — the shorter of the estimated life of the technology or the term of the technology transfer contract; software and system design costs and other charges — 2 to 5 years. When an indication of impairment is identified, any excess of the carrying amount of an asset over its recoverable amount is recognized as a loss. If the recoverable amount increases in a subsequent period, the previously recognized impairment loss would be reversed and recognized as a gain. However, the adjusted amount may not exceed the carrying amount that would have been determined, net of amortization, as if no impairment loss had been recognized. | ||
Effective January 1, 2007, the Company adopted the newly released Statement of Financial Accounting Standards No. 37, “Accounting for Intangible Assets”. The Company had reassessed the useful lives and the amortization method of its recognized intangible assets at the effective date. Expenditures related to research activities and those related to development activities that do not meet the criteria for capitalization are charged to expenses when incurred. | ||
Pension Costs | ||
For employees who participate in defined contribution pension plans, pension costs are recorded based on the actual contributions made to employees’ individual pension accounts during their service periods. For employees who participate in defined benefit pension plans, pension costs are recorded based on actuarial calculations. | ||
Government Subsidies | ||
Income-related subsidies from governments are recognized in earnings when the requirements for subsidies are met. | ||
Income Tax | ||
The Company applies intra-period and inter-period allocations for its income tax whereby (1) a portion of current year’s income tax expense is allocated to the cumulative effect of changes in accounting principles; and (2) deferred income tax assets and liabilities are recognized for the tax effects of temporary differences, net operating loss carryforwards and unused tax credits. 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 noncurrent 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, then it is classified as either current or noncurrent based on the expected length of time before it is realized or settled. | ||
Any tax credits arising from purchases of machinery, equipment and technology, research and development expenditures, personnel training expenditures, and investments in important technology-based enterprises are recognized using the flow-through method. | ||
Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision. | ||
Income tax on unappropriated earnings (excluding earnings from foreign consolidated subsidiaries) at a rate of 10% is expensed in the year of shareholder approval which is the year subsequent to the year the earnings are generated. | ||
The R.O.C. government enacted the Alternative Minimum Tax Act (the AMT Act), which became effective on January 1, 2006. The alternative minimum tax (AMT) imposed under the AMT Act is a supplemental tax levied at a rate of 10% which is payable if the income tax payable determined pursuant to the Income Tax Law is below the minimum amount prescribed under the AMT Act. The taxable income for |
F-16
Table of Contents
calculating the AMT includes most of the tax-exempt income under various laws and statutes. TSMC and subsidiaries domiciled in the R.O.C. have considered the impact of the AMT Act in the determination of their tax liabilities. | ||
Stock-based Compensation | ||
Employee stock option plans that are amended or have options granted on or after January 1, 2004 are accounted for by the interpretations issued by the Accounting Research and Development Foundation of the Republic of China. (the ARDF). The Company adopted the intrinsic value method and any compensation cost determined using this method is recognized in earnings over the employee vesting period. | ||
Treasury Stock | ||
Treasury stock is stated at cost and shown as a deduction in shareholders’ equity. When TSMC retires treasury stock, the treasury stock account is reduced and the common stock as well as the capital surplus — additional paid-in capital are reversed on a pro rata basis. When the book value of the treasury stock exceeds the sum of the par value and additional paid-in capital, the difference is charged to capital surplus — treasury stock transactions and to retained earnings for any remaining amount. TSMC’s stock held by its subsidiaries is treated as treasury stock and reclassified from investments accounted for using equity method to treasury stock. The gains resulted from disposal of the treasury stock held by subsidiaries and cash dividends received by subsidiaries from TSMC are recorded under capital surplus — treasury stock transactions. | ||
Foreign-currency Transactions | ||
Foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange gains or losses derived from foreign-currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in earnings. | ||
At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are revalued at prevailing exchange rates with the resulting gains or losses recognized in earnings. | ||
Translation of Foreign-currency Financial Statements | ||
The financial statements of foreign subsidiaries are translated into New Taiwan dollars at the following exchange rates: Assets and liabilities — spot rates at year-end; shareholders’ equity — historical rates; income and expenses — average rates during the year. The resulting translation adjustments are recorded as a separate component of shareholders’ equity. | ||
Concentration of Credit Risk | ||
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, receivables, investments and deposits. The Company limits its exposure to credit loss by depositing its cash and cash equivalents with high credit rating financial institutions. The Company’s sales are primarily denominated in U.S. dollars. Sales to top ten customers represented 52%, 53% and 51% of the consolidated sales for the years ended December 31, 2005, 2006 and 2007, respectively. The Company routinely assesses the financial strength of substantially all customers. The financial condition of the counter-party to investments and deposits is assessed by management on a regular basis. | ||
Fair Values of Financial Instruments | ||
The carrying amount of cash equivalents approximates fair value due to the short period of time to maturity. Fair values of investments in equity or debt securities and derivative financial instruments are based on quoted market prices or pricing models using current market data. Receivables, other financial assets, payables and short-term loans are financial instruments with carrying amounts that approximate fair values. |
F-17
Table of Contents
Fair value of long-term loans with floating interest rates is their carrying amount. Fair value of long-term loans with fixed interest rates is the present value of expected cash flows discounted using the interest rate the Company may obtain for similar long-term loans. For the Company’s investment portfolio without immediately available market quotes, management believes that the carrying amount of the portfolio approximates the fair value at December 31, 2006 and 2007. Management believes that the differences between the estimated fair values and carrying amounts of these financial instruments were not significant at December 31, 2006 and 2007. |
Earnings Per Share | ||
Earnings per share is computed by dividing income attributable to shareholders of the parent by the weighted-average number of shares outstanding in each year, which is retroactively adjusted to the beginning of the year for stock dividends and stock bonuses issued subsequently. Earnings per equivalent ADS is calculated by multiplying earnings per share by five (one ADS represents five common shares). | ||
Recent Accounting Pronouncements | ||
In March 2007, the ARDF issued an interpretation that requires companies to record the bonus paid to directors, supervisors and employees as an expense rather than an appropriation of earnings. This interpretation should be applied to financial statements for fiscal years beginning on or after January 1, 2008. Based on management’s reasonable estimate, the Company believes that the adoption of this standard will result in a charge to earnings of approximately 15% of the net income for 2008. However, the actual percentage to be paid in profit sharing bonuses is subject to the approval of the Company’s shareholders. | ||
The ARDF also issued Statement of Financial Accounting Standards No. 39, “Accounting for Share-based Payment” (R.O.C. SFAS No. 39) in August 2007, which requires companies to measure share-based payment transactions at fair value and charge such amount to earnings. R.O.C. SFAS No. 39 should be applied to financial statements for fiscal years beginning on or after January 1, 2008. The adoption of R.O.C. SFAS No. 39 will change the Company’s accounting treatment for shares-based payment on a prospective basis beginning in the first quarter of 2008. | ||
The ARDF revised Statement of Financial Accounting Standards No. 10, “Accounting for Inventories” (R.O.C. SFAS No. 10) in November 2007, which requires inventories to be stated at the lower of cost or net realizable value item by item. Inventories are required to be recorded by the specific identification method, first-in, first-out method or weighted average method. The last-in, first-out method is no longer permitted. The revised R.O.C. SFAS No. 10 should be applied to financial statements for the fiscal years beginning on or after January 1, 2009. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of R.O.C. SFAS No. 10 will have on its results of operation and financial positions and is not yet in a position to determine such effect. | ||
3. | U.S. DOLLAR AMOUNTS | |
The Company maintains its accounts and expresses its consolidated financial statements in New Taiwan dollars. For convenience only, U.S. dollar amounts presented in the accompanying consolidated financial statements have been translated from New Taiwan dollars at the noon buying rate in The City of New York for cable transfers in New Taiwan dollars as certified for customs purposes by the Federal Reserve Bank of New York as of December 31, 2007, which was NT$32.43 to US$1.00. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange. | ||
4. | ACCOUNTING CHANGES |
a. | Effect of adopting the newly released and revised R.O.C. SFASs |
F-18
Table of Contents
On January 1, 2006, the Company adopted the newly released Statements of Financial Accounting Standards No. 34, “Financial Instruments: Recognition and Measurement” (R.O.C. SFAS No. 34) and No. 36, “Financial Instruments: Disclosure and Presentation”. | |||
The Company had categorized its financial assets and liabilities upon initial adoption of the newly released R.O.C. SFASs. The adjustments made to the carrying amounts of the financial instruments categorized as financial assets or financial liabilities at fair value through profit or loss were included in the cumulative effect of changes in accounting principles; the adjustments made to the carrying amounts of those categorized as available-for-sale financial assets were recognized as adjustments to shareholders’ equity. | |||
The effect of adopting the newly released R.O.C. SFASs is summarized as follows: |
Recognized as | ||||||||
Cumulative | ||||||||
Effect of | Recognized as a | |||||||
Changes in | Separate | |||||||
Accounting | Component of | |||||||
Principles | Shareholders’ | |||||||
(Net of Tax) | Equity | |||||||
Financial assets or liabilities at fair value through profit or loss | $ | 1,606.7 | $ | — | ||||
Available-for-sale financial assets | — | 306.5 | ||||||
$ | 1,606.7 | $ | 306.5 | |||||
The adoption of the newly released R.O.C. SFASs resulted in a decrease in net income before cumulative effect of changes in accounting principles of NT$1,083.5 million, an increase in net income of NT$523.2 million, and an increase in basic earnings per share (after income tax) of NT$0.02 for the year ended December 31, 2006. | |||
Effective January 1, 2006, the Company adopted the newly revised R.O.C. SFAS No. 5 and SFAS No. 25, which prescribe that investment premiums, representing goodwill, be assessed for impairment at least on an annual basis instead of being amortized. Such a change in accounting principle did not have a material effect on the Company’s consolidated financial statements as of and for the year ended December 31, 2006. |
b. | Reclassifications | ||
Upon adoption of R.O.C. SFAS No. 34, certain accounts in the consolidated financial statements as of and for the year ended December 31, 2005 were reclassified to conform to the consolidated financial statements as of and for the years ended December 31, 2006 and 2007. The previously issued consolidated financial statements as of and for the year ended December 31, 2005 were not required to be restated. | |||
Certain accounting policies prior to the adoption of R.O.C. SFAS No. 34 are summarized as follows: |
1) | Short-term investments | ||
Short-term investments that were publicly-traded, easily converted to cash, and not acquired for the purpose of controlling the investees or establishing close business relationship with the investees were carried at the lower of cost or market value at the balance sheet date, with any temporary decline in value charged to current income. The market value of publicly-traded stocks was determined using the average-closing prices for the last month of the year. | |||
2) | Derivative financial instruments |
F-19
Table of Contents
The Company entered into forward exchange contracts to manage foreign exchange exposures on foreign-currency-denominated assets and liabilities. The contracts were recorded in New Taiwan dollars at the current rate of exchange at the contract date. The differences in the New Taiwan dollar amounts translated using the current rates and the amounts translated using the contracted forward rates were amortized over the terms of the forward contracts using the straight-line method. At the end of each year, the receivables or payables arising from forward contracts were restated using the prevailing exchange rates with the resulting differences credited or charged to income. In addition, the receivables and payables related to the same forward contracts were netted with the resulting amount presented as either an asset or a liability. Any resulting gain or loss upon settlement was credited or charged to income in the year of settlement. | |||
The Company entered into cross currency swap contracts to manage currency exposures on foreign-currency-denominated assets and liabilities. The principal amount was recorded using the current rates of exchange at the contract date. The differences in the New Taiwan dollar amounts translated using the current rates and the amounts translated using the contracted rates were amortized over the terms of the contracts using the straight-line method. At the end of each year, the receivables or payables arising from cross-currency swap contracts were restated using prevailing exchange rate with the resulting differences credited or charged to income. In addition, the receivables and payables related to the contracts of the same counter party were netted with the resulting amount presented as either an asset or a liability. The difference in interest computed pursuant to the contracts on each settlement date or the balance sheet date was recorded as an adjustment to the interest income or expense associated with the hedged items. Any resulting gain or loss upon settlement was credited or charged to income in the year of settlement. | |||
The Company entered into interest rate swap contracts to manage exposures to changes in interest rates on existing assets or liabilities. These transactions were accounted for on an accrual basis, in which the cash settlement receivable or payable was recorded as an adjustment to interest income or expense associated with the hedged items. | |||
Certain accounts in the consolidated financial statements for the year ended December 31, 2005 have been reclassified to conform to the classifications prescribed by R.O.C. SFAS No. 34. The reclassifications of the whole or a part of the account balances of certain accounts are summarized as follows: |
Before | After | |||||||
Reclassification | Reclassification | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Statement of income | ||||||||
Interest income | $ | 3,069.4 | $ | 2,806.2 | ||||
Foreign exchange gain, net | 3.0 | 2,610.0 | ||||||
Interest expense | (2,662.5 | ) | (1,413.4 | ) | ||||
Unrealized valuation loss on short-term investments | (337.2 | ) | — | |||||
Loss on disposal of investment, net | (9.9 | ) | — | |||||
Valuation loss on financial instruments, net | — | (337.2 | ) | |||||
Loss on settlement and disposal of financial instruments, net | — | (3,602.8 | ) | |||||
$ | 62.8 | $ | 62.8 | |||||
F-20
Table of Contents
5. | CASH AND CASH EQUIVALENTS |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Cash and deposits in banks | $ | 85,496.1 | $ | 84,105.4 | ||||
Repurchase agreements collaterized by government bonds | 31,241.6 | 10,067.8 | ||||||
Asset-backed commercial papers | — | 522.1 | ||||||
Corporate notes | 1,026.5 | 291.2 | ||||||
Treasury bills | 73.0 | — | ||||||
$ | 117,837.2 | $ | 94,986.5 | |||||
6. | FINANCIAL ASSETS/LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Trading financial assets | ||||||||
Publicly-traded stocks | $ | 1,162.3 | $ | 1,590.2 | ||||
Cross currency swap contracts | 44.6 | 35.6 | ||||||
Forward exchange contracts | — | 6.6 | ||||||
$ | 1,206.9 | $ | 1,632.4 | |||||
Trading financial liabilities | ||||||||
Forward exchange contracts | $ | 0.1 | $ | 185.6 | ||||
Cross currency swap contracts | 10.8 | 63.7 | ||||||
$ | 10.9 | $ | 249.3 | |||||
The Company entered into derivative contracts during the years ended December 31, 2006 and 2007 to manage exposures due to the fluctuations of foreign exchange rates. The derivative contracts entered into by the Company did not meet the criteria for hedge accounting prescribed by R.O.C. SFAS No. 34. Therefore, the Company did not apply hedge accounting treatment for its derivative financial contracts. | ||
Outstanding forward contracts as of December 31, 2006 and 2007: |
Contract | ||||||||
Amount | ||||||||
Maturity Date | (in Millions) | |||||||
December 31, 2006 | ||||||||
Sell JPY/Buy US$ | January 2007 | JPY | 38.6 | |||||
December 31, 2007 | ||||||||
Sell US$/Buy NT$ | January 2008 | US$ | 111.0 | |||||
Sell EUR/Buy NT$ | February 2008 to July 2008 | EUR | 48.0 |
F-21
Table of Contents
Outstanding cross currency swap contracts as of December 31, 2006 and 2007: |
Maturity Date | Contract | Range of | Range of | |||
Amount | Interest Rates | Interest Rates | ||||
(in Millions) | Paid | Received | ||||
December 31, 2006 | ||||||
January 2007 to February 2007 | US$820.0 | 3.19%-5.91% | 0.90%-3.25% | |||
December 31, 2007 | ||||||
January 2008 to February 2008 | US$975.0 | 3.53%-5.60% | 0.02%-3.01% |
For the years ended December 31, 2006 and 2007, net losses arising from derivative financial instruments were NT$1,613.4 million (including realized settlement losses of NT$1,647.1 million and valuation gains of NT$33.7 million) and NT$924.9 million (including realized settlement losses of NT$684.1 million and valuation losses of NT$240.8 million), respectively. | ||
The Company did not enter into any interest rate swap contracts during the years ended December 31, 2006 and 2007. The Company rescinded all interest rate swap contracts in the first quarter of 2005 before their original maturities. The rescission loss of NT$28.3 million has been reclassified and included in the “loss on settlement and disposal of financial instruments” account |
7. | AVAILABLE-FOR-SALE FINANCIAL ASSETS |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Money market funds | $ | 667.8 | $ | 19,212.1 | ||||
Open-end mutual funds | 26,147.3 | 14,966.7 | ||||||
Corporate bonds | 16,494.3 | 10,745.1 | ||||||
Agency bonds | 12,691.6 | 8,635.8 | ||||||
Government bonds | 6,921.5 | 7,767.6 | ||||||
Corporate issued asset-backed securities | 10,541.7 | 5,357.1 | ||||||
Publicly-traded stocks | 208.9 | 905.3 | ||||||
Structured time deposits | 499.3 | 499.4 | ||||||
74,172.4 | 68,089.1 | |||||||
Current portion | (67,523.9 | ) | (66,688.4 | ) | ||||
$ | 6,648.5 | $ | 1,400.7 | |||||
In 2004, the Company entered into investment management agreements with three well-known financial institutions (fund managers) to manage its investment portfolios. In accordance with the investment guidelines and terms specified in these agreements, the securities invested by the fund managers cannot be below a pre-defined credit rating. The investment portfolios included securities such as corporate bonds, agency bonds, government bonds, asset-backed securities and others. Securities acquired with maturities of less than three months from the date of purchase were classified as cash equivalents. |
F-22
Table of Contents
Structured time deposits categorized as available-for-sale financial assets consisted of the following: |
Principal | Carrying | |||||||||||||||
Amount | Amount | Interest Rates | Maturity Date | |||||||||||||
NT$ | NT$ | |||||||||||||||
(In Millions) | ||||||||||||||||
December 31, 2006 | ||||||||||||||||
Step-up callable deposits | ||||||||||||||||
Domestic deposits | $ | 500.0 | $ | 499.3 | 1.76 | % | March 2008 | |||||||||
December 31, 2007 | ||||||||||||||||
Step-up callable deposits | ||||||||||||||||
Domestic deposits | $ | 500.0 | $ | 499.4 | 1.76 | % | March 2008 | |||||||||
The interest rate of the step-up callable deposits was pre-determined by the Company and the banks. |
8. | HELD-TO-MATURITY FINANCIAL ASSETS |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Corporate bonds | $ | 13,742.5 | $ | 10,900.2 | ||||
Government bonds | 12,070.7 | 7,824.4 | ||||||
Structured time deposits | 11,671.1 | 1,500.0 | ||||||
37,484.3 | 20,224.6 | |||||||
Current portion | (8,510.8 | ) | (11,526.9 | ) | ||||
$ | 28,973.5 | $ | 8,697.7 | |||||
Structured time deposits categorized as held-to-maturity financial assets consisted of the following: |
Range of | ||||||||||||
Principal | Interest | Interest | ||||||||||
Amount | Receivable | Rates | Maturity Date | |||||||||
NT$ | NT$ | |||||||||||
(In Millions) | ||||||||||||
December 31, 2006 | ||||||||||||
Step-up callable deposits | ||||||||||||
Domestic deposits | $ | 4,500.0 | $ | 13.9 | 1.40%-1.83% | June 2007 to October 2008 | ||||||
Callable range accrual deposits | ||||||||||||
Domestic deposits | 3,911.5 | 4.8 | (See below) | September 2009 to December 2009 | ||||||||
Foreign deposits | 3,259.6 | 5.0 | (See below) | October 2009 to January 2010 | ||||||||
$ | 11,671.1 | $ | 23.7 | |||||||||
December 31, 2007 | ||||||||||||
Step-up callable deposits | ||||||||||||
Domestic deposits | $ | 1,500.0 | $ | 5.6 | 1.77%-1.83% | April 2008 to October 2008 | ||||||
The amount of interest earned from the callable range accrual deposits is based on a pre-defined range as determined by the 3-month or 6-month LIBOR plus an agreed upon rate ranging between 2.10% and 3.45%. Based on the terms of the contracts, if the 3-month or 6-month LIBOR moves outside of the pre-defined |
F-23
Table of Contents
range, the interest paid to the Company is at a fixed rate between zero and 1.5%. Under the terms of the contracts, the bank has the right to cancel the contracts prior to the maturity date. | ||
As of December 31, 2006, the principal of the deposits that resided in banks located in Hong Kong and Singapore amounted to US$80.0 million and US$20.0 million, respectively. As of December 31, 2007, no structured time deposit resided in banks located in foreign countries. | ||
9. | RECEIVABLES, NET |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Notes receivable | $ | 60.3 | $ | 59.0 | ||||
Accounts receivable | 34,897.4 | 47,145.1 | ||||||
34,957.7 | 47,204.1 | |||||||
Allowance for doubtful receivables | (749.9 | ) | (701.8 | ) | ||||
Allowance for sales returns and others | (2,870.8 | ) | (4,089.0 | ) | ||||
(3,620.7 | ) | (4,790.8 | ) | |||||
$ | 31,337.0 | $ | 42,413.3 | |||||
Changes in the allowances are summarized as follows: |
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Allowance for doubtful receivables | ||||||||||||
Balance, beginning of year | $ | 982.8 | $ | 980.6 | $ | 749.9 | ||||||
Effect of inclusion of newly consolidated subsidiaries | 3.5 | — | — | |||||||||
Additions | 1.1 | 54.7 | 3.0 | |||||||||
Deductions | (6.8 | ) | (285.4 | ) | (51.1 | ) | ||||||
Balance, end of year | $ | 980.6 | $ | 749.9 | $ | 701.8 | ||||||
Allowance for sales returns and others | ||||||||||||
Balance, beginning of year | $ | 3,342.5 | $ | 4,317.4 | $ | 2,870.8 | ||||||
Effect of inclusion of newly consolidated subsidiaries | — | — | 12.9 | |||||||||
Additions | 5,805.5 | 5,382.2 | 5,773.4 | |||||||||
Deductions | (4,830.6 | ) | (6,828.8 | ) | (4,568.1 | ) | ||||||
Balance, end of year | $ | 4,317.4 | $ | 2,870.8 | $ | 4,089.0 | ||||||
F-24
Table of Contents
10. | INVENTORIES, NET |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Finished goods | $ | 5,146.8 | $ | 4,321.9 | ||||
Work in process | 14,688.7 | 17,346.9 | ||||||
Raw materials | 1,674.0 | 1,862.5 | ||||||
Supplies and spare parts | 926.1 | 1,261.7 | ||||||
22,435.6 | 24,793.0 | |||||||
Allowance for losses | (1,004.9 | ) | (930.7 | ) | ||||
$ | 21,430.7 | $ | 23,862.3 | |||||
Changes in the allowance are summarized as follows: |
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Balance, beginning of year | $ | 1,577.5 | $ | 1,685.8 | $ | 1,004.9 | ||||||
Effect of inclusion of newly consolidated subsidiaries | 0.2 | — | 16.3 | |||||||||
Additions | 159.0 | 172.1 | 165.4 | |||||||||
Write-offs | (50.9 | ) | (853.0 | ) | (255.9 | ) | ||||||
Balance, end of year | $ | 1,685.8 | $ | 1,004.9 | $ | 930.7 | ||||||
11. | INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD |
December 31 | ||||||||||||||||
2006 | 2007 | |||||||||||||||
% of | % of | |||||||||||||||
Carrying | Owner- | Carrying | Owner- | |||||||||||||
Amount | ship | Amount | ship | |||||||||||||
NT$ | NT$ | |||||||||||||||
(In Millions) | (In Millions) | |||||||||||||||
Vanguard International Semiconductor Corporation (VIS) | $ | 5,931.7 | 27 | $ | 11,220.1 | 37 | ||||||||||
Systems on Silicon Manufacturing Company Pte Ltd. (SSMC) | 7,960.9 | 39 | 9,092.7 | 39 | ||||||||||||
VisEra Holding Company (VisEra Holding) | 1,108.3 | 49 | 2,204.5 | 49 | ||||||||||||
$ | 15,000.9 | $ | 22,517.3 | |||||||||||||
In November 2006, the Company acquired 81 thousand shares in SSMC for SGD115.2 million from EDB Investments Pte Ltd. under a Shareholders Agreement. After the acquisition, the number of SSMC shares owned by the Company increased to 463 thousand and the Company’s percentage of ownership increased from 32% to 39%. | ||
In August 2007, the Company acquired 169,600 thousand shares in VIS for NT$4,927.9 million. After the acquisition, the Company’s percentage of ownership in VIS increased from 27% to 37%. |
F-25
Table of Contents
For the years ended December 31, 2005, 2006 and 2007, net equity in earnings of NT$1,433.2 million, NT$2,347.2 million and NT$2,507.9 million were recognized, respectively. The related equity in earnings of equity method investees were determined based on the audited financial statements of the investees for the same periods as the Company. | ||
As of December 31, 2006 and 2007, fair values of publicly traded stocks included in investments accounted for using equity method were NT$11,027.1 million and NT$ 15,189.2 million, respectively. | ||
Movements of the difference between the cost of investment and the Company’s share in investees’ net assets allocated to depreciable assets for the years ended December 31, 2006 and 2007 were as follows: |
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Balance, beginning of year | $ | — | $ | — | $ | 952.2 | ||||||
Additions | — | 1,010.8 | 1,968.6 | |||||||||
Depreciation/Amortization | — | (58.6 | ) | (331.1 | ) | |||||||
Balance, end of year | $ | — | $ | 952.2 | $ | 2,589.7 | ||||||
Movements of the aforementioned difference allocated to goodwill for the years ended December 31, 2006 and 2007 were as follows: |
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Balance, beginning of year | $ | — | $ | — | $ | 213.9 | ||||||
Additions | — | 213.9 | 773.4 | |||||||||
Balance, end of year | $ | — | $ | 213.9 | $ | 987.3 | ||||||
12. | FINANCIAL ASSETS CARRIED AT COST |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Non-publicly traded stocks | $ | 2,924.4 | $ | 3,462.4 | ||||
Mutual funds | 347.9 | 383.2 | ||||||
$ | 3,272.3 | $ | 3,845.6 | |||||
F-26
Table of Contents
13. | PROPERTY, PLANT AND EQUIPMENT, NET |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Cost | ||||||||
Land improvements | $ | 844.7 | $ | 942.2 | ||||
Buildings | 112,595.1 | 118,640.1 | ||||||
Machinery and equipment | 579,825.3 | 646,419.4 | ||||||
Office equipment | 10,646.7 | 11,829.6 | ||||||
Leased assets | 612.9 | 652.3 | ||||||
704,524.7 | 778,483.6 | |||||||
Advance payments and construction in progress | 12,607.6 | 21,868.2 | ||||||
717,132.3 | 800,351.8 | |||||||
Accumulated depreciation | ||||||||
Land improvements | 234.4 | 262.7 | ||||||
Buildings | 54,288.2 | 63,239.9 | ||||||
Machinery and equipment | 400,579.6 | 467,665.1 | ||||||
Office equipment | 7,839.3 | 8,796.8 | ||||||
Leased assets | 96.6 | 135.1 | ||||||
463,038.1 | 540,099.6 | |||||||
Net | $ | 254,094.2 | $ | 260,252.2 | ||||
Depreciation expense on property, plant and equipment was NT$71,385.8 million, NT$71,225.2 million and NT$77,171.3 million for the years ended December 31, 2005, 2006 and 2007, respectively. | ||
The Company entered into agreements to lease buildings that qualify as capital leases. The term of the leases is from December 2003 to December 2013. The future minimum lease payments as of December 31, 2007 is NT$ 725.7 million. |
14. | DEFERRED CHARGES, NET |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Technology license fees | $ | 4,132.2 | $ | 5,819.1 | ||||
Software and system design costs | 1,669.8 | 1,449.6 | ||||||
Others | 134.9 | 654.9 | ||||||
$ | 5,936.9 | $ | 7,923.6 | |||||
Amortization expense on deferred charges was NT$4,341.3 million, NT$2,472.4 million and NT$2,793.0 million for the years ended December 31, 2005, 2006 and 2007, respectively. | ||
As of December 31, 2007, the Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows: |
Amount | ||||
NT$ | ||||
Year | (In Millions) | |||
2008 | $ | 2,345.3 | ||
2009 | 1,507.8 | |||
2010 | 1,354.4 | |||
2011 | 807.7 | |||
2012 | 504.8 | |||
2013 and thereafter | 1,403.6 | |||
$ | 7,923.6 | |||
F-27
Table of Contents
15. | BONDS PAYABLE |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Domestic unsecured bonds: | ||||||||
Issued in December 2000 and repayable in December 2007, 5.36% interest payable annually | $ | 4,500.0 | $ | — | ||||
Issued in January 2002 and repayable in January 2007, 2009 and 2012 in three installments, 2.60%, 2.75% and 3.00% interest payable annually, respectively | 15,000.0 | 12,500.0 | ||||||
19,500.0 | 12,500.0 | |||||||
Current portion | (7,000.0 | ) | — | |||||
$ | 12,500.0 | $ | 12,500.0 | |||||
As of December 31, 2007, future principal repayments for the Company’s bonds were as follows: |
Amount | ||||
NT$ | ||||
Year of Repayment | (In Millions) | |||
2009 | $ | 8,000.0 | ||
2012 | 4,500.0 | |||
$ | 12,500.0 | |||
16. | LONG-TERM BANK LOANS |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Secured loans: | ||||||||
US$20.0 million, repayable in full in one lump sum payment in November 2010, annual interest at 5.91% in 2006 and 5.88% in 2007 | $ | 651.9 | $ | 648.9 | ||||
Repayable from August 2009 in 17 quarterly installments, annual interest at 2.91%-2.99 | — | 630.0 | ||||||
Repayable from December 2007 in 8 semi-annual installments, annual interest at 2.39%-3.20% | — | 456.8 | ||||||
Repayable from March 2007 in 12 quarterly installments, annual interest at 2.79%-3.16% | — | 124.9 | ||||||
Repayable from May 2007 in 16 quarterly installments, annual interest at 2.48%-2.85% | — | 54.6 | ||||||
Repayable from April 2005 in 16 quarterly installments, annual interest at 2.51%-2.85% | — | 45.0 | ||||||
Repayable from February 2005 in 17 quarterly installments, annual interest at 2.65%-4.53% | — | 40.7 | ||||||
Unsecured loans: |
F-28
Table of Contents
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Science Park Administration (SPA) SOC loan, repayable from October 2003 in 20 quarterly installments, interest-free | 4.9 | 2.1 | ||||||
SPA DSP loan, repayable from July 2002 in 20 quarterly installments, interest-free | 1.3 | — | ||||||
658.1 | 2,003.0 | |||||||
Current portion | (4.1 | ) | (280.8 | ) | ||||
$ | 654.0 | $ | 1,722.2 | |||||
Pursuant to the loan agreements, financial ratios calculated based on annual audited financial statements of TSMC-Shanghai as well as semi-annual and annual financial statements of Xintec must comply with certain financial covenants. As of December 31, 2007, TSMC-Shanghai and Xintec were in compliance with all such financial covenants. | ||
As of December 31, 2007, future principal repayments under the Company’s long-term bank loans were as follows: |
Amount | ||||
NT$ | ||||
Year of Repayment | (In Millions) | |||
2008 | $ | 280.8 | ||
2009 | 302.1 | |||
2010 | 947.5 | |||
2011 | 220.6 | |||
2012 and thereafter | 252.0 | |||
$ | 2,003.0 | |||
17. | OTHER LONG-TERM PAYABLES |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Payables for acquisition of property, plant and equipment (Note 28l) | $ | 7,431.4 | $ | 7,908.5 | ||||
Payables for royalties | 1,889.8 | 5,174.7 | ||||||
9,321.2 | 13,083.2 | |||||||
Current portion (under accrued expenses and other current liabilities) | (617.9 | ) | (3,673.2 | ) | ||||
$ | 8,703.3 | $ | 9,410.0 | |||||
The payables for royalties were primarily attributable to several license arrangements that the Company entered into for certain semiconductor-related patents. | ||
As of December 31, 2007, future payments for other long-term payables were as follows: |
Amount | ||||
NT$ | ||||
Year of Payment | (In Millions) | |||
2008 | $ | 3,673.2 | ||
2009 | 582.0 | |||
2010 | 497.7 | |||
2011 | 421.8 | |||
2012 and thereafter | 7,908.5 | |||
$ | 13,083.2 | |||
F-29
Table of Contents
18. | PENSION PLANS | |
The Labor Pension Act (the Act) became effective on July 1, 2005. The employees of TSMC, GUC, and Xintec who were subject to the Labor Standards Law prior to July 1, 2005 were allowed to choose to be subject to the pension mechanism under the Act with their seniority as of July 1, 2005 retained or continue to be subject to the pension mechanism under the Labor Standards Law. Employees who joined TSMC, GUC, Xintec and Mutual-Pak after July 1, 2005 can only be subject to the pension mechanism under the Act. | ||
The pension mechanism under the Act is deemed a defined contribution plan. Pursuant to the Act, TSMC, GUC, Xintec and Mutual-Pak have made monthly contributions equal to 6% of each employee’s monthly salary to employees’ pension accounts starting from July 1, 2005. Furthermore, TSMC-NA, TSMC-Shanghai and TSMC-Europe and TSMC Canada are required by local regulations to make contributions, at a certain percentage of the monthly basic salary of their employees. Pursuant to the aforementioned Act and local regulations, the Company has made monthly contributions and recognized pension costs of NT$305.3 million, NT$679.9 million and NT$725.8 million for the years ended December 31, 2005, 2006 and 2007, respectively. | ||
TSMC, GUC and Xintec have defined benefit plans under the Labor Standards Law that provide benefits based on an employee’s length of service and average monthly salary for the six-month period prior to retirement. TSMC, GUC and Xintec contribute an amount equal to 2% of salaries paid each month to their respective pension funds (the Funds), which are administered by the Labor Pension Fund Supervisory Committee established by the government (the Committees) and deposited in the name of the Committees in the Bank of Taiwan (originally the Central Trust of China, which was merged into the Bank of Taiwan on July 1, 2007). | ||
TSMC, GUC, Xintec and Mutual-Pak use December 31 as the measurement date for their pension plans. | ||
Changes in projected benefit obligation and plan assets for the years ended December 31, 2005, 2006 and 2007 are summarized as follows: |
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Projected benefit obligation | ||||||||||||
Balance, beginning of year | $ | 4,904.1 | $ | 5,976.9 | $ | 6,956.1 | ||||||
Effect of inclusion of newly consolidated subsidiaries | 16.1 | — | 19.0 | |||||||||
Service cost | 470.9 | 178.5 | 184.2 | |||||||||
Interest cost | 163.8 | 164.2 | 156.4 | |||||||||
Actuarial loss (gain) | 436.6 | 653.4 | (1,257.0 | ) | ||||||||
Benefits paid | (14.6 | ) | (16.9 | ) | (15.0 | ) | ||||||
Balance, end of year | $ | 5,976.9 | $ | 6,956.1 | $ | 6,043.7 | ||||||
Plan assets | ||||||||||||
Balance, beginning of year | $ | 1,447.5 | $ | 1,691.6 | $ | 1,958.6 | ||||||
Effect of inclusion of newly consolidated subsidiaries | 7.6 | — | 17.0 |
F-30
Table of Contents
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Actual return of plan assets | 18.7 | 44.7 | 69.0 | |||||||||
Employer contribution | 226.2 | 233.1 | 209.4 | |||||||||
Benefits paid | (8.4 | ) | (10.8 | ) | (15.0 | ) | ||||||
Balance, end of year | $ | 1,691.6 | $ | 1,958.6 | $ | 2,239.0 | ||||||
Other information of defined benefit plans was as follows: |
a. | Components of net periodic pension cost |
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Service cost | $ | 470.9 | $ | 178.5 | $ | 184.3 | ||||||
Interest cost | 163.8 | 164.2 | 156.4 | |||||||||
Projected return on plan assets | (49.8 | ) | (49.4 | ) | (51.3 | ) | ||||||
Amortization | 8.3 | 12.0 | 35.8 | |||||||||
Net periodic pension cost | $ | 593.2 | $ | 305.3 | $ | 325.2 | ||||||
b. | Reconciliation of funded status of the plans and accrued pension cost |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Benefit obligation | ||||||||
Vested benefit obligation | $ | 102.9 | $ | 120.2 | ||||
Nonvested benefit obligation | 3,883.4 | 3,479.1 | ||||||
Accumulated benefit obligation | 3,986.3 | 3,599.3 | ||||||
Additional benefits based on future salaries | 2,969.8 | 2,444.4 | ||||||
Projected benefit obligation | 6,956.1 | 6,043.7 | ||||||
Fair value of plan assets | (1,958.6 | ) | (2,239.0 | ) | ||||
Funded status | 4,997.5 | 3,804.7 | ||||||
Unrecognized net transition obligation | (118.4 | ) | (109.9 | ) | ||||
Unrecognized net loss | (1,339.0 | ) | (42.0 | ) | ||||
Accrued pension cost | $ | 3,540.1 | $ | 3,652.8 | ||||
Vested benefit | $ | 106.6 | $ | 120.1 | ||||
c. | Actuarial assumptions: |
Discount rate used in determining present values | 2.25%-3.50% | 2.75%-3.00% | ||
Future salary increase rate | 2.00%-3.00% | 2.00%-3.00% | ||
Expected rate of return on plan assets | 2.50% | 2.50%-3.00% |
F-31
Table of Contents
d. | Expected benefit payments |
Amount | ||||
NT$ | ||||
(In Millions) | ||||
2008 | $ | 87.1 | ||
2009 | 21.9 | |||
2010 | 32.2 | |||
2011 | 58.2 | |||
2012 | 54.9 | |||
2013 and thereafter | 776.8 |
e. | TSMC, GUC and Xintec expect to make contributions to their pension funds in 2008 of NT$199.0 million, NT$2.2 million and NT$2.7 million, respectively. |
Year Ended December 31 | |||||||||||||||
2005 | 2006 | 2007 | |||||||||||||
NT$ | NT$ | NT$ | |||||||||||||
(In Millions) | |||||||||||||||
f. | Contributions to the Funds | $ | 226.2 | $ | 233.1 | $ | 209.4 | ||||||||
g. | Payments from the Funds | $ | 8.4 | $ | 7.4 | $ | 15.0 | ||||||||
h. | Plan assets allocation | ||
Under the Labor Standards Law, the government is responsible for the administration of the Funds and determination of the investment strategies and policies. As of December 31, 2006 and 2007, the asset allocation was primarily in cash, equity securities and debt securities. Furthermore, under the Labor Standards Law, the rate of return on assets shall not be less than the average interest rate on a two-year time deposit published by the local banks. The government is responsible for any shortfall in the event that the rate of return is less than the required rate of return. |
19. | INCOME TAX |
a. | Income tax expense consisted of: |
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Current | ||||||||||||
Domestic | $ | 3,531.8 | $ | 7,395.2 | $ | 10,595.9 | ||||||
Foreign | 485.3 | 283.1 | 170.6 | |||||||||
4,017.1 | 7,678.3 | 10,766.5 | ||||||||||
Deferred | ||||||||||||
Domestic | (3,295.7 | ) | 173.7 | 976.9 | ||||||||
Foreign | (90.8 | ) | (78.3 | ) | (33.8 | ) | ||||||
(3,386.5 | ) | 95.4 | 943.1 | |||||||||
Income tax expense | $ | 630.6 | $ | 7,773.7 | $ | 11,709.6 | ||||||
F-32
Table of Contents
b. | A reconciliation of income tax expense based on “income before income tax” at statutory rates and income tax currently payable was as follows: |
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Income tax expense based on “income before income tax” statutory rates | $ | 23,658.5 | $ | 34,786.3 | $ | 30,829.4 | ||||||
Tax effect of the following: | ||||||||||||
Tax-exempt income | (12,243.4 | ) | (12,281.4 | ) | (7,668.4 | ) | ||||||
Temporary and permanent differences | 1,123.7 | (2,817.1 | ) | (150.9 | ) | |||||||
Additional tax at 10% on unappropriated earnings | 1,494.8 | 1,170.1 | 2,710.9 | |||||||||
Cumulative effect of changes in accounting principles | — | (82.1 | ) | — | ||||||||
Investment tax credits used | (10,133.8 | ) | (12,769.4 | ) | (14,713.7 | ) | ||||||
Income tax currently payable | $ | 3,899.8 | $ | 8,006.4 | $ | 11,007.3 | ||||||
c. | Income tax expense consisted of the following: |
Income tax currently payable | $ | 3,899.8 | $ | 8,006.4 | $ | 11,007.3 | ||||||
Other income tax adjustments | 117.3 | (328.2 | ) | (240.8 | ) | |||||||
Net change in deferred income tax assets | ||||||||||||
Investment tax credits | 1,965.9 | 3,914.8 | 5,122.5 | |||||||||
Net operating loss carryforwards | 690.6 | 1,412.9 | 841.5 | |||||||||
Temporary differences | (2,402.4 | ) | (2,181.5 | ) | (800.4 | ) | ||||||
Adjustment in valuation allowance | (3,640.6 | ) | (3,050.7 | ) | (4,220.5 | ) | ||||||
Income tax expense | $ | 630.6 | $ | 7,773.7 | $ | 11,709.6 | ||||||
d. | Net deferred income tax assets consisted of the following: |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Current deferred income tax assets | ||||||||
Investment tax credits | $ | 7,870.8 | $ | 5,372.7 | ||||
Temporary differences | 584.2 | 674.2 | ||||||
Valuation allowance | (441.0 | ) | (474.6 | ) | ||||
$ | 8,014.0 | $ | 5,572.3 | |||||
Noncurrent deferred income tax assets | ||||||||
Investment tax credits | $ | 12,252.3 | $ | 9,885.5 | ||||
Net operating loss carryforwards | 4,816.8 | 3,963.1 | ||||||
Temporary differences | 895.5 | 1,204.0 | ||||||
Valuation allowance | (7,686.3 | ) | (3,687.2 | ) | ||||
10,278.3 | 11,365.4 | |||||||
Noncurrent deferred income tax liabilities | ||||||||
Temporary differences | ||||||||
Depreciation | (4,475.7 | ) | (4,051.0 | ) | ||||
Others | (0.5 | ) | (1.1 | ) | ||||
(4,476.2 | ) | (4,052.1 | ) | |||||
Net noncurrent deferred income tax assets | $ | 5,802.1 | $ | 7,313.3 | ||||
F-33
Table of Contents
As of December 31, 2007, the net operating loss carryforwards were generated by WaferTech, TSMC Development and TSMC Technology and would expire on various dates through 2026. |
e. | Integrated income tax information: | ||
The balance of the imputation credit account (ICA) of TSMC as of December 31, 2006 and 2007 was NT$828.6 million and NT$3,012.8 million, respectively. | |||
The estimated creditable ratio for distribution of TSMC’s earnings of 2006 and 2007 was 5.23% and 1.86%, respectively. | |||
The imputation credit allocated to the shareholders is based on its balance as of the date of dividend distribution. The estimated creditable ratio may change when the actual distribution of imputation credit is made. | |||
f. | All of TSMC’s earnings generated prior to December 31, 1997 have been appropriated. | ||
g. | As of December 31, 2007, investment tax credits of TSMC, GUC, Xintec and Mutual-Pak consisted of the following: |
Total | Remaining | |||||||||||||||
Creditable | Creditable | Expiry | ||||||||||||||
Law/Statute | Item | Amount | Amount | Year | ||||||||||||
NT$ | NT$ | |||||||||||||||
(In Millions) | ||||||||||||||||
Statute for Upgrading Industries | Purchase of machinery and equipment | $ | 306.1 | $ | — | 2007 | ||||||||||
3,202.1 | 24.4 | 2008 | ||||||||||||||
6,044.0 | 14.3 | 2009 | ||||||||||||||
6,625.1 | 6,625.1 | 2010 | ||||||||||||||
3,703.9 | 3,703.9 | 2011 | ||||||||||||||
$ | 19,881.2 | $ | 10,367.7 | |||||||||||||
Statute for Upgrading Industries | Research and development expenditures | $ | 1,295.7 | $ | — | 2007 | ||||||||||
2,599.5 | 6.6 | 2008 | ||||||||||||||
1,546.6 | 1,078.3 | 2009 | ||||||||||||||
1,887.4 | 1,887.4 | 2010 | ||||||||||||||
1,749.3 | 1,749.3 | 2011 | ||||||||||||||
$ | 9,078.5 | $ | 4,721.6 | |||||||||||||
Statute for Upgrading Industries | Personnel training expenditures | $ | 16.4 | $ | — | 2007 | ||||||||||
16.2 | — | 2008 | ||||||||||||||
46.3 | 46.3 | 2009 | ||||||||||||||
42.3 | 42.3 | 2010 | ||||||||||||||
0.5 | 0.5 | 2011 | ||||||||||||||
$ | 121.7 | $ | 89.1 | |||||||||||||
Statute for Upgrading Industries | Investments in important technology-based enterprises | $ | 79.8 | $ | 79.8 | 2010 | ||||||||||
h. | The profits generated from the following projects of TSMC, GUC and Xintec are exempt from income tax for a four- or five-year period: |
F-34
Table of Contents
Tax-Exemption Period | ||
Construction of Fab 12 — Module A | 2004 to 2007 | |
Construction of Fab 14 — Module A | 2006 to 2010 | |
Construction of Fab 14 — Module B | 2007 to 2011 | |
2003 plant expansion of GUC | 2007 to 2011 | |
2003 plant expansion of Xintec | 2007 to 2011 |
i. | The tax authorities have examined income tax returns of TSMC through 2004. |
20. | SHAREHOLDERS’ EQUITY |
Common Stock, Capital Surplus and Earnings | ||
As of December 31, 2007, 1,132.9 million ADSs of TSMC were traded on the NYSE. The number of common shares represented by the ADSs was 5,664.3 million (one ADS represents five common shares). | ||
Capital surplus can only be used to offset a deficit under the Company Law. However, the capital surplus generated from donations and the excess of the issuance price over the par value of capital stock (including the stock issued for new capital, mergers, convertible bonds and the surplus from treasury stock transactions) may be appropriated as stock dividends, which are limited to a certain percentage of TSMC’s paid-in capital. | ||
As of December 31, 2006 and 2007, capital surplus consisted of the following: |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
From merger | $ | 24,003.6 | $ | 24,003.6 | ||||
Additional paid-in capital | 19,974.4 | 19,526.5 | ||||||
From convertible bonds | 9,360.4 | 9,360.4 | ||||||
From treasury stock transactions | 389.2 | 491.0 | ||||||
From long-term investments | 379.9 | 351.2 | ||||||
Donations | — | — | ||||||
$ | 54,107.5 | $ | 53,732.7 | |||||
As of December 31, 2006 and 2007, retained earnings consisted of: |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Unappropriated earnings | $ | 152,778.1 | $ | 161,828.3 | ||||
Legal capital reserve | 43,705.7 | 56,406.7 | ||||||
Special capital reserve | 640.7 | 629.5 | ||||||
Total | $ | 197,124.5 | $ | 218,864.5 | ||||
TSMC’s Articles of Incorporation provide that, when allocating the net profits for each fiscal year, TSMC shall first offset its losses in previous years and then set aside the following items accordingly: |
F-35
Table of Contents
a. | Legal capital reserve at 10% of the profits left over, until the accumulated legal capital reserve has equaled TSMC’s paid-in capital; | ||
b. | Special capital reserve in accordance with relevant laws or regulations or as requested by the authorities in charge; | ||
c. | Bonus to directors and bonus to employees of TSMC of not more than 0.3% and not less than 1% of the remainder, respectively. Directors who also serve as executive officers of TSMC are not entitled to receive the bonus to directors. TSMC may issue stock bonuses to employees of an affiliated company meeting the conditions set by the Board of Directors or, by the person duly authorized by the Board of Directors; | ||
d. | Any balance left over shall be allocated according to the resolution of the shareholders’ meeting. |
TSMC’s Articles of Incorporation also provide that profits of TSMC may be distributed by way of cash dividend and/or stock dividend. However, distribution of profits shall be made preferably by way of cash dividend. Distribution of profits may also be made by way of stock dividend; provided that the ratio for stock dividend shall not exceed 50% of the total distribution. | ||
Any appropriations of the profits are recorded in the year of shareholder approval and given effect to in the financial statements of that year. | ||
TSMC no longer has supervisors since January 1, 2007. The required duties of supervisors are being fulfilled by the Audit Committee. | ||
The appropriation for legal capital reserve shall be made until the reserve equals TSMC’s paid-in capital. The reserve may be used to offset a deficit, or be distributed as dividends and bonuses for the portion in excess of 50% of the paid-in capital if TSMC has no unappropriated earnings and the reserve balance has exceeded 50% of TSMC’s paid-in capital. The Company Law also prescribes that, when the reserve has reached 50% of TSMC’s paid-in capital, up to 50% of the reserve may be transferred to capital. | ||
A special capital reserve equivalent to the net debit balance of the other components of shareholders’ equity (for example, cumulative translation adjustments and unrealized loss on financial assets, but excluding treasury stock) shall be made from unappropriated earnings pursuant to existing regulations promulgated by the Securities and Futures Bureau (SFB). Any special reserve appropriated may be reversed to the extent that the net debit balance reverses. | ||
The appropriations of earnings for 2005 and 2006 had been approved in TSMC’s shareholders’ meetings held on May 16, 2006, and May 7, 2007, respectively. The appropriations of earnings of 2007 were approved by the Board of Directors on February 19, 2008. The appropriations of earnings of 2007 have not yet been resolved by the shareholders. The appropriations and dividends per share were as follows: |
Appropriations of Earnings | Dividends Per Share | |||||||||||||||||||||||
For Fiscal | For Fiscal | For Fiscal | For Fiscal | For Fiscal | For Fiscal | |||||||||||||||||||
Year 2005 | Year 2006 | Year 2007 | Year 2005 | Year 2006 | Year 2007 | |||||||||||||||||||
NT$ | NT$ | NT$ | NT$ | NT$ | NT$ | |||||||||||||||||||
(In Millions) | ||||||||||||||||||||||||
Legal capital reserve | $ | 9,357.5 | $ | 12,701.0 | $ | 10,917.7 | ||||||||||||||||||
Special capital reserve | (1,585.7 | ) | (11.2 | ) | (237.7 | ) | ||||||||||||||||||
Bonus to employees — in cash | 3,432.1 | 4,572.8 | 3,939.9 | |||||||||||||||||||||
Bonus to employees — in stock | 3,432.1 | 4,572.8 | 3,939.9 | |||||||||||||||||||||
Cash dividends to shareholders | 61,825.1 | 77,489.1 | 76,881.3 | 2.50 | 3.00 | 3.00 | ||||||||||||||||||
Stock dividends to shareholders | 3,709.5 | 516.6 | 512.5 | 0.15 | 0.02 | 0.02 | ||||||||||||||||||
Bonus to directors and supervisors | 257.4 | 285.8 | 176.9 | |||||||||||||||||||||
$ | 80,428.0 | $ | 100,126.9 | $ | 96,130.5 | |||||||||||||||||||
F-36
Table of Contents
TSMC’s shareholders’ meeting held on May 7, 2007 also resolved to distribute stock dividends out of capital surplus in the amount of NT$774.9 million. The Board of Directors also resolved to distribute stock dividends out of capital surplus in the amount of NT$768.8 million on February 19, 2008. The amounts of the appropriations of earnings for 2007 and the stock dividends to be distributed out of capital surplus have not yet been resolved by the shareholders. However, the Company Law prescribes that TSMC, as a holder of treasury stock, shall not participate in the appropriations of earnings. Therefore, the actual cash dividend per share and stock dividend per share are slightly more than those in the aforementioned resolutions. | ||
The amounts of the appropriations of earnings for 2005 and 2006 are consistent with the resolutions of the meetings of the Board of Directors held on February 14, 2006 and February 6, 2007, respectively. If the above bonus to employees, directors and supervisors had been paid entirely in cash and charged to earnings of 2005 and 2006, the basic earnings per share (after income tax) for the years ended December 31, 2005 and 2006 shown in the respective financial statements would have decreased from NT$3.79 to NT$3.50 and NT$4.93 to NT$4.56, respectively. | ||
The shares distributed as a bonus to employees represented 1.39% and 1.77% of TSMC’s total outstanding common shares as of December 31, 2005 and 2006, respectively. | ||
The information about the appropriations of bonus to employees, directors and supervisors is available at the Market Observation Post System website. | ||
Under the Integrated Income Tax System that became effective on January 1, 1998, R.O.C. resident shareholders are allowed a tax credit for their proportionate share of the income tax paid by TSMC on earnings generated since January 1, 1998. |
21. | STOCK-BASED COMPENSATION PLANS |
TSMC’s Employee Stock Option Plans, under the TSMC 2002 Plan, TSMC 2003 Plan, and TSMC 2004 Plan, were approved by the SFB on June 25, 2002, October 29, 2003 and January 6, 2005, respectively. The maximum number of options authorized to be granted under the TSMC 2002 Plan, TSMC 2003 Plan and TSMC 2004 Plan was 100,000 thousand, 120,000 thousand and 11,000 thousand, respectively, with each option eligible to subscribe for one common share when exercisable. The options may be granted to qualified employees of TSMC or any of its domestic or foreign subsidiaries, in which TSMC’s shareholding with voting rights, directly or indirectly, is more than fifty percent (50%). The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date. Under the terms of the plans, the options are granted at an exercise price equal to the closing price of TSMC’s common shares listed on the TSE on the grant date. | ||
Options of the plans that had never been granted or had been granted but subsequently cancelled had expired as of December 31, 2007. | ||
Information about TSMC’s outstanding stock options for the years ended December 31, 2005, 2006 and 2007 was as follows: |
Weighted- | ||||||||
average | ||||||||
Number of | Exercise | |||||||
Options | Price | |||||||
(In Thousands) | (NT$) | |||||||
Year ended December 31, 2005 | ||||||||
Balance, beginning of year | 64,367 | $ | 40.5 | |||||
Options granted | 14,864 | 48.4 | ||||||
Options exercised | (6,837 | ) | 39.6 |
F-37
Table of Contents
Weighted- | ||||||||
average | ||||||||
Number of | Exercise | |||||||
Options | Price | |||||||
(In Thousands) | (NT$) | |||||||
Options canceled | (4,636 | ) | 44.1 | |||||
Balance, end of year | 67,758 | 42.1 | ||||||
Year ended December 31, 2006 | ||||||||
Balance, beginning of year | 67,758 | $ | 39.4 | |||||
Options granted | 2,758 | 40.1 | ||||||
Options exercised | (14,550 | ) | 40.1 | |||||
Options canceled | (3,152 | ) | 43.7 | |||||
Balance, end of year | 52,814 | 39.6 | ||||||
Year ended December 31, 2007 | ||||||||
Balance, beginning of year | 52,814 | $ | 37.9 | |||||
Options granted | 1,094 | 37.9 | ||||||
Options exercised | (10,988 | ) | 39.8 | |||||
Options cancelled | (1,045 | ) | 45.9 | |||||
Balance, end of year | 41,875 | 37.4 | ||||||
The number of outstanding options and exercise prices have been adjusted to reflect the appropriations of earnings in accordance with the plans. The options granted included the result of the aforementioned adjustment. | ||
As of December 31, 2007, information about TSMC’s outstanding and exercisable options was as follows: |
Options Outstanding | ||||||||||||||||||||
Weighted- | Options Exercisable | |||||||||||||||||||
average | Weighted- | Weighted- | ||||||||||||||||||
Range of | Number of | Remaining | average | Number of | average | |||||||||||||||
Exercise | Options (in | Contractual | Exercise | Options (in | Exercise | |||||||||||||||
Price (NT$) | Thousands) | Life (Years) | Price (NT$) | Thousands) | Price (NT$) | |||||||||||||||
$25.9- $36.4 | 28,527 | 5.16 | $ | 33.1 | 28,528 | $ | 33.1 | |||||||||||||
38.9 - 51.3 | 13,348 | 6.89 | 46.6 | 6,838 | 46.4 | |||||||||||||||
41,875 | 37.4 | 35,366 | 35.6 | |||||||||||||||||
GUC’s Employee Stock Option Plans, consisting of the GUC 2002 Plan and GUC 2003 Plan, were approved by its Board of Directors on July 1, 2002 and January 23, 2003, respectively. The maximum number of options authorized to be granted under the GUC 2002 Plan and GUC 2003 Plan was 5,000 and 7,535, respectively, with each option eligible to subscribe for one thousand common shares when exercisable. The options may be granted to qualified employees of GUC. The options of all the plans are valid for six years and exercisable at certain percentages subsequent to the second anniversary of the grant date. | ||
Moreover, the GUC 2004 Plan, GUC 2006 Plan, and GUC 2007 Plan were approved by the SFB on August 16, 2004, July 3, 2006, and November 28, 2007 to grant a maximum of 2,500 options, 3,665 options and 1,999 options, respectively, with each option eligible to subscribe for one thousand common shares when exercisable. The options may be granted to qualified employees of GUC or any of its subsidiaries. Except for the options of the GUC 2006 Plan which are valid until August 15, 2011, the options of the other two GUC option Plans are valid for six years. Options of all three Plans are exercisable at certain percentages subsequent to the second anniversary of the grant date. |
F-38
Table of Contents
Information about GUC’s outstanding stock options for the years ended December 31, 2005, 2006 and 2007 was as follows: |
Weighted- | ||||||||
average | ||||||||
Exercise | ||||||||
Number of | Prices | |||||||
Options | (NT$) | |||||||
Year ended December 31, 2005 | ||||||||
Balance, beginning of year | 7,889 | $ | 10.5 | |||||
Options granted | 2,499 | 11.0 | ||||||
Options exercised | (2,641 | ) | 10.5 | |||||
Options canceled | (615 | ) | 10.6 | |||||
Balance, end of year | 7,132 | 10.7 | ||||||
Year ended December 31, 2006 | ||||||||
Balance, beginning of year | 7,132 | $ | 10.7 | |||||
Options granted | 3,689 | 19.5 | ||||||
Options exercised | (2,862 | ) | 10.5 | |||||
Options canceled | (617 | ) | 12.1 | |||||
Balance, end of year | 7,342 | 14.0 | ||||||
Year ended December 31, 2007 | ||||||||
Balance, beginning of year | 7,342 | $ | 14.0 | |||||
Options granted | 2,053 | 183.6 | ||||||
Options exercised | (1,563 | ) | 10.2 | |||||
Options canceled | (234 | ) | 13.5 | |||||
Balance, end of year | 7,598 | 60.3 | ||||||
The number of outstanding options and exercise prices have been adjusted to reflect the distribution of earnings by GUC in accordance with the plans. The options granted shown above included options resulting from the aforementioned adjustment and options newly granted in accordance with the plans. | ||
As of December 31, 2007, information about GUC’s outstanding and exercisable options was as follows: |
Options Outstanding | ||||||||||||||||||||
Weighted- | Options Exercisable | |||||||||||||||||||
average | Weighted- | Weighted- | ||||||||||||||||||
Range of | Number of | Remaining | average | Number of | average | |||||||||||||||
Exercise | Options | Contractual | Exercise | Options | Exercise | |||||||||||||||
Price (NT$) | Life (Years) | Price (NT$) | Price (NT$) | |||||||||||||||||
$9.6-$10.5 | 2,247 | 0.58-3.75 | $ | 10.0 | 850 | $ | 10.2 | |||||||||||||
17.7 | 3,418 | 3.67 | 17.7 | — | — | |||||||||||||||
194.0 | 1,933 | 6.00 | 194.0 | — | — | |||||||||||||||
7,598 | 60.3 | 850 | 10.2 | |||||||||||||||||
Xintec’s Employee Stock Option Plans, consisting of the Xintec 2006 Plan and Xintec 2007 Plan, were approved by the SFB on July 3, 2006 and June 26, 2007, respectively. The maximum number of options |
F-39
Table of Contents
authorized to be granted under the Xintec 2006 Plan and Xintec 2007 Plan was 6,000 thousand each, with each option eligible to subscribe for one common share of Xintec when exercisable. The options may be granted to qualified employees of Xintec or any of its subsidiaries. The options of all the plans are valid for ten years and exercisable at certain percentages subsequent to the second anniversary of the grant date. | ||
Information about Xintec’s outstanding stock options for the year ended December 31, 2007 was as follows: |
Weighted- | ||||||||
Number of | average | |||||||
Options | Exercise | |||||||
(in Thousands) | Price (NT$) | |||||||
Year ended December 31, 2007 | ||||||||
Balance, beginning of year | 4,968 | $ | 13.0 | |||||
Options granted | 5,555 | 17.3 | ||||||
Options canceled | (881 | ) | 14.1 | |||||
Balance, end of year | 9,642 | 15.1 | ||||||
The number of outstanding options and exercise prices have been adjusted to reflect the distribution of earnings by Xintec in accordance with the plans. | ||
As of December 31, 2007, information about Xintec’s outstanding and exercisable options was as follows: |
Options Outstanding | ||||||||||||||
Weighted- | Options Exercisable | |||||||||||||
average | Weighted- | Weighted- | ||||||||||||
Range of | Number of | Remaining | average | Number of | average | |||||||||
Exercise | Options (in | Contractual | Exercise | Options (in | Exercise | |||||||||
Price (NT$) | Thousands) | Life (Years) | Price (NT$) | Thousands) | Price (NT$) | |||||||||
$12.7-$20.0 | 9,642 | 8.75-9.96 | $ | 15.1 | — | $— |
The requisite service period under the TSMC 2002 Plan, 2003 Plan, and 2004 Plan is 4 years, which is the same as the vesting period. Based on the vesting schedule, 50% of the options vest two years after the date of grant, 25% of the options vest three years after the date of grant, and the remaining 25% of the options vest four years after the date of grant. If employment is terminated voluntarily by an employee or by the Company, any vested options must be exercised within three months of the employment termination date. For the GUC 2002 Plan, 2003 Plan, 2004 Plan, 2006 Plan and 2007 Plan, the requisite service period is also four years, which is the same as the vesting period. Based on the vesting schedule, 50% of the options vest two years after the date of grant and 50% of the options vest four years after the date of grant. If employment is terminated voluntarily by an employee or by the Company, any vested options must be exercised within three days of the employment termination date. For the Xintec 2006 Plan and 2007 Plan, the requisite service period is also 4 years, with 50% of the options vested two years after the date of grant, 25% of the options vested three years after the date of grant, and the remaining 25% of the options vested four years after the date of grant. If employment is terminated voluntarily by an employee or by the Company, any vested options must be exercised within three months of the employment termination date. | ||
No compensation cost was recognized under the intrinsic value method for the years ended December 31, 2005, 2006 and 2007. Had the Company used the fair value based method to evaluate the options granted after January 1, 2004 using the Black Scholes model, the assumptions and pro forma results of the Company for the years ended December 31, 2005, 2006 and 2007 would have been as follows: |
F-40
Table of Contents
Year Ended December 31 | ||||||||||||||
2005 | 2006 | 2007 | ||||||||||||
Assumptions: | ||||||||||||||
TSMC | Weighted average fair value of grants | 17.69 | — | — | ||||||||||
Expected dividend yield | 1.00%-3.44% | 1.00%-3.44% | 1.00%-3.44% | |||||||||||
Expected volatility | 43.77%-46.15% | 43.77%-46.15% | 43.77%-46.15% | |||||||||||
Risk free interest rate | 3.07%-3.85% | 3.07%-3.85% | 3.07%-3.85% | |||||||||||
Expected life | 5 years | 5 years | 5 years | |||||||||||
GUC | Weighted average fair value of grants | 3.32 | 3.73 | 63.74 | ||||||||||
Expected dividend yield | — | — | 0.00%-0.60% | |||||||||||
Expected volatility | 22.65%-28.02% | 22.65%-41.74% | 22.65%-45.47% | |||||||||||
Risk free interest rate | 2.56% | 2.23%-2.56% | 2.12%-2.56% | |||||||||||
Expected life | 6 years | 3-6 years | 3-6 years | |||||||||||
Xintec | Weighted average fair value of grants | — | — | 2.84 | ||||||||||
Expected dividend yield | — | — | 0.80% | |||||||||||
Expected volatility | — | — | 31.79%-47.42% | |||||||||||
Risk free interest rate | — | — | 1.88%-2.45% | |||||||||||
Expected life | 3 years |
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Net income attributable to shareholders of the parent: | ||||||||||||
As reported | 93,575.0 | $ | 127,009.7 | $ | 109,177.1 | |||||||
Pro forma | 93,456.5 | 126,887.2 | 109,089.0 | |||||||||
Consolidated earnings per share (EPS) — after income tax (NT$): | ||||||||||||
Basic EPS as reported | 3.55 | 4.82 | 4.14 | |||||||||
Pro forma basic EPS | 3.55 | 4.81 | 4.14 | |||||||||
Diluted EPS as reported | 3.55 | 4.81 | 4.14 | |||||||||
Pro forma diluted EPS | 3.55 | 4.81 | 4.14 |
The expected volatility is determined based on the historical stock price trends. The expected life computation is based on business environment and the option plan itself. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. The dividend yield is based on the anticipated future cash dividends yield at the time of grant. |
22. | TREASURY STOCK |
Beginning | Stock | Ending | ||||||||||||||
Shares | Addition | Dividends | Shares | |||||||||||||
(Shares in Thousands) | ||||||||||||||||
Year ended December 31, 2006 | ||||||||||||||||
Parent company stock held by subsidiaries | 32,938 | — | 988 | 33,926 | ||||||||||||
Year ended December 31, 2007 | ||||||||||||||||
Parent company stock held by subsidiaries | 33,926 | — | 170 | 34,096 | ||||||||||||
Repurchase under share buyback plan | — | 800,000 | — | 800,000 | ||||||||||||
33,926 | 800,000 | 170 | 834,096 | |||||||||||||
F-41
Table of Contents
As of December 31, 2006 and 2007, the book value of the treasury stock was NT$ 918.1 million and NT$49,385.0 million, respectively; the market value was NT$2,290.0 million and NT$ 51,713.9 million, respectively. TSMC’s common shares held by subsidiaries were treated as treasury stock and the holders are entitled to the rights of shareholders, with the exception of voting rights. | ||
TSMC held a meeting of the Board of Directors and approved a share buyback plan to repurchase TSMC’s common shares up to 800,000 thousand shares listed on the TSE during the period from November 14, 2007 to January 13, 2008 for the buyback price in the range from NT$43.2 to NT$94.2. As of December 31, 2007, TSMC had repurchased 800,000 thousand common shares for a total cost of NT$48,466.9 million. All the treasury stock repurchased will be retired in 2008. | ||
23. | EARNINGS PER SHARE |
Year Ended December 31 | ||||||||||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||||||||||
Before | After | Before | After | Before | After | |||||||||||||||||||
Income | Income | Income | Income | Income | Income | |||||||||||||||||||
Tax | Tax | Tax | Tax | Tax | Tax | |||||||||||||||||||
Basic EPS | ||||||||||||||||||||||||
Income before cumulative effect of changes in accounting principles attributable to shareholders of the parent | $ | 3.58 | $ | 3.55 | $ | 5.05 | $ | 4.76 | $ | 4.59 | $ | 4.14 | ||||||||||||
Cumulative effect of changes in accounting principles attributable to shareholders of the parent | — | — | 0.06 | 0.06 | — | — | ||||||||||||||||||
Income attributable to shareholders of the parent | $ | 3.58 | $ | 3.55 | $ | 5.11 | $ | 4.82 | $ | 4.59 | $ | 4.14 | ||||||||||||
Diluted EPS | ||||||||||||||||||||||||
Income before cumulative effect of changes in accounting principles attributable to shareholders of the parent | $ | 3.57 | $ | 3.55 | $ | 5.04 | $ | 4.75 | $ | 4.58 | $ | 4.14 | ||||||||||||
Cumulative effect of changes in accounting principles attributable to shareholders of the parent | — | — | 0.06 | 0.06 | — | — | ||||||||||||||||||
Income attributable to shareholders of the parent | $ | 3.57 | $ | 3.55 | $ | 5.10 | $ | 4.81 | $ | 4.58 | $ | 4.14 | ||||||||||||
EPS was computed as follows: |
Number of | EPS | |||||||||||||||||||
Amounts (Numerator) | Shares | Before | After | |||||||||||||||||
Before | After | (Denominator) | Income | Income | ||||||||||||||||
Income Tax | Income Tax | (In Thousands) | Tax | Tax | ||||||||||||||||
NT$ | NT$ | NT$ | NT$ | |||||||||||||||||
(In Millions) | ||||||||||||||||||||
Year ended December 31, 2005 | ||||||||||||||||||||
Basic EPS | ||||||||||||||||||||
Income available to shareholders of the parent | $ | 94,214.6 | $ | 93,575.0 | 26,349,396 | $ | 3.58 | $ | 3.55 | |||||||||||
Effect of dilutive potential common stock — stock options | — | — | 10,331 | |||||||||||||||||
Diluted EPS | ||||||||||||||||||||
Income available to shareholders of the parent (including effect of dilutive potential common stock) | $ | 94,214.6 | $ | 93,575.0 | 26,359,727 | $ | 3.57 | $ | 3.55 | |||||||||||
Year ended December 31, 2006 | ||||||||||||||||||||
Basic EPS |
F-42
Table of Contents
Number of | EPS | |||||||||||||||||||
Amounts (Numerator) | Shares | Before | After | |||||||||||||||||
Before | After | (Denominator) | Income | Income | ||||||||||||||||
Income Tax | Income Tax | (In Thousands) | Tax | Tax | ||||||||||||||||
NT$ | NT$ | NT$ | NT$ | |||||||||||||||||
(In Millions) | ||||||||||||||||||||
Income available to shareholders of the parent | $ | 134,698.7 | $ | 127,009.7 | 26,374,757 | $ | 5.11 | $ | 4.82 | |||||||||||
Effect of dilutive potential common stock — stock options | — | — | 24,101 | |||||||||||||||||
Diluted EPS | ||||||||||||||||||||
Income available to shareholders of the parent (including effect of dilutive potential common stock) | $ | 134,698.7 | $ | 127,009.7 | 26,398,858 | $ | 5.10 | $ | 4.81 | |||||||||||
Year ended December 31, 2007 | ||||||||||||||||||||
Basic EPS | ||||||||||||||||||||
Income available to shareholders of the parent | $ | 120,890.7 | $ | 109,177.1 | 26,346,582 | $ | 4.59 | $ | 4.14 | |||||||||||
Effect of dilutive potential common stock — stock options | — | — | 21,668 | |||||||||||||||||
Diluted EPS | ||||||||||||||||||||
Income available to shareholders of the parent (including effect of dilutive potential common stock) | $ | 120,890.7 | $ | 109,177.1 | 26,368,250 | $ | 4.58 | $ | 4.14 | |||||||||||
24. | DISCLOSURES FOR FINANCIAL INSTRUMENTS |
a. | Fair values of financial instruments were as follows: |
December 31 | ||||||||||||||||
2006 | 2007 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
NT$ | NT$ | NT$ | NT$ | |||||||||||||
(In Millions) | (In Millions) | |||||||||||||||
Assets | ||||||||||||||||
Financial assets at fair value through profit or loss | $ | 1,206.9 | $ | 1,206.9 | $ | 1,632.4 | $ | 1,632.4 | ||||||||
Available-for-sale financial assets | 74,172.4 | 74,172.4 | 68,089.1 | 68,089.1 | ||||||||||||
Held-to-maturity financial assets | 37,484.3 | 37,375.5 | 20,224.6 | 20,192.2 | ||||||||||||
Liabilities | ||||||||||||||||
Financial liabilities at fair value through profit or loss | 10.9 | 10.9 | 249.3 | 249.3 | ||||||||||||
Bonds payable (including current portion) | 19,500.0 | 19,817.1 | 12,500.0 | 12,670.0 | ||||||||||||
Long-term bank loans (including current portion) | 658.1 | 658.1 | 2,003.0 | 2,003.0 | ||||||||||||
Other long-term payables (including current portion) | 10,413.1 | 10,413.1 | 13,083.2 | 13,083.2 | ||||||||||||
Obligations under capital leases | 612.9 | 612.9 | 652.3 | 652.3 |
b. | Methods and assumptions used in the estimation of fair values of financial instruments |
1) | The aforementioned financial instruments do not include cash and cash equivalents, receivables, other financial assets, payables, and payables to contractors and equipment suppliers. The carrying amounts of these financial instruments approximate their fair values. | ||
2) | Fair values of financial assets/liabilities at fair value through profit or loss, available-for-sale and held-to-maturity financial assets other than derivatives and structured time deposits were based on their quoted market prices. | ||
3) | Fair values of derivatives and structured time deposits were determined using valuation techniques incorporating estimates and assumptions that were consistent with prevailing market conditions. |
F-43
Table of Contents
4) | Fair value of bonds payable was based on their quoted market price. | ||
5) | Fair values of long-term bank loans, other long-term payables and obligations under capital leases were based on the present value of expected cash flows, which approximate their carrying amounts. |
c. | Gains and losses recognized for the changes in fair value of derivatives estimated using valuation techniques during the years ended December 31, 2006 and 2007 were NT$33.7 million and NT$240.8 million, respectively. | ||
d. | As of December 31, 2006 and 2007, financial assets exposed to fair value interest rate risk were NT$111,492.3 million and NT$87,450.6 million, respectively; financial liabilities exposed to fair value interest rate risk were NT$10.9 million and NT$249.3 million, respectively. As of December 31, 2006, financial assets exposed to cash flow interest rate risk were NT$7,171.1 million. | ||
e. | Movements of the unrealized gain/loss on financial instruments for the years ended December 31, 2006 and 2007 were as follows: |
Year Ended December 31, 2006 | ||||||||||||
Equity in | ||||||||||||
Valuation | ||||||||||||
Valuation | Gain on | |||||||||||
Gain on | Available- | |||||||||||
Available- | for-sale | |||||||||||
for-sale | Financial | |||||||||||
Financial | Assets Held | |||||||||||
Assets | by Investees | Total | ||||||||||
Balance, beginning of year | $ | 302.4 | $ | — | $ | 302.4 | ||||||
Recognized directly in shareholders’ equity | 174.2 | 175.6 | 349.8 | |||||||||
Removed from shareholders’ equity and recognized in earnings | (90.6 | ) | — | (90.6 | ) | |||||||
Balance, end of year | $ | 386.0 | $ | 175.6 | $ | 561.6 | ||||||
Year Ended December 31, 2007 | ||||||||||||
Equity in | ||||||||||||
Valuation | ||||||||||||
Valuation | Gain on | |||||||||||
Gain on | Available- | |||||||||||
Available- | for-sale | |||||||||||
for-sale | Financial | |||||||||||
Financial | Assets Held | |||||||||||
Assets | by Investees | Total | ||||||||||
Balance, beginning of year | $ | 386.0 | $ | 175.6 | $ | 561.6 | ||||||
Recognized directly in shareholders’ equity | 849.8 | (122.4 | ) | 727.4 | ||||||||
Removed from shareholders’ equity and recognized in earnings | (608.0 | ) | — | (608.0 | ) | |||||||
Balance, end of year | $ | 627.8 | $ | 53.2 | $ | 681.0 | ||||||
f. | Information about financial risk |
1) | Market risk. The publicly-traded stocks categorized as financial assets at fair value through profit or loss are exposed to market price fluctuations. The derivative financial instruments categorized |
F-44
Table of Contents
as financial assets/liabilities at fair value through profit or loss are mainly used to hedge the exchange rate fluctuations of foreign-currency assets and liabilities; therefore, the market risk of derivatives will be offset by the foreign exchange risk of these hedged items. Available-for-sale financial assets held by the Company are mainly fixed-interest-rate debt securities; therefore, the fluctuations in market interest rates would result in changes in fair value of these debt securities. | |||
2) | Credit risk. Credit risk represents the potential loss that would be incurred by the Company if the counter-parties or third-parties breached contracts. Financial instruments with positive fair values at the balance sheet date are evaluated for credit risk. The counter-parties or third-parties to the foregoing financial instruments are reputable financial institutions, business organizations and government agencies. Management believes that the Company’s exposure to default by those parties is low. | ||
3) | Liquidity risk. The Company has sufficient operating capital to meet cash needs upon settlement of derivative financial instruments, bonds payable and bank loans. Therefore, the liquidity risk is low. | ||
4) | Cash flow interest rate risk. The Company mainly invests in fixed-interest-rate debt securities. Therefore, cash flows are not expected to fluctuate significantly due to changes in market interest rates. |
25. | RELATED PARTY TRANSACTIONS | |
Except as disclosed in the consolidated financial statements and other notes, the following is a summary of significant related party transactions: |
a. | Philips, one of the major shareholders of TSMC, which has become a non-related party since March, 2007. | ||
b. | Investees of TSMC | ||
VIS (accounted for using equity method) SSMC (accounted for using equity method) | |||
c. | VisEra Technology Company, Ltd. (VisEra), an indirect investee accounted for using equity method by TSMC | ||
d. | Omnivision International Holding, Ltd. (Omnivision), originally a shareholder holding a 25% equity interest in VisEra. Because VisEra has not been a consolidated entity of the Company since November 2005, Omnivision is no longer considered a related party. | ||
e. | Others: Related parties over which the Company exercises significant influence but with which the Company had no material transactions |
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
For the year | ||||||||||||
Sales | ||||||||||||
VisEra | $ | — | $ | 99.4 | $ | 739.9 | ||||||
VIS | 12.3 | 14.4 | 59.2 | |||||||||
SSMC | 195.3 | 6.5 | 2.9 | |||||||||
Philips | 3,298.8 | 4,025.0 | — |
F-45
Table of Contents
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Omnivision | 2,489.2 | — | — | |||||||||
Others | 285.1 | 42.0 | — | |||||||||
$ | 6,280.7 | $ | 4,187.3 | $ | 802.0 | |||||||
Purchases | ||||||||||||
SSMC | $ | 5,729.7 | $ | 6,820.6 | $ | 5,468.4 | ||||||
VIS | 4,142.4 | 3,919.6 | 4,208.2 | |||||||||
VisEra | — | — | 0.6 | |||||||||
$ | 9,872.1 | $ | 10,740.2 | $ | 9,677.2 | |||||||
Manufacturing expenses — technical assistance fees | ||||||||||||
VisEra | $ | — | $ | — | $ | 63.9 | ||||||
VIS | — | — | 0.4 | |||||||||
Philips (see Note 28a) | 581.1 | 755.9 | — | |||||||||
$ | 581.1 | $ | 755.9 | $ | 64.3 | |||||||
Research and development expenses | ||||||||||||
VisEra | $ | — | $ | — | $ | 43.1 | ||||||
Proceeds from disposal of property, plant and equipment | ||||||||||||
VisEra | $ | 534.3 | $ | — | $ | — | ||||||
Non-operating income and gains | ||||||||||||
VIS (primarily technical service income, see Note 28h) | $ | 210.7 | $ | 261.2 | $ | 346.3 | ||||||
VisEra | 308.1 | 246.2 | 321.8 | |||||||||
SSMC (primarily technical service income, see Note 28e) | 316.2 | 315.0 | 290.6 | |||||||||
$ | 835.0 | $ | 822.4 | $ | 958.7 | |||||||
At end of year | ||||||||||||
Receivables | ||||||||||||
VisEra | $ | — | $ | 1.0 | $ | 10.9 | ||||||
Philips | 573.6 | 250.9 | — | |||||||||
Others | 119.7 | 0.4 | — | |||||||||
$ | 693.3 | $ | 252.3 | $ | 10.9 | |||||||
Other receivables | ||||||||||||
VIS | $ | 74.5 | $ | 121.9 | $ | 118.7 | ||||||
SSMC | 149.2 | 69.6 | 84.8 | |||||||||
VisEra | 374.2 | 59.0 | 40.1 | |||||||||
Others | — | 6.4 | — | |||||||||
$ | 597.9 | $ | 256.9 | $ | 243.6 | |||||||
Payables | ||||||||||||
VIS | $ | 563.2 | $ | 719.8 | $ | 839.6 | ||||||
SSMC | 485.9 | 459.3 | 655.1 | |||||||||
VisEra | — | — | 8.7 | |||||||||
Philips | 694.0 | 688.6 | — | |||||||||
$ | 1,743.1 | $ | 1,867.7 | $ | 1,503.4 | |||||||
F-46
Table of Contents
Year Ended December 31 | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Other long-term payables | ||||||||||||
Philips (see Note 28a) | $ | 1,100.5 | $ | 403.4 | $ | — | ||||||
Deferred credits | ||||||||||||
VisEra | $ | 186.5 | $ | 124.4 | $ | 62.2 | ||||||
The terms of sales to related parties were not significantly different from those of sales to third parties. For other related party transactions, prices were determined in accordance with mutual agreements. | ||
TSMC deferred the gains (classified under deferred credits) derived from sales of property, plant and equipment to VisEra, and then recognized such gains (classified under the non-operating income and gains) over the depreciable lives of the disposed assets. | ||
TSMC leased certain buildings and facilities to VisEra. The related rental income was classified under non-operating income. The lease terms and prices were determined in accordance with mutual agreements. | ||
26. | PLEDGED OR MORTGAGED ASSETS | |
The Company provided certain assets as collateral mainly for long-term bank loans and land lease agreements, which were as follows: |
December 31 | ||||||||
2006 | 2007 | |||||||
Other financial assets | $ | 52.9 | $ | 48.9 | ||||
Property, plant and equipment, net | 4,293.6 | 5,733.3 | ||||||
$ | 4,346.5 | $ | 5,782.2 | |||||
27. | SIGNIFICANT LONG-TERM LEASES | |
The Company leases several parcels of land and office premises from the SPA and Jhongli Industrial Park Service Center. These operating leases expire on various dates from March 2008 to December 2027 and can be renewed upon expiration. | ||
The Company entered into lease agreements for its office premises and certain equipment located in the United States, Japan, Shanghai and Taiwan. These operating leases expire between 2008 and 2016 and can be renewed upon expiration. | ||
As of December 31, 2007, future lease payments were as follows: |
Year | Amount | |||
NT$ | ||||
(In Millions) | ||||
2008 | $ | 556.9 | ||
2009 | 544.9 | |||
2010 | 458.7 | |||
2011 | 319.3 | |||
2012 and thereafter | 2,582.9 | |||
$ | 4,462.7 | |||
F-47
Table of Contents
Rent expense for the years ended December 31, 2005, 2006 and 2007 was NT$949.4 million, NT$1,368.2 million and NT$1,398.3 million, respectively. | ||
28. | SIGNIFICANT COMMITMENTS AND CONTINGENCIES | |
Significant commitments and contingencies of the Company as of December 31, 2007, excluding those disclosed in other notes, were as follows: |
a. | On June 20, 2004, TSMC and Philips (Philips parted with its semiconductor company which was renamed as NXP B.V. in September 2006) amended the Technical Cooperation Agreement, which was originally signed on May 12, 1997. The amended Technical Cooperation Agreement is for five years beginning from January 1, 2004. Upon expiration, this amended Technical Cooperation Agreement will be terminated and will not be automatically renewed; however, the patent cross license arrangement between TSMC and Philips (now NXP B.V.) will survive the expiration of the amended Technical Cooperation Agreement. Under this amended Technical Cooperation Agreement, TSMC will pay Philips (now NXP B.V.) royalties based on a fixed amount mutually agreed-on, rather than under a certain percentage of TSMC’s annual net sales. TSMC and Philips (now NXP B.V.) agreed to cross license the patents owned by each party. TSMC also obtained through Philips (now NXP B.V.) a number of cross patent licenses. | ||
b. | Under a technical cooperation agreement with ITRI, the R.O.C. Government or its designee approved by TSMC can use up to 35% of TSMC’s capacity if TSMC’s outstanding commitments to its customers are not prejudiced. The term of this agreement is for five years beginning from January 1, 1987 and is automatically renewed for successive periods of five years unless otherwise terminated by either party with one year prior notice. The agreement was automatically renewed in 1992, 1997, 2002 and on January 1, 2007. | ||
c. | 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, 2007, TSMC had a total of US$68.4 million of guarantee deposits. | ||
d. | 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, which is an integrated circuit foundry in Singapore. TSMC’s equity interest in SSMC was 32%. Nevertheless, Philips parted with its semiconductor company which was renamed as NXP B.V. in September 2006. TSMC and NXP B.V. purchased all the SSMC shares owned by EDB Investments Pte Ltd. pro rata according to the Shareholders Agreement on November 15, 2006. After the purchase, TSMC and NXP B.V. currently own approximately 39% and 61% of the SSMC shares respectively. The Company and Philips (now NXP) committed to buy specific percentages of the production capacity of SSMC. TSMC and Philips (now NXP B.V.) are required, in the aggregate, to purchase up to 70% of SSMC’s capacity, but TSMC alone is not required to purchase more than 28% of the capacity. If any party defaults on the commitment and the capacity utilization of SSMC fall below a specific percentage of its capacity, the defaulting party is required to compensate SSMC for all related unavoidable costs. | ||
e. | TSMC provides technical services to SSMC under a Technical Cooperation Agreement (the Agreement) entered into on May 12, 1999. TSMC receives compensation for such services computed at a specific percentage of net selling price of all products sold by SSMC. The Agreement shall remain in force for ten years and may be automatically renewed for successive periods of five years each unless pre-terminated by either party under certain conditions. | ||
f. | 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 written notice for early termination |
F-48
Table of Contents
under certain conditions. In January 2003, TSMC and National entered into a Termination Agreement whereby the TTA was terminated. Under the Termination Agreement, TSMC will be relieved of any further obligation to transfer any additional technology. In addition, TSMC granted National an option to request prior to January 2008 the transfer of certain technologies under the same terms and conditions as the terminated TTA. National did not make such request by the deadline, therefore the option has expired in January 2008. | |||
g. | In December 2003, TSMC entered into a Technology Development and License Agreement with Freescale Semiconductor, Inc. to jointly develop 65-nm SOI (silicon on insulator) technology. TSMC will also license related 90-nm SOI technology from Freescale Semiconductor, Inc. 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 Freescale Semiconductor, Inc. and will share a portion of the costs associated with the joint development project. | ||
h. | TSMC provides a technology transfer to VIS under a Manufacturing License and Technology Transfer Agreement entered into on April 1, 2004. TSMC receives compensation for such technology transfer in the form of royalty payments from VIS computed at specific percentages of net selling price of certain products sold by VIS. VIS agreed to reserve its certain capacity to manufacture for TSMC certain products at prices as agreed by the parties. | ||
i. | Effective January 1, 2006, The Company entered into the Joint Technology Cooperation Agreement with Philips (now NXP B.V.), Freescale Semiconductor, Inc. and STMicroelectronics to jointly develop 45-nm and beyond advanced CMOS Logic and e-DRAM technologies. The Company will contribute process technologies and share a portion of the costs associated with this joint development project. This agreement was to expire on December 31, 2008, but the Company has ended its participation in the project. For the Company, this agreement had terminated as of January 26, 2008. | ||
j. | TSMC, TSMC-North America and WaferTech filed a series of lawsuits in late 2003 and 2004 against Semiconductor Manufacturing International Corporation, SMIC (Shanghai) and SMIC Americas (aggregately referring to as “SMIC”). The lawsuits alleged that SMIC infringed multiple TSMC, TSMC-North America and WaferTech patents and misappropriated TSMC, TSMC-North America and WaferTech’s trade secrets. These suits were settled out of court on January 30, 2005. As part of the settlement, Semiconductor Manufacturing International Corporation shall pay US$175 million over six years to resolve TSMC, TSMC-North America and WaferTech’s claims. As of December 31, 2007, SMIC had paid US$90 million in accordance with the terms of this settlement agreement. In August 2006, TSMC, TSMC-North America and WaferTech filed a lawsuit against SMIC in Alameda County Superior Court in California for breach of aforementioned settlement agreement, breach of promissory notes and trade secret misappropriation, seeking injunctive relief and monetary damages. In September 2006, SMIC filed a cross-complaint against TSMC, TSMC-North America and WaferTech in the same court, alleging TSMC, TSMC-North America and WaferTech of breach of the settlement agreement and implied covenant of good faith and fair dealing, in response to TSMC, TSMC-North America and WaferTech’s August complaint. In November 2006, SMIC filed a complaint with Beijing People’s High Court against TSMC, TSMC-North America and WaferTech alleging defamation and breach of good faith. The California State Superior Court of Alameda County issued an Order on TSMC, TSMC-North America and WaferTech’s pre-trial motion for a preliminary injunction against SMIC on September 7, 2007. In the Order, the Court found “TSMC has demonstrated a significant likelihood that it will ultimately prevail on the merits of its claim for breach of certain paragraphs of the (2005) Settlement Agreement” with SMIC. The Court also found “TSMC has demonstrated a significant probability of establishing that SMIC retains and is using TSMC Information in SMIC’s 0.13um and smaller technologies, and there is significant threat of serious irreparable harm to TSMC if SMIC were to disclose or transfer that information before final resolution of the case.” Therefore, the Court ordered that, effective immediately, SMIC must provide advance notice and an opportunity for TSMC, TSMC-North America and WaferTech to object before disclosing items enumerated in the Court Order to SMIC’s third party partners. The Court, however, did not grant a preliminary injunction as requested by TSMC, TSMC-North America and WaferTech. The result of the above-mentioned litigation cannot be determined at this time. |
F-49
Table of Contents
k. | In April 2004, UniRAM Technology, Inc. filed an action with the US District Court in the Northern District of California against TSMC and TSMC North America, alleging patent infringement and trade secret misappropriation and seeking injunctive relief and damages. A jury in the District Court made a verdict in September 2007, awarding US$30.5 million to the plaintiff. TSMC intends to pursue remedies against this verdict. As a result of the verdict, TSMC accrued the full amount of the award, US$30.5 million, which is reported as a separate line item in the income statement. | ||
l. | The Company entered into an agreement with a counterparty in 2003 whereby the Company is obligated to purchase certain property, plant and equipment at the agreed-upon price within the contract period. If the purchase is not completed, the Company is obligated to compensate the counterparty for the loss incurred. The Property, plant and equipment have been in use by the Company since 2004 and are being depreciated over their estimated service lives. The related obligation totaled NT$7,431.4 million and NT$7,908.5 million as of December 31, 2006 and 2007, respectively, which is included in other long-term payables on the Company’s consolidated balance sheets. | ||
m. | Amounts available under unused letters of credit as of December 31, 2007 were NT$36.6 million. |
29. | SEGMENT FINANCIAL INFORMATION |
a. | Industry financial information | ||
The Company is engaged mainly in the manufacturing, selling, packaging and testing of integrated circuits. Therefore, the disclosure of industry financial information is not applicable to the Company. | |||
b. | Geographic information: |
North | Adjustments | |||||||||||||||
America | and | |||||||||||||||
and Others | Taiwan | Elimination | Consolidated | |||||||||||||
NT$ | NT$ | NT$ | NT$ | |||||||||||||
(In Millions) | ||||||||||||||||
Year ended December 31, 2005 | ||||||||||||||||
Sales to other than consolidated entities | $ | 152,517.8 | $ | 114,047.3 | $ | — | $ | 266,565.1 | ||||||||
Sales among consolidated entities | 13,513.2 | 152,132.5 | (165,645.7 | ) | — | |||||||||||
Total sales | $ | 166,031.0 | $ | 266,179.8 | $ | (165,645.7 | ) | $ | 266,565.1 | |||||||
Gross profit | $ | 2,858.1 | $ | 115,722.2 | $ | (377.4 | ) | $ | 118,202.9 | |||||||
Operating expenses | (27,234.3 | ) | ||||||||||||||
Non-operating income and gains | 9,399.4 | |||||||||||||||
Non-operating expenses and losses | (6,104.7 | ) | ||||||||||||||
Income before income tax | $ | 94,263.3 | ||||||||||||||
Net income attributable to minority interest | $ | 57.7 | ||||||||||||||
Identifiable assets | $ | 92,904.4 | $ | 430,084.0 | $ | (45,861.3 | ) | $ | 477,127.1 | |||||||
Long-term investments | 42,382.5 | |||||||||||||||
Total assets | $ | 519,509.6 | ||||||||||||||
Year ended December 31, 2006 | ||||||||||||||||
F-50
Table of Contents
North | Adjustments | |||||||||||||||
America | and | |||||||||||||||
and Others | Taiwan | Elimination | Consolidated | |||||||||||||
NT$ | NT$ | NT$ | NT$ | |||||||||||||
(In Millions) | ||||||||||||||||
Sales to other than consolidated entities | $ | 191,511.9 | $ | 125,895.3 | $ | — | $ | 317,407.2 | ||||||||
Sales among consolidated entities | 18,998.6 | 191,345.1 | (210,343.7 | ) | — | |||||||||||
Total sales | $ | 210,510.5 | $ | 317,240.4 | $ | (210,343.7 | ) | $ | 317,407.2 | |||||||
Gross profit | $ | 5,641.4 | $ | 150,498.0 | $ | (329.3 | ) | $ | 155,810.1 | |||||||
Operating expenses | (28,545.4 | ) | ||||||||||||||
Non-operating income and gains | 9,705.6 | |||||||||||||||
Non-operating expenses and losses | (3,608.1 | ) | ||||||||||||||
Income before income tax | $ | 133,362.2 | ||||||||||||||
Net income attributable to minority interest | $ | 185.5 | ||||||||||||||
Identifiable assets | $ | 133,341.6 | $ | 441,339.4 | $ | (41,091.0 | ) | $ | 533,590.0 | |||||||
Long-term investments | 53,895.2 | |||||||||||||||
Total assets | $ | 587,485.2 | ||||||||||||||
North | Adjustments | |||||||||||||||
America | and | |||||||||||||||
and Others | Taiwan | Elimination | Consolidated | |||||||||||||
NT$ | NT$ | NT$ | NT$ | |||||||||||||
(In Millions) | ||||||||||||||||
Year ended December 31, 2007 | ||||||||||||||||
Sales to other than consolidated entities | $ | 193,066.2 | $ | 129,564.4 | $ | — | $ | 322,630.6 | ||||||||
Sales among consolidated entities | 18,084.1 | 194,035.5 | (212,119.6 | ) | — | |||||||||||
Total sales | $ | 211,150.3 | $ | 323,599.9 | $ | (212,119.6 | ) | $ | 322,630.6 | |||||||
Gross profit | $ | 3,895.1 | $ | 139,227.5 | $ | (772.4 | ) | $ | 142,350.2 | |||||||
Operating expenses | (30,628.3 | ) | ||||||||||||||
Non-operating income and gains | 11,933.8 | |||||||||||||||
Non-operating expenses and losses | (2,013.7 | ) | ||||||||||||||
Income before income tax | $ | 121,642.0 | ||||||||||||||
Net income attributable to minority interest | $ | 755.3 | ||||||||||||||
Identifiable assets | $ | 145,483.4 | $ | 439,675.9 | $ | (50,755.4 | ) | $ | 534,403.9 | |||||||
Long-term investments | 36,461.3 | |||||||||||||||
Total assets | $ | 570,865.2 | ||||||||||||||
F-51
Table of Contents
c. | Net sales |
Year Ended December 31 | ||||||||||||
Areas | 2005 | 2006 | 2007 | |||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Taiwan | $ | 30,908.7 | $ | 34,483.2 | $ | 42,876.0 | ||||||
United States | 119,792.3 | 155,166.0 | 163,242.2 | |||||||||
Asia and others | 102,977.9 | 105,808.9 | 84,802.0 | |||||||||
Europe | 18,122.8 | 27,425.4 | 37,416.0 | |||||||||
271,801.7 | 322,883.5 | 328,336.2 | ||||||||||
Sales returns and allowances | (5,236.6 | ) | (5,476.3 | ) | (5,705.6 | ) | ||||||
Net sales | $ | 266,565.1 | $ | 317,407.2 | $ | 322,630.6 | ||||||
The net sales information is presented by billed regions. | |||
d. | Major customers representing at least 10% of gross sales |
Year Ended December 31 | ||||||||||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||||||||||
NT $ | % | NT $ | % | NT $ | % | |||||||||||||||||||
(In Millions) | ||||||||||||||||||||||||
Customer A | $ | 24,718.3 | 9 | $ | 33,950.4 | 11 | $ | 37,731.0 | 11 | |||||||||||||||
Customer B | 29,855.4 | 11 | 25,214.9 | 8 | 29,502.8 | 9 |
e. | Net sales by product categories: |
Year Ended December 31 | ||||||||||||
Product Category | 2005 | 2006 | 2007 | |||||||||
NT$ | NT$ | NT$ | ||||||||||
(In Millions) | ||||||||||||
Wafer fabrication | $ | 239,576.6 | $ | 286,452.0 | $ | 293,431.3 | ||||||
Mask making | 14,448.5 | 15,317.1 | 16,984.5 | |||||||||
Others | 12,540.0 | 15,638.1 | 12,214.8 | |||||||||
$ | 266,565.1 | $ | 317,407.2 | $ | 322,630.6 | |||||||
F-52
Table of Contents
30. | SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANY AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES OF AMERICA | |
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the Republic of China (R.O.C. GAAP), which differ in the following respects from accounting principles generally accepted in the United States of America (U.S. GAAP): |
a. | Marketable securities | ||
Under R.O.C. GAAP, prior to January 1, 2006, marketable securities were carried at the lower of aggregate cost or market value, and debt securities were carried at cost, with only unrealized losses recognized. Effective January 1, 2006, the Company adopted R.O.C. SFAS No. 34, “Financial Instruments: Recognition and Measurement”, and No. 36, “Financial Instruments: Disclosure and Presentation”. Financial instruments including debt securities and equity securities are categorized as financial assets or liabilities at fair value through profit or loss (FVTPL), available-for-sale or held-to-maturity securities. FVTPL has two sub-categories, financial assets designated on initial recognition as one to be measured at fair value, and those that are classified as held for trading, which are also measured at fair value with fair value changes recognized in profit and loss. These classifications are similar to those required by U.S. Statement of Financial Accounting Standards (U.S. SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. | |||
Under U.S. SFAS No.115, debt and equity securities that have readily determinable fair values are classified as either trading, available-for-sale or held-to-maturity securities. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and traded for short-term profit are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity. | |||
Upon adoption of R.O.C. SFAS No. 34 and No. 36 on January 1, 2006, the Company recorded an accumulated effect of changes in accounting principles of NT$1,606.7 million to adjust the carrying amount of trading securities, which were recorded at the lower of aggregate cost or market value, to fair market value, which is a one-time reconciling adjustment between U.S. GAAP and R.O.C. GAAP in 2006. | |||
Upon adoption of R.O.C. SFAS No. 34 and No. 36, the Company also adjusted the carrying amount of the marketable securities categorized as available-for-sale, which were carried at the lower of aggregate cost or market with unrealized losses included in earnings, to fair market value on January 1, 2006. Therefore, prior to January 1 2006, unrealized gains and losses included in shareholders’ equity associated with available-for-sale marketable securities under R.O.C. GAAP were different from those under U.S. GAAP. | |||
The Company classified money market funds as available-for-sale marketable securities under both R.O.C. GAAP and U.S. GAAP. |
F-53
Table of Contents
b. | Equity-method investees | ||
The Company’s proportionate share of the net income (loss) from an equity-method investee may differ if the equity-method investee’s net income (loss) under R.O.C. GAAP differs from that under U.S. GAAP. Such differences between R.O.C. GAAP and U.S. GAAP would result in adjustments to investments accounted for using equity method and the equity in earnings (losses) of equity-method investees recorded in net income. | |||
c. | Impairment of long-lived assets | ||
Under U.S. GAAP, an impairment loss is recognized when the carrying amount of an asset or a group of assets is not recoverable from the expected future cash flows and the impairment loss is measured as the difference between the fair value and the carrying amount of the asset or group of assets. The impairment loss is recorded in earnings and cannot be reversed subsequently. Effective January 1, 2002, long-lived assets (excluding goodwill and other indefinite lived assets) held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. | |||
Under R.O.C. GAAP, for purposes of evaluating the recoverability of long-lived assets, assets purchased for use in the business but subsequently determined to have no use were written down to fair value and recorded as either idle assets or assets held for disposition. Under R.O.C. GAAP, effective January 1, 2005, the Company is required to recognize an impairment loss when an indication is identified that the carrying amount of an asset or a group of assets is not recoverable from the expected future cash flows. However, if the recoverable amount increases in a future period, the amount previously recognized as impairment would be reversed and recognized as a gain. The adjusted amount may not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized. Accordingly, the depreciation basis of long-lived assets impaired prior to January 1, 2005 under U.S. GAAP is different from the depreciation basis under R.O.C. GAAP. The impairment loss recognized in 2005 was NT$121.3 million. However, no impairment charges have been recorded by the Company since 2006. | |||
d. | 10% tax on unappropriated earnings | ||
In the R.O.C., a 10% tax is imposed on unappropriated earnings (excluding earnings from foreign consolidated subsidiaries). For R.O.C. GAAP purposes, the Company records the 10% tax on unappropriated earnings in the year of shareholders’ approval. Starting from 2002, the American Institute of Certified Public Accountants International Practices Task Force concluded that in accordance with Emerging Issues Task Force (EITF) 95-10, “Accounting for tax credits related to dividends in accordance with SFAS 109,” the 10% tax on unappropriated earnings should be accrued under U.S. GAAP during the period the earnings arise and adjusted to the extent that distributions are approved by the shareholders in the following year. The adjustment had no effect on the income tax expense under U.S. GAAP in 2005 as a result of a corresponding reduction in the valuation allowance as the previously reserved tax credits became utilizable due to the additional tax. To the extent the Company does not have sufficient tax credits to offset the 10% tax, additional tax expense would be recognized under U.S. GAAP. The net effects of the adjustment of 10% tax on unappropriated earnings were NT$3,278.0 million and NT$2,260.3 million in 2006 and 2007 under U.S. GAAP, respectively. |
F-54
Table of Contents
e. | Goodwill and intangible assets | ||
Under R.O.C. GAAP, goodwill was recorded for the excess of the purchase price over the net tangible assets for the purchase of a 32% equity interest in TSMC-Acer Semiconductor Manufacturing Corporation (TASMC) in 1999 and was amortized over ten years. Under U.S. GAAP, the goodwill was amortized over five years. | |||
Goodwill was not recorded under R.O.C. GAAP for the acquisition of the remaining 68% equity interest in TASMC in June 2000, because under R.O.C. GAAP goodwill from a business combination in the form of a share exchange was charged to capital surplus. Under U.S. GAAP, the acquisition cost is the fair value of the shares issued in exchange and the difference between the acquisition cost and the sum of the fair values of the net tangible and identifiable intangible assets acquired is recorded as goodwill. Accordingly, the goodwill from the acquisition of the remaining 68% equity interest in TASMC was recorded for U.S. GAAP purposes and was amortized over the estimated life of five years. | |||
Effective January 1, 2002, the Company adopted U.S. SFAS No. 142, “Goodwill and Other Intangible Assets” and ceased amortization of goodwill which is now assessed for impairment annually or more frequently if impairment indicators arise. In accordance with U.S. SFAS No. 142, the Company had completed its goodwill impairment test at the reporting unit level and found no impairment as of December 31, 2005, 2006 and 2007. | |||
Effective January 1, 2005, the Company adopted R.O.C. SFAS No. 35, “Accounting for Impairment of Assets” which required the Company to evaluate impairment of an asset group, including goodwill allocated to such group. The Company found no impairment as of December 31, 2005, 2006 and 2007. Effective January 1, 2006, the Company adopted R.O.C. SFAS No. 25 (revised 2005), “Business Combinations” which is similar to U.S. SFAS No. 142. Upon adoption of R.O.C. SFAS No.25, the Company ceased amortization of goodwill which is now assed for impairment in accordance with the provisions of the standard and R.O.C. SFAS No. 35. | |||
f. | Derivative financial instruments | ||
Under R.O.C. GAAP, prior to January 1, 2006, the receivables or payables arising from forward contracts were restated using the prevailing exchange rates with the resulting differences credited or charged to earnings. In addition, the receivables and payables related to forward contracts were netted with the resulting amount presented as either an asset or a liability. The receivables and payables arising from cross-currency swap contracts and interest rate swap contracts that were related to the contracts of the same counter party were netted with the resulting amount presented as either an asset or a liability. The difference in interest computed pursuant to the contracts on each settlement date or the balance sheet date was recorded as an adjustment to the interest income or expense associated with the hedged items. The notional amounts of foreign currency option contracts entered into for hedging purposes were not recognized as an asset or a liability on contract dates. The premiums paid or received for the options bought or written was amortized and charged to earnings on a straight-line basis over the term of the related contract. Any resulting gain or loss upon settlement was credited or charged to earnings in the year of settlement. Effective January 1, 2006, the Company adopted R.O.C. SFAS No. 34, “Financial Instruments: Recognition and Measurement,” and derivatives that do not qualify for hedge accounting are recorded as financial assets or liabilities at FVTPL and measured at fair value as described in Note 2. | |||
Under U.S. GAAP, derivative instruments are accounted for in accordance with U.S. SFAS No. 133, as amended, which requires all entities to recognize derivative instruments as assets and liabilities on the balance sheet at fair value. If certain conditions are met, entities may elect to designate a derivative instrument as a hedging instrument. The derivative instruments used by the Company do not qualify for hedge accounting under U.S. SFAS No.133. Therefore, under U.S. GAAP, derivatives have historically been, and continue to be, recorded on the balance sheet at fair value, with changes in fair value recognized in earnings. There is no GAAP difference on the accounting treatment of derivative instruments since January 1, 2006. |
F-55
Table of Contents
g. | Bonuses to employees, directors and supervisors | ||
According to R.O.C. regulations and TSMC’s Articles of Incorporation, a portion of the Company’s distributable earnings should be set aside as bonuses to employees, directors and supervisors. Bonuses to directors and supervisors are usually paid in cash. However, bonuses to employees may be paid in cash or stock, or a combination of both. Under R.O.C. GAAP, the bonuses, including stock bonuses which are valued at the par value of NT$10 each, are treated as appropriations of retained earnings and are charged to retained earnings after such bonuses are formally approved by the shareholders in the following year. | |||
Under U.S. GAAP, such bonuses are treated as compensation expense and are charged to earnings. The amount of compensation expense related to stock bonuses is determined based on the market value of TSMC’s common stock at the date of stock distribution in the following year. The total amount of the aforementioned bonuses to be paid in the following year is initially accrued based on management’s estimate pursuant to TSMC’s Articles of Incorporation in the year to which it relates. Any difference between the amount initially accrued and the market value of the bonuses upon the payment of cash and the issuance of shares is recognized in the year of approval by shareholders. Subsidiaries registered in the R.O.C. follow the same accounting treatment as TSMC. | |||
The Company records two separate U.S. GAAP reconciling adjustments relating to bonuses paid to employees, directors and supervisors each year. The first reconciling adjustment, referred to as “Bonuses to employees, directors and supervisors — current year accrual”, records the full bonuses earned in the current year, in an amount equal to the product of the total net income for the current year multiplied by the percentage set forth based on management’s estimate pursuant to TSMC’s Articles of Incorporation. The second reconciling adjustment, referred to as “Fair market value adjustment of prior year accrual”, is made in the following year to record the additional compensation expense for prior-year bonuses paid in stock, which is measured at the fair market value on the date of stock distribution. | |||
h. | Pension benefits | ||
U.S. SFAS No. 87, “Employer’s Accounting for Pensions” requires the Company to determine the accumulated pension obligation and the pension expense on an actuarial basis. The Company adopted U.S. SFAS No. 87 at the beginning of 1993 for U.S. GAAP purposes. | |||
U.S. SFAS No. 87 was amended by U.S. SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (U.S. SFAS No. 158) on September 29, 2006, which requires employers to recognize the overfunded or underfunded status of a defined benefit pension plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. U.S. SFAS No. 158 defines the funded status of a benefit plan as the difference between the fair value of the plan assets and the projected benefit obligation. Previously unrecognized items such as gains or losses, prior service credits and the transition asset or obligation are required to be recognized in other comprehensive income and subsequently recognized through net periodic benefit cost pursuant to the recognition and amortization provisions of U.S. SFAS No. 87. | |||
R.O.C. SFAS No. 18 is similar in many respects to U.S. SFAS No. 87 and was adopted by the Company in 1996. However, R.O.C. SFAS No. 18 does not require a company to recognize the overfunded or underfunded status of a defined benefit pension plan as an asset or liability in the statement of financial position. | |||
The difference in the date of adoption gives rise to a U.S. GAAP difference in the actuarial computation for transition obligation and the related amortization. |
F-56
Table of Contents
i. | Stock-based compensation | ||
Effective January 1, 2006, the Company adopted the fair value recognition provisions of U.S. Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (U.S. SFAS No. 123R), and the modified prospective transition method and therefore has not restated the results for prior periods. Under the transition method, stock-based compensation expense for the year ended December 31, 2006 includes compensation expense for all unvested stock-based compensation awards granted prior to January 1, 2006 that are expected to vest, based on the grant date fair value estimated in accordance with the original provision of U.S. SFAS No. 123, “Accounting for Stock-Based Compensation” (U.S. SFAS No. 123) or the intrinsic value described in the next paragraph. Upon an employee’s termination, unvested awards are forfeited, which affects the quantity of options to be included in the calculation of stock-based compensation expense. Forfeitures do not include vested options that expire unexercised. Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimate in accordance with the provisions of U.S. SFAS No. 123R. The Company recognizes these compensation costs using the graded vesting method over the requisite service period of the award, which is generally the option vesting term of four years. Prior to the adoption of U.S. SFAS No. 123R, the Company recognized stock-based compensation expense in accordance with U.S. Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (U.S. APB 25). See Note 31c for additional stock-based compensation disclosures. | |||
Certain characteristics of the stock options granted under the TSMC 2002 Plan and GUC 2004 Plan are not reasonably estimable using appropriate valuation methodologies as prescribed under U.S. SFAS No. 123 and have been accounted for using the variable accounting method. Upon the adoption of U.S. SFAS No. 123R, the Company continued to account for these stock options based on their intrinsic value, remeasured at each reporting date through the date of exercise or settlement. | |||
Under R.O.C. GAAP, employee stock option plans that are amended or have options granted on or after January 1, 2004 must be accounted for by the interpretations issued by the ARDF. The Company adopted the intrinsic value method and any compensation expense determined using this method is recognized over the vesting period. No stock-based compensation expense was recognized under R.O.C. GAAP for the years ended December 31, 2005, 2006 and 2007. | |||
j. | Carry interest | ||
For marketable security investments of InveStar Semiconductor Development Fund, Inc. (ISDF) managed by fund managers, the Company is required by the investment management contract to pay carry interest based on the net realized gain (an amount of annual company profits after accumulated adjusted cost of capital and net of management fees) multiplied by certain percentages. Therefore, the Company estimates and accrues for such expense during the year. | |||
Under R.O.C. GAAP, carry interest expense was not accrued prior to 2006 as the marketable security investments were carried at the lower of cost or market and no unrealized gains were recognized prior to disposal of investments. After adoption of ROC SFAS No. 34 and 36, the carry interest accrued for the trading marketable security is recognized as an expense. However, the carry interest accrued for the available-for-sale marketable security is recognized as an adjustment of unrealized gain under the shareholders’ equity. | |||
Under U.S. GAAP, the Company accrued an expense of NT$193.3 million in 2005 and reversed such accrual in 2006 since the expense was recorded under R.O.C. GAAP starting from 2006. |
F-57
Table of Contents
k. | Earnings per share | ||
Under R.O.C. GAAP, earnings per share is calculated as described in Notes 2 and 23. Under U.S. GAAP, earnings per share is calculated by dividing net income by the average number of shares outstanding in each period, adjusted retroactively for any stock dividends issued and stock splits subsequently. Other shares issued from unappropriated earnings, such as stock bonuses to employees, are included in the calculation of weighted-average number of shares outstanding from the date of occurrence. | |||
Under both R.O.C. GAAP and U.S. GAAP, the unvested stock options are included in the diluted EPS calculation using the treasury stock method if the inclusion of such would be dilutive. The accounting for stock options under R.O.C GAAP is generally the same as U.S. APB 25 in all material aspects, which uses intrinsic value to account for the stock-based compensation. However, under U.S. GAAP, upon the adoption of SFAS No. 123R, the denominator used to calculate diluted EPS is likely to be different from the denominator used under U.S. APB 25 and R.O.C. GAAP. | |||
U.S. SFAS No.123R paragraphs 66 and 67 state that the shares or stock options shall be treated as contingently issuable shares in accordance with U.S. SFAS No. 128, “Earnings per share”. The statement provides guidance on applying the treasury stock method for equity instruments granted in share-based payment transactions in determining diluted earnings per share. In applying the treasury stock method, the assumed proceeds shall be the sum of (a) the exercise price, (b) the amount of compensation cost attributed to future services and not yet recognized, and (c) the amount of excess tax benefits that would be credited to additional paid-in capital assuming exercise of the options. Therefore, the number of shares included in the denominator of the diluted EPS calculation under U.S. SFAS No. 123R will be different from that under R.O.C. GAAP. Earnings per equivalent American Depository Share (ADS) is calculated by multiplying earnings per share by five (one ADS represents five common shares). | |||
l. | Consolidated entities | ||
Under R.O.C. GAAP, the Company adopted R.O.C. SFAS No. 7, “Consolidated Financial Statements”, which requires that the accompanying consolidated financial statements include the accounts of all directly and indirectly majority owned subsidiaries of TSMC, and the accounts of investees in which TSMC’s ownership percentage is less than 50% but over which TSMC has a controlling interest. All significant intercompany balances and transactions are eliminated upon consolidation. Partially owned, non-controlled equity investees are accounted for under the equity method. The standard is similar to Accounting Research Bulletin No. 51 “Consolidated Financial Statements” (U.S. ARB No. 51). | |||
U.S. FASB Interpretation No. 46R (Revised December 2003), “Consolidation of Variable Interest Entities” (U.S. FIN 46R), which clarifies U.S. ARB No. 51 and replaces FASB Interpretation No. 46 “Consolidation of Variable Interest Entities”, addresses consolidation by business enterprises of variable interest entities. The interpretation states that if an enterprise absorbs a majority of the expected losses or receives a majority of the expected residual rewards, or both, of a Variable Interest Entity (VIE) through its variable interests, it is identified as the primary beneficiary and is required to consolidate the VIE. | |||
Under U.S. GAAP, the Company consolidated the accounts of VisEra for the year ended December 31, 2004 and for the ten months period ended October 31, 2005 based on the majority voting interest rule pursuant to U.S. ARB No. 51 and U.S. FIN 46R. Subsequent to October 31, 2005, however, VisEra was no longer treated as a consolidated subsidiary of the Company. The Company believes that this accounting treatment is appropriate under U.S. GAAP because: (i) the Company lost its control over VisEra in November 2005 due to changes in the investment structure through which VisEra became a subsidiary of VisEra Holdings (Cayman), in which the Company owns only a 50% equity interest; (ii) Cayman is not a VIE as defined in paragraph 5 of FIN 46R; (iii) Cayman is not a majority owned subsidiary of the Company that would require consolidation under U.S. ARB No. 51; and (iv) the |
F-58
Table of Contents
Company does not otherwise have control over Cayman. Therefore, the Company deconsolidated VisEra as of November 1, 2005. | |||
Under U.S. GAAP, the Company consolidated the accounts of GUC for the years ended December 31, 2005, 2006, and 2007. GUC is a business entity and an independent operation, which satisfies the exemption defined in paragraph 4h of U.S. FIN 46R. Therefore, GUC does not fall under the scope of U.S. FIN46R, and the Company follows U.S. ARB No. 51 as well as Regulation S-X Rule 1-02(g) to determine whether a parent-subsidiary relationship existed. | |||
In December 2004, the ARDF revised R.O.C. SFAS No. 7, which was required to be adopted by the Company on January 1, 2005. The revised R.O.C. SFAS No. 7 requires the Company to consolidate all investees over which the Company has a controlling interest. As a result of the adoption of this standard, subsequent to December 31, 2004, there has been no difference between R.O.C. GAAP and U.S. GAAP with respect to consolidated entities of the Company. | |||
The following reconciles net income and shareholders’ equity under R.O.C. GAAP as reported in the consolidated financial statements to the net income and shareholders’ equity determined under U.S. GAAP, giving effect to the differences listed above. |
Year Ended December 31 | ||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
(In Millions Except Per Share Amounts) | ||||||||||||||||
Net income | ||||||||||||||||
Net income attributable to shareholders of the parent based on R.O.C. GAAP | $ | 93,575.0 | $ | 127,009.7 | $ | 109,177.1 | $ | 3,366.5 | ||||||||
Adjustments: | ||||||||||||||||
a. Marketable securities | ||||||||||||||||
1. Adjustment of unrealized gain on trading securities | 1,062.0 | — | — | |||||||||||||
2. Reversal (realization) of unrealized loss on marketable securities | 337.2 | (262.0 | ) | (52.3 | ) | (1.6 | ) | |||||||||
3. Reversal of cumulative effect of change in accounting principle for adopting R.O.C. SFAS No. 34 | — | (1,606.7 | ) | — | — | |||||||||||
b. U.S. GAAP adjustments on equity-method investees | (161.9 | ) | (42.6 | ) | (69.9 | ) | (2.1 | ) | ||||||||
c. Reversal of depreciation on assets impaired under U.S. GAAP | 1,398.7 | 1,391.5 | 1,408.4 | 43.4 | ||||||||||||
d. 10% tax on undistributed earnings | — | (3,278.0 | ) | (2,260.3 | ) | (69.7 | ) | |||||||||
e. Reversal of amortization of goodwill recognized under R.O.C. GAAP | 1,220.3 | — | — | — | ||||||||||||
f. Adjustment to market value for derivative financial instruments | (225.3 | ) | — | — | — |
F-59
Table of Contents
Year Ended December 31 | ||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
(In Millions Except Per Share Amounts) | ||||||||||||||||
g. Bonuses to employees, directors and supervisors | ||||||||||||||||
1. Current year accrual | $ | (7,121.7 | ) | $ | (9,488.6 | ) | $ | (8,232.8 | ) | $ | (253.9 | ) | ||||
2. Fair market value adjustment of prior year accrual | (13,795.4 | ) | (18,016.4 | ) | (28,352.0 | ) | (874.2 | ) | ||||||||
h. Pension expense | (9.9 | ) | 3.9 | 3.9 | 0.1 | |||||||||||
i. Stock-based compensation | ||||||||||||||||
1. Stock-based compensation | (791.4 | ) | (471.7 | ) | (373.9 | ) | (11.5 | ) | ||||||||
2. Cumulative effect of change in accounting principle for adopting U.S. SFAS 123R | — | 37.9 | — | — | ||||||||||||
j. Adjustment of carry interest | (193.3 | ) | 170.4 | — | — | |||||||||||
Income tax effect of U.S. GAAP adjustments | 147.8 | 98.3 | (41.9 | ) | (1.3 | ) | ||||||||||
Minority interest effect of U.S. GAAP adjustments | (23.8 | ) | 165.0 | 451.3 | 13.9 | |||||||||||
Net adjustment | (18,156.7 | ) | (31,299.0 | ) | (37,519.5 | ) | (1,156.9 | ) | ||||||||
Net income based on U.S. GAAP | $ | 75,418.3 | $ | 95,710.7 | $ | 71,657.6 | $ | 2,209.6 | ||||||||
Basic earnings per common share based on U.S. GAAP | ||||||||||||||||
Income before cumulative effect of changes in accounting principles | $ | 2.97 | $ | 3.71 | $ | 2.74 | $ | 0.08 | ||||||||
Cumulative effect of changes in accounting principles | — | 0.01 | — | — | ||||||||||||
Net income | $ | 2.97 | $ | 3.72 | $ | 2.74 | $ | 0.08 | ||||||||
Diluted earnings per common share based on U.S. GAAP | ||||||||||||||||
Income before cumulative effect of changes in accounting principles | $ | 2.96 | $ | 3.71 | $ | 2.74 | $ | 0.08 | ||||||||
Cumulative effect of changes in accounting principles | — | — | — | — | ||||||||||||
Net income | $ | 2.96 | $ | 3.71 | $ | 2.74 | $ | 0.08 | ||||||||
Basic earnings per ADS | ||||||||||||||||
Income before cumulative effect of changes in accounting principles | $ | 14.83 | $ | 18.57 | $ | 13.70 | $ | 0.42 | ||||||||
Cumulative effect of changes in accounting principles | — | 0.01 | — | — | ||||||||||||
Net income | $ | 14.83 | $ | 18.58 | $ | 13.70 | $ | 0.42 | ||||||||
F-60
Table of Contents
Year Ended December 31 | ||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
(In Millions Except Per Share Amounts) | ||||||||||||||||
Diluted earnings per ADS | ||||||||||||||||
Income before cumulative effect of changes in accounting principles | $ | 14.82 | $ | 18.56 | $ | 13.69 | $ | 0.42 | ||||||||
Cumulative effect of changes in accounting principles | — | — | — | — | ||||||||||||
Net income | $ | 14.82 | $ | 18.56 | $ | 13.69 | $ | 0.42 | ||||||||
Basic number of weighted average shares outstanding under U.S. GAAP (in thousands) | 25,434,207 | 25,756,825 | 26,148,636 | |||||||||||||
Diluted number of weighted average shares outstanding under U.S. GAAP (in thousands) | 25,444,538 | 25,778,163 | 26,169,636 | |||||||||||||
December 31 | ||||||||||||
2006 | 2007 | |||||||||||
NT$ | NT$ | US$ | ||||||||||
(Note 3) | ||||||||||||
(In Millions) | ||||||||||||
Shareholders’ equity | ||||||||||||
Equity attributable to shareholders of the parent based on R.O.C. GAAP | $ | 507,981.3 | $ | 487,091.4 | $ | 15,019.8 | ||||||
Adjustments: | ||||||||||||
a. U.S. GAAP adjustments on equity-method investees | (445.1 | ) | (432.5 | ) | (13.3 | ) | ||||||
b. Impairment of long-lived assets | ||||||||||||
1. Loss on impairment of assets | (10,657.7 | ) | (10,573.7 | ) | (326.1 | ) | ||||||
2. Reversal of depreciation on assets impaired under U.S. GAAP | 8,561.8 | 9,878.6 | 304.6 | |||||||||
c. 10% tax on undistributed earnings | (3,278.0 | ) | (5,538.3 | ) | (170.8 | ) | ||||||
d. Goodwill | ||||||||||||
1. Carrying amount difference from 68% equity interest in TASMC’s share acquisition | 52,212.7 | 52,212.7 | 1,610.0 | |||||||||
2. Reversal of amortization of goodwill recognized under R.O.C. GAAP | (11,257.5 | ) | (11,274.1 | ) | (347.7 | ) |
F-61
Table of Contents
December 31 | ||||||||||||
2006 | 2007 | |||||||||||
NT$ | NT$ | US$ | ||||||||||
(Note 3) | ||||||||||||
(In Millions) | ||||||||||||
e. Bonuses to employees, directors and supervisors | $ | (9,488.5 | ) | $ | (8,175.3 | ) | $ | (252.1 | ) | |||
f. Accrued pension cost | (43.8 | ) | (39.9 | ) | (1.2 | ) | ||||||
g. Accrual for accumulated other comprehensive income under U.S. SFAS No. 158 | ||||||||||||
1. The adoption of U.S. SFAS No. 158 | (1,391.3 | ) | — | — | ||||||||
2. Deferred pension loss | — | (87.5 | ) | (2.7 | ) | |||||||
Income tax effect of U.S. GAAP adjustments | 209.0 | 166.6 | 5.2 | |||||||||
Minority interest effect of U.S. GAAP adjustments | 0.1 | 0.1 | — | |||||||||
Net increase in equity attributable to shareholders of the parent | 24,421.7 | 26,136.7 | 805.9 | |||||||||
Equity attributable to shareholders of the parent based on U.S. GAAP | $ | 532,403.0 | $ | 513,228.1 | $ | 15,825.7 | ||||||
Year Ended December 31 | ||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
(In Millions) | ||||||||||||||||
Changes in equity attributable to shareholders of the parent based on U.S. GAAP | ||||||||||||||||
Balance, beginning of year | $ | 427,124.8 | $ | 477,297.2 | $ | 532,403.0 | $ | 16,417.0 | ||||||||
Net income for the year | 75,418.3 | 95,710.7 | 71,657.6 | 2,209.6 | ||||||||||||
Unrealized gain (loss) on available-for-sale marketable securities | ||||||||||||||||
TSMC | (133.3 | ) | 338.7 | 290.9 | 9.0 | |||||||||||
Equity-method investees | (221.4 | ) | 151.1 | (119.2 | ) | (3.7 | ) | |||||||||
Common shares issued as bonus to employees | ||||||||||||||||
TSMC | 16,881.6 | 21,431.1 | 32,776.7 | 1,010.7 | ||||||||||||
Equity-method investees | 54.4 | 51.6 | 78.7 | 2.4 | ||||||||||||
Adjustment arising from changes of ownership percentage in investees | 73.2 | 186.1 | (85.6 | ) | (2.7 | ) | ||||||||||
Translation adjustments | 1,574.5 | (549.1 | ) | 93.4 | 2.9 | |||||||||||
Treasury stock repurchased by the Company | — | — | (48,466.9 | ) | (1,494.5 | ) | ||||||||||
Proceeds from sales of treasury stock | 899.5 | — | ||||||||||||||
Cash dividends received by subsidiaries from parent company | 84.3 | 82.3 | 101.8 | 3.1 | ||||||||||||
Cash dividends to common shareholders | (46,504.1 | ) | (61,825.1 | ) | (77,489.1 | ) | (2,389.4 | ) | ||||||||
Stock-based compensation | 896.4 | 326.2 | 233.4 | 7.2 | ||||||||||||
Issuance of stock from exercising stock options | 270.9 | 575.2 | 436.9 | 13.5 | ||||||||||||
Adjustment of prior year accrual of 10% tax on undistributed earnings | 878.1 | — | — | — |
F-62
Table of Contents
Year Ended December 31 | ||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
(In Millions) | ||||||||||||||||
Adjustment of pension cost upon adoption of U.S. SFAS No. 158 | ||||||||||||||||
TSMC | $ | — | $ | (1,391.3 | ) | $ | — | $ | — | |||||||
Equity-method investees | — | 18.3 | — | — | ||||||||||||
Changes in actuarial gain and transition obligation | ||||||||||||||||
TSMC | — | — | $ | 1,303.8 | $ | 40.2 | ||||||||||
Equity-method investees | — | — | 12.7 | 0.4 | ||||||||||||
Balance, end of year | $ | 477,297.2 | $ | 532,403.0 | $ | 513,228.1 | $ | 15,825.7 | ||||||||
The following U.S. GAAP condensed balance sheets as of December 31, 2006 and 2007, and statements of operations for the years ended December 31, 2005, 2006 and 2007 have been derived from the audited consolidated financial statements and reflect the adjustments presented above. | ||
Certain accounts have been reclassified to conform to U.S. GAAP. Technical service income is included in sales with the related costs included in cost of sales. Provision for litigation loss, gains and losses on disposal of property, plant and equipment and other assets, rental income with related costs, losses on idle assets due to decreasing demand for products produced using those assets and certain other items in non-operating income (expense) are included in operating expenses. |
December 31 | ||||||||||||
2006 | 2007 | |||||||||||
NT$ | NT$ | US$ | ||||||||||
(Note 3) | ||||||||||||
(In Millions) | ||||||||||||
Assets | ||||||||||||
Current assets | $ | 260,317.2 | $ | 249,822.3 | $ | 7,703.4 | ||||||
Long-term investments | 53,450.1 | 36,028.8 | 1,111.0 | |||||||||
Property, plant and equipment, net | 251,998.4 | 259,557.0 | 8,003.6 | |||||||||
Goodwill | 46,940.2 | 46,926.2 | 1,447.0 | |||||||||
Other assets | 13,402.5 | 18,508.4 | 570.7 | |||||||||
Total assets | $ | 626,108.4 | $ | 610,842.7 | $ | 18,835.7 | ||||||
Liabilities | ||||||||||||
Current liabilities | $ | 59,627.1 | $ | 62,419.5 | $ | 1,924.8 | ||||||
Long-term liabilities | 22,873.5 | 24,284.5 | 748.8 | |||||||||
Other liabilities | 10,048.1 | 7,316.6 | 225.6 | |||||||||
Minority interest in subsidiaries | 1,156.7 | 3,594.0 | 110.8 | |||||||||
Equity attributable to shareholders of the parent | 532,403.0 | 513,228.1 | 15,825.7 | |||||||||
Total liabilities and shareholders’ equity | $ | 626,108.4 | $ | 610,842.7 | $ | 18,835.7 | ||||||
F-63
Table of Contents
Year Ended December 31 | ||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
(In Millions) | ||||||||||||||||
Net sales | $ | 267,027.7 | $ | 317,978.7 | $ | 323,221.0 | $ | 9,966.7 | ||||||||
Cost of sales | 161,808.4 | 179,174.2 | 202,045.7 | 6,230.2 | ||||||||||||
Gross profit | 105,219.3 | 138,804.5 | 121,175.3 | 3,736.5 | ||||||||||||
Operating expenses | 32,763.6 | 37,050.1 | 44,775.0 | 1,380.6 | ||||||||||||
Income from operations | 72,455.7 | 101,754.4 | 76,400.3 | 2,355.9 | ||||||||||||
Non-operating income, net | 3,526.9 | 4,892.3 | 9,573.1 | 295.2 | ||||||||||||
Income before income tax, minority interest and cumulative effect of changes in accounting principles | 75,982.6 | 106,646.7 | 85,973.4 | 2,651.1 | ||||||||||||
Income tax expense | 482.8 | 10,953.4 | 14,011.8 | 432.1 | ||||||||||||
Net income before minority interest and cumulative effect of changes in accounting principles | 75,499.8 | 95,693.3 | 71,961.6 | 2,219.0 | ||||||||||||
Cumulative effect of changes in accounting principles | — | 37.9 | — | — | ||||||||||||
Net income attributable to shareholders of the parent | 75,418.3 | 95,710.7 | 71,657.6 | 2,209.6 | ||||||||||||
Net income attributable to minority interest | 81.5 | 20.5 | 304.0 | 9.4 | ||||||||||||
The Company reports comprehensive income (loss) in accordance with U.S. SFAS No. 130, “Reporting Comprehensive Income” for U.S. GAAP purposes. U.S. SFAS No. 130 requires that in addition to net income (loss), a company should report other comprehensive income (loss) consisting of the changes in equity of the company during the year from transactions and other events and circumstance from nonowner sources. It includes all changes in equity during the year except those resulting from investments by shareholders and distribution to shareholders. The components of other comprehensive income for the Company consist of unrealised gains and losses relating to the translation of financial statements maintained in foreign currencies, unrealized gains and losses relating to the Company’s investments in available-for-sale securities and changes in the funded status of the defined benefit pension plan. |
F-64
Table of Contents
Statements of comprehensive income for the years ended December 31, 2005, 2006 and 2007 are as follows: |
Year Ended December 31 | ||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
(In Millions) | ||||||||||||||||
Net income attributable to shareholders of the parent based on U.S. GAAP | $ | 75,418.3 | $ | 95,710.7 | $ | 71,657.6 | $ | 2,209.6 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Adjustment of unrealized gain (loss) on financial instruments | ||||||||||||||||
TSMC | (133.3 | ) | 338.7 | 290.9 | 9.0 | |||||||||||
Equity-method investees | (221.4 | ) | 151.1 | (119.2 | ) | (3.7 | ) | |||||||||
Translation adjustments | 1,574.5 | (549.1 | ) | 93.4 | 2.9 | |||||||||||
Changes in actuarial loss and transition obligation | ||||||||||||||||
TSMC | — | — | 1,303.8 | 40.2 | ||||||||||||
Equity-method investees | — | — | 12.7 | 0.4 | ||||||||||||
Comprehensive income | $ | 76,638.1 | $ | 95,651.4 | $ | 73,239.2 | $ | 2,258.4 | ||||||||
The components of accumulated other comprehensive income (loss) were as follows: |
December 31 | ||||||||||||
2006 | 2007 | |||||||||||
NT$ | NT$ | US$ | ||||||||||
(Note 3) | ||||||||||||
(In Millions) | ||||||||||||
Cumulative translation adjustment | $ | (1,294.5 | ) | $ | (1,201.1 | ) | $ | (37.0 | ) | |||
Unrealized gain on financial instruments | 411.3 | 583.0 | 18.0 | |||||||||
Actuarial loss and transition obligation | (1,373.0 | ) | (56.5 | ) | (1.8 | ) | ||||||
Total accumulated other comprehensive loss | $ | (2,256.2 | ) | $ | (674.6 | ) | $ | (20.8 | ) | |||
F-65
Table of Contents
The Company applies R.O.C. SFAS No. 17, “Statement of Cash Flows”. Its objectives and principles are similar to those set out in U.S. SFAS No. 95, “Statement of Cash Flows”. The principal differences between the two standards relate to classification. Cash flows from investing activities for changes in deferred charges, refundable deposits and other assets-miscellaneous, and cash flows from financing activities for changes in guarantee deposits, other liabilities and cash bonuses paid to employees, directors and supervisors are reclassified to operating activities under U.S. SFAS No. 95. Summarized cash flow data by operating, investing and financing activities in accordance with U.S. SFAS No. 95 are as follows: |
Year Ended December 31 | ||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||
NT$ | NT$ | NT$ | US$ | |||||||||||||
(Note 3) | ||||||||||||||||
(In Millions) | ||||||||||||||||
Net cash inflow (outflow) from: | ||||||||||||||||
Operating activities | $ | 155,445.3 | $ | 199,536.9 | $ | 173,886.5 | $ | 5,361.9 | ||||||||
Investing activities | (76,730.2 | ) | (117,032.1 | ) | (67,241.4 | ) | (2,073.4 | ) | ||||||||
Financing activities | (57,111.7 | ) | (61,014.5 | ) | (128,977.7 | ) | (3,977.1 | ) | ||||||||
Change in cash and cash equivalents | 21,603.4 | 21,490.3 | (22,332.6 | ) | (688.6 | ) | ||||||||||
Cash and cash equivalents at the beginning of year | 74,531.4 | 96,483.7 | 117,837.2 | 3,633.6 | ||||||||||||
Effect of exchange rate changes | 348.9 | (136.8 | ) | (518.1 | ) | (16.0 | ) | |||||||||
Cash and cash equivalents at the end of year | $ | 96,483.7 | $ | 117,837.2 | $ | 94,986.5 | $ | 2,929.0 | ||||||||
F-66
Table of Contents
31. | ADDITIONAL DISCLOSURES REQUIRED BY U.S. GAAP |
a. | Recent accounting pronouncements |
In December 2007, the FASB issued U.S. SFAS No. 141R, “Business Combination” (U.S. SFAS No. 141R) and U.S. SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements— an amendment of ARB No. 51” (U.S. SFAS No. 160). U.S. SFAS No. 141R requires most of the assets acquired and liabilities assumed in the business combination to be measured at fair value, as of the acquisition date. In addition, the net assets of non-controlling interest’s share of the acquired subsidiaries should be recognized at fair value. U.S. SFAS No. 160 requires the Company to include non-controlling interests as a separate component of shareholders’ equity, instead of a liability or temporary equity. U.S. SFAS No. 141R is effective for the Company for business combination consummated on or after January 1, 2009 and U.S. SFAS No. 160 is effective for the Company beginning after January 1, 2009. The Company is currently evaluating the effect that the adoption of U.S. SFAS No. 141R and SFAS No. 160 will have on its results of operation and financial position and is not yet in a position to determine such effect. |
In February 2007, the FASB issued U.S. SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (U.S. SFAS No. 159). U.S. SFAS No. 159 allows the Company to elect to measure certain financial assets and liabilities at fair value through earnings. This statement is effective for the Company beginning January 1, 2008. The Company believes that the adoption of U.S. SFAS No. 159 has no material impact on its results of operations and financial position. |
In June 2007, the FASB ratified EITF No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF 07-3). EITF 07-3 requires that the nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized. Such amounts should be recognized as an expense as the goods are delivered or the related services are performed. This statement is effective for the Company beginning January 1, 2008. The Company believes that the adoption of EITF 07-3 will have no material impact on its results of operations and financial position. |
F-67
Table of Contents
In September 2006, the FASB issued U.S. SFAS No. 157, “Fair Value Measurements” (U.S. SFAS No. 157), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. U.S. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for the Company beginning January 1, 2008. In November 2007, the FASB provided a one year deferral for the implementation of U.S. SFAS No. 157 for other nonfinancial assets and liabilities. The Company believes that the adoption of U.S. SFAS No. 157 has no material impact on its results of operations and financial position. |
b. | Marketable securities |
As of December 31, 2006 and 2007, marketable securities by category were as follows: |
December 31 | ||||||||
2006 | 2007 | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Marketable securities — trading | $ | 1,162.3 | $ | 1,590.2 | ||||
Marketable securities — available-for-sale | 74,172.4 | 68,089.1 | ||||||
Marketable securities — held-to-maturity | 37,484.3 | 20,224.6 |
The Company uses the average cost method for trading securities and available-for-sale securities when determining their cost basis. Proceeds from sales of available-for-sale securities for the years ended December 31, 2005, 2006 and 2007 were NT$102,577.8 million, NT$91,620.4 million and NT$94,908.7 million, respectively. Net realized losses on these sales were NT$137.9 million and NT$190.3 million for the years ended December 31, 2005 and 2006, respectively, and net realized gains on these sales were NT$557.9 million for the year ended December 31, 2007. |
F-68
Table of Contents
As of December 31, 2006 and 2007, available-for-sale and held-to-maturity securities of the Company were as follows: |
December 31, 2006 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Adjusted | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
NT$ | NT$ | NT$ | NT$ | |||||||||||||
(In Millions) | ||||||||||||||||
Corporate bonds | $ | 30,389.3 | $ | 53.5 | $ | (192.8 | ) | $ | 30,250.0 | |||||||
Corporate issued asset-backed securities | 10,600.9 | 14.5 | (73.7 | ) | 10,541.7 | |||||||||||
Open-end mutual funds | 25,768.7 | 378.6 | — | 26,147.3 | ||||||||||||
Agency bonds | 12,735.8 | 10.4 | (54.6 | ) | 12,691.6 | |||||||||||
Government bonds | 18,996.2 | 137.5 | (78.2 | ) | 19,055.5 | |||||||||||
Money market funds | 667.8 | — | — | 667.8 | ||||||||||||
Publicly traded stocks | 89.0 | 119.9 | — | 208.9 | ||||||||||||
Structured time deposits | 12,171.1 | — | (186.0 | ) | 11,985.1 | |||||||||||
Total | $ | 111,418.8 | $ | 714.4 | $ | (585.3 | ) | $ | 111,547.9 | |||||||
Categorized as: | ||||||||||||||||
Current assets | ||||||||||||||||
Available-for-sale securities | $ | 67,523.9 | ||||||||||||||
Held-to-maturity securities | 8,522.6 | |||||||||||||||
Long-term investments | ||||||||||||||||
Available-for-sale securities | 6,648.5 | |||||||||||||||
Held-to-maturity securities | 28,852.9 | |||||||||||||||
$ | 111,547.9 | |||||||||||||||
December 31, 2007 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Adjusted | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
NT$ | NT$ | NT$ | NT$ | |||||||||||||
(In Millions) | ||||||||||||||||
Corporate bonds | $ | 21,677.4 | $ | 60.2 | $ | (148.0 | ) | $ | 21,589.6 | |||||||
Corporate issued asset-backed securities | 5,930.6 | 17.1 | (590.6 | ) | 5,357.1 | |||||||||||
Open-end mutual funds | 14,694.1 | 272.6 | — | 14,966.7 | ||||||||||||
Agency bonds | 8,529.9 | 111.3 | (5.4 | ) | 8,635.8 | |||||||||||
Government bonds | 15,559.8 | 90.0 | (24.5 | ) | 15,625.3 | |||||||||||
Money market funds | 19,212.1 | — | — | 19,212.1 | ||||||||||||
Publicly traded stocks | 102.6 | 802.7 | — | 905.3 | ||||||||||||
Structured time deposits | 2,000.0 | — | (10.6 | ) | 1,989.4 | |||||||||||
Total | $ | 87,706.5 | $ | 1,353.9 | $ | (779.1 | ) | $ | 88,281.3 | |||||||
F-69
Table of Contents
December 31, 2007 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Adjusted | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
NT$ | NT$ | NT$ | NT$ | |||||||||||||
(In Millions) | ||||||||||||||||
Categorized as: | ||||||||||||||||
Current assets | ||||||||||||||||
Available-for-sale securities | $ | 66,688.4 | ||||||||||||||
Held-to-maturity securities | 11,509.7 | |||||||||||||||
Long-term investments | ||||||||||||||||
Available-for-sale securities | 1,400.7 | |||||||||||||||
Held-to-maturity securities | 8,682.5 | |||||||||||||||
$ | 88,281.3 | |||||||||||||||
The following table shows the gross unrealized losses and fair value of the investments with unrealized losses that are not deemed to be other-than-temporary impaired, aggregated by investment category and length of time that have been in a continuous unrealized loss position as of December 31, 2007: |
Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
NT$ | NT$ | NT$ | NT$ | NT$ | NT$ | |||||||||||||||||||
(In Millions) | ||||||||||||||||||||||||
Corporate bonds | $ | 7,464.1 | $ | (114.8 | ) | $ | 9,667.4 | $ | (33.2 | ) | $ | 17,131.5 | $ | (148.0 | ) | |||||||||
Corporate issued Asset-backed securities | 2,901.2 | (590.6 | ) | — | — | 2,901.2 | (590.6 | ) | ||||||||||||||||
Government bonds | 4,988.9 | (3.9 | ) | 6,765.9 | (20.6 | ) | 11,754.8 | (24.5 | ) | |||||||||||||||
Agency bonds | 742.3 | (5.4 | ) | — | — | 742.3 | (5.4 | ) | ||||||||||||||||
Structured time deposits | 993.1 | (6.9 | ) | 996.3 | (3.7 | ) | 1,989.4 | (10.6 | ) | |||||||||||||||
$ | 17,089.6 | $ | (721.6 | ) | $ | 17,429.6 | $ | (57.5 | ) | $ | 34,519.2 | $ | (779.1 | ) | ||||||||||
The gross unrealized losses related to bonds and asset-backed securities were due to fair value fluctuations in an unstable United States credit environment. The Company has the intent and ability to hold the investments for a sufficient period of time to allow for recovery in market value. |
F-70
Table of Contents
As of December 31, 2007, the amortized cost and fair value of the Company’s available-for-sale and held-to-maturity investments in debt securities by contractual maturity were as follows: |
Amortized | ||||||||
Cost | Fair Value | |||||||
NT$ | NT$ | |||||||
(In Millions) | ||||||||
Due in one year or less | $ | 21,472.6 | $ | 21,466.6 | ||||
Due after one year through two years | 17,181.3 | 17,280.4 | ||||||
Due after two years through five years | 6,925.1 | 6,892.6 | ||||||
Due after five years | 8,118.7 | 7,557.6 | ||||||
$ | 53,697.7 | $ | 53,197.2 | |||||
Total appreciation of trading marketable securities held by the Company as of December 31, 2006 and 2007 was NT$964 million and NT$1,486.0 million, respectively. Total appreciation as of December 31, 2005 included a gain of NT$221 million that resulted from the transfer of formerly unquoted available-for-sale securities to trading securities as they became marketable. There was no such transfer for the years ended December 31, 2006 and 2007. | |||
c. | Stock-based compensation plans | ||
Effective January 1, 2006, TSMC adopted the fair value recognition provisions of U.S. SFAS No. 123R, using the modified prospective transition method and therefore has not restated the results for prior periods. Under the transition method, stock-based compensation expense in the year ended December 31, 2006 includes stock-based compensation expense for all share-based payment awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provision of U.S. SFAS No. 123, “Accounting for Stock-Based Compensation” (U.S. SFAS No. 123). In addition, the stock-based compensation expense also includes intrinsic value of certain outstanding share-based awards for which it was not possible to reasonably estimate their grant-date fair value under the requirement of U.S. SFAS No. 123. Stock-based compensation expense for all share-based payment awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provision of U.S. SFAS No. 123R. The Company recognizes these compensation costs using the graded vesting method over the requisite service period of the award, which is generally a four-year vesting period. The adoption of U.S. SFAS No. 123R resulted in a cumulative gain from accounting change of NT$37.9 million, which reflects the net cumulative impact of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when they occur as previously permitted. Prior to the adoption of U.S. SFAS No. 123R, the Company accounted for awards granted under the intrinsic value method prescribed by U.S. APB 25 and related interpretations, and provided the required pro forma disclosures prescribed by U.S. SFAS No. 123. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB No. 107) regarding the SEC’s interpretation of U.S. SFAS No. 123R and the value of share-based payments for public companies. TSMC has applied the provisions of SAB No. 107 in its adoption of U.S. SFAS No. 123R. | |||
As a result of adopting U.S. SFAS No. 123R, income before income tax and cumulative effect of changes in accounting principles and net income for the year ended December 31, 2006 were NT$73.1 million and NT$67.1 million, respectively, lower than if the Company had continued to account for stock-based compensation under U.S. APB 25. |
F-71
Table of Contents
The following table reflects the reported and pro forma net income and basic and diluted net earnings per share or ADS for the years ended December 31, 2005 in accordance with the fair value based method provision of U.S. SFAS 123: |
Year Ended | ||||
December 31 | ||||
2005 | ||||
NT$ | ||||
(In Millions Except | ||||
Per Share Amounts) | ||||
Net income based on U.S. GAAP, as reported | $ | 75,418.3 | ||
Add: Stock-based compensation expense (gain) included in reported net income attributable to shareholders of the parent under U.S. APB 25, net of tax | 753.5 | |||
Less: Stock-based compensation expense determined under U.S. SFAS No. 123, net of tax | (846.8 | ) | ||
Pro forma net income attributable to shareholders of the parent | $ | 75,325.0 | ||
Earnings per share: | ||||
Pro forma basic earnings per share | $ | 2.96 | ||
Pro forma diluted earnings per share | 2.96 | |||
Basic earnings per share as reported | 2.97 | |||
Diluted earnings per share as reported | 2.96 | |||
Pro forma basic earnings per ADS | 14.81 | |||
Pro forma diluted earnings per ADS | 14.80 | |||
Basic earnings per ADS as reported | 14.83 | |||
Diluted earnings per ADS as reported | 14.82 |
The fair values of the options granted under the TSMC 2002 Plan and GUC 2004 Plan were not reasonably estimable using appropriate valuation methodologies as prescribed under U.S. SFAS No. 123 because the terms of such plans included a provision for a reduction in the exercise price in the event TSMC or GUC issues additional common shares or issues ADSs at a price lower than the exercise price of a granted stock option. Accordingly, the expenses for the stock options granted under the TSMC 2002 Plan and GUC 2004 Plan were determined using the variable accounting method. Upon adoption of U.S. SFAS No. 123R, the Company continued to account for these stock options based on their intrinsic value, remeasured at each reporting date through the date of exercise or other settlement. | |||
Please refer to Note 21 of the Consolidated Financial Statements for other general terms of TSMC’s, GUC’s and Xintec’s Employee Stock Option Plans, such as the maximum contractual term and the number of shares authorized for each stock option plan, as well as the supplemental information such as outstanding options as of December 31, 2007. | |||
The weighted average remaining contractual term and aggregate intrinsic value of options under the foregoing plans as of December 31, 2007 were as follows: |
F-72
Table of Contents
Weighted | ||||||||
Average | ||||||||
Remaining | ||||||||
Contractual | Aggregate | |||||||
Term | Intrinsic Value | |||||||
(In Years) | NT$ | |||||||
(In Millions) | ||||||||
TSMC: | ||||||||
Options outstanding | 5.7 | $ | 1,031.1 | |||||
Options exercisable | 5.5 | 932.0 | ||||||
GUC: | ||||||||
Options outstanding | 4.0 | 1,209.9 | ||||||
Options exercisable | 2.0 | 177.9 | ||||||
Xintec: | ||||||||
Options outstanding | 8.8 | 13.4 | ||||||
Options exercisable | — | — |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between TSMC’s or GUC’s stock closing price on the last trading date of the year ended December 31, 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2007. | |||
The number of options expected to vest for the years ended December 31, 2006 and 2007 was 23,093 thousand shares and 16,937 thousand shares, respectively. | |||
Total intrinsic value of options exercised in the years ended December 31, 2006 and 2007 was NT$332.2 million and NT$741.9 million, respectively. Total fair value of options vested, net of taxes, during the years ended December 31, 2006 and 2007 was NT$528.8 million and NT$574.5 million, respectively. | |||
As of December 31, 2007, there was NT$279.3 million of unrecognized compensation cost related to stock-based compensation plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.4 year. | |||
d. | Uncertainty in income taxes | ||
On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An interpretation of FASB Statement No. 109” (U.S. FIN 48), which clarifies the accounting for uncertainty in income taxes by prescribing a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. U.S. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of U.S. FIN 48, the Company did not recognize any cumulative effect adjustment impacting retained earnings as of the beginning of fiscal year 2007. As of December 31, 2007, there was no material uncertain tax position or unrecognized tax benefit identified by the Company. The Company does not expect there will be any significant change in this tax position on unrecognized tax benefits within 12 months of the reporting date. |
F-73
Table of Contents
e. | Subsidy income | ||
The subsidy income of NT$321.9 million, NT$334.5 million and NT$364.3 million recognized in the years ended December 31, 2005, 2006 and 2007, respectively, represented payments granted by the government of the People’s Republic of China in connection with the Company’s investment in Mainland China. Under R.O.C. GAAP, such government grants are recorded as non-operating income when received. In the absence of specific U.S. GAAP accounting guidance, the Company applied the International Accounting Standard 20, “Accounting for Government Grants and Disclosure of Government Assistance”. Therefore the subsidy income was recognized when received as non-operating income under U.S. GAAP as well. | |||
f. | Settlement income | ||
Settlement income of NT 964.7 million, NT$979.2 million and NT$985.1 million was recognized in the years ended December 31, 2005, 2006 and 2007, respectively, under the settlement agreement with Semiconductor Manufacturing Company Limited (SMIC). The dispute settlement is not a component of the activities that constitute the Company’s ongoing major or central operations and therefore is classified as non-operating income in accordance with U.S. FASB Standard of Financial Accounting Concept (SFAC) No. 6, “Elements of Financial Statements”. | |||
Under paragraph 84 (g) of U.S. FASB SFAC No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises”, the Company recognized such settlement income on a cash basis due to the Company’s serious doubt as to its collectibility at the time the settlement agreement was consummated. The Company continues to analyze the recognition of the remaining settlement income based on its collectibility, and will evaluate SMIC’s reported financial condition, capital resources and liquidity condition on a regular basis. |
F-74