1934 Act Registration No. 1-31731
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
Dated August 20, 2003
CHUNGHWA TELECOM CO., LTD.
(Translation of registrant's name into English)
21-3 Hsinyi Road, Section 1
Taipei, Taiwan
Republic of China
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F ___
---
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes ___ No X
---
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): Not Applicable
Enclosures: (1) Press release dated August 20, 2003
(2) Financial Statements as of December 31, 2002 and June 30,
2003 (Unaudited) and for Three Months and Six Months Ended June
30, 2002 and 2003 (Unaudited)
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant Chunghwa Telecom Co., Ltd. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: August 20, 2003
CHUNGHWA TELECOM CO., LTD.
By: /s/ Shyue-Ching Lu
---------------------
Name: Shyue-Ching Lu
Title: President
Chunghwa Telecom announces 25% sequential increase in EPS in the Second
Quarter ended June 30, 2003
Taiwan, August 20, 2003 - Chunghwa Telecom Co., Ltd (TAIEX: 2412, NYSE: CHT),
today announced revenues of NT$45.7 billion, net income of NT$13.3 billion and
fully-diluted earnings per common share (EPS) of NT$1.38, or US$0.40 per ADS,
for the second quarter ended June 30, 2003.
On a sequential basis, second quarter results represent a 3.3% increase in
revenues, a 25% increase in net income and EPS. All figures were prepared in
accordance with US GAAP.
The increase in second quarter revenues was driven by growth across all
business segments. Fixed Line, Wireless, and Internet and Data divisions grew
by 1.9%, 2.9%, and 4.1%, respectively.
Total operating costs and expenses in second quarter decreased by 4.2%
compared with the first quarter. This was primarily due to a decrease of
NT$0.7 billion in bad debt provisions in the second quarter of 2003. Cost of
Services and Depreciation and Amortization expenses also decreased by NT$0.3
billion and NT$0.1 billion in the second quarter of 2003, respectively.
Earnings before interest, tax, depreciation, and amortization (EBITDA) was
NT$26.7 billion for the second quarter, representing a 58.5% EBITDA margin.
Net income for the second quarter increased by 25% to reach NT$13.3 billion,
resulting in a net margin of 29.2% for the period. EPS for the second quarter
was NT$1.38 per common share, a 25% increase compared with first quarter EPS
of NT$1.11 per common share.
Capital expenditure totaled NT$6.18 billion in the second quarter,
representing a 16.04% decrease compared to NT$7.35 billion in the first
quarter of 2003. Chunghwa Telecom expects full year capital expenditures to be
NT$33 billion.
Cash flow from operations reached NT$19.9 billion in the second quarter
compared to NT$19.5 billion in the first quarter. As of June 30, 2003,
Chunghwa Telecom has cash and cash equivalents of NT$16.7 billion and total
debt of NT$ 700 million.
Business Performance Highlights
Internet and Data Services
o Compared with the first quarter, Internet and Data revenues increased
4.1% to NT$8.9 billion in the second quarter. ADSL is the key driver of
growth. As of June 30, 2003, ADSL subscribers totaled 2.04 million,
compared to 1.86 million at the
end of March 2003. HiNet subscribers increased from 3.40 million as of
March 30, 2003 to 3.47 million as of June 30, 2003.
o Broadband ARPU was NT$996 for the six months ended June 30, 2003.
Chunghwa Telecom reduced its ADSL tariff in July by 16% to expand the
customer base and encourage customers to migrate from lower bandwidth to
1.5 Mbps ADSL service.
o Leased line revenues increased by 0.5% in the second quarter compared to
first quarter. Leased line rental rates remain competitive but demand for
local and DLD leased lines services increased in the second quarter as a
result of the launch of new 3G operators.
Wireless Services
o Total wireless revenues in second quarter increased 2.9% quarter-on-
quarter to NT$16.6 billion.
o Chunghwa Telecom retained its leading market share through strong
marketing activities and competitive tariff packages. As of June 2003,
Chunghwa Telecom had 7.76 million mobile subscribers, representing a 1.9%
quarter-on-quarter increase. The company's market share was 35% based on
revenues and 31% based on subscribers.
o The company's blended mobile ARPU of NT$711 remains the highest in
Taiwan. Although ARPU declined by on a year-on-year basis, it increased
by 0.7% on a quarter-on-quarter basis.
Fixed Line Services
o Total fixed line revenues increased 1.9% to NT$19.5 billion in the second
quarter compared to the first quarter.
o Seasonal effects as well as the positive impact from SARS more than
offset the effects of narrowband-to-broadband and fixed-to-mobile
migration, resulting in positive revenue growth in both local and
domestic long distance businesses. Similarly, international long distance
revenues increased by 1.8% in the second quarter, benefiting from the
growth in the wholesale business.
Financial Statements
Financial statements can be found on our website: www.cht.com.tw
Financial operational data can be found here.
About Chunghwa Telecom
Chunghwa Telecom (TAIEX:2412, NYSE: CHT) is the leading telecom service
provider in Taiwan. Chunghwa Telecom provides fixed line services, mobile
services and Internet and data services to residential and business customers
in Taiwan.
Note Concerning Forward-looking Statements
Except for statements in respect of historical matters, the statements made in
this press conference contain "forward-looking statements" within the meaning
of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S.
Securities Exchange Act of 1934. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
performance, financial condition or results of operations of Chunghwa Telecom
to be materially different from what may be implied by such forward-looking
statements. Investors are cautioned that actual events and results could
differ materially from those statements as a result of a number of factors
including, among other things: extensive regulation of state owned enterprises
by the ROC government and extensive regulation of telecom industry; the
intensely competitive telecom industry; our relationship with our labor union;
general economic and political conditions, including those related to the
telecom industry; possible disruptions in commercial activities caused by
natural and human induced events and disasters, including terrorist activity,
armed conflict and highly contagious diseases, such as SARS; and those risks
identified in the section entitled "Risk Factors" in Chunghwa Telecom's Form
F-1 filed with the U.S. Securities and Exchange Commission in connection with
our U.S. initial public offering.
The financial statements included in this press conference were unaudited, and
prepared and published in accordance with U.S. GAAP. Chunghwa Telecom also
prepared contain financial statements for the same periods discussed in this
press conference under ROC GAAP. Investors are cautioned that there are many
differences between ROC GAAP and U.S. GAAP. As a result, our results under
U.S. GAAP and ROC GAAP may in many events be substantially different.
The forward-looking statements in this press conference reflect the current
belief of Chunghwa Telecom as of the date of this press conference and we
undertake no obligation to update these forward-looking statements for events
or circumstances that occur subsequent to such date.
For inquiries:
Fufu Shen
Investor Relations
+886 2 2344 4634
ffshen@cht.com.tw
Chunghwa Telecom Co., Ltd.
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 AND
JUNE 30, 2003 (UNAUDITED) AND FOR THREE MONTHS AND
SIX MONTHS ENDED JUNE 30, 2002 AND 2003 (UNAUDITED)
CHUNGHWA TELECOM CO., LTD.
BALANCE SHEETS
(Amounts in millions, except shares and par value data)
December 31, JUNE 30
A S S E T S Notes 2002 2003 2003
- ----------- --------- ---------- ---------- -------
NT$ NT$ US$
(UNAUDITED) (UNAUDITED)
(NOTE 3)
CURRENT ASSETS
Cash and cash equivalents 2, 4, 18 $ 7,652 $ 16,671 $ 482
Trade notes and accounts receivable - net 2, 5 17,211 16,533 478
Inventories 2 1,164 1,426 41
Prepaid expenses 486 2,811 81
Deferred income taxes 2, 14 16,845 16,898 488
Other current assets 6 1,929 2,415 70
---------- ---------- ---------
Total Current Assets 45,287 56,754 1,640
---------- ---------- ---------
INVESTMENTS
IN UNCONSOLIDATED
COMPANIES 2, 7, 18 3,727 3,425 99
---------- ---------- ---------
PROPERTY, PLANT AND EQUIPMENT -
NET 2, 8, 15 338,388 326,942 9,446
---------- ---------- ---------
INTANGIBLE ASSETS
Prepaid pension cost 2, 13 24,032 29,365 848
3G concession 2 10,179 10,179 294
Patents and computer software - net 2 212 228 7
---------- ---------- ---------
Total Intangible Assets 34,423 39,772 1,149
---------- ---------- ---------
OTHER ASSETS
Deferred income taxes - non-current 2, 14 3,464 3,165 92
Other 18 3,364 3,371 97
---------- ---------- ---------
Total Other Assets 6,828 6,536 189
---------- ---------- ---------
TOTAL ASSETS $ 428,653 $ 433,429 $ 12,523
========== ========== =========
LIABILITIES AND STOCKHOLDERS' December 31, June 30
EQUITY Notes 2002 2003 2003
- -------------------------------------------- ------- ----------- ---------- ------
NT$ NT$ US$
(UNAUDITED) (UNAUDITED)
(NOTE 3)
CURRENT LIABILITIES
Trade notes and accounts payable $ 11,217 $ 9,191 $ 266
Income tax payable 6,172 5,773 167
Accrued expenses 9 13,804 11,969 346
Accrued pension liabilities 2, 13 32,226 39,515 1,142
Current portion of deferred income 2 3,957 3,509 102
Dividends payable - 38,591 1,115
Customers' deposits 18 11,975 11,390 329
Other current liabilities 10, 15 17,574 13,981 402
---------- ---------- ---------
Total Current Liabilities 96,925 133,919 3,869
---------- ---------- ---------
OTHER LIABILITIES
Deferred income - net of current portion 2 13,855 12,663 366
Long-term loans 11, 18 17,700 700 20
Other 153 233 7
---------- ---------- ---------
Total Other Liabilities 31,708 13,596 393
---------- ---------- ---------
Total Liabilities 128,633 147,515 4,262
---------- ---------- ---------
COMMITMENTS AND CONTINGENT
LIABILITIES 16
STOCKHOLDERS' EQUITY 12
Capital stock - NT$10 (US$0.29) par value;
authorized, issued and outstanding -
9,647,724,900 common shares 96,477 96,477 2,787
Capital surplus 133,862 134,350 3,882
Retained earnings 69,681 55,087 1,592
---------- ---------- ---------
Total Stockholders' Equity 300,020 285,914 8,261
---------- ---------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 428,653 $ 433,429 $ 12,523
========== ========== =========
The accompanying notes are an integral part of the financial
statements.
2
CHUNGHWA TELECOM CO., LTD.
STATEMENTS OF OPERATIONS
(Amounts in millions, except shares and per share and per ADS data)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
Notes 2002 2003 2003 2002 2003 2003
----- --------- --------- --------- ---------- --------- -------
NT$ NT$ US$ NT$ NT$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(NOTE 3) (NOTE 3)
SERVICE REVENUES 2 $ 44,279 $ 45,688 $ 1,320 $ 87,472 $ 89,910 $ 2,598
---------- ------------- ---------- ---------- --------- ----------
OPERATING COSTS AND EXPENSES 2
Costs of services,excluding
depreciation and amortization 13,605 13,933 403 27,084 28,153 813
Marketing, excluding depreciation
and amortization 2 3,955 4,277 124 7,084 9,338 270
Generaland administrative,
excluding depreciation and
amortization 651 625 18 1,435 1,373 40
Research and development, excluding
depreciation and amortization 2 607 599 17 1,154 1,202 35
Depreciation and amortization -
costs of services 9,859 9,769 282 18,934 19,634 567
Depreciation and amortization -
operating expenses 591 630 18 1,202 1,280 37
---------- --------- --------- ---------- --------- ---------
Total Operating Costs and Expenses 29,268 29,833 862 56,893 60,980 1,762
---------- --------- --------- ---------- --------- ---------
INCOME FROM OPERATIONS 15,011 15,855 458 30,579 28,930 836
---------- --------- --------- ---------- --------- ---------
OTHER INCOME
Interest 67 28 1 85 46 1
Equity in net income of
unconsolidated companies 2, 7 167 32 1 112 - -
Other income 484 558 16 1,222 1,146 33
---------- --------- --------- ---------- --------- ---------
Total Other Income 718 618 18 1,419 1,192 34
---------- --------- --------- ---------- --------- ---------
OTHER EXPENSES
Interest 57 12 - 72 22 1
Equity in net loss of unconsolidated
companies 2, 7 - - - - 68 2
Other expense 55 99 3 300 146 4
---------- --------- --------- ---------- --------- ---------
Total Other Expenses 112 111 3 372 236 7
---------- --------- --------- ---------- --------- ---------
INCOME BEFORE INCOME TAX 15,617 16,362 473 31,626 29,886 863
INCOME TAX 2, 14 3,097 3,031 88 6,423 5,889 170
---------- --------- --------- ---------- --------- ---------
NET INCOME $ 12,520 $ 13,331 $ 385 $ 25,203 $ 23,997 $ 693
========== ========= ========= ========== ========= =========
NET INCOME PER SHARE 2 $1.30 $1.38 $0.04 $2.61 $2.49 $0.07
===== ===== ===== ===== ===== =====
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 9,647,724,900 9,647,724,900 9,647,724,900 9,647,724,900 9,647,724,900 9,647,724,900
============= ============= ============= ============= ============= ============
NET INCOME PER PRO FORMA
EQUIVALENT ADS 2 $12.97 $13.81 $0.40 $26.12 $24.87 $0.72
====== ====== ===== ====== ====== =====
WEIGHTED-AVERAGE NUMBER OF
PRO FORMA EQUIVALENT ADSs
OUTSTANDING 964,772,490 964,772,490 964,772,490 964,772,490 964,772,490 964,772,490
============ =========== =========== ============ =========== ===========
The accompanying notes are an integral part of the financial statements.
3
CHUNGHWA TELECOM CO., LTD.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in millions, except shares data)
CAPITAL STOCK RETAINED EARNINGS TOTAL
----------------------- ----------------------------
Common CAPITAL Legal Special Unappropriated STOCKHOLDERS'
Shares Amount SURPLUS Reserve Reserve Earnings Total EQUITY
------------- -------- --------- ------- ------- ---------- ------ -------------
NT$ NT$ NT$ NT$ NT$ NT$ NT$
BALANCE, DECEMBER 31, 2001 (IN NT$) 9,647,724,900 $ 96,477 $133,820 $21,379 $ 2,675 $ 35,306 $59,360 $289,657
Additional capital contributed
by government (Unaudited) - - 22 - - - - 22
Appropriations and distributions
of 2001 earnings: (Unaudited)
Legal reserve - - - 3,727 - ( 3,727) - -
Dividends declared - - - - - ( 33,767) ( 33,767) ( 33,767)
Net income for the six months
ended June 30, 2002 (Unaudited) - - - - - 25,203 25,203 25,203
------------- ------- -------- ------- -------- -------- ------- --------
BALANCE, JUNE 30, 2002
(IN NT$)(UNAUDITED) 9,647,724,900 $96,477 $133,842 $25,106 $ 2,675 $ 23,015 $50,796 $281,115
============== ======= ======== ======= ======== ======== ======= ========
BALANCE, DECEMBER 31, 2002 (IN NT$) 9,647,724,900 $96,477 $133,862 $25,106 $ 2,675 $ 41,900 $69,681 $300,020
Additional capital contributed
by government (Unaudited) - - 25 - - - - 25
Additional capital contributed
by the MOTC through selling shares
to employees at a discounted
price (Unaudited) - - 463 - - - - 463
Appropriations and distributions
of 2002 earnings: (Unaudited)
Legal reserve - - 4,331 - ( 4,331) - -
Dividends declared - - - - - ( 38,591) ( 38,591) (38,591)
Net income for the six months
ended June 30, 2002 (Unaudited) - - - - - 23,997 23,997 23,997
--------------- ------- -------- ------- -------- -------- ---------- --------
BALANCE, JUNE 30, 2003
(IN NT$) (UNAUDITED) 9,647,724,900 $96,477 $134,350 $29,437 $ 2,675 $ 22,975 $ 55,087 $285,914
=============== ======= ======== ======= ======== ======== ========== ========
BALANCE, JUNE 30, 2003
(IN US$) (UNAUDITED) (NOTE 3) 9,647,724,900 $ 2,787 $ 3,882 $ 851 $ 77 $ 664 $ 1,592 $ 8,261
=============== ======= ======= ======= ======== ======== ========== ========
The accompanying notes are an integral part of the financial statements.
5
CHUNGHWA TELECOM CO., LTD.
STATEMENTS OF CASH FLOWS
(Amounts in millions)
SIX MONTHS ENDED JUNE 30
-------------------------
2002 2003 2003
--------- --------- -------
NT$ NT$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(NOTE 3)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25,203 $ 23,997 $ 693
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 327 1,783 52
Depreciation and amortization 20,136 20,914 604
Net loss on disposal of scrap inventories and
property, plant and equipment 50 - -
Equity in net loss (net income) of unconsolidated
companies ( 112) 68 2
Stock compensation expenses for shares issued to
employees at a discount - 463 14
Deferred income taxes 382 246 7
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade notes and accounts receivable ( 3,094) ( 1,060) ( 31)
Inventories ( 2,866) ( 2,180) ( 63)
Prepaid expenses ( 1,966) ( 2,325) ( 67)
Other current assets 755 ( 531) ( 15)
Other assets 1,080 ( 58) ( 2)
Increase (decrease) in:
Trade notes and accounts payable ( 822) ( 108) ( 3)
Income tax payable 3,196 ( 399) ( 12)
Accrued expenses ( 2,455) ( 1,835) ( 53)
Customers' deposits ( 556) ( 585) ( 17)
Other current liabilities 976 591 17
Accrued pension liabilities 1,700 1,956 57
Deferred income ( 1,614) ( 1,640) ( 47)
Other liabilities ( 9) 80 2
---------- ---------- ----------
Net Cash Provided by Operating Activities 40,311 39,377 1,138
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of investments in unconsolidated
companies ( 2,000) - -
Proceeds from disposal of investments in unconsolidated companies - 234 7
Acquisitions of property, plant and equipment ( 17,739) ( 13,534) ( 391)
Proceeds from disposal of property, plant and equipment 203 5 -
Payment on 3G concession ( 10,179) - -
Acquisitions of patents and computer software ( 51) ( 88) ( 3)
----------- ---------- ----------
Net Cash Used in Investing Activities ( 29,766) ( 13,383) ( 387)
---------- ---------- ----------
(Forward)
5
SIX MONTHS ENDED JUNE 30
-------------------------
2002 2003 2003
--------- --------- -------
NT$ NT$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(NOTE 3)
CASH FLOWS FROM FINANCING ACTIVITIES
Avail of short-term loans $ 13,000 $ - $ -
Proceeds from long-term loans 11,700 - -
Payments on principal of long-term loans ( 17,000) ( 17,000) ( 491)
Additional capital contributed by government 22 25 1
---------- ---------- ----------
Net Cash Provided by (Used in) Financing Activities 7,722 ( 16,975) ( 490)
---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 18,267 9,019 261
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,643 7,652 221
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,910 $ 16,671 $ 482
========== ========== ==========
SUPPLEMENTAL INFORMATION
Interest paid $ 224 $ 82 $ 2
========== ========== ==========
Income tax paid $ 2,844 $ 6,040 $ 75
========== ========== ==========
NON-CASH FINANCING ACTIVITIES
Dividends payable $ 33,767 $ 38,591 $ 1,115
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
6
CHUNGHWA TELECOM CO., LTD.
NOTES TO FINANCIAL STATEMENTS (Amounts
in millions of New Taiwan Dollars, unless stated otherwise)
1. GENERAL
Chunghwa Telecom Co., Ltd. ("Chunghwa" or "the Company") was incorporated
on July 1, 1996 in the Republic of China ("ROC") pursuant to the
Telecommunications Act No. 30. The company is a company limited by shares
and, prior to August 2000, was wholly owned by the Ministry of
Transportation and Communications ("MOTC"). Prior to July 1, 1996, the
current operations of Chunghwa were carried out under the Directorate
General of Telecommunications ("DGT"). The DGT was established by the
MOTC in June 1943 to take primary responsibility in the development of
telecommunications infrastructure and to formulate policies related to
telecommunications. On July 1, 1996, the telecom operations of the DGT
were spun-off as Chunghwa continues to carry out the business and the DGT
continues to be the industry regulator.
As a "dominant telecommunications service provider" of fixed-line and
cellular telephone services, within the meaning of applicable
telecommunications regulations of the ROC, the Company is subject to
additional requirements imposed by the MOTC.
The MOTC is in the process of privatizing the Company by reducing the
government ownership to below 50% in stages. Certain of the Company's
common shares were sold, in connection with the foregoing privatization
plan, in domestic public offerings in August 2000, in September 2000, in
June 2001, in December 2002, and in March 2003, in April 2003, and in
July 2003. Certain of the Company's common shares were also sold to its
employees in October 2000, October 2001, November 2002, January 2003,
April 2003, and June 2003. Certain of the Company's common shares were
also sold in an international offering of securities in the form of
American Depository Shares ("ADS") in July 2003. In addition, the MOTC
intends to sell certain of the Company's common shares in the ROC and
throughout the process to the Company's employees. The MOTC owns 65.99%
shares of the Company as of August 1, 2003.
The Company's common shares were listed and traded on Taiwan Stock
Exchange and New York Stock Exchange on October 27, 2000 and on July 17,
2003, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The Company maintains its accounting books and
records based on the ROC Government regulations and generally accepted
accounting principles in the ROC ("ROC GAAP"). The accompanying financial
statements have been prepared to present its financial position, results
of operations and cash flows in accordance with generally accepted
accounting principles in the United States ("US GAAP").
The financial statements as of June 30, 2003 and for the three and six
months ended June 30, 2002 and 2003 included herein are unaudited and
have been prepared by the Company pursuant to the rules and regulations
of the United States Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with US GAAP have been
condensed or omitted as permitted by such rules and regulations, although
the Company believes that the disclosures are adequate to make the
7
information presented not misleading. In the opinion of management, all
adjustments (which include normal recurring adjustments) necessary for a
fair presentation of results for the interim periods have been made. The
results of the Company for interim periods are not necessarily indicative
of results of the Company to be expected for the full fiscal year.
Use of estimates. The preparation of financial statements requires
management to make certain estimates and assumptions that affect the
recorded amounts of assets, liabilities, revenues and expenses of the
Company. The Company continually evaluates these estimates, including
those related to allowances for doubtful accounts, useful lives of long
term assets, pension plans, valuation allowances on deferred income
taxes, customer service periods, impairment of assets and the fair value
of financial instruments. The Company bases its estimates on historical
experience and other assumptions, which it believes to be reasonable
under the circumstances. Actual results may differ from these estimates.
Foreign currency transactions. The functional currency of the Company is
the local currency, the New Taiwan dollar (NT$). Thus, the transactions
of the Company that are denominated in currencies other than the New
Taiwan dollars (the "foreign currency") are recorded in New Taiwan
dollars at the exchange rates prevailing on the transaction dates. Gains
or losses realized upon the settlement of a foreign currency transaction
are included in the period in which the transaction is settled. The
balances, at the balance sheet dates, of the foreign currency assets and
liabilities are adjusted to reflect the prevailing exchange rates and the
resulting differences are recorded as follows:
a. Long-term stock investments accounted for by the equity method - as
cumulative translation adjustment under stockholders' equity.
b. Other assets and liabilities - credited or charged to current income.
Cash equivalents. Cash equivalents include commercial paper purchased
with maturities of three months or less from the date of acquisition.
Inventories. Inventories, consisting mainly of telecommunication cables,
are stated at the lower of cost (weighted-average cost method) or market
value (replacement cost or net realizable value). If the market value is
below cost, the Company writes down the inventory to the market value
which then becomes the new cost basis.
Investments in unconsolidated companies. Investments in shares of stock
in companies where the Company exercises significant influence over their
operating and financial policy decisions are accounted for using the
equity method. The difference between the investment cost and the
Company's proportionate share in the net assets of the investee at the
date of acquisition is amortized using the straight-line method over five
years, which difference is fully amortized. Any cash dividends received
are recognized as a reduction in the carrying value of the investment.
Unrealized profits arising from downstream transactions to equity
investees are deferred in the Company's portion of equity income or loss.
Profits and losses arising from equipment purchases from equity investees
are eliminated and recognized over the estimated remaining useful life of
the equipment.
Investments in shares of stock with no readily determinable market values
are accounted for using the cost method when the ownership is less than
20%. Cash dividends received are recorded as income and stock dividends
received are accounted for as increases in the number of shares held but
not recognized as income.
8
The costs of investments sold are determined using the weighted-average
method.
Property, plant and equipment. Property, plant and equipment are stated
at cost. Depreciation expense is determined based upon the assets'
estimated useful life using the straight-line method.
The estimated useful lives are as follows:
Useful Life
(Years)
Buildings and improvements 10-60
Telecommunications equipment:
Transmission equipment 9-15
Exchange equipment 6-12
Miscellaneous equipment 3-10
Cost of maintenance and repairs, including the cost of replacing minor
items not constituting substantial improvements, is charged to current
income.
Losses incurred for the sale or disposal of property, plant and equipment
are recorded as costs of services.
Valuation of long-lived assets. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the total of the expected
future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the assets, a loss is recognized for the
excess of the carrying amount over the fair value of the asset. No
impairment charge was recorded throughout the periods presented in the
accompanying financial statements.
3G Concession. This is the amount paid by the Company to the ROC
government in connection with the grant of a concession to provide
various telecommunication services using spectrum assigned by the MOTC
that utilizes the International Mobile Telecommunication - 2000: The
Global Standard for Third Generation Wireless Communications technical
standards as announced by the International Telecommunications Union (the
"3G concession"). Licenses for 3G mobile telecommunication services are
granted by the MOTC through a three-step procedure. Applicants first
obtain a concession from the MOTC through a bidding process. The
concession is valid from the issue date to December 31, 2004. The Company
may apply to extend this date by one year with approval from the MOTC.
The holder of the concession must then obtain a network construction
permit from the Directorate General of Telecommunications (the "DGT", the
regulator of the telecommunication industry). Once the network
construction is complete, the applicant may apply for a 3G license from
the MOTC. The 3G license is valid through December 31, 2018. The 3G
concession and any additional licensing fees will be amortized on a
straight-line basis from the date operations commence through the date
the license expires. The 3G Concession cost is currently subject to
testing under SFAS No.144 "Accounting for the Impairment or Disposal of
Long-lived Assets".
Patents and computer software. Patents are amortized using the
straight-line method over the estimated useful lives ranging from 12 to
20 years. Computer software costs are capitalized and amortized using the
straight-line method over the estimated useful lives of three years.
Amortization expenses for the three months ended June 30, 2002 and 2003
were NT$29 million (unaudited) and NT$38 million (unaudited),
respectively, and NT$58 million (unaudited) and NT$72 million (unaudited)
for the six months ended June 30, 2002 and 2003, respectively.
9
Accumulated amortization was NT$659 million as of December 31, 2002, and
NT$731 million (unaudited) as of June 30, 2003.
Deferred income. Deferred income represents one-time connection fees
received from subscribers. The deferred income is recognized over the
average expected customer service periods.
The average expected customer service periods (in years) are as follows:
AS OF AS OF
JUNE 30, 2002 JUNE 30, 2003
-------------- -------------
(UNAUDITED) (UNAUDITED)
Fixed-line 14.0 13.0
Cellular 6.0 6.0
Paging 2.0 2.0
Internet 3.0 3.0
Revenue recognition. The Company evaluates revenue recognition for its
transactions using the SEC Staff Accounting Bulletin ("SAB") No. 103,
Topic 13, "Revenue Recognition".
The Company records service revenues over the periods they are earned.
The costs of providing services are recognized as incurred. Handset
subsidy costs are paid to a vendor that sells a handset to a customer who
subscribes to the service, as an inducement to enter into a service
contract, and are recognized as a cost of service when incurred. Usage
revenues from fixed-line services, cellular services, Internet and data
services, and inter-connection and call transfer fees from other
telecommunications companies and carriers are billed in arrears and are
recognized based upon minutes of traffic processed when the services are
provided in accordance with contract terms. The Company had accrued
unbilled revenues for services provided amounting to NT$1,265 million as
of December 31, 2002, and NT$1,317 million (unaudited) as of June 30,
2003, and are included in accounts receivable in the accompanying balance
sheets.
Other revenues are recognized as follows: (a) one-time subscriber
connection fees are deferred and recognized over the average expected
customer service periods, (b) fixed-monthly fees (on fixed-line services,
wireless (cellular and paging) and Internet and data services) are
accrued every month, and (c) prepaid services (fixed line, cellular and
internet) are recognized as income based upon actual usage by customers
or when the right to use those services expires.
Concentrations. For all periods presented, no individual customer or
supplier constituted more than 10% of the Company's revenues, trade notes
and accounts receivables, purchases or trade notes and accounts payable.
The Company also does not have concentrations of available sources of
labor, services or other rights that could, if suddenly eliminated,
severely impact its operations. However, telecommunications franchises
and licenses are issued solely by authority of the ROC government. The
withdrawal or the revocation of the franchise and licenses by the ROC
government would severely impact the Company's operations. The Company
invests its cash with several high-quality financial institutions.
Pension costs. Pension costs are recorded on the basis of actuarial
calculations in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 87, "Employers' Accounting for Pensions", and are
disclosed in accordance with SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". As a foreign registrant, the
Company adopted
10
SFAS No. 87 on July 1, 1996 since it was not feasible for the Company to
obtain the information necessary to adopt SFAS No. 87 as of July 1, 1989.
The Company has allocated a portion of the transition obligation directly
to equity on the date of adoption based on the ratio of: (a) the years
elapsed between the effective date in SFAS No. 87 and the adoption date,
to (b) the remaining service period of employees expected to receive
benefits as estimated at the adoption date.
Advertising and promotional expenses. Advertising and promotional
expenses are charged to income as incurred. These expenses were NT$423
million (unaudited) and NT$203 million (unaudited) for the three months
ended June 30, 2002 and 2003, respectively, and NT$486 million
(unaudited) and NT$512 million (unaudited) for the six months ended June
30, 2002 and 2003, respectively.
Research and development costs. Research and development costs are
charged to income as incurred.
Employee stock compensation. In connection with the privatization plan of
the Company, employees may be offered to purchase shares of common stock
of the Company at less than fair market value. The Company records the
difference between the quoted market price of the stock on the date of
purchase and the purchase price as compensation expense and charges to
income in the period of the purchase.
Income tax. The Company is subject to income tax in the ROC. The Company
accounts for income tax using the asset and liability method. Under this
method, deferred income tax is recognized for investment tax credits,
losses carried forward and the future tax consequences attributable to
differences between financial statement carrying amounts and their
respective tax bases, using enacted laws. A valuation allowance is
recognized if, based on the weight of available evidence, it is more
likely than not that a portion or the entire deferred tax asset will not
be realized.
Income taxes on undistributed earnings (10%) generated after 1998 are
recorded as expense in the current year.
Comprehensive income. Comprehensive income includes all changes in equity
(net assets) during a period from sources other than the stockholders.
The balance of comprehensive income is zero for all balance sheet dates
presented.
Net income per share and per pro forma equivalent ADS. Net income per
share is computed by dividing net income by the weighted-average number
of common shares outstanding during the periods. Net income per pro forma
equivalent ADS is calculated by multiplying the above net income per
share by ten as each ADS is expected to represent ten common shares.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The statement requires, among other provisions,
retirement obligations to be recognized when they are incurred and
displayed as liabilities, with a corresponding amount capitalized as part
of the related long-lived asset. The capitalized element is required to
be expensed using a systematic and rational method over its useful life.
The Company assessed the impact of the adoption as required on January 1,
2003 of this standard and believes that there is no material impact on
the accompanying financial statements.
11
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires that
a liability for a cost associated with an exit or disposal activity be
measured at fair value and recorded when it meets the definition of a
liability in FASB Concepts Statement No. 6, "Elements of Financial
Statements". SFAS No. 146 superceded EITF No. 94-3 "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit and
Activity (Including Certain Costs Incurred in Restructuring)", which
required recognition of a liability for costs associated with an exit or
disposal activity when the company committed to an exit/disposal plan.
SFAS No. 146 is effective for exit or disposal activities initiated after
December 31, 2002. Restatement of prior periods is not required. SFAS No.
146 applies to future restructuring activities and the application of
SFAS No. 146 has no impact on the accompanying financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", which amended FASB
No. 123 "Accounting for Stock Based Compensation". This statement
provides alternative methods, of transition for an equity that
voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. This statement also amended the
disclosure provisions of that statement to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. This
statement is effective January 1, 2003 and there was no material impact
on the accompanying financial statements.
In November 2002, FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The interpretation elaborates on
the existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at
the time a company issues a guarantee, the Company must recognize an
initial liability for the fair value, or market value, of the obligations
it assumes under the guarantee and must disclose that information on its
interim and annual financial statements. The provisions related to
recognizing a liability at inception of the guarantee for the fair value
of the guarantor's obligations does not apply to product warranties or to
guarantees accounted for as derivatives. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees
issued or modified after December 31, 2002. There was no material impact
on the accompanying financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities -- an Interpretation of Accounting Research Bulletin
("ARB") No. 51." FIN No. 46 requires the primary beneficiary to
consolidate a variable interest entity if it has a variable interest that
will absorb a majority of the entity's expected losses if they occur,
receive a majority of the entity's expected residual returns if they
occur, or both. FIN No. 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest
entities in which the entity obtains an interest after that date. For
variable interest entities acquired before February 1, 2003, the
effective date for the company is July 1, 2003. The Company does not
expect application to have a material impact on the accompanying
financial statements.
In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables," related to the timing of
revenue recognition for arrangements in which goods or services or both
are delivered separately in a bundled sales arrangement. The EITF
requires that when the deliverables included in this type of arrangement
meet certain criteria, they should be accounted for separately as
separate units of accounting. This may result in a difference in the
timing of revenue recognition, but will not result in a change in the
total amount of revenue recognized in a bundled sales arrangement. The
allocation of revenue to the separate deliverables is based on the
relative fair value of each item. If the fair value is not available for
the
12
delivered items then the residual method must be used. This method
requires that the amount allocated to the undelivered items in the
arrangement is their full fair value. This would result in the discount,
if any, being allocated to the delivered items. This consensus is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company does not believe there will be
a significant impact of this consensus on its results of operations,
financial position and cash flows.
In January 2003, the EITF reached a consensus on EITF 02-18, "Accounting
for Subsequent Investments in an Investee after Suspension of Equity
Method Loss Recognition." This consensus states that if an additional
investment, in whole or in part, represents the funding of prior losses
for an equity-method investee, the investor should recognize the
previously suspended losses. This determination would be based on various
factors including whether the investment results in an increased
ownership percentage, the fair value of the consideration received is
equivalent to the consideration paid and whether the investment is
acquired from a third party or directly from an investee. If any of these
provisions are met, the additional investment would generally not be
considered as funding prior losses. When appropriate to recognize prior
losses, the amount recognized would be limited to the amount of the
additional investment determined to represent the funding of prior
losses. The consensus will be effective for additional investments made
after February 5, 2003. There has been no significant impact to the
Company's results of operations, financial position and cash flows since
the effective date of this consensus.
In April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is applied prospectively and
is effective for contracts entered into or modified after June 30, 2003.
The Company has not entered into any contracts or modified any contracts.
Accordingly, the application of SFAS No. 149 does not have a material
impact on the accompanying financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." The Statement establishes standards for how an issuer classifies
and measures certain financial instruments. This Statement is effective
for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Statement requires that certain
financial instruments that, under previous guidance, could be accounted
for as equity be classified as liabilities, or assets in some
circumstances. This Statement does not apply to features embedded in a
financial instrument that is not a derivative in its entirety. The
Statement also requires disclosures about alternative ways of settling
the instruments and the capital structure of entities whose shares are
mandatorily redeemable. The Company does not expect the adoption of SFAS
No. 150 to have a significant impact on its financial statements.
3. U.S. DOLLAR AMOUNTS
The Company maintains its accounts and expresses its financial statements
in New Taiwan dollars. For convenience only, U.S. dollar amounts
presented in the accompanying financial statements have been translated
at the noon buying rate for cable transfers as certified for customs
purposes by the Federal Reserve Bank of New York as of June 30, 2003,
which was NT$34.61 to US$1.00. The convenience translations should not be
construed as representations that the New Taiwan dollar amounts have
been, could have been, or could in the future be, converted into U.S.
dollars at this or any other rate of exchange.
13
4.CASH AND CASH EQUIVALENTS
December 31, June 30,
2002 2003
-------------- ------------
NT$ NT$
(UNAUDITED)
Cash and bank deposits $ 2,460 $ 3,540
Commercial paper purchased 5,192 13,131
---------- ----------
$ 7,652 $ 16,671
========== ==========
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The changes in this account are summarized as follows:
SIX MONTHS ENDED
JUNE 30
2002 2003
----------- ------
NT$ NT$
(UNAUDITED) (UNAUDITED)
Balance, beginning of period $ 5,008 $ 7,505
Provision for doubtful accounts 327 1,738
Trade notes and accounts
receivable written off ( 949) ( 1,275)
---------- ----------
Balance, end of period $ 4,386 $ 7,968
========== ==========
6. OTHER CURRENT ASSETS
December 31, June 30,
2002 2003
---- ----
NT$ NT$
(UNAUDITED)
Other receivables - net $ 1,800 $ 2,060
Prepayments 52 289
Miscellaneous 77 66
---------- ----------
$ 1,929 $ 2,415
========== ==========
14
7. INVESTMENTS IN UNCONSOLIDATED COMPANIES
The investments in unconsolidated companies comprise the following:
December 31, June 30,
2002 2003
--------------------- ---------------------
% of % of
Carrying Owner- Carrying Owner-
Value ship Value ship
------ ------ ------- ------
NT$ NT$
(UNAUDITED) (UNAUDITED)
Equity investees:
Taiwan International Standard Electronics
("TISE") $ 435 40 $ 377 40
Chunghwa Investment ("CHI") 982 49 972 49
----- -----
1,417 1,349
----- -----
Cost investees:
Taipei Financial Center ("TFC") 2,000 12 2,000 12
Lucent Technologies Taiwan Telecom
("Lucent") 234 15 - -
RPTI International ("RPTI") 71 12 71 12
Siemens Telecommunication Systems
("Siemens") 5 15 5 15
----- -----
2,310 2,076
----- -----
$3,727 $3,425
====== ======
TISE designs, manufactures and sells telecommunications equipment. It
also provides maintenance services on such telecommunications equipment.
No dividends were declared by TISE for the three months and six months
ended June 30, 2002 and 2003, respectively.
CHI invests in companies engaged in telecom and software businesses. No
dividends were declared by CHI for the three months and six months ended
June 30, 2002 and 2003, respectively.
The investments in TFC, RPTI and Siemens have no quoted market values and
are carried at their original costs which approximate fair value. The
investment in Lucent was sold at its carrying value in June, 2003.
8. PROPERTY, PLANT AND
EQUIPMENT - NET
December 31, June 30,
2002 2003
---------- ------
NT$ NT$
(UNAUDITED)
Cost
Land $ 42,142 $ 42,303
Buildings and improvements 51,528 53,300
Telecommunications equipment 594,786 606,989
Miscellaneous equipment 26,931 23,965
---------- ----------
Subtotal 715,387 726,557
---------- ----------
15
(Forward) Accumulated depreciation
Buildings and improvement 10,154 10,704
Telecommunications equipment 395,791 410,599
Miscellaneous equipment 19,732 16,980
---------- ----------
Subtotal 425,677 438,283
---------- ----------
Construction in progress 48,582 38,162
---------- ----------
Advances related to acquisitions of equipment 96 506
---------- ----------
Property, plant and equipment - net $ 338,388 $ 326,942
========== ==========
On July 1, 1996, pursuant to the guidance on the incorporation of the
Company and as instructed by the ROC's Executive Yuan (executive branch),
the ROC government (through the MOTC) transferred to the Company certain
land and buildings with carrying value of NT$53,895 million. Those
properties, as of that date, were registered in the name of the ROC's
National Properties Bureau ("NPB"). As the number of the Company's
properties is large, management has begun the process of registering the
titles to the properties in the name of the Company. The process has been
delayed due to the requirement of rezoning a small number of
currently-classified agricultural and industrial zoned property to
telecommunication or special purpose property prior to the approval of
title transfer by the Executive Yuan. As of December 31, 2002 and June
30, 2003, titles to land and buildings with carrying value of NT$ 617
million and NT$517 million (unaudited) were still in the name of the NPB,
respectively.
The Company carries insurance on certain buildings and certain telecom
equipment with carrying value of NT$7,871 million and NT$7,105 million
(unaudited) as of December 31, 2002 and June 30, 2003, respectively. The
Company does not carry comprehensive insurance on all properties.
9. ACCRUED EXPENSES
December 31, June 30,
2002 2003
---- ----
NT$ NT$
(UNAUDITED)
Accrued compensation $ 8,862 $ 8,871
Accrued franchise fees 2,369 1,188
Other accrued expenses 2,573 1,910
---------- ----------
Total $ 13,804 $ 11,969
========== ==========
10. OTHER CURRENT LIABILITIES
December 31, June 30,
2002 2003
NT$ NT$
(UNAUDITED)
Advances from subscribers $ 5,897 $ 5,867
Payables to construction suppliers 4,075 1,004
Amounts collected in trust for others 3,443 3,848
Payables to equipment suppliers 1,933 832
Miscellaneous 2,226 2,430
---------- ----------
Total $ 17,574 $ 13,981
========== ==========
16
11. LONG-TERM LOANS
Long-term loans consist of the following:
December 31, June 30,
2002 2003
---------- ------
NT$ NT$
(UNAUDITED)
Syndicated Loans $ 17,000 $ -
Common Tunnel Fund 700 700
---------- ----------
Total $ 17,700 $ 700
========== ==========
The Syndicated Loans were obtained pursuant to long-term loan agreements
with several banks that allow the Company to obtain unsecured credit
until December 16, 2005. The aggregate outstanding principal amounts as
of December 31, 2002 (consisting of three separate loans of NT$8 billion,
NT$7 billion and NT$2 billion) are due on December 16, 2005. These loans
bear fixed annual interest rates ranging from 1.58% to 1.70% for the
years ended December 31, 2002. As of June 30, 2003, the Company prepaid
NT$17 billion of the outstanding balances of these syndicated loans.
The loan from the Common Tunnel Fund was obtained pursuant to a long-term
loan agreement with the Common Tunnel Fund managed by Ministry of
Interior that allows the Company to obtain unsecured interest-free credit
until March 12, 2007. The outstanding principal amounts as of December
31, 2002 and June 30, 2003 are payable in three annual installments
(NT$0.2 billion, NT$0.2 billion and NT$0.3 billion) starting on March 12,
2005.
12. STOCKHOLDERS' EQUITY
Under the Company's Articles of Incorporation, authorized capital is
divided into 9,647,724,900 common shares. Company's Articles of
Incorporation and the Republic of China Telecommunications Act provide
that the MOTC has the right to purchase two redeemable preferred shares
(NT$10 par value) in the event its ownership in the Company falls below
50% of the outstanding common shares. The MOTC, as the holder of those
preferred shares, needs to consent to any change in the name of the
Company, change in the scope of the business of the Company and any
transfer of a substantial portion of the Company's business or property.
In addition, the holder of the preferred shares, or its nominated
representative, will act as a director and/or supervisor during the
entire period in which the preferred shares are outstanding. The Company
must redeem all outstanding preferred shares within three years from the
date of their issuance.
Under the ROC Company Law, capital surplus may only be utilized to offset
deficits or be declared as stock dividends. Also, such capital surplus
can only be declared as a stock dividend by the Company at an amount
calculated in accordance with the provisions of existing regulations. As
of December 31, 2002, the amount of retained earnings available for
dividends was NT$43,570 million and was based on earnings as determined
using ROC government regulations.
In addition, before distributing a dividend or making any other
distribution to stockholders, the
17
Company must pay all outstanding taxes, recover any past losses and set
aside a legal reserve equal to 10% of its net income, and, depending on
its business needs or requirements, may also set aside a special reserve.
The cash dividends to be distributed shall not be less than 10% of the
total amount of dividends to be distributed. In addition, if the cash
dividend to be distributed is less than NT$0.10 per share, such cash
dividend shall be distributed in the form of common shares.
Furthermore, under the ROC Company Law, the appropriation for legal
reserve shall be made until the accumulated reserve equals the aggregate
par value of the outstanding capital stock of the Company. This reserve
can only be used to offset a deficit, or when reaching 50% of the
aggregate par value of the outstanding capital stock of the Company, up
to 50% of the reserve may, at the option of the Company, be declared as a
stock dividend and transferred to capital.
The MOTC, as part of the privatization plan of the Company, offered for
sale to both corporate and individual investors 289,431,000 common shares
of the Company between the period from August 16, 2000 to August 19, 2000
through an auction whereby the minimum price per share was set at NT$104.
The minimum price was set on July 20, 2000 by an evaluation committee
designated by the MOTC. The actual number sold was 206,627,000 common
shares of the Company at an average price of approximately NT$109 per
share for total proceeds of NT$22,549 million.
From September 6, 2000 to September 14, 2000, the MOTC offered for sale
to individual investors 1,334,982,000 common shares of the Company at
NT$104 per share, of which only 65,832,000 common shares were sold for
total proceeds of NT$6,847 million.
From June 7, 2001 to June 20, 2001, the MOTC offered for sale to both
corporate and individual investors 482,386,000 common shares of the
Company through an auction whereby the minimum price per share
(throughout the offer period) was set between NT$57.00 and NT$60.50. The
MOTC sold 173,484,000 common shares for total proceeds of NT$9,950
million.
On December 25, 2002, the MOTC offered and sold to corporate investors
1,300,000,000 common shares of the Company at NT$50.30 per share for
total proceeds of NT$65,390 million.
From March 3, 2003 to March 5, 2003, the MOTC offered for sale to both
corporate and individual investors 100,000,000 common shares of the
Company through an auction whereby the minimum price per share
(throughout the offer period) was set between NT$51 and NT$52. The MOTC
sold 7,424,000 common shares for total proceeds of NT$380 million.
From April 10, 2003 to April 16, 2003, the MOTC offered for sale to both
corporate and individual investors 500,000,000 common shares of the
Company through an auction whereby the minimum price per share
(throughout the offer period) was set between NT$49 and NT$50. The MOTC
sold 165,830,000 common shares for total proceeds of NT$8,276 million.
On July 17, 2003, the MOTC offered for sale to both corporate and
individual investors 200,000,000 common shares of the Company through an
auction whereby the minimum price per share (throughout the offer period)
was set at NT$49. The MOTC sold 200,000,000 common shares for total
proceeds of NT$9,800 million.
The MOTC, as a part of privatization plan of the Company, offered for
sale in the form of American Depository Shares ("ADS") 96,500,000 shares
on July 17, 2003 and 14,475,000 shares on July 24, 2003 (one ADS
represents ten common shares) whereby the price per ADS was set at
US$14.24 (NT$49 per common share). The MOTC sold 110,975,000 ADSs,
representing
18
1,109,750,000 common shares, for total proceeds of US$1,580 million
(NT$54,307 million).
The MOTC, in connection with the privatization plan of the Company, sold,
at discounted prices, to employees 3,051,786 shares from October 12, 2000
to October 16, 2000, 683,455 shares from October 4, 2001 to October 8,
2001, 40,856,440 shares from January 15, 2003 to January 24, 2003,
215,251 shares from April 2, 2003 to April 4, 2003 and 4,806,292 shares
from June 2, 2003 to June 6, 2003 for total consideration of NT$255
million, NT$28 million, NT$1,645 million, NT$ 9 million and NT$189
million, respectively. The terms of the offers for the share purchases
provided that substantially all full-time employees meeting limited
employment qualifications may participate on an equitable basis taking
into account service years, rank, level, salary and position, and
performance. Such common shares, pursuant to the Enforcement Rule of the
Statute Governing Privatization of State-Owned Enterprises, were offered
and sold at a price similar to the price for those common shares sold to
individual and corporate investors, which were NT$104, NT$51.20,
NT$50.30, NT$51 AND NT$49 per share, respectively. The employees
purchased the common shares at discounts of 10% and 20% in consideration
for their commitment to hold the common shares for two and three years
(the "holding periods"), respectively. In circumstances wherein the
employees took advantage of such discounts, the common shares are held by
an escrow agent on behalf of the employees/stockholders. There are no
circumstances under which the MOTC or the Company would be required to
repurchase these common shares. Also, the employees are not required to
remain employed with the Company during the duration of the holding
periods. The Company has recognized NT$53 million (unaudited) and NT$463
million (unaudited) as compensation expense for the three months and six
months ended June 30, 2003 for the shares purchased by employees in 2003
that were subject to a discount. In addition, the MOTC sold 1,000,004
common shares, 10,424 common shares, 1,373,151 common shares, 7,481
common shares and 67,035 common shares to employees at their undiscounted
price of NT$104 per share, NT$51.20 per share, NT$50.30 per share, NT$51
per share and NT$49 per share, respectively, for total consideration of
NT$104 million, NT$1 million, NT$69 million, NT$0.4 million and NT$3
million, respectively.
The MOTC, in connection with the compensation of the employees, sold to
employees 209,337 shares from October 29, 2001 to November 7, 2001 and
293,589 shares from November 1, 2002 to November 7, 2002 for total
consideration of NT$2 million and NT$3 million, respectively. The terms
of the offers for the share purchases provided that employees purchase
common shares from the above offering and hold for one to three years.
Such common shares, pursuant to the Enforcement Rule of the Statute
Governing Privatization of State-Owned Enterprises, were sold at par
value (NT$10). The employees are not required to remain employed with the
Company during the duration of the holding periods.
13. PENSION PLAN
At the time of its incorporation on July 1, 1996, the Company continued
the existing two noncontributory defined benefit pension plans covering
all its employees, as previously adopted by the DGT. The first plan
(hereinafter referred to as "Plan A") covers civil service eligible
employees (i.e., employees who meet the necessary qualifications set by
the ROC government) and the second plan (hereinafter referred to as "Plan
B") covers all other employees of the Company (hereinafter referred to as
"non-civil service eligible employees"). The adoption of two pension
plans is necessary as different pension laws apply to civil service
eligible and non-civil service eligible employees.
Plan A provides benefits equal to the sum of: (a) the lump-sum payment
equivalent to one
19
benefit unit per year for the first twenty service years rendered and
one-half benefit unit per service year rendered thereafter, with one
benefit unit equivalent to a portion of the salary of the employee at the
time of retirement (referred to hereinafter as "pensionable salary"), and
(b) annuity payments payable monthly equivalent to a certain percentage
of the benefit unit. Plan B provides benefits equal to the lesser of: (a)
forty-five benefit units, or (b) two benefit units per service year
rendered for the first fifteen years, and one-half benefit unit per
service year exceeding fifteen years rendered before August 1, 1984 and
one benefit unit per service year for services rendered after August 1,
1984, with one benefit unit equivalent to the monthly average base salary
(consisting of regular salary items plus overtime salary). Plan A is
funded based on amounts included in budgets approved by the Legislative
Yuan and supplementary budgets approved by the Executive Yuan while Plan
B is funded at an amount equivalent to 2% to 15% of the monthly salary.
The Company adopted SFAS No. 87 on July 1, 1996 (adoption date), the date
of its incorporation. The unrecognized net transition obligation recorded
to shareholders' equity on July 1, 1996 was NT$6,571 million which
represents the difference in the net pension cost for the period from the
issuance of SFAS No. 87 and the date of adoption. The remaining
unrecognized net transition obligation of NT$16,790 million is amortized
over the estimated remaining service period of the employees as
determined on July 1, 1996, which is a period of twenty-five years and
seventeen years for civil service eligible employees and non-civil
service eligible employees, respectively.
On June 23, 1997, the Council for Economic Planning and Development of
the ROC government officially instructed the Company to complete its
privatization by June 30, 2001. Effective on the privatization date,
except for those who will have reached the mandatory retirement age (age
of 65 for Plan A participants and age 60 for Plan B participants) by that
day, employees will receive pension benefit payments calculated in
accordance with the Guidelines on Payments of Severance Benefits to
Employees of State-Owned Enterprises ("Guidelines"), as required by the
ROC government for state-owned enterprises instructed to undergo
privatization plans. The employees not covered by the Guidelines will
continue to receive benefits either as Plan A or Plan B participants.
Under the Guidelines, the Company was to pay all benefit payments on June
30, 2001, the initial expected date of privatization, to settle all
employees' past service costs under the existing plans. On the actual
privatization date, a replacement plan with substantially the same
provisions will be put in place. The settlement benefit payments,
regardless of the respective original plan participation, will be as
follows: (a) employees who will voluntarily leave the Company on the
privatization date (hereinafter referred to as "separated employees")
will receive a service clearance payment which is calculated similar to
the benefit formula under the original Plan B as mentioned above plus an
additional six-month salary and one-month advance notice pay (hereinafter
referred to as the "additional separation payments"); (b) employees who
opt to remain with the privatized company after the privatization date
(hereinafter referred to as "privatized company employees") will receive
an amount equivalent to those received by the separated employees without
the additional separation payments; and (c) privatized company employees
who are involuntarily terminated by the Company within five years from
the date of privatization (hereinafter referred to as "redundant
employees") will receive redundancy benefits equivalent to the amount
computed based on one benefit unit for every year of service after
privatization plus the additional separation payments (hereinafter
referred to as "redundancy benefit payments"). The six-month portion of
the additional separation payments and the redundancy benefit payments
will be paid by the MOTC and the one-month portion will be paid by the
Company.
The unrecognized prior service costs, which amounted to NT$30,018
million, related to the increased benefits provided under the plan
amendment described in the preceding paragraph
20
were amortized through June 30, 2001. The unrecognized prior service
costs associated with the plan amendment exclude any costs expected to be
incurred for the additional separation payments or redundancy benefit
payments. The additional separation payments under the Guidelines are
accounted for as special termination benefits and will be recognized in
the period when the employee accepts the offer while the redundancy
benefit payments will be recognized in the period management has approved
a plan of termination.
On December 2, 1999, in order to increase operational efficiency, the
Company approved a Special Retirement Incentive Program ("Program"). The
employees eligible under the Program, except those who would have reached
the mandatory retirement age during its effectiveness, are those: (a) who
have worked with the Company for at least five years and who are at least
60 years of age, (b) who have worked with the Company for at least 25
years, (c) who have worked with the Company for at least fifteen years
and who are at least 55 years of age, (d) who are at least 45 years old,
(e) who are unable to return to work after an extended illness, and (f)
special cases approved by a special committee. The Program allowed
eligible employees who elected to voluntarily leave the Company between
the period from June 1, 2000 through June 30, 2001 to also receive
benefit payments based on the respective original plan (meaning Plan A or
Plan B) plus the additional separation payments. The present value of
such amount over and above the lump sum amount that would have been paid
to the employees had they stayed until June 30, 2001 was accounted for as
special termination benefits. Accordingly, such benefits were recognized
as a liability and charged to income upon the employees acceptance of the
terms of the Program. The Company recognized termination benefits of
NT$2,284 million for the year ended June 30, 2000 and NT$2,413 million
for the year ended December 31, 2001. No employee accepted the terms of
the Program during the six months ended December 31, 2000.
On November 14, 2000, the Statute of Chunghwa Telecom Co., Ltd. was
amended to effectively adjust the salaries of certain civil service
eligible employees, which adjustment should be completed at least six
months prior to the privatization. In addition, the service years as
contractual employees rendered prior to the incorporation of the Company
on July 1, 1996 is included in determining the total service years of
certain employees for purposes of determining the benefit obligation
under the Plan. The change in benefit obligation attributable to the
salary adjustment has been accounted for as an actuarial loss while the
change in the benefit obligation attributable to the recognition of
additional service years as contractual employees, which approximated
NT$785 million, was accounted for as unrecognized prior service cost.
On December 31, 2000, the Legislative Yuan approved the ROC government
budget for the calendar year 2001 (the "Budget"). The Budget assumed that
the proceeds from the privatization of the Company would be in the fourth
quarter of the calendar year 2001, thereby formalizing the ROC
government's approval to delay the privatization. The MOTC also
instructed the Company to complete its privatization by December 31,
2001. The change in the privatization date to December 31, 2001 was
viewed as a change in the plan assumption, and, accordingly, the
resulting adjustment in the projected benefit obligation accounted for as
an actuarial gain.
The privatization of the Company was not completed on December 31, 2001,
primarily as a result of unfavorable conditions in the capital markets.
The MOTC has informed the Company by a letter sent on December 28, 2001
that the new target privatization date is December 31, 2003. The Company
will account for the change in the privatization date also as a change in
the assumption with the resulting adjustment in the projected benefit
obligation accounted for as an actuarial gain.
In addition, pursuant to a regulation issued by the Executive Yuan, the
obligation related to annuity payments due after the date of
privatization for Plan A participants who retire prior to
21
that date will be borne by the MOTC. Such amounts have been included in
the Company's pension computation as of December 31, 2002 and June 30,
2003. Upon privatization, the portion of liabilities that will be taken
over by the MOTC will be accounted for as contributed capital and
recorded in stockholders' equity.
Pension costs amounted to NT$1,008 million (unaudited) and NT$1,035
million (unaudited) for the three months ended June 30, 2002 and 2003,
respectively, and NT$2,015 million (unaudited) and NT$2,069 million
(unaudited) for the six months ended June 30, 2002 and 2003,
respectively. The Company's contributions to the retirement plan were
NT$65 million (unaudited) and NT$56 million (unaudited) for the three
months ended June 30, 2002 and 2003, and NT$316 million (unaudited) and
NT$113 million (unaudited) for the six months ended June 30, 2002 and
2003, respectively.
14. INCOME TAX
The components of income tax are as follows:
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- --------------------------
2002 2003 2002 2003
------------- -------------- ------------- -----------
NT$ NT$ NT$ NT$
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Current $ 2,820 $ 2,942 $ 6,041 $ 5,643
Deferred 277 89 382 246
---------- ---------- ---------- ----------
$ 3,097 $ 3,031 $ 6,423 $ 5,889
========== ========== ========== ==========
A reconciliation between income tax expense computed by applying the
statutory income tax rate of 25% to income before income tax and income
tax expense shown in the statements of operations is as follows:
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- ----------------------------
2002 2003 2002 2003
------------- -------------- ------------- -------------
NT$ NT$ NT$ NT$
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Income tax expense computed at
statutory tax rate $ 3,905 $ 4,090 $ 7,907 $ 7,471
Permanent differences ( 82) ( 32) ( 121) 30
Investment Tax Credit ( 657) ( 876) ( 1,110) ( 1,560)
Other ( 69) ( 151) ( 253) ( 52)
---------- ---------- ---------- ----------
Income tax expense $ 3,097 $ 3,031 $ 6,423 $ 5,889
========== ========== ========== ==========
Upon privatization in the period when the government's ownership
percentage falls below 50%, the Company will continue to be subject to a
10% tax on its undistributed earnings as required by the Income Tax Law
of the ROC. As the Company is currently and has historically been
required under government regulations to distribute all its earnings
within six months subsequent to year end, it has been required to pay a
minimal amount of tax under this regulation. For ROC GAAP purposes, the
10% tax on undistributed earnings is recorded as an expense at the time
22
shareholders resolve that its earnings shall be retained and the
liability is incurred.
Permanent differences consist primarily of tax-exempt income from the
sale of marketable securities and interest income on commercial paper
purchased, which are subject to a separate income tax rate of 20%.
Deferred income taxes arise due to temporary differences in the book and
tax bases of certain assets and liabilities. Significant components of
deferred income tax assets are shown in the following table:
December 31, June 30,
2002 2003
---------- ------
NT$ NT$
(Unaudited)
Current:
Provision for doubtful accounts $ 1,688 $ 1,634
Deferred income 989 877
Accrued pension costs 14,823 15,073
Prepaid card revenues (related liability is included in "other
current liabilities") 915 875
Other - net 145 100
---------- ----------
18,560 18,559
Less - valuation allowance 1,715 1,661
---------- ----------
$ 16,845 $ 16,898
========== ==========
Non-current:
Deferred income $ 3,442 $ 3,146
Other 1,091 1,040
---------- ----------
4,533 4,186
Less - valuation allowance 1,069 1,021
---------- ----------
$ 3,464 $ 3,165
========== ==========
The above deferred income tax assets were computed based on a tax rate of
25%. A portion of the amount included in Other relates to the timing
differences between US GAAP reporting and the taxable base for the 10%
undistributed earnings tax. These differences are computed based on a tax
rate of 10%.
15. TRANSACTIONS WITH RELATED PARTIES
As the Company is a state-owned enterprise, the ROC government is one of
the Company's largest customers. The Company provides fixed-line
services, wireless services, Internet and other services to the various
departments and agencies of the ROC government and other state-owned
enterprises in the normal course of business and at arm's-length prices.
The information on service revenues from government bodies and related
organizations have not been provided because details of the type of users
were not maintained by the Company. The Company believes that all costs
of doing business are reflected in the financial statements and that no
additional expenditures will be incurred as a result of the privatization
being completed.
In addition, the Company acquired from TISE, an equity investee, several
telecommunications
23
exchange facilities and related supplies and replacement parts totaling
NT$4,269 million (unaudited) and NT$2,437 million (unaudited) for the
three months ended June 30, 2002 and 2003, respectively, and NT$4,272
million (unaudited) and NT$2,651 million (unaudited) for the six months
ended June 30, 2002 and 2003, respectively. These transactions were
conducted under normal commercial terms, the Company recorded payables to
TISE as other current liabilities of NT$873 million as of December 31,
2002 and NT$274 million (unaudited) as of June 30, 2003, respectively.
16. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 2002 and June 30, 2003, the Company had remaining
commitments under non-cancelable contracts with various parties as
follows: (a) acquisitions of land and buildings of NT$ 4,231 million and
NT$ 3,608 million (unaudited), respectively, and (b) acquisitions of
telecommunications equipment of NT$ 14,611 million and NT$10,199 million
(unaudited), respectively.
The Company also has non-cancelable operating leases covering certain
buildings, computers, computer peripheral equipment and operating system
software under contracts that expire in various years. Minimum rental
commitments under those leases are as follows:
December 31, June 30,
2002 2003
-------------- --------
NT$ NT$
(Unaudited)
Within the following year $ 1,350 $ 1,091
During the second year 596 575
During the third year 272 366
During the fourth year 136 221
During the fifth year and thereafter 74 98
As of December 31, 2002 and June 30, 2003, the Company had unused letters
of credit of NT$ 2,345 million and NT$13,423 million (unaudited),
respectively.
17. LITIGATION
The Company is involved in various legal proceedings of a nature
considered normal to its business. It is the Company's policy to accrue
for amounts related to these legal matters when it is probable that a
liability has been incurred and the amount is reasonably estimable.
The Company believes that the various asserted claims and litigation in
which it is involved will not materially affect its financial position,
future operating results or cash flows, although no assurance can be
given with respect to the ultimate outcome of any such claim or
litigation.
24
18. INFORMATION ON FINANCIAL INSTRUMENTS
The non-derivative financial instruments are as follows:
December 31, 2002 June 30, 2003
---------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ------- ------ ------
NT$ NT$ NT$ NT$
(Unaudited) (Unaudited)
Assets
Cash and cash equivalents $ 7,652 $ 7,652 $ 16,671 $ 16,671
Investments in unconsolidated companies,
accounted for using the equity method 1,417 1,952 1,349 1,824
Refundable deposits (included in
"other assets - other") 2,759 2,759 2,711 2,711
Liabilities
Customers' deposits 11,975 9,004 11,390 8,548
Long-term loans 17,700 17,700 700 700
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
a. Cash and cash equivalents. The carrying amounts approximate fair
values because of the short maturity of those instruments.
b. Investments in unconsolidated companies, accounted for using the
equity method. The fair value is based on net asset values of the
investments in unconsolidated companies since the quoted market
prices are not available.
c. Refundable deposits. The carrying amounts approximate fair values
since the average lease term associated with these deposits is
approximately one year.
d. Customers' deposits. The fair value is the discounted value based on
projected cash flow. The projected cash flows were discounted using
the average expected customer service periods.
e. Long-term loans. The fair value is discounted value based on
projected cash flow. The projected cash flows were discounted using
the maturity dates of long-term loans.
19. SEGMENT REPORTING
SFAS No. 131 - "Disclosure about Segments of an Enterprise and Related
Information", establishes standards for reporting information about
operating segments in the financial statements. Operating segments are
defined as components of an enterprise for which separate financial
information is available for regular evaluation by the chief operating
decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance.
The Company organizes its business segments based on the various types of
telecommunications services provided to customers. The major business
segments operated by the Company are classified as below:
25
o Local operations - the provision of local telephone services;
o DLD operations - the provision of domestic long distance call services;
o ILD operations - the provision of international long distance call
services;
o Cellular operations - the provision of cellular and related services;
o Paging operation - the provision of paging and related services;
o Internet and data operation - the provision of Internet access, lease
line, and related services;
o All other operations - the services other than the above six
categories, such as carrying out project research and providing
training.
The operating segments are managed separately as each operating segment
represents a strategic business unit that serves different markets. All
the operating segments of the Company have been aggregated into the above
reportable segments.
The Company evaluates performance based on several factors using
information prepared on the ROC government regulations basis. The
information below is provided on this basis with a summary of US GAAP
adjustments to reconcile to the amounts presented in the statement of
operations. The Company does not allocate interest and other income,
interest expense or taxes to operating segments, nor does the Company's
chief operating decision maker evaluate operating segments on these
criteria. Except as discussed above, the accounting policies for segment
reporting are the same as for the company as a whole. The Company's
primary measure of segment profit is based on income or loss from
operations.
a. Business Segments:
As of and for the three months ended June 30, 2002 (Unaudited)
--------------------------------------------------------------
Fixed-Line Internet
---------------------------- Cellular and All
Local DLD ILD Service Paging Data Other Total
-------- ------ ------ -------- ------ ------ ----- -----
NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$
Service revenues for reportable segments 16,187 3,899 4,181 15,900 267 9,876 716 51,026
Elimination of intersegment amount ( 4,072) ( 503) ( -) ( 211) ( 1) (2,275) ( -) (7,062)
US GAAP adjustments 437 ( 19) ( 17) ( 27) ( 2) ( 105) ( 6) 315
-------- -------- -------- ------ ------ -------- ------- --------
Total service revenues from external
customers 12,552 3,377 4,164 15,716 264 7,496 710 44,279
======== ======== ======== ====== ====== ======== ======= ========
Operating costs and expenses, excluding
depreciation and amortization 8,200 1,681 2,713 7,024 262 4,166 37 24,083
Elimination of intersegment amount ( 814) (1,258) ( 575) (3,209) ( 46) (1,133) ( 27) ( 7,062)
US GAAP adjustments 484 ( 8) ( 11) ( 91) ( 2) 86 152 610
-------- -------- -------- ------ ------ -------- ------- --------
7,870 415 2,127 3,724 214 3,119 162 17,631
======== ======== ======== ====== ====== ======== ======= --------
Unallocated corporate amount 1,187
--------
Total operating costs and expenses,
excluding depreciation and amortization 18,818
========
Depreciation and amortization 6,022 230 184 1,682 100 2,250 50 10,518
US GAAP adjustments ( 61) ( 1) 2 ( 15) ( 1) ( 24) ( 2) ( 102)
-------- -------- -------- ------ ------ ------- ------ --------
5,961 229 186 1,667 99 2,226 48 10,416
======== ======== ======== ====== ====== ======= ====== ========
Unallocated corporate amount 34
--------
Total Depreciation and Amortization 10,450
========
Income from operations
1,965 1,988 1,284 7,194) ( 95) 3,460 629 16,425
Elimination of intersegment amount (3,258) 755 575 2,998 45 ( 1,142) 27 -
US GAAP adjustments 14 ( 10) ( 8) 133 1 (167) ( 156) ( 193)
-------- -------- -------- ------ ------ -------- ------- --------
( 1,279) 2,733 1,851 10,325 ( 49) 2,151 500 16,232
======== ======== ======== ====== ====== ======== ======= ========
Unallocated corporate amount ( 1,221)
--------
Total income from operations 15,011
========
26
Income before income tax 2,060 2,032 1,331 7,346 ( 96) 3,483 628 16,784
Elimination of intersegment amount (3,258) 755 575 2,998 45 (1,142) 27 -
US GAAP adjustments 78 ( 13) 6 135 1 ( 165) ( 153) ( 111)
-------- -------- -------- ------ ------ -------- ------- --------
( 1,120) (2,774) 1,912 10,479 ( 50) 2,176 502 16,673
======== ======== ======== ====== ====== ======== ======= ========
Unallocated corporate amount ( 1,056)
Total income before income tax --------
15,617
As of and for the three months ended June 30, 2003 (Unaudited)
- --------------------------------------------------------------
Fixed-Line Internet
---------------------------- Cellular and All
Local DLD ILD Service Paging Data Other Total
-------- ------ ------ -------- ------ ------ ----- -----
NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$
Service revenues for reportable segments 15,381 4,124 3,909 16,602 180 10,964 714 51,874
Elimination of intersegment amount ( 3,898) ( 693) - ( 239) ( 1) (2,056) - (6,887)
US GAAP adjustments 622 6 9 69 - 2 ( 7) 701
-------- -------- -------- -------- -------- -------- ------- ---------
Total service revenues from external
customers 12,105 3,437 3,918 16,432 179 8,910 707 45,688
======== ======== ======== ========= ======== ======== ======= =========
Operating costs and expenses, excluding
depreciation and amortization 7,837 1,607 2,768 6,968 128 4,925 113 24,346
Elimination of intersegment amount ( 976) (1,136) ( 727) (2,913) ( 21) (1,087) ( 27) (6,887)
US GAAP adjustments 573 17 30 78 3 243 83 1,027
-------- -------- -------- -------- -------- -------- -------- -------
7,434 488 2,071 4,133 110 4,081 169 18,486
======== ======== ======== ======== ======== ======== ======== =========
Unallocated corporate amount 948
-------
Total operating costs and expenses, excluding
depreciation and amortization 19,434
=======
Depreciation and amortization 5,756 311 153 1,393 78 2,539 220 10,450
US GAAP adjustments ( 62) ( 2) ( 2) ( 13) ( 1) ( 18) ( 1) ( 99)
-------- -------- --------- ------- -------- ------- ------- ---------
5,694 309 151 1,380 77 2,521 219 10,351
======== ======== ======== ======== ======== ======== ======= =========
Unallocated corporate amount 48
--------
Total depreciation and amortization 10,399
========
Income from operations 1,788 2,206 988 8,241 ( 26) 3,500 381 17,078
Elimination of intersegment amount (2,922) 443 727 2,674 20 ( 969) 27 -
US GAAP adjustments ( 111) ( 9) ( 19) 4 ( 2) ( 223) ( 89) ( 227)
-------- ------- -------- -------- --------- -------- ------- ---------
( 1,023) (2,640) 1,696 10,919 ( 8) 2,308 319 16,851
======== ======= ======== ======== ========= ======== ======= =========
Unallocated corporate amount ( 996)
---------
Total income from operations 15,855
=========
Income before income tax 1,909 2,229 975 8,303 ( 25) 3,605 373 17,369
Elimination of intersegment amount ( 2,922) 443 727 2,674 20 ( 969) 27 -
US GAAP adjustments 255 ( 5) ( 14) 18 ( 1) ( 178) ( 75) ( 30)
--------- ------- -------- ------- -------- -------- ------ ---------
( 788) (2,667) 1,688 10,995 ( 6) 2,458 325 17,339
======== ======= ======== ======= ======== ======== ====== =========
Unallocated corporate amount ( 977)
Total income before income tax --------
16,362
========
As of and for the six months ended June 30, 2002 (Unaudited)
- ------------------------------------------------------------
Fixed-Line Internet
---------------------------- Cellular and All
Local DLD ILD Service Paging Data Other Total
-------- ------ ------ -------- ------ ------ ----- -----
NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$
Service revenues for reportable segments 32,744 7,901 7,723 31,058 556 19,913 1,248 101,143
Elimination of intersegment amount (8,440) ( 969) ( -) ( 439) ( 2) (4,679) ( -) (14,529)
US GAAP adjustments 920 ( 41) ( 62) 205 ( 5) ( 148) ( 11) 858
-------- -------- --------- -------- -------- -------- ------ --------
Total service revenues from external
customers 25,224 6,891 7,661 30,824 549 15,086 1,237 87,472
======= ======== ========= ======== ======== ======== ======== ========
Operating costs and expenses, excluding
depreciation and amortization 15,689 3,541 5,080 13,799 473 8,656 277 47,515
Elimination of intersegment amount (1,525) (2,648) (1,132) (6,522) ( 98) (2,515) ( 89) (14,529
US GAAP adjustments 1,154 42 56 89 6 248 165 1,760
-------- -------- -------- -------- -------- -------- -------- --------
15,318 935 4,004 7,366 381 6,389 353 34,746
======== ======== ======== ======== ======== ======== ======== ========
Unallocated corporate amount 2,011
-------
Total operating costs and expenses, excluding
depreciation and amortization 36,757
=======
Depreciation and amortization 11,876 585 318 2,738 211 4,319 230 20,277
US GAAP adjustments ( 137) ( 7) ( 2) ( 25) ( 2) ( 31) ( 3) ( 207)
-------- -------- --------- -------- -------- -------- ------ --------
11,739 578 316 2,713 209 4,288 227 20,070
======= ======== ========= ======== ======== ======== ====== ========
Unallocated corporate amount 66
--------
Total depreciation and amortization 20,136
========
Income from operations 5,179 3,775 2,325 14,521 ( 128) 6,938 741 33,351
Elimination of intersegment amount (6,915) 1,679 1,132 6,083 96 (2,164) 89 -
US GAAP adjustments ( 97) ( 76) ( 116) 141 ( 91) 365 ( 173) ( 695)
-------- -------- --------- -------- -------- -------- ------ --------
( 1,833) 5,378 3,341 20,745 ( 41) 4,409 657 32,656
======== ======== ========= ======== ======== ======== ====== ========
27
Unallocated corporate amount ( 2,077)
---------
Total Income from operations 30,579
=========
Income before income tax 5,082 3,797 2,372 14,819 ( 134) 6,992 718 33,646
Elimination of intersegment amount ( 6,915) 1,679 1,132 6,083 96 (2,164) 89 -
US GAAP adjustments 340 ( 70) ( 89) 171 ( 8) ( 358) (150) ( 164)
------- ------- --------- -------- -------- -------- ------ --------
( 1,493) 5,406 3,415 21,073 ( 46) 4,470 657 33,482
( 1,856)
--------
31,626
========
As of and for the six months ended June 30, 2003 (unaudited)
- ------------------------------------------------------------
Fixed-Line Internet
---------------------------- Cellular and All
Local DLD ILD Service Paging Data Other Total
-------- ------ ------ -------- ------ ------ ----- -----
NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$
Service revenues for reportable segments 30,882 8,048 7,727 32,617 366 21,470 1,144 102,25
Elimination of intersegment amount (8,059) (1,361) - ( 483) ( 2) (4,006) - ( 13,911)
US GAAP adjustments 1,247 31 38 259 - 5) ( 13) 1,567
-------- -------- --------- -------- -------- -------- ------- ---------
Total service revenues from external
customers 24,070 6,718 7,765 32,393 364 17,469 1,131 89,910
======== ======== ========= ========= ======== ======== ======= =========
Operating costs and expenses, excluding
depreciation and amortization 15,669 3,286 5,404 15,268 269 9,187 432 49,515
Elimination of intersegment amount (1,823) (2,370) (1,385) (6,131) ( 43) (2,088) ( 71) (13,911)
US GAAP adjustments 1,542 47 77 205 7 537 217 2,632
-------- -------- -------- -------- -------- -------- ------- --------
15,388 963 4,096 9,342 233 7,636 578 38,236
======== ======== ======== ======== ======== ======== ======= =========
Unallocated corporate amount 1,830
Total operating costs and expenses, excluding -------
depreciation and amortization 40,066
=======
Depreciation and amortization 11,613 699 254 2,790 156 5,010 503 21,025
US GAAP adjustments ( 127) ( 7) ( 4) ( 26) ( 2) ( 35) ( 1) ( 202)
-------- -------- -------- -------- -------- -------- ------- --------
11,486 692 250 2,764 154 4,975 502 20,823
======== ======== ======== ======== ======== ======== ======== =======
Unallocated corporate amount 91
-------
Total depreciation and amortization 20,914
=======
Income from operations 3,600 4,063 2,069 14,559 ( 59) 7,273 209 31,714
Elimination of intersegment amount ( 6,236) 1,009 1,385 5,648 41 (1,918) 71 -
US GAAP adjustments ( 168) ( 9) ( 35) 80 ( 5) ( 497) (229) ( 863)
-------- -------- -------- -------- -------- -------- -------- --------
( 2,804) 5,063 3,419 20,287 ( 23) 4,858 51 30,851
Unallocated corporate amount ( 1,921)
--------
Total income from operations 28,930
========
Income before income tax 3,643 4,104 2,046 14,682 ( 59) 7,418 187 32,021
Elimination of intersegment amount ( 6,236) 1,009 1,385 5,648 41 (1,918) 71 -
US GAAP adjustments ( 198) 2 ( 18) ( 125) ( 3) ( 371) ( 181) ( 248)
-------- --------- -------- -------- -------- -------- ------- --------
( 2,395) 5,115 3,413 20,455 ( 21) 5,129 77 31,773
======== ======== ========= ======== ======== ======== ======= ========
Unallocated corporate amount ( 1,887)
---------
Total income before income tax 29,886
=========
B. Geographic Information
The Users of the Company's services are mainly from Taiwan, ROC. The
revenues it derived outside Taiwan are mainly interconnection fees
from other telecommunication carriers. The geographic information for
revenues is as follows:
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- -------------------------------
2002 2003 2002 2003
-------------- ---------- -------------- -----------
NT$ NT$ NT$ NT$
(Unaudited) (Unaudited)
Taiwan, ROC $ 42,662 $ 44,015 $ 84,376 $ 86,837
Overseas 1,617 1,673 3,096 3,073
---------- ---------- ---------- ----------
Total $ 44,279 $ 45,688 $ 87,472 $ 89,910
========== ========== ========== ==========
c. Gross sales to major customers
28
The Company has no single customer account representing 10% or more
of its total revenues for all periods presented.
The Company has non-revenue generating offices in Hong Kong, Thailand
and the United States of America. All non-current assets (including
investments in unconsolidated companies, property, plant and
equipment, intangible assets, and other assets) except for NT$0.08
million and NT$0.06 million (unaudited) at December 31, 2002 and June
30, 2003, respectively, are located in Taiwan, ROC.