As filed with the Securities and Exchange Commission on January 21, 2009
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
KT Corporation
(Exact name of Registrant as specified in its charter)
| | | | |
| Republic of Korea | | 4813 | | Not Applicable |
(Jurisdiction of incorporation or organization) | | (Primary Standard Industrial Classification Code Number) | | (I.R.S. Employer Identification Number) |
206 Jungja-dong
Bundang-gu, Sungnam,
Gyunggi-do, Korea, 463-711
Telephone: +82-31-727-0950
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
KT America, Inc.
3435 Wilshire Blvd. Suite 2160
Los Angeles, CA 90010
United States
Telephone: 213-351-1261
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
| | |
Jinduk Han, Esq. Cleary Gottlieb Steen & Hamilton LLP 39th Floor, Bank of China Tower One Garden Road, Central Hong Kong, S.A.R. People’s Republic of China 852-2521-4122 | | Alan L. Beller, Esq. Cleary Gottlieb Steen & Hamilton LLP One Liberty Plaza New York, NY 10006-1470 United States of America 212-225-2000 |
Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ¨
Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ¨
CALCULATION OF REGISTRATION FEE
| | | | | | | | | | | |
Title of each class of securities to be registered | | Amount to be registered(1) | | Proposed maximum offering price per unit(2) | | Proposed maximum aggregate offering
price(1)(2) | | Amount of
registration fee |
Common stock, par value (Won)5,000 per share | | 10,090,818 | | $ | 28.60 | | $ | 288,597,395 | | $ | 11,342 |
| (1) | Represents the maximum number of shares of common stock of KT Corporation expected to be issued to stockholders of KT Freetel Co., Ltd. resident in the United States in connection with the merger described herein, based on the merger ratio of 0.7192335 shares of common stock of KT Corporation to be issued for every one share of common stock of KT Freetel Co., Ltd. The securities to be issued in connection with the merger outside the United States are not registered under this registration statement. |
| (2) | Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(f), based on the market value per share of common stock of KT Corporation calculated pursuant to Rule 457(c) by taking the average of the high and low prices of such shares as reported on the Stock Market Division of the Korea Exchange on January 15, 2009 and converting it into U.S. Dollars based on the market average exchange rate, as announced by the Seoul Money Brokerage Services Ltd. as in effect on such date of (Won)1,344.6 = US$1.00. |
The information in this preliminary prospectus is not complete and may be changed. We may not ask you to vote until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any jurisdiction where the offer or sale is not permitted.
Subject to Completion, dated January 21, 2009
Extraordinary General Meeting of Stockholders of KT Freetel Co., Ltd.
MERGER PROPOSAL
The board of directors of KT Freetel Co., Ltd. (“KT Freetel”) and of KT Corporation each has approved the merger agreement that would result in KT Freetel merging with and into KT Corporation. In the merger, each holder of one outstanding share of KT Freetel common stock will receive 0.7192335 shares of KT Corporation common stock.
KT Corporation and KT Freetel believe the merger will:
| | • | | maximize management efficiencies for their telecommunication operations; |
| | • | | enable them to effectively respond to the convergence trend of the telecommunications market environment in Korea; |
| | • | | enable them to deliver customer-oriented one-stop services; |
| | • | | enable them to efficiently allocate resources and reduce costs in their telecommunication operations; and |
| | • | | strengthen their overall competitiveness in the Korean telecommunications industry. |
Before we can proceed with the merger, the merger agreement must be approved by KT Freetel stockholders and KT Corporation stockholders at their respective extraordinary general meetings. KT Freetel’s extraordinary general meeting will be held at on March 27, 2009 at a.m. local time. KT Corporation’s extraordinary general meeting will be held at on March 27, 2009 at a.m. local time. The date and time of the general meetings may be changed as agreed between KT Corporation and KT Freetel, pursuant to the terms of the merger agreement.
This prospectus has been prepared for stockholders of KT Freetel residing in the United States to provide information about the merger and the extraordinary general meeting of stockholders of KT Freetel.We encourage you to read this document in its entirety, including the section describingrisk factors relating to the merger that begins on page 7.
Common stockholders of KT Freetel will be entitled to attend and vote, either in person or by proxy at the extraordinary general meeting if they are recorded on the stockholder register on February 5, 2009, which is 50 days prior to the date of the meeting.
Your vote is important, regardless of the number of shares you own. On behalf of your board of directors, I urge you to vote in favor of the merger.
Haing-Min Kwon
President and Chief Executive Officer
KT Freetel Co., Ltd.
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in connection with the merger or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
This prospectus is dated , 2009 and is expected to be first mailed to stockholders on or about such date.
WHERE YOU CAN FIND MORE INFORMATION
KT Corporation has filed a registration statement on Form F-4 to register with the U.S. Securities and Exchange Commission (“SEC”) the common stock of KT Corporation to be delivered in connection with the merger. This prospectus is a part of that registration statement. As allowed by SEC rules, this prospectus does not contain all the information you can find in the registration statement or the exhibits to the registration statement.
KT Corporation is subject to the information reporting requirements of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) and, under the Exchange Act, files reports and other information with the SEC. KT Corporation files annual and current reports and other information with the SEC. You may read and copy these reports and other information, including the registration statement filed by KT Corporation and the exhibits to the registration statement, at the SEC’s public reference room at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the availability of the public reference room. KT Corporation’s SEC filings are also available to the public from commercial document retrieval services and at the Internet world wide web site maintained by the SEC at www.sec.gov.
You can also inspect reports and other information about KT Corporation at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The SEC permits KT Corporation to “incorporate by reference” information into this prospectus. This means that the company can disclose important information to you by referring to another document filed separately with the SEC. The information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by information contained directly in this prospectus.
This prospectus incorporates by reference the documents set forth below that have been previously filed with or furnished to the SEC. These documents contain important information about KT Corporation and its financial condition.
| | |
KT CORPORATION SEC FILINGS (COMMISSION FILE NO. 1-14926; CIK NO. 0000892450) | | PERIOD |
Annual Report on Form 20-F (the “KT 20-F”) | | Year ended December 31, 2007, filed on June 30, 2008 |
| |
Reports on Form 6-K | | furnished on July 23, 2008, August 11, 2008, December 8, 2008, December 12, 2008, December 29, 2008, January 9, 2009, January 16, 2009 (both) and January 20, 2009 (together, the “Form 6-Ks”) |
KT Corporation also incorporates by reference into this prospectus additional documents that it may file with the SEC from the date of this prospectus to the date of the KT Freetel extraordinary general meeting of stockholders. These include amendments to KT Corporation’s annual report on Form 20-F and any of its reports on Form 6-K specifically identified as being incorporated by reference into this prospectus.
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If you are a KT Freetel stockholder, you can obtain any of the documents incorporated by reference from KT Corporation or the SEC as described above. Documents incorporated by reference are available without charge, excluding all exhibits unless an exhibit has been specifically incorporated by reference into this prospectus. Stockholders may obtain documents incorporated by reference into this prospectus by requesting them in writing, by telephone or by e-mail from KT Corporation at the following address:
KT Corporation
Investor Relations Team
206 Jungja-dong
Bundang-gu, Sungnam
Gyunggi-do, Korea 463-711
Telephone: +82-31-727-0950
Facsimile: +82-31-727-0949
e-mail: ir@kt.com
If you would like to request documents from KT Corporation, please do so by no later than March 20, 2009 in order to receive them before the KT Freetel extraordinary general meeting.
You should rely only on the information contained in this prospectus to vote on the merger. Neither KT Corporation nor KT Freetel has authorized anyone to provide you with information different from that contained in the prospectus. This prospectus is dated , 2009. You should not assume that the information contained in this prospectus is accurate as of any other date. Neither the mailing of this prospectus, nor the delivery of shares of KT Corporation common stock, cash or other consideration should be deemed to create any implication to the contrary.
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TABLE OF CONTENTS
iii
NOTES
The fiscal years of KT Corporation and KT Freetel end on December 31 of each year. All references to a particular year are to the year ended December 31 of that year.
Unless otherwise indicated, the financial information presented in this document has been prepared in accordance with accounting principles generally accepted in the Republic of Korea, which are known as “Korean GAAP”, which differ in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). See (i) Note 36 of Notes to Financial Statements of KT Corporation as of and for the year ended December 31, 2007 included in the KT 20-F which is incorporated herein by reference, (ii) Note 19 of Notes to Financial Statements of KT Corporation as of and for the six months ended June 30, 2008 incorporated herein by reference to KT Corporation’s Form 6-K furnished on January 9, 2009, (iii) Note 31 of Notes to Financial Statements of KT Freetel as of and for the year ended December 31, 2007 included herein and (iv) Note 18 of Notes to Financial Statements of KT Freetel as of and for the six months ended June 30, 2008 included herein for descriptions of these differences. The financial statements of KT Freetel are included herein pursuant to Item 17(b)(5) of Form F-4, as stockholders of KT Corporation will be voting on the merger.
Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.
CURRENCIES AND EXCHANGE RATES
All references to “Won” or “(Won)” in this prospectus are to the currency of Korea, and all references to “Dollars”, “U.S. Dollars”, “$” or “US$” are to the currency of the United States of America.
The tables below set forth, for the periods and dates indicated, information concerning the noon buying rate for Won, expressed in Won per one U.S. Dollar. The “noon buying rate” is the rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, translations of Won amounts into U.S. Dollars in this prospectus were made at the noon buying rate in effect on June 30, 2008 which was (Won)1,046.8 to US$1.00. We do not intend to imply that the Won or U.S. Dollar amounts referred to herein could have been or could be converted into U.S. Dollars or Won, as the case may be, at any particular rate, or at all. On January 9, 2009, the noon buying rate was (Won)1,347.5 = US$1.00.
| | | | | | | | | | | | |
| | | Won per U.S. Dollar (noon buying rate) |
| | | Average | | High | | Low | | Period-End |
| | | (of month end rates) | | | | | | |
2003 | | (Won) | 1,183.0 | | (Won) | 1,262.0 | | (Won) | 1,146.0 | | (Won) | 1,192.0 |
2004 | | | 1,139.3 | | | 1,195.1 | | | 1,035.1 | | | 1,035.1 |
2005 | | | 1,023.2 | | | 1,059.8 | | | 997.0 | | | 1,010.0 |
2006 | | | 950.1 | | | 1,002.9 | | | 913.7 | �� | | 930.0 |
2007 | | | 928.0 | | | 950.2 | | | 903.2 | | | 935.8 |
2008 | | | 1,105.8 | | | 1,507.9 | | | 935.2 | | | 1,262.0 |
2009 (through January 9) | | | | | | | | | | | | |
January (through January 9) | | | — | | | 1,347.5 | | | 1,292.3 | | | 1,347.5 |
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SUMMARY
This summary highlights material information in this prospectus and may not contain all of the information that is important to you. You should carefully read the entire prospectus for a complete understanding of the merger. In particular, you should read the documents attached to this prospectus, including the merger agreement, and the other documents to which this prospectus refers you. See “Where You Can Find More Information” beginning on page (i).
KT Corporation
206 Jungja-dong
Bundang-gu, Sungnam
Gyunggi-do, Korea, 463-711
Telephone: +82-2-31-727-0950
KT Corporation is the leading telecommunications service provider in Korea and one of the largest and most advanced in Asia. As of June 30, 2008, KT Corporation had total assets of (Won)24,983.9 billion and total liabilities of (Won)14,013.6 billion. KT Corporation owns substantially all of the domestic public exchanges, the nationwide network of local telephone lines, the principal public long-distance telephone transmission facilities and the principal data communications network in Korea, as well as two satellites in operation. In addition, through KT Freetel, KT Corporation operates nationwide personal communications service and High Speed Downlink Packet Access-based IMT-2000 networks. KT Corporation had operating revenues in the first six months of 2008 of (Won)10,057.9 billion, and net income of (Won)303.9 billion on a consolidated basis.
KT Freetel Co., Ltd. (see page 19)
7-18 Shincheon-dong, Songpa-gu
Seoul, Korea, 138-240
Telephone: +82-2-2010-0809
KT Freetel is one of the largest providers of mobile services based on Code Division Multiple Access (“CDMA”) technology and Wideband Code Division Multiple Access (“W-CDMA”) technology. KT Freetel (including resale subscribers of KT Corporation) had a market share of 31.5% as of June 30, 2008 in terms of the number of mobile service subscribers in Korea announced by the Korea Communications Commission, making KT Freetel the second largest mobile telecommunications service provider. As of June 30, 2008, KT Freetel had total assets of (Won)7,890.9 billion and total liabilities of (Won)3,655.7 billion. As of the date hereof, KT Freetel is 54.25% owned by KT Corporation and is a consolidated subsidiary of KT Corporation.
The Proposed Merger (see page 12)
In the merger, KT Freetel will merge with and into KT Corporation, with KT Corporation surviving the merger. In the merger, KT Freetel common stockholders will receive 0.7192335 shares of KT Corporation common stock for every one share of KT Freetel common stock they own, and cash instead of fractional shares that they would otherwise be entitled to receive in the merger. Immediately following the merger, we anticipate that current stockholders of KT Freetel, other than KT Corporation, will own approximately 18.9% of KT Corporation’s outstanding common stock.
Treatment of KT Freetel Stock Options (see page 14)
If we successfully complete the merger, KT Corporation intends to assume KT Freetel’s employee stock options by converting options to acquire shares of KT Freetel common stock into options to acquire shares of KT Corporation common stock. The number of shares that each option would represent the right to purchase and the
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exercise price per share will be adjusted based on the merger ratio. KT Corporation and KT Freetel will take all necessary measures to amend stock option agreements entered into between the directors, officers and employees of KT Freetel prior to the date of the merger, with such amendments to take effect on the date of the registration of the merger. Existing stock options to acquire shares of KT Corporation common stock will not be affected by the merger.
Share Ownership of Directors and Executive Officers
As of December 31, 2008, the latest date for which such information is currently available, KT Freetel’s directors, executive officers and their affiliates owned, in the aggregate, 43,998 shares of KT Freetel’s common stock, which is less than 0.03% of the shares of KT Freetel’s common stock outstanding on that date. The approval of the merger agreement will require a special resolution adopted by the affirmative vote of at least two-thirds of the shares of common stock present or represented at each general meeting of the shareholders. See “—The Extraordinary General Meetings”. To our knowledge, directors and executive officers of KT Freetel intend to vote “FOR” approval of the merger.
Dissent and Appraisal Rights (see page 15)
Under Korean law, holders of shares of KT Corporation or KT Freetel common stock who oppose the merger may exercise an appraisal right and require KT Corporation or KT Freetel, as the case may be, to purchase their shares. In order for stockholders to exercise such right, dissenting stockholders must submit to KT Corporation or KT Freetel, as the case may be, written notice of their intention to dissent prior to the extraordinary general meeting and, within twenty days of such meeting, must request that their shares be repurchased.
If the merger is completed, KT Corporation or KT Freetel, as the case may be, expects to pay (Won)29,284 for each share of KT Freetel common stock properly submitted to KT Freetel for appraisal and (Won)38,535 for each share of KT Corporation common stock properly submitted to KT Corporation for appraisal. Under Korean law, any dissenting stockholder of KT Corporation or KT Freetel, as the case may be, may request a court to adjust the appraisal price. For a more complete description of the appraisal rights, see “The Merger—Dissent and Appraisal Rights”.
The Extraordinary General Meetings (see page 10)
The KT Freetel extraordinary general meeting will be held at on March 27, 2009, starting at a.m. local time. The KT Corporation extraordinary general meeting will be held at on March 27, 2009, starting at a.m. local time. The date and time of the general meetings may be changed as agreed between KT Corporation and KT Freetel, pursuant to the terms of the merger agreement. The agenda for both meetings is the approval of the merger agreement.
The approval of the merger agreement will require a special resolution adopted by the affirmative vote of at least two-thirds of the shares of common stock present or represented at each meeting. The shares voting to approve the merger agreement must also represent at least one-third of the total issued and outstanding shares of common stock. Each share of common stock present or represented at the meetings will be entitled to one vote.
As of the date hereof, KT Corporation owned 102,129,938 shares of KT Freetel common stock, representing 54.26% of the total votes entitled to be cast at the KT Freetel extraordinary general meeting. KT Corporation intends to vote all of its KT Freetel shares in favor of the resolution to approve the merger agreement.
Interests of Directors and Officers in the Merger (see page 13)
You should be aware that a number of directors and officers of KT Freetel may have interests in the merger that are different from, or in addition to, your interests as a KT Freetel stockholder. We describe these interests beginning on page 13 of this prospectus.
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Accounting Treatment (see page 14)
Under Korean GAAP, KT Corporation will account for the merger using the carrying amounts in consolidated financial statements.
Income Tax Consequences of the Merger (see page 21)
As described in (and subject to the qualifications and assumptions set forth in) “Tax Considerations—United States Federal Income Taxation” below, a U.S. holder that exchanges all of its shares of KT Freetel common stock solely for KT Corporation common shares pursuant to the merger will not recognize any income, gain or loss, except with respect to cash received in lieu of a fractional KT Corporation common share. Holders of KT Freetel common stock should consult with their own tax advisors as to the tax consequences of the merger and of holding common stock of KT Corporation in their particular circumstances.
Conditions to the Completion of the Merger (see page 17)
Each of KT Corporation’s and KT Freetel’s obligation to complete the merger is subject to satisfaction or waiver of specified conditions, including those listed below:
| | • | | KT Corporation and KT Freetel must obtain all material governmental approvals necessary for the closing of the merger set forth in the merger agreement; |
| | • | | KT Corporation and KT Freetel must have performed their respective covenants and other obligations in the merger agreement in all material respects; |
| | • | | there shall not have occurred any material adverse effect on the assets or business conditions of either KT Corporation or KT Freetel; |
| | • | | respective representations and warranties of KT Corporation and KT Freetel in the merger agreement must be true and correct in all material respects as of the date of the merger agreement and as of the date of the merger; and |
| | • | | the merger must have been authorized and approved by the board of directors and stockholders of KT Corporation and KT Freetel. |
Termination of the Merger Agreement (see page 18)
KT Corporation and KT Freetel can jointly agree in writing to terminate the merger agreement at any time prior to the completion of the merger. In addition, either entity may terminate the merger agreement if, among other things:
| | • | | the completion of the merger becomes impossible or unlawful because any necessary governmental approval or consent is not granted or due to a change in applicable law, and the parties do not agree to an amended merger agreement within 30 days from the occurrence of any such event; |
| | • | | a material adverse effect results from a breach by the other party of any of its representations, warranties or obligations under the merger agreement and such breach is not cured within 30 days after notice; |
| | • | | either the aggregate purchase price to be paid by KT Corporation to its shareholders who exercise appraisal rights exceeds (Won)1 trillion, or the aggregate purchase price to be paid by KT Freetel to its shareholders who exercise appraisal rights exceeds (Won)700 billion; or |
| | • | | the material governmental approvals necessary for the closing of the merger set forth in the merger agreement have been obtained, but such approvals include conditions which (i) if complied with, are reasonably expected to result in a material adverse change in the financial condition, results of operation, the business condition or prospects of KT Corporation, or (ii) are impossible or extremely difficult to comply with within the time period set forth in such approvals. |
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Creditor Protection Procedures (see page 14)
Under Korean law, KT Corporation and KT Freetel are required to implement creditor protection procedures in connection with the merger. After the merger agreement is approved at the extraordinary general meeting, creditors of KT Corporation and KT Freetel that are opposed to the merger may require them to perform their respective payment obligations to such creditors on an accelerated basis or provide collateral or property in trust to secure such payment.
Regulatory Matters (see page 14)
We are working to obtain all necessary regulatory approvals required under Korean and other laws and regulations. KT Corporation and KT Freetel submitted a report regarding the proposed merger to the Financial Services Commission and the Korea Exchange on January 20, 2009, the date of execution of the merger agreement. KT Corporation also submitted an application for approval of the merger, pursuant to the Telecommunication Business Act, to the Korea Communications Commission on January 21, 2009. KT Corporation and KT Freetel have undertaken in the merger agreement to use their best efforts to obtain all necessary Korean or non-Korean approvals required to complete the merger.
Completion and Effectiveness of the Merger
We will complete the merger when all the conditions to completion of the merger are satisfied or waived in accordance with the merger agreement. The merger will become effective when KT Corporation registers the merger with the commercial registry office of the Suwon District Court, Sungnam Branch, and KT Freetel registers its dissolution as a result of the merger with the commercial registry office of the Seoul Eastern District Court, pursuant to the applicable requirements of Korean law. We expect to complete the merger during the second quarter of 2009.
Summary Market Price Information
Shares of KT Corporation and KT Freetel common stock are traded on the Stock Market Division of the Korea Exchange. The table below lists the closing prices of KT Corporation’s and KT Freetel’s common stock, and the equivalent value of KT Freetel’s common stock based upon the merger ratio, on January 19, 2009, the last trading day before the public announcement of the proposed merger, and on , 2009.
| | | | | | |
| | | January 19, 2009 | | , 2009 |
KT Corporation common stock | | (Won) | 39,750 | | (Won) | |
KT Freetel common stock | | | 28,450 | | | |
Pro forma equivalent per share value of KT Freetel common stock(1) | | | 28,590 | | | |
| (1) | Calculated by multiplying the KT Corporation common stock closing price by the merger ratio of 0.7192335. |
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Summary Financial Data of KT Corporation and KT Freetel
We present below per common share data on a Korean GAAP basis regarding the net income, cash dividends declared and book value of KT Corporation and KT Freetel on a historical basis.
Year Ended December 31, 2007
| | | | | | |
| | | KT Corporation
(Historical) | | KT Freetel
(Historical) |
Net income (loss) per share | | | | | | |
Basic | | (Won) | 4,754 | | (Won) | 1,277 |
Diluted | | | 4,754 | | | 1,277 |
Dividends per share | | | 2,000 | | | — |
Book value per share | | | 40,472 | | | 22,693 |
Six Months Ended June 30, 2008
| | | | | | | |
| | | KT Corporation
(Historical) | | KT Freetel
(Historical) | |
Net income (loss) per share | | | | | | | |
Basic | | (Won) | 1,545 | | (Won) | (57 | ) |
Diluted | | | 1,545 | | | (57 | ) |
Dividends per share | | | — | | | — | |
Book value per share | | | 39,862 | | | 21,976 | |
Questions About the Merger
If you have any questions about the merger or the voting procedures in connection with the extraordinary general meeting of KT Freetel stockholders, you may contact:
KT Freetel
Investor Relations Team
7-18 Shincheon-dong, Songpa-gu
Seoul, Korea
Telephone: +82-2-2010-0809
Facsimile: +82-2-2016-1082
e-mail: shkang@ktf.com
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RISK FACTORS
As a result of the merger, KT Freetel’s businesses will be subject to the following new or increased risks related to KT Corporation’s other businesses and/or the structure of the merger. In addition to the risks described below, the combined company will continue to be subject to the risks described in the KT Form 20-F under the section entitled “Item 3. Key Information—Risk Factors”. You should carefully consider the following risk factors as well as the other information contained or incorporated into this prospectus in deciding whether to vote in favor of the merger.
Risks Relating to the Merger
Your vote at the extraordinary general meeting of stockholders may not affect the outcome with respect to the proposed merger.
The approval of the merger agreement at the extraordinary general meeting of KT Freetel stockholders will require a special resolution adopted by the affirmative vote of at least two-thirds of the shares of common stock present or represented at the meeting and at least one-third of the total issued and outstanding shares of common stock. KT Corporation currently owns KT Freetel common stock representing 54.26% of total votes entitled to be cast at the extraordinary general meeting, and intends to vote all of its KT Freetel shares in favor of the resolution to approve the merger agreement. Accordingly, your vote at the extraordinary general meeting may have no effect on the outcome with respect to the proposed merger.
Furthermore, to be effective, the merger agreement must also be approved by KT Corporation stockholders at its extraordinary general meeting through a special resolution adopted by the affirmative vote of at least two-third of the shares of common stock present or represented at the meeting and at least one-third of KT Corporation’s total issued and outstanding shares of common stock. If the merger agreement is not approved by KT Corporation stockholders, then the proposed merger may not be successful, even if the merger agreement is approved by KT Freetel stockholders.
There was no formal valuation determining the fairness of the merger ratio.
The merger ratio was determined in accordance with Korean law and not by arms’ length negotiations between KT Corporation and KT Freetel. There was no formal valuation of KT Freetel or KT Corporation by an independent third party. Neither KT Freetel nor KT Corporation has obtained a fairness opinion by an investment banking firm or other qualified appraiser, and neither intends to obtain such an appraisal. Accordingly, the merger ratio may not represent what you would regard as fair or adequate consideration for your KT Freetel common stock.
The merger ratio is fixed and will not reflect market fluctuations; as a result, the value of KT Corporation common stock you receive in the merger may be less than when you vote.
Upon completion of the merger, shares of KT Freetel common stock will be converted into shares of KT Corporation common stock. The ratio at which KT Freetel common stock will be converted is fixed, and there will be no adjustment for changes in the market price of KT Corporation common stock. Any change in the price of KT Corporation common stock occurring prior to the effective date of the merger will affect the value that KT Freetel stockholders will receive in the merger. The value of KT Corporation common stock received in the merger may be higher or lower than the value calculated as of the date of the extraordinary general meeting, depending on whether the market price of KT Corporation’s common stock goes up or down. Stock price changes may result from a variety of factors that are beyond our control, including changes in KT Freetel’s or KT Corporation’s businesses, operations and prospects, regulatory considerations and general market and economic conditions. KT Freetel is not permitted to “walk away” from the merger or resolicit the vote of stockholders solely because of changes in the market price of KT Corporation’s common stock.
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We may fail to realize the anticipated benefits of the merger.
The success of the merger of KT Freetel with KT Corporation will depend, in part, on our ability to realize the anticipated synergies, growth opportunities and, to a lesser extent, cost savings from combining those two businesses. The realization of these anticipated benefits may be blocked, delayed or reduced as a result of numerous factors, some of which are outside our control. These factors include:
| | • | | difficulties in integrating the operations of KT Freetel with those of KT Corporation, including information systems, personnel, policies and procedures, and in reorganizing or reducing overlapping personnel, operations, marketing networks and administrative functions; |
| | • | | unforeseen contingent risks or latent liabilities relating to the merger that may become apparent in the future; |
| | • | | difficulties in managing a larger business; |
| | • | | loss of key personnel or customers; and |
Accordingly, we cannot assure you that we will realize the anticipated benefits of the merger or that the merger will not adversely affect our combined business, financial condition and results of operations.
The integration of the operations of KT Freetel into KT Corporation may require significant amounts of time, financial resources and management attention. KT Corporation’s management intends to implement a business plan to effectively combine the operations of KT Freetel with the operations of KT Corporation. If this business plan is not effective in integrating these operations, however, we may not realize the anticipated benefits of the merger. Moreover, the integration process could result in the disruption of our ongoing business and information technology systems, or inconsistencies in standards, controls, procedures and policies and a reduction in employee morale, each of which may adversely affect our ability to maintain relationships with customers and to retain key personnel.
The merger is subject to various conditions and may not be completed as scheduled or at all.
Under the merger agreement, the obligation of KT Corporation and KT Freetel to complete the merger is subject to a number of specified conditions, including obtaining or satisfying all material regulatory approvals, permits, consents and requirements necessary for the consummation of the merger, as well as approval by the stockholders of KT Corporation. Regulatory authorities in Korea or elsewhere may seek to block or delay the merger or may impose conditions that reduce the anticipated benefits of the merger or make it difficult to complete as planned. In addition, both parties have the right to terminate the merger agreement at any time prior to the completion of the merger, upon mutual written consent. Either party may also terminate the merger agreement upon a continuing breach of the agreement by the other party that has a material adverse effect on the finances or business conditions of either party. Accordingly, even if the merger is approved at the extraordinary general meeting of stockholders of KT Freetel, the merger may not be completed as scheduled or at all. If the merger is not completed, we would fail to realize the anticipated benefits from the combination, see “The Merger—Background and Reasons for the Merger”.
Additional Risks Relating to KT Corporation
Disruptions in global credit and financial markets and the resulting governmental actions around the world could have a material adverse impact on the business and funding needs of KT Corporation.
Global credit markets have been experiencing difficulties and volatility since the second half of 2008. The market uncertainty that started from the U.S. residential market further expanded to other markets such as those for leveraged finance, collateralized debt obligations and other structured products. These developments have resulted in significant contraction, de-leveraging and reduced liquidity in the global credit markets, as well as bankruptcy or acquisition of, and government assistance to, several major U.S. and European financial
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institutions, including the bankruptcy filing of Lehman Brothers in September 2008. In response to such developments, legislators and financial regulators in the United States and other jurisdictions, including Korea, have implemented a number of policy measures designed to add stability to financial markets. However, the overall impact of these legislative and regulatory efforts on the global financial markets is uncertain, and they may not have the intended stabilizing effects. The SEC, other regulators, self-regulatory organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies, and may effect changes in law or interpretations of existing laws.
We are exposed to adverse changes in the global and Korean economic environments, changes in interest rates and instability in the global financial markets. As liquidity and credit concerns and volatility in the global financial markets increased significantly, the value of the Won relative to the Dollar has depreciated at an accelerated rate. During the period from January 2, 2008 through December 17, 2008, the value of the Won relative to the U.S. dollar declined by approximately 31%. The market average exchange rate, as announced by the Seoul Monetary Brokerage Services Ltd., was (Won)1,359.9 to US$1.00 on January 19, 2009. Such depreciation of the Won has increased our cost in Won of servicing foreign currency-denominated debt, while continued exchange rate volatility may also result in foreign exchange losses for us. In addition, recent increases in credit spreads, as well as limitations on the availability of credit resulting from heightened concerns about the stability of the markets generally and the strength of counterparties specifically have led many lenders and institutional investors to reduce or cease providing funding to borrowers, which may negatively impact our liquidity and results of operation. Major market disruptions and the current adverse changes in market conditions and regulatory climate may further impair our ability to meet our desired funding needs. We cannot predict how long the current market conditions will last. These recent and developing economic and governmental factors may have a material adverse effect on our business and ability to meet our funding needs.
FORWARD-LOOKING INFORMATION
The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This prospectus contains forward-looking statements, which may include statements regarding the period following completion of the merger.
Words such as “anticipate”, “estimate”, “expect”, “project”, “intend”, “plan”, “believe” and words and terms of similar substance used in connection with any discussion of future operating or financial performance, or the merger of KT Corporation and KT Freetel, identify forward-looking statements. All forward-looking statements are management’s present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In addition to the risks related to the businesses of KT Corporation and KT Freetel, the factors relating to the merger discussed under “Risk Factors Relating to the Merger”, among others, could cause actual results to differ materially from those described in the forward-looking statements. These factors include, but are not limited to, any downward adjustment of the value of KT Corporation common stock relative to KT Freetel common stock, failure to realize the anticipated benefits of the merger and adverse regulatory developments. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date they are made. Except as required by law, neither KT Corporation nor KT Freetel is under any obligation, and each expressly disclaims any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
All subsequent forward-looking statements attributable to KT Corporation or KT Freetel or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
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THE EXTRAORDINARY GENERAL MEETING OF KT FREETEL STOCKHOLDERS
Time, Place and Purpose
The extraordinary general meeting of KT Freetel stockholders is scheduled to be held at Seoul, Korea on March 27, 2009, at a.m. local time, which may be changed as agreed between KT Corporation and KT Freetel. The extraordinary general meeting is being held so that common stockholders of KT Freetel can consider and vote upon a special resolution approving the merger agreement between KT Corporation and KT Freetel, pursuant to which KT Freetel will be merged into KT Corporation, with KT Corporation continuing as the surviving entity.
Record Date and Outstanding Capital Stock
The board of directors of KT Freetel has fixed the close of business on February 5, 2009, as the record date for the determination of KT Freetel common stockholders entitled to notice of and to vote at the extraordinary general meeting. On the record date, there were shares of KT Freetel stock outstanding held by holders of record.
Voting Rights and Votes Required
Common stockholders of KT Freetel recorded on the stockholder register as of the record date will be entitled to attend and vote, either in person or by proxy, at the extraordinary general meeting. Each share of common stock present or represented at the meeting will be entitled to one vote.
The adoption of any special resolution at the extraordinary general meeting requires the affirmative vote of at least two-thirds of the shares of common stock present or represented at the meeting. The shares voting affirmatively must also represent at least one-third of the total issued and outstanding shares of common stock.
As of the date hereof, KT Corporation owned 102,129,938 shares of KT Freetel common stock, representing 54.26% of the total votes entitled to be cast on the merger. KT Corporation intends to vote, or cause to be voted, all of the shares of KT Freetel common stock owned by it in favor of the resolution to approve the merger agreement.
Voting by Proxy
Common stockholders of KT Freetel may vote either in person at the extraordinary general meeting or by proxy. Stockholders who wish to vote their shares of KT Freetel common stock by proxy can do so through one of the following methods:
| | • | | Voting through Korea Securities Depository. Common stockholders will be entitled to instruct Korea Securities Depository, as depositary for KT Freetel common stock issued in book-entry form, as to how to vote their shares of common stock at the extraordinary general meeting. A stockholder wishing to provide voting instructions to Korea Securities Depository must: |
| | • | | If it has not received from its standing proxy in Korea a voting instruction form prepared by Korea Securities Depository, ask the standing proxy to obtain and send the voting instruction form to the stockholder; and |
| | • | | Complete the voting instruction form and return it to the stockholder’s standing proxy in Koreaby no later thanMarch 18, 2009(Seoul time), with instructions for the standing proxy to submit the voting instruction form to the Korea Securities Depository by the end of business on March 19, 2009. |
Although there is no guarantee, if Korea Securities Depository receives a completed voting instruction form from a stockholder through its standing proxy on or prior to March 19, 2009, Korea Securities
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Depository will try to vote the stockholder’s shares in accordance with the instructions of the stockholder, as far as practical and subject to the requirements of Korean law. Stockholders will be able to change their vote after they send in their voting instruction forms to Korea Securities Depository, by attending the meeting and voting their shares in person or, if available, by requesting their respective standing proxies to attend the meeting and vote the shares by proxy as described below.
| | • | | Voting through a Standing Proxy in Korea. Depending on the terms of its agreement with its standing proxy in Korea, a KT Freetel common stockholder may also be entitled to request the standing proxy to attend the extraordinary general meeting on behalf of the stockholder and vote the stockholder’s shares by proxy in accordance with the stockholder’s instructions.Stockholders who wish to vote their shares of KT Freetel common stock in this manner should consult with their standing proxy. Among other things, in order to vote its shares by proxy in this manner, a stockholder must deliver a power of attorney to its standing proxy authorizing it to vote the shares on behalf of the stockholder at the extraordinary general meeting. The standing proxy will be required to produce the power of attorney at the meeting. |
A stockholder may revoke a power of attorney after it is delivered and provide a different power of attorney to its standing proxy at any time prior to the extraordinary general meeting. A stockholder may also revoke any power of attorney and attend and vote directly at the extraordinary general meeting.
If you have further questions regarding your voting rights, you should contact your standing proxy in Korea, or KT Freetel at:
KT Freetel
7-18 Shincheon-dong, Songpa-gu
Seoul, Korea
Telephone: +82-2-2010-0809
Facsimile: +82-2-2016-1082
e-mail: shkang@ktf.com
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THE MERGER
Background and Reasons for the Merger
On January 20, 2009, the board of directors of KT Corporation and KT Freetel approved a merger agreement between the two entities providing for the merger of KT Freetel with and into KT Corporation. On the same date, KT Corporation and KT Freetel executed the merger agreement.
The purpose of the merger is to unify KT Corporation’s telecommunication businesses, which are currently split between the mobile communication service offered under the “KTF” brand operated by its 54.25% subsidiary, KT Freetel, and the fixed-line telephone service offered under the “KT” brand business operated directly by KT Corporation. KT Corporation and KT Freetel believe that unifying these businesses through the merger will:
| | • | | maximize management efficiencies for their telecommunication operations; |
| | • | | enable them to effectively respond to the convergence trend of the telecommunications market environment in Korea; |
| | • | | enable them to deliver customer-oriented one-stop services; |
| | • | | enable them to efficiently allocate resources and reduce costs in their telecommunication operations; and |
| | • | | strengthen their overall competitiveness in the Korean telecommunications industry. |
KT Corporation intends to permit the current KT Freetel operations to maintain their operational autonomy following the merger, though those operations will have access to KT Corporation’s management expertise and resources to allow them to increase their overall efficiency and competitiveness.
Conversion of KT Freetel Common Stock
When the merger is completed, KT Freetel common stockholders will receive 0.7192335 shares of KT Corporation common stock for every one share of KT Freetel common stock they own. KT Corporation will not issue any fractional shares of common stock to KT Freetel common stockholders in connection with the merger. Instead, common stockholders of KT Freetel will receive cash, calculated based on the closing price of the KT Corporation common stock as of the date the shares of KT Corporation common stock to be newly issued and delivered to the KT Freetel common stockholders will be listed on the Stock Market Division of the Korea Exchange, in lieu of any fractional shares they would otherwise be entitled to receive.
The merger ratio was determined in accordance with Korean law and not by arms’ length negotiations between KT Corporation and KT Freetel. See “Risk Factors—Risks Relating to the Merger”. Applicable Korean law requires that the merger ratio be calculated based on the applicable prices of the common stock of the constituent corporations, which in each case is to be the lesser of:
| | • | | The arithmetic average of |
| | (1) | the closing price of the common stock on the day immediately prior to the date of the approval of the merger by the board of directors of KT Corporation and KT Freetel or the execution of the merger agreement, whichever is earlier, |
| | (2) | the weighted average of the daily closing prices of the common stock during the one week period ending on such day and |
| | (3) | the weighted average of the daily closing prices of the common stock during the one month period ending on such day, and |
| | • | | The closing price of the common stock on the day immediately prior to the date of the approval of the merger by the board of directors of KT Corporation and KT Freetel or the execution of the merger agreement, whichever is earlier. |
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Accordingly, the applicable price of the common stock of each of KT Corporation and KT Freetel was calculated for purposes of determining the merger ratio based on the lesser of:
| | • | | the arithmetic average of |
| | (1) | the closing price of its common stock on January 19, 2009, |
| | (2) | its weighted average daily closing stock prices for the one week period ending January 19, 2009 and |
| | (3) | its weighted average daily closing stock prices for the one month period ending January 19, 2009, and |
| | • | | the closing price of its common stock on January 19, 2009. |
Based on this calculation, the applicable prices of KT Corporation common stock and KT Freetel common stock were determined to be (Won)39,556 and (Won)28,450, respectively, and the merger ratio was determined to be 0.7192335.
Interests of Certain KT Freetel Directors and Executive Officers in the Merger
You should be aware that a number of directors and officers of KT Freetel may have agreements or arrangements that provide them with interests in the merger that differ from those of KT Freetel stockholders. The KT Freetel board of directors was aware of these interests during its deliberations of the merits of the merger.
Management Positions. Concurrently with the merger, the directors of KT Freetel will resign from their offices, and KT Corporation will not appoint any new directors by reason of the merger. However, we expect that the current executive officers of KT Freetel will become executive officers of KT Corporation following the merger.
Stock Ownership. As of December 31, 2008, the directors and executive officers of KT Freetel, together with their respective affiliates, beneficially owned 43,998 shares representing approximately 0.023% of the outstanding shares of KT Freetel common stock, as well as options to purchase an additional 444,471 shares.
In addition, as of December 31, 2008, the directors and executive officers of KT Freetel, together with their respective affiliates, beneficially owned 20,395 shares of common stock of KT Corporation, and no options to purchase additional shares of KT Corporation.
Indemnification and Insurance. KT Freetel’s directors and executive officers are insured against liability relating to the performance of their duties under a directors’ and officers’ insurance policy. The policy provides coverage of up to (Won)50 billion in the aggregate for all insured persons, with respect to each incident triggering liability.
Completion and Effectiveness of the Merger
The merger will be completed when all of the conditions to completion of the merger are satisfied or waived, including the approval of the merger agreement by the stockholders of KT Corporation and KT Freetel. The merger will become effective when KT Corporation registers the merger with the commercial registry office of the Suwon District Court, Sungnam Branch, and KT Freetel registers its dissolution as a result of the merger with the commercial registry office of the Seoul Eastern District Court, pursuant to applicable requirements of Korean law.
We are working on completing the merger as quickly as possible. We expect to complete the merger during the second quarter of 2009.
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Exchange of KT Freetel Common Stock for KT Corporation Common Stock
When the merger becomes effective or shortly thereafter, the Korea Securities Depository, which is the clearing agency for KT Freetel common stock, will register the newly issued KT Corporation common stock or treasury shares of KT Corporation common stock, each in book-entry form in the names of the common stockholders of record of KT Freetel as of the effective date of the merger, in exchange for KT Freetel common stock so registered as of such date.
Creditor Protection Procedures
Under the Korean Commercial Code, KT Freetel is required to implement the following creditor protection procedures in connection with the merger:
| | • | | Within two weeks of the approval of the merger agreement by KT Freetel’s stockholders at its extraordinary general meeting, KT Freetel must provide a public notice to its creditors providing the creditors with a specified amount of time, not less than one month, to raise any objection to the merger. |
| | • | | Any creditor failing to raise an objection during the specified period of time will be deemed to have approved the merger. |
| | • | | If a creditor raises an objection to the merger, KT Freetel will be required to perform its payment obligation to such creditor on an accelerated basis, to provide such creditor with collateral, or to deposit property with a trust company for the benefit of such creditor. |
Treatment of KT Freetel Stock Options
As of December 31, 2008, options to purchase an aggregate of 444,471 shares of KT Freetel common stock were outstanding and held by the officers, directors and employees of KT Freetel. Pursuant to the merger agreement, all outstanding KT Freetel stock options will be converted into corresponding options to purchase 319,678 shares of KT Corporation common stock for every share of KT Freetel common stock that an option holder is entitled to purchase under the outstanding KT Freetel stock options.
In the event that a director or officer of KT Freetel resigns from KT Freetel as a result of the merger prior to the expiration of a specified period of two years from the grant date of any options he or she holds, the number of shares he or she is entitled to purchase under the relevant options will be reduced proportionately to reflect the number of days remaining from the date of his or her resignation to the end of such two year period, as the case may be.
Accounting Treatment of the Merger
The consolidated financial statements of KT Corporation incorporated by reference into this prospectus have been prepared in accordance with Korean GAAP. KT Corporation intends to account for the merger using the carrying amounts in consolidated financial statements under Korean GAAP. The acquired KT Freetel assets and liabilities will be recorded at book value in the consolidated financial statements. Any excess will be recognized as capital surplus.
Regulatory Matters
We have summarized below the material regulatory requirements affecting the merger. Although we have not yet received all of the required approvals we discuss, we anticipate that we will receive them in time to complete the merger by the second quarter of 2009.
Korean Telecommunication Regulatory Requirements. Under the Telecommunication Business Act, we are required to obtain an approval in respect of the merger from the Korea Communications Commission. KT Corporation submitted an application for approval of the merger pursuant to this Act to the Korea Communications Commission on January 21, 2009.
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Korean Antitrust Requirements. Under the Monopoly Regulation & Fair Trade Act of Korea, we are required to file a business combination report with the Korea Fair Trade Commission within 30 days of the execution of the merger agreement. However, this filing requirement was waived under applicable Korean law because the Korea Communications Commission was obligated to consult directly with the Korea Fair Trade Commission after KT Corporation filed the application for approval of the merger with the Korea Communications Commission on January 21, 2009. The Korea Fair Trade Commission may require us to provide additional documents or information relating to the merger.
Other Requirements. In addition, KT Corporation and KT Freetel each submitted a report regarding the proposed merger to the Financial Services Commission and the Korea Exchange on January 20, 2009, the date of the execution of the merger agreement. KT Corporation and KT Freetel each have also undertaken in the merger agreement to use their best efforts to obtain all other Korean or non-Korean regulatory approvals necessary to complete the merger.
Dissent and Appraisal Rights
Holders of KT Corporation or KT Freetel common stock are entitled to appraisal rights under Korean law.
Under the Korean Securities and Exchange Act and the Regulation on Securities Issuance & Disclosure, in order to exercise the appraisal rights, a holder of KT Corporation or KT Freetel common stock, as the case may be, must:
| | • | | have been listed on the stockholder registry as of February 5, 2009 and maintain such ownership until the day on which the appraisal rights are exercised; |
| | • | | provide written notice to KT Corporation or KT Freetel, as the case may be, of his or her objection to the merger prior to the extraordinary general meeting; and |
| | • | | within 20 days of the extraordinary general meeting, request that KT Corporation or KT Freetel, as the case may be, purchase his or her shares. |
KT Corporation or KT Freetel, as the case may be, will purchase the shares of each dissenting stockholder who has properly submitted a purchase request to KT Corporation or KT Freetel, as the case may be, within one month from the expiry of such 20-day exercise period. Stockholders wishing to exercise their appraisal rights must hold their shares until KT Corporation or KT Freetel, as the case may be, purchases such shares within the specified one-month period.
Under Korean law, the purchase price for shares in respect of which appraisal rights have been exercised is to be determined through negotiation between the dissenting stockholders and KT Corporation or KT Freetel, as the case may be. However, if the dissenting stockholders and KT Corporation or KT Freetel, as the case may be, fail to agree on a purchase price, Korean law provides that the purchase price will be calculated as the arithmetic average of the weighted average daily closing prices of KT Corporation’s or KT Freetel’s common stock, as the case may be, for (1) the two month period, (2) the one month period and (3) the one week period ending the date immediately prior to January 20, 2009, the date KT Corporation and KT Freetel’s board of directors approved the execution of the merger agreement. The appraisal prices to be offered by KT Corporation and KT Freetel were calculated as follows using the formula described above:
| | | |
| | | KT Corporation
Common Stock |
(1) Two month daily closing price weighted average | | (Won) | 36,687 |
(2) One month daily closing price weighted average | | | 39,401 |
(3) One week daily closing price weighted average | | | 39,516 |
Appraisal Price(arithmetic average of (1), (2) and (3)) | | (Won) | 38,535 |
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| | | |
| | | KT Freetel
Common Stock |
(1) Two month daily closing price weighted average | | (Won) | 29,567 |
(2) One month daily closing price weighted average | | | 29,548 |
(3) One week daily closing price weighted average | | | 28,738 |
Appraisal Price(arithmetic average of (1), (2) and (3)) | | (Won) | 29,284 |
Under Korean law, any dissenting stockholder of KT Corporation or KT Freetel, as the case may be, may request a court to adjust the appraisal price.
If you own shares of common stock of KT Freetel and wish to find out more information about how to exercise your appraisal rights, you should contact KT Freetel at the following address:
KT Freetel 7-18 Shincheon-dong, Songpa-gu Seoul, Korea, 138-240
Telephone: +82-2-2010-0809 Facsimile: +82-2-2016-1082 e-mail: shkang@ktf.com
The Merger Agreement
We believe this summary describes all material terms of the merger agreement. However, because the merger agreement is the primary legal document that governs the merger, we urge you to read the full text of the merger agreement for its terms and provisions and other information that may be important to you. The merger agreement is attached as Annex I to this prospectus and is incorporated by reference in this prospectus.
General terms of the merger agreement. KT Corporation and KT Freetel have agreed that through the merger, KT Freetel will be merged with and into KT Corporation, with KT Corporation being the surviving entity. Upon effectiveness of the merger, KT Freetel will cease to exist. The date of the merger will be May 18, 2009, and the date of registration of the merger will be May 19, 2009, either of which dates may be changed as agreed by KT Corporation and KT Freetel.
Merger ratio. KT Freetel common stockholders will receive 0.7192335 share of KT Corporation common stock for every one share of KT Freetel common stock they own. KT Corporation will deliver 7,584,793 shares of its newly issued common stock (par value (Won)5,000) and 45,629,485 shares of its treasury stock (par value (Won)5,000) to KT Freetel stockholders listed on the stockholder registry of KT Freetel as of the date of the merger. KT Corporation has waived issuance of the merger consideration in respect of all of the outstanding shares of KT Freetel common stock held by KT Corporation immediately prior to the merger. The number of shares to be issued or delivered may be adjusted in the event (i) KT Freetel acquires its own shares as a result of the exercise of appraisal rights by its stockholders who oppose the merger, (ii) adjustment is necessary to comply with the foreign shareholding limitation rules under Article 6, Paragraph (1) of the Telecommunication Business Act of Korea, or (iii) a payment is made with respect to any fractional shares (although any such adjustment will not affect the Merger Ratio).
Stock Options. The stock options granted prior to the date of the merger agreement, to the directors, officers or employees of KT Freetel will be converted into stock options granting the rights to purchase the stock of KT Corporation, based on the following formula:
[Amount of Adjusted Stock Options] = [Amount of Stock Options Granted Prior to Adjustment] x [Merger Ratio]
[Adjusted Exercise Price] = [Exercise Price Prior to Adjustment] / [Merger Ratio]
KT Freetel and KT Corporation will take all necessary measures for the amendment, prior to the date of the merger, of stock option agreements entered into between directors, officers and employees of KT Freetel and KT Freetel. However, any such amendments to the stock option agreements will take effect on the date of the registration of the merger.
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Stockholder approval of merger. Pursuant to the merger agreement, KT Corporation and KT Freetel will hold their extraordinary meetings of stockholders for approval of the merger on March 27, 2009, which may be changed as agreed by KT Corporation and KT Freetel.
Effect of Merger. As of the date of the merger, all of the assets, liabilities, rights and obligations (including contractual rights and obligations) of KT Freetel will be comprehensively succeeded by KT Corporation. The employees of KT Freetel will become employees of KT Corporation as a result of the merger and the obligations to pay severance payments to those employees will be succeeded by KT Corporation.
Dividend Limitation. KT Corporation may distribute dividends for the fiscal year 2008. The exact amount of the dividends, which shall not exceed an aggregate of (Won)400 billion, will be determined at its ordinary general stockholders’ meeting for the fiscal year 2008.
Governance of KT Freetel. The directors and audit committee members of KT Corporation who assumed offices prior to the date of the merger will, unless there is any particular basis for terminations of office, continue to hold their positions until their current respective terms of office expire. However, the directors and audit committee members of KT Freetel shall cease to hold their respective offices as of the date of the registration of the merger.
Representations and Warranties. The merger agreement contains limited representations and warranties of KT Corporation and KT Freetel relating to, among other things:
| | • | | corporate organization and other similar corporate matters; |
| | • | | authorization, execution, delivery and performance of the merger agreement; |
| | • | | capital structure and securities of KT Corporation and KT Freetel; |
| | • | | government approvals and conflicts; and |
Covenants. The merger agreement contains covenants of KT Corporation and KT Freetel relating to, among other things:
| | • | | making best efforts to complete the merger; |
| | • | | providing information to the other party and consulting with each other in connection with such delivery; |
| | • | | providing notice to the other party whenever either party is aware of an event (i) that may have a material adverse effect on the merger; (ii) that results in any of its representations and warranties no longer being true in any material respect; or (iii) that prevents the satisfaction of any condition to the merger; |
| | • | | obtaining any necessary third-party consents in connection with the consummation of the merger; and |
| | • | | continuing their business in the ordinary course. |
Conditions to the merger. The obligation of each of KT Corporation and KT Freetel to complete the merger is subject to the satisfaction or waiver of specified conditions, including those listed below:
| | • | | obtaining or satisfying all material government approvals necessary for the closing of the merger set forth in the merger agreement; |
| | • | | the merger must have been authorized and approved by the board of directors and stockholders of KT Corporation and KT Freetel; |
| | • | | representations and warranties set out in the merger agreement must be true and correct in all material respects as of the date of the merger agreement and as of the date of the merger; |
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| | • | | there shall not have occurred any material adverse change in the assets or business conditions of either KT Corporation or KT Freetel; and |
| | • | | all covenants and other obligations required to be performed by the parties under the merger agreement must have been performed in all material aspects. |
Termination. The merger agreement may be terminated at any time prior to the completion of the merger:
| | • | | by mutual written consent of KT Corporation and KT Freetel; |
| | • | | with respect to either KT Corporation or KT Freetel, if a proceeding for bankruptcy, dissolution, liquidation, insolvency or rehabilitation commences or an application has been made to commence any such proceeding; |
| | • | | (i) if stockholders’ approval for the merger is not obtained by either KT Corporation or KT Freetel within three (3) months from the closure of shareholders’ registry to determine the shareholders entitled to exercise voting rights at the general shareholders’ meeting convened for the purpose of approving the merger, (ii) any governmental approval required for the merger is definitively rejected by the relevant governmental authority even prior to the expiry of the three (3) month period described in (i) above, or (iii) it becomes evident that it will be infeasible or illegal to consummate the merger pursuant to the merger agreement due to a change in laws or governmental restrictions, and KT Corporation and KT Freetel do not agree to an amended merger agreement within 30 days from the occurrence of such event; |
| | • | | if a material adverse effect results from a breach by the other party of any of its representations, warranties or obligations under the merger agreement, and such breach is not cured within 30 days of receiving written notice from the non-breaching party; |
| | • | | if either (i) the aggregate purchase price to be paid by KT Corporation to its stockholders who exercise appraisal rights exceeds (Won)1 trillion, or (ii) the aggregate purchase price to be paid by KT Freetel to its stockholders who exercise appraisal rights exceeds (Won)700 billion; |
| | • | | if between the execution of the merger agreement and the merger date, there is a material adverse change in the financial condition, results of operation, the business condition or prospects, of either KT Corporation or KT Freetel; or |
| | • | | when necessary governmental approvals have been obtained for the merger, but such approvals include conditions which (i) if complied with, are reasonably expected to result in a material adverse change in the financial condition, results of operations, the business condition or prospects of KT Corporation, or (ii) are impossible or extremely difficult to comply with within the time period set forth in such approvals. |
Effect of termination. After termination, either party may seek damages and other rights or remedies from the party responsible for any default or breach under the merger agreement and each party shall, at the request of the other party, return or destroy any materials and information obtained from the other party within 14 days of the termination date.
Governing law and jurisdiction. The merger agreement is governed by the laws of Korea. KT Corporation and KT Freetel have both irrevocably submitted to the exclusive jurisdiction of the Seoul Central District Court to hear and determine any suit, action or proceedings, and to settle any disputes, which may arise out of or in connection with the merger agreement.
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INFORMATION ABOUT KT CORPORATION
For information about KT Corporation, including an overview of its business, organizational structure and property and a review of its operations and financial results, see the KT 20-F and the Form 6-Ks, which are incorporated by reference into this prospectus.
INFORMATION ABOUT KT FREETEL
KT Freetel, incorporated on January 3, 1997, provides personal communications service (“PCS”), value added services, and sale and lease of personal communications devices based on Code Division Multiple Access (“CDMA”) technology and Wideband Code Division Multiple Access (“W-CDMA”) technology, utilizing 20 MHz of bandwidth in the 1800 MHz frequency. It obtained one of the three licenses to provide nationwide PCS service in June 1996 and began offering PCS service in all major population centers in Korea in October 1997. PCS service is a digital wireless telephone and data transmission system that uses portable handsets with long battery life to communicate via low-power antennae. In May 2001, KT Freetel launched its 2.5 generation high-speed wireless data services, thereby allowing subscribers who have Evolution-Data Optimized (or EV-DO)-compatible handsets to access high-speed multimedia services including voice, data and video transmission. KT Freetel also expanded its coverage area of High Speed Downlink Packet Access (or HSDPA)-based IMT-2000 services to 84 cities in December 2006 and nationwide in March 2007. HSDPA-based IMT-2000 is a third-generation, high-capacity wireless Internet and video multimedia communications technology, which allows an operator to provide to its subscribers significantly larger bandwidth capacity. KT Freetel currently offers such services under the brand name “SHOW”.
KT Freetel competes with SK Telecom, a mobile service provider that has a longer operating history than KT Freetel, and LG Telecom, that began its service at around the same time as KT Freetel. As of December 31, 2007, KT Freetel had approximately 13.7 million subscribers (including approximately 2.9 million resale subscribers of KT Corporation, who utilize KT Freetel’s mobile network through an air-time reselling arrangement between KT Corporation and KT Freetel), which was second largest among the three mobile service providers. As of December 31, 2007, KT Freetel had a market share of 31.5% of the mobile telecommunication service market, in terms of number of subscribers announced by the Korea Communications Commission, while SK Telecom had a market share of 50.5%. Among KT Freetel’s 13.7 million subscribers (including resale subscribers of KT Corporation), 3.2 million subscribers signed up for SHOW as of December 31, 2007, representing a market share of 56.2% in terms of number of subscribers using third-generation HSDPA-based IMT-2000 service as estimated by KT Freetel. KT Freetel is 54.25% owned by KT Corporation as of the date hereof, and is a consolidated subsidiary of KT Corporation.
For further information about KT Freetel, including an overview of its business, organizational structure and property and a review of its operations and financial results, see KT 20-F and Form 6-K furnished on January 9, 2009, which are incorporated by reference into this prospectus.
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DESCRIPTION OF KT CORPORATION’S CAPITAL STOCK
For a description of the material terms of the capital stock of KT Corporation under the articles of incorporation currently in effect, and of certain relevant provisions of the Korean Commercial Code, the Korean Securities and Exchange Act of 1976, as amended and certain related laws of Korea, see “Item 10.B. Memorandum and Articles of Association” in KT Corporation’s Annual Report on Form 20-F for the year ended December 31, 2007, which is incorporated by reference into this prospectus.
COMPARISON OF RIGHTS OF KT CORPORATION STOCKHOLDERS AND KT FREETEL STOCKHOLDERS
KT Corporation and KT Freetel are each organized under the law of the Republic of Korea. Any differences, therefore, in the rights of holders of KT Corporation common stock and holders of KT Freetel common stock would arise primarily from differences in their respective articles of incorporation.
There are no material differences in the rights of holders of KT Corporation common stock and holders of KT Freetel common stock under KT Corporation’s articles of incorporation and the articles of incorporation of KT Freetel, except that under KT Corporation’s articles of incorporation, holders of an aggregate of 1% or more of KT Corporation’s outstanding shares with voting rights may request cumulative voting when electing two or more directors. KT Freetel’s articles of incorporation currently do not allow cumulative voting.
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TAX CONSIDERATIONS
The following summary is based upon tax laws of the United States and the Republic of Korea as in effect on the date hereof, and is subject to any change in United States or Korean law that may come into effect after such date. Holders of common stock of KT Freetel are advised to consult their own tax advisors as to the United States, Korean or other tax consequences of the merger and of the ownership of KT Corporation common stock, including the effect of any national, state or local tax laws.
United States Federal Income Taxation
This summary describes the anticipated material U.S. federal income tax consequences of the merger and of the ownership of KT Corporation common stock to a U.S. holder (as defined below) of KT Freetel common stock. This discussion assumes that holders of KT Freetel common stock hold such stock and will hold their KT Corporation common stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code (the “Code”), and does not address all the U.S. federal income tax consequences that may be relevant to particular holders in light of their individual circumstances or to holders that are subject to special rules, such as:
| | • | | financial institutions; |
| | • | | tax-exempt organizations; |
| | • | | dealers in securities or currencies; |
| | • | | persons whose functional currency is not the U.S. dollar; |
| | • | | traders in securities that elect to use a mark-to-market method of accounting; |
| | • | | investors in pass-through entities; |
| | • | | persons that hold KT Freetel or KT Corporation common stock as part of a straddle, hedge, constructive sale or conversion transaction; |
| | • | | persons that acquired their shares of KT Freetel or KT Corporation common stock through the exercise of an employee stock option or otherwise as compensation; |
| | • | | holders of options granted under any KT Freetel or KT Corporation benefit plan; and |
| | • | | persons that own or are deemed to own 10% or more of any class of stock in KT Freetel or KT Corporation. |
If a partnership holds common shares of KT Freetel or KT Corporation, the tax treatment of a partner will generally depend on the status of the partners and the activities of the partnership. If a U.S. holder is a partner in a partnership holding common shares of KT Freetel or KT Corporation, the U.S. holder should consult its tax advisors.
The following discussion is based upon the Code, its legislative history, Treasury regulations promulgated pursuant to the Code, treaties and published rulings and decisions, all as currently in effect as of the date of this document, and all of which are subject to change, possibly with retroactive effect, and to differing interpretations. Tax considerations under state, local and foreign laws, or U.S. federal tax laws other than those pertaining to income tax, are not addressed in this summary.
Holders of KT Freetel common stock should consult with their own tax advisors as to the tax consequences of the merger and of holding common stock of KT Corporation in their particular circumstances, including the applicability and effect of the alternative minimum tax and any state, local or foreign and other tax laws and of changes in those laws.
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For purposes of this discussion, the term “U.S. holder” means a beneficial owner of KT Freetel or KT Corporation common stock that is (i) a U.S. citizen or resident, as determined for U.S. federal income tax purposes, (ii) a corporation (or entity taxable as a corporation) created or organized in or under the laws of the United States, any state thereof or the District of Columbia, or (iii) any other person that is subject to U.S. federal income tax on a net income basis in respect of shares of KT Freetel or KT Corporation.
Material U.S. Federal Income Tax Consequences of the Merger
In connection with the merger, Cleary Gottlieb Steen & Hamilton LLP will provide an opinion (the “tax opinion”) substantially to the effect that the merger will be treated as a reorganization within the meaning of Section 368(a) of the Code. This opinion will be subject to customary qualifications and assumptions, including the assumption that the merger will be completed according to the terms of the Merger Agreement. In rendering the tax opinion, Cleary Gottlieb Steen & Hamilton LLP may require and rely upon representations and covenants, including those contained in letters and certificates of officers of KT Freetel and KT Corporation.
Neither the tax opinion nor the discussion that follows is binding on the Internal Revenue Service (the “IRS”) or the courts. In addition, neither KT Freetel nor KT Corporation intends to request a ruling from the IRS with respect to the merger. Accordingly, there can be no assurance that the IRS will not challenge the conclusion expressed in the tax opinion or the discussion set forth below under “—Consequences to U.S. Holders of KT Freetel Common Stock”, or that a court will not sustain such a challenge. In addition, if any of the representations or assumptions upon which the tax opinion is based is inconsistent with the actual facts, the U.S. federal income tax consequences of the merger could be adversely affected.
Based on KT Freetel’s past, current and projected income, assets, and activities, KT Freetel does not believe that it has been a passive foreign investment company (“PFIC”) since the initial public offering, and it does not expect to become a PFIC during its current taxable year. The following discussion assumes that KT Freetel is not a PFIC for U.S. federal income tax purposes. If KT Freetel was a PFIC at any time during a U.S. holder’s holding period with respect to KT Freetel stock, the tax consequences of the merger to such U.S. holder would differ from those discussed below. U.S. holders should consult with their own tax advisors regarding the tax consequences of the merger to them if KT Freetel is a PFIC.
Consequences to U.S. Holders of KT Freetel Common Stock
Based on the conclusion set forth in the tax opinion, the following material U.S. federal income tax consequences to U.S. holders of KT Freetel common stock will result from the merger:
| | • | | A U.S. holder that exchanges all of its shares of KT Freetel common stock solely for KT Corporation common shares pursuant to the merger will not recognize any income, gain or loss, except with respect to cash received in lieu of a fractional KT Corporation common share. |
| | • | | A U.S. holder of KT Freetel common stock that exercises its appraisal rights under Korean law (and that exchanges all of its shares of KT Freetel common stock solely for cash in connection with the merger) generally will recognize capital gain or loss equal to the difference between the amount of cash received and its tax basis in the KT Freetel common stock. Any such capital gain or loss generally will be long-term capital gain or loss if the U.S. holder has held the shares of KT Freetel common stock for more than one year at the time the merger is completed. Long-term capital gain of an individual U.S. holder generally is subject to a maximum U.S. federal income tax rate of 15%. The deductibility of capital losses is subject to limitations. |
| | • | | A U.S. holder’s aggregate tax basis in the KT Corporation common shares received in exchange for KT Freetel common shares pursuant to the merger (including any fractional share interests deemed received by the U.S. holder, as discussed below) will equal such holder’s aggregate tax basis in the KT Freetel common shares surrendered pursuant to the merger. A U.S. holder’s holding period for the KT Corporation common shares received pursuant to the merger generally will include the holding period of the KT Freetel common shares surrendered in exchange therefor. A U.S. holder with differing bases |
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| | and/or holding periods with respect to shares of KT Freetel common stock should consult its tax advisor with regard to identifying the bases or holding periods of the particular shares of KT Corporation common stock received in the merger. |
| | • | | A U.S. holder that receives cash in lieu of a fractional KT Corporation common share pursuant to the merger will be treated as having received the fractional share pursuant to the merger and then as having exchanged the fractional share for cash in a redemption by KT Corporation. In general, this deemed redemption will be treated as a sale or exchange, provided the redemption is not determined to be essentially equivalent to a dividend. Although this determination will depend on whether and to what extent the redemption reduces the U.S. holder’s deemed percentage stock ownership of KT Corporation, the IRS has ruled that a redemption is not essentially equivalent to a dividend (and, therefore, will result in sale or exchange treatment) in the case of a stockholder of a publicly held company whose relative stock interest is minimal and who exercises no control over corporate affairs if the redemption results in any actual reduction in the stock interest of the stockholder. As a result, the redemption of a fractional share of KT Corporation common stock generally will be treated as a sale or exchange, and a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount of cash received and the portion of the holder’s tax basis allocable to the fractional share. Any capital gain or loss generally will be long-term capital gain or loss if the U.S. holder has held the shares of KT Freetel common stock for more than one year at the time the merger is completed. Long-term capital gain of an individual U.S. holder generally is subject to a maximum U.S. federal income tax rate of 15%. The deductibility of capital losses is subject to limitations. |
Foreign Tax Credit Considerations
Under Korean tax laws, a non-Korean holder of KT Freetel common stock will be deemed to have received dividends from KT Corporation as a result of the merger to the extent the amount of cash received in lieu of a fractional share plus the aggregate value of KT Corporation common stock received (calculated based on the par value of KT Corporation common stock) exceeds such non-Korean holder’s basis in KT Freetel common stock. See “—Korean Tax Considerations—Consequences of the Merger” below. A U.S. holder may not be able to use the foreign tax credit associated with the Korean withholding tax imposed on any such deemed distribution unless the holder can use the credit against United States tax due on other foreign-source income. U.S. holders should consult their own tax advisors regarding the application of the foreign tax credit rules in their particular circumstances.
Information Reporting and Backup Withholding
Payments of cash (if any) to a U.S. holder in or as a result of the merger that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient and demonstrates this fact when so required or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against the U.S. holder’s U.S. federal income tax liability provided the required information is furnished to the IRS.
Reporting Requirements
A U.S. holder that receives KT Corporation common shares as a result of the merger will be required to retain records pertaining to the merger, and certain U.S. holders will be required to provide information to the IRS with respect to the merger. U.S. holders are urged to consult with their tax advisors regarding reporting requirements applicable to the merger.
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Ownership of KT Corporation Common Stock
The discussion set forth below is applicable to U.S. holders (1) that are residents of the United States for purposes of the current tax treaty between the United States and Korea (the “Treaty”), (2) whose KT Corporation shares are not, for purposes of the Treaty, effectively connected with a fixed base or permanent establishment in Korea and (3) that otherwise qualify for the full benefits of the Treaty.
Dividends
The gross amount of any cash dividend (prior to deduction of Korean taxes) that a U.S. holder receives with respect to KT Corporation common shares generally will be treated as a dividend and taxed as ordinary income at the time of receipt by a U.S. holder. Such dividends will not be eligible for the dividends received deduction generally allowed to corporations under the Code.
Dividends paid in Won will be included in income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of a U.S. holder’s receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars on such date. If such a dividend is converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. If the Won received as a dividend are not converted into U.S. dollars on the date of receipt, a U.S. holder will have a basis in the Won equal to their U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Won will be treated as ordinary income or loss.
Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2011 with respect to KT Corporation common stock will be subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends”. Dividends paid on the KT Corporation common stock will be treated as qualified dividends if KT Corporation (i) is eligible for the benefits of a comprehensive income tax treaty with the United States that the IRS has approved for the purposes of the qualified dividend rules and (ii) was not, in the year prior to the year in which the dividend was paid, and is not, in the year in which the dividend is paid, a PFIC. The Treaty has been approved for the purposes of the qualified dividend rules. KT Corporation believes that it was not treated as a PFIC for U.S. federal income tax purposes with respect to its 2008 taxable year. In addition, based on current expectations regarding the value and nature of its assets, the sources and nature of its income, and relevant market data, KT Corporation does not anticipate becoming a PFIC for its 2009 taxable year. Because the PFIC determination must be made annually, however, there can be no assurances that KT Corporation will not be considered a PFIC for any given taxable year.
Sales and Other Dispositions
Upon a sale, exchange, or other taxable disposition of KT Corporation common shares, a U.S. holder will generally recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized on the disposition and the U.S. holder’s U.S. dollar tax basis in the shares that are disposed of. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.
Foreign Tax Credit Considerations
With certain exceptions as described below, the Korean withholding tax that is imposed on distributions with respect to KT Corporation common shares will be treated, up to any applicable reduced rates provided under the Treaty, as a foreign income tax that is eligible (subject to generally applicable limitations and conditions under U.S. tax laws) for credit against a U.S. holder’s federal income tax liability or, at the U.S. holder’s election, for deduction in computing the holder’s taxable income. Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities. Dividends generally will constitute foreign-source “passive category income” (or, in the case of certain of certain U.S. holders,
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“general category income”) for foreign tax credit purposes. Any gain or loss recognized by a U.S. holder upon a sale or other taxable disposition of KT Corporation common shares generally will be treated as U.S.-source gain or loss.
Distributions of additional shares in respect of KT Corporation common stock that are made as part of a pro rata distribution to all stockholders of KT Corporation generally will not be subject to U.S. federal income tax. A U.S. holder may not be able to use the foreign tax credit associated with any Korean withholding tax imposed on a distribution of additional shares that is not subject to U.S. tax unless the holder can use the credit against United States tax due on other foreign-source income.
Any Korean securities transaction tax or agricultural and fishery special surtax imposed on the sale or other disposition of KT Corporation shares will not be treated as a creditable foreign tax for U.S. federal income tax purposes, although U.S. holders may be entitled to deduct such taxes from the amount realized on the sale or other disposition, subject to applicable limitations under the Code.
U.S. holders should consult their own tax advisors regarding the application of the foreign tax credit rules to their investment in KT Corporation common shares, including the possible adverse impact of failing to take advantage of benefits under the Treaty.
Estate and Gift Tax
Korea may impose an inheritance tax on a decedent who owns KT Corporation shares, even if the decedent was not a citizen or resident of Korea. See “—Korean Tax Considerations—Inheritance Tax and Gift Tax” below. The amount of any inheritance tax paid to Korea may be eligible for credit against the amount of U.S. federal estate tax imposed on the estate of a U.S. holder. Korea also may impose a gift tax. The Korean gift tax generally will not be treated as a creditable foreign tax for U.S. tax purposes. Prospective purchasers should consult their personal tax advisors regarding the consequences of the imposition of the Korean inheritance or gift tax.
Information Reporting and Backup Withholding
Payments in respect of the shares of KT Corporation common stock that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient and demonstrates this fact when so required or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against the U.S. holder’s U.S. federal income tax liability provided the required information is furnished to the IRS.
Korean Tax Considerations
The following discussion is a summary of the material Korean tax consequences to non-Korean holders of KT Freetel common stock of the merger and of the ownership of KT Corporation common stock.
For purposes of this discussion, a non-Korean holder means a holder who is not:
| | • | | a corporation organized under Korean law; |
| | • | | a corporation whose place of management is located in Korea; or |
| | • | | engaged in a trade or business in Korea through a permanent establishment or a fixed base to which the relevant income is attributable or with which the relevant income is effectively connected. |
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This discussion regarding Korean tax laws set forth below is based on the Korean tax laws currently in effect and as currently interpreted by the Korean taxation authorities. This discussion is not exhaustive of all possible tax considerations which may apply to a particular stockholder. The non-Korean holders of KT Freetel common stock are advised to consult their tax advisors as to the overall tax consequences to them of the merger and of ownership of KT Corporation common stock, including specifically the tax consequences under Korean law and the current tax treaty between Korea and the United States.
Consequences of the Merger
Under Korean tax laws, a non-Korean holder of KT Freetel common stock will be deemed to have received dividends from KT Corporation to the extent that the amount of cash received in lieu of a fractional share interest in KT Corporation common stock plus the aggregate value of KT Corporation common stock received for KT Freetel common stock as a result of a merger exceed such non-Korean holder’s basis in KT Freetel common stock. In this regard, the value of KT Corporation common stock received for KT Freetel common stock will be calculated based on the par value of KT Corporation common stock.
Dividends on Shares of Common Stock
The dividends paid, whether in cash or in shares, including deemed dividends described above, to a non-Korean holder of KT Corporation common stock are generally subject to withholding tax at a rate of 22% or a reduced rate of withholding under the tax treaty between Korea and the country in which a non-Korean holder resides provided that such non-Korean holder is the “beneficial owner” of the dividends. The net amount of dividends to be actually paid to the non-Korean holder of KT Corporation common stock will be the gross amount of dividends less the amount of withholding tax.
For example, if a non-Korean holder of KT Corporation common stock is a qualified resident of the United States for purposes of the tax treaty between the United States and Korea and such non-Korean holder is the “beneficial owner” of a dividend, a reduced withholding tax rate of 16.5% (including local surtax) will generally apply.
In order to be entitled to a reduced rate of withholding tax under the tax treaty between Korea and the country in which a non-Korean holder of KT Corporation common stock resides, such holder must submit to KT Corporation (or its agent), prior to the payment date of dividends, evidence of tax residence for Korean tax purposes. Excess taxes withheld may not be recoverable even if the non-Korean holder subsequently produces evidence that such holder was entitled to have tax withheld at a lower rate.
Dividends in the form of free shares which reflect transfers of certain capital reserves or asset revaluation reserves into paid-in-capital may be subject to Korean withholding tax.
Capital Gains
For Korean tax purposes, a non-Korean holder of KT Corporation common stock will recognize capital gain to the extent realized from sale or exchange of KT Corporation common stock unless (i) such non-Korean holder of KT Corporation common stock is entitled to the exemption provided by the tax treaty between Korea and the country in which a non-Korean holder resides provided that such non Korean holder is the “beneficial owner” of the dividends, or (ii) such non-resident holder of KT Corporation common stock does not have any permanent establishment in Korea and owns or has owned directly or beneficially less than 25% of the total issued and outstanding shares of KT Corporation common stock at any time during the year of sale or exchange and for the five calendar years before the year of sale or exchange and such sale or exchange is made on the Korea Exchange.
In the absence of the application of a tax treaty which exempts or reduces the rate of tax on capital gains, the amount of Korean withholding tax on capital gains of a non-Korean holder of KT Corporation common stock will be the lesser of 22% (subject to the production of satisfactory evidence of the acquisition cost and the
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transaction costs of KT Corporation common stock) of the net capital gains or 11% of the gross realization proceeds. However, if a non-Korean holder of KT Corporation common stock is a qualified resident of the United States for purposes of the tax treaty between the United States and Korea and such non-Korean holder is the “beneficial owner” of the capital gains, such non-Korean holder is generally entitled to an exemption from Korean withholding tax in respect of any capital gain realized in sale or exchange of shares of KT Corporation common stock.
If a non-Korean holder of KT Corporation common stock sells shares of KT Corporation common stock, the purchaser or, in the case of the sale of shares of KT Corporation common stock on the Korea Exchange or through a licensed securities company in Korea, the licensed securities company, is required to withhold Korean tax from the sales price in an amount equal to 11% of the gross realization proceeds and to make payment of this amount to the Korean tax authority, unless such non-Korean holder establishes the entitlement to an exemption of taxation under the tax treaty between Korea and the country in which such non-Korean holder resides or produces satisfactory evidence of the acquisition cost and transaction costs for KT Corporation common stock.
To obtain the benefit of an exemption available under applicable tax treaties, a non-Korean holder of KT Corporation common stock must submit to the purchaser or the licensed securities company, as the case may be, an application for exemption prior to the payment, with a certificate of non-Korean holder’s tax residence issued by a competent authority of non-Korean holder’s residence country. Excess taxes withheld may not be recoverable even if the non-Korean holder subsequently produces evidence that the non-Korean holder was entitled to have taxes withheld at a lower rate.
Application of the Tax Treaty between the United States and Korea
Under the tax treaty between the United States and Korea, a resident of the United States means (i) a United States corporation, and (ii) any other person (except a corporation or any entity treated as a corporation under United States law) residing in the United States for U.S. tax purposes.
Further, the reduced Korean withholding tax rate on dividends and capital gains under the tax treaty between the United States and Korea (including the capital gains exception) would not be available if (a) the U.S. resident holders of KT Corporation common stock are certain investment or holding companies, (b) the dividends or capital gains derived by residents of the United States from KT Corporation common stock are effectively connected with the United States residents’ permanent establishments in Korea or (c) in the case of capital gains derived by an individual, (i) such United States resident maintains a fixed base in Korea for a period aggregating 183 days or more during the taxable year and KT Corporation common stock is effectively connected with such fixed base or (ii) such United States resident is present in Korea for 183 days or more during the taxable year.
Inheritance Tax and Gift Tax
If a non-Korean holder of KT Corporation common stock dies while holding a share of KT Corporation common stock or donates a share of KT Corporation common stock, the heir or donee (or in certain circumstances, the non-Korean holder as the donor) will be subject to Korean inheritance or gift tax presently at the rate of 10% to 50%, provided that the value of KT Corporation common stock is greater than a specified amount.
Securities Transaction Tax
The transfer of shares of KT Corporation common stock generally will be subject to a securities transaction tax at the rate of 0.15% of the sale price of the shares of KT Corporation common stock when traded on the Korea Exchange and will be subject to an agriculture and fishery community special surtax at the rate of 0.15% of the sale price of the shares of KT Corporation common stock. If the transfer of shares of KT Corporation common stock is not made on the Korea Exchange, subject to certain exceptions, such transfer will be subject to a securities transaction tax at the rate of 0.5% and will not be subject to an agriculture and fishery community special surtax.
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LEGAL MATTERS
The validity of the common stock of KT Corporation that will be issued in the merger will be passed on for KT Corporation by Kim & Chang, Korean counsel to KT Corporation. Cleary Gottlieb Steen & Hamilton LLP, special U.S. tax counsel to KT Corporation, will pass on certain U.S. federal income tax consequences of the merger to U.S. holders of KT Freetel common stock.
EXPERTS
The 2007 consolidated financial statements and the retrospective adjustments to the 2006 and 2005 consolidated financial statements included in the KT Form 20-F which is incorporated by reference into the registration statement filed on Form F-4, to which this Prospectus forms a part, and the effectiveness of KT Corporation’s internal control over financial reporting have been audited by Deloitte Anjin LLC, an independent registered public accounting firm, as stated in their reports incorporated by reference into the registration statement, which reports (1) express an unqualified opinion on the 2007 financial statements and include explanatory paragraphs referring to i) the adjustments to the 2006 and 2005 consolidated financial statements to retrospectively apply the adoption of Korean Accounting Standards and reclassify certain accounts in prior periods to conform to current period’s presentation, and ii) the translation of Won amounts into U.S. dollar amounts, and iii) information relating to the nature and effect of differences from accounting principles generally accepted in the United States of America, (2) expresses an unqualified opinion on the retrospective adjustments to the 2006 and 2005 consolidated financial statements, and (3) expresses an unqualified opinion on the effectiveness of internal control over financial reporting. Such financial statements have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of KT Corporation and its subsidiaries as of and for each of the years ended December 31, 2005 and 2006, included in the KT Form 20-F which is incorporated by reference into the registration statement filed on Form F-4, to which this Prospectus forms a part, have been audited by KPMG Samjong Accounting Corp., an independent registered public accounting firm, as stated in its report, which is incorporated by reference into the registration statement filed on Form F-4 (which report expresses an unqualified opinion on such financial statements before the effects of the adjustments and disclosures to retrospectively apply the changes in accounting and reclassifications pursuant to the adoption of Statements of Korean Accounting Standards). Such financial statements have been included in reliance upon the report of KPMG Samjong Accounting Corp., given upon its authority as experts in auditing and accounting.
The consolidated financial statements of KT Freetel and its subsidiaries included in the registration statement filed on Form F-4, to which this Prospectus forms a part, have been audited by Deloitte Anjin LLC, an independent registered public accounting firm, as stated in their report appearing therein which report expresses an unqualified opinion on the consolidated financial statements and includes explanatory paragraphs relating to the translation of Won amounts into U.S. dollar amounts, and information relating to the nature and effect of differences from accounting principles generally accepted in the United States of America. Such financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS
| | |
| | | Page |
Consolidated Financial Statements of KT Freetel, Co., Ltd. | | |
| |
Consolidated Balance Sheets as of December 31, 2007 and June 30, 2008 | | F-2 |
| |
Consolidated Statements of Operations for the six months ended June 30, 2007 and 2008 | | F-5 |
| |
Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2008 | | F-6 |
| |
Consolidated Statements of Changes in Equity for the six months ended June 30, 2007 and 2008 | | F-9 |
| |
Notes to Consolidated Financial Statements for the six months ended June 30, 2007 and 2008 | | F-10 |
| |
Report of Independent Registered Public Accounting Firm | | F-45 |
| |
Consolidated Balance Sheets as of December 31, 2006 and 2007 | | F-46 |
| |
Consolidated Statements of Income for the years ended December 31, 2005, 2006 and 2007 | | F-49 |
| |
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007 | | F-50 |
| |
Consolidated Statements of Changes in Equity for the years ended December 31, 2005, 2006 and 2007 | | F-53 |
| |
Notes to Consolidated Financial Statements for the years ended December 31, 2005, 2006 and 2007 | | F-55 |
F-1
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2007 and June 30, 2008
(Unaudited)
| | | | | | | | | |
| | | In millions of Korean won | | In thousands of
U.S. dollars
(Note 2) |
| | | 2007 | | 2008 | | 2008 |
ASSETS | | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | |
Cash and cash equivalents | | (Won) | 330,473 | | (Won) | 113,014 | | $ | 107,961 |
Short-term financial instruments (Note 3) | | | 3,800 | | | 10,668 | | | 10,191 |
Short-term investment securities (Note 3) | | | 3,861 | | | 959 | | | 916 |
Accounts receivable-trade, net of allowance for doubtful accounts of (Won)210,347 million in 2007 and (Won)160,717 million in 2008 (Notes 2 and 15) | | | 1,175,000 | | | 1,352,588 | | | 1,292,117 |
Short-term loans (Note 2) | | | 4,906 | | | 4,912 | | | 4,692 |
Accounts receivable-other, net of allowance for doubtful accounts of (Won)18,034 million in 2007 and (Won)17,245 million in 2008 (Notes 2 and 15) | | | 34,268 | | | 42,213 | | | 40,326 |
Advance payments, net of allowance for doubtful accounts of (Won)12,051 million in 2007 and (Won)10,995 million in 2008 (Notes 2 and 15) | | | 30,514 | | | 35,063 | | | 33,495 |
Prepaid expenses | | | 16,334 | | | 21,282 | | | 20,331 |
Current portion of deferred income tax assets | | | 135,363 | | | 104,651 | | | 99,972 |
Inventories (Note 4) | | | 162,709 | | | 349,457 | | | 333,834 |
Other current assets (Note 2) | | | 1,243 | | | 6,212 | | | 5,934 |
| | | | | | | | | |
Total Current Assets | | | 1,898,471 | | | 2,041,019 | | | 1,949,769 |
| | | | | | | | | |
NON-CURRENT ASSETS: | | | | | | | | | |
Long-term financial instruments (Note 3) | | | 56 | | | 49 | | | 47 |
Long-term investment securities | | | 27,613 | | | 17,147 | | | 16,380 |
Equity method investment securities | | | 62,420 | | | 156,381 | | | 149,390 |
Long-term loans (Note 2) | | | 34,528 | | | 48,900 | | | 46,714 |
Other investment assets | | | 19,157 | | | 48,615 | | | 46,442 |
Property and equipment, net (Note 5 ) | | | 4,266,945 | | | 4,230,084 | | | 4,040,967 |
Intangible assets, net (Note 6 ) | | | 894,917 | | | 855,809 | | | 817,548 |
Long-term accounts receivable-trade, net of discount on present value of (Won)4,147 million in 2007 and (Won)15,479 million in 2008 | | | 42,512 | | | 126,132 | | | 120,493 |
Guarantee deposits | | | 232,102 | | | 241,510 | | | 230,713 |
Deferred income tax assets | | | 54,748 | | | 120,396 | | | 115,013 |
Long-term accounts receivable-other | | | — | | | 493 | | | 471 |
Other non-current assets | | | 4,300 | | | 4,396 | | | 4,199 |
| | | | | | | | | |
Total Non-current Assets | | | 5,639,298 | | | 5,849,912 | | | 5,588,377 |
| | | | | | | | | |
TOTAL ASSETS | | (Won) | 7,537,769 | | (Won) | 7,890,931 | | $ | 7,538,146 |
| | | | | | | | | |
(Continued)
F-2
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Balance Sheets—(Continued)
As of December 31, 2007 and June 30, 2008
(Unaudited)
| | | | | | | | | |
| | | In millions of Korean won | | In thousands of
U.S. dollars
(Note 2) |
| | | 2007 | | 2008 | | 2008 |
LIABILITIES AND EQUITY | | | | | | | | | |
CURRENT LIABILITIES : | | | | | | | | | |
Accounts payable-trade (Note 15) | | (Won) | 327,200 | | (Won) | 546,489 | | $ | 522,058 |
Short-term borrowings | | | 35,893 | | | 118,403 | | | 113,109 |
Accounts payable-other (Note 15) | | | 659,798 | | | 789,139 | | | 753,858 |
Advance receipts | | | 4,121 | | | 13,678 | | | 13,066 |
Withholdings | | | 122,110 | | | 135,799 | | | 129,728 |
Accrued expenses | | | 175,687 | | | 184,826 | | | 176,563 |
Income taxes payable | | | 44,107 | | | 2,328 | | | 2,224 |
Current portion of long-term borrowings and debentures
(Note 7) | | | 332,614 | | | 382,368 | | | 365,273 |
Current portion of long-term accounts payable-other
(Note 8) | | | 108,920 | | | 125,748 | | | 120,126 |
Current portion of accrued provisions (Note 9) | | | 9,770 | | | 12,154 | | | 11,611 |
Current portion of deferred income tax liabilities | | | — | | | 13 | | | 12 |
Other current liabilities | | | 1,145 | | | 1,145 | | | 1,094 |
| | | | | | | | | |
Total Current Liabilities | | | 1,821,365 | | | 2,312,090 | | | 2,208,722 |
| | | | | | | | | |
NON-CURRENT LIABILITIES : | | | | | | | | | |
Long-term borrowings (Note 7) | | | 14,618 | | | 76,219 | | | 72,811 |
Long-term debentures (Note 7) | | | 859,037 | | | 917,563 | | | 876,541 |
Long-term accounts payable-other (Note 8) | | | 406,288 | | | 289,391 | | | 276,453 |
Long-term guarantee deposits received | | | 2,526 | | | 2,688 | | | 2,568 |
Accrued provisions (Note 9) | | | 4,048 | | | 4,983 | | | 4,760 |
Accrued severance indemnities, net (Note 2) | | | 53,994 | | | 48,458 | | | 46,292 |
Other non-current liabilities | | | 2,514 | | | 4,261 | | | 4,071 |
| | | | | | | | | |
Total Non-current Liabilities | | | 1,343,025 | | | 1,343,563 | | | 1,283,496 |
| | | | | | | | | |
Total Liabilities | | | 3,164,390 | | | 3,655,653 | | | 3,492,218 |
| | | | | | | | | |
(Continued)
F-3
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Balance Sheets—(Continued)
As of December 31, 2007 and June 30, 2008
(Unaudited)
| | | | | | | | | | | | |
| | | In millions of Korean won | | | In thousands of
U.S. dollars
(Note 2) | |
| | | 2007 | | | 2008 | | | 2008 | |
LIABILITIES AND EQUITY | | | | | | | | | | | | |
EQUITY: | | | | | | | | | | | | |
Common Stock (Note 10) | | | 1,044,181 | | | | 1,044,181 | | | | 997,498 | |
Capital Surplus | | | 1,725,493 | | | | 1,725,493 | | | | 1,648,350 | |
Capital Adjustments: | | | | | | | | | | | | |
Treasury stock (Note 10) | | | (2,078 | ) | | | (124,283 | ) | | | (118,727 | ) |
Stock options (Note 11) | | | 4,088 | | | | 4,088 | | | | 3,905 | |
Loss on disposal of treasury stock | | | — | | | | (58 | ) | | | (55 | ) |
Other share-based payment (Note 11) | | | — | | | | 502 | | | | 480 | |
| | | | | | | | | | | | |
Total Capital Adjustments | | | 2,010 | | | | (119,751 | ) | | | (114,397 | ) |
| | | | | | | | | | | | |
Accumulated Other Comprehensive Income (Note 12) | | | | | | | | | | | | |
Unrealized gain on valuation of available-for-sale
securities | | | 5,717 | | | | (2,270 | ) | | | (2,169 | ) |
Increase in equity of associates | | | 608 | | | | 2,017 | | | | 1,927 | |
Decrease in equity of associates | | | — | | | | (2 | ) | | | (2 | ) |
Loss on translation of foreign operations | | | (81 | ) | | | (10 | ) | | | (10 | ) |
Gain on valuation of derivatives | | | — | | | | 3,114 | | | | 2,975 | |
| | | | | | | | | | | | |
Total Accumulated Other Comprehensive Income | | | 6,244 | | | | 2,849 | | | | 2,721 | |
| | | | | | | | | | | | |
Retained Earnings | | | | | | | | | | | | |
Legal reserve | | | 43,194 | | | | 43,194 | | | | 41,263 | |
Voluntary reserve | | | 1,350,000 | | | | 1,500,000 | | | | 1,432,938 | |
Unappropriated retained earnings | | | 172,587 | | | | 11,655 | | | | 11,134 | |
| | | | | | | | | | | | |
Total Retained Earnings | | | 1,565,781 | | | | 1,554,849 | | | | 1,485,335 | |
| | | | | | | | | | | | |
Minority Interest | | | 29,670 | | | | 27,657 | | | | 26,421 | |
| | | | | | | | | | | | |
Total Equity | | | 4,373,379 | | | | 4,235,278 | | | | 4,045,928 | |
| | | | | | | | | | | | |
TOTAL LIABILITIES AND EQUITY | | (Won) | 7,537,769 | | | (Won) | 7,890,931 | | | $ | 7,538,146 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-4
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Six Months Ended June 30, 2007 and 2008
(Unaudited)
| | | | | | | | | | | | |
| | | In millions of Korean won | | | In thousands
of U.S. dollars
(Note 2) | |
| | | 2007 | | | 2008 | | | 2008 | |
OPERATING REVENUES (Notes 13 and 15) | | (Won) | 3,647,713 | | | (Won) | 4,271,616 | | | $ | 4,080,642 | |
OPERATING EXPENSES (Notes 13 and 15) | | | 3,434,732 | | | | 4,245,583 | | | | 4,055,773 | |
| | | | | | | | | | | | |
OPERATING INCOME | | | 212,981 | | | | 26,033 | | | | 24,869 | |
| | | | | | | | | | | | |
NON-OPERATING REVENUES (EXPENSES) | | | | | | | | | | | | |
Interest income | | | 14,724 | | | | 13,169 | | | | 12,580 | |
Gain (loss) on foreign currency transaction, net | | | 318 | | | | (2,718 | ) | | | (2,596 | ) |
Gain (loss) on foreign currency translation, net | | | 335 | | | | (25,687 | ) | | | (24,539 | ) |
Interest expense | | | (68,644 | ) | | | (56,823 | ) | | | (54,283 | ) |
Loss on disposal of accounts receivable—trade | | | (39 | ) | | | (101 | ) | | | (96 | ) |
Equity in income (loss) of associates, net | | | 638 | | | | (4,784 | ) | | | (4,570 | ) |
Gain on disposal of short-term investment securities, net | | | 3,509 | | | | 2,517 | | | | 2,404 | |
Gain on disposal of long-term investment securities, net | | | — | | | | 312 | | | | 298 | |
Loss on disposal of property and equipment, net | | | (14,940 | ) | | | (4,957 | ) | | | (4,735 | ) |
Loss on impairment of property and equipment | | | (1,058 | ) | | | (18,963 | ) | | | (18,115 | ) |
Gain on disposal of intangible assets, net | | | 134 | | | | 86 | | | | 82 | |
Reversal of negative goodwill (Note 6) | | | 324 | | | | — | | | | — | |
Gain on valuation of derivatives, net (Note 17) | | | 281 | | | | 31,313 | | | | 29,913 | |
Loss on settlement of derivatives | | | (39 | ) | | | — | | | | — | |
Dividend income | | | 301 | | | | 310 | | | | 296 | |
Donation | | | (7,772 | ) | | | (7,488 | ) | | | (7,153 | ) |
Other bad debt expense | | | (72 | ) | | | (19 | ) | | | (18 | ) |
Others | | | 5,173 | | | | 4,371 | | | | 4,176 | |
| | | | | | | | | | | | |
| | | (66,827 | ) | | | (69,462 | ) | | | (66,356 | ) |
| | | | | | | | | | | | |
INCOME BEFORE INCOME TAX EXPENSE | | | 146,154 | | | | (43,429 | ) | | | (41,487 | ) |
INCOME TAX EXPENSE | | | 11,467 | | | | (30,501 | ) | | | (29,137 | ) |
| | | | | | | | | | | | |
NET INCOME (LOSS) | | (Won) | 134,687 | | | (Won) | (12,928 | ) | | $ | (12,350 | ) |
| | | | | | | | | | | | |
Attributable to: | | | | | | | | | | | | |
EQUITY HOLDERS OF THE PARENT | | (Won) | 130,859 | | | (Won) | (10,932 | ) | | $ | (10,443 | ) |
MINORITY INTEREST | | | 3,828 | | | | (1,996 | ) | | | (1,907 | ) |
| | | | | | | | | | | | |
| | (Won) | 134,687 | | | (Won) | (12,928 | ) | | $ | (12,350 | ) |
| | | | | | | | | | | | |
NET INCOME (LOSS) PER SHARE (Note 14)(*) | | | | | | | | | | | | |
Basic and diluted income (loss) per share (in Korean won) | | (Won) | 669 | | | (Won) | (57 | ) | | $ | (0.05 | ) |
| | | | | | | | | | | | |
| (*) | Income per share attributable to the equity holders of the parent |
See accompanying notes to consolidated financial statements
F-5
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2007 and 2008
(Unaudited)
| | | | | | | | | | | | |
| | | In millions of Korean won | | | In thousands of
U.S. dollars
(Note 2) | |
| | | 2007 | | | 2008 | | | 2008 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net income | | (Won) | 134,687 | | | (Won) | (12,928 | ) | | $ | (12,350 | ) |
Expenses not involving cash payments: | | | | | | | | | | | | |
Provision for severance indemnities | | | 11,624 | | | | 12,859 | | | | 12,284 | |
Depreciation | | | 525,883 | | | | 512,315 | | | | 489,411 | |
Amortization of intangible assets | | | 64,074 | | | | 56,834 | | | | 54,293 | |
Bad debt expense | | | 29,661 | | | | 6,845 | | | | 6,539 | |
Stock compensation | | | 51 | | | | 502 | | | | 480 | |
Loss on valuation of inventories | | | 10,742 | | | | 2,392 | | | | 2,285 | |
Loss on foreign currency translation, net | | | — | | | | 25,687 | | | | 24,539 | |
Interest expense | | | 11,844 | | | | 10,881 | | | | 10,395 | |
Loss on disposal of accounts receivable—trade | | | 39 | | | | 101 | | | | 96 | |
Equity in loss of associates, net | | | — | | | | 4,784 | | | | 4,570 | |
Loss on disposal of property and equipment, net | | | 14,940 | | | | 4,957 | | | | 4,735 | |
Loss on impairment of property and equipment | | | 1,058 | | | | 18,963 | | | | 18,115 | |
Others | | | 6,673 | | | | 5,663 | | | | 5,410 | |
| | | | | | | | | | | | |
Sub-total | | | 676,589 | | | | 662,783 | | | | 633,152 | |
| | | | | | | | | | | | |
Income not involving cash receipts: | | | | | | | | | | | | |
Gain on foreign currency translation, net | | | 347 | | | | — | | | | — | |
Equity in income of associates, net | | | 638 | | | | — | | | | — | |
Gain on disposal of short-term investment securities, net | | | 3,509 | | | | 2,517 | | | | 2,404 | |
Gain on disposal of long-term investment securities, net | | | — | | | | 312 | | | | 298 | |
Gain on disposal of intangible assets, net | | | 134 | | | | 86 | | | | 82 | |
Reversal of negative goodwill | | | 324 | | | | — | | | | — | |
Interest income (present value) | | | — | | | | 5,976 | | | | 5,709 | |
Gain on valuation of derivatives, net | | | 281 | | | | 31,313 | | | | 29,913 | |
Others | | | 48 | | | | 11 | | | | 11 | |
| | | | | | | | | | | | |
Sub-total | | | (5,281 | ) | | | (40,215 | ) | | | (38,417 | ) |
| | | | | | | | | | | | |
Changes in assets and liabilities related to operating activities: | | | | | | | | | | | | |
Accounts receivable-trade | | | 82,522 | | | | (81,383 | ) | | | (77,745 | ) |
Accounts receivable-other | | | 1,633 | | | | 1,565 | | | | 1,495 | |
Prepaid expenses | | | (4,479 | ) | | | (4,948 | ) | | | (4,727 | ) |
Inventories | | | (88,823 | ) | | | (189,140 | ) | | | (180,684 | ) |
Deferred income tax assets | | | (30,148 | ) | | | (33,082 | ) | | | (31,603 | ) |
Other current assets | | | (4,914 | ) | | | (2,314 | ) | | | (2,211 | ) |
Long-term accounts receivable-trade | | | 11,523 | | | | (77,648 | ) | | | (74,177 | ) |
Guarantee deposits | | | (6,050 | ) | | | (9,209 | ) | | | (8,797 | ) |
Other non-current assets | | | — | | | | (296 | ) | | | (283 | ) |
Accounts payable-trade | | | 148,003 | | | | 112,265 | | | | 107,246 | |
Accounts payable-other | | | (28,289 | ) | | | 124,038 | | | | 118,493 | |
Withholdings | | | (978 | ) | | | 9,151 | | | | 8,742 | |
Accrued expenses | | | (11,508 | ) | | | 9,758 | | | | 9,322 | |
(Continued)
F-6
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows—(Continued)
For the Six Months Ended June 30, 2007 and 2008
(Unaudited)
| | | | | | | | | |
| | | In millions of Korean won | | | In thousands of
U.S. dollars
(Note 2) | |
| | | 2007 | | | 2008 | | | 2008 | |
Income taxes payable | | (6,221 | ) | | (41,913 | ) | | (40,039 | ) |
Deferred income tax liabilities | | 6 | | | 13 | | | 12 | |
Other current liabilities | | (14,859 | ) | | 6,044 | | | 5,774 | |
Long-term guarantee deposits received | | 10 | | | 187 | | | 179 | |
Accrued provisions | | (4,916 | ) | | (547 | ) | | (523 | ) |
Other non-current liabilities | | 416 | | | 282 | | | 269 | |
Payment of severance indemnities | | (5,753 | ) | | (18,774 | ) | | (17,935 | ) |
| | | | | | | | | |
Sub-total | | 37,175 | | | (195,951 | ) | | (187,192 | ) |
| | | | | | | | | |
Net Cash Provided by Operating Activities | | 843,170 | | | 413,689 | | | 395,193 | |
| | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Cash inflows from investing activities: | | | | | | | | | |
Disposal of short-term financial instruments | | 90,352 | | | 4,697 | | | 4,487 | |
Disposal of short-term investment securities | | 678,604 | | | 313,635 | | | 299,613 | |
Collection of short-term loans | | 9,295 | | | 11,910 | | | 11,378 | |
Disposal of long-term financial instruments | | — | | | 5 | | | 5 | |
Disposal of long-term investment securities | | 68 | | | 1,111 | | | 1,061 | |
Disposal of equity method investment securities | | — | | | 1,579 | | | 1,508 | |
Disposal of property and equipment | | 372 | | | 6,408 | | | 6,122 | |
Disposal of intangible assets | | 286 | | | 595 | | | 568 | |
Others | | 20,000 | | | 2,165 | | | 2,068 | |
| | | | | | | | | |
Sub-total | | 798,978 | | | 342,105 | | | 326,810 | |
| | | | | | | | | |
Cash outflows for investing activities: | | | | | | | | | |
Acquisition of short-term financial instruments | | 50,050 | | | 11,505 | | | 10,991 | |
Acquisition of short-term investment securities | | 560,300 | | | 310,110 | | | 296,246 | |
Increase in short-term loans | | — | | | 751 | | | 717 | |
Acquisition of long-term investment securities | | 88 | | | 504 | | | 481 | |
Acquisition of equity method investment securities | | — | | | 97,700 | | | 93,332 | |
Increase in long-term loans | | 23,472 | | | 25,799 | | | 24,646 | |
Acquisition of property and equipment | | 655,310 | | | 506,124 | | | 483,496 | |
Acquisition of intangible assets | | 19,988 | | | 17,691 | | | 16,900 | |
Others | | — | | | 3,838 | | | 3,666 | |
| | | | | | | | | |
Sub-total | | (1,309,208 | ) | | (974,022 | ) | | (930,475 | ) |
| | | | | | | | | |
Net Cash Used in Investing Activities | | (510,230 | ) | | (631,917 | ) | | (603,665 | ) |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Cash inflows from financing activities: | | | | | | | | | |
Increase in short-term borrowings | | 69,664 | | | 113,143 | | | 108,085 | |
Increase in long-term borrowings | | — | | | 68,166 | | | 65,118 | |
Proceeds from issuance of debentures | | — | | | 397,791 | | | 380,007 | |
| | | | | | | | | |
Sub-total | | 69,664 | | | 579,100 | | | 553,210 | |
| | | | | | | | | |
(Continued)
F-7
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows—(Continued)
For the Six Months Ended June 30, 2007 and 2008
(Unaudited)
| | | | | | | | | | | | |
| | | In millions of Korean won | | | In thousands of
U.S. dollars
(Note 2) | |
| | | 2007 | | | 2008 | | | 2008 | |
Cash outflows for financing activities: | | | | | | | | | | | | |
Repayment of short-term borrowings | | | 62,113 | | | | 23,775 | | | | 22,712 | |
Repayment of current portion of long-term borrowings and debentures | | | 300,000 | | | | 320,608 | | | | 306,274 | |
Repayment of long-term borrowings | | | — | | | | 1,387 | | | | 1,325 | |
Repayment of current portion of long-term accounts payable-other | | | 90,000 | | | | 110,000 | | | | 105,082 | |
Acquisition of treasury stock | | | — | | | | 122,561 | | | | 117,082 | |
Payment of dividends | | | 117,384 | | | | — | | | | — | |
| | | | | | | | | | | | |
Sub-total | | | (569,497 | ) | | | (578,331 | ) | | | (552,475 | ) |
| | | | | | | | | | | | |
Net Cash Provided by (Used in) Financing Activities | | | (499,833 | ) | | | 769 | | | | 735 | |
| | | | | | | | | | | | |
NET DECREASE IN CASH AND CASH EQUIVALENTS | | | (166,893 | ) | | | (217,459 | ) | | | (207,737 | ) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD | | | 590,712 | | | | 330,473 | | | | 315,698 | |
| | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD | | (Won) | 423,819 | | | (Won) | 113,014 | | | $ | 107,961 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-8
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
For the Six Months Ended June 30, 2007 and 2008
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions of Korean won) | | Common
stock | | Capital
surplus | | Capital
adjustments | | | Accumulated
other
comprehensive
income | | | Retained
earnings | | | Minority
interest | | | Total | |
Balance as of January 1, 2007 (as reported) | | (Won) | 1,044,181 | | (Won) | 1,726,645 | | (Won) | 3,188 | | | (Won) | 7,195 | | | (Won) | 1,527,847 | | | (Won) | 11,095 | | | (Won) | 4,320,151 | |
Dividends | | | — | | | — | | | — | | | | — | | | | (117,384 | ) | | | — | | | | (117,384 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Retained earnings after appropriations | | | — | | | — | | | — | | | | — | | | | 1,410,463 | | | | 11,095 | | | | 4,202,767 | |
Net income for the period | | | — | | | — | | | — | | | | — | | | | 130,859 | | | | 3,828 | | | | 134,687 | |
Compensation expense resulting from stock options | | | — | | | — | | | 51 | | | | — | | | | — | | | | — | | | | 51 | |
Unrealized loss on valuation of available-for-sale securities | | | — | | | — | | | — | | | | (2,039 | ) | | | — | | | | (25 | ) | | | (2,064 | ) |
Changes in equity of associates | | | — | | | — | | | — | | | | (32 | ) | | | — | | | | — | | | | (32 | ) |
Others | | | — | | | — | | | — | | | | (7 | ) | | | 369 | | | | — | | | | 362 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of June 30, 2007 | | (Won) | 1,044,181 | | (Won) | 1,726,645 | | (Won) | 3,239 | | | (Won) | 5,117 | | | (Won) | 1,541,691 | | | (Won) | 14,898 | | | (Won) | 4,335,771 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of January 1, 2008 (as reported) | | (Won) | 1,044,181 | | (Won) | 1,725,493 | | (Won) | 2,010 | | | (Won) | 6,244 | | | (Won) | 1,565,781 | | | (Won) | 29,670 | | | (Won) | 4,373,379 | |
Retained earnings after appropriations | | | — | | | — | | | — | | | | — | | | | 1,565,781 | | | | 29,670 | | | | 4,373,379 | |
Net income for the period | | | — | | | — | | | — | | | | — | | | | (10,932 | ) | | | (1,996 | ) | | | (12,928 | ) |
Acquisition of treasury stock | | | — | | | — | | | (122,561 | ) | | | — | | | | — | | | | — | | | | (122,561 | ) |
Disposal of treasury stock | | | — | | | — | | | 356 | | | | — | | | | — | | | | — | | | | 356 | |
Loss on disposal of treasury stock | | | | | | | | | (58 | ) | | | | | | | | | | | | | | | (58 | ) |
Share-based payment | | | — | | | — | | | 502 | | | | — | | | | — | | | | — | | | | 502 | |
Unrealized loss on valuation of available-for-sale securities | | | — | | | — | | | — | | | | (7,988 | ) | | | — | | | | (14 | ) | | | (8,002 | ) |
Changes in equity of associates | | | — | | | — | | | — | | | | 1,408 | | | | — | | | | (3 | ) | | | 1,405 | |
Gain (loss) on valuation of derivatives, net | | | — | | | — | | | — | | | | 3,114 | | | | — | | | | — | | | | 3,114 | |
Others | | | — | | | — | | | — | | | | 71 | | | | — | | | | — | | | | 71 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of June 30, 2008 | | (Won) | 1,044,181 | | (Won) | 1,725,493 | | (Won) | (119,751 | ) | | (Won) | 2,849 | | | (Won) | 1,554,849 | | | (Won) | 27,657 | | | (Won) | 4,235,278 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
(In thousands of U.S. dollars) | | | | | | | | | | | | | | | | | | | |
Balance as of January 1, 2008 (as reported) | | $ | 997,498 | | $ | 1,648,350 | | $ | 1,920 | | | $ | 5,964 | | | $ | 1,495,778 | | | $ | 28,344 | | | $ | 4,177,854 | |
Retained earnings after appropriations | | | — | | | — | | | — | | | | — | | | | 1,495,778 | | | | 28,344 | | | | 4,177,854 | |
Net income for the period | | | — | | | — | | | — | | | | — | | | | (10,443 | ) | | | (1,907 | ) | | | (12,350 | ) |
Acquisition of treasury stock | | | — | | | — | | | (117,082 | ) | | | — | | | | — | | | | — | | | | (117,082 | ) |
Disposal of treasury stock | | | — | | | — | | | 340 | | | | — | | | | — | | | | — | | | | 340 | |
Loss on disposal of treasury stock | | | — | | | — | | | (55 | ) | | | — | | | | — | | | | — | | | | (55 | ) |
Share-based payment | | | — | | | — | | | 480 | | | | — | | | | — | | | | — | | | | 480 | |
Unrealized loss on valuation of available-for-sale securities | | | — | | | — | | | — | | | | (7,631 | ) | | | — | | | | (13 | ) | | | (7,644 | ) |
Changes in equity of associates | | | — | | | — | | | — | | | | 1,345 | | | | — | | | | (3 | ) | | | 1,342 | |
Gain (loss) on valuation of derivatives, net | | | — | | | — | | | — | | | | 2,975 | | | | — | | | | — | | | | 2,975 | |
Others | | | — | | | — | | | — | | | | 68 | | | | — | | | | — | | | | 68 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of June 30, 2008 | | $ | 997,498 | | $ | 1,648,350 | | $ | (114,397 | ) | | $ | 2,721 | | | $ | 1,485,335 | | | $ | 26,421 | | | $ | 4,045,928 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-9
KT FREETEL CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Six Months Ended June 30, 2007 and 2008
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
a. Parent
KT Freetel Co., Ltd. (“KTF”) was incorporated on January 3, 1997, under the Commercial Code of the Republic of Korea, and listed on the Korean Securities Dealers Association Automated Quotation System (the “KOSDAQ”) in December 1999. On April 19, 2004, KTF transferred its listing from the KOSDAQ to the Korea Stock Exchange. KTF is currently engaged in providing personal communications service (“PCS”), value added services, and sale and lease of personal communication devices in Korea.
b. Consolidated Subsidiaries
The consolidated financial statements include the accounts of KTF and its controlled subsidiaries (the “Company”) listed below. Generally, control is deemed to exist when the investor has more than 50 percent of the total outstanding voting stock or when the investor is the largest shareholder and owns more than 30 percent of the total outstanding voting stock. All inter-company accounts and transactions have been eliminated in consolidation.
| | | | | | | | | | |
Subsidiary | | Financial
year end | | Year of
obtaining
control | | Ownership
percentage (%) | | Primary business |
| | | | 2007 | | 2008 | |
KTF Technologies Co., Ltd. (“KTFT”)(*1) | | Dec.31 | | 2002 | | 74.94 | | 74.94 | | Developing and manufacturing of PCS handsets |
PT. KTF Indonesia.
(“KTF Indonesia”) | | Dec.31 | | 2004 | | 99.00 | | 99.00 | | Providing PCS |
KTF Mhows Co., Ltd.
(“KTF Mhows”) | | Dec.31 | | 2004 | | 51.00 | | 51.00 | | Mobile advertisement |
KTF M&S Co., Ltd.
(“KTF M&S”)(*2) | | Dec.31 | | 2007 | | 100.00 | | 100.00 | | PCS distribution |
KTF Music Corp. (“KTF Music”(*3))
(formerly, “Bluecord Technology Co., Ltd.”). | | Dec.31 | | 2007 | | 35.28 | | 35.28 | | Semiconductor and telecommunication equipment manufacture |
Doremi Media Co., Ltd. (“Doremi Media”)(*4) | | Dec.31 | | 2007 | | 64.24 | | 64.24 | | Recording device and music disc manufacture |
| | (*1) | On November 30, 2002, KTF exercised the conversion right of convertible bonds at (Won)5,000 per share to acquire an additional 400,000 shares of common stock of KTFT. The acquisition of KTFT was recorded in accordance with the purchase method of accounting. As a result of this acquisition, KTF recorded negative goodwill of (Won)3,258 million for the fair value of KTFT’s net assets in excess of the acquisition cost. Negative goodwill is recognized as income on a systematic basis over the remaining weighted average useful life (5 years) of the identifiable acquired depreciable or amortizable assets. |
On June 17, 2004, September 30, 2005 and March 23, 2006, KTF acquired KTFT’s minority interests, which represent the subsidiary’s outstanding common stocks of 13.35%, 2.30% and 1.88%, respectively. As a result of these acquisitions, KTF recorded the excess of the acquisition cost over the book value of KTFT’s net assets to capital surplus of (Won)953 million in 2004 and the excess of the book
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value of KTFT’s net assets over the acquisition costs to capital surplus of (Won)580 million in 2005 and the excess of the acquisition cost over the book value of KTFT’s net assets to capital surplus of (Won)1,132 million in 2006.
| | (*2) | In January 2007, KTF M&S was incorporated as a wholly owned subsidiary of KTF. |
| | (*3) | On December 26, 2007, KTF acquired 35.28% ownership interest of KTF Music. As a result of this acquisition, KTF recorded goodwill of (Won)11,206 million for the acquisition cost of KTF Music’s net assets in excess of the fair value. |
| | (*4) | Doremi Media is owned 64.24% by KTF Music. |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Financial Statement Presentation
The Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. To conform more closely to presentations customary in filings with the Securities and Exchange Commission of the United States of America, the accompanying consolidated financial statements have been restructured and translated into English for the convenience of the readers of financial statements. Certain supplementary information included in the statutory Korean language consolidated financial statements, not required for a fair presentation of the Company and its subsidiaries’ financial position or result of operations, is not presented in the accompanying consolidated financial statements.
b. Adoption of New Accounting Standards
In 2008, the Company newly adopted the amendment to the Korea Accounting Institute (“KAI”) Opinion 06-2 “Deferred Income Taxes on Investments in Subsidiaries, Associates and Interests in Joint Ventures”. However, the Company’s adoption of new KAI Opinion 06-2 did not have an effect on net assets as of June 30, 2008 and net income for the six months ended June 30, 2008.
c. Cash and Cash Equivalents
Cash and cash equivalents includes cash, substitute securities including checks issued by others, and checking accounts, ordinary deposits and financial instruments, which can be easily converted into cash and whose value changes due to changes in interest rates are not material, with maturities (or date of redemption) of three months or less upon acquisition.
d. Allowance for Doubtful Accounts
An allowance for doubtful accounts is provided based on the estimated loss on uncollectible accounts and historical bad debt experience. Changes in allowance for doubtful accounts receivable-trade, accounts receivable-other and others for the year ended December 31, 2007 and for six months ended June 30, 2008 are summarized as follows (In millions of Korea won):
| | | | | | | | |
| | | 2007
(12 months) | | | 2008
(6 months) | |
Balance at beginning of the period | | (Won) | 224,470 | | | (Won) | 241,212 | |
Write-offs | | | (31,840 | ) | | | (58,076 | ) |
Provision | | | 48,582 | | | | 6,864 | |
| | | | | | | | |
Balance at end of the period | | (Won) | 241,212 | | | (Won) | 190,000 | |
| | | | | | | | |
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e. Inventories
Inventories, which consist mainly of supplies for telecommunication facilities and PCS handsets for sales, are stated at the acquisition cost, with cost determined using the moving average method. The Company maintains perpetual inventory system, which is adjusted to physical inventory counts performed at year end. When the market value of inventories (net realizable value for merchandise and current replacement cost for supplies) is less than the carrying value, carrying value is stated at the lower of cost or market. The Company applies the lower of cost or market method by group of inventories and loss on inventory valuation is presented as a deduction from inventories and charged to operating expenses. However, when the circumstances that previously caused inventories to be written down below cost no longer exist and the new market value of inventories subsequently recovers, the valuation loss is reversed to the extent of the original valuation loss and the reversal is deducted from operating expenses.
f. Securities (excluding the equity method investment securities)
Debt and equity securities are initially stated at the market value of consideration given for acquisition (market value of securities acquired if market value of consideration given is not available) plus incidental costs attributable to the acquisition of the securities and are classified into trading, available-for-sale and held-to-maturity securities depending on the purpose and nature of acquisition. Trading securities are presented as short-term investments while available-for-sale securities and held-to-maturity securities are presented as short-term investments or long-term investment securities depending on their nature in the balance sheet. The moving average method for equity securities and the specific identification method for debt securities are used to determine the cost of securities for the calculation of gain (loss) on disposal of those securities.
—Trading securities
Securities that are bought and held principally for the purpose of selling them in the near term with active and frequent buying and selling, including securities which consist of a portfolio of securities with the clear objective of generating profits on short-term differences in price, are classified as trading securities. Trading securities are recorded at their fair value and unrealized gains or losses from trading securities are recorded as gain (loss) on valuation of trading securities included in the non-operating revenues (expenses).
—Held-to-maturity securities
Debt securities that have fixed or determinable payments with a fixed maturity are classified as held-to-maturity securities only if the Company has both the positive intent and ability to hold those securities to maturity. However, debt securities, whose maturity dates are due within one year from the balance sheet date are classified as current assets.
After initial recognition, held-to-maturity securities are stated at amortized cost in the balance sheet. When held-to-maturity securities are measured at amortized costs, the difference between their acquisition cost and face value is amortized using the effective interest rate method and the amortization is included in the cost and interest income.
When the possibility of not being able to collect the principal and interest of held-to-maturity securities according to the terms of the contracts is highly likely, the difference between the recoverable amount (the present value of expected cash flows using the effective interest rate upon acquisition of the securities) and book value are recorded as loss on impairment of held-to-maturity securities included in the non-operating expenses and the held-to-maturity securities are stated at the recoverable amount after impairment loss. If the value of impaired securities subsequently recovers and the recovery can be objectively related to an event occurring after the impairment loss was recognized, the reversal of impairment loss are recorded as reversal of impairment loss on held-to-maturity
F-12
securities included in non-operating revenues. However, the resulting carrying amount after the reversal of impairment loss shall not exceed the amortized cost that would have been measured, at the date of the reversal, if no impairment loss were recognized.
—Available-for-sale securities
Debt and equity securities that do not fall under the classifications of trading or held-to-maturity securities are categorized and presented as available-for-sale securities included in investment assets. However, if an available-for-sale security matures or it is certain that such security will be disposed of within one year from the balance sheet date, it is classified as a current asset.
Available-for-sale securities are recorded at fair value. Unrealized gain or loss from available-for-sale securities are presented as gain or loss on valuation of available-for-sale securities included in accumulated other comprehensive income of equity. In addition, accumulated gain or loss on valuation of available-for-sale securities are reflected in either gain or loss on disposal of available-for-sale securities or loss on impairment of available-for-sale securities upon disposal or recognition of impairment of the securities. However, available-for-sale equity securities that are not marketable and whose fair value cannot be reliably measured are recorded at acquisition cost.
When there is objective evidence that the available-for-sale securities are impaired and the recoverable amount is lower than the cost (amortized cost for debt securities) of the available-for-sale securities, an impairment loss is recognized as loss on impairment of available-for-sale securities of non-operating expenses and the related unrealized gain or loss remaining in stockholders’ equity is adjusted to the impairment loss. If the value of impaired securities subsequently recovers and the recovery can be objectively related to an event occurring after the impairment loss was recognized, the reversal of impairment loss can be recognized up to the previously recorded impairment loss as a reversal of loss on impairment of available-for-sale securities included in non-operating revenues. However, if the fair value increases after the impairment loss is recognized but does not relate to the recovery of impairment loss as described above, the increase in fair value is recorded in equity.
g. Equity Method Investment Securities
Investments in equity securities of companies, over which the Company exercises significant influence, are reported using the equity method of accounting.
—Accounting for changes in the equity of the investee
Under the equity method of accounting, the Company records changes in its proportionate equity of the net assets of the investee depending on the nature of the underlying changes in the investee as follows; (i) “equity in income (loss) of associates” in the non-operating revenues (expense) for net income (loss) of the investee; (ii) “increase (decrease) in retained earnings of associates” in the retained earnings for changes in beginning retained earnings of the investee; (iii) “increase (decrease) in equity of associates” in the accumulated other comprehensive income (loss) for other changes in equity of the investee.
When the equity method investee’s unappropriated retained earnings carried over from prior period changes due to significant error corrections, the Company records the changes in equity as “equity in income (loss) of associates” included in the non-operating revenues (expenses) unless the impact of the changes on the Company’s consolidated financial statements is significant. If the changes results from the changes in accounting policies of the equity method investee, they are reflected in the unappropriated retained earnings carried over from prior period in accordance with Statement of Korea Accounting Standards (“SKAS”) on changes in accounting policy and errors corrections. When the investee declares cash dividends, the dividends to be received are deducted directly from equity method investment securities.
F-13
—Treatment of investment difference
Difference between the acquisition cost and the Company’s proportionate equity in the fair value of net assets of the investee upon acquisition (“Investment difference”) are considered as (negative) goodwill and accounted for in accordance with accounting standards for business combination. The goodwill portion which is amortized over useful lives (5 years) on a straight line method and the negative goodwill portion which is amortized over the weighted average useful lives of depreciable non-monetary assets of the investee are included in “equity in income (loss) of associates”.
When the Company’s equity interest in the investee increases due to an increase (or decrease) in contributed capital with (or without) consideration, the changes in the Company’s proportionate equity in the investee is accounted for as investment difference. If the Company’s equity interest decreases, the changes are accounted for as “gain (loss) on disposal of the equity method investment securities”.
—Difference between the fair value and book value of net assets of the investee
Upon acquisition of the equity method investment securities, the Company’s proportionate shares in the differences between the fair values and book values of the identifiable assets and liabilities of the investee are amortized/reversed and included in “equity in income (loss) of associates” in accordance with the investee’s methods of accounting for the assets and liabilities.
—Elimination of unrealized gain or loss from intercompany transactions
The Company’s proportionate share in the gain (loss) arising from transactions between the Company and the investee, which remains in the book value of assets held as of balance sheet date is considered unrealized gain (loss) and adjusted to equity method investment securities.
—Impairment loss on equity method investment securities
When there is objective evidence that the equity method investment securities are impaired and the recoverable amount is lower than the carrying amount of the equity method investment securities, an impairment loss is recognized as “loss on impairment of equity method investment securities” included in non-operating expenses and shall first reduce the unamortized investment difference, if any. When the recoverable amount is recovered after the recognition of impairment loss, the reversal of impairment loss can be recognized as income up to the previously recorded impairment loss. The book value of the equity method investment securities after the reversal of the impairment loss cannot exceed the book value calculated as if the impairment loss had not been originally recognized. The reversal of the impairment loss recognized against the unamortized investment difference is not allowed.
—Translation of financial statements of overseas investees
For overseas investees whose financial statements are prepared in foreign currencies, the equity method of accounting is applied after assets and liabilities are translated in accordance with the accounting treatments for the translation of the financial statements of overseas’ subsidiaries for consolidated financial statements. The Company’s proportionate share of the difference between assets net of liabilities and equity after translation into Korean won is accounted for as “increase (decrease) in equity of associates” included in the accumulated other comprehensive income (loss).
h. Property and Equipment
Property and equipment are stated at cost (acquisition cost or manufacturing cost plus expenditures directly related to preparing the asset ready for use). Expenditures after acquisition or completion that increase future economic benefit in excess of the most recently assessed capability level of the asset are capitalized; other expenditures are charged to expense as incurred.
F-14
Interest expense, discount and other financial charges, including certain foreign exchange translation gains and losses on borrowings associated with the manufacture, purchase, or construction of property and equipment, incurred prior to the completion of the acquisition, were capitalized until the year ended December 31, 2002, and are no longer capitalized commencing from January 1, 2003 as allowed by SKAS No. 7.
Depreciation is computed by the straight-line method based on the following useful lives of the related units of property and equipment and the accumulated depreciation and impairment are directly deducted from the related assets.
| | |
| | | Useful lives (years) |
Buildings and structures | | 15~30 |
Machinery and equipment | | 5~8 |
Vehicles | | 4~8 |
Other | | 2~8 |
When the expected future cash flow from use or disposal of the property and equipment is lower than the carrying amount due to obsolescence, physical damage and other, the carrying amount is adjusted to the recoverable amount (the higher of net sales price or value in use) and the difference is recognized as an impairment loss. The Company recorded loss on impairment of property and equipment totaling (Won)1,058 million and (Won)18,963 million for the six months ended June 30, 2007 and 2008, respectively.
i. Intangible Assets
Intangible assets are initially recognized at acquisition cost (purchase cost plus expenditures directly related to preparing the asset ready for use) and subsequently presented at amortized cost using the straight-line method, with amortization beginning when the asset is available for use.
Intangible assets are amortized based on the following useful lives:
| | |
| | | Useful lives (years) |
Good will | | 5 |
Frequency usage rights | | 13 |
Intellectual property rights | | 5~10 |
Facility usage rights | | 10~20 |
Development costs | | 2 |
Other intangible assets | | 5 |
When the recoverable amount (the higher of net sales price or value in use) of intangible assets is significantly lower than the carrying amount due to obsolescence, and other, the difference is recognized as an impairment loss. When the recoverable amount subsequently exceeds the carrying amount of the impaired asset, the excess is recorded as a reversal of impairment loss to the extent that the reversed asset does not exceed the carrying amount before previous impairment as adjusted by amortization. There was no loss on impairment of intangible assets for the six months ended June 30, 2007 and 2008.
j. Present Value Discount for Assets and Liabilities
Receivables or payables from long-term installment transactions, long-term loans/borrowings or the other similar transactions are stated at present value which is determined by discounting total amounts receivable or payable in the future using the effective interest rate, if the nominal value is significantly different from the present value. The discount or premium resulting from the determination of present value should be reported in the balance sheet as a direct deduction from or addition to the nominal value of the related receivables or payables and the amortization by the effective interest rate method is included in the period income (loss).
F-15
k. Translation of Assets and Liabilities Denominated in Foreign Currency
Transactions denominated in foreign currencies are recorded in Korean won translated at the exchange rate prevailing on the transaction date and the resulting gain (loss) from foreign currency transactions is included in non-operating revenues (expenses). Monetary assets and liabilities denominated in foreign currency are translated into Korean won at the Base Rates announced by Seoul Money Brokerage Services, Ltd. on the balance sheet dates, which were, for U.S. dollars, (Won)938.2: USD 1 and (Won)1,043.4: USD 1 at December 31, 2007 and June 30, 2008, respectively, and the resulting gain (loss) from foreign currency translation is included in non-operating revenues (expenses)
l. Discount on debenture
Discounts on debentures are amortized over the redemption period of the debentures using the effective interest rate method. Amortization of discounts is recognized as interest expense.
m. Provisions for Severance Indemnities
All employees with more than one year of service are entitled to receive a lump-sum payment upon termination of their employment with the Company, based on their length of service and rate of pay at the time of termination. The accrual for severance indemnities is computed as if all employees were to terminate at the balance sheet dates and amounted to (Won)53,994 million and (Won)48,458 million as of December 31, 2007 and June 30, 2008, respectively.
n. Provisions
The Company recognizes a provision for a liability with uncertain timing or amount when (1) there is a present obligation of the Company arising from past events, (2) it is highly likely that an outflow of resources will be required to settle the obligation, and (3) the amount for the settlement of the obligation can be reliably measurable.
o. Derivative Instruments
The Company records rights and obligations arising from derivative instruments in assets and liabilities, which are stated at fair value. Gains and losses that result from the changes in the fair value of derivative instruments are recognized in current earnings. However, for derivative instruments that cash flow hedge accounting applies to, the effective portion of the gain or loss on the derivatives instruments are recorded as gain (loss) on valuation of derivatives included in the accumulated other comprehensive income (loss).
p. Share-based Payment
The Company’s share-based payment transactions are accounted for in accordance with SKAS No.22 “Share-based Payment” which is effective from fiscal year beginning on or after December 31, 2006. As allowed in the transition clause of SKAS No. 22, for employee stock options granted before January 1, 2007, the Company accounts for them in accordance with Interpretation No. 39-35 “Accounting for Stock Options”.
(i) Stock options
The Company has granted stock options to its executive officers and directors prior to January 1, 2007, and for equity-settled stock options, the Company records compensation expenses which are allocated over the period in which the options vest with the corresponding credit to the stock options of the capital adjustments. When the options are exercised with the issuance of new shares, the difference between the exercise price plus the stock option cost recorded in the capital adjustments account and
F-16
the par value of the new shares issued, is recorded as additional paid-in capital. In the event the Company grants stock options based on cash-settled share-based payment, the Company records compensation expenses which are allocated over the period in which the options vest with the corresponding liability recorded.
When stock options are forfeited because the specified vesting requirements are not satisfied, previously recognized compensation costs are reversed to earnings and the corresponding capital adjustments or liabilities are reversed as well. When stock options expire unexercised, previously recognized compensation costs and corresponding capital adjustments are reversed to capital surplus.
(ii) Other share-based payments
Other share -based payments granted on or after January 1, 2007 are measured as below:
For equity-settled share-based payment transactions, the Company measures the goods or services received, and the corresponding increase in equity (capital adjustments), directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the Company measures the value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.
For cash-settled share-based payment transactions, the Company measures the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the Company re-measures the fair value of the liability at each reporting date and at the date of settlement, with any changes in value recognized in profit or loss for the period.
For share-based payment transactions in which the terms of the arrangement provide either the Company or the supplier of goods or services with a choice of whether the Company settles the transaction in cash or by issuing equity instruments, the Company is required to account for that transaction, or the components of that transaction, as a cash-settled share-based payment transaction if, and to the extent that, the Company has incurred a liability to settle in cash (or other assets), or as an equity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred.
q. Accounting for Leases
A lease is classified as a finance lease or an operating lease depending on the extent of transfer to the Company of the risks and rewards incidental to ownership. If a lease meets any one of the following criteria, it is accounted for as a finance lease:
| | • | | The lease transfers ownership of the asset to the lessee by the end of the lease term; |
| | • | | The lessee has the option to purchase the asset at a bargain price and it is certain that the option will be exercised; |
| | • | | The lease term is for the major part (75% or more) of the economic life of the asset even if title is not transferred; |
| | • | | At the date of lease commencement the present value of the minimum lease payments amounts to at least substantially all (90% or more) of the fair value of the leased asset; or |
| | • | | The leased assets are of such a specialized nature that only the Company can use them without major modifications. |
All other leases are treated as operating leases.
For operating leases, lease payments excluding guaranteed residual value are recognized as an expense on a straight-line basis over the lease term and contingent rent is expensed as incurred. Finance leases are recognized as assets and liabilities at the lower of fair value of the leased property or the present value of the
F-17
minimum lease payments discounted using the implicit interest rate of the lessor (or the Company’s incremental borrowing rate if the implicit interest rate is not practicable to determine). Any initial direct costs incurred by the Company are added to the amount recognized as an asset. The depreciation policy for depreciable leased assets is consistent with that for the similar depreciable assets that are owned by the Company. Annual minimum lease payments excluding guaranteed residual value is allocated to interest expense, which is calculated using the effective interest rate, and finance lease repayment amount. Contingent rent relating to finance are charged as expenses in the periods in which they are incurred, however, if the amount is material it is allocated to principal and interest, respectively, over the remaining lease term.
r. Revenue Recognition
The Company’s revenues are principally derived from sales of PCS handsets and PCS service revenues, which consist of non-refundable activation fees, fixed monthly access fees and usage charges. The Company recognizes sales on PCS handsets when these are delivered to the dealers, fixed monthly access fees in the period of service, and usage charges and non-refundable activation fees at the time services are rendered. Each revenue element sold by the Company has its own standalone value to the customer, objective and reliable evidence of fair value, and the delivery or performance of related undelivered item(s), if any, is considered probable and substantially in the control of the Company.
In addition, the Company provides handset subsidies, call bonus mileages and warranties on PCS handsets, none of which cause deferral of revenue as such items are accounted for separately as described in Note 2 and Note 8.
The Company recognizes sales revenues on a gross basis when the Company is the primary obligor in the transactions with customers and if the Company merely acts as an agent for the buyer or seller from whom it earns a commission, then the sales revenues are recognized on a net basis.
s. Payment of a Handset Subsidy to Mobile Phone Users
According to the provisions of the Telecommunications Business Law (“TBL”), the Company has provided a one time handset subsidy to eligible mobile phone users, who have subscribed to the Company’s service or any other mobile carriers for 18 consecutive months, within the next two years from June 27, 2006 to March 26, 2008.
Above handset subsidy program was terminated effective March 27, 2008, however the Company currently provides a variety of handset subsidy programs to PCS subscribers according to its operation policy and sets forth the programs in details in the service agreement. The handset subsidy provided by the Company is expensed as incurred.
t. Income Taxes
When the Company recognizes deferred income tax assets or liabilities for the temporary differences between the carrying amount of an asset and liability and tax base, a deferred income tax liability for taxable temporary difference is fully recognized except to the extent in accordance with income tax related SKAS while a deferred tax asset for deductible temporary difference is recognized to the extent that it is almost certain that taxable profit will be available against which the deductible temporary difference can be utilized. Deferred income tax asset (liability) is classified as current or non-current asset (liability) depending on the classification of related asset (liability) in the balance sheet. Deferred income tax asset (liability) which does not relate to specific asset (liability) account in the balance sheet such as deferred income tax asset recognized for tax loss carry forwards is classified as current or non-current asset (liability) depending on the expected reversal period. Deferred income tax assets and liabilities in the same tax jurisdiction and in the same current or non-current classification are presented on a net basis. Current and deferred income tax expense are included in income tax expense in the statement of operations and
F-18
additional income taxes or tax refunds for the prior periods are included in income tax expense for the current period when recognized. However, income taxes resulting from transactions or events, which were directly recognized in stockholders’ equity in current or prior periods, or business combinations are directly adjusted to equity account or goodwill (or negative goodwill).
u. Use of Estimates
The Company’s management uses reasonable estimates and assumptions in preparing the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the Republic of Korea. The estimates and assumptions can change according to additional experiences, changes in circumstances, new information and other and may be different from actual results.
v. Elimination of Inter-Company Unrealized Gain/Loss
Unrealized gains and losses included in the inventories, property and equipment and other which were acquired by transactions amongst KTF and subsidiaries are fully eliminated using the gross margin ratio of the transactions and the gains and losses on disposal.
w. Translation of Overseas Subsidiaries’ Financial Statements
For overseas subsidiaries whose financial statements are prepared in foreign currencies, assets and liabilities are translated at the exchange rate at the consolidated balance sheet date and statement of income items are translated at the average exchange rate for the respective fiscal period. Net translation adjustments are recorded as gain (loss) on translation of foreign operations included in the accumulated other comprehensive income.
x. Changes in Consolidated Entities
KTF M&S, KTF Music, Doremi Media were newly acquired in 2007 and included in the consolidation. For the six months ended June 30, 2008, there is no entity newly acquired and included in the consolidation.
In addition, when a subsidiary is acquired during the year, it is presented in the consolidated statements of operations as though it had been acquired at the beginning of the year, and its earning (loss) prior to acquisition is separately presented as a deductive (additive) line item in the consolidated statements of operations.
y. Basis of Translating Consolidated Financial Statements
The consolidated financial statements are expressed in Korean won and, solely for the convenience of the reader, the consolidated financial statements as of and for the six months ended June 30, 2008, have been translated into U.S. dollars at the rate of (Won)1,046.8 to USD1, the noon buying rate in the City of New York for cable transfers in Korean won as certified for customs purposes by the Federal Reserve Bank of New York on the last business day of the period ended June 30, 2008. The translation should not be construed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any other rate.
z. Reclassifications of Prior Period Financial Statements
Certain reclassifications have been made in prior period financial statements to conform to classifications used in the current period. Such reclassifications did not have an effect on the net assets of the Company as of December 31, 2007, or net income of the Company for the six months ended June 30, 2007.
F-19
3. RESTRICTED DEPOSITS
Details of restricted deposits as of December 31, 2007 and June 30, 2008 are as follows (in millions of Korean won):
| | | | | | | | | | |
| | | Financial institutions | | December 31,
2007 | | June 30,
2008 | | Description |
Short-term financial instruments | | Korea Securities Financial Corp. | | (Won) | 277 | | (Won) | 620 | | Collateral for loan to employees |
| | Shinhan Bank | | | 835 | | | — | | Collateral for borrowings |
| | Industrial Bank of Korea | | | — | | | 1,000 | | Collateral for third party |
| | | | | | | | | | |
| | | | | 1,112 | | | 1,620 | | |
| | | | | | | | | | |
Short-term investment securities | | Korea Post Office | | | 50 | | | — | | Collateral for buying PCS from Samsung Electronics Co., Ltd. |
Long-term financial instruments | | Shinhan Bank and Others | | | 22 | | | 13 | | Checking account deposit |
| | | | | | | | | | |
Total | | | | (Won) | 1,184 | | (Won) | 1,633 | | |
| | | | | | | | | | |
4. INVENTORIES
Inventory valuations as of December 31, 2007 and June 30, 2008 are summarized as follows (in millions of Korean won):
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2007 | | | June 30, 2008 | |
| | | Cost | | Lower of
cost or
market value | | Valuation
allowance | | | Cost | | Lower of
cost or
market value | | Valuation
allowance | |
Merchandise | | (Won) | 164,173 | | (Won) | 152,974 | | (Won) | (11,199 | ) | | (Won) | 338,896 | | (Won) | 328,910 | | (Won) | (9,986 | ) |
Supply | | | 1,170 | | | 520 | | | (650 | ) | | | 3,460 | | | 2,736 | | | (724 | ) |
Raw material | | | 8,785 | | | 8,642 | | | (143 | ) | | | 17,799 | | | 17,212 | | | (587 | ) |
Other | | | 573 | | | 573 | | | — | | | | 714 | | | 599 | | | (115 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total | | (Won) | 174,701 | | (Won) | 162,709 | | (Won) | (11,992 | ) | | (Won) | 360,869 | | (Won) | 349,457 | | (Won) | (11,412 | ) |
| | | | | | | | | | | | | | | | | | | | |
5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2007 and June 30, 2008 are summarized as follows (in millions of Korean won):
| | | | | | | | |
| | | December 31, 2007 | | | June 30, 2008 | |
Property and equipment, at cost | | (Won) | 10,888,850 | | | (Won) | 11,335,640 | |
Less: accumulated depreciation | | | (6,615,427 | ) | | | (7,099,586 | ) |
Less: accumulated impairment loss | | | (6,478 | ) | | | (5,970 | ) |
| | | | | | | | |
Net | | (Won) | 4,266,945 | | | (Won) | 4,230,084 | |
| | | | | | | | |
F-20
6. GOODWILL
Change in goodwill and negative goodwill for the year ended December 31, 2007 and the six months ended June 30, 2008 are as follows (in millions of Korean won):
| | | | | | | | | | | | | | |
| | | 2007 (12 months) |
| | | January 1,
2007 | | | Increase | | Reversal
(Amortization) | | | December 31,
2007 |
KTFT | | (Won) | (648 | ) | | (Won) | — | | (Won) | 648 | | | (Won) | — |
KTF Music | | | — | | | | 11,206 | | | — | | | | 11,206 |
| | | | | | | | | | | | | | |
Total | | (Won) | (648 | ) | | (Won) | 11,206 | | (Won) | 648 | | | (Won) | 11,206 |
| | | | | | | | | | | | | | |
| |
| | | 2008 (6 months) |
| | | January 1,
2008 | | | Increase | | Reversal
(Amortization) | | | June 30,
2008 |
KTF Music | | (Won) | 11,206 | | | (Won) | — | | (Won) | (1,121 | ) | | (Won) | 10,085 |
| | | | | | | | | | | | | | |
7. LONG-TERM BORROWINGS AND DEBENTURES
a. Long-term Borrowings in Korean Won
Long-term borrowings as of December 31, 2007 and June 30, 2008 are summarized as follows (in millions of Korean won):
| | | | | | | | | | | | | |
| | | Financial institutions | | Interest rate
per annum | | | December 31,
2007 | | | June 30,
2008 | |
Working capital loans | | Shinhan Bank | | 6.15 | % | | (Won) | 10,000 | | | (Won) | 10,000 | |
| | Hana Bank | | 6.13 | % | | | 10,000 | | | | 10,000 | |
Facility capital loans | | Shinhan Bank | | 4.50 | % | | | 797 | | | | 797 | |
| | Shinhan Bank | | 7.60 | % | | | 695 | | | | — | |
Working capital loans | | Korea Credit Guarantee Fund | | 7.35 | % | | | 4,864 | | | | 3,564 | |
| | | | | | | | | | | | | |
Total | | | | | | | | 26,356 | | | | 24,361 | |
Less: current portion | | | | | | | | (10,608 | ) | | | (10,000 | ) |
| | | | | | | | | | | | | |
Long-term portion | | | | | | | | 15,748 | | | | 14,361 | |
Less: discount | | | | | | | | (1,130 | ) | | | (746 | ) |
| | | | | | | | | | | | | |
Net | | | | | | | (Won) | 14,618 | | | (Won) | 13,615 | |
| | | | | | | | | | | | | |
b. Long-term Borrowings in Foreign Currency
Long-term borrowings in foreign currency as of June 30, 2008 are as follows (in millions of Korean won and thousands of U.S. dollars):
| | | | | | | | | | | |
| | | Financial institutions | | Interest rate per annum | | Foreign currency | | | Korean won
equivalent |
Facility capital loans | | Korea Development Bank | | LIBOR(3M)+2.00% | | USD | 70,000 | | | (Won) | 73,038 |
Less: current portion | | | | | | USD | (10,000 | ) | | | 10,434 |
Net | | | | | | USD | 60,000 | | | (Won) | 62,604 |
| | | | | | | | | | | |
F-21
c. Debentures
Debentures as of December 31, 2007 and June 30, 2008 are summarized as follows (in millions of Korean won):
| | | | | | | | | | | | | | |
Type | | Issue date | | Maturity | | Interest rate
per annum | | December 31, 2007 | | | June 30, 2008 | |
44th | | 2/19/2004 | | 2/19/2009 | | 5.66% | | (Won) | 360,000 | | | (Won) | 360,000 | |
45th | | 3/15/2004 | | 3/15/2008 | | 5.24% | | | 320,000 | | | | — | |
47-1st | | 7/12/2004 | | 7/12/2009 | | 4.95% | | | 230,000 | | | | 230,000 | |
47-2nd | | 7/12/2004 | | 7/12/2011 | | 5.32% | | | 70,000 | | | | 70,000 | |
48th | | 2/15/2005 | | 2/15/2010 | | 5.31% | | | 200,000 | | | | 200,000 | |
51-2nd | | 6/20/2008 | | 6/20/2013 | | 6.41% | | | — | | | | 70,000 | |
49th | | 2/25/2008 | | 2/25/2011 | | LIBOR(3M)+
1.50% | | | — | | |
USD | 182,595
(175,000 |
) |
50th | | 4/28/2008 | | 4/28/2011 | | LIBOR(3M)+
1.60% | | | — | | |
JPY | 68,725
(7,000 |
) |
51-1st | | 6/20/2008 | | 6/20/2011 | | LIBOR(3M)+
1.60% | | | — | | |
USD | 99,123
(95,000 |
) |
2nd private bonds with warrant | | 9/2/2005 | | 9/2/2008 | | 7.11% | | | 2,100 | | | | 2,100 | |
| | | | | | | | | | | | | | |
Total | | | | | | | | | 1,182,100 | | | | 1,282,543 | |
Less: current portion | | | | | | | | | (322,100 | ) | | | (362,100 | ) |
| | | | | | | | | | | | | | |
Long-term portion | | | | | | | | | 860,000 | | | | 920,443 | |
Less: discount | | | | | | | | | (963 | ) | | | (2,880 | ) |
| | | | | | | | | | | | | | |
Net | | | | | | | | (Won) | 859,037 | | | (Won) | 917,563 | |
| | | | | | | | | | | | | | |
(*) Details of bonds with warrants are as follows:
| | | | |
Issued amount (in Korean won) | | : | | (Won)3,000 million |
Stated interest rate | | : | | 7.11% |
Exercise price (in Korean won) | | : | | (Won)4,518 per share |
Exercise period | | : | | September 3, 2006 ~ August 2, 2008 |
Number of total exercisable shares | | : | | 664,010 |
Exercised shares | | : | | — |
Unexercised shares | | : | | 664,010 |
Others | | : | | Subject to request by the holders, certain portion of the bonds are early redeemable before maturity; up to 10% of issued amount at one year after 1st anniversary of issuance and 20% of issued amount at the interest payment date after 2nd anniversary of issuance. (Won)900 million of the issued amount was early redeemed through
June 30, 2008. |
F-22
d. Repayment Schedule of Long-term Borrowings and Debentures
Repayment schedule of the Company’s long-term borrowings and debentures as of June 30, 2008 is as follows (in millions of Korean won):
| | | | | | |
Year ending June 30, | | Debentures | | Borrowings |
2009 | | (Won) | 362,100 | | (Won) | 20,434 |
2010 | | | 430,000 | | | 52,260 |
2011 | | | 350,443 | | | 21,476 |
2012 | | | 70,000 | | | 608 |
2013 | | | 70,000 | | | 608 |
Thereafter | | | — | | | 2,013 |
| | | | | | |
Total | | (Won) | 1,282,543 | | (Won) | 97,399 |
| | | | | | |
8. LONG-TERM ACCOUNTS PAYABLE-OTHER
Long-term accounts payable-other is almost related to the purchase of frequency use right and required to be paid including applicable interest from 2009 to 2011. Long-term accounts payable-other as of December 31, 2007 and June 30, 2008 are stated at the net present value of future cash flows, calculated using the effective interest rate (9.93%) at the time of receipt of frequency use license as follows (in millions of Korean won):
| | | | | | | | |
| | | December 31, 2007 | | | June 30, 2008 | |
Long-term accounts payable-other | | (Won) | 560,000 | | | (Won) | 450,000 | |
Less: current portion | | | (110,000 | ) | | | (130,000 | ) |
Less: discount | | | (43,712 | ) | | | (30,609 | ) |
| | | | | | | | |
Net | | (Won) | 406,288 | | | (Won) | 289,391 | |
| | | | | | | | |
The maturities of the Company’s long-term accounts payable-other as of June 30, 2008 is as follow (in millions of Korean won):
| | | |
Year ending June 30, | | Amount |
2009 | | (Won) | 130,000 |
2010 | | | 150,000 |
2011 | | | 170,000 |
| | | |
Total | | (Won) | 450,000 |
| | | |
9. ACCRUED PROVISIONS
The Company has accounted for the call bonus mileage and warranty, which the Company is obliged to pay to its customers, as accrued provisions. Warranties related to sales of handset are provided for one year and are recorded as liability based on the management’s estimate according to the historical experience.
Changes in accrued provisions for the year ended December 31, 2007 and the six months ended June 30, 2008 are summarized as follows (in millions of Korean won):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 (12 months) | | | 2008 (6 months) | |
| | | Call bonus | | | Warranty | | | Others(*) | | | Total | | | Call bonus | | | Warranty | | | Others(*) | | | Total | |
Beginning of the period | | (Won) | 16,265 | | | (Won) | 3,505 | | | (Won) | — | | | (Won) | 19,770 | | | (Won) | 8,380 | | | (Won) | 5,412 | | | (Won) | 26 | | | (Won) | 13,818 | |
Provision | | | — | | | | 10,549 | | | | 26 | | | | 10,575 | | | | 3,717 | | | | 5,559 | | | | 7 | | | | 9,283 | |
Payment | | | (7,885 | ) | | | (8,642 | ) | | | — | | | | (16,527 | ) | | | (1,425 | ) | | | (4,539 | ) | | | — | | | | (5,964 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 8,380 | | | | 5,412 | | | | 26 | | | | 13,818 | | | | 10,672 | | | | 6,432 | | | | 33 | | | | 17,137 | |
Less: current portion | | | (4,332 | ) | | | (5,412 | ) | | | (26 | ) | | | (9,770 | ) | | | (5,689 | ) | | | (6,432 | ) | | | (33 | ) | | | (12,154 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net | | (Won) | 4,048 | | | (Won) | — | | | (Won) | — | | | (Won) | 4,048 | | | (Won) | 4,983 | | | (Won) | — | | | (Won) | — | | | | 4,983 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-23
10. COMMON STOCKS AND CAPITAL SURPLUS
a. Common Stocks
As of June 30, 2008, the Company’s number of shares authorized are 400,000,000 shares with par value of (Won)5,000 per share.
As of December 31, 2007 and June 30, 2008, the number of shares issued by the Company are 192,722,091, and the common stock amounted to (Won)1,044,181 million. As allowed by the Korean Securities Exchange Law, the Company has retired treasury stocks by charges against retained earnings. Therefore, the common stock amount differs from the amount resulting from multiplying the number of shares issued by (Won)5,000 par value of common stock.
b. Treasury Stocks
Changes in treasury stocks for the year ended December 31, 2007 and the six months ended June 30, 2008 are summarized as follows (in millions of Korean won):
| | | | | | | | | | | | | | |
| | | 2007 (12 months) | | | 2008 (6 months) | |
Accounts | | Number of
shares | | | Amount | | | Number of
shares | | | Amount | |
Beginning of the period | | 61,273 | | | (Won) | 2,077 | | | 61,334 | | | (Won) | 2,078 | |
Acquisition | | 2,979,061 | | | | 94,072 | | | 4,291,556 | | | | 122,561 | |
Retirement | | (2,979,000 | ) | | | (94,071 | ) | | — | | | | — | |
Disposal | | — | | | | — | | | (10,505 | ) | | | (356 | ) |
| | | | | | | | | | | | | | |
End of the period | | 61,334 | | | (Won) | 2,078 | | | 4,342,385 | | | (Won) | 124,283 | |
| | | | | | | | | | | | | | |
11. STOCK OPTION
The Company entered into stock option agreements with its chief executive officer and senior managers. The stock option will be vested after two or three years from the date of grant and can be exercised for five years from the date when they are vested. Upon the exercise of stock options, the Company will issue its common stocks or provide the treasury stocks.
Principal assumptions made in relation to estimation of compensation expense for the stock options are as follows:
| | | | | | | | | | | | | | | |
| | | 1st | | 2nd | | | 3rd | | | 4th | |
Grant date | | | 2001.03.29 | | | 2002.03.25 | | | | 2003.09.08 | | | | 2005.03.04 | |
Grantee | | | Former CEO | |
| Senior
managers |
| |
| CEO,
Senior managers |
| |
| Senior
managers |
|
Number of shares | | | 18,000 | | | 44,800 | | | | 629,500 | | | | 128,800 | |
Exercise price per share (in Korean won) | | (Won) | 41,273 | | (Won) | 45,178 | | | (Won) | 30,000 | | | (Won) | 30,700 | |
Type | | | Equity settled | | | Equity settled | | | | Equity settled | | | | Equity settled | |
Exercise period | |
| 2004.3.30 ~
2009.3.29 | |
| 2005.3.26 ~
2010.3.25 |
| |
| 2005.9.9 ~
2010.9.8 |
| |
| 2007.3.5 ~
2012.3.4 |
|
Risk free interest rate | | | (*) | | | 6.44 | % | | | 4.31 | % | | | 4.18 | % |
Expected duration (year) | | | (*) | | | 3.0 | | | | 3.0 | | | | 3.0 | |
Expected volatility | | | (*) | | | 97.05 | % | | | 63.14 | % | | | 37.33 | % |
Fair value per option (in Korean won) | | | (*) | | | 30,565 | | | | 8,812 | | | | 4,715 | |
Total compensation expense (in millions of Korean won) | | | (*) | | (Won) | 874 | | | (Won) | 2,694 | | | (Won) | 520 | |
| (*) | 1st stock option was all expired without exercise. |
F-24
Changes in stock options for the six months ended June 30, 2008 are as follows:
| | | | | | | | | | | | | | | |
| | | 1st | | | 2nd | | | 3rd | | | 4th | | | Total | |
Outstanding at beginning of the period | | 18,000 | | | 44,800 | | | 629,500 | | | 128,800 | | | 821,100 | |
Cancelled | | — | | | — | | | (308,587 | ) | | — | | | (308,587 | ) |
Forfeited or expired | | (18,000 | ) | | (16,200 | ) | | — | | | — | | | (34,200 | ) |
Performance condition adjustment | | — | | | — | | | (15,159 | ) | | (18,683 | ) | | (33,842 | ) |
Exercised | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
Outstanding and exercisable at end of the period | | — | | | 28,600 | | | 305,754 | | | 110,117 | | | 444,471 | |
| | | | | | | | | | | | | | | |
The Company values stock options granted based on the fair value method. Total compensation expense of (Won)4,088 million is allocated over the vesting period and the compensation expense charged to operations for the six months ended June 30, 2008 is nil.
Details of other share-based payments (stock grants) to directors including chief executive officer are as follows:
| | |
| | | Description |
Grant date | | June 20, 2007 |
Grantee | | CEO, non-permanent directors |
Estimated number of shares granted | | 17,120 shares |
Vesting Conditions | | Service condition: six months Non-market performance condition: achievement of performance for 2008 |
Fair value per option (in Korean won) | | (Won)29,300 |
Above compensation costs were calculated based on the fair value method and charged to current operations for the six months ended June 30, 2008 as follows (in millions of Korean won):
| | | | |
| | | Amount | |
Total compensation costs | | (Won) | 502 | |
Compensation costs recognized in prior periods | | | — | |
Compensation costs recognized in the current period | | | (502 | ) |
| | | | |
Compensation costs to be recognized after the current period | | (Won) | — | |
| | | | |
F-25
12. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the six months ended June 30, 2007 and 2008 are as follows (in millions of Korean won):
| | | | | | | | |
Description | | 2007
(6 months) | | | 2008
(6 months) | |
Net income (loss) | | (Won) | 134,687 | | | (Won) | (12,928 | ) |
Other comprehensive income (loss),: | | | | | | | | |
Loss on translation of foreign operations (Tax effect: nil in 2007 and 2008) | | | (7 | ) | | | 71 | |
Unrealized loss on valuation of available-for-sale securities (Tax effect: (Won)(749) million in 2007 and (Won)(3,035) million in 2008) | | | (2,064 | ) | | | (8,002 | ) |
Increase in equity of associates (Tax effect: nil in 2007 and 2008) | | | (40 | ) | | | 1,408 | |
Decrease in equity of associates (Tax effect: nil in 2007 and 2008) | | | 8 | | | | (3 | ) |
Gain on valuation of derivatives (Tax effect: nil in 2007 and (Won)1,181 million in 2008) | | | — | | | | 3,114 | |
| | | | | | | | |
Comprehensive income (loss) | | (Won) | 132,584 | | | (Won) | (16,340 | ) |
| | | | | | | | |
Attributable to: | | | | | | | | |
Equity holders of the parent | | (Won) | 128,781 | | | (Won) | (14,327 | ) |
Minority interest | | | 3,803 | | | | (2,013 | ) |
| | | | | | | | |
| | (Won) | 132,584 | | | (Won) | (16,340 | ) |
| | | | | | | | |
13. OPERATING REVENUES AND EXPENSES
Operating revenues for the six months ended June 30, 2007 and 2008 are as follows (in millions of Korean won):
| | | | | | |
| | | 2007
(6 months) | | 2008
(6 months) |
PCS service | | (Won) | 2,782,904 | | (Won) | 3,215,189 |
Sales of PCS Handsets | | | 864,809 | | | 1,056,427 |
| | | | | | |
Total | | (Won) | 3,647,713 | | (Won) | 4,271,616 |
| | | | | | |
Operating expenses for the six months ended June 30, 2007 and 2008 are as follows (in millions of Korean won):
| | | | | | |
| | | 2007
(6 months) | | 2008
(6 months) |
Cost of merchandise | | (Won) | 598,089 | | (Won) | 938,680 |
Salaries and wages | | | 92,423 | | | 108,173 |
Provision for severance indemnities | | | 11,067 | | | 12,264 |
Employee welfare | | | 17,324 | | | 19,416 |
Rent | | | 76,097 | | | 87,416 |
Commissions | | | 251,700 | | | 282,088 |
Depreciation | | | 523,033 | | | 509,256 |
Amortization | | | 62,745 | | | 55,729 |
Tax and dues | | | 21,367 | | | 16,855 |
Interconnection charges | | | 350,999 | | | 404,360 |
Leased line charges | | | 195,978 | | | 186,003 |
Ordinary development costs | | | 13,068 | | | 14,190 |
Sales promotion | | | 247,899 | | | 433,758 |
Sales commissions | | | 589,804 | | | 784,245 |
Advertisements | | | 67,338 | | | 64,237 |
Bad debt expense | | | 29,661 | | | 6,845 |
Water and electricity | | | 34,610 | | | 36,944 |
Communications | | | 14,424 | | | 16,117 |
Repairs and maintenance | | | 32,740 | | | 29,586 |
Other | | | 204,366 | | | 239,421 |
| | | | | | |
Total | | (Won) | 3,434,732 | | (Won) | 4,245,583 |
| | | | | | |
F-26
14. INCOME (LOSS) PER SHARE
The Company’s net incomes (loss) per share for the six months ended June 30, 2007 and 2008 are computed as follows (in millions of Korean won, except for per share data):
| | | | | | | |
| | | 2007 (6 months) | | 2008 (6 months) | |
Net income (loss) | | (Won) | 130,858 | | (Won) | (10,932 | ) |
Weighted average number of common stock outstanding | | | 195,639,818 | | | 191,777,366 | |
| | | | | | | |
Basic and diluted net income (loss) per share (in Korean won) | | (Won) | 669 | | (Won) | (57 | ) |
| | | | | | | |
Potential common stocks as of June 30, 2008 are as follows:
| | | | |
| | | Exercisable Period | | Common stock to be issued |
2nd stock option(*) | | March 25, 2005 ~ March 24, 2010 | | 28,600 |
3rd stock option(*) | | September 9, 2005 ~ September 8, 2010 | | 305,754 |
4th stock option(*) | | March 5, 2007 ~ March 4, 2012 | | 110,117 |
Other share-based payments
(stock grants)(*) | | April 14, 2009 | | 17,120 |
| | | | |
Total | | | | 461,591 |
| | | | |
| (*) | Share-based payments have no dilutive effect and are excluded from the calculation of diluted income per share. |
15. TRANSACTIONS WITH RELATED PARTIES
Significant transactions amongst the Company’s consolidated parties for the six months ended June 30, 2007 and 2008 are summarized as follows (in millions of Korean won):
| | | | | | | | | | |
Seller | | Purchaser | | Transactions | | 2007
(6 months) | | 2008
(6 months) |
KTF | | KTF Mhows | | PCS services | | (Won) | 1,445 | | (Won) | 2,620 |
| | KTFT | | PCS services | | | 63 | | | 686 |
| | KTF M&S | | Purchase of PCS networks and other | | | 18,911 | | | 261,143 |
KTF Mhows | | KTFT | | Sales of Mobile | | | — | | | 34 |
| | KTF | | Advertising expenses | | | 2,476 | | | 2,271 |
KTF M&S | | KTFT | | Commission and other | | | 4,962 | | | 14,369 |
| | KTF | | Commissions of sale | | | 36,490 | | | 149,759 |
KTF Music | | Doremi Media | | Sales of sound source | | | 462 | | | 202 |
KTFT | | KTF | | Purchase of PCS networks and other | | | 189,835 | | | 196,825 |
| | KTF M&S | | Purchase of PCS networks and other | | | 105 | | | — |
Doremi Media | | KTF Music | | Cost of sound source | | | 182 | | | 206 |
| | | | | | | | | | |
Total | | | | | | (Won) | 254,931 | | (Won) | 628,115 |
| | | | | | | | | | |
F-27
Significant account balances amongst the Company’s consolidated parties as of December 31, 2007 and June 30, 2008 are as follows (in millions of Korea won):
| | | | | | | | |
Debtor | | Creditor | | December 31, 2007 | | June 30, 2008 |
KTF | | KTF M&S | | (Won) | 761 | | (Won) | 54,035 |
| | KTF Mhows | | | 518 | | | 1,222 |
| | KTFT | | | 10 | | | 995 |
| | KTF Music | | | — | | | 20 |
KTF Mhows | | KTFT | | | 14 | | | — |
| | KTF | | | 3,257 | | | 2,199 |
KTF M&S | | KTF | | | 5,594 | | | — |
KTF Music | | KTF | | | — | | | 1,505 |
| | Doremi Media | | | 290 | | | 332 |
KTFT | | KTF | | | 100,569 | | | 107,154 |
| | KTF M&S | | | 5,445 | | | — |
Doremi Media | | KTF Music | | | 72 | | | 71 |
| | | | | | | | |
Total | | | | (Won) | 116,530 | | (Won) | 167,533 |
| | | | | | | | |
The Company’s relationships with affiliates as of June 30, 2008 are as follows:
| | |
Relationship | | Name |
Parent | | KT Corporation (“KT”) |
| |
Subsidiaries of the parent company | | KTN, KTH, KTP, KTJ, KTS, KTR, KTC, KTL, KTPI, KTCC, NTC, Telecop Service, KT Capital, Olive Nine, KTAI, KT FDS and Others |
| |
Equity method investee | | KDB, Harex Info Tech, eNtoB, Boston Film Fund, Sidus FNH, KTF-CJ Music Contents Investment Fund, Sidus FNH-BENEX Cinema Fund1, KTF-DoCoMo Mobile Investment Fund, Bluecord Technology and others |
The Company considers management of vice president or higher and non-permanent directors who have the authority and responsibility for planning, operation and control and are in charge of business or division unit as key management personnel. Compensation to key management personnel of the Company for the six months ended June 30, 2007 and 2008 are as follows (in millions of Korean won):
| | | | | | | | |
Account | | 2007
(6 months) | | 2008
(6 months) | | Description |
Share-based payments | | (Won) | 15 | | (Won) | 501 | | Stock options |
Other benefits | | | 517 | | | 601 | | Salaries, bonuses, other allowances, retirement benefits, medical benefits and other |
| | | | | | | | |
| | (Won) | 532 | | (Won) | 1,102 | | |
| | | | | | | | |
F-28
Significant transactions between KTF and its related parties for the six months ended June 30, 2007 and 2008 are summarized as follows (in millions of Korean won):
Revenues
| | | | | | | | |
Related party | | Transactions | | 2007
(6 months) | | 2008
(6 months) |
Parent | | | | | | | | |
KT | | Interconnection charges and others | | (Won) | 434,098 | | (Won) | 420,588 |
| | | |
Subsidiaries of the parent company | | | | | | | | |
KTN | | Purchase of PCS handsets | | | 8,174 | | | 16,947 |
KTH | | PCS services | | | 188 | | | 1,257 |
KTP | | Interconnection charges and others | | | 531 | | | 607 |
KTL | | Interconnection charges and others | | | 3 | | | — |
KTC | | Interconnection charges and others | | | 10 | | | 85 |
KTR | | Interconnection charges and others | | | 1 | | | — |
Others | | Interconnection charges and others | | | 1,806 | | | 606 |
| | | |
Equity method investee | | | | | | | | |
KDB | | PCS services | | | 18 | | | 1 |
eNtoB Corp | | PCS services | | | 1 | | | — |
Sidus FNH-BENEX Cinema Fund1 | | Others | | | — | | | 3 |
Others | | Commissions and other | | | — | | | 13 |
| | | | | | | | |
Total | | | | (Won) | 444,830 | | (Won) | 440,107 |
| | | | | | | | |
Purchases
| | | | | | | | |
Related party | | Transactions | | 2007
(6 months) | | 2008
(6 months) |
Parent | | | | | | | | |
KT | | Leased line charges and others | | (Won) | 229,575 | | (Won) | 228,294 |
| | | |
Subsidiaries of the parent company | | | | | | | | |
KTN | | Sales commissions | | | 7,581 | | | 16,077 |
KTH | | Commissions | | | 8,632 | | | 4,442 |
KTP | | Interconnection charges | | | 426 | | | 724 |
KTL | | Commissions | | | 2 | | | 5 |
KTC | | Sales promotion | | | 1,358 | | | 1,107 |
KTR | | Rent | | | 1,048 | | | 386 |
Telecop Service | | Commissions | | | 43 | | | 69 |
Olive Nine | | Advertisements | | | 30 | | | — |
Others | | Commissions and others | | | — | | | 2,280 |
| | | |
Equity method investee | | | | | | | | |
KDB | | Commissions | | | 271 | | | 141 |
Harex Info Tech | | Commissions and others | | | 909 | | | 543 |
eNtoB | | Others | | | — | | | 586 |
Others | | Royalty and others | | | — | | | 337 |
| | | | | | | | |
Total | | | | (Won) | 249,875 | | (Won) | 254,991 |
| | | | | | | | |
F-29
Significant account balances between KTF and its related parties as of December 31, 2007 and June 30, 2008 are as follows (in millions of Korean won):
Receivables
| | | | | | | | |
Related party | | Description | | December 31,
2007 | | June 30,
2008 |
Parent | | | | | | | | |
KT | | Receivables and others | | (Won) | 222,813 | | (Won) | 206,480 |
| | | |
Subsidiaries of the parent company | | | | | | | | |
KTN | | Receivables and others | | | 1,712 | | | 619 |
KTH | | Receivables | | | 95 | | | 1,407 |
KTP | | Receivables-other | | | 232 | | | 233 |
KTR | | Advance payments | | | 6 | | | 1 |
Others | | Receivables | | | 79 | | | 1,511 |
| | | |
Equity method investee | | | | | | | | |
Others | | Receivables and others | | | 1,137 | | | 1,438 |
| | | | | | | | |
Total | | | | (Won) | 226,074 | | (Won) | 211,689 |
| | | | | | | | |
Payables
| | | | | | | | |
Related party | | Description | | December 31,
2007 | | June 30,
2008 |
Parent | | | | | | | | |
KT | | Payables and others | | (Won) | 52,499 | | (Won) | 63,646 |
| | | |
Subsidiaries of the parent company | | | | | | | | |
KTN | | Payables-other | | | 536 | | | 5,232 |
KTH | | Payables-other | | | 3,487 | | | 2,160 |
KTP | | Payables-other and Others | | | 5 | | | 8 |
KTC | | Payables-other | | | 353 | | | 371 |
KTR | | Payables-other | | | 38 | | | 43 |
Telecop Service | | Payables-other | | | 3 | | | 16 |
Others | | Payables-other and Others | | | 1,442 | | | 1,573 |
| | | |
Equity method investee | | | | | | | | |
KDB | | Commissions | | | 61 | | | 155 |
Harex Info Tech | | Commissions and others | | | 59 | | | 250 |
Others | | Royalty and others | | | 39 | | | 584 |
| | | | | | | | |
Total | | | | (Won) | 58,522 | | (Won) | 74,038 |
| | | | | | | | |
As of June 30, 2008, the Company has provided guarantees for related parties as follows (in millions of Korean won and thousands of U.S. dollars):
| | | | | | | |
Guarantor | | Guarantee | | Description | | Amount |
KTF Music | | Music City Media | | Guarantee for loan | | (Won) | 83 |
F-30
16. COMMITMENTS AND CONTINGENCIES
KTF has entered into an agreement covering the resale of PCS with KT. As compensation for providing telecommunications network, KTF receives certain amount by multiplying outgoing call generated from KT’s subscribers by the rate per minute.
As of June 30, 2008, the Company has bank overdraft agreements with Shinhan Bank with guarantee limits of (Won)50,000 million.
As of June 30, 2008, the Company is faced with various lawsuits as the defendant for total claims of (Won)15,566 million. The management of the Company believes the outcome of these lawsuits will not have a material impact on the financial statements
KTF entered into a PCS production contract with Dasung Technology Inc. and Netrontech Co., Ltd.
KTF pays a 5.25% royalty of the unit net price of CDMA PCS to Qualcomm Incorporated.
17. DERIVATIVES
As of June 30, 2008, the Company has entered into various derivatives contracts with financial institutions as follows:
| | | | |
Type of transaction | | Financial institution | | Description |
Combined interest rate currency swap | | Calyon etc. | | Exchange of foreign currency fixed (variable) interest with local currency variable (fixed) interest |
| | |
Put option | | — | | Contract giving the right to sell an underlying security at a specified price |
The assets and liabilities recorded relating to the outstanding contracts as of June 30, 2008 are as follows (in millions of Korean won, and thousands of U.S. dollars and Japanese yen):
| | | | | | | | | | | | |
Type of transaction | | Contract amount | | Assets
(Current) | | Assets
(Non-
Current) | | Liabilities
(Current) |
Combined interest rate currency swap | | USD | 340,000 | | | | | | | | | |
(Note) | | JPY | 7,000,000 | | (Won) | — | | (Won) | 29,418 | | (Won) | — |
Put option | | | — | | | 8,161 | | | — | | | — |
| | | | | | | | | | | | |
| | USD | 340,000 | | | | | | | | | |
Total | | JPY | 7,000,000 | | (Won) | 8,161 | | (Won) | 29,418 | | (Won) | — |
| | | | | | | | | | | | |
F-31
| (Note) | Details of the combined interest rate currency swap contracts to which cash flow hedge accounting is applied as of June 30, 2008 are as follows (in thousands of U.S. dollars and Japanese yen, and millions of Korean won): |
| | | | | | | | | | |
Type of transaction | | Contract date | | Maturity date | | Contract amount | | Fair value
(Non-current) |
Combined interest rate currency swap | | February 12, 2008 | | February 25, 2011 | | USD | 70,000 | | | 7,717 |
| | February 13, 2008 | | February 25, 2011 | | USD | 35,000 | | | 3,919 |
| | February 13, 2008 | | February 25, 2011 | | USD | 30,000 | | | 3,183 |
| | February 14, 2008 | | February 25, 2011 | | USD | 20,000 | | | 2,313 |
| | February 14, 2008 | | February 25, 2011 | | USD | 20,000 | | | 2,334 |
| | March 3, 2008 | | December 13, 2010 | | USD | 70,000 | | | 8,107 |
| | April 18, 2008 | | April 28, 2011 | | JPY | 4,000,000 | | | 458 |
| | April 21, 2008 | | April 28, 2011 | | JPY | 3,000,000 | | | 990 |
| | June 11, 2008 | | June 20, 2011 | | USD | 50,000 | | | 88 |
| | June 11, 2008 | | June 20, 2011 | | USD | 15,000 | | | 34 |
| | June 13, 2008 | | June 20, 2011 | | USD | 30,000 | | | 275 |
| | | | | | | | | | |
| | | | | | USD | 340,000 | | | |
Total | | | | | | JPY | 7,000,000 | | (Won) | 29,418 |
| | | | | | | | | | |
Above foreign currency swap contracts are to hedge the risk of variability of future cash flows from variable rate foreign currency bonds and as of June 30, 2008, the gain and loss on valuation of the swap contracts amounting to (Won)4,481 million and (Won)1,367 million, net of income tax effect, are included in accumulated other comprehensive income and minority interest and for the six months ended June 30, 2008 the gain on valuation of the swap contract totaling (Won)25,122 million is recognized in current operations as a result of foreign currency translation gain from foreign currency bonds. In applying cash flow hedge accounting, the Company hedges its exposures to cash flow fluctuation until June 20, 2011. Approximately (Won)1,391 million of net derivative gain included in accumulated other comprehensive income at June 30, 2008 is expected to be reclassified into current operations within 12 months from that date.
The valuation gains and losses on the derivative contracts for the six months ended June 30, 2007 and 2008 are as follows (in millions of Korean won):
| | | | | | | | | | | | | | | | | | |
| | | 2007 (6 months) |
| | | Valuation gain | | Valuation loss |
Type of transaction | | For trading | | For hedging | | Total | | For trading | | For hedging | | Total |
Currency swap | | (Won) | — | | (Won) | — | | (Won) | — | | (Won) | 23 | | (Won) | — | | (Won) | 23 |
Put option | | | 304 | | | — | | | 304 | | | — | | | — | | | — |
| | | | | | | | | | | | | | | | | | |
Total | | (Won) | 304 | | (Won) | — | | (Won) | 304 | | (Won) | 23 | | (Won) | — | | (Won) | 23 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2008 (6 months) |
| | | Valuation gain | | Valuation loss | | Valuation
gain (Note) |
Type of transaction | | For trading | | For hedging | | Total | | For trading | | For hedging | | Total | | For hedging |
Combined interest rate currency swap | | (Won) | — | | (Won) | 25,122 | | (Won) | 25,122 | | (Won) | — | | (Won) | — | | (Won) | — | | (Won) | 4,296 |
Put option | | | 6,190 | | | — | | | 6,190 | | | — | | | — | | | — | | | — |
| | | | | | | | | | | | | | | | | | | | | |
Total | | (Won) | 6,190 | | (Won) | 25,122 | | (Won) | 31,312 | | (Won) | — | | (Won) | — | | (Won) | — | | (Won) | 4,296 |
| | | | | | | | | | | | | | | | | | | | | |
| (Note) | The amounts are before adjustment of deferred income tax which shall be directly reflected to equity and are included in equity. |
F-32
18. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Korea (“Korean GAAP”), which differ in certain respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). The significant differences are described below. Other differences do not have a significant effect on either consolidated net income or stockholders’ equity.
a. Companies Included in Consolidation
Under Korean GAAP, investments in subsidiaries and controlled entities are consolidated and substantial control is deemed to exist when the investor is the largest stockholder and owns more than 30 percent of total outstanding voting stock. However, U.S. GAAP generally requires that all majority-owned subsidiaries be consolidated and that any entity of which the Company owns twenty to fifty percent of total outstanding voting stock not be consolidated; rather that entity should be accounted for under the equity method.
Under U.S. GAAP, if a business enterprise has a controlling financial interest in a variable interest entity, which is defined by FASB Interpretation No. 46 Revised (“FIN 46R”), the assets, liabilities and results of the activities of the variable interest entity should be included in the consolidated financial statements with those of the business enterprise. Under the Korean GAAP, there is no specific provision for the accounting treatment of variable interest entities.
b. Capitalization of Foreign Currency Translation Gain (Loss)
Under previous Korean GAAP, certain unrealized foreign currency translation gains and losses were excluded from the results of operations and included in the cost of property and equipment. However, under U.S. GAAP, all unrealized foreign currency translation gains and losses on monetary assets and liabilities are to be included in the current year’s results of operations.
The amounts of foreign currency translation gains and losses included in property and equipment under previous Korean GAAP were adjusted to comply with U.S. GAAP.
c. Interest Capitalization
Under Korean GAAP, the Company elected, starting from January 1, 2003, to no longer capitalize interest expense. However, under U.S. GAAP, the Company’s policy is to capitalize interest that would have theoretically been avoided had expenditures not been made for assets, which require a period of time to get them ready for their intended uses.
d. Deferred Charges
Deferred charges in intangibles consist primarily of development costs. The development costs which are recoverable from future earnings are deferred under Korean GAAP.
Under U.S. GAAP, development costs are charged to expenses when incurred and are classified as operating expenses.
e. Revenue Recognition
Under Korean GAAP, activation fees are recorded as revenue when billed and the related direct incremental acquisition costs are expensed as incurred.
Under U.S. GAAP, such amounts are deferred and recognized over the period of the customer relationship.
F-33
f. Handset Subsidies to Long-term Mobile Subscribers
Under Korean GAAP, handset subsidies are recorded as operating expenses. Under US GAAP, such amounts are directly deducted from revenue.
g. Merger with KTM.Com
Under Korean GAAP, as KTF and KTM.Com Co., Ltd. (“KTM.Com”) were subsidiaries of KT prior to the merger, assets and liabilities were transferred from KTM.Com to KTF at book values and the difference between the par value of capital stock issued and the value of net assets transferred was recorded in the capital surplus account.
Under U.S. GAAP, as KTF and KTM.Com were not subsidiaries but equity method investees of KT prior to the merger, assets and liabilities were transferred from KTM.Com to KTF at fair values and the difference between the fair value of capital stock issued and the fair value of net assets transferred was recorded as intangible assets and goodwill.
The Company classified the intangible assets into three components: subscriber base, licensing cost and goodwill.
h. Merger with KT ICOM
Under Korean GAAP, as KTF and KT ICOM were subsidiaries of KT prior to the merger, assets and liabilities were transferred from KT ICOM to KTF at book values as shown in the consolidated financial statements of KT and the difference between the par value of capital stock issued and the value of net assets transferred was recorded in the capital surplus account.
The merger was not accounted for as a merger of entities under common control as KTF and KT ICOM are not subsidiaries of KT and assets and liabilities were transferred from KT ICOM to KT Freetel at fair value under U.S. GAAP. As the fair values of net assets transferred amounting to (Won)228,244 million exceed the fair value of capital stock issued amounting to (Won)190,755 million, the non-current assets of (Won)37,489 million were reduced proportionally.
i. Goodwill and Other Intangibles
Under Korean GAAP, the purchase price over the fair value of net assets being acquired was recorded as goodwill and it is amortized over 20 years. Impairment loss is recognized when the carrying amount of goodwill exceeds the fair value.
Under SFAS No. 142 “Goodwill and Intangible Assets”, intangible assets with finite lives continue to be amortized over their useful economic lives. Goodwill and intangible assets with indefinite lives are not amortized, but tested for impairment, at least annually.
In accordance with SFAS No. 142, the goodwill and intangibles acquired from KTM.Com and KT ICOM and amortization expense for the six months ended June 30, 2007 and 2008 are as follows (in millions of Korean won):
| | | | | | | | | | | |
| | | | | Initial amount | | Amortization expense |
| | | | 2007
(6 months) | | 2008
(6 months) |
KTM.Com | | Goodwill | | (Won) | 753,065 | | (Won) | — | | (Won) | — |
| | Subscriber base | | | 605,563 | | | — | | | — |
| | Licensing cost | | | 83,875 | | | 7,292 | | | 7,292 |
KT ICOM | | Frequency usage right | | | 1,194,045 | | | 45,911 | | | 45,911 |
Under Korean GAAP, licensing costs paid by the initial stockholders to obtain the operating licenses prior to the establishment of the Company were not recorded in the accounts of the Company.
F-34
Under U.S. GAAP, licensing costs were accounted for as an intangible asset and capital surplus at the time of establishment of the Company.
Since the Company determined the useful life of licensing costs of second generation service (“2G”) to be indefinite, the Company determined not to amortize the related costs until December 31, 2005.
On December 31, 2005, the Korea Communication Act (“Act”) was revised, which is effective July 1, 2006. Under the Act, the right of the usage of frequency for 2G will expire in June 2011. As such, the Company is amortizing licensing costs of 2G of (Won)162,708 million over the remaining useful life and amortization expenses for the six months ended June 30, 2007 and 2008 are (Won)14,792 million, respectively.
j. Investor-level Goodwill
Under Korean GAAP, for investments in affiliated companies accounted for using the equity method, the excess of acquisition cost of the affiliates over the Company’s share of their net assets at the acquisition date is being amortized by the straight-line method over its estimated useful life. Under U.S. GAAP, the investor-level goodwill is not amortized, but instead tested for impairment in accordance with APB No. 18. The investor-level goodwill which is recorded only at the investor’s financial statements represents the excess of the acquisition cost of equity method investees over the fair value of investor’s share of net identifiable assets acquired.
k. Additional Equity Investment in Subsidiaries
Under Korean GAAP, when additional interest is acquired after acquiring a majority interest in a subsidiary, the differences between the Company’s acquisition cost of the additional interest and the corresponding carrying amount of the acquired additional interest in a subsidiary is presented as an adjustment to capital surplus.
Under U.S. GAAP, the cost of an additional interest would be allocated based on the fair value of net assets at the time the additional interest is acquired, with the excess allocated to goodwill.
l. Minority Interest in Consolidated Subsidiaries
Under Korean GAAP, minority interest in consolidated subsidiaries is presented as a component of stockholders’ equity in the consolidated balance sheets.
Under U.S. GAAP, minority interest in consolidated subsidiaries is not included in stockholders’ equity; rather, it is presented between liabilities and stockholders’ equity item in the consolidated balance sheets.
m. Income Taxes
Under U.S. GAAP, effective January 1, 2007 the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which supplements SFAS No. 109 “Accounting for Income Taxes” (SFAS No. 109), by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires that the tax effect(s) of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the tax position are to be recognized. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustment would be recorded directly to retained earnings and reported as a change in accounting principle.
F-35
n. Comprehensive Income
Prior to January 1, 2007, Korean GAAP did not require to present comprehensive income, however, effective January 1, 2007, the Company adopted SKAS No. 21, “Preparation and Presentation of Financial Statements 1”, which requires separate disclosure of the details of comprehensive income. Consequently, there is no GAAP difference as of December 31, 2007, in terms of disclosure of comprehensive income and its components.
Under U.S. GAAP, comprehensive income and its components must be presented in the financial statements. Comprehensive income includes all changes in stockholders’ equity during a period except those resulting from investments by, or distributions to, owners, including certain items not included in the current results of operations.
Comprehensive income for the six months ended June 30, 2007 and 2008 and accumulated other comprehensive income balance as of June 30, 2007 and 2008 is summarized as follows (in millions of Korean won):
| | | | | | | | |
| | | 2007
(6 months) | | | 2008
(6 months) | |
Net earnings (losses) as adjusted in accordance with U.S. GAAP | | (Won) | 109,920 | | | (Won) | (43,954 | ) |
Other comprehensive income, net of tax: | | | | | | | | |
Foreign currency translation adjustments | | | (7 | ) | | | 72 | |
Unrealized gains (losses) on investments: | | | | | | | | |
Unrealized holding losses, net of tax of ((Won)1,138) million and ((Won)1,634) million in 2007 and 2008, respectively | | | (2,884 | ) | | | (4,309 | ) |
Less: reclassification adjustment for gains (losses) realized in net earning due to disposal, net of tax of (Won)391 million and ((Won)1,062) million in 2007 and 2008, respectively | | | 1,032 | | | | (2,798 | ) |
Unrealized gains on valuation of derivatives, net of tax of (Won)1,181 million in 2008 | | | — | | | | 3,114 | |
| | | | | | | | |
Comprehensive income (loss) as adjusted in accordance with
U.S. GAAP | | (Won) | 108,061 | | | (Won) | (47,875 | ) |
| | | | | | | | |
Accumulated other comprehensive income (loss) balances: | | | | | | | | |
Foreign currency translation adjustments | | (Won) | (72 | ) | | (Won) | (10 | ) |
Unrealized gains on investments | | | 5,293 | | | | 2,261 | |
| | | | | | | | |
| | (Won) | 5,221 | | | (Won) | 2,251 | |
| | | | | | | | |
o. New Accounting Pronouncements
| | (i) | In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)) which retained the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but SFAS No. 141(R) changed the method of applying the acquisition method in a number of significant aspects. SFAS No. 141(R) will require that: (1) for all business combinations, the acquirer records all assets and liabilities of the acquired business, including goodwill, generally at their fair values; (2) certain contingent assets and liabilities acquired be recognized at their fair values on the acquisition date; (3) contingent consideration be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settled; (4) acquisition-related transaction and restructuring costs be expensed rather than treated as part of the cost of the acquisition and included in the amount recorded for assets acquired; (5) in step acquisitions, previous equity interests in an acquiree held prior to obtaining control be re-measured to their acquisition-date fair values, with any gain or loss recognized in earnings; and |
F-36
| | (6) when making adjustments to finalize initial accounting, companies revise any previously issued post- acquisition financial information in future financial statements to reflect any adjustments as if they had been recorded on the acquisition date. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS No. 141(R) amends SFAS No. 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of this statement should also apply the provisions of SFAS No. 141(R). This standard will be applied to all future business combinations after December 31, 2008. |
| | (ii) | In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51” (SFAS No. 160) which amends ARB 51 to establish new standards that will govern the accounting for and reporting of noncontrolling interests in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Also, SFAS No. 160 requires that: (1) noncontrolling interest, previously referred to as minority interest, be reported as part of equity in the consolidated financial statements; (2) losses be allocated to the noncontrolling interest even when such allocation might result in a deficit balance, reducing the losses attributed to the controlling interest; (3) changes in ownership interests be treated as equity transactions if control is maintained; and, (4) upon a loss of control, any gain or loss on the interest sold be recognized in earnings. SFAS No. 160 is effective on a prospective basis for all fiscal years beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which will be applied retrospectively. Management is currently evaluating the effects, if any, that SFAS No. 160 may have on the Company’s financial condition and results of operations. |
| | (iii) | In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133” (SFAS No. 161), that expands the disclosure requirements of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133). SFAS No. 161 requires additional disclosures regarding: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. In addition, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives described in the context of an entity’s risk exposures, quantitative disclosures about the location and fair value of derivative instruments and associated gains and losses, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. |
| | (iv) | In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”) that is intended to improve financial reporting by identifying a consistent framework, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS No. 162 is effective 60 days following the Securities and Exchanges Commission’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” |
| | (v) | In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60” (SFAS No. 163) that clarifies how FASB Statement No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities and also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures about the insurance enterprise’s risk-management activities and requires that disclosures about the risk-management activities of the insurance enterprise be effective for the first period beginning after issuance of this |
F-37
| | Statement. Except for those disclosures, earlier application is not permitted. Management is currently evaluating the effects, if any, that SFAS No. 163 may have on the Company’s financial condition and results of operations. |
p. U.S GAAP Reconciliations
The effects of the significant adjustments to net earnings for the six months ended June 30, 2007 and 2008 and stockholders’ equity for the year ended December 31, 2007 and the six months ended June 30, 2008 which would be required if U.S. GAAP were to be applied instead of Korean GAAP are summarized as follows (in millions of Korean won except per share data):
| | | | | | | | | | |
| | | Note
Reference | | 2007
(6 months) | | | 2008
(6 months) | |
Net income (attributable to equity holders of the parent) under Korean GAAP | | | | (Won) | 130,859 | | | (Won) | (10,932 | ) |
Adjustments: | | | | | | | | | | |
Capitalization of foreign currency translation gain (loss), net | | 18.b | | | 269 | | | | 317 | |
Interest capitalization | | 18.c | | | (1,873 | ) | | | (1,538 | ) |
Deferred charges | | 18.d | | | 7,267 | | | | 460 | |
Revenue recognition | | 18.e | | | (22,686 | ) | | | (42,991 | ) |
Merger with KT ICOM | | 18.h | | | 2,051 | | | | 2,051 | |
Licensing cost | | 18.i | | | (14,792 | ) | | | (14,792 | ) |
Investor- level goodwill | | 18.j | | | 773 | | | | 4,809 | |
Deferred income tax effects of U.S. GAAP adjustments | | | | | 8,052 | | | | 18,662 | |
| | | | | | | | | | |
| | | | | (20,939 | ) | | | (33,022 | ) |
| | | | | | | | | | |
Adjusted net income under U.S. GAAP | | | | (Won) | 109,920 | | | (Won) | (43,954 | ) |
| | | | | | | | | | |
Basic and diluted earnings per share | | | | (Won) | 562 | | | (Won) | (229 | ) |
| | | | | | | | | | |
| | | |
| | | Note
Reference | | December 31,
2007 | | | June 30,
2008 | |
Stockholder’s equity under Korean GAAP | | | | (Won) | 4,373,379 | | | (Won) | 4,235,278 | |
Adjustments: | | | | | | | | | | |
Capitalization of foreign currency translation gain (loss), net | | 18.b | | | (297 | ) | | | 20 | |
Interest capitalization | | 18.c | | | 62,841 | | | | 61,303 | |
Deferred charges | | 18.d | | | (1,338 | ) | | | (878 | ) |
Revenue recognition | | 18.e | | | (70,553 | ) | | | (113,544 | ) |
Merger with KTM.Com | | 18.g | | | 688,653 | | | | 688,653 | |
Merger with KT ICOM | | 18.h | | | (36,577 | ) | | | (34,526 | ) |
Licensing cost | | 18.i | | | 103,542 | | | | 88,750 | |
Investor- level goodwill | | 18.j | | | 3,473 | | | | 8,282 | |
Additional equity investment in subsidiaries | | 18.k | | | 1,132 | | | | 1,132 | |
Minority interest in consolidated subsidiaries | | 18.l | | | (29,670 | ) | | | (27,658 | ) |
Deferred income tax effects of U.S. GAAP adjustments | | | | | (16,415 | ) | | | 1,721 | |
| | | | | | | | | | |
| | | | | 704,791 | | | | 673,255 | |
| | | | | | | | | | |
Stockholders’ equity as adjusted in accordance with U.S. GAAP | | | | (Won) | 5,078,170 | | | (Won) | 4,908,533 | |
| | | | | | | | | | |
F-38
Condensed balance sheets in accordance with U.S. GAAP as of December 31, 2007 and June 30, 2008 are as follows (in millions of Korean won):
| | | | | | |
| | | December 31,
2007 | | June 30,
2008 |
Assets | | | | | | |
Current assets | | (Won) | 1,870,669 | | (Won) | 2,020,950 |
Non-current assets | | | 6,449,944 | | | 6,664,371 |
| | | | | | |
Total assets | | (Won) | 8,320,613 | | (Won) | 8,685,321 |
| | | | | | |
Liabilities | | | | | | |
Current liabilities | | (Won) | 1,833,051 | | (Won) | 2,341,525 |
Long-term liabilities | | | 1,396,433 | | | 1,424,459 |
| | | | | | |
Total liabilities | | | 3,229,484 | | | 3,765,984 |
| | | | | | |
Minority interest in consolidated subsidiaries | | | 12,959 | | | 10,804 |
| | | | | | |
Stockholders’ equity | | | 5,078,170 | | | 4,908,533 |
| | | | | | |
Total liabilities, minority interest and stockholders’ equity | | (Won) | 8,320,613 | | (Won) | 8,685,321 |
| | | | | | |
The following table reconciles cash flows from operating, investing and financing activities for the six months ended June 30, 2007 and 2008 under Korean GAAP, as reported in the consolidated financial statements to cash flows from operating, investing and financing activities for the six months ended June 30, 2007 and 2008 under U.S. GAAP (in millions of Korean won):
| | | | | | | | |
| | | 2007 (6 months) | | | 2008 (6 months) | |
Cash flows from operating activities under Korean GAAP | | (Won) | 843,170 | | | (Won) | 413,689 | |
Adjustments: | | | | | | | | |
Difference in consolidation scope(*) | | | — | | | | 1,855 | |
| | | | | | | | |
Cash flows from operating activities under U.S. GAAP | | (Won) | 843,170 | | | (Won) | 415,544 | |
| | | | | | | | |
Cash flows from investing activities under Korean GAAP | | (Won) | (510,230 | ) | | (Won) | (631,917 | ) |
Adjustments: | | | | | | | | |
Difference in consolidation scope(*) | | | — | | | | 4,037 | |
| | | | | | | | |
Cash flows from investing activities under U.S. GAAP | | (Won) | (510,230 | ) | | (Won) | (627,880 | ) |
| | | | | | | | |
Cash flows from financing activities under Korean GAAP: | | (Won) | (499,833 | ) | | (Won) | 769 | |
Adjustments: | | | | | | | | |
Difference in consolidation scope(*) | | | — | | | | 5,770 | |
| | | | | | | | |
Cash flows from financing activities under U.S. GAAP | | (Won) | (499,833 | ) | | (Won) | 6,539 | |
| | | | | | | | |
Cash and cash equivalents at end of the period under Korean GAAP | | (Won) | 423,819 | | | (Won) | 113,014 | |
Adjustments: | | | | | | | | |
Difference in consolidation scope(*) | | | — | | | | (4,874 | ) |
| | | | | | | | |
Cash and cash equivalents at end of the period under U.S. GAAP | | (Won) | 423,819 | | | (Won) | 108,140 | |
| | | | | | | | |
| | (*) | Reconciling items affecting cash flows related to difference in consolidation scope between Korean GAAP and U.S. GAAP |
F-39
19. ADDITIONAL U.S. GAAP DISCLOSURES
a. Income Tax Expense
The components of income tax expense for the six months ended June 30, 2007 and 2008 are as follows (in millions of Korean won):
| | | | | | | | |
| | | 2007
(6 months) | | | 2008
(6 months) | |
Current income tax expense | | (Won) | 40,602 | | | (Won) | 2,600 | |
Deferred income tax benefit | | | (37,188 | ) | | | (48,949 | ) |
| | | | | | | | |
Income tax expense (benefit) | | (Won) | 3,414 | | | (Won) | (46,349 | ) |
| | | | | | | | |
Substantially all income before income taxes and related income tax expense (benefit) are attributable to domestic operations. The provision for income taxes using statutory tax rates differs from the actual provision for the six months ended June 30, 2007 and 2008 for the following reasons (in millions of Korean won):
| | | | | | | | |
| | | 2007
(6 months) | | | 2008
(6 months) | |
Provision for income taxes at statutory tax rates | | (Won) | 36,116 | | | (Won) | (25,681 | ) |
Investment tax credits | | | (32,109 | ) | | | (37,354 | ) |
Additional income tax payment (refund) related to prior periods | | | 844 | | | | (922 | ) |
Non-temporary difference | | | 1,268 | | | | 10,211 | |
Changes in deferred income tax unrecognized | | | (1,379 | ) | | | 13,431 | |
Others | | | (1,326 | ) | | | (6,034 | ) |
| | | | | | | | |
Actual provision for income taxes | | (Won) | 3,414 | | | (Won) | (46,349 | ) |
| | | | | | | | |
The effective tax rates after adjustments of certain differences between amounts reported for financial accounting and income tax purpose were approximately 2.9% and 50.1% for the six months ended June 30, 2007 and 2008, respectively.
F-40
The tax effects of temporary differences that resulted in significant portions of the deferred income tax assets and liabilities computed under U.S. GAAP at December 31, 2007 and June 30, 2008 and a description of financial statement items that created these differences are as follows (in millions of Korean won):
| | | | | | | | |
| | | December 31, 2007 | | | June 30, 2008 | |
Deferred income tax assets: | | | | | | | | |
Allowance for doubtful accounts | | (Won) | 47,589 | | | (Won) | 25,999 | |
Inventories | | | 12,984 | | | | 11,931 | |
Unearned revenue | | | 23,309 | | | | 35,131 | |
Equity method investment securities | | | 5,055 | | | | 30,906 | |
Tax credit carryforwards | | | 94,546 | | | | 128,023 | |
Tax loss carryforwards | | | 4,379 | | | | 8,670 | |
Accrued expenses | | | 33,988 | | | | 42,317 | |
Accounts payable-other | | | 3,618 | | | | 5,224 | |
Donation | | | 14 | | | | | |
Loss on impairment of long-term investment securities | | | 3,449 | | | | 3,364 | |
Provision for severance indemnities | | | 10,203 | | | | 11,711 | |
Other | | | 4,558 | | | | 13,701 | |
| | | | | | | | |
Total deferred income tax assets | | | 243,692 | | | | 316,977 | |
Valuation allowance | | | (33,843 | ) | | | (53,680 | ) |
| | | | | | | | |
Deferred income tax assets | | | 209,849 | | | | 263,297 | |
| | |
Deferred income tax liabilities: | | | | | | | | |
Available-for-sale securities | | | (2,155 | ) | | | — | |
Property and equipment | | | (8,189 | ) | | | (3,271 | ) |
Intangible assets | | | (21,754 | ) | | | (17,989 | ) |
Gain on valuation of derivatives | | | (542 | ) | | | (10,335 | ) |
Other | | | (209 | ) | | | (4,425 | ) |
| | | | | | | | |
Deferred income tax liabilities | | | (32,849 | ) | | | (36,020 | ) |
| | | | | | | | |
Net deferred income tax assets | | (Won) | 177,000 | | | (Won) | 227,277 | |
| | | | | | | | |
In 2007 and 2008, valuation allowance was recognized as realization of deferred income tax asset was not assessed as more likely than not mainly due to lack of expected future taxable income.
In assessing the recoverability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differenced become deductible and tax carryforwards are utilizable. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred income tax assets are deductible, management believes that it is more likely than not the Company will realize the benefits of these deductible differences and tax carryforwards.
Upon adoption of FIN 48 as of January 1, 2007, the Company recorded a decrease to retained earnings of (Won)4,439 million as a cumulative effect of the liability for uncertain tax positions. At January 1, 2007, the Company had (Won)4,439 million of total gross unrecognized tax benefits, of which (Won)4,272 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. At December 31, 2007 and June 30, 2008 the amount of unrecognized tax benefits that would favorably affect the effective income tax rate in future periods was (Won)130 million and (Won)19 million. These amounts consider the guidance in FIN 48-1,“Definition of Settlement in FASB Interpretation No. 48”.The liability for uncertain tax positions is classified as a non-current liability.
F-41
A reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period is as follows (in millions of Korean won):
| | | | | | | | |
| | | 2007
(12 months) | | | 2008
(6 months) | |
Beginning balance | | (Won) | 4,439 | | | (Won) | 3,303 | |
Additions to tax positions recorded during the current period | | | 155 | | | | 120 | |
Additions to tax positions recorded during prior periods | | | — | | | | 23 | |
Reductions to tax positions recorded during prior periods | | | — | | | | — | |
Reductions to tax positions due to a lapse of statutory limitations | | | — | | | | — | |
Reductions for settlement | | | (1,291 | ) | | | (2,924 | ) |
| | | | | | | | |
Ending balance | | (Won) | 3,303 | | | (Won) | 522 | |
| | | | | | | | |
The Company’s practice is to classify interest on uncertain tax positions in non-operating expense. The Company recognized (Won)25 million and (Won)13 million in penalties for the year ended December 31, 2007 and the six months ended June 30, 2008, respectively. The Company had (Won)191 million and (Won)93 million accrued for the payment of penalties as of December 31, 2007 and June 30, 2008, respectively.
The Company has open tax years ranging from 2003 to 2008, by which our taxes remain subject to examination. However, the Company does not anticipate that the total amount of unrecognized tax benefits will significantly change in the next 12 months.
b. Fair Value Measurements
On January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements, for all financial and nonfinancial assets and liabilities recognized at fair value in the consolidated financial statements on a recurring basis. The adoption of this statement did not change our previous accounting for financial assets and liabilities. The provisions of SFAS No. 157 will be applied to nonfinancial assets and liabilities that are recognized at fair value in the consolidated financial statements on a nonrecurring basis beginning January 1, 2009. Upon application of the remaining provisions of SFAS No. 157 on January 1, 2009, the Company will provide additional disclosures regarding our nonrecurring fair value measurements, including our annual impairment review of goodwill and intangible assets.
SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a three-tier fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
F-42
The following fair value hierarchy table presents information regarding our assets and liabilities measured at fair value on a recurring basis as of June 30, 2008 (in millions of Korean won):
| | | | | | | | | | | | |
Assets | | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and Cash equivalents | | (Won) | 61,333 | | (Won) | 46,807 | | (Won) | — | | (Won) | 108,140 |
Short-term financial instruments | | | 1,100 | | | 1,648 | | | — | | | 2,748 |
Short-term investment securities | | | — | | | 959 | | | — | | | 959 |
Long-term investment securities: | | | | | | | | | | | | |
Marketable equity securities | | | 9,948 | | | — | | | — | | | 9,948 |
Debt securities | | | — | | | 64 | | | — | | | 64 |
Derivative assets: | | | | | | | | | | | | |
Cross currency interest rate swap | | | | | | 29,418 | | | | | | 29,418 |
Put option | | | — | | | | | | 8,161 | | | 8,161 |
| | | | | | | | | | | | |
| | (Won) | 72,381 | | (Won) | 78,896 | | (Won) | 8,161 | | (Won) | 159,438 |
| | | | | | | | | | | | |
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash equivalents: The carrying amount of cash equivalents approximates fair value as maturities are less than three months. Fair values of cash equivalent instruments that do not trade on a regular basis in active markets are classified as Level 2. The cash equivalents are primarily comprised of trust deposit, RP, money market deposit account and money market funds.
Short-term financial instruments: The carrying amount of short-term financial instruments approximates fair value due to the short-term maturity. Fair values of short-term financial instruments are measured at the quoted price obtained from brokers for identical or comparable assets or liabilities. The short-term financial instruments are comprised of installment saving-type fund and others.
Marketable equity securities: The fair value of marketable equity securities is measured using quoted market prices and accordingly, they are classified as Level 1 as they are traded in an active market for which closing stock prices are readily available.
Derivative instruments assets: The derivative instruments assets consist of cross currency interest rate swap and put option contracts. The fair value of cross currency interest rate swap derivatives is primarily based on the quoted price obtained from brokers. The Company generally classifies this instrument within Level 2 of the valuation hierarchy, however, the Company also classifies put option contracts that are valued based upon models with significant unobservable inputs as Level 3 of the valuation hierarchy. The fair value of the put option is measured using Black-Sholes option pricing model that utilizes unobservable inputs such as expectation about dividend and future volatility.
The following table provides a reconciliation of the beginning and ending balances for the six months ended June 30, 2008 of the Company’s put option, as the option is measured at fair value using significant unobservable inputs (in millions of Korean won):
| | | |
Balances at beginning of period (January 1, 2008) | | (Won) | 1,971 |
Unrealized gain included in earnings | | | 6,190 |
Unrealized gain (loss) included in other comprehensive income | | | — |
Purchases, sales, issuances and settlements, net | | | — |
Transfer in and/or (out) of Level 3 | | | — |
| | | |
Balances as of June 30, 2008 | | (Won) | 8,161 |
| | | |
F-43
c. Accrued Severance Indemnities
The Company expects to pay the following future benefits to its employees upon their normal retirement age (in millions of Korean won):
| | | |
Year ending June 30, | | Amount |
Prior to June 30, 2015 | | (Won) | — |
2015 | | | 445 |
2016 | | | 1,235 |
2017 | | | 1,724 |
2018 | | | 4,808 |
| | | |
| | (Won) | 8,212 |
| | | |
The above amounts were determined based on the employees’ current salary rates and the number of service years that will be accumulated upon their expected retirement date. These amounts do not include amounts that might be paid to employees that will cease working with the Company before their normal retirement age.
F-44
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
KT Freetel Co., Ltd.
Seoul, Korea
We have audited the accompanying consolidated balance sheets of KT Freetel Co., Ltd. and subsidiaries (the “Company”) as of December 31, 2006 and 2007, and the related consolidated statements of income, cash flows and changes in equity for each of the three years in the period ended December 31, 2007 (all expressed in Korean won). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of KT Freetel Co., Ltd. and subsidiaries as of December 31, 2006 and 2007, and the results of their operations, their cash flows and changes in their equity for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the Republic of Korea.
Our audit also comprehended the translation of Korean won amounts into U.S. dollar amounts and, in our opinion, such convenience translation has been made in conformity with the basis stated in Note 2 to the consolidated financial statements. Such U.S. dollar amounts are presented solely for the convenience of readers of the financial statements.
Principles generally accepted in the Republic of Korea vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 31 to the consolidated financial statements.
/s/ Deloitte Anjin LLC
Seoul, Korea
August 29, 2008
F-45
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2006 and 2007
| | | | | | | | | |
| | | In millions of Korean won | | In thousands
of U.S. dollars
(Note 2) |
| | | 2006 | | 2007 | | 2007 |
ASSETS | | | | | | | | | |
| | | |
CURRENT ASSETS: | | | | | | | | | |
Cash and cash equivalents (Notes 25 and 28) | | (Won) | 590,712 | | (Won) | 330,473 | | $ | 353,145 |
Short-term financial instruments (Notes 3 and 26) | | | 90,500 | | | 3,800 | | | 4,061 |
Short-term investment securities (Notes 3 and 6) | | | 202,544 | | | 3,861 | | | 4,126 |
Accounts receivable-trade, net of allowance for doubtful accounts of (Won)214,650 million in 2006 and (Won)210,347 million in 2007 (Notes 2, 4, 12, 25 and 26) | | | 1,216,244 | | | 1,175,000 | | | 1,255,610 |
Short-term loans (Notes 2 and 8) | | | 10,408 | | | 4,906 | | | 5,243 |
Accounts receivable-other, net of allowance for doubtful accounts of (Won)9,820 million in 2006 and (Won)18,034 million in 2007 (Notes 2 and 26) | | | 76,659 | | | 34,268 | | | 36,619 |
Advance payments, net of allowance for doubtful accounts of (Won)12,051 million in 2007 (Notes 2 and 26) | | | 20,064 | | | 30,514 | | | 32,607 |
Prepaid expenses | | | 14,218 | | | 16,334 | | | 17,455 |
Current portion of deferred income tax assets (Note 23) | | | 107,956 | | | 135,363 | | | 144,649 |
Inventories (Notes 5 and 9) | | | 130,163 | | | 162,709 | | | 173,871 |
Other current assets (Note 2) | | | 3,274 | | | 1,243 | | | 1,328 |
| | | | | | | | | |
Total Current Assets | | | 2,462,742 | | | 1,898,471 | | | 2,028,714 |
| | | | | | | | | |
NON-CURRENT ASSETS: | | | | | | | | | |
Long-term financial instruments (Note 3) | | | 20 | | | 56 | | | 60 |
Long-term investment securities (Note 6) | | | 29,882 | | | 27,613 | | | 29,507 |
Equity method investment securities (Note 7) | | | 57,205 | | | 62,420 | | | 66,702 |
Long-term loans (Notes 2, 8 and 26) | | | 15,066 | | | 34,528 | | | 36,897 |
Other investment assets | | | 39,991 | | | 19,157 | | | 20,471 |
Property and equipment, net (Notes 9 and 10) | | | 4,236,328 | | | 4,266,945 | | | 4,559,677 |
Intangible assets, net (Notes 9 and 11) | | | 967,712 | | | 894,917 | | | 956,312 |
Long-term accounts receivable-trade (Note 12) | | | 53,801 | | | 42,512 | | | 45,429 |
Guarantee deposits | | | 214,313 | | | 232,102 | | | 248,025 |
Deferred income tax assets (Note 23) | | | 42,553 | | | 54,748 | | | 58,504 |
Other non-current assets | | | — | | | 4,300 | | | 4,595 |
| | | | | | | | | |
Total Non-current Assets | | | 5,656,871 | | | 5,639,298 | | | 6,026,179 |
| | | | | | | | | |
TOTAL ASSETS | | (Won) | 8,119,613 | | (Won) | 7,537,769 | | $ | 8,054,893 |
| | | | | | | | | |
(Continued)
F-46
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Balance Sheets—(Continued)
As of December 31, 2006 and 2007
| | | | | | | | | |
| | | In millions of Korean won | | In thousands
of U.S. dollars
(Note 2) |
| | | 2006 | | 2007 | | 2007 |
LIABILITIES AND EQUITY | | | | | | | | | |
| | | |
CURRENT LIABILITIES: | | | | | | | | | |
Accounts payable-trade (Notes 25 and 26) | | (Won) | 229,066 | | (Won) | 327,200 | | $ | 349,648 |
Short-term borrowings (Notes 13 and 25) | | | 60,038 | | | 35,893 | | | 38,355 |
Accounts payable-other (Notes 25 and 26) | | | 845,134 | | | 659,798 | | | 705,063 |
Advance receipts | | | 30,240 | | | 4,121 | | | 4,404 |
Withholdings | | | 102,202 | | | 122,110 | | | 130,487 |
Accrued expenses (Note 25) | | | 128,064 | | | 175,687 | | | 187,740 |
Income taxes payable | | | 43,889 | | | 44,107 | | | 47,133 |
Current portion of long-term borrowings and debentures (Notes 13 and 14) | | | 509,764 | | | 332,614 | | | 355,433 |
Current portion of long-term accounts payable-other (Notes 12 and 15) | | | 89,116 | | | 108,920 | | | 116,392 |
Current portion of accrued provisions (Note 16) | | | 10,305 | | | 9,770 | | | 10,440 |
Other current liabilities | | | 216 | | | 1,145 | | | 1,224 |
| | | | | | | | | |
Total Current Liabilities | | | 2,048,034 | | | 1,821,365 | | | 1,946,319 |
| | | | | | | | | |
NON-CURRENT LIABILITIES: | | | | | | | | | |
Long-term borrowings (Notes 12 and 13) | | | 20,000 | | | 14,618 | | | 15,621 |
Long-term debentures (Note 14) | | | 1,178,159 | | | 859,037 | | | 917,971 |
Long-term accounts payable-other (Notes 12 and 15) | | | 493,877 | | | 406,288 | | | 434,161 |
Long-term guarantee deposits received (Note 26) | | | 5,558 | | | 2,526 | | | 2,699 |
Accrued provisions (Note 16) | | | 9,465 | | | 4,048 | | | 4,326 |
Accrued severance indemnities, net (Note 2) | | | 44,365 | | | 53,994 | | | 57,698 |
Other non-current liabilities | | | 4 | | | 2,514 | | | 2,686 |
| | | | | | | | | |
Total Non-current Liabilities | | | 1,751,428 | | | 1,343,025 | | | 1,435,162 |
| | | | | | | | | |
Total Liabilities | | | 3,799,462 | | | 3,164,390 | | | 3,381,481 |
| | | | | | | | | |
(Continued)
F-47
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Balance Sheets—(Continued)
As of December 31, 2006 and 2007
| | | | | | | | | | | | |
| | | In millions of Korean won | | | In thousands
of U.S. dollars
(Note 2) | |
| | | 2006 | | | 2007 | | | 2007 | |
LIABILITIES AND EQUITY | | | | | | | | | | | | |
| | | |
EQUITY: | | | | | | | | | | | | |
Common Stock (Note 17) | | | 1,044,181 | | | | 1,044,181 | | | | 1,115,816 | |
Capital Surplus | | | 1,726,645 | | | | 1,725,493 | | | | 1,843,869 | |
Capital Adjustments: | | | | | | | | | | | | |
Treasury stock (Note 17) | | | (2,077 | ) | | | (2,078 | ) | | | (2,221 | ) |
Stock option (Note 20) | | | 5,265 | | | | 4,088 | | | | 4,369 | |
| | | | | | | | | | | | |
Total Capital Adjustments | | | 3,188 | | | | 2,010 | | | | 2,148 | |
| | | | | | | | | | | | |
Accumulated Other Comprehensive Income (Note 21) | | | | | | | | | | | | |
Unrealized gain on valuation of available-for-sale securities | | | 7,231 | | | | 5,717 | | | | 6,109 | |
Increase in equity of associates | | | 29 | | | | 608 | | | | 650 | |
Loss on translation of foreign operations | | | (65 | ) | | | (81 | ) | | | (86 | ) |
| | | | | | | | | | | | |
Total Accumulated Other Comprehensive Income | | | 7,195 | | | | 6,244 | | | | 6,673 | |
| | | | | | | | | | | | |
Retained Earnings (Note 18) | | | | | | | | | | | | |
Legal reserve | | | 31,455 | | | | 43,194 | | | | 46,157 | |
Voluntary reserve | | | 1,200,000 | | | | 1,350,000 | | | | 1,442,616 | |
Unappropriated retained earnings | | | 296,392 | | | | 172,587 | | | | 184,427 | |
| | | | | | | | | | | | |
Total Retained Earnings | | | 1,527,847 | | | | 1,565,781 | | | | 1,673,200 | |
| | | | | | | | | | | | |
Minority Interest | | | 11,095 | | | | 29,670 | | | | 31,706 | |
| | | | | | | | | | | | |
Total Equity | | | 4,320,151 | | | | 4,373,379 | | | | 4,673,412 | |
| | | | | | | | | | | | |
TOTAL LIABILITIES AND EQUITY | | (Won) | 8,119,613 | | | (Won) | 7,537,769 | | | $ | 8,054,893 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-48
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31, 2005, 2006 and 2007
| | | | | | | | | | | | | | | | |
| | | In millions of Korean won | | | In thousands of
U.S. dollars
(Note 2) | |
| | | 2005 | | | 2006 | | | 2007 | | | 2007 | |
OPERATING REVENUES (Notes 22 and 26) | | (Won) | 6,152,812 | | | (Won) | 6,627,720 | | | (Won) | 7,326,783 | | | $ | 7,829,433 | |
OPERATING EXPENSES (Notes 22 and 26) | | | 5,292,745 | | | | 5,924,681 | | | | 6,901,714 | | | | 7,375,202 | |
| | | | | | | | | | | | | | | | |
OPERATING INCOME | | | 860,067 | | | | 703,039 | | | | 425,069 | | | | 454,231 | |
| | | | | | | | | | | | | | | | |
NON-OPERATING REVENUE (EXPENSES): | | | | | | | | | | | | | | | | |
Interest income | | | 9,406 | | | | 26,213 | | | | 24,218 | | | | 25,879 | |
Gain on foreign currency transaction, net | | | 9,455 | | | | 6,001 | | | | 365 | | | | 390 | |
Gain (loss) on foreign currency translation, net (Note 25) | | | 7,821 | | | | 1,824 | | | | (555 | ) | | | (593 | ) |
Interest expense | | | (186,701 | ) | | | (145,244 | ) | | | (132,993 | ) | | | (142,117 | ) |
Loss on disposal of accounts receivable—trade (Note 4) | | | (12,511 | ) | | | (12,281 | ) | | | (409 | ) | | | (437 | ) |
Equity in income (loss) of associates, net (Note 7) | | | 146 | | | | (2,505 | ) | | | (2,461 | ) | | | (2,630 | ) |
Loss on impairment of equity method investment securities (Note 7) | | | — | | | | — | | | | (3,238 | ) | | | (3,460 | ) |
Gain on disposal of short-term investment securities, net | | | 8,713 | | | | 22,850 | | | | 4,585 | | | | 4,900 | |
Gain on disposal of long-term investment securities, net | | | 386 | | | | 139 | | | | 1,226 | | | | 1,310 | |
Loss on impairment of long-term investment securities, net (Note 6) | | | (25,131 | ) | | | (586 | ) | | | (1,481 | ) | | | (1,583 | ) |
Loss on disposal of property and equipment, net | | | (58,502 | ) | | | (42,044 | ) | | | (43,529 | ) | | | (46,515 | ) |
Loss on impairment of property and equipment (Note 10) | | | (1,011 | ) | | | (1,133 | ) | | | (3,059 | ) | | | (3,269 | ) |
Gain on disposal of intangible assets, net | | | 108 | | | | 42 | | | | 154 | | | | 165 | |
Loss on impairment of intangible assets (Note 11) | | | (3,762 | ) | | | (9,047 | ) | | | (3,698 | ) | | | (3,952 | ) |
Reversal of negative goodwill (Note 11) | | | 648 | | | | 648 | | | | 648 | | | | 692 | |
Gain (loss) on settlement of derivatives | | | (9,292 | ) | | | (1,415 | ) | | | 3 | | | | 3 | |
Loss on valuation of derivatives | | | (2,340 | ) | | | (216 | ) | | | — | | | | — | |
Dividend income | | | 301 | | | | 552 | | | | 306 | | | | 327 | |
Gain on restructuring of debt (Note 13) | | | — | | | | — | | | | 2,797 | | | | 2,989 | |
Donation | | | (19,647 | ) | | | (21,579 | ) | | | (16,136 | ) | | | (17,243 | ) |
Other bad debt expense | | | — | | | | — | | | | (1,236 | ) | | | (1,321 | ) |
Loss on cancellation of a lease | | | — | | | | (22,695 | ) | | | — | | | | — | |
Others | | | 23,978 | | | | 25,794 | | | | 24,505 | | | | 26,187 | |
| | | | | | | | | | | | | | | | |
| | | (257,935 | ) | | | (174,682 | ) | | | (149,988 | ) | | | (160,278 | ) |
| | | | | | | | | | | | | | | | |
INCOME BEFORE INCOME TAX EXPENSE | | | 602,132 | | | | 528,357 | | | | 275,081 | | | | 293,953 | |
INCOME TAX EXPENSE (Note 23) | | | 53,845 | | | | 115,549 | | | | 37,419 | | | | 39,986 | |
NEWLY INCLUDED SUBSIDIARIES’ NET LOSS BEFORE ACQUISITION | | | — | | | | — | | | | 12,820 | | | | 13,699 | |
| | | | | | | | | | | | | | | | |
NET INCOME (Note 30) | | (Won) | 548,287 | | | (Won) | 412,808 | | | (Won) | 250,482 | | | | 267,666 | |
| | | | | | | | | | | | | | | | |
Attributable to: | | | | | | | | | | | | | | | | |
Equity holders of the parent | | (Won) | 547,297 | | | (Won) | 412,001 | | | (Won) | 249,019 | | | $ | 266,103 | |
Minority interest | | | 990 | | | | 807 | | | | 1,463 | | | | 1,563 | |
| | | | | | | | | | | | | | | | |
| | (Won) | 548,287 | | | (Won) | 412,808 | | | (Won) | 250,482 | | | $ | 267,666 | |
| | | | | | | | | | | | | | | | |
NET INCOME PER SHARE (Note 24)(*) | | | | | | | | | | | | | | | | |
Basic and diluted net income per share (in Korean won) | | (Won) | 3,013 | | | (Won) | 2,049 | | | (Won) | 1,277 | | | $ | 1.365 | |
| | | | | | | | | | | | | | | | |
| (*) | Income per share attributable to the equity holders of the parent |
See accompanying notes to consolidated financial statements
F-49
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005, 2006 and 2007
| | | | | | | | | | | | | | | | |
| | | In millions of Korean won | | | In thousands
of U.S. dollars
(Note 2) | |
| | | 2005 | | | 2006 | | | 2007 | | | 2007 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | |
Net income | | (Won) | 548,287 | | | (Won) | 412,808 | | | (Won) | 250,482 | | | $ | 267,666 | |
Expenses not involving cash payments: | | | | | | | | | | | | | | | | |
Provision for severance indemnities | | | 15,085 | | | | 15,035 | | | | 20,845 | | | | 22,275 | |
Depreciation | | | 1,044,506 | | | | 1,045,521 | | | | 1,051,634 | | | | 1,123,781 | |
Amortization of intangible assets | | | 119,484 | | | | 128,263 | | | | 121,036 | | | | 129,340 | |
Bad debt expense | | | 54,375 | | | | 89,240 | | | | 47,346 | | | | 50,594 | |
Stock compensation | | | 5,160 | | | | 304 | | | | 56 | | | | 60 | |
Loss on valuation of inventories | | | 13,498 | | | | 24,231 | | | | 14,890 | | | | 15,912 | |
Loss on foreign currency translation, net | | | — | | | | — | | | | 558 | | | | 596 | |
Interest expense | | | 26,719 | | | | 25,099 | | | | 23,537 | | | | 25,152 | |
Loss on disposal of accounts receivable—trade | | | 12,511 | | | | 12,281 | | | | 409 | | | | 437 | |
Equity in loss of associates, net | | | — | | | | 2,505 | | | | 2,461 | | | | 2,630 | |
Loss on impairment of equity method investment securities | | | — | | | | — | | | | 3,238 | | | | 3,460 | |
Loss on impairment of long-term investment securities, net | | | 25,131 | | | | 586 | | | | 1,481 | | | | 1,583 | |
Loss on disposal of property and equipment, net | | | 58,502 | | | | 42,044 | | | | 43,529 | | | | 46,515 | |
Loss on impairment of property and equipment | | | 1,011 | | | | 1,133 | | | | 3,059 | | | | 3,269 | |
Loss on impairment of intangible assets | | | 3,762 | | | | 9,047 | | | | 3,698 | | | | 3,952 | |
Loss on settlement of derivatives | | | 9,292 | | | | 1,415 | | | | — | | | | — | |
Loss on valuation of derivatives | | | 2,340 | | | | 216 | | | | — | | | | — | |
Others | | | 5,656 | | | | 8,889 | | | | 12,171 | | | | 13,004 | |
| | | | | | | | | | | | | | | | |
Sub-total | | | 1,397,032 | | | | 1,405,809 | | | | 1,349,948 | | | | 1,442,560 | |
| | | | | | | | | | | | | | | | |
Income not involving cash receipts: | | | | | | | | | | | | | | | | |
Gain on foreign currency translation, net | | | 7,821 | | | | 1,824 | | | | — | | | | — | |
Equity in income of associates, net | | | 146 | | | | — | | | | — | | | | — | |
Gain on disposal of short-term investment securities, net | | | 8,713 | | | | 22,850 | | | | 4,585 | | | | 4,900 | |
Gain on disposal of long-term investment securities, net | | | 386 | | | | 139 | | | | 1,226 | | | | 1,310 | |
Gain on disposal of intangible assets, net | | | 108 | | | | 42 | | | | 154 | | | | 165 | |
Reversal of negative goodwill | | | 648 | | | | 648 | | | | 648 | | | | 692 | |
Gain on restructuring of debt (Note 13) | | | — | | | | — | | | | 2,797 | | | | 2,989 | |
Interest income (present value) | | | 2,828 | | | | — | | | | — | | | | — | |
Cancellation of stock options | | | 103 | | | | — | | | | — | | | | — | |
Others | | | 436 | | | | 15,425 | | | | 1,852 | | | | 1,979 | |
Newly included subsidiaries’ net income before acquisition (not involving cash receipts) | | | — | | | | — | | | | 12,156 | | | | 12,990 | |
| | | | | | | | | | | | | | | | |
Sub-total | | | (21,189 | ) | | | (40,928 | ) | | | (23,418 | ) | | | (25,025 | ) |
| | | | | | | | | | | | | | | | |
(Continued)
F-50
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows—(Continued)
For the Years Ended December 31, 2005, 2006 and 2007
| | | | | | | | | | | | |
| | | In millions of Korean won | | | In thousands
of U.S. dollars
(Note 2) | |
| | | 2005 | | | 2006 | | | 2007 | | | 2007 | |
Changes in assets and liabilities related to operating activities: | | | | | | | | | | | | |
Accounts receivable-trade | | 62,652 | | | 137,665 | | | 80,081 | | | 85,575 | |
Accounts receivable-other | | (14,395 | ) | | 27,640 | | | 33,510 | | | 35,809 | |
Prepaid expenses | | (1,405 | ) | | (1,489 | ) | | (2,091 | ) | | (2,235 | ) |
Inventories | | 22,437 | | | 67,427 | | | (47,247 | ) | | (50,488 | ) |
Deferred income tax assets | | (52,584 | ) | | 13,094 | | | (39,055 | ) | | (41,734 | ) |
Other current assets | | 6,042 | | | 553 | | | (1,201 | ) | | (1,283 | ) |
Long-term accounts receivable-trade | | 28,858 | | | 2,158 | | | 11,289 | | | 12,063 | |
Guarantee deposits | | (15,109 | ) | | 10,319 | | | (15,451 | ) | | (16,511 | ) |
Other non-current assets | | — | | | — | | | (3,683 | ) | | (3,936 | ) |
Accounts payable-trade | | (6,049 | ) | | (101,239 | ) | | (3,628 | ) | | (3,877 | ) |
Accounts payable-other | | 216,205 | | | 117,548 | | | (187,689 | ) | | (200,565 | ) |
Withholdings | | (22,573 | ) | | 89 | | | 19,665 | | | 21,014 | |
Accrued expenses | | (5,578 | ) | | (14,289 | ) | | 47,208 | | | 50,447 | |
Income taxes payable | | 67,772 | | | (50,098 | ) | | 229 | | | 245 | |
Other current liabilities | | 7,318 | | | (8,089 | ) | | (25,216 | ) | | (26,946 | ) |
Long-term guarantee deposits received | | — | | | 5,457 | | | (4,103 | ) | | (4,384 | ) |
Accrued provisions | | (2,743 | ) | | (8,960 | ) | | (16,526 | ) | | (17,660 | ) |
Other non-current liabilities | | 135 | | | (922 | ) | | 2,505 | | | 2,677 | |
Payment of severance indemnities | | (11,332 | ) | | (12,198 | ) | | (11,089 | ) | | (11,850 | ) |
| | | | | | | | | | | | |
Sub-total | | 279,651 | | | 184,666 | | | (162,492 | ) | | (173,639 | ) |
| | | | | | | | | | | | |
Net Cash Provided by Operating Activities | | 2,203,781 | | | 1,962,355 | | | 1,414,520 | | | 1,511,562 | |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
Cash inflows from investing activities: | | | | | | | | | | | | |
Disposal of short-term financial instruments | | 371,300 | | | 2,185,000 | | | 140,000 | | | 149,604 | |
Disposal of short-term investment securities | | 119,173 | | | 1,734,497 | | | 1,201,824 | | | 1,284,274 | |
Collection of short-term loans | | 24,332 | | | 19,287 | | | 9,908 | | | 10,588 | |
Disposal of long-term investment securities | | 1,151 | | | 1,195 | | | 1,656 | | | 1,770 | |
Disposal of equity method investment securities | | — | | | — | | | 1,949 | | | 2,083 | |
Collection of long-term loans | | 1,702 | | | 43 | | | — | | | — | |
Disposal of property and equipment | | 127,694 | | | 16,016 | | | 2,595 | | | 2,773 | |
Disposal of intangible assets | | 464 | | | 249 | | | 374 | | | 400 | |
Others | | 1,133 | | | 760 | | | — | | | — | |
| | | | | | | | | | | | |
Sub-total | | 646,949 | | | 3,957,047 | | | 1,358,306 | | | 1,451,492 | |
| | | | | | | | | | | | |
Cash outflows for investing activities: | | | | | | | | | | | | |
Acquisition of short-term financial instruments | | 801,300 | | | 1,845,500 | | | 50,948 | | | 54,443 | |
Acquisition of short-term investment securities | | 350,049 | | | 1,669,051 | | | 996,842 | | | 1,065,230 | |
Acquisition of long-term investment securities | | 2,237 | | | 1,521 | | | 1,288 | | | 1,376 | |
Acquisition of equity method investment securities | | 16,590 | | | 7,000 | | | 4,026 | | | 4,302 | |
Increase in long-term loans | | 13,527 | | | 9,556 | | | 22,818 | | | 24,384 | |
Acquisition of property and equipment | | 729,456 | | | 1,232,481 | | | 1,126,988 | | | 1,204,305 | |
Acquisition of intangible assets | | 28,974 | | | 40,324 | | | 32,014 | | | 34,210 | |
Others | | 13,742 | | | 26,166 | | | 255 | | | 272 | |
| | | | | | | | | | | | |
Sub-total | | (1,955,875 | ) | | (4,831,599 | ) | | (2,235,179 | ) | | (2,388,522 | ) |
| | | | | | | | | | | | |
Net Cash Used in Investing Activities | | (1,308,926 | ) | | (874,552 | ) | | (876,873 | ) | | (937,030 | ) |
| | | | | | | | | | | | |
(Continued)
F-51
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows—(Continued)
For the Years Ended December 31, 2005, 2006 and 2007
| | | | | | | | | | | | | | | | |
| | | In millions of Korean won | | | In thousands
of U.S. dollars
(Note 2) | |
| | | 2005 | | | 2006 | | | 2007 | | | 2007 | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | |
Cash inflows from financing activities: | | | | | | | | | | | | | | | | |
Increase in short-term borrowings | | | 230,787 | | | | 46,951 | | | | 28,300 | | | | 30,242 | |
Increase in long-term borrowings | | | 10,000 | | | | 20,000 | | | | — | | | | — | |
Proceeds from issuance of debentures | | | 199,297 | | | | — | | | | — | | | | — | |
Paid-in capital increase | | | 514,811 | | | | — | | | | — | | | | — | |
Disposal of treasury stock | | | 69,108 | | | | — | | | | — | | | | — | |
Others | | | 5,936 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Sub-total | | | 1,029,939 | | | | 66,951 | | | | 28,300 | | | | 30,242 | |
| | | | | | | | | | | | | | | | |
Cash outflows for financing activities: | | | | | | | | | | | | | | | | |
Takeover of accounts receivable-trade | | | — | | | | 200,000 | | | | — | | | | — | |
Repayment of short-term borrowings | | | 500,000 | | | | 27,398 | | | | 30,115 | | | | 32,181 | |
Repayment of current portion of long-term borrowings and debentures | | | 1,035,653 | | | | 340,280 | | | | 510,000 | | | | 544,988 | |
Acquisition of treasury stock | | | 13,368 | | | | 164,885 | | | | 94,071 | | | | 100,525 | |
Payment of dividends | | | 99,715 | | | | 120,688 | | | | 117,384 | | | | 125,437 | |
Capital transactions in consolidated entities | | | — | | | | — | | | | 1,152 | | | | 1,231 | |
Others | | | — | | | | 3,170 | | | | 90,000 | | | | 96,174 | |
| | | | | | | | | | | | | | | | |
Sub-total | | | (1,648,736 | ) | | | (856,421 | ) | | | (842,722 | ) | | | (900,536 | ) |
| | | | | | | | | | | | | | | | |
Net Cash Used in Financing Activities | | | (618,797 | ) | | | (789,470 | ) | | | (814,422 | ) | | | (870,294 | ) |
| | | | | | | | | | | | | | | | |
EFFECT OF CHANGES IN CONSOLIDATED ENTITIES | | | 601 | | | | (15,221 | ) | | | 16,536 | | | | 17,670 | |
| | | | | | | | | | | | | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 276,659 | | | | 283,112 | | | | (260,239 | ) | | | (278,092 | ) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR | | | 30,941 | | | | 307,600 | | | | 590,712 | | | | 631,237 | |
| | | | | | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS AT END OF THE YEAR (Note 28) | | (Won) | 307,600 | | | (Won) | 590,712 | | | (Won) | 330,473 | | | $ | 353,145 | |
| | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-52
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
For the Years Ended December 31, 2005, 2006 and 2007
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions of Korean won) | | Common
stock | | Capital
surplus | | | Capital
adjustments | | | Accumulated
other
comprehensive
income | | | Retained
earnings | | | Minority
interest | | | Total | |
Balance as of January 1, 2005 (as reported) | | (Won) | 955,702 | | (Won) | 1,324,536 | | | (Won) | (88,668 | ) | | (Won) | 4,965 | | | (Won) | 985,573 | | | (Won) | 8,041 | | | (Won) | 3,190,149 | |
Dividends | | | — | | | — | | | | — | | | | — | | | | (99,715 | ) | | | — | | | | (99,715 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retained earnings after appropriations | | | — | | | — | | | | — | | | | — | | | | 885,858 | | | | 8,041 | | | | 3,090,434 | |
Net income for the period | | | — | | | — | | | | — | | | | — | | | | 547,297 | | | | 990 | | | | 548,287 | |
Paid-in capital increase | | | 88,479 | | | 405,832 | | | | — | | | | — | | | | — | | | | — | | | | 494,311 | |
Changes in consolidated entities | | | — | | | 580 | | | | (65 | ) | | | — | | | | 158 | | | | 11,739 | | | | 12,412 | |
Retirement of treasury stock | | | — | | | — | | | | 13,366 | | | | — | | | | (13,366 | ) | | | — | | | | — | |
Loss on disposal of treasury stock | | | — | | | — | | | | (17,457 | ) | | | — | | | | — | | | | — | | | | (17,457 | ) |
Purchase of treasury stock | | | — | | | — | | | | (13,368 | ) | | | — | | | | — | | | | — | | | | (13,368 | ) |
Disposal of treasury stock | | | — | | | — | | | | 91,724 | | | | — | | | | — | | | | — | | | | 91,724 | |
Compensation expense resulting from stock options | | | — | | | — | | | | (103 | ) | | | — | | | | — | | | | — | | | | (103 | ) |
Changes in equity of affiliates | | | — | | | — | | | | — | | | | (14 | ) | | | — | | | | — | | | | (14 | ) |
Unrealized gain on valuation of available-for-sale securities | | | — | | | — | | | | — | | | | 1,204 | | | | — | | | | — | | | | 1,204 | |
Changes in minority interest | | | — | | | — | | | | — | | | | — | | | | — | | | | 17 | | | | 17 | |
Others | | | — | | | — | | | | — | | | | — | | | | (725 | ) | | | — | | | | (725 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2005 | | (Won) | 1,044,181 | | (Won) | 1,730,948 | | | (Won) | (14,571 | ) | | (Won) | 6,155 | | | (Won) | 1,419,222 | | | (Won) | 20,787 | | | (Won) | 4,206,722 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of January 1, 2006 (as reported) | | (Won) | 1,044,181 | | (Won) | 1,730,948 | | | (Won) | (14,571 | ) | | (Won) | 6,155 | | | (Won) | 1,419,222 | | | (Won) | 20,787 | | | (Won) | 4,206,722 | |
Dividends | | | — | | | — | | | | — | | | | — | | | | (120,688 | ) | | | — | | | | (120,688 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retained earnings after appropriations | | | — | | | — | | | | — | | | | — | | | | 1,298,534 | | | | 20,787 | | | | 4,086,034 | |
Changes in ownership interests in consolidated entities | | | — | | | (1,132 | ) | | | — | | | | — | | | | — | | | | (526 | ) | | | (1,658 | ) |
Paid-in capital increase | | | — | | | (3,171 | ) | | | — | | | | — | | | | — | | | | — | | | | (3,171 | ) |
Net income for the period | | | — | | | — | | | | — | | | | — | | | | 412,001 | | | | 807 | | | | 412,808 | |
Changes in consolidated entities | | | — | | | — | | | | — | | | | — | | | | — | | | | (10,038 | ) | | | (10,038 | ) |
Appropriation of loss on disposal of treasury stock | | | — | | | — | | | | 17,457 | | | | — | | | | (17,457 | ) | | | — | | | | — | |
Acquisition of treasury stock | | | — | | | — | | | | (164,885 | ) | | | — | | | | | | | | — | | | | (164,885 | ) |
Retirement of treasury stock | | | — | | | — | | | | 164,884 | | | | — | | | | (164,884 | ) | | | — | | | | — | |
Compensation expense resulting from stock options | | | — | | | — | | | | 303 | | | | — | | | | — | | | | — | | | | 303 | |
Unrealized gain on valuation of available-for-sale securities | | | — | | | — | | | | — | | | | 973 | | | | — | | | | — | | | | 973 | |
Changes in equity of associates | | | — | | | — | | | | — | | | | 43 | | | | — | | | | — | | | | 43 | |
Others | | | — | | | — | | | | — | | | | 24 | | | | (347 | ) | | | 65 | | | | (258 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2006 | | (Won) | 1,044,181 | | (Won) | 1,726,645 | | | (Won) | 3,188 | | | (Won) | 7,195 | | | (Won) | 1,527,847 | | | (Won) | 11,095 | | | (Won) | 4,320,151 | |
| | | | | | | | | | | | | | | | | | | | �� | | | | | | | |
(Continued)
F-53
KT FREETEL CO., LTD. AND SUBSIDIARIES
Consolidated Statements of Changes in Equity—(Continued)
For the Years Ended December 31, 2005, 2006 and 2007
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions of Korean won) | | Common
stock | | Capital
surplus | | | Capital
adjustments | | | Accumulated
other
comprehensive
income | | | Retained
earnings | | | Minority
interest | | | Total | |
Balance as of January 1, 2007 (as reported) | | (Won) | 1,044,181 | | (Won) | 1,726,645 | | | (Won) | 3,188 | | | (Won) | 7,195 | | | (Won) | 1,527,847 | | | (Won) | 11,095 | | | (Won) | 4,320,151 | |
Dividends | | | — | | | — | | | | — | | | | — | | | | (117,384 | ) | | | — | | | | (117,384 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retained earnings after appropriations | | | — | | | — | | | | — | | | | — | | | | 1,410,463 | | | | 11,095 | | | | 4,202,767 | |
Changes in ownership interests in consolidated entities | | | — | | | (1,152 | ) | | | — | | | | — | | | | — | | | | — | | | | (1,152 | ) |
Net income for the period | | | — | | | — | | | | — | | | | — | | | | 249,019 | | | | 1,463 | | | | 250,482 | |
Changes in consolidated entities | | | — | | | — | | | | — | | | | — | | | | — | | | | 17,129 | | | | 17,129 | |
Acquisition of treasury stock | | | — | | | — | | | | (94,071 | ) | | | — | | | | — | | | | — | | | | (94,071 | ) |
Retirement of treasury stock | | | — | | | — | | | | 94,071 | | | | — | | | | (94,071 | ) | | | — | | | | — | |
Compensation expense resulting from stock options | | | — | | | — | | | | (1,178 | ) | | | — | | | | — | | | | — | | | | (1,178 | ) |
Unrealized loss on valuation of available-for-sale securities | | | — | | | — | | | | — | | | | (1,514 | ) | | | — | | | | (17 | ) | | | (1,531 | ) |
Changes in equity of associates | | | — | | | — | | | | — | | | | 579 | | | | — | | | | — | | | | 579 | |
Others | | | — | | | — | | | | — | | | | (16 | ) | | | 370 | | | | — | | | | 354 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2007 | | (Won) | 1,044,181 | | (Won) | 1,725,493 | | | (Won) | 2,010 | | | (Won) | 6,244 | | | (Won) | 1,565,781 | | | (Won) | 29,670 | | | (Won) | 4,373,379 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
(In thousands of U.S. dollars) | | | |
Balance as of January 1, 2007 (as reported) | | $ | 1,115,816 | | $ | 1,845,100 | | | $ | 3,407 | | | $ | 7,689 | | | $ | 1,632,664 | | | $ | 11,856 | | | $ | 4,616,532 | |
Dividends | | | — | | | — | | | | — | | | | — | | | | (125,437 | ) | | | — | | | | (125,437 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retained earnings after appropriations | | | — | | | — | | | | — | | | | — | | | | 1,507,227 | | | | 11,856 | | | | 4,491,095 | |
Changes in ownership interests in consolidated entities | | | — | | | (1,231 | ) | | | — | | | | — | | | | — | | | | — | | | | (1,231 | ) |
Net income for the period | | | — | | | — | | | | — | | | | — | | | | 266,103 | | | | 1,563 | | | | 267,666 | |
Changes in consolidated entities | | | — | | | — | | | | — | | | | — | | | | — | | | | 18,305 | | | | 18,305 | |
Acquisition of treasury stock | | | — | | | — | | | | (100,525 | ) | | | — | | | | — | | | | — | | | | (100,525 | ) |
Retirement of treasury stock | | | — | | | — | | | | 100,525 | | | | — | | | | (100,525 | ) | | | — | | | | — | |
Compensation expense resulting from stock options | | | — | | | — | | | | (1,259 | ) | | | — | | | | — | | | | — | | | | (1,259 | ) |
Unrealized loss on valuation of available-for-sale securities | | | — | | | — | | | | — | | | | (1,618 | ) | | | — | | | | (18 | ) | | | (1,636 | ) |
Changes in equity of associates | | | — | | | — | | | | — | | | | 619 | | | | — | | | | — | | | | 619 | |
Others | | | — | | | — | | | | — | | | | (17 | ) | | | 395 | | | | — | | | | 378 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2007 | | $ | 1,115,816 | | $ | 1,843,869 | | | $ | 2,148 | | | $ | 6,673 | | | $ | 1,673,200 | | | $ | 31,706 | | | $ | 4,673,412 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements
F-54
KT FREETEL CO., LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2005, 2006 and 2007
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
a. Parent
KT Freetel Co., Ltd. (“KTF”) was incorporated on January 3, 1997, under the Commercial Code of the Republic of Korea, and listed on the Korean Securities Dealers Association Automated Quotation System (the “KOSDAQ”) in December 1999. On April 19, 2004, KTF transferred its listing from the KOSDAQ to the Korea Stock Exchange. KTF is currently engaged in providing personal communications service (“PCS”), value added services, and sale and lease of personal communication devices in Korea.
KTF’s shares as of December 31, 2007 are owned as follows:
| | | | |
| | | Number of shares | | Ownership
Percentage (%) |
KT Corporation (“KT”) | | 102,129,938 | | 52.99 |
NTT DoCoMo Inc. | | 20,176,309 | | 10.47 |
Prism Offshore Fund, Ltd. | | 5,063,030 | | 2.63 |
Qualcomm Incorporated | | 4,016,350 | | 2.08 |
MSCOP-Pledgee OF 12676 | | 2,241,287 | | 1.16 |
National Pension Service | | 2,014,142 | | 1.05 |
Microsoft Corp. | | 2,030,000 | | 1.05 |
Others | | 55,051,035 | | 28.57 |
| | | | |
Total | | 192,722,091 | | 100.00 |
| | | | |
b. Consolidated Subsidiaries
The consolidated financial statements include the accounts of KTF and its controlled subsidiaries (the “Company”) listed below. Generally, control is deemed to exist when the investor has more than 50 percent of the total outstanding voting stock or when the investor is the largest shareholder and owns more than 30 percent of the total outstanding voting stock. All inter-company accounts and transactions have been eliminated in consolidation.
| | | | | | | | | | | | |
Subsidiary | | Financial
year end | | Year of
obtaining
control | | Ownership percentage (%) | | Primary business |
| | | | 2005 | | 2006 | | 2007 | |
KTF Technologies Co., Ltd.
(“KTFT”)(*1) | | Dec.31 | | 2002 | | 73.05 | | 74.94 | | 74.94 | | Developing and manufacturing of PCS handsets |
PT. KTF Indonesia. (“KTF Indonesia”) | | Dec.31 | | 2004 | | 99.00 | | 99.00 | | 99.00 | | Providing PCS |
KTF Mhows Co., Ltd. (“KTF Mhows”) | | Dec.31 | | 2004 | | 51.00 | | 51.00 | | 51.00 | | Mobile advertisement |
KTF M&S Co., Ltd. (“KTF M&S”)(*2) | | Dec.31 | | 2007 | | — | | — | | 100.00 | | PCS distribution |
Bluecord Technology Corp. (“Bluecord Technology”)(*3) | | Dec.31 | | 2007 | | — | | — | | 35.28 | | Semiconductor and telecommunication equipment manufacture |
Doremi Media Co., Ltd. (“Doremi Media”)(*4) | | Dec.31 | | 2007 | | — | | — | | 64.24 | | Recording device and music disc manufacture |
F-55
| (*1) | On November 30, 2002, KTF exercised the conversion right of convertible bonds at (Won)5,000 per share to acquire an additional 400,000 shares of common stock of KTFT. The acquisition of KTFT was recorded in accordance with the purchase method of accounting. As a result of this acquisition, KTF recorded negative goodwill of (Won)3,258 million for the fair value of KTFT’s net assets in excess of the acquisition cost. Negative goodwill is recognized as income on a systematic basis over the remaining weighted average useful life (5 years) of the identifiable acquired depreciable or amortizable assets. |
On June 17, 2004, September 30, 2005 and March 23, 2006, KTF acquired KTFT’s minority interest, which represents the subsidiary’s outstanding common stocks of 13.35 percent, 2.30% and 1.88%, respectively. As a result of these acquisitions, KTF recorded the excess of the acquisition cost over the book value of KTFT’s net assets to capital surplus of (Won)953 million in 2004 and the excess of the book value of KTFT’s net assets over the acquisition costs to capital surplus of (Won)580 million in 2005 and the excess of the acquisition cost over the book value of KTFT’s net assets to capital surplus of (Won)1,132 million in 2006.
| (*2) | In January 2007, KTF M&S was incorporated as a wholly owned subsidiary of KTF. |
| (*3) | On December 26, 2007, KTF acquired 35.28% ownership interest of Bluecord Technology. As a result of this acquisition, KTF recorded goodwill of (Won)11,206 million for the acquisition cost of Bluecord Technology’s net assets in excess of the fair value. |
| (*4) | Doremi Media is owned 64.24% by Bluecord Technology. |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Financial Statement Presentation
The Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. To conform more closely to presentations customary in filings with the Securities and Exchange Commission of the United States of America, the accompanying consolidated financial statements have been restructured and translated into English for the convenience of the readers of financial statements. Certain supplementary information included in the statutory Korean language consolidated financial statements, not required for a fair presentation of the Company and its subsidiaries’ financial position or result of operations, is not presented in the accompanying consolidated financial statements.
b. Adoption of Statements of Korea Accounting Standards (“SKAS”)
Through December 31, 2007, the Korea Accounting Standards Board (“KASB”) has issued SKAS No. 1 through No. 25 to revise the previous Financial Accounting Standards. Among these statements, SKAS No. 1 through No. 20 (excluding No. 11) should be applied in the prior periods whereas SKAS No. 11 and No. 21 through No. 25 shall be applied from the current period. Application of these SKAS’s has no material impact on the Company’s consolidated financial statements for the current period.
F-56
Summary of major changes from the application of new SKAS’s during the current period are as follows:
| | |
SKAS | | Summary of major changes |
No. 11 “Discontinuing Operations” | | • Present income (loss) from discontinuing operations and continuing operations separately on the face of the income statement. • Disclose the details of discontinuing operations in the notes to the financial statements of the period in which the initial disclosure event of a discontinuing operation occurs. • Reclassify into income (loss) from discontinuing operations in the comparative financial statements of the period in which an initial disclosure event occurs any income or loss that arose in the prior period(s) from the discontinuing operation. |
| |
No. 21 “Preparation and Presentation of Financial Statements I” | | • Separate previous investment assets into investment assets and other non-current assets. • Separate previous capital adjustments into capital adjustments and accumulated other comprehensive income (loss). • Include statement of changes in equity in the set of financial statements. • Disclose the details of comprehensive income in the notes. |
| |
No. 22 “Share-based Payment” | | • Record compensation cost for stock appreciation right settled by treasury stock in equity. • Provide detail guidelines about vesting conditions. • Do not allow measurement by intrinsic value for cash settled share-based payment (except for non-public companies). • Do not re-measure share-based payment transactions previously granted upon initial public offerings (IPO). |
| |
No. 23 “Earnings Per Share” | | • Do not require non-public companies (except for those in the process of IPO) to disclose earnings per share (under the previous Interpretation, only dilutive earnings per share could be omitted). • Clarify calculation methods for basic earnings per share and outstanding average common stock. • Present earnings per share on the face of the income statement. |
| |
No. 25 “Consolidated Financial Statements” | | • Present negative minority interest as a deductive item in equity. • Present income (loss) attributable to equity holders of the parent and minority interest separately on the face of the income statement. |
In addition, any additional income taxes and tax refunds attributable to prior periods are included in income tax expense for the current period in accordance with the amendment of SKAS No. 16 “Income Taxes”.
Such adoptions of new SKASs and amendments to SKASs did not have an effect on the net assets as of December 31, 2006 and 2007 and net income of the Company for each of the three years in the period ended December 31, 2007. The changes of accounting are retroactively applied in the accompanying consolidated financial statements for the prior periods in accordance with SKAS No. 21 and SKAS No. 16.
F-57
c. Cash and Cash Equivalents
Cash and cash equivalents includes cash, substitute securities including checks issued by others, and checking accounts, ordinary deposits and financial instruments, which can be easily converted into cash and whose value changes due to changes in interest rates are not material, with maturities (or date of redemption) of three months or less upon acquisition.
d. Allowance for Doubtful Accounts
An allowance for doubtful accounts is provided based on the estimated loss on uncollectible accounts and historical bad debt experience. Changes in the allowance for doubtful accounts receivable-trade, accounts receivable-other and others for each of the three years in the period ended December 31, 2005, 2006 and 2007 are summarized as follows (in millions of Korea won):
| | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | |
Balance at beginning of the year | | (Won) | 143,138 | | | (Won) | 158,332 | | | (Won) | 224,470 | |
Write-offs | | | (39,181 | ) | | | (23,102 | ) | | | (31,840 | ) |
Provision | | | 54,375 | | | | 89,240 | | | | 48,582 | |
| | | | | | | | | | | | |
Balance at end of the year | | (Won) | 158,332 | | | (Won) | 224,470 | | | (Won) | 241,212 | |
| | | | | | | | | | | | |
e. Inventories
Inventories, which consist mainly of supplies for telecommunication facilities and PCS handsets for sales, are stated at the acquisition cost, with cost determined using the moving average method. The Company maintains perpetual inventory system, which is adjusted to physical inventory counts performed at year end. When the market value of inventories (net realizable value for merchandise and current replacement cost for supplies) is less than the carrying value, carrying value is stated at the lower of cost or market. The Company applies the lower of cost or market method by group of inventories and loss on inventory valuation is presented as a deduction from inventories and charged to operating expenses. However, when the circumstances that previously caused inventories to be written down below cost no longer exist and the new market value of inventories subsequently recovers, the valuation loss is reversed to the extent of the original valuation loss and the reversal is deducted from operating expenses. The Company recorded loss on inventory valuation totaling (Won)13,498 million, (Won)24,231 million and (Won)14,890 million for the years ended December 31, 2005, 2006 and 2007, respectively.
f. Securities (excluding the equity method investment securities)
Debt and equity securities are initially stated at the market value of consideration given for acquisition (market value of securities acquired if market value of consideration given is not available) plus incidental costs attributable to the acquisition of the securities and are classified into trading, available-for-sale and held-to-maturity securities depending on the purpose and nature of acquisition. Trading securities are presented as short-term investments while available-for-sale securities and held-to-maturity securities are presented as short-term investments or long-term investment securities depending on their nature in the balance sheet. The moving average method for equity securities and the specific identification method for debt securities are used to determine the cost of securities for the calculation of gain (loss) on disposal of those securities.
—Trading securities
Securities that are bought and held principally for the purpose of selling them in the near term with active and frequent buying and selling, including securities which consist of a portfolio of securities with the clear objective of generating profits on short-term differences in price, are classified
F-58
as trading securities. Trading securities are recorded at their fair value and unrealized gains or losses from trading securities are recorded as gain (loss) on valuation of trading securities included in the non-operating revenues (expenses).
—Held-to-maturity securities
Debt securities that have fixed or determinable payments with a fixed maturity are classified as held-to-maturity securities only if the Company has both the positive intent and ability to hold those securities to maturity. However, debt securities, whose maturity dates are due within one year from the balance sheet date are classified as current assets.
After initial recognition, held-to-maturity securities are stated at amortized cost in the balance sheet. When held-to-maturity securities are measured at amortized costs, the difference between their acquisition cost and face value is amortized using the effective interest rate method and the amortization is included in the cost and interest income.
When the possibility of not being able to collect the principal and interest of held-to-maturity securities according to the terms of the contracts is highly likely, the difference between the recoverable amount (the present value of expected cash flows using the effective interest rate upon acquisition of the securities) and book value are recorded as loss on impairment of held-to-maturity securities included in the non-operating expenses and the held-to-maturity securities are stated at the recoverable amount after impairment loss. If the value of impaired securities subsequently recovers and the recovery can be objectively related to an event occurring after the impairment loss was recognized, the reversal of impairment loss are recorded as reversal of impairment loss on held-to-maturity securities included in non-operating revenues. However, the resulting carrying amount after the reversal of impairment loss shall not exceed the amortized cost that would have been measured, at the date of the reversal, if no impairment loss were recognized.
—Available-for-sale securities
Debt and equity securities that do not fall under the classifications of trading or held-to-maturity securities are categorized and presented as available-for-sale securities included in investment assets. However, if an available-for-sale security matures or it is certain that such security will be disposed of within one year from the balance sheet date, it is classified as a current asset.
Available-for-sale securities are recorded at fair value. Unrealized gain or loss from available-for-sale securities are presented as gain or loss on valuation of available-for-sale securities included in accumulated other comprehensive income of stockholders’ equity. In addition, accumulated gain or loss on valuation of available-for-sale securities are reflected in either gain or loss on disposal of available-for-sale securities or loss on impairment of available-for-sale securities upon disposal or recognition of impairment of the securities. However, available-for-sale equity securities that are not marketable and whose fair value cannot be reliably measured are recorded at acquisition cost.
When there is objective evidence that the available-for-sale securities are impaired and the recoverable amount is lower than the cost (amortized cost for debt securities) of the available-for-sale securities, an impairment loss is recognized as loss on impairment of available-for-sale securities of non-operating expenses and the related unrealized gain or loss remaining in equity is adjusted to the impairment loss. If the value of impaired securities subsequently recovers and the recovery can be objectively related to an event occurring after the impairment loss was recognized, the reversal of impairment loss can be recognized up to the previously recorded impairment loss as a reversal of loss on impairment of available-for-sale securities included in non-operating revenues. However, if the fair value increases after the impairment loss is recognized but does not relate to the recovery of impairment loss as described above, the increase in fair value is recorded in equity.
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g. Equity Method Investment Securities
Investments in equity securities of companies, over which the Company exercises significant influence, are reported using the equity method of accounting.
—Accounting for changes in the equity of the investee
Under the equity method of accounting, the Company records changes in its proportionate equity of the net assets of the investee depending on the nature of the underlying changes in the investee as follows; (i) “equity in income (loss) of associates” in the non-operating revenues (expense) for net income (loss) of the investee; (ii) “increase (decrease) in retained earnings of associates” in the retained earnings for changes in beginning retained earnings of the investee; (iii) “increase (decrease) in equity of associates” in the accumulated other comprehensive income (loss) for other changes in equity of the investee.
When the equity method investee’s unappropriated retained earnings carried over from prior period changes due to significant error corrections, the Company records the changes in equity as “equity in income (loss) of associates” included in the non-operating revenues (expenses) unless the impact of the changes on the Company’s consolidated financial statements is significant. If the changes results from the changes in accounting policies of the equity method investee, they are reflected in the unappropriated retained earnings carried over from prior period in accordance with Statement of Korea Accounting Standards (“SKAS”) on changes in accounting policy and errors corrections. When the investee declares cash dividends, the dividends to be received are deducted directly from equity method investment securities.
—Treatment of investment difference
Difference between the acquisition cost and the Company’s proportionate equity in the fair value of net assets of the investee upon acquisition (“Investment difference”) are considered as (negative) goodwill and accounted for in accordance with accounting standards for business combination. The goodwill portion which is amortized over useful lives (5 years) on a straight line method and the negative goodwill portion which is amortized over the weighted average useful lives of depreciable non-monetary assets of the investee are included in “equity in income (loss) of associates”.
When the Company’s equity interest in the investee increases due to an increase (or decrease) in contributed capital with (or without) consideration, the changes in the Company’s proportionate equity in the investee is accounted for as investment difference. If the Company’s equity interest decreases, the changes are accounted for as “gain (loss) on disposal of the equity method investment securities”.
—Difference between the fair value and book value of net assets of the investee
Upon acquisition of the equity method investment securities, the Company’s proportionate shares in the differences between the fair values and book values of the identifiable assets and liabilities of the investee are amortized/reversed and included in “equity in income (loss) of associates” in accordance with the investee’s methods of accounting for the assets and liabilities.
—Elimination of unrealized gain or loss from intercompany transactions
The Company’s proportionate share in the gain (loss) arising from transactions between the Company and the investee, which remains in the book value of assets held as of balance sheet date is considered unrealized gain (loss) and adjusted to equity method investment securities.
—Impairment loss on equity method investment securities
When there is objective evidence that the equity method investment securities are impaired and the recoverable amount is lower than the carrying amount of the equity method investment securities,
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an impairment loss is recognized as “loss on impairment of equity method investment securities” included in non-operating expenses and shall first reduce the unamortized investment difference, if any. When the recoverable amount is recovered after the recognition of impairment loss, the reversal of impairment loss can be recognized as income up to the previously recorded impairment loss. The book value of the equity method investment securities after the reversal of the impairment loss cannot exceed the book value calculated as if the impairment loss had not been originally recognized. The reversal of the impairment loss recognized against the unamortized investment difference is not allowed.
—Translation of financial statements of overseas investees
For overseas investees whose financial statements are prepared in foreign currencies, the equity method of accounting is applied after assets and liabilities are translated in accordance with the accounting treatments for the translation of the financial statements of overseas’ subsidiaries for consolidated financial statements. The Company’s proportionate share of the difference between assets net of liabilities and equity after translation into Korean won is accounted for as “increase (decrease) in equity of associates” included in the accumulated other comprehensive income (loss).
h. Property and Equipment
Property and equipment are stated at cost (acquisition cost or manufacturing cost plus expenditures directly related to preparing the asset ready for use). Expenditures after acquisition or completion that increase future economic benefit in excess of the most recently assessed capability level of the asset are capitalized; other expenditures are charged to expense as incurred.
Interest expense, discount and other financial charges, including certain foreign exchange translation gains and losses on borrowings associated with the manufacture, purchase, or construction of property and equipment, incurred prior to the completion of the acquisition, were capitalized until the year ended December 31, 2002, and are no longer capitalized commencing from January 1, 2003 as allowed by SKAS No. 7.
Depreciation is computed by the straight-line method based on the following useful lives of the related units of property and equipment and the accumulated depreciation and impairment are directly deducted from the related assets.
| | |
| | | Useful lives (years) |
Buildings and structures | | 15~30 |
Machinery and equipment | | 5~8 |
Vehicles | | 4~8 |
Other | | 2~8 |
When the expected future cash flow from use or disposal of the property and equipment is lower than the carrying amount due to obsolescence, physical damage and other, the carrying amount is adjusted to the recoverable amount (the higher of net sales price or value in use) and the difference is recognized as an impairment loss. The Company recorded loss on impairment of property and equipment totaling (Won)1,011 million, (Won)1,133 million and (Won)3,059 million for the years ended December 31, 2005, 2006 and 2007, respectively.
i. Intangible Assets
Intangible assets are initially recognized at acquisition cost (purchase cost plus expenditures directly related to preparing the asset ready for use) and subsequently presented at amortized cost using the straight-line method, with amortization beginning when the asset is available for use.
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Intangible assets are amortized based on the following useful lives:
| | |
| | | Useful lives (years) |
Intellectual property rights | | 5~10 |
Facility usage rights | | 10~20 |
Frequency usage rights | | 13 |
Development cost | | 2 |
Other intangible assets | | 5 |
When the recoverable amount (the higher of net sales price or value in use) of intangible assets is significantly lower than the carrying amount due to obsolescence, and other, the difference is recognized as an impairment loss. When the recoverable amount subsequently exceeds the carrying amount of the impaired asset, the excess is recorded as a reversal of impairment loss to the extent that the reversed asset does not exceed the carrying amount before previous impairment as adjusted by amortization. The Company recorded loss on impairment of intangible assets totaling (Won)3,762 million, (Won)9,047 million and (Won)3,698 million for the years ended December 31, 2005, 2006 and 2007, respectively.
j. Present Value Discount for Assets and Liabilities
Receivables or payables from long-term installment transactions, long-term loans/borrowings or the other similar transactions are stated at present value which is determined by discounting total amounts receivable or payable in the future using the effective interest rate, if the nominal value is significantly different from the present value. The discount or premium resulting from the determination of present value should be reported in the balance sheet as a direct deduction from or addition to the nominal value of the related receivables or payables and the amortization by the effective interest rate method is included in the period income (loss).
k. Translation of Assets and Liabilities Denominated in Foreign Currency
Transactions denominated in foreign currencies are recorded in Korean won translated at the exchange rate prevailing on the transaction date and the resulting gain (loss) from foreign currency transactions is included in non-operating revenues (expenses). Monetary assets and liabilities denominated in foreign currency are translated into Korean won at the Base Rates announced by Seoul Money Brokerage Services, Ltd. on the balance sheet dates, which were, for U.S. dollars, (Won)1,013.0: USD 1, (Won)929.6: USD 1 and (Won)938.2: USD 1 at December 31, 2005, 2006 and 2007, respectively, and the resulting gain (loss) from foreign currency translation is included in non-operating revenues (expenses).
l. Discount on debenture
Discounts on debentures are amortized over the redemption period of the debentures using the effective interest rate method. Amortization of discounts is recognized as interest expense.
m. Provisions for Severance Indemnities
All employees with more than one year of service are entitled to receive a lump-sum payment upon termination of their employment with the Company, based on their length of service and rate of pay at the time of termination. The accrual for severance indemnities is computed as if all employees were to terminate at the balance sheet dates and amounted to (Won)44,365 million and (Won)53,994 million as of December 31, 2006 and 2007, respectively.
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Changes in accrued severance indemnities for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | |
Beginning of the year | | (Won) | 37,517 | | | (Won) | 41,465 | | | (Won) | 44,365 | |
Severance payments | | | (11,332 | ) | | | (12,198 | ) | | | (11,089 | ) |
Provision | | | 15,754 | | | | 15,925 | | | | 21,734 | |
Other changes | | | (474 | ) | | | (827 | ) | | | (1,016 | ) |
| | | | | | | | | | | | |
End of the year | | (Won) | 41,465 | | | (Won) | 44,365 | | | (Won) | 53,994 | |
| | | | | | | | | | | | |
n. Provisions
The Company recognizes a provision for a liability with uncertain timing or amount when (1) there is a present obligation of the Company arising from past events, (2) it is highly likely that an outflow of resources will be required to settle the obligation, and (3) the amount for the settlement of the obligation can be reliably measurable.
o. Derivative Instruments
The Company records rights and obligations arising from derivative instruments in assets and liabilities, which are stated at fair value. Gains and losses that result from the changes in the fair value of derivative instruments are recognized in current earnings. However, for derivative instruments that cash flow hedge accounting applies to, the effective portion of the gain or loss on the derivatives instruments are recorded as gain (loss) on valuation of derivatives included in the accumulated other comprehensive income (loss).
p. Share-based Payment
The Company’s share-based payment transactions are accounted for in accordance with SKAS No.22 “Share-based Payment” which is effective from fiscal year beginning on or after December 31, 2006. As allowed in the transition clause of SKAS No. 22, for employee stock options granted before January 1, 2007, the Company accounts for them in accordance with Interpretation No. 39-35 “Accounting for Stock Options”.
(i) Stock options
The Company has granted stock options to its executive officers and directors prior to January 1, 2007, and for equity-settled stock options, the Company records compensation expenses which are allocated over the period in which the options vest with the corresponding credit to the stock options of the capital adjustments. When the options are exercised with the issuance of new shares, the difference between the exercise price plus the stock option cost recorded in the capital adjustments account and the par value of the new shares issued, is recorded as additional paid-in capital. In the event the Company grants stock options based on cash-settled share-based payment, the Company records compensation expenses which are allocated over the period in which the options vest with the corresponding liability recorded.
When stock options are forfeited because the specified vesting requirements are not satisfied, previously recognized compensation costs are reversed to earnings and the corresponding capital adjustments or liabilities are reversed as well. When stock options expire unexercised, previously recognized compensation costs and corresponding capital adjustments are reversed to capital surplus.
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(ii) Other share-based payments
Other share-based payments granted on or after January 1, 2007 are measured as below:
For equity-settled share-based payment transactions, the Company measures the goods or services received, and the corresponding increase in equity (capital adjustments), directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the Company measures the value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.
For cash-settled share-based payment transactions, the Company measures the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the Company re-measures the fair value of the liability at each reporting date and at the date of settlement, with any changes in value recognized in profit or loss for the period.
For share-based payment transactions in which the terms of the arrangement provide either the Company or the supplier of goods or services with a choice of whether the Company settles the transaction in cash or by issuing equity instruments, the Company is required to account for that transaction, or the components of that transaction, as a cash-settled share-based payment transaction if, and to the extent that, the Company has incurred a liability to settle in cash (or other assets), or as an equity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred.
q. Accounting for Leases
A lease is classified as a finance lease or an operating lease depending on the extent of transfer to the Company of the risks and rewards incidental to ownership. If a lease meets any one of the following criteria, it is accounted for as a finance lease:
| | • | | The lease transfers ownership of the asset to the lessee by the end of the lease term; |
| | • | | The lessee has the option to purchase the asset at a bargain price and it is certain that the option will be exercised; |
| | • | | The lease term is for the major part (75% or more) of the economic life of the asset even if title is not transferred; |
| | • | | At the date of lease commencement the present value of the minimum lease payments amounts to at least substantially all (90% or more) of the fair value of the leased asset; or |
| | • | | The leased assets are of such a specialized nature that only the Company can use them without major modifications. |
All other leases are treated as operating leases.
For operating leases, lease payments excluding guaranteed residual value are recognized as an expense on a straight-line basis over the lease term and contingent rent is expensed as incurred. Finance leases are recognized as assets and liabilities at the lower of fair value of the leased property or the present value of the minimum lease payments discounted using the implicit interest rate of the lessor (or the Company’s incremental borrowing rate if the implicit interest rate is not practicable to determine). Any initial direct costs incurred by the Company are added to the amount recognized as an asset. The depreciation policy for depreciable leased assets is consistent with that for the similar depreciable assets that are owned by the Company. Annual minimum lease payments excluding guaranteed residual value is allocated to interest expense, which is calculated using the effective interest rate, and finance lease repayment amount. Contingent rent relating to finance are charged as expenses in the periods in which they are incurred, however, if the amount is material it is allocated to principal and interest, respectively, over the remaining lease term.
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r. Revenue Recognition
The Company’s revenues are principally derived from sales of PCS handsets and PCS service revenues, which consist of non-refundable activation fees, fixed monthly access fees and usage charges. The Company recognizes sales on PCS handsets when these are delivered to the dealers, fixed monthly access fees in the period of service, and usage charges and non-refundable activation fees at the time services are rendered. Each revenue element sold by the Company has its own standalone value to the customer, objective and reliable evidence of fair value, and the delivery or performance of related undelivered item(s), if any, is considered probable and substantially in the control of the Company.
In addition, the Company provides handset subsidies, call bonus mileages and warranties on PCS handsets, none of which cause deferral of revenue as such items are accounted for separately as described in Note 2 and Note 16
The Company recognizes sales revenues on a gross basis when the Company is the primary obligor in the transactions with customers and if the Company merely acts as an agent for the buyer or seller from whom it earns a commission, then the sales revenues are recognized on a net basis.
s. Payment of a Handset Subsidy to Mobile Phone Users
According to the revised provisions of the Telecommunications Business Law (“TBL”), the Company is allowed to provide a one time handset subsidy to eligible mobile phone users within the next two years from March 27, 2006 to March 26, 2008. Pursuant to the TBL, the Company may establish its subsidy policy regarding the eligibility criteria and amount of payment. Consistent with the TBL, the Company provides a subsidy for mobile phone users who have subscribed to the Company’s service or any other mobile carriers for 18 consecutive months. Moreover, the Company has the right to discontinue the payment depending on marketing strategies, if necessary. However, the Company is required to report changes in the service agreement, should they take place, to the Ministry of Information and Communication within 30 days of the effective date.
t. Income Taxes
When the Company recognizes deferred income tax assets or liabilities for the temporary differences between the carrying amount of an asset and liability and tax base, a deferred income tax liability for taxable temporary difference is fully recognized except to the extent in accordance with income tax related SKAS while a deferred tax asset for deductible temporary difference is recognized to the extent that it is almost certain that taxable profit will be available against which the deductible temporary difference can be utilized. Deferred income tax asset (liability) is classified as current or non-current asset (liability) depending on the classification of related asset (liability) in the balance sheet. Deferred income tax asset (liability) which does not relate to specific asset (liability) account in the balance sheet such as deferred income tax asset recognized for tax loss carry forwards is classified as current or non-current asset (liability) depending on the expected reversal period. Deferred income tax assets and liabilities in the same tax jurisdiction and in the same current or non-current classification are presented on a net basis. Current and deferred income tax expense are included in income tax expense in the statement of operations and additional income taxes or tax refunds for the prior periods are included in income tax expense for the current period when recognized. However, income taxes resulting from transactions or events, which were directly recognized in stockholders’ equity in current or prior periods, or business combinations are directly adjusted to equity account or goodwill (or negative goodwill).
u. Use of Estimates
The Company’s management uses reasonable estimates and assumptions in preparing the accompanying consolidated financial statements in accordance with accounting principles generally
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accepted in the Republic of Korea. The estimates and assumptions can change according to additional experiences, changes in circumstances, new information and other and may be different from actual results.
v. Elimination of Inter-Company Unrealized Gain/Loss
Unrealized gains and losses included in the inventories, property and equipment and other which were acquired by transactions amongst KTF and subsidiaries are fully eliminated using the gross margin ratio of the transactions and the gains and losses on disposal.
w. Translation of Overseas Subsidiaries’ Financial Statements
For overseas subsidiaries whose financial statements are prepared in foreign currencies, assets and liabilities are translated at the exchange rate at the consolidated balance sheet date and statement of income items are translated at the average exchange rate for the respective fiscal period. Net translation adjustments are recorded as gain (loss) on translation of foreign operations included in the accumulated other comprehensive income.
x. Changes in Consolidated Entities
For the year ended December 31, 2007, KTF M&S, Bluecord Technology, Doremi Media were newly acquired in 2007 and included in the consolidation.
In addition, when a subsidiary is acquired during the year, it is presented in the consolidated statements of income as though it had been acquired at the beginning of the year, and its earning (loss) prior to acquisition is separately presented as a deductive (additive) line item in the consolidated statements of income.
y. Basis of Translating Consolidated Financial Statements
The consolidated financial statements are expressed in Korean won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 2007, have been translated into U.S. dollars at the rate of (Won)935.8 to USD 1, the noon buying rate in the City of New York for cable transfers in Korean won as certified for customs purposes by the Federal Reserve Bank of New York on the last business day of the year ended December 31, 2007. The translation should not be construed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any other rate.
z. Reclassifications of Prior Period Financial Statements
Certain reclassifications have been made in prior period financial statements to conform to classifications used in the current period. Such reclassifications did not have an effect on the net assets of the Company as of December 31, 2006, or net income of the Company for the years ended December 31, 2005 and 2006.
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3. RESTRICTED DEPOSITS
Details of restricted deposits as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | | | | | |
| | | Financial institutions | | 2006 | | 2007 | | Description |
Short-term financial instruments | | Korea Securities Financial Corp. | | (Won)
| —
| | (Won)
| 277
| | Collateral for loan to employees |
| | Shinhan Bank | | | — | | | 835 | | Collateral for borrowings |
| | | | | | | | | | |
| | | | | — | | | 1,112 | | |
| | | | | | | | | | |
Short-term investment securities | | Korea Post Office | |
| —
| |
| 50
| | Collateral for buying PCS from Samsung Electronics Co., Ltd. |
Long-term financial instruments | | Shinhan Bank and Others | |
| 20
| |
| 22
| | Checking account deposit |
| | | | | | | | | | |
Total | | (Won) | 20 | | (Won) | 1,184 | | |
| | | | | | | | | | |
4. DISPOSAL OF ACCOUNTS RECEIVABLE-TRADE
On December 19, 2003, the Company transferred PCS service accounts receivable-trade with a total balance of (Won)253,247 million as of October 31, 2003 to Shinhan Bank Trust. The Company received (Won)200,000 million of cash and (Won)53,247 million of beneficiary certificates as a result of transferring such PCS service accounts receivable-trade, for which the outstanding balance is revolved on a continuous basis through February 28, 2007 with Shinhan Bank Trust. In connection with revolving the outstanding balance of PCS service accounts receivable-trade, the Company recognized a “loss on disposal of accounts receivable-trade” of (Won)11,862 million, and (Won)10,881 million for the years ended December 31, 2005 and 2006, respectively. On December 21, 2006, call option on Asset Based Securitization (“ABS”) was exercised.
5. INVENTORIES
Inventory valuations as of December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
| | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | | 2007 | |
| | | Cost | | Lower of
cost or
market value | | Valuation
allowance | | | Cost | | Lower of
cost or
market value | | Valuation
allowance | |
Merchandise | | (Won) | 145,972 | | (Won) | 117,922 | | (Won) | (28,050 | ) | | (Won) | 164,173 | | (Won) | 152,974 | | (Won) | (11,199 | ) |
Supply | | | 3,442 | | | 2,895 | | | (547 | ) | | | 1,170 | | | 520 | | | (650 | ) |
Raw material | | | 9,206 | | | 8,717 | | | (489 | ) | | | 8,785 | | | 8,642 | | | (143 | ) |
Other | | | 629 | | | 629 | | | — | | | | 573 | | | 573 | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | (Won) | 159,249 | | (Won) | 130,163 | | (Won) | (29,086 | ) | | (Won) | 174,701 | | (Won) | 162,709 | | (Won) | (11,992 | ) |
| | | | | | | | | | | | | | | | | | | | |
6. SECURITIES
Securities as of December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
| | | | | | | | |
| | | | | 2006 | | 2007 |
Short-term investment securities | | Available-for-sale securities | | (Won) | 202,544 | | (Won) | 3,861 |
Long-term investment securities | | Available-for-sale securities | | | 29,882 | | | 27,553 |
| | Held-to-maturity securities | | | — | | | 60 |
| | | | | | | | |
| | | | | 29,882 | | | 27,613 |
Total | | (Won) | 232,426 | | (Won) | 31,474 |
| | | | | | | | |
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Short-term investment securities
| | | | | | | | | |
| | | 2006 |
| | | Acquisition cost | | Fair value | | Unrealized gains |
Beneficiary certificates | | (Won) | 200,503 | | (Won) | 202,005 | | (Won) | 1,502 |
Debt securities | | | 539 | | | 539 | | | — |
| | | | | | | | | |
Total | | (Won) | 201,042 | | (Won) | 202,544 | | (Won) | 1,502 |
| | | | | | | | | |
| |
| | | 2007 |
| | | Acquisition cost | | Fair value | | Unrealized gains |
Beneficiary certificates | | (Won) | 503 | | (Won) | 881 | | (Won) | 378 |
Equity securities | | | 200 | | | 2,091 | | | 1,891 |
Debt securities | | | 889 | | | 889 | | | — |
| | | | | | | | | |
Total | | (Won) | 1,592 | | (Won) | 3,861 | | (Won) | 2,269 |
| | | | | | | | | |
Available-for-sale securities (long-term investment securities)
| | | | | | | | | | | | | | | | |
| | | 2006 | |
Equity securities | | Percentage
of ownership | | | Acquisition
cost | | Fair value or
net book
value | | Book value | | Unrealized
gains (losses)(*1) | |
Listed equity securities: | | | | | | | | | | | | | | | | |
Zakang Inc. | | 0.04 | % | | (Won) | 300 | | (Won) | 13 | | (Won) | 13 | | (Won) | (287 | ) |
GaeaSoft Corp. | | 2.01 | % | | | 533 | | | 1,084 | | | 1,084 | | | 551 | |
KRTnet Corp. | | 7.39 | % | | | 1,954 | | | 4,200 | | | 4,200 | | | 2,246 | |
Geotel Corp. | | 7.83 | % | | | 262 | | | 2,970 | | | 2,970 | | | 2,707 | |
PT. Mobile-8 Telecom | | 2.30 | % | | | 10,069 | | | 13,323 | | | 13,323 | | | 3,255 | |
| | | | | | | | | | | | | | | | |
Sub total | | | | | | 13,118 | | | 21,590 | | | 21,590 | | | 8,472 | |
| | | | | | | | | | | | | | | | |
Non-listed equity securities: | | | | | | | | | | | | | | | | |
Mondex Korea Co., Ltd. | | 6.02 | % | | | 920 | | | — | | | — | | | — | |
Internet Metrix Inc. | | 2.00 | % | | | 200 | | | 14 | | | 14 | | | — | |
Inews24. Co., Ltd. | | 2.83 | % | | | 350 | | | — | | | — | | | — | |
The Radio News Co., Ltd. | | 10.73 | % | | | 624 | | | — | | | — | | | — | |
Prime Venture Capital Co., Ltd. | | 4.00 | % | | | 1,000 | | | — | | | — | | | — | |
NAZCA Entertainment Co., Ltd. | | 7.13 | % | | | 500 | | | 130 | | | 46 | | | — | |
Toysoft Co., Ltd. | | 8.78 | % | | | 500 | | | 32 | | | 28 | | | — | |
CXP, Inc. | | 12.06 | % | | | 1,200 | | | 50 | | | 50 | | | — | |
IMM Investment Corp. | | 1.09 | % | | | 500 | | | 283 | | | 210 | | | — | |
Vacom Wireless, Inc. | | 16.77 | % | | | 1,880 | | | 641 | | | 641 | | | — | |
WIZcommunications Co., Ltd. | | 10.91 | % | | | 290 | | | 291 | | | 290 | | | — | |
Intromobile Co., Ltd. | | 8.00 | % | | | 200 | | | 437 | | | 200 | | | — | |
Korea Smart Card Co., Ltd. | | 1.06 | % | | | 326 | | | 24 | | | 24 | | | — | |
Directmedia Co., Ltd. | | 12.87 | % | | | 435 | | | 285 | | | 248 | | | — | |
Ncerti Co., Ltd. | | 19.90 | % | | | 328 | | | 476 | | | 328 | | | — | |
Neighbor System, Inc. | | 10.40 | % | | | 525 | | | 462 | | | 525 | | | — | |
Entaz Co., Ltd. | | 10.14 | % | | | 1,000 | | | 702 | | | 1,000 | | | — | |
CEC Mobile Ltd. | | 16.67 | % | | | 4,456 | | | 1,508 | | | 1,508 | | | — | |
Engineering Financial Corp. | | 0.01 | % | | | 15 | | | 11 | | | 15 | | | — | |
MIC2001-4TG Venture | | 5.00 | % | | | 350 | | | 677 | | | 350 | | | — | |
KTOA | | — | | | | 689 | | | 689 | | | 689 | | | — | |
Others | | — | | | | 1,622 | | | 1,663 | | | 1,097 | | | — | |
| | | | | | | | | | | | | | | | |
Sub total | | | | | | 17,910 | | | 8,375 | | | 7,263 | | | — | |
| | | | | | | | | | | | | | | | |
Total | | | | | (Won) | 31,028 | | (Won) | 29,965 | | (Won) | 28,853 | | (Won) | 8,472 | |
| | | | | | | | | | | | | | | | |
F-68
| | | | | | | | | | | | | | | | |
| | | 2007 | |
Equity securities | | Percentage
of ownership
(%) | | | Acquisition
cost | | Fair value or
net book
value | | Book value | | Unrealized
gains (losses)(*1) | |
Listed equity securities: | | | | | | | | | | | | | | | | |
Zakang Inc. | | 0.04 | % | | (Won) | 300 | | (Won) | 5 | | (Won) | 5 | | (Won) | (295 | ) |
GaeaSoft Corp. | | 2.01 | % | | | 533 | | | 756 | | | 756 | | | 223 | |
KRTnet Corp. | | 7.39 | % | | | 1,954 | | | 4,122 | | | 4,122 | | | 2,168 | |
Geotel Corp. | | 7.83 | % | | | 1,143 | | | 4,323 | | | 4,323 | | | 3,180 | |
PT. Mobile-8 Telecom | | 2.30 | % | | | 10,069 | | | 10,508 | | | 10,508 | | | 439 | |
| | | | | | | | | | | | | | | | |
Sub total | | | | | | 13,999 | | | 19,714 | | | 19,714 | | | 5,715 | |
| | | | | | | | | | | | | | | | |
Non-listed equity securities(*2): | | | | | | | | | | | | | | | | |
Mondex Korea Co., Ltd. | | 6.02 | % | | | 920 | | | — | | | — | | | — | |
Internet Metrix Inc. | | 2.00 | % | | | 200 | | | 25 | | | 14 | | | — | |
Inews24. Co., Ltd. | | 2.83 | % | | | 350 | | | 27 | | | — | | | — | |
The Radio News Co., Ltd. | | 10.73 | % | | | 624 | | | — | | | — | | | — | |
Prime Venture Capital Co., Ltd. | | 2.67 | % | | | 1,000 | | | 194 | | | — | | | — | |
NAZCA Entertainment Co., Ltd. | | 7.13 | % | | | 500 | | | 154 | | | 46 | | | — | |
Toysoft Co., Ltd | | 8.78 | % | | | 500 | | | 29 | | | 28 | | | — | |
CXP, Inc. | | 12.06 | % | | | 1,200 | | | 8 | | | 50 | | | — | |
IMM Investment Corp. | | 1.09 | % | | | 500 | | | 233 | | | 210 | | | — | |
Vacom Wireless, Inc. | | 16.77 | % | | | 1,880 | | | 1,122 | | | 641 | | | — | |
WIZcommunications Co., Ltd. | | 10.91 | % | | | 290 | | | 430 | | | 290 | | | — | |
Korea Smart Card Co., Ltd. | | 0.66 | % | | | 326 | | | 90 | | | 24 | | | — | |
Directmedia Co., Ltd. | | 12.54 | % | | | 435 | | | 309 | | | 248 | | | — | |
Ncerti Co., Ltd. | | 19.90 | % | | | 328 | | | 407 | | | 328 | | | — | |
Neighbor System, Inc. | | 10.40 | % | | | 525 | | | 451 | | | 525 | | | — | |
Entaz Co., Ltd. | | 10.14 | % | | | 1,000 | | | 828 | | | 1,000 | | | — | |
Luxpia Co., Ltd. | | 5.96 | % | | | 1,000 | | | 1,000 | | | 1,000 | | | — | |
Paramount Music Co., Ltd.(*3) | | 48.90 | % | | | 1,000 | | | 368 | | | 1,000 | | | — | |
CEC Mobile Ltd.(*4) | | 16.67 | % | | | 4,456 | | | — | | | — | | | — | |
Engineering Financial Corp. | | 0.01 | % | | | 15 | | | 32 | | | 15 | | | — | |
MIC2001-4TG Venture | | 5.00 | % | | | 350 | | | 350 | | | 350 | | | — | |
KTOA | | — | | | | 689 | | | 689 | | | 689 | | | — | |
Others(*4) | | — | | | | 1,983 | | | 1,913 | | | 1,210 | | | — | |
| | | | | | | | | | | | | | | | |
Sub total | | | | | | 20,071 | | | 8,659 | | | 7,668 | | | — | |
| | | | | | | | | | | | | | | | |
Total | | | | | (Won) | 34,070 | | (Won) | 28,373 | | (Won) | 27,382 | | (Won) | 5,715 | |
| | | | | | | | | | | | | | | | |
| (*1) | The amounts are not adjusted for the tax effects. |
| (*2) | The fair value of these non-listed equity securities could not be measured reliably and these securities were recorded at acquisition cost. |
| (*3) | Although the Company’s ownership in this company is more than 20%, the Company does not have significant influence over these companies through the participation in these companies’ various management decisions. As a result, the Company accounts for this investment as available-for-sale securities. |
| (*4) | For the year ended December 31, 2007, the Company recognized an impairment loss of (Won)1,557 million on non-listed equity securities of which the net equity value had declined compared to the acquisition cost and it is not expected to recover. The Company recognized a reversal of impairment loss of (Won)76 million for the year ended December 31, 2007 on non-listed equity securities of which the value of impaired securities subsequently recovered up to the previously recorded loss on impairment of long-term securities. |
F-69
| | | | | | | | | | | | | |
Debt securities | | Description | | 2006 |
| | | Maturity | | Fair
value | | Amortized
cost | | Unrealized
gains (losses) |
Government and public bonds | | National and local governments | | 2008~2013 | | (Won) | 1,029 | | (Won) | 1,029 | | (Won) | — |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Debt securities | | Description | | 2007 |
| | | Maturity | | Fair
value | | Amortized
cost | | Unrealized
gains (losses) |
Government and public bonds | | National and local governments | | 2009~2013 | | (Won) | 171 | | (Won) | 171 | | (Won) | — |
| | | | | | | | | | | | | |
| | | | | | | | |
Changes in unrealized gain (loss) | | 2006 | | | 2007 | |
Balance at beginning of the year | | (Won) | 8,632 | | | (Won) | 9,974 | |
Realized losses (gains) on disposal of securities, net | | | (5,431 | ) | | | (1,922 | ) |
Changes in unrealized gains (losses), net | | | 6,773 | | | | (68 | ) |
| | | | | | | | |
Balance at end of the year before tax effects and minority interest | | | 9,974 | | | | 7,984 | |
Less: tax effects | | | (2,743 | ) | | | (2,196 | ) |
Less: minority interest | | | — | | | | (71 | ) |
| | | | | | | | |
Balance at end of the year after tax effects and minority interest | | (Won) | 7,231 | | | (Won) | 5,717 | |
| | | | | | | | |
7. EQUITY METHOD INVESTMENT SECURITIES
Details of investments in securities accounted for using the equity method as of December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
| | | | | | | | | | | | | |
| | | 2006 |
| | | Percentage of
ownership | | | Acquisition cost | | Equity in net
asset value | | | Book value |
Korea Digital Satellite Broadcasting Co., Ltd. (“KDB”) | | 2.12 | % | | (Won) | 9,954 | | (Won) | (228 | ) | | (Won) | — |
Harex Info Tech Inc. | | 21.17 | % | | | 3,375 | | | 753 | | | | 1,902 |
Korea IT Fund | | 10.00 | % | | | 30,000 | | | 30,483 | | | | 30,483 |
Korea Telecom Strategy Fund | | 10.00 | % | | | 2,000 | | | 1,837 | | | | 1,837 |
eNtoB Corp. | | 3.13 | % | | | 500 | | | 673 | | | | 673 |
Boston Film Fund | | 39.02 | % | | | 8,000 | | | 8,014 | | | | 8,014 |
Sidus FNH Corp. | | 15.30 | % | | | 8,400 | | | 2,615 | | | | 7,264 |
KTF-CJ Music Contents Investment Fund (Centurion Music 1) | | 50.00 | % | | | 5,000 | | | 5,025 | | | | 5,025 |
Sidus FNH-BENEX Cinema Fund1 | | 6.67 | % | | | 2,000 | | | 2,007 | | | | 2,007 |
| | | | | | | | | | | | | |
Total | | | | | (Won) | 69,229 | | (Won) | 51,179 | | | (Won) | 57,205 |
| | | | | | | | | | | | | |
F-70
| | | | | | | | | | | | |
| | | 2007 |
| | | Percentage of
ownership | | | Acquisition cost | | Equity in net
asset value | | Book value |
Korea Digital Satellite Broadcasting Co., Ltd. (“KDB”)(*2) | | 2.12 | % | | (Won) | 9,954 | | (Won) | — | | (Won) | — |
Harex Info Tech Inc. | | 21.17 | % | | | 3,375 | | | 417 | | | 1,183 |
Korea IT Fund(*2) | | 10.00 | % | | | 30,000 | | | 33,248 | | | 33,248 |
eNtoB Corp.(*2)(*4) | | 3.13 | % | | | 500 | | | 755 | | | 755 |
Boston Film Fund(*3)(*4) | | 39.02 | % | | | 8,000 | | | 7,149 | | | 7,149 |
Sidus FNH Corp.(*2) | | 15.30 | % | | | 8,400 | | | 2,688 | | | 6,175 |
KTF-CJ Music Contents Investment Fund (Centurion Music 1)(*3)(*4) | | 50.00 | % | | | 5,000 | | | 5,011 | | | 5,011 |
Sidus FNH-BENEX Cinema Fund1(*2) | | 6.67 | % | | | 2,000 | | | 1,993 | | | 1,993 |
KTF-DoCoMo Mobile Investment Fund(*3)(*4) | | 45.00 | % | | | 4,500 | | | 4,491 | | | 4,491 |
Dooristar Co., Ltd.(*1)(*4) | | 49.00 | % | | | 1,500 | | | 230 | | | 112 |
Music City China Co., Ltd.(*1)(*4) | | 100.00 | % | | | 144 | | | — | | | — |
Doremi Music Publishing Co., Ltd.(*1)(*4) | | 100.00 | % | | | 200 | | | 217 | | | 217 |
Music City Media Co., Ltd.(*1)(*4) | | 94.55 | % | | | 1,040 | | | 527 | | | — |
Oscar ent. Co., Ltd.(*1)(*4) | | 49.00 | % | | | 650 | | | 417 | | | 417 |
Bluecord Corp.(*1)(*4) | | 100.00 | % | | | 2,778 | | | 1,611 | | | 1,611 |
Parangoyangi Co., Ltd(*1)(*4) | | 100.00 | % | | | 2,900 | | | 58 | | | 58 |
| | | | | | | | | | | | |
Total | | | | | (Won) | 80,941 | | (Won) | 58,812 | | (Won) | 62,420 |
| | | | | | | | | | | | |
| (*1) | Bluecord Technology is newly included in the consolidation in 2007 and its investment in Music City China Co., Ltd. and other six companies are accounted for using the equity method. |
| (*2) | Although the Company’s ownership in these companies is less than 20%, the ownership percentages including KT’s ownership in these companies are over 20%. As a result, the Company accounts for these investments using the equity method. |
| (*3) | The Company’s ownership in these companies is more than 30%. However, since KTF has no control over these companies, these investments are accounted for using the equity method. |
| (*4) | These securities were accounted for using the equity method of accounting based on unaudited financial statements as of and for the year ended December 31, 2007 as the audited financial statements on these companies could not be obtained by the Company’s year-end closing. In order to verify the reliability of such unaudited financial statements, the Company has performed the following procedures and found no significant exceptions: |
| | i) | Obtain the unaudited financial statements signed by the investee’s chief executive officer and statutory auditor. |
| | ii) | Identified whether the major transactions or accounting events, including those disclosed to public by the investee, which were acknowledged by the Company are properly reflected in the unaudited financial statements. |
| | iii) | Identify the major accounting issues under discussion between the investee and its external auditors and the investee’s plan to resolve such issues. |
| | iv) | Analyze the effect of potential difference between the unaudited and audited financial statements. |
F-71
Changes in carrying amount resulting from the equity method of accounting for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | | | | | | | | | | | | | |
| | | 2006 |
| | | January 1,
2006 | | Increase
(decrease)
in equity of
associates | | | Equity in
income (loss) | | | Others
increase
(decrease) | | | December 31,
2006 |
Harex Info Tech Inc. | | (Won) | 2,698 | | (Won) | — | | | (Won) | (796 | ) | | (Won) | — | | | (Won) | 1,902 |
KTF Mhows | | | 2,508 | | | — | | | | — | | | | (2,508 | ) | | | — |
Korea IT Fund | | | 30,857 | | | — | | | | (488 | ) | | | 114 | | | | 30,483 |
Korea Telecom Strategy Fund | | | 2,015 | | | — | | | | (195 | ) | | | 17 | | | | 1,837 |
eNtoB Corp. | | | 630 | | | — | | | | 43 | | | | — | | | | 673 |
Boston Film Fund | | | — | | | — | | | | 35 | | | | 7,979 | | | | 8,014 |
Sidus FNH Corp. | | | 8,400 | | | — | | | | (1,136 | ) | | | — | | | | 7,264 |
KTF-CJ Music Contents Investment Fund (Centurion Music 1) | | | — | | | 5,000 | | | | 25 | | | | — | | | | 5,025 |
Sidus FNH-BENEX Cinema Fund1 | | | — | | | 2,000 | | | | 7 | | | | — | | | | 2,007 |
| | | | | | | | | | | | | | | | | | |
Total | | (Won) | 47,108 | | (Won) | 7,000 | | | (Won) | (2,505 | ) | | (Won) | 5,602 | | | (Won) | 57,205 |
| | | | | | | | | | | | | | | | | | |
| |
| | | 2007 |
| | | January 1,
2007 | | Increase
(decrease)
in equity of
associates(*1) | | | Equity in
income (loss) | | | Others
increase
(decrease)(*2) | | | December 31,
2007 |
Harex Info Tech Inc. | | (Won) | 1,902 | | (Won) | — | | | (Won) | (719 | ) | | (Won) | — | | | (Won) | 1,183 |
Korea IT Fund | | | 30,483 | | | — | | | | 2,272 | | | | 493 | | | | 33,248 |
Korea Telecom Strategy Fund | | | 1,837 | | | (1,837 | ) | | | — | | | | — | | | | — |
eNtoB Corp. | | | 673 | | | — | | | | 82 | | | | — | | | | 755 |
Boston Film Fund | | | 8,014 | | | — | | | | (865 | ) | | | — | | | | 7,149 |
Sidus FNH Corp. | | | 7,264 | | | — | | | | (1,089 | ) | | | — | | | | 6,175 |
KTF-CJ Music Contents Investment Fund (Centurion Music 1) | | | 5,025 | | | — | | | | (14 | ) | | | — | | | | 5,011 |
Sidus FNH-BENEX Cinema Fund1 | | | 2,007 | | | — | | | | (14 | ) | | | — | | | | 1,993 |
KTF-DoCoMo Mobile Investment Fund | | | — | | | 4,500 | | | | (9 | ) | | | — | | | | 4,491 |
Dooristar Co., Ltd. | | | — | | | 1,002 | | | | (314 | ) | | | (576 | ) | | | 112 |
Music City China Co., Ltd. | | | — | | | 71 | | | | — | | | | (71 | ) | | | — |
Doremi Music Publishing Co., Ltd. | | | — | | | 240 | | | | (23 | ) | | | — | | | | 217 |
Music City Media Co., Ltd. | | | — | | | — | | | | (527 | ) | | | 527 | | | | — |
Oscar ent. Co., Ltd. | | | — | | | 636 | | | | 35 | | | | (254 | ) | | | 417 |
Bluecord Corp. | | | — | | | 2,369 | | | | (763 | ) | | | 5 | | | | 1,611 |
Parangoyangi Co., Ltd | | | — | | | 2,900 | | | | (513 | ) | | | (2,329 | ) | | | 58 |
| | | | | | | | | | | | | | | | | | |
Total | | (Won) | 57,205 | | (Won) | 9,881 | | | (Won) | (2,461 | ) | | (Won) | (2,205 | ) | | (Won) | 62,420 |
| | | | | | | | | | | | | | | | | | |
| (*1) | Initial carrying amounts of Bluecord Technology’s equity method investment securities are included. |
| (*2) | Others consist of equity in capital adjustment of affiliates and loss on impairment of equity method investment securities. Also, the Company recognized loss on impairment of equity method investment securities of (Won)3,238 million for the year ended December 31, 2007. |
F-72
Changes in investment differences from equity method investment securities for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | |
Affiliate | | January 1,
2006 | | Increase | | Amortization | | | December 31,
2006 | | January 1,
2007 | | Increase
(decrease) | | | Reversal
(amortization) | | | Loss on
impairment | | | December 31,
2007 | |
Harex Info Tech | | (Won) | 1,531 | | (Won) | — | | (Won) | (383 | ) | | (Won) | 1,148 | | (Won) | 1,148 | | (Won) | — | | | (Won) | (382 | ) | | (Won) | — | | | (Won) | 766 | |
Sidus FNH | | | 5,812 | | | — | | | (1,162 | ) | | | 4,650 | | | 4,650 | | | — | | | | (1,163 | ) | | | — | | | | 3,487 | |
Dooristar. | | | — | | | — | | | — | | | | — | | | — | | | 783 | | | | (207 | ) | | | (576 | ) | | | — | |
Doremi Music Publishing | | | — | | | — | | | — | | | | — | | | — | | | (32 | ) | | | 9 | | | | — | | | | (23 | ) |
Oscar ent. | | | — | | | — | | | — | | | | — | | | — | | | 339 | | | | (85 | ) | | | (254 | ) | | | — | |
Parangoyangi | | | — | | | — | | | — | | | | — | | | — | | | 2,541 | | | | (212 | ) | | | (2,329 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | (Won) | 7,343 | | (Won) | — | | (Won) | (1,545 | ) | | (Won) | 5,798 | | (Won) | 5,798 | | (Won) | 3,631 | | | (Won) | (2,040 | ) | | (Won) | (3,159 | ) | | (Won) | 4,230 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Details of unrealized gains (losses) arising from intercompany transactions, which are eliminated, as of December 31, 2007 are as follows (in millions of Korean won):
| | | | | | | | | | | | | | | | | |
Company | | Accounts | | January 1, 2007 | | Increase | | | Decrease | | | December 31, 2007 | |
Bluecord Corp. | | Land | | (Won) | — | | (Won) | (167 | ) | | (Won) | — | | | (Won) | (167 | ) |
| | Buildings | | | — | | | 240 | | | | (4 | ) | | | 236 | |
| | Other | | | — | | | 4 | | | | — | | | | 4 | |
| | | | | | | | | | | | | | | | | |
Total | | | | (Won) | — | | (Won) | 77 | | | (Won) | (4 | ) | | (Won) | 73 | |
| | | | | | | | | | | | | | | | | |
The Company’s equity in net asset value of the investees not recognized due to the discontinuance of the equity method of accounting as of December 31, 2007 is as follows. (in millions of Korean won):
| | | | | | | | | | | |
Company | | Changes in 2007 | | Changes
through 2006 | | | Balance at
December 31, 2007 | |
KDB | | (Won) | 527 | | (Won) | (674 | ) | | (Won) | (147 | ) |
Music City China Co., Ltd. | | | 613 | | | (613 | ) | | | — | |
| | | | | | | | | | | |
Total | | (Won) | 1,140 | | (Won) | (1,287 | ) | | (Won) | (147 | ) |
| | | | | | | | | | | |
Condensed financial information of the investees in which investments are accounted for using the equity method of accounting as of and for the year ended December 31, 2007 is as follows (in millions of Korean won):
| | | | | | | | | | | | | |
| | | Total assets | | Total liabilities | | Revenue | | Net income (loss) | |
KDB | | (Won) | 513,708 | | (Won) | 341,515 | | (Won) | 387,393 | | (Won) | 38,199 | |
Harex Info Tech Inc. | | | 3,544 | | | 1,573 | | | 5,626 | | | (1,589 | ) |
Korea IT Fund | | | 332,476 | | | — | | | — | | | 22,710 | |
eNtoB Corp. | | | 64,663 | | | 40,494 | | | 553,608 | | | 2,653 | |
Boston Film Fund | | | 18,832 | | | 513 | | | 1,319 | | | (2,215 | ) |
Sidus FNH Corp. | | | 27,439 | | | 9,868 | | | 22,603 | | | 478 | |
KTF-CJ Music Contents Investment Fund (Centurion Music 1) | | | 10,133 | | | 112 | | | — | | | 8 | |
Sidus FNH-BENEX Cinema Fund1 | | | 30,043 | | | 151 | | | 1,150 | | | (209 | ) |
KTF-DoCoMo Mobile Investment Fund | | | 10,083 | | | 104 | | | — | | | (20 | ) |
Dooristar Co., Ltd. | | | 998 | | | 529 | | | 533 | | | (218 | ) |
Doremi Music Publishing Co., Ltd. | | | 251 | | | 14 | | | 179 | | | (32 | ) |
Music City Media Co., Ltd. | | | 556 | | | 1,114 | | | 1,322 | | | 92 | |
Oscar ent. Co., Ltd. | | | 1,129 | | | 278 | | | 1,606 | | | 250 | |
Bluecord Corp. | | | 5,003 | | | 3,323 | | | 1,685 | | | (690 | ) |
Parangoyangi Co., Ltd. | | | 856 | | | 798 | | | 2,789 | | | (279 | ) |
F-73
8. LOAN TO EMPLOYEES
As of December 31, 2006 and 2007, the Company has provided loans to its employees for purchase of the Company’s stock with the balance of (Won)1,245 million ((Won)901 million in short-term loans and (Won)344 million in long-term loans) and (Won)637 million ((Won)419 million in short-term loans and (Won)218 million in long-term loans), respectively. Also, as of December 31, 2007, the Company has provided loans to its employees for their housing with the balance of (Won)100 million.
9. INSURANCE
As of December 31, 2006 and 2007, certain assets are insured with Hyundai Fire and Marine Insurance Co., Ltd. and other insurance companies as follows (in millions of Korean won):
| | | | | | | | | | | | | | |
| | | | | 2006 | | 2007 |
| | | Risk covered | | Book value | | Coverage | | Book value | | Coverage |
Land | | Property package | | (Won) | 42 | | (Won) | 42 | | (Won) | — | | (Won) | — |
Buildings | | ” | | | 231,895 | | | 347,641 | | | 252,427 | | | 257,609 |
Structures | | ” | | | 35,366 | | | 36,885 | | | 47,863 | | | 49,436 |
Machinery | | ” | | | 532,947 | | | 657,434 | | | 813,888 | | | 969,507 |
Equipment usage rights | | ” | | | 31 | | | 34 | | | 102,669 | | | 102,669 |
Inventories | | Theft and fire | | | — | | | — | | | 8,000 | | | 6,500 |
Others | | Others | | | — | | | — | | | — | | | 90 |
| | | | | | | | | | | | | | |
Total | | | | (Won) | 800,281 | | (Won) | 1,042,036 | | (Won) | 1,224,847 | | (Won) | 1,385,811 |
| | | | | | | | | | | | | | |
Also, as of December 31, 2007, the Company carries product liability insurance, comprehensive automobile insurance for its vehicles, industrial accident insurance for its employees and other.
10. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
| | | | | | | | |
| | | 2006 | | | 2007 | |
Property and equipment, at cost | | (Won) | 9,984,816 | | | (Won) | 10,888,850 | |
Less: accumulated depreciation | | | (5,745,070 | ) | | | (6,615,427 | ) |
Less: accumulated impairment loss | | | (3,418 | ) | | | (6,478 | ) |
| | | | | | | | |
Net | | (Won) | 4,236,328 | | | (Won) | 4,266,945 | |
| | | | | | | | |
Changes in property and equipment for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | | | | | | | | | | | | | | | | |
| | | 2006 |
| | | January 1,
2006 | | Acquisition
cost | | Disposal | | | Depreciation | | | Others | | | December 31,
2006 |
Land | | (Won) | 119,546 | | (Won) | 60 | | (Won) | (305 | ) | | (Won) | — | | | (Won) | — | | | (Won) | 119,301 |
Buildings | | | 276,570 | | | 333 | | | (350 | ) | | | (10,826 | ) | | | 4,399 | | | | 270,126 |
Structures | | | 74,086 | | | 29 | | | (1,174 | ) | | | (3,642 | ) | | | 2,800 | | | | 72,099 |
Machinery | | | 3,379,962 | | | 33,701 | | | (53,767 | ) | | | (916,236 | ) | | | 1,047,370 | | | | 3,491,030 |
Vehicles | | | 2,774 | | | 11 | | | (68 | ) | | | (1,313 | ) | | | 420 | | | | 1,824 |
Others | | | 217,964 | | | 16,111 | | | (1,595 | ) | | | (113,504 | ) | | | 68,105 | | | | 187,081 |
Construction-in-progress | | | 40,577 | | | 1,182,237 | | | (902 | ) | | | — | | | | (1,127,045 | ) | | | 94,867 |
| | | | | | | | | | | | | | | | | | | | | |
Total | | (Won) | 4,111,479 | | (Won) | 1,232,482 | | (Won) | (58,161 | ) | | (Won) | (1,045,521 | ) | | (Won) | (3,951 | ) | | (Won) | 4,236,328 |
| | | | | | | | | | | | | | | | | | | | | |
F-74
| | | | | | | | | | | | | | | | | | | | | |
| | | 2007 |
| | | January 1,
2007 | | Acquisition
cost | | Disposal | | | Depreciation | | | Others(*) | | | December 31,
2007 |
Land | | (Won) | 119,301 | | (Won) | — | | (Won) | (231 | ) | | (Won) | — | | | (Won) | 2,771 | | | (Won) | 121,841 |
Buildings | | | 270,126 | | | 220 | | | (243 | ) | | | (11,100 | ) | | | 8,457 | | | | 267,460 |
Structures | | | 72,099 | | | 37 | | | (1,073 | ) | | | (3,832 | ) | | | 7,522 | | | | 74,753 |
Machinery | | | 3,491,030 | | | 21,641 | | | (43,087 | ) | | | (931,048 | ) | | | 962,441 | | | | 3,500,977 |
Vehicles | | | 1,824 | | | 127 | | | (121 | ) | | | (1,101 | ) | | | 2,354 | | | | 3,083 |
Others | | | 187,081 | | | 12,188 | | | (1,195 | ) | | | (104,553 | ) | | | 122,106 | | | | 215,627 |
Construction-in-progress | | | 94,867 | | | 1,092,775 | | | — | | | | — | | | | (1,104,438 | ) | | | 83,204 |
| | | | | | | | | | | | | | | | | | | | | |
Total | | (Won) | 4,236,328 | | (Won) | 1,126,988 | | (Won) | (45,950 | ) | | (Won) | (1,051,634 | ) | | (Won) | 1,213 | | | (Won) | 4,266,945 |
| | | | | | | | | | | | | | | | | | | | | |
| (*) | Others include increase due to changes in consolidated entities. KTFT recognized loss on impairment of property and equipment of (Won)1,011 million, (Won)1,133 million and (Won)3,059 million for the years ended December 31, 2005, 2006 and 2007, respectively. |
11. INTANGIBLE ASSETS
Changes in intangible assets for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | |
| | | | | | Increase | | Decrease | | | |
| | | January 1,
2006 | | | Acquisition | | Other | | Amortization
(Reversal) | | | Other | | December 31,
2006 | |
Intellectual property rights | | (Won) | 2,363 | | | (Won) | 1,718 | | (Won) | — | | (Won) | 585 | | | (Won) | — | | (Won) | 3,496 | |
Facility usage rights | | | 7,786 | | | | 1,310 | | | — | | | 1,456 | | | | 43 | | | 7,597 | |
Frequency usage rights | | | 1,021,374 | | | | — | | | — | | | 93,528 | | | | — | | | 927,846 | |
Development costs | | | 16,198 | | | | 25,946 | | | 691 | | | 24,101 | | | | 9,047 | | | 9,687 | |
Other | | | 16,251 | | | | 12,240 | | | — | | | 8,594 | | | | 164 | | | 19,733 | |
Negative goodwill | | | (1,295 | ) | | | — | | | — | | | (648 | ) | | | — | | | (647 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Total | | (Won) | 1,062,677 | | | (Won) | 41,214 | | (Won) | 691 | | (Won) | 127,616 | | | (Won) | 9,254 | | (Won) | 967,712 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | 2007 |
| | | | | | Increase | | Decrease | | |
| | | January 1,
2007 | | | Acquisition | | Other(*1) | | Amortization
(Reversal) | | | Other(*2) | | December 31,
2007 |
Intellectual property rights | | (Won) | 3,496 | | | (Won) | 1,799 | | (Won) | 8 | | (Won) | 761 | | | (Won) | — | | (Won) | 4,542 |
Facility usage rights | | | 7,597 | | | | 3,783 | | | — | | | 1,896 | | | | 26 | | | 9,458 |
Frequency usage rights | | | 927,846 | | | | — | | | — | | | 93,527 | | | | — | | | 834,319 |
Development costs | | | 9,687 | | | | 1,436 | | | 1,732 | | | 11,127 | | | | 391 | | | 1,337 |
Other | | | 19,733 | | | | 24,996 | | | 18,350 | | | 13,725 | | | | 4,093 | | | 45,261 |
Negative goodwill | | | (647 | ) | | | — | | | — | | | (647 | ) | | | — | | | — |
| | | | | | | | | | | | | | | | | | | | |
Total | | (Won) | 967,712 | | | (Won) | 32,014 | | (Won) | 20,090 | | (Won) | 120,389 | | | (Won) | 4,510 | | (Won) | 894,917 |
| | | | | | | | | | | | | | | | | | | | |
| (*1) | Other includes initial carrying amounts of Bluecord Technology and Doremi media’s goodwill. |
F-75
| (*2) | Loss on impairment of intangible assets for the years ended December 31, 2006 and 2007 are included as follow (in millions of Korean won): |
| | | | | | | | |
Subsidiary | | Description | | 2006 | | 2007 |
KTFT | | Development costs | | (Won) | 9,047 | | (Won) | — |
Bluecord Technology | | Goodwill | | | — | | | 3,477 |
Bluecord Technology | | Other | | | — | | | 21 |
Doremi media | | Other | | | — | | | 200 |
| | | | | | | | |
Total | | | | (Won) | 9,047 | | (Won) | 3,698 |
| | | | | | | | |
Ordinary development costs of (Won)9,652, (Won)7,303 million and (Won)31,068 million were charged to expense for the years ended December 31, 2005, 2006 and 2007, respectively.
| (*3) | On December 15, 2000, KT ICOM acquired the license to provide third generation mobile services utilizing 2GHz frequency band (“IMT-2000 service”) with W-CDMA technology. KT ICOM paid (Won)650 billion of the total license fee of (Won)1,300 billion on March 20, 2001 and the remaining balance was required to be paid including interest for the period from 2007 to 2011. On December 4, 2001, MIC granted the license to KT ICOM and assigned the related frequency band, giving KT ICOM the right to provide IMT-2000 services using W-CDMA technology for 15 years from that date. |
On March 6, 2003, KT ICOM was merged into KTF, and the Company started to provide IMT-2000 service on December 28, 2003.
12. PRESENT VALUE OF ASSETS AND LIABILITIES
Assets and liabilities measured at present value as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | | | | | | | | | |
| | | 2006 |
Accounts | | Discount
rate | | | Collection
period | | Nominal
value | | Present
value | | Discount |
Accounts receivable-trade | | 5.37 | % | | 2007 | | (Won) | 292,498 | | (Won) | 288,344 | | (Won) | 4,154 |
Current portion of long-term accounts payable-other | | 9.93 | % | | 2007 | | | 90,000 | | | 89,116 | | | 884 |
Long-term accounts receivable-trade | | 5.37 | % | | 2008~2009 | | | 58,487 | | | 53,801 | | | 4,686 |
Long-term accounts payable-other | | 9.93 | % | | 2008~2011 | | | 560,000 | | | 493,877 | | | 66,123 |
| | | | | | | | | | | | | | |
| | | 2007 |
Accounts | | Discount
rate | | | Collection
period | | Nominal
value | | Present
value | | Discount |
Accounts receivable-trade | | 5.43 | % | | 2008 | | (Won) | 218,491 | | (Won) | 214,600 | | (Won) | 3,891 |
Current portion of long-term accounts payable-other | | 9.93 | % | | 2008 | | | 110,000 | | | 108,920 | | | 1,080 |
Long-term accounts receivable-trade | | 5.43 | % | | 2009~2010 | | | 46,659 | | | 42,512 | | | 4,147 |
Long-term accounts payable-other | | 9.93 | % | | 2009~2011 | | | 450,000 | | | 406,288 | | | 43,712 |
Long-term borrowings | | 7.35 | % | | 2008~2015 | | | 4,864 | | | 3,734 | | | 1,130 |
F-76
13. BORROWINGS
a. Short-term Borrowings
Short-term borrowings as of December 31, 2006 and 2007 are summarized as follows (in thousands of foreign currencies and millions of Korean won):
| | | | | | | | | | | | |
| | | Financial institutions | | Interest rate
per annum | | 2006 | | | 2007 | |
General loans | | Shinhan Bank and | | 7.14~11.5% | | (Won) | — | | | (Won) | 2,575 | |
| | others | | | | | | | | | | |
General loans(*) | | Woori Bank | | 7,87~8.12% | | | — | | | | 3,500 | |
Discounted promissory notes | | Shinhan Bank and | | 4.45~5.38% | | | 28,687 | | | | 8,300 | |
| | others | | | | | | | | | | |
Usance letter of credit | | Woori Bank and | | LIBOR+0.5% | | | 17,910 | | | | 9,290 | |
| | others | | | | | | | | | | |
| | | | | | USD | (19,267 | ) | | USD | (9,902 | ) |
| | | | LIBOR+0.5% | | | 1,897 | | | | 2,228 | |
| | | | | | JPY | (242,694 | ) | | JPY | (267,296 | ) |
| | | | LIBOR+0.5% | | | 1,544 | | | | — | |
| | | | | | EUR | (1,263 | ) | | | — | |
Other | | Korea Exchange Bank | | 4.85% | | | 10,000 | | | | 10,000 | |
| | | | | | | | | | | | |
Total | | | | | | (Won) | 60,038 | | | (Won) | 35,893 | |
| | | | | | | | | | | | |
| (*) | Real estates and fire insurances for construction are pledged as collateral with a pledged amount of (Won)5,700 million as of December 31, 2007. |
b. Long-term Borrowings
Long-term borrowings as of December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
| | | | | | | | | | | | | |
| | | Financial institutions | | Interest rate
per annum | | | 2006 | | | 2007 | |
Working capital loans | | Woori Bank | | 5.80 | % | | (Won) | 10,000 | | | (Won) | — | |
| | Shinhan Bank | | 6.15 | % | | | 10,000 | | | | 10,000 | |
| | Hana Bank | | 6.13 | % | | | 10,000 | | | | 10,000 | |
Facility capital loans | | Shinhan Bank | | 4.50 | % | | | — | | | | 797 | |
| | Shinhan Bank | | 7.60 | % | | | — | | | | 695 | |
Working capital loans | | Korea Credit Guarantee Fund(*) | | 7.35 | % | | | — | | | | 4,864 | |
| | | | | | | | | | | | | |
Total | | | | | | | | 30,000 | | | | 26,356 | |
Less: current portion | | | | | | | | (10,000 | ) | | | (10,608 | ) |
| | | | | | | | | | | | | |
Long-term portion | | | | | | | | 20,000 | | | | 15,748 | |
Less: discount | | | | | | | | — | | | | (1,130 | ) |
| | | | | | | | | | | | | |
Net | | | | | | | (Won) | 20,000 | | | (Won) | 14,618 | |
| | | | | | | | | | | | | |
| (*) | The Company recognized a gain on restructuring of debts of (Won)2,763 million and real estates are pledged as collateral with a pledged amount of (Won)10,000 million as of December 31, 2007. |
F-77
c. Repayment Schedule of Long-term Borrowings
Repayment schedule of the Company’s long-term borrowings as of December 31, 2007 is as follows (in millions of Korean won):
| | | |
Year ending December 31, | | Amount |
2008 | | (Won) | 10,608 |
2009 | | | 10,608 |
2010 | | | 1,303 |
2011 | | | 608 |
�� 2012 | | | 1,405 |
Thereafter | | | 1,824 |
| | | |
Total | | (Won) | 26,356 |
| | | |
14. DEBENTURES
Debentures as of December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
| | | | | | | | | | | | | | |
Type | | Issue date | | Maturity | | Interest rate
per annum | | 2006 | | | 2007 | |
42nd | | 11/14/2002 | | 11/14/2007 | | 5.94% | | (Won) | 200,000 | | | (Won) | — | |
44th | | 2/19/2004 | | 2/19/2009 | | 5.66% | | | 360,000 | | | | 360,000 | |
45th | | 3/15/2004 | | 3/15/2008 | | 5.24% | | | 320,000 | | | | 320,000 | |
46th | | 5/10/2004 | | 5/10/2007 | | 4.61% | | | 300,000 | | | | — | |
47-1st | | 7/12/2004 | | 7/12/2009 | | 4.95% | | | 230,000 | | | | 230,000 | |
47-2nd | | 7/12/2004 | | 7/12/2011 | | 5.32% | | | 70,000 | | | | 70,000 | |
48th | | 2/15/2005 | | 2/15/2010 | | 5.31% | | | 200,000 | | | | 200,000 | |
2nd private bonds with warrant | | 9/2/2005 | | 9/2/2008 | | 7.11% | | | — | | | | 2,100 | |
| | | | | | | | | | | | | | |
Total | | | | | | | | | 1,680,000 | | | | 1,182,100 | |
Less: current portion | | | | | | | | | (500,000 | ) | | | (322,100 | ) |
| | | | | | | | | | | | | | |
Long-term portion | | | | | | | | | 1,180,000 | | | | 860,000 | |
Less: discount | | | | | | | | | (1,841 | ) | | | (963 | ) |
| | | | | | | | | | | | | | |
Net | | | | | | | | (Won) | 1,178,159 | | | (Won) | 859,037 | |
| | | | | | | | | | | | | | |
(*) Details of bonds with warrants are as follows:
| | | | |
Issued amount (in Korean won) | | : | | (Won)3,000 million |
Stated interest rate | | : | | 7.11% |
Exercise price (in Korean won) | | : | | (Won)4,518 per share |
Exercise period | | : | | September 3, 2006 ~ August 2, 2008 |
Number of total exercisable shares | | : | | 664,010 |
Exercised shares | | : | | — |
Unexercised shares | | : | | 664,010 |
Others | | : | | Subject to request by the holders, certain portion of the bonds are early redeemable before maturity; up to 10% of issued amount at one year after 1st anniversary of issuance and 20% of issued amount at the interest payment date after 2nd anniversary of issuance. (Won)900 million of the issued amount was early redeemed through December 31, 2007. |
F-78
Repayment schedule of the Company’s debentures as of December 31, 2007 is as follows (in millions of Korean won):
| | | |
Year ending December 31, | | Amount |
2008 | | (Won) | 322,100 |
2009 | | | 590,000 |
2010 | | | 200,000 |
2011 | | | 70,000 |
| | | |
Total | | (Won) | 1,182,100 |
| | | |
15. LONG-TERM ACCOUNTS PAYABLE-OTHER
Long-term accounts payable-other is related to the purchase of frequency usage right and required to be paid including applicable interest from 2008 to 2011. Long-term accounts payable-other as of December 31, 2006 and 2007 are stated at the net present value of future cash flows, calculated using the effective interest rate (9.93%) at the time of receipt of frequency usage license as follows (in millions of Korean won):
| | | | | | | | |
| | | 2006 | | | 2007 | |
Long-term accounts payable-other | | (Won) | 650,000 | | | (Won) | 560,000 | |
Less: current portion | | | (90,000 | ) | | | (110,000 | ) |
Less: discount | | | (66,123 | ) | | | (43,712 | ) |
| | | | | | | | |
Net | | (Won) | 493,877 | | | (Won) | 406,288 | |
| | | | | | | | |
The maturities of the Company’s long-term accounts payable-other as of December 31, 2007 are as follow (in millions of Korean won):
| | | |
Year ending December 31, | | Amount |
2008 | | (Won) | 110,000 |
2009 | | | 130,000 |
2010 | | | 150,000 |
2011 | | | 170,000 |
| | | |
Total | | (Won) | 560,000 |
| | | |
16. ACCRUED PROVISIONS
The Company has accounted for the call bonus mileage and warranty, which the Company is obliged to pay to its customers, as accrued provisions. Warranties related to sales of handset are provided for one year and are recorded as liability based on the management’s estimate according to the historical experience.
Changes in accrued provisions for the years ended December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | | 2007 | |
| | | Call bonus | | | Warranty | | | Total | | | Call bonus | | | Warranty | | | Others | | | Total | |
Beginning of the year | | (Won) | 18,896 | | | (Won) | 2,835 | | | (Won) | 21,731 | | | (Won) | 16,265 | | | (Won) | 3,505 | | | (Won) | — | | | (Won) | 19,770 | |
Provision | | | 297 | | | | 6,999 | | | | 7,296 | | | | — | | | | 10,549 | | | | 26 | | | | 10,575 | |
Payment | | | (2,928 | ) | | | (6,329 | ) | | | (9,257 | ) | | | (7,885 | ) | | | (8,642 | ) | | | — | | | | (16,527 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 16,265 | | | | 3,505 | | | | 19,770 | | | | 8,380 | | | | 5,412 | | | | 26 | | | | 13,818 | |
Less: current portion | | | (6,800 | ) | | | (3,505 | ) | | | (10,305 | ) | | | (4,332 | ) | | | (5,412 | ) | | | (26 | ) | | | (9,770 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net | | (Won) | 9,465 | | | | — | | | (Won) | 9,465 | | | (Won) | 4,048 | | | | — | | | | — | | | (Won) | 4,048 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-79
Call bonus mileages provided by the Company expires in 5 years from the date when call bonus mileages are earned. The Company expects its call bonus mileages to be used as follows (in millions of Korean won):
| | | | | | |
Year ending December 31, | | Nominal amount | | Present value |
2008 | | (Won) | 4,467 | | (Won) | 4,332 |
2009 | | | 2,350 | | | 2,159 |
2010 | | | 1,239 | | | 1,078 |
2011 | | | 656 | | | 540 |
2012 | | | 348 | | | 271 |
| | | | | | |
Total | | (Won) | 9,060 | | (Won) | 8,380 |
| | | | | | |
17. COMMON STOCK AND CAPITAL SURPLUS
a. Common Stocks
As of December 31, 2007, the Company’s number of shares authorized are 400,000,000 shares with par value of (Won)5,000 per share.
As of December 31, 2006 and 2007, the numbers of shares issued by the Company are 195,701,091 shares and 192,722,091 shares, respectively, and the common stock amounted to 1,044,181 million. As allowed by the Korean Securities Exchange Law, the Company retired 2,979,000 treasury stocks through December 31, 2007 by charges against retained earnings. Therefore, the common stock amount differs from the amount resulting from multiplying the number of shares issued by (Won)5,000 par value of common stock.
b. Treasury Stocks
Changes in treasury stocks for the years ended December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
| | | | | | | | | | |
| | | 2006 | | 2007 |
Accounts | | Number of
shares | | Amount | | Number of
shares | | Amount |
Beginning of the year | | 61,247 | | (Won) | 2,076 | | 61,273 | | (Won) | 2,077 |
Acquisition | | 5,507,026 | | | 164,885 | | 2,979,061 | | | 94,072 |
Retirement | | 5,507,000 | | | 164,884 | | 2,979,000 | | | 94,071 |
| | | | | | | | | | |
End of the year | | 61,273 | | (Won) | 2,077 | | 61,334 | | (Won) | 2,078 |
| | | | | | | | | | |
18. RETAINED EARNINGS
Retained earnings appropriated to the legal reserve cannot be used as cash dividends under the applicable laws and regulations. The Korean Commercial Code requires the Company to appropriate an amount equal to at least 10% of the cash dividend amount to a legal reserve at the end of the year for each accounting period until the reserve equals 50% of stated capital. The legal reserve may be used to reduce a deficit or may be transferred to capital.
In accordance with the relevant tax laws, the Company is allowed to appropriate a reserve for technology and human resource development to recognize certain tax deductible benefits through the early recognition of future expenditures for tax purposes. This reserve used for its original purpose and the remaining balance after use are restored to retained earnings and may be used for dividends in accordance with the relevant tax laws.
F-80
19. DIVIDENDS
Details of KTF’s dividends for common stocks for the years ended December 31, 2006 and 2007 are as follows (in Korean won except for share data):
| | | | | | | |
| | | 2006 | | | 2007 |
Dividends of per share (dividend ratio) | | (Won) | 600(12% | ) | | (Won) | — |
Number of shares outstanding | | | 195,639,818 | | | | 192,660,757 |
| | | | | | | |
Dividends | | (Won) | 117,383,890,800 | | | (Won) | — |
| | | | | | | |
20. STOCK OPTION
The Company entered into stock option agreements with its chief executive officer and senior managers. The stock option will be vested after two or three years from the date of grant and can be exercised for five years from the date when they are vested. Upon the exercise of stock options, the Company will issue its common stocks or provide treasury stocks.
Principal assumptions made in relation to estimation of compensation expense for the stock options are as follows:
| | | | | | | | | | | | | | | | |
| | | 1st | | | 2nd | | | 3rd | | | 4th | |
Grant date | | | 2001.03.29 | | | | 2002.03.25 | | | | 2003.09.08 | | | | 2005.03.04 | |
Grantee | | | Former CEO | | | | Senior managers | | | | CEO, | | | | Senior managers | |
| | | | | | | | | | | Senior managers | | | | | |
Number of shares | | | 18,000 | | | | 44,800 | | | | 629,500 | | | | 128,800 | |
Exercise price per share
(in Korean won) | | (Won) | 41,273 | | | (Won) | 45,178 | | | (Won) | 30,000 | | | (Won) | 30,700 | |
Type | | | Equity settled | | | | Equity settled | | | | Equity settled | | | | Equity settled | |
Exercise period | |
| 2004.3.30~
2009.3.29 |
| |
| 2005.3.26~
2010.3.25 |
| |
| 2005.9.9~
2010.9.8 |
| |
| 2007.3.5~
2012.3.4 |
|
Risk free interest rate | | | ( | *) | | | 6.44 | % | | | 4.31 | % | | | 4.18 | % |
Expected duration (year) | | | ( | *) | | | 3.0 | | | | 3.0 | | | | 3.0 | |
Expected volatility | | | ( | *) | | | 97.05 | % | | | 63.14 | % | | | 37.33 | % |
Fair value per option
(in Korean won) | | | ( | *) | | | 30,565 | | | | 8,812 | | | | 4,715 | |
Total compensation expense
(in millions of Korean won) | | | ( | *) | | (Won) | 874 | | | (Won) | 2,695 | | | (Won) | 519 | |
| (*) | 1st stock option was all expired without exercise. |
Changes in stock options for the year ended December 31, 2007 are as follows:
| | | | | | | | | | | | | | | |
| | | 1st | | | 2nd | | | 3rd | | | 4th | | | Total | |
Outstanding at beginning of the period | | 18,000 | | | 44,800 | | | 629,500 | | | 128,800 | | | 821,100 | |
Cancelled | | — | | | — | | | (308,587 | ) | | — | | | (308,587 | ) |
Forfeited or expired | | (18,000 | ) | | (16,200 | ) | | — | | | — | | | (34,200 | ) |
Performance condition adjustment | | — | | | — | | | (15,159 | ) | | (18,683 | ) | | (33,842 | ) |
Exercised | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
Outstanding and exercisable at end of the period | | — | | | 28,600 | | | 305,754 | | | 110,117 | | | 444,471 | |
| | | | | | | | | | | | | | | |
F-81
The Company values stock options granted based on the fair value method. Total compensation expense of (Won)4,088 million is allocated over the vesting period and the compensation expense charged to operations for the year ended December 31, 2007 are (Won)43 million. As of December 31, 2007, approximately 19,299,709 shares of common stocks have been reserved for issuance under the stock option plan.
21. COMPREHENSIVE INCOME
Comprehensive income for the years ended December 31, 2006 and 2007 is as follows (in millions of Korean won):
| | | | | | | |
Description | | 2006 | | 2007 | |
Net income | | (Won) | 412,808 | | (Won) | 250,482 | |
Other comprehensive income (loss): | | | | | | | |
Gain on translation of foreign operations (Tax effect: nil in 2006 and 2007) | | | 1 | | | — | |
Loss on translation of foreign operations (Tax effect: nil in 2006 and 2007) | | | — | | | (16 | ) |
Unrealized gain (loss) on valuation of available-for-sale securities
(Tax effect: (Won)369 million in 2006 and (Won)(574) million in 2007) | | | 973 | | | (1,531 | ) |
Increase in equity of associates (Tax effect: nil in 2006 and 2007) | | | — | | | 579 | |
Decrease in equity of associates (Tax effect: nil in 2006 and 2007) | | | 43 | | | — | |
| | | | | | | |
Comprehensive income | | (Won) | 413,825 | | (Won) | 249,514 | |
| | | | | | | |
Attributable to: Equity holders of the parent | | (Won) | 413,018 | | (Won) | 248,068 | |
Minority interest | | | 807 | | | 1,446 | |
| | | | | | | |
Total | | (Won) | 413,825 | | (Won) | 249,514 | |
| | | | | | | |
22. OPERATING REVENUES AND EXPENSES
Operating revenues for the years ended December 31, 2005, 2006, and 2007 are as follows (in millions of Korean won):
| | | | | | | | | |
| | | 2005 | | 2006 | | 2007 |
PCS Service | | (Won) | 5,108,349 | | (Won) | 5,339,781 | | (Won) | 5,708,930 |
Sales of PCS handsets | | | 1,044,463 | | | 1,287,939 | | | 1,617,853 |
| | | | | | | | | |
| | (Won) | 6,152,812 | | (Won) | 6,627,720 | | (Won) | 7,326,783 |
| | | | | | | | | |
F-82
Operating expenses for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | | | | |
| | | 2005 | | 2006 | | 2007 |
Cost of merchandise | | (Won) | 1,000,824 | | (Won) | 1,174,261 | | (Won) | 1,101,659 |
Salaries and wages | | | 180,242 | | | 176,922 | | | 195,630 |
Provision for severance indemnities | | | 14,968 | | | 14,858 | | | 19,693 |
Employee welfare | | | 31,308 | | | 35,119 | | | 35,524 |
Rent | | | 114,971 | | | 135,828 | | | 159,577 |
Lease | | | 61,307 | | | 32,601 | | | 1,172 |
Commissions | | | 414,632 | | | 471,363 | | | 477,245 |
Depreciation | | | 1,043,022 | | | 1,041,066 | | | 1,044,563 |
Amortization | | | 116,947 | | | 126,465 | | | 117,839 |
Tax and dues | | | 44,363 | | | 55,319 | | | 38,682 |
Interconnection charges | | | 603,160 | | | 679,462 | | | 724,237 |
Leased line charges | | | 360,655 | | | 356,129 | | | 386,542 |
Ordinary development costs | | | 9,652 | | | 7,303 | | | 31,068 |
Sales promotion | | | 162,040 | | | 330,687 | | | 539,381 |
Sales commissions | | | 721,154 | | | 812,095 | | | 1,184,890 |
Advertisements | | | 114,711 | | | 121,186 | | | 136,197 |
Bad debt expense | | | 54,375 | | | 89,240 | | | 47,346 |
Water and electricity | | | 54,900 | | | 62,230 | | | 75,861 |
Communications | | | 30,485 | | | 27,429 | | | 29,533 |
Repairs and maintenance | | | 74,340 | | | 78,723 | | | 72,906 |
Other | | | 84,689 | | | 96,395 | | | 482,169 |
| | | | | | | | | |
Total | | (Won) | 5,292,745 | | (Won) | 5,924,681 | | (Won) | 6,901,714 |
| | | | | | | | | |
23. INCOME TAX EXPENSE
Components of income tax expense for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | | | | | | |
| | | 2005 | | | 2006 | | 2007 | |
Current income tax expense (including additional income taxes and tax refunds) | | (Won) | 78,819 | | | (Won) | 102,497 | | (Won) | 76,474 | |
Changes in deferred income tax assets and liabilities related to temporary differences (including tax loss and credits carryforwards)(*) | | | (24,974 | ) | | | 13,052 | | | (39,055 | ) |
| | | | | | | | | | | |
Income tax expense | | (Won) | 53,845 | | | (Won) | 115,549 | | (Won) | 37,419 | |
| | | | | | | | | | | |
| (*) | Changes in deferred income tax assets and liabilities for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won): |
| | | | | | | | |
| | | 2006 | | | 2007 | |
Beginning balance from temporary difference | | (Won) | 98,899 | | | (Won) | 78,803 | |
Ending balance from temporary difference | | | (82,224 | ) | | | (115,135 | ) |
Beginning balance from tax credit carryforwards | | | 65,031 | | | | 68,285 | |
Ending balance from tax credit carryforwards | | | (68,285 | ) | | | (71,555 | ) |
Directly added to (deducted from) equity | | | (369 | ) | | | 547 | |
| | | | | | | | |
Changes in deferred income tax assets | | (Won) | 13,052 | | | (Won) | (39,055 | ) |
| | | | | | | | |
F-83
An explanation of the relationship between income tax expense and accounting income before income tax expense for the years ended December 31, 2005, 2006 and 2007 is as follows (in millions of Korean won):
| | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | |
Ordinary income before income tax expense | | (Won) | 602,132 | | | (Won) | 528,357 | | | (Won) | 275,081 | |
| | | | | | | | | | | | |
Income tax expense at statutory income tax rate (14.3% of taxable income less than (Won)100 million and 27.5% of taxable income exceeding (Won)100 million) | | | 165,586 | | | | 146,165 | | | | 82,335 | |
Differences (Note) | | | (111,741 | ) | | | (30,616 | ) | | | (44,916 | ) |
| | | | | | | | | | | | |
Income tax expense | | (Won) | 53,845 | | | (Won) | 115,549 | | | (Won) | 37,419 | |
| | | | | | | | | | | | |
Effective tax rates | | | 9.3 | % | | | 21.9 | % | | | 13.6 | % |
| | | | | | | | | | | | |
(Note) Differences: | | | | | | | | | | | | |
Non-temporary difference | | (Won) | (27,026 | ) | | (Won) | 11,800 | | | (Won) | 1,568 | |
Changes in deferred income tax assets (liabilities) unrecognized related to equity method investment securities | | | 2,539 | | | | 930 | | | | 6,062 | |
Tax credit carryforwards | | | (83,497 | ) | | | (43,394 | ) | | | (36,355 | ) |
Other tax credits | | | — | | | | (1,826 | ) | | | (4,798 | ) |
Additional income tax and tax refund for prior periods | | | (2,665 | ) | | | 14,873 | | | | 1,214 | |
Other | | | (1,092 | ) | | | (12,999 | ) | | | (12,607 | ) |
| | | | | | | | | | | | |
| | (Won) | (111,741 | ) | | (Won) | (30,616 | ) | | (Won) | (44,916 | ) |
| | | | | | | | | | | | |
F-84
Changes in temporary differences, including tax loss and credits carryforwards, and deferred income tax assets (liabilities) for the years ended December 31, 2006 and 2007 are as follows (in millions of won):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | |
| | | January 1,
2006 | | | Final tax
return
amount(*1) | | | Increase | | | Decrease | | | December 31,
2006 | | | Deferred income tax
asset (liabilities) | |
| | | | | | | | Current | | | Non-
current | |
(Deductible temporary differences) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Inventories | | (Won) | 27,996 | | | (Won) | 27,996 | | | (Won) | 29,128 | | | (Won) | 27,996 | | | (Won) | 29,128 | | | (Won) | 29,128 | | | (Won) | — | |
Allowance for doubtful accounts | | | 101,881 | | | | 104,889 | | | | 131,354 | | | | 104,851 | | | | 131,392 | | | | 131,392 | | | | — | |
Provision for severance indemnities | | | 26,060 | | | | 25,746 | | | | 2,233 | | | | — | | | | 27,979 | | | | — | | | | 27,979 | |
Accrued expense | | | 92,032 | | | | 92,032 | | | | 69,258 | | | | 92,032 | | | | 69,258 | | | | 69,258 | | | | — | |
Account payable—other | | | 7,271 | | | | 7,271 | | | | 6,345 | | | | 7,262 | | | | 6,354 | | | | 6,347 | | | | 7 | |
Loss on impairment of long-term investment securities | | | 76,179 | | | | 76,139 | | | | 586 | | | | 65,973 | | | | 10,752 | | | | — | | | | 10,752 | |
Available-for-sale securities | | | — | | | | — | | | | 287 | | | | — | | | | 287 | | | | — | | | | 287 | |
Reserve for liabilities | | | 21,731 | | | | 21,731 | | | | 19,769 | | | | 21,731 | | | | 19,769 | | | | 10,304 | | | | 9,465 | |
Equity method investment securities | | | 9,218 | | | | 4,369 | | | | 3,723 | | | | 3,849 | | | | 4,243 | | | | — | | | | 4,243 | |
Donation | | | 4,200 | | | | 4,200 | | | | 3,600 | | | | 4,200 | | | | 3,600 | | | | 3,600 | | | | — | |
Amortization | | | 1,754 | | | | 1,754 | | | | 1,123 | | | | 349 | | | | 2,528 | | | | — | | | | 2,528 | |
Development costs | | | 5,438 | | | | 5,438 | | | | 6,309 | | | | 5,438 | | | | 6,309 | | | | — | | | | 6,309 | |
Depreciation | | | 5,884 | | | | 5,884 | | | | 5,626 | | | | 1,210 | | | | 10,300 | | | | — | | | | 10,300 | |
Derivatives | | | 3,690 | | | | 3,690 | | | | 216 | | | | 3,690 | | | | 216 | | | | 216 | | | | — | |
Other | | | 4,811 | | | | 7,806 | | | | 3,039 | | | | 5,571 | | | | 5,274 | | | | 880 | | | | 4,394 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sub total | | | 388,145 | | | (Won) | 388,945 | | | (Won) | 282,596 | | | (Won) | 344,152 | | | | 327,389 | | | | 251,125 | | | | 76,264 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Not recognized as deferred income tax assets(*2) | | | 9,298 | | | | | | | | | | | | | | | | 8,998 | | | | — | | | | 8,998 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recognized as deferred income tax assets | | | 378,847 | | | | | | | | | | | | | | | | 318,391 | | | | 251,125 | | | | 67,266 | |
Tax rate(*3) | | | 27.5 | % | | | | | | | | | | | | | | | 27.5 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred income tax assets | | | 104,183 | | | | | | | | | | | | | | | | 87,557 | | | | 69,059 | | | | 18,498 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Tax credit carryforwards) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total tax credit | | | 111,238 | | | | | | | | | | | | | | | | 101,695 | | | | 49,641 | | | | 52,054 | |
Not recognized as deferred income tax assets | | | 30,628 | | | | | | | | | | | | | | | | 16,905 | | | | — | | | | 16,905 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recognized as deferred income tax assets | | | 80,610 | | | | | | | | | | | | | | | | 84,790 | | | | 49,641 | | | | 35,149 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred income tax assets | | | 65,032 | | | | | | | | | | | | | | | | 68,286 | | | | 40,114 | | | | 28,171 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Taxable temporary differences) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accrued revenue | | | (755 | ) | | (Won) | (756 | ) | | (Won) | (2,931 | ) | | (Won) | (756 | ) | | | (2,931 | ) | | | (2,931 | ) | | | — | |
Available-for-sale securities | | | (8,632 | ) | | | (6,249 | ) | | | (10,151 | ) | | | (6,179 | ) | | | (10,221 | ) | | | — | | | | (10,221 | ) |
Derivatives | | | — | | | | — | | | | (1,494 | ) | | | — | | | | (1,494 | ) | | | (1,494 | ) | | | — | |
Deposit for severance indemnity | | | (1,610 | ) | | | (1,557 | ) | | | (984 | ) | | | (289 | ) | | | (2,252 | ) | | | — | | | | (2,252 | ) |
Short term investment securities | | | (97 | ) | | | (97 | ) | | | — | | | | (97 | ) | | | — | | | | — | | | | — | |
Depreciation | | | (8,015 | ) | | | (8,015 | ) | | | — | | | | (1,781 | ) | | | (6,234 | ) | | | — | | | | (6,234 | ) |
Other | | | (171 | ) | | | (735 | ) | | | (198 | ) | | | (735 | ) | | | (198 | ) | | | — | | | | (198 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sub total | | | (19,280 | ) | | (Won) | (17,409 | ) | | (Won) | (15,758 | ) | | (Won) | (9,837 | ) | | | (23,330 | ) | | | (4,425 | ) | | | (18,905 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Not recognized as deferred income tax liabilities(*2) | | | (66 | ) | | | | | | | | | | | | | | | (3,937 | ) | | | — | | | | (3,937 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recognized as deferred income tax liabilities | | | (19,214 | ) | | | | | | | | | | | | | | | (19,393 | ) | | | (4,425 | ) | | | (14,968 | ) |
Tax rate(*3) | | | 27.5 | % | | | | | | | | | | | | | | | 27.5 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred income tax liabilities | | | (5,284 | ) | | | | | | | | | | | | | | | (5,333 | ) | | | (1,217 | ) | | | (4,116 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred income tax assets, net | | (Won) | 163,931 | | | | | | | | | | | | | | | (Won) | 150,510 | | | (Won) | 107,956 | | | (Won) | 42,553 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-85
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | |
| | | January 1,
2007 | | | Final tax
return
amount(*1) | | | Increase | | | Decrease | | | December 31,
2007 | | | Deferred income tax
asset (liabilities) | |
| | | | | | | Current | | | Non-
current | |
(Deductible temporary differences) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Inventories | | (Won) | 29,128 | | | (Won) | 29,128 | | | (Won) | 48,800 | | | (Won) | 29,877 | | | (Won) | 48,051 | | | (Won) | 48,051 | | | (Won) | — | |
Allowance for doubtful accounts | | | 131,392 | | | | 131,392 | | | | 197,187 | | | | 142,660 | | | | 185,919 | | | | 185,919 | | | | — | |
Provision for severance indemnities | | | 27,979 | | | | 27,979 | | | | 11,995 | | | | 55 | | | | 39,919 | | | | — | | | | 39,919 | |
Accrued expense | | | 69,258 | | | | 69,258 | | | | 123,594 | | | | 69,258 | | | | 123,594 | | | | 123,594 | | | | — | |
Account payable—other | | | 6,354 | | | | 6,345 | | | | 13,437 | | | | 6,622 | | | | 13,160 | | | | 12,784 | | | | 376 | |
Loss on impairment of long-term investment securities | | | 10,752 | | | | 10,753 | | | | 1,791 | | | | — | | | | 12,544 | | | | — | | | | 12,544 | |
Available-for-sale securities | | | 287 | | | | 287 | | | | 1,854 | | | | — | | | | 2,141 | | | | — | | | | 2,141 | |
Reserve for liabilities | | | 19,769 | | | | 19,769 | | | | 16,332 | | | | 19,769 | | | | 16,332 | | | | 9,770 | | | | 6,562 | |
Equity method investment securities | | | 4,243 | | | | 3,134 | | | | 31,373 | | | | 3,378 | | | | 31,129 | | | | — | | | | 31,129 | |
Donation | | | 3,600 | | | | 3,600 | | | | 50 | | | | 3,600 | | | | 50 | | | | 50 | | | | — | |
Amortization | | | 2,528 | | | | 2,529 | | | | 1,173 | | | | 727 | | | | 2,975 | | | | — | | | | 2,975 | |
Development costs | | | 6,309 | | | | 6,309 | | | | (781 | ) | | | 5,084 | | | | 444 | | | | — | | | | 444 | |
Depreciation | | | 10,300 | | | | 10,301 | | | | 8,423 | | | | 2,870 | | | | 15,854 | | | | — | | | | 15,854 | |
Derivatives | | | 216 | | | | 216 | | | | — | | | | 216 | | | | — | | | | — | | | | — | |
Other | | | 5,274 | | | | 4,933 | | | | 39,416 | | | | 900 | | | | 43,449 | | | | 236 | | | | 43,213 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sub total | | | 327,389 | | | (Won) | 325,933 | | | (Won) | 494,644 | | | (Won) | 285,016 | | | | 535,561 | | | | 380,404 | | | | 155,157 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Not recognized as deferred income tax assets(*2) | | | 8,998 | | | | | | | | | | | | | | | | 86,607 | | | | 14,458 | | | | 72,149 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recognized as deferred income tax assets | | | 318,391 | | | | | | | | | | | | | | | | 448,954 | | | | 365,946 | | | | 83,008 | |
Tax rate(*3) | | | 27.5 | % | | | | | | | | | | | | | | | 27.5 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred income tax assets | | | 87,557 | | | | | | | | | | | | | | | | 123,462 | | | | 100,635 | | | | 22,827 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Tax credit carryforwards) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total tax credit | | | 101,695 | | | | | | | | | | | | | | | | 114,697 | | | | 43,750 | | | | 70,947 | |
Not recognized as deferred income tax assets | | | 16,905 | | | | | | | | | | | | | | | | 22,991 | | | | — | | | | 22,991 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recognized as deferred income tax assets | | | 84,790 | | | | | | | | | | | | | | | | 91,706 | | | | 43,750 | | | | 47,956 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred income tax assets | | | 68,286 | | | | | | | | | | | | | | | | 71,555 | | | | 35,000 | | | | 36,555 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Taxable temporary differences) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accrued revenue | | | (2,931 | ) | | (Won) | (3,265 | ) | | (Won) | (1,225 | ) | | (Won) | (3,431 | ) | | | (1,059 | ) | | | (868 | ) | | | (191 | ) |
Available-for-sale securities | | | (10,221 | ) | | | (7,608 | ) | | | (724 | ) | | | (203 | ) | | | (8,129 | ) | | | (227 | ) | | | (7,902 | ) |
Derivatives | | | (1,494 | ) | | | (1,494 | ) | | | — | | | | 477 | | | | (1,971 | ) | | | — | | | | (1,971 | ) |
Deposit for severance indemnity | | | (2,253 | ) | | | (2,253 | ) | | | (838 | ) | | | (569 | ) | | | (2,522 | ) | | | — | | | | (2,522 | ) |
Short term investment securities | | | — | | | | — | | | | (37 | ) | | | (37 | ) | | | — | | | | — | | | | — | |
Depreciation | | | (6,234 | ) | | | (6,234 | ) | | | — | | | | (1,778 | ) | | | (4,456 | ) | | | — | | | | (4,456 | ) |
Other | | | (197 | ) | | | (768 | ) | | | (898 | ) | | | (1,009 | ) | | | (657 | ) | | | — | | | | (657 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sub total | | | (23,330 | ) | | (Won) | (21,622 | ) | | (Won) | (3,722 | ) | | (Won) | (6,550 | ) | | | (18,794 | ) | | | (1,095 | ) | | | (17,699 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Not recognized as deferred income tax liabilities(*2) | | | (3,937 | ) | | | | | | | | | | | | | | | (956 | ) | | | (107 | ) | | | (849 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recognized as deferred income tax liabilities | | | (19,393 | ) | | | | | | | | | | | | | | | (17,838 | ) | | | (988 | ) | | | (16,850 | ) |
Tax rate(*3) | | | 27.5 | % | | | | | | | | | | | | | | | 27.5 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred income tax liabilities | | | (5,333 | ) | | | | | | | | | | | | | | | (4,905 | ) | | | (272 | ) | | | (4,634 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred income tax assets, net | | (Won) | 150,510 | | | | | | | | | | | | | | | (Won) | 190,112 | | | (Won) | 135,363 | | | (Won) | 54,748 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (*1) | Tax effects from true-up for prior year tax return arising from temporary difference and non-temporary differences were adjusted in deferred income tax assets and current earnings, respectively. |
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| (*2) | The Company did not recognize deferred income tax assets related to the tax effects of deductible temporary differences from equity in losses of affiliates since it was not almost certain that the Company would be able to realize the related tax benefits in the foreseeable future. The Company also did not recognize deferred income tax liabilities representing the tax effect of taxable temporary differences from equity method investees, since it is almost certain that the differences will not reverse in the foreseeable future given that the Company is able to control the timing of reversal of the temporary difference and the investees have not declared dividends in the past 5 years. |
| (*3) | Tax rate is the enacted marginal tax rate which is expected to apply to taxable income in the periods in which the deferred income tax liability or asset is expected to be settled or realized. |
Deferred income tax assets (liabilities) and income tax benefit (expense) added to (deducted from) equity as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | | | | | | | |
| | | 2006 |
| | | Total | | Income tax
expense | | Deferred income tax
assets (liabilities) | | | Net of tax |
Gain on valuation of available-for-sale securities | | (Won) | 9,974 | | — | | (Won) | (2,743 | ) | | (Won) | 7,231 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | 2007 |
| | | Total | | Income tax
expense | | Deferred income tax
assets (liabilities) | | | Net of tax |
Gain on valuation of available-for-sale securities | | (Won) | 7,886 | | — | | (Won) | (2,169 | ) | | (Won) | 5,717 |
| | | | | | | | | | | | |
24. INCOME PER SHARE
The Company’s net income per share for the years ended December 31, 2005, 2006 and 2007 is computed as follows (in millions of Korean won, except for per share data):
| | | | | | | | | |
| | | 2005 | | 2006 | | 2007 |
Net income | | (Won) | 547,297 | | (Won) | 412,001 | | (Won) | 249,019 |
Weighted average number of common stock outstanding | | | 181,629,486 | | | 201,086,493 | | | 194,948,875 |
| | | | | | | | | |
Basic and diluted net income per share (in Korean won) | | (Won) | 3,013 | | (Won) | 2,049 | | (Won) | 1,277 |
| | | | | | | | | |
Potential common stocks as of December 31, 2007 are as follows:
| | | | |
| | | Exercisable Period | | Common stock to be issued |
2nd stock option | | March 25, 2005 ~ March 24, 2010 | | 28,600 |
3rd stock option | | September 9, 2005 ~ September 8, 2010 | | 305,754 |
4th stock option | | March 5, 2007 ~ March 4, 2012 | | 110,117 |
| | | | |
Total | | | | 444,471 |
| | | | |
Stock options have no dilutive effect and are excluded from the calculation of diluted income per share.
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25. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES
Significant assets and liabilities denominated in foreign currencies (excluding those held by overseas subsidiaries) as of December 31, 2006 and 2007 are summarized as follows (in millions of Korean won and thousands of foreign currencies):
| | | | | | | | | | | | |
| | | 2006 | | 2007 |
| | | Foreign
currencies | | Korean won
equivalent | | Foreign
currencies | | Korean won
equivalent |
Assets: | | | | | | | | | | | | |
Cash and cash equivalents | | USD | 8 | | (Won) | 8 | | USD | 88 | | (Won) | 83 |
| | JPY | 5,492 | | | 43 | | JPY | 3,090 | | | 26 |
Accounts receivable-trade | | USD | 120 | | | 111 | | USD | 58 | | | 54 |
| | JPY | — | | | — | | JPY | 6,898 | | | 58 |
| | | | | | | | | | | | |
| | USD | 128 | | | | | USD | 146 | | | |
Total assets | | JPY | 5,492 | | (Won) | 162 | | JPY | 9,988 | | (Won) | 221 |
| | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Accounts payable-trade | | USD | 1,187 | | (Won) | 1,103 | | USD | 3,861 | | (Won) | 3,622 |
| | JPY | 25,522 | | | 200 | | JPY | 107,080 | | | 892 |
Short-term borrowings | | USD | 19,267 | | | 17,910 | | USD | 9,902 | | | 9,290 |
| | EUR | 1,263 | | | 1,544 | | EUR | — | | | — |
| | JPY | 242,694 | | | 1,897 | | JPY | 267,296 | | | 2,227 |
Accounts payable-other | | USD | 21,091 | | | 19,606 | | USD | 12,391 | | | 11,626 |
| | EUR | 133 | | | 162 | | EUR | 31 | | | 43 |
| | JPY | — | | | — | | JPY | 22,664 | | | 189 |
Accrued expenses | | USD | 411 | | | 382 | | USD | 524 | | | 492 |
| | EUR | 16 | | | 20 | | EUR | 15 | | | 21 |
| | | | | | | | | | | | |
| | USD | 41,956 | | | | | USD | 26,678 | | | |
| | JPY | 268,216 | | | | | JPY | 397,040 | | | |
Total liabilities | | EUR | 1,412 | | (Won) | 42,824 | | EUR | 46 | | (Won) | 28,402 |
| | | | | | | | | | | | |
26. TRANSACTIONS WITH RELATED PARTIES
Significant transactions amongst the Company’s consolidated parties for the years ended December 31, 2005, 2006 and 2007 are summarized as follows (in millions of Korean won):
| | | | | | | | | | | | | |
Seller | | Purchaser | | Transactions | | 2005 | | 2006 | | 2007 |
KTF | | KTF M&S | | Sales of PCS handsets | | (Won) | — | | (Won) | — | | (Won) | 137,601 |
| | KTF Mhows | | PCS services | | | — | | | 2,803 | | | 2,837 |
| | KTFT | | PCS services | | | 992 | | | 126 | | | 138 |
| | KTF Indonesia | | Others | | | 776 | | | 500 | | | — |
KTF Mhows | | KTFT | | Sales of Mobile | | | — | | | — | | | 145 |
| | KTF | | Advertising expenses | | | — | | | 10,660 | | | 10,805 |
KTFT | | KTF | | Purchase of PCS networks and other | | | 237,024 | | | 218,924 | | | 358,150 |
| | KTF M&S | | Purchase of PCS networks and other | | | — | | | — | | | 5,055 |
KTF M&S | | KTFT | | Commission and other | | | — | | | — | | | 5,160 |
| | KTF | | Commissions of sale | | | — | | | — | | | 61,326 |
KTF Indonesia | | KTF | | Commissions | | | — | | | — | | | 361 |
Doremi Media | | Bluecord Technology | | Cost of sound source | | | — | | | — | | | 314 |
Bluecord Technology | | Doremi Media | | Sales of sound source | | | — | | | — | | | 587 |
| | | | | | | | | | | | | |
Total | | | | | | (Won) | 238,792 | | (Won) | 233,013 | | (Won) | 582,479 |
| | | | | | | | | | | | | |
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Significant account balances amongst the Company’s consolidated parties as of December 31, 2006 and 2007 are as follows (in millions of Korea won):
| | | | | | | | |
Debtor | | Creditor | | 2006 | | 2007 |
KTF | | KTF M&S | | (Won) | — | | (Won) | 761 |
| | KTF Mhows | | | 497 | | | 518 |
| | KTFT | | | 104 | | | 10 |
KTF Mhows | | KTFT | | | — | | | 14 |
| | KTF | | | 3,606 | | | 3,257 |
KTF M&S | | KTF | | | — | | | 5,594 |
KTFT | | KTF | | | 92,108 | | | 100,569 |
| | KTF M&S | | | — | | | 5,445 |
Doremi Media | | Bluecord Technology | | | — | | | 72 |
Bluecord Technology | | Doremi Media | | | — | | | 290 |
| | | | | | | | |
Total | | | | (Won) | 96,315 | | (Won) | 116,530 |
| | | | | | | | |
The Company’s relationships with affiliates as of December 31, 2005, 2006 and 2007 are as follows:
| | |
Relationship | | Name |
Parent | | KT |
| |
Subsidiaries of the parent company | | KTN, KTH, KTP, KTJ, KTS, KTR, KTC, KTL, KTPI, KTCC, NTC, Telecop Service, KT Capital, Olive Nine, KTAI, KT FDS and Others |
| |
Equity method investee | | KDB, Harex Info Tech, eNtoB, Boston Film Fund, Sidus FNH, KTF-CJ Music Contents Investment Fund, Sidus FNH-BENEX Cinema Fund1, KTF-DoCoMo Mobile Investment Fund, Bluecord Technology and others |
The Company considers management of vice president or higher and non-permanent directors who have the authority and responsibility for planning, operation and control and are in charge of business or division unit as key management personnel. Compensation to key management personnel of the Company for the years ended December 31, 2007 is as follows (in millions of Korean won):
| | | | | |
Account | | Amount | | Description |
Share-based payments | | (Won) | 91 | | Stock options |
Other benefits | |
| 757
| | Salaries, bonuses, other allowances, retirement benefits, medical benefits and other |
| | | | | |
| | (Won) | 848 | | |
| | | | | |
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Significant transactions between KTF and its related parties for the years ended December 31, 2005, 2006 and 2007 are summarized as follows (in millions of Korean won):
Revenues
| | | | | | | | | | | |
Related party | | Transactions | | 2005 | | 2006 | | 2007 |
Parent | | | | | | | | | | | |
KT | | Interconnection charges and others | | (Won) | 779,524 | | (Won) | 730,504 | | (Won) | 850,117 |
| | | | |
Subsidiaries of the parent company | | | | | | | | | | | |
KTN | | Purchase of PCS handsets | | | 2,348 | | | 2,658 | | | 12,267 |
KTH | | PCS services | | | 50 | | | 127 | | | 688 |
KTP | | Interconnection charges and others | | | 1,000 | | | 2,421 | | | 1,239 |
KTJ | | Interconnection charges and others | | | 44 | | | 19 | | | 1 |
KTL | | Interconnection charges and others | | | 1 | | | 1 | | | 1 |
KTC | | Interconnection charges and others | | | 40 | | | 10 | | | 16 |
KTR | | Interconnection charges and others | | | — | | | 1 | | | 103 |
| | | | |
Equity method investee | | | | | | | | | | | |
Harex Info Tech | | PCS services | | | — | | | 1 | | | — |
eNtoB | | PCS services | | | — | | | 1 | | | 1 |
Sidus FNH-BENEX
Cinema Fund1 | | PCS services | | | — | | | — | | | 3 |
Others | | Commissions and other | | | 2,124 | | | — | | | 1,070 |
| | | | | | | | | | | |
Total | | | | (Won) | 785,131 | | (Won) | 735,743 | | (Won) | 865,506 |
| | | | | | | | | | | |
Purchases
| | | | | | | | | | | |
Related party | | Transactions | | 2005 | | 2006 | | 2007 |
Parent | | | | | | | | | | | |
KT | | Leased line charges and others | | (Won) | 512,426 | | (Won) | 424,533 | | (Won) | 455,121 |
| | | | |
Subsidiaries of the parent company | | | | | | | | | | | |
KTN | | Sales commissions | | | 7,671 | | | 4,514 | | | 11,720 |
KTH | | Commissions | | | 26,833 | | | 15,884 | | | 16,989 |
KTP | | Interconnection charges | | | 539 | | | 695 | | | 907 |
KTL | | Commissions | | | 43 | | | 53 | | | 11 |
KTC | | Sales promotion | | | 454 | | | 2,228 | | | 2,435 |
KTR | | Rent | | | 22 | | | 2,321 | | | 1,558 |
Telecop Service | | Commissions | | | — | | | 30 | | | 88 |
Olive Nine | | Advertisements | | | — | | | — | | | 30 |
| | | | |
Equity method investee | | | | | | | | | | | |
KDB | | Commissions | | | 377 | | | 265 | | | 435 |
Harex Info Tech | | Commissions and others | | | 326 | | | 1,390 | | | 1,402 |
eNtoB Corp | | others | | | — | | | 1 | | | — |
Sidus FNH-BENEX
Cinema Fund1 | | Sales promotion | | | — | | | 41 | | | 10 |
Others | | Royalty and others | | | 6,367 | | | — | | | 1,555 |
| | | | | | | | | | | |
Total | | | | (Won) | 550,058 | | (Won) | 451,955 | | (Won) | 492,261 |
| | | | | | | | | | | |
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Significant account balances between KTF and its related parties as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
Receivables
| | | | | | | | |
Related party | | Description | | 2006 | | 2007 |
Parent | | | | | | | | |
KT | | Receivables and others | | (Won) | 146,628 | | (Won) | 199,026 |
| | Guarantee deposits | | | 29,902 | | | 23,788 |
| | | |
Subsidiaries of the parent company | | | | | | | | |
KTN | | Receivables and others | | | 560 | | | 1,712 |
KTH | | Receivables | | | 17 | | | 95 |
KTP | | Receivables-other | | | 276 | | | 231 |
KTJ | | Receivables | | | 1 | | | — |
| | | |
Equity method investee | | | | | | | | |
Others | | Receivables and others | | | — | | | 1,222 |
| | | | | | | | |
Total | | | | (Won) | 177,384 | | (Won) | 226,074 |
| | | | | | | | |
Payables
| | | | | | | | |
Related party | | Description | | 2006 | | 2007 |
Parent | | | | | | | | |
KT | | Payables and others | | (Won) | 81,031 | | (Won) | 48,548 |
| | Long-term deposit received | | | 4,390 | | | 3,951 |
| | | |
Subsidiaries of the parent company | | | | | 848 | | | 536 |
KTN | | Payables-other | | | 4,222 | | | 3,487 |
KTH | | Payables-other | | | 40 | | | 5 |
KTP | | Payables-other and Others | | | 880 | | | 353 |
KTC | | Payables-other | | | 4 | | | 38 |
KTR | | Payables-other | | | 6 | | | 3 |
Telecop Service | | Payables-other | | | | | | |
| | | |
Equity method investee | | | | | | | | |
KDB | | Commissions | | | — | | | 61 |
Harex Info Tech | | Commissions and others | | | — | | | 59 |
Others | | Royalty and others | | | — | | | 1,481 |
| | | | | | | | |
Total | | | | (Won) | 91,421 | | (Won) | 58,522 |
| | | | | | | | |
As of December 31, 2007, the Company has provided guarantees for related parties as follows (in millions of Korean won and thousands of U.S. dollars):
| | | | | | | |
Guarantor | | Creditor | | Description | | Amount |
Joint liability on guarantee | | The Korea Securities Finance Corporation | | Guarantee for Employee Stock Ownership Association | | (Won) | 277 |
| | Shinhan Bank | | Performance for guarantee | | (Won) | 104 |
| | Korea Exchange Bank | | Guarantee for loan | | (Won) | 520 |
| | Shinhan Bank | | Guarantee for loan | | (Won) | 3,076 |
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27. COMMITMENTS AND CONTINGENCIES
KTF has entered into an agreement covering the resale of PCS with KT. As compensation for providing telecommunications network, KTF receives certain amount by multiplying outgoing call generated from KT’s subscribers by the rate per minute.
As of December 31, 2007, the Company has bank overdraft agreements with Shinhan Bank with guarantee limits of (Won)50,000 million.
Accounts receivable-trade sold but not matured as of December 31, 2007 is (Won)15,306 million.
As of December 31, 2007, the Company is faced with various lawsuits as the defendant for total claims of (Won)11,664 million. The management of the Company believes the outcome of these lawsuits will not have a material impact on the financial statements.
KTF entered into a PCS production contract with Dasung Technology Inc. and Netrontech Co., Ltd.
KTF pays a 5.25% royalty of the unit net price of CDMA PCS to Qualcomm Incorporated.
28. STATEMENTS OF CASH FLOWS
The statements of cash flows have been presented using the indirect method. Significant non-cash transactions for the years ended December 31, 2005, 2006 and 2007 are detailed as follows (in millions of Korean won):
| | | | | | | | | |
| | | 2005 | | 2006 | | 2007 |
Transfer of long-term investment securities to equity method investment securities | | (Won) | 38,659 | | (Won) | — | | (Won) | — |
Transfer of accounts receivable-other to equity method investment securities | | | 586 | | | — | | | — |
Transfer of other current assets to equity method investment securities | | | 283 | | | — | | | — |
Transfer of other investment assets to equity method investment securities | | | — | | | — | | | 20,000 |
Transfer of long-term loans to short-term loans | | | 12,414 | | | 21,418 | | | 3,559 |
Transfer of loner-term debentures to current portion | | | 340,280 | | | 500,000 | | | 322,100 |
Transfer of long-term accounts payable-other to current portion | | | — | | | 90,000 | | | 110,000 |
Retirement of treasury stock | | | 13,366 | | | 164,884 | | | 94,071 |
Transfer of accrued provisions to current portion | | | 9,096 | | | 6,800 | | | 4,322 |
29. SUBSEQUENT EVENTS
As of February 25, 2008, The Company has issued foreign currency bond as follows
| | |
| | | Description |
Class | | Unregistered and unsecured debenture (floating interest) |
Amounts | | (Won)165,305 million (USD 175,000 thousand) |
Interest | | LIBOR +1.5% (3 month) |
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30. NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT AND MINORITY INTEREST
Details of net income attributable to equity holders of the parents and minority interest as of December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won)
| | | | | | | | | | | |
| | | 2005 | | | 2006 | | 2007 | |
Net income | | | | | | | | | | | |
Minority interest(*) | | (Won) | 990 | | | (Won) | 807 | | (Won) | 1,463 | |
Holders of the parents | | | 547,297 | | | | 412,001 | | | 249,019 | |
| | | | | | | | | | | |
| | (Won) | 548,287 | | | (Won) | 412,808 | | (Won) | 250,482 | |
| | | | | | | | | | | |
(*) Details of net income of minority interest: | | | | | | | | | | | |
Net income of subsidiaries | | (Won) | 2,844 | | | (Won) | 455 | | (Won) | 2,677 | |
Elimination of inter-company transactions | | | (1,854 | ) | | | 352 | | | (1,214 | ) |
| | | | | | | | | | | |
| | (Won) | 990 | | | (Won) | 807 | | (Won) | 1,463 | |
| | | | | | | | | | | |
31. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Korea (“Korean GAAP”), which differ in certain respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). The significant differences are described below. Other differences do not have a significant effect on either consolidated net income or stockholders’ equity.
a. Companies Included in Consolidation
Under Korean GAAP, investments in subsidiaries and controlled entities are consolidated and substantial control is deemed to exist when the investor is the largest stockholder and owns more than 30 percent of total outstanding voting stock. However, U.S. GAAP generally requires that all majority-owned subsidiaries be consolidated and that any entity of which the Company owns twenty to fifty percent of total outstanding voting stock not be consolidated; rather that entity should be accounted for under the equity method.
Under U.S. GAAP, if a business enterprise has a controlling financial interest in a variable interest entity, which is defined by FASB Interpretation No. 46 Revised (“FIN 46R”), the assets, liabilities and results of the activities of the variable interest entity should be included in the consolidated financial statements with those of the business enterprise. Under the Korean GAAP, there is no specific provision for the accounting treatment of variable interest entities.
b. Capitalization of Foreign Currency Translation Gain (Loss)
Under previous Korean GAAP, certain unrealized foreign currency translation gains and losses were excluded from the results of operations and included in the cost of property and equipment. However, under U.S. GAAP, all unrealized foreign currency translation gains and losses on monetary assets and liabilities are to be included in the current year’s results of operations.
The amounts of foreign currency translation gains and losses included in property and equipment under previous Korean GAAP were adjusted to comply with U.S. GAAP.
F-93
c. Interest Capitalization
Under Korean GAAP, the Company elected, starting from January 1, 2003, to no longer capitalize interest expense. However, under U.S. GAAP, the Company’s policy is to capitalize interest that would have theoretically been avoided had expenditures not been made for assets, which require a period of time to get them ready for their intended uses.
d. Deferred Charges
Deferred charges in intangibles consist primarily of development costs. The development costs which are recoverable from future earnings are deferred under Korean GAAP.
Under U.S. GAAP, development costs are charged to expenses when incurred and are classified as operating expenses.
e. Revenue Recognition
Under Korean GAAP, activation fees are recorded as revenue when billed and the related direct incremental acquisition costs are expensed as incurred.
Under U.S. GAAP, such amounts are deferred and recognized over the period of the customer relationship.
f. Handset Subsidies to Long-term Mobile Subscribers
Under Korean GAAP, handset subsidies are recorded as operating expenses. Under US GAAP, such amounts are directly deducted from revenue.
g. Merger with KTM.Com
Under Korean GAAP, as KTF and KTM.Com Co., Ltd. (“KTM.Com”) were subsidiaries of KT prior to the merger, assets and liabilities were transferred from KTM.Com to KTF at book values and the difference between the par value of capital stock issued and the value of net assets transferred was recorded in the capital surplus account.
Under U.S. GAAP, as KTF and KTM.Com were not subsidiaries but equity method investees of KT prior to the merger, assets and liabilities were transferred from KTM.Com to KTF at fair values and the difference between the fair value of capital stock issued and the fair value of net assets transferred was recorded as intangible assets and goodwill.
The Company classified the intangible assets into three components: subscriber base, licensing cost and goodwill.
h. Merger with KT ICOM
Under Korean GAAP, as KTF and KT ICOM were subsidiaries of KT prior to the merger, assets and liabilities were transferred from KT ICOM to KTF at book values as shown in the consolidated financial statements of KT and the difference between the par value of capital stock issued and the value of net assets transferred was recorded in the capital surplus account.
The merger was not accounted for as a merger of entities under common control as KTF and KT ICOM are not subsidiaries of KT and assets and liabilities were transferred from KT ICOM to KT Freetel at fair value under U.S. GAAP. As the fair values of net assets transferred amounting to (Won)228,244 million exceed the fair value of capital stock issued amounting to (Won)190,755 million, the non-current assets of (Won)37,489 million were reduced proportionally.
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i. Goodwill and Other Intangibles
Under Korean GAAP, the purchase price over the fair value of net assets being acquired was recorded as goodwill and it is amortized over 20 years. Impairment loss is recognized when the carrying amount of goodwill exceeds the fair value.
Under SFAS No. 142 “Goodwill and Intangible Assets”, intangible assets with finite lives continue to be amortized over their useful economic lives. Goodwill and intangible assets with indefinite lives are not amortized, but tested for impairment, at least annually.
In accordance with SFAS No. 142, the goodwill and intangibles acquired from KTM.Com and KT ICOM and amortization expense for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | | | | | | | | | |
| | | | | | | Amortization expense |
| | | | | Initial amount | | 2005 | | 2006 | | 2007 |
KTM.Com | | Goodwill | | (Won) | 753,065 | | (Won) | — | | (Won) | — | | (Won) | — |
| | Subscriber base | | | 605,563 | | | 54,068 | | | — | | | — |
| | Licensing cost | | | 83,875 | | | — | | | 14,583 | | | 14,583 |
KT ICOM | | Frequency usage right | | | 1,194,045 | | | 94,134 | | | 89,283 | | | 91,822 |
Under Korean GAAP, licensing costs paid by the initial stockholders to obtain the operating licenses prior to the establishment of the Company were not recorded in the accounts of the Company.
Under U.S. GAAP, licensing costs were accounted for as an intangible asset and capital surplus at the time of establishment of the Company.
Since the Company determined the useful life of licensing costs of second generation service (“2G”) to be indefinite, the Company determined not to amortize the related costs until December 31, 2005.
On December 31, 2005, the Korea Communication Act (“Act”) was revised, which is effective July 1, 2006. Under the Act, the right of the usage of frequency for 2G will expire in June 2011. As such, the Company is amortizing licensing costs of 2G of (Won)162,708 million over the remaining useful life and amortization expenses for the years ended 2006 and 2007 are (Won)29,583 million, respectively.
j. Disposal of Accounts Receivable-Trade
Under Korean GAAP, the transaction between KT Freetel and Shinhan Bank Trust is recorded as a sale of accounts receivable-trade. Under U.S. GAAP, this transaction does not qualify for sale accounting and as such, the transaction is classified as borrowings. There has no impact on the Company’s consolidated financial statements for the current period.
k. Investor-level Goodwill
Under Korean GAAP, for investments in affiliated companies accounted for using the equity method, the excess of acquisition cost of the affiliates over the Company’s share of their net assets at the acquisition date is being amortized by the straight-line method over its estimated useful life. Under U.S. GAAP, the investor-level goodwill is not amortized, but instead tested for impairment in accordance with APB No. 18. The investor-level goodwill which is recorded only at the investor’s financial statements represents the excess of the acquisition cost of equity method investees over the fair value of investor’s share of net identifiable assets acquired.
l. Additional Equity Investment in Subsidiaries
Under Korean GAAP, when additional interest is acquired after acquiring a majority interest in a subsidiary, the differences between the Company’s acquisition cost of the additional interest and the corresponding carrying amount of the acquired additional interest in a subsidiary is presented as an adjustment to capital surplus.
F-95
Under U.S. GAAP, the cost of an additional interest would be allocated based on the fair value of net assets at the time the additional interest is acquired, with the excess allocated to goodwill.
m. Minority Interest in Consolidated Subsidiaries
Under Korean GAAP, minority interest in consolidated subsidiaries is presented as a component of stockholders’ equity in the consolidated balance sheets.
Under U.S. GAAP, minority interest in consolidated subsidiaries is not included in stockholders’ equity; rather, it is presented between liabilities and stockholders’ equity item in the consolidated balance sheets.
n. Income Taxes
Under U.S. GAAP, effective January 1, 2007 the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which supplements SFAS No. 109 “Accounting for Income Taxes” (SFAS No. 109), by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires that the tax effect(s) of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the tax position are to be recognized. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustment would be recorded directly to retained earnings and reported as a change in accounting principle. As a result of the adoption of FIN 48 as of January 1, 2007, the Company recorded a decrease to retained earnings of (Won)4,439 million as a cumulative effect of a change in accounting principle with an increase to the liability amounting to (Won)4,439 million for uncertain tax positions.
o. Comprehensive Income
Prior to January 1, 2007, Korean GAAP did not require to present comprehensive income, however, effective January 1, 2007, the Company adopted SKAS No. 21, “Preparation and Presentation of Financial Statements 1”, which requires separate disclosure of the details of comprehensive income. Consequently, there is no GAAP difference as of December 31, 2007, in terms of disclosure of comprehensive income and its components.
Under U.S. GAAP, comprehensive income and its components must be presented in the financial statements. Comprehensive income includes all changes in stockholders’ equity during a period except those resulting from investments by, or distributions to, owners, including certain items not included in the current results of operations.
F-96
Comprehensive income for the years ended December 31, 2005, 2006 and 2007 and accumulated other comprehensive income balance as of December 31, 2005, 2006 and 2007 is summarized as follows (in millions of Korean won):
| | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | |
Net earnings as adjusted in accordance with U.S. GAAP | | (Won) | 503,798 | | | (Won) | 402,991 | | | (Won) | 199,395 | |
Other comprehensive income, net of tax: | | | | | | | | | | | | |
Foreign currency translation adjustments | | | (89 | ) | | | 24 | | | | (17 | ) |
Unrealized gains on investments: | | | | | | | | | | | | |
Unrealized holding gains, net of tax of (Won)990 million, (Won)1,860 million and (Won)102 million in 2005, 2006 and 2007, respectively | | | 5,989 | | | | 4,904 | | | | 385 | |
Less: reclassification adjustment for gains (losses) realized in net earning due to disposal, net of tax of ((Won)1,240) million, ((Won)1,524) million and ((Won)484) million in 2005, 2006 and 2007, respectively | | | (3,268 | ) | | | (4,017 | ) | | | (1,276 | ) |
| | | | | | | | | | | | |
Comprehensive income as adjusted in accordance with U.S. GAAP | | (Won) | 506,430 | | | (Won) | 403,902 | | | (Won) | 198,487 | |
| | | | | | | | | | | | |
Accumulated other comprehensive income (loss) balances: | | | | | | | | | | | | |
Foreign currency translation adjustments | | (Won) | (89 | ) | | (Won) | (65 | ) | | (Won) | (82 | ) |
Unrealized gains on investments | | | 6,258 | | | | 7,145 | | | | 6,254 | |
| | | | | | | | | | | | |
| | (Won) | 6,169 | | | (Won) | 7,080 | | | (Won) | 6,172 | |
| | | | | | | | | | | | |
p. New Accounting Pronouncements
| | (i) | In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) which provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. |
| | | SFAS No. 157 requires expanded disclosures about fair value measurements and establishes a three-level hierarchy for fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The standard also requires that a company use its own nonperformance risk when measuring liabilities carried at fair value, including derivatives. In February 2008, the FASB approved FSP No. 157-2, “Effective Date of FASB Statement No. 157” (FSP No. 157-2), that permits companies to partially defer the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The FSP did not permit companies to defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. SFAS No. 157 is effective for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually for financial statements issued for fiscal years beginning after November 15, 2007. The provisions of SFAS No. 157 will be applied prospectively. Management intends to defer adoption of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis and is currently evaluating the effects, if any, that SFAS No. 157 may have on the Company’s financial condition and results of operations. |
| | (ii) | In September 2006, the FASB ratified EITF Issue No. 06-1, “Accounting for Consideration Given by a Service Provider to a Manufacturer or Reseller of Equipment Necessary for an End-Customer to Receive Service from the Service Provider” (EITF No. 06-1), which provides guidance regarding whether the consideration given by a service provider to a manufacturer or reseller of specialized equipment should be characterized as a reduction of revenue or as an expense. EITF No. 06-1 is effective for the first annual reporting period beginning after June 15, 2007. Entities are required to recognize the effects of applying this issue as a change in accounting principle through retrospective |
F-97
| | application to all prior periods unless it is impracticable to do so. Management estimates that upon adoption, this guidance will not have a material effect on the Company’s financial condition and results of operations. |
| | (iii) | In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities—including an Amendment of SFAS No. 115” (SFAS No. 159), which permits an entity to measure certain financial assets and financial liabilities at fair value that are not currently required to be measured at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS No. 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities. The Statement also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election. SFAS No. 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. Management does not expect the adoption of this standard to have a material impact on the Company’s financial condition and results of operations. |
| | (iv) | In June 2007, the FASB ratified EITF Issue No. 07-3, “Accounting for Nonrefundable Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF 07-3), requiring that nonrefundable advance payments for future research and development activities be deferred and capitalized. Such amounts should be expensed as the related goods are delivered or the related services are performed. The Statement is effective for fiscal years beginning after December 15, 2007. Management estimates that upon adoption, this guidance will not have a material effect on the Company’s financial condition and results of operations. |
| | (v) | In June 2007, the FASB ratified EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11), which requires entities to record to additional paid in capital the tax benefits on dividends or dividend equivalents that are charged to retained earnings for certain share-based awards. In a share-based payment arrangement, employees may receive dividends or dividend equivalents on awards of nonvested equity shares, nonvested equity share units during the vesting period, and share options until the exercise date. Generally, the payment of such dividends can be treated as deductible compensation for tax purposes. The amount of tax benefits recognized in additional paid-in capital should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 is effective for fiscal years beginning after December 15, 2007. Management estimates that upon adoption, this guidance will not have a material effect on the Company’s financial condition and results of operations. |
| | (vi) | In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)) which retained the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but SFAS No. 141(R) changed the method of applying the acquisition method in a number of significant aspects. |
| | | SFAS No. 141(R) will require that: (1) for all business combinations, the acquirer records all assets and liabilities of the acquired business, including goodwill, generally at their fair values; (2) certain contingent assets and liabilities acquired be recognized at their fair values on the acquisition date; (3) contingent consideration be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settled; (4) acquisition-related transaction and restructuring costs be expensed rather than treated as part of the cost of the acquisition and included in the amount recorded for assets acquired; (5) in step acquisitions, previous equity interest in an acquiree held prior to obtaining control be re-measured to their acquisition-date fair values, with any gain or loss recognized in earnings; and (6) when making adjustments to finalize initial accounting, companies revise any previously issued post-acquisition financial information in future financial statements to reflect any adjustments as if they had been |
F-98
| | recorded on the acquisition date. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS No. 141(R) amends SFAS No. 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of this statement should also apply the provisions of SFAS No. 141(R). This standard will be applied to all future business combinations after December 31, 2008. |
| | (vii) | In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an Amendment of ARB 51” (SFAS No. 160) which amends ARB 51 to establish new standards that will govern the accounting for and reporting of noncontrolling interest in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Also, SFAS No. 160 requires that: (1) noncontrolling interest, previously referred to as minority interest, be reported as part of equity in the consolidated financial statements; (2) losses be allocated to the noncontrolling interest even when such allocation might result in a deficit balance, reducing the losses attributed to the controlling interest; (3) changes in ownership interest be treated as equity transactions if control is maintained; and, (4) upon a loss of control, any gain or loss on the interest sold be recognized in earnings. SFAS No. 160 is effective on a prospective basis for all fiscal years beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which will be applied retrospectively. Management is currently evaluating the effects, if any, that SFAS No. 160 may have on the Company’s financial condition and results of operations. |
| | (viii) | In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133” (SFAS No. 161), that expands the disclosure requirements of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133). SFAS No. 161 requires additional disclosures regarding: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. In addition, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives described in the context of an entity’s risk exposures, quantitative disclosures about the location and fair value of derivative instruments and associated gains and losses, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. |
| | (ix) | In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”) that is intended to improve financial reporting by identifying a consistent framework, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS No. 162 is effective 60 days following the Securities and Exchanges Commission’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” |
| | (x) | In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60” (SFAS No. 163) that clarifies how FASB Statement No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities and also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures about the insurance enterprise’s risk-management activities and requires that disclosures about the risk-management activities of the insurance enterprise be effective for the first period beginning after issuance of this Statement. Except for those disclosures, earlier application is not permitted. Management is currently evaluating the effects, if any, that SFAS No. 163 may have on the Company’s financial condition and results of operations. |
F-99
q. U.S GAAP Reconciliations
The effects of the significant adjustments to net earnings for the years ended December 31, 2005, 2006 and 2007 and stockholders’ equity as of December 31, 2006 and 2007 that are required if U.S. GAAP were applied instead of Korean GAAP are summarized as follows (in millions of Korean won, except per share amounts):
| | | | | | | | | | | | | | |
| | | Note
reference | | 2005 | | | 2006 | | | 2007 | |
Net income (attributable to equity holders of the parent) under Korean GAAP | | | | (Won) | 547,297 | | | (Won) | 412,001 | | | (Won) | 249,019 | |
Adjustments: | | | | | | | | | | | | | | |
Capitalization of foreign currency translation gain (loss), net | | 31.b | | | 820 | | | | (228 | ) | | | 538 | |
Interest capitalization | | 31.c | | | (1,050 | ) | | | (1,881 | ) | | | (4,017 | ) |
Deferred charges | | 31.d | | | (5,058 | ) | | | 4,809 | | | | 5,815 | |
Revenue recognition | | 31.e | | | (3,348 | ) | | | (15,290 | ) | | | (49,097 | ) |
Merger with KT ICOM | | 31.h | | | 2,884 | | | | 6,640 | | | | 4,102 | |
Amortization of subscriber base | | 31.i | | | (54,068 | ) | | | — | | | | — | |
Licensing cost | | 31.i | | | — | | | | (29,583 | ) | | | (29,583 | ) |
Disposal of account receivable-trade | | 31.j | | | (179 | ) | | | (147 | ) | | | — | |
Investor- level goodwill | | 31.k | | | — | | | | 1,928 | | | | 1,545 | |
Deferred income tax effects of U.S. GAAP adjustments | | | | | 16,500 | | | | 24,742 | | | | 21,073 | |
| | | | | | | | | | | | | | |
| | | | | (43,499 | ) | | | (9,010 | ) | | | (49,624 | ) |
| | | | | | | | | | | | | | |
Adjusted net income under U.S. GAAP | | | | (Won) | 503,798 | | | (Won) | 402,991 | | | (Won) | 199,395 | |
| | | | | | | | | | | | | | |
Basic and diluted earnings per shares | | | | (Won) | 2,774 | | | (Won) | 2,004 | | | (Won) | 1,023 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Note
reference | | 2006 | | | 2007 | |
Stockholders’ equity under Korean GAAP | | | | (Won) | 4,320,151 | | | (Won) | 4,373,379 | |
Adjustments: | | | | | | | | | | |
Capitalization of foreign currency translation gain (loss), net | | 31.b | | | (835 | ) | | | (297 | ) |
Interest capitalization | | 31.c | | | 66,858 | | | | 62,841 | |
Deferred charges | | 31.d | | | (7,152 | ) | | | (1,338 | ) |
Revenue recognition | | 31.e | | | (21,456 | ) | | | (70,553 | ) |
Merger with KTM.Com | | 31.g | | | 688,653 | | | | 688,653 | |
Merger with KT ICOM | | 31.h | | | (40,679 | ) | | | (36,577 | ) |
Licensing cost | | 31.i | | | 133,125 | | | | 103,542 | |
Investor- level goodwill | | 31.k | | | 1,928 | | | | 3,473 | |
Additional equity investment in subsidiaries | | 31.l | | | 1,132 | | | | 1,132 | |
Minority interest in consolidated subsidiaries | | 31.m | | | (11,095 | ) | | | (29,670 | ) |
Deferred income tax effects of U.S. GAAP adjustments | | | | | (32,978 | ) | | | (16,415 | ) |
| | | | | | | | | | |
| | | | | 777,501 | | | | 704,791 | |
| | | | | | | | | | |
Stockholders’ equity as adjusted in accordance with U.S. GAAP | | | | (Won) | 5,097,652 | | | (Won) | 5,078,170 | |
| | | | | | | | | | |
F-100
Condensed balance sheets in accordance with U.S. GAAP as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | |
| | | 2006 | | 2007 |
Assets | | | | | | |
Current assets | | (Won) | 2,462,797 | | (Won) | 1,870,669 |
Non-current assets | | | 6,479,293 | | | 6,449,944 |
| | | | | | |
Total assets | | (Won) | 8,942,090 | | (Won) | 8,320,613 |
| | | | | | |
Liabilities | | | | | | |
Current liabilities | | (Won) | 2,061,279 | | (Won) | 1,833,051 |
Long-term liabilities | | | 1,773,901 | | | 1,396,433 |
| | | | | | |
Total liabilities | | | 3,835,180 | | | 3,229,484 |
| | | | | | |
Minority interest in consolidated subsidiaries | | | 9,258 | | | 12,959 |
| | | | | | |
Stockholders’ equity | | | 5,097,652 | | | 5,078,170 |
| | | | | | |
Total liabilities, minority interest and stockholders’ equity | | (Won) | 8,942,090 | | (Won) | 8,320,613 |
| | | | | | |
The following table reconciles cash flows from operating, investing and financing activities for the years ended December 31, 2005, 2006 and 2007 under Korean GAAP, as reported in the consolidated financial statements to cash flows from operating, investing and financing activities for the years ended December 31, 2005, 2006 and 2007 under U.S. GAAP (in millions of Korean won):
| | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | |
Cash flows from operating activities under Korean GAAP | | (Won) | 2,203,781 | | | (Won) | 1,962,355 | | | (Won) | 1,414,520 | |
Adjustments: | | | | | | | | | | | | |
Trading securities | | | (240,000 | ) | | | 241,823 | | | | — | |
Difference in consolidation scope(*) | | | (1,021 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Cash flows from operating activities under U.S. GAAP | | (Won) | 1,962,760 | | | (Won) | 2,204,178 | | | (Won) | 1,414,520 | |
| | | | | | | | | | | | |
Cash flows from investing activities under Korean GAAP | | (Won) | (1,308,926 | ) | | (Won) | (874,552 | ) | | (Won) | (876,873 | ) |
Adjustments: | | | | | | | | | | | | |
Trading securities | | | 240,000 | | | | (241,823 | ) | | | — | |
Difference in consolidation scope(*) | | | 6,082 | | | | — | | | | — | |
| | | | | | | | | | | | |
Cash flows from investing activities under U.S. GAAP | | (Won) | (1,062,844 | ) | | (Won) | (1,116,375 | ) | | (Won) | (876,873 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities under Korean GAAP: | | (Won) | (618,797 | ) | | (Won) | (789,470 | ) | | (Won) | (814,422 | ) |
Adjustments: | | | | | | | | | | | | |
Difference in consolidation scope(*) | | | (20,282 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Cash flows from financing activities under U.S. GAAP | | (Won) | (639,079 | ) | | (Won) | (789,470 | ) | | (Won) | (814,422 | ) |
| | | | | | | | | | | | |
Cash and cash equivalents at end of the year under Korean GAAP | | (Won) | 307,600 | | | (Won) | 590,712 | | | (Won) | 330,473 | |
Adjustments: | | | | | | | | | | | | |
Difference in consolidation scope(*) | | | (15,221 | ) | | | — | | | | (16,535 | ) |
| | | | | | | | | | | | |
Cash and cash equivalents at end of the year under U.S. GAAP | | (Won) | 292,379 | | | (Won) | 590,712 | | | (Won) | 313,938 | |
| | | | | | | | | | | | |
| (*) | Reconciling items affecting cash flows related to difference in consolidation scope between Korean GAAP and U.S. GAAP |
F-101
32. ADDITIONAL U.S. GAAP DISCLOSURES
a. Income Tax Expense
The components of income tax expense for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
| | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | |
Current income tax expense | | (Won) | 106,429 | | | (Won) | 102,497 | | | (Won) | 75,337 | |
Deferred income tax benefit | | | (70,249 | ) | | | (11,221 | ) | | | (58,295 | ) |
| | | | | | | | | | | | |
Income tax expense | | (Won) | 36,180 | | | (Won) | 91,276 | | | (Won) | 17,042 | |
| | | | | | | | | | | | |
Substantially all income before income taxes and related income tax expense (benefit) are attributable to domestic operations. The provision for income taxes using statutory tax rates differs from the actual provision for the years ended December 31, 2005, 2006 and 2007 for the following reasons (in millions of Korean won):
| | | | | | | | | | | | |
| | | 2005 | | | 2006 | | | 2007 | |
Provision for income taxes at statutory tax rates | | (Won) | 147,921 | | | (Won) | 121,892 | | | (Won) | 63,165 | |
Investment tax credits | | | (83,497 | ) | | | (45,219 | ) | | | (41,153 | ) |
Additional income tax payment (refund) related to prior years | | | (2,665 | ) | | | 14,873 | | | | 1,214 | |
Non-temporary difference | | | (27,026 | ) | | | 11,800 | | | | 1,568 | |
Changes in deferred income tax unrecognized | | | 2,539 | | | | 930 | | | | 5,992 | |
Others | | | (1, 092 | ) | | | (13,000 | ) | | | (13,744 | ) |
| | | | | | | | | | | | |
Actual provision for income taxes | | (Won) | 36,180 | | | (Won) | 91,276 | | | (Won) | 17,042 | |
| | | | | | | | | | | | |
The effective tax rates after adjustments of certain differences between amounts reported for financial accounting and income tax purpose, were approximately 6.7%, 18.4% and 7.7% for the years ended December 31, 2005, 2006 and 2007, respectively.
The tax effects of temporary differences that resulted in significant portions of the deferred income tax assets and liabilities at December 31, 2006 and 2007, computed under U.S. GAAP, and a description of financial statement items that created these differences are as follows (in millions of Korean won):
| | | | | | | | |
| | | 2006 | | | 2007 | |
Deferred income tax assets: | | | | | | | | |
Allowance for doubtful accounts | | (Won) | 36,133 | | | (Won) | 47,589 | |
Inventories | | | 8,010 | | | | 12,984 | |
Unearned revenue | | | 9,808 | | | | 23,309 | |
Equity method investment securities | | | 274 | | | | 5,055 | |
Tax credit carryforwards | | | 85,191 | | | | 94,546 | |
Tax loss carryforwards | | | — | | | | 4,379 | |
Accrued expenses | | | 19,046 | | | | 33,988 | |
Accounts payable-other | | | 1,747 | | | | 3,618 | |
Donation | | | 990 | | | | 14 | |
Loss on impairment of long-term investment securities | | | 2,957 | | | | 3,449 | |
Provision for severance indemnities | | | 7,075 | | | | 10,203 | |
Other | | | 5,680 | | | | 4,558 | |
| | | | | | | | |
Total deferred income tax assets | | | 176,911 | | | | 243,692 | |
Valuation allowance | | | (19,381 | ) | | | (33,843 | ) |
| | | | | | | | |
Deferred income tax assets | | | 157,530 | | | | 209,849 | |
| | |
Deferred income tax liabilities: | | | | | | | | |
Available-for-sale securities | | | (2,732 | ) | | | (2,155 | ) |
Property and equipment | | | (9,903 | ) | | | (8,189 | ) |
Intangible assets | | | (25,508 | ) | | | (21,754 | ) |
Other | | | (1,158 | ) | | | (751 | ) |
| | | | | | | | |
Deferred income tax liabilities | | | (39,301 | ) | | | (32,849 | ) |
| | | | | | | | |
Net deferred income tax assets | | (Won) | 118,229 | | | (Won) | 177,000 | |
| | | | | | | | |
F-102
In 2006 and 2007, valuation allowance was recognized as realization of deferred income tax asset was not assessed as more likely than not mainly due to lack of expected future taxable income.
In 2007, the Company was eligible for investment tax credits of (Won)157,709 million. However, due to the minimum tax provisions, the Company utilized only (Won)43,012 million. The remaining tax credit will expire in 2012. During 2007, the Company concluded that the remaining tax credit was more likely than not of realization in the future based on future taxable income estimates. As a result, the Company recorded an income tax benefit of (Won)71,555 million for the tax credit.
In assessing the recoverability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differenced become deductible and tax carryforwards are utilizable. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred income tax assets are deductible, management believes that it is more likely than not the Company will realize the benefits of these deductible differences and tax carryforwards.
Upon adoption of FIN 48 as of January 1, 2007, the Company recorded a decrease to retained earnings of (Won)4,439 million as a cumulative effect of the liability for uncertain tax positions. At January 1, 2007, the Company had (Won)4,439 million of total gross unrecognized tax benefits, of which (Won)4,272 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. At December 31, 2007, the amount of unrecognized tax benefits that would favorably affect the effective income tax rate in future periods was (Won)130 million. These amounts consider the guidance in FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48”. The liability for uncertain tax positions is classified as a non-current liability.
A reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period is as follows (in millions of Korean won):
| | | | |
| | | Total | |
Balance at January 1, 2007 | | (Won) | 4,439 | |
Additions to tax positions recorded during the current year | | | 155 | |
Additions to tax positions recorded during prior years | | | — | |
Reductions to tax positions recorded during prior years | | | — | |
Reductions to tax positions due to a lapse of statutory limitations | | | — | |
Reductions for settlement | | | (1,291 | ) |
| | | | |
Balance at December 31, 2007 | | (Won) | 3,303 | |
| | | | |
The Company’s practice is to classify interest on uncertain tax positions in interest income (expense) and penalties in non-operating expense. The Company recognized (Won)25 million in penalties in 2007. As of December 31, 2007, the Company had (Won)191 million accrued for the payment of penalties.
The Company has open tax years ranging from 2003 to 2007, by which our taxes remain subject to examination. However, the Company does not anticipate that the total amount of unrecognized tax benefits will significantly change in the next 12 months.
F-103
b. Accrued Severance Indemnities
The Company expects to pay the following future benefits to its employees upon their normal retirement age (in millions of Korean won):
| | | |
Year ending December 31 | | Amount |
Prior to 2014 | | (Won) | — |
2014 | | | 483 |
2015 | | | 1,343 |
2016 | | | 1,797 |
2017 | | | 3,290 |
| | | |
| | (Won) | 6,913 |
| | | |
The above amounts were determined based on the employees’ current salary rates and the number of service years that will be accumulated upon their expected retirement date. These amounts do not include amounts that might be paid to employees that will cease working with the Company before their normal retirement age.
F-104
Annex I
MERGER AGREEMENT
This Merger Agreement (the “Agreement”) is made and entered into on this 20th day of January, 2009, by and betweenKT CORPORATION, a corporation (chusik hoesa) duly organized and existing under the laws of the Republic of Korea (“Korea”) and having its principal place of business located at 206 Jungja-dong, Bundang-gu, Sungnam City, Kyunggi Province, Korea (“KT”) andKT FREETEL CO., LTD., a corporation (chusik hoesa) duly organized and existing under the laws of Korea and having its principal place of business located at 7-18 Shincheon-dong, Songpa-gu, Seoul, Korea (“KTF”).
WITNESSETH:
WHEREAS, KT primarily engages in the information and telecommunications business and is listed on the Securities Market Division of the Korea Exchange (“KRX”), and KTF primarily engages in the telecommunications business, including providing utility services from the use of frequency and is listed on the Securities Market Division of KRX; and
WHEREAS, the boards of directors of KT and KTF have each determined that a merger of KTF with and into KT (the “Merger”) is desirable.
NOW, THEREFORE, KT and KTF agree as follows:
Article 1 Merger
| 1.1 | Through the Merger, KTF will be merged with and into KT, with KT being the surviving entity, and upon effectiveness of the Merger, KTF will cease to exist. |
| 1.2 | The date of the Merger will be May 18, 2009 (the “Merger Date”) and the date of the registration of the Merger will be May 19, 2009, both of which may be changed as agreed by KT and KTF if necessary, depending on the progress of the Merger procedures. |
Article 2 Merger Ratio and Total Number of Shares to be Delivered upon Merger
| 2.1 | The exchange ratio for the shares of KT and KTF, respectively, shall be 1:0.7192335 (the “Merger Ratio”). KT will deliver 7,584,793 shares of its newly issued common stock (par value 5,000 Korean Won) (the “New Shares”) and 45,629,485 shares of its treasury stock (par value 5,000 Korean Won) (the “Treasury Shares”) to shareholders listed on the shareholders registry of KTF as of the Merger Date. |
| 2.2 | KT may decide not to deliver either New Shares or Treasury Shares in respect of all or part of the shares of KTF common stock held by KT or all or part of the treasury shares of KTF common stock held by KTF. |
| 2.3 | Any fractional shares arising as a result of the issuance of the New Shares or the Treasury Shares shall be paid in cash to the shareholders of KTF set forth in Section 2.1 above, to which such fractional shares are attributable, calculated on the basis of the closing price of the New Shares on the KRX as of the listing date thereof. |
| 2.4 | The starting date for the calculation of dividends in connection with the New Shares to be issued by KT pursuant to Section 2.1 hereof shall be January 1, 2009. |
Article 3 Total Amount of Increases in Paid-in Capital and Reserves of KT
| 3.1 | KT shall increase its paid-in capital by 37,923,965,000 Korean Won through the Merger so that its paid-in capital shall be 1,598,922,260,000 Korean Won immediately after the date of the registration of the Merger. |
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| 3.2 | The reserves of KT shall increase in the amount equal to net assets to which it succeeds as of the Merger Date (which shall mean total assets of KTF to which KT succeeds minus total liabilities of KTF to which KT succeeds) minus the increased amount of paid-in capital of KT after the Merger;provided, that to the extent that the amount of reserves does not exceed the amount as calculated in the aforesaid manner, KT may succeed to all or part of the earned surplus reserves or other statutory reserves of KTF in accordance with the applicable laws and generally accepted accounting principles. |
| 3.3 | The total authorized number of shares that can be issued by KT shall not be affected by the Merger. |
| 3.4 | The number of the New Shares to be issued and the Treasury Shares to be delivered as set forth in Section 2.1 and the amount of paid-in capital as set forth in Section 3.1 may be adjusted in the event (i) the adjustment is necessary to comply with the limitation on foreign shareholding of KT shares under Article 6, Paragraph (1) of the Telecommunication Business Act of Korea, (ii) KTF acquires its own shares as a result of the exercise of appraisal rights by its shareholders who oppose the Merger, or (iii) the payment is made with respect to any fractional shares pursuant to Section 2.3 hereof;provided, that any such adjustment shall not affect the Merger Ratio set forth in Section 2.1. |
| 3.5 | The stock options granted to the directors, officers or employees of KTF prior to the date of this Agreement and validly existing as of the Merger Date (the “KTF Stock Options”) shall be converted into stock options of KT granting the rights to purchase the stock of KT, based on the following terms: |
[Amount of Adjusted Stock Options] = [Amount of Stock Options Granted Prior to Adjustment] × [Merger Ratio set forth in Section 2.1]
[Adjusted Exercise Price] = [Exercise Price Prior to Adjustment] / [Merger Ratio set forth in Section 2.1]
KT and KTF shall take all necessary measures to amend the stock option agreements relating to the KTF Stock Options entered into by and between KTF and its directors, officers and employees to reflect the adjustments described above. However, any such amendments to the stock option agreements shall take effect on the date of the registration of the Merger as set forth in Section 1.2 hereof.
Article 4 Shareholders’ Meeting Approving Merger
Each of KT and KTF shall convene a shareholders’ meeting, respectively, on March 27, 2009 for approval of the Merger;provided, that the date of the meeting may be changed as agreed by KT and KTF when there are unavoidable reasons.
Article 5 Performance on the Merger Date
| 5.1 | KTF shall transfer to KT, and KT shall assume from KTF, any and all documents related to assets, liabilities and shareholders of KTF. |
| 5.2 | KTF shall transfer to KT, and KT shall assume from KTF, any and all businesses of KTF. KTF shall provide any and all necessary information unimpaired and any necessary cooperation in order to enable KT to assume the business in ordinary condition, and any specific matters shall be determined by mutual agreement between KT and KTF. |
| 5.3. | KTF shall transfer to KT, and KT shall assume from KTF, any and all rights and obligations of service users of KTF. KT and KTF shall exercise their best efforts in order to protect users by performing the obligations under relevant regulations in good faith upon mutual consultation. |
Article 6 Effect of Merger
| 6.1 | As of the Merger Date, all of the assets, liabilities, rights, obligations and contractual capacities of KTF shall be comprehensively succeeded to by KT. KT shall succeed to all disputes and legal proceedings in which KTF is involved. |
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| 6.2 | The employees of KTF as of the Merger Date shall become employees of KT as of the Merger Date and KT shall succeed to the obligation to pay the severance payments of such employees. |
| 6.3 | KT and KTF agree to amend the articles of incorporation of KT as described inExhibit 1at the general shareholders’ meeting approving the Merger pursuant to this Agreement. |
Article 7 Completion and Effectiveness of Merger
| 7.1 | Immediately after the Merger Date, KT shall hold a meeting of its board of directors to report and resolve on matters regarding the Merger, and shall publicly notify matters related thereto. |
| 7.2 | The Merger shall take effect upon completion of the registration of the Merger. |
Article 8 Dividend Limitation
KT may distribute dividends for the fiscal year 2008. The amount of dividends, which shall not exceed 400 billion Won, shall be determined at the ordinary general shareholders’ meeting for the fiscal year 2008.
Article 9 Directors and Audit Committee Members
Notwithstanding Article 527-4, Paragraph (1) of the Korean Commercial Code, the directors and audit committee members of KT who assumed offices prior to the Merger Date shall continue to hold their positions until their respective terms of office determined at the time of the assumption of their offices, unless there is any particular basis for termination of office. However, the directors and audit committee members of KTF shall cease to hold their respective offices as of the date of the registration of the Merger.
Article 10 Representations and Warranties
| 10.1 | In connection with the Merger, KTF hereby represents and warrants to KT as follows, as of the date hereof and as of the Merger Date (or, if made as of a specified date, as of such date): |
| | 10.1.1 | Incorporation. KTF is a corporation duly organized and validly existing under the laws of Korea and has all power and authority required to own, lease and use its properties and business and to conduct its business as it is now being conducted. |
| | 10.1.2 | Authorization. KTF has all requisite corporate power and authority to prepare, execute and deliver this Agreement and to perform its obligations hereunder. As of the date hereof, the execution and performance of this Agreement have been duly authorized by all necessary corporate action on the part of KTF, other than the approval by its general shareholders’ meeting for approval of the Merger, and thereafter, this Agreement has been duly executed and delivered by KTF. |
| | 10.1.3 | Capitalization. As of the date hereof, information relating to (i) the issued and outstanding capital stock, convertible bonds, bonds with warrants and exchangeable bonds of KTF, (ii) stock options granted by KTF to its directors, officers and employees, (iii) options or contracts under which KTF may be required to issue or deliver stock upon the exercise of a conversion right or an exchange right by third parties, and (iv) treasury stock held by KTF, is set forth inExhibit 2-1 attached hereto and is true and correct in all material respects. The authorized capital stock of KTF is 400,000,000 shares, of which 188,274,091 shares were duly authorized, validly issued and fully paid as of the date hereof. |
| | 10.1.4 | Consent; No Violation. (i) In connection with the execution and performance of its obligations under this Agreement, KTF is not required to obtain any governmental approval, which if not obtained, would have a material adverse effect on the closing of the Merger, and (ii) neither the execution nor performance of KTF’s obligations under this Agreement (a) violates its articles of incorporation or other by-laws, or (b) causes any violation of any laws to which it is subject. |
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| | 10.1.5 | Financial Statements. The financial statements of KTF as of September 30, 2008 fairly present the financial conditions of KTF as of such date. |
| 10.2 | In connection with the Merger, KT hereby represents and warrants to KTF as follows, as of the date hereof and as of the Merger Date (or, if made as of a specified date, as of such date): |
| | 10.2.1 | Incorporation. KT is a corporation duly organized and validly existing under the laws of Korea and has all power and authority required to own, lease and use its properties and business and to conduct its business as it is now being conducted. |
| | 10.2.2 | Authorization. KT has all requisite corporate power and authority to prepare, execute and deliver this Agreement and to perform its obligations hereunder. As of the date hereof, the execution and performance of this Agreement have been duly authorized by all necessary corporate action on the part of KT, other than the approval by its general shareholders’ meeting for approval of the Merger, and thereafter, this Agreement has been duly executed and delivered by KT. |
| | 10.2.3 | Capitalization. As of the date hereof, information relating to (i) the issued and outstanding capital stock, convertible bonds, bonds with warrants and exchangeable bonds of KT, (ii) stock options granted by KT to its directors, officers and employees, (iii) options or contracts under which KT may be required to issue or deliver stock upon the exercise of a conversion right or an exchange right by third parties, and (iv) treasury stock held by KT, is set forth inExhibit 2-2 attached hereto and is true and correct in all material respects. The authorized capital stock of KT is 1,000,000,000 shares, of which 273,535,700 shares were duly authorized, validly issued and fully paid as of the date hereof. |
| | 10.2.4 | Consent; No Violation. (i) In connection with the execution and performance of its obligations under this Agreement, KT is not required to obtain any governmental approval, which if not obtained, would have a material adverse effect on the closing of the Merger, except for the approval by the Korea Communications Commission of the Merger pursuant to Article 13 of the Telecommunication Business Act, and (ii) neither the execution nor performance of KT’s obligations under this Agreement (a) violates its articles of incorporation or other by-laws, or (b) causes any violation of any laws to which it is subject. |
| | 10.2.5 | Financial Statements. The financial statements of KT as of September 30, 2008 fairly present the financial conditions of KT as of such date |
Article 11 Covenants
During the period from the date hereof to the Merger Date, KT and KTF hereby covenant to each other to undertake the following:
| 11.1 | Best Efforts. Each of KT and KTF shall use its best efforts to cause the Merger to be consummated within the dates specified herein. |
| 11.2 | Access to Information. Each of KT and KTF shall deliver to the other party or its representatives such documents or information as are reasonably requested by the other party or its representatives, to the extent that such delivery does not interfere with its ordinary course of business. Each of KT and KTF shall cause its representatives to consult with the other party in connection with the delivery of such documents or information. |
| 11.3 | Notice. Each of KT and KTF shall immediately notify the other party in writing of any condition or event that may have a material adverse effect on the Merger, or that results in any of the representations and warranties contained in this Agreement no longer being true in any material respect or that prevents the satisfaction of any condition precedent to the Merger set forth in Article 12 hereof. |
| 11.4 | Consent of Third Party. Each of KT and KTF shall use its best efforts to give notice to, or obtain any consent from, any third party required in connection with the consummation of the transactions contemplated hereby. |
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| 11.5 | Ordinary Course of Business. Each of KT and KTF (i) shall not engage in any corporate business activities other than in the ordinary course of business and shall operate its business activities generally consistent with its past business practices, (ii) shall not institute any unusual or uncommon method of manufacture, purchase, sale, lease, management, accounting or operation that vary materially from those methods used by it as of the date hereof, and (iii) shall not violate any applicable laws. |
Article 12 Conditions Precedent
The obligations of each of KT and KTF to complete the Merger under this Agreement is subject to the satisfaction prior to or on the Merger Date of the conditions set forth below;provided, that KT and KTF may waive or provide exemption from any of the conditions specified below, in whole or in part, in writing:
| 12.1 | Authorizations. The authorization and approval for the Merger by the board of directors and at the general shareholders meeting of KT and KTF, respectively, and any and all necessary governmental approvals set forth in Section 10.2.4 shall have been obtained, and all requirements under the applicable laws and regulations of Korea should have been satisfied, as required for the execution of this Agreement and the consummation of the transactions contemplated by this Agreement. |
| 12.2 | Representations and Warranties. The representations and warranties of KT and KTF made in Article 10 hereof shall be true and correct in all material respects as of the date hereof and as of the Merger Date. |
| 12.3 | Covenants. All covenants and other obligations required to be performed by KT and KTF as set forth in Article 11 hereof shall have been performed in all material respects. |
| 12.4 | No Material Adverse Change.From the date of this Agreement until the Merger Date, any material adverse change shall not have occurred in the assets or business conditions of either KT or KTF. |
Article 13 Termination
| 13.1 | This Agreement may be terminated at any time prior to the Merger Date if any of the following events occur;provided, that any party liable for the occurrence of any event of termination may not terminate this Agreement: |
| | 13.1.1 | if KT and KTF mutually agree in writing to terminate this Agreement; |
| | 13.1.2 | if the proceeding for bankruptcy, dissolution, liquidation, insolvency or rehabilitation commences or an application thereof has been made to commence any such proceeding with respect to either KT or KTF; |
| | 13.1.3 | (i) if shareholders’ approval for the Merger is not obtained by either KT or KTF within three (3) months from the closure of its shareholders registry to determine the shareholders entitled to exercise voting rights at the general shareholders’ meeting convened for the purpose of approving the Merger, (ii) any governmental approval necessary for the Merger as set forth in Section 10.2.4 is definitively rejected by the relevant governmental authority even prior to the expiry of the three (3) month period prescribed in (i) above, or (iii) it becomes evident that it will be infeasible or illegal to consummate the Merger under this Agreement due to a change in the laws or governmental restrictions and KT and KTF do not otherwise agree on alternative terms within thirty (30) days from the occurrence of such event; |
| | 13.1.4 | if a material adverse effect results from a breach by either KT or KTF of any of its respective representations and warranties, covenants or obligations under this Agreement, and such breach fails to be cured within thirty (30) days from the receipt of a written notice requiring to cure such breach delivered by the non-breaching party; |
| | 13.1.5 | if either the aggregate purchase price to be paid by KT to its shareholders who exercise appraisal rights exceeds 1 trillion Korean Won, or the aggregate purchase price to be paid by KTF to its shareholders who exercise appraisal rights exceeds 700 billion Korean Won; |
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| | 13.1.6 | if from the date hereof until the Merger Date, there is a material adverse change in the financial condition, results of operations, the business condition or prospects, of either KT or KTF; or |
| | 13.1.7 | when the governmental approvals necessary for the Merger set forth in Section 10.2.4 have been obtained, but such approvals include conditions which (i) if complied with, are reasonably expected to result in a material adverse change in the financial condition, results of operations, the business condition or prospects of KT, or (ii) are impossible or extremely difficult to comply with within the time period set forth in such approvals. |
| 13.2 | The effect of termination of the Agreement is as follows: |
| | 13.2.1 | If this Agreement is terminated, either party shall, at the request of the other party, return or destroy any material or information obtained from the other party within fourteen (14) days of the date of termination of this Agreement. |
| | 13.2.2 | Any termination of this Agreement shall not affect either party’s rights to claim damages and other rights or remedies against the other party arising from a default or breach by such other party under this Agreement. |
| | 13.2.3 | Notwithstanding any termination of this Agreement, the provisions of Sections 13.2, 15.1, 15.2 and 15.8 shall survive and remain effective. |
Article 14 Other Matters
Matters necessary to the Merger not specified in this Agreement shall be determined by mutual consultation between KT and KTF in accordance with the purpose of this Agreement.
Article 15 Miscellaneous
| 15.1 | Confidentiality. Neither party to this Agreement shall disclose, divulge or release the contents of this Agreement or the material or information provided by the other party in the course of negotiation, execution and performance of this Agreement, to any third party, without prior written consent of the other party, except when such disclosure is required by laws and regulations or an order of the court. |
| 15.2 | Notice. All notices, requests, claims and other communications relevant to this Agreement shall be delivered in person or by letter in registered mail or by facsimile transmission to the addresses as follows;provided, that any party may change such addresses by giving a prior written notice to the other party at any time. |
| | | Address: 206 Jungja-dong, Bundang-gu, Sungnam, Gyunggi-do, Korea |
| | | Attention: Head of the Group Strategy CFT |
| | | Address: 7-18 Shincheon-dong, Songpa-gu, Seoul, Korea |
| | | Attention: Head of the Strategy and Planning Division |
| 15.3 | Amendment. This Agreement may be amended by a written agreement between KT and KTF;provided, that the Merger Ratio, amendment to articles of incorporation and matters regarding the appointment of a director or an audit committee member shall not be amended after such matters have been approved at the general shareholders’ meeting. |
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| 15.4 | Waiver. If any party (i) fails to exercise or delays the exercise of the rights hereunder, or (ii) exercises the rights hereunder in a single or partial manner, such party shall not be precluded from further exercising such rights. |
| 15.5 | Entire Agreement. This Agreement shall constitute the entire agreement by and among the parties regarding the matters set forth in this Agreement as of the date of this Agreement, and any and all prior oral or written agreement, express or implied, other than as set forth in this Agreement, shall be invalid. |
| 15.6 | Severability. If any one or more of the provisions contained in this Agreement (including any sentence, phrase or a part thereof) shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. |
| 15.7 | Assignment. No party to this Agreement may assign or delegate its rights or obligations under this Agreement without the prior written consent of the other party. |
| 15.8 | Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of Korea. Any disputes arising out of or in connection with the execution, performance, construction or violation of this Agreement shall be settled subject to the exclusive jurisdiction of the Seoul Central District Court. |
[Signature page to follow]
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IN WITNESS WHEREOF, KT and KTF have executed two (2) counterparts of the original of this Agreement as of January 20, 2009, and each party shall keep each such counterpart.
KT CORPORATION
206 Jungja-dong, Bundang-gu, Sungnam City, Kyunggi Province
Representative Director Suk-Chae Lee (/s/ SUK-CHAE LEE)
KT Freetel Co., Ltd.
7-18 Shincheon-dong, Songpa-gu, Seoul
Representative Director Haing-Min Kwon (/s/ HAING-MIN KWON)
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Exhibit 1
Amendments to Articles of Incorporation of KT
| | | | |
Article | | Original | | Amended |
Article 2 (Purpose) | | …(Omission of what precedes) 14. Any and all other activities or businesses incidental to or necessary for the attainment of the foregoing. | | 14. Telecommunications business including services provided by using frequency 15. Value added communications service business 16. Business of production, provision (showing) and distribution of contents such as phonograph records, musical pictures, films, videos and games, etc. 17. Electronic finance-related business such as issuance and management of electronic prepayment means and electronic payment settlement agency systems, etc. 18. Sale and lease of equipments and facilities relating to Subparagraphs 14 through 17. 19. Overseas business and export & import business relating to Subparagraphs 14 through 18. 20. Travel business 21. Insurance agent business 22. Any and all other activities or businesses incidental to or necessary for the attainment of the foregoing. |
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Exhibit 2-1
Capitalization of KTF (As of the date hereof)
| 1. | Issued and outstanding capital stock, convertible bonds, bonds with warrants and exchangeable bonds of KTF |
| | (1) | Capital stock: 188,274,091 common shares in registered form with par value 5,000 Korean Won |
| | (2) | Convertible bonds, bonds with warrants and exchangeable bonds: N/A |
| 2. | Stock options granted by KTF to its directors, officers and employees |
| | | | | | | | | | |
Date of
Grant | | Recipient | | Number
of Shares
Granted
Under
Stock
Option | | Number
of Shares
Granted
but Not
Exercised
Under
Stock
Option | | Exercise
Price | | Exercise Period |
2002.03.25 | | Woo-Sik Kim | | 5,800 | | 5,800 | | 45,178 | | 2005.03.25~2010.03.24 |
2002.03.25 | | Won-Pyo Hong | | 5,800 | | 5,800 | | 45,178 | | 2005.03.25~2010.03.24 |
2002.03.25 | | Min-Hee Lee | | 5,800 | | 5,800 | | 45,178 | | 2005.03.25~2010.03.24 |
2002.03.25 | | Joo-Young Song | | 5,800 | | 5,800 | | 45,178 | | 2005.03.25~2010.03.24 |
2002.03.25 | | Yi-Sun Kim | | 5,400 | | 5,400 | | 45,178 | | 2005.03.25~2010.03.24 |
2003.09.08 | | Joong-Woong Kim | | 9,900 | | 5,000 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | Il-Chong Nam | | 9,900 | | 5,000 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | Seong-Cheol Jeon | | 9,900 | | 5,000 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | Young-Joo Cho | | 60,000 | | 56,740 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | In-Moo Huh | | 40,000 | | 4,500 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | Joo-Young Song | | 40,000 | | 37,881 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | Min-Hee Lee | | 30,000 | | 28,370 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | Soo-Sung Jeong | | 30,000 | | 28,370 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | Seo-Hwan Cho | | 30,000 | | 28,730 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | Hyun-Myung Pyo | | 30,000 | | 28,370 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | Hun-Cheol Shin | | 30,000 | | 2,500 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | Moon-Ho Lee | | 30,000 | | 28,370 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | Tae-Beom Noh | | 30,000 | | 18,913 | | 30,000 | | 2005.09.09~2010.09.08 |
2003.09.08 | | Gi-Cheol Kim | | 30,000 | | 28,370 | | 30,000 | | 2005.09.09~2010.09.08 |
2005.03.04 | | Hong-Gi Kim | | 9,700 | | 9,700 | | 30,700 | | 2007.03.05~2012.03.04 |
2005.03.04 | | Jae-Cheol Lee | | 9,700 | | 9,700 | | 30,700 | | 2007.03.05~2012.03.04 |
2005.03.04 | | Gi-Gwon Doh | | 9,700 | | 9,700 | | 30,700 | | 2007.03.05~2012.03.04 |
2005.03.04 | | Deok-Nam Hwang | | 9,700 | | 9,700 | | 30,700 | | 2007.03.05~2012.03.04 |
2005.03.04 | | Hoon Han | | 30,000 | | 21,705 | | 30,700 | | 2007.03.05~2012.03.04 |
2005.03.04 | | Young-Doh Hong | | 30,000 | | 24,806 | | 30,700 | | 2007.03.05~2012.03.04 |
2005.03.04 | | Tae-Geun Kim | | 30,000 | | 24,806 | | 30,700 | | 2007.03.05~2012.03.04 |
| | Total | | 567,100 | | 444,471 | | | | |
| 3. | Options or contracts under which KTF may be required to issue or deliver stock upon the exercise of a conversion right or an exchange right by third parties: N/A |
| 4. | Treasury stock held by KTF: 50,882 shares |
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Exhibit 2-2
Capitalization of KT (As of the date hereof)
| 1. | Issued and outstanding capital stock, convertible bonds, bonds with warrants and exchangeable bonds of KT |
| | (1) | Capital stock: 273,535,700 common shares in registered form with par value 5,000 Korean Won |
| | (2) | Convertible bonds, bonds with warrants and exchangeable bonds: N/A |
| 2. | Stock options granted by KT to its directors, officers and employees |
| | | | | | | | | | |
Date of
Grant | | Recipient | | Number
of Shares
Granted
Under
Stock
Option | | Number
of Shares
Granted
But Not
Exercised
Under
Stock
Option | | Exercise
Price | | Exercise Period |
2002.12.26 | | Yong-Gyung Lee | | 300,000 | | 253,100 | | 70,000 | | 2004.12.27~2009.12.26 |
2002.12.26 | | Tae-Won Jeong | | 100,000 | | 45,145 | | 70,000 | | 2004.12.27~2009.12.26 |
2002.12.26 | | Young Han Song | | 60,000 | | 28,717 | | 70,000 | | 2004.12.27~2009.12.26 |
2002.12.26 | | Ahn-Yong Choi | | 60,000 | | 32,170 | | 70,000 | | 2004.12.27~2009.12.26 |
2002.12.26 | | Hong-Sik Jeon | | 100,000 | | 12,500 | | 70,000 | | 2004.12.27~2009.12.26 |
2003.09.16 | | Hyun-Joon Chang | | 5,200 | | 3,000 | | 57,000 | | 2005.09.17~2010.09.16 |
2005.02.04 | | Hee-Chang Noh | | 60,000 | | 43,153 | | 54,600 | | 2007.02.05~2012.02.04 |
| | Total | | 685,200 | | 417,785 | | | | |
| 3. | Options or contracts under which KT may be required to issue or deliver stock upon the exercise of a conversion right or an exchange right by third parties: N/A |
| 4. | Treasury stock held by KT: 71,500,404 shares |
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
| Item 20. | Indemnification of Directors and Officers |
KT Corporation’s directors, executive officers and the members of its audit committee are insured against liability relating to the performance of their duties under a directors’ and officers’ insurance policy. The policy provides coverage of up to (Won)50 billion in the aggregate for all insured persons, with respect to each incident triggering liability.
| Item 21. | Exhibits and Financial Statement Schedules |
| | |
Number | | Description |
| 2.1 | | Merger Agreement dated as of January 20, 2009 by and between KT Corporation and KT Freetel (included as Annex I to the prospectus which is a part of this registration statement and incorporated by reference herein). |
| |
| 3.1† | | Amended and Restated Articles of Incorporation of KT Corporation (in English). |
| |
| 4.1* | | Form of Share Certificate of KT Corporation’s common stock, par value (Won)5,000 per share (in English and Korean). |
| |
| 4.2** | | Deposit Agreement dated as of May 25, 1999 entered into among KT Corporation, Citibank, N.A., as depositary, and all Holders and Beneficial Owners of American Depositary Shares evidenced by the American Depositary Receipts issued thereunder, including the form of American depositary receipt. |
| |
| 4.3** | | Form of Amendment No. 1 Deposit Agreement dated as of May 25, 1999 entered into among KT Corporation, Citibank, N.A., as depositary, and all Holders and Beneficial Owners of American Depositary Shares evidenced by the American Depositary Receipts issued thereunder, including the form of American depositary receipt. |
| |
| 4.4** | | Letter from Citibank, N.A., as depositary, to the Registrant relating to the pre-release of the American depositary receipts. |
| |
| 4.5* | | Letter from Citibank, N.A., as depositary, to the Registrant relating to the establishment of a direct registration system for American Depositary Shares and the issuance of uncertificated American Depositary Shares as part of the direct registration system. |
| |
| 4.6 | | Long-term debt instruments of KT Corporation and its consolidated subsidiaries and for any of its consolidated subsidiaries for which financial statements are required to be filed are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. KT Corporation agrees to furnish the Commission on request a copy of any instrument defining the rights of holders of its long-term debt and that of any subsidiary for which consolidated or unconsolidated financial statements are required to be filed. |
| |
| 5.1† | | Opinion of Kim & Chang regarding the legality of securities being registered. |
| |
| 8.1† | | Opinion of Cleary Gottlieb Steen & Hamilton LLP regarding tax matters. |
| |
| 21.1* | | List of Subsidiaries of KT Corporation. |
| |
| 23.1† | | Consent of Kim & Chang (included as part of its opinion filed as Exhibit 5.1 and incorporated herein by reference). |
| |
| 23.2† | | Consent of Deloitte Anjin LLC regarding financial statements of KT Corporation. |
| |
| 23.3† | | Consent of Deloitte Anjin LLC regarding financial statements of KT Freetel. |
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| | |
Number | | Description |
| 23.4† | | Consent of KPMG Samjong Accounting Corp. |
| |
| 23.5† | | Consent of Cleary Gottlieb Steen & Hamilton LLP (included as part of its opinion filed as Exhibit 8.1 and incorporated by reference). |
| |
| 24.1† | | Powers of Attorney (contained on signature pages to the registration statement). |
| * | Incorporated by reference to the registrant’s annual report on Form 20-F (No. 1-14926), filed on June 30, 2008. |
| ** | Incorporated by reference to the registrant’s previous filing on Form F-6 (No. 333-13578) declared effective on February 3, 2004. |
| | (b) | Financial Statement Schedules |
None.
| | (a) | The undersigned registrant hereby undertakes: |
| | (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| | (i) | To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; |
| | (ii) | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; |
| | (iii) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
| | (2) | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| | (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
| | (4) | To file a post-effective amendment to the registration statement to include any financial statements required by Item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished,provided, that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. |
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| | (5) | That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
| | (i) | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
| | (ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
| | (iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
| | (iv) | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
| | (b) | The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| | (c) | The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. |
| | (d) | The registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| | (e) | Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by them is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. |
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| | (f) | The undersigned registrant hereby undertakes: (i) to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means; and (ii) to arrange or provide for a facility in the United States for the purpose of responding to such requests. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. |
| | (g) | The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. |
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SIGNATURES OF KT CORPORATION
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Sungnam, Republic of Korea, on January 21, 2009.
| | |
| KT CORPORATION |
| |
| By: | | /s/ SUK-CHAE LEE |
| Name: | | Suk-Chae Lee |
| Title: | | President and Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas Bum Joon Kim, Vice President, and his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including pre-effective and post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on January 21, 2009.
| | |
Name | | Title |
| |
/s/ SUK-CHAE LEE Suk-Chae Lee | | President and Chief Executive Officer |
| |
/s/ PAUL C. YI (CHANG YOP YI) Paul C. Yi (Chang Yop Yi) | | Chairperson of the Board of Directors |
| |
Jong-Lok Yoon | | Senior Executive Vice President and Director |
| |
/s/ JEONG-SOO SUH Jeong-Soo Suh | | Senior Executive Vice President and Director |
| |
/s/ JEONG-SUK KOH Jeong-Suk Koh | | Director |
| |
/s/ SI-CHIN KANG Si-Chin Kang | | Director and Chairman of Audit Committee |
| |
/s/ IN-MAN SONG In-Man Song | | Director and Audit Committee Member |
| |
/s/ JOON PARK Joon Park | | Director and Audit Committee Member |
| |
/s/ YEON HAK KIM Yeon Hak Kim | | Chief Financial Officer and Executive Vice President |
II-5
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF KT CORPORATION
Pursuant to the Securities Act of 1933, as amended, the undersigned, the duly registered representative in the United States of KT Corporation, has signed this Registration Statement or amendment thereto in the City of Los Angeles, State of California, on January 21, 2009.
| | |
| *By: | | /s/ KYUNG MIN SONG |
| Name: | | Kyung Min Song |
| Title: | | Chief Executive Officer KT America, Inc. |
II-6
Exhibit Index
| | |
Number | | Description |
| 2.1 | | Merger Agreement dated as of January 20, 2009 by and between KT Corporation and KT Freetel (included as Annex I to the prospectus which is a part of this registration statement and incorporated by reference herein). |
| |
| 3.1† | | Amended and Restated Articles of Incorporation of KT Corporation (in English). |
| |
| 4.1* | | Form of Share Certificate of KT Corporation’s common stock, par value (Won)5,000 per share (in English and Korean). |
| |
| 4.2** | | Deposit Agreement dated as of May 25, 1999 entered into among KT Corporation, Citibank, N.A., as depositary, and all Holders and Beneficial Owners of American Depositary Shares evidenced by the American Depositary Receipts issued thereunder, including the form of American depositary receipt. |
| |
| 4.3** | | Form of Amendment No. 1 Deposit Agreement dated as of May 25, 1999 entered into among KT Corporation, Citibank, N.A., as depositary, and all Holders and Beneficial Owners of American Depositary Shares evidenced by the American Depositary Receipts issued thereunder, including the form of American depositary receipt. |
| |
| 4.4** | | Letter from Citibank, N.A., as depositary, to the Registrant relating to the pre-release of the American depositary receipts. |
| |
| 4.5* | | Letter from Citibank, N.A., as depositary, to the Registrant relating to the establishment of a direct registration system for American Depositary Shares and the issuance of uncertificated American Depositary Shares as part of the direct registration system. |
| |
| 4.6 | | Long-term debt instruments of KT Corporation and its consolidated subsidiaries and for any of its consolidated subsidiaries for which financial statements are required to be filed are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. KT Corporation agrees to furnish the Commission on request a copy of any instrument defining the rights of holders of its long-term debt and that of any subsidiary for which consolidated or unconsolidated financial statements are required to be filed. |
| |
| 5.1† | | Opinion of Kim & Chang regarding the legality of securities being registered. |
| |
| 8.1† | | Opinion of Cleary Gottlieb Steen & Hamilton LLP regarding tax matters. |
| |
| 21.1* | | List of Subsidiaries of KT Corporation. |
| |
| 23.1† | | Consent of Kim & Chang (included as part of its opinion filed as Exhibit 5.1 and incorporated herein by reference). |
| |
| 23.2† | | Consent of Deloitte Anjin LLC regarding financial statements of KT Corporation. |
| |
| 23.3† | | Consent of Deloitte Anjin LLC regarding financial statements of KT Freetel. |
| |
| 23.4† | | Consent of KPMG Samjong Accounting Corp. |
| |
| 23.5† | | Consent of Cleary Gottlieb Steen & Hamilton LLP (included as part of its opinion filed as Exhibit 8.1 and incorporated by reference). |
| |
| 24.1† | | Powers of Attorney (contained on signature pages to the registration statement). |
| * | Incorporated by reference to the registrant’s annual report on Form 20-F (No. 1-14926), filed on June 30, 2008. |
| ** | Incorporated by reference to the registrant’s previous filing on Form F-6 (No. 333-13578) declared effective on February 3, 2004. |
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