Korea Line Corporation
Financial Statements
December 31, 2004
Korea Line Corporation
Index
December 31, 2004 and 2003
Page(s)
Report of Independent Auditors ...................................... 1
Financial Statements
Balance Sheets ...................................................... 2 - 3
Statements of Income ................................................ 4
Statements of Appropriations of Retained Earnings.................... 5
Statements of Cash Flows ............................................ 6 - 7
Notes to Financial Statements ....................................... 8 - 44
Samil PricewaterhouseCoopers
Kukje Center Building
191 Hankangro 2ga, Yongsanku
Seoul 140-702, KOREA
(Yongsan P.O. Box 266, 140-600)
Samil PricewaterhouseCoopers is the Korean member firm of
PricewaterhouseCoopers. PricewaterhouseCoopers refers to the network of member
firms of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity.
Report of Independent Auditors
------------------------------
To the Board of Directors and Shareholders of
Korea Line Corporation
We have audited the accompanying balance sheet of Korea Line Corporation (the
"Company") as of December 31, 2004, and the related statements of income,
appropriations of retained earnings, and cash flows for the year then ended.
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 audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Korea Line Corporation as of
December 31, 2004, and the results of its operations, the changes in its
retained earnings and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the Republic of Korea.
Accounting 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 33 to the financial statements.
Seoul, Republic of Korea
June 30, 2005
Korea Line Corporation
Balance Sheets
December 31, 2004 and 2003
In millions of In thousands of
Korean Won US dollars
---------- ----------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Assets
Current assets
Cash and cash equivalents (Note 4) 44,735 21,985 42,858 21,062
Short-term deposits (Notes 5 and 9) 39,466 19,118 37,810 18,316
Trading securities (Note 6) 4,645 14 4,450 13
Accounts receivable - trade (Note
17) 26,795 23,865 25,671 22,864
Accounts receivable - other 8,264 3,599 7,917 3,448
Accrued income 1,002 925 960 886
Prepaid expenses 35,637 28,144 34,142 26,963
Inventories 12,113 14,556 11,604 13,945
Advance payments 3 2 3 2
Other current assets 3,120 5,008 2,988 4,797
-------- --------- --------- ---------
Total current assets 175,779 117,216 168,403 112,296
-------- --------- --------- ---------
Investment securities (Note 7)
Available-for-sale securities 31,491 48,344 30,169 46,316
Held-to-maturity securities 20,718 1,400 19,849 1,341
Equity securities of affiliates 14,903 11,664 14,278 11,175
Property, ships and equipment, net
(Notes 8, 10, 14 and 15) 929,931 862,480 890,909 826,288
Intangible assets (Note 11) 5,409 - 5,182 -
Long-term deposits (Notes 5 and 9) 1,065 549 1,020 526
Guarantee deposits 2,121 1,411 2,032 1,352
Deferred income tax assets (Note 24) - 16,128 - 15,451
Other
assets 3,706 5,694 3,552 5,455
-------- --------- --------- ---------
Total assets 1,185,12 1,064,886 1,135,39 1,020,200
-------- --------- --------- ---------
In millions of In thousands of
Korean Won US dollars
---------- ----------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Liabilities and Stockholders' Equity
Current liabilities
Trade payables (Note 17) 35,116 27,849 33,643 26,680
Other payables 2,513 2,945 2,408 2,821
Short-term borrowings - 15,000 - 14,371
Withholdings 4,698 3,275 4,501 3,138
Accrued expenses 4,761 3,572 4,562 3,422
Dividends payable 13 12 12 11
Unearned income 33,102 16,466 31,713 15,775
Income taxes payable 15,184 - 14,547 -
Current portion of long-term
borrowings
(Notes 12 and 14) 2,703 3,672 2,590 3,518
Current portion of debentures
(Note 13) 6,999 49,963 6,705 47,866
Current portion of long-term
accounts payable
- other (Notes 15 and 18) 50,312 40,402 48,200 38,707
-------- ---------- ---------- --------
Total current liabilities 155,401 163,156 148,881 156,309
Long-term borrowings (Notes 12 and
14) 26,892 32,741 25,764 31,367
Debentures (Note 13) 37,148 6,999 35,589 6,705
Long-term accounts payable - other
(Notes 15 and 18) 546,297 615,345 523,373 589,524
Accrued severance indemnities, net
(Note 16) 2,338 4,718 2,240 4,520
Deferred income tax liabilities - -
(Note 24) 2,571 2,463
Long-term advance received (Note 28) 86,641 128,056 83,005 122,683
Other long-term liabilities 225 213 216 204
---------- ---------- ---------- --------
Total liabilities 857,513 951,228 821,531 911,312
---------- ---------- ---------- ---------
Commitments and contingencies
(Note 27)
Stockholders' equity Common stock of 5,000 par value:
Authorized - 30,000,000 shares
Issued - 10,000,000 shares 50,000 50,000 47,902 47,902
Capital surplus (Note 19) 45,405 29,196 43,500 27,970
Retained earnings
Appropriated (Note 20) 30,702 702 29,414 672
Unappropriated 206,344 37,924 197,685 36,333
Capital adjustments:
Treasury stock (Note 21) (5,421) (4,805) (5,194) (4,603)
Equity in capital surplus of
affiliates (Note 7) 581 641 556 614
---------- ---------- ---------- ---------
Total stockholders' equity 327,611 113,658 313,863 108,888
---------- ---------- ---------- ---------
Total liabilities and 1,185,12 1,064,886 1,135,394 1,020,200
stockholders' equity
---------- ---------- ---------- ---------
The accompanying notes are an integral part of these financial statements.
Korea Line Corporation
Statements of Income
Years Ended December 31, 2004 and 2003
- -------------------------------------------------------------------------------
In millions of In thousands of US
Korean Won dollars
----------------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Sales (Note 27) 1,150,131 627,928 1,101,86 601,578
Cost of sales (Note 22) 973,285 551,869 932,444 528,711
---------- -------- ---------------------
Gross profit 176,846 76,059 169,425 72,867
Selling, general and administrative
expenses
(Note 23) 10,248 7,223 9,818 6,920
---------- ------------------- ----------
Operating income 166,598 68,836 159,607 65,947
Other incomes and gains
Interest income 5,721 8,471 5,481 8,116
Dividend income 77 238 73 228
Gain on foreign currency
transaction 19,904 6,024 19,069 5,771
Gain on foreign currency
translation 88,921 1,707 85,190 1,636
Gain on valuation of trading - -
securities (Note 6) 561 537
Equity in earnings of affiliates
(Note 7) 3,606 3,547 3,455 3,398
Gain on valuation of derivatives - -
(Note 27) 983 942
Others 981 1,306 940 1,251
---------- -------------------- ---------
120,754 21,293 115,687 20,400
Other expenses and losses
Interest expense 5,575 7,487 5,341 7,173
Amortization of discount to
present value
of long-term accounts payable -
other 20,348 16,386 19,494 15,698
Loss on foreign currency
transaction 15,752 4,840 15,091 4,637
Loss on foreign currency
translation 4,621 83 4,427 79
Loss on impairment of investment - -
(Note 7) 1,900 1,820
Others 1,252 16,761 1,200 16,058
---------- -------------------- --------
49,448 45,557 47,373 43,645
Income before income taxes 237,904 44,572 227,921 42,702
Income taxes (Note 24) 37,078 13,232 35,522 12,677
Net income 200,826 31,340 192,399 30,025
---------- -------------------- --------
Basic earnings per share of common
stock
in Won and US dollars (Note 25) 21,505 3,308 21 3
---------- -------------------- ---------
iluted earnings per share of common
stock
in Won and US dollars (Note 25) 21,097 3,308 20 3
---------- ---------- --------- ---------
The accompanying notes are an integral part of these financial statements.
Korea Line Corporation
Statements of Appropriations of Retained Earnings
Years Ended December 31, 2004 and 2003
(Dates of Appropriations: March 18, 2005 and March 19, 2004
for the years ended December 31, 2004 and 2003, respectively)
- -------------------------------------------------------------------------------
In millions of In thousands of US
Korean Won dollars
---------------------- ------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Unappropriated retained earnings
Balance at beginning of year 5,518 6,311 5,286 6,046
Cumulative effect of accounting
changes - 273 - 262
Net earnings 200,826 31,340 192,399 30,025
----------- ---------- --------- --------
206,344 37,924 197,685 36,333
----------- ---------- --------- --------
Appropriation (Note 20)
Legal reserve 3,000 10,000 2,874 9,580
Reserve for improvement of
financial structure 21,000 7,000 20,119 6,707
Reserve for business expansion 50,000 - 47,902 -
Reserve for business
rationalization 85,000 - 81,433 -
Reserve for special depreciation 7,507 - 7,192 -
Other voluntary reserve 16,000 13,000 15,329 12,455
Cash dividends (Note 26) 9,855 2,406 9,441 2,305
1,000 won per share in 2004
250 won per share in 2003
----------- ---------- --------- --------
192,362 32,406 184,290 31,047
----------- ---------- --------- --------
Unappropriated retained earnings to
be carried over to subsequent year 13,982 5,518 13,395 5,286
----------- ---------- --------- --------
The accompanying notes are an integral part of these financial statements.
Korea Line Corporation
Statements of Cash Flows
Years Ended December 31, 2004 and 2003
- -------------------------------------------------------------------------------
In millions of In thousands of
Korean Won US dollars
--------------------- -------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Cash flows from operating activities
Net income 200,826 31,340 192,399 30,025
Adjustments to reconcile net
earnings to net cash
Provision for severance
indemnities 2,593 1,514 2,484 1,450
Depreciation 48,975 45,724 46,920 43,805
Amortization - 8 - 8
Interest expense 479 60 459 58
Amortization of discount to
present value
of long-term accounts payable 20,348 16,386 19,494 15,698
Deferred income taxes 16,128 13,231 15,451 12,676
Bad debt expenses, net 418 (15) 401 (14)
Gain on disposition of trading
securities, net (107) (92) (102) (88)
Unrealized loss (gain) on trading
securities, net (561) 5 (537) 5
Foreign currency translation, net (87,515) (1,472) (83,842) (1,410)
Loss on disposition of trade
receivables 657 12,306 629 11,790
Equity in earnings of affiliates (3,606) (3,547) (3,455) (3,398)
Loss on sales of property, ship
and equipment, net 14 153 13 146
Unrealized gain on derivatives (983) - (942) -
Loss on other investments, net 1,883 1,938 1,804 1,856
Miscellaneous revenues - (495) - (474)
Changes in assets and liabilities:
Increase in trade receivables (4,654) (12,217) (4,459) (11,704)
Increase in prepaid expenses (7,494) (11,842) (7,180) (11,345)
Increase in trade payables 7,478 10,121 7,164 9,696
Increase in income taxes
payables 15,184 - 14,547 -
Increase in unearned income 16,635 7,392 15,937 7,082
Others, net (679) (14,761) (650) (14,142)
---------- ---------- --------- ---------
Net cash provided by
operating activities 226,019 95,737 216,535 91,720
---------- ---------- --------- ---------
Cash flows from investing activities
(Increase) decrease in short-term
deposits (20,347) 30,096 (19,493) 28,833
Proceeds from sale of trading
securities 1,373 441 1,315 422
Purchase of marketable securities (5,337) (16) (5,113) (15)
Proceeds from sale of
available-for-sale securities 16,223 6,681 15,542 6,400
Purchase of available-for-sale
securities (34) (1,000) (33) (958)
Purchase of held-to-maturity
securities (20,718) - (19,848) -
Dividends from affiliates 306 - 293 -
Disposal of property, ships and
equipment 20 3,410 19 3,267
Purchase of property, ships and
equipment (116,461) (6,915) (111,574) (6,625)
Purchase of intangible assets (5,408) - (5,181) -
Increase (decrease) in leasehold
deposits 12 (1,348) 12 (1,291)
Decrease in other assets 1,215 2,553 1,164 2,446
---------- --------- --------- ---------
Net cash (used in) provided
by
investing activities 149,156 33,902 142,897 32,479
---------- ---------- --------- ---------
In millions of In thousands of US
Korean Won dollars
--------------------- ------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Cash flows from financing activities
Short-term borrowings 11,470 15,000 10,989 14,371
Long-term borrowings 902 330 864 316
Issuance of bonds with stock warrants 20,000 - 19,161 -
Issuance of convertible bonds 19,799 - 18,968 -
Increase in long-term accounts
payable 92,354 - 88,479 -
Proceeds from sale of treasury stocks 32,570 691 31,203 662
Repayments of short-term borrowings (26,470) (20,601) (25,359) (19,737)
Repayments of long-term borrowings - (107,242) - (102,742)
Repayments of current portion of
long-term accounts payable (87,179) - (83,521) -
Repayments of current portion of
long-term borrowings (3,672) - (3,518) -
Repayments of bonds payable (50,000) (33,000) (47,902) (31,615)
Decrease in other long-term advance
received (41,415) - (39,677) -
Dividends paid (2,404) - (2,303) -
Acquisition of treasury stocks (20,068) - (19,226) -
---------- ---------- --------- --------
Net cash used in financing
activities (54,113) (144,822) (51,842)(138,745)
---------- ---------- --------- ---------
Net increase (decrease) in 22,750 (15,183) 21,796 (14,546)
cash and cash equivalents
Cash and cash equivalents
Beginning of year 21,985 37,168 21,062 35,608
---------- ---------- --------- --------
End of year 44,735 21,985 42,858 21,062
year ---------- ---------- --------- --------
Korea Line Corporation
Notes to Financial Statements
Years Ended December 31, 2004 and 2003
- -------------------------------------------------------------------------------
1. The Company
Korea Line Corporation (the "Company") was incorporated on December 31,
1968 under the laws of the Republic of Korea to engage in sea-borne
transportation of industrial resources vital for key industries.
The Company became a publicly traded company upon listing its common stocks
on the Korea Stock Exchange on April 23, 1992. The major stockholders of
the Company as of December 31, 2004 are Maeng-kee Lee, Golar LNG Limited
and others.
The Company owned 17 bulk carriers including 2 ships under capital leases,
2 hot coil carriers and 2 LNG carriers and participated in consortium for 4
LNG carriers as of December 31, 2004, with total deadweight tonnage of
2,440,518 metric tons.
2. Summary of Significant Accounting Policies and Basis of Financial Statement
Presentation
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. Accordingly, these financial statements are
intended for use only by those who are informed about Korean accounting
principles and practices. The accompanying financial statements have been
condensed, restructured and translated into English (with certain expanded
descriptions) from the Korean language financial statements.
The accompanying financial statements include only the accounts of Korea
Line Corporation, and do not consolidate the accounts of any of the
Company's subsidiaries (Note 7). Instead, these entities are accounted for
under the equity method of accounting.
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the Republic of Korea requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and related notes to financial statements. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers short-term financial instruments with a maturity of
three months or less at the acquisition date to be cash equivalents.
Financial Instruments
Short-term deposits are instruments handled by financial institutions which
are held for short-term cash management purposes or will mature within one
year, including time deposits, installment savings deposits and restricted
bank deposits.
Allowance for Doubtful Accounts
Allowance for doubtful accounts is estimated based on an analysis of
individual accounts and past experience of collection.
Inventories
Inventories are stated at the lower of cost or net realizable value. Net
realizable value is the estimated selling price in the ordinary course of
business, less the estimated selling cost. The cost of inventories is
determined on the FIFO method.
Investments in Securities
The Company accounts for equity and debt securities under the provision of
Statement of Korean Accounting Standards No. 8, Investments in Securities.
This statement requires investments in equity and debt securities to be
classified into three categories: trading, available-for-sale and
held-to-maturity.
Securities are initially carried at cost, including incidental expenses,
with cost being determined using the weighted average method. Debt
securities, which the Company has the intent and ability to hold to
maturity, are generally carried at cost, adjusted for the amortization of
discounts or premiums. Premiums and discounts on debt securities are
amortized over the term of the debt using the effective interest method.
Trading and available-for-sale securities are carried at fair value, except
for non-marketable equity securities that are classified as
available-for-sale securities and are carried at cost when fair value
cannot be obtained. The fair value of non-marketable debt securities are
determined by using the present value of future cash flows, discounted at a
reasonable interest rate determined considering the credit ratings provided
by independent credit rating agencies.
Unrealized valuation gains or losses on trading securities are charged to
operations and those resulting from available-for-sale securities are
charged to capital adjustment, the accumulated amount of which shall be
charged to operations when the related securities are sold, or when an
impairment loss on the securities is recognized. Impairment losses are
recognized in the statement of income when the recoverable amounts are less
than the acquisition cost of securities or adjusted cost of debt securities
for the amortization of discounts or premiums.
Investment Securities under the Equity Method of Accounting
Investments in affiliated companies owned 20% or more or over which the
Company has significant management control are stated at an amount as
determined using the equity method.
Under the equity method of accounting, the Company's initial investment is
recorded at cost and is subsequently increased to reflect the Company's
share of the investee income and reduced to reflect the Company's share of
the investee losses or dividends received. Any excess in the Company's
acquisition cost over the Company's share of the investee's identifiable
net assets is considered as goodwill and amortized by the straight-line
method over the estimated useful life. The amortization of goodwill is
recorded against the equity income of affiliates. When events or
circumstances indicate that carrying amount may not be recoverable, the
Company reviews the goodwill amount for any impairment.
Under the equity method of accounting, the Company does not record its
share of loss of an affiliate company when such loss would make the
Company's investment in such entity less than zero.
Property, Ships and Equipment
Property, ships and equipment are stated at cost, except in the case of
revaluation made in accordance with the old Assets Revaluation Law. Plant
and equipment under capital leases are stated at an amount equal to the
lower of their fair value or the present value of minimum lease payments at
inception of lease.
Depreciation is computed by the straight-line method using rates based on
useful lives of the respective assets as follows:
Useful Lives (years)
Buildings 40
Ships 10 ~ 25
Vehicles 5
Tools, Furniture and fixtures 5
The Company recognizes interest costs and other financial charges on
borrowings associated with the manufacture, purchase, or construction of
property, ships and equipment as an expense in the period in which they are
incurred.
Routine maintenance and repairs are charged to expense as incurred.
Expenditures that enhance the value or extend the useful life of the
related assets are capitalized.
The Company reviews for the impairment of property, ships and equipment,
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment loss would be
recognized when estimated undiscounted future net cash flows expected to
result from the use of the asset and its eventual disposition are less than
its carrying amount. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Leases
The Company accounts for and classifies its lease transactions as either an
operating or capital lease, depending on the terms of the lease under
Korean Lease Accounting Standards. If a lease is substantially non
cancellable and meets one or more of the criteria listed below, the present
value of future minimum lease payments is reflected as an obligation under
capital lease.
- Ownership of the leased property shall be transferred to the lessee at
the end of the lease term without additional payment or for a contract
price.
- The lease has a bargain purchase option.
- The lease term is equal to 75% or more of the estimated economic
useful life of the leased property.
- The present value at the beginning of the lease term of the minimum
lease payments equals or exceeds 90% of the fair value of the leased
property.
Otherwise, the lease is classified as an operating lease with lease
payments expensed as incurred.
Intangible Assets
Intangibles assets include free docking rights for a certain period,
received from Pohang Regional Maritime Affairs and Fisheries Office in
exchange for a port facility donated by the Company.
Such intangible assets are amortized using the straight-line method over a
reasonable period based on the nature of the asset.
Income Taxes
Income tax on the income for the year comprises current and deferred taxes.
Income tax is recognized in the statement of earnings except to the extent
that it relates to items recognized directly to equity, in which case it is
recognized in equity.
Deferred tax is provided using the asset and liability method, providing
for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
taxation purposes. The amount of deferred tax provided is based on the
expected manner of realization or settlement of the carrying amount of
assets and liabilities, using tax rates enacted or substantially enacted at
the balance sheet date.
A deferred tax asset is recognized only to the extent that it is probable
that future taxable income will be available against which the unused tax
losses and credits can be utilized. Deferred tax assets are reduced to the
extent that it is no longer probable that the related tax benefit will be
realized.
Discount on Debentures
Discount on debentures issued, which represents the difference between the
face value and issuance price of debentures, is amortized using the
effective interest method over the life of the debentures. The amount
amortized is included in interest expense.
Convertible Bonds and Bonds with Stock Warrants
Effective January 1, 2003, the Company adopted the Statement of Korea
Accounting Standards (SKAS) No. 9, "Convertible Securities" related to
convertible bonds and bonds with stock warrants. When issuing convertible
bonds or bonds with stock warrants, the values of conversion rights or
stock warrants are recognized as a capital surplus in stockholders' equity
and as a deduction from those bonds.
At issuance, the values of embedded conversion rights or non-detachable
stock warrants are measured by deducting the present value of the bonds
without those features from the gross proceeds received by issuing bonds
with those features. However, for bonds with detachable stock warrants, the
values of stock warrants are computed based on the relative fair values of
the two core components - ordinary debt securities and detachable stock
warrants.
When the holders of the convertible bonds are entitled to an additional
interest ("guaranteed interest") if the conversion option is not exercised,
the present value of the guaranteed interest is amortized as interest
expense over the term of the bonds, or until the conversion if the option
is exercised, on an effective interest method. The conversion option is
also amortized as interest expense over the option term on an effective
interest method.
Accrued Severance Indemnities
Employees who have been with the Company for more than one year are
entitled to lump-sum payments based on current rates of pay and length of
service when they leave the Company. Provision has been made in the
accompanying balance sheets for the estimated liability under the plan
which would be payable if all employees left on the balance sheet date. A
portion of these benefits is covered by employees' severance indemnity
insurance where the employees have vested interest in the deposits made by
the Company with the insurance company. The deposits are, therefore,
deducted from the severance liability in the accompanying balance sheets.
Through March, 1999, under the National Pension Plan of Korea, the Company
was required to transfer a certain portion of retirement allowances of
employees to the National Pension Fund. The amount transferred will reduce
the retirement and severance benefit amount to be payable to the employees
when they leave the Company and is accordingly reflected as a reduction of
the retirement and severance benefits liability in the accompanying balance
sheets. Since April 1999, however, a new regulation applies and such
transfers to the National Pension Fund are no longer required
Foreign Currency Translation
Monetary assets and liabilities denominated in foreign currencies are
translated into Korean won at the balance sheet date, with the resulting
gains and losses recognized in current results of operations. Monetary
assets and liabilities denominated in foreign currencies are translated
into Korean won at $1043.8 to US$1, the rate of exchange on December 31,
2004 that is permitted by the Financial Accounting Standards. Non-monetary
assets and liabilities denominated in foreign currencies, which are stated
at historical cost, are translated into Korean won at the foreign exchange
rate ruling at the date of the transaction.
Derivatives
Derivative instruments are presented as assets or liabilities valued
principally at the fair value of rights or obligations associated with the
derivative contracts. The unrealized gain or loss from derivative
transactions is recognized in current operations.
However, for derivative instruments with the purpose of hedging the
exposure to the variability of cash flows of a forecasted transaction, the
hedge-effective portion of the derivative's gain or loss is deferred as a
capital adjustment, a component of stockholder's equity. The deferred gain
or loss will be adjusted to the related asset or liability resulted from
the forecasted transaction, or adjusted to income when the forecasted
transaction affects income statement. The ineffective portion of the gain
or loss is charged or credited to current results of operations.
Forward foreign exchange contracts, which have been made to hedge foreign
exchange receivables and payables in the future, are classified as forward
foreign exchange contracts for hedging purposes. Unrealized gain or loss on
forward foreign exchange contracts for hedging purposes are deferred as
capital adjustment. The deferred gain or loss will be credited or charged
to income when related foreign exchange receivables and payables are
settled. The Company had no derivative instruments that qualified for hedge
accounting for the years ended December 31, 2004 and 2003.
Valuation of Receivables and Payables at Present Value
Receivables and payables arising from long-term installment transactions,
long-term cash loans/borrowings and other similar loan/borrowing
transactions are stated at present value. The difference between nominal
value and present value is deducted directly from the nominal value of
related receivables or payables and is amortized using the effective
interest method. The amount amortized is included in interest expense or
interest income.
Dividends Payable
Dividends are recorded when approved by the board of directors and
shareholders.
Contingent Liabilities
Contingent losses are generally recognized as liability when probable and
reasonably estimable.
Revenue and Expense Recognition
Revenues and expenses are recognized on the accrual basis. Revenues
generated from time charters, which are classified as operating leases by
the Company, are recorded over the term of the charter as service is
provided. Voyage charter revenues and associated expenses are recognized
ratably over the duration of the voyage. Voyage revenue is recognized on a
discharge-to-discharge basis. Under this basis, voyage revenue is
recognized evenly over the period from departure of a vessel from its last
discharge port to departure from the next discharge port. Vessel operating
costs include an allocation of administrative overheads that relate to
vessel operating activity which includes certain technical and operational
support staff for the vessels, information technology, legal, accounting,
and corporate costs. These costs are allocated based on internal cost
studies, which management believes are reasonable estimates.
Earnings Per Share
Earnings per share are calculated by dividing net earnings by the
weighted-average number of shares of common stock outstanding during each
period.
Changes in Accounting Principles and Estimates
The cumulative effect of changes in accounting standards is charged or
credited to the opening balance of retained earnings and the effect of
changes in accounting estimates is applied prospectively.
Reclassification of Prior Year Financial Statements
Certain accounts of financial statements as of and for the year ended
December 31, 2003 were reclassified to conform to the current year's
presentation. These reclassifications do not result in any change to
reported net earnings or stockholders' equity.
3. Basis of Translating Financial Statements
The financial statements are expressed in Korean won and, solely for the
convenience of the reader, have been translated into U.S. dollars at the
rate of $1,043.8 to US$1, the basic exchange rate on December 31, 2004.
This translation should not be construed as a representation that any or
all of the amounts shown could be converted into US dollars at this or any
other rate.
4. Cash and Cash Equivalents
Cash and cash equivalents as of December 31, 2004 and 2003 are as follows:
<table>
<caption>
In millions of Korean Won In thousands of US dollars
------------------------- --------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Cash 3 4 3 4
Checking accounts 6 9 6 9
Passbook accounts 1,798 147 1,722 140
Time deposits 38,941 21,825 37,307 20,909
Money market fund 3,987 - 3,820 -
----------------- --------------- ---------- -------
44,735 21,985 42,858 21,062
----------------- ---------------- --------- ------
</table>
5. Restricted Deposits
Restricted deposits as of December 31, 2004 and 2003 are as follows:
<table>
<caption>
In millions of Korean Won In thousands of US dollars
------------------------- --------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Short-term deposits 1,920 1,509 1,839 1,446
Long-term deposits 22 25 21 24
----------------- --------------- ---------- -------
1,942 1,534 1,860 1,470
----------------- --------------- ---------- -------
The deposits are provided as collateral for borrowings.
6. Trading Securities
Trading securities as of December 31, 2004 and 2003 are summarized as
follows:
</table>
<table>
<caption>
In millions of Korean Won In thousands of US dollars
------------------------- --------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Eastel system 3 4 3 4
KTF 12 10 11 9
STX 4,630 - 4,436 -
----------------- --------------- ---------- -------
4,645 14 4,450 13
----------------- --------------- ---------- -------
</table>
All trading securities are listed on the Korean Stock Exchange and valued
at market price resulting in a gain in valuation of $561 million ($537
thousand).
7. Investment Securities
Available-for-sale securities
(i) Equity securities
<table>
<caption>
2004
-----------------------------------------------------------
In millions of Korean Won In thousands of US dollars
------------------------- --------------------------
Percentage of Acquisition Book Value Acquisition Book Value
ownership (%) Cost Cost
Korea Economic Daily - $ 2 $ 2 $ 2 $ 2
BM Foundry - 15 15 14 14
Dain Ferry Hanmi Technology 4.7 149 149 142 142
Hanmi Technology Investment 1.8 340 340 326 326
Tongyeong TUG 14.5 290 290 278 278
Redfox I 3.9 500 - 479 -
Korea Marine Fund 11.8 1,000 1,000 958 958
Daehan Central Security(*) 70.8 736 - 705 -
Korea FA Systems(*) 35.0 150 150 144 144
Korico Enterprise(*) 35.0 252 252 241 241
Korea Marine Agency 9.9 202 202 194 194
Overseas Shipping Corp. 9.9 284 284 272 272
--------------- -------------- -------------- -------------
$ 3,920 $ 2,684 $ 3,755 $ 2,571
--------------- -------------- -------------- -------------
</table>
(*) Certain investments in non-marketable equity securities in which the
Company holds 20% or more interests have been recorded at costs if total
assets of each investee is less than $7,000 million ($6,706 thousand) and
the differences between the acquisition costs and the value of the
investments under the equity method are not significant.
The Company recognized impairment loss of $500 million ($479 thousand) from
investment in Redfox I. Daehan Central Securities went into liquidation and
the Company is expected to receive $572 million ($548 thousand) as
liquidation dividend and $163 million ($156 thousand) was written off to
other deductions account.
<table>
<caption>
2003 (Unaudited)
-----------------------------------------------------------
In millions of Korean Won In thousands of US dollars
------------------------- --------------------------
Percentage of Acquisition Book Value Acquisition Book Value
ownership (%) Cost Cost
Korea Economic Daily - $ 2 $ 2 $ 2 $ 2
BM Foundry - 15 15 14 14
Dain Ferry Hanmi Technology 4.7 115 115 110 110
Hanmi Technology Investment 1.8 340 340 326 326
Tongyeong TUG 14.5 290 290 278 278
Redfox I 3.9 500 500 479 479
Korea Marine Fund 11.8 1,000 1,000 958 958
Daehan Central Security 70.8 736 736 705 705
Korea FA Systems 35.0 150 150 144 144
Korico Enterprise 35.0 252 252 241 241
Korea Marine Agency 9.9 202 202 194 194
Overseas Shipping Corp. 9.9 284 284 272 272
--------------- -------------- -------------- -------------
$ 3,886 $ 3,886 $ 3,723 $ 3,723
--------------- -------------- -------------- -------------
</table>
(ii) Debt securities
<table>
<caption>
In millions of Korean Won In thousands of US dollars
------------------------- --------------------------
Maturity 2004 2003 2004 2003
(Unaudited) (Unaudited)
Subordinated bonds (Note 28) Jan 31, 2008 $ 28,807 $ 44,458 $27,598 $ 42,593
-------------- --------------- ------------ ---------------
</table>
Held-to-maturity securities
<table>
<caption>
In millions of Korean Won In thousands of US dollars
------------------------- --------------------------
Maturity 2004 2003 2004 2003
(Unaudited) (Unaudited)
Subordinated bonds July 10, 2005 $ - $ 1,400 $ - $ 1,341
Money trust Dec 31, 2005 20,718 - 19,849 -
-------------- --------------- ------------ ---------------
$ 20,718 $ 1,400 $19,849 $ 1,341
-------------- --------------- ------------ ---------------
</table>
In 2004, the Company wrote off in full the value of subordinated bonds
amounting to $1,400 million ($1,341 thousand).
Investment securities under the equity method
Investments in affiliated companies accounted for using the equity method
for the years ended December 31, 2004 and 2003 are as follows:
<table>
<caption>
2004 (In millions of Korean Won)
--------------------------------
Adjustment to
-------------
Affiliate Ownership (%) Beginning Dividends Capital Equity in Ending
Balance Adjustment Earning Balance
Kwangyang Marine Co., Ltd 58.9 $ 11,664 $ (306) $ (61) $ 3,606 $ 14,903
</table>
<table>
<caption>
2004 (In thousands of US dollars)
---------------------------------
Adjustment to
-------------
Affiliate Ownership (%) Beginning Dividends Capital Equity in Ending
Balance Adjustment Earning Balance
Kwangyang Marine Co., Ltd 58.9 $ 11,175 $ (294) $ (58) $3,455 $ 14,278
2003 (In millions of Korean Won)
--------------------------------
Adjustment to
-------------
Affiliate Ownership (%) Beginning Dividends Capital Equity in Ending
Balance Adjustment Earning Balance
Kwangyang Marine Co., Ltd 58.9 $ 8,150 $ (306) $ - $ 3,820 $ 11,664
</table>
<table>
<caption>
2003 (In thousands of US dollars)
---------------------------------
Adjustment to
-------------
Affiliate Ownership (%) Beginning Dividends Capital Equity in Ending
Balance Adjustment Earning Balance
Kwangyang Marine Co., Ltd 58.9 $ 7,808 $ (294) $ - $3,661 $ 11,175
</table>
Adjustment to equity in earning in 2003 includes the cumulative effect of
accounting change of Kwangyang Marine Co., Ltd amounting to $273 million
($263 thousand).
8. Property, Ships and Equipment
Property, ships and equipment at December 31, 2004 and 2003 are summarized
as follows:
<table>
<caption>
In millions of Korean Won In thousands of US dollars
------------------------- --------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Land $ 8,406 $ 8,406 $ 8,058 $ 8,053
Buildings and structures 8,494 8,494 8,138 8,138
Ships 1,133,939 1,046,628 1,086,357 1,002,709
Vehicles 306 288 293 276
Tools and furniture 1,969 2,103 1,886 2,015
Construction-in-progress (Note 27) 35,485 6,747 33,996 6,464
----------------- ------------------ -------------- -------------
1,118,599 1,072,666 1,138,723 1,027,655
Less : Accumulated depreciation (258,668) (210,186) (247,814) (201,367)
----------------- ------------------ -------------- -------------
$ 929,931 $ 862,480 $ 890,909 $ 826,288
----------------- ------------------ -------------- -------------
</table>
The Company revalued its property, ships and equipment a number of times
before 1999 under the then Korean Assets Revaluation Law. As a result, the
Company recorded a revaluation surplus of $183,357 million ($175,663
thousand), net of revaluation tax. $148,137 million ($141,921 thousand) of
the revaluation surplus was used to offset accumulated deficits and $10,270
million ($9,839 thousand) was transferred to capital in a stock dividend
and the balance of $24,950 million ($23,903 thousand) remains in capital
surplus at December 31, 2004.
The officially declared value of lands which is used for the various
government purposes at December 31, 2004 and 2003, as announced by the
Ministry of Construction and Transportation, are $8,826 million ($8,455
thousand), and $7,265 million ($6,960 thousand), respectively. The
officially declared land value, which is used for tax assessment purposes,
is not intended to represent fair value.
9. Pledged Assets and Guarantees
At December 31, 2004 and 2003, the following assets stated at book value
are pledged as collateral for the loans:
<table>
<caption>
In millions of Korean Won In thousands of US dollars
------------------------- --------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Short-term deposits $ 1,920 $ 1,509 $ 1,839 $ 1,446
Long-term deposits - 25 - 24
----------------- ------------------ -------------- -------------
$ 1,920 $ 1,534 $ 1,839 $ 1,470
----------------- ------------------ -------------- -------------
</table>
The Company has been provided with guarantees from financial institutions
in the amount of $29 million ($28 thousand) as of December 31, 2004 for the
Company's contracts of affreightment.
10. Insured Assets
As of December 31, 2004, ships, buildings, tools, furniture and fixtures
were insured against fire damage up to $1,063,080 million ($1,018,472
thousand). In addition, the Company maintains insurance policies covering
loss and liability arising from employees' accidents and automobile
accidents.
11. Intangible Assets
Intangible assets as of December 31, 2004 and 2003 are summarized as
follows:
<table>
<caption>
In millions of Korean Won In thousands of US dollars
------------------------- --------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
<s> <c> <c> <c> <c>
Rights from donated asset $ 5,409 $ - $ 5,182 $ -
----------------- ------------------ -------------- -------------
</table>
The Company donated a port facility to Pohang Regional Maritime Affairs and
Fisheries Office and received the rights to dock without paying docking
charges equal to the amount of the facility donated, which is estimated to
take two years. Therefore, the donated port facility which is recognized as
intangible assets will be amortized over two years.
12. Long-term Borrowings
Long-term borrowings as of December 31, 2004 and 2003 are summarized as
follows:
<table>
<caption>
In millions of Korean Won In thousands of US dollars
----------------------------- -----------------------------
Interest rate 2004 2003 2004 2003
per annum (Unaudited) (Unaudited)
Debt in Korean won
Korea Citi Bank 6.5 ~ 8 % $ 1,316 $ 438 $ 1,260 $ 420
Korea Exchange Bank 6.4 % 420 466 403 446
Kookmin Bank 6.6 ~ 8 % 420 420 403 403
Debt in US dollars
Hanmi Bank 7.0 % - 923 - 884
KDB Capital (Note 14) 6.9 % 27,439 34,166 26,288 32,732
-------------- -------------- -------------- --------------
29,595 36,413 28,354 34,885
Less : Current portion (2,703) (3,672) (2,590) (3,518)
-------------- -------------- -------------- --------------
$ 26,892 $ 32,741 $25,764 $ 31,367
-------------- -------------- -------------- --------------
</table>
Aggregate principal maturities for the Company's long-term borrowings as of
December 31, 2004 are as follows:
Year ending December 31, In millions of In thousands of
Korean Won US dollars
2005 $ 2,703 $ 2,590
2006 2,916 2,794
2007 3,141 3,009
2008 3,516 3,368
Thereafter 17,319 16,593
---------------- -------------
$ 29,595 $ 28,354
13. Debentures
Debentures as of December 31, 2004 and 2003 are summarized as follows:
Debentures
<table>
<caption>
In millions of Korean Won In thousands of US dollars
----------------------------- -----------------------------
Interest rate 2004 2003 2004 2003
per annum (Unaudited) (Unaudited)
8th 6.8 % $ - $ 30,000 $ - $ 28,741
10th 8.4 % - 7,000 - 6,706
11th 6.7 % - 3,000 - 2,874
12th 7.5 % 7,000 7,000 6,706 6,706
13th 8.7 % - 10,000 - 9,581
7,000 57,000 6,706 54,608
Less : Current portion (6,999) (49,963) (6,705) (47,866)
Discount on debentures (1) (38) (1) (37)
-------------- -------------- -------------- --------------
$ - $ 6,999 $ - $ 6,705
-------------- -------------- -------------- --------------
</table>
Bonds with stock warrants
<table>
<caption>
In millions of Korean Won In thousands of US dollars
----------------------------- -----------------------------
Interest rate 2004 2003 2004 2003
per annum (Unaudited) (Unaudited)
Face value 6.2 % $ 20,000 $ - $19,161 $ -
Less : Stock warrants adjustment (2,265) - (2,170) -
-------------- -------------- -------------- --------------
$ 17,735 $ - $16,991 $ -
-------------- -------------- -------------- --------------
Value of stock warrants $ 2,539 $ - $ 2,432 $ -
-------------- -------------- -------------- --------------
</table>
On April 13, 2004, the Company issued bonds with stock warrants with a face
amount of $20,000 million ($19,161 thousand) to Green Fire and Marine
Insurance Co. Holders of bonds with warrants are entitled to exercise the
warrants from April 13, 2005 to March 13, 2009. The exercise price varies
every quarter based on the terms of the bond and current prices. The
exercise price at the time of issue was $25,100 ($24.05) per share of
common stock which has changed to $24,400 ($23.37) per share at December
31, 2004.
Convertible bonds
<table>
<caption>
In millions of Korean Won In thousands of US dollars
----------------------------- -----------------------------
Interest rate 2004 2003 2004 2003
per annum (Unaudited) (Unaudited)
Face value 4.0 % $ 20,000 $ - $ 19,161 $ -
Guaranteed interest 886 - 849 -
Less : Conversion rights adjustment (1,293) - (1,239) -
Discount on debentures (180) - (173) -
------------- -------------- ------------- -------------
$ 19,413 $ - $ 18,598 $ -
------------- -------------- ------------- -------------
Value of conversion rights $ 553 $ - $ ,530 $ -
------------- -------------- ------------- -------------
</table>
On September 6, 2004, convertible bonds were issued with a face amount of
$20,000 million ($19,161 thousand) which was bought by Green Fire and
Marine Insurance Co. Holders of convertible bonds are entitled to convert
bonds into share of the Company's common stock from September 6, 2005 to
September 6, 2007. The exercise price changes every quarter based on the
market price and it is $39,000 ($37.36) per share of common stock at
December 31, 2004 (at the time of issue it was $44,350 ($42.49)). In case
of non-conversion, the guaranteed interest will be paid.
14. Leases
The Company has non-cancelable capital leases for 2 vessels. Future minimum
lease payments under the lease as of December 31, 2004 are as follows:
<table>
<caption>
Year ending December 31, In millions of In thousands of US
Korean Won dollars
<s> <c> <c>
2005 $ 4,359 $ 4,176
2006 4,359 4,176
2007 4,359 4,176
2008 4,359 4,176
2009 4,358 4,176
Thereafter 14,711 14,094
-------------------- --------------------
Total minimum lease payments 36,505 34,974
Less : Amount representing interest (9,066) (8,686)
Present value of net minimum capital lease payments, ---------------------- --------------------
including current maturities of W 2,501 million. $ 27,439 $ 26,288
---------------------- --------------------
</table>
Obligations under the capital leases above are included in long-term
borrowings (Note 12).
At December 31, 2004 and 2003, the gross amount of ships and related
accumulated depreciation recorded under capital leases are as follows:
In millions of Korean Won In thousands of US dollars
---------------------------------- ----------------------------------
2004 2003 2004 2003 (Unaudited)
(Unaudited)
Ships $ 58,754 $ 58,754 $ 56,289 $ 56,288
Less : Accumulated depreciation (15,566) (13,098) (14,913) (12,548)
----------------- ------------------ ---------------- ----------------
$ 43,188 $ 45,656 $ 41,376 $ 43,740
----------------- ----------------- ----------------- ----------------
Depreciation charged on assets held under capital leases for the years
ended December 31, 2004 and 2003 amounted to $2,468 million ($2,364
thousand) each year.
The charges on bare-boat charters and time charters are treated as
operating leases and expensed in proportion to related charter periods.
15. Long-term Accounts Payable - Other
In millions of Korean Won In thousands of US dollars
----------------------------- -----------------------------
Interest 2004 2003 2004 2003
rate per (Unaudited) (Unaudited)
annum
Science Maritime $ $ 3,456 $ - $3,311
- -
Hyundai Libor +1.00% 10,814 15,313 10,360 14,670
SK Libor +0.99% 14,560 22,367 13,949 21,428
Sun Gemini Navigation Libor +0.98% 10,428 18,029 9,990 17,272
Hanjin Shipping Libor +1.06% 11,531 16,540 11,047 15,846
Sun Prosperity Libor +2.05% 37,802 49,002 36,216 46,946
Grand Maritime Libor +1.00% 23,775 31,415 22,777 30,097
Horizon Maritime Libor +0.87% 359,121 438,692 344,052 420,284
Meridian Maritime Libor +1.16% 381,362 465,862 365,359 446,314
Giant Marine Shipping Libor +1.65% 17,121 - 16,403 -
Treasure Maritime Libor +1.25% 37,244 - 35,681 -
G. Alliance Maritime Libor +1.80% 19,711 - 18,883 -
-------------- -------------- -------------- --------------
923,469 1,060,676 884,717 1,016,168
Less : Discounts to present value (326,860) (404,929) (313,144) (387,937)
Current portion (50,312) (40,402) (48,200) (38,707)
-------------- -------------- -------------- --------------
$ 546,297 $ 615,345 $523,373 $589,524
============= ============= ============== ==============
The Company purchases ships on long-term installments according to Bareboat
Charter Hire Purchase (BBCHP) contracts and acquires the ownership after
the last installment is paid. However, the Company books as fixed assets
the total amount of installments with a matching entry to long-term
accounts payable when the ships are delivered. When the installment is
paid, the interest portion is charged to interest expense and the principle
amount is offset against long-term payables.
16. Accrued Severance Indemnities
Changes in the accrued severance indemnities for the years ended December
31, 2004 and 2003 are summarized as follows:
In millions of Korean Won In thousands of US dollars
---------------------------------- ----------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Balance at beginning of year $ 4,897 $ 5,773 $ 4,692 $ 5,531
Provision for the year 2,594 1,514 2,485 1,450
Payments during the year (1,279) (2,390) (1,225) (2,290)
----------------- --------------------------------------------------
Balance at end of year 6,212 4,897 5,952 4,691
Transfer to National Pension Fund (147) (179) (141) (171)
Deposits in employees' severance
benefit insurance (3,727) - (3,571) -
----------------- --------------------------------------------------
$ 2,338 $ 4,718 $ 2,240 $ 4,520
----------------- --------------------------------------------------
Under the severance benefit insurance contract, payments of the Company's
accrued severance indemnities to employees are guaranteed to the extent of
the deposits held at Korea Life Insurance Co., Ltd. The deposits at Korea
Life Insurance Co., Ltd are presented as a deduction from the retirement
and severance benefits liability.
17. Assets and Liabilities Denominated in Foreign Currencies
Details of assets and liabilities denominated in foreign currencies as of
December 31, 2004 and 2003 are as follows:
2004 2003 (Unaudited)
-----------------------------------------------------------------------
Foreign Currency Korean Won Foreign Currency Korean Won
(in thousands) Equivalent (in thousands) Equivalent
(in millions) (in millions)
Deposits USD 64,670 $ 67,503 USD 18,306 $ 21,928
Accounts receivables USD 6,957 7,261 USD 4,938 5,914
Other receivables USD 4,802 5,012 USD 6,933 8,304
-----------------------------------------------------------------------
Total USD 76,429 79,776 USD 30,177 36,146
-----------------------------------------------------------------------
Accounts payables USD 6,931 7,235 USD 8,185 9,804
Long-term accounts payable-other USD 555,968 596,609 USD 547,460 655,747
including current portion YEN 1,609,500
Long-term borrowings including current
portion USD 26,288 27,439 U 29,295 35,089
-----------------------------------------------------------------------
Total USD 589,187 $ 631,283 USD 584,940 $ 700,640
YEN 1,609,500
-----------------------------------------------------------------------
18. Valuation of Receivables and Payables at Present Value
Long-term accounts payable stated at present value as of December 31, 2004
are as follows:
In millions of In thousands of US
Korean Won dollars
Nominal amount $ 923,469 $ 884,718
Discount to present value 326,860 313,144
Book value including current portion 596,609 571,574
The Company purchases ships on long-term installments based on Bareboat
Charter Hire Purchase (BBCHP) contracts and repays the installments over 3
to 20 years. The Company recorded sum of the principal and related interest
as long-term accounts payable and then classifies the related interest as
the discount to present value of long-term accounts payables. The discount
to present value is amortized using the effective interest method over the
payment period and included in current expenses. When each installment is
paid, variances of LIBOR between inception and payment date are adjusted to
the interest expense.
19. Capital Surplus
Capital surplus as of December 31, 2004 and 2003 are summarized as follows:
In millions of Korean Won In thousands of US dollars
-------------------------------- ---------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Additional paid in capital $ 4,041 $ 4,041 $ 3,872 $ 3,872
Assets revaluation surplus (Note 8) 24,950 24,950 23,903 23,903
Gain on sale of treasury stock 13,322 205 12,763 195
Value of conversion rights 553 - 530 -
Value of stock warrants 2,539 - 2,432 -
-----------------------------------------------------------------
$ 45,405 $ 29,196 $43,500 $27,970
================ ================ ============== ================
20. Appropriated Retained Earnings
Appropriated retained earnings as of December 31, 2004 and 2003 are
summarized as follows:
In millions of Korean Won In thousands of US dollars
--------------------------------- --------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Legal reserve $ 10,000 $ - $ 9,580 $ -
Reserve for improvement of financial
structure 7,702 702 7,380 672
Other voluntary reserves 13,000 - 12,454 -
---------------- ---------------- -------------- ----------------
$ 30,702 $ 702 $29,414 $ 672
================ ================ ============== ================
The Korean Commercial Code requires the Company to appropriate as legal
reserve an amount equal to at least 10% of cash dividends for each
accounting period until the reserve equals 50% of stated capital.
Listed companies are required to set up as reserve for financial structure
improvement an amount calculated based on a certain percentage of net gains
on sale of fixed assets, net of taxes and on net earnings until the net
worth ratio reaches 30%.
The above reserves may be used to reduce deficit or transferred to the
stated capital through free issues of shares.
21. Treasury Stock
The Company is allowed to deal in its own shares under the Korean
Securities Transaction Law to stabilize its share price in the stock
market. The Company held 146,510 shares of the Company's own stock at
December 31, 2004 which were acquired at a cost of $5,421 million ($5,194
thousand).
22. Related Party Transactions
Significant transactions with the related parties for the years ended
December 31, 2004 and 2003 are as follows:
In millions of Korean Won In thousands of US dollars
----------------------------- -----------------------------
Related parties Transactions 2004 2003 2004 2003
(Unaudited) (Unaudited)
Korico Enterprises Ltd. Supplies expenses $ 3,768 $ - $ 3,610 $ -
Rental revenues 45 - 43 -
Kwangyang Marine Co., Ltd. Agency fees 176 163 169 156
Rental revenues 7 42 7 40
Korea F.A systems Service fees 1,045 - 1,001 -
Significant accounts balances with the related parties as of December 31,
2004 and 2003 are as follows:
In millions of Korean Won In thousands of US dollars
---------------------------- -----------------------------
Related parties Accounts 2004 2003 2004 2003
(Unaudited) (Unaudited)
Kwangyang Marine Co., Ltd. Accounts receivable $ - $ 116 $ - $ 111
Accounts payable - 7 - 7
Korea F.A systems Accounts payable 550 - 527 -
Korico Enterprises Ltd Accounts payable 1,212 - 1,161 -
The guarantees the Company has provided for related parties as of December
31, 2004 are as follows:
Guaranteed Amount In
Related Parties Types of Guarantee thousands of US dollars Lender
Kwangyang Marine Co., Ltd. Lease $ 2,023 Jeil Citi Lease
Lease 892 Woori Finance
Lease 15,833
Korico Enterprises Ltd. Short-term borrowings 718 Hana Bank
------------------------
$ 19,466
------------------------
23. Selling, General and Administrative Expenses
Selling, general and administrative expenses for the years ended December
31, 2004 and 2003 are summarized as follows:
In millions of Korean Won In thousands of US dollars
------------------------------ ----------------------------------
2004 2003 (Unaudited) 2004 2003 (Unaudited)
Salaries $ 4,419 $ 3,598 $ 4,234 $ 3,447
Retirement allowance 694 570 665 546
Employee benefits 772 399 739 382
Rental expenses 65 62 62 60
Travel 247 159 236 152
Vehicle maintenance 103 82 99 79
Communication 24 22 23 21
Utility expenses 84 115 81 110
Taxes and dues 215 464 206 444
Supplies 52 48 50 46
Publication 65 56 62 54
Entertainment 223 232 213 223
Depreciation 328 355 314 340
Repairs 20 9 19 9
Advertising 147 35 141 33
Service fees 1,320 173 1,265 166
Training 22 12 21 11
Amortization - 8 - 7
Bad debt expenses 418 - 401 -
Others 1,030 824 987 790
------------------ --------------- --------------- ----------------
$ 10,248 $ 7,223 $ 9,818 $ 6,920
================= ============== ============== =================
24. Income Taxes
The Company is subject to a number of taxes based upon earnings which
result in the following normal tax rates:
Taxable Income 2004 2005 and thereafter
Up to $100 million 16.5% 14.3%
Over $100 million 29.7% 27.5%
The components of income tax expense for the years ended December 31, 2004
and 2003 are as follows:
In millions of Korean Won In thousands of US dollars
--------------------------------- --------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Current income taxes $ 19,597 $ - $ 18,775 $ -
Deferred income taxes 17,481 13,232 16,747 12,677
------------------- -------------- ----------------- ---------------
$ 37,078 $ 13,232 $ 35,522 $ 12,677
-------------------- ------------- ------------------ --------------
The Company offset tax effect of $1,217 million ($1,166 thousand) against
capital surplus derived from gain on sale of treasury stock amounting
$14,336 million ($13,734 thousand) during 2004.
Income taxes at normal tax rates differ from actual provision for income
taxes for the year ended December 31, 2004 for the following reasons:
In millions of In thousands of US
Korean Won dollars
Income taxes at normal rates $ 70,657 $ 67,692
Permanent differences primarily from bonds with warrants 921 882
Tax loss brought forward (18,391) (17,619)
Investment tax credit (16,897) (16,188)
Others, primarily from change in tax rate 788 755
---------------------- --------------------
$ 37,078 $ 35,522
---------------------- --------------------
Details of the differences between taxable income and accounting income for 2004 are as follows
In millions of Korean Won In thousands of US dollars
-----------------------------------------------------------------
Temporary Permanent Temporary Permanent
Difference Difference Difference Difference
Additions
Accrued income $ 925 $ - $ 886 $ -
Equity securities of affiliates 366 - 351 -
Impairment loss from investment 1,900 - 1,820 -
Allowance for bad debt 368 - 352 -
Accrued severance indemnities 1,690 - 1,619 -
Reserve for special depreciation 263 - 252 -
Stock warrants - 2,539 - 2,433
Stock warrants adjustments 274 - 262 -
Conversion rights - 552 - 529
Redemption premium 886 - 849 -
Amortization of conversion rights 146 - 140 -
Gain on sale of treasury stock - 14,336 - 13,735
Interest expense - 21 - 20
Entertainment - 48 - 46
------------------- -------------- --------------- ----------------
Sub total 6,818 17,496 6,531 16,763
-------------------- -------------- -------------- ----------------
Deductions
Accrued income 1,002 - 960 -
Stock warrants adjustments 2,539 - 2,433 -
Conversion rights 1,439 - 1,378 -
Accrued severance indemnities 416 - 399 -
Deposit for severance indemnities 3,727 - 3,570 -
Deferred foreign currency translation loss 7,548 - 7,231 -
Gain on trading securities 561 - 537 -
Equity in earnings 3,606 - 3,455 -
Equity in capital adjustments - 60 - 58
Gain on derivatives 983 - 942 -
Loss on trading securities 5 - 5 -
Special depreciation 7,507 - 7,192 -
Reserve for special depreciation 2,215 - 2,122 -
-------------------- ------------- --------------- ----------------
Sub total 31,548 60 30,224 58
------------------- --------------- -------------- ----------------
Net $ (24,730) $ 17,436 $ (23,693) $ 16,705
------------------- --------------- -------------- ----------------
The tax effects of temporary differences that result in significant
portions of the deferred income tax assets and liabilities at December 31,
2004 are presented below:
Deferred Tax Assets (Liabilities)
--------------------------------------------
In millions of In thousands of US
Korean Won dollars
Provision for severance benefits $ 1,460 $ 1,399
Severance benefits (1,025) (982)
Deferred foreign currency translation loss 3,154 3,022
Provision for depreciation of purchase on subsidy (386) (370)
Stock warrants adjustment (623) (597)
Conversion rights adjustment (355) (340)
Equity in earnings of affiliates (2,601) (2,492)
Impairment losses on investments 523 501
Special depreciations (2,673) (2,560)
Others (45) (44)
---------------------- --------------------
$ (2,571) $ (2,463)
==================== ===================
Under the new provision of Korean tax law enacted in 2004, the Company may
file and pay income taxes by applying tonnage tax system. The Company has
elected to adopt the tonnage tax system in March 2005.
The Company recognizes deferred tax assets and liabilities, which represent
temporary differences of assets and liabilities between the financial
reporting and tax bases. Deferred tax assets and liabilities are computed
on such temporary differences, including available net operating loss
carryforwards and tax credits, by applying statutory tax rates applicable
to the years when such differences are expected to reverse. Deferred tax
assets are recognized when it is more likely than not that such deferred
tax assets will be realized. The total income tax provision includes the
current tax expense under applicable tax regulations and the change in the
balance of deferred tax assets and liabilities during the year.
As of December 31, 2003, the Company had unutilized net operating losses of
$100,640 million ($84,021 thousand) and unused tax credits of $17,243
million ($14,396 thousand) expiring in 2007. The Company recognized
deferred tax asset of $11,500 million ($9,601 thousand) on some of its
unutilized net operating losses. No deferred tax asset was recognized on
the remaining unutilized operating losses of $61,919 million ($51,694
thousand) and tax credit of $17,243 million ($14,396 thousand), as the same
were considered not realizable.
Tax credits for investments are accounted for using the flow-through
method, whereby income taxes are reduced during the period when the assets
that gave rise to the said credits are placed in service. To the extent
that the said credits are not currently utilized, deferred tax assets,
subject to realizability as stated above, are recognized as carryforward
amounts. As of December 31, 2004, the Company has unused investment tax
credits of $10,061 million ($9,639 thousand) expiring on 2008. However, the
Company does not recognize the tax credit as deferred tax assets as of
December 31, 2004 because its realizability is uncertain due to the
election of tonnage tax system.
25. Earnings Per Share
Earnings per share are calculated as follows:
In millions of Korean Won In thousands of US dollars
------------------------------ ---------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Net income 200,826 31,340 $192,399 $ 30,025
Weighted average number of outstanding common
shares 9,338,462 9,474,371 9,338,462 9,474,371
--------- --------- --------- ---------
Earnings per share in won and US dollar $ 21,505 $ 3,308 $ 21 $ 3
========= ========== ========= ==========
Details of calculation of weighted average number of outstanding common
shares are as follows:
Number of Treasury Stock Number of Outstanding Duration Number of Cumulative
Shares Shares
377,573 9,622,427 30 288,672,810
590,563 9,409,437 61 573,975,657
659,613 9,340,387 13 121,425,031
761,193 9,238,807 13 120,104,491
810,193 9,189,807 2 18,379,614
899,573 9,100,427 63 573,326,901
909,933 9,090,067 19 172,711,273
973,243 9,026,757 90 812,408,130
217,373 9,782,627 42 410,870,334
- 10,000,000 9 90,000,000
144,810 9,855,190 20 197,103,800
146,510 9,853,490 3 29,560,470
--------------- --------------------------
Total 365 3,408,538,511
--------------- --------------------------
Weighted average number of shares : 3,408,538,511/365 = 9,338,462
Diluted earnings per share are calculated as follows:
In millions of Korean Won In thousands of US dollar
(except for number of shares (except for number of shares
and earnings per share) and earnings per share)
---------------------------------------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Net earnings $ 200,826 $ 31,340 $ 192,399 $ 30,025
Interest expenses on bond with warrants 1,007 - 965 -
Interest expenses on convertible bond 396 - 379 -
--------------------------------------------------------------
Net earnings available for common and 202,229 31,340 193,743 30,025
common equivalent shares
Weighted average number of common and
common equivalent shares 9,585,673 9,474,371 9,585,673 9,474,371
--------------------------------------------------------------
Diluted net earnings per share in won and $ 21,097 $ 3,308 $ 20 $ 3
US dollars
--------------------------------------------------------------
Diluted earnings per share are calculated by dividing net earnings
available for common and common equivalent shares by the weighted average
number of common and common equivalent shares. The bonds with stock
warrants and convertible bonds are assumed to be converted when they are
issued. The number of stock warrants is included in common stock, in case
average market value is over exercising price, using treasury stock method.
Potentially dilutive securities as of December 31, 2004 are as follows:
Number of Potentially Dilutive
Shares
Bonds with stock warrants 819,672
Convertible bonds 512,820
26. Dividend
Dividends are generally proposed based on each year's earnings and are
declared, recorded and paid in the subsequent year. Proposed dividends for
2004 and 2003 are calculated as following:
2004 2003 (Unaudited)
Number of outstanding shares 9,855,190 9,624,227
Par value (in won) 5,000 5,000
Rate 20% 5%
Dividend (in won) 9,855,190,000 2,406,056,750
The Company's dividend payout ratios for the years ended December 31, 2004
and 2003 are shown below:
In millions of Korean Won In thousands of US dollars
-------------------------------- -------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Dividend 9,855 2,406 9,441 2,305
Net earnings 200,826 31,340 192,399 30,025
Dividend payout ratio 4.91% 7.68% 4.91% 7.68%
The Company's dividend yield ratios for the years ended December 31, 2004
and 2003 are calculated as follows:
In Korean Won In US dollars
------------------------------- -------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Dividend per share 1,000 250 0.95 0.24
Market price at balance sheet date 35,400 16,600 33.91 15.90
Dividend yield ratio 2.82% 1.51% 2.80% 1.51%
27. Commitments and Contingencies
The Company has offered 6 checks and notes in blank in respect of
guarantees for payment and performance of contracts as of December 31, 2004
and 2003.
Various claims involving the Company amounted to $4,306 thousand as of
December 31, 2004, which could be covered by insurance. These claims arose
in the ordinary course of business and significant losses are not expected
to occur from them.
The Company has entered into various long-term shipping contracts with
POSCO, KEPCO, Korea Gas Corporation etc. The freight charges detailed in
these contracts are generally revised every one or two years.
The Company is planning to purchase 6 new ships which will require total
investment of US 176.5 million dollars and 11.5 billion yen. The Company
plans to borrow US$ 222.6 million dollars, 1.6 billion yen and 2.4 billion
won from a SPC formed by Nordea Bank, S.G.Bank and Korea Development Bank
to finance the project. The Company has paid a 10% down payment of $35,485
million ($33,996 thousand) which is currently included in construction in
progress. The ships will be delivered in 2005 (2) and 2006 (4).
The Company has unused overdraft facilities from various banks amounting to
24 billion won at December 31, 2004. In 1998, the Company entered into a
sale-leaseback arrangement. Under the arrangement, the Company sold 4 ships
and leased them back for periods from 7 to 9 years. The leaseback has been
accounted for as an operating lease. The gain, amounting to $46,118 million
($44,183 thousand) was realized in this transaction.
The Company jointly acquired 4 LNG carriers with other shipping companies
and accounted for its portions as assets. In this regard, the Company has
recognized revenues and costs arising from operations of the carriers in
proportion to the Company's interest in each carrier.
A summary of commitment with respect to forward exchange transactions as of
December 31, 2004 are as follows:
Contract amount
------------------------------
Type Terminal Date Buying Selling Exchange Rate
(thousands) (thousands)
Forward transaction 31-Mar-05 $ 15,000 JPY1,575,000 JPY/USD=105.00
28-Jan-05 $ 11,470 - Won/USD=1,059.90
28-Jan-05 - $ 11,470 Won/USD=1,060.00
Target forward 4-Jan-05~10-Mar-05 $ 33,000 Won/USD=1,073.70~1,162.30
Catapult forward 24-Nov-05 $ 5,500 Won/USD=1,100.00
Premium deposit 05-Jan-05 $ 5,000 Won/USD=1,164.20
The above contracts were valued at December 31, 2004 resulting in a gain of
$983 million ($942 thousand)
28. Sale of Accounts Receivable
The Company has a contract of affreightment (COA) with POSCO to provide
shipping services. On July 23, 2002, the Company sold present and future
accounts receivable from POSCO during the period from June 19, 2002 to
January 31, 2008 to Korea Line Asset Securitization Specialty Limited for
$128,821 million ($123,415 thousand) and recorded the associated liability
as part of other long-term liabilities in the balance sheet. Relating to
this, Korea Line Securitization Specialty Limited has issued to the Company
a subordinated bond of $50,000 million ($47,901 thousand). As at December
31, 2004, the balances of other long-term liabilities and the subordinated
bond are $86,641 million ($83,005 thousand) and $28,807 million ($27,598
thousand), respectively.
29. Added Value Information
The components of shipping costs and selling and administrative expenses
which are necessary in calculating added value for the years ended December
31, 2004 and 2003 are as follows:
In millions of Korean Won In thousands of US dollars
-----------------------------------------------------------------
2004 2003 (Unaudited) 2004 2003 (Unaudited)
Wages and salaries $ 22,067 $ 17,931 $ 21,141 $ 17,179
Severance benefits 2,594 1,514 2,485 1,450
Employee welfare 772 399 739 382
Depreciation 48,975 45,723 46,920 43,805
Rent 65 62 63 60
Taxes and dues 215 464 206 444
-----------------------------------------------------------------
$ 74,688 $ 66,093 $71,554 $ 63,320
-----------------------------------------------------------------
30. Employee Welfare and Contributions
The Company maintains a scholarship fund, athletic facilities, workmen's
accident compensation insurance, unemployment insurance and medical
insurance for the employee welfare. The Company has spent on such employee
benefits the amount of $772 million ($739 thousand) and $399 million ($382
thousand), respectively.
The Company donated $403 million ($386 thousand) and $14 million ($13
thousand) to a university and others for the years ended December 31, 2004
and 2003, respectively.
31. Cash Flow Information
Significant transactions not affecting cash flows for the years ended
December 31, 2004 and 2003, are as follows:
In millions of Korean Won In thousands of US dollars
-------------------------------------------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited)
Gain (loss) on trading securities $ 561 $ (5) $ 537 $ (5)
Impairment of investment 1,900 - 1,820 -
Equity in earnings 3,606 3,547 3,455 3,398
Equity in capital adjustments 60 - 58 -
Gain on derivatives 983 - 942 -
Construction-in-progress transferred to Ship 87,311 - 83,648 -
Bond transferred to current portion 7,000 6,000 6,706 5,748
Long-term borrowing transferred to current
portion 2,703 4,436 2,589 4,250
Long-term payable-other transferred to
current portion 90,215 86,823 86,429 83,180
32. Subsequent Events
The Company acquired 2 bulk carriers with total deadweight tonnage of
356,000 metric tons amounting to $96,000 million ($91,972 thousand) in
February and March 2005.
33. GAAP Reconciliation
Reconciliation to US Generally Accepted Accounting Principles
The financial statements of the Company are prepared in accordance with
generally accepted accounting principles in the Republic of Korea ("Korean
GAAP"), which differ in certain respects from generally accepted accounting
principles in the United States of America ("US GAAP"). Application of US
GAAP would have affected the balance sheet as of December 31, 2004 and net
income for the year then ended to the extent described below.
Significant Differences between Korean GAAP and US GAAP
Reconciliation of net income from Korean GAAP to US GAAP
2004
Net income in accordance with Korean GAAP (in millions
of Korean Won) 200,826
Adjustments:
Capitalization of dry-docking expenditure (b) 5,840
Capitalization of interest (c) 1,674
Asset revaluation (d) 6,235
Deferred income from operating leases (e) 5,575
Convertible bonds (f) 56
Asset backed securitization (g) 846
Intangibles (i) 5
Deferred tax (j) (33,909)
Deferred tax on US GAAP adjustments (j) (5,298)
----------------------------------------------------------------------------------
Net income (in millions of Korean Won) pre-remeasurement 181,850
Net income (in thousands of US dollars ) 158,938
Functional currency remeasurement (k) (83,147)
----------------------------------------------------------------------------------
Net income in accordance with US GAAP (in thousands
of US dollars) 75,791
----------------------------------------------------------------------------------
Reconciliation of shareholders' equity from Korean
GAAP to US GAAP
2004
Total shareholders' equity in accordance with Korean GAAP
(in millions of Korean Won) 327,611 327,611
Adjustments:
Capitalization of dry-docking expenditure (b) 12,017
Capitalization of interest (c) 1,985
Asset revaluation (d) (91,729)
Deferred income from operating leases (e) (10,919)
Convertible bonds (f) (496)
Asset backed securitization (g) 5,917
Intangibles (i) (6)
Deferred tax adjustments (j) 21
Total shareholders' equity (in millions of Korean Won) 244,401
----------------------------------------------------------------------------------
Total shareholders' equity (in thousands of US dollars)
pre-remeasurement 234,989
Functional currency remeasurement (k) 36,407
----------------------------------------------------------------------------------
Net assets in accordance with US GAAP
(in thousands of US dollars) 271,396
----------------------------------------------------------------------------------
The adjustments noted above relate to the following differences between
Korean GAAP and US GAAP:
(a) Consolidation
Under Korean GAAP, the Company presents its primary financial statements on
a non-consolidated basis. In the non-consolidated financial statements,
investments in majority-owned subsidiaries and entities in which the
Company has the ability to exercise significant influence over the
operating and financial policies are accounted for using the equity method.
Under US GAAP, companies are required to consolidate all entities in which
they have, directly or indirectly, a controlling financial interest. There
is no impact of the above difference on the reconciliation statements
presented as these non-consolidated entities are accounted for using the
equity method under Korean GAAP.
Under US GAAP, in accordance with FIN 46-R "Consolidation of Variable
Interest Entities", certain variable interest entities (VIEs) are required
to be consolidated by a company if that company is subject to a majority of
the risk of expected loss from the VIEs' activities or entitled to receive
a majority of the entity's expected residual return, or both. The impact of
consolidating VIE is disclosed under the head "Asset backed securitization"
in the reconciliation statement.
In order to disclose the impact of consolidation on the US GAAP balance
sheet of the Company, a condensed consolidated balance sheet as of December
31, 2004 is presented below:
(in thousands of US dollars) 2004
Assets
Current assets 217,518
Property, plant and equipment, net 1,016,566
Others assets 17,104
----------------------------------------------------------------
Total assets 1,251,188
----------------------------------------------------------------
Liabilities
Current liabilities 175,956
Long-term liabilities 795,734
----------------------------------------------------------------
Total liabilities 971,690
Minority interests 8,102
Stockholders' equity 271,396
----------------------------------------------------------------
Total liabilities and stockholders' equity 1,251,188
----------------------------------------------------------------
(b) Capitalization of dry-docking expenditure
Under Korean GAAP, dry-docking expenditure associated with the Company's
ships is expensed as incurred.
US GAAP requires that dry-docking expenditure that extends an asset's
useful life or significantly increase its value be capitalized when
incurred and depreciated. Routine maintenance and repairs are expensed as
incurred. Accordingly, the Company has capitalized dry-docking expenditure
and depreciates them over the period until next anticipated dry-docking,
which is generally two years.
Capitalized dry-docking expenditures for the year ended December 31, 2004
is as follows:
2004
(in millions of Korean Won)
Capitalized dry-docking expenditure 11,128
Amortization of capitalized dry-docking expenditure (5,288)
--------------------------------------------------------------
Net income impact 5,840
--------------------------------------------------------------
(c) Capitalization of interest
Under Korean GAAP, effective from the period beginning after December 31,
2002, interest costs that would have been theoretically avoided had
expenditures not been made for assets which require a period of time to
prepare them for their intended use are generally expensed as incurred,
except when certain criteria are met for capitalization. The Company has
adopted this application and expensed financing costs subject to the
capitalization.
Under US GAAP, the Company is required to capitalize the amount that would
have been theoretically avoided had expenditures not been made for assets
which require a period of time to prepare them for their intended use.
Capital projects that have had their progress halted would suspend the
capitalization of interest and would also delay the accumulation of
depreciation during the suspense period.
Capitalized interest for the year ended December 31, 2004 is as follows:
2004
(in millions of Korean Won)
Capitalized interest 1,674
--------------------------------------------------------------
Net income impact 1,674
--------------------------------------------------------------
(d) Asset revaluation
Under Korean GAAP, certain fixed assets were subject to upward revaluations
in accordance with the Asset Revaluation Law, with the revaluation
increment credited to capital surplus. As a result of this revaluation,
depreciation expense on these assets was adjusted to reflect the increased
basis.
Under US GAAP, such a revaluation is not permitted and depreciation expense
should be based on historical cost. This results in a decrease in
depreciation expense due to reversal of additional depreciation on the
revaluation amount.
(e) Deferred income from operating leases Under Korean GAAP, income derived
from sale of subsequently leased assets is recognized in full in the year
of sale.
Under US GAAP, in accordance with Statement of Financial Accounting
Standard ("SFAS") 28 "Accounting for sales with leasebacks", income derived
from the sale of subsequently leased assets is deferred and amortized in
proportion to the related gross rental charged to expense over the lease
term.
(f) Convertible bonds
In September 2004, the Company issued convertible bonds with a face value
of 20,000 million Won and carrying an interest rate of 4%.
Under Korean GAAP, on issue of convertible debt a separate value for the
conversion rights is recognized.
Under US GAAP, in accordance with Accounting Practice Bulletin ("APB") 14
"Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants ", there is no such separation of the conversion feature and as a
result the Company has treated the debt issue entirely as debt.
(g) Asset backed securitization
In order to raise finance, in 2002, the Company assigned some of its future
account receivables, for the period from June 19, 2002 to January 31, 2008
to Korea Line Asset Securitization Specialty Limited ("KLASS"), an entity
owned by a financial institution. The Company received cash amounting to
$128,821 million and recorded the associated liability as part of other
long-term liabilities in the balance sheet. As part of the same transaction
the Company bought subordinated bonds amounting to $50,000 million from
KLASS.
Under Korean GAAP, the liability is shown as a "long-term advance receipt"
which is being written off as revenues are paid over to KLASS. The
subordinated bonds are accounted for as unlisted securities under
investments.
Under US GAAP, the Company has determined that KLASS is a variable interest
entity in which the Company has a variable interest and is the primary
beneficiary. The Company has consolidated KLASS and the material
adjustments include intercompany eliminations of the "long-term advance
receipt" in KLC and the corresponding "advance payment" in KLASS, recording
of the borrowings of KLASS and recording the income and expenses of KLASS
in the consolidated financials of the Company.
(h) Stock dividends
Under Korean GAAP, stock dividends are recognized at par value.
Under US GAAP, the Company stock dividends are recognized at fair value.
(i) Intangibles
Under Korean GAAP, development costs incurred for new products or
technology (including software) is permitted to be capitalized if the costs
can be clearly identified and the future economic benefits are probable.
Under US GAAP, research and development costs are expensed as incurred.
(j) Deferred tax adjustments
Under Korean GAAP, a deferred tax asset is recognized when it is probable
that sufficient taxable profit will be available against which temporary
differences may be utilized. US GAAP requires a more prescriptive approach
when evaluating whether or not a deferred tax asset will ultimately be
realized. A valuation allowance must be established for deferred tax assets
when it is more likely than not that that they will not be realized.
As of December 31, 2003, under Korean GAAP, a deferred tax asset had been
recognized only for a portion of the Company's net operating losses and no
deferred tax asset was recognized in relation to the Company's tax credits.
During 2004, the Company generated sufficient taxable income to record a
deferred tax asset of $33,909 million under Korean GAAP. Under US GAAP,
since the Company had recognized this net deferred tax asset as of December
31, 2003, the amount credited to net income upon recognition of the
deferred tax asset under Korean GAAP has been reversed.
The deferred tax on US GAAP adjustments includes the effect on deferred
income taxes of the foregoing reconciling items, as appropriate.
(k) Foreign currency translation
Under Korean GAAP, there are no special provisions for the determination
and application of functional currency. The Company reports in Korean Won.
All foreign exchange gains and losses are reported in net income.
Under US GAAP, in accordance with SFAS 52 "Foreign currency translation"
the Company's functional currency is the US dollar as a majority of
revenues are received in US dollars and a majority of the Company's
expenditures are made in US dollars. The Company has accordingly remeasured
all its assets, liabilities and results of operations from Korean Won into
its functional currency, US dollars. The resultant loss on remeasurement of
$ 83 million has been recognized in income.
(l)Cash flow statement
No reconciliation is required as there are no material differences between
the cash flow statement prepared in conformity with Korean GAAP and that
presented in accordance with US GAAP.
In order, to disclose the impact of consolidation on the US GAAP cash flows
of the Company, a condensed statement of cash flows for the year ended
December 31, 2004 is presented below:
(in thousands of US dollars) 2004
Operating activities
Net income 75,791
Total of adjustments to reconcile net income to net cash provided by operational working
capital 86,329
Total changes in operational working capital, excluding cash and debt 122,381
-----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 284,501
-----------------------------------------------------------------------------------------------------------
Investing activities
Additions to property, ships and equipment (237,903)
Others (43,794)
-----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (281,697)
-----------------------------------------------------------------------------------------------------------
Financing activities
Repayment of debentures (92,289)
Repayment of current portion of long-term account payable - other (87,462)
Increase in long-term account payable - other 77,511
Increase in long-term borrowings 127,588
Others (4,535)
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 20,813
-----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 23,617
Cash and cash equivalents at beginning of period 25,615
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 49,232
-----------------------------------------------------------------------------------------------------------
(m) Classification difference
Under Korean GAAP, certain income and expense items considered as
non-operating or extraordinary would be considered as operating items under
US GAAP. In addition, Korean GAAP does not require cash balances that are
restricted in use to be separately disclosed. Under US GAAP such restricted
cash balances would need to be separately presented on the face of the
balance sheet. These reclassifications would have no impact on the
shareholders' equity, net income or earnings per share amounts reported
under US GAAP.
03849.0004#582525