6-K 1 form6k.txt FORM 6K 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.