Korea Line Corporation
Financial Statements
December 31, 2005 and 2004
Korea Line Corporation
Index
December 31, 2005 and 2004
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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............................................8-43
Samil PricewaterhouseCoopers
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, 2005 and 2004, and the related statements of
income, appropriations of retained earnings, and cash flows for the years 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 audits.
We conducted our audit 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Korea Line Corporation as of
December 31, 2005 and 2004, and the results of its operations, the changes in
its retained earnings and its cash flows for the years then ended, in conformity
with accounting principles generally accepted in the Republic of Korea.
Without qualifying our opinion, we draw attention to the followings matters,
As discussed in note 27 to the financial statements, under the new provision of
Korean tax law enacted from 2005, the Company elected to pay income taxes by
applying tonnage tax system to its income from international shipping and
accounted for tax expense in line with the new provision in the accompanying
financial statements.
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 32 to the financial statements.
Seoul, Republic of Korea
June 1, 2006
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.
Korea Line Corporation
Balance Sheets
December 31, 2005 and 2004
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In millions of won In thousands of US dollars
----------------------- -----------------------------
2005 2004 2005 2004
Assets
Current assets:
Cash and cash equivalents (Notes 4 and 19) 25,084 44,735 $ 24,762 $ 44,161
Short-term deposits (Notes 5 and 9) 39,182 60,184 38,679 59,412
Marketable securities (Note 6) 9,905 4,645 9,778 4,585
Accounts receivable - trade (Note 19) 24,509 26,795 24,194 26,451
Accounts receivable - other 9,479 8,264 9,357 8,158
Accrued income 779 1,002 769 989
Prepaid expenses 33,405 35,637 32,976 35,180
Inventories 17,959 12,112 17,729 11,956
Advance payments 1 3 1 3
Other current assets 9,767 3,120 9,642 3,080
------------ ------------ ------------ ------------
Total current assets 170,070 196,497 167,887 193,975
------------ ------------ ------------ ------------
Investment securities: (Notes 7 and 18)
Available-for-sale securities 8,146 31,491 8,042 31,087
Equity securities of affiliates 18,962 14,903 18,719 14,712
Property, ships and equipment, net
(Notes 8,10,14,15 and 31) 980,234 929,931 967,655 917,997
Intangible assets (Note 11) 2,704 5,409 2,669 5,340
Long-term deposits (Note 5) 585 1,065 577 1,051
Guarantee deposits 2,902 2,121 2,865 2,094
Other assets (Note 19) 2,692 3,707 2,657 3,659
------------ ------------ ------------ ------------
Total assets 1,186,295 1,185,124 $1,171,071 $1,169,915
------------ ------------ ------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable (Notes 19 and 23) 39,119 35,116 $ 38,617 $ 34,665
Other payables 3,428 2,513 3,384 2,481
Withholdings 6,983 4,698 6,893 4,638
Accrued expenses 6,633 4,761 6,548 4,700
Dividends payable 19 13 19 13
Unearned income 16,953 33,102 16,735 32,677
Income taxes payable 208 15,184 205 14,989
Deferred income tax liabilities (Note 27) 1,228 - 1,212 -
Current portion of long-term borrowings
(Notes 12,14 and 19) 2,837 2,703 2,801 2,668
Current portion of debentures (Note 13) - 6,999 - 6,909
Current portion of long-term accounts
payable - other (Notes 15 and 19) 56,939 50,312 56,209 49,667
------------ ------------ ------------ ------------
Total current liabilities 134,347 155,401 132,623 153,407
Long-term borrowings (Notes 12, 14 and 19) 23,341 26,892 23,041 26,547
Debentures (Note 13) 38,114 37,148 37,625 36,671
Long-term accounts payable - other
(Notes 15, 16 and 19) 559,151 546,297 551,975 539,286
Accrued severance indemnities, net (Note 17) 3,674 2,338 3,627 2,308
Deferred income tax liabilities (Note 27) 6,264 2,571 6,184 2,538
Long-term advance received (Note 18) 37,558 86,641 37,076 85,529
Other long-term liabilities 237 225 234 222
------------ ------------ ------------ ------------
Total liabilities 802,686 857,513 $ 792,385 $ 846,508
------------ ------------ ------------ ------------
Stockholders' equity:
Common stock of KRW 5,000 par value:
Authorized - 30,000,000 shares
Issued - 10,000,000 shares 50,000 50,000 $ 49,358 $ 49,358
Capital surplus (Notes 8 and 20) 45,405 45,405 44,822 44,822
Retained earnings:
Appropriated (Note 21) 213,208 30,702 210,472 30,308
Unappropriated 99,747 206,344 98,467 203,696
Capital adjustments:
Treasury stock (Note 22) (26,225) (5,421) (25,888) (5,351)
Equity in capital surplus of
affiliates (Note 7) 1,474 581 1,455 574
------------ ------------ ------------ ------------
Total stockholders' equity 383,609 327,611 378,686 323,407
Commitments and contingencies (Note 31)
Total liabilities and
stockholders' equity 1,186,295 1,185,124 $1,171,071 $1,169,915
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
Korea Line Corporation
Statements of Income
Years ended December 31, 2005 and 2004
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In millions of won In thousands of US dollars
----------------------- -----------------------------
2005 2004 2005 2004
Sales 1,109,273 1,150,131 $1,095,038 $1,135,371
Cost of sales (Notes 23 and 25) 1,005,241 973,285 992,341 960,795
------------ ------------ ------------ ------------
Gross profit 104,032 176,846 102,697 174,576
Selling, general and administrative expenses
(Notes 23, 24 and 25) 13,166 10,248 12,997 10,116
------------ ------------ ------------ ------------
Operating income 90,866 166,598 89,700 164,460
Other incomes and gains
Interest income 5,523 5,721 5,452 5,648
Dividend income 339 77 334 76
Gain on foreign currency transaction 15,836 19,904 15,633 19,649
Gain on foreign currency translation 20,286 88,921 20,026 87,780
Gain on valuation of marketable
securities (Note 6) 3,904 561 3,854 554
Gain on disposition of accounts receivable 2,027 - 2,001 -
Equity in earnings of affiliates (Note 7) 2,913 3,606 2,876 3,560
Gain on valuation of derivatives (Note 31) 1,719 983 1,697 970
Gain on transaction of derivatives 3,166 - 3,125 -
Others 1,115 981 1,100 968
------------ ------------ ------------ ------------
56,828 120,754 56,098 119,205
------------ ------------ ------------ ------------
Other deductions :
Interest expense 4,204 5,575 4,150 5,503
Amortization of discount to present value
of long-term accounts payable - other 28,401 20,348 28,037 20,087
Loss on foreign currency transaction 14,161 15,752 13,979 15,550
Loss on foreign currency translation 81 4,621 80 4,562
Loss on impairment of investment - 1,900 - 1,876
Loss on transaction of derivatives 7,476 - 7,380 -
Others 211 1,252 208 1,236
------------ ------------ ------------ ------------
54,534 49,448 53,834 48,814
------------ ------------ ------------ ------------
Income before income taxes 93,160 237,904 91,964 234,851
Income taxes (Note 27) 7,395 37,078 7,300 36,602
Net income 85,765 200,826 $ 84,664 $ 198,249
------------ ------------ ------------ ------------
Basic earnings per share of common stock
in won and US dollars (Note 28) 9,125 21,505 $ 9 $ 21
------------ ------------ ------------ ------------
Diluted earnings per share of common stock
in won and US dollars (Note 28) 8,569 21,097 $ 8 $ 21
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
Korea Line Corporation
Statements of Appropriation of Retained Earnings
Years Ended December 31, 2005 and 2004
(Date of appropriation: March 17, 2006 and March 18, 2005 for the years ended December 31, 2005 and 2004, respectively)
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In millions of won In thousands of US dollars
----------------------- -----------------------------
2005 2004 2005 2004
Unappropriated retained earnings
Balance at beginning of year 13,982 5,518 $ 13,803 $ 5,447
Net income 85,765 200,826 84,664 198,249
------------ ------------ ------------ ------------
99,747 206,344 $ 98,467 $ 203,696
------------ ------------ ------------ ------------
Appropriation (Note 29)
Legal reserve 1,000 3,000 987 2,961
Reserve for improvement of financial
structure - 21,000 - 20,731
Reserve for business expansion 40,000 50,000 39,487 49,358
Reserve for business rationalization 30,000 85,000 29,615 83,909
Reserve for special depreciation - 7,507 - 7,411
Other voluntary reserve 8,000 16,000 7,897 15,795
Cash dividends
750 won per share in 2005 6,915 - 6,826 -
1,000 won per share in 2004 - 9,855 - 9,728
------------ ------------ ------------ ------------
85,915 192,362 $ 84,812 $ 189,893
------------ ------------ ------------ ------------
Unappropriated retained earnings to be
carried over to subsequent year 13,832 13,982 $ 13,655 $ 13,803
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
Korea Line Corporation
Statements of Cash Flows
Years Ended December 31, 2005 and 2004
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In millions of won In thousands of US dollars
----------------------- -----------------------------
2005 2004 2005 2004
Cash flows from operating activities
Net income 85,765 200,826 $ 84,664 $ 198,249
Adjustments to reconcile net earnings to net cash
Provision for retirement and severance
benefits 2,203 2,593 2,175 2,559
Depreciation 54,128 48,975 53,433 48,346
Amortization 2,704 - 2,669 -
Interest expense 29,368 20,827 28,992 20,560
Bad debt expenses, net (34) 418 (33) 413
Gain on disposition of marketable
securities, net 1 (107) 1 (106)
Unrealized gain on marketable securities, net (3,904) (561) (3,854) (554)
Foreign currency translation, net (20,126) (87,515) (19,867) (86,392)
Loss (gain) on disposition of trade
receivables (2,027) 657 (2,001) 649
Gain on disposition of available-for-sale
securities (110) - (109) -
Equity in earnings of affiliates (2,913) (3,606) (2,876) (3,560)
Loss (gain) on sales of property, ship
and equipment, net (12) 14 (12) 14
Unrealized gain on derivatives (1,719) (983) (1,697) (970)
Loss on other investments, net - 1,883 - 1,859
Changes in assets and liabilities:
Decrease (increase) in trade receivables 4,771 (4,654) 4,710 (4,594)
Decrease (increase) in prepaid expenses 2,232 (7,494) 2,203 (7,398)
Increase in deferred income tax assets - 16,128 - 15,921
Increase in accounts payable 4,020 7,478 3,968 7,382
(Decrease) increase in income taxes
payables (14,977) 15,184 (14,785) 14,989
(Decrease) increase in unearned income (16,149) 16,635 (15,942) 16,421
Others, net (2,271) (679) (2,241) (670)
------------ ------------ ------------ ------------
Net cash provided by operating
activities 120,950 226,019 119,398 223,118
------------ ------------ ------------ ------------
Cash flows from investing activities
Decrease (increase) in short-term deposits 284 (20,347) 281 (20,086)
Proceeds from sale of marketable securities 4 1,373 4 1,356
Purchase of marketable securities (1,361) (5,337) (1,344) (5,269)
Proceeds from sale of available-for-sale securities 23,455 16,223 23,154 16,015
Purchase of available-for-sale securities - (34) - (34)
Proceeds from sale of held-to-maturity securities 20,718 - 20,452 -
Decrease in held-maturity securities - (20,718) - (20,452)
Dividends from affiliates 306 306 302 302
Disposal of property, ships and equipment 12 20 12 20
Purchase of property, ships and equipment (104,432) (116,461) (103,092) (114,966)
Purchase of intangible assets - (5,408) - (5,339)
Decrease (increase) in other assets (287) 1,227 (283) 1,211
------------ ------------ ------------ ------------
Net cash used in investing activities (61,301) (149,156) $ (60,514) $ (147,242)
------------ ------------ ------------ ------------
Cash flows from financing activities
Proceeds from Short-term borrowings - 11,470 $ - $ 11,323
Proceeds from Long-term borrowings - 902 - 890
Issuance of bonds with stock warrants - 20,000 - 19,743
Proceeds from issuance of convertible bonds - 19,799 - 19,545
Proceeds from long-term accounts payable - other 114,543 92,354 113,073 91,169
Proceeds from sale of treasury stocks - 32,570 - 32,152
Repayments of short-term borrowings - (26,470) - (26,130)
Repayments of current portion of long-term
accounts payable - other (75,778) (87,179) (74,806) (86,060)
Repayments of current portion of long-term
borrowings (2,682) (3,672) (2,648) (3,625)
Repayment of long-term accounts payable-other (28,648) - (28,280) -
Repayments of debentures payable (7,000) (50,000) (6,910) (49,358)
Decrease in other long-term liabilities (49,082) (41,415) (48,452) (40,884)
Dividends paid (9,849) (2,404) (9,723) (2,373)
Acquisition of treasury stocks (20,804) (20,068) (20,537) (19,810)
------------ ------------ ------------ ------------
Net cash used in financing activities (79,300) (54,113) (78,283) (53,418)
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (19,651) 22,750 (19,399) 22,458
Cash and cash equivalents
Beginning of year 44,735 21,985 44,161 21,703
------------ ------------ ------------ ------------
End of year 25,084 44,735 $ 24,762 $ 44,161
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
Korea Line Corporation
Notes to Financial Statements
December 31, 2005 and 2004
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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, 2005 are Jin-bang Lee, Golar LNG Limited and
others.
The Company owned 18 bulk carriers including two ships under capital
leases, two hot coil carriers and two LNG carriers and participated in
consortium for four LNG carriers as of December 31, 2005, with total
deadweight tonnage of 2,436,120 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 Kwangyang Marine
Co., Ltd which is accounted for under the equity method of accounting (See
note 7).
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
Upon acquisition, the Company classifies certain debt and equity securities
into one of the three categories: held-to-maturity, available-for-sale, or
marketable securities. Investments in debt securities that the Company has
the positive intent and ability to hold to maturity are classified as
held-to-maturity. Securities that are bought and held principally for the
purpose of selling them in the near term (thus held for only a short period
of time) are classified as marketable securities. Trading generally
reflects active and frequent buying and selling, and marketable securities
are generally used to generate profit on short-term differences in price.
Investments not classified as either held-to-maturity or marketable
securities are classified as available-for-sale securities.
Marketable securities are carried at fair value, with unrealized holding
gains and losses included in income. Available-for-sale securities are
carried at fair value, with unrealized holding gains and losses reported as
a capital adjustment. Investments in equity securities that do not have
readily determinable fair values are stated at cost. Declines in value
judged to be other-than-temporary on available-for-sale securities are
charged to current results of operations. Investments in debt securities
that are classified into held-to-maturity are reported at amortized cost at
the balance sheet date and such amortization is included in interest
income.
Marketable securities are at the quoted market prices as of the period end.
Non-marketable debt securities are recorded at the fair values derived from
the discounted cash flows by using an interest rate deemed to approximate
the market interest rate. The market interest rate is determined by the
issuers' credit rate announced by the accredited credit rating agencies in
Korea. Money market funds are recorded at the fair value determined by the
investment management companies.
Marketable securities are classified as current assets, whereas
available-for-sale securities and held-to-maturity securities are
classified as long-term investments. However, available-for-sale
security`ies whose maturity dates are due within one year from the balance
sheet date or whose likelihood of being disposed of within one year from
the balance sheet date is probable are classified as current assets.
Likewise, held-to-maturity securities whose maturity dates are due within
one year from the balance sheet date are classified as current assets.
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 cancelable 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. Obligations under the
capital leases are included in long-term borrowings and long-term accounts
payable.
- 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
Rights from donated assets are stated as intangible assets. 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 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 warrants. When issuing convertible bonds
or bonds with stock purchase warrants, the values of the conversion rights
or stock warrants shall be recognized separately, and accordingly deducted
from long-term debt as conversion rights or stock warrants adjustment and
credited to stockholders' equity as a capital surplus for conversion rights
or stock warrants.
When the company is obliged to pay a redemption premium to the holders of
the debentures who do not exercise their options to convert and hold the
debentures until maturity, the premium shall be added to the debentures and
deducted from conversion rights or stock warrants adjustment at the date of
issue.
The conversion rights and stock warrants adjustments are amortized over the
terms of the debentures using the effective interest rate method and the
amount amortized is recorded as interest expense.
Considerations for conversion rights or stock warrants and adjustments
shall be measured by deducting the present value of ordinary or straight
debt securities (redemption premium is included) from the gross proceeds of
the convertible bonds or bonds with stock purchase warrants received at the
date of issue. However, in the case of bonds with detachable stock
warrants, considerations for such warrants shall be computed based on the
fair values of the two core components - straight debt securities and
detachable stock warrants.
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 KRW 1,013.0 to US$1, the rate of exchange on
December 31, 2005 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.
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
relatively 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.
Prior Year Adjustments
Prior period adjustments resulting from other than fundamental errors are
charged or credited to net income for the current period. The fundamental
errors are defined as errors with such a significant effect on the
financial statements for one or more prior periods that those financial
statements can no longer be considered to have been reliable at the date of
their issue. The prior period adjustments resulting from the fundamental
errors are charged or credited to the beginning balance of retained income,
and the financial statements of the prior year are restated.
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.
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.
Reclassification of Prior Year Financial Statements
Certain accounts of financial statements as of and for the year ended
December 31, 2004 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 US dollars at the rate
of KRW 1,013.0 to US $1, the basic exchange rate on December 31, 2005.
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, 2005 and 2004 are as follows:
In millions of Korean won In thousands of US dollars
--------------------------- ----------------------------
2005 2004 2005 2004
Cash - 3 $ - $ 3
Checking accounts 12 6 12 6
Passbook accounts 24 1,798 24 1,775
Time deposits 17,192 38,941 16,971 38,441
Money market deposit account 7,856 - 7,755 -
Money market fund - 3,987 - 3,936
------------ ------------ ------------ ------------
25,084 44,735 $ 24,762 $ 44,161
------------ ------------ ------------ ------------
5. Restricted Deposits
Restricted deposits as of December 31, 2005 and 2004 are as follows:
In millions of Korean won In thousands of US dollars
--------------------------- ----------------------------
2005 2004 2005 2004
Short-term deposits 3,578 1,920 $ 3,532 $ 1,895
Long-term deposits 19 22 19 22
------------ ------------ ------------ ------------
3,597 1,942 $ 3,551 $ 1,917
------------ ------------ ------------ ------------
6. Marketable Securities
Marketable securities as of December 31, 2005 and 2004 are as follows:
In millions of Korean won In thousands of US dollars
--------------------------- ----------------------------
2005 2004 2005 2004
Dongwon Systems 6 3 $ 6 $ 3
KTF 12 12 12 12
STX 9,887 4,630 9,760 4,570
------------ ------------ ------------ ------------
9,905 4,645 $ 9,778 $ 4,585
------------ ------------ ------------ ------------
All marketable securities are listed on the Korean Stock Exchange and
valued at market price resulting in a gain in valuation of KRW 3,904
million ($ 3,854 thousand).
7. Investment Securities
Available-for-sale Securities
(i) Equity Securities
2005
---------------------------------------------------------
In millions of Korean won In thousands of US dollars
--------------------------- ----------------------------
Percentage of Acquisition Book Acquisition Book
Ownership (%) Cost Value Cost Value
Korea Economic Daily - 1 1 $ 1 $ 1
BM Foundry 1.50 15 15 15 15
Dain Ferry 4.72 149 149 147 147
Hanmi Technology Investment 1.82 340 340 336 336
Tongyeong TUG 14.50 290 290 286 286
Redfox I 3.92 500 - 493 -
Korea Marine Fund 11.80 1,000 1,000 987 987
Korea FA Systems 29.00 125 125 124 124
Kolico Enterprise 35.00 252 252 249 249
Korea Marine Agency 9.89 202 202 199 199
Overseas Shipping Corporation 9.87 284 284 280 280
------------ ------------ ------------ ------------
3,158 2,658 $ 3,117 $ 2,624
------------ ------------ ------------ ------------
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 KRW 7,000 million ($ 6,910
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 W 500 million ($ 494 thousand)
from investment in Redfox I in 2004.
2004
---------------------------------------------------------
In millions of Korean won In thousands of US dollars
--------------------------- ----------------------------
Percentage of Acquisition Book Acquisition Book
Ownership (%) Cost Value Cost Value
Korea Economic Daily - 2 2 $ 2 $ 2
BM Foundry 1.50 15 15 15 15
Dain Ferry 4.72 149 149 147 147
Hanmi Technology Investment 1.82 340 340 336 336
Tongyeong TUG 14.50 290 290 286 286
Redfox I 3.92 500 - 493 -
Korea Marine Fund 11.80 1,000 1,000 987 987
Daehan Central Security 70.80 736 - 727 -
Korea FA Systems 35.00 150 150 148 148
Kolico Enterprise 35.00 252 252 249 249
Korea Marine Agency 9.89 202 202 200 200
Overseas Shipping Corporation 9.87 284 284 280 280
------------ ------------ ------------ ------------
3,920 2,684 $ 3,870 $ 2,650
------------ ------------ ------------ ------------
(ii) Debt Securities
In millions of Korean won In thousands of US dollars
--------------------------- ----------------------------
Maturity 2005 2004 2005 2004
Subordinated bonds (Note 18) Jan 31, 2008 5,488 28,807 5,418 $ 28,437
--------- --------- --------- ---------
Investment Securities under the Equity Method
Investments in affiliated companies accounted for using the equity method
for the years ended 2005 and 2004 are as follows:
2005 (In millions of Korean won)
---------------------------------------------------------------------------
Adjustment to
---------------------------------------
Ownership Beginning Capital Equity in Ending
Affiliate (%) Balance Dividends Adjustment Earning Balance
Kwangyang Marine Co., Ltd. 58.85 14,903 (306) 1,452 2,913 18,962
-------- --------- --------- --------- --------
2005 (In millions of US dollars)
---------------------------------------------------------------------------
Adjustment to
---------------------------------------
Ownership Beginning Capital Equity in Ending
Affiliate (%) Balance Dividends Adjustment Earning Balance
Kwangyang Marine Co., Ltd. 58.85 14,712 (302) 1,433 2,876 18,719
-------- --------- --------- --------- --------
2004 (In millions of Korean won)
---------------------------------------------------------------------------
Adjustment to
---------------------------------------
Ownership Beginning Capital Equity in Ending
Affiliate (%) Balance Dividends Adjustment Earning Balance
Kwangyang Marine Co., Ltd. 58.85 11,664 (306) (61) 3,606 14,903
-------- --------- --------- --------- --------
2004 (In millions of US dollars)
---------------------------------------------------------------------------
Adjustment to
---------------------------------------
Ownership Beginning Capital Equity in Ending
Affiliate (%) Balance Dividends Adjustment Earning Balance
Kwangyang Marine Co., Ltd. 58.85 11,514 (302) (60) 3,560 14,712
-------- --------- --------- --------- --------
Details of the elimination of unrealized profits arising from intercompany
transactions which have been reflected on the net income for the year ended
December 31, 2005, are as follows:
In millions of In thousands of
Korean won US dollars
---------- ----------
Kwangyang Marine Co., Ltd. KRW 109 $ 106
A summary of financial information of equity-method investees as of and for the
year ended December 31, 2005 and 2004, are as follows:
2005 (In millions of Korean won)
--------------------------------
Affiliate Assets Liabilities Sales Net Income
- --------- ------ ----------- ----- ----------
Kwangyang Marine Co., Ltd. KRW 60,701 KRW 28,291 KRW 33,250 KRW 5,135
2005 (In thousands of US dollars)
---------------------------------
Affiliate Assets Liabilities Sales Net Income
- --------- ------ ----------- ----- ----------
Kwangyang Marine Co., Ltd. $ 59,922 $ 27,928 $ 32,463 $ 5,013
2004 (In millions of Korean won)
--------------------------------
Affiliate Assets Liabilities Sales Net Income
- --------- ------ ----------- ----- ----------
Kwangyang Marine Co., Ltd. KRW 61,326 KRW 36,000 KRW 30,727 KRW 5,868
2004 (In thousands of US dollars)
---------------------------------
Affiliate Assets Liabilities Sales Net Income
- --------- ------ ----------- ----- ----------
Kwangyang Marine Co., Ltd. $ 60,539 $ 35,538 $ 30,000 $ 5,729
8. Property, Ships and Equipment
Property, ships and equipment as of December 31, 2005 and 2004 are as
follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
Land KRW 8,406 KRW 8,406 $ 8,298 $ 8,298
Buildings and structures 8,494 8,494 8,385 8,385
Ships 1,231,273 1,133,939 1,215,472 1,119,387
Vehicles 308 306 304 302
Tools and furniture 1,597 1,969 1,577 1,944
Construction-in-progress (Note 24) 42,397 35,485 41,853 35,030
1,292,475 1,188,599 1,275,889 1,173,346
Less accumulated depreciation (312,241) (258,668) (308,234) (255,349)
-----------------------------------------------------------------------
KRW 980,234 KRW 929,931 $ 967,655 $ 917,997
-----------------------------------------------------------------------
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 KRW 183,357 million ($181,004
thousand), net of revaluation tax. KRW 148,137 million ($146,236 thousand)
of the revaluation surplus was used to offset accumulated deficits and KRW
10,270 million ($10,138 thousand) was transferred to capital in a stock
dividend and the balance of KRW 24,950 million ($24,630 thousand) remains
in capital surplus at December 31, 2005.
The officially declared value of lands which is used for the various
government purposes at December 31, 2005 and 2004, as announced by the
Ministry of Construction and Transportation, are KRW 10,148 million ($
10,018 thousand), and KRW 8,826 million ($ 8,713 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, 2005 and 2004, the following assets stated at book value
are pledged as collateral for the loans:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
Short-term deposits KRW 3,578 KRW 1,920 $ 3,532 $ 1,895
The Company has been provided with guarantees from financial institutions
in the amount of KRW 2,420 million ($2,389 thousand) as of December 31,
2005 for the Company's contracts of affreightment.
10. Insured Assets
As of December 31, 2005, ships, buildings, tools, furniture and fixtures
were insured against fire damage up to KRW 1,360,655 million ($ 1,343,193
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, 2005 and 2004 are as follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
Rights from donated asset KRW 2,704 KRW 5,409 $ 2,669 $ 5,340
The Company donated a building in 2004 to Pohang Regional Maritime Affairs
and Fisheries Office and received an exemption from paying docking charges
for a period, estimated to be two years, equal to the value of the building
donated. The cost of the donated building was, therefore, recognized as an
intangible asset and amortized over two years.
12. Long-term Borrowings
Long-term borrowings as of December 31, 2005 and 2004 are as follows:
Interest
rate per In millions of Korean won In thousands of US dollars
annum 2005 2004 2005 2004
----- ---- ---- ---- ----
Local currency (won) debt:
Korea Citi Bank 3.0 ~ 5.5% KRW 1,292 KRW 1,316 $ 1,275 $ 1,299
Kookmin Bank 2.25% 357 420 352 415
Korea Exchange Bank 3.7 ~ 5.2% 327 420 323 415
Foreign currency
(US dollar) debt:
KDB Capital (Note 14) 6.9 % 24,202 27,439 23,892 27,086
26,178 29,595 25,842 29,215
Less current portion (2,837) (2,703) (2,801) (2,668)
----------- ---------- -------- ---------
KRW 23,341 KRW 26,892 $23,041 $26,547
Aggregate principle maturities for the Company's long-term borrowing as of
December 31, 2005 are as follow:
Year ending December 31, In millions In thousands of
of Korean won US dollars
------------- ----------
2006 KRW 2,837 $ 2,800
2007 3,057 3,018
2008 3,425 3,381
Thereafter 16,859 16,643
---------- ---------
KRW 26,178 $25,842
13. Debentures
Debentures as of December 31, 2005 and 2004 are as follows:
Debentures
Interest In millions of In thousands of
rate per Korean won US dollars
annum 2005 2004 2005 2004
----- ---- ---- ---- ----
Face value 7.51% KRW - KRW 7,000 $ - $ 6,910
-------- --------- ------- ----------
Less : Current portion - (6,999) - (6,909)
Less : Discount on debentures - (1) - (1)
-------- --------- ------- ----------
KRW - KRW - $ - $ -
Bonds with Stock Warrants
Interest In millions of In thousands of
rate per Korean won US dollars
annum 2005 2004 2005 2004
----- ---- ---- ---- ----
Face value 6.2 % KRW 20,000 KRW 20,000 $ 19,743 $ 19,743
Less: Stock warrants adjustment (1,821) (2,265) (1,797) (2,236)
----------- ----------- --------- ----------
KRW 18,179 KRW 17,735 $ 17,946 $ 17,507
----------- ----------- --------- ----------
Value of stock warrants KRW 2,539 KRW 2,539 $ 2,506 $ 2,506
On April 13, 2004, the Company issued bonds with stock warrants with a face
amount of KRW 20,000 million ($ 19,743 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 KRW 25,100 ($24.78) per share of
common stock, which has changed to KRW 24,400 ($24.09) per share at
December 31, 2005.
Convertible Bonds
Interest In millions of In thousands of
rate per Korean won US dollars
annum 2005 2004 2005 2004
----- ---- ---- ---- ----
Face value 4.0 % KRW 20,000 KRW 20,000 $ 19,743 $ 19,743
Guaranteed interest 886 886 875 875
Less: Conversion rights adjustment (835) (1,293) (824) (1,276)
----------- ------------ ---------- ----------
Less : Discount on debentures (116) (180) (115) (178)
----------- ------------ ---------- ----------
KRW 19,935 KRW 19,413 $ 19,679 $ 19,164
----------- ------------ ---------- ----------
Value of conversion rights KRW 553 KRW 553 $ 546 $ 546
On September 6, 2004, convertible bonds were issued with a face amount of W
20,000 million ($ 19,743 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 KRW 31,045 ($30.65) per share of common stock at
December 31, 2005 (at the time of issue it was KRW 44,350 ($43.78)). In
case of non-conversion, the redemption price for the convertible bonds will
include the spread, which is the difference between the stated interest
rate and the guaranteed interest rate.
14. Leases
The Company has non-cancelable capital leases for two vessels. Future
minimum lease payments under the lease as of December 31, 2005 are as
follows: Year ending December 31, In millions of In thousands of Korean won
US dollars
2006 KRW 4,230 $ 4,176
2007 4,230 4,176
2008 4,230 4,176
2009 4,230 4,176
Thereafter 14,278 14,094
---------- -----------
Total minimum lease payments 31,198 30,798
Less : Amount representing interest (6,996) (6,906)
---------- -----------
Present value of net minimum capital lease
payments, including current maturities of
KRW 2,602 million KRW 24,202 $ 2 892
Obligations under the capital leases above are included in long-term
borrowings (See note 12).
At December 31, 2005 and 2004, 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
------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
Ships KRW 58,754 KRW 58,754 $ 58,000 $ 58,000
Less: Accumulated depreciation (18,034) (15,566) (17,803) (15,366)
KRW 40,720 KRW 43,188 $ 40,197 $ 42,634
------------------------------------------------------------
Depreciation charged on assets held under capital leases for the years
ended December 31, 2005 and 2004 amounted to KRW 2,468 million ($2,437
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
Interest In millions of In thousands of
rate per Korean won US dollars
annum 2005 2004 2005 2004
----- ---- ---- ---- ----
Hyundai Libor+1.00% KRW 8,045 KRW 10,814 $ 7,942 $ 10,676
SK Libor+0.99% 9,381 14,560 9,260 14,373
Sun Gemini Navigation Libor+0.98% 20,286 10,428 20,026 10,294
Hanjin Shipping Libor+1.06% 8,393 11,531 8,285 11,383
Sun Prosperity Libor+2.05% 25,984 37,802 25,650 37,317
Grand Maritime Libor+1.00% 19,579 23,775 19,328 23,470
Horizon Maritime Libor+0.87% 326,039 359,121 321,855 354,512
Meridina Maritime Libor+1.16% 346,231 381,362 341,788 376,468
Giant Marine Shipping Libor+1.65% 9,742 17,121 9,617 16,901
Treasure Maritime Libor+1.25% 26,748 37,244 26,405 36,766
G. Alliance Maritime Libor+1.80% 15,354 19,711 15,157 19,458
Begonia Maritime Libor+1.30% 63,185 - 62,374 -
Global Navigation Libor+1.38% 38,448 - 37,955 -
--------- --------- --------- ---------
917,415 923,469 905,642 911,618
Less: Discounts to present value (301,325) (326,860) (297,458) (322,665)
Current portion (56,939) (50,312) (56,209) (49,667)
--------- --------- --------- ---------
KRW 559,151 KRW 546,297 $ 551,975 $ 539,286
The Company purchases ships on long-term installments according to
Bare-Boat 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.
Future minimum long-term payables payments under the accounts payable-other
as of December 31, 2005 are as follows:
In millions of In thousands of In thousands
Year ending December 31 Korean won US dollars of JPY
----------------------- ---------- ---------- ------
2006 KRW 95,625 $ 92,043 (Y) 277,37
2007 84,705 81,270 276,551
2008 75,101 71,794 276,069
2009 77,763 74,427 275,364
2010 61,654 58,528 275,022
Thereafter 522,567 497,819 2,125,588
---------- ----------- -----------
Total minimum long-term payables payments 917,415 875,881 3,505,973
Less: Amounts representing interest (301,325) (293,270) (493,503)
---------- ----------- -----------
Present value of net minimum
payables payments
Including current maturities of
W 56,939 million KRW 616,090 $ 582,611 (Y) 3,012,47
---------- ----------- -----------
At December 31, 2005 and 2004, the gross amount of ships and related
accumulated depreciation recorded under BBCHP are as follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
Ships KRW 956,678 KRW 859,345 $ 944,400 $ 848,317
Less: Accumulated depreciation (211,660) (171,227) (208,943) (169,030)
------------- ------------- ------------ -----------
KRW 745,018 KRW 688,118 $ 735,457 $ 679,287
Depreciation charged on assets held under BBCHP for the years ended
December 31, 2005 and 2004 amounted to KRW 40,433 million ($39,476
thousand) and KRW 35,341 million ($34,505 thousand), respectively.
16. Valuation of Receivables and Payables at Present Value
Long-term accounts payable - other stated at present value as of December
31, 2005 and 2004 are as follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
Nominal amount KRW 917,415 KRW 923,469 $ 905,642 $ 911,618
Discount to present value (301,325) (326,860) (297,458) (322,665)
------------- ------------- ------------ -----------
Book value including
current portion KRW 616,090 KRW 596,609 $ 608,184 $ 588,953
The Company purchases ships on long-term installments based on Bare-Boat
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.
17. Accrued Severance Indemnities
Changes in the accrued severance indemnities during the years ended
December 31, 2005 and 2004 are as follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
Balance at beginning of year KRW 6,212 KRW 4,897 $ 6,132 $ 4,834
Provision for the year 2,203 2,594 2,175 2,561
Payments during the year (1,316) (1,279) (1,299) (1,263)
Balance at end of year 7,099 6,212 7,008 6,132
Transfer to National Pension Fund (125) (147) (123) (145)
Deposits in employees' severance
benefit insurance (3,300) (3,727) (3,258) (3,679)
----------- ----------- ---------- ----------
KRW 3,674 KRW 2,338 $ 3,627 $ 2,308
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, therefore, presented as a deduction from the
retirement and severance benefits liability.
18. 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
KRW 128,821 million ($127,168 thousand) and recorded the associated
liability as part of long-term advance received in the balance sheet.
Relating to this, Korea Line Securitization Specialty Limited has issued to
the Company a subordinated bond of KRW 50,000 million ($49,358 thousand).
As at December 31, 2005, the balances of long-term advance received and the
subordinated bond are KRW 37,558 million ($37,076 thousand) and KRW 5,488
million ($5,418 thousand), respectively.
19. Assets and Liabilities Denominated in Foreign Currencies
Details of assets and liabilities denominated in foreign currencies as of
December 31, 2005 and 2004 are as follows:
2005 2004
Foreign Korean won Foreign Korean won
Currency Equivalent Currency Equivalent
(in thousands) (in millions) (in thousands) (in millions)
-------------- ------------- -------------- -------------
Deposits USD 16,972 KRW 17,193 USD 64,670 KRW 67,503
Accounts receivable USD 24,788 25,110 USD 27,085 27,438
Accounts receivable-other USD 2,636 2,670 USD 4,801 5,012
--------------- ------------- --------------- ------------
Total USD 44,396 KRW 44,973 USD 96,556 KRW 99,953
--------------- ------------- --------------- ------------
Accounts payable USD 23,512 KRW 23,818 USD 6,931 KRW 7,235
Long-term accounts USD 582,611 590,185 USD 555,968 532,639
payable-other including
current portion
YEN 3,012,469 25,904 YEN 1,609,500 63,970
Long-term borrowings
including current portion USD 23,891 24,202 USD 26,288 27,439
--------------- ------------- --------------- ------------
Total USD 630,014 USD 589,187
YEN 3,012,469 KRW 664,109 YEN 1,609,500 KRW 631,283
--------------- ------------- --------------- ------------
20. Capital Surplus
Capital surplus as of December 31, 2005 and 2004 are as follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
Additional paid in capital KRW 4,041 KRW 4,041 $ 3,989 $ 3,989
Assets revaluation surplus (Note 8) 24,950 24,950 24,630 24,630
Gain on sale of treasury stock 13,322 13,322 13,151 13,151
Value of conversion rights 553 553 546 546
Value of stock warrants 2,539 2,539 2,506 2,506
------------ ---------- --------- ---------
KRW 45,405 KRW 45,405 $ 44,822 $ 44,822
21. Appropriated Retained Earnings
Appropriated retained earnings as of December 31, 2005 and 2004 are
summarized as follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
Legal reserve KRW 13,000 KRW 10,000 $ 12,833 $ 9,872
Reserve for improvement of
financial structure 28,701 7,702 28,333 7,603
Other voluntary reserves 171,507 13,000 169,306 12,833
------------ ---------- --------- ---------
KRW 213,208 KRW 30,702 $ 210,472 $ 30,308
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.
22. 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 779,530 shares of the Company's own stock at
December 31, 2005 which were acquired at a cost of KRW 26,225 million
($25,888 thousand).
23. Related Party Transactions
Significant transactions with the related parties for the years ended
December 31, 2005 and 2004 are as follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
Related parties Transactions 2005 2004 2005 2004
--------------- ------------ ---- ---- ---- ----
Kolico Enterprises Ltd. Supplies expenses KRW 3,560 KRW 3,768 $ 3,514 3,720
Service fees 221 231 218 228
Rental revenues 45 45 44 44
Kwangyang Marine
Co., Ltd. Agency fees 203 176 200 174
Rental revenues 6 3 6 3
Disposition of
Investment 135 - 133 -
Korea Marine Agency Management fees 12,553 9,688 12,392 9,564
Rental revenues 86 86 85 85
Overseas Shipping
Corporation Cargo service fees 414 238 409 235
Rental revenues 11 15 11 15
Korea F.A. systems Service fees 1,051 1,612 1038 1,591
Significant accounts balances with the related parties as of December 31,
2005 and 2004 are as follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
Related parties Balance of 2005 2004 2005 2004
--------------- ---------- ---- ---- ---- ----
Korea F.A. systems Accounts payable KRW - KRW 89 $ - 88
Korea Marine Agency Accounts payable 320 4 316 4
Overseas Shipping Corporation Accounts payable 134 103 132 102
Kolico Enterprises Ltd. Accounts payable 715 1,212 706 1,196
The guarantees the Company has provided to related parties as of December
31, 2005 are as follows:
In thousands of US dollars
Related Parties Types of guarantee Guaranteed amount Lender
--------------- ------------------ ----------------- ------
Kwangyang Marine Co., Ltd. Lease $ 1,449 Jeil CitiLease
Lease 13,225 CHB
Kolico Enterprises Ltd. Short-term borrowings 642 Hana Bank
------------
$ 15,316
24. Selling, General and Administrative Expenses
Selling, general and administrative expenses for the years ended December
31, 2005 and 2004 are as follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
Salaries KRW 5,103 KRW 4,419 $ 5,038 $ 4,362
Retirement allowance 875 694 864 685
Employee benefits 693 772 684 762
Rental expenses 58 65 57 64
Travel 233 247 230 244
Vehicle maintenance 146 103 144 102
Communication 21 24 21 24
Utility expenses 101 84 100 83
Taxes and dues 238 215 235 212
Supplies 46 52 45 51
Publication 54 65 53 64
Entertainment 242 223 239 220
Depreciation 387 328 382 324
Repairs 28 20 28 20
Advertising 42 147 41 145
Service fees 1,212 1,320 1,196 1,303
Training 13 22 13 22
Amortization 2,704 - 2,669 -
Bad debt expenses - 418 - 412
Others 970 1,030 958 1,017
----------- ----------- --------- ---------
KRW 13,166 KRW 10,248 $ 12,997 $ 10,116
25. 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, 2005 and 2004 are as follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
Wages and salaries KRW 26,400 KRW 22,067 $ 26,061 $ 21,784
Severance benefits 2,203 2,593 2,175 2,560
Employee welfare 693 772 684 762
Depreciation 54,128 48,975 53,433 48,346
Rent 58 65 57 64
Taxes and dues 238 215 235 212
----------- ----------- -------- ---------
KRW 83,720 KRW 74,687 $ 82,645 $ 73,728
26. Employee Welfare and Contributions
The Company maintains a scholarship fund, athletic facilities, worker's
accident compensation insurance, unemployment insurance and medial
insurance for the employee welfare. The Company has spent on such employee
benefit the amount of KRW 693 million ($ 684 thousand) and KRW 772 million
($ 762 thousand), for the years ended December 31, 2005 and 2004,
respectively.
The Company donated KRW 208 million ($ 205 thousand) and KRW 403 million ($
398 thousand) to a university and others for the years ended December 31,
2005 and 2004, respectively.
27. Income Taxes
The components of income tax expense for the years ended December 31, 2005
and 2004 are as follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
2005 2004 2005 2004
---- ---- ---- ----
Current income taxes KRW 3,033 KRW 19,597 $ 2,994 $ 19,34
Deferred income taxes 4,362 17,481 4,306 17,256
---------- ----------- --------- --------
KRW 7,395 KRW 37,078 $ 7,300 $ 36,602
The Company offset tax effect of KRW 559 million ($552 thousand) against
capital adjustment, a component of stockholders' equity, derived from
equity in capital adjustments of affiliate amounting KRW 2,033 million
($2,007 thousand) during 2005. The tax effect of KRW 1,217 million ($1,201
thousand) in 2004 was also offset against capital surplus derived from gain
on sale of treasury stock amounting KRW 14,336 million ($14,152 thousand).
Under the new provision of Korean tax law enacted from 2005, the Company
elected to apply tonnage tax system for the next five years to its
international shipping business. Non shipping income or loss is still
taxable under the normal corporate income tax law at the rates of 14.3% up
to KRW 100 million and at 27.5% for net income over KRW 100 million.
The effective tax rates, after applying new provisions in 2005 for shipping
income and after adjustments for certain differences between the amounts
reported for financial accounting and income tax purposes (for non shipping
income only in 2005) and deducting investment tax credit (in 2004) were
approximately 7.94% and 15.59% in 2005 and 2004, respectively.
Details of the additions and deductions to accounting income for the years ended
December 31, 2005 and 2004 to compute taxable income are as follows:
2005
-----------------------------------------------------------
In millions of Korean won In thousands of US dollars
-----------------------------------------------------------
Temporary Permanent Temporary Permanent
Difference Difference Difference Difference
Additions
Reserve for special depreciation KRW 263 KRW - $ 260 $ -
Equity securities of affiliates 306 - 302 -
Equity in surplus of affiliates - 1,453 - 1,434
Gain on derivatives 983 - 970 -
--------------------------------------------------------
Sub total 1,552 1,453 1,532 1,434
--------------------------------------------------------
Deductions
Gain on marketable securities 3,904 - 3,854 -
Equity in earnings 2,913 - 2,876 -
Equity in surplus of affiliates 1,452 - 1,433 -
Gain on derivatives 33 - 32 -
Impairment loss of investment 1,400 - 1,382 -
--------------------------------------------------------
Sub total 9,702 - 9,577 -
---------------------------------------------------------
Net KRW (8,150) KRW 1,453 $ (8,045) $ 1,434
--------------------------------------------------------
The differences above are for non-shipping business.
2004
------------------------------------------------------------
In millions of Korean won In thousands of US dollars
------------------------------------------------------------
Temporary Permanent Temporary Permanent
Difference Difference Difference Difference
Additions:
Reserve for special depreciation KRW 263 KRW - $ 252 $ -
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 -
Stock warrants - 2,539 - 2,433
Stock warrants adjustments 274 - 262 -
Conversion rights - 552 - 529
Redemption premium 886 - 849 -
Amortization of conversion 146 - 140 -
rights
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 417 - 399 -
Deposit for severance 3,727 - 3,570 -
indemnities
Deferred foreign currency
translation 7,548 - 7,231 -
Gain on marketable securities 561 - 537 -
Equity in earnings 3,606 - 3,455 -
Equity in capital adjustments - 60 - 58
Gain on derivatives 983 - 942 -
Loss on marketable securities 5 - 5 -
Special depreciation 7,507 - 7,192 -
Reserve for special depreciation 2,215 - 2,122 -
------------------------------------------------------------
Sub total 31,549 60 30,224 58
-------------------------------------------------------------
Net KRW (24,731) KRW 17,436 $ (23,693) $ 6,705
------------------------------------------------------------
Details of gross deferred income tax assets and liabilities arising from
non-shipping business as of December 31, 2005 are as follows:
In millions of Korean won
---------------------------------------------------------------
Deferred Tax Assets
Reversal of Temporary
Differences (Liabilities)
---------------------- -----------------------
Temporary 2007 Non-
Differences 2006 and after Current Current
Investment in affiliate 41 - 41 - 11
Impairment loss on 500 - 500 - 138
investment
Dividend from affiliate 1,377 - 1,377 - 379
------------ --------- ---------- --------- -----------
Sub-total 1,918 - 1,918 - 528
------------ --------- ---------- --------- -----------
Gain on marketable (-)4,465 - (-)4,465 (-)1,228 -
securities
Gain on derivatives (-)33 (-)33 - - (-)9
Reserve for special (-)1,140 - (-)1,140 - (-)313
depreciation
Special depreciation (-)7,507 - (-)7,507 - (-)2,065
Special depreciable asset (-)2,215 - (-)2,215 - (-)609
Equity in earnings of (-)13,802 - (-)13,802 - (-)3,796
affiliate
------------ --------- ---------- --------- -----------
Sub-total (-)29,162 (-)33 (-)29,129 (-)1,228 (-)6,792
------------ --------- ---------- --------- -----------
Net amount (-)27,244 (-)33 (-)27,211 (-)1,228 (-)6,264
------------ --------- ---------- --------- -----------
In thousands of US dollars
---------------------------------------------------------------
Deferred Tax Assets
Reversal of Temporary
Differences (Liabilities)
---------------------- -----------------------
Temporary 2007 Non-
Differences 2006 and after Current Current
Investment in affiliate 40 - 40 - 11
Impairment loss on 494 - 494 - 136
investment
Dividend from affiliate 1,359 - 1,359 - 374
------------ --------- ----------- --------- -----------
Sub-total 1,893 - 1,893 - 521
------------ --------- ----------- --------- -----------
Gain on marketable (-)4,408 - (-)4,408 (-)1,212 -
securities
Gain on derivatives (-)33 (-)33 - - (-)9
Reserve for special (-)1,125 - (-)1,125 - (-)309
depreciation
Special depreciation (-)7,411 - (-)7,411 - (-)2,039
Special depreciable asset (-)2,187 - (-)2,187 - (-)601
Equity in earnings of (-)13,625 - (-)13,625 - (-)3,747
affiliate
------------ --------- ----------- --------- -----------
Sub-total (-)28,789 (-)33 (-)28,756 (-)1,212 (-)6,705
------------ --------- ----------- --------- -----------
Net amount (-)26,896 (-)33 (-)26,863 (-)1,212 (-)6,184
------------ --------- ----------- --------- -----------
28. Earnings Per Share
Earnings per share are calculated as follows:
In millions of Korean won In thousands of US dollars
------------------------------ ----------------------------
2005 2004 2005 2004
Net income in millions of won
and thousands of US dollars KRW 85,765 KRW 200,826 $84,664 $198,249
Weighted average number of
outstanding common shares 9,399,235 9,338,462 9,399,235 9,338,462
-------------- ------------- ------------- -------------
Earnings per share KRW 9,125 KRW 21,505 $ 9 $ 21
In won and US dollar
-------------- ------------- ------------- -------------
Diluted earnings per share are calculated as follows:
Korean won (millions US dollars (thousands,
except number of shares except number of shares
and earnings per share) and earnings per share)
-------------------------- --------------------------
2005 2004 2005 2004
Net income KRW 85,765 KRW 200,826 $84,664 $198,249
Interest expenses on BW 444 1,007 438 994
Interest expenses on CB 1,322 396 1,305 391
-------------------------------------------------------
Net earnings available for common 87,531 202,229 86,407 199,634
and common equivalent shares
Weighted average number of common
and common equivalent shares 10,214,574 9,585,673 10,214,574 9,585,673
------------ ------------ ------------ ------------
Diluted Net earnings per share
in Korean won and US dollars KRW 8,569 KRW 21,097 $ 8 $ 21
------------ ------------ ------------ ------------
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 warrants and
convertible bonds are assumed to be converted when they are issued. The
number of 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, 2005 are as follows:
Number of potentially dilutive shares
Bonds with stock warrants 819,672
Convertible bonds 644,226
29. Dividend
Dividends are generally proposed based on each year's income and are
declared, recorded and paid in the subsequent year. Proposed dividends for
the years ended December 31, 2005 and 2004 are calculated as follows:
In millions of Korean won In thousands of US dollars
------------------------- --------------------------
2005 2004 2005 2004
Number of outstanding
shares 9,220,470 9,855,190 9,220,470 9,855,190
Par value (in won) 5,000 5,000 4.93 4.93
Rate 15% 20% 15% 20%
Dividend 6,915 9,855 6,826 9,728
The Company's dividend payout ratios for the years ended December 31, 2005
and 2004 are as follows:
In millions of Korean won In thousands of US dollars
-------------------------------------------------------
2005 2004 2005 2004
Dividend 6,915 9,855 6,826 9,728
Net income 85,765 200,826 84,664 198,249
Dividend payout ratio 8.06% 4.91% 8.06% 4.91%
The Company's dividend yield ratios for the years ended December 31, 2005
and 2004 are calculated as follow:
In millions of Korean won In thousands of US dollars
-------------------------------------------------------
2005 2004 2005 2004
Dividend per share 750 1,000 0.74 0.99
Market price at balance sheet 25,800 35,400 25.47 34.95
date
Dividend yield ratio 2.91% 2.82% 2.91% 2.82%
30. Cash Flow Information
Significant transactions not affecting cash flows for the years ended
December 31, 2005 and 2004, are as follow:
In millions of Korean won In thousands of US dollars
--------------------------- --------------------------
2005 2004 2005 2004
Construction-in-progress
transferred to Ship 97,334 87,311 96,085 86,191
Bond transferred to current
portion - 7,000 - 6,910
Long-term borrowing transferred
to current portion 2,815 2,703 2,779 2,668
Long-term payable-other
transferred to current portion 95,625 90,215 94,398 89,057
Long-term receivable
transferred to current portion 1,688 - 1,666 -
31. 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,
2005.
Various claims involving the Company amounted to $4,434 thousand as of
December 31, 2005, 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 1 or 2 years.
The Company is planning to purchase five new ships which will require
total investment of $ 139.7 million and iI5.52 billion. The Company
plans to borrow $ 149.7 million 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 KRW 42,397 million ($41,853 thousand)
which is currently included in construction in progress. The ships will
be delivered in the last quarter of 2006 and the first quarter of 2008.
The Company jointly acquired four 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 portion to the Company's interest in each carrier.
The Company has unused overdraft facilities from various banks amounting
to KRW 34,000 million at December 31, 2005.
The Company has outstanding catapult forward contract as of December 31,
2005, which was valued at balance sheet date resulting in a gain of KRW
33 million ($33 thousand). Per the contract, the Company sells $2,000
thousand when the exchange rate on maturity date of January 6, 2006 is
1,045.5 or over or sells $1,000 thousand when the rate is under
1,045.50.
The Company has Freight and Hire BCI (Baltic Capesize Index) forward
contracts as following.
BCI Position Unit Contract Maturity
---------------------------------------------------------------------------------
Freight Route 4 Sell 75,000 M-Ton U$ 12.10 per M-Ton Jan. 2006
Sell 75,000 M-Ton U$ 11.85 per M-Ton
Hire Average of Buy 365day U$ 25,750 per day Jan. 2007 ~
Route 8~11 Sell 365day U$ 30,000 per day Dec. 2007
The above contracts were valued at December 31, 2005 resulting in a gain
of KRW 1,686 million ($1,664 thousand).
The Company entered into a contract with Mitsubishi Corporation to sell
a ship under construction which is scheduled to be completed around
April 2006 for the amount of US$ 37,250 thousand. The cost of the ship
will be about $ 32,500 thousand and the disposition gain will be
accounted for at the time of delivery.
32. 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, 2005 and 2004 and net income for the years 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
2005 2004
Net income in accordance with Korean GAAP (in millions of
Korean won) 85,765 200,826
Adjustments:
Capitalization of dry-docking expenditure (b) (1,352) 5,840
Capitalization of interest (c) 1,364 1,674
Asset revaluation (d) 6,049 6,235
Deferred income from operating leases (e) 5,273 5,575
Convertible bonds (f) 176 56
Asset backed securitization (g) (2,660) 846
Intangibles (i) 3 5
Deferred tax (j) 22,858 (33,909)
Deferred tax on US GAAP adjustments (j) (22,093) (5,298)
Financing cost (k) 370 -
Tax leases (l) 1,680 -
----------------------------------
Net income (in millions of Korean won) pre-remeasurement 97,433 181,850
Net income (in thousands of US dollars ) 96,060 158,938
Functional currency remeasurement (n) (19,850) (83,147)
----------------------------------
Net income in accordance with US GAAP
(in thousands of US dollars) 76,210 75,791
----------------------------------
Reconciliation of shareholders' equity from Korean GAAP to
US GAAP
2005 2004
Total shareholders' equity in accordance with Korean GAAP
(in millions of Korean won) 383,609 327,611
Adjustments:
Capitalization of dry-docking expenditure (b) 10,129 12,017
Capitalization of interest (c) 3,349 1,985
Asset revaluation (d) (83,913) (91,729)
Deferred income from operating leases (e) (5,646) (10,919)
Convertible bonds (f) (376) (496)
Asset backed securitization (g) 3,256 5,917
Intangibles (i) (1) (6)
Deferred tax adjustments (j) 809 21
Financing cost (k) 370 -
Tax leases (l) 1,596 -
-----------------------------------
Total shareholders' equity (in millions of Korean won) 313,182 244,401
Total shareholders' equity (in thousands of US dollars)
pre-remeasurement 309,150 234,989
Functional currency remeasurement (n) 8,981 36,407
-----------------------------------
Net assets in accordance with US GAAP
(in thousands of US dollars) 318,131 271,396
-----------------------------------
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 and there is no GAAP
difference in application of the equity method between Korean GAAP and US 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 VIEs
on the reconciliation statements presented are disclosed under the headings
"Asset backed securitization" and "Tax leases". The consolidation of ships under
construction-related VIEs, as described below in note (m), has no impact on
shareholders' equity, net income or earnings per share as reported under US
GAAP.
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, 2005 and
2004 is presented below:
(in thousands of US dollars) 2005 2004
Assets
Current assets 201,801 217,518
Property, ships and equipment, net 993,945 1,016,566
Others assets 189,765 17,104
------------ ------------------
Total assets 1,385,511 1,251,188
------------ ------------------
Liabilities
Current liabilities 325,252 175,956
Long-term liabilities 731,125 795,734
------------ ------------------
Total liabilities 1,056,377 971,690
Minority interests 11,003 8,102
Stockholders' equity 318,131 271,396
------------ ------------------
Total liabilities and stockholders' equity 1,385,511 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 years ended December 31, 2005 and
2004 are as follows:
2005 2004
(in millions of Korean won)
Capitalized dry-docking expenditure 5,999 11,128
Amortization of capitalized dry-docking expenditure (7,351) (5,288)
----------- ---------
Net income impact (1,352) 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 related to capital projects including construction of
vessels.
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.
Interest costs capitalized for the years ended December 31, 2005 and 2004 are as
follows:
2005 2004
(in millions of Korean won)
Capitalized interest 1,413 1,674
Amortization of capitalized interest (49) -
----------- ----------------
Net income impact 1,364 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 revaluation of fixed assets is not permitted and,
accordingly, depreciation expense should be based on historical cost. This
results in a decrease in depreciation expense and increase in gains or decrease
losses on sales of the revalued assets due to reversal of the revaluation
amounts.
(e) Deferred income from operating leases
Under Korean GAAP, a gain on 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 a gain
on 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 KRW
20,000 million won and carrying an interest rate of 4%.
Under Korean GAAP, on issuance of convertible debt a separate value for the
conversion rights is recognized and the conversion rights are recognized as an
equity item.
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. Thus, the separate
recognition of the conversion rights and related additional interest expenses
are reversed under US GAAP.
(g) Asset backed securitization
In order to raise more cash, 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 KRW 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 KRW 50,000 million from KLASS.
Under Korean GAAP, the Company does not consolidate KLASS and the liability to
KLASS is shown as a "long-term advance receipt" which is being written off as
receivables are delivered to KLASS according to the assignment agreement. 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 that the Company is the
primary beneficiary of KLASS. Accordingly, 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 of the income and expenses of
KLASS in the consolidated financial statements 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) are 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.
According to the tonnage tax system of Korean tax law, it is applied to the
Company's international shipping business. Non-shipping income or loss is still
taxable under the normal corporate income tax law at the rates of 14.3% up to
KRW 100 million and at 27.5% for net income over KRW 100 million. Accordingly,
the deferred tax on US GAAP adjustments includes the effect on deferred income
taxes of the foregoing reconciling items relating to non-shipping income and
loss, as appropriate.
(k) Financing cost
Under Korean GAAP, financing costs associated with long-term financing are
expensed when incurred.
Under US GAAP, the Company's lease financing costs are to be deferred and
amortized over the term of the lease.
(l) Tax leases
During 2005, the Company entered into four UK tax leases. Under both Korean and
US GAAP, the leases are classified as capital leases.
Under Korean GAAP, tax lease-related SPCs are not consolidated.
Under US GAAP, the Company has determined that the tax lease-related entities
are variable interest entities (VIEs) in which the Company has a variable
interest and is the primary beneficiary. The Company has consolidated these VIEs
and the material adjustments are reflected in the headings "long-term financial
instruments" and "long-term advance payments" and the recording of the income
and expenses of the VIEs in the consolidated US GAAP financials of the Company.
Under US GAAP, the upfront cash consideration for future tax benefit received
from the UK lessor and held by the related SPC is deferred and recognized as
income over the term of the lease. However, under Korean GAAP, the Company
recognizes such tax benefit when the related cash is transferred to KLC from the
SPC because the tax lease-related SPC is not consolidated by the Company and
there is no specific guidance with respect to the recognition of such tax
benefit under Korean GAAP.
(m) Ships under construction
In order to raise finance for the construction of its vessels, the Company
entered into agreements with its lenders, which involved the establishment of
Special Purpose Companies ("SPCs"). Under the arrangement the lenders loaned
monies to the SPCs. The SPCs then entered into shipbuilding contracts with the
shipyard. Since the Company also makes an investment in such SPCs, which are
deemed to be an investment in the ships under construction, the Company
recognizes all of the debt related to the ships under construction during the
construction period under US GAAP. Upon completion of the vessel, the Company
will continue to recognize the ships as well as the related debt under the
capital leases with the SPCs that will become effective upon the delivery of the
vessels. Under Korean GAAP, the Company does not recognize any debt related to
the ships under construction for the construction period nor consolidate the
SPCs for ships under construction. The material adjustments are reflected in the
headings "property, ships and equipment" and "long-term accounts payable" in the
consolidated US GAAP financials of the Company. The impact of these adjustments
on the financials of the Company is the same as that of consolidating the SPCs
related to the ships under construction.
(n) Foreign currency translation
Under Korean GAAP, there are no special provisions for the determination and
application of functional currency. The Company reports its financial position
and results 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 using its functional currency, US dollars. The
resulting loss on remeasurement of $20 million (2004: $83 million) has been
recognized in income. (o) 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 years ended December
31, 2005 and 2004 is presented below:
(in thousands of US dollars) 2005 2004
Operating activities
Net income 76,210 75,791
Total of adjustments to reconcile net income to net cash
provided by operational working capital 104,481 86,329
Total changes in operational working capital, excluding cash
and debt (25,386) 122,381
--------------- ---------------
Net cash provided by operating activities 155,305 284,501
--------------- ---------------
Investing activities
Additions to property, ships and equipment (109,462) (237,903)
Others 48,828 (43,794)
--------------- ---------------
Net cash used for investing activities (60,634) (281,697)
--------------- ---------------
Financing activities
Repayment of debentures (51,219) (92,289)
Repayment of current portion of long-term account payable -
other (105,178) (87,462)
Increase in long-term account payable - other 111,832 77,511
Increase in long-term borrowings - 127,588
Others (63,532) (4,535)
--------------- ---------------
Net cash (used in) provided by financing activities (108,097) 20,813
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Net change in cash and cash equivalents (13,426) 23,617
Cash and cash equivalents at beginning of period 49,232 25,615
--------------- ---------------
Cash and cash equivalents at end of period 35,806 49,232
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(p) 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.