Far EasTone Telecommunications Co., Ltd. 2018 Annual Shareholders’ Meeting Handbook
June 14, 2018 Taipei City, R.O.C.
The English version is the translation of the Chinese version and if there is any conflict between the meaning of terms in the Chinese version and English translation, the meaning of the Chinese version shall prevail.
0 Far EasTone Telecommunications Co., Ltd. Agenda of 2018 Annual Shareholders' Meeting Time: 9:00 a.m., June 14, 2018 Place: Taipei Hero House, 20 Changsha Street, Sec. 1, Taipei City Opening – Chairman Company Presentation – Chairman / President Agenda of Meeting – Chairman I. Matters to be reported (1) The 2017 Business report…………...... ……..…………….………………………………… ……………………… 3 (2) The 2017 Financial statements …………………..……...….…………………………………………… .…. …………… 6 (3) The 2017 Audit Committee’s review report.………………………………………………………………………………… 7 (4) The 2017 directors’ and employees’ compensation.…………………………………………… ………………………… 8 (5) The issuance of corporate bonds………………………………………………………………… ………………………… 9 (6) Revisions to the Ethical Corporate Management Best Practice Principles……………………………………………… 10 II. Matters to be ratified (1) The 2017 financial statements (including 2017 business report)……….……………..……………..…………………... 11 (2) The 2017 retained earnings distribution….……………....….…………....….……………...…………....…….….…….... 12 III. Matters to be discussed and election (1) To discuss and approve the cash distribution from Capital Surplus…………………..………………………….……... 13 (2) Election of new Directors of the Company (The term of the newly elected eleven Directors, including three Independent Directors). .……………....….…………....….……………..…....…….….…….... …………....….…………. 14 (3) To release the non-competition restriction on Directors in accordance with Article 209 of the Company Law... .…. 20 IV. Extempore Motion V. Motion to Adjourn
1 Attachment 1. Independent Auditors’ Report………………………………………………………...... 21 2. Balance Sheets……………………………………………………………………...……….….………………...... 25 3. Statements of Comprehensive Income………….………………………….………………...... …………………………….. 26 4. Statements of Changes in Equity……………………..………………………………………...…...……..……...... 28 5. Statements of Cash Flows…………………………………………….……………………….....…………..………………... 29 6. Independent Auditors’ Report…………………………………….……………………...……..……..……………………….. 31 7. Consolidated Balance Sheets…………………………………………….…………………..…....……...…...... 36 8. Consolidated Statements of Comprehensive Income…………………………………….………….……………..……….. 37 9. Consolidated Statements of Changes in Equity……………………………………….…...... ……….………………. 39 10. Consolidated Statements of Cash Flows……………………………………………….……………..…………………….. 40 11. Amendment to the “Ethical Corporate Management Best Practice Principles” of Far EasTone Telecommunications Co., Ltd. …………………………….…...... ……….………………. …………………………….…...... ………. 42 12. Status of Directors’ shareholding of the 7th Term Board of Directors on April 16, 2018…………………………………. 44 13. Director and Employees’ compensation………..……………………………………….………………...……………...... 44 14. Impact of Stock Dividend Distribution on Business Performance, EPS and Return on Investment……………...... 44
Articles 1. Articles of Incorporation of Far EasTone Telecommunication Co., Ltd……………………………………..…...………... 46 2. Ethical Corporate Management Best Practice Principles…………………. .……..……….……………. …………..…... 53 3. Directors Election Guidelines……………. .……..……….………………. …………… …… . .……..……….…………… 58 4. Rules Governing the Conduct of Shareholders’ Meeting……………….. …………… ……...…..……...... 60
2 I. Matters to be reported
(1) The 2017 Business report
Dear shareholders,
2017 marked the 20th anniversary for FarEasTone Telecommunications (FET). In these past two decades, we have always upheld the brand motto “Closing the Distance” and played an important role as “Relationship Connector.” FET has also grown from a market value of NT$65 billion to a NT$240 billion company. In 2017, despite the difficult economic environment worldwide, FET employees nevertheless efficiently worked together and produced outstanding concrete results outperforming expectations. Consolidated revenue in 2017 reached NT$92 billion, merging earnings before interest, taxes, depreciation, and amortization (EBITDA) and after-tax income as NT$28.1 billion and NT$10.8 billion, respectively. The earnings per share (EPS) was $NT3.332; evidently, this demonstrates that FET continues to create maximum value for its shareholders.
Leading Quality Internet Service FET continues to offer outstanding internet quality to its customers. FET is Taiwan's SpeedTest Awards Winner for Fastest Mobile Network during Q3-Q4 2017. In this 4G spectrum tight race against our competitors, FET persists to determinedly work towards obtaining sufficient spectrum and improving better internet service and experience.
Innovative Transformation: Providing Internet of Things (IoT) Services In 2017, FET not only strived for a higher speed and more stable 4.5G super tri-band internet, but also introduced “BoBee,” a light-weight wearable GPS locator device; it is a continuous product from the 2016 “all around mobile housekeeper” service of the consumers’ digital lifestyle IoT series, designed for elders, children, and pets. FET simultaneously introduced the personalized “Digital Expert,” a computer, communication, and consumer electronics technical support service.
Our Motivational Engines: “Innovative Digital Business” and “Enterprise Clients” Concerning self-expectations, FET is not only just a telecommunications company, but we are also an information communication provider that offers all-round lifestyle and business required services to our clients. After being the first telecommunications company in Taiwan to launch the direct carrier billing service through Google Play and Apple App Store, we are pleased to report that FET currently ranks first concerning occupancy rate in the Google Play market. Additionally, FET was selected as Google Play’s one of the two most innovative global business model representative companies.
FET’s digital brand “friDay” successfully integrates several services such as video, music, shopping, e-wallet, gaming…etc. Customers could enjoy convenience and enrichment of the mobile digital lifestyle via our friDay application. For example, “friDay Wallet” is currently the most downloaded mobile payment application in Taiwan, due to its wide range of features such as sensor payment, QR code and barcode payment, 3 cloud payment, and entertainment applications. The notion of “mobile phone is the new wallet” steadily increases in society; therefore “friDay Wallet” became an important part of the everyday life. FET also applied the Big Data analysis technology into our telecom service and our friDay series by observing customers’ usage trends and needs, in hopes to offer more refined products and services in the future.
In regards to enterprise clients on IoT applications, FET showcased six main smart IoT services during the 2017 World Congress on Information Technology (WCIT). Services include: scooter IoT network, power monitoring management, "Health+" cloud health management service, “BoBee,” Big Data analysis, and Tainan Smart City. FET’s “IoT Ecosystem,” which was established in 2017, also seized the top spot for six categories in the industry. Clearly, FET not only accomplished convenient digital lifestyle, but also will bring revenue increase and enhanced efficiency to our enterprise clients.
Acquired Broadband Spectrum, Seized 5G Application Opportunities Furthermore, FET has not only worked with the telecom-equipment giant Ericsson to establish the first 5G Lab in Taiwan, but has also continued to enthusiastically develop IoT applications and polish our mobile services to become the preferred partner and brand in the digital lifestyle and pave a solid path forward to the future of 5G roll-out. In 2017, we announced that FET established the "IoT Ecosystem," becoming the first Taiwanese telecom operator to officially launch the NB-IoT (Narrow Band-IoT) service to business enterprises. We are also the first telecom company in Taiwan to receive 3 million NB-IoT numbers issued by the National Communications Commission (NCC). We perpetually develop our NB-IoT technology applications through projects such as Smart Manufacturing, Smart Transportation, Smart City, and Smart Health.
Following the International Trend with Our Sustainability Strategic Blueprint, To actualize our corporate sustainability management approach, FET has upheld “Go Prosperous,” “Go Innovative,” “Go Caring,” and “Go Inclusive” as the four pillars of our sustainability strategy since 2015. We have combined our corporate sustainability strategy with our core operating strategy in response to the United Nations’ Sustainable Development Goals (SDGs), hoping to maximize our governance, environmental and social contributions. In 2017, FET won the “Exemplary Awards” presented by Global Views Monthly. FET also garnered seven awards at the 2017 Taiwan Corporate Sustainability Awards:“Top 50 Corporate Sustainability Award,” “Growth through Innovation Award,” “Creativity in Communication Award,” “Social Inclusion Award,” “Transparency and Integrity Award,” “Supply Chain Management Award,” and “Taiwan’s Top 50 CSR Report Information and Communications Awards.” Furthermore, FET was included in the Dow Jones Sustainability Indices (DJSI) Emerging Markets, a leading benchmark for sustainability initiatives, for the second consecutive year. Additionally, FET also topped the corporate governance evaluation released by the Taiwan Stock Exchange and was one of very few listed companies to be ranked in the top 5% of benchmark enterprises for three consecutive years, proving our sustainable governance performance has exceeded international standard.
Starting 2018, “Go Eco” became an additional pillar in FET’s corporate sustainability strategic blueprint. Therefore, with five sturdy pillars as the corporate sustainability driving force, FET integrates its core value in responding the UN’s SDGs, while aiming towards the global sustainable development trend.
4 FET continues to strengthen its corporate governance, implement corporate social responsibility, and show solicitude for social welfare and environmental protection.
High Quality Customer Experience and Innovative Application Services As technology rapidly changes within the past decades, FET nevertheless retains the brand motto “Closing the Distance” to achieve high quality customer experience and innovative application services, in hopes to become consumers’ best partner in their digital lifestyle. Facing the next industry generation, FET continues to innovate and breakthrough into Taiwan’s telecommunications market as an influential leader. With the upcoming 5G future, we aim to be the force that fosters social progress and drives corporate growth in harmony with society, thereby maximizing value for shareholders, customers, employees and other stakeholders as we seek to achieve the vision of “FET Connects and Enriches Life.”
Consequently, we would like to offer our most sincere gratitude to you, our shareholders. We look forward to the challenges of the year ahead and to our continuing dialogue. We wish you good health and all the best.
Chairman President Chief Accountant
5 (2) The 2017 Financial statements
1. Balance Sheets 2. Statements of Comprehensive Income 3. Statements of Changes in Equity 4. Statements of Cash Flows 5. Consolidated Balance Sheets 6. Consolidated Statements of Comprehensive Income 7. Consolidated Statements of Changes in Equity 8. Consolidated Statements of Cash Flows
Please refer to the attachments, page 21~41, for Independent Auditors’ Report together with all above financial reports of Year 2017. For complete financial reports, please download from the Market Observation Post System of the Taiwan Stock Exchange (http://newmops.twse.com.tw)
6 (3) The 2017Audit Committee’s review report
The Board of Directors has prepared the Company’s 2017 Business Report, the Financial Statements and the Proposal for Profit Distribution. The CPAs of Deloitte & Touche, Annie Lin and Denny Kuo have audited the Financial Statements (including the Stand-alone & the Consolidated Financial Reports) and issued the audit opinions. The Business Report, Financial Statements, and the Proposal for Profit Distribution have been reviewed and determined to be correct and accurate by the Audit Committee members of Far EasTone Telecommunications Co., Ltd. According to Article 14-4 of the Securities and Exchange Act and Article 219 of the Company Act, we hereby submit this report.
Far EasTone Telecommunications Co., Ltd.
Chairman of the Audit Committee:
Lawrence Juen-Yee LAU
March 2, 2018
7 (4) The 2017 directors’ and employees’ compensation Explanatory Notes： 1. According to Article 26 of the Articles of Incorporation, if the Company has surplus, it shall set aside 1%~2% for employees’ compensation and set aside no more than 1% as directors’ compensation. It is proposed that for the 2017, the Company distributes 2% of the before tax earnings as employees’ compensation in the amount of NT$261,539,193, and distributes approximate 0.72% of the before tax earnings as directors’ compensation in the amount of NT$94,154,109. The distribution will take place in cash. 2. The compensation of the Company’s directors is distributed in accordance with the shareholding each one represents, and the effort each has contributed to the Company’s affairs, which are carefully considered for the remuneration arrangement. The Company’s PIPNS regulations will determine the times and date of the compensation of employees. 3. This proposal has been approved by the 14th meeting of the seventh-term Board of Directors on February 23, 2018 for submitting to the 2018 Annual Shareholders Meeting for report. 4. Please report. Resolution:
8 (5) The issuance of corporate bonds Explanatory Notes： 1. Latest Information of the Corporate Bonds Issued in Y2017 & Y2018. Domestic Unsecured Bond Offering Type (1st of Year 2017) (2nd of Year 2017) (3rd of Year 2017) (1st of Year 2018) NT$ 3.0 billion NT$ 5.0 billion Total Amount NT$ 4.5 billion NT$ 2.0 billion (A Issue: NT$ 1.5 billion (A Issue: NT$ 1.5 billion B Issue: NT$ 1.5 billion) B Issue: NT$ 3.5 billion) A Issue: 5.5 years A Issue: 5 years Maturity 5 years 7 years B Issue: 7 years B Issue: 7 years A Issue: 0.95% p.a. A Issue: 0.85% p.a. Coupon Rate 1.17% p.a. 1.17% p.a. B Issue: 1.09% p.a. B Issue: 1.01% p.a. Each issue of the bond is repayable in lump sum on the The bond is repayable in lump sum on the expiry date. expiry date. Repayment The interest is calculated on the coupon rate and paid The interest is calculated on the coupon rate and paid annually. annually. Guarantor None Approval Authority Taipei Exchange Authority Approved Date April 17th, 2017 September 1st, 2017 December 14th, 2017 April 30th, 2018 Approval Letter No. 106000093711 10600244932 10600338561 10700102541 Use of Proceeds To repay short term borrowing and strengthen financial structure Issued at par value on April Issued at par value on Issued at par value on Issued at par value on May Remark 26th, 2017 September 4th, 2017 December 20th, 2017 7th, 2018 2. According to Article 246 of Company Law, the Company shall report the corporate bond issuances to the shareholders’ meeting. Please report. Resolution:
9 (6) Revisions to the Ethical Corporate Management Best Practice Principles Explanatory Notes： 1. It is proposed to amend the coordination department for the implementation of “Ethical Corporate Management Best Practice Principles”. Please refer to the attachments, page 42. 2. This proposal has been approved by the 15th meeting of the seventh-term Board of Directors on May 4, 2018 for submitting to the 2018 Annual Shareholders Meeting for report. 3. Please report. Resolution:
10 II. Matters to be ratified
(1) The 2017 financial statements (including 2017 business report) Explanatory Notes： 1. The 2017 business report and the 2017 annual financial statements and consolidated financial statements as of December 31, 2017 have been audited by the Company’s auditing CPAs, Ms. Annie Lin and Mr. Tony Chang of Deloitte and Touche. Audit Committee of the Company has reviewed the Financial Statements for the year ended December 31, 2017 and issued audit reports. 2. This proposal has been approved by the 14th meeting of the seventh-term Board of Directors on February 23, 2018. 3. Please ratify. Resolution:
11 (2) The 2017 retained earnings distribution Explanatory Notes： 1. It is proposed the Company to distribute cash dividend of NT$9,896,066,960 from the retained earnings at NT$3.037 per share. 2. Please refer to the following table for the Company’s 2017 appropriation proposal: Far EasTone Telecommunications Co., Ltd. Retained Earnings Distribution Proposal (in NT dollars) Un-appropriated earnings as of January 1, 2017 2,737,450 Add: actuarial gain (loss) recognized as retained earnings 19,026,194 Less: Adjustments due to changes in investees’ equity in equity-method (55,547,073) investments Adjusted un-appropriated earnings (33,783,429) Add:Y2017 Net income 10,856,681,558 Less: legal reserve (1,082,289,813) Add :reverse special reserve 157,138,957 Maximum distributable earnings 9,897,747,273 Less: appropriation Cash dividends (NT$3.037per share) (9,896,066,960) Un-appropriated earnings after distribution 1,680,313 3. If the outstanding shares are impacted due to the Company’s subsequent capital increase or other matters before the ex-cash dividend record date, it is proposed the Board of Directors be authorized by the Shareholders’ Meeting to adjust the ultimate cash to be distributed to each common share based on the number of actual outstanding shares on the ex-cash dividend record date. Cash dividend of individual shareholder will be round down to and distributed in integer of New Taiwan Dollar, with fractions of the Dollar of the cash dividend of each shareholder be reduced and be accounted for as the other income of the Company. 4. It is proposed that the Board authorizes the Chairman to fix the record date of ex-cash dividend after the approval by the 2018 annual Shareholders’ Meeting. 5. This proposal has been approved by the 14th meeting of the seventh-term Board of Directors on February 23, 2018. 6. Please ratify. Resolution:
12 III. Matters to be discussed and election
(1) To discuss and approve the Cash distribution from Capital Surplus Explanatory Notes: 1. According to Article 241 of the Company Act: “Where a company incurs no loss, it may distribute its legal reserve and capital reserve-Additional Paid-in Capital-Share Issuance in Excess of Par Value as cash dividend to its original shareholders in proportion to the number of shares being held by each of them.” It is proposed the Company to distribute cash dividend of NT$$2,323,311,078 from the Capital Surplus: Net Assets from Merger at NT$0.713 per share. 2. If the outstanding shares are impacted due to the Company’s subsequent capital increase or other matters before the ex-cash distribution record date, it is proposed the Board of Directors be authorized by the Shareholders’ Meeting to adjust the ultimate cash to be distributed to each common share based on the number of actual outstanding shares on the ex-cash distribution record date. Cash dividend of individual shareholder will be round down to and distributed in integer of New Taiwan Dollar, with fractions of the Dollar of the cash dividend of each shareholder be reduced and be accounted for as the other income of the Company. 3. It is proposed that the Board authorizes the Chairman to fix the record date of ex-cash distribution after the approval by the 2018 annual Shareholders’ Meeting. 4. This proposal has been approved by the 14th meeting of the seventh-term Board of Directors on February 23, 2018. 5. In Ratification Proposal 2, it is proposed the Company distributes cash of NT$9,896,066,960 from the retained earnings at NT$3.037 per share. With the cash distribution of NT$0.713 per share from capital surplus: Net Assets from Merger, totaling cash NT$3.75 per share of 2017. 6. Please approve. Resolution:
13 (2) Election of new Directors of the Company (The term of the newly elected eleven Directors, including three Independent Directors) Explanatory Notes: 1. The tenure of Directors of the Company is three years and the term of Directors of the Seventh term of the Board will expire on June 17, 2018. According to the Article 195 of the Company Act, new Directors shall be elected at the annual Shareholders’ Meeting of 2018. The term of the newly elected eleven Directors (including three Independent Directors) is three years, effective from June 14, 2018 to June 13, 2021. Regulations governing the professional qualifications, restrictions on shareholdings and concurrent positions held, assessment of independence, method of nomination, and other matters for compliance with respect to independent directors shall be followed. 2. According to the Article 192-1 of the Company Act, the Board of Directors (via this Board Meeting) of the Company and any shareholders with 1% above shareholding may nominate director candidates. During the period (from April 9, 2018 to April 18, 2018) for nomination, the Company has received the nomination of eleven director candidates from the major shareholder Yuan Ding Investment Co., Ltd. After examination, all eleven candidates both meet the requirements and qualifications of director or independent director. The Company has make public announcement about the qualified eight Directors and three Independent Directors candidate roster after the approval by the Board of Directors, Please refer to page 15~19. 3. This proposal has been approved by the 14th and 15th meeting of the seventh-term Board of Directors on February 23, 2018 and May 4, 2018 for submitting to the 2018 Annual Shareholders Meeting for election. 4. Please elect. Election result:
14 The Eighth term of the Board of Directors of candidate list Shareholding Type Candidate Education Major Experience Current Position (Unit: shares) Director Douglas Hsu, M.S., University of Notre President of FarEastern Chairman of Far Eastern 1,066,657,614 Representative of Yuan Dame, U.S.A. New Century New Century Ding Investment Co., M.S., Economics, Corporation Corporation Ltd. Columbia University, Chairman of Asia U.S.A. Cement Co., Ltd. Honor Ph.D., Chairman of Far Eastern Management , National Department Stores Ltd. Chiao Tung University Chairman of Oriental Union Chemical Corp. Chairman of U-Ming Marine Transport Corp. Chairman of New Century InfoComm Tech Co., Ltd. Vice Chairman of Far Eastern International Bank Director Peter Hsu, M.S., Operations Vice President of Ding & Vice Chairman of Far 1,066,657,614 Representative of Yuan Research, Stanford Ding Management Eastern New Century Ding Investment Co., University, USA Consultants Co. Ltd. Corporation Ltd. Director of Asia Cement Co., Ltd. Supervisor of U-Ming Marine Transport Corp. Director Jan Nilsson, M.S., Industrial and Vice Chairman of Far None 1,066,657,614 Representative of Yuan Management Eastone Ding Investment Co., Engineering, Linkoping Telecommunications Ltd. University, Sweden Co., Ltd. President of Far Eastone Telecommunications Co., Ltd. Sr. Executive VP of 15 Satelindo Telecom Indonesia Director Champion Lee, MBA, Texas A&I President of Yuan Ding Director of Far Eastern 4,163,500 Representative of Yuan University, USA Co., Ltd. New Century Ding Co., Ltd. Sr. EVP of Far Eastern Corporation New Century Director of Asia Cement Corporation Co., Ltd. Director of U-Ming Marine Transport Corp. Director Jeff Hsu, Representative Master’s degree in Worked as a Strategy Chief Innovation Officer 4,163,500 of Yuan Ding Co., Ltd. Design and Innovation and Design Consultant in of Far Eastern Group Methods, Institute of the United States with Director & Executive Design, Illinois Institute clients ranging from Senior Vice President of of Technology hi-tech startups to U-Ming Marine Transport MBA, University of Notre Nestle, Denso Corp. Dame Automotive, Kia Motors, and Target. Captain’s commission in the United States Marine Corps Director Toon Lim, Postgraduate Diploma in Chief Operating Officer, Advisor, SingTel Group 919,653 Representative of Ding Business Administration SingTel Group Board Director, APT Yuan International University of Singapore Satellite, HK Investment Co., Ltd. BE(Hons), University of Canterbury Director Keijiro Murayama, MBA, May 2001 Senior Manager, Executive Director Asia 331,000 Representative of Goizueta Business Smart-life Solutions Business, Global U-Ming Marine Transport School Emory University Department, Smart-life Business Division, NTT Corp. (USA) Business Division, NTT DOCOMO, Inc. DOCOMO, Inc. Director Bonnie Peng, Doctor of Journalism, Chairperson of the 2nd Professor, Department of 1,426,303 Representative of Asia Southern Illinois term of National Social and Policy Investment Corp. University, Carbondale, Communication Sciences, and USA Commission Department of Professor, Department of Information
16 Journalism (Graduate Communication program), National (Graduate program), Chengchi University, Yuan Zu University Taiwan Independent Lawrence Juen-Yee LAU B.S. in Physics and Academician, Academia Ralph and Claire Landau 0 Director Economics, Stanford Sinica, 1982; Professor of Economics, (Note 1) University Kwoh-Ting Li Professor The Chinese University M.A. and Ph.D. in in Economic of Hong Kong; Economics, University of Development, Stanford Independent California at Berkeley University Non-executive Director, Vice-Chancellor CNOOC Limited in Hong (President) of The Kong; Chinese University of Independent Hong Kong; Non-executive Director, Chairman of CIC AIA Group Limited in International (Hong Hong Kong; Kong) Co., Limited Independent Non-executive Director, Hysan Development Company Limited in Hong Kong; Member of the Hong Kong Special Administrative Region Exchange Fund Advisory Committee, member of its Currency Board and Investment Sub-Committees and Chairman of its Governance Sub-Committee; Vice-Chairman, Our Hong Kong Foundation; Member and Chairman
17 of the Prize Recommendation Committee, the LUI Che Woo Prize Company; Chairman, Board of Directors, The Chinese University of Hong Kong (Shenzhen) Finance Institute, aka Shenzhen Finance Institute Independent Chung Laung Liu Sc. D., Massachusetts President and Mei Yi William M. W. Mong 0 Director Institute of Technology Che Honorary Chair Honorary Chair Professor of National Professor, National Tsing Hua University, Tsing Hua University, Taiwan Taiwan Professor Emeritus of Independent Director of University of Illinois at United Microelectronics Urbana-Champaign Corporation Independent Director of Microelectronics Technology Inc. Independent Director of Powerchip Semiconductor Corporation Independent Tim Pan Ph.D. in Electrical Microsoft Research Senior Outreach 0 Director Engineering, Washington (since 2005) Director, Microsoft University in St. Louis, Board member of St. Research Asia U.S.A. John’s University (Taiwan) Co-founder of Gemfor Technology Co-founder of GoldKey Technology Note 1: According to the “Regulations Governing Appointment of Independent Directors and Compliance Matters for Public Companies ”, If
18 an independent director candidate included by a public company under the provisions of the preceding paragraph has already served as an independent director of the public company for three consecutive terms or more, the company shall publicly disclose, together with the review results under the preceding paragraph, the reasons why the candidate is nominated again for the independent directorship, and present the reasons to the shareholders at the time of the election at the shareholders meeting. Independent Director Lawrence Juen-Yee Lau is currently the Chairman of FET Audit Committee and FET Remuneration Committee. Serving as the Academician of Academia Sinica, Mr. Lau is an expert in Economic Development and Economic Growth, and possesses a broad global perspective. With multinational financial expertise and extensive management experience, Mr. Lau provided FET with insightful advices on corporate governance and business management during the term. He is well versed in telecom industry, and has profound understanding of telecom all these years. Therefore, Mr. Lau is nominated as an Independent Director candidate, in the hope that he continues to assist FET in Board and functional Committees operations.
19 (3) To release the non-competition restriction on Directors in accordance with Article 209 of the Company Law Explanatory Notes: 1. According to Article 209 of the Company Act, a Director who does anything for himself or on behalf of another person that is within the scope of the company's business shall explain to the Shareholders’ Meeting the essential contents of such an act and secure its approval. 2. If the Director candidate to be elected as the eighth term Board of Directors actually does anything for themselves or on behalf of another person within the scope of the Company’s business as follows, it is proposed to release the non-competition restriction for the would-be newly elected directors and their representatives at the annual Shareholders’ Meeting of Year 2018. Name Title and Competition Company Major Business Scope Toon Lim, Representative of Ding Advisor, SingTel Group Yuan International Investment Co., Board Director, APT Satellite, HK Ltd. Telecommunications Executive Director Asia Business, Keijiro Murayama, Representative of Global Business Division, NTT U-Ming Marine Transport Corp. DOCOMO, Inc. 3. This proposal has been approved by the 15th meeting of the seventh-term Board of Directors on May 4, 2018 for submitting to the 2018 Annual Shareholders Meeting for approval. 4. Please approve. Resolution:
IV. Extempore Motion
V. Motion to Adjourn
20 INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders Far EasTone Telecommunications Co., Ltd.
Opinion
We have audited the financial statements of Far EasTone Telecommunications Co., Ltd. (the Company), which comprise the balance sheets as of December 31, 2017 and 2016, and the statements of comprehensive income, changes in equity and cash flows for the years then ended, and the notes to the financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and its financial performance and its cash flows for the years then ended in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers.
Basis for Opinion
We conducted our audits in accordance with the Regulations Governing Auditing and Attestation of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with The Norm of Professional Ethics for Certified Public Accountant of the Republic of China, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the year ended December 31, 2017. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
The descriptions of the key audit matters of the financial statements for the year ended December 31, 2017 are as follows:
Impairment Loss of Property, Plant and Equipment and Intangible Assets (Including Goodwill)
As of December 31, 2017, the balances of property, plant and equipment and intangible assets account for 64% of the total assets and are material for the financial statements as a whole. The economic trends, market competition, and technology development influence the operation of the Company and the management’s evaluation and judgment on the expected economic benefits and recoverable amounts of the cash-generating unit to which an asset belongs, which in return is used for the evaluation of the asset’s impairment. Thus, the impairment of property, plant and equipment and intangible assets is considered a key audit matter.
21 For the estimates and judgments related to property, plant and equipment and intangible assets, please refer to Note 5 to the financial statements. For other related disclosures, please refer to Note 11 and Note 13.
By conducting the tests of controls, we obtained an understanding of the Company’s asset impairment evaluation processes and the design and implementation of related controls. We also performed corresponding audit procedures as follows:
1. Obtain the Company’s asset impairment evaluation reports for each cash-generating unit.
2. Evaluate the reasonableness of the Company’s identification of asset impairment, the assumptions and sensitivity used in the asset impairment assessment, including the appropriateness of the classification of cash-generating unit, the cash flows forecasts and discount rates used.
Recognition of Mobile Telecommunications Service Revenue
The mobile telecommunications service revenue is the main source of the revenue, and it accounts for 77% of the Company’s total revenue of 2017. The calculation of telecommunications service revenue highly relies on automated systems and includes complicated data transmission. In order to meet market demands and remain competitive, the Company often launches different combinations of products and services which makes the calculation of revenue more complex and directly affects the accuracy and timing of revenue recognition. Therefore, the recognition of mobile telecommunications service revenue is considered a key audit matter.
For the accounting policies related to mobile telecommunications service revenue, please refer to Note 4 to the financial statements.
By conducting the tests of controls, we obtained an understanding of the Company’s recognition of mobile telecommunications service revenue and the design and implementation of related controls. We also engaged IT specialists to perform corresponding audit procedures as follows:
1. Review the contracts of mobile subscribers to confirm the accuracy of the information in the accounting system.
2. Perform test dialing to verify the accuracy and completeness of the traffic and information in the switch equipment.
3. Test the accuracy of the billing calculation.
4. Test the completeness and accuracy of the calculation and billing of monthly fees and airtime fees.
5. Test the completeness and accuracy of the calculation and billing of value-added service fees.
For the revenue recognition of billed and unbilled amounts, we conducted the following tests:
1. For the billed amounts, we compare if there is any difference between the reports generated from the accounting system and the billing system.
2. For the unbilled amounts, we recalculate the service revenue for services provided as of the balance sheet date based on the applied charge rates to confirm the accuracy.
22 Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance, including the audit committee, are responsible for overseeing the Company’s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the auditing standards generally accepted in the Republic of China will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with the auditing standards generally accepted in the Republic of China, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
1. Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
2. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
3. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
4. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern.
23 5. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
6. Obtain sufficient and appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the financial statements. We are responsible for the direction, supervision, and performance of the audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with statements that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements for the year ended December 31, 2017 and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partners on the audit resulting in this independent auditors’ report are An-Hwei Lin and Cheng-Hung Kuo.
Deloitte & Touche Taipei, Taiwan Republic of China
February 23, 2018
Notice to Readers
The accompanying financial statements are intended only to present the financial position, financial performance 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 applied in the Republic of China.
For the convenience of readers, the independent auditors’ report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language independent auditors’ report and financial statements shall prevail.
24 FAR EASTONE TELECOMMUNICATIONS CO., LTD.
BALANCE SHEETS DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars)
2017 2016 ASSETS Amount % Amount %
CURRENT ASSETS Cash and cash equivalents (Notes 4, 6 and 28) $ 1,093,018 1 $ 779,886 1 Derivative financial assets for hedging - current (Notes 4 and 7) - - 2,073 - Debt investments with no active market - current (Notes 4 and 28) 42,488 - 48,198 - Notes receivable (Note 4 and 28) 35,465 - 29,424 - Accounts receivable, net (Notes 4 and 8) 5,755,169 4 6,136,547 5 Accounts receivable - related parties (Notes 4, 8 and 28) 252,976 - 302,662 - Other receivables - related parties (Note 28) 261,960 - 79,562 - Inventories (Notes 4 and 9) 3,550,840 3 1,261,852 1 Prepaid expenses 679,833 1 1,048,386 1 Other financial assets - current (Notes 4 and 28) 2,575,508 2 2,700,876 2 Other current assets (Note 28) 37,046 - 41,596 -
Total current assets 14,284,303 11 12,431,062 10
NONCURRENT ASSETS Financial assets carried at cost (Note 4) 195,000 - 150,000 - Investments accounted for using the equity method (Notes 4, 10 and 28) 30,093,290 23 30,047,042 23 Property, plant and equipment, net (Notes 4, 11 and 28) 28,927,960 22 32,184,965 25 Investment properties (Notes 4 and 12) 761,492 1 754,028 1 Concessions, net (Notes 1, 4 and 13) 41,820,510 32 38,383,531 30 Computer software, net (Notes 4 and 13) 2,801,276 2 2,541,309 2 Goodwill (Notes 4 and 13) 10,283,031 8 10,283,031 8 Deferred income tax assets (Notes 4 and 22) 675,336 1 829,824 1 Refundable deposits (Note 28) 442,572 - 436,954 -
Total noncurrent assets 116,000,467 89 115,610,684 90
TOTAL $ 130,284,770 100 $ 128,041,746 100
LIABILITIES AND EQUITY
CURRENT LIABILITIES Short-term borrowings (Notes 4 and 14) $ 400,000 - $ 2,400,000 2 Short-term bills payable (Notes 4 and 14) - - 2,799,387 2 Derivative financial liabilities for hedging - current (Notes 4 and 7) - - 40,229 - Notes payable 12,056 - 9,613 - Accounts payable 2,661,505 2 1,554,621 1 Accounts payable - related parties (Note 28) 1,607,562 1 1,124,819 1 Other payables (Note 16) 6,455,120 5 7,674,958 6 Other payables - related parties (Note 28) 3,757,966 3 1,077,282 1 Current tax liabilities (Notes 4 and 22) 1,894,767 1 1,603,206 1 Unearned revenue (Note 4) 2,615,961 2 2,303,684 2 Current portion of long-term borrowings (Notes 4 , 14 and 15) 8,998,533 7 6,197,478 5 Guarantee deposits received - current 200,885 - 219,343 - Other current liabilities (Notes 4 and 17) 642,709 1 594,466 1
Total current liabilities 29,247,064 22 27,599,086 22
NONCURRENT LIABILITIES Bonds payable (Notes 4 and 15) 20,373,820 16 12,190,103 10 Long-term borrowings (Notes 4 and 14) 7,600,000 6 14,048,345 11 Provisions - noncurrent (Notes 4 and 17) 335,304 - 318,447 - Deferred income tax liabilities (Notes 4 and 22) 1,629,888 1 1,495,976 1 Net defined benefit liabilities - noncurrent (Notes 4 and 18) 727,479 1 763,723 1 Guarantee deposits received - noncurrent 246,199 - 265,089 - Other noncurrent liabilities (Notes 4, 10 and 16) 366,604 - 354,959 -
Total noncurrent liabilities 31,279,294 24 29,436,642 23
Total liabilities 60,526,358 46 57,035,728 45
EQUITY Capital stock Common stock 32,585,008 25 32,585,008 25 Capital surplus 8,143,345 6 10,166,874 8 Retained earnings Legal reserve 17,405,561 14 16,270,878 13 Special reserve 783,467 1 769,907 - Unappropriated earnings 10,822,899 8 11,346,830 9 Total retained earnings 29,011,927 23 28,387,615 22 Other equity 18,132 - (133,479) -
Total equity 69,758,412 54 71,006,018 55
TOTAL $ 130,284,770 100 $ 128,041,746 100
The accompanying notes are an integral part of the financial statements.
25 FAR EASTONE TELECOMMUNICATIONS CO., LTD.
STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)
2017 2016 Amount % Amount %
OPERATING REVENUES (Notes 4, 20 and 28) $ 72,945,992 100 $ 78,838,895 100
OPERATING COSTS (Notes 4, 9, 21 and 28) 41,675,647 57 46,227,643 59
GROSS PROFIT 31,270,345 43 32,611,252 41
OPERATING EXPENSES (Notes 4, 21 and 28) Marketing 14,369,608 20 16,199,526 20 General and administrative 4,709,283 6 4,570,071 6
Total operating expenses 19,078,891 26 20,769,597 26
OPERATING INCOME 12,191,454 17 11,841,655 15
NONOPERATING INCOME AND EXPENSES Other income (Notes 4, 21 and 28) 132,434 - 143,137 - Other gains and losses (Notes 4 and 12) 83,295 - 54,108 - Financial costs (Notes 4, 21 and 28) (472,909) - (470,159) (1) Share of the profit of subsidiaries and associates (Notes 4 and 10) 1,459,098 2 2,159,787 3 Losses on disposal of property, plant, equipment and intangible assets (Note 4) (638,322) (1) (616,691) (1) Impairment losses recognized on property, plant and equipment (Notes 4 and 11) - - (313,563) -
Total nonoperating income and expenses 563,596 1 956,619 1
INCOME BEFORE INCOME TAX 12,755,050 18 12,798,274 16
INCOME TAX (Notes 4 and 22) 1,898,368 3 1,406,971 2
NET INCOME 10,856,682 15 11,391,303 14
OTHER COMPREHENSIVE INCOME Items that will not be reclassified subsequently to profit or loss: Remeasurement of defined benefit plans (Notes 4 and 18) 18,887 - (34,528) - Share of other comprehensive income of subsidiaries and associates (Notes 4 and 19) 139 - (648) - 19,026 - (35,176) - (Continued)
26 FAR EASTONE TELECOMMUNICATIONS CO., LTD.
STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)
2017 2016 Amount % Amount %
Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations (Notes 4 and 19) (4) - (198) - Unrealized losses on available-for-sale financial assets (Notes 4 and 19) - - (4,752) - Cash flow hedges (Notes 4 and 19) 31,670 - (26,814) - Share of other comprehensive income of subsidiaries and associates (Notes 4 and 19) 119,945 - 23,497 - 151,611 - (8,267) -
Total other comprehensive income, net of income tax 170,637 - (43,443) -
TOTAL COMPREHENSIVE INCOME $ 11,027,319 15 $ 11,347,860 14
EARNINGS PER SHARE, NEW TAIWAN DOLLARS (Note 23) Basic $3.33 $3.50 Diluted $3.33 $3.49
The accompanying notes are an integral part of the financial statements. (Concluded)
27 FAR EASTONE TELECOMMUNICATIONS CO., LTD.
STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars, Except Dividends Per Share)
Other Equity Exchange Unrealized Gains Retained Earnings Differences on (Losses) on Share Capital (Note 19) Unappropriated Translating Available-for-sale Number of Shares Capital Surplus Legal Reserve Special Reserve Earnings Foreign Operations Financial Assets Cash Flow Hedges (Thousand Share) Amounts (Notes 4 and 19) (Note 19) (Note 19) (Notes 4 and 19) (Notes 4 and 19) (Notes 4 and 19) (Notes 4 and 19) Total
BALANCE AT JANUARY 1, 2016 3,258,501 $ 32,585,008 $ 12,058,158 $ 15,127,206 $ 824,480 $ 11,436,725 $ 829 $ 14,625 $ (140,666) $ 71,906,365
Appropriation of the 2015 earnings Legal reserve - - - 1,143,672 - (1,143,672) - - - - Special reserve - - - - (54,573) 54,573 - - - - Cash dividends - NT$3.174 per share - - - - - (10,342,482) - - - (10,342,482)
Cash dividends from capital surplus - NT$0.576 per share - - (1,876,896) ------(1,876,896)
Adjustments to share of changes in equities of associates - - (14,388) - - (14,441) - - - (28,829)
Net income for the year ended December 31, 2016 - - - - - 11,391,303 - - - 11,391,303
Other comprehensive income (losses) for the year ended December 31, 2016 - - - - - (35,176) 3,809 (60,497) 48,421 (43,443)
BALANCE AT DECEMBER 31, 2016 3,258,501 32,585,008 10,166,874 16,270,878 769,907 11,346,830 4,638 (45,872) (92,245) 71,006,018
Appropriation of the 2016 earnings Legal reserve - - - 1,134,683 - (1,134,683) - - - - Special reserve - - - - 13,560 (13,560) - - - - Cash dividends - NT$3.129 per share - - - - - (10,195,849) - - - (10,195,849)
Cash dividends from capital surplus - NT$0.621 per share - - (2,023,529) ------(2,023,529)
Adjustments to share of changes in equities of associates - - - - - (5,182) - - - (5,182)
Difference between the price for acquisition or disposal of subsidiaries and carrying amount - - - - - (144) - - - (144)
Changes in percentage of ownership interests in subsidiaries - - - - - (50,221) - - - (50,221)
Net income for the year ended December 31, 2017 - - - - - 10,856,682 - - - 10,856,682
Other comprehensive income (losses) for the year ended December 31, 2017 - - - - - 19,026 (516) 45,872 106,255 170,637
BALANCE AT DECEMBER 31, 2017 3,258,501 $ 32,585,008 $ 8,143,345 $ 17,405,561 $ 783,467 $ 10,822,899 $ 4,122 $ - $ 14,010 $ 69,758,412
The accompanying notes are an integral part of the financial statements.
28 FAR EASTONE TELECOMMUNICATIONS CO., LTD.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars)
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax $ 12,755,050 $ 12,798,274 Adjustments for: Depreciation 7,798,274 7,351,816 Amortization 692,430 644,334 Amortization of concessions 3,078,021 2,581,338 Allowance for doubtful accounts 481,907 296,273 Financial costs 472,909 470,159 Interest income (27,284) (24,740) Share of the profit of subsidiaries and associates (1,459,098) (2,159,787) Loss on disposal of property, plant, equipment and intangible assets 638,322 616,691 Gain on disposal of financial assets - (265) Impairment loss recognized on property, plant and equipment - 313,563 Reversal of write-down of inventories (1,073) (29,444) (Gain) loss on change in fair value of investment properties (7,464) 198,552 Deferred loss on derivative assets for hedging - (4,500) Net changes in operating assets and liabilities Notes receivable (6,041) 597 Accounts receivable (100,529) (772,295) Accounts receivable - related parties 49,686 (100,679) Other receivables - related parties (49,841) 173,193 Inventories (2,287,915) 1,644,745 Prepaid expenses 368,553 51,098 Other current assets (3,519) (207) Notes payable 2,443 (930) Accounts payable 1,106,884 (135,167) Accounts payable - related parties 482,743 (123,733) Other payables (812,117) (53,338) Other payables - related parties (124,299) 77,679 Provisions (36,896) (7,419) Unearned revenue 312,277 (114,911) Other current liabilities 53,710 332,781 Net defined benefit liabilities (13,489) (9,728) Cash generated from operations 23,363,644 24,013,950 Interest received 23,148 25,801 Dividend received 1,966,584 2,907,365 Interest paid (355,809) (465,727) Income taxes paid (1,328,761) (1,530,158)
Net cash generated from operating activities 23,668,806 24,951,231
CASH FLOWS FROM INVESTING ACTIVITIES Proceeds of the disposal of available-for-sale financial assets - 190,134 Disposal (acquisition) of debt investments with no active market 5,710 (38,457) (Continued)
- 29 - FAR EASTONE TELECOMMUNICATIONS CO., LTD.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars)
2017 2016
Acquisition of financial assets carried at cost (45,000) - Acquisition of investments accounted for using the equity method (590,620) (30,000) Proceeds from capital reduction of investments accounted for using the equity method 99,985 217,936 Acquisition of property, plant and equipment (5,686,247) (7,751,175) Proceeds from the disposal of property, plant and equipment 66,686 40,249 Increase in refundable deposits (112,130) (125,896) Decrease in refundable deposits 106,512 158,150 Increase in financing provided by other receivables - related parties (130,000) - Decrease in financing provided by other receivables - related parties - 241,000 Acquisition of intangible assets (7,471,107) (9,033,843) Proceeds from disposal of intangible assets 3,750 - Decrease (increase) in other financial assets 125,368 (323,810)
Net cash used in investing activities (13,627,093) (16,455,712)
CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in short-term borrowings (2,000,000) 2,400,000 (Decrease) increase in short-term bills payable (2,799,387) 2,799,387 Proceeds from issue of bond payables 14,675,877 - Repayments of bonds payable (6,200,000) (1,600,000) Proceeds from long-term borrowings 8,900,057 1,699,831 Repayment of long-term borrowings (12,848,402) (8,141,487) Increase in guarantee deposits received 72,819 77,965 Decrease in guarantee deposits received (110,167) (103,766) Increase in financing obtained from other payables - related parties 2,800,000 - Decrease in financing obtained from other payables - related parties - (6,500,000) Cash dividends paid (12,219,378) (12,219,378)
Net cash used in financing activities (9,728,581) (21,587,448)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 313,132 (13,091,929)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 779,886 13,871,815
CASH AND CASH EQUIVALENTS, END OF THE YEAR $ 1,093,018 $ 779,886
The accompanying notes are an integral part of the financial statements. (Concluded)
- 30 - INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders Far EasTone Telecommunications Co., Ltd.
Opinion
We have audited the consolidated financial statements of Far EasTone Telecommunications Co., Ltd. and its subsidiaries (the Group), which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2017 and 2016, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers, and International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), IFRIC Interpretations (IFRIC), and SIC Interpretations (SIC) endorsed and issued into effect by the Financial Supervisory Commission of the Republic of China.
Basis for Opinion
We conducted our audit in accordance with the Regulations Governing Auditing and Attestation of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with The Norm of Professional Ethics for Certified Public Accountant of the Republic of China, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2017. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
- 31 - The description of the key audit matters of the consolidated financial statements for the year ended December 31, 2017 are as follows:
Impairment Loss of Property, Plant and Equipment and Intangible Assets (Including Goodwill)
As of December 31, 2017, the consolidated balances of property, plant and equipment and intangible assets account for 77% of the total assets and are material for the consolidated financial statements as a whole. The economic trends, market competition, and technology development influence the operation of the Group and the management’s evaluation and judgment on the expected economic benefits and recoverable amounts of the cash-generating unit to which the asset belongs, which in turn is used for the evaluation of the asset’s impairment. Thus, the impairment of property, plant and equipment and intangible assets is considered as a key audit matter.
For the estimates and judgments related to property, plant and equipment and intangible assets, please refer to Note 5 to the consolidated financial statements. For other related disclosures, please refer to Note 14 and Note 16.
By conducting the tests of controls, we obtained an understanding of the Group’s asset impairment evaluation processes and of the design and implementation of related controls. We also performed corresponding audit procedures as follows:
1. Obtain the Group’s asset impairment evaluation reports for each cash-generating unit.
2. Evaluate the reasonableness of the Group’s identification of asset impairment, the assumptions and sensitivity used in the asset impairment assessment, including the appropriateness of the classification of cash-generating unit, cash flows forecasts and discount rates used.
Recognition of Mobile Telecommunications Service Revenue
The mobile telecommunications service revenue is the main source of the revenue, and it accounts for 69% of the Group’s total revenue of 2017. The calculation of mobile telecommunications service revenue highly relies on automated systems and includes complicated and huge data transmission. In order to meet market demands and remain competitive, the Group often launches different combinations of products and services which makes the calculation of revenue more complex and directly affects the accuracy and timing of revenue recognition. Therefore, the recognition of mobile telecommunications service revenues is considered as a key audit matter.
For the accounting policies related to mobile telecommunications service revenues, please refer to Note 4 to the consolidated financial statements.
By conducting the tests of controls, we obtained an understanding of the Group’s recognition of mobile telecommunications service revenues and of the design and implementation of related controls. We also engaged IT specialists to perform corresponding audit procedures as follows:
1. Review the contracts of mobile subscribers to confirm the accuracy of the information in the accounting system.
2. Perform test dialing to verify the accuracy and completeness of the traffic and information in the switch equipment.
3. Test the accuracy of the billing calculation.
4. Test the completeness and accuracy of the calculation and billing of monthly fees and airtime fees.
- 32 - 5. Test the completeness and accuracy of the calculation and billing of value-added service fees.
For the revenue recognition of billed and unbilled amounts, we conducted the following tests:
1. For the billed amounts, we compare if there is any difference between the reports generated from the accounting system and the billing system.
2. For the unbilled amounts, we recalculate the service revenue for services provided as of the balance sheet date based on the applied charge rates to confirm the accuracy.
Other Matter
We have also audited the parent company only financial statements of Far EasTone as of and for the years ended December 31, 2017 and 2016 on which we have issued an unmodified opinion.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers and International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), IFRIC Interpretations (IFRIC), and SIC Interpretations (SIC) endorsed and issued into effect by the Financial Supervisory Commission of the Republic of China, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance, including the audit committee, are responsible for overseeing the Group’s financial reporting process.
Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the auditing standards generally accepted in the Republic of China will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
- 33 - As part of an audit in accordance with the auditing standards generally accepted in the Republic of China, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
1. Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
2. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
3. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
4. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.
5. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
6. Obtain sufficient and appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision, and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with statements that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
- 34 - From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements for the year ended December 31, 2017 and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partners on the audit resulting in this independent auditors’ report are An-Hwei Lin and Cheng-Hung Kuo.
Deloitte & Touche Taipei, Taiwan Republic of China
February 23, 2018
Notice to Readers
The accompanying consolidated financial statements are intended only to present the consolidated financial position, financial performance 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 consolidated financial statements are those generally accepted and applied in the Republic of China.
For the convenience of readers, the independent auditors’ report and the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language independent auditors’ report and consolidated financial statements shall prevail.
- 35 - FAR EASTONE TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars)
2017 2016 ASSETS Amount % Amount %
CURRENT ASSETS Cash and cash equivalents (Notes 4, 6 and 34) $ 8,347,304 6 $ 10,258,743 8 Financial asset at fair value through profit or loss - current (Notes 4 and 34) 595,200 - - - Available-for-sale financial assets - current (Notes 4 and 34) - - 598,132 - Derivative financial assets for hedging - current (Notes 4, 7 and 34) 1,700 - 2,073 - Debt investments with no active market - current (Notes 4, 9 and 34) 658,765 1 910,396 1 Notes receivable, net (Notes 4 and 10) 70,321 - 64,361 - Accounts receivable, net (Notes 4 and 10) 7,706,352 6 7,445,520 6 Accounts receivable - related parties (Notes 4, 10 and 34) 251,910 - 205,425 - Inventories (Notes 4 and 11) 4,776,547 4 2,488,365 2 Prepaid expenses 859,512 1 1,190,030 1 Other financial assets - current (Notes 4, 34 and 35) 2,856,693 2 3,079,280 2 Other current assets (Note 34) 159,849 - 315,063 -
Total current assets 26,284,153 20 26,557,388 20
NONCURRENT ASSETS Financial assets carried at cost (Notes 4 and 8) 263,308 - 218,308 - Investments accounted for using the equity method (Notes 4, 13 and 34) 1,205,015 1 1,025,081 1 Property, plant and equipment, net (Notes 4, 14 and 34) 46,233,707 35 49,849,572 37 Investment properties (Notes 4 and 15) 1,082,453 1 1,041,406 1 Concessions, net (Notes 1, 4 and 16) 41,820,510 31 38,383,531 29 Goodwill (Notes 4 and 16) 10,808,901 8 10,808,901 8 Other intangible assets (Notes 4 and 16) 3,479,960 3 3,266,025 2 Deferred income tax assets (Notes 4 and 26) 759,909 - 943,784 1 Other noncurrent assets (Notes 4, 10, 17, 22, 34 and 35) 768,439 1 713,326 1
Total noncurrent assets 106,422,202 80 106,249,934 80
TOTAL $ 132,706,355 100 $ 132,807,322 100
LIABILITIES AND EQUITY
CURRENT LIABILITIES Short-term borrowings (Notes 4 and 18) $ 864,000 1 $ 2,800,000 2 Short-term bills payable (Notes 4 and 18) 299,681 - 3,149,171 2 Derivative financial liabilities for hedging - current (Notes 4, 7 and 34) - - 47,767 - Notes payable 45,637 - 15,425 - Accounts payable (Note 34) 6,515,052 5 4,126,464 3 Other payables (Note 20) 7,531,030 6 8,795,001 7 Current tax liabilities (Note 4) 2,033,857 1 2,157,366 2 Provisions - current (Notes 4 and 21) 227,536 - 219,922 - Unearned revenue (Note 4) 2,806,802 2 2,447,193 2 Current portion of long-term borrowings (Notes 4, 18 and 19) 8,998,533 7 6,197,478 5 Guarantee deposits received - current 246,344 - 257,597 - Other current liabilities (Note 34) 823,502 1 767,320 -
Total current liabilities 30,391,974 23 30,980,704 23
NONCURRENT LIABILITIES Bonds payable (Notes 4 and 19) 20,373,820 15 12,190,103 9 Long-term borrowings (Notes 4 and 18) 7,600,000 6 14,048,345 11 Provisions -noncurrent (Notes 4 and 21) 887,441 1 859,586 1 Deferred income tax liabilities (Notes 4 and 26) 1,730,452 1 1,595,238 1 Deferred revenue - noncurrent (Note 20) 185,766 - 193,188 - Net defined benefit liabilities - noncurrent (Notes 4 and 22) 728,162 1 764,232 1 Guarantee deposits received - noncurrent 296,738 - 310,364 - Other noncurrent liabilities (Notes 4 and 13) 65,789 - 142,961 -
Total noncurrent liabilities 31,868,168 24 30,104,017 23
Total liabilities 62,260,142 47 61,084,721 46
EQUITY ATTRIBUTABLE TO OWNERS OF FAR EASTONE Capital stock Common stock 32,585,008 25 32,585,008 24 Capital surplus 8,143,345 6 10,166,874 8 Retained earnings Legal reserve 17,405,561 13 16,270,878 12 Special reserve 783,467 1 769,907 1 Unappropriated earnings 10,822,899 8 11,346,830 8 Total retained earnings 29,011,927 22 28,387,615 21 Other equity 18,132 - (133,479) -
Total equity attributable to owners of Far EasTone 69,758,412 53 71,006,018 53
NONCONTROLLING INTERESTS 687,801 - 716,583 1
Total equity 70,446,213 53 71,722,601 54
TOTAL $ 132,706,355 100 $ 132,807,322 100
The accompanying notes are an integral part of the consolidated financial statements.
- 36 - FAR EASTONE TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)
2017 2016 Amount % Amount %
OPERATING REVENUES (Notes 4, 24 and 34) $ 92,069,681 100 $ 94,344,266 100
OPERATING COSTS (Notes 4, 11, 25 and 34) 56,306,762 61 56,193,147 60
GROSS PROFIT 35,762,919 39 38,151,119 40
OPERATING EXPENSES (Notes 4, 25 and 34) Marketing 15,663,463 17 17,274,374 18 General and administrative 5,883,158 7 5,852,395 6
Total operating expenses 21,546,621 24 23,126,769 24
OPERATING INCOME 14,216,298 15 15,024,350 16
NONOPERATING INCOME AND EXPENSES Other income (Notes 4, 25 and 34) 98,094 - 93,536 - Other gains and losses (Notes 4, 7, 15, 16 and 34) 145,680 - 275,644 - Financial costs (Notes 4, 25 and 34) (461,784) - (441,781) - Share of the loss of associates (Note 4) (79,524) - (164,917) - Loss on disposal of property, plant, equipment and intangible assets (Note 4) (756,192) (1) (683,934) (1) Impairment loss recognized on property, plant and equipment (Notes 4 and 14) - - (313,563) -
Total nonoperating income and expenses (1,053,726) (1) (1,235,015) (1)
INCOME BEFORE INCOME TAX 13,162,572 14 13,789,335 15
INCOME TAX (Notes 4 and 26) 2,308,929 2 2,378,660 3
NET INCOME 10,853,643 12 11,410,675 12
OTHER COMPREHENSIVE INCOME Items that will not be reclassified subsequently to profit or loss: Remeasurement of defined benefit plans (Note 4) 19,430 - (35,245) - 19,430 - (35,245) - Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations (Notes 4 and 23) (491) - 5,590 - (Continued)
- 37 - FAR EASTONE TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)
2017 2016 Amount % Amount %
Unrealized gains (losses) on available-for-sale financial assets (Notes 4 and 23) 45,872 - (60,497) - Cash flow hedges (Notes 4, 7 and 23) 24,698 - (17,269) - Share of other comprehensive income of associates accounted for using the equity method (Note 4) 81,589 - 65,243 - 151,668 - (6,933) -
Total other comprehensive income, net of income tax 171,098 - (42,178) -
TOTAL COMPREHENSIVE INCOME $ 11,024,741 12 $ 11,368,497 12
NET INCOME ATTRIBUTABLE TO: Owners of Far EasTone $ 10,856,682 12 $ 11,391,303 12 Noncontrolling interests (3,039) - 19,372 -
$ 10,853,643 12 $ 11,410,675 12
COMPREHENSIVE INCOME ATTRIBUTABLE TO: Owners of Far EasTone $ 11,027,319 12 $ 11,347,860 12 Noncontrolling interests (2,578) - 20,637 -
$ 11,024,741 12 $ 11,368,497 12
EARNINGS PER SHARE, NEW TAIWAN DOLLARS (Note 27) Basic $ 3.33 $ 3.50 Diluted $ 3.33 $ 3.49
The accompanying notes are an integral part of the consolidated financial statements. (Concluded)
- 38 - FAR EASTONE TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars, Except Dividends Per Share)
Equity Attributable to Owners of Far EasTone Other Equity Exchange Unrealized Gains Retained Earnings Differences (Losses) on Unappropriated on Translating Available-for-sale Noncontrolling Share Capital Capital Surplus Legal Reserve Special Reserve Earnings Foreign Operations Financial Assets Cash Flow Hedges Interests (Note 23) (Notes 4, 23 and 29) (Note 23) (Note 23) (Notes 4, 23 and 28) (Notes 4 and 23) (Notes 4 and 23) (Notes 4 and 23) Total (Notes 4 and 23) Total Equity
BALANCE AT JANUARY 1, 2016 $ 32,585,008 $ 12,058,158 $ 15,127,206 $ 824,480 $ 11,436,725 $ 829 $ 14,625 $ (140,666 ) $ 71,906,365 $ 752,531 $ 72,658,896
Appropriation of the 2015 earnings Legal reserve - - 1,143,672 - (1,143,672 ) ------Special reserve - - - (54,573 ) 54,573 ------Cash dividends - NT$3.174 per share - - - - (10,342,482 ) - - - (10,342,482 ) - (10,342,482 )
Cash dividends from capital surplus - NT$0.576 per share - (1,876,896 ) ------(1,876,896 ) - (1,876,896 )
Adjustments to share of changes in equities of associates - - - - (1,892 ) - - - (1,892 ) - (1,892 )
Changes in ownership interests of subsidiaries - (14,388 ) - - (12,549 ) - - - (26,937 ) 26,937 -
Cash capital reduction by subsidiaries ------(15 ) (15 )
Cash dividends distributed by subsidiaries ------(83,507 ) (83,507 )
Net income for the year ended December 31, 2016 - - - - 11,391,303 - - - 11,391,303 19,372 11,410,675
Other comprehensive income (losses) for the year ended December 31, 2016 - - - - (35,176 ) 3,809 (60,497 ) 48,421 (43,443 ) 1,265 (42,178 )
BALANCE AT DECEMBER 31, 2016 32,585,008 10,166,874 16,270,878 769,907 11,346,830 4,638 (45,872 ) (92,245 ) 71,006,018 716,583 71,722,601
Appropriation of the 2016 earnings Legal reserve - - 1,134,683 - (1,134,683 ) ------Special reserve - - - 13,560 (13,560 ) ------Cash dividends - NT$3.129 per share - - - - (10,195,849 ) - - - (10,195,849 ) - (10,195,849 )
Cash dividends from capital surplus - NT$0.621 per share - (2,023,529 ) ------(2,023,529 ) - (2,023,529 )
Adjustments to share of changes in equities of associates - - - - (5,182 ) - - - (5,182 ) - (5,182 )
Cash capital reduction by subsidiaries ------(15 ) (15 )
Difference between the price for acquisition or disposal of subsidiaries and carrying amount - - - - (144 ) - - - (144 ) 4,726 4,582
Changes in percentage of ownership interests of subsidiaries - - - - (50,221 ) - - - (50,221 ) 31,313 (18,908 )
Cash dividends distributed by subsidiaries ------(62,228 ) (62,228 )
Net income for the year ended December 31, 2017 - - - - 10,856,682 - - - 10,856,682 (3,039 ) 10,853,643
Other comprehensive income (losses) for the year ended December 31, 2017 - - - - 19,026 (516 ) 45,872 106,255 170,637 461 171,098
BALANCE AT DECEMBER 31, 2017 $ 32,585,008 $ 8,143,345 $ 17,405,561 $ 783,467 $ 10,822,899 $ 4,122 $ - $ 14,010 $ 69,758,412 $ 687,801 $ 70,446,213
The accompanying notes are an integral part of the consolidated financial statements.
- 39 -
FAR EASTONE TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars)
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax $ 13,162,572 $ 13,789,335 Adjustments for: Depreciation 10,032,639 9,444,179 Amortization 841,357 791,724 Amortization of concessions 3,078,021 2,581,338 Allowance for doubtful accounts 486,145 421,688 Net loss on financial assets at fair value through profit or loss 3,400 - Financial costs 461,784 441,781 Interest income (61,789) (43,085) Dividend income (2,056) (2,011) Share of the loss of associates 79,524 164,917 Loss on disposal of property, plant, equipment and intangible assets 756,192 683,934 Transfer of property, plant and equipment to expenses 132 - Gain on disposal of financial assets (52,270) (265) Reversal of write-down of inventories (22,329) (31,779) Impairment loss on nonfinancial assets - 313,563 Loss on change in fair value of investment properties 24,677 18,653 Deferred gain (loss) on derivative assets for hedging 37,362 11,438 Net changes in operating assets and liabilities Financial assets held for trading (598,600) - Derivative financial assets for hedging (1,700) - Notes receivable (5,960) (3,741) Accounts receivable (768,188) (1,071,514) Accounts receivable - related parties (46,485) 18,759 Inventories (2,260,164) 2,048,609 Prepaid expenses 334,684 70,798 Other current assets 187,571 (14,082) Notes payable 30,212 1,931 Accounts payable 2,111,440 (400,494) Other payables (860,579) (158,732) Provisions (42,177) (9,808) Unearned revenue 339,596 2,220 Other current liabilities 19,678 357,268 Net defined benefit liabilities (12,055) (10,272) Cash generated from operations 27,252,634 29,416,352 Interest received 57,860 50,094 Dividend received 2,056 2,011 Interest paid (337,893) (421,965) Income taxes paid (2,125,391) (1,971,801)
Net cash generated from operating activities 24,849,266 27,074,691
CASH FLOWS FROM INVESTING ACTIVITIES Proceeds of the disposal of available-for-sale financial assets 651,425 190,134 (Continued)
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FAR EASTONE TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In Thousands of New Taiwan Dollars)
2017 2016
Disposal of debt investments with no active market 251,631 611,656 Acquisition of financial assets carried at cost (45,000) - Proceeds of the disposal of financial assets carried at cost 945 - Acquisition of investments accounted for using the equity method (274,497) (30,000) Acquisition of property, plant and equipment (7,732,052) (8,906,250) Proceeds of the disposal of property, plant and equipment 76,351 38,081 Increase in refundable deposits (304,648) (316,693) Decrease in refundable deposits 281,198 312,106 Acquisition of intangible assets (7,538,693) (9,147,729) Cash received through merger 236,615 - Decrease (increase) in other financial assets 238,587 (297,880)
Net cash used in investing activities (14,158,138) (17,546,575)
CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in short-term borrowings (1,936,000) 2,293,029 (Decrease) increase in short-term bills payable (2,849,490) 2,819,463 Proceeds from issuance of bond payables 14,675,877 - Repayments of bonds payable (6,200,000) (1,600,000) Proceeds of long-term borrowings 8,900,057 1,699,831 Repayment of long-term borrowings (12,848,402) (8,141,487) Increase in guarantee deposits received 98,865 114,190 Decrease in guarantee deposits received (135,010) (131,836) Decrease in deferred revenue (7,422) (21,179) Cash dividends paid (12,281,606) (12,302,885) Net changes in noncontrolling interests (18,924) (15)
Net cash used in financing activities (12,602,055) (15,270,889)
EFFECT OF EXCHANGE RATE CHANGES (512) 6,749
DECREASE IN CASH AND CASH EQUIVALENTS (1,911,439) (5,736,024)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 10,258,743 15,994,767
CASH AND CASH EQUIVALENTS, END OF THE YEAR $ 8,347,304 $ 10,258,743
The accompanying notes are an integral part of the consolidated financial statements. (Concluded)
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Ethical Corporate Management Best Practice Principles The Far EasTone Telecommunications Co., Ltd. Article Current Articles Amended Articles Explanation Article 17 (Organization and responsibilities) (Organization and responsibilities) In accordance with organization The Applicable parties should exercise the best The Applicable parties should exercise the best adjustment, transfer the effort care of professional standards to keep the effort care of professional standards to keep the coordination responsibilities to Company from exercising unethical behaviors Company from exercising unethical behaviors Human Resources Department. and from time to time to review the result of and from time to time to review the result of implementation and continuous improvement to implementation and continuous improvement to assure of full implementation of ethical business assure of full implementation of ethical business conduct policies. conduct policies. For sound management of ethical business For sound management of ethical business conduct, Business Control Department shall conduct, Strategy & Finance Division shall coordinate related departments to implement coordinate related departments to implement following ethical management practices and following ethical management practices and regularly reports to the board of directors. regularly reports to the board of directors. 1. Assisting incorporation of ethics and moral 1. Assisting incorporation of ethics and moral values into the company's operation strategy values into the company's operation strategy and adopting ensuring ethical management and adopting ensuring ethical management measures in compliance with laws and measures in compliance with laws and regulations. regulations. 2. Adopting programs and procedures to 2. Adopting programs and procedures to prevent unethical conduct. prevent unethical conduct. 3. Setting up supervising mechanisms against 3. Setting up supervising mechanisms against business activities with higher unethical business activities with higher unethical conduct risks. conduct risks. 4. Promoting and coordinating awareness and 4. Promoting and coordinating awareness and educational activities with respect to ethics educational activities with respect to ethics policy. policy. 5. Developing a whistle-blowing system to 5. Developing a whistle-blowing system to ensure its effective operating. ensure its effective operating. 6. Assisting the board of directors and 6. Assisting the board of directors and management to audit and assess whether management to audit and assess whether
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the preventive measures taken for the the preventive measures taken for the purpose of implementing ethical purpose of implementing ethical management are operating effectively. management are operating effectively.
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Status of Directors’ shareholding on April 16, 2018 The list of the Seventh Term Board of Directors of Far EasTone Telecommunications Co., Ltd. Title Name Shares % Chairman Douglas Hsu, Representative of Yuan Ding Investment Co., Ltd. Peter Hsu, Representative of Yuan Ding Investment Co., Ltd. 1,066,657,614 32.73 Managing Director Jan Nilsson, Representative of Yuan Ding Investment Co., Ltd. Lawrence Juen-Yee LAU -- -- Independence Director Kurt Roland Hellström -- -- Chung Laung Liu -- -- Champion Lee, Representative of Yuan Ding Co., Ltd. 4,163,500 0.13 Jeff Hsu, Representative of Yuan Ding Co., Ltd. Keijiro Murayama, Representative of U-Ming Marine Transport Corp. 331,000 0.01 Director Bonnie Peng, Representative of Asia Investment Corp. 1,426,303 0.04 Toon Lim, Representative of Ding Yuan International Investment Co., 919,653 0.03 Ltd. Total shares owned by all Directors 1,073,498,070 32.94 The total legal registered shares owned by all Directors 78,204,019 2.40 Director and Employees’ compensation Year 2017 Director and Employees’ compensation has been approved by the 14th meeting of the seventh-term Board of Directors on February 23, 2018. The information regarding compensation to Directors and Employees are as underneath: - It is proposed to distribute NT$261,539,193 for employee compensation and NT$94,154,109 for Directors compensation. The distribution will take place in cash. - As the compensation to Employees and Directors are different from recognized estimated amount, the difference, reasons, and measures should be disclosed: Not applicable. Impact of Stock Dividend Distribution on Business Performance, EPS and Return on Investment Impact of Stock Dividend Distribution on Business Performance, EPS and Return on Investment: Not applicable.
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ARTICLES
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The Articles of Incorporation of Far EasTone Telecommunication Co., Ltd. Approved by Annual Shareholder’s Meeting on 2016/6/16 Chapter I. General Provisions Article 1 The Corporation shall be named Far EasTone Telecommunication Co., Ltd. and be incorporated as a company limited by shares in accordance with the Company Law of the Republic of China. Article 2 The scope of business of the Company shall be as follows: (1) G901011 Type I Telecommunications Enterprise; (2) G902011 Type II Telecommunications Enterprise; (3) F213060 Retail Sale of Telecom Instruments; (4) F113070 Wholesale of Telecom Instruments; (5) JA02010 Electric Appliance and Audiovisual Electric Products Repair Shops; (6) E701030 Restrained Telecom Radio Frequency Equipments and Materials Construction; (7) F401010 International Trade; (8) F204110 Retail sale of Cloths, Clothes, Shoes, Hat, Umbrella and Apparel, Clothing Accessories and Other Textile Products; (9) CC01070 Telecommunication Equipment and Apparatus Manufacturing; (10) I301020 Data Processing Services; (11) IZ11010 overdue receivables management service business; (12) F201070 Retail sale of Flowers; (13) F209060 Retail sale of Stationery Articles, Musical Instruments and Educational Entertainment Articles; (14) F213030 Retail sale of Computing and Business Machinery Equipment; (15) F218010 Retail sale of Computer Software; (16) IZ12010 Manpower Services; (17) JZ99050 Agency Services; (18) I301030 Digital Information Supply Services; (19) I401010 General Advertising Services; (20) IZ99990 Other Industry and Commerce Services Not Elsewhere Classified; (21) JE01010 Rental and Leasing Business; (22) I199990 Other Consultancy; (23) IE01010 Telecommunications Number Agencies; (24) JA02990 Other Repair Shops; (25) F401021 Restrained Telecom Radio Frequency Equipments and Materials Import; (26) CC01060 Wired Communication Equipment and Apparatus Manufacturing; (27) CC01080 Electronic Parts and Components Manufacturing; 46
(28) CC01110 Computers and Computing Peripheral Equipments Manufacturing; (29) CC01120 Data Storage Media Manufacturing and Duplicating; (30) CC01990 Electrical Machinery, Supplies Manufacturing; (31) CD01020 Tramway Cars Manufacturing; (32) E601010 Electric Appliance Construction; (33) E601020 Electric Appliance Installation; (34) E603010 Cables Construction; (35) E603050 Cybernation Equipments Construction; (36) E603080 Traffic Signals Construction; (37) E603090 Illumination Equipments Construction; (38) E605010 Computing Equipments Installation Construction; (39) E701010 Telecommunications Construction; (40) E701020 Channel KU and C of Satellite TV Equipments and Materials Construction; (41) EZ05010 Apparatus Installation Construction; (42) F113050 Wholesale of Computing and Business Machinery Equipment; (43) F114080 Wholesale of Tramway Cars and Parts; (44) F118010 Wholesale of Computer Software; (45) F119010 Wholesale of Electronic Materials; (46) F214080 Retail Sale of Tramway Cars and Parts; (47) F214990 Retail Sale of Other Transport Equipment and Parts; (48) G202010 Parking Garage Business; (49) I103060 Management Consulting Services; (50) I301010 Software Design Services; (51) IG03010 Energy Technical Services; (52) IZ13010 Internet Identify Services; (53) J101050 Sanitary and Pollution Controlling Services; (54) F108031 Wholesale of Drugs, Medical Goods; (55) F208031 Retail sale of Medical Equipments; (56) I301040 Third Party Payment Platform; (57) F399040 Non-Store Retailing (58)ZZ99999 Other business items that are not prohibited or restricted by law, except those that are subject to special approval. Article 3 The Corporation may provide guarantees for third parties by the regulation of Procedure for Making Endorsements and Guarantees. The Corporation may also act as a shareholder with limited liability of another company. Upon approval of the Board Directors, its investment may exceed forty percent (40%) of the paid-in capital of the Corporation, notwithstanding Article 13 of the
47
Company Law, but the Company shall follow the Company’s “Procedures for Handling Acquisition or Disposal of Assets” for acquiring assets. Article 4 The head office of the Corporation shall be located in Taipei, Taiwan, ROC. The Board of Directors may decide to establish branch offices within or outside the territory of the Republic of China. Chapter II. Shares Article 5 The registered capital of the Company is NT$42,000,000,000 and is divided into 4,200,000,000 common shares with a par value of NT$10 each share. The Board is authorized, at different stage, to issue the shares that are not outstanding. Article 6 Prior to issuance, the share certificates of the Corporation shall bear the shareholders’ names, shall be numbered serially, shall be signed or sealed by three or more Directors of the Board, and certified by the competent government agent. The share certificates may not be printed to represent the Company’s shares. Registration with the Taiwan Securities Central Depository Co., Ltd. is necessary. On the total number of shares, the Company may, as well, consolidate share certificates for printing, provided that the share certificates shall be put into the Taiwan Securities Central Depository Co., Ltd. for deposit. The Company may, while requested by the Taiwan Securities Central Depository Co., Ltd., consolidate shares to issue share certificates of large denomination. The Company may issue preferred stocks. Where the Company is merged with another company, the Company is not required to come to resolution through a preferred stocks shareholders’ extraordinary meeting. Article 7 The Company shall handle equity affairs in compliance with “Regulations Governing Equity Affairs of Public Offering Companies” and other laws concerned. Article 8 No transfer of share certificates shall be permitted within sixty days prior to a regular meeting of shareholders, thirty days prior to a special meeting of shareholders, or within five days prior to the date fixed for distributing dividends, bonuses, or other benefits. Chapter III. Shareholders’ Meetings Article 9 Shareholders’ meetings shall be convened as follows: (1) Regular meeting –to be convened by the Board of Directors within six months from closing of every fiscal year; and (2) Special meeting – shall be convened in accordance with relevant laws and regulations. Article 10 Unless otherwise provided for in the Company Law and these Articles of Incorporation, the shareholders’ meeting shall be duly called pursuant to the Company’s Regulations Governing Shareholders’ Meetings. Article 11 A notice to convene a regular meeting of shareholders shall be given to each shareholder thirty days in advance. A notice to convene a special meeting of shareholders shall be given to each shareholder fifteen days in advance. The notice shall state the time, place and purpose of the meeting to be convened. Article 12 Resolutions at a Shareholders’ meeting shall, unless otherwise provided for in the Company Law, be adopted by a majority vote of shareholders present in person or by proxy, who represent a majority of the total number of outstanding shares.
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Article 13 In case a shareholder is unable to attend the Shareholders’ meeting, he/she may make another person his/her proxy to attend the meeting. They proxy document for this purpose must be provided, however, in the event the same proxy acts for two or more shareholders, his delegated voting power shall not exceed three percent (3%) of the total voting power of the Company’s total issued shares and such portion of shares exceeding three percent (3%) shall not be counted for vote purposes. This limitation shall not apply to holders of proxies engaged in the trust business or the shares transfer agency. Article 14 Resolutions adopted at a meeting of the shareholders shall be recorded in the minutes of the proceedings which shall be prepared in English and in Chinese and shall be signed and sealed by the chairman of the meeting. The minutes of proceedings shall also include the time and place of the meeting, name of the chairman, number of shares represented by attending shareholders (or proxies) and the manner in which resolutions had been adopted, as well as other essentials of the proceedings. The minutes shall be given to each shareholder within twenty (20) days after the meeting and may be effected by means of a public notice and shall be duly filed according to law along with a list of shareholders present at the meeting and the proxies. Chapter IV. Directors and Officers Article 15 The Company shall have nine (9) to eleven (11) Directors, to be elected who are competent persons at Shareholders’ meeting. The tenure of office of Directors will be three (3) years and they will be eligible for re-election. Among the aforesaid number of members of the Board of Directors shall have three (3) Independent Directors. Election of Directors shall adopt candidate nomination system according to Article 192-1 of the Company Act. Regulations governing the professional qualifications, restrictions on shareholdings and concurrent positions held, assessment of being independent, method of nomination, and other matters for compliance with respect to Independent Directors shall follow relevant regulations prescribed by the Competent Authority. The remuneration for Directors shall be determined by the Remuneration Committee and the Board of Directors. The total number of registered shares owned by all Directors shall be determined pursuant to “Rules and Review Procedures for Director and Supervisor Share Ownership Ratios at Public Companies”, as amended May 20, 2008. Article15-1 Pursuant to Article 14-4 of the Securities and Exchange Act, as amended June 5, 2013, the Company will establish an Audit Committee when as the 7th Term Board of Directors is elected into the office in 2015. The Audit Committee shall make up of the entire number of Independent Directors, is responsible for executing powers relegated to Supervisors by the Company Act, Securities and Exchange Act and other laws and regulations. The organizing members, exercise of powers and other matters to be abided by the Audit Committee shall follow related laws, regulations or rules or regulations of the Company. The organization regulations of the Audit Committee shall be stipulated by the Board of Director. Article 16 A corporate shareholder of this Company shall have the right to designate a number of representatives to be elected as Director(s) of the Company and the right to designate representatives as substitutes or successors of such Director(s). Article 17 The Managing Directors shall be selected from among the directors. He Directors shall form a Board of Directors. The chairman or the vice chairman of the board shall be elected from the managing directors. He Managing Directors shall form a Board of Managing Directors. During the recess of the board of directors, the managing directors shall regularly exercise the power and 49
authority of the board of directors accordingly. Article 18 A meeting of the Board of Directors shall be convened by its Chairman, provided that the initial meeting of each term of the Board of Directors shall be called by the Director who receives the number of ballots representing the largest of votes. Directors may attend the meeting in person or by proxy. A Director cannot represent more than one absentee Director for a meeting of the Board of Directors. A Director residing in a foreign country may appoint, in writing, a Director residing within the Republic of China as his alternate to attend the meetings of the Board of Directors regularly, provided, the appointment shall be registered with competent government authority. In case a meeting of the Board of Directors is held via visual communication network, then the Directors taking part in such a visual communication meeting shall be deemed to have attended the meeting in person. The notice for the Board meeting shall state the reasons and agenda of the meeting, and shall be sent to each Directors seven (7) days prior to the meeting, provided, however, that in case of emergency the meeting may be convened at any time. The meeting notice provided in preceding paragraph could be issued by email or fax. Article 19 The Chairman of the Board of Directors shall preside at meetings of the Board of Directors. In case the Chairman of the Board of Directors is on leave or absent or cannot exercise his power and authority for any cause, the Vice Chairman shall act on his behalf. In case of absent of or unavailability of the Vice Chairman as well, the Chairman of the Board of Directors shall designate one of the managing directors to act on his behalf. In the absence of such a designation, the managing directors or the directors shall elect from among themselves an acting chairman of the Board of Directors. Article 20 The powers of the Board of Directors shall be as follows: (1) make business plans; (2) review and examine important rules; (3) appoint and dismiss officers; (4) determine the establishment, change or revocation of any domestic or foreign branch offices; (5) review and examine budget and financial reports; (6) establish audit committee or any other functional committees; review and approve regulations governing the exercise of power and duty of these functional committees. (7) implement any other matters designated by resolution of the shareholders or in accordance with the Company Law, and determine any other important matters. Article 21 (Omitted) Article 22 The Company has one President, one General Auditor and several Executives Vice Presidents and Vice Presidents. All managerial officers shall be duly appointed, discharged by the Board of Directors through a majority vote of the attending Directors who represent a majority of the total Directors. Article 23 The President shall take charge of all affairs of the Corporation in accordance with the order of the Chairman of the Board. The Executive Vice Presidents shall assist the President. Article 23-1 The Company shall take out liability insurance for Directors and officers with respect to their liabilities resulting from exercising 50
their duties during their terms of occupancy. Chapter V. Accounting Article 24 The business year of the Corporation shall begin on January 1st and end on December 31st of each year. Annual closing of books shall be made at the closing date / end of each business year. Article 25 At the end of each fiscal year, the Board of Directors shall, on thirty days prior to the regular Shareholders’ Meeting, prepare the following reports, and forward them to the Audit Committee for examination and for the latter’s preparing examination report: (1) Report on operations; (2) Financial reports; and (3) Proposal concerning distribution of net profits or action to deal with losses. The appointment, dismissal and compensation of the certified accountant responsible for auditing the above books and reports shall be determined by the Board of Directors by a majority vote of the attending Directors representing a majority of the Board members. Article 26 IF there is profit for the current year, the Company shall set aside 1%~2% of it as compensation for employees and, shall set aside not more than 1% of it as compensation for Directors. If there is accumulated loss on the books of the Company, portion of the profit equaling the loss shall first be set aside to cover the latter. The employees’ compensation may be distributed by shares or by cash. The company shall, by a resolution adopted by a majority vote at a meeting of board of directors attended by two-thirds of the total number of directors, determine the actual profit ratio of distribution, amount, methods, and number of shares, and shall report to the shareholders’ meeting. The board of directors shall also determine the ratio of distribution of directors’ compensation and amount and shall report to the shareholders’ meeting. If the account closing at the end of the fiscal year of the company discloses profit, the company, when allocating its profit, after paying all taxes, making good losses of previous year(s), shall first set aside ten (10) percent of said profit in balance as statutory surplus reserve, and then set aside special surplus reserve as required by the Articles of Incorporation or by resolution of the shareholders’ meeting. The rest of surplus, if any, shall be consolidated with the unallocated earning accumulated in the preceding year(s) as distributable earning, as determined by the shareholders’ meeting to be allocated equally according to all shares to every shareholder as shareholders’ dividend or to be retained. Article 27 The dividend payout ratio each fiscal year shall be no less than fifty percent 50% of the final surplus which is the sum of after-tax profit of the fiscal year to withhold previous loss, if any, legal reserve and special reserve as required by law; while cash dividend declared by the Corporation shall be no less than fifty percent (50%) of the total dividends distributed that year; provided, however, depending on whether the Corporation has any financial structure improvement or major capital expenditure plans in the year, the earning unallocated and accumulated in the preceding year may be distributed, and the payout ratio and percentage of cash dividend may be raised or lowered by a resolution adopted at the shareholders’ meeting. Article 28 Dividends will be paid only to those shareholders whose names are recorded on the shareholders’ register on the date fixed for distributing dividends. 51
Chapter VI. Appendix Article 29 Other rules of the Corporation shall be set up separately by the Board of Directors. Article 30 Provisions of the Company law shall be referred to for matters not provided for in these Articles of Incorporation. Article 31 These Articles of Incorporation were agreed upon and signed on Mar. 7, 1997. First amended on Jun. 6, 1997; Second amended on Aug. 20, 1998; Third amended on Apr. 28, 1999; Fourth amended on Apr. 21, 2000; Fifth amended on Dec. 28, 2000; Sixth amended on May. 15, 2001; Seventh amended on Jun. 25, 2002; Eighth amended on May 23, 2003; Ninth amended on Feb. 18, 2004; Tenth amended on Jun. 30,2004; Eleventh amended on May 20, 2005; Twelfth amended on May 26, 2006; Thirteenth amended on June 12, 2007; Fourteenth amended on June 15, 2010; Fifteenth amended on June 9, 2011; Sixteenth amended on June 13, 2012; Seventeenth amended on June 13, 2013; Eighteenth amendment on June 11, 2014; Nineteenth amendment on June 18, 2015; Twentieth amendment on June 16, 2016.
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Far EasTone Telecommunications Co., Ltd Ethical Corporate Management Best Practice Principles Approved by Board of Director Meeting on 2018/5/4 Article 1 (Purpose and applicable subjects and scope) For the purpose of nurture a sustainable development and establishment of an organizational culture of ethical management, the Company specifically stipulates this Ethical Corporate Management Best Practice Principles (the “Principles”). The Principles is applicable to the Company’s directors, managers, employees, mandataries and people who have actual ability of control (the “Applicable parties”). The Principles is applicable also to subsidiaries, non-profit corporations where the Company directly or indirectly contributes over 50% of fund and other group enterprises and organizations, such as institutions or corporations which the Company have actual ability of control. Article 2 (Prohibition against dishonest behaviors) During the course of business activities, the Applicable parties shall not directly or indirectly offer, promise, ask or accept any illegitimate benefits or show any dishonest behavior, such as violation of honesty, illegal behavior or breach of fiduciary duty in order to gain or maintain benefits (the “dishonest behaviors”). The subjects of foresaid behaviors include public servants, political candidates, political parties or political party workers, public or private enterprises or institutions and their directors, supervisors, managers and employee, actual controllers and other stakeholders. Article 3 (Forms of benefits) Benefits referred to in the Principles are all things with value, including any form or name of money, gifts, commissions, positions, service, special discounts, kickbacks, etc., except those acceptable under normal social customs, purely accidental, and does not contain effect on specific rights and obligations. Article 4 (Compliance with laws and regulations) The Company should comply with the Company Act, Securities and Exchange Act, Business Entity Accounting Act, Political Donations Act, Anti-Corruption Act, Government Procurement Act, Act on Recusal of Public Servants Due to Conflicts of Interest, related regulations governing securities listing or other rules governing business behaviors as the basis of implementation of basic prerequisite for ethical corporate management. Article 5 (Policy) The Company stipulates policies on the basis of ethics in accordance with its business philosophy of incorruptibility, transparency and responsibility and establishes good corporate governance and risk control mechanisms in order to create a sustainable development environment. Article 6 (Preventive Programs) The Company sets specific ethical management practices and behavior standards for the prevention of dishonest behaviors in
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accordance with the Principles and specifies things to be noticed when the Applicable parties perform respective business. Article 7 (Scope of Principles of Business Conduct) The Company stipulates preventive programs should at least include precautions against the following behaviors: 1. Offering and accepting bribes. 2. Making illegal political donation. 3. Improper charitable donation or sponsorship. 4. Offering or accepting unreasonable gifts, entertainment or other illegitimate benefits. 5. Misappropriation of trade secrets and infringement of trademark rights, patent rights, copyrights, and other intellectual property rights. 6. Engaging in unfair competitive practices. 7. Preventing products or services from damaging the rights and interests of stakeholders. Article 8 (Commitment and implement) The Company shall specify on its website and in its annual reports its ethical business policies and the commitment by the board of directors and the management on rigorous and thorough implementation of such policies, and shall carry out the policies in internal management and in commercial activities. Article 9 (Ethical business conduct activities) The Company conducts business activities in a fair way based on the principle of ethical business conduct. The Company will consider the legality of contractors, suppliers, or other business counterparties and find out whether these parties have any records of unethical behaviors before engaging in business contact to avoid making transactions with counterparties with records of dishonest behaviors. When the Company enters into any important contract with contractors, suppliers, or other trading counterparties, the contract shall include clauses of conformity with honest business conduct policies and clauses of termination or dissolution of the contract if the counterparty is involved in any dishonest behavior. Article 10 (Prohibition against offering and accepting bribes) The Applicable parties shall not directly or indirectly offer, promise, ask or accept any improper benefits in whatever form to or from clients, contractors, suppliers, public servants, or other stakeholders when they conduct business. Article 11 (Prohibition against making illegal political donation) Any donation made by the Applicable parties to political parties, or organizations which participate in political activities or individuals should conform the Political Donation Act and related internal procedures. No business benefit or dealing advantages shall be obtained through such donation. Article 12 (Prohibition against improper charitable donation or sponsorship) Charitable donation or sponsorship made by the Applicable parties should conform to applicable laws and regulations and internal procedures and shall not be used as disguised bribery. Article 13 (Prohibition against unreasonable gifts, entertainment or other illegitimate benefits) 54
The Company and the Applicable parties shall not directly or indirectly provide or accept any gifts, special treatment and improper benefits to establish business relationship or affect commerce transactions, except for souvenirs or promotion gifts with value no more than NT$2,000 or with logos of suppliers, distributors or customers based on local customs and courtesy. Article 14 (Prohibition against infringement of intellectual property rights) The Company and the Applicable parties shall observe applicable laws and regulations dealing with intellectual property rights; may not use, disclose, dispose of, or damage intellectual property or other acts infringing intellectual property rights without prior consent of the intellectual property rights holder. Article 15 (Prohibition against engaging in unfair competition practices) The Company shall engage in business activities in accordance with applicable competition laws and regulations, and may not engage in unfair competition practices. Article 16 (Preventing products and services from damaging stakeholders) The Company and the Applicable parties shall observe applicable laws and regulations in the course of provision of products and services to ensure the information transparency of products and services to ensure the transparency of information, with a view to prevent damaging the rights of consumers or other stakeholders to be caused by such products and services. Article 17 (Organization and responsibilities) The Applicable parties should exercise the best effort care of professional standards to keep the Company from exercising unethical behaviors and from time to time to review the result of implementation and continuous improvement to assure of full implementation of ethical business conduct policies. For sound management of ethical business conduct, Strategy & Finance Division shall coordinate related departments to implement following ethical management practices and regularly reports to the board of directors. 1. Assisting incorporation of ethics and moral values into the company's operation strategy and adopting ensuring ethical management measures in compliance with laws and regulations. 2. Adopting programs and procedures to prevent unethical conduct. 3. Setting up supervising mechanisms against business activities with higher unethical conduct risks. 4. Promoting and coordinating awareness and educational activities with respect to ethics policy. 5. Developing a whistle-blowing system to ensure its effective operating. 6. Assisting the board of directors and management to audit and assess whether the preventive measures taken for the purpose of implementing ethical management are operating effectively. Article 18 (Compliance with laws and regulations in business execution) The Applicable parties should observe laws and regulations and preventive measures in executing business. Article 19 (Act on recusal due to conflict of interests) The Company stipulates policies to prevent conflict of interests in order to identify, monitor, and manage unethical conduct risks caused by such conflict, and offers appropriate channels for the directors, managers and other stakeholders attending the board of director meeting to voluntarily elaborate any possible conflict of interest facts between the Company and them. 55
The Company’s directors, , managers, and other stakeholders attending board meetings shall highly self-disciplined, shall state the important aspects of the relationship of interest at the given board meeting when any proposed agenda item to be discussed in the meeting of the board of directors has conflict of interests against himself or a corporate entity by which himself represents, if his or her participation is likely to prejudice the interest of the Company, he/she shall recusal and be not allowed to participate in discussion and voting, and he/she is not allowed to exercise as proxy on behalf of other directors. Directors shall also be self-disciplined and not be allowed to support each other. The Applicable parties shall not obtain any illegitimate benefit for themselves, their spouses, parents, children or any other people through their position or influence in the Company. Article 20 (Accounting and internal control) The Company establishes an effective accounting and internal control system respecting operating activities with higher unethical business operation risk. The Company has no off-the-book accounts or secret accounts and frequently carries out review to ensure the effective design and implementation of the system. The Company’s Internal Audit department shall regularly check compliance of the foresaid system and prepare the audit report for reporting to the board of directors. The Internal Audit may engage certified public accountant to carry out the audit, and may engage professionals to assist if necessary. Article 21 (Operating procedures and behavior guidelines) The Company stipulates handling procedures or behavior standards to prevent dishonest behaviors. The contents include the following: 1. Recognition criteria for offering or accepting illegitimate benefits. 2. Handling procedures for offering legal political donation. 3. Handling procedures and amount standards for offering legitimate charitable donation or sponsorship. 4. Regulations, reporting and handling procedures to avoid conflict of interest related to work. 5. Confidentiality for secret and sensitive data obtained from business. 6. Standards and handling procedures for suppliers, customers, and counterparties involved in dishonest behaviors. 7. Handling procedures for discovery of violation of Principles of Business Conduct. 8. Disciplinary punishment for violators. Article 22 (Training and assessment) The Company’s chairman, president, or senior management shall communicate the importance of corporate ethics to its directors, employees, and mandataries on a regular basis. The Company undertakes educational propaganda of the Principles for the Applicable parties on a regular basis. The Company periodically gives training and communication to the Company’s staff and actual controller. Operating units shall communicate with counterparties which have business contacts with the Company and make them understand the determination, policies, and preventive measures of the Company’s ethical management conduct and results of violation of ethical behaviors. The Company shall combine the ethical business conduct policies with employees’ performance assessment. 56
Article 23 (Reporting System) The Company establishes a mailbox to be used by Company’s internal people and outsiders. When material misconduct or likelihood of material impairment to the Company is investigated to be true by the department in charge of handling the correspondence received, the department shall immediately prepare a report and notify the independent directors in writing. Article 24 (Punishment and appeal system) When the Applicable parties violated ethical management practice, such misconduct will be penalized by the Company as appropriate under the circumstances. The Company shall set up an appeal system for people who violate the Principles in order to seek remedy in accordance with related regulations. Article 25 (Disclosure of information) The Company shall disclose the measures taken for implementing ethical corporate management policy, the status of implementation, and the effectiveness of promotion on the corporate website, annual reports and prospectuses, and shall disclose the contents of the Principles on the Market Observation Post System(MOPS). Article 26 (Review and revision of the Principles) The Company shall from time to time observe the developments of domestic and foreign standards for ethical corporate management and encourages the Applicable parties to submit their suggestions for reviewing and improving ethical corporate management policies and measures to be taken in order to upgrade effectiveness of the Company’s ethical business management conduct. Article 27 (Implementation) The Principles shall enter into force after being approved by the Audit Committee and the board of directors, and shall be reported at the shareholders’ meeting afterwards. The same procedure shall be followed to amend the Principles.
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Far EasTone Telecommunications Co., Ltd. Directors Election Guidelines Approved by Annual Shareholder’s Meeting on 2015/6/18. Article 1 These guidelines shall apply to the election of directors of the Corporation, unless the laws and Company’s articles of incorporation other relevant regulations shall apply thereto. Article 2 The election of the Corporation’s directors shall be on the basis of accumulation of votes. Ballot of the eligible voter shall be assigned with code of certificate of present voter. The ballots to be prepared by Board of directors shall indicate serial number of present voter and the number of votes he represented. Article 3 The election of the Independent and non-Independent Directors of the Corporation shall be held at the same time in accordance with the number of persons to be elected, with voting rights be separately calculated for the Independent and non-independent Director. Those receiving ballots representing the highest numbers of voting rights will be sequentially elected. When two or more candidates win same votes thus exceeding the seats, the ones with the same number of voting rights shall draw lots to determine. In the event of absent tied candidate or candidates, the presiding person of the election shall draw the lot representing the absent candidate(s). Election of Directors shall adopt the candidates nomination system in accordance with Article 192-1 of the Company Act and with respect to the qualification, independent condition and other matters of electing Independent Directors, “Regulations Governing Appointment of Independent Directors and Compliance Matters for Public Companies” and other related laws and regulations shall govern. Article 4 In the beginning of the election, the chairman shall designate two canvassers and two tally clerks to carry out relevant missions. The canvasser shall be limited to shareholder of the Corporation. Article 5 The canvasser shall perform the following missions: (1) Prior to casting of votes, open the vote box to the participants and have a seal attached onto the cover of box. (2) Maintain good order for vote casting and prevent any negligence or irregularities in voting. (3) Upon completion of voting, remove the seal from box cover, take out the ballots and count the number of ballots. (4) Check to see if there are any invalid votes and have the valid votes hand over to tally clerk. (5) Conduct supervision over the votes recorded by tally clerk and votes won by the eligible directors/supervisors. Article 6 Where a candidate is a natural person, the voters shall expressly enter the candidate’s account name and shareholder account number on the ballots if he is a shareholder, and shall expressly enter the candidate’s name and ID document number on the ballots if he is not a shareholder. Where a candidate is a government or a corporate shareholder, other than the shareholder account number, the voters may enter as well the name of the government or a corporate shareholder and name of the representative. In case of several representatives, the names of representatives shall be entered. Article 7 A ballot is null and void if: 58
(1) Not in the ballot form as required under the Regulations; (2) Bearing two or more candidates on a same ballot; (3) Remaining blank bearing no entries from the vote; (4) Bearing entries not satisfactory to Article VI or bearing other irrelevant wording; (5) Bearing vague, illegible wording; (6) Bearing a candidate who proves nonconforming in qualifications. Article 8 Ballot boxes shall be produced and prepared by the Corporation, and be opened and examined by the ballot examiner to the public prior to casting of votes. Article 9 After all ballots are cast into ballot box, the canvasser shall join the tally clerk in opening of ballot box. Article 10 The canvasser shall supervise over the count of ballots of tally clerk. Article 11 In case of any doubts about the ballots, the canvasser shall be requested to conduct a verification to see the validity of the ballots. The invalid ballots shall be segregated from the valid ones and be certified as invalid ballots by the canvasser after having counted number of ballots and the voting rights. Article 12 According to results of the votes, the canvasser shall conduct a check on the valid ballots and invalid ballots and produce a record indicating the number of valid ballots and voting rights, the invalid ballots and the voting rights and then the chairman shall announce the names of the elected Directors and Supervisors. Article 13 Board of Directors shall issue notice of being elected to the Directors-elected. Article 14 These guidelines shall become effective upon having been approved by meeting of shareholders and the same provision shall also apply to revision thereto.
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Far EasTone Telecommunications Co., Ltd Regulations Governing the Conduct of Shareholders’ Meetings Approved by Annual Shareholder’s Meeting on 2014/6/11 Article 1 These Regulations governing all affairs of the Company’s shareholders’ meetings. Article 2 The Company’s Shareholders’ meeting shall be held at a place where the Company is headquartered or a place facilitating and appropriate to shareholders (or proxies thereof), and shall be held not earlier than 9:00 the morning or later than 3:00 in the afternoon. The meeting notice of the Shareholders’ meeting shall state the registration time, location and other important information. The aforesaid registration time shall start at least thirty minutes before the beginning of the meeting. The registration location shall bear clear indication and staffed with sufficient and competent personnel. When calling a Shareholders’ meeting, the Company shall adopt electronic transmission as one of the methods for exercising voting power, and such exercise shall be specified in the meeting notice. Shareholders who exercise their voting power via electronic transmission shall be deemed as attending the shareholders' meeting in person, but they shall be deemed as having waived their exercise of voting power with respect to any temporary motions and amendments/alternates to original motions, proposed at the Shareholders’ meeting. Shareholders (or by proxies) shall attend the Meeting carrying attendance card, sign-in card or other certificate of attendance. The proxy solicitor shall provide Citizen ID for verification purpose. While attending the Shareholders’ Meeting, Shareholders (or by proxies) may submit sign-in cards rather than personal registration with signatures. The attendance at a Shareholders' meeting shall be counted based on the quantity of shares. The number of shares shall be counted based on the certificate of attendance as furnished plus the quantity of shares for which the voting power is exercised via electronic transmission. The Company may appoint the retained Attorneys-at-Law, CPAs or other people concerned to attend a Shareholders’ meeting as an observer. The Shareholders’ meeting staff shall wear identity certificates or sashes. A Shareholders’ meeting shall be chaired by the chairman if it is called by the chairman. In absence of the Chairman or his being unable to exercise his functions, the Vice Chairman shall act in his place. In absence of a Vice Chairman or while the Vice Chairman is unable to exercise his functions, the Chairman shall appoint a Director to act in the place otherwise a Director shall be elected from among themselves to act in the place. Where the Board of Directors meeting is called by a person beyond the Board of Directors, the meeting shall be chaired by the convener. Where there are two or more qualified conveners, one shall be elected from among themselves to chair the meeting. To be eligible to substitute to chair a Shareholder’s Meeting, it requires a Director having been serving with a tenure for more than six months, and with a familiarity of both the daily operation and finance condition of the company. The same requirements apply to representative of an institutional Director. The Company shall record in sound or videotape the Shareholders’ meeting throughout the process and shall keep the videotape or
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record for a minimum of one year. If a shareholder files a lawsuit pursuant to Article 189 of the Company Law, the video and audio records shall be conserved until the conclusion of the litigation. Article 3 The chairman may call to order to the meeting where a shareholders’ meeting is attended by shareholders (or proxies thereof) representing a majority of the total issued shares. The chairman may announce extension of the time if the attendance is below the specified quorum within the specified time limit. The chairman may announce two extensions in maximum and the total period of extension shall not exceed an hour. In the event the total attendance is still below the specified quorum with two extensions but represents up to one-third of the total issued shares through shareholders (or proxies thereof), decision may be resolved on ordinary issues through a quasi-resolution by a majority vote of the attending shareholders (or proxies thereof). In the event the total number of shares represented by shareholders (or proxies thereof) is up to the specified quorum after the quasi-resolution is made, the chairman shall bring the quasi-resolution to the shareholders’ meeting for acknowledgement retroactively. Article 4 The shareholders’ meeting’s agenda shall be determined by the board of directors if the meeting is called by the board of directors. The meeting shall be handled according to the established agenda, which shall not be changed unless resolved by the shareholders’ meeting. The preceding provision is applicable mutatis mutandis to a shareholders’ meeting called by another person entitled to call the shareholders’ meeting beyond the board of directors The chairman shall not announce adjournment of the meeting until the issues set forth in the two preceding paragraphs (including occasional motion) unless duly resolved. Where the Chairman announces adjournment against the aforementioned provision at a shareholders’ meeting, one may be elected by a majority vote of the attending shareholders to chair and continue the meeting. After the meeting is adjourned as resolved, shareholders shall not elect a new chairman to continue the shareholders’ meeting at the same location or a location elsewhere. Article 5 A shareholder (or proxy) shall submit floor requisition, bearing attendance certificate code, shareholder account number and subjects so that the chairman will appoint the floor order before speaking in floor. A shareholder (or proxy) who does not speak up shall be deemed having not spoken up even he has submitted the floor requisition. Where the contents actually spoken are found differing from the entry in the floor requisition, only the contents of the verified speech shall govern. Article 6 A proposal shall be posed in writing. Except the proposals enumerated on the agenda, a proposal posed by a shareholder to amend the provided proposals, alternatives or other proposals by means of occasional motion shall be seconded by other shareholders (proxies). This same is applicable to a proposal to change agenda, to adjourn. The total number represented by the proposing shareholder and seconding shareholders shall be up to 100,000 shares minimum. Article 7 Explanation to a proposal shall not exceed five minutes. Speech as an inquiry or in reply shall not exceed three minutes per person and may be extended for another three minuets if permitted by chairman. The chairman may stop a shareholder (or proxy) from speaking if he speaks beyond the specified time limit, specified issues or permitted times. When a shareholder (or proxy) speaks in floor, other shareholders (proxies) shall not interrupt unless agreed upon 61
by the chairman and the speaking shareholder (or proxy) otherwise the chairman shall stop the interruption. Article 15 shall apply if such shareholder (or proxy) objects the chairman in stopping the interruption. Article 8 On the same issue, each shareholder shall not speak more than twice. Where a corporation is authorized to attend a shareholders’ meeting, such corporation shall appoint only one proxy to attend the meeting. Where a corporation appoints more than two proxies to the meeting, only one proxy may speak in floor. Article 9 After an attending shareholder (or proxy) speaks, the chairman may reply himself or by appointing another person. Amidst discussion of a proposal, the chairman may, in due time, announce conclusion of the discussion or announce discontinuation of the discussion as necessary. Article 10 On a proposal the discussion process of which is announced concluded or discontinued, the chairman shall announce voting pursuant to the number of shares represented. The staff to monitor resolution and to tally votes shall be appointed by the chairman and shall be subject to consent by attending shareholders (proxies). The staff to monitor voting shall only be shareholders. Article 11 Unless otherwise provided for in law or Articles of Incorporation, decisions in the shareholders' meeting shall be resolved by a majority vote of the attending shareholders (proxies). Where any shareholder who exercises voting power via electronic transmission does not object to the motion, and neither does the other present shareholders upon the chairperson’s inquiry, the motion shall be deemed as ratified as validly as if voted by ballot. Where any shareholder objects to the motion, a vote by ballot shall be applied, and the chairperson may decide to vote on a case by case basis, or adopt a package vote or split vote against various motions (including the motion for election), and count votes separately. In case of an amendment or alternative to a same proposal, the chairman will determine the order of voting. Where one among them is resolved, all others shall be deemed vetoed and call for no more voting process. The results of voting and election shall be announced on the spot after the vote counting and be kept for records. Article 12 During the process of the meeting, the chairman may announce an intermission as the actual situation may justify. Article 13 In case of an air-raid alarm during process of a meeting, the meeting shall be discontinued forthwith for evacuation. The meeting may be resumed an hour after the “all-clear” announcement. Article 14 The chairman may command security guards or discipline personnel to help maintain the order of the meeting. Such security guards or discipline personnel shall wear armbands to identify their capacity while on duty to maintain the order. Article 15 The shareholders (proxies) shall accept instructions by the chairman, the security guards or discipline personnel in maintaining the order. The chairman, the security guards or discipline personnel may expel those who interfere with the shareholders’ meeting. Article 16 Any matters insufficiently provided for herein shall be subject to the Company Law, Securities Trading Law and other laws concerned. Article 17 These Regulations and amendment hereof shall come into enforcement after binge resolved in the shareholders’ meeting.
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