6-K 1 d6k.txt FORM 6K 1934 Act Registration No. 1-31731 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 6-K REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 Dated April 27, 2004 Chunghwa Telecom Co., Ltd. (Translation of Registrant's Name into English) 21-3 Hsinyi Road Sec. 1, Taipei, Taiwan, 100 R.O.C. (Address of Principal Executive Office) (Indicate by check mark whether the registrant files or will file annual reports under cover of form 20-F or Form 40-F.) Form 20-F x Form 40-F ----------------- ------------ (Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.) Yes No x ----------- --------------- (If "Yes" is marked, indicated below the file number assigned to the registrant in connection with Rule 12g3-2(b): Not applicable) SIGNATURE 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: 2004/04/27 Chunghwa Telecom Co., Ltd. By: /s/ Tan HoChen ----------------------------------- Name: Tan HoChen Title: Chairman & CEO Exhibit Exhibit Description 1 Financial Statements for the Years Ended December 31, 2003 and 2002 Together with Independent Auditors' Report- ROC GAAP 2 Financial Statements as of December 31, 2002 and 2003, and for Each of the Years in the Three Year Period Ended December 31, 2003 Together with Independent Auditors' Report- US GAAP 3 Financial Statements for the three months Ended March 31, 2004 and 2003 Together with Independent Accountants' Report- ROC GAAP 4 Financial Statements as of December 31, 2003 and March 31, 2004 (Unaudited) and for Three Months Ended March 31, 2003 and 2004 (Unaudited)- US GAAP 5 Press Release on 2004/04/27 Chunghwa Telecom Co., Ltd. Financial Statements for the Years Ended December 31, 2003 and 2002 Together with Independent Auditors' Report Readers are advised that the original version of these financial statements is in Chinese. If there is any conflict between these financial statements and the Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail. English Translation of a Report Originally Issued in Chinese ------------------------------------------------------------ INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Chunghwa Telecom Co., Ltd. We have audited the accompanying balance sheets of Chunghwa Telecom Co., Ltd. as of December 31, 2003 and 2002, and the related statements of operations, changes in stockholders' equity and cash flows for the years then ended, all expressed in New Taiwan dollars. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the Regulations for Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those regulations and standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidences supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with relevant regulations, regulations governing the preparation of financial statements of public companies and accounting principles generally accepted in the Republic of China. As stated in Notes 2 and 3 to the financial statements, the Company's accounts are subject to examination by the Directorate General of Budget, Accounting and Statistics of the Executive Yuan and by the Ministry of Audit of the Control Yuan. The accounts as of and for the year ended December 31, 2002 have been examined by these government agencies, and adjustments from this examinations have been recognized in the accompanying financial statements. March 11, 2004 Notice to Readers ----------------- The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China. - 1 - English Translation of Financial Statements Originally Issued in Chinese ------------------------------------------------------------------------ CHUNGHWA TELECOM CO., LTD. BALANCE SHEETS DECEMBER 31, 2003 AND 2002 (Amounts in New Taiwan Thousand Dollars, Except Par Value Data) --------------------------------------------------------------------------------
2002 2003 (As Adjusted--Note 3) ---------------------- --------------------- ASSETS Amount % Amount % ------------- ------- ------------- ------ CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) $ 13,553,029 3 $ 7,652,160 2 Trade notes and accounts receivable--net of allowance for doubtful accounts of $2,345,601 in 2003 and $1,491,907 in 2002 (Notes 2 and 5) 13,982,456 3 15,758,335 3 Other current monetary assets 1,664,655 -- 1,852,471 1 Inventories--net (Notes 2 and 6) 1,219,459 -- 1,163,638 -- Deferred income taxes (Notes 2 and 15) 12,070,690 3 12,449,441 3 Other current assets (Note 7) 532,234 -- 565,480 -- ------------- ------- ------------- ------ Total current assets 43,022,523 9 39,441,525 9 ------------- ------- ------------- ------ INVESTMENTS IN UNCONSOLIDATED COMPANIES AND FUNDS (Notes 2, 8 and 19) Funds 2,000,000 -- 2,000,000 -- Investments accounted for using the equity method 1,419,482 -- 1,416,901 -- Investments accounted for using the cost method 2,076,603 1 2,310,303 1 ------------- ------- ------------- ------ Total investment in unconsolidated companies and funds 5,496,085 1 5,727,204 1 ------------- ------- ------------- ------ PROPERTY, PLANT AND EQUIPMENT (Notes 2, 9 and 18) Cost Land 101,756,249 22 101,578,675 22 Land improvements 1,392,265 -- 1,331,175 -- Buildings 53,750,744 12 51,442,169 11 Machinery and equipment 22,466,397 5 21,038,736 5 Telecommunications network facilities 614,501,192 133 602,314,839 129 Miscellaneous equipment 2,131,065 1 2,105,199 1 ------------- ------- ------------- ------ Total cost 795,997,912 173 779,810,793 168 Revaluation increment on land 5,951,540 1 5,960,931 1 ------------- ------- ------------- ------ 801,949,452 174 785,771,724 169 Less: Accumulated depreciation 447,098,909 97 427,315,037 92 ------------- ------- ------------- ------ 354,850,543 77 358,456,687 77 Construction in progress and advances related to acquisitions of equipment 43,106,304 10 48,754,710 10 ------------- ------- ------------- ------ Property, plant and equipment--net 397,956,847 87 407,211,397 87 ------------- ------- ------------- ------ INTANGIBLE ASSETS (Note 2) 3G concession 10,179,000 2 10,179,000 2 Deferred pension cost 427,551 -- -- -- Patents and computer software--net 251,361 -- 211,506 -- ------------- ------- ------------- ------ Total intangible assets 10,857,912 2 10,390,506 2 ------------- ------- ------------- ------ OTHER ASSETS Refundable deposits 2,018,235 1 759,254 -- Overdue receivables--net of allowance for losses of $5,440,436 in 2003 and $6,012,517 in 2002 (Notes 2 and 5) 991,871 -- 1,706,425 1 Deferred income taxes--non-current (Notes 2 and 15) 14,256 -- 22,841 -- Other 465,650 -- 604,274 -- ------------- ------- ------------- ------ Total other assets 3,490,012 1 3,092,794 1 ------------- ------- ------------- ------ TOTAL ASSETS $ 460,823,379 100 $ 465,863,426 100 ============= ======= ============= ======
The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche report dated March 11, 2004) - 2 - --------------------------------------------------------------------------------
2002 2003 (As Adjusted--Note 3) ---------------------- --------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Amount % Amount % ------------- ------- ------------- ------ CURRENT LIABILITIES Trade notes and accounts payable $ 11,712,596 2 $ 11,217,375 2 Income tax payable (Notes 2 and 15) 4,923,766 1 6,058,482 1 Accrued expenses (Note 10 and 18) 14,177,945 3 13,636,152 3 Accrued pension liabilities (Notes 2 and 17) 3,608,836 1 2,305,671 1 Dividends payable (Notes 3) -- -- 38,590,900 8 Other current liabilities (Notes 11 and 18) 21,181,189 5 14,053,397 3 ------------- ------- ------------- ------ Total current liabilities 55,604,332 12 85,861,977 18 ------------- ------- ------------- ------ LONG-TERM LIABILITIES Long-term loans (Note 12) 700,000 -- 17,700,000 4 Deferred income 419,037 -- 393,182 -- ------------- ------- ------------- ------ Total long-term liabilities 1,119,037 -- 18,093,182 4 ------------- ------- ------------- ------ RESERVE FOR LAND VALUE INCREMENTAL TAX (Note 9) 211,182 -- 211,182 -- ------------- ------- ------------- ------ OTHER LIABILITIES Customers' deposits (Notes 11) 5,606,588 2 11,974,520 3 Other 243,115 -- 153,291 -- ------------- ------- ------------- ------ Total other liabilities 5,849,703 2 12,127,811 3 ------------- ------- ------------- ------ Total liabilities 62,784,254 14 116,294,152 25 ------------- ------- ------------- ------ STOCKHOLDERS' EQUITY Capital stock--$10 par value; authorized, issued and outstanding--9,647,725 thousand shares 96,477,249 21 96,477,249 21 ------------- ------- ------------- ------ Capital surplus: Paid-in capital in excess of par value 214,538,597 47 214,546,263 46 Capital surplus from revaluation of land 5,740,358 1 5,749,909 1 Donations 13,170 -- 13,170 -- ------------- ------- ------------- ------ Total capital surplus 220,292,125 48 220,309,342 47 ------------- ------- ------------- ------ Retained earnings: Legal reserve 29,436,072 6 29,436,072 6 Special reserve 2,675,419 -- 2,675,419 1 Unappropriated earnings 49,158,782 11 670,892 -- ------------- ------- ------------- ------ Total retained earnings 81,270,273 17 32,782,383 7 ------------- ------- ------------- ------ Cumulative translation adjustments ( 522) -- 300 -- ------------- ------- ------------- ------ Total stockholders' equity 398,039,125 86 349,569,274 75 ------------- ------- ------------- ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 460,823,379 100 $ 465,863,426 100 ============= ======= ============= ======
- 2 - English Translation of Financial Statements Originally Issued in Chinese ------------------------------------------------------------------------ CHUNGHWA TELECOM CO., LTD. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (Amounts in New Taiwan Thousand Dollars, Except Basic Net Income Per Share Data) --------------------------------------------------------------------------------
2002 2003 (As Adjusted--Note 3) ---------------------- --------------------- Amount % Amount % ------------- ------- ------------- ------ SERVICE REVENUES $ 179,148,543 100 $ 176,089,011 100 COSTS OF SERVICES (Note 18) 90,722,628 50 90,391,945 51 ------------- ------- ------------- ------ GROSS PROFIT 88,425,915 50 85,697,066 49 ------------- ------- ------------- ------ OPERATING EXPENSES Marketing 24,297,453 14 24,300,566 14 General and administrative 2,718,777 1 2,876,279 1 Research and development 3,093,454 2 3,102,725 2 ------------- ------- ------------- ------ Total operating expenses 30,109,684 17 30,279,570 17 ------------- ------- ------------- ------ INCOME FROM OPERATIONS 58,316,231 33 55,417,496 32 ------------- ------- ------------- ------ OTHER INCOME Penalties income 1,071,382 1 1,480,114 1 Income from sale of scrap 306,774 -- 194,822 -- Dividends 123,005 -- 103,396 -- Interest 99,800 -- 187,007 -- Foreign exchange gain--net 18,708 -- -- -- Equity in net income of unconsolidated companies 3,403 -- -- -- Other income 577,449 -- 532,938 -- ------------- ------- ------------- ------ Total other income 2,200,521 1 2,498,277 1 ------------- ------- ------------- ------ OTHER EXPENSES Losses on disposal of property, plant and equipment 221,603 -- 255,096 -- Losses arising from natural calamities 84,231 -- 208,114 -- Interest 43,071 -- 170,621 -- Equity in net loss of unconsolidated companies -- -- 232,551 -- Foreign exchange loss--net -- -- 224,414 -- Other expense 1,306,329 1 1,079,330 1 ------------- ------- ------------- ------ Total other expenses 1,655,234 1 2,170,126 1 ------------- ------- ------------- ------ INCOME BEFORE INCOME TAX 58,861,518 33 55,745,647 32 INCOME TAX (Notes 2 and 15) 10,373,628 6 12,518,392 7 ------------- ------- ------------- ------ NET INCOME $ 48,487,890 27 $ 43,227,255 25 ============= ======= ============= ======
(Continued) - 3 - English Translation of Financial Statements Originally Issued in Chinese ------------------------------------------------------------------------ 2002 (As 2003 Adjusted--Note 3) --------------- ---------------- Income Income Before Before Income Net Income Net Tax Income Tax Income ------- ------ -------- ------- BASIC NET INCOME PER SHARE (Notes 2 and 16) $ 6.10 $ 5.03 $ 5.78 $ 4.48 ======= ====== ======== ======= The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche report dated March 11, 2004) (Concluded) - 4 - English Translation of Financial Statements Originally Issued in Chinese ------------------------------------------------------------------------ CHUNGHWA TELECOM CO., LTD. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (Amounts in New Taiwan Thousand Dollars, Except Dividend Per Share Data) --------------------------------------------------------------------------------
Capital Surplus (Notes 2, 9 and 13) -------------------------------------------------------------------- Capital Gain on Common Capital Stock Paid-in surplus disposal of ------------------------- capital from property, Shares in excess of revaluation plant and (thousands) Amount par value of land equipment Donations Total ----------- ------------ ------------- ----------- ----------- --------- ------------- BALANCE, JANUARY 1, 2002 (AS ADJUSTED) 9,647,725 $ 96,477,249 $ 214,546,263 $ 5,750,491 $ 75,176 $ 13,170 $ 220,385,100 Reclassification of gain on disposal of property, plant and equipment -- -- -- -- ( 75,176) -- ( 75,176) Reclassification of capital surplus from revaluation upon disposal of land to other income -- -- -- ( 582) -- -- ( 582) Net income in the 2002 -- -- -- -- -- -- -- Appropriation of 2002 earnings Legal reserve -- -- -- -- -- -- -- Dividends-$4 per share -- -- -- -- -- -- -- Cumulative translation adjustment for foreign-currency investments in unconsolidated companies -- -- -- -- -- -- -- ----------- ------------ ------------- ----------- ----------- --------- ------------- BALANCE, DECEMBER 31, 2002 (AS ADJUSTED, Note 3) 9,647,725 96,477,249 214,546,263 5,749,909 -- 13,170 220,309,342 Reclassification of capital surplus from revaluation upon disposal of land to other income -- -- -- ( 8,249) -- -- ( 8,249) Net transfer of property, plant and equipment to National Properties Bureau and other government agencies -- -- ( 7,666) ( 1,302) -- -- ( 8,968) Net income in 2003 -- -- -- -- -- -- -- Cumulative translation adjustment for foreign-currency investments in unconsolidated companies -- -- -- -- -- -- -- ----------- ------------ ------------- ----------- ----------- --------- ------------- BALANCE, DECEMBER 31, 2003 9,647,725 $ 96,477,249 $ 214,538,597 $ 5,740,358 $ -- $ 13,170 $ 220,292,125 =========== ============ ============= =========== =========== ========= =============
The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche report dated March 11, 2004) - 5 -
Retained Earnings (Notes 13) --------------------------------------------------------- Cumulative Total Legal Special Unappropriated Translation Stockholders' reserve reserve earnings Total Adjustments Equity ------------ ----------- -------------- ------------ ----------- ------------- BALANCE, JANUARY 1, 2002 (AS ADJUSTED) $ 25,105,829 $ 2,675,419 $ 289,604 $ 28,070,852 $ -- $ 344,933,201 Reclassification of gain on disposal of property, plant and equipment -- -- 75,176 75,176 -- -- Reclassification of capital surplus from revaluation upon disposal of land to other income -- -- -- -- -- ( 582) Net income in the 2002 -- -- 43,227,255 43,227,255 -- 43,227,255 Appropriation of 2002 earnings Legal reserve 4,330,243 -- ( 4,330,243) -- -- -- Dividends-$4 per share -- -- ( 38,590,900) ( 38,590,900) -- ( 38,590,900) Cumulative translation adjustment for foreign-currency investments in unconsolidated companies -- -- -- -- 300 300 ------------ ----------- -------------- ------------ ----------- ------------- BALANCE, DECEMBER 31, 2002 (AS ADJUSTED, Note 3) 29,436,072 2,675,419 670,892 32,782,383 300 349,569,274 Reclassification of capital surplus from revaluation upon disposal of land to other income -- -- -- -- - ( 8,249) Net transfer of property, plant and equipment to National Properties Bureau and other government agencies -- -- -- -- - ( 8,968) Net income in 2003 -- -- 48,487,890 48,487,890 - 48,487,890 Cumulative translation adjustment for foreign-currency investments in unconsolidated companies -- -- -- -- ( 822) ( 822) ------------ ----------- -------------- ------------ ----------- ------------- BALANCE, DECEMBER 31, 2003 $ 29,436,072 $ 2,675,419 $ 49,158,782 $ 81,270,273 $ (522) $ 398,039,125 ============ =========== ============== ============ =========== =============
- 5 - English Translation of Financial Statements Originally Issued in Chinese ------------------------------------------------------------------------ CHUNGHWA TELECOM CO., LTD. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (Amounts in New Taiwan Thousand Dollars) --------------------------------------------------------------------------------
2002 (As Adjusted 2003 --Note 3) ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 48,487,890 $ 43,227,255 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts 3,239,187 4,930,849 Depreciation and amortization 41,980,125 40,896,748 Reversal of allowance for losses on inventories ( 15,093) ( 18,040) Net loss on disposal of property, plant and equipment 241,392 212,613 Equity in net loss (income) of unconsolidated companies ( 3,403) 232,551 Deferred income taxes 387,336 538,126 Accrued pension liabilities 875,614 1,175,895 Changes in operating assets and liabilities: Decrease (increase) in: Trade notes and accounts receivable 912,682 2,203,957 Other current monetary assets 107,006 763,683 Inventories ( 1,704,570) ( 463,536) Other current assets 33,246 47,816 Overdue receivables ( 1,580,626) ( 4,038,714) Increase (decrease) in: Trade notes and accounts payable 2,159,063 ( 2,666,327) Income tax payable ( 1,134,716) 3,198,939 Accrued expenses 541,793 ( 383,959) Other current liabilities ( 1,293,809) 1,583,673 Deferred income 25,855 ( 10,133) ------------ ------------ Net cash provided by operating activities 95,846,590 91,431,396 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposal of investments in unconsolidated companies 233,700 -- Acquisitions of investments in unconsolidated companies -- ( 1,999,843) Proceeds from disposal of property, plant and equipment 6,150 293,745 Acquisitions of property, plant and equipment ( 32,247,702) ( 43,259,505) Payment on 3G concession, patents and computer software and other assets ( 1,418,903) ( 9,267,018) ------------ ------------ Net cash used in investing activities ( 33,426,755) ( 54,232,621) ------------ ------------
(Continued) - 6 - English Translation of Financial Statements Originally Issued in Chinese ------------------------------------------------------------------------ 2002 (As Adjusted 2003 -- Note 3) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term loans $ -- $ 38,700,000 Payment on principal of long-term loans ( 17,000,000) ( 38,000,000) Decrease in customers' deposits ( 1,017,890) ( 940,416) Increase (decrease) in other liabilities 89,824 ( 182,323) Cash dividends paid ( 38,590,900) ( 33,767,037) ------------ ------------ Net cash used in financing activities ( 56,518,966) ( 34,189,776) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 5,900,869 3,008,999 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,652,160 4,643,161 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,553,029 $ 7,652,160 ============ ============ SUPPLEMENTAL INFORMATION Interest paid $ 112,113 $ 424,090 Less: Capitalized interest 45,890 302,382 ------------ ------------ Interest paid, excluding capitalized interest $ 66,223 $ 121,708 ============ ============ Income tax paid $ 11,121,008 $ 8,781,327 ============ ============ The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche report dated March 11, 2004) (Concluded) - 7 - English Translation of Financial Statements Originally Issued in Chinese ------------------------------------------------------------------------ CHUNGHWA TELECOM CO., LTD. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (Amounts in Thousands 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 to form Chunghwa 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 various stages. In July 2000, the Company received approval from the Securities and Futures Commission (the "SFC") for a domestic initial public offering and its common shares were listed and traded on the Taiwan Stock Exchange (the "TSE") on October 27, 2000. Certain of the Company's common shares were sold by an auction, in connection with the foregoing privatization plan, in domestic public offerings in June 2001, December 2002, March 2003, April 2003 and July 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 17, 2003 and were listed and traded on the New York Stock Exchange (the "NYSE").The MOTC intends to continue to sell certain of the Company's common shares in the ROC and throughout the privatization process to the Company's employees. The MOTC has sold 35.02% shares of the Company as of December 31, 2003. The number of employees as of December 31, 2003 and 2002 are 29,070 and 28,967, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements are prepared in conformity with relevant regulations, regulations governing the preparation of financial statements of public companies and accounting principles generally accepted in the Republic of China. The significant accounting policies are summarized as follows: Basis of Presentation As a state-owned company, the Company maintains statutory accounts in accordance with the laws and regulations issued by the Executive Yuan, the MOTC, the Ministry of Audit (the "MOA") of the Control Yuan and, in the absence of any specific laws and regulations applicable to a particular transaction or account, the regulations governing the preparation of financial statements of public companies and generally accepted accounting principles in the Republic of China. The accounts are subject to annual examinations by the Directorate General of Budget, Accounting and Statistics (the "DGBAS") of the Executive Yuan and by the MOA (DGBAS and MOA are hereinafter referred to as "government agencies"). The objective of these examinations is to evaluate the Company's performance against the budget approved by the Legislative Yuan. The accounts are considered final only after adjustments, if any, based on the annual examinations, are recorded. The accounts for the year ended December 31, 2002 have been examined by these government agencies and the resulting adjustments were recorded retroactively. - 8 - Current Assets and Liabilities Current assets are commonly identified as those which are reasonably expected to be realized in cash, or sold or consumed within one year. Current liabilities are obligations which mature within one year. Cash and Cash Equivalents Cash and cash equivalents are commercial paper purchased with maturities of three months or less from the date of acquisition. Allowance for Doubtful Receivables Allowance for doubtful receivables is provided on the basis of a review of the collectibility of individual receivables. Inventories Inventories are stated at the lower of cost (weighted-average cost method) or market value (replacement cost or net realizable value). Investments in Unconsolidated Companies Investments in shares of stock in companies where the Company exercises significant influence in their operating and financial policy decisions are accounted for using the equity method. Under the equity method, the investment is initially stated at cost and subsequently adjusted for its proportionate share in the net earnings of investee companies. Any cash dividends received are recognized as a reduction in the carrying value of the investments. 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 purchased 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%. Reductions in carrying value of those investments for decline in value are charged to stockholder's equity. Reductions which are determined to be other than temporary are charged to current income. Cash dividends received are recorded as income. Stock dividends received are accounted for as increases in the number of shares held and are not recognized as income. The costs of investments sold are determined using the weighted-average method. Property, Plant and Equipment Property, plant and equipment are stated at cost plus a revaluation increment, if any, less accumulated depreciation. Major renewals and betterments are capitalized, while maintenance and repairs are expensed currently. Depreciation expense is determined based upon the asset's estimated useful life using the straight-line method. The estimated useful lives are as follows: land improvements, 10 to 30 years; buildings, 10 to 60 years; machinery and equipment, 6 to 10 years; telecommunication network facilities, 6 to 15 years; and miscellaneous equipment, 3 to 10 years. Upon sale or disposal of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to income. - 9 - Intangible Assets The amount recorded for the 3G Concession will be amortized upon the MOTC approval of using the straight-line method over the lower of the legal useful life or estimated useful life. 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. Pension Costs Pension costs are recognized according to the budget approved by the Legislative Yuan and the actuarial report. In addition, the DGBAS issued instructions that the pension costs of all state-owned companies to be privatized should be measured and recognized on the assumption that there is no privatization and that an additional amount should be calculated on the basis of the employees' service years if the additional amount does not reduce the budgeted net income. An additional minimum liability is recognized, if an unfunded accumulated benefit obligation exists, and an equal amount is recognized as an intangible asset, provided that the asset recognized does not exceed the amount of unrecognized net transition obligation and unrecognized prior service cost. Revenue Recognition Revenues are recognized when revenues are realized or realizable and earned. Related costs are expensed as incurred. Service revenue is based on the fair value of the sales price, after business discount and quantity discount, between the Company and customer. The sales price of service revenue is the amount which matures within one year. The difference between fair value and maturity value is not material and the transactions occur frequently so the interest factor is not included in calculating fair value. Usage revenues from fixed-line services (including local, domestic long distance and international long distance), cellular services, Internet and data services, and interconnection 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. Other revenues are recognized as follows: (a) one-time subscriber connection fees are recognized upon activation, (b) fixed-monthly fees (on fixed-line services, wireless, 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 expire. Expense Recognition Expenses including commissions paid to agencies and handset subsidy costs paid to vendors that sell handsets to customers who subscribe to the service (as an inducement to enter into a service contract) are charged to income as incurred. Income Tax 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 tax consequences of differences between financial statement carrying amounts and their respective tax bases. A valuation allowance is recognized if, available evidence indicates it is more likely than not that a portion or the entire deferred tax asset will not be realized. A deferred tax asset or liability should be classified as current or noncurrent according to the classification of its related asset or liability. However, if a deferred asset or liability cannot be related to an asset or liability in the financial statements, it should be classified as current or non-current depending on the expected reversal date of the temporary difference. - 10 - Investment tax credits utilized are recognized as reduction of income tax expense. Adjustments of prior years' tax liabilities are added to or deducted from the current year's tax provision. Income taxes (10%) on undistributed earnings are recorded as expense in the year when the stockholders have resolved that the earnings shall be retained. Earnings Per Share Earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Foreign-currency Transactions The functional currency of the Company is the local currency, the New Taiwan dollar. 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; and b. Other assets and liabilities--credited or charged to current income. 3. ADJUSTMENTS OF FINANCIAL STATEMENTS For the Year Ended December 31, 2002 The Company's financial statements for the year ended December 31, 2002 had been examined by the government agencies, and the resulting adjustments had been recorded retroactively as of December 31, 2002. The effects of these adjustments are summarized as follows:
Adjustment As Previously Increase Reported (Decrease) As Adjusted ------------- ------------- -------------- Balance sheet ------------- Assets Current assets $ 39,438,555 $ 2,970 $ 39,441,525 Investments in unconsolidated companies and funds 5,727,204 -- 5,727,204 Property, plant and equipment--net 407,211,397 -- 407,211,397 Intangible assets 10,390,506 -- 10,390,506 Other assets 3,092,794 -- 3,092,794 ------------- ------------- -------------- Total assets $ 465,860,456 $ 2,970 $ 465,863,426 ============= ============= ==============
(Continued) - 11 -
Adjustment As Previously Increase Reported (Decrease) As Adjusted ------------- ------------- -------------- Liabilities Current liabilities $ 47,290,325 $ 38,571,652 $ 85,861,977 Long-term liabilities 18,093,182 -- 18,093,182 Reserve for land value incremental tax 211,182 -- 211,182 Other liabilities 12,127,811 -- 12,127,811 ------------- ------------- -------------- Total liabilities 77,722,500 38,571,652 116,294,152 ------------- ------------- -------------- Total stockholders' equity 388,137,956 ( 38,568,682) 349,569,274 ------------- ------------- -------------- Total liabilities and stockholders' equity $ 465,860,456 $ 2,970 $ 465,863,426 ============= ============= ============== Statement of income ------------------- Service revenues $ 176,089,011 $ -- $ 176,089,011 Costs of services 90,407,298 ( 15,353) 90,391,945 Operating expenses 30,293,844 ( 14,274) 30,279,570 Other income 2,498,277 -- 2,498,277 Other expenses 2,170,126 -- 2,170,126 Income before income tax 55,716,020 29,627 55,745,647 Income tax 12,510,983 7,409 12,518,392 Net income 43,205,037 22,218 43,227,255
The adjustments made by the government agencies that increased "income before income tax" amounting to $29,627 thousand were due to the different bases of estimates used by the MOA in determining certain accruals. The increase in current liabilities of $38,571,652 thousand and decreased in total stockholders' equity of $38,568,682 thousand were due to the appropriations of 2002 earnings accounted in the year 2002 by the MOA. 4. CASH AND CASH EQUIVALENTS December 31 ----------------------------- 2003 2002 ------------- ------------- Cash Cash on hand $ 108,905 $ 121,227 Cash in banks 2,003,431 2,338,411 ------------- ------------- 2,112,336 2,459,638 Cash equivalents Commercial paper purchased, annual yield rate--ranging from 0.83%-0.93% and 1.30%-1.40% for the years ended December 31, 2003 and 2002, respectively 11,440,693 5,192,522 ------------- ------------- $ 13,553,029 $ 7,652,160 ============= ============= - 12 - 5. ALLOWANCE FOR DOUBTFUL ACCOUNTS Years Ended December 31 ----------------------------- 2003 2002 ------------- ------------- Notes and accounts receivable ----------------------------- Balance, beginning of year $ 1,491,907 $ 769,221 Provision for doubtful accounts 863,197 723,470 Accounts receivable written off ( 9,503) ( 784) ------------- ------------- Balance, end of year $ 2,345,601 $ 1,491,907 ============= ============= Overdue receivable ------------------ Balance, beginning of year $ 6,012,517 $ 4,238,782 Provision for doubtful accounts 2,295,180 4,207,154 Accounts receivable written off ( 2,867,261) ( 2,433,419) ------------- ------------- Balance, end of year $ 5,440,436 $ 6,012,517 ============= ============= 6. INVENTORIES--NET December 31 ----------------------------- 2003 2002 ------------- ------------- Supplies $ 1,125,333 $ 1,123,107 Work in process 740 36,282 Materials in transit 94,683 20,639 ------------- ------------- 1,220,756 1,180,028 Less: Allowance for losses 1,297 16,390 ------------- ------------- $ 1,219,459 $ 1,163,638 ============= ============= The insurance coverage on inventories as of December 31, 2003 amounted to $1,147,270 thousand. 7. OTHER CURRENT ASSETS December 31 ----------------------------- 2003 2002 ------------- ------------- Prepaid expenses $ 494,295 $ 488,470 Miscellaneous 37,939 77,010 ------------- ------------- $ 532,234 $ 565,480 ============= ============= 8. INVESTMENTS IN UNCONSOLIDATED COMPANIES AND FUNDS
December 31 --------------------------------------------------- 2003 2002 ------------------------ ------------------------ Carrying % of Carrying % of Value Ownership Value Ownership ------------ --------- ------------ --------- Funds Fixed Line Funds Piping Funds $ 1,000,000 $ 1,000,000 1,000,000 1,000,000 ------------ ------------ 2,000,000 2,000,000 ------------ ------------
(Continued) - 13 -
December 31 --------------------------------------------------- 2003 2002 ------------------------ ------------------------ Carrying % of Carrying % of Value Ownership Value Ownership ------------ --------- ------------ --------- Investments in unconsolidated companies Equity investees: Chunghwa Investment("CHI") $ 986,698 49 $ 981,888 49 Taiwan International Standard Electronics("TISE") 432,784 40 435,013 40 ------------ ------------ 1,419,482 1,416,901 ------------ ------------ Cost investees Taipei Financial Center("TFC") 1,999,843 12 1,999,843 12 Siemens Telecommunication Systems("Siemens") 71,500 12 71,500 12 RPTI International("RPTI") 5,250 15 5,250 15 International Telecommunication Development("ITD") 10 -- 10 -- Lucent Technologies Taiwan Telecom("Lucent") -- -- 233,700 15 ------------ ------------ 2,076,603 2,310,303 ------------ ------------ Total investments in unconsolidated companies 3,496,085 3,727,204 ------------ ------------ $ 5,496,085 $ 5,727,204 ============ ============
The carrying values of the investments in unconsolidated companies and the related equity in net income of an equity-accounted unconsolidated company are based on audited financial statements. The Company sold its investment in Lucent for $233,700 thousand in June, 2003. The equity ownership in the net assets of investments in unconsolidated companies accounted for using the cost method, which were computed by the percentage of ownership, were $1,998,567 thousand and $2,354,926 thousand as of December 31, 2003 and 2002, respectively. As part of the government's effort to upgrade the existing telecommunications infrastructure, the Company and other public utility companies were required to contribute to a Fixed Line Fund managed by the Ministry of Interior Affairs and a Piping Fund administered by the Taipei City Government. These funds will be used to finance various telecommunications infrastructure projects, and any deficiency of the funds will be reimbursed by the companies. 9. PROPERTY, PLANT AND EQUIPMENT December 31 ----------------------------- 2003 2002 Cost ------------- ------------- Land $ 101,756,249 $ 101,578,675 Land improvements 1,392,265 1,331,175 Buildings 53,750,744 51,442,169 Machinery and equipment 22,466,397 21,038,736 Telecommunications network facilities 614,501,192 602,314,839 Miscellaneous equipment 2,131,065 2,105,199 ------------- ------------- Total cost 795,997,912 779,810,793 Revaluation increment on land 5,951,540 5,960,931 ------------- ------------- 801,949,452 785,771,724 ------------- ------------- (Continued) - 14 - December 31 ----------------------------- 2003 2002 ------------- ------------- Accumulated depreciation Land improvements $ 634,267 $ 579,534 Buildings 11,301,777 10,362,790 Machinery and equipment 15,831,266 14,523,931 Telecommunications network facilities 417,573,124 400,168,111 Miscellaneous equipment 1,758,475 1,680,671 ------------- ------------- 447,098,909 427,315,037 ------------- ------------- Construction in progress and advances related to acquisition of equipment 43,106,304 48,754,710 ------------- ------------- Property, plant and equipment-net $ 397,956,847 $ 407,211,397 ============= ============= Pursuant to the related regulation, the Company revalued its land owned as of April 30, 2000 based on the publicly announced value on July 1, 1999. These revaluations which were approved by the MOA resulted in increases in the carrying values of property, plant and equipment of $5,986,074 thousand, long-term liabilities for land value incremental tax of $211,182 thousand, and capital surplus of $5,774,892 thousand. 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 $120,957,303 thousand. 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, 2003, titles to land and buildings with carrying value of $416,094 thousand were still in the name of the NPB. Depreciation on property, plant and equipment for the years ended December 31, 2003 and 2002 amounted to $41,710,486 thousand and $40,746,915 thousand, respectively. Capitalized interest expense aggregated to $45,890 thousand and $302,382 thousand for the years ended December 31, 2003 and 2002, respectively. The rate of capitalized interest is from 0.56%-1.67% and 1.51% to 4.18%, respectively. The insurance coverages on property, plant and equipment as of December 31, 2003 aggregated $5,146,249 thousand. 10. ACCRUED EXPENSES December 31 ----------------------------- 2003 2002 ------------- ------------- Accrued compensation $ 8,996,844 $ 8,839,216 Accrued franchise fees 2,435,419 2,369,400 Other accrued expenses 2,745,682 2,427,536 ------------- ------------- $ 14,177,945 $ 13,636,152 ============= ============= - 15 - 11. OTHER CURRENT LIABILITIES December 31 ----------------------------- 2003 2002 ------------- ------------- Deposit from cellular telephone services $ 5,350,042 $ -- Amounts collected from subscribers in trust for others 3,610,204 3,442,905 Payables to equipment suppliers 3,229,909 1,933,430 Advances from subscribers 3,104,573 2,234,773 Payables to constructors suppliers 3,080,981 4,075,404 Miscellaneous 2,805,480 2,366,885 ------------- ------------- $ 21,181,189 $ 14,053,397 ============= ============= The Company reclassified the amount of deposits from cellular telephone services it expects to pay to its customers in 2004, from other long-term liabilities to other current liabilities. 12. LONG-TERM LOANS Long-term loans consist of the following: December 31 ----------------------------- 2003 2002 ------------- ------------- Common Tunnel Fund $ 700,000 $ 700,000 Syndicated Loans -- 17,000,000 ------------- ------------- $ 700,000 $ 17,700,000 ============= ============= 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, 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. The Syndicated Loans were obtained pursuant to long-term loan agreements with several banks that allows the Company to obtain unsecured credit until June 19, 2006. These loans bear fixed annual interest rates ranging from 1.58% to 1.70% on December 31, 2002. As of December 31, 2003, the Company had repaid the outstanding balance of these syndicated loans. As of December 31, 2003, the Company has unused credit lines totaling approximately $230,000,000 thousand, which are available for short-term and long-term borrowings. 13. STOCKHOLDERS' EQUITY Under the Company's Articles of Incorporation, authorized capital is divided into 9,647,724,900 common shares (at $10 par value per share), all of which are issued and outstanding. The 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. For the purpose of privatizing the company, the MOTC sold 1,109,750 common shares of the Company in an international offering of securities in the form of American Depositary Shares (ADS) amounting to 110,975 thousand units (one ADS represents ten common shares) on the New York Stock Exchange in July 17, 2003. - 16 - The ADS holders generally have the same rights and obligations as other common shareholders, subject to the provision of relevant laws. The exercise of such rights and obligations shall comply with the related regulations and deposit agreement, which stipulate, among other things, that ADS holders can, through deposit agents: a. Exercise their voting rights; b. Sell their ADSs; and c. Receive dividends declared and subscribe to the issuance of new shares. As of December 31, 2003, a portion of the outstanding ADSs were revoked in exchange for approximately 120,160 thousand common shares of the Company, which represented 1.25% of the Company's total outstanding common shares. Therefore, the outstanding ADSs were 98,914 thousand units, which equaled approximately 989,140 thousand common shares and represented 10.25% of the Company's total outstanding common shares. The MOTC, as the holder of those preferred shares is entitled to the same rights as holders of common shares and certain additional rights as specified in the Company's Articles of Incorporation as follows: a. 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. b. The holder of preferred shares has the same option as holders of common shares when the Company raises capital by issuing new shares. c. The holder of the preferred shares will have the right to vote on any change in the name of the Company or the nature of its business and any transfer of a substantial portion of the Company's business or property. d. The holder of the preferred shares may not transfer the ownership. The Company must redeem all outstanding preferred shares within three years from the date of their issuance. Under the ROC Company Law, capital surplus can only be utilized to offset deficits or be declared as stock dividends. Also, such capital surplus and donations can only be declared as a stock dividend by the Company at an amount calculated in accordance with the provisions of existing regulations. In addition, before distributing a dividend or making any other distribution to stockholders, the 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 the dividends to be distributed. In addition, if the cash dividend to be distributed is less than $0.10 per share, such cash dividend shall be distributed in the form of common shares. Telecommunications service is a capital-intensive and the Corporation requires capital expenditures to sustain its competitive position in high-growth market. Thus, the Company's dividend policy takes into account future capital expenditure outlays. In this regard, a portion of the earnings may be retained to finance these capital expenditures. The remaining earnings can then be distributed as dividends if approved by the stockholders in the following year and will be recorded in the financial statements of that year. 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 the balance is 50% of the aggregate par value of the outstanding capital stock of the Company, the Company may, at its option, declare 50% of the reserve as a stock dividend and transfer the amount to capital. - 17 - The appropriations and distributions of the 2003 earnings of the Company have not been approved by the board of directors and stockholders on March 11, 2004, the issuance date of the independent auditors' report. Related information can be accessed through the Market Observation Post System on the Web site of the Taiwan Stock Exchange Corporation. The Company did not distribute bonuses for employees and remunerations of directors and supervisors for the 2002 earnings. Under the Integrated Income Tax System that became effective on July 1, 1998, non-corporate stockholders are allowed a tax credit for the income tax paid by the Company on earnings generated in 1999 and onwards. An Imputation Credit Account (ICA) is maintained by the Company for such income tax and the tax credit is allocated to each stockholder. 14. COMPENSATION, DEPRECIATION AND AMORTIZATION EXPENSES Years Ended December 31, 2003 --------------------------------------------- Cost of Operating Services Expenses Total ------------- ------------- ------------- Compensation expense Salaries $ 15,035,818 $ 8,727,995 $ 23,763,813 Insurance 708,233 344,114 1,052,347 Pension 661,707 399,385 1,061,092 Other compensation 6,029,882 3,378,335 9,408,217 ------------- ------------- ------------- 22,435,640 12,849,829 35,285,469 Depreciation expense 39,426,072 2,284,414 41,710,486 Amortization expense 145,347 124,154 269,501 ------------- ------------- ------------- $ 62,007,059 $ 15,258,397 $ 77,265,456 ============= ============= ============= Years Ended December 31, 2002 --------------------------------------------- Cost of Operating Services Expenses Total ------------- ------------- ------------- Compensation expense Salaries $ 14,958,734 $ 8,315,704 $ 23,274,438 Insurance 624,186 262,731 886,917 Pension 953,355 533,969 1,487,324 Other compensation 5,903,056 3,154,349 9,057,405 ------------- ------------- ------------- 22,439,331 12,266,753 34,706,084 Depreciation expense 38,418,603 2,328,311 40,746,914 Amortization expense 57,676 92,158 149,834 ------------- ------------- ------------- $ 60,915,610 $ 14,687,222 $ 75,602,832 ============= ============= ============= - 18 - 15. INCOME TAX a. A reconciliation between income tax expense computed by applying the statutory income tax rate of 25% to income before income tax and income tax payable shown in the statements of income is as follows: Years Ended December 31 ---------------------------- 2003 2002 ------------ ------------ Income tax expense computed at statutory income tax rate stated above $ 14,715,369 $ 13,936,402 Add (deduct) tax effects of: Permanent differences ( 49,888) ( 2,889) Timing differences ( 460,878) 14,060 Investment tax credits ( 4,347,786) ( 2,094,721) ------------ ------------ Income tax payable $ 9,856,817 $ 11,852,852 ============ ============ b. Income tax expense consisted of the following: Income tax payable $ 9,856,817 $ 11,852,852 Income tax--separated 14,964 22,729 Income tax--deferred 387,336 538,126 Adjustments of prior years' income tax -- 4,152 Income tax on undistributed earnings 114,511 100,533 ------------ ------------ $ 10,373,628 $ 12,518,392 ============ ============ The balances of income tax payable as of December 31, 2003 and 2002 are shown net of prepaid income tax, respectively. c. Net deferred income tax assets consisted of the following: December 31 ---------------------------- 2003 2002 ------------ ------------ Current Deferred income tax assets: Provision for doubtful receivables $ 1,614,307 $ 1,687,850 Accrued pension cost 12,011,188 12,394,786 Other 60,133 54,671 ------------ ------------ 13,685,628 14,137,307 Less: Valuation allowance ( 1,614,307) ( 1,687,850) ------------ ------------ 12,071,321 12,449,457 Deferred income tax liability: Unrealized foreign exchange gain ( 631) ( 16) ------------ ------------ Net deferred income tax assets $ 12,070,690 $ 12,449,441 ============ ============ Noncurrent deferred income tax assets: Unrealized losses on disposal of property, plant and equipment $ 14,256 $ 14,256 Unrealized advertisements expense -- 8,585 ------------ ------------ Net deferred income tax assets $ 14,256 $ 22,841 ============ ============ - 19 - d. The related information under the Integrated Income Tax System is as follows: December 31 ---------------------------- 2003 2002 ------------ ------------ Balance of Imputation Credit Account (ICA) $ 8,671,428 $ 11,863,796 ============ ============ The estimated ICA rate for the 2003 earnings as of December 31, 2003 and the actual ICA rate for 2002 earnings were 17.65% and 33.44%, respectively. The credit available for allocation to the stockholders is calculated on the basis of the balance of ICA on the date of distribution of dividends. Accordingly, the estimated rate as of December 31, 2003 may differ from the actual rate determined based on the balance of the ICA on the dividend distribution date. e. Undistributed earnings information As of December 31, 2003 and 2002, the Company's undistributed earnings generated in June 30, 1998 and onward was $32,336 thousand for 2003 and 2002. Income tax returns through the year ended December 31, 2002 had been examined by the tax authorities. 16. BASIC NET INCOME PER SHARE
Net Income per Share Amount (Numerator) (Dollars) ----------------------------- ----------------------------- Weighted- average Number of Income Before Common Shares Income Before Income Tax Net Income Outstanding Income Tax Net Income ------------- ------------- ------------- ------------- ------------- Year ended December 31, 2003 ---------------------------- Net income $ 58,861,518 $ 48,487,890 9,647,725 ============= ============= ============= Basic net income per share $ 6.10 $ 5.03 ============= ============= Year ended December 31, 2002 ---------------------------- Net income $ 55,745,647 $ 43,227,255 ============= ============= Basic net income per share 9,647,725 $ 5.78 $ 4.48 ============= ============= =============
17. PENSION PLAN The Company has different pension plans for its employees depending on their classifications. In general, the employees' pension entitlement is based on MOTC regulations, Labor Law and/or the private pension plan of the Company. The funding of the pension plan for employees classified as staff is based on the budget approved by the Legislative Yuan and a supplementary budget approved by the Executive Yuan. The staff pension fund is administered by a pension fund committee and deposited in its name in a commercial bank. The pension plan for employees classified as workers is funded monthly at 15% or less of their wages and is also administered by a pension committee and deposited in its name in the Central Trust of China. - 20 - Pension information is summarized as follows: a. Reconciliation between the fund status and accrued pension cost is summarized as follows: December 31 ---------------------------- 2003 2002 ------------ ------------ Benefit obligation Vested benefit obligation ($ 51,281,917) ($ 45,180,808) Non-vested benefit obligation ( 34,347,712) ( 38,023,270) ------------ ------------ Accumulated benefit obligation ( 85,629,629) ( 83,204,078) Additional benefit obligation ( 428,148) ( 1,664,082) ------------ ------------ Projected benefit obligation ( 86,057,777) ( 84,868,160) Fair values of plan assets 82,578,473 83,831,027 ------------ ------------ Funded status ( 3,479,304) ( 1,037,133) Unrecognized net transition obligation 298,019 ( 1,268,538) Additional liability ( 427,551) -- ------------ ------------ Accrued pension cost ($ 3,608,836) ($ 2,305,671) ============ ============ b. Vested benefit $ 52,050,005 $ 46,061,834 ============ ============ c. Actuarial assumptions Discount rate used in determining present value 3.20% 3.75% Rate of compensation increase 5.50% 5.00% Long-term rate of return on plan assets 3.20% 3.75% d. Contributions and payments Years Ended December 31 ---------------------------- 2003 2002 ------------ ------------ Contributions $ 222,947 $ 246,423 ============ ============ Payments of benefits $ 2,585,114 $ 7,969,393 ============ ============ Pension costs amounted to $1,098,561 thousand and $1,593,112 thousand for the years ended December 31, 2003 and 2002, respectively. The privatization of the Company was not completed on December 31, 2003, the Chairman, as representative of the MOTC, approved the new target privatization date to be December 31, 2004. Therefore, based on the assumption that the timing of the privatization is December 31, 2004, the accrued pension cost as of December 31, 2003 was $3,608,836 thousand. 18. 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 data 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. - 21 - a. The Company engages in business transactions with the following related party: Company Relationship -------------------------------------- -------------------------------------- Taiwan International Standard Equity-accounted investee Electronics Chunghwa System Subsidiary of Chunghwa Investment Integration b. Significant transactions with the above related party are summarized as follows:
December 31 -------------------------------------------- 2003 2002 -------------------- -------------------- Amount % Amount % ------------ ----- ------------ ----- 1) Payables Accrued expenses Chunghwa System Integration $ 29,750 -- $ -- -- ============ ===== ============ ===== Payable to construction supplier (included in "other current liabilities") Taiwan International Standard Electronics $ 631,799 4 $ 872,983 6 Chunghwa System Integration 21,360 -- -- -- ------------ ----- ------------ ----- $ 653,159 4 $ 872,983 6 ============ ===== ============ ===== Years Ended December 31 -------------------------------------------- 2003 2002 -------------------- --------------------- Amount % Amount % ------------ ----- ------------ ----- 2) Cost of Services Chunghwa System Integration $ 96,158 -- $ -- -- ============ ===== ============ ===== 3) Acquisition of properties Taiwan International Standard Electronics $ 4,471,429 14 $ 6,878,921 16 Chunghwa System Integration 48,439 -- -- -- ------------ ----- ------------ ----- $ 4,519,868 14 $ 6,878,921 16 ============ ===== ============ =====
The foregoing acquisitions were conducted under normal commercial terms. 19. COMMITMENTS AND CONTINGENT LIABILITIES As of December 31, 2003, the Company's remaining commitments under non-cancelable contracts with various parties were as follows: a. Acquisitions of buildings of $3,402,272 thousand. b. Acquisitions of telecommunications equipment of $10,975,677 thousand. c. Unused letters of credit of about $10,775,467 thousand. d. Contracted to print billing, envelops and telephone directories of approximately $283,566 thousand. - 22 - e. The Company also has non-cancelable operating leases covering certain buildings, computers, computer peripheral equipment and operation system software under contracts that expire in various years. Minimum rental commitments under those leases are as follows: Year Rental Amount ------------------- ------------- 2004 $ 1,036,269 2005 746,569 2006 571,290 2007 255,533 2008 and thereafter 129,508 f. A commitment to contribute $2,500,000 thousand to a Fixed Line Fund administered by the Ministry of Interior Affairs and Taiwan Power Company, of which $1,000,000 thousand has been contributed by the Company on June 30, 1995. If the balance of the Fixed Line Fund is not sufficient for its purpose, the above three parties will determine when to raise additional funds and the contribution amounts from each party. g. A commitment to contribute $2,000,000 thousand to a Piping Fund administered by the Taipei City Government, of which $1,000,000 thousand was contributed by the Company on August 15, 1996. 20. ADDITIONAL DISCLOSURES Following are the additional disclosures required by the SFC for the Company and its investees: a. Financing provided: None. b. Endorsement/guarantee provided: None. c. Marketable securities held: Please see Table 1. d. Marketable securities acquired and disposed of at costs or prices at least $100 million or 20% of the paid-in capital: Please see Table 2. e. Acquisition of individual real estates at costs of at least $100 million or 20% of the paid-in capital: Please see Table 3. f. Disposal of individual real estates at prices of at least $100 million or 20% of the paid-in capital: None. g. Total purchase from or sale to related parties amounting to at least $100 million or 20% of the paid-in capital: None. h. Receivables from related parties amounting to $100 million or 20% of the paid-in capital: None. i. Names, locations, and other information of investees on which the Company exercises significant influences: Please see Table 4. j. Financial transactions 1) The Company has no derivative financial instruments. 2) Fair value of financial instruments - 23 -
December 31, 2003 December 31, 2002 --------------------------- --------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ------------ ------------ ------------ ------------ Nonderivative financial instruments ------------------------------------------- Assets Cash and cash equivalents $ 13,553,029 $ 13,553,029 $ 7,652,160 $ 7,652,160 Trade notes and accounts receivable--net 13,982,456 13,982,456 15,758,335 15,758,335 Other current monetary assets 1,664,655 1,664,655 1,852,471 1,852,471 Investments in unconsolidated companies and funds 5,496,085 5,855,359 5,727,204 6,306,532 Refundable deposits (included in "other assets--others") 2,018,235 2,018,235 759,254 759,254 Overdue receivables--net 991,871 991,871 1,706,425 1,706,425 Liabilities Trade notes and accounts payable 11,712,596 11,712,596 11,217,375 11,217,375 Accrued expense 14,177,945 14,177,945 13,636,152 13,636,152 Long-term loans 700,000 700,000 17,700,000 17,700,000 Customers' deposits 5,606,588 5,606,588 11,974,520 11,974,520
The Company's basis for determining the fair values is as follows: a) Financial instruments except those mentioned in b) and c) above--the carrying values reported in the balance sheet approximate the fair values of these assets. b) Fair values of investments in unconsolidated companies and funds are based on the net asset values of the investments in unconsolidated companies, if quoted market prices are not available. c) 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. k. Investment in Mainland China: None. 21. SEGMENT INFORMATION a. Industry The financial information of the Company by industry: Please see Table 5. b. Geographic The Company had no foreign operations as of December 31, 2003. c. Foreign revenue The foreign revenue of the Company is less than 10% of total sales. d. Major customers No single customer accounts for more than 10% of total revenues. - 24 - CHUNGHWA TELECOM CO., LTD. MARKETABLE SECURITIES HELD DECEMBER 31, 2003 (Amounts in Thousands of New Taiwan Dollars) --------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------- Relationship with the No. Held Company Name Marketable Securities Type and Name Company ---------------------------------------------------------------------------------------------------- 0 Chunghwa Telecom Co., Common stock Ltd. ------------ Chunghwa Investment Co., Ltd. Equity method investee Taiwan International Standard Electronics Equity method investee Taipei Financial Center - RPTI International - Siemens Telecommunication Systems - International Telecommunication Development - 1 Chunghwa Investment Common stock Co., Ltd. ------------ Chunghwa System Integration Co., Ltd. Subsidiary Chunghwa Telecom Global Subsidiary Wayia Com Inc. - TV bean Co., Ltd. - Vanteh Software Company - The China Steel Corporation - Beneficiary certification ------------------------- Prudential Financial Bond Fund - APIT Bond Fund - Homerun Bond Fund - Prudential Bond Fund - Barits Bond Fund - The Forever Fund - TIIM Bond Fund - UBS Soaring Eagle Bond Fund - Sheng Hua 1699 Bond Fund - High Yield Securities Investment Trust Fund - The First Global Investment Trust The Duoli-2 - Bond Fund Fuh-Hwa Bond Fund - Cathay Global Balanced Fund - HSBC Taiwan Dragon Fund - Albatross Fund - Ta Chong Gallop Bond Fund - Jardin Fleming Taiwan Balance Trust Fund - Grand Cathay Balance 2 Fund - Cathay Capital Income Growth Bond Fund - Fuhwa Classical Fund - Polaris Taiwan Top50 Tracker Fund ----------------------------------------------------------------------------------------------------
- 25 - TABLE 1 ------- --------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------- December 31, 2003 ------------------------------------------------------------------ Shares (Thousands/ Percentage of Market Value or Financial Statement Account Thousand Units) Carrying Value Ownership Net Asset Value Note --------------------------------------------------------------------------------------------------------------------- Investments in unconsolidated companies 98,000 $ 986,698 49 $ 986,698 Note 1 Investments in unconsolidated companies 1,760 432,784 40 870,094 Note 1 Investments in unconsolidated companies 199,984 1,999,843 12 1,708,996 Note 2 Investments in unconsolidated companies 9,234 71,500 12 110,883 Note 2 Investments in unconsolidated companies 75 5,250 15 178,721 Note 2 Investments in unconsolidated companies -- 10 -- 17 Note 2 Investments in unconsolidated companies 60,000 608,153 100 608,153 Note 1 Investments in unconsolidated companies 1,000 144,057 100 144,057 Note 1 Investments in unconsolidated companies 4,000 40,000 19 26,989 Note 2 Investments in unconsolidated companies 1,200 12,000 12 11,209 Note 2 Investments in unconsolidated companies 1,080 12,960 7 15,169 Note 2 Short-term investment 350 9,783 -- 9,695 Note 4 Short-term investment 8,704 121,040 -- 122,151 Note 3 Short-term investment 8,330 100,891 -- 101,994 Note 3 Short-term investment 7,564 100,779 -- 101,832 Note 3 Short-term investment 6,665 98,488 -- 99,522 Note 3 Short-term investment 8,321 96,360 -- 97,184 Note 3 Short-term investment 6,557 90,949 -- 91,049 Note 3 Short-term investment 6,002 80,705 -- 81,518 Note 3 Short-term investment 6,783 70,209 -- 70,788 Note 3 Short-term investment 3,820 45,033 -- 45,434 Note 3 Short-term investment 2,894 40,000 -- 40,096 Note 3 Short-term investment 2,596 36,109 -- 36,450 Note 3 Short-term investment 2,427 30,533 -- 30,878 Note 3 Short-term investment 3,000 30,000 -- 31,320 Note 3 Short-term investment 1,771 25,899 -- 26,170 Note 3 Short-term investment 2,383 25,315 -- 25,600 Note 3 Short-term investment 2,000 20,723 -- 24,883 Note 3 Short-term investment 1,515 20,040 -- 20,042 Note 3 Short-term investment 1,545 20,020 -- 20,395 Note 3 Short-term investment 1,925 20,000 -- 20,147 Note 3 Short-term investment 1,000 10,000 -- 10,059 Note 3 100 4,783 -- 4,590 Note 3 --------------------------------------------------------------------------------------------------------------------- (Continued)
- 25 -
----------------------------------------------------------------------------------------- Relationship with No. Held Company Name Marketable Securities Type and Name the Company ----------------------------------------------------------------------------------------- Convertible bonds ----------------- Yang Ming 2B -- 2 Chunghwa System Beneficiary certificates Integration Co., Ltd. ------------------------ Homerun Bond Fund -- The Forever Fund -- Cathay Capital Income Growth Bond Fund -- Prudential Financial Bond Fund -- ABN.AMRO Bond Fund -- Taiwan Solomon Bond Fund -- Fubon Dragon Bond Fund -- APIT Bond Fund -- Barits Value Balance Fund -- Albatross Fund -- Fuh-Hwa Bond Fund -- Convertible bonds ----------------- Rexon Industrial CBE -- Evergreen Marine 1 -- -----------------------------------------------------------------------------------------
Note 1: The net asset values of unconsolidated companies are based on audited financial statements. Note 2: The net asset values of unconsolidated companies are based on unaudited financial statements. Note 3: The market value of short-term investments is based on the net asset values of the funds as of December 31, 2003. Note 4: The market value of short-term investments is based on the average closing price during December 2003. Note 5: The short-term investment is a listed company on January 2004. - 26 -
--------------------------------------------------------------------------------------------------------- December 31, 2003 ------------------------------------------------------------------ Shares (Thousands/ Percentage of Market Value or Financial Statement Account Thousand Units) Carrying Value Ownership Net Asset Value Note --------------------------------------------------------------------------------------------------------- Short-term investment 160 $ 16,000 -- $ 20,432 Note 3 Short-term investment 7,394 99,504 -- 99,538 Note 3 Short-term investment 5,156 71,582 -- 71,606 Note 3 Short-term investment 6,728 70,407 -- 70,429 Note 3 Short-term investment 4,974 69,787 -- 69,809 Note 3 Short-term investment 4,102 59,341 -- 59,353 Note 3 Short-term investment 4,611 51,521 -- 51,538 Note 3 Short-term investment 4,430 49,931 -- 49,931 Note 3 Short-term investment 2,760 33,780 -- 33,792 Note 3 Short-term investment 1,873 20,000 -- 20,064 Note 3 Short-term investment 479 5,145 -- 5,146 Note 3 Short-term investment 401 5,099 -- 5,101 Note 3 Short-term investment 245 30,258 -- 31,287 Note 4 Short-term investment 100 2,000 -- 2,000 Note 5 -----------------------------------------------------------------------------------------------------------
- 26 - CHUNGHWA TELECOM CO., LTD. MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2003 (Amounts in Thousands of New Taiwan Dollars) --------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------ Beginning Balance ---------------------- Shares (Thousands/ Marketable Securities Type Financial Statement Counter- Nature of Thousand No. Company Name and Name Account party Relationship Units) Amount ------------------------------------------------------------------------------------------------------------------------------------ 0 Chunghwa Telecom Co., Lucent Technologies Taiwan Investments in Lucent - 234 $ 233,700 Ltd. Telecom unconsolidated Technologies companies International Inc. ------------------------------------------------------------------------------------------------------------------------------------ 1 Chunghwa Investment Prudential Financial Bond Short-term investment - - -- -- Co., Ltd. Fund Barits Bond Fund Short-term investment - - 4,358 50,000 APIT Bond Fund Short-term investment - - -- -- Homerun Bond Fund Short-term investment - - -- -- Prudential Financial Bond Short-term investment - - 2,067 30,240 Fund TIIM Bond Fund Short-term investment - - -- -- Yang Ming 2B Short-term investment - - -- -- UBS Soaring Eagle Bond Fund Short-term investment - - -- -- Ta chong Gallop Bond Fund Short-term investment - - -- -- Sheng Hua 1699 Bond Fund Short-term investment - - -- -- DAM Bond Fund Short-term investment - - -- -- Homerun Bond Fund Short-term investment - - -- -- Prudential Well Pool Fund Short-term investment - - 3,484 41,159 JF (Taiwan) Bond Fund Short-term investment - - 2,446 35,285 The Forever Fund Short-term investment - - -- -- 2 Chunghwa System Fubon Global Fixed Income Short-term investment - - -- -- Integration Co., Ltd. Fund The Forever Fund Short-term investment - - -- -- Taiwan Solomon Bond Fund Short-term investment - - -- -- Prudential Financial Bond Short-term investment - - 5,047 69,441 fund ABN.AMRO Bond Fund Short-term investment - - 4,980 70,865 APIT Bond Fund Short-term investment - - 4,199 50,328 Invessco GP ROC Bond Fund Short-term investment - - 3,571 50,288 Cathay Capital Income Short-term investment - - -- -- Growth Bond Fund ------------------------------------------------------------------------------------------------------------------------------------
- 27 - TABLE 2 -------
------------------------------------------------------------------------------------------------------------------------- Acquisition Disposal Ending Balance ----------------------- Equity in Income ---------------------------------------------------------------------------- Shares (Loss) of Shares Shares (Thousands/ Unconsolidated (Thousands/ (Thousands/ Thousand Companies Thousand Carrying Gain (Loss) Thousand Units) Amount Units) Amount Value on Disposal Units) Amount ------------------------------------------------------------------------------------------------------------------------- -- $ -- $ -- 234 $ 233,700 $ 233,700 $ -- -- $ -- ------------------------------------------------------------------------------------------------------------------------- 25,360 351,255 -- 16,656 231,255 230,215 1,040 8,704 121,040 32,229 371,857 -- 28,266 326,857 325,497 1,360 8,321 96,360 24,989 301,315 -- 16,659 201,315 200,424 891 8,330 100,891 7,564 100,779 -- -- -- -- -- 7,564 100,779 24,609 362,206 -- 20,011 295,206 293,958 1,248 6,665 98,488 18,007 241,041 -- 12,005 161,041 160,336 705 6,002 80,705 1,000 100,000 -- 840 101,434 84,000 17,434 160 16,000 13,566 140,209 -- 6,783 70,209 70,000 209 6,783 70,209 13,203 136,800 -- 11,203 116,404 116,077 327 2,000 20,723 8,483 100,000 -- 4,663 55,000 54,967 33 3,820 45,033 14,591 160,000 -- 14,591 160,682 160,000 682 -- -- 13,733 200,363 -- 13,773 201,143 200,363 780 -- -- 9,478 112,944 -- 12,962 154,619 154,103 516 -- -- 4,893 71,024 -- 7,339 106,791 106,309 482 -- -- 9,304 129,000 -- 2,747 38,126 38,051 75 6,557 90,949 10,000 100,000 -- 10,000 99,517 100,000 ( 483) -- -- 27,163 372,851 -- 22,007 302,856 301,269 1,587 5,156 71,582 31,949 352,782 -- 27,338 302,783 301,261 1,522 4,611 51,521 15,393 214,243 -- 15,466 215,243 213,897 1,346 4,974 69,787 22,482 322,438 -- 23,360 335,438 333,962 1,476 4,102 59,341 11,571 140,265 -- 13,010 157,765 156,813 952 2,760 33,780 5,304 75,147 -- 8,875 125,874 125,435 439 -- -- 13,456 140,407 -- 6,728 70,407 70,000 407 6,728 70,407 -------------------------------------------------------------------------------------------------------------------------
- 27 - CHUNGHWA TELECOM CO., LTD. ACQUISITION OF INDIVIDUAL REAL ESTATES AT COSTS OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2003 (Amounts in Thousands of New Taiwan Dollars) --------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------- Transaction Transaction Payment Company Name Property Date Amount Term Counter-Party -------------------------------------------------------------------------------------------------------------------- Chunghwa Telecom. Co., Building 2003.3.21 $ 236,846 Paid Dong-Bang Engineering Limited Company Ltd. Building 2003.3.24 147,721 Paid E-Kuen Construction Co., Ltd. and others Building 2003.5.08 117,038 Paid Sunkai Builder Co., Ltd. Building 2003.5.12 101,710 Paid Te Chang Construction Co., Ltd. and others Building 2003.5.21 302,076 Paid Guo-Chi Construction Co., Ltd. and others Building 2003.12.05 207,068 Paid Ming-Cheng Construction Co., Ltd. Building 2003.12.15 110,297 Paid Guo-Chi Construction Co., Ltd. and others --------------------------------------------------------------------------------------------------------------------
- 28 - TABLE 3 ------- --------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------ Prior Transactions with Related Counter-party Nature of --------------------------------------------- Relationship Owner Relationship Transfer Date Amount Price Reference Purpose of Acquisition Other Terms ------------------------------------------------------------------------------------------------------------------------------ None - - - - Bidding Telecommunications construction None None - - - - Bidding Telecommunications construction None None - - - - Bidding Telecommunications construction None None - - - - Bidding Telecommunications construction None None - - - - Bidding Telecommunications construction None None - - - - Bidding Telecommunications construction None None - - - - Bidding Telecommunications construction None ------------------------------------------------------------------------------------------------------------------------------
- 28 - CHUNGHWA TELECOM CO., LTD. NAMES, LOCATIONS, AND OTHER INFORMATION OF INVESTEES ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE FOR THE YEAR ENDED DECEMBER 31, 2003 (Amounts in Thousands of New Taiwan Dollars, Unless Otherwise Specified) --------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------- Main Businesses and Investor Company Investee Company Location Products --------------------------------------------------------------------------------------------------------------- Chunghwa Telecom Co., Ltd. Chunghwa Investment 24F, No. 456, Hsinyi Rd., Investment Co., Ltd. Sec. 4, Taipei Taiwan International No. 4, Min Sheng St., Manufacturing, selling, Standard Electronics Tu-Chen Taipei Hsien designing and maintaining of telecommunications systems and equipment Chunghwa Investment Co., Ltd. Chunghwa System 24F, No. 458, Hsinyi Rd., Integrated communication and Integration Co., Ltd. Sec. 4, Taipei information services Chunghwa Telecom United States Multinational enterprise data Global service, Internet gateway and voice wholesale, mobile commerce value-added services, and content services. ---------------------------------------------------------------------------------------------------------------
Note 1: The equity in net income (net loss) of unconsolidated companies is based on audited financial statements. Note 2: The equity in net loss of an unconsolidated company amounting to $99,624 thousand is calculated from the audited financial statements plus a gain on realized upstream transactions of $165,692 thousand less a gain on unrealized upstream transactions of $68,297 thousand. Note 3: Chunghwa Telecom Global is recognized the US$3,500 thousand as additional paid-in capital. - 29 - TABLE 4 ------- --------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------ Original Investment Amount Balance as of December 31, 2003 ------------------------------------------------------------------- Net Income December 31, Shares Percentage of Carrying (Loss) of the Recognized 2003 Dec. 31, 2002 (Thousands) Ownership (%) Value Investee Gain (Loss) Note ------------------------------------------------------------------------------------------------------------------ $ 980,000 $ 980,000 98,000 49 $ 986,698 $ 11,494 $ 5,632 Equity-accounted (Note 1) investee 164,000 164,000 1,760 40 432,784 ( 249,060) ( 2,229) Equity-accounted (Notes 1, 2) investee 600,000 600,000 60,000 100 608,153 10,426 10,426 Subsidiary (Note 1) 154,086 34,090 1,000 100 144,057 69 69 Subsidiary (US$ 4,500 (US$ 1,000 (Note 3) (Note 1) thousand) thousand) ------------------------------------------------------------------------------------------------------------------
- 29 - CHUNGHWA TELECOM CO., LTD. INDUSTRY FINANCIAL INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (Amount in Thousands of New Taiwan Dollars) --------------------------------------------------------------------------------
Local Domestic Long International Telephone Distance Call Long Distance Service Service Call Service -------------- ------------- ------------- Year ended December 31, 2003 ---------------------------- Service revenues from external customers $ 45,666,183 $ 13,399,506 $ 15,617,961 Intersegment service revenues 18,144,578 2,599,996 1,701 -------------- ------------- ------------- Total service revenues $ 63,810,761 $ 15,999,502 $ 15,619,662 ============== ============= ============= Segment income before income tax $ 8,068,254 $ 8,143,635 $ 3,944,883 ============== ============= ============= Interest income Equity in net gain of unconsolidated companies Other income Interest expense General expense Other expense Income before tax Assets for reportable assets $ 218,734,293 $ 8,867,882 $ 14,507,202 ============== ============= ============= Investment in unconsolidated companies and funds Other assets Total assets Depreciation expenses $ 22,232,745 $ 1,327,261 $ 615,385 ============== ============= ============= Expenditures for segment assets $ 7,544,592 $ 1,313,891 $ 415,098 ============== ============= =============
- 30 - TABLE 5 ------- --------------------------------------------------------------------------------
Cellular Paging Internet and Service Service Data Service All Other Adjustment Total ------------- ------------ ------------- ------------ ------------- ------------- Year ended December 31, 2003 ---------------------------- Service revenues from external customers $ 65,672,112 $ 592,216 $ 35,577,042 $ 2,623,523 $ -- $ 179,148,543 Intersegment service revenues 987,376 3,541 8,582,142 131,706 ( 30,451,040) -- ------------- ------------ ------------- ------------ ------------- ------------- Total service revenues $ 66,659,488 $ 595,757 $ 44,159,184 $ 2,755,229 ($ 30,451,040) $ 179,148,543 ============= ============ ============= ============ ============= ============= Segment income before income tax $ 27,843,724 ($ 197,855) $ 13,333,784 $ 1,038,750 $ -- $ 62,175,175 ============= ============ ============= ============ ============= Interest income 99,800 Equity in net gain of unconsolidated companies 3,403 Other income 2,097,318 Interest expense ( 43,071) General expense ( 3,858,944) Other expense ( 1,612,163) ------------- Income before tax $ 58,861,518 ============= Assets for reportable assets $ 65,295,858 $ 1,103,445 $ 105,092,500 $ 12,814,299 $ -- $ 426,415,479 ============= ============ ============= ============ ============= Investment in unconsolidated companies and funds 5,496,085 Other assets 28,911,815 ------------- Total assets $ 460,823,379 ============= Depreciation expenses $ 5,562,378 $ 311,033 $ 10,803,631 $ 708,776 ============= ============ ============= ============ Expenditures for segment assets $ 7,937,694 $ -- $ 14,302,570 $ 666,331 ============= ============ ============= ============
(Continued) - 30 -
Local Domestic Long International Telephone Distance Call Long Distance Service Service Call Service -------------- ------------- ------------- Year ended December 31, 2002 ---------------------------- Service revenues from external customers $ 48,910,720 $ 14,032,256 $ 15,718,825 Intersegment service revenues 18,343,298 2,102,596 594 -------------- ------------- ------------- Total service revenues $ 67,254,018 $ 16,134,852 $ 15,719,419 ============== ============= ============= Segment income before income tax $ 9,756,275 $ 7,272,642 $ 3,728,906 ============== ============= ============= Interest income Equity in net loss of unconsolidated companies Other income Interest expense General expense Other expense Income before tax Assets for reportable assets $ 260,382,289 $ 10,509,544 $ 14,078,862 ============== ============= ============= Investment in unconsolidated companies and funds Other assets Total assets Depreciation expenses $ 23,403,666 $ 1,348,858 $ 542,333 ============== ============= ============= Expenditures for segment assets $ 17,760,275 $ 2,727,895 $ 879,048 ============== ============= =============
Note: 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 local telephone service, domestic long distance call service, international long distance call service, cellular service, paging service, Internet and data service and other service. - 31 -
Cellular Paging Internet and Service Service Data Service All Other Adjustment Total ------------- ------------ ------------- ------------ ------------- ------------- Year ended December 31, 2002 ---------------------------- Service revenues from external customers $ 62,469,539 $ 1,053,655 $ 31,180,874 $ 2,723,142 $ -- $ 176,089,011 Intersegment service revenues 867,353 4,789 9,344,137 181,350 ( 30,844,117) -- ------------- ------------ ------------- ------------ ------------- ------------- Total service revenues $ 63,336,892 $ 1,058,444 $ 40,525,011 $ 2,904,492 ($ 30,844,117) $ 176,089,011 ============= ============ ============= ============ ============= ============= Segment income before income tax $ 24,884,604 ($ 174,422) $ 12,423,888 $ 1,529,489 $ -- $ 59,421,382 ============= ============ ============= ============ ============= Interest income 187,007 Equity in net loss of unconsolidated companies ( 232,551) Other income 2,311,270 Interest expense ( 170,621) General expense ( 4,003,886) Other expense ( 1,766,954) ------------- Income before tax $ 55,745,647 ============= Assets for reportable assets $ 61,495,659 $ 1,448,317 $ 75,369,345 $ 14,436,178 $ -- $ 437,720,194 ============= ============ ============= ============ ============= Investment in unconsolidated companies and funds 5,727,204 Other assets 22,416,028 ------------- Total assets $ 465,863,426 ============= Depreciation expenses $ 5,277,389 $ 373,149 $ 8,938,582 $ 722,462 ============= ============ ============= ============ Expenditures for segment assets $ 4,708,728 $ -- $ 15,964,632 $ 1,159,786 ============= ============ ============= ============
- 31 - Chunghwa Telecom Co., Ltd. Financial Statements as of December 31, 2002 and 2003, and for Each of the Years in the Three Year Period Ended December 31, 2003 Together with Independent Auditors' Report INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Chunghwa Telecom Co., Ltd. We have audited the accompanying balance sheets of Chunghwa Telecom Co., Ltd. as of December 31, 2002 and 2003, and the related statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 2003, all expressed in New Taiwan dollars. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Chunghwa Telecom Co., Ltd. as of December 31, 2002 and 2003 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Our audits also comprehended the translation of New Taiwan Dollar amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 3. Such U.S. dollar amounts are presented for the convenience of the readers. Deloitte & Touche (T N Soong & Co and Deloitte & Touche (Taiwan) Established Deloitte & Touche Effective June 1, 2003) Taipei, Taiwan Republic of China March 11, 2004 - 1 - CHUNGHWA TELECOM CO., LTD. BALANCE SHEETS (Amounts in Millions, Except Shares and Par Value Data) --------------------------------------------------------------------------------
December 31 ------------------------------------ ASSETS Notes 2002 2003 2003 ---------- ---------- ---------- ---------- NT$ NT$ US$ (Note 3) CURRENT ASSETS Cash and cash equivalents 2,4,18 $ 7,652 $ 13,553 $ 399 Trade notes and accounts receivable--net 2,5 17,211 14,813 436 Inventories--net 2,6 1,164 1,220 36 Prepaid expenses 486 494 14 Deferred income taxes 2,14 16,845 16,983 500 Other current assets 1,929 1,703 50 ---------- ---------- ---------- Total current assets 45,287 48,766 1,435 ---------- ---------- ---------- INVESTMENTS IN UNCONSOLIDATED COMPANIES 2,7,18 3,727 3,496 103 ---------- ---------- ---------- PROPERTY, PLANT AND EQUIPMENT--Net 2,8,15 338,388 329,678 9,699 ---------- ---------- ---------- INTANGIBLE ASSETS Deferred pension cost 2,13 24,032 29,940 881 3G concession 2 10,179 10,179 300 Patents and computer software--net 2 212 251 7 ---------- ---------- ---------- Total intangible assets 34,423 40,370 1,188 ---------- ---------- ---------- OTHER ASSETS Deferred income taxes--non-current 2,14 3,464 2,901 85 Other 18 3,364 4,484 132 ---------- ---------- ---------- Total other assets 6,828 7,385 217 ---------- ---------- ---------- TOTAL ASSETS $ 428,653 $ 429,695 $ 12,642 ========== ========== ==========
The accompanying notes are an integral part of the financial statements. - 2 - --------------------------------------------------------------------------------
December 31 ------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Notes 2002 2003 2003 ---------- ---------- ---------- ---------- NT$ NT$ US$ (Note 3) CURRENT LIABILITIES Trade notes and accounts payable $ 11,217 $ 11,713 $ 345 Income tax payable 2,14 6,172 4,923 145 Accrued expenses 9 13,804 14,206 418 Accrued pension liabilities 2,13 32,226 42,199 1,241 Current portion of deferred income 2 3,957 3,186 94 Customers' deposits 18 11,975 10,957 322 Other current liabilities 10,15 17,574 19,203 565 ---------- ---------- ---------- Total current liabilities 96,925 106,387 3,130 ---------- ---------- ---------- OTHER LIABILITIES Deferred income--net of current portion 2 13,855 11,610 341 Long-term loans 11,18 17,700 700 21 Other 153 243 7 ---------- ---------- ---------- Total other liabilities 31,708 12,553 369 ---------- ---------- ---------- Total liabilities 128,633 118,940 3,499 ---------- ---------- ---------- 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 2,838 Capital surplus 133,862 135,873 3,998 Retained earnings 69,681 78,405 2,307 ---------- ---------- ---------- Total stockholders' equity 300,020 310,755 9,143 ---------- ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 428,653 $ 429,695 $ 12,642 ========== ========== ==========
2 CHUNGHWA TELECOM CO., LTD. STATEMENTS OF OPERATIONS (Amounts in Millions, Except Shares and Per Share and Per ADS Data) --------------------------------------------------------------------------------
Years Ended December 31 --------------------------------------------------------------------- Notes 2001 2002 2003 2003 ----- --------------- --------------- --------------- --------------- NT$ NT$ NT$ US$ (Note 3) SERVICE REVENUES 2 $ 184,378 $ 179,361 $ 182,466 $ 5,368 --------------- --------------- --------------- --------------- OPERATING COSTS AND EXPENSES 2 Costs of services, excluding depreciation and amortization 72,733 58,120 59,633 1,755 Marketing, excluding depreciation and amortization 2 21,867 20,167 19,992 588 General and administrative, excluding depreciation and amortization 3,451 2,647 2,726 80 Research and development, excluding depreciation and amortization 2 2,804 2,428 2,581 76 Depreciation and amortization--cost of services 36,648 37,890 39,170 1,152 Depreciation and amortization --operating expense 2,272 2,408 2,399 71 --------------- --------------- --------------- --------------- Total operating costs and expenses 139,775 123,660 126,501 3,722 --------------- --------------- --------------- --------------- INCOME FROM OPERATIONS 44,603 55,701 55,965 1,646 --------------- --------------- --------------- --------------- OTHER INCOME Interest 649 187 100 3 Equity in net income of unconsolidated companies 189 -- 3 -- Other income 2,803 2,294 2,098 62 --------------- --------------- --------------- --------------- Total other income 3,641 2,481 2,201 65 --------------- --------------- --------------- --------------- OTHER EXPENSES Interest 392 171 43 1 Equity in net loss of unconsolidated companies 2,7 -- 232 -- -- Other expense 971 852 509 15 --------------- --------------- --------------- --------------- Total other expenses 1,363 1,255 552 16 --------------- --------------- --------------- --------------- INCOME BEFORE INCOME TAX 46,881 56,927 57,614 1,695 INCOME TAX 2,14 9,519 12,839 10,299 303 --------------- --------------- --------------- --------------- NET INCOME $ 37,362 $ 44,088 $ 47,315 $ 1,392 =============== =============== =============== =============== NET INCOME PER SHARE 2 $ 3.87 $ 4.57 $ 4.90 $ 0.14 =============== =============== =============== =============== WEIGHTED--AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 9,647,724,900 9,647,724,900 9,647,724,900 9,647,724,900 =============== =============== =============== =============== NET INCOME PER PRO FORMA EQUIVALENT ADS 2 $ 38.73 $ 45.70 $ 49.04 $ 1.44 =============== =============== =============== =============== WEIGHTED--AVERAGE NUMBER OF PRO FORMA EQUIVALENT ADSs OUTSTANDING 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 -------------------------- Common Capital shares Amount Surplus ------------- ---------- ---------- NT$ NT$ BALANCE, DECEMBER 31, 2000 (IN NT$) 9,647,724,900 $ 96,477 $ 133,758 Additional capital contributed by government -- -- 62 Appropriations of 2000 earnings: Legal reserve -- -- -- Dividends -- -- -- Net income for the year ended December 31, 2001 -- -- -- ------------- ---------- ---------- BALANCE, DECEMBER 31, 2001 (IN NT$) 9,647,724,900 96,477 133,820 Additional capital contributed by government -- -- 42 Appropriations and distributions of 2001 earnings: Legal reserve -- -- -- Dividends -- -- -- Net income for the year ended December 31, 2002 -- -- -- ------------- ---------- ---------- BALANCE, DECEMBER 31, 2002 (IN NT$) 9,647,724,900 96,477 133,862 Additional capital contributed by government -- -- 80 Additional capital contributed by the MOTC through selling shares to employees at a discounted price -- -- 1,931 Appropriations and distributions of 2002 earnings: Legal reserve -- -- -- Dividends -- -- -- Net income for the year ended December 31, 2003 -- -- -- ------------- ---------- ---------- BALANCE, DECEMBER 31, 2003 (IN NT$) 9,647,724,900 $ 96,477 $ 135,873 ============= ========== ========== BALANCE, DECEMBER 31, 2003 (IN US$) (Note 3) 9,647,724,900 $ 2,838 $ 3,998 ============= ========== ==========
Retained Earnings ------------------------------------------------------ Total Legal Special Unappropriated Stockholders' reserve reserve earnings Total Equity ---------- ----------- -------------- ---------- ------------- NT$ NT$ NT$ NT$ NT$ BALANCE, DECEMBER 31, 2000 (IN NT$) $ 15,105 $ 2,675 $ 60,175 $ 77,955 $ 308,190 Additional capital contributed by government -- -- -- -- 62 Appropriations of 2000 earnings: Legal reserve 6,274 -- ( 6,274) -- -- Dividends -- -- ( 55,957) ( 55,957) ( 55,957) Net income for the year ended December 31, 2001 -- -- 37,362 37,362 37,362 ---------- ----------- -------------- ---------- ------------- BALANCE, DECEMBER 31, 2001 (IN NT$) 21,379 2,675 35,306 59,360 289,657 Additional capital contributed by government -- -- -- -- 42 Appropriations and distributions of 2001 earnings: Legal reserve 3,727 -- ( 3,727) -- -- Dividends -- -- ( 33,767) ( 33,767) ( 33,767) Net income for the year ended December 31, 2002 -- -- 44,088 44,088 44,088 ---------- ----------- -------------- ---------- ------------- BALANCE, DECEMBER 31, 2002 (IN NT$) 25,106 2,675 41,900 69,681 300,020 Additional capital contributed by government -- -- -- -- 80 Additional capital contributed by the MOTC through selling shares to employees at a discounted price -- -- -- -- 1,931 Appropriations and distributions of 2002 earnings: Legal reserve 4,331 -- ( 4,331) -- -- Dividends -- -- ( 38,591) ( 38,591) ( 38,591) Net income for the year ended December 31, 2003 -- -- 47,315 47,315 47,315 ---------- ----------- -------------- ---------- ------------- BALANCE, DECEMBER 31, 2003 (IN NT$) $ 29,437 $ 2,675 $ 46,293 $ 78,405 $ 310,755 ========== =========== ============== ========== ============= BALANCE, DECEMBER 31, 2003 (IN US$) (Note 3) $ 866 $ 79 $ 1,362 $ 2,307 $ 9,143 ========== =========== ============== ========== =============
The accompanying notes are an integral part of the financial statements. - 4 - CHUNGHWA TELECOM CO., LTD. STATEMENTS OF CASH FLOWS (Amounts in Millions) --------------------------------------------------------------------------------
Years Ended December 31 ------------------------------------------------- 2001 2002 2003 2003 ---------- ---------- ---------- ---------- NT$ NT$ NT$ US$ (Note 3) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 37,362 $ 44,088 $ 47,315 $ 1,392 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts 3,869 4,931 3,239 95 Depreciation and amortization 38,920 40,298 41,569 1,223 Cash dividends received from unconsolidated companies 94 -- -- -- Net loss on disposal of scrap inventories and property, plant and equipment 955 150 143 4 Equity in net loss (net income) of unconsolidated companies ( 189) 232 ( 3) -- Stock compensation for shares issued to employees at a discount -- -- 1,931 57 Deferred income taxes ( 1,850) 744 425 13 Changes in operating assets and liabilities: Decrease (increase) in: Trade notes and accounts receivable ( 3,280) ( 1,764) ( 760) ( 22) Inventories 2,454 ( 483) ( 1,719) ( 51) Prepaid expenses 1,383 60 ( 8) -- Other current assets ( 259) 811 145 4 Other assets ( 1,724) 1,028 ( 1,235) ( 36) Increase (decrease) in: Trade notes and accounts payable 3,583 ( 2,666) 2,159 63 Income tax payable ( 4,540) 3,314 ( 1,249) ( 37) Accrued expenses ( 892) ( 422) 402 12 Customers' deposits ( 1,294) ( 940) ( 1,018) ( 30) Other current liabilities 1,066 1,969 1,138 33 Accrued pension liabilities 957 3,653 4,065 120 Deferred income ( 3,243) ( 3,467) ( 3,016) ( 89) Other liabilities ( 273) ( 183) 90 3 ---------- ---------- ---------- ---------- Net cash provided by operating activities 73,099 91,353 93,613 2,754 ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of investments in unconsolidated companies ( 980) ( 2,000) -- -- Proceeds from disposal of investments in unconsolidated companies 58 -- 234 7 Acquisitions of property, plant and equipment ( 52,935) ( 43,260) ( 32,248) ( 948) Proceeds from disposal of property, plant and equipment 294 294 6 -- Payment on 3G concession -- ( 10,179) -- -- Acquisitions of patents and computer software ( 131) ( 174) ( 193) ( 6) ---------- ---------- ---------- ---------- Net cash used in investing activities ( 53,694) ( 55,319) ( 32,201) ( 947) ---------- ---------- ---------- ----------
(Continued) - 5 -
Years Ended December 31 ------------------------------------------------- 2001 2002 2003 2003 ---------- ---------- ---------- ---------- NT$ NT$ NT$ US$ (Note 3) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term loans $ 30,000 $ 38,700 $ - $ - Payments on principal of long-term loans ( 13,000) ( 38,000) ( 17,000) ( 500) Cash dividends paid ( 55,957) ( 33,767) ( 38,591) ( 1,135) Additional capital contributed by government 62 42 80 2 ---------- ---------- ---------- ---------- Net cash used in financing activities ( 38,895) ( 33,025) ( 55,511) ( 1,633) ---------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 19,490) 3,009 5,901 174 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 24,133 4,643 7,652 225 ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,643 $ 7,652 $ 13,553 $ 399 ========== ========== ========== ========== SUPPLEMENTAL INFORMATION Interest paid $ 392 $ 122 $ 66 $ 2 ========== ========== ========== ========== Income tax paid $ 15,908 $ 8,781 $ 11,121 $ 327 ========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements. (Concluded) - 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 sold to its employees in October 2000, October 2001, November 2002, February 2003, April 2003, June 2003, July 2003 and December 2003. In July, 2003 the MOTC sold the Company's common shares in an international offering of securities in the form of American Depository Shares ("ADS"). The MOTC intends to continue to sell the Company's common shares in the ROC and throughout the process of privatization to the Company's employees. As of March 11, 2004 the MOTC owns 64.98% shares of the Company. The Company's common shares were listed and traded on the Taiwan Stock Exchange and the 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 accounting principles generally accepted 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 December 31, 2003 and for the years ended December 31, 2002 and 2003 included herein have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). - 7 - 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$) as it is the currency of the primary economic environment. 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 operating and financial policy decisions are accounted for using the equity method of accounting. 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 over the estimated useful life of any intangible assets identified. Any goodwill identified is not amortized and evaluated for impairment when circumstances warrant. 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. The costs of investments sold are determined using the weighted-average method. - 8 - 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 subject to review for impairment as other 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 years ended December 31, 2001, 2002 and 2003 were NT$112 million, NT$122 million and NT$154 million, respectively. Accumulated amortization was NT$659 million and NT$813 million as of December 31, 2002 and 2003, respectively. - 9 - 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 December 31 --------------------------- 2002 2003 ------------ ------------ Fixed-line 13 13 Cellular 6 5 Paging 2 2 Internet 3 3 Revenue Recognition The Company evaluates revenue recognition for its transactions using the SEC Staff Accounting Bulletin ("SAB") No. 104, "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 and NT$1,329 million as of December 31, 2002 and 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. - 10 - Pension Costs Pension costs are recorded on the basis of actuarial calculations. As a foreign registrant, the Company adopted SFAS No. 87 on July 1, 1996 as 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$1,723 million, NT$1,935 million and NT$1,861 million for the years ended December 31, 2001, 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 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. - 11 - Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("FASB") released Interpretation No. 46 Consolidation of Variable Interest Entities ("FIN 46") which requires that all primary beneficiaries of Variable Interest Entities (VIE) consolidate that entity. FIN 46 is effective immediately for VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to VIEs in which an enterprise holds a variable interest it acquired before February 1, 2003. In December 2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify some of the provisions of the interpretation and to defer the effective date of implementation for certain entities. Under the guidance of FIN 46R, entities that do not have interests in structures that are commonly referred to as special purpose entities (SPE's) are required to apply the provisions of the interpretation in financial statements for periods ending after March 14, 2004. The Company does not have interests in special purpose entities and will apply the provisions of FIN 46R with its first quarter 2004 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 December 31, 2003, which was NT$33.99 to US$1.00. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange. 4. CASH AND CASH EQUIVALENTS December 31 --------------------------- 2002 2003 ------------ ------------ NT$ NT$ Cash and bank deposits $ 2,460 $ 2,112 Commercial paper purchased 5,192 11,441 ------------ ------------ Total $ 7,652 $ 13,553 ============ ============ 5. ALLOWANCE FOR DOUBTFUL ACCOUNTS The changes in this account are summarized as follows: Years Ended December 31 ------------------------------------------ 2001 2002 2003 ------------ ------------ ------------ NT$ NT$ NT$ Balance, beginning of period $ 2,563 $ 5,008 $ 7,505 Provision for doubtful accounts 3,869 4,931 3,158 Accounts receivable written off ( 1,424) ( 2,434) ( 2,877) ----------- ----------- ----------- Balance, end of period $ 5,008 $ 7,505 $ 7,786 =========== =========== =========== - 12 - 6. INVENTORIES--NET December 31 --------------------------- 2002 2003 ------------ ------------ NT$ NT$ Supplies--net $ 1,107 $ 1,124 Work in process 36 1 Materials in transit 21 95 ------------ ------------ $ 1,164 $ 1,220 ============ ============ The insurance coverage on inventories as of December 31, 2003 amounted to NT$1,147million. 7. INVESTMENTS IN UNCONSOLIDATED COMPANIES The investments in unconsolidated companies comprise the following:
December 31 --------------------------------------------------------- 2002 2003 --------------------------- --------------------------- Carrying % of Carrying % of Value Ownership Value OwnerShip ------------ ------------ ------------ ------------ NT$ NT$ Equity investees: Chunghwa Investment ("CHI") $ 982 49 $ 987 49 Taiwan International Standard Electronics ("TISE") 435 40 433 40 ------------ ------------ 1,417 1,420 ------------ ------------ 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 $ 3,496 ============ ============
TISE designs, manufactures and sells telecommunications equipment. It also provides maintenance services on such telecommunications equipment. No dividends were declared by TISE for the years ended December 31, 2002 and 2003, respectively. CHI invests in companies engaged in telecom and software businesses. No dividends were declared by CHI for the years ended December 31, 2002 and 2003, respectively. The investments in TFC, Lucent, 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. - 13 - 8. PROPERTY, PLANT AND EQUIPMENT--NET December 31 --------------------------- 2002 2003 ------------ ------------ NT$ NT$ Cost Land $ 42,142 $ 42,326 Buildings and improvements 51,528 53,901 Telecommunications equipment 594,786 607,093 Miscellaneous equipment 26,931 28,279 ------------ ------------ Subtotal 715,387 731,599 ------------ ------------ Accumulated depreciation Buildings and improvements 10,154 11,215 Telecommunications equipment 395,791 412,773 Miscellaneous equipment 19,732 21,140 ------------ ------------ Subtotal 425,677 445,128 ------------ ------------ Construction in progress 48,582 43,159 ------------ ------------ Advances related to acquisition of equipment 96 48 ------------ ------------ Property, plant and equipment--net $ 338,388 $ 329,678 ============ ============ 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 2003, titles to land and buildings with carrying value of NT$617 million and NT$397 million were still in the name of the NPB, respectively. Capitalized interest expense aggregated to NT$130 million, NT$302 million and NT$46 million for the years ended December 31, 2001, 2002 and 2003, respectively. The rate of capitalized interest is from 4.15% to 4.32%, 1.51% to 4.18%, and 0.56% to 1.67%, respectively. The Company carries insurance on certain buildings and certain telecom equipment with carrying value of NT$7,871 million and NT$5,146 million as of December 31, 2002 and 2003, respectively. The Company does not carry comprehensive insurance on all properties. 9. ACCRUED EXPENSES December 31 --------------------------- 2002 2003 ------------ ------------ NT$ NT$ Accrued compensation $ 8,862 $ 8,997 Accrued franchise fees 2,369 2,435 Other accrued expenses 2,573 2,774 ------------ ------------ Total $ 13,804 $ 14,206 ============ ============ - 14 - 10. OTHER CURRENT LIABILITIES December 31 --------------------------- 2002 2003 ------------ ------------ NT$ NT$ Advances from subscribers $ 5,897 $ 6,504 Payables to construction suppliers 4,075 3,081 Amounts collected from subscribers in trust for others 3,443 3,610 Payable to equipment suppliers 1,933 3,230 Miscellaneous 2,226 2,778 ------------ ------------ Total $ 17,574 $ 19,203 ============ ============ 11. LONG-TERM LOANS Long-term loans consist of the following: December 31 --------------------------- 2002 2003 ------------ ------------ NT$ NT$ Syndicated Loan $ 17,000 $ -- Common Tunnel Fund 700 700 ------------ ------------ Total $ 17,700 $ 700 ============ ============ 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 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. The Syndicated Loans were obtained pursuant to long-term loan agreements with several banks that allows the Company to obtain unsecured credit until June 19, 2006. These loans bear fixed annual interest rates ranging from 1.58% to 1.70% on December 31, 2002. As of December 31, 2003, the Company had repaid the outstanding balance of these syndicated loans. As of December 31, 2003, the Company has unused credit lines totaling approximately NT$230,000 million, which are available for short-term and long-term borrowings. 12. STOCKHOLDERS' EQUITY Under the Company's Articles of Incorporation, authorized capital is 9,647,724,900 common shares. The 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. For the purpose of privatizing the company, the MOTC sold 1,109,750 common shares of the Company in an international offering of securities in the form of American Depositary Shares (ADS) amounting to 110,975 thousand units (one ADS represents ten common shares) on the New York Stock Exchange on July 17, 2003. - 15 - The ADS holders generally have the same rights and obligations as other common shareholders, subject to the provision of relevant laws. The exercise of such rights and obligations shall comply with the related regulations and deposit agreement, which stipulate, among other things, that ADS holders can, through deposit agents; exercise their voting rights, sell their ADSs, and receive dividends declared and subscribe to the issuance of new shares. As of December 31, 2003, a portion of the outstanding ADSs were revoked in exchange for approximately 120,160 thousand common shares of the Company, which represented 1.25% of the Company's total outstanding common shares. Therefore, the outstanding ADSs were 98,914 thousand units, which equaled approximately 989,140 thousand common shares and represented 10.25% of the Company's total outstanding common shares. The MOTC, as the holder of those preferred shares is entitled to the same rights as holders of common shares and certain additional rights as specified in the Company's Articles of Incorporation as follows: a. 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. b. The holder of preferred shares has the same stock option as holders of common shares when the Company raises capital by issuing new shares. c. The holder of the preferred shares will have the right to vote on any change in the name of the Company or the nature of its business and any transfer of a substantial portion of the Company's business or property. d. The holder of the preferred shares may not transfer the ownership. 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, 2003, the amount of retained earnings available for dividends was NT$49,159 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 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. 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. 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. - 16 - 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 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, 4,806,292 shares from June 2, 2003 to June 6, 2003 and 97,066,540 shares from October 28, 2003 to October 31, 2003 for total consideration of NT$255 million, NT$28 million, NT$1,645 million, NT$9 million, NT$189 million and NT$3,789 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, NT$49 and NT$45 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$1,452 million as compensation expense for the year ended December 31, 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, 67,035 common shares and 37,883,399 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, NT$49 and NT$45 per share, respectively, for total - 17 - consideration of NT$104 million, NT$1 million, NT$69 million, NT$0.4 million, NT$3 million, and 1,705 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, 293,589 shares from November 1, 2002 to November 7, 2002 and 381,489 shares from November 28, 2003 to December 3, 2003 for total consideration of NT$2 million, NT$3 million and NT$4 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. The Company has recognized NT$15 million as compensation expense for the year ended December 31, 2003 for the shares purchased by employees in 2003 that were subject to par value. 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 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 (the 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. - 18 - 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 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 amounts 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 employee acceptance of the terms of the Program. The Company recognized termination benefits of NT$2,413 million for the year ended December 31, 2001. 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 approximated NT$680 million and was accounted for as an actuarial gain. The privatization of the Company was not completed on December 31, 2001 primarily a result of unfavorable conditions in the capital markets. The MOTC informed the Company on December 28, 2001 that the new target privatization date was December 31, 2003. The Company accounted for the change in the privatization date also as a change in the assumption with the resulting adjustment in the projected benefit obligation of NT$668 million accounted for as an actuarial loss. - 19 - The privatization of the Company was not completed on December 31, 2003. On November 29, 2003, the Chairman, as representative of the MOTC, approved the new target privatization date to be December 31, 2004. The Company accounted for the change in the privatization date as a change in the assumption with the resulting adjustment of NT$1,243 million in the projected benefit obligation accounted for as an actuarial gain. In addition, pursuant to a regulation issued by the Executive Yuan, the obligation related to annuity payments due after the date of privatization for Plan A participants who retire prior to that date will be borne by the MOTC. Such amounts have been included in the Company's pension computation as of December 31, 2002 and 2003. Upon privatization, the portion of liabilities that will be taken over by the MOTC will be accounted for as contributed capital and recorded in stockholders' equity. The components of net periodic benefit costs are as follows:
Years Ended December 31 ------------------------------------------ 2001 2002 2003 ------------ ------------ ------------ NT$ NT$ NT$ Service cost $ 2,429 $ 2,285 $ 1,970 Interest cost 5,229 2,870 2,362 Expected return on plan assets ( 4,071) ( 2,196) ( 1,618) Termination benefit under the Program 2,413 -- -- Amortization of unrecognized net transition obligation 939 939 939 Amortization of unrecognized prior service costs 4,381 -- -- Amortization of unrecognized net loss 6 172 635 ----------- ----------- ----------- Net periodic pension cost $ 11,326 $ 4,070 $ 4,288 =========== =========== ===========
The changes in benefits obligation and plan assets and the reconciliation of funded status are as follows:
Years Ended December 31 ------------------------------------------ 2001 2002 2003 ------------ ------------ ------------ NT$ NT$ NT$ Change in benefits obligation: Projected benefits obligation, beginning of year ($ 106,231) ($ 114,289) ($ 119,822) Services cost ( 2,429) ( 2,285) ( 1,970) Interest cost ( 5,229) ( 2,870) ( 2,362) Termination benefit under the Program ( 2,413) -- -- Actuarial loss ( 6,782) ( 8,347) ( 4,557) Benefits paid 8,795 7,969 2,585 ----------- ----------- ----------- Projected benefits obligation, end of year ($ 114,289) ($ 119,822) ($ 126,126) =========== =========== =========== Change in plan assets: Fair value of plan assets, beginning of year $ 83,889 $ 89,377 $ 83,478 Actual return on plan assets 3,914 1,654 1,462 Employer contributions 10,369 416 223 Benefits paid ( 8,795) ( 7,969) ( 2,585) ----------- ----------- ----------- Fair value of plan assets, end of year $ 89,377 $ 83,478 $ 82,578 =========== =========== ===========
(Continued) - 20 -
Years Ended December 31 ------------------------------------------ 2001 2002 2003 ------------ ------------ ------------ NT$ NT$ NT$ Reconciliation of funded status Funded status ($ 24,912) ($ 36,344) ($ 43,548) Unrecognized net transition obligation 11,628 10,689 9,750 Unrecognized actuarial loss 8,743 17,461 21,539 ----------- ----------- ----------- Net amount recognized ($ 4,541) ($ 8,194) ($ 12,259) =========== =========== =========== The weighted-average asset allocations: Asset category Time deposit 68% 67% 73% Short-term Notes 32% 33% 30% Taiwan government securities --% --% 4% ----------- ----------- ----------- Total 100% 100% 100% =========== =========== ===========
The target asset allocations are established through an investment policy established by the Chunghwa Telecom's Employee Pension Fund Committee and agreed to by the MOF. As increased liquidity of the fund is necessary due to the privatization of the Company, the current policy for plan assets is to place funds in time deposit accounts of the financial and postal institutions, non-designated trust funds in an investing company or financial institution and government bonds. In addition, the pension fund may invest in beneficial certificates of equity securities. The Company expects to contribute NT$6,271 million to the pension plans in 2004. Under the terms agreed upon for the privatization of the Company, the MOTC will contribute NT$40,791 million to the pension plans in 2004. Expected benefit payments, which reflect expected future service, as appropriate, are as follows: NT$129,957 million in 2004, NT$250 million in 2005 and NT$674 million in 2006. The amounts recognized in the accompanying balance sheets at December 31 are as follows:
Years Ended December 31 ------------------------------------------ 2001 2002 2003 ------------ ------------ ------------ NT$ NT$ NT$ Amounts recognized Accrued pension liability ($ 21,583) ($ 32,226) ($ 42,199) Intangible assets--deferred pension cost 17,042 24,032 29,940 ----------- ----------- ----------- Net amount recognized ($ 4,541) ($ 8,194) ($ 12,259) =========== =========== =========== Aggregate Accumulated benefit obligation ($ 110,960) ($ 116,332) ($ 125,499) =========== =========== =========== Accumulated benefit obligation--Plan A ($ 110,571) ($ 116,200) ($ 125,291) =========== =========== =========== Fair value of plan assets--Plan A $ 88,998 $ 82,884 $ 81,813 =========== =========== =========== Actuarial assumptions Discount rate used in determining present value 4.00% 3.75% 3.20% Long-term rate of return on plan assets 4.00% 3.75% 3.20% Rate of compensation increase 5.00% 5.00% 5.50%
- 21 - The discount rate and expected return on plan assets presented in the table above is used to determine pension expense for the succeeding year. We select the expected rate of return on plan assets on the basis of a near term view of asset portfolio performance of our pension plans due to the privatization of the Company and the near term potential need for liquidity. 14. INCOME TAXES The components of income taxes are as follows:
Years Ended December 31 ------------------------------------------ 2001 2002 2003 ------------ ------------ ------------ NT$ NT$ NT$ Current $ 11,369 $ 12,095 $ 10,724 Deferred ( 1,850) 744 ( 425) ----------- ----------- ----------- $ 9,519 $ 12,839 $ 10,299 =========== =========== ===========
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 and comprehensive income is as follows:
Years Ended December 31 ------------------------------------------ 2001 2002 2003 ------------ ------------ ------------ NT$ NT$ NT$ Income tax expense computed at statutory tax rate $ 11,720 $ 14,232 $ 14,404 Permanent differences ( 354) ( 99) 308 Investment tax credits ( 2,554) ( 2,095) ( 4,348) Other 707 801 ( 65) ----------- ----------- ----------- Income tax expense $ 9,519 $ 12,839 $ 10,299 =========== =========== ===========
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 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%. - 22 - 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 --------------------------- 2002 2003 ------------ ------------ NT$ NT$ Current: Provision for doubtful accounts $ 1,688 $ 1,614 Deferred income 989 797 Accrued pension costs 14,823 15,237 Prepaid card revenues (related liability is included in "other current liabilities") 915 850 Other--net 145 435 ------------ ------------ 18,560 18,933 Less--valuation allowance 1,715 1,950 ------------ ------------ $ 16,845 $ 16,983 ============ ============ Non-current: Deferred income $ 3,442 $ 2,887 Other 1,091 1,828 ------------ ------------ 4,533 4,715 Less--valuation allowance 1,069 1,814 ------------ ------------ $ 3,464 $ 2,901 ============ ============ 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. . The Company engages in business transactions with the following related party: Company Relationship -------------------------------------- -------------------------------------- TISE Equity investee Chunghwa System Integration("CSI") Subsidiary of CHI - 23 - Significant transactions with the above related party are summarized as follows:
December 31 --------------------------------------------------------- 2002 2003 --------------------------- --------------------------- Amount % Amount % ------------ ------------ ------------ ------------ Payables Accrued expenses CSI $ -- -- $ 30 -- ============ ============ ============ ============ Payable to construction supplier (included in "other current liabilities") TISE $ 873 4 $ 632 6 CSI -- -- 21 -- ------------ ------------ ------------ ------------ $ 873 4 $ 653 6 ============ ============ ============ ============
Years Ended December --------------------------------------------------------------------------------------- 2001 2002 2003 --------------------------- --------------------------- --------------------------- Amount % Amount % Amount % ------------ ------------ ------------ ------------ ------------ ------------ Operating Cost and Expenses CSI $ -- -- $ -- -- $ 96 -- ============ ============ ============ ============ ============ ============ Acquisition of Equipment TISE $ 3,018 6 $ 6,879 16 $ 4,471 14 CSI -- -- -- -- 49 -- ------------ ------------ ------------ ------------ ------------ ------------ $ 3,018 6 $ 6,879 16 $ 4,520 14 ============ ============ ============ ============ ============ ============
The foregoing acquisitions were conducted under normal commercial terms. 16. COMMITMENTS AND CONTINGENT LIABILITIES As of December 31, 2003, the Company has remaining commitments under non-cancelable contracts with various parties as follows: (a) acquisitions of land and buildings of NT$3,402 million, and (b) acquisitions of telecommunications equipment of NT$10,976 million. The Company also has non-cancelable operating leases covering certain buildings, computers, computer peripheral equipment and operating system software under contracts that expire in various years through 2006. Minimum rental commitments under those leases are as follows: December 31, 2003 ------------ NT$ Within the following year $ 1,036 During the second year 747 During the third year 571 During the fourth year 256 During the fifth year and thereafter 129 ------------ Total $ 2,739 ============ As of December 31, 2003, the Company had unused letters of credit of NT$10,775 million. - 24 - The Company has a commitment to contribute NT$2,500 million to a Fixed Line Fund administered by the Ministry of Interior Affairs and Taiwan Power Company, of which NT$1,000 million has been contributed by the Company on June 30, 1995. If the balance of the Fixed Line Fund is not sufficient for its purpose, the above three parties will determine when to raise additional funds and the contribution amounts from each party. In addition, the Company has a commitment to contribute NT$2,000 million to a Piping Fund administered by the Taipei City Government, of which NT$1,000 million was contributed by the Company on August 15, 1996. 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. A commitment to contribute NT$2,500 million to a Fixed Line Fund administered by the Ministry of Interior Affairs and Taiwan Power Company, of which NT$1,000 million has been contributed by the Company on June 30, 1995. If the balance of the Fixed Line Fund is not sufficient for its purpose, the above three parties will determine when to raise additional funds and the contribution amounts from each party. A commitment to contribute NT$2,000 million to a Piping Fund administered by the Taipei City Government, of which NT$1,000 million was contributed by the Company on August 15, 1996. 18. INFORMATION ON FINANCIAL INSTRUMENTS The non-derivative financial instruments are as follows:
December 31 --------------------------------------------------------- 2002 2003 --------------------------- --------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------ NT$ NT$ NT$ NT$ Assets Cash and cash equivalents $ 7,652 $ 7,652 $ 13,553 $ 13,553 Investments in unconsolidated companies, accounted for using the equity method 1,417 1,952 1,420 1,857 Refundable deposits (included in "other assets--other") 2,759 2,759 4,018 4,018 Liabilities Customers' deposits 11,975 9,004 10,957 9,337 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. - 25 - 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 if quoted market prices are not available. c. Refundable deposits. The carrying amounts approximate fair values as 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 the discounted value based on projected cash flows. The projected cash flows were discounted using the maturity dates of long-term loans. 19. SEGMENT REPORTING Operating segments are defined as components of an enterprise regarding 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: . Local operations--the provision of local telephone services; . DLD operations--the provision of domestic long distance call services; . ILD operations--the provision of international long distance call services; . Cellular operations--the provision of cellular and related services; . Paging operation--the provision of paging and related services; . Internet and data operation--the provision of Internet access, lease line, and related services; . 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 because 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. - 26 - a. Business Segments: As of and for the year ended December 31, 2001 ----------------------------------------------
Fixed-Line --------------------------------- Cellular Local DLD ILD Service --------- --------- --------- --------- NT$ NT$ NT$ NT$ Service revenues for reportable segments $ 73,536 $ 20,731 $ 20,682 $ 57,595 Elimination of intersegment amount ( 18,872) ( 2,608) ( 1) ( 828) US GAAP adjustments 1,799 ( 128) ( 67) ( 94) --------- --------- --------- --------- Total service revenues from external customers $ 56,463 $ 17,995 $ 20,614 $ 56,673 ========= ========= ========= ========= Operating costs and expenses, excluding depreciation and amortization $ 41,991 $ 11,131 $ 14,447 $ 31,557 Elimination of intersegment amount ( 2,951) ( 7,388) ( 2,300) ( 13,673) US GAAP adjustments 3,246 313 324 1,729 --------- --------- --------- --------- $ 42,286 $ 4,056 $ 12,471 $ 19,613 ========= ========= ========= ========= Unallocated corporate amount Total operating costs and expenses, excluding depreciation and amortization Depreciation and amortization $ 23,947 $ 1,448 $ 821 $ 4,405 US GAAP adjustments ( 345) ( 25) ( 15) ( 46) --------- --------- --------- --------- $ 23,602 $ 1,423 $ 806 $ 4,359 ========= ========= ========= ========= Unallocated corporate amount Total depreciation and amortization Income from operations $ 7,598 $ 8,152 $ 5,414 $ 21,633 Elimination of intersegment amount ( 15,921) 4,780 2,299 12,845 US GAAP adjustments ( 1,102) ( 416) ( 376) ( 1,777) --------- --------- --------- --------- ($ 9,425) $ 12,516 $ 7,337 $ 32,701 ========= ========= ========= ========= Unallocated corporate amount Total income from operations Segment income before income tax $ 6,110 $ 8,116 $ 5,411 $ 21,454 Elimination of intersegment amount ( 15,921) 4,780 2,299 12,845 US GAAP adjustments 772 ( 381) ( 156) ( 684) --------- --------- --------- --------- ($ 9,039) $ 12,515 $ 7,554 $ 33,615 ========= ========= ========= ========= Unallocated corporate amount Total segment income before income tax Segment assets $ 271,271 $ 16,364 $ 19,176 $ 50,179 US GAAP adjustments ( 56,130) ( 3,058) ( 2,594) ( 3,561) --------- --------- --------- --------- $ 215,141 $ 13,306 $ 16,582 $ 46,618 ========= ========= ========= ========= Unallocated corporate amount Total segment assets Expenditures for segment assets $ 17,425 $ 4,663 $ 635 $ 12,680 ========= ========= ========= ========= Unallocated corporate amount Total expenditures for segment assets
Internet Paging and Data All Other Total --------- --------- --------- --------- NT$ NT$ NT$ NT$ Service revenues for reportable segments $ 1,341 $ 38,571 $ 2,608 $ 215,064 Elimination of intersegment amount ( 3) ( 9,813) ( 88) ( 32,213) US GAAP adjustments 6 32 ( 21) 1,527 --------- --------- --------- --------- Total service revenues from external customers $ 1,344 $ 28,790 $ 2,499 $ 184,378 ========= ========= ========= ========= Operating costs and expenses, excluding depreciation and amortization $ 1,157 $ 21,867 $ 1,232 $ 123,382 Elimination of intersegment amount ( 379) ( 5,368) ( 154) ( 32,213) US GAAP adjustments 46 395 44 6,097 --------- --------- --------- --------- $ 824 $ 16,894 $ 1,122 97,266 ========= ========= ========= Unallocated corporate amount 3,589 --------- Total operating costs and expenses, excluding depreciation and amortization $ 100,855 ========= Depreciation and amortization $ 485 $ 7,703 $ 479 $ 39,288 US GAAP adjustments ( 5) ( 23) ( 6) ( 465) --------- --------- --------- --------- $ 480 $ 7,680 $ 473 38,823 ========= ========= ========= Unallocated corporate amount 97 --------- Total depreciation and amortization $ 38,920 ========= Income from operations ($ 301) $ 9,001 $ 897 $ 52,394 Elimination of intersegment amount 376 ( 4,445) 66 -- US GAAP adjustments ( 35) ( 340) ( 59) ( 4,105) --------- --------- --------- --------- $ 40 $ 4,216 $ 904 48,289 ========= ========= ========= Unallocated corporate amount 3,686 --------- Total income from operations $ 44,603 ========= Segment income before income tax ($ 315) $ 9,355 $ 869 $ 51,000 Elimination of intersegment amount 376 ( 4,445) 66 -- US GAAP adjustments ( 28) ( 291) ( 10) ( 778) --------- --------- --------- --------- $ 33 $ 4,619 $ 925 50,222 ========= ========= ========= Unallocated corporate amount ( 3,341) --------- Total segment income before income tax $ 46,881 ========= Segment assets $ 2,323 $ 70,888 $ 11,221 $ 441,422 US GAAP adjustments ( 154) ( 4,306) ( 2,142) ( 71,945) --------- --------- --------- --------- $ 2,169 $ 66,582 $ 9,079 369,477 ========= ========= ========= Unallocated corporate amount 41,937 --------- Total segment assets $ 411,414 ========= Expenditures for segment assets $ 2 $ 16,173 $ 1,241 $ 52,819 ========= ========= ========= Unallocated corporate amount 116 --------- Total expenditures for segment assets $ 52,935 =========
As of and for the year ended December 31, 2002 ----------------------------------------------
Fixed-Line --------------------------------- Cellular Local DLD ILD Service --------- --------- --------- --------- NT$ NT$ NT$ NT$ Service revenues for reportable segments $ 67,950 $ 16,135 $ 15,720 $ 63,337 Elimination of intersegment amount ( 18,343) ( 2,103) ( 1) ( 867) US GAAP adjustments 2,184 ( 17) ( 17) 416 --------- --------- --------- --------- Total service revenues from external customers $ 51,791 $ 14,015 $ 15,702 $ 62,886 ========= ========= ========= ========= Operating costs and expenses, excluding depreciation and amortization $ 34,112 $ 7,510 $ 11,453 $ 33,150 Elimination of intersegment amount ( 3,896) ( 5,453) ( 2,500) ( 13,419) 2,000 72 96 233 --------- --------- --------- --------- US GAAP adjustments $ 32,216 $ 2,129 $ 9,049 $ 19,964 ========= ========= ========= ========= Unallocated corporate amount Total operating costs and expenses, excluding depreciation and amortization
Internet Paging and Data All Other Total --------- --------- --------- --------- NT$ NT$ NT$ NT$ Service revenues for reportable segments $ 1,059 $ 40,525 $ 2,904 $ 207,630 Elimination of intersegment amount ( 5) ( 9,344) ( 181) ( 30,844) US GAAP adjustments -- 33 ( 24) 2,575 --------- --------- --------- --------- Total service revenues from external customers $ 1,054 $ 31,214 $ 2,699 $ 179,361 ========= ========= ========= ========= Operating costs and expenses, excluding depreciation and amortization $ 859 $ 19,130 $ 624 $ 106,838 Elimination of intersegment amount ( 163) ( 5,243) ( 170) ( 30,844) US GAAP adjustments 14 676 274 3,365 --------- --------- --------- --------- $ 710 $ 14,563 $ 728 79,359 ========= ========= ========= Unallocated corporate amount 4,003 --------- Total operating costs and expenses, excluding depreciation and amortization $ 83,362 =========
(Continued) - 27 -
Fixed-Line --------------------------------- Cellular Local DLD ILD Service --------- --------- --------- --------- NT$ NT$ NT$ NT$ Depreciation and amortization $ 23,445 $ 1,353 $ 545 $ 5,304 US GAAP adjustments ( 358) ( 21) ( 5) ( 77) --------- --------- --------- --------- $ 23,087 $ 1,332 $ 540 $ 5,227 ========= ========= ========= ========= Unallocated corporate amount Total depreciation and amortization Income from operations $ 10,393 $ 7,272 $ 3,722 $ 24,883 Elimination of intersegment amount ( 14,447) 3,350 2,499 12,552 US GAAP adjustments 542 ( 68) ( 108) 260 --------- --------- --------- --------- ($ 3,512) $ 10,554 $ 6,113 $ 37,695 ========= ========= ========= ========= Unallocated corporate amount Total income from operations Segment income before income tax $ 10,115 $ 7,310 $ 3,741 $ 25,562 Elimination of intersegment amount ( 14,447) 3,350 2,499 12,552 US GAAP adjustments 1,048 ( 48) ( 82) 321 --------- --------- --------- --------- ($ 3,284) $ 10,612 $ 6,158 $ 38,435 ========= ========= ========= ========= Unallocated corporate amount Total segment income before income tax Segment assets $ 260,407 $ 10,510 $ 14,071 $ 61,496 US GAAP adjustments ( 47,106) ( 810) ( 1,734) ( 4,657) --------- --------- --------- --------- $ 213,301 $ 9,700 $ 12,337 $ 56,839 ========= ========= ========= ========= Unallocated corporate amount Total segment assets Expenditures for segment assets $ 17,760 $ 2,728 $ 879 $ 4,709 ========= ========= ========= ========= Unallocated corporate amount Total expenditures for segment assets
Internet Paging and Data All Other Total --------- --------- --------- --------- NT$ NT$ NT$ NT$ Depreciation and amortization $ 374 $ 8,974 $ 751 $ 40,746 US GAAP adjustments ( 5) ( 125) ( 5) ( 596) --------- --------- --------- --------- $ 369 $ 8,849 $ 746 40,150 ========= ========= ========= Unallocated corporate amount 148 --------- Total depreciation and amortization $ 40,298 ========= Income from operations ($ 174) $ 12,421 $ 1,529 $ 60,046 Elimination of intersegment amount 158 ( 4,101) ( 11) -- US GAAP adjustments ( 9) ( 518) ( 293) ( 194) --------- --------- --------- --------- ($ 25) $ 7,802 $ 1,225 59,852 ========= ========= ========= Unallocated corporate amount ( 4,151) --------- Total income from operations $ 55,701 ========= Segment income before income tax ($ 177) $ 12,518 $ 1,489 $ 60,558 Elimination of intersegment amount 158 ( 4,101) ( 11) -- US GAAP adjustments ( 6) ( 346) ( 224) 663 --------- --------- --------- --------- ($ 25) $ 8,071 $ 1,254 61,221 ========= ========= ========= Unallocated corporate amount ( 4,294) --------- Total segment income before income tax $ 56,927 ========= Segment assets $ 1,448 $ 75,369 $ 14,436 $ 437,737 US GAAP adjustments ( 81) ( 9,353) ( 4,077) ( 67,818) --------- --------- --------- --------- $ 1,367 $ 66,016 $ 10,359 369,919 ========= ========= ========= Unallocated corporate amount 58,734 --------- Total segment assets $ 428,653 ========= Expenditures for segment assets $ -- $ 15,965 $ 1,160 $ 43,201 ========= ========= ========= Unallocated corporate amount 59 --------- Total expenditures for segment assets $ 43,260 =========
As of and for the year ended December 31, 2003 ----------------------------------------------
Fixed-Line --------------------------------- Cellular Local DLD ILD Service --------- --------- --------- --------- NT$ NT$ NT$ NT$ Service revenues for reportable segments $ 64,508 $ 16,000 $ 15,620 $ 66,659 Elimination of intersegment amount ( 18,145) ( 2,600) ( 2) ( 987) US GAAP adjustments 2,048 35 45 516 --------- --------- --------- --------- Total service revenues from external customers $ 48,411 $ 13,435 $ 15,663 $ 66,188 ========= ========= ========= ========= Operating costs and expenses, excluding depreciation and amortization $ 33,430 $ 6,528 $ 11,059 $ 33,264 Elimination of intersegment amount ( 4,735) ( 4,772) ( 2,942) ( 13,239) US GAAP adjustments 3,516 110 163 425 --------- --------- --------- --------- $ 32,211 $ 1,866 $ 8,280 $ 20,450 ========= ========= ========= ========= Unallocated corporate amount Total operating costs and expenses, excluding depreciation and amortization Depreciation and amortization $ 22,312 $ 1,328 $ 616 $ 5,574 US GAAP adjustments ( 248) ( 11) ( 11) ( 52) --------- --------- --------- --------- $ 22,064 $ 1,317 $ 605 $ 5,522 ========= ========= ========= ========= Unallocated corporate amount Total depreciation and amortization Income from operations $ 8,766 $ 8,144 $ 3,945 $ 27,821 Elimination of intersegment amount ( 13,410) 2,172 2,940 12,252 --------- --------- --------- --------- US GAAP adjustments ( 1,220) ( 64) ( 107) 143 --------- --------- --------- --------- ($ 5,864) $ 10,252 $ 6,778 $ 40,216 ========= ========= ========= ========= Unallocated corporate amount Total income from operations
Internet Paging and Data All Other Total --------- --------- --------- --------- Service revenues for reportable segments $ 595 $ 44,159 $ 2,750 $ 210,291 Elimination of intersegment amount ( 3) ( 8,582) ( 132) ( 30,451) US GAAP adjustments -- 4 ( 22) 2,626 --------- --------- --------- --------- Total service revenues from external customers $ 592 $ 35,581 $ 2,596 $ 182,466 ========= ========= ========= ========= Operating costs and expenses, excluding depreciation and amortization $ 482 $ 19,935 $ 930 $ 105,628 Elimination of intersegment amount ( 86) ( 4,420) ( 257) ( 30,451) US GAAP adjustments 15 1,191 473 5,893 --------- --------- --------- --------- $ 411 $ 16,706 $ 1,146 81,070 ========= ========= ========= Unallocated corporate amount 3,862 --------- Total operating costs and expenses, excluding depreciation and amortization $ 84,932 ========= Depreciation and amortization $ 311 $ 10,891 $ 786 $ 41,818 US GAAP adjustments ( 3) ( 86) -- ( 411) --------- --------- --------- --------- $ 308 $ 10,805 $ 786 41,407 ========= ========= ========= Unallocated corporate amount 162 --------- Total depreciation and amortization $ 41,569 ========= Income from operations ($ 198) $ 13,333 $ 1,034 $ 62,845 Elimination of intersegment amount 83 ( 4,162) 125 -- US GAAP adjustments ( 12) ( 1,101) ( 495) ( 2,856) --------- --------- --------- --------- ($ 127) $ 8,070 $ 664 59,989 ========= ========= ========= Unallocated corporate amount ( 4,024) --------- Total income from operations $ 55,965 =========
(Continued) - 28 -
Fixed-Line --------------------------------- Cellular Local DLD ILD Service --------- --------- --------- --------- NT$ NT$ NT$ NT$ Segment income before income tax $ 8,897 $ 8,221 $ 3,936 $ 28,037 Elimination of intersegment amount ( 13,410) 2,172 2,940 12,252 US GAAP adjustments ( 536) ( 48) ( 81) 213 --------- --------- --------- --------- ($ 5,049) $ 10,345 $ 6,795 $ 40,502 ========= ========= ========= ========= Unallocated corporate amount Total segment income before income tax Segment assets $ 218,741 $ 8,870 $ 14,510 $ 65,306 US GAAP adjustments ( 41,770) ( 1,810) ( 1,676) ( 4,921) --------- --------- --------- --------- $ 176,971 $ 7,060 $ 12,834 $ 60,385 ========= ========= ========= ========= Unallocated corporate amount Total segment assets Expenditures for segment assets $ 7,545 $ 1,314 $ 415 $ 7,938 ========= ========= ========= ========= Unallocated corporate amount Total expenditures for segment assets
Internet Paging and Data All Other Total --------- --------- --------- --------- NT$ NT$ NT$ NT$ Segment income before income tax ($ 198) $ 13,548 $ 994 $ 63,435 Elimination of intersegment amount 83 ( 4,162) 125 -- US GAAP adjustments ( 10) ( 895) ( 420) ( 1,777) --------- --------- --------- --------- ($ 125) $ 8,491 $ 699 61,658 ========= ========= ========= Unallocated corporate amount ( 4,044) --------- Total segment income before income tax $ 57,614 ========= Segment assets $ 1,103 $ 105,098 $ 12,814 $ 426,442 US GAAP adjustments ( 66) ( 14,052) ( 2,929) ( 67,224) --------- --------- --------- --------- $ 1,037 $ 91,046 $ 9,885 359,218 ========= ========= ========= Unallocated corporate amount 70,477 --------- Total segment assets $ 429,695 ========= Expenditures for segment assets $ -- $ 14,302 $ 666 $ 32,180 ========= ========= ========= Unallocated corporate amount 68 --------- Total expenditures for segment assets $ 32,248 =========
b. Geographic information The users of the Company's services are mainly from Taiwan, ROC. The revenues it derived outside Taiwan are mainly inter-connection fees from other telecommunication carriers. The geographic information for revenues is as follows: Years Ended December 31 ---------------------------------- 2001 2002 2003 ---------- ---------- ---------- NT$ NT$ NT$ Taiwan, ROC $ 179,607 $ 173,127 $ 176,424 Overseas 4,771 6,234 6,037 ---------- ---------- ---------- Total $ 184,378 $ 179,361 $ 182,461 ========== ========== ========== c. Gross sales to major customers 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$0.04 million at December 31, 2002 and 2003, respectively, are located in Taiwan, ROC. - 29 - Chunghwa Telecom Co., Ltd. Financial Statements for the three months Ended March 31, 2004 and 2003 Together with Independent Accountants' Report Readers are advised that the original version of these financial statements is in Chinese. If there is any conflict between these financial statements and the Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail. English Translation of a Report Originally Issued in Chinese ------------------------------------------------------------ INDEPENDENT ACCOUNTANTS' REPORT April 19, 2004 The Board of Directors and Stockholders Chunghwa Telecom Co., Ltd. We have reviewed the accompanying balance sheets of Chunghwa Telecom Co., Ltd. as of March 31, 2004 and 2003, and the related statements of operations and cash flows for the three months then ended, all expressed in New Taiwan dollars. These financial statements are the responsibility of the Company's management. Our responsibility is to issue a report on these financial statements based on our review. Except for the matters described in the next paragraph, we conducted our reviews in accordance with Statement on of Auditing Standards No. 36 "Review of Financial Statements" issued by the Auditing Committee of the Accounting Research and Development Foundation of the Republic of China. A review consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in Republic of China, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. A stated in Note 8 to the financial statements, we did not review the financial statements of equity-accounted investments, the investments in which are reflected in the accompanying financial statements using the equity method of accounting. The aggregate carrying values of the equity-accounted investments were NT$1,424,068 thousand and NT$1,316,808 thousand as of March 31, 2004 and 2003 and the equity in their net gain (loss) were NT$4,586 thousand and NT$(100,093) thousand for the three months then ended. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the Republic of China. - 1 - As stated in Notes 2 and 3 to the financial statements, the Company's accounts are subject to examination by the Directorate General of Budget, Accounting and Statistics of the Executive Yuan and by the Ministry of Audit of the Control Yuan. The accounts as of and for the year ended December 31, 2002 have been examined by these government agencies, and adjustments from this examinations have been recognized in the accompanying financial statements. Notice to Readers ----------------- The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China. - 2 - English Translation of Financial Statements Originally Issued in Chinese ------------------------------------------------------------------------ CHUNGHWA TELECOM CO., LTD. BALANCE SHEETS (Amounts in New Taiwan Thousand Dollars, Except Par Value Data) --------------------------------------------------------------------------------
March 31 --------------------------------------------- 2004 2003 --------------------- --------------------- ASSETS Amount % Amount % ------------- ----- ------------- ----- CURRENT ASSETS Cash and cash equivalents (Notes 2 and 4) $ 28,548,794 6 $ 5,735,010 1 Trade notes and accounts receivable--net of allowance for doubtful accounts of $2,459,928 in 2004 and $1,708,830 in 2003 (Notes 2 and 5) 13,800,279 3 15,661,087 4 Other current monetary assets 1,659,265 1 2,232,335 1 Inventories--net (Notes 2 and 6) 1,379,435 -- 1,203,692 -- Deferred income taxes (Notes 2 and 16) 12,035,518 2 12,341,747 3 Other current assets (Note 7) 3,222,801 1 3,007,441 -- ------------- ----- ------------- ----- Total current assets 60,646,092 13 40,181,312 9 ------------- ----- ------------- ----- INVESTMENTS IN UNCONSOLIDATED COMPANIES AND FUNDS (Notes 2, 8 and 20) Funds 2,000,000 -- 2,000,000 -- Investments accounted for using the equity method 1,424,068 -- 1,316,808 -- Investments accounted for using the cost method 2,076,603 1 2,310,303 1 ------------- ----- ------------- ----- Investment in unconsolidated companies and funds 5,500,671 1 5,627,111 1 ------------- ----- ------------- ----- PROPERTY, PLANT AND EQUIPMENT (Notes 2, 9 and 19) Cost Land 101,826,282 22 101,643,362 22 Land improvements 1,435,114 -- 1,345,525 -- Buildings 53,921,070 12 52,169,774 12 Machinery and equipment 22,854,520 5 21,937,944 5 Telecommunications network facilities 615,185,913 131 607,349,027 132 Miscellaneous equipment 2,139,577 -- 2,121,880 1 ------------- ----- ------------- ----- Total cost 797,362,476 170 786,567,512 172 Revaluation increment on land 5,951,541 1 5,960,931 1 ------------- ----- ------------- ----- 803,314,017 171 792,528,443 173 Less: Accumulated depreciation 451,281,531 96 433,781,688 95 ------------- ----- ------------- ----- 352,032,486 75 358,746,755 78 Construction in progress and advances related to acquisitions of equipment 38,690,430 8 42,241,283 9 ------------- ----- ------------- ----- Property, plant and equipment--net 390,722,916 83 400,988,038 87 ------------- ----- ------------- ----- INTANGIBLE ASSETS (Note 2) 3G concession 10,179,000 2 10,179,000 2 Prepaid pension cost 950,809 -- -- -- Patents and computer software--net 241,255 -- 235,375 -- ------------- ----- ------------- ----- Total intangible assets 11,371,064 2 10,414,375 2 ------------- ----- ------------- ----- OTHER ASSETS Refundable deposits 1,040,143 1 744,771 1 Overdue receivables--net of allowance for losses of $4,434,032 in 2004 and $6,808,322 in 2003 (Notes 2 and 5) 851,111 -- 426,627 -- Deferred income taxes--non-current (Notes 2 and 16) 14,256 -- 20,695 -- Other 411,512 -- 592,543 -- ------------- ----- ------------- ----- Total other assets 2,317,022 1 1,784,636 1 ------------- ----- ------------- ----- TOTAL ASSETS $ 470,557,765 100 $ 458,995,472 100 ============= ===== ============= =====
The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche report dated April 19, 2004) --------------------------------------------------------------------------------
March 31 --------------------------------------------- 2004 2003 --------------------- --------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Amount % Amount % ------------- ----- ------------- ----- CURRENT LIABILITIES Short-term bank loans (Note 10) $ -- -- $ 3,000,000 1 Trade notes and accounts payable 11,506,670 3 9,749,997 2 Income tax payable (Notes 2 and 16) 7,531,525 2 8,747,538 2 Accrued expenses (Notes 11and 19) 11,394,816 2 11,699,353 3 Accrued pension liabilities (Notes 2 and 18) 4,124,082 1 2,426,259 -- Current portion of long-term loans (Note 13) 200,000 -- -- -- Other current liabilities (Notes 12 and 19) 18,129,580 4 11,343,063 2 ------------- ----- ------------- ----- Total current liabilities 52,886,673 12 46,966,210 10 ------------- ----- ------------- ----- LONG-TERM LIABILITIES Long-term loans (Note 13) 500,000 -- 700,000 -- Deferred income 382,723 -- 389,293 -- ------------- ----- ------------- ----- Total long-term liabilities 882,723 -- 1,089,293 -- ------------- ----- ------------- ----- RESERVE FOR LAND VALUE INCREMENTAL TAX (Note 9) 211,182 -- 211,182 -- ------------- ----- ------------- ----- OTHER LIABILITIES Customers' deposits 5,440,666 1 11,591,316 3 Other 190,506 -- 196,294 -- ------------- ----- ------------- ----- Total other liabilities 5,631,172 1 11,787,610 3 ------------- ----- ------------- ----- Total liabilities 59,611,750 13 60,054,295 13 ------------- ----- ------------- ----- STOCKHOLDERS' EQUITY (Notes 2, 9 and 14) Common capital stock--$10 par value; authorized, issued and outstanding--9,647,725 thousand shares 96,477,249 20 96,477,249 21 ------------- ----- ------------- ----- Capital surplus: Paid-in capital in excess of par value 214,538,597 46 214,546,263 47 Capital surplus from revaluation of land 5,740,358 1 5,749,909 1 Donations 13,170 -- 13,170 -- ------------- ----- ------------- ----- Total capital surplus 220,292,125 47 220,309,342 48 ------------- ----- ------------- ----- Retained earnings: Legal reserve 29,436,072 6 25,105,829 5 Special reserve 2,675,419 1 2,675,419 1 Unappropriated earnings 62,065,672 13 54,373,038 12 ------------- ----- ------------- ----- Total retained earnings 94,177,163 20 82,154,286 18 ------------- ----- ------------- ----- Other adjustment Cumulative translation adjustments ( 522) -- 300 -- ------------- ----- ------------- ----- Total stockholders' equity 410,946,015 87 398,941,177 87 ------------- ----- ------------- ----- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 470,557,765 100 $ 458,995,472 100 ============= ===== ============= =====
English Translation of Financial Statements Originally Issued in Chinese ------------------------------------------------------------------------ CHUNGHWA TELECOM CO., LTD. STATEMENTS OF OPERATIONS (Amounts in New Taiwan Thousand Dollars, Except Earnings Per Share Data) --------------------------------------------------------------------------------
Three Months Ended March 31 --------------------------------------------- 2004 2003 --------------------- --------------------- Amount % Amount % ------------- ----- ------------- ----- SERVICE REVENUES $ 44,988,681 100 $ 43,181,362 100 COSTS OF SERVICES (Note 19) 22,364,867 49 22,224,287 51 ------------- ----- ------------- ----- GROSS PROFIT 22,623,814 51 20,957,075 49 ------------- ----- ------------- ----- OPERATING EXPENSES Marketing 5,712,491 13 5,883,094 13 General and administrative 698,047 1 754,793 2 Research and development 742,861 2 721,723 2 ------------- ----- ------------- ----- Total operating expenses 7,153,399 16 7,359,610 17 ------------- ----- ------------- ----- INCOME FROM OPERATIONS 15,470,415 35 13,597,465 32 ------------- ----- ------------- ----- OTHER INCOME Penalties income 217,170 1 335,009 1 Income from sale of scrap 146,637 -- 25,431 -- Foreign exchange gain--net 52,930 -- -- -- Interest 33,084 -- 18,492 -- Dividends income 28,434 -- 122,082 -- Equity in net gain of unconsolidated companies 4,586 -- -- -- Other income 130,712 -- 114,505 -- ------------- ----- ------------- ----- Total other income 613,553 1 615,519 1 ------------- ----- ------------- ----- OTHER EXPENSES Losses on disposal of property, plant and equipment 11,639 -- 36,776 -- Interest 114 -- 10,229 -- Equity in net loss of unconsolidated companies -- -- 100,093 -- Foreign exchange loss--net -- -- 10,793 -- Other expense 515,808 1 441,467 1 ------------- ----- ------------- ----- Total other expenses 527,561 1 599,358 1 ------------- ----- ------------- ----- INCOME BEFORE INCOME TAX 15,556,407 35 13,613,626 32 INCOME TAX (Notes 2 and 16) 2,649,517 6 2,810,405 7 ------------- ----- ------------- ----- NET INCOME $ 12,906,890 29 $ 10,803,221 25 ============= ===== ============= =====
(Continued) - 4 - English Translation of Financial Statements Originally Issued in Chinese ------------------------------------------------------------------------ Three Months Ended March 31 ----------------------------------- 2004 2003 ---------------- ---------------- Income Income Before Before Income Income Tax Net Tax Net Expense Income Expense Income ------- ------ ------- ------ EARNINGS PER SHARE Basic net income per share (Notes 2 and 17) $ 1.61 $ 1.34 $ 1.41 $ 1.12 ======= ====== ======= ====== The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche report dated April 19, 2004) (Concluded) - 5 - CHUNGHWA TELECOM CO., LTD. STATEMENTS OF CASH FLOWS (Amounts in New Taiwan Thousand Dollars) --------------------------------------------------------------------------------
Three Months Ended March 31 --------------------------- 2004 2003 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 12,906,890 $ 10,803,221 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts 470,552 1,248,984 Depreciation and amortization 10,304,291 10,618,129 Reversal of allowance for losses on inventories ( 1,297) ( 9,227) Net loss on disposal of property, plant and equipment 11,639 36,776 Equity in net loss (gain) of unconsolidated companies ( 4,586) 100,093 Deferred income taxes 35,172 109,840 Accrued pension liabilities ( 8,012) 120,588 Changes in operating assets and liabilities: Decrease (increase) in: Trade notes and accounts receivable 67,679 ( 119,748) Other current monetary assets ( 28,479) ( 383,744) Inventories ( 800,382) ( 1,684,551) Other current assets ( 2,690,567) ( 2,444,931) Overdue receivables ( 181,425) 251,690 Increase (decrease) in: Trade notes and accounts payable 435,777 186,346 Income tax payable 2,607,759 2,696,465 Accrued expenses ( 2,783,129) ( 2,104,940) Other current liabilities ( 461,282) 412,985 Deferred income ( 36,314) ( 3,889) ------------ ------------ Net cash provided by operating activities 19,844,286 19,834,087 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property, plant and equipment ( 5,108,250) ( 7,357,184) Proceeds from disposal of property, plant and equipment 780 213 Decrease (increase) of intangible assets 979,638 ( 54,065) ------------ ------------ Net cash used in investing activities ( 4,127,832) ( 7,411,036) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term bank loans -- 3,000,000 Payment on principal of long-term loans -- ( 17,000,000) Decrease in customers' deposits ( 668,080) ( 383,204) Increase (decrease) in other liabilities ( 52,609) 43,003 ------------ ------------ Net cash provided used in financing activities ( 720,689) ( 14,340,201) ------------ ------------
(Continued) - 6 - Three Months Ended March 31 --------------------------- 2004 2003 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 14,995,765 ($ 1,917,150) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,553,029 7,652,160 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,548,794 $ 5,735,010 ============ ============ SUPPLEMENTAL INFORMATION Interest paid $ 114 $ 42,377 Less: Capitalized interest -- 32,148 ------------ ------------ Interest paid, excluding capitalized interest $ 114 $ 10,229 ============ ============ Income tax paid $ 6,585 $ 4,100 ============ ============ NON-CASH FINANCING ACTIVITIES Current portion of long-term loans $ 200,000 $ -- ============ ============ The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche report dated April 19, 2004) (Concluded) - 7 - Chunghwa Telecom Co., Ltd. Financial Statements as of December 31, 2003 and March 31, 2004 (Unaudited) and for Three Months Ended March 31, 2003 and 2004 (Unaudited) CHUNGHWA TELECOM CO., LTD. BALANCE SHEETS (Amounts in Millions, Except Shares and Par Value Data) --------------------------------------------------------------------------------
March 31 December 31, --------------------------- ASSETS Notes 2003 2004 2004 ----- ------------ ------------ ------------ NT$ NT$ US$ (Unaudited) (Unaudited) (Note 3) CURRENT ASSETS Cash and cash equivalents 9 $ 13,553 $ 28,549 $ 865 Trade notes and accounts receivable--net 14,813 14,489 439 Inventories--net 1,220 1,380 42 Prepaid expenses 494 3,144 95 Deferred income taxes 16,983 17,036 516 Other current assets 1,703 1,738 53 ------------ ------------ ------------ Total current assets 48,766 66,336 2,010 ------------ ------------ ------------ INVESTMENTS IN UNCONSOLIDATED COMPANIES 4,9 3,496 3,501 106 ------------ ------------ ------------ PROPERTY, PLANT AND EQUIPMENT--Net 329,678 322,556 9,775 ------------ ------------ ------------ INTANGIBLE ASSETS Deferred pension cost 6 29,940 29,940 907 3G concession 10,179 10,179 309 Patents and computer software--net 251 241 7 ------------ ------------ ------------ Total intangible assets 40,370 40,360 1,223 ------------ ------------ ------------ OTHER ASSETS Deferred income taxes--non-current 2,901 2,785 84 Other 9 4,484 3,452 105 ------------ ------------ ------------ Total other assets 7,385 6,237 189 ------------ ------------ ------------ TOTAL ASSETS $ 429,695 $ 438,990 $ 13,303 ============ ============ ============
The accompanying notes are an integral part of the financial statements. --------------------------------------------------------------------------------
March 31 December 31, --------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Notes 2003 2004 2004 ----- ------------ ------------ ------------ NT$ NT$ US$ (Unaudited) (Unaudited) (Note 3) CURRENT LIABILITIES Trade notes and accounts payable $ 11,713 $ 11,507 $ 349 Income tax payable 4,923 7,531 228 Accrued expenses 14,206 11,421 346 Accrued pension liabilities 42,199 42,730 1,295 Current portion of deferred income 3,186 3,021 91 Current portion of long-term loans -- 200 6 Customers' deposits 9 10,957 10,288 312 Other current liabilities 2 19,203 16,636 504 ------------ ------------ ------------ Total current liabilities 106,387 103,334 3,131 ------------ ------------ ------------ OTHER LIABILITIES Deferred income--net of current portion 11,610 11,111 337 Long-term loans 9 700 500 15 Other 243 190 6 ------------ ------------ ------------ Total other liabilities 12,553 11,801 358 ------------ ------------ ------------ Total liabilities 118,940 115,135 3,489 ------------ ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES 7 STOCKHOLDERS' EQUITY 5 Capital stock--NT$10 (US$0.29) par value; authorized, issued and outstanding--9,647,724,900 common shares 96,477 96,477 2,924 Capital surplus 135,873 136,042 4,122 Retained earnings 78,405 91,336 2,768 ------------ ------------ ------------ Total stockholders' equity 310,755 323,855 9,814 ------------ ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 429,695 $ 438,990 $ 13,303 ============ ============ ============
1 CHUNGHWA TELECOM CO., LTD. STATEMENTS OF OPERATIONS (Amounts in Millions, Except Shares and Per Share and Per ADS Data) --------------------------------------------------------------------------------
Three Months Ended March 31 ------------------------------------------------ Notes 2003 2004 2004 ----- -------------- -------------- -------------- NT$ NT$ US$ (Unaudited) (Unaudited) (Unaudited) (Note 3) SERVICE REVENUES $ 44,222 $ 45,628 $ 1,383 -------------- -------------- -------------- OPERATING COSTS AND EXPENSES Costs of services, excluding depreciation and amortization 2 14,220 14,491 439 Marketing, excluding depreciation and amortization 2 5,061 4,607 140 General and administrative, excluding depreciation and amortization 2 748 691 21 Research and development, excluding depreciation and amortization 2 603 598 18 Depreciation and amortization--cost of services 9,865 9,612 291 Depreciation and amortization --operating expense 650 591 18 -------------- -------------- -------------- Total operating costs and expenses 31,147 30,590 927 -------------- -------------- -------------- INCOME FROM OPERATIONS 13,075 15,038 456 -------------- -------------- -------------- OTHER INCOME Interest 18 33 1 Equity in net income of unconsolidated companies 4 -- 5 -- Other income 588 578 17 -------------- -------------- -------------- Total other income 606 616 18 -------------- -------------- -------------- OTHER EXPENSES Interest 10 -- -- Equity in net loss of unconsolidated companies 4 100 -- -- Other expense 47 47 1 -------------- -------------- -------------- Total other expenses 157 47 1 -------------- -------------- -------------- INCOME BEFORE INCOME TAX 13,524 15,607 473 INCOME TAX 2,858 2,676 81 -------------- -------------- -------------- NET INCOME $ 10,666 $ 12,931 $ 392 ============== ============== ============== NET INCOME PER SHARE $ 1.11 $ 1.34 $ 0.04 ============== ============== ============== WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 9,647,724,900 9,647,724,900 9,647,724,900 ============== ============== ============== NET INCOME PER PRO FORMA EQUIVALENT ADS $ 11.06 $ 13.40 $ 0.41 ============== ============== ============== WEIGHTED-AVERAGE NUMBER OF PRO FORMA EQUIVALENT ADSs OUTSTANDING 964,772,490 964,772,490 964,772,490 ============== ============== ==============
The accompanying notes are an integral part of the financial statements. - 2 - CHUNGHWA TELECOM CO., LTD. STATEMENTS OF CASH FLOWS (Amounts in Millions) --------------------------------------------------------------------------------
Three Months Ended March 31 ------------------------------------------ 2003 2004 2004 ------------ ------------ ------------ NT$ NT$ US$ (Unaudited) (Unaudited) (Unaudited) (Note 3) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 10,666 $ 12,931 $ 392 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts 1,245 471 14 Depreciation and amortization 10,515 10,203 309 Net loss on disposal of scrap inventories and property, plant and equipment 33 8 -- Equity in net loss (net income) of unconsolidated companies 100 ( 5) -- Stock compensation expenses for shares issued to employee at a discount 410 162 5 Deferred income taxes 157 63 2 Changes in operating assets and liabilities: Decrease (increase) in: Trade notes and accounts receivable ( 59) ( 113) ( 3) Inventories ( 1,156) ( 802) ( 24) Prepaid expenses ( 2,467) ( 2,650) ( 80) Other current assets ( 359) ( 69) ( 2) Other assets ( 24) 1,010 30 Increase (decrease) in: Trade notes and accounts payable ( 351) 436 13 Income tax payable 2,697 2,608 79 Accrued expenses ( 1,979) ( 2,785) ( 84) Customers' deposits ( 384) ( 669) ( 20) Other current liabilities 267 ( 486) ( 15) Accrued pension liabilities 977 531 16 Deferred income ( 838) ( 664) ( 20) Other liabilities 43 ( 53) ( 2) ------------ ------------ ------------ Net cash provided by operating activities 19,493 20,127 610 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property, plant and equipment ( 7,357) ( 5,108) ( 155) Proceeds from disposal of property, plant and equipment -- 1 -- Acquisitions of patents and computer software ( 57) ( 31) ( 1) ------------ ------------ ------------ Net cash used in investing activities ( 7,414) ( 5,138) ( 156) ------------ ------------ ------------
(Continued) - 3 -
Three Months Ended March 31 ------------------------------------------ 2003 2004 2004 ------------ ------------ ------------ NT$ NT$ US$ (Unaudited) (Unaudited) (Unaudited) (Note 3) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term loans--net $ 3,000 $ -- $ -- Payments on principal of long-term loans ( 17,000) -- -- Additional capital contributed by government 4 7 -- ------------ ------------ ------------ Net cash used in financing activities ( 13,996) 7 -- ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 1,917) 14,996 454 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,652 13,553 411 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,735 $ 28,549 $ 865 ============ ============ ============ SUPPLEMENTAL INFORMATION Interest paid $ 42 $ -- $ -- ============ ============ ============ Income tax paid $ 4 $ 7 $ -- ============ ============ ============
The accompanying notes are an integral part of the financial statements. (Concluded) - 4 - 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 sold to its employees in October 2000, October 2001, November 2002, February 2003, April 2003, June 2003, July 2003 and December 2003. In July, 2003 the MOTC sold the Company's common shares in an international offering of securities in the form of American Depository Shares ("ADS"). The MOTC intends to continue to sell the Company's common shares in the ROC and throughout the process of privatization to the Company's employees. As of April 19, 2004 the MOTC owns 64.94% shares of the Company. The Company's common shares were listed and traded on the Taiwan Stock Exchange and the New York Stock Exchange on October 27, 2000 and on July 17, 2003, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The financial statements has been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments necessary for a fair statement of the results of operations, financial position and cash flows for each period presented. The results for interim periods are not necessarily indicative of results for the full year. 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. - 5 - Derivative Financial Instruments The Company enters into forward contracts to reduce its exposure to foreign currency risk and variability in operating results due to fluctuations in exchange rates underlying the value of liabilities denominated in foreign currencies until such liabilities are paid. A forward contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates. These foreign currency forward exchange contracts are denominated in the same currency in which the underlying foreign currency liabilities are denominated and bear a contract value and maturity date that approximate the value and expected settlement date, respectively, of the underlying transactions. For contracts that are designated and effective as hedges, unrealized gains and losses on open contracts at the end of each accounting period, resulting from changes in the fair value of these contracts, are recognized in earnings in the same period as gains and losses on the underlying foreign denominated receivables are recognized and generally offset. Gains and losses on forward contracts and foreign denominated liabilities are included in other income (expense), net. The Company does not enter into or hold derivatives for trading or speculative purposes and only enters into contracts with highly rated financial institutions Derivatives are recognized at fair value and included in either other current liabilities or other current assets on the balance sheet. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("FASB") released Interpretation No. 46 Consolidation of Variable Interest Entities ("FIN 46") which requires that all primary beneficiaries of Variable Interest Entities (VIE) consolidate that entity. FIN 46 is effective immediately for VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to VIEs in which an enterprise holds a variable interest it acquired before February 1, 2003. In December 2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify some of the provisions of the interpretation and to defer the effective date of implementation for certain entities. Under the guidance of FIN 46R, entities that do not have interests in structures that are commonly referred to as special purpose entities (SPE's) are required to apply the provisions of the interpretation in financials statements for periods ending after March 14, 2004. The Company does not have interests in special purpose entities and will apply the provisions of FIN 46R with its first quarter 2004 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 March 31, 2004, which was NT$33.00 to US$1.00. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange. - 6 - 4. INVESTMENTS IN UNCONSOLIDATED COMPANIES The investments in unconsolidated companies comprise the following:
December 31, 2003 March 31, 2004 --------------------------- --------------------------- Carrying % of Carrying % of Value Ownership Value OwnerShip ------------ ------------ ------------ ------------ NT$ NT$ (Unaudited) Equity investees: Chunghwa Investment ("CHI") $ 987 49 $ 986 49 Taiwan International Standard Electronics ("TISE") 433 40 439 40 ------------ ------------ 1,420 1,425 ------------ ------------ Cost investees: Taipei Financial Center ("TFC") 2,000 12 2,000 12 RPTI International ("RPTI") 71 12 71 12 Siemens Telecommunication Systems ("Siemens") 5 15 5 15 ------------ ------------ 2,076 2,076 ------------ ------------ $ 3,496 $ 3,501 ============ ============
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 ended March 31, 2003 and 2004, respectively. CHI invests in companies engaged in telecom and software businesses. No dividends were declared by CHI for the three months ended March 31, 2003 and 2002, respectively. The investments in TFC, RPTI and Siemens have no quoted market values and are carried at their original costs which approximates fair value. 5. STOCKHOLDERS' EQUITY Under the Company's Articles of Incorporation, authorized capital is 9,647,724,900 common shares. The 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. For the purpose of privatizing the company, the MOTC sold 1,109,750 common shares of the Company in an international offering of securities in the form of American Depositary Shares (ADS) amounting to 110,975 thousand units (one ADS represents ten common shares) on the New York Stock Exchange in July 17, 2003. The ADS holders generally have the same rights and obligations as other common shareholders, subject to the provision of relevant laws. The exercise of such rights and obligations shall comply with the related regulations and deposit agreement, which stipulate, among other things, that ADS holders can, through deposit agents; exercise their voting rights, sell their ADSs, and receive dividends declared and subscribe to the issuance of new shares. - 7 - As of December 31, 2003 and March 31, 2004, a portion of the outstanding ADSs were revoked in exchange for approximately 120,160 thousand common shares and 500 thousand common shares of the Company, which represented 1.25% and 0.01% of the Company's total outstanding common shares, respectively. Therefore, the outstanding ADSs were 98,914 thousand units and 110,925 thousand units, which equaled approximately 989,140 thousand common shares and 1,109,250 thousand common shares, and represented 10.25% and 11.50% of the Company's total outstanding common shares, respectively. 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, 2003 and March 31, 2004, the amount of retained earnings available for dividends were NT$49,159 million and NT$62,066 million (unaudited) respectively and were based on earnings as determined using ROC government regulations. In addition, before distributing a dividend or making any other distribution to stockholders, the 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. 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. 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 appropriations and distributions of the 2003 earnings of the Company have been approved by the board of directors on April 15, 2004 as follows, and are pending for the approval of stockholders: Amount ------------ Special reserve $ -- Legal reserve 4,849 Dividends--$4.5 per share 43,415 ------------ $ 48,264 ============ The appropriation and distributions of the 2002 earning of the Company have been approved and resolved by the stockholders, for 10% legal reserve of $4,331 and cash dividends of $38,591 ($4 per share). The MOTC, in connection with the privatization plan of the Company, sold shares of stock at discounted prices, to employees at various times from October 2000 to October 31, 2003. 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$410 million (unaudited) for the shares purchased by employees that were subject to a discount for the three months ended March 31, 2003. - 8 - The MOTC, in connection with the compensation of the employees, sold to employees 3,286,907 shares from February 27, 2004 to March 9, 2004 for NT$33 million. 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. The Company has recognized NT$162 million (unaudited) as compensation expense for the three months ended March 31, 2004 for the shares purchased by employees that were subject to par value. 6. PENSION PLAN Pension costs amounted to NT$1,034 million (unaudited) and NT$1,111 million (unaudited) for the three months ended March 31, 2003 and 2004, respectively. The Company's contributions to the retirement plan were NT$57 million (unaudited) and NT$581 million (unaudited) for the three months ended March 31, 2003 and 2004, respectively. 7. COMMITMENTS AND CONTINGENT LIABILITIES As of March 31, 2004, the Company has remaining commitments under non-cancelable contracts with various parties as follows: (a) acquisitions of land and buildings of NT$3,662 million (unaudited), and (b) acquisitions of telecommunications equipment of NT$9,079 million (unaudited). The Company also has non-cancellable operating leases covering certain buildings, computers, computer peripheral equipment and operating system software under contracts that expire in various years through 2006. Minimum rental commitments under those leases are as follows: March 31, 2004 ------------ NT$ (Unaudited) Within the following year $ 802 During the second year 830 During the third year 631 During the fourth year 361 During the fifth year and thereafter 185 ------------ $ 2,809 ============ As of March 31, 2004, the Company had unused letters of credit of NT$9,957 million (unaudited). A commitment to contribute NT$2,500 million to a Fixed Line Fund administered by the Ministry of Interior Affairs and Taiwan Power Company, of which NT$1,000 million has been contributed by the Company on June 30, 1995. If the balance of the Fixed Line Fund is not sufficient for its purpose, the above three parties will determine when to raise additional funds and the contribution amounts from each party. A commitment to contribute NT$2,000 million to a Piping Fund administered by the Taipei City Government, of which NT$1,000 million was contributed by the Company on August 15, 1996. - 9 - 8. 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. 9. INFORMATION ON FINANCIAL INSTRUMENTS a. The derivative financial instruments The Company enters into forward contracts to reduce its exposure to foreign currency risk and variability in operating results due to fluctuations in exchange rates underlying the value of liabilities denominated in foreign currencies until such liabilities are paid. The outstanding foreign currency forward exchange contracts as of March 31, 2004 cosisted of $17 millions in Euros with a fair market value of (NT$20 millions) with maturity dates ranging from April 29, 2004 to June 14, 2004. Net unrealized exchange loss for the three months ended March 31, 2004 was of $22,041 thousand. b. The non-derivative financial instruments are as follows:
December 31, 2003 March 31, 2004 --------------------------- --------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------ NT$ NT$ NT$ NT$ (Unaudited) (Unaudited) Assets Cash and cash equivalents $ 13,553 $ 13,553 $ 28,549 $ 28,549 Investments in unconsolidated companies, accounted for using the equity method 1,420 1,857 1,425 1,840 Refundable deposits (included in "other assets--other") 4,018 4,018 3,040 3,040 Liabilities Current portion of long-term loans -- -- 200 200 Customers' deposits 10,957 9,337 10,288 8,706 Long-term loans 700 700 500 500
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: 1) Cash and cash equivalents, commercial paper issued, and short-term bank loans notes. The carrying amounts approximate fair values because of the short maturity of those instruments. 2) 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 if quoted market prices are not available. 3) Refundable deposits. The carrying amounts approximate fair values as he average lease term associated with these deposits is approximately one year. 4) 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. - 10 - 5) Long-term loans (including current portion of long-term loans). The fair value is the discounted value based on projected cash flows. The projected cash flows were discounted using the maturity dates of long-term loans. 10. SEGMENT REPORTING Operating segments are defined as components of an enterprise regarding 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: . Local operations--the provision of local telephone services; . DLD operations--the provision of domestic long distance call services; . ILD operations--the provision of international long distance call services; . Cellular operations--the provision of cellular and related services; . Paging operation--the provision of paging and related services; . Internet and data operation--the provision of Internet access, lease line, and related services; . 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 because 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 March 31, 2003 (unaudited) ---------------------------------------------------------------
Fixed-Line -------------------------------------- Cellular Local DLD ILD Service ---------- ---------- ---------- ---------- NT$ NT$ NT$ NT$ Service revenues for reportable segments $ 15,501 $ 3,924 $ 3,818 $ 16,015 Elimination of intersegment amount ( 4,161) ( 668) -- ( 244) US GAAP adjustments 625 25 29 190 ---------- ---------- ---------- ---------- Total service revenues from external customers $ 11,965 $ 3,281 $ 3,847 $ 15,961 ========== ========== ========== ========== Internet Paging and Data All Other Total ---------- ---------- ---------- ---------- NT$ NT$ NT$ NT$ Service revenues for reportable segments $ 186 $ 10,506 $ 430 $ 50,380 Elimination of intersegment amount ( 1) ( 1,950) -- ( 7,024) US GAAP adjustments -- 3 ( 6) 866 ---------- ---------- ---------- ---------- Total service revenues from external customers $ 185 $ 8,559 $ 424 $ 44,222 ========== ========== ========== ==========
(Continued) - 11 -
Fixed-Line -------------------------------------- Cellular Local DLD ILD Service ---------- ---------- ---------- ---------- NT$ NT$ NT$ NT$ Operating costs and expenses, excluding depreciation and amortization $ 7,832 $ 1,679 $ 2,636 $ 8,300 Elimination of intersegment amount ( 847) ( 1,234) ( 658) ( 3,218) US GAAP adjustments 969 30 47 127 ---------- ---------- ---------- ---------- $ 7,954 $ 475 $ 2,025 $ 5,209 ========== ========== ========== ========== Unallocated corporate amount Total operating costs and expenses, excluding depreciation and amortization Depreciation and amortization $ 5,857 $ 388 $ 101 $ 1,397 US GAAP adjustments ( 65) ( 5) ( 2) ( 13) ---------- ---------- ---------- ---------- $ 5,792 $ 383 $ 99 $ 1,384 ========== ========== ========== ========== Unallocated corporate amount Total depreciation and amortization Income from operations $ 1,812 $ 1,857 $ 1,081 $ 6,318 Elimination of intersegment amount ( 3,314) 566 658 2,974 US GAAP adjustments ( 279) -- ( 16) 76 ---------- ---------- ---------- ---------- ($ 1,781) $ 2,423 $ 1,723 $ 9,368 ========== ========== ========== ========== Unallocated corporate amount Total income from operations Segment income before income tax $ 1,734 $ 1,875 $ 1,071 $ 6,379 Elimination of intersegment amount ( 3,314) 566 658 2,974 US GAAP adjustments ( 27) 7 ( 4) 107 ---------- ---------- ---------- ---------- ($ 1,607) $ 2,448 $ 1,725 $ 9,460 ========== ========== ========== ========== Unallocated corporate amount Total segment income before income tax Internet Paging and Data All Other Total ---------- ---------- ---------- ---------- NT$ NT$ NT$ NT$ Operating costs and expenses, excluding depreciation and amortization $ 141 $ 4,262 $ 319 $ 25,169 Elimination of intersegment amount ( 22) ( 1,001) ( 44) ( 7,024) US GAAP adjustments 4 294 134 1,605 ---------- ---------- ---------- ---------- $ 123 $ 3,555 $ 409 19,750 ========== ========== ========== Unallocated corporate amount 882 ---------- Total operating costs and expenses, excluding depreciation and amortization $ 20,632 ========== Depreciation and amortization $ 78 $ 2,471 $ 283 $ 10,575 US GAAP adjustments ( 1) ( 17) -- ( 103) ---------- ---------- ---------- ---------- $ 77 $ 2,454 $ 283 10,472 ========== ========== ========== Unallocated corporate amount 43 ---------- Total depreciation and amortization $ 10,515 ========== Income from operations ($ 33) $ 3,773 ($ 172) $ 14,636 Elimination of intersegment amount 21 ( 949) 44 -- US GAAP adjustments ( 3) ( 274) ( 140) ( 636) ---------- ---------- ---------- ---------- ($ 15) $ 2,550 ($ 268) 14,000 ========== ========== ========== Unallocated corporate amount ( 925) ---------- Total income from operations $ 13,075 ========== Segment income before income tax ($ 34) $ 3,813 ($ 186) $ 14,652 Elimination of intersegment amount 21 ( 949) 44 -- US GAAP adjustments ( 2) ( 193) ( 106) ( 218) ---------- ---------- ---------- ---------- ($ 15) $ 2,671 ($ 248) 14,434 ========== ========== ========== Unallocated corporate amount ( 910) ---------- Total segment income before income tax $ 13,524 ==========
As of and for the three months ended March 31, 2004 (unaudited) ---------------------------------------------------------------
Fixed-Line -------------------------------------- Cellular Local DLD ILD Service ---------- ---------- ---------- ---------- NT$ NT$ NT$ NT$ Service revenues for reportable segments $ 14,739 $ 3,598 $ 3,693 $ 17,498 Elimination of intersegment amount ( 4,009) ( 624) -- ( 238) US GAAP adjustments 408 2 2 60 ---------- ---------- ---------- ---------- Total service revenues from external customers $ 11,138 $ 2,976 $ 3,695 $ 17,320 ========== ========== ========== ========== Operating costs and expenses, excluding depreciation and amortization $ 7,708 $ 1,375 $ 2,609 $ 8,141 Elimination of intersegment amount ( 886) ( 1,027) ( 695) ( 3,348) US GAAP adjustments 627 19 31 97 ---------- ---------- ---------- ---------- $ 7,449 $ 367 $ 1,945 $ 4,890 ========== ========== ========== ========== Unallocated corporate amount Total operating costs and expenses, excluding depreciation and amortization Depreciation and amortization $ 5,007 $ 228 $ 156 $ 1,321 US GAAP adjustments ( 57) ( 3) ( 2) ( 13) ---------- ---------- ---------- ---------- $ 4,950 $ 225 $ 154 $ 1,308 ========== ========== ========== ========== Unallocated corporate amount Total depreciation and amortization Income from operations $ 2,024 $ 1,995 $ 928 $ 8,036 Elimination of intersegment amount ( 3,123) 403 695 3,110 US GAAP adjustments ( 162) ( 14) ( 27) ( 24) ---------- ---------- ---------- ---------- ($ 1,261) $ 2,384 $ 1,596 $ 11,122 ========== ========== ========== ========== Unallocated corporate amount Total income from operations Segment income before income tax $ 1,954 $ 2,035 $ 983 $ 8,072 Elimination of intersegment amount ( 3,123) 403 695 3,110 US GAAP adjustments 93 ( 7) ( 14) 20 ---------- ---------- ---------- ---------- ($ 1,076) $ 2,431 $ 1,664 $ 11,202 ========== ========== ========== ========== Unallocated corporate amount Total segment income before income tax Internet Paging and Data All Other Total ---------- ---------- ---------- ---------- NT$ NT$ NT$ NT$ Service revenues for reportable segments $ 89 $ 12,264 $ 599 $ 52,480 Elimination of intersegment amount -- ( 2,446) -- ( 7,317) US GAAP adjustments -- -- ( 7) 465 ---------- ---------- ---------- ---------- Total service revenues from external customers $ 89 $ 9,818 $ 592 $ 45,628 ========== ========== ========== ========== Operating costs and expenses, excluding depreciation and amortization $ 85 $ 5,293 $ 906 $ 26,117 Elimination of intersegment amount ( 17) ( 1,278) ( 66) ( 7,317) US GAAP adjustments 2 275 81 1,132 ---------- ---------- ---------- ---------- $ 70 $ 4,290 $ 921 19,932 ========== ========== ========== Unallocated corporate amount 455 ---------- Total operating costs and expenses, excluding depreciation and amortization $ 20,387 ========== Depreciation and amortization $ 77 $ 3,157 $ 333 $ 10,279 US GAAP adjustments ( 1) ( 25) -- ( 101) ---------- ---------- ---------- ---------- $ 76 $ 3,132 $ 333 10,178 ========== ========== ========== Unallocated corporate amount 25 ---------- Total depreciation and amortization $ 10,203 ========== Income from operations ($ 73) $ 3,814 ($ 640) $ 16,084 Elimination of intersegment amount 17 ( 1,168) 66 -- US GAAP adjustments ( 1) ( 250) ( 88) ( 566) ---------- ---------- ---------- ---------- $ 57) $ 2,396 ($ 662) 15,518 ========== ========== ========== Unallocated corporate amount ( 480) ---------- Total income from operations $ 15,038 ========== Segment income before income tax ($ 74) $ 3,846 ($ 658) $ 16,158 Elimination of intersegment amount 17 ( 1,168) 66 -- US GAAP adjustments -- ( 134) ( 57) ( 99) ---------- ---------- ---------- ---------- ($ 57) $ 2,544 ($ 649) 16,059 ========== ========== ========== Unallocated corporate amount ( 452) ---------- Total segment income before income tax $ 15,607 ==========
- 12 - b. Geographic information The users of the Company's services are mainly from Taiwan, ROC. The revenues it derived outside Taiwan are mainly inter-connection fees from other telecommunication carriers. The geographic information for revenues is as follows: Three Months Ended March 31 ------------------------- 2003 2004 ----------- ----------- NT$ NT$ (Unaudited) (Unaudited) Taiwan, ROC $ 42,822 $ 44,238 Overseas 1,400 1,390 ----------- ----------- Total $ 44,222 $ 45,628 =========== =========== c. Gross sales to major customers 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$0.04 million and NT$0.03 million (unaudited) at December 31, 2003 and March 31, 2004, respectively, are located in Taiwan, ROC. - 13 - [Logo of Chunghwa Telecom] Chunghwa Telecom Reports Operating Results for the Calendar Year 2003 and the First Quarter of 2004 Taipei, Taiwan, R.O.C. April 27, 2004 - Chunghwa Telecom Co., Ltd (TAIEX: 2412, NYSE: CHT) ("Chunghwa" or "the Company"), today reported revenues for the year ending December 31, 2003 of NT$182.5 billion, net income of NT$47.3 billion and fully-diluted earnings per common share (EPS) of NT$4.90, or US$1.44 per ADS. The Company also reported earnings results for the first quarter of 2004 with revenues of NT$45.6 billion, net income of NT$12.9 billion and earnings per share (EPS) of NT$1.34, or US$0.41 per ADS. All figures were prepared in accordance with US GAAP. Revenues and Costs Total revenue for 2003 was NT$182.5bn, a 1.7% increase YoY. Of this, 42.5% was from fixed-line services, 36.6% was from wireless services and 19.5% was from Internet and data services, with the remainder from others. Revenue from the Company's wireless, and Internet and data services grew by 4.4% and 14%, respectively. International and domestic long distance revenue declined slightly by 0.2% and 4.1%, respectively, due to traffic migration and fixed line competition. Local call revenue declined by 6.5% YoY, mostly due to the mobile substitution effect and the migration to broadband from dial-up Internet access. Total operating costs and expenses for 2003 increased by 2.3% YoY. This was primarily due to the increase in personnel expenses resulting from discount provided for employee stock subscription. The Company will continue to implement stringent cost control. Total revenue for first quarter of 2004 was NT$45.6bn, a 3.2% increase YoY. Of this, 39.0% was from fixed-line services, 38.2% was from wireless services and 21.5% was from Internet and data services, with the remainder from others. We have continued to shift our revenue mix towards growing businesses including Internet and data and cellular services. As compared to the first quarter of 2003, fixed-line revenue decreased by 6.7%, and wireless, and Internet and data revenue continued to grow by 7.8% and 14.7% respectively. Total operating costs and expenses for first quarter of 2004 were NT$30.6bn, a 1.8% decrease YoY. This was mainly due to decrease in bad debt provision and depreciation and amortization expenses. Businesses Performance Highlights Internet and Data Services . Internet and data revenue for 2003 increased by 14.0% YoY to approximately NT$35.6bn. Revenue in the first quarter of 2004 was NT$9.8bn, a 14.7% increase YoY. . Total Internet subscribers number was over 3.55mn as of Dec. 31, 2003, a 7% increase YoY. In the first quarter of 2004, we had 3.63mn subscribers contributed by 75,000 net addition at the end of March. . ADSL subscribers totaled 2.43mn as of Dec. 31, 2003, a 44% increase YoY. We had continued our ADSL subscriber growth and had 2.59mn subscribers as of the end of March. Wireless Services . Total wireless revenues for 2003 increased by 4.4% YoY to NT$66.8bn. For the first quarter of 2004, wireless revenues grew by 7.8% YoY to NT$17.4bn. . At the end of 2003, mobile subscribers reached 8.27mn, a 11.4% YoY increase. At the end of March 2004, we had 8.08mn mobile subscribers. Chunghwa continued to be #1 in both revenue and subscribers Chunghwa continues to be the leading wireless provider in Taiwan in both revenue and subscriber market share with 36% and 33% respectively as of the end of February. Fixed Line Services . Total fixed line revenues declined by 4.9% to NT$77.5bn mainly due to fixed line competition, mobile substitution effect and continuous migration of dial-up subscribers to ADSL broadband services. Fixed-line revenue for the first quarter of 2004 was NT$17.8bn, a decrease of 6.7% YoY. . Chunghwa's total fixed line subscriber base stood at approximately 13.14mn as of Dec. 31, 2003, and increase of 1.2% YoY. As at the end of March 2004, the number of fixed line subscribers totaled 13.18mn. Financial Statements Financial statements and additional operational data can be found on our website at www.cht.com.tw/ir/filedownload. ------------------------------ About Chunghwa Telecom Chunghwa Telecom (TAIEX 2412, NYSE: CHT) is the leading telecom service provider in Taiwan. Chunghwa Telecom provides fixed line, mobile 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 certain 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 5488 chtir@cht.com.tw ----------------