CHT

Business Context and Reporting Period

Company: Chunghwa Telecom Co., Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2005 (Unaudited)
Filing Date: July 6, 2005

Chunghwa Telecom is the dominant telecommunications service provider in Taiwan, offering fixed-line, cellular, paging, and internet services. The company is in the process of privatization; as of April 15, 2005, the Ministry of Transportation and Communications (MOTC) owned 64.85% of the company. The financial statements are presented in New Taiwan Dollars (NT$) with US Dollar (US$) translations for convenience.

Key Financial Metrics

Note: US$ amounts are translated at the rate of NT$31.46 to US$1.00 as of March 31, 2005.

Material Changes vs. Prior Period

• Revenue Decline: Service revenues decreased by NT$1,081 million (2.4%) to NT$44,547 million, driven primarily by declines in Local and Domestic Long Distance (DLD) fixed-line segments.
• Profitability: Net income decreased by NT$863 million (6.7%) to NT$12,068 million. Operating income fell by NT$637 million.
• Cost Management: Total operating costs and expenses decreased slightly by NT$444 million to NT$30,146 million, largely due to reduced marketing and cost of services expenses.
• Cash Flow: Net cash provided by operating activities decreased by NT$2,825 million to NT$17,302 million. This was offset by a significant increase in cash and cash equivalents due to a net increase of NT$3,885 million during the quarter.
• Investing Activities: Net cash used in investing activities increased significantly to NT$13,218 million (from NT$5,138 million), primarily due to a net purchase of short-term investments of NT$7,940 million.
• Debt Reduction: Long-term loans decreased by NT$200 million as the company made scheduled payments on the Common Tunnel Fund loan.

Outlook, Risks, and Contingencies

• Privatization: The MOTC continues to sell shares to employees and the public to reduce government ownership below 50%. Recent employee share purchases in April 2005 resulted in recognized compensation expenses of NT$204 million.
• Segment Performance: The Cellular Service segment remains the most profitable, generating NT$2,184 million in income from operations. The Local Fixed-Line segment reported a loss of NT$2,185 million from operations after intersegment eliminations and adjustments.
• Commitments: As of March 31, 2005, the company has non-cancelable commitments for land/buildings (NT$3,370 million) and telecommunications equipment (NT$11,241 million).
• Legal: The company is involved in various legal proceedings considered normal to its business. Management believes these will not materially affect financial position.
• Accounting Changes: The company noted the issuance of SFAS No. 123(R) regarding share-based payments but stated there is no current impact as the company does not issue stock options.

Investor Verification Checklist

• Revenue Mix: Verify the continued decline in fixed-line revenues versus the growth or stability of cellular and internet segments.
• Privatization Timeline: Monitor the MOTC's progress in reducing ownership below 50% and the associated impact on corporate governance and preferred share rights.
• Capital Expenditures: Review the sustainability of high capital expenditures (NT$5,267 million in Q1 2005) relative to cash flow generation.
• Debt Structure: Confirm the terms of the interest-free Common Tunnel Fund loan and the schedule for remaining repayments.
• Foreign Exchange: Assess the impact of NT$ to US$ exchange rate fluctuations on the reported US$ financial metrics.