AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 2003
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
---------------------
REGISTRATION STATEMENT*
UNDER
SCHEDULE B
OF
THE SECURITIES ACT OF 1933
---------------------
THE KOREA DEVELOPMENT BANK
(Name of Registrant)
---------------------
THE REPUBLIC OF KOREA
(Co-Signatory)
NAMES AND ADDRESSES OF AUTHORIZED REPRESENTATIVES:
<Table>
SEONG-HO PARK HI-SU LEE
OR JAE-MIN YOON Duly Authorized Representative
Duly Authorized Representatives in the United States of
in the United States of The Republic of Korea
The Korea Development Bank 335 East 45th Street
320 Park Avenue, 32nd Floor New York, New York 10017
New York, New York 10022
</Table>
COPIES TO:
JINDUK HAN, ESQ.
Cleary, Gottlieb, Steen & Hamilton
39th Floor, Bank of China Tower
One Garden Road
Hong Kong
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
The securities registered hereby will be offered on a delayed or continuous
basis pursuant to the procedures set forth in Securities Act Release Nos.
33-6240 and 33-6424.
---------------------
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
AMOUNT TO AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES BEING REGISTERED BE REGISTERED(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
Debt securities, with or without warrants to purchase debt
securities, and guarantees(1)............................. US$3,000,000,000 US$242,700
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</Table>
(1) Consists of guarantees to be issued by the Registrant in respect of
obligations of other parties.
(2) Or an equivalent amount in another currency or currencies or in composite
currencies or as determined by reference to an index or, if the debt
securities are to be offered at a discount, the approximate proceeds to the
Registrant. Includes the maximum principal amount of the obligations to be
guaranteed by the Registrant under the guarantees registered hereby.
---------------------
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus
contained in this Registration Statement and supplements to such Prospectus will
also be used in connection with US$1,045,788,520 of debt securities with or
without warrants to purchase debt securities registered under Registration
Statement No. 333-97299.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* This Registration Statement also constitutes Post-Effective Amendment No. 2
to Registration Statement No. 333-97299.
EXPLANATORY NOTE
This registration statement relates to US$3,000,000,000 aggregate amount of
(i) debt securities (with or without warrants) of The Korea Development Bank to
be offered from time to time as separate issues on terms and in the manner to be
specified in a prospectus supplement to be delivered in connection with each
such offering and (ii) guarantees to be issued by The Korea Development Bank in
respect of obligations of other parties on terms and in the manner to be
specified in a prospectus supplement to be delivered in connection with each
such issuance. The prospectus constituting a part of this registration statement
relates to the debt securities (with or without warrants) and guarantees
registered hereunder and US$1,045,788,520 aggregate principal amount of debt
securities (with or without warrants) and guarantees registered under
Registration Statement No.333-97299 (including an aggregate principal amount of
US$200,000,000 of debt securities that may be sold by us from time to time in a
continuous offering designated Medium-Term Notes, Series C, Due Not Less Than
Nine Months From Date of Issue (the "Series C Notes")).
This registration statement contains a form of prospectus supplement filed
as Exhibit K-1 to this registration statement, together with the supplement to
that prospectus supplement filed as Exhibit K-2 to this registration statement,
to be used in connection with the sale by us of the Series C Notes in a
continuous offering.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 30, 2003
PROSPECTUS
(KDB LOGO)
THE KOREA DEVELOPMENT BANK
$3,000,000,000
DEBT SECURITIES
WARRANTS TO PURCHASE DEBT SECURITIES
GUARANTEES
------------------------------
WE WILL PROVIDE THE SPECIFIC TERMS OF THESE SECURITIES IN SUPPLEMENTS TO
THIS PROSPECTUS. YOU SHOULD READ THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT
CAREFULLY BEFORE YOU INVEST.
------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
This prospectus is dated , 2003
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Certain Defined Terms And Conventions....................... 3
Use Of Proceeds............................................. 3
The Korea Development Bank.................................. 4
Overview.................................................. 4
Capitalization............................................ 5
Business.................................................. 6
Selected Financial Statement Data......................... 8
Operations................................................ 12
Sources of Funds.......................................... 20
Debt...................................................... 21
Overseas Operations....................................... 22
Property.................................................. 22
Directors and Management; Employees....................... 22
Financial Statements and the Auditors..................... 23
The Republic Of Korea....................................... 105
Land and History.......................................... 105
Government and Politics................................... 106
The Economy............................................... 108
Gross Domestic Product and Major Financial Indicators..... 124
Balance of Payments and Foreign Trade..................... 133
The Financial System...................................... 138
Monetary Policy........................................... 142
Government Finance........................................ 145
Debt...................................................... 147
Tables and Supplementary Information...................... 150
Description Of The Securities............................... 153
Description of Debt Securities............................ 153
Description of Warrants................................... 159
Terms Applicable to Debt Securities and Warrants.......... 160
Description of Guarantees................................. 161
Limitations On Issuance Of Bearer Debt Securities And Bearer
Warrants.................................................. 162
Taxation.................................................... 163
Korean Taxation........................................... 163
United States Tax Considerations.......................... 165
Plan Of Distribution........................................ 172
Legal Matters............................................... 173
Authorized Representatives In The United States............. 173
Official Statements And Documents........................... 173
Experts..................................................... 173
Forward-Looking Statements.................................. 173
Further Information......................................... 175
</Table>
2
CERTAIN DEFINED TERMS AND CONVENTIONS
All references to "Korea" or the "Republic" contained in this prospectus
mean The Republic of Korea. All references to the "Government" mean the
government of Korea. All references to the "Bank" mean The Korea Development
Bank.
Unless otherwise indicated, all references to "won", "Won" or "W" contained
in this prospectus are to the currency of Korea, and references to "U.S.
dollars", "Dollars", "$" or "US$" are to the currency of the United States of
America.
All discrepancies in any table between totals and the sums of the amounts
listed are due to rounding.
Our principal financial statements are our non-consolidated financial
statements. Unless specified otherwise, our financial and other information is
presented on a non-consolidated basis and does not include such information with
respect to our subsidiaries.
USE OF PROCEEDS
Unless otherwise specified in the applicable prospectus supplement, we will
use the net proceeds from the sale of the securities for our general operations.
3
THE KOREA DEVELOPMENT BANK
OVERVIEW
We were established in 1954 as a government-owned financial institution
pursuant to The Korea Development Bank Act, as amended (the "KDB Act"). Since
our establishment, we have been the leading bank in the Republic with respect to
the provision of long-term financing for projects designed to assist the
nation's economic growth and development. The Government owns all of our paid-in
capital. Our registered office is located at 16-3 Youido-dong, Youngdeungpo-gu,
Seoul, The Republic of Korea.
Our primary purpose, as stated in the KDB Act, is to "furnish and
administer funds for the financing of major industrial projects in order to
expedite industrial development and expansion of the national economy." We make
loans available to major industries for equipment, capital investment and the
development of high technology. In addition to these equipment capital loans, we
make working capital loans to borrowers to whom we have extended equipment
capital loans, to enterprises the capital of which has been subscribed for, or
is owned by, the Government or us and to high technology companies as provided
by our By-Laws.
As of June 30, 2003, we had W46,949.1 billion of loans outstanding, total
assets of W82,227.5 billion and total equity of W6,968.7 billion, as compared to
W44,917.2 billion of loans outstanding, W78,782.3 billion of total assets and
W6,940.6 billion of total equity as of December 31, 2002. For the first half of
2003, we recorded interest income of W1,381.7 billion, interest expense of
W1,377.4 billion and net loss of W392.3 billion, as compared to W1,679.0 billion
of interest income, W1,639.8 billion of interest expense and W112.5 billion of
net income for the first half of 2002. See "The Korea Development Bank--Selected
Financial Statement Data".
Pursuant to the KDB Act, the Government must hold all of our paid-in
capital. In addition to contributions to our capital, the Government provides
direct financial support for our financing activities. The Government's
determination each fiscal year regarding the amount of financial support to
extend to us, in the form of loans, guarantees or contributions to capital,
plays an important role in determining our lending capacity. The Government,
acting through the President of the Republic, has the power to appoint or
dismiss our Governor and Chairman of the Board of Directors. In addition, the
Government, acting through the Minister of Finance and Economy, has the power to
appoint and dismiss our members of the Board of Directors and Auditor. Pursuant
to the KDB Act, the Minister of Finance and Economy has supervisory power over
our general business and managerial matters while the Financial Supervisory
Commission has supervisory authority over capital adequacy and managerial
soundness matters.
The Government supports our operations pursuant to Article 44 of the KDB
Act. Article 44 provides that "the annual net losses of the Korea Development
Bank shall be offset each year by the reserve, and if the reserve be
insufficient, the deficit shall be replenished by the Government." As a result
of the KDB Act, the Government is generally responsible for our operations and
is legally obligated to replenish any deficit that arises if our reserve,
consisting of our surplus and capital surplus items, is insufficient to cover
our annual net losses. In light of the above, if we had insufficient funds to
make any payment under any of our obligations, including the debt securities and
guarantees covered by this prospectus, the Government would take appropriate
steps, such as by making a capital contribution, by allocating funds or by
taking other action, to enable us to make such payment when due. The provisions
of Article 44 do not, however, constitute a direct guarantee by the Government
of our obligations under the debt securities or the guarantees, and the
provisions of the KDB Act, including Article 44, may be amended at any time by
action of the National Assembly.
In January 1998, the Government amended the KDB Act to:
- subordinate our borrowings from the Government to other indebtedness
incurred in our operations;
- allow the Government to offset any deficit that arises if our reserve
fails to cover our annual net losses by transferring Government-owned
property, including securities held by the Government, to us; and
4
- allow direct injections of capital by the Government without prior
National Assembly approval.
The Government amended the KDB Act in May 1999 and the Enforcement Decree
of the KDB Act, as amended (the "KDB Decree"), in March 2000, to allow the
Financial Supervisory Commission to supervise and regulate us in terms of
capital adequacy and managerial soundness.
In March 2002, the Government amended the KDB Act to enable us, among other
things, to:
- obtain low-cost funds from The Bank of Korea and from the issuance of
debt securities (in addition to already permitted Industrial Finance
Bonds), which funds may be used for increased levels of lending to small
and medium size enterprises;
- broaden the scope of borrowers to which we may extend working capital
loans to include companies in the manufacturing industry, enterprises
which are "closely related" to enhancing the corporate competitiveness
of the manufacturing industry and leading-edge high-tech companies; and
- extend credits to mergers and acquisitions projects intended to
facilitate corporate restructuring efforts.
The Minister of Finance and Economy of the Republic has, on behalf of the
Republic, signed the registration statement of which this prospectus forms a
part.
CAPITALIZATION
As of December 31, 2002, our authorized capital was W10,000 billion and
capitalization was as follows:
<Table>
<Caption>
JUNE 30,
2003(1)
-------------
(BILLIONS OF
WON)
Long-term debt(2)(3):
Won currency borrowings................................... W 3,849.4
Industrial finance bonds.................................. 20,009.8
Foreign currency borrowings............................... 9,699.4
---------
Total long-term debt................................... 33,558.6
---------
Capital:
Paid-in capital........................................... 7,161.9
Capital surplus........................................... 44.4
Retained earnings......................................... (96.9)
Capital adjustments....................................... (140.6)
---------
Total capital.......................................... 6,968.7
---------
Total capitalization........................................ W40,527.4
=========
</Table>
- ------------
(1) Except as disclosed in this prospectus, since June 30, 2003 there has been
no material adverse change in our capitalization.
(2) We have translated borrowings in foreign currencies into Won at the rate of
W1,193.1 to US$1.00, which was the market average exchange rate, as
announced by the Seoul Money Brokerage Services Ltd., on June 30, 2003.
(3) As of June 30, 2003, we had contingent liabilities totaling W10,627.7
billion under outstanding guarantees issued on behalf of our clients. For
further information relating to our contingent liabilities under
outstanding guarantees as of June 30, 2003, see "Notes to Non-Consolidated
Financial Statements of June 30, 2002 and 2003--Notes 12 and 13".
5
BUSINESS
PURPOSE AND AUTHORITY
Since our establishment, we have been the leading bank in the Republic in
providing long-term financing for projects designed to assist the nation's
economic growth and development.
Under the KDB Act, the KDB Decree and our By-Laws, our primary purpose is
to "furnish and administer funds for the financing of major industrial projects
in order to expedite industrial development and expansion of the national
economy." Since we serve the public policy objectives of the Government, we do
not seek to maximize profits. We do, however, strive to maintain a level of
profitability to strengthen our equity base and support growth in the volume of
our business.
Under the KDB Act, we may:
- provide equipment capital loans with maturities of more than one year to
major industries;
- provide working capital loans to high technology industries as well as
our existing borrowers of equipment capital loans;
- issue guarantees for the benefit of projects that we have the authority
to finance;
- make equity investments in Korean corporations engaged in activities
that we have the authority to finance or that are designated by the
Government;
- subscribe to, underwrite, invest in or guarantee corporate debentures,
including debentures issued by non-corporate special juridical persons
established by special laws of the Republic, issued to finance major
industrial projects or debt securities or debentures issued by public
institutions;
- engage in debt securities dealing activities in the secondary market;
- accept some types of time and savings deposits from the general public;
- accept demand deposits from existing corporate customers, central and
local governments and entities designated by Presidential decree;
- underwrite or invest in stocks of Government-owned corporations carrying
out major industrial projects;
- execute foreign exchange transactions, including currency and interest
swap transactions;
- provide planning, management, research and other support services at the
request of the Government, public bodies, financial institutions or
enterprises; and
- carry out other businesses incidental to the foregoing.
GOVERNMENT SUPPORT AND SUPERVISION
The Government owns all of our paid-in capital, as required by the KDB Act.
On February 20, 2000, the Government contributed W100 billion in cash to our
capital. On December 29, 2000, we reduced our paid-in capital by W959.8 billion
to offset our expected net loss for the year. To compensate for the resulting
deficit under the KDB Act, on June 20, 2001, the Government contributed W3
trillion in the form of shares of common stock of the Korea Electric Power
Corporation ("KEPCO") to our capital. On December 29, 2001, the Government
contributed W50 billion in cash to our capital. Taking into account these
capital contributions and reduction, as of December 31, 2001, our total paid-in
capital was W7,161.9 billion, compared to W4,111.9 billion as of December 31,
2000. See "The Korea Development Bank--Financial Statements and the
Auditors--Notes to Non-Consolidated Financial Statements of June 30, 2002 and
2003--Note 15".
6
In addition to capital contributions, the Government directly supports our
financing activities by:
- lending us funds to on-lend;
- allowing us to administer Government loans made from a range of special
Government funds;
- allowing us to administer some of The Bank of Korea's surplus foreign
exchange holdings; and
- allowing us to receive credit from The Bank of Korea.
The extent of the Government's yearly financial support, in the form of
loans, guarantees or contributions to capital, helps determine our lending
capacity.
The Government also supports our operations pursuant to Articles 43 and 44
of the KDB Act. Article 43 provides that "the annual net profit of the Korea
Development Bank, after adequate allowances are made for depreciation in assets,
shall be totally transferred to reserve" and that accumulated amounts in reserve
may be capitalized in accordance with the provisions of the KDB Decree. Article
44 provides that "the net losses of the Korea Development Bank shall be offset
each fiscal year by the reserve, and if the reserve be insufficient, the deficit
shall be replenished by the Government".
As a result of the KDB Act, the Government is generally responsible for our
operations and is legally obligated to replenish any deficit that arises if our
reserve, consisting of our surplus and capital surplus items, is insufficient to
cover our annual net losses. In light of the above, if we had insufficient funds
to make any payment under any of our obligations, including the debt securities
and the guarantees covered by this prospectus, the Government would take
appropriate steps, such as by making a capital contribution, by allocating funds
or by taking other action, to enable us to make such payment when due. The
provisions of Article 44 do not, however, constitute a direct guarantee by the
Government of our obligations under the debt securities or the guarantees, and
the provisions of the KDB Act, including Article 44, may be amended at any time
by action of the National Assembly.
The Government closely supervises our operations in the following ways:
- the President of the Republic appoints our Governor and Chairman of the
Board of Directors upon the recommendation of the Minister of Finance
and Economy;
- the Minister of Finance and Economy appoints our Deputy Governor and
Executive Directors upon the recommendation of our Governor;
- one month prior to the beginning of each fiscal year, we must submit our
proposed program of operations for the fiscal year to the Minister of
Finance and Economy;
- the Minister of Finance and Economy must approve our operating manual,
which sets out guidelines for all principal operating matters, including
the range of permitted financings;
- the Board of Audit and Inspection, a Government department, examines our
settlement of accounts annually;
- the Minister of Finance and Economy and the Financial Supervisory
Commission together have broad authority to require reports from us on
any matter and to examine our books, records and other documents. On the
basis of the reports and examinations, the Minister of Finance and
Economy may issue any orders deemed necessary to enforce the KDB Act or
delegate examinations to the Financial Supervisory Commission;
- the Financial Supervisory Commission may supervise our operations to
ensure managerial soundness based upon the KDB Decree and the Bank
Supervisory Regulations of the Financial Supervisory Commission and may
issue orders deemed necessary for such supervision;
- the National Assembly receives our annual report within four months
after the end of each fiscal year outlining our operations and analyzing
our activities; and
- we may amend our By-Laws only with the approval of the Minister of
Finance and Economy.
7
In addition, the conditions of the IMF aid package stated that domestic
banks in the Republic, including us, should undergo external audits from
internationally recognized accounting firms. Accordingly, we have had our annual
financial statements for years commencing 1998 audited by an external auditor.
See "The Korea Development Bank--Financial Statements and the Auditors" and
"Experts".
Pursuant to our most recently approved program of operations, we expect to
support the reform and restructuring of the Republic's economic and industrial
structure, including financing of promising small and medium sized enterprises,
providing export finance and encouraging investments in infrastructure necessary
to promote consumer demand and industrial reorganization.
SELECTED FINANCIAL STATEMENT DATA
RESULTS OF OPERATIONS
You should read the following financial statement data together with the
financial statements and notes included in this prospectus:
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- -----------------
1998 1999 2000 2001 2002 2002 2003
-------- ------- -------- ------- ------- ------- -------
(BILLIONS OF WON) (BILLIONS OF WON)
(AUDITED) (UNAUDITED)
INCOME STATEMENT DATA
Total Interest Income................. 6,472.9 5,070.5 5,458.0 4,583.0 3,311.5 1,679.0 1,381.7
Total Interest Expenses............... 6,240.3 5,190.0 5,356.8 4,359.8 3,179.0 1,639.8 1,377.4
Net Interest Income................... 232.6 (119.5) 101.2 223.1 132.5 39.2 4.2
Operating Revenues.................... 8,707.3 7,573.3 9,869.5 9,758.4 8,006.6 5,274.5 3,651.5
Operating Expenses.................... 13,545.3 8,218.5 9,516.7 9,083.5 8,551.6 5,456.4 4,076.6
Net Income (Loss)..................... (4,889.4) 211.7 (1,398.4) 109.0 183.9 112.5 (392.3)
</Table>
<Table>
<Caption>
AS OF DECEMBER 31,
---------------------------------------------------- AS OF JUNE 30,
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- -----------------
(BILLIONS OF WON) (BILLIONS OF WON)
(AUDITED) (UNAUDITED)
BALANCE SHEET DATA
Total Loans(1)....................... 45,098.7 43,293.4 49,992.4 47,270.9 44,917.2 46,949.1
Total Borrowings(2).................. 71,373.1 65,481.8 70,446.6 68,391.0 66,804.4 69,534.5
Total Assets......................... 90,412.3 75,663.5 81,309.1 82,003.1 78,782.3 82,227.5
Total Liabilities.................... 86,100.1 69,424.3 77,510.9 75,069.6 71,841.7 75,258.9
Total Equity......................... 4,312.2 6,239.2 3,798.2 6,933.4 6,940.6 6,968.7
</Table>
- ------------
(1) These figures include loans, domestic usance, bills of exchange bought,
local letters of credit negotiation and loan-type suspense accounts
pursuant to the applicable guidelines.
(2) Total Borrowings include deposits, call money, borrowings and industrial
finance bonds.
2001
We had net income of W109.0 billion in 2001 compared to net loss of
W1,398.4 billion in 2000 principally due to improving economic conditions in the
Republic in 2001.
Principal factors for the net income in 2001 included:
- gains of W563 billion primarily due to valuation gains on KEPCO stock,
gains on sales of equity interests in Professional Korea Chemical Co.,
Ltd. and gains realized upon conversion of convertible bonds of Daewoo
Securities;
- fees and commissions of W311 billion due to increased bond underwriting
and project financing activities; and
8
- net interest income of W223 billion primarily due to decreased interest
expense on borrowings and bond payables.
The above factors were partially offset by net loss on disposition of loans
of W1,074 billion, primarily due to dispositions of loans that had been made to
Daewoo Motor.
The overall statutory income tax rate applicable to us is 30.8%. We paid
virtually no income tax in 2001 because we carried forward net operating losses
from 1998 to offset net income. Net losses can be carried forward for a maximum
of five years under the Corporate Income Tax Law of the Republic.
2002
We had net income of W183.9 billion in 2002 compared to net income of
W109.0 billion in 2001 principally due to the continued growth of the Korean
economy in 2002.
Principal factors for the net income in 2002 included:
- gains on equity method investees of W985.3 billion primarily due to
gains from investments in KEPCO and Daewoo Shipbuilding & Marine
Engineering;
- fees and commissions of W273.3 billion primarily due to increased bond
underwriting and project financing activities; and
- net interest income of W132.5 billion primarily due to decreased
interest expenses on borrowings and bond payables.
The above factors were partially offset by new loan loss reserves of W551.7
billion and net loss on foreign currency transactions of W128.2 billion.
The overall statutory income tax rate applicable to us is 29.7%. We paid
virtually no income tax in 2002 because we carried forward net operating losses
from 1998 to offset net income. Net losses can be carried forward for a maximum
of five years under the Corporate Income Tax Law of the Republic.
First half of 2003
In the first half of 2003, we had a net loss of W392.3 billion compared to
net income of W112.5 billion in the first half of 2002.
Principal factors for the net loss in the first half of 2003 included:
- additional loan loss reserves of W483.0 billion primarily due to the
deterioration of the financial condition of companies in our loan
portfolio such as SK Networks (formerly known as SK Global); and
- impairment losses of W337.5 billion primarily due to valuation losses on
the stock of Hyundai Engineering and Construction and Hynix
Semiconductor resulting from changes in accounting regulations with
respect to companies subject to the Corporate Restructuring Promotion
Act. As a result of such changes, beginning on January 1, 2003, our
equity interests in companies subject to the Corporate Restructuring
Promotion Act were recorded at prevailing market prices instead of at
acquisition cost.
The above factors were partially offset by gains on equity method investees
of W281.2 billion including gains from investments in KEPCO and Daewoo
Shipbuilding & Marine Engineering and fees and commissions of W197.7 billion.
PROVISIONS FOR POSSIBLE LOAN LOSSES AND LOANS IN ARREARS
We establish provisions for possible losses from problem loans, including
guarantees and other extensions of credit, based on the length of the delinquent
periods and the nature of the loans, including guarantees and other extensions
of credit. As of June 30, 2003, we established provisions of W
9
1,603.5 billion for possible loan losses and bad debt securities, 47.1% higher
than the provisions as of December 31, 2002, and W49.3 billion for doubtful
accounts relating to foreign exchange, guarantees and other assets, representing
a 27.7% decrease from December 31, 2002.
Certain of our customers have restructured loans with their creditor banks.
As of June 30, 2003, we have provided loans of W4,508.3 billion for companies
under workout, court receivership, court mediation and other restructuring
procedures. In addition, as of such date, we held equity securities of such
companies in the amount of W540.1 billion following debt-equity swaps. As of
June 30, 2003, we had established provisions of W1,227.8 billion for possible
loan losses and W27.3 billion for present value discount with regard to the
above loans. We cannot assure you that actual results of the credit loss from
the loans to these customers will not exceed the provisions reserved.
Financial Supervisory Commission guidelines classify loans into five
categories; provisions are made in accordance with ratios applicable to each
category. Effective December 31, 1999, the Financial Supervisory Commission
adopted more stringent definitions for the relevant loan categories which more
closely follow international standards. Under the revised definitions, loans are
categorized as follows:
Normal................ Credits extended to customers which, in
consideration of their business and operations,
financial conditions and future cash flows, do not
raise concerns regarding their ability to repay
the credits. 0.5% or more reserves required.
Special attention..... Credits extended to customers (1) which, in
consideration of their business and operations,
financial conditions and future cash flows, are
judged to have potential risks with respect to
their ability to repay the credits in the future,
although there have not occurred any immediate
risks of default in repayment; or (2) which are in
arrears for one month or more but less than three
months. 2.0% or more reserves required.
Substandard........... (1) Credits extended to customers, which in
consideration of their business and operations,
financial conditions and future cash flows, are
judged to have incurred considerable risks for
default in repayment as the customers' ability to
repay has deteriorated; or (2) that portion which
is expected to be collected of total credits (a)
extended to customers which have been in arrears
for three months or more, (b) extended to
customers which are judged to have incurred
serious risks due to the occurrence of final
refusal to pay their promissory notes, liquidation
or bankruptcy proceedings, or closure of their
businesses or (c) of "Doubtful Customers" or
"Estimated-loss Customers" (each as defined
below). 20% or more reserves required.
Doubtful.............. That portion of credits in excess of the amount
expected to be collected of total credits extended
to (1) customers ("Doubtful Customers") which, in
consideration of their business and operations,
financial conditions and future cash flows, are
judged to have incurred serious risks of default
in repayment due to noticeable deterioration in
their ability to repay; or (2) customers which
have been in arrears for three months or more but
less than twelve months. 50% or more reserves
required.
Loss.................. That portion of credits in excess of the amount
expected to be collected of total credits extended
to (1) customers ("Estimated-loss Customers"),
which, in consideration of their business and
operations, financial conditions and future cash
flows, are judged to have to be accounted as a
loss as the inability to repay became certain due
to
10
serious deterioration in their ability to repay;
(2) customers which have been in arrears for
twelve months or more; or (3) customers which are
judged to have incurred serious risks of default
in repayment due to the occurrence of final
refusal to pay their promissory notes, liquidation
or bankruptcy proceedings, or closure of their
businesses. 100% reserves required.
The following table provides information on our loan loss provisions.
<Table>
<Caption>
AS OF AS OF
DECEMBER 31, 2001(1) DECEMBER 31, 2002(1)
------------------------------------- -------------------------------------
MINIMUM LOAN MINIMUM LOAN
LOAN PROVISIONING LOSS LOAN PROVISIONING LOSS
AMOUNT RATIO PROVISIONS AMOUNT RATIO PROVISIONS
--------- ------------ ---------- --------- ------------ ----------
(IN BILLIONS OF WON, EXCEPT PERCENTAGE)
Normal................ W52,423.7 0.5% W 245.6 W47,268.5 0.5% W236.3
Special attention..... 4,635.7 2.0% 451.9 3,964.0 2.0% 79.3
Sub-Standard.......... 1,709.5 20.0% 647.1 729.0 20.0% 145.8
Doubtful.............. 445.4 50.0% 273.0 205.3 50.0% 102.7
Loss.................. 490.0 100.0% 490.0 59.7 100.0% 59.7
Others(2)............. -- -- -- -- -- --
--------- -------- --------- ------
Total................. W59,704.3 W2,107.6 W52,226.5 W623.8
========= ======== ========= ======
<Caption>
AS OF
JUNE 30, 2003(1)
-------------------------------------
MINIMUM LOAN
LOAN PROVISIONING LOSS
AMOUNT RATIO PROVISIONS
--------- ------------ ----------
(IN BILLIONS OF WON, EXCEPT PERCENTAGE)
Normal................ W48,698.1 0.5% W 199.7
Special attention..... 2,153.8 2.0% 430.5
Sub-Standard.......... 1,904.0 20.0% 657.7
Doubtful.............. 527.4 50.0% 268.4
Loss.................. 94.9 100.0% 94.9
Others(2)............. 5,802.0 -- --
--------- --------
Total................. W59,180.2 W1,651.2
========= ========
</Table>
- ------------
(1) These figures include loans, guarantees, domestic usance, bills of exchange
bought, local letters of credit negotiation and loan-type suspense accounts
pursuant to the applicable guidelines.
(2) Includes loans guaranteed by the Government.
As of June 30, 2003, our delinquent loans totaled W2,526.3 billion,
representing 4.3% of our outstanding loans and guarantees as of such date. On
June 30, 2003, our legal reserve was W294.1 billion, representing 0.5% of our
outstanding loans and guarantees as of such date.
LOANS TO FINANCIALLY TROUBLED COMPANIES
We have significant credit exposure to a number of financially troubled
Korean companies including several former Hyundai Group affiliates, SK Networks
and Korea Thrunet Co., Ltd. As of June 30, 2003, our credit extended to these
companies totaled W2,417.2 billion, accounting for 2.9% of our total assets as
of such date.
As of June 30, 2003, our total exposure to several former Hyundai Group
affiliates classified as "financially troubled" decreased to W1,105.4 billion
from W1,280.0 billion as of December 31, 2002, primarily due to the
normalization in operations of certain of such former Hyundai Group affiliates.
Our exposure to Hyundai Group affiliates includes W328.1 billion to Hyundai
Engineering & Construction, W366.0 billion to Hyundai Merchant Marine, and
W411.2 billion to Hynix Semiconductor.
In March 2003, the principal creditor banks of SK Networks commenced
corporate restructuring procedures against SK Networks after it publicly
announced that its financial statements understated its debt by W1.1 trillion
and overstated its profits by W1.5 trillion. In addition, Korea Thrunet, an
Internet broadband service provider, filed for court receivership and received a
court order for the commencement of corporate reorganization proceedings in
March 2003. As of June 30, 2003, our total exposure to SK Networks and Korea
Thrunet was W1,023.7 billion and W288.1 billion, respectively. In October 2003,
SK Networks and its principal creditors agreed to a restructuring plan which,
among other things, will allow foreign creditors to cash out their debts at a
buyout rate of 43% of the face value of the outstanding debt owed to them. In
accordance with the decision of the Creditor Financial Institution Committee of
SK Networks, W501.4 billion of our loans to SK Networks was exchanged for equity
of SK Networks, consisting of W191.1 billion in common shares, W224.8 billion in
callable preferred shares and W85.4 billion in convertible bonds.
11
As of June 30, 2003, we established provisions of W229.3 billion for
several former Hyundai Group affiliates (including W113.3 billion for the
exposure to Hynix Semiconductor, W44.1 billion for the exposure to Hyundai
Merchant Marine and W10.7 billion for the exposure to Hyundai Engineering &
Construction), W417.4 billion for our exposure to SK Networks and W102.3 billion
for our exposure to Korea Thrunet.
As of June 30, 2003, we had total exposures of W387.3 billion to LG Card
Co., Ltd., Korea's largest credit card company in terms of both number of credit
card holders and charge volume, in the form of debt securities issued by LG
Card. Although no workouts or reorganization proceedings have been commenced, LG
Card has been experiencing significant liquidity problems commencing in the
second half of 2003. In November 2003, we and other creditors of LG Card agreed
to provide W2 trillion in new loans to enable LG Card to resume cash operations.
Our portion of this commitment is W287.8 billion. Certain of LG Card's creditors
(including us) also agreed to extend payments on existing debt for one year
after the chairman of LG Group pledged his personal stake in LG Corp., the group
holding company, as collateral. Although our exposure to LG Card is fully
collateralized, the value of such collateral or our pro rata entitlement thereto
may not be sufficient to cover all future losses arising from our exposure to LG
Card. In addition, if LG Card were to enter into workout, restructuring,
reorganization or liquidation proceedings in the future, our recovery may be
limited. We may, therefore, experience future losses with respect to our
exposure to LG Card. We cannot provide any assurance that our exposure to LG
Card will not increase in the future, whether through additional loans, equity
investments or otherwise.
In addition to our loans in Korea, as of June 30, 2003, we had loans
totaling approximately US$35.5 million to Indonesian entities. We have
classified US$1.9 million of these amounts as non-performing loans and have made
provision for potential losses relating to them since 1998. We also had
investments in securities of such entities totaling US$7.9 million as of June
30, 2003.
As of June 30, 2003, we had credit exposure totaling approximately US$135
million to Russia, which is guaranteed by the Government, after writing off
US$15 million of non-guaranteed exposure in June 2002. We classified the
remaining US$135 million as a normal loan and have not made any provision for
that credit exposure.
For the first six months ended June 30, 2003, we have not sold any
non-performing loans to KAMCO.
OPERATIONS
LOAN OPERATIONS
We mainly provide equipment capital loans and working capital loans to
private Korean enterprises that undertake major industrial projects. The loans
generally cover over 50%, and in some cases as much as 100%, of the total
project cost. Equipment capital loans include loans to major industries for
development of high technology and for acquisition, improvement or repair of
machinery and equipment. All loans for equipment must be for more than one year.
We may extend working capital loans to entities to whom we made equipment
capital loans or provided guarantees, to enterprises partly or wholly owned by
the Government or by us and to small- and medium-sized companies engaged in the
high technology business.
We disburse loan proceeds in installments to ensure that the borrower uses
the loan for its intended purpose. The KDB Act requires monitoring of the
projects or enterprises to which we extend loans or in which we invest and
authorizes us to assign our own personnel to a borrower in need of management
assistance.
Before approving a loan, we consider:
- the economic benefits of the project to the Republic;
- the extent to which the project serves priorities established by the
Government's industrial policy;
12
- the project's operational feasibility;
- the loan's and the project's profitability; and
- the quality of the borrower's management.
We generally charge interest of up to 6.5% over our prime rate, although we
provide a discount between 0.3% and 0.8% to credit-constrained small- and
medium-sized companies. We adjust the prime rate monthly. The spread depends on
the purpose of the loan, maturity date and the borrower's credit ratings.
Certain loans bear interest at below market rates. Equipment capital loans
generally have original maturities of five to ten years, although we
occasionally make equipment capital loans with longer maturities. Working
capital loans usually mature within two years.
We generally obtain collateral valued in excess of the original loan from
large companies and up to the value of the loan from small- and medium-sized
companies. Depending on the type of borrower and loan, the collateral may be
equipment purchased with the loan proceeds, industrial plants, real estate and
marketable securities. We appraise the value of our collateral at least once a
year.
The following table sets out, by currency and category of loan, our total
outstanding loans:
LOANS(1)
<Table>
<Caption>
DECEMBER 31,
------------------------------ JUNE 30,
2000 2001 2002 2003
-------- -------- -------- --------
(BILLIONS OF WON)
Equipment Capital Loans:
Domestic Currency.................................. 14,306.0 10,611.9 9,967.1 9,841.3
Foreign Currency(2)................................ 16,482.2 15,324.3 13,651.4 13,322.6
-------- -------- -------- --------
30,788.2 25,936.2 23,618.5 23,163.9
Working Capital Loans:
Domestic Currency.................................. 10,328.7 6,844.7 4,422.2 5,449.7
Foreign Currency(2)................................ 2,999.9 2,910.1 2,467.1 2,650.5
-------- -------- -------- --------
13,328.6 9,754.8 6,889.3 8,100.2
-------- -------- -------- --------
Total Loans..................................... 44,116.8 35,691.0 30,507.8 31,264.1
======== ======== ======== ========
</Table>
- ------------
(1) Includes loans extended to affiliates.
(2) Includes loans disbursed and repayable in Won, the amounts of which are
based upon an equivalent amount of foreign currency. This type of loan
totaled W6,510.6 billion as of December 31, 2000, W6,548.0 billion as of
December 31, 2001, W5,476.3 billion as of December 31, 2002 and W5,384.2
billion as of June 30, 2003. See "The Korea Development Bank--
Operations--Loan Operations--Loans by Categories--Local Currency Loans
Denominated in Foreign Currencies".
As of June 30, 2003, we had W31,264.1 billion in outstanding loans, a 2.4%
increase from December 31, 2002. The increase reflected higher demand for
working capital loans.
13
Maturities of Outstanding Loans
The following table categorizes our outstanding loans by their remaining
maturities:
OUTSTANDING LOANS BY REMAINING MATURITIES(1)
<Table>
<Caption>
DECEMBER 31, AS % OF AS % OF
------------------------------ DECEMBER 31, JUNE 30, JUNE 30, 2003
2000 2001 2002 2002 TOTAL 2003 TOTAL
-------- -------- -------- ------------ -------- ----------------
(BILLIONS OF WON, EXCEPT PERCENTAGES)
Loans with Remaining
Maturities of Less Than
One Year................ 13,331.0 10,030.2 7,986.6 26.2 9,848.0 31.5
Loans with Remaining
Maturities of One Year
or More................. 30,785.8 25,660.8 22,521.2 73.8 21,416.1 68.5
-------- -------- -------- ----- -------- -----
Total................... 44,116.8 35,691.0 30,507.8 100.0 31,264.1 100.0
======== ======== ======== ===== ======== =====
</Table>
- ------------
(1) Includes loans extended to affiliates.
Loans by Industrial Sector
The following table sets out the total amount of our outstanding loans,
categorized by industry sector:
OUTSTANDING LOANS BY INDUSTRY SECTOR(1)
<Table>
<Caption>
DECEMBER 31, AS % OF AS % OF
------------------------------ DECEMBER 31, JUNE 30, JUNE 30,
2000 2001 2002 2002 TOTAL 2003 2003 TOTAL
-------- -------- -------- ------------ -------- ----------
(BILLIONS OF WON, EXCEPT PERCENTAGES)
Manufacturing................. 18,225.5 15,694.3 13,662.0 44.8 14,359.4 45.9
Transportation and
Communication............... 3,826.8 3,971.1 3,425.7 11.2 3,589.6 11.5
Electric, Gas and Water Supply
Industry.................... 6,315.4 4,017.8 3,149.4 10.3 2,434.1 7.8
Banking and Insurance......... 11,013.8 5,417.8 4,163.7 13.7 4,138.8 13.2
Public Administration and
National Defense............ 411.8 4,176.7 3,734.7 12.2 3,708.3 11.9
Others........................ 4,323.5 2,413.3 2,372.3 7.8 3,033.8 9.7
-------- -------- -------- ----- -------- -----
Total......................... 44,116.8 35,691.0 30,507.8 100.0 31,264.0 100.0
======== ======== ======== ===== ======== =====
Percentage increase (decrease)
from previous period........ 5.8% (19.1)% (14.5)% 2.4%
</Table>
- ------------
(1) Includes loans extended to affiliates.
The manufacturing sector accounted for 45.9% of our outstanding loans as of
June 30, 2003. Loans related to the manufacture of metal products, machinery and
equipment accounted for 18.3% of our total outstanding loans, and loans related
to the manufacture of chemical, petroleum, coal, rubber and plastic products for
14.6%.
The Small and Medium Industry Promotion Corporation was our single largest
borrower as of June 30, 2003, accounting for 10.7% of our outstanding loans. As
of June 30, 2003, our five largest borrowers accounted for 21.3% of our
outstanding loans and the 20 largest borrowers for 36.4%. The
14
following table breaks down the loans to our 20 largest borrowers outstanding as
of June 30, 2003 by industry sector:
20 LARGEST BORROWER BY INDUSTRY SECTOR
<Table>
<Caption>
AS % OF
JUNE 30, 2003
TOTAL OUTSTANDING
LOANS
-----------------
Financing, Insurance and Business Services.................. 56.4%
Manufacturing............................................... 17.0%
Construction................................................ 7.2%
Transportation and Communication............................ 11.3%
Electricity and Waterworks.................................. 8.1%
</Table>
Pursuant to the KDB Decree, we may not extend credits in excess of 20% of
our total capital to a single borrower and in excess of 25% of our total capital
to a single borrower and certain affiliates, with certain statutory exceptions
including debt restructurings pursuant to the Republic's insolvency laws or
other public policy reasons. The KDB Decree requires that any credits in excess
of the foregoing limits at the time of the amendment shall be reduced below the
limits by December 31, 2004. In addition the KDB Decree requires us to limit the
aggregate of large credits, defined as those in excess of 10% of our total
capital, to 500% of our total capital. We are currently in compliance with these
requirements.
A number of our borrowers have encountered financial difficulties during
the recent economic crisis. See "The Korea Development Bank--Selected Financial
Statement Data--Loans to Financially Troubled Companies".
The following table categorizes the new loans made by us by industry
sector:
NEW LOANS BY INDUSTRY SECTOR
<Table>
<Caption>
SIX MONTHS ENDED AS % OF
AS % OF ------------------- SIX MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30, ENDED
--------------------------- DECEMBER 31, ------------------- JUNE 30,
2000 2001 2002 2002 TOTAL 2002 2003 2003 TOTAL
------- ------- ------- ------------ -------- -------- ----------
(BILLIONS OF WON, EXCEPT PERCENTAGES)
Manufacturing.................... 5,908.8 4,879.1 4,121.9 54.7 2,463.2 2,481.2 47.0
Transportation and
Communication.................. 1,693.8 900.4 1,338.4 17.7 434.4 1,086.2 20.6
Electricity and Waterworks....... 995.9 2,160.8 776.2 10.3 536.5 844.5 16.0
Financing, Insurance and Business
Services....................... 634.8 173.0 764.8 10.1 498.0 578.1 10.9
Others........................... 764.4 647.3 543.1 7.2 55.5 294.5 5.5
------- ------- ------- ----- ------- ------- -----
Total.......................... 9,997.7 8,760.6 7,544.4 100.0 3,987.6 5,284.5 100.0
======= ======= ======= ===== ======= ======= =====
Percentage increase (decrease)
from previous period........... 12.6% (12.4)% (13.9)% (30.0)% 32.5%
</Table>
Loans by Categories
In addition to dividing our loans into equipment capital and working
capital loans, we classify loans into several groupings, the most important
being:
- industrial fund loans;
- foreign currency loans;
- local currency loans denominated in foreign currencies;
- offshore loans in foreign countries; and
- government fund loans.
15
See "The Korea Development Bank--Financial Statements and the
Auditors--Notes to Non-Consolidated Financial Statements of June 30, 2002 and
2003--Note 5" for more information on the types of credit extended by us and the
amounts of each type outstanding as of June 30, 2003.
The following table sets out loans by categories as of June 30, 2003:
<Table>
<Caption>
EQUIPMENT CAPITAL WORKING CAPITAL
LOANS(1) LOANS(1)
------------------ ----------------
JUNE 30, JUNE 30,
2003 % 2003 %
--------- ------ -------- -----
(BILLIONS OF WON, EXCEPT PERCENTAGES)
Industrial Fund Loans...................................... 6,871.5 29.7 3,793.7 46.8
Foreign Currency Loans..................................... 2,294.2 9.9 992.3 12.2
Local Currency Loans Denominated in Foreign Currencies..... 4,455.6 19.2 928.6 11.5
Offshore Loans in Foreign Currencies....................... 1,284.9 5.6 -- --
Government Fund Loans...................................... 952.7 4.1 539.5 6.7
ADB and IBRD Loans......................................... 5,287.8 22.8 -- --
Others..................................................... 2,017.2 8.7 1,846.0 22.8
-------- ----- ------- -----
Total...................................................... 23,163.9 100.0 8,100.1 100.0
======== ===== ======= =====
</Table>
- ------------
(1) Includes loans extended to affiliates totaling W1,515.3 billion.
Industrial Fund Loans. Industrial fund loans are equipment capital and
working capital loans denominated in Won to borrowers in major industries to
finance equipment and facilities.
We currently make equipment capital industrial fund loans at floating rates
for terms of up to 20 years and for up to 100% of the equipment cost being
financed. We make working capital industrial fund loans at floating rates and in
amounts constituting up to 40% of the borrower's estimated annual sales.
Foreign Currency Loans. We extend loans denominated in U.S. dollars,
Japanese yen or other foreign currencies principally to finance the purchase of
industrial equipment from abroad or the implementation of overseas industrial
development projects by Korean companies. We make these loans at floating
interest rates with original maturities, in the case of equipment capital
foreign currency loans, of up to 20 years and, in the case of working capital
foreign currency loans, of up to two years.
Local Currency Loans Denominated in Foreign Currencies. We make local
currency loans denominated in foreign currencies for the same purposes, and to
the same borrowers, as foreign currency loans. Although we denominate the loans
in foreign currency, the borrower receives and repays the loans in Won based on
foreign exchange rates at the time of receipt and repayment. We currently make
loans of this type at floating interest rates, with original maturities, in the
case of equipment capital loans, of up to 20 years and, in the case of working
capital loans, of up to two years.
Offshore Loans in Foreign Currencies. We extend offshore loans in foreign
currencies to finance:
- the purchase of industrial equipment and the implementation of overseas
industrial projects by overseas subsidiaries and branches of Korean
companies; and
- the overseas industrial development projects of foreign government
entities, international organizations and foreign companies.
We make these loans at floating interest rates with original maturities, in
the form of equipment capital foreign currency loans, of up to 20 years.
16
Government Fund Loans. We make government fund loans primarily to finance:
- water supply and drainage facilities;
- the Seoul and Pusan subway systems;
- small tourist facilities;
- rural and coastal electricity facilities;
- hospitals; and
- other facilities.
Government fund loans require approval by the appropriate Government
ministry. We currently make government fund loans in Won at fixed interest rates
with original maturities, in the case of equipment capital loans, of seven to 35
years and, in the case of working capital loans, of up to three years.
Other Loans. We also make special purpose fund loans for particular
industries or projects using funds lent to us by the Government and foreign
financial institutions. The Government funds that finance these loans include,
among others:
- the Petroleum Business Fund (energy conservation projects and alternate
fuel development projects);
- the Tourism Promotion Fund (hotel and resort projects); and
- the Special Industry Supporting Fund (defense projects).
We also make special purpose fund loans from money received from the World
Bank, the ADB, other multinational agencies and foreign financial institutions.
For further information relating to such loans, see "The Korea Development
Bank--Sources of Funds" and "The Korea Development Bank--Financial Statements
and the Auditors--Notes to Non-Consolidated Financial Statements of June 30,
2002 and 2003--Note 5".
GUARANTEE OPERATIONS
We extend guarantees to our clients to facilitate their other borrowings
and to finance major industrial projects. We guarantee Won-denominated corporate
debentures, local currency loans, and other Won liabilities and foreign currency
loans from domestic and overseas Korean financial institutions and from foreign
institutions. The KDB Act and our By-Laws limit the aggregate amount of our
industrial finance bond obligations and guarantee obligations. See "The Korea
Development Bank--Sources of Funds".
We generally obtain collateral valued in excess of the original guarantee.
We appraise the value of our collateral at least once a year. Depending on the
borrower, the collateral may be industrial plants, real estate and marketable
securities.
The following table shows our outstanding guarantees:
GUARANTEES OUTSTANDING
<Table>
<Caption>
DECEMBER 31,
---------------------------- JUNE 30,
2000 2001 2002 2003
-------- ------- ------- --------
(BILLIONS OF WON)
Acceptances............................................ 4,582.2 4,443.9 1,135.8 979.4
Guarantees on local borrowing.......................... 1,783.0 1,285.1 930.6 783.1
Guarantees on foreign borrowing........................ 3,641.9 4,109.3 3,435.8 8,790.4
Letter of guarantee for importers...................... 56.7 34.3 37.8 74.8
-------- ------- ------- --------
Total.................................................. 10,063.8 9,872.6 5,540.0 10,627.7
======== ======= ======= ========
</Table>
17
On November 13, 2002, we entered into a guarantee agreement with KEPCO with
respect to certain of KEPCO's debt securities in connection with KEPCO's
restructuring and privatization. Pursuant to the guarantee agreement, we issued
in February 2003 our guarantee to holders of KEPCO's Yankee and Global debt
securities with final maturities ranging from 2003 to 2096 (although our
guarantee obligations only run through 2016) in an aggregate principal amount of
approximately W3.3 trillion, based on exchange rates prevailing on the guarantee
issuance date, February 25, 2003, and we issued in April 2003 our guarantee to
holders of KEPCO's Eurobonds with final maturities ranging from 2004 to 2007 in
an aggregate principal amount of approximately W0.9 trillion, based on exchange
rates prevailing on the guarantee issuance date, April 29, 2003. The guarantees
described above constitute full, irrevocable and unconditional guarantees, on an
unsecured and unsubordinated basis, in respect of the principal, interest and
other payments due with respect to those debt obligations. KEPCO paid and will
continue to pay us an annual guarantee fee of 0.05% of (i) the aggregate
outstanding principal amount of all issues of debt securities that will be
covered by the benefit of our guarantee and (ii) the sum of all interest
payments due on such debt securities from the date of calculation until the
earlier of their maturity or their stated redemption date.
With respect to certain debt obligations of KEPCO and its generation
subsidiaries that are not covered by the guarantee above with final maturities
ranging from 2003 to 2006 in an aggregate amount of up to approximately W3.2
trillion based on exchange rates prevailing on December 31, 2002, we may also in
the future guarantee the principal, interest and other payments due in respect
of such debt obligations. Our issuance of the guarantees will be subject to a
number of conditions, including Korean court approvals required for meetings of
the bondholders of KEPCO and its generation subsidiaries, our internal approvals
and/or our agreement with KEPCO on the scope and terms of the guarantees.
We currently own approximately 21.57% of the outstanding shares of common
stock of KEPCO, and the Government, which owns all of our paid-in capital, owns
an additional 32.35% of such shares.
INVESTMENTS
We invest in a range of Korean private and Government-owned enterprises but
we will not take a controlling interest in a company unless the Government
specifically instructs us to do so. Although generally a long-term investor, we
sell investments from time to time. In recent years, sales resulted principally
from the Government's privatization program, and we expect to continue such
sales in the future. Our equity investments decreased to W13,836.1 billion as of
June 30, 2003 from W13,946.8 billion as of December 31, 2002, principally as a
result of valuation loss on capital stock of Hyundai Engineering and
Construction and Hynix Semiconductor.
To support the Government's policy of helping credit-constrained small-and
medium-sized companies, we allocated W190 billion and W170 billion for year 2002
and 2003, respectively, for investment in promising small- and medium-sized
companies and invested W154.5 billion and W21.3 billion in 124 and 15 companies
in 2002 and for the first half of 2003, respectively.
The KDB Act and our By-Laws provide that the cost basis of our total equity
investments may not exceed twice the sum of our paid-in capital and our reserve
from profit. In addition, pursuant to the KDB Decree, we may not acquire equity
securities of a single company in excess of 15% of its entire voting shares. The
15% limit, however, does not apply to certain investments, including those in
Government-controlled companies financed by capital contributions from the
Government. As of June 30, 2003, the cost basis of our equity investments
subject to the restriction under the KDB Act and our By-Laws totaled W3,665.3
billion, equal to 24.6% of our equity investment ceiling. For a discussion of
Korean accounting principles relating to our equity investments, see "The Korea
Development Bank--Financial Statements and the Auditors".
18
The following table sets out our equity investments by industry sector on a
book value basis:
EQUITY INVESTMENTS
<Table>
<Caption>
BOOK VALUE AS OF
JUNE 30, 2003
-----------------
(BILLIONS OF WON)
Electricity & Waterworks.................................... 5,488.2
Construction................................................ 3,922.1
Finance and Insurance....................................... 1,343.1
Manufacturing............................................... 966.5
Other....................................................... 2,116.2
--------
Total....................................................... 13,836.1
========
</Table>
As of June 30, 2003, we held total equity investments, on a book value
basis, of W2,709.9 billion in four of our five largest borrowers and W4,435.3
billion in 12 of our 20 largest borrowers. As of June 30, 2003, we owned a
controlling interest in a financial services company which was one of our 20
largest borrowers. We have not established a policy addressing loans to
enterprises in which we hold equity interests or equity interests in enterprises
to which we have extended loans.
When possible, we use the prevailing market price of a security to
determine the value of our interest. However, if no readily ascertainable market
value exists for our holdings, we record these investments at the cost of
acquisition. With respect to our equity interests in enterprises in which we
hold more than 15% of interest, we value these investments annually, with
certain exceptions, on a net asset value basis when the investee company
releases its financial statements. As of June 30, 2003, the aggregate value of
our equity investments accounted for approximately 103.7% of their aggregate
cost basis.
As part of our investment activities, we underwrite straight and
convertible bond issuances in Won for domestic corporations. We also invest in
municipal bonds, extending funds to municipalities at subsidized interest rates,
mostly to finance water supply and drainage infrastructure projects.
OTHER ACTIVITIES
We engage in a range of industrial development activities in addition to
providing loans and guarantees, including:
- conducting economic and industrial research;
- performing engineering surveys;
- providing business analyses and managerial assistance; and
- offering trust services.
As of June 30, 2003, we held in trust cash and other assets totaling
W14,129.4 billion, and we generated in the first half of 2003 trust fee income
equaling W15.2 billion. Pursuant to Korean law, we segregate trust assets from
our other assets; trust assets are not available to satisfy claims of our
depositors or other creditors. Accordingly, we account for our trust accounts
separately from our banking accounts. However, if the income from our trust
operations fails to generate the guaranteed minimum rate of return on some of
our money trusts, we are responsible for covering the deficit either from
previously established provisions in our trust accounts or by a transfer from
our banking accounts. We have transferred W86.2 billion, W360.5 billion, W243.6
billion and W262.8 billion in 2000, 2001, 2002 and the first half of 2003,
respectively, from our banking accounts to cover deficits in our trust accounts.
Surplus funds generated by the trust assets may be deposited into our banking
accounts and earn interest. We reflect trust fees earned by us on our trust
account management services as other operating revenues in the income statement
of the banking accounts.
19
SOURCES OF FUNDS
In addition to our capital and reserves, we obtain funds primarily from:
- borrowings from the Government;
- issuances of bonds in the domestic and international capital markets;
- borrowings from international borrowings from The Bank of Korea; and
- deposits.
All of our borrowings are unsecured.
BORROWINGS FROM THE GOVERNMENT
We borrow from the Government's general purpose funds and its special
purpose funds. General purpose loans generally are in Won and have fixed
interest rates and maturities ranging from three to 35 years. We incur special
purpose loans, principally from the Petroleum Business Fund, the Tourism
Promotion Fund and the Special Industry Supporting Fund, in connection with
specific projects we finance. The Government links the interest rate and
maturity of each special purpose borrowing to the terms of the financing we
provide for the specific project.
The following table sets out our Government borrowings as of June 30, 2003:
<Table>
<Caption>
TYPE OF FUNDS BORROWED AMOUNT
- ---------------------- -----------------
(BILLIONS OF WON)
General Purpose............................................. 2,093.2
Special Purpose............................................. 8,356.7
--------
Total..................................................... 10,449.9
========
</Table>
DOMESTIC AND INTERNATIONAL CAPITAL MARKETS
We issue industrial finance bonds both in Korea and abroad, some of which
the Government directly guarantees. We generally issue domestic bonds at fixed
interest rates with original maturities of one to ten years.
The following table sets out the outstanding balance of our industrial
finance bonds as of June 30, 2003:
<Table>
<Caption>
OUTSTANDING BALANCE AMOUNT
- ------------------- -----------------
(BILLIONS OF WON)
Denominated in Won.......................................... 25,626.3
Denominated in Other Currencies............................. 10,116.2
--------
Total..................................................... 35,742.5
========
</Table>
The KDB Act provides that the aggregate outstanding principal amount of our
industrial finance bonds, other than those directly guaranteed or purchased by
the Government, plus the aggregate outstanding amount of our on-balance sheet
and off-balance sheet guarantee obligations, other than those excepted by
statute, may not exceed 30 times the sum of our paid-in capital and our reserve
from profit. As of June 30, 2003, the aggregate amount of our industrial finance
bonds and guarantee obligations (including guarantee obligations relating to
loans that had not been borrowed as of June 30, 2003) was W48,839.5 billion,
equal to 23.0% of our authorized amount under the KDB Act, which was W218,138.7
billion.
20
FOREIGN CURRENCY BORROWINGS
We borrow money from institutions, principally syndicates of commercial
banks, outside the Republic in foreign currencies. We frequently enter into
related interest rate and currency swap transactions. The loans generally have
original maturities of five to ten years. We also borrow from the World Bank,
the ADB and other similar supranational institutions to fund special projects,
with terms linked to the related loans we extend. As of June 30, 2003, the
outstanding amount of our foreign currency borrowings was US$13.6 billion.
The Bank of Korea deposits a portion of its surplus foreign currency with
us. We account for The Bank of Korea deposits as foreign currency borrowings.
The amount of these deposits totaled W254.7 billion, W156.1 billion and W106.1
billion as of December 31, 2001, December 31, 2002 and June 30, 2003,
respectively. The deposits, typically denominated in U.S. dollars, bear interest
at floating rates and have maturities of one year, although we frequently extend
the maturities on a year-to-year basis. Deposits made at the direction of the
Government to finance certain development projects have maturities matching the
terms of the related loans extended by us.
Our long term and short term foreign currency borrowings decreased to
W16,301.3 billion as of June 30, 2003 from W17,434.9 billion as of December 31,
2002.
DEPOSITS
We take demand deposits and time and savings deposits. We accept demand
deposits offering interest rates ranging from zero to one percent only from
enterprises to which we have extended credit, the central and local governments,
and other persons as specified by Presidential decree. We may accept time and
savings deposits from the general public. Time and savings deposits generally
have maturities shorter than three years and bear interest at fixed rates. As of
June 30, 2003, demand deposits held by us totaled W625.6 billion and time and
savings deposits held by us totaled W6,766.5 billion.
DEBT
DEBT REPAYMENT SCHEDULE
The following table sets out our principal repayment schedule:
DEBT PRINCIPAL REPAYMENT SCHEDULE
<Table>
<Caption>
MATURING ON OR BEFORE JUNE 30,
----------------------------------------------------
CURRENCY(1)(2) 2004 2005 2006 2007 THEREAFTER
- -------------- -------- -------- ------- ------- ----------
(BILLIONS OF WON)
Won.......................................... 13,615.2 6,988.1 5,363.1 1,284.0 2,696.4
Foreign...................................... 9,190.5 6,370.1 2,895.4 2,221.8 5,739.7
-------- -------- ------- ------- -------
Total Won Equivalent....................... 22,805.7 13,358.2 8,258.5 3,505.8 8,436.1
======== ======== ======= ======= =======
</Table>
- ------------
(1) Borrowings in foreign currency have been translated into Won at the market
average exchange rates on June 30, 2003, as announced by the Seoul Money
Brokerage Services Ltd.
(2) We categorize debt with respect to which we have entered into currency swap
agreements by our repayment currency under such agreements.
21
DEBT RECORD
We have never defaulted in the payment of principal or interest on any of
our obligations.
OVERSEAS OPERATIONS
We operate overseas subsidiaries in Hong Kong and Dublin. The subsidiaries
engage in a variety of banking and merchant banking services, including:
- managing and underwriting new securities issues;
- syndicating medium and long-term loans;
- trading securities;
- trading in the money market; and
- providing investment management and advisory services.
We currently maintain branches in Tokyo, Shanghai, Singapore, New York and
London and two overseas representative offices in Frankfurt and Beijing.
During 1998, 1999 and 2000, we closed one overseas branch in Bangkok, six
overseas subsidiaries, Korea Associated Securities Inc., KDB Bank (Schweiz) AG,
KDB (UK) Ltd., KDB International (Singapore) Ltd., KDB (Deutschland) Gmbh, KDB
Lease (Japan) Ltd., and eleven overseas representative offices in Toronto,
Budapest, Sydney, Mexico City, Hanoi, Manila, Paris, Santiago, Moscow, New Delhi
and Jakarta.
PROPERTY
Our head office is located at 16-3 Youido-dong, Youngdeungpo-gu, Seoul,
Korea, a 35,996 square meter building completed in July 2001 and owned by us. In
addition to the head office, we maintain 36 branches in major cities throughout
the Republic, including 9 in Seoul. We generally own our domestic office space
and lease our overseas offices under long-term leases.
DIRECTORS AND MANAGEMENT; EMPLOYEES
Our Board of Directors, comprising the Governor and Chairman of the Board
of Directors, the Deputy Governor and the Executive Directors, manages our
affairs. The President of the Republic appoints the Governor and Chairman of the
Board of Directors upon the recommendation of the Minister of Finance and
Economy. The Minister of Finance and Economy appoints the Deputy Governor and
Executive Directors upon the recommendation of the Governor. The Board of
Directors decides all important matters relating to our operations. The
Directors serve for three-year terms and may be re-appointed. As of June 30,
2003, the directors were:
<Table>
<Caption>
Governor and Chairman of the Board of Directors: Ji-Chang Yoo
Deputy Governor: Yun-Woo Lee
Executive Directors: Sung-Kun Rhee
Wang-Kyung Kim
Jae-Hong Chang
Jong-Bae Kim
Chang-Gyu Laah
Jeong-Soo Lee
</Table>
As of June 30, 2003, we employed 1,994 persons with 1,344 located in our
Seoul head office.
22
FINANCIAL STATEMENTS AND THE AUDITORS
The Minister of Finance and Economy appoints our Auditor who is responsible
for examining our financial operations and auditing our financial statements and
records. The present Auditor is Gong-Jae Lee, who was appointed for a three-year
term on April 20, 2002.
We prepare our financial statements annually for submission to the Minister
of Finance and Economy, accompanied by an opinion of the Auditor. Although we
are not legally required to have financial statements audited by external
auditors, an independent public accounting firm has audited our non-consolidated
and consolidated financial statements commencing with such financial statements
as of and for the year ended December 31, 1998. As of the date of this
prospectus, our external auditor is Samil Accounting Corporation, located at
Kukje Center Building, 191, Hankang-ro, 2-ka, Yongsan-gu, Seoul, Korea.
Our financial statements appearing in this prospectus were prepared in
conformity with Korean law and in accordance with generally accepted accounting
principles in the Republic, summarized in "The Korea Development Bank--Financial
Statements and the Auditors--Notes to Non-Consolidated Financial Statements of
June 30, 2002 and 2003--Note 2". These principles and procedures differ in
certain material respects from generally accepted accounting principles in the
United States ("US GAAP").
We generally record our trading portfolio of marketable equity securities
and other equity investments at the cost of acquisition (including incidental
expenses related to purchase), computed on the moving average method. However,
if the aggregate market value of the trading portfolio of marketable securities
as of the balance sheet date differs from their purchase cost, we record the
securities at market value. If the market value of equity investments, except
for those of companies in which we hold more than 15% of interest ("affiliated
companies"), differs from their purchase cost, we record the investment at
market value. Starting in April 1999, we record our equity investments in
affiliated companies by using the equity method, pursuant to which we account
for adjustments in the value of our investments resulting from changes to the
affiliated companies' net asset values. However, we do not apply the equity
method for the following investments: (1) total assets of investees are less
than W7,000 million; (2) investees which are owned by the Korean Government and
Government invested companies; (3) investees under court receivership or
bankruptcy; and (4) investees in the process of being sold.
We generally record our debt securities investments, except for our trading
portfolio of marketable debt securities, at the cost of acquisition (including
incidental expenses related to purchase), computed on the specific
identification method. We record our trading portfolio of marketable debt
securities at market value. Starting in April 1999, we record all our debt
securities investments at market value except for debt securities invested with
the intention of holding until maturity, which we record at the cost of
acquisition or amortized cost.
We record the value of our premises and equipment on our balance sheet on
the basis of a revaluation conducted as of July 1, 1998. The Minister of Finance
and Economy approved the revaluation in accordance with applicable Korean law.
We value additions to premises and equipment since such date at cost.
23
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
The Korea Development Bank
We have audited the accompanying non-consolidated balance sheets of the
Korea Development Bank (the "Bank") as of December 31, 2002 and 2001, and the
related non-consolidated statements of income, appropriations of retained
earnings and cash flows for the years then ended, expressed in Korean Won. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the Republic of Korea. 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 the Bank as of December 31,
2002 and 2001, and the results of its operations, the changes in its retained
earnings and its cash flows for the years then ended, in conformity with
financial accounting standards generally accepted in the Republic of Korea.
Without qualifying our opinion, we draw your attention to Note 15 of the
non-consolidated financial statements, which states that the Korean Government
increased the paid-in capital of the Bank by W3,000,000 million in 2001 by
contributing 127,086,334 shares of Korea Electric Power Corporation valued at
W23,606 per share on June 20, 2001 and W50,000 million cash on December 29,
2001.
Accounting principles and auditing standards and their application in
practice vary among countries. The accompanying non-consolidated financial
statements are not intended to present the financial position, results of
operations and cash flows in conformity with accounting principles and practices
generally accepted in countries and jurisdictions other than the Republic of
Korea. In addition, the procedures and practices used in the Republic of Korea
to audit such financial statements may differ from those generally accepted and
applied in other countries. Accordingly, this report and the accompanying
non-consolidated financial statements are for use by those who are knowledgeable
about Korean accounting principles or auditing standards and their application
in practice.
Samil Accounting Corporation
Seoul, Korea
January 24, 2003
24
THE KOREA DEVELOPMENT BANK
NON-CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
<Table>
<Caption>
IN MILLIONS OF KOREAN WON
-------------------------
2002 2001
----------- -----------
ASSETS
Cash and due from banks (Note 3)............................ W 1,970,664 W 2,673,433
Trading securities (Note 4)................................. 1,333,027 1,246,645
Investment securities (Note 4).............................. 25,045,299 24,061,402
Loans,
net of provision for possible loan losses of W1,089,983
million in 2002 and W1,835,652 million in 2001 and
present value discount of W126,955 million in 2002 and
W331,227 million in 2001 (Note 5)...................... 44,917,231 47,270,861
Premises and equipment, net (Note 6)........................ 681,952 715,793
Derivative financial instruments (Note 14).................. 1,645,161 2,372,569
Other assets (Note 7)....................................... 3,189,010 3,662,357
----------- -----------
Total assets........................................... W78,782,344 W82,003,060
=========== ===========
LIABILITIES AND EQUITY
Deposits (Note 8)........................................... W 8,745,304 W10,483,335
Borrowings (Note 9)......................................... 24,459,085 21,353,378
Industrial finance bonds,
gross of premium on bonds of W16,396 million in 2002 and
W292 million in 2001 and net of discount on bonds of
W52,460 million in 2002 and W81,868 million in 2001
(Note 10).............................................. 33,600,020 36,554,291
Provision for possible guarantee losses (Note 12)........... 63,223 140,980
Accrued severance benefits.................................. 14,685 12,219
Derivative financial instruments (Note 14).................. 1,424,200 2,614,541
Other liabilities (Note 11)................................. 3,535,222 3,910,871
----------- -----------
Total liabilities...................................... 71,841,739 75,069,615
----------- -----------
Commitments and contingencies (Note 13)
Equity:
Paid-in capital (Notes 1 and 15).......................... 7,161,861 7,161,861
Capital surplus (Note 15)................................. 44,373 44,373
Retained earnings......................................... 294,103 109,428
Capital adjustments (Note 15)............................. (559,732) (382,217)
----------- -----------
Total equity........................................... 6,940,605 6,933,445
----------- -----------
Total liabilities and equity........................... W78,782,344 W82,003,060
=========== ===========
</Table>
The accompanying notes are an integral part of these non-consolidated financial
statements.
25
THE KOREA DEVELOPMENT BANK
NON-CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
<Table>
<Caption>
IN MILLIONS OF KOREAN WON
-------------------------
2002 2001
----------- -----------
Interest income:
Interest on loans......................................... W2,546,169 W3,634,930
Interest on due from banks................................ 62,560 225,728
Interest on trading securities............................ 65,940 112,300
Interest on investment securities......................... 602,566 593,748
Other interest income..................................... 34,280 16,269
---------- ----------
3,311,515 4,582,975
---------- ----------
Interest expense:
Interest on deposits...................................... 404,641 532,312
Interest on borrowings.................................... 671,157 1,174,039
Interest on bonds payable................................. 2,047,937 2,597,114
Other interest expenses................................... 55,245 56,365
---------- ----------
3,178,980 4,359,830
---------- ----------
Net interest income......................................... 132,535 223,145
---------- ----------
Non-interest revenue:
Fees and commissions...................................... 273,343 311,159
Gain from trading securities.............................. 87,930 134,514
Gain from derivative financial instruments (Note 14)...... 3,609,610 3,599,451
Others (Note 16).......................................... 724,155 1,130,268
---------- ----------
4,695,038 5,175,392
---------- ----------
Non-interest expense:
Fees and commissions...................................... 34,460 35,926
Loss from trading securities.............................. 52,746 72,515
Loss from derivative financial instruments (Note 14)...... 3,567,271 3,591,505
General and administrative expenses (Note 17)............. 266,143 241,232
Others (Note 16).......................................... 1,451,989 782,531
---------- ----------
5,372,609 4,723,709
---------- ----------
Operating income............................................ (545,036) 674,828
Non-operating income (expense), net (Note 18)............... 730,971 (558,911)
---------- ----------
Income before income taxes.................................. 185,935 115,917
Income taxes (Note 19)...................................... 2,063 6,961
---------- ----------
Net income.................................................. W 183,872 W 108,956
========== ==========
</Table>
The accompanying notes are an integral part of these non-consolidated financial
statements.
26
THE KOREA DEVELOPMENT BANK
NON-CONSOLIDATED STATEMENTS OF APPROPRIATIONS OF RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
DATE OF APPROPRIATIONS: FEBRUARY 28, 2003 AND 2002
<Table>
<Caption>
IN MILLIONS OF KOREAN WON
-------------------------
2002 2001
----------- -----------
Retained earnings before appropriations:
Retained earnings carried over from the prior year........ W -- W --
Effects on valuation of investments by the equity
method................................................. 803 472
Net income for the year................................... 183,872 108,956
-------- --------
184,675 109,428
-------- --------
Appropriations of retained earnings:
Legal reserve............................................. 184,675 109,428
-------- --------
184,675 109,428
-------- --------
Unappropriated retained earnings carried forward to the
subsequent year........................................... W -- W --
======== ========
</Table>
The accompanying notes are an integral part of these non-consolidated financial
statements.
27
THE KOREA DEVELOPMENT BANK
NON-CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
<Table>
<Caption>
IN MILLIONS OF KOREAN WON
-------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. W 183,872 W 108,956
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss (gain) on disposal of loans, net..................... (7,207) 1,074,304
Loss (gain) on trading securities, net.................... (34,988) (55,985)
Loss (gain) on investment securities, net................. (724,506) (507,019)
Provision for (reversal of) allowance for bad debt
losses................................................. 551,700 (141,338)
Depreciation.............................................. 31,884 28,654
Retirement allowance...................................... 15,503 13,176
Loss (gain) on foreign currency translation, net.......... 143,580 (10,889)
Loss (gain) from derivative financial instruments, net.... (25,765) 224,555
Decrease in accrued income................................ 64,862 219,219
Increase in derivative financial instruments.............. (437,168) (24,846)
Payment of severance benefits............................. (3,054) (5,762)
Others, net............................................... 79,689 (798,046)
----------- -----------
Net cash provided by operating activities................. (161,598) 124,979
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in trading securities............. (51,395) 500,549
Net decrease in loans..................................... 1,320,904 1,869,161
Net increase in investment securities..................... (202,112) (3,007,823)
Net decrease (increase) in premises and equipment......... 5,278 (15,010)
Others, net............................................... 632,555 2,478,600
----------- -----------
Net cash provided by investing activities................. 1,705,230 1,825,477
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits....................... (1,738,031) 1,961,368
Net increase (decrease) in borrowings..................... 3,182,706 (2,192,114)
Net decrease in bonds issued.............................. (3,094,644) (1,709,307)
Increase in paid-in capital............................... -- 50,000
Others, net............................................... (98) 110
----------- -----------
Net cash used in financing activities..................... (1,650,067) (1,889,943)
----------- -----------
Net increase (decrease) in cash............................. (106,435) 60,513
Cash, beginning of the year................................. 144,908 84,395
----------- -----------
Cash, end of the year (Note 3).............................. W 38,473 W 144,908
=========== ===========
</Table>
The accompanying notes are an integral part of these non-consolidated financial
statements.
28
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
1. THE BANK:
The Korea Development Bank (the "Bank") was established in 1954 in
accordance with the Korea Development Bank Act for the purpose of supplying and
managing major industrial capital to develop the Korean industry. The Bank
operates through 34 local branches, 5 overseas branches, 3 overseas subsidiaries
and 2 overseas offices as of December 31, 2002. The Bank is engaged in the
banking business under the Korea Development Bank Act and in the trust business
according to the Trust Business Act and other related regulations.
The Korea Development Bank Act prescribes that the Korean Government owns
the entire capital of the Bank.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies followed by the Bank in the preparation
of its financial statements are summarized below.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The Bank operates both a commercial banking business and a trust business
in which the Bank, as a fiduciary, holds and manages the property of others.
Under the Trust Business Act, the trust funds held as fiduciary are accounted
for and reported separately from the Bank's own commercial banking business.
The Bank maintains its official accounting records in Korean Won and
prepares statutory financial statements in the Korean language in conformity
with the accounting principles generally accepted in the Republic of Korea. The
accompanying non-consolidated financial statements have been condensed,
restructured and translated into English from the Korean language financial
statements. Certain accounting principles applied by the Bank 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 by those
who are informed about Korean accounting principles and practices. Certain
information attached to the Korean language financial statements, that are not
required for a fair presentation of the Bank's financial position and results of
operations, are not presented in the accompanying non-consolidated financial
statements.
The preparation of non-consolidated financial statements in conformity with
financial accounting standards requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the non-consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Due to the inherent
uncertainty involved in making estimates, actual results could differ from those
estimates.
RECOGNITION OF INTEREST INCOME
The Bank recognizes interest income on loans and debt securities on an
accrual basis. However, interest income on delinquent and dishonored loans,
other than those subject to security deposits and guaranteed by financial
institutions, is recognized on a cash basis. Such unaccrued interest income as
of December 31, 2002 and 2001 amounted to W226,022 million and W122,915 million,
respectively.
PROVISION FOR POSSIBLE LOAN LOSSES
The Bank provides for possible loan losses based on the borrowers' future
debt servicing ability (forward looking criteria) as determined by a credit
rating model developed by the Bank. This credit rating model includes the
financial and non-financial factors of borrowers and classifies the borrowers'
29
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
credit risk. Provisions are determined by applying the following minimum
percentages to the various credit risk ratings:
<Table>
<Caption>
PROVISION
LOAN CLASSIFICATIONS PERCENTAGES
- -------------------- -----------
Normal...................................................... 0.5%
Special attention........................................... 2% or more
Substandard................................................. 20% or more
Doubtful.................................................... 50% or more
Loss........................................................ 100%
</Table>
Pursuant to the revised Regulation on Supervision of Banking Business which
is effective December 1, 2002, the Bank has changed the credit line for
importers from acceptances to domestic import usance bills. As a result of this
change, loans and borrowings increased by W3,237,446 million and the provision
for possible losses in 2002 is approximately W63,416 million more than that of
which would have been reported under the previous accounting method.
SECURITIES
Marketable securities held for obtaining short-term transaction gains are
included in trading securities. Those securities not included in trading
securities are classified as investment securities. Securities which have a fair
value different from their acquisition cost are carried in accordance with the
following guidelines:
Trading securities
The initial cost of trading securities is determined by the moving average
method. Subsequently, trading securities are carried at their market values.
Unrealized gains and losses on trading securities are charged to current
operations.
Investment securities
Marketable securities held for investment purposes are carried at their
market values. Unrealized gains and losses on marketable investment securities
are reported as a capital adjustment in shareholders' equity.
Investment securities which allow the Bank significant influence over the
investee are valued using the equity method of accounting. The Bank considers
that it has significant influence on the investees in which the Bank holds more
than 15% of interest. However, the Bank does not apply the equity method for the
following investments.
- Investees having total assets of less than W7,000 million
- Investees under the court receivership or bankruptcy
- Investees under the process of being sold-out
- Converted stocks with restriction on disposition under the corporate
restructuring law
In addition, when the investees incur accumulated losses and the book value
of the investment becomes below zero, the equity method is no longer used.
However, the equity method will be used again when income or capital changes
exceed losses accrued during the period in which the equity method is not used.
30
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
Under the equity method, the Bank records changes in its proportionate
ownership of the book value of the investee in current operations, as capital
adjustments or as adjustments to retained earnings, depending on the nature of
the underlying changes in the book value of the investee.
Non-marketable equity securities and debt securities held to maturity are
stated at cost. If market value or net book value declines significantly
compared to acquisition cost and is not expected to be recovered, the
acquisition cost is adjusted to the market value or net book value. In such
cases, the difference between the carrying amount and the revalued amount is
charged to current operations.
The Bank recorded impairment losses amounting to W387,710 million and
W289,725 million in 2002 and 2001, respectively.
PREMISES AND EQUIPMENT AND RELATED DEPRECIATION
Premises and equipment used for business purposes are recorded at cost,
except for those assets subject to upward revaluation in accordance with the
Korean Asset Revaluation Law. Such revaluation presents facilities and buildings
at their depreciated replacement cost and land at the prevailing market price,
as of the effective date of revaluation.
Depreciation is computed using the declining-balance method, except for
buildings and structures, which are depreciated using the straight-line method,
based on the estimated useful lives of the assets as described below:
<Table>
<Caption>
ESTIMATED USEFUL LIVES
----------------------
Buildings................................................... 20-40 years
Structures.................................................. 10-40
Machinery................................................... 4
Vehicles.................................................... 4
Others...................................................... 4
</Table>
Routine maintenance and repairs are charged to expense as incurred.
Expenditures which enhance the value or extend the useful life of facilities are
capitalized as premises and equipment.
Interest costs incurred in connection with the purchase or construction of
investment assets, tangible assets and intangible assets are capitalized as part
of the cost of such assets.
INTANGIBLE ASSETS
Intangible assets are stated at cost, net of accumulated amortization.
Amortization of these intangibles is computed using the straight-line method
over a period of four or five years.
PRESENT VALUE DISCOUNT
Receivables and payables arising from long-term installment transactions,
long-term cash loans (borrowings) and other similar transactions are stated at
present value if the difference between the nominal value and present value is
material. Such differences are presented in the present value discount account
and directly deducted from the nominal value of the related receivables or
payables. The present value discount account is amortized using the effective
interest rate method as interest expense or interest income.
Loans which are impaired due to the restructuring of the borrower, court
mediation or negotiation, are revalued using the adjusted interest rate. The
difference between the book value and the readjusted value
31
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
is offset against the provision for possible loan losses, and the remaining
difference is recognized as bad debt expenses in the year incurred.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated
into Korean Won at the basic exchange rates (W1,200.4/US$1) on the balance sheet
date. The resulting exchange gains or losses are reflected in current
operations.
BONDS SOLD UNDER REPURCHASE AGREEMENTS
The Bank provides a provision for possible losses from the bonds sold under
repurchase agreements as determined based possible loss estimates when the bonds
are repurchased. The provision for possible losses as of December 31, 2002 and
2001 amounted to W102,054 million and W220,677 million, respectively.
DISPOSITION OF LOANS
The Bank records the difference between the selling price and the book
value of disposed loans as a gain or loss on disposal of loans. The book value
is the face amount of the disposed loans less identifiable allowance for
possible loan losses. When the Bank cannot allocate the allowance for possible
loan losses to specific disposed loans, it records the gain or loss as the
difference between the selling price and the face amount of the loan.
ACCRUED SEVERANCE BENEFITS
Employees and directors with one or more years of service are entitled to
receive a lump-sum payment upon termination of their employment with the Bank,
based on their length of service and rate of pay at the time of termination.
Accrued severance benefits represent the amount which would be payable assuming
all eligible employees were to terminate their employment as of the balance
sheet date.
Accrued severance benefits are funded at approximately 40.5% as of December
31, 2002, through a group severance trust in Woori Bank. The Bank accounts for
the amounts funded under the group severance trust as a deduction to accrued
severance benefits.
Actual payments of severance benefits for the years ended December 31, 2002
and 2001 amounted to W3,051 million and W5,762 million (including W4,030 million
of early payment of severance benefits), respectively.
PROVISION FOR POSSIBLE GUARANTEE LOSSES
The Bank sets up a provision for possible losses on guarantees outstanding
as determined based on a credit risk rating of the companies for which
guarantees are provided. The Bank provides a provision of 20% or more of
guaranteed amounts for companies classified as "substandard," 50% or more for
"doubtful" and 100% for "loss". The allowance is shown in the liability section.
DEFERRED INCOME TAXES
The Bank records deferred income taxes which arises from temporary
differences between the amount reported for financial reporting purposes and
income tax purposes. Income tax expense comprises taxes payable for the period
and the change in deferred income tax assets and liabilities for the period.
32
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
BONDS PURCHASED UNDER RESALE AGREEMENTS AND BONDS SOLD UNDER REPURCHASE
AGREEMENTS
Bonds purchased or sold under resale or repurchase agreements are included
in loans and borrowings, respectively. The difference between the selling and
repurchase price is treated as interest and accrued evenly over the period
covered by the agreements.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
Accounts and records of the overseas branches are maintained in foreign
currencies. For presentation in the accompanying non-consolidated financial
statements, the financial statements of the branches have been translated at the
exchange rates as of the balance sheet date.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments held for trading purposes are stated at
fair value as of the balance sheet date.
Derivative financial instruments for fair value hedges are stated at market
value. The gains and losses on the hedging instruments, as well as the related
loss or gain on the hedged items, are recognized in current operations in the
same accounting period.
COMPENSATION TO TRUST ACCOUNTS
The Bank receives management fees from trust accounts for management and
custodian services.
Certain trust funds held by the Bank are guaranteed a certain rate of
return by the Bank. If the income from trust operations is insufficient to
generate the required rate of return, the deficiency may be either recovered
from previously established special allowances or compensated by the Bank's
banking accounts. Such compensation is accounted for as other operating expenses
of the banking accounts and other income of the trust accounts, in accordance
with the relevant laws and regulations applicable to trust operations.
STATEMENT OF CASH FLOWS
On the statement of cash flows, the Bank recorded the net cash inflows and
outflows for loans, deposits and trading securities due to their frequent
turnover and short-term maturity.
RECLASSIFICATION OF PRIOR YEAR AMOUNTS
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation. These reclassifications have no effect on
previously reported net income or retained earnings for 2001.
33
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
3. CASH AND DUE FROM BANKS:
Cash and due from banks as of December 31, 2002 and 2001 comprise the
following:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -----------------------
2002.12.31 2002 2001
--------------- ---------- ----------
Cash on hand in Won.................................. -- W 36,624 W 142,842
Cash on hand in foreign currency..................... -- 1,849 2,066
Due from banks in Won................................ 5.9-8.0 288,743 97,146
Due from banks in foreign currency................... 0.0-5.59 1,643,448 2,431,379
---------- ----------
W1,970,664 W2,673,433
========== ==========
</Table>
Due from banks in Won as of December 31, 2002 and 2001 are summarized as
follows:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- ------------------
BANK 2002.12.31 2002 2001
- ---- --------------- -------- -------
The Bank of Korea........................................ -- W220,385 W62,720
Others................................................... 5.9-8.0 68,358 34,426
-------- -------
W288,743 W97,146
======== =======
</Table>
Due from banks in foreign currency as of December 31, 2002 and 2001 are
summarized as follows:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -----------------------
BANK 2002.12.31 2002 2001
- ---- --------------- ---------- ----------
The Bank of Korea.................................... -- W 12,787 W 40,774
Kookmin Bank......................................... 2.75-3.50 489,959 567,787
Woori Bank........................................... 1.70-4.05 66,022 217,480
KDB Asia (HK) Ltd. .................................. 1.61-2.17 359,763 281,398
KDB Ireland Ltd. .................................... 1.62-5.59 242,481 267,740
Korea Exchange Bank.................................. 1.59-3.50 87,444 123,123
Hana Bank............................................ 1.72-2.12 48,016 132,610
Others............................................... 1.27-4.20 336,976 800,467
---------- ----------
W1,643,448 W2,431,379
========== ==========
</Table>
34
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
Restricted deposits included in due from banks as of December 31, 2002 are
as follows:
<Table>
<Caption>
MILLIONS OF WON
---------------
Reserve deposits with the Bank of Korea..................... W220,385
China Construction Bank..................................... 6,993
Woori Bank.................................................. 4,690
Kookmin Bank................................................ 56,980
Shinhan Bank................................................ 6,644
Shanghai Pudong Development Bank............................ 4,802
Industrial and Commercial Bank of China..................... 3,601
--------
W304,095
========
</Table>
Reserve deposits with the Bank of Korea represent amounts required under
the Banking Act for the payment of deposits. Reserve deposits with China
Construction Bank, Shanghai Pudong Development Bank and Industrial and
Commercial Bank of China also represent amounts required under the related
banking regulations of those countries. Deposits with Woori Bank, Kookmin Bank
and others are pledged as collateral.
The maturities of amounts due from banks as of December 31, 2002 are as
follows (millions of Won):
<Table>
<Caption>
DUE FROM BANKS DUE FROM BANKS IN
MATURING ON OR BEFORE IN WON FOREIGN CURRENCY TOTAL
- --------------------- -------------- ----------------- ----------
Mar. 31, 2003.................................... W220,429 W1,362,310 W1,582,739
Jun. 30, 2003.................................... -- 41,542 41,542
Dec. 31, 2003.................................... 10,661 112,953 123,614
Dec. 31, 2004.................................... 12,448 27,609 40,057
Dec. 31, 2005.................................... 28,817 81,027 109,844
Dec. 31, 2006.................................... 16,388 -- 16,388
Dec. 31, 2007.................................... -- -- --
Thereafter....................................... -- 18,007 18,007
-------- ---------- ----------
W288,743 W1,643,448 W1,932,191
======== ========== ==========
</Table>
35
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
4. SECURITIES:
Trading securities as of December 31, 2002 and 2001 comprise the following:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -----------------------
2002.12.31 2002 2001
--------------- ---------- ----------
Marketable equity securities......................... -- W -- W 10,243
Government and public bonds.......................... 6.05-6.25 152,475 110,108
Corporate bonds...................................... 6.10-7.37 169,351 170,486
Beneficiary certificates............................. -- 606,671 375,702
Debt securities in foreign currency.................. 4.75 388,790 580,106
Others............................................... 5.66 15,740 --
---------- ----------
W1,333,027 W1,246,645
========== ==========
</Table>
Par value, acquisition cost and fair value of trading debt securities as of
December 31, 2002 and 2001 are as follows (millions of Won):
<Table>
<Caption>
PAR VALUE ACQUISITION COST FAIR VALUE
------------------- ------------------- -------------------
2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- --------
Government and public
bonds...................... W150,000 W110,000 W151,746 W108,967 W152,475 W110,108
Corporate bonds.............. 170,000 171,139 168,468 169,765 169,351 170,486
Securities in foreign
currency................... 370,200 590,524 385,733 578,601 388,790 580,106
-------- -------- -------- -------- -------- --------
W690,200 W871,663 W705,947 W857,333 W710,616 W860,700
======== ======== ======== ======== ======== ========
</Table>
Trading securities in each foreign currency as of December 31, 2002 and
2001 comprise the following:
<Table>
<Caption>
FOREIGN CURRENCY (IN THOUSANDS) MILLIONS OF WON
------------------------------- -------------------
2002 2001 2002 2001
-------------- -------------- -------- --------
32US$3,884..... US$398,466 W388,790 W528,406
DEM -- DEM 35,021 -- 20,996
EUR -- EUR 22,844 -- 26,787
SGD -- SGD 5,459 -- 3,917
-------- --------
W388,790 W580,106
======== ========
</Table>
36
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
Investment securities as of December 31, 2002 and 2001 comprise the
following:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -------------------------
2002.12.31 2002 2001
--------------- ----------- -----------
Equity securities
Investments using the equity method.............. -- W 7,041,539 W 6,034,406
Investments not using the equity method.......... -- 6,905,254 6,748,332
----------- -----------
13,946,793 12,782,738
----------- -----------
Debt securities
Government and public bonds...................... 4.98-7.50 2,247,242 2,913,054
Corporate bonds.................................. 3.81-5.24 4,895,282 4,894,965
Investment securities in foreign currency........ 3.83-7.25 3,169,469 2,444,203
Others(*)........................................ 1.0-22.0 786,513 1,026,442
----------- -----------
11,098,506 11,278,664
----------- -----------
W25,045,299 W24,061,402
=========== ===========
</Table>
- ------------
(*) Investment securities amounting to W485,000 million are pledged as
collateral to KDB First Securitization Specialty Co., Ltd. and others and
investment securities amounting to W142,600 million are pledged for
construction performance insurance.
With regards to futures trading, 6,319,660 shares of Korea Electric Power
corporation are pledged as a substitute for deposit money to Kookmin Futures
Inc. and others.
Investments in debt securities available-for-sale as of December 31, 2002
and 2001 comprise the following (millions of Won):
<Table>
<Caption>
PAR VALUE ACQUISITION COST MARKET(CARRYING) VALUE
----------------------- ----------------------- -----------------------
2002 2001 2002 2001 2002 2001
---------- ---------- ---------- ---------- ---------- ----------
Government and public bonds.... W 42,399 W 97,943 W 42,378 W 68,033 W 44,927 W 158,879
Corporate bonds................ 4,655,850 4,077,799 4,488,215 4,118,184 4,171,455 4,036,957
Investment securities in
foreign currency............. 3,164,853 2,140,878 2,102,743 1,521,545 2,098,907 1,428,171
Others......................... 679,635 907,679 772,531 895,548 671,162 911,075
---------- ---------- ---------- ---------- ---------- ----------
W8,542,737 W7,224,299 W7,405,867 W6,603,310 W6,986,451 W6,535,082
========== ========== ========== ========== ========== ==========
</Table>
Investments in debt securities held-to-maturity as of December 31, 2002 and
2001 comprise the following (millions of Won):
<Table>
<Caption>
PAR VALUE ACQUISITION COST CARRYING AMOUNT OF BONDS
----------------------- ----------------------- -------------------------
2002 2001 2002 2001 2002 2001
---------- ---------- ---------- ---------- ----------- -----------
Government and public bonds... W2,209,785 W2,764,362 W2,201,252 W2,756,469 W2,202,315 W2,754,175
Corporate bonds............... 733,000 865,613 717,101 653,905 723,827 858,008
Investment securities in
foreign currency............ 1,073,168 1,021,909 1,144,905 1,018,688 1,070,562 1,016,032
Others........................ 114,583 115,384 114,563 115,366 115,351 115,367
---------- ---------- ---------- ---------- ---------- ----------
W4,130,536 W4,767,268 W4,177,821 W4,544,428 W4,112,055 W4,743,582
========== ========== ========== ========== ========== ==========
</Table>
37
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
Equity investments as of December 31, 2002 and 2001 comprise the following
(millions of Won):
<Table>
<Caption>
OWNERSHIP FAIR VALUE OR
(%) ACQUISITION COST BOOK VALUE NET BOOK VALUE(*)
---------- ------------------------- ------------------------- -------------------------
2002.12.31 2002 2001 2002 2001 2002 2001
---------- ----------- ----------- ----------- ----------- ----------- -----------
Investments using the equity
method:
The KDB Capital Corp. ......... 79.86 W 467,706 W 478,208 W 102,965 W 203,576 W 85,929 W 173,854
Daewoo Securities Co., Ltd. ... 39.46 563,247 563,247 554,034 563,442 468,986 421,421
Daewoo Shipbuilding & Marine
Engineering Co., Ltd. ....... 42.10 390,368 390,368 614,560 428,515 530,755 317,821
Daewoo Heavy Industries &
Machinery Ltd. .............. 21.91 173,078 173,078 188,915 186,153 159,469 146,891
Korea Electric Power
Corporation.................. 21.59 3,265,468 3,265,468 4,541,043 3,634,862 7,667,147 7,177,780
Seoul Debt Restructuring
Fund......................... 43.80 117,224 262,800 114,110 259,384 114,110 259,384
Arirang Restructuring Fund..... 43.73 126,846 145,800 101,567 132,763 101,567 132,763
Mukoonghwa Restructuring
Fund......................... 43.71 142,995 145,700 124,764 147,084 124,764 147,084
Hankang Restructuring Fund..... 23.01 95,915 145,700 97,270 147,802 97,270 147,801
Others......................... -- 671,552 396,566 602,311 330,825 631,998 336,184
----------- ----------- ----------- ----------- ----------- -----------
6,014,399 5,966,935 7,041,539 6,034,406 9,981,995 9,260,983
----------- ----------- ----------- ----------- ----------- -----------
Investments not using the equity
method:
Samsung Life Insurance Co.,
Ltd. ........................ 1.89 264,496 264,496 132,248 132,248 100,476 40,518
Industrial Bank of Korea....... 18.95 400,000 400,000 387,013 410,721 387,013 410,721
Korea Highway Corporation...... 10.22 1,430,100 1,430,100 1,430,184 1,430,184 1,430,379 1,471,251
Korea National Housing
Corp. ....................... 22.68 1,300,618 1,300,618 1,300,618 1,300,618 1,238,252 1,336,842
Korea Land Development
Corp. ....................... 26.90 1,161,904 1,161,904 1,191,329 1,191,329 881,293 844,292
Korea Water Resources Corp. ... 7.30 671,307 671,307 671,307 671,307 546,045 745,646
Others......................... -- 2,448,885 2,222,397 1,792,555 1,611,925 1,941,842 1,630,572
----------- ----------- ----------- ----------- ----------- -----------
7,677,310 7,450,822 6,905,254 6,748,332 6,525,300 6,479,842
----------- ----------- ----------- ----------- ----------- -----------
W13,691,709 W13,417,757 W13,946,793 W12,782,738 W16,507,295 W15,740,825
=========== =========== =========== =========== =========== ===========
</Table>
- ------------
(*) Net book value is used in the case of non-listed investees.
38
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
Investment securities using the equity method as of December 31, 2002 are
summarized as follows (millions of Won):
<Table>
<Caption>
VALUATION
BEGINNING ACQUISITION GAIN OR CAPITAL ENDING BOOK
BOOK VALUE (DISPOSITION) DIVIDENDS LOSS(*) ADJUSTMENT VALUE
---------- ------------- --------- ---------- ---------- -----------
The KDB Capital Corp. ......................... W 203,576 W (4,421) W -- W (98,435) W 2,245 W 102,965
Daewoo Securities Co., Ltd. ................... 563,442 -- -- (394) (9,014) 554,034
Daewoo Shipbuilding & Marine Engineering Co.,
Ltd. ........................................ 428,515 -- -- 78,591 107,454 614,560
Daewoo Heavy Industries & Machinery Ltd. ...... 186,153 -- -- 2,939 (177) 188,915
Seoul Debt Restructuring Fund.................. 259,384 -- 140,335 (4,939) -- 114,110
Arirang Restructuring Fund..................... 132,763 -- 18,954 (12,242) -- 101,567
Mukoonghwa Restructuring Fund.................. 147,084 -- 21,855 (465) -- 124,764
Korea Electric Power Corp. .................... 3,634,862 -- 75,931 1,007,385 (25,273) 4,541,043
Hankang Restructuring Fund..................... 147,802 -- 56,532 6,000 -- 97,270
Others......................................... 330,825 275,054 1,969 (1,246) (353) 602,311
---------- -------- -------- ---------- -------- ----------
W6,034,406 W270,633 W315,576 W 977,194 W 74,882 W7,041,539
========== ======== ======== ========== ======== ==========
</Table>
- ------------
(*) Valuation gain or loss includes loss on foreign currency translation
amounting to W8,117 million for the year ended December 31, 2002.
The equity method adjustments are calculated as the difference between the
initial purchase price and the Bank's initial proportionate ownership of the net
book value of investees at the time of purchase. Equity method adjustment debits
are amortized over five years and equity method adjustment credits are amortized
over five years (for those purchased before December 31, 2000) or weighted
average useful lives of tangible assets of investees using the straight-line
method. The accumulated unamortized equity method adjustments are as follows
(millions of Won):
<Table>
<Caption>
2002 2001
------------------------------------ ------------------------------------
EQUITY METHOD EQUITY METHOD EQUITY METHOD EQUITY METHOD
ADJUSTMENT DEBIT ADJUSTMENT CREDIT ADJUSTMENT DEBIT ADJUSTMENT CREDIT
---------------- ----------------- ---------------- -----------------
Beginning balance.............. W318,508 W3,550,739 W245,266 W 10,735
Increase (decrease)............ (31,120) 24,015 125,815 3,750,927
Amortization................... (71,488) (418,398) (52,573) (210,923)
-------- ---------- -------- ----------
Ending balance................. W215,900 W3,156,356 W318,508 W3,550,739
======== ========== ======== ==========
</Table>
39
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
Investees in which the Bank holds more than 15% of interest but are not
valued using the equity method as of December 31, 2002 are summarized as follows
(millions of Won):
<Table>
<Caption>
OWNERSHIP ACQUISITION BOOK FAIR VALUE OR
(%) COST VALUE NET BOOK VALUE
--------- ----------- --------- --------------
Korea National Housing Corp.(*1).............. 22.7 1,300,618 1,300,618 1,238,252
Korea Land Development Corp.(*1).............. 26.9 1,161,904 1,161,904 881,293
Korea National Tourism Organization(*1)....... 43.6 24,370 35,529 139,016
Hyundai Petrochemical Co., Ltd.(*2)........... 27.8 60,094 60,094 197,999
KP Chemical Corp.(*2)......................... 19.9 94,421 57,597 57,597
Donghae Pulp Co., Ltd.(*2).................... 51.4 24,500 17,395 17,395
Kia Steel Co., Ltd.(*2)....................... 17.2 31,945 3,642 3,642
Others(*3).................................... -- 56,240 54,745 31,850
</Table>
- ------------
(*1) Investees which are controlled by the government or government investing
companies.
(*2) Investees under court receivership, workout process and other
restructuring process.
(*3) Investees whose total assets are less than W7,000 million.
As of December 31, 2002, the Bank used unaudited or unreviewed financial
statements for the following investees (millions of Won):
<Table>
<Caption>
PRE ADJUSTED
EXPECTED TIME OF CLOSING NET BOOK VALUE ADJUSTMENT NET BOOK VALUE
------------------------ -------------- ---------- --------------
The KDB Capital Corp........ May, 2003 W 114,353 W(8,871)(*) W 105,482
Daewoo Securities Co.,
Ltd....................... May, 2003 1,185,908 (1)(*) 1,185,907
Daewoo Shipbuilding &
Marine Engineering Co.,
Ltd....................... March, 2003 1,256,642 -- 1,256,642
Pan Ocean Shipping Co.,
Ltd....................... March, 2003 190,505 -- 190,505
Mukoonghwa Restructuring
Fund...................... May, 2003 285,408 -- 285,408
Seoul Debt Restructuring
Fund...................... May, 2003 260,525 -- 260,525
Hankang Restructuring
Fund...................... May, 2003 422,794 -- 422,794
Arirang Restructuring
Fund...................... May, 2003 232,253 -- 232,253
Others...................... March or May, 2003 156,183 -- 156,183
</Table>
- ------------
(*) Adjustment made by using the Bank's standard provision ratio for possible
loan losses.
Unaudited or unreviewed financial statements were used due to the
difference in the fiscal year-end, or closing delay of the investees and other
reasons. The most recent audited or reviewed financial statements, except for
the above investees, were used for the equity method investees.
40
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
Investment securities denominated in foreign currency as of December 31,
2002 and 2001 comprise the following:
<Table>
<Caption>
FOREIGN CURRENCY (IN THOUSANDS) MILLIONS OF WON
- ----------------------------------------------- -----------------------
2002 2001 2002 2001
- ----------------------------- ---------------- ---------- ----------
SECURITIES AVAILABLE-FOR-SALE
US$ 1,359,939 US $ 806,460 W1,632,470 W1,069,448
JPY 42,643,208 JPY 32,448,921 431,920 327,539
EUR 16,394 EUR 7,699 20,613 9,028
DEM -- DEM 33,021 -- 19,797
SGD 2,490 SGD 2,549 1,722 1,829
CHF 90 CHF 669 78 530
GBP 4,027 GBP -- 7,753 --
CNY 30,001 CNY -- 4,351
---------- ----------
W2,098,907 W1,428,171
========== ==========
SECURITIES HELD-TO-MATURITY
JPY 17,172,020 JPY 16,059,582 W 173,930 W 162,106
US$ 744,842 US $ 643,938 894,109 853,926
EUR 2,006 EUR -- 2,523 --
---------- ----------
W1,070,562 W1,016,032
========== ==========
</Table>
Issuers of the securities held by the Bank as of December 31, 2002 and 2001
are categorized as follows:
<Table>
<Caption>
MILLIONS OF WON PERCENTAGE (%)
------------------------- --------------
2002 2001 2002.12.31
----------- ----------- --------------
By country
The Republic of Korea............................ W25,793,484 W24,883,635 97.78
The Philippines.................................. 68,093 123,963 0.26
Thailand......................................... 16,343 19,094 0.06
Indonesia........................................ 8,383 20,909 0.03
Others........................................... 492,023 260,446 1.87
----------- ----------- ------
W26,378,326 W25,308,047 100.00
=========== =========== ======
</Table>
41
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
<Table>
<Caption>
MILLIONS OF WON PERCENTAGE (%)
------------------------- --------------
2002 2001 2001.12.31
----------- ----------- --------------
By issuer
Korea Electric Power Corporation................. W 4,659,477 W 3,634,862 17.66
Korea National Housing Corp...................... 1,606,211 1,603,433 6.09
Korea Highway Corporation........................ 1,450,238 1,430,184 5.50
Korea Deposit Insurance Corp..................... 1,333,077 1,350,764 5.05
Korea Land Development Corp...................... 1,191,328 1,191,629 4.52
Korea Asset Management Corp...................... 585,197 761,243 2.22
Others........................................... 15,552,798 15,335,932 58.96
----------- ----------- ------
W26,378,326 W25,308,047 100.00
=========== =========== ======
</Table>
<Table>
<Caption>
MILLIONS OF WON PERCENTAGE (%)
----------------------------- --------------
2002 2001 2002.12.31
--------------- ----------- --------------
By industry
Banking and insurance........................... W 7,269,345 W 7,208,018 27.56
Manufacturing................................... 5,586,592 4,715,490 21.18
Construction.................................... 3,966,773 4,163,905 15.04
Electric, gas and water supply industry......... 4,906,646 4,147,909 18.60
Public administration and national defense...... 2,130,266 2,316,380 8.07
Others.......................................... 2,518,704 2,756,345 9.55
----------- ----------- ------
W26,378,326 W25,308,047 100.00
=========== =========== ======
</Table>
5. LOANS:
Loans as of December 31, 2002 and 2001 comprise the following:
<Table>
<Caption>
MILLIONS OF WON
-------------------------
2002 2001
----------- -----------
Loans in Won................................................ W14,389,340 W17,456,629
Loans in foreign currency................................... 16,118,522 18,234,381
Other loans................................................. 15,626,307 13,746,730
----------- -----------
46,134,169 49,437,740
Less: Provision for possible loan losses.................. (1,089,983) (1,835,652)
Present value discount account...................... (126,955) (331,227)
----------- -----------
W44,917,231 W47,270,861
=========== ===========
</Table>
42
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
Loans in Won and foreign currency as of December 31, 2002 and 2001 comprise
the following:
(1) LOANS IN WON
<Table>
<Caption>
ANNUAL AVERAGE
INTEREST RATE (%) MILLIONS OF WON
----------------- -------------------------
2002.12.31 2002 2001
----------------- ----------- -----------
Loans for working capital:
Industrial fund loans........................... 8.18 W 2,954,632 W 5,045,799
Government fund loans........................... 5.83 551,690 605,180
Overdrafts...................................... 10.38 77,489 333,729
Others.......................................... 5.82-7.81 838,419 860,038
----------- -----------
4,422,230 6,844,746
----------- -----------
Loans for facilities:
Industrial fund loans........................... 8.14 7,060,734 7,805,907
Government fund loans........................... 5.77 924,386 1,040,819
Others.......................................... 4.46-7.62 1,981,990 1,765,157
----------- -----------
9,967,110 10,611,883
----------- -----------
W14,389,340 W17,456,629
=========== ===========
</Table>
(2) LOANS IN FOREIGN CURRENCY
<Table>
<Caption>
ANNUAL AVERAGE
INTEREST RATE (%) MILLIONS OF WON
----------------- -------------------------
2002.12.31 2002 2001
----------------- ----------- -----------
Loans for working capital:
Local currency loans denominated in foreign
currencies................................... 5.24 W 878,387 W 1,369,883
Foreign currency loans.......................... 3.36 981,347 1,317,037
Others.......................................... 3.13 607,381 223,163
----------- -----------
2,467,115 2,910,083
----------- -----------
Loans for facilities:
Local currency loans denominated in foreign
currencies................................... 4.11 4,597,906 5,178,075
Foreign currency loans.......................... 4.08 2,423,167 2,509,006
Offshore loans in foreign currencies............ 3.44 1,291,518 1,753,187
Loans to Asian Development Bank................. 2.63 1,208,755 1,335,968
Loans to International Bank for Reconstruction
and Development.............................. 2.96 4,115,638 4,547,409
Others.......................................... 4.21 14,423 653
----------- -----------
13,651,407 15,324,298
----------- -----------
W16,118,522 W18,234,381
=========== ===========
</Table>
43
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
(3) OTHER LOANS
<Table>
<Caption>
MILLIONS OF WON
-------------------------
2002 2001
----------- -----------
Notes purchased............................................. W 4,887 W 4,340
Bills purchased............................................. 3,045,154 3,511,753
Advances for customers...................................... 75,316 155,629
Bonds purchased under repurchase agreements................. 161,805 --
Call loans.................................................. 742,276 2,054,998
Domestic import usance bills................................ 3,352,839 806,170
Debentures accepted by private subscription................. 7,777,071 6,686,098
Others(*)................................................... 466,959 527,742
----------- -----------
W15,626,307 W13,746,730
=========== ===========
</Table>
- ------------
(*) Included loans to be converted to equity amounting to W438,749 million as
follows:
<Table>
<Caption>
AMOUNTS RESTRICTION ON
(MILLIONS OF WON) CONVERSION PRICE DISPOSITION
----------------- ---------------- ----------------------
Ssangyong Cement Co., Ltd. ....................... W400,000 W5,000/share Till December 31, 2005
Daewoo Engineering & Construction Co., Ltd. ...... 13,512 W5,000/share Till December 31, 2003
Hynix Semiconductor Co., Ltd. .................... 25,237 W5,000/share Till December 31, 2003
--------
W438,749
========
</Table>
The maturity of loans in Won and foreign currency as of December 31, 2002
are as follows:
<Table>
<Caption>
LOANS FOR
WORKING CAPITAL LOANS FOR FACILITY
LOANS FOR WORKING LOANS FOR IN FOREIGN IN FOREIGN
MATURING ON OR BEFORE CAPITAL IN WON FACILITY IN WON CURRENCY CURRENCY TOTAL
- --------------------- ----------------- --------------- --------------- ------------------ -----------
Mar. 31, 2003........ W 870,531 W 414,730 W 484,496 W 527,085 W 2,296,842
Jun. 30, 2003........ 538,411 416,999 386,410 502,269 1,844,089
Dec. 31, 2003........ 975,320 783,326 843,253 1,243,756 3,845,655
Dec. 31, 2004........ 935,747 1,797,600 528,794 2,142,204 5,404,345
Dec. 31, 2005........ 199,923 1,912,797 89,949 3,087,782 5,290,451
Dec. 31, 2006........ 257,775 1,324,950 72,950 1,402,478 3,058,153
Dec. 31, 2007........ 180,968 1,042,510 23,072 1,102,681 2,349,231
Thereafter........... 463,555 2,274,198 38,191 3,643,152 6,419,096
---------- ---------- ---------- ----------- -----------
W4,422,230 W9,967,110 W2,467,115 W13,651,407 W30,507,862
========== ========== ========== =========== ===========
</Table>
44
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
As of December 31, 2002 and 2001, a provision for possible loan losses and
doubtful accounts is provided as follows:
<Table>
<Caption>
MILLIONS OF WON
-----------------------
2002 2001
---------- ----------
Loans
Loans in Won and foreign currency and notes purchased..... W 527,474 W1,349,978
Bills purchased........................................... 39,773 224,834
Advances for customers.................................... 3,803 17,976
Call loans................................................ 143 980
Domestic import usance bills.............................. 104,441 11,367
Debentures accepted by private subscription............... 100,777 135,086
Other loans............................................... 313,572 95,431
---------- ----------
1,089,983 1,835,652
Other assets.............................................. 4,946 90,146
---------- ----------
W1,094,929 W1,925,798
========== ==========
</Table>
Changes in the provision for possible loan losses during the years ended
December 31, 2002 and 2001 are as follows (millions of Won):
<Table>
<Caption>
2002
--------------------------------------
LOANS OTHER ASSETS TOTAL 2001
---------- ------------ ---------- ----------
Balance at the beginning of the year...... W1,835,652 W90,146 W1,925,798 W2,255,735
Changes in overseas branches due to
foreign currency translation............ (3,378) -- (3,378) 3,638
Transfer from loans repurchased........... 79,161 -- 79,161 253,781
Write-offs due to loan restructuring...... (20,360) -- (20,360) (158,557)
Current write-offs........................ (1,593,255) (13,347) (1,606,602) (463,004)
Current provision (reversal).............. 623,553 (71,853) 551,700 (141,338)
Others.................................... 168,611 -- 168,611 175,543
---------- ------- ---------- ----------
W1,089,984 W 4,946 W1,094,930 W1,925,798
========== ======= ========== ==========
</Table>
As of December 31, 2002, classification of loans and provisions for
possible loan losses are as follows (millions of Won):
<Table>
<Caption>
PROVISIONS FOR
POSSIBLE LOAN
CLASSIFICATION LOANS(*) LOSSES RATIO (%)
- -------------- ----------- -------------- ---------
Normal.................................................. W37,938,345 W 200,854 0.5
Special attention....................................... 2,980,269 576,101 19.3
Substandard............................................. 715,886 189,236 26.4
Doubtful................................................ 113,753 67,301 59.2
Loss.................................................... 56,491 56,491 100.0
Others(**).............................................. 4,202,470 -- --
----------- ---------- -----
W46,007,214 W1,089,983 2.4
=========== ========== =====
</Table>
- ------------
(*) Present value discounts are deducted.
(**) Loans to the Korean Government or loans guaranteed by the Korean
Government.
45
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
The provision ratios to total loans and provision ratios to non-performing
loans as of December 31, 2002, 2001 and 2000 are as follows (millions of Won):
<Table>
<Caption>
2002 2001 2000
----------- ----------- -----------
Total loans........................................ W46,007,214 W49,106,512 W52,155,410
Provisions for possible loss....................... 1,089,983 1,835,652 2,163,037
Provision ratio (%)................................ 2.4 3.7 4.1
Non-performing loans............................... W 886,130 W 2,036,767 W 4,444,737
Provisions for possible loss....................... 313,028 1,162,328 1,882,229
Provision ratio (%)................................ 35.3 57.1 42.3
</Table>
Restructured loans for 2002 and 2001 due to court receivership, court
mediation or other financial restructuring process are as follows:
<Table>
<Caption>
MILLIONS OF WON
---------------------
2002 2001
-------- ----------
Changes in contractual terms................................ W 72,154 W 879,102
Exemption................................................... -- 5,818
Conversion to equity investment............................. 775,051 63,647
Conversion to convertible bonds............................. -- 501,247
-------- ----------
Total....................................................... W847,205 W1,449,814
======== ==========
</Table>
When the contractual terms (i.e., principal, interest rate, or maturity) of
impaired loans are restructured, the Bank adjusts the carrying amount of the
impaired loans to the present value determined based on the restructured terms.
The Bank recognizes losses arising from the restructuring of the impaired loans
as incurred. Loans restructured by changes in contractual terms are as follows
(millions of Won):
<Table>
<Caption>
PERIOD OF RESTRUCTURING
-----------------------
2002 2001
---------- ----------
Beginning
Original amount before restructuring...................... W2,208,352 W2,588,016
Present value............................................. 1,877,125 2,161,338
---------- ----------
Present value discount.................................... 331,227 426,678
---------- ----------
Increase.................................................... 20,360 158,557
Decrease (amortization)..................................... (224,632) (254,008)
---------- ----------
(204,272) (95,451)
---------- ----------
Ending
Original amount before restructuring...................... 1,156,979 2,208,352
Present value............................................. 1,030,024 1,877,125
---------- ----------
Present value discount.................................... W 126,955 W 331,227
========== ==========
</Table>
The present value discount is amortized using the effective interest rate
method over the redemption period.
46
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
The Bank's loan portfolio by nation, major customers and industry as of
December 31, 2002 and 2001 are categorized as follows:
<Table>
<Caption>
MILLIONS OF WON PERCENTAGE (%)
------------------------- --------------
2002 2001 2002.12.31
----------- ----------- --------------
By nation:
The Republic of Korea............................ W29,058,776 W33,801,953 95.3
Indonesia........................................ 135,789 232,689 0.4
Russia........................................... 162,054 198,915 0.5
USA.............................................. 172,117 87,523 0.6
Others........................................... 979,126 1,369,930 3.2
----------- ----------- ------
W30,507,862 W35,691,010 100.00
=========== =========== ======
</Table>
<Table>
<Caption>
MILLIONS OF WON PERCENTAGE (%)
------------------------- --------------
2002 2001 2002.12.31
----------- ----------- --------------
By customer:
Small & Medium Industry Promotion Corp........... W 3,352,770 W 3,703,856 11.0
Korea Hydro & Nuclear Power Co., Ltd............. 1,299,679 1,621,499 4.3
Korea Deposit Insurance Corp..................... 1,202,210 1,328,259 3.9
Korea Asset Management Corp...................... 730,934 1,165,942 2.4
Korean Airline Co., Ltd.......................... 602,616 816,480 2.0
Don Yang Cement Corporation...................... 532,992 -- 1.7
Others........................................... 22,786,661 27,054,974 74.7
----------- ----------- ------
W30,507,862 W35,691,010 100.00
=========== =========== ======
</Table>
<Table>
<Caption>
MILLIONS OF WON PERCENTAGE (%)
------------------------- --------------
2002 2001 2002.12.31
----------- ----------- --------------
By industry:
Manufacturing.................................... W13,661,997 W15,694,250 44.8
Banking and insurance............................ 4,163,668 5,417,795 13.7
Electric, gas and water supply industry.......... 3,149,387 4,017,839 10.3
Transportation and communication................. 3,425,730 3,971,096 11.2
Public administration and national defense....... 3,734,740 4,176,728 12.2
Others........................................... 2,372,340 2,413,302 7.8
----------- ----------- ------
W30,507,862 W35,691,010 100.00
=========== =========== ======
</Table>
47
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
6. PREMISES AND EQUIPMENT:
Premises and equipment as of December 31, 2002 and 2001 comprise the
following:
<Table>
<Caption>
MILLIONS OF WON
-------------------------------------------------------------
ACQUISITION COST OR ACCUMULATED
REVALUATION DEPRECIATION NET BOOK VALUE
------------------- ----------------- -------------------
2002 2001 2002 2001 2002 2001
-------- -------- ------- ------- -------- --------
Land...................... W330,630 W361,828 W -- W -- W330,630 W361,828
Buildings and
structures.............. 357,592 355,783 29,944 21,152 327,648 334,631
Machinery................. 53,906 45,256 39,409 36,577 14,497 8,679
Vehicles.................. 1,324 1,237 930 939 394 298
Construction in
progress................ 759 107 -- -- 759 107
Others.................... 27,690 26,882 19,666 16,632 8,024 10,250
-------- -------- ------- ------- -------- --------
W771,901 W791,093 W89,949 W75,300 W681,952 W715,793
======== ======== ======= ======= ======== ========
</Table>
As of December 31, 2002 and 2001, the government-posted prices of the
Bank's land amounted to W240,363 million and W263,890 million, respectively.
The Bank's premises and equipment, other than construction in-progress, are
covered by insurance policies against fire and other casualty losses. Automotive
equipment is covered by a legal and general insurance policy.
7. OTHER ASSETS:
Other assets as of December 31, 2002 and 2001 comprise the following:
<Table>
<Caption>
MILLIONS OF WON
-----------------------
2002 2001
---------- ----------
Prepaid expenses............................................ W 309,743 W 354,977
Receivables................................................. 1,797,526 2,105,145
Accrued income.............................................. 431,606 496,468
Intangible assets........................................... 47,662 42,125
Deferred income tax assets.................................. 146,834 146,709
Others...................................................... 460,709 609,125
---------- ----------
3,194,080 3,754,549
Loss: Provision for possible losses......................... (4,946) (90,146)
Present value discount................................ (124) (2,046)
---------- ----------
W3,189,010 W3,662,357
========== ==========
</Table>
48
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
8. DEPOSITS:
Deposits as of December 31, 2002 and 2001 comprise the following:
<Table>
<Caption>
ANNUAL AVERAGE
INTEREST RATE (%) MILLIONS OF WON
----------------- ------------------------
2002.12.31 2002 2001
----------------- ---------- -----------
Won currency deposits:
Demand deposits
Checking deposits............................ -- W 1,537 W 1,784
Temporary deposits........................... 0.02 150,929 188,764
Passbook deposits............................ 0.94 71,891 25,828
Others....................................... 1.00 14,316 234
---------- -----------
238,673 216,610
---------- -----------
Time and savings deposits
Time deposits................................ 5.38 3,777,189 3,794,788
Installment savings deposits................. 7.15 133,769 165,544
Corporate savings deposits................... 3.84 2,104,439 2,094,579
Savings deposits............................. 3.03 172,263 196,744
Long-term savings for households............. 11.39 168,930 130,712
Others....................................... 9.68 114,105 70,453
---------- -----------
6,470,695 6,452,820
---------- -----------
6,709,368 6,669,430
---------- -----------
Foreign currency deposits:
Demand deposits
Checking deposits............................ -- 46,900 61,487
Passbook deposits............................ 0.59 248,586 399,474
Temporary deposits........................... 0.33 146 993
Others....................................... 0.91 1,275 4,524
---------- -----------
296,907 466,478
---------- -----------
Savings deposits
Time deposits................................ 1.73 213,579 1,097,033
---------- -----------
510,486 1,563,511
---------- -----------
Negotiable certificates of deposits............... 4.27 1,525,450 2,250,394
---------- -----------
W8,745,304 W10,483,335
========== ===========
</Table>
49
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
The maturities of time and savings deposits in Won and foreign currency as
of December 31, 2002 are as follows (millions of Won):
<Table>
<Caption>
INSTALLMENT TIME DEPOSITS IN
MATURING ON OR BEFORE TIME DEPOSITS SAVINGS DEPOSITS FOREIGN CURRENCY TOTAL
- --------------------- ------------- ---------------- ---------------- ----------
Mar. 31, 2003........................ W1,334,884 W 16,860 W149,408 W1,501,152
Jun. 30, 2003........................ 803,392 18,969 35,645 858,006
Dec. 31, 2003........................ 1,342,235 49,801 27,104 1,419,140
Dec. 31, 2004........................ 230,470 42,357 1,422 274,249
Dec. 31, 2005........................ 56,239 5,781 -- 62,020
Dec. 31, 2006........................ 8,697 1 -- 8,698
Dec. 31, 2007........................ 1,272 -- -- 1,272
---------- -------- -------- ----------
W3,777,189 W133,769 W213,579 W4,124,537
========== ======== ======== ==========
</Table>
9. BORROWINGS:
Borrowings as of December 31, 2002 and 2001 comprise the following:
<Table>
<Caption>
ANNUAL AVERAGE
INTEREST RATE (%) MILLIONS OF WON
----------------- -------------------------
2002.12.31 2002 2001
----------------- ----------- -----------
Won currency borrowings
Ministry of Finance and Economy................ 5.24 W 2,192,150 W 2,448,672
Industrial Bank of Korea....................... 4.87 476,596 368,223
Small & Medium Industry Promotion Fund......... 5.36 260,203 310,230
Ministry of Culture and Tourism................ 4.20 519,669 421,238
Korea Energy Management Corporation............ 4.71 467,586 370,012
Local governments.............................. 4.74 80,848 90,286
Others......................................... 5.34-8.93 367,845 272,857
----------- -----------
4,364,897 4,281,518
----------- -----------
Foreign currency borrowings
Small & Medium Industry Promotion Fund......... 3.14 209 1,311
KfW group in Germany ("KFW")................... 3.02 34,472 44,755
Asian Development Bank ("ADB")................. 2.54 3,609,587 3,988,168
International Bank for Reconstruction and
Development ("IBRD")........................ 2.85 5,669,560 6,262,696
The Japan Bank for International Cooperation
("JBIC").................................... 0.86 229,034 269,634
The Bank of Korea.............................. 2.25 156,088 254,712
Others......................................... 0.86-3.34 7,735,910 4,357,012
----------- -----------
17,434,860 15,178,288
----------- -----------
</Table>
50
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
<Table>
<Caption>
ANNUAL AVERAGE
INTEREST RATE (%) MILLIONS OF WON
----------------- -------------------------
2002.12.31 2002 2001
----------------- ----------- -----------
Other borrowings
Bonds sold under repurchase agreements......... -- 2,333,885 1,324,756
Notes sold..................................... -- 2,504 2,838
Call money..................................... -- 322,939 565,978
----------- -----------
2,659,328 1,893,572
----------- -----------
W24,459,085 W21,353,378
=========== ===========
</Table>
The repayment of W229,034 million included in the borrowings above are
guaranteed by the Korean Government.
The Bank entered into an agreement with the JBIC (Japan Bank for
International Cooperation) relating to the borrowings amounting to W229,034
millions to be used for designated purposes. As of December 31, 2002, the Bank
has local loans denominated in foreign currency and foreign currency loans
amounting W209,668 million and W19,366 million, respectively, relating to this
borrowing.
The maturities of borrowings in Won and foreign currency as of December 31,
2002 are as follows (millions of Won):
<Table>
<Caption>
WON CURRENCY FOREIGN CURRENCY
MATURING ON OR BEFORE BORROWINGS BORROWINGS TOTAL
- --------------------- ------------ ---------------- -----------
Mar. 31, 2003...................................... W 149,057 W 3,985,322 W 4,134,379
Jun. 30, 2003...................................... 98,124 1,227,262 1,325,386
Dec. 31, 2003...................................... 214,863 1,592,037 1,806,900
Dec. 31, 2004...................................... 575,499 3,775,643 4,351,142
Dec. 31, 2005...................................... 603,516 2,266,420 2,869,936
Dec. 31, 2006...................................... 577,414 855,346 1,432,760
Dec. 31, 2007...................................... 495,436 788,350 1,283,786
Thereafter......................................... 1,650,988 2,944,480 4,595,468
---------- ----------- -----------
W4,364,897 W17,434,860 W21,799,757
========== =========== ===========
</Table>
The subordinated debt included in borrowings as of December 31, 2002
comprises the following:
<Table>
<Caption>
ANNUAL AVERAGE
TYPE INTEREST RATE (%) MILLIONS OF WON CONDITION OF BORROWINGS
- ---- ----------------- --------------- -----------------------
Government fund....................... Installment
5.24 W 2,191,846 reimbursement
Agency for International Development Installment
relending facilities................ 2.00 304 reimbursement
Asian Development Bank relending
facilities.......................... 2.54 3,609,587 Lump sum reimbursement
International Bank for Reconstruction
and Development relending Installment
facilities.......................... 2.85 5,669,560 reimbursement
-----------
W11,471,297
===========
</Table>
51
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
10. INDUSTRIAL FINANCE BONDS:
Industrial finance bonds ("IFB") as of December 31, 2002 and 2001 comprise
the following:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -------------------------
2002.12.31 2002 2001
--------------- ----------- -----------
IFB in Won......................................... 6.93 W24,352,837 W24,491,004
IFB in foreign currency............................ 0.91-8.60 8,066,690 9,494,910
Offshore IFB in foreign currency................... 1.65-9.00 1,216,557 2,649,953
----------- -----------
33,636,084 36,635,867
----------- -----------
Premiums on IFB.................................. 16,396 292
Discounts on IFB................................. (52,460) (81,868)
----------- -----------
W33,600,020 W36,554,291
=========== ===========
</Table>
Under the Korea Development Bank Act, the Bank has authority to issue
industrial finance bonds. The amount of issued bonds and guarantees outstanding
by the Bank are limited to the amount of 30 times of paid-in capital and legal
reserve. Bonds purchased or guaranteed by the Korean Government are not included
in the limit. When existing bonds are refinanced or guarantees are executed, the
limit is temporarily not applied. The amount of issued bonds guaranteed by the
Korean Government as of December 31, 2002 and 2001 amounted to W4,000 million
and W14,910 million, respectively.
The Bank acquired W277,471 million and W369,260 million of industrial
finance bonds as of December 31, 2002 and 2001, respectively. The treasury bonds
are deducted from industrial finance bonds.
The maturities of IFB as of December 31, 2002 are as follows (millions of
Won):
<Table>
<Caption>
OFFSHORE IFB
IFB IN FOREIGN IN FOREIGN
MATURING ON OR BEFORE IFB IN WON CURRENCY CURRENCY TOTAL
- --------------------- ----------- -------------- --------------- -----------
Mar. 31, 2003......................... W 2,640,550 W 454,694 W 105,335 W 3,200,579
Jun. 30, 2003......................... 2,946,063 312,910 -- 3,258,973
Dec. 31, 2003......................... 6,513,800 684,468 206,469 7,404,737
Dec. 31, 2004......................... 4,565,747 1,947,867 447,749 6,961,363
Dec. 31, 2005......................... 6,424,492 713,767 -- 7,138,259
Dec. 31, 2006......................... 821,435 2,766,049 409,585 3,997,069
Dec. 31, 2007......................... 294,370 664,161 47,419 1,005,950
Thereafter............................ 146,380 522,774 -- 669,154
----------- ---------- ---------- -----------
W24,352,837 W8,066,690 W1,216,557 W33,636,084
=========== ========== ========== ===========
</Table>
- ------------
(*) Premium and discount on bonds are excluded.
52
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
11. OTHER LIABILITIES:
Other liabilities as of December 31, 2002 and 2001 comprise the following:
<Table>
<Caption>
MILLIONS OF WON
-----------------------
2002 2001
---------- ----------
Payables.................................................... W1,804,464 W2,093,876
Accrued expenses............................................ 909,732 862,699
Advanced income............................................. 168,004 203,996
Guarantee deposits.......................................... 29,500 37,406
Advances received on IFB.................................... 14,476 6,249
Provisions for possible other losses........................ 208,358 227,194
Trust account debit......................................... 249,677 370,890
Others...................................................... 151,011 108,561
---------- ----------
W3,535,222 W3,910,871
========== ==========
</Table>
12. GUARANTEES OUTSTANDING AND COMMITMENTS:
The Bank provides guarantees for its customers. Guarantees outstanding and
the related provision for possible loss as of December 31, 2002 and 2001 are as
follows (millions of Won):
<Table>
<Caption>
GUARANTEES AMOUNT PROVISION FOR POSSIBLE LOSS
----------------------- ----------------------------
2002 2001 2002 2001
---------- ---------- ------------ -------------
Acceptances.................................. W1,135,796 W4,443,871 W 237 W 56,733
Guarantees on local borrowings............... 930,529 1,285,079 684 7,255
Guarantees on indebtedness in foreign
currency................................... 3,435,820 4,109,326 62,286 75,730
Letters of guarantee for importers........... 37,836 34,330 16 1,262
---------- ---------- ------- --------
W5,539,981 W9,872,606 W63,223 W140,980
========== ========== ======= ========
</Table>
53
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
The unsettled guarantees and commitments provided by the Bank as of
December 31, 2002 and 2001 are as follows:
<Table>
<Caption>
MILLIONS OF WON
-------------------------
2002 2001
----------- -----------
Unsettled guarantees
Local letter of credit issuance........................... W 10,224 W 11,695
Foreign letter of credit issuance......................... 1,463,845 1,376,794
Others.................................................... 760,562 455,070
----------- -----------
2,234,631 1,843,559
----------- -----------
Commitments
For loans in Won.......................................... 7,078,917 6,827,927
For loans foreign currency................................ 689,436 612,450
----------- -----------
7,768,353 7,440,377
----------- -----------
Bonds sold under repurchase agreements...................... 354,728 781,532
----------- -----------
W10,357,712 W10,065,468
=========== ===========
</Table>
13. COMMITMENTS AND CONTINGENCIES:
The Bank has entered into agreements to provide certain syndicated loans
with foreign banks. The total amount available under such loans are US$107,125
thousand (equivalent to W128,593 million) and W40,700 million, of which
US$55,392 thousand (equivalent to W66,493 million) and W35,700 million,
respectively, have not been withdrawn by borrowers as of December 31, 2002.
During 1998, the Bank sold with recourse W3,084,141 million of
non-performing loans classified as substandard or below to the Korea Asset
Management Corporation for proceeds amounting to W1,339,629 million. The
resulting loss was recorded as a loss on disposition of loans during 1998.
During 2002, the Bank recognized losses from the settlement of such loans in the
amount of W107 million. As of December 31, 2002, the Bank recorded a provision
for possible losses from disposition of unsettled loans amounting to W102,054
million as other liabilities (see Note 11).
Loans sold off to KDB First Securitization Specialty Co., Ltd. and others
in accordance with the Asset Securitization Plan as of December 31, 2002
comprise the following (millions of Won):
<Table>
<Caption>
RETAINED
SUBORDINATED
DISPOSAL DATE BOOK VALUE SELLING PRICE DEBT SECURITIES COLLATERAL (*)
------------------ ---------- ------------- --------------- --------------
KDB First SPC........ June 8, 2000 W 950,627 W 600,000 W201,800 W120,000
KDB Second SPC....... November 8, 2000 914,764 423,600 143,600 80,000
KDB Third SPC........ September 20, 2001 1,793,546 949,900 349,900 185,000
KDB Fifth SPC........ December 13, 2001 765,358 528,400 238,400 100,000
---------- ---------- -------- --------
W4,424,295 W2,501,900 W933,700 W485,000
========== ========== ======== ========
</Table>
- ------------
(*) Investment securities are provided as collateral (see Note 4).
54
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
According to the contracts on asset transfers stipulating warranty for the
assets above, the Bank has a responsibility of warranty up to 30 percent of the
proceeds when the principal or a part of the interest is not repaid at the
expected due date of the cash flows payment schedule.
The Bank sold off W435,159 million and W3,120,559 million of loans in 2002
and 2001 to KDB LONESTAR CRC and Korea Asset Management Corporation. The Bank
recorded gains and losses from the disposition of the loans amounting to W57,555
million and W50,348 million in 2002, respectively, and W497,109 million and
W1,571,413 million in 2001, respectively.
The Bank has provided credit lines to several securitization specialty
companies amounting to W7,768,353 million, of which W5,626 million was withdrawn
as of December 31, 2002.
In response to the generally unstable economic conditions, the Korean
government and the private sector have been implementing structural reforms to
historical business practices. Implementation of these reforms is progressing
slowly, particularly in the areas of restructuring private enterprises and
reforming the banking industry. The Korean government continues to apply
pressure to Korean companies to restructure into more efficient and profitable
firms. The Bank may be either directly or indirectly affected by these generally
unstable economic conditions and the reform program described above. The
accompanying financial statements reflect management's assessment of the impact
to date of the economic situation on the financial position of the Bank. Actual
results may differ materially from management's current assessment.
The Bank provided loans amounting to W1,503,631 million and securities
amounting to W121,889 million on December 31, 2002 for companies under workout,
court receivership, court mediation and other restructuring process. The Bank
provided W278,734 million for possible loan losses and W32,697 million for
present value discount with regard to the above loans and securities. Actual
results of the credit loss from the loans to the customers could differ from the
provisions reserved.
14. DERIVATIVE FINANCIAL INSTRUMENTS AND THE RELATED CONTRACTS:
The Bank utilizes derivative financial instruments to hedge against
financial market risks or for trading purposes.
In case of trading purposes, the Bank uses futures and forward contracts,
swaps, and options, in order to gain a profit from short-term fluctuations of
the underlying value of the derivatives, by forecasting the future interest
rate, exchange rate or other variables affecting the value of the instruments.
Furthermore, the Bank also trades the instruments to hedge against the
derivative financial instruments purchased by the Bank's customers.
Additionally, the trading derivatives include the derivatives used to hedge
the exchange rate of the Bank's foreign currency assets and liabilities and
interest rate of the Bank's loans and borrowings, of which the underlying assets
and liabilities are already valued at fair market value in accordance with the
financial accounting standards generally accepted in the Republic of Korea or
the position hedging transactions in which derivative instruments are not
specifically identified to the underlying transactions.
The hedging instruments generally include the cross currency swaps and/or
interest rate swaps used to hedge the borrowings and bonds denominated in
foreign currency from the exchange rate and/or the interest rate risks. Those
hedging transactions are made with foreign financial institutions and domestic
banks. The hedging instruments also include the interest swaps used to reduce
interest rate risks of the Industrial Finance Bonds issued in Won.
55
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
The unsettled contract amount of the Bank's derivatives and the related
valuation gain (loss) are as follows (millions of Won):
<Table>
<Caption>
UNSETTLED CONTRACT AMOUNT VALUATION GAIN/LOSS(I/S)
-------------------------------------- -------------------------------------------------
TRADING HEDGING TRADING HEDGING VALUATION
TOTAL PURPOSE PURPOSE TOTAL PURPOSE PURPOSE GAIN/LOSS(B/S)
----------- ----------- ---------- --------- --------- -------- --------------
Interest rate
Forward............................. W 324,108 W 324,108 W -- W 12 W 12 W -- W 12
Futures............................. 7,333,834 7,333,834 -- 38,981 38,981 -- --
Swap................................ 39,207,910 38,940,740 267,170 60,308 (94,319) 154,627 318,632
Option
--Buy............................. 320,000 320,000 -- 5,381 5,381 -- 4,805
--Sell............................ 320,000 320,000 -- (3,455) 579 (4,034) (3,724)
Futures Option
--Buy............................. 5,275 5,275 -- 70 70 -- 110
--Sell............................ 1,394 1,394 -- (3) (3) -- (6)
----------- ----------- ---------- --------- --------- -------- ---------
47,512,521 47,245,351 267,170 101,294 (49,299) 150,593 319,829
----------- ----------- ---------- --------- --------- -------- ---------
Currency
Forward............................. 8,595,470 8,595,470 -- 130,091 130,091 -- 135,933
Futures............................. 41,054 41,054 -- -- -- -- --
Swap................................ 15,037,377 13,779,069 1,258,308 (222,405) (426,967) 204,562 (230,237)
Option
--Buy............................. 761,187 761,187 -- (9,206) (9,206) -- 10,111
--Sell............................ 680,503 680,503 -- 5,447 5,447 -- (14,705)
----------- ----------- ---------- --------- --------- -------- ---------
25,115,591 23,857,283 1,258,308 (96,073) (300,635) 204,562 (98,898)
Equity Option
Buy................................. 169,212 169,212 -- 13,599 13,599 -- 14,729
Sell................................ 164,211 164,211 -- 6,945 6,945 -- (14,699)
----------- ----------- ---------- --------- --------- -------- ---------
333,423 333,423 -- 20,544 20,544 -- 30
----------- ----------- ---------- --------- --------- -------- ---------
W72,961,535 W71,436,057 W1,525,478 W 25,765 W(329,390) W355,155 W 220,961
=========== =========== ========== ========= ========= ======== =========
</Table>
15. EQUITY:
PAID-IN CAPITAL
The Bank increased and decreased its paid-in capital several times
including a W3,000,000 million investment in kind by 127,086,333 shares of Korea
Electric Power Corporation valued at W23,606 per share on June 20, 2001, W50,000
million cash injection on December 29, 2001, and the raising of W100,000 million
and the reduction of W959,800 million paid-in capital for the year ended in
December 31, 2000. Paid-in capital of the Bank as of December 31, 2002 is
W7,161,861 million.
56
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
CAPITAL SURPLUS
In accordance with a resolution of the Board of Directors, the Bank
decreased its paid-in capital used to offset accumulated deficit and the capital
surplus of the Bank as of December 31, 2002 are as follows (millions of Won):
<Table>
<Caption>
DECREASE IN OFFSETTED
PAID-IN ACCUMULATED CAPITAL
RESOLUTION OF BOARD OF DIRECTORS CAPITAL DEFICIT SURPLUS
- -------------------------------- ----------- ----------- -------
October 27, 1998........................................ W4,218,800 W4,184,046 W34,754
November 22, 2000....................................... 959,800 950,181 9,619
---------- ---------- -------
W5,178,600 W5,134,227 W44,373
========== ========== =======
</Table>
LEGAL RESERVE
The Korea Development Bank Act requires the Bank to appropriate net income
as a legal reserve. This reserve can be transferred to paid-in capital or used
to offset accumulated deficit.
OFFSETTING OF ACCUMULATED DEFICIT
In accordance with the Korea Development Bank Act, the Bank offsets
accumulated deficit with reserves. If reserves are insufficient to eliminate the
accumulated deficit, the Korean Government should complement the deficiency.
Offsetted accumulated deficit with the approval of the Korean Government since
2000 are as follows:
<Table>
<Caption>
APPROVAL MILLIONS OF
YEAR DATE ACCOUNTS WON
- ---- --------- --------------- -----------
2000................................................. 2001.2.28 Legal reserve W 456,997
Capital reserve 950,181
----------
W1,407,178
==========
</Table>
CAPITAL ADJUSTMENTS
Changes in gains or losses on valuation of investment securities accounted
for as capital adjustments are as follows (millions of Won):
<Table>
<Caption>
2002 2001
------------------------------------- ---------
INVESTMENTS INVESTMENTS
IN EQUITY IN DEBT
SECURITIES SECURITIES TOTAL TOTAL
----------- ----------- --------- ---------
Beginning Balance........................... W(341,507) W(40,710) W(382,217) W(358,068)
Decrease due to disposal.................... (39,947) (27,868) (67,815) (57,807)
Current valuation gains or losses........... (138,463) 28,763 (109,700) 33,658
--------- -------- --------- ---------
Ending Balance.............................. W(519,917) W(39,815) W(559,732) W(382,217)
========= ======== ========= =========
</Table>
57
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
16. OTHER NON-INTEREST REVENUE (EXPENSE):
Other non-interest revenue (expense) for the years ended December 31, 2002
and 2001 comprise the following (millions of Won):
<Table>
<Caption>
2002 2001
---------- ----------
Other non-interest revenue
Gain on foreign currency transactions..................... W 322,392 W 392,429
Reversal of provision for possible losses on guarantees
outstanding............................................ 76,850 105,125
Reversal of provision for possible loan losses............ -- 141,338
Gain on valuation of hedged items......................... 253,781 427,344
Others.................................................... 71,132 64,032
---------- ----------
W 724,155 W1,130,268
========== ==========
Other non-interest expense
Loss on foreign currency transactions..................... W 450,549 W 351,051
Education tax............................................. 24,201 27,208
Deposit insurance expenses................................ 3,918 4,277
Donations................................................. 34,818 41,360
Loss on valuation of hedged items......................... 271,995 273,143
Others.................................................... 666,508 85,492
---------- ----------
W1,451,989 W 782,531
========== ==========
</Table>
17. GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the years ended at December 31,
2002 and 2001 comprise the following:
<Table>
<Caption>
MILLIONS OF WON
-------------------
2002 2001
-------- --------
Salaries.................................................... W126,515 W110,905
Retirement allowance........................................ 15,503 13,176
Employee benefits........................................... 21,624 20,984
Rent........................................................ 6,685 6,214
Depreciation................................................ 20,985 21,662
Taxes and dues.............................................. 11,484 11,024
Printing.................................................... 3,381 3,325
Travel...................................................... 3,141 3,134
Commission.................................................. 8,726 8,560
Others...................................................... 48,099 42,248
-------- --------
W266,143 W241,232
======== ========
</Table>
58
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
18. NON-OPERATING INCOME (EXPENSE):
Non-operating income (expense) for the years ended December 31, 2002 and
2001 comprise the following:
<Table>
<Caption>
MILLIONS OF WON
-----------------------
2002 2001
---------- ----------
Non-operating income
Gain on disposal of premises and equipment................ W 200 W 75
Rental income............................................. 1,070 2,356
Gain on disposal of loans................................. 57,555 497,109
Gain from investment securities........................... 1,191,817 819,397
Others.................................................... 13,829 25,326
---------- ----------
1,264,471 1,344,263
---------- ----------
Non-operating expense
Loss on disposal of premises and equipment................ 7,780 17,584
Loss on disposal of loans................................. 50,348 1,571,413
Loss from investment securities........................... 466,283 312,380
Others.................................................... 9,089 1,797
---------- ----------
533,500 1,903,174
---------- ----------
W 730,971 W (558,911)
========== ==========
</Table>
19. INCOME TAX EXPENSE:
The statutory income tax rate applicable to the Bank, including resident
tax surcharges, is approximately 29.7%. However, there was no income taxes
payable, except for special additional taxes due to an operating loss
carry-forward.
Income tax expense for the years ended December 31, 2002 and 2001 comprise
the following:
<Table>
<Caption>
MILLIONS OF WON
---------------
2002 2001
------ ------
Income taxes payable (special additional tax)............... W -- W 706
Deferred income taxes....................................... -- 5,434
Income taxes for overseas branches.......................... 2,063 821
------ ------
W2,063 W6,961
====== ======
</Table>
59
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
The tax effect of major tax adjustments for the years ended December 31,
2002 and 2001 are as follows:
<Table>
<Caption>
MILLIONS OF WON
---------------------
2002 2001
--------- ---------
Income before income tax expense............................ W 185,935 W 115,917
========= =========
Computed income tax at the expected statutory rate.......... 55,223 35,702
--------- ---------
Temporary differences (tax effect):
Provision for possible loan losses........................ (67,259) (148,473)
Provision for severance benefits.......................... (790) 2,545
Loss on settlement of non-performing loans disposed....... (5,594) (144,271)
Loss on investments using the equity method............... (299,241) (91,586)
Write-off of loans........................................ 308,242 226,333
Provision for guarantees outstanding...................... (22,607) (70,271)
Impairment loss on investment securities.................. 51,864 (40,742)
Present value discount.................................... 7,092 (72,436)
Others.................................................... 299,027 (278,165)
--------- ---------
270,734 (617,066)
--------- ---------
Permanent differences (tax effect):
Dividends received Others................................. (12,928) (8,776)
Others.................................................... (38,141) 20,451
--------- ---------
(51,069) 11,675
--------- ---------
Tax effect of taxable income................................ 274,888 --
Tax effect of operating loss carry-forward.................. 274,888 --
========= =========
Special value added tax..................................... -- 706
--------- ---------
Income taxes payable........................................ W -- W 706
========= =========
</Table>
60
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
Changes in temporary differences for the years ended December 31, 2002 and
2001 are as follows (millions of Won):
<Table>
<Caption>
BEGINNING
BALANCE DECREASE INCREASE ENDING BALANCE
---------- ---------- ----------- --------------
Accrued severance benefits............. W 8,264 W 2,659 W -- W 5,605
Acquisition of stocks resulting from
the transfer of capital surplus to
common stock......................... 93,785 1,118 -- 92,667
Loss on valuation of investment
securities........................... 12,981 1,369 -- 11,612
Gain on valuation of trading
securities........................... (61,887) -- (98,659) (160,546)
Impairment loss on investment equity
securities........................... 698,145 63,791 154,156 788,510
Impairment loss on investment debt
securities........................... 361,695 148,410 232,671 445,956
Present value discount................. 191,497 -- 23,880 215,377
Provision for possible loan losses..... 697,606 697,606 471,144 471,144
Provision for guarantees outstanding... 139,341 139,341 63,223 63,223
Loss on settlement of non-performing
loans disposed....................... 227,194 227,194 208,358 208,358
Loss on investment valuation by the
equity method........................ (160,943) -- (1,007,544) (1,168,487)
Write-off of loans..................... 734,846 162,999 1,200,851 1,772,698
Others................................. (376,388) (936,775) 171,196 731,583
---------- ---------- ----------- -----------
2,566,136 507,712 1,419,276 3,477,700
Operating loss carry-forward........... 3,558,081 816,761 -- 2,741,320
---------- ---------- ----------- -----------
6,124,217 1,324,473 1,419,276 6,219,020
========== ========== =========== ===========
Gross deferred income tax assets....... W1,818,892 W 393,368 W 421,525 W 1,847,049
========== ========== =========== ===========
Deferred income tax assets recorded on
the balance sheet.................... W 146,709 W 146,834
========== ===========
</Table>
Considering the future deductibility of accumulated deficit and temporary
differences from future taxable income, the Bank recorded W146,834 million out
of total future income tax benefits of W1,847,049 million.
61
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
20. AVERAGE AMOUNTS OF ASSETS AND LIABILITIES RELATED TO INTEREST INCOME AND
EXPENSE:
Interest income or interest expense and related average amounts of assets
or liabilities for 2002 and 2001 are as follows (millions of Won):
<Table>
<Caption>
2002 2001
--------------------------------- ---------------------------------
INTEREST INCOME INTEREST INCOME
AVERAGE AMOUNTS OR EXPENSE AVERAGE AMOUNTS OR EXPENSE
--------------- --------------- --------------- ---------------
(Assets)
Due from banks..................... W 2,321,166 W 62,560 W 3,819,060 W 225,728
Securities......................... 12,392,033 668,506 10,752,294 706,048
Loans.............................. 44,081,790 2,546,169 47,684,966 3,634,930
Others............................. 34,280 16,269
---------- ----------
W3,311,515 W4,582,975
========== ==========
(Liabilities)
Deposits........................... W 8,900,359 W 404,641 W 9,192,630 W 532,312
Borrowings......................... 20,630,046 671,158 21,672,006 1,174,039
Bonds.............................. 36,054,817 2,047,937 36,740,049 2,597,114
Others............................. 55,244 56,365
---------- ----------
W3,178,980 W4,359,830
========== ==========
</Table>
21. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES:
Significant assets and liabilities denominated in foreign currencies as of
December 31, 2002 and 2001 are as follows:
<Table>
<Caption>
THOUSANDS OF U.S.$(*) MILLIONS OF WON
----------------------------- -------------------------
2002 2001 2002 2001
------------- ------------- ----------- -----------
(Assets)
Cash............................. US$ 1,540 US$ 1,558 W 1,849 W 2,066
Due from banks................... 1,369,083 1,833,481 1,643,448 2,431,379
Trading securities............... 323,884 437,452 388,790 580,106
Investment securities............ 2,754,118 1,920,358 3,306,043 2,546,587
Bills bought..................... 2,536,782 2,648,181 3,045,154 3,511,753
Call loans....................... 540,318 1,135,800 648,598 1,506,184
Loans............................ 13,427,626 13,750,382 16,118,522 18,234,381
Domestic import usance bills..... 2,793,102 607,925 3,352,839 806,170
Receivables...................... 1,134,060 1,102,357 1,361,326 1,461,836
Other assets..................... 1,590,630 1,070,746 1,909,392 1,419,916
------------- ------------- ----------- -----------
US$26,471,143 US$24,508,240 W31,775,961 W32,500,378
============= ============= =========== ===========
</Table>
62
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
<Table>
<Caption>
THOUSANDS OF U.S.$(*) MILLIONS OF WON
----------------------------- -------------------------
2002 2001 2002 2001
------------- ------------- ----------- -----------
(Liabilities)
Deposits......................... US$ 536,105 US$ 1,516,651 W 643,540 W 2,011,231
Borrowings....................... 14,524,208 11,445,810 17,434,860 15,178,288
Bonds sold under repurchase
agreements..................... 589,872 281,532 708,082 373,340
Call money....................... 269,026 204,342 322,939 270,978
Bonds in foreign currency........ 7,714,125 9,136,761 9,260,036 12,116,259
Others........................... 1,746,748 2,077,741 2,096,795 2,755,292
------------- ------------- ----------- -----------
US$25,380,084 US$24,662,837 W30,466,252 W32,705,388
============= ============= =========== ===========
</Table>
- ------------
(*) Foreign currencies denominated other than in U.S. Dollars have been
converted into U.S. Dollars by using the exchange rate in effect as of
December 31, 2002 and 2001.
22. OPERATION RESULTS OF TRUST ACCOUNTS:
The income statements of the Trust Accounts for the years ended December
31, 2002 and 2001 are as follows:
<Table>
<Caption>
MILLIONS OF WON
-------------------
2002 2001
-------- --------
(Revenue)
Interest income............................................. W188,388 W179,446
Gain from securities........................................ 51,020 193,267
Others...................................................... 22,437 44,952
-------- --------
W261,845 W417,665
======== ========
(Expenses)
Dividends of trust profits to Beneficiaries................. W104,408 W299,389
Commissions paid............................................ 231 185
Loss from securities........................................ 104,025 66,729
Taxes and dues.............................................. -- 53
Trust fee to the Bank....................................... 23,871 22,596
Provisions for possible loan losses......................... 9,196 17,072
Others...................................................... 20,114 11,641
-------- --------
W261,845 W417,665
======== ========
</Table>
63
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002 AND 2001
23. RELATED PARTY TRANSACTIONS:
Significant transactions which occurred in the ordinary course of business
with related parties for the years ended December 31, 2002 and 2001 are as
follows:
<Table>
<Caption>
MILLIONS OF WON LOANS
-----------------------
2002 2001
---------- ----------
The KDB Capital Corp........................................ W 325,583 W 735,587
KDB Asia (HK) Ltd........................................... 24,008 26,522
Daewoo Shipbuilding & Marine Engineering Co., Ltd........... 480,951 412,914
Daewoo Securities Co., Ltd.................................. 200,000 200,000
Pan Ocean Shipping Co., Ltd.(*)............................. 180,319 --
---------- ----------
W1,210,861 W1,375,023
========== ==========
</Table>
- ------------
(*) Included as a related party in 2002.
24. SUPPLEMENTAL CASH FLOW INFORMATION:
Transactions not involving an inflow or outflow of cash are as follows:
<Table>
<Caption>
MILLIONS OF WON
---------------------
2002 2001
-------- ----------
Capital contribution inkind................................. W -- W3,000,000
Loans converted to equity securities........................ 775,051 63,647
</Table>
64
THE KOREA DEVELOPMENT BANK
NON-CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002
<Table>
<Caption>
IN MILLIONS OF KOREAN WON
---------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
ASSETS
Cash and due from banks (Note 3)............................ W 1,285,831 W 1,970,664
Securities (Note 4)......................................... 27,879,455 26,378,326
Loans,
net of provision for possible loan losses of W1,603,459
million in 2003 and W1,089,983 million in 2002 and
present value discount of W112,942 million in 2003 and
W126,955 million in 2002 (Note 5)...................... 46,949,105 44,917,231
Premises and equipment, net (Note 6)........................ 671,773 681,952
Derivative financial instruments (Note 14).................. 1,591,463 1,645,161
Other assets (Note 7)....................................... 3,849,914 3,189,010
----------- -----------
Total assets........................................... W82,227,541 W78,782,344
=========== ===========
LIABILITIES AND EQUITY
Deposits (Note 8)........................................... W 8,813,105 W 8,745,304
Borrowings (Note 9)......................................... 24,978,945 24,459,085
Industrial finance bonds,
gross of premium on bonds of W22,135 million in 2003 and
W16,396 million in 2002 and net of discount on bonds of
W43,036 million in 2003 and W52,460 million in 2002
(Note 10).............................................. 35,742,497 33,600,020
Provision for possible guarantee losses (Note 12)........... 47,450 63,223
Accrued severance benefits.................................. 22,276 14,685
Derivative financial instruments (Note 14).................. 1,491,512 1,424,200
Other liabilities (Note 11)................................. 4,163,067 3,535,222
----------- -----------
Total liabilities...................................... 75,258,852 71,841,739
----------- -----------
Commitments and contingencies (Note 13)
Equity:
Paid-in capital (Notes 1 and 15).......................... 7,161,861 7,161,861
Capital surplus (Note 15)................................. 44,373 44,373
Retained earnings......................................... (96,908) 294,103
Capital adjustments....................................... (140,637) (559,732)
----------- -----------
Total equity........................................... 6,968,689 6,940,605
----------- -----------
Total liabilities and equity........................... W82,227,541 W78,782,344
=========== ===========
</Table>
The accompanying notes are an integral part of these non-consolidated financial
statements.
65
THE KOREA DEVELOPMENT BANK
NON-CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
<Table>
<Caption>
IN MILLIONS OF KOREAN WON
-------------------------------
FOR THE SIX-MONTH PERIODS ENDED
JUNE 30
-------------------------------
2003 2002
-------------- --------------
Interest income:
Interest on loans......................................... W1,052,226 W1,298,904
Interest on due from banks................................ 16,390 34,813
Interest on trading securities............................ 24,266 32,782
Interest on available-for-sale securities................. 191,882 168,643
Interest on held-to-maturity securities................... 87,081 138,211
Other interest income..................................... 9,822 5,631
---------- ----------
1,381,667 1,678,984
---------- ----------
Interest expense:
Interest on deposits...................................... 188,756 200,437
Interest on borrowings.................................... 283,857 336,537
Interest on bonds payable................................. 893,991 1,058,182
Other interest expenses................................... 10,839 44,635
---------- ----------
1,377,443 1,639,791
---------- ----------
Net interest income......................................... 4,224 39,193
Provision for loan losses (Note 5)........................ 482,965 200,218
---------- ----------
Net interest loss after provision for loan losses........... (478,741) (161,025)
---------- ----------
Non-interest revenue:
Fees and commissions...................................... 197,700 137,301
Gain from trading securities.............................. 25,911 52,622
Gain from available-for-sale securities................... 25,713 34,174
Gain from derivative financial instruments................ 1,405,548 2,875,301
Others (Note 16).......................................... 614,918 496,114
---------- ----------
2,269,790 3,595,512
---------- ----------
Non-interest expense:
Fees and commissions........................................ 98,492 15,550
Loss from trading securities................................ 11,161 27,591
Loss from derivative financial instruments.................. 1,566,128 2,964,866
General and administrative expenses (Note 17)............... 137,036 117,867
Others (Note 16)............................................ 403,398 490,556
---------- ----------
2,216,215 3,616,430
---------- ----------
Operating loss.............................................. (425,166) (181,943)
Non-operating income, net (Note 18)......................... 33,125 294,681
---------- ----------
Income (loss) before income taxes........................... (392,041) 112,738
Income taxes (Note 20)...................................... 288 216
---------- ----------
Net income (loss)........................................... W (392,329) W 112,522
========== ==========
</Table>
The accompanying notes are an integral part of these non-consolidated financial
statements.
66
THE KOREA DEVELOPMENT BANK
NON-CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003
(UNAUDITED)
<Table>
<Caption>
IN MILLIONS OF
KOREAN WON
--------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... W (392,329)
Adjustments to reconcile net loss to net cash provided by
operating activities
Gain on disposal of loans, net............................ (7,063)
Gain on trading securities, net........................... (14,750)
Loss on available-for-sale securities, net................ 341,244
Gain on equity method securities.......................... (374,973)
Provision for allowance for loan losses................... 482,965
Depreciation.............................................. 10,313
Retirement allowance...................................... 9,427
Loss on foreign currency translation...................... 547
Loss from derivative financial instruments, net........... 94,848
Gain on valuation of hedged items, net.................... (116,361)
Increase in accounts receivable........................... (703,568)
Increase in accounts payable.............................. 631,707
Net decrease in derivative financial instruments.......... 26,161
Payment of severance benefits............................. (1,836)
Receipt of dividend....................................... 113,088
Others, net............................................... 34,918
-----------
Net cash provided by operating activities................. 134,338
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in trading securities........................ 21,949
Net increase in loans..................................... (2,492,198)
Net increase in available-for-sale securities............. (2,188,737)
Net decrease in held-to-maturity securities............... 645,123
Net decrease in equity method securities.................. 371,088
Net decrease in premises and equipment.................... 512
Others, net............................................... 800,215
-----------
Net cash used in investing activities..................... (2,842,048)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits.................................. 67,800
Net increase in borrowings................................ 530,710
Net increase in bonds issued.............................. 2,232,142
Others, net............................................... 5,220
-----------
Net cash provided by financing activities................. 2,835,872
-----------
Net increase in cash........................................ 128,162
Cash, beginning of the period............................... 38,473
-----------
Cash, end of the period (Note 3)............................ W 166,635
===========
</Table>
The accompanying notes are an integral part of these non-consolidated financial
statements.
67
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
1. THE BANK:
The Korea Development Bank (the "Bank") was established in 1954 in
accordance with the Korea Development Bank Act for the purpose of supplying and
managing major industrial capital to develop the Korean industry. The Bank
operates through 35 local branches, 5 overseas branches, 3 overseas subsidiaries
and 2 overseas offices as of June 30, 2003. The Bank is engaged in the banking
business under the Korea Development Bank Act and in the trust business in
accordance with the Trust Business Act and other related regulations.
The Korea Development Bank Act prescribes that the Korean Government owns
the entire capital of the Bank.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies followed by the Bank in the preparation
of its non-consolidated financial statements are summarized below.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The Bank operates both a commercial banking business and a trust business
in which the Bank, as a fiduciary, holds and manages the property of others.
Under the Trust Business Act, the trust funds held as fiduciary are accounted
for and reported separately from the Bank's own commercial banking business.
The Bank maintains its official accounting records in Korean Won and
prepares statutory financial statements in the Korean language in conformity
with the accounting principles generally accepted in the Republic of Korea. The
accompanying non-consolidated financial statements have been condensed,
restructured and translated into English from the Korean language
non-consolidated financial statements. Certain accounting principles applied by
the Bank 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 by those who are informed about Korean
accounting principles and practices. Certain information attached to the Korean
language non-consolidated financial statements, but not required for a fair
presentation of the Bank's financial position and results of operations, is not
presented in the accompanying non-consolidated financial statements.
The preparation of the non-consolidated financial statements requires
management to make estimates and assumptions that affect amounts reported
herein. Although these estimates are based on management's best knowledge of
current events and actions that the Bank may undertake in the future, actual
results may be different from those estimates.
APPLICATION OF THE STATEMENTS OF KOREAN FINANCIAL ACCOUNTING STANDARDS
The Bank's non-consolidated interim financial statements were prepared in
accordance with the financial accounting standards generally accepted in the
Republic of Korea and Statements of Korean Financial Accounting Standards No. 2
through No. 9, in effect for the fiscal periods beginning after December 31,
2002.
The significant accounting policies adopted by the Bank for the interim
financial statements are identical to the accounting policies followed by the
Bank for the annual financial statements for the year ended December 31, 2002,
except for the classification of securities.
68
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
The financial statements of prior periods, presented for comparative
purposes, were reclassified in accordance with Korean Financial Accounting
Standards applicable to the Bank as of June 30, 2003. Such reclassification does
not affect either the prior periods' net income or net assets.
RECOGNITION OF INTEREST INCOME
The Bank recognizes interest income on loans and debt securities on an
accrual basis. However, interest income on delinquent and dishonored loans,
other than those subject to security deposits and guaranteed by financial
institutions, is recognized on a cash basis. Such unaccrued interest income as
of June 30, 2003 amounted to W256,899 million.
PROVISION FOR POSSIBLE LOAN LOSSES
The Bank provides for possible loan losses based on the borrowers' future
debt servicing ability (forward looking criteria) as determined by a credit
rating model developed by the Bank. This credit rating model includes the
financial and non-financial factors of borrowers and classifies the borrowers'
credit risk. Provisions are determined by applying the following minimum
percentages to the various credit risk ratings:
<Table>
<Caption>
PROVISION
LOAN CLASSIFICATIONS PERCENTAGES
- -------------------- -----------
Normal...................................................... 0.5%
Special attention........................................... 2% or more
Substandard................................................. 20% or more
Doubtful.................................................... 50% or more
Loss........................................................ 100%
</Table>
Pursuant to the revised Regulation on the Supervision of the Banking
Business which is effective December 1, 2002, the Bank has changed the credit
line for importers from acceptances to domestic import usance bills.
SECURITIES
Securities that are bought and held principally for the purpose of
generating profits on short-term differences in price, which are actively and
frequently bought and sold, are classified as trading securities. Debt
securities with fixed or determinable payments and fixed maturity that the Bank
has the intent and ability to hold to maturity are classified as
held-to-maturity securities. Investments classified as neither trading
securities nor held-to-maturity securities are classified as available-for-sale
securities.
Trading and available-for-sale securities are carried at fair value, except
for non-marketable equity securities classified as available-for-sale
securities, which are carried at cost. The fair value of debt securities, which
do not have a quoted market value, are calculated using the present value of
future cash flows, discounted at a reasonable interest rate determined based on
the credit ratings provided by independent credit rating institutions.
Unrealized holding gains or losses on trading securities are charged to
current operations and those resulting from available-for-sale securities are
recorded as a capital adjustment, the accumulated amount of which shall be
charged to current operations when the related securities are sold or when an
impairment loss on the securities is recognized.
69
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Held-to-maturity securities are generally carried at amortized cost.
Premiums and discounts on debt securities are amortized until their maturity
using the effective interest rate method.
Impairment losses are recognized in the statement of operations when the
recoverable amounts are less than the acquisition cost of equity securities or
amortized cost of debt securities.
The Bank recorded impairment losses amounting to W337,508 million for the
six-month ended June 30, 2003.
Investment securities which allow the Bank a significant influence over the
investee are valued using the equity method of accounting. The Bank considers
that it has a significant influence on the investees in which the Bank holds
more than 15% of interest. However, the Bank does not apply the equity method
for the following investments.
- Investees having total assets of less than W7,000 million
- Investees under court receivership or bankruptcy
- Investees under the process of being sold-out
- Converted shares of stock with a restriction on disposal under the
corporate restructuring law
The Bank discontinues the equity method of accounting for investments in
equity method investees when the Bank's share of accumulated losses equals the
costs of the investments and until the subsequent change in its proportionate
net income of the investees equals its proportionate net losses not recognized
during the period the equity method was suspended.
Under the equity method, the Bank records changes in its proportionate
ownership of the book value of the investee in current operations, as capital
adjustments or as adjustments to retained earnings, depending on the nature of
the underlying changes in the book value of the investee.
PREMISES AND EQUIPMENT AND RELATED DEPRECIATION
Premises and equipment used for business purposes are recorded at cost,
except for those assets subject to upward revaluation in accordance with the
Korean Asset Revaluation Law. Such revaluation presents facilities and buildings
at their depreciated replacement cost and land at the prevailing market price,
as of the effective date of revaluation.
Depreciation is computed using the declining-balance method, except for
buildings and structures, which are depreciated using the straight-line method,
based on the estimated useful lives of the assets as described below:
<Table>
Buildings................................................... 20-40 years
Structures.................................................. 10-40 years
Machinery................................................... 4 years
Vehicles.................................................... 4 years
Others...................................................... 4 years
</Table>
Routine maintenance and repairs are charged to expense as incurred.
Expenditures, which enhance the value or extend the useful life of the related
assets, are capitalized.
The Bank recognizes an impairment loss when the carrying amount of an asset
exceeds its recoverable amount. The impairment loss is recognized in the
statement of operations and is deducted from the acquisition cost of the
impaired asset. If there is a subsequent recovery from the impairment, a
reversal of
70
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
the previous write-down is made up to the amount of the original cost. The
reversal amount of the previously recognized loss is credited to current
operations as a gain.
INTANGIBLE ASSETS
Intangible assets are stated at cost, net of accumulated amortization.
Amortization of these intangibles is computed using the straight-line method
over a period of four to five years.
PRESENT VALUE DISCOUNT
Receivables and payables arising from long-term installment transactions,
long-term cash loans (borrowings) and other similar transactions are stated at
present value if the difference between the nominal value and present value is
material. Such differences are presented in the present value discount account
and directly deducted from the nominal value of the related receivables or
payables. The present value discount account is amortized using the effective
interest rate method as interest expense or interest income.
Loans which are impaired due to the restructuring of the borrower, court
mediation or negotiation, are revalued using the adjusted interest rate. The
difference between the book value and the readjusted value is offset against the
provision for possible loan losses, and the remaining difference is recognized
as a bad debt expense in the year incurred.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated
into Korean Won at the basic exchange rates (W1,193.1/US$1) on the balance sheet
date. The resulting exchange gains or losses are reflected in current
operations.
BONDS SOLD UNDER REPURCHASE AGREEMENTS
The Bank provides a provision for possible losses from the bonds sold under
repurchase agreements as determined based on possible loss estimates when the
bonds are repurchased. The provision for possible losses as of June 30, 2003
amounted to W84,848 million.
DISPOSITION OF LOANS
The Bank records the difference between the selling price and the book
value of disposed loans as a gain or loss on disposal of loans. The book value
is the face amount of the disposed loans less identifiable allowance for
possible loan losses. When the Bank cannot allocate the allowance for possible
loan losses to specific disposed loans, it records the gain or loss as the
difference between the selling price and the face amount of the loan.
ACCRUED SEVERANCE BENEFITS
Employees and directors with one or more years of service are entitled to
receive a lump-sum payment upon termination of their employment with the Bank,
based on their length of service and rate of pay at the time of termination.
Accrued severance benefits represent the amount which would be payable assuming
all eligible employees and directors were to terminate their employment as of
the balance sheet date.
71
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Accrued severance benefits are funded at approximately 30.98% as of June
30, 2003, through a group severance trust in Woori Bank. The Bank accounts for
the amounts funded under the group severance trust as a deduction to accrued
severance benefits.
Actual payments of severance benefits for the six-month period ended June
30, 2003 amounted to W1,836 million.
PROVISION FOR POSSIBLE GUARANTEE LOSSES
The Bank sets up a provision for possible losses on guarantees outstanding
as determined based on a credit risk rating of the companies for which
guarantees are provided. The Bank provides a provision of 20% or more of
guaranteed amounts for companies classified as "substandard," 50% or more for
"doubtful" and 100% for "loss". The allowance is shown in the liability section.
DEFERRED INCOME TAXES
The Bank records deferred income taxes which arises from temporary
differences between the amount reported for financial reporting purposes and
income tax purposes. Income tax expense comprises taxes payable for the period
and the change in deferred income tax assets and liabilities for the period.
BONDS PURCHASED UNDER RESALE AGREEMENTS AND BONDS SOLD UNDER REPURCHASE
AGREEMENTS
Bonds purchased or sold under resale or repurchase agreements are included
in loans and borrowings, respectively. The difference between the selling and
repurchase price is treated as interest and accrued evenly over the period
covered by the agreements.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
Accounts and records of the overseas branches are maintained in foreign
currencies. For presentation in the accompanying non-consolidated financial
statements, the financial statements of the branches have been translated at the
exchange rates as of the balance sheet date.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments held for trading purposes are stated at
fair value as of the balance sheet date.
Derivative financial instruments for fair value hedges are stated at market
value. The gains and losses on the hedging instruments, as well as the related
loss or gain on the hedged items, are recognized in current operations in the
same accounting period.
COMPENSATION TO TRUST ACCOUNTS
The Bank receives management fees from trust accounts for management and
custodian services.
Certain trust funds held by the Bank are guaranteed a certain rate of
return by the Bank. If the income from trust operations is insufficient to
generate the required rate of return, the deficiency may be either recovered
from previously established special allowances or compensated by the Bank's
banking accounts. Such compensation is accounted for as other operating expenses
of the banking accounts and other income of the trust accounts, in accordance
with the relevant laws and regulations applicable to trust operations.
72
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
STATEMENT OF CASH FLOWS
In the preparation of the statement of cash flows, the Bank has presented
net amounts of cash inflows and cash outflows for items where the turnover is
quick and the amounts are large.
3. CASH AND DUE FROM BANKS:
Cash and due from banks as of June 30, 2003 and December 31, 2002 are
summarized as follows:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -----------------------
2003.6.30 2003 2002
--------------- ---------- ----------
Cash on hand in Won.................................. -- W 164,326 W 36,624
Cash on hand in foreign currency..................... -- 2,309 1,849
Due from banks in Won................................ 7.26 293,823 288,743
Due from banks in foreign currency................... 1.77-2.04 825,373 1,643,448
---------- ----------
W1,285,831 W1,970,664
========== ==========
</Table>
Due from banks in Won as of June 30, 2003 and December 31, 2002 are
summarized as follows:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -------------------
BANK 2003.6.30 2003 2002
- ---- --------------- -------- --------
The Bank of Korea....................................... -- W219,967 W220,385
Others.................................................. 7.26 73,856 68,358
-------- --------
W293,823 W288,743
======== ========
</Table>
Due from banks in foreign currency as of June 30, 2003 and December 31,
2002 are summarized as follows:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- ---------------------
BANK 2003.6.30 2003 2002
- ---- --------------- -------- ----------
The Bank of Korea...................................... -- W 22,702 W 12,787
Korea Exchange Bank.................................... 2.04 41,759 87,444
Woori Bank............................................. 2.04 42,952 66,022
Korea First Bank....................................... 2.04 38,776 --
Chohung Bank........................................... 2.04 41,759 54,018
Hana Bank.............................................. 2.04 29,828 48,016
KDB Asia Limited Hong Kong............................. 2.04 71,586 359,763
KDB Ireland Ltd........................................ -- 360,913 242,481
KDBA (HK).............................................. 1.77 118,117
Others................................................. -- 56,981 772,917
-------- ----------
W825,373 W1,643,448
======== ==========
</Table>
73
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Restricted deposits included in due from banks as of June 30, 2003 are as
follows:
<Table>
<Caption>
MILLIONS OF WON
---------------
Kookmin Bank................................................ W 68,453
Woori Bank.................................................. 4,690
Reserve deposits with the Bank of Korea..................... 242,668
China Construction Bank..................................... 6,951
Industrial & Commercial Bank of China (ICBC), Shanghai...... 3,579
Shanghai Pudong Development Bank (SPDB), Shanghai........... 4,773
--------
W331,114
========
</Table>
Deposits with Kookmin Bank and Woori Bank are pledged as collateral.
Reserve deposits with the Bank of Korea represent amounts required under the
Banking Act for the payment of deposits. Reserve deposits with China
Construction Bank, ICBC Shanghai and SPDB Shanghai also represent amounts
required under the related banking regulations of those countries.
The maturities of the amounts due from banks as of June 30, 2003 are as
follows (Millions of Won):
<Table>
<Caption>
DUE FROM BANKS DUE FROM BANKS IN
MATURED ON OR BEFORE IN WON FOREIGN CURRENCY TOTAL
- -------------------- -------------- ------------------- ----------
Sep. 30, 2003................................... W225,370 W481,633 W 707,003
Dec. 31, 2003................................... -- 101,413 101,413
Jun. 30, 2004................................... 13,423 34,131 47,554
Jun. 30, 2005................................... 33,505 87,693 121,198
Jun. 30, 2006................................... 858 102,607 103,465
Jun. 30, 2007................................... 20,667 -- 20,667
Jun. 30, 2008................................... -- 17,896 17,896
-------- -------- ----------
W293,823 W825,373 W1,119,196
======== ======== ==========
</Table>
4. SECURITIES:
Securities as of June 30, 2003 and December 11, 2002 are summarized as
follows:
<Table>
<Caption>
MILLIONS OF WON
-------------------------
2003 2002
----------- -----------
Trading securities.......................................... W 1,325,829 W 1,333,027
Available-for-sale securities............................... 16,127,733 W13,891,705
Held-to-maturity securities................................. 3,466,930 W 4,112,055
Securities under the equity method.......................... 6,958,963 W 7,041,539
----------- -----------
W27,879,455 W26,378,326
=========== ===========
</Table>
74
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Trading securities as of June 30, 2003 and December 31, 2002 comprise the
following:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -----------------------
2003.6.30 2003 2002
--------------- ---------- ----------
Government and public bonds.......................... 5.22 W 511,523 W 152,475
Corporate bonds...................................... 5.27-6.35 312,344 W 169,351
Beneficiary certificates............................. -- 71,746 W 606,671
Securities in foreign currency....................... 3.75 430,216 W 388,790
Others............................................... -- -- 15,740
---------- ----------
W1,325,829 W1,333,027
========== ==========
</Table>
Par value, acquisition cost and fair value of trading debt securities as of
June 30, 2003 and December 31, 2002 are as follows (Millions of Won):
<Table>
<Caption>
ACQUISITION COST BOOK VALUE FAIR VALUE
--------------------- --------------------- ---------------------
2003 2002 2003 2002 2003 2002
---------- -------- ---------- -------- ---------- --------
Government and public
bonds................. W 510,250 W151,746 W 511,523 W152,475 W 511,523 W152,475
Corporate bonds......... 311,758 168,468 312,344 169,351 312,344 169,351
Securities in foreign
currency.............. 432,783 385,733 430,216 388,790 430,216 388,790
---------- -------- ---------- -------- ---------- --------
W1,254,791 W705,947 W1,254,083 W710,616 W1,254,083 W710,616
========== ======== ========== ======== ========== ========
</Table>
Trading securities in foreign currency as of June 30, 2003 and December 31,
2002 comprise the following:
<Table>
<Caption>
FOREIGN CURRENCY (IN THOUSANDS) MILLIONS OF WON
------------------------------- -------------------
2003 2002 2003 2002
-------------- -------------- -------- --------
USD298,898 USD323,884 W356,616 W388,790
EUR 47,648 EUR -- 64,912 --
JPY497,600 JPY -- 4,958 --
SGD 3,127 SGD -- 3,730 --
-------- --------
W430,216 W388,790
======== ========
</Table>
75
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Available-for-sale securities as of June 30, 2003 and December 31, 2002
comprise the following:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -------------------------
2003.6.30 2003 2002
--------------- ----------- -----------
Equity investments................................. -- W 6,871,225 W 6,905,254
Government and public bonds........................ 6.80 260,081 44,927
Corporate bonds.................................... 4.88-6.28 5,464,325 4,171,455
Beneficiary certificates........................... -- 319,583 139,057
Other securities in Won............................ 4.57-5.05 761,734 532,105
Other securities in foreign currency............... 3.41-5.15 2,450,785 2,098,907
----------- -----------
W16,127,733 W13,891,705
=========== ===========
</Table>
Available-for-sale equity securities, not using the equity method, as of
June 30, 2003 and December 31, 2002 are summarized as follows (Millions of Won):
<Table>
<Caption>
NUMBER OF OWNERSHIP FAIR VALUE OR
SHARES (%) ACQUISITION COST BOOK VALUE NET BOOK VALUE
--------- --------- ----------------------- ----------------------- -----------------------
2003.6.30 2003.6.30 2003 2002 2003 2002 2003 2002
--------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Korea Highway
Corporation........ 143,010 9.66 W1,430,100 W1,430,100 W1,430,184 W1,430,184 W1,389,039 W1,430,379
GM Daewoo Motors Co.,
Ltd. .............. 108 40.33 261,375 223,203 261,375 223,203 834,494 223,203
Samsung Life
Insurance Co.,
Ltd. .............. 378 1.89 264,496 264,496 132,248 132,248 108,970 100,476
Industrial Bank of
Korea.............. 57,405 18.95 400,000 400,000 382,188 387,013 638,065 387,013
Korea National
Housing Corp. ..... -- 20.56 1,300,618 1,300,618 1,300,618 1,300,618 1,158,936 1,238,252
Korea Land
Development
Corp. ............. -- 26.77 1,161,904 1,161,904 1,191,328 1,192,329 942,404 881,293
Korea Water Resources
Corp. ............. -- 6.90 671,307 671,307 671,307 671,307 556,235 546,045
Others............... -- -- 2,063,566 2,225,682 1,507,903 1,568,352 1,397,200 1,718,639
---------- ---------- ---------- ---------- ---------- ----------
W7,553,366 W7,677,310 W6,877,151 W6,905,254 W7,025,343 W6,525,300
========== ========== ========== ========== ========== ==========
</Table>
Available-for-sale debt securities as of June 30, 2003 and December 31,
2002 comprise the following (Millions of Won):
<Table>
<Caption>
PAR VALUE ACQUISITION COST BOOK VALUE
----------------------- ----------------------- -----------------------
2003 2002 2003 2002 2003 2002
---------- ---------- ---------- ---------- ---------- ----------
Government and public bonds... W 242,419 W 42,399 W 273,413 W 42,378 W 260,081 W 44,927
Corporate bonds............... 5,942,716 4,655,850 5,887,167 4,488,215 5,464,325 4,171,455
Beneficiary certificates...... 333,308 150,352 332,760 150,352 319,583 139,057
Investment debt securities in
Won......................... 761,771 529,283 761,679 622,179 761,734 532,105
Investment debt securities in
foreign currency............ 2,437,720 3,164,853 2,451,376 2,102,743 2,444,859 2,098,907
---------- ---------- ---------- ---------- ---------- ----------
W9,717,934 W8,542,737 W9,706,395 W7,405,867 W9,250,582 W6,986,451
========== ========== ========== ========== ========== ==========
</Table>
76
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Held-to-maturity debt securities as of June 30, 2003 and December 31, 2002
comprise the following (Millions of Won):
<Table>
<Caption>
PAR VALUE ACQUISITION COST BOOK VALUE
----------------------- ----------------------- -----------------------
2003 2002 2003 2002 2003 2002
---------- ---------- ---------- ---------- ---------- ----------
Government and public bonds... W1,971,608 W2,209,785 W1,963,881 W2,201,252 W1,965,580 W2,202,315
Corporate bonds............... 553,000 733,000 542,925 717,101 545,959 723,827
Investment debt securities in
Won......................... 115,368 114,583 115,351 114,563 115,356 115,351
Investment debt securities in
foreign currency............ 844,354 1,073,168 839,975 1,144,905 840,035 1,070,562
---------- ---------- ---------- ---------- ---------- ----------
W3,484,330 W4,130,536 W3,462,132 W4,177,821 W3,466,930 W4,112,055
========== ========== ========== ========== ========== ==========
</Table>
Securities under the equity method as of June 30, 2003 and December 31,
2002 are summarized as follows (Millions of Won):
<Table>
<Caption>
NUMBER OF OWNERSHIP FAIR VALUE OR
SHARES (%) ACQUISITION COST BOOK VALUE NET ASSET VALUE
--------- --------- ----------------------- ----------------------- ------------------------
2003.6.30 2003.6.30 2003 2002 2003 2002 2003 2002
--------- --------- ---------- ---------- ---------- ---------- ----------- ----------
Korea Electric Power
Corporation............... 138,056 21.59 W3,265,467 W3,265,468 W4,816,884 W4,541,043 W 7,736,294 W7,667,147
Daewoo Shipbuilding &
Marine Engineering Co.,
Ltd. ..................... 59,826 31.10 288,383 390,368 479,308 614,560 427,523 530,755
Daewoo Securities Co.,
Ltd. ..................... 74,309 39.46 563,246 563,247 533,524 554,034 460,611 468,986
GM Daewoo Auto & Technology
Company................... 70,706 29.93 213,206 213,206 225,767 213,206 618,486 213,206
The KDB Capital Corp. ..... 111,332 79.86 467,705 467,706 -- 102,965 -- 85,929
Seoul Debt Restructuring
Fund...................... 52,560 43.80 76,752 117,224 73,122 114,110 73,122 114,110
Arirang Restructuring
Fund...................... 29,160 43.73 95,353 126,846 78,535 101,567 78,535 101,567
Mukoonghwa Restructuring
Fund...................... 29,140 43.71 94,331 142,995 77,578 124,764 77,578 124,764
Hankang Restructuring
Fund...................... 29,140 23.01 95,915 95,915 65,946 97,270 65,945 97,270
Others..................... -- -- 628,306 613,424 608,299 578,020 608,853 578,261
---------- ---------- ---------- ---------- ----------- ----------
W5,788,664 W6,014,399 W6,958,963 W7,041,539 W10,146,947 W9,981,995
========== ========== ========== ========== =========== ==========
</Table>
77
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Details of valuation on the securities using the equity method as of and
for the six-month period ended June 30, 2003 are as follows (Millions of Won):
<Table>
<Caption>
BEGINNING ACQUISITION VALUATION CAPITAL ENDING
BOOK VALUE (DISPOSITION) DIVIDENDS GAIN (LOSS) ADJUSTMENT BOOK VALUE
---------- ------------- --------- ----------- ---------- -----------
Korea Electric Power Corp.................. W4,541,043 W -- W110,445 W425,525 W(39,239) W4,816,884
Daewoo Shipbuilding & Marine Engineering
Co., Ltd. ............................... 614,560 (160,116) -- 39,405 (14,541) 479,308
Daewoo Securities Co. Ltd. ................ 554,034 -- -- (19,627) (883) 533,524
GM Daewoo Auto & Technology Company........ 213,206 -- -- 12,561 -- 225,767
Daewoo Heavy Industries & Machinery
Ltd. .................................... 188,915 -- -- 8,276 302 197,493
Mukoonghwa Restructuring Fund.............. 124,764 (48,664) -- 1,858 (380) 77,578
Seoul Debt Restructuring Fund.............. 114,110 (40,471) -- (1,073) 556 73,122
Arirang Restructuring Fund................. 101,567 (31,493) -- 8,476 (15) 78,535
The KDB Capital Corp. ..................... 102,965 -- -- (179,594) 76,629 --
Hankang Restructuring Fund................. 97,270 (22,729) -- (8,595) -- 65,946
Pan Ocean Shipping Co., Ltd. .............. 95,518 -- -- 2,598 19 98,135
KDB Asia (HK) Ltd. ........................ 66,247 -- -- (1,809) (1,487) 62,951
Korea Asset Management Corp. .............. 45,465 -- 1,200 4,497 17,306 66,068
KDB Bank (Hungary) Ltd. ................... 35,238 -- -- (445) -- 34,793
KDB Ireland Ltd. .......................... 31,701 -- -- (10,707) -- 20,994
Others..................................... 114,936 13,487 1,443 (925) 1,810 127,865
---------- --------- -------- -------- -------- ----------
W7,041,539 W(289,986) W113,088 W280,421 W 40,077 W6,958,963
========== ========= ======== ======== ======== ==========
Foreign currency translation loss.......... 809
--------
W281,230
========
</Table>
The equity method adjustments are calculated as the differences between the
initial purchase price and the Bank's initial proportionate ownership of the net
book value of investees at the time of purchase. Equity method adjustment debits
are amortized over five years and equity method adjustment credits are amortized
over five years or weighted-average useful lives of tangible assets of investees
using the straight-line method. The accumulated unamortized equity method
adjustments as of and for the six-month period ended June 30, 2003 and December
31, 2002 are as follows (Millions of Won):
<Table>
<Caption>
2003 2002
------------------------------------ ------------------------------------
EQUITY METHOD EQUITY METHOD EQUITY METHOD EQUITY METHOD
ADJUSTMENT DEBIT ADJUSTMENT CREDIT ADJUSTMENT DEBIT ADJUSTMENT CREDIT
---------------- ----------------- ---------------- -----------------
Beginning balance.............. W215,900 W3,156,356 W318,508 W3,550,739
Increase (decrease)............ (15,815) 414,492 (31,120) 24,015
Amortization................... 27,758 220,586 (71,488) (418,398)
-------- ---------- -------- ----------
Ending balance................. W172,327 W3,350,262 W215,900 W3,156,356
======== ========== ======== ==========
</Table>
78
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Investees in which the Bank holds more than 15% of interest but are not
valued using the equity method as of June 30, 2003 are summarized as follows
(Millions of Won):
<Table>
<Caption>
OWNERSHIP ACQUISITION FAIR VALUE OR
(%) COST BOOK VALUE NET BOOK VALUE
--------- ----------- ---------- --------------
Korea National Housing Corp.(*1).......... 20.56 W1,300,618 W1,300,618 W1,158,936
Korea Land Development Corp.(*1).......... 26.77 1,161,904 1,191,328 942,404
Korea National Tourism Organization(*1)... 43.58 24,370 35,529 137,042
KP Chemical Corp.(*2)..................... 19.91 94,421 29,082 29,082
Donghae Pulp Co., Ltd.(*2)................ 51.36 24,500 21,462 21,462
Kia Steel Co., Ltd.(*2)................... 17.20 31,945 7,826 7,826
Industrial Bank of Korea(*1).............. 15.49 326,906 326,906 521,539
Others(*3)................................ 51,895 41,646 23,236
---------- ---------- ----------
W3,016,559 W2,954,397 W2,841,527
========== ========== ==========
</Table>
- ------------
(*1) Investees which are controlled by the government or government investing
companies.
(*2) Investees under court receivership, workout process and other
restructuring process.
(*3) Investees whose total assets are less than W7,000 million.
The maturity of investments in available-for-sale and held-to-maturity debt
securities as of June 30, 2003 comprise the following (Millions of Won):
<Table>
<Caption>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
MATURED ON OR BEFORE DEBT SECURITIES DEBT SECURITIES
- -------------------- ------------------ ----------------
Jun. 30, 2004............................................... W2,868,002 W 613,257
Jun. 30, 2008............................................... 5,594,635 2,568,164
Jun. 30, 2013............................................... 787,945 285,509
---------- ----------
W9,250,582 W3,466,930
========== ==========
</Table>
79
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Investment securities denominated in foreign currency as of June 30, 2003
and December 31, 2002 comprise the following:
<Table>
<Caption>
FOREIGN CURRENCY MILLIONS OF WON
(IN THOUSANDS) EQUIVALENT
----------------------- -----------------------
CURRENCY 2003 2002 2003 2002
-------- ---------- ---------- ---------- ----------
AVAILABLE-FOR-SALE
SECURITIES................ USD 1,658,209 1,359,939 W1,978,409 W1,632,470
JPY 43,858,652 42,643,208 437,012 431,920
EUR 12,591 16,394 17,153 20,613
GBP 4,011 4,027 7,897 7,753
CNY 30,193 30,001 4,352 4,351
CHF 41 90 36 78
SGD -- 2,490 -- 1,722
---------- ----------
W2,444,859 W2,098,907
========== ==========
HELD-TO-MATURITY
SECURITIES................ USD 580,403 744,842 W 692,479 W 894,109
JPY 14,536,085 17,172,020 144,839 173,930
EUR 1,994 2,006 2,717 2,523
---------- ----------
W 840,035 W1,070,562
========== ==========
</Table>
As of June 30, 2003, investment securities amounting to W485,000 million
are pledged as collateral to KDB First Securitization Specialty Co., Ltd. and
others and investment securities amounting to W134,300 million are pledged for
construction performance insurance.
With regards to futures trading, 8,015,660 shares of Korea Electric Power
Corporation and debt securities of Korea Deposit Insurance Corporation amounting
to W4,500 million are pledged as a substitute for the deposit money to Kookmin
Futures Inc. and others, as of June 30, 2003.
Impairment losses on securities for the six-month period ended June 30,
2003 are as follows (Million of Won):
<Table>
<Caption>
ISSUER AMORTIZED COST IMPAIRMENT LOSS BOOK VALUE
- ------ -------------- --------------- ----------
Equity Securities
Hyundai Engineering & Construction Co., Ltd. ...... W250,151 W125,576 W124,575
KP Chemical Co., Ltd. ............................. 94,421 65,339 29,082
Ssangyong Cement Industrial Co., Ltd. ............. 43,634 30,544 13,090
Orion Electric CRV................................. 2,821 2,821 --
Daewoo Engineering & Construction Co., Ltd. ....... 8,391 2,010 6,381
Bioinfomatix Inc. ................................. 1,995 1,995 --
Miju Steel Co., Ltd. .............................. 6,313 1,906 4,407
Others............................................. 25,027 19,970 5,057
-------- -------- --------
W432,753 W250,161 W182,592
======== ======== ========
</Table>
80
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
<Table>
<Caption>
ISSUER AMORTIZED COST IMPAIRMENT LOSS BOOK VALUE
- ------ -------------- --------------- ----------
Debt Securities
SK Global Co., Ltd. ............................... W 19,739 W 8,882 W 10,857
Hyundai Engineering & Construction Co., Ltd. ...... 152,900 72,187 80,713
SK Global HK....................................... 5,965 2,684 3,281
SK Global America.................................. 5,984 2,703 3,281
Others............................................. 7,329 891 6,438
-------- -------- --------
W191,917 W 87,347 W104,570
======== ======== ========
</Table>
In accordance with the Statement of Korean Financial Accounting Standards
No. 8, certain held-to-maturity securities amounting to W249,131 million were
reclassified as available-for-sale securities on January 1, 2003 since the
Bank's intent to hold the securities to maturity was not certain at the time of
the acquisition. Among the reclassified securities, a portion amounting to
W3,606 million matured during the six-month period ended June 30, 2003.
Issuers of securities held by the Bank as of June 30, 2003 and December 31,
2002 are categorized as follows:
<Table>
<Caption>
MILLIONS OF WON PERCENTAGE (%)
------------------------- --------------
2003 2002 2003.6.30
----------- ----------- --------------
By Country
The Republic of Korea............................. W27,170,391 W25,793,484 97.46
The United States of America...................... 165,666 147,905 0.60
The Philippines................................... 62,190 68,093 0.22
Malaysia.......................................... 76,390 65,418 0.27
The United Kingdom................................ 79,243 41,777 0.28
Others............................................ 325,575 261,649 1.17
----------- ----------- ------
W27,879,455 W26,378,326 100.00
=========== =========== ======
</Table>
<Table>
<Caption>
MILLIONS OF WON PERCENTAGE (%)
------------------------- --------------
2003 2002 2003.6.30
----------- ----------- --------------
By Issuer
Korea Electric Power Corporation.................. W 4,997,698 W 4,659,477 17.94
Korea National Housing Corp. ..................... 1,601,275 1,606,211 5.74
Korea Highway Corporation......................... 1,430,184 1,450,238 5.13
Korea Deposit Insurance Corp. .................... 1,321,713 1,333,077 4.74
Korea Land Development Corp. ..................... 1,191,328 1,191,328 4.27
Korea Asset Management Corp. ..................... 542,155 585,197 1.94
Others............................................ 16,795,102 15,552,798 60.24
----------- ----------- ------
W27,879,455 W26,378,326 100.00
=========== =========== ======
</Table>
81
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
<Table>
<Caption>
MILLIONS OF WON PERCENTAGE (%)
------------------------- --------------
2003 2002 2003.6.30
----------- ----------- --------------
By Industry
Banking and insurance............................. W 9,007,735 W 7,269,345 32.31
Construction...................................... 4,445,688 3,966,773 15.95
Manufacturing..................................... 5,421,437 5,586,592 19.45
Public services and national defense.............. 2,083,760 2,130,266 7.47
Electric, gas and water supply industry........... 5,230,588 4,906,646 18.76
Communication..................................... 282,871 170,549 1.01
Others............................................ 1,407,376 2,348,155 5.05
----------- ----------- ------
W27,879,455 W26,378,326 100.00
=========== =========== ======
</Table>
5. LOANS:
Loans as of June 30, 2003 and December 31, 2002 comprise the following:
<Table>
<Caption>
MILLIONS OF WON
-------------------------
2003 2002
----------- -----------
Loans in Won................................................ W15,290,961 W14,389,340
Loans in foreign currency................................... 15,973,068 16,118,522
Other loans................................................. 17,401,477 15,626,307
----------- -----------
48,665,506 46,134,169
Less: Provision for possible loan losses.................. (1,603,459) (1,089,983)
----------- -----------
Present value discount account......................... (112,942) (126,955)
----------- -----------
W46,949,105 W44,917,231
=========== ===========
</Table>
82
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Loans in Won and foreign currency as of June 30, 2003 and December 31, 2002
comprise the following:
LOANS IN WON
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -------------------------
2003.6.30 2003 2002
--------------- ----------- -----------
Loans for working capital:
Industrial fund loans............................ 7.26 W 3,793,720 W 2,954,632
Government fund loans............................ 5.08 539,502 551,690
Overdraft........................................ 8.58 157,695 77,489
Others........................................... 5.23-8.38 958,744 838,419
----------- -----------
5,449,661 4,422,230
----------- -----------
Loans for facilities:
Industrial fund loans............................ 7.22 6,871,507 7,060,734
Government fund loans............................ 5.10 952,739 924,386
Others........................................... 3.88-7.39 2,017,054 1,981,990
----------- -----------
9,841,300 9,967,110
----------- -----------
W15,290,961 W14,389,340
=========== ===========
</Table>
LOANS IN FOREIGN CURRENCY
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -------------------------
2003.6.30 2003 2002
--------------- ----------- -----------
Loans for working capital:
Local currency loans denominated in foreign
currencies........................................ 4.46 W 928,585 W 878,387
Foreign currency loans.............................. 2.82 992,265 981,347
Others.............................................. 2.89 729,631 607,381
----------- -----------
2,650,481 2,467,115
---- ----------- -----------
Loans for facilities:
Local currency loans denominated in foreign
currencies........................................ 3.52 4,455,611 4,597,906
Foreign currency loans.............................. 3.46 2,294,169 2,423,167
Offshore loans in foreign currencies................ 3.14 1,284,939 1,291,518
Asian Development Bank loans........................ 2.26 1,197,314 1,208,755
International Bank for Reconstruction and
Development loans................................. 2.33 4,090,498 4,115,638
Others.............................................. 3.58 56 14,423
----------- -----------
13,322,587 13,651,407
----------- -----------
W15,973,068 W16,118,522
=========== ===========
</Table>
83
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
OTHER LOANS
<Table>
<Caption>
MILLIONS OF WON
---------------------------------
2003 2002
--------------- ---------------
Debentures accepted by private subscription................. W 8,151,718 W 7,777,071
Bills purchased............................................. 2,931,674 3,045,154
Call loans.................................................. 1,597,212 742,276
Domestic import usance bills................................ 3,636,741 3,352,839
Advances for customers...................................... 269,986 75,316
Bonds purchased under repurchase agreements................. 265,830 161,805
Notes purchased............................................. 1,744 4,887
Others(*)................................................... 546,572 466,959
----------- -----------
W17,401,477 W15,626,307
=========== ===========
</Table>
- ------------
(*) Include loans to be converted to equity amounting to W438,749 million as
follows:
<Table>
<Caption>
BOOK VALUE
(MILLIONS OF WON) CONVERSION PRICE RESTRICTION ON DISPOSAL
----------------- ---------------- -----------------------
Ssangyong Cement Industrial Co., Ltd............. W400,000 W5,000/share Until December 31, 2005
Daewoo Engineering & Construction Co., Ltd....... 13,512 W5,000/share Until December 31, 2003
Daewoo International Corp........................ 25,237 W5,000/share Until December 31, 2003
--------
W438,749
========
</Table>
The maturity of loans in Won and in foreign currency as of June 30, 2003
are as follows (Millions of Won):
<Table>
<Caption>
LOANS FOR LOANS FOR
LOANS FOR LOANS FOR WORKING CAPITAL FACILITIES
WORKING CAPITAL FACILITIES IN FOREIGN IN FOREIGN
MATURING ON OR BEFORE IN WON IN WON CURRENCY CURRENCY TOTAL
- --------------------- --------------- ---------- --------------- ----------- -----------
Sep. 30, 2003............... W1,034,790 W 573,983 W 661,418 W 725,175 W 2,995,366
Dec. 31, 2003............... 764,190 420,537 582,962 928,246 2,695,935
Jun. 30, 2004............... 1,713,654 769,842 772,571 900,591 4,156,658
Jun. 30, 2005............... 677,754 1,745,542 364,795 3,154,505 5,942,596
Jun. 30, 2006............... 326,143 1,795,277 194,548 1,847,213 4,163,181
Jun. 30, 2007............... 401,032 1,416,393 24,061 1,397,776 3,239,262
Jun. 30, 2008............... 108,125 1,014,555 10,619 1,057,089 2,190,388
Thereafter.................. 423,973 2,105,171 39,507 3,311,992 5,880,643
---------- ---------- ---------- ----------- -----------
W5,449,661 W9,841,300 W2,650,481 W13,322,587 W31,264,029
========== ========== ========== =========== ===========
</Table>
84
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Changes in the provision for possible loan losses for the six-month period
ended June 30, 2003 and December 31, 2002 are as follows (Millions of Won):
<Table>
<Caption>
2003
--------------------------------------
LOANS OTHER ASSETS TOTAL 2002
---------- ------------ ---------- ----------
Balance at the beginning of the period.... W1,089,983 W 4,946 W1,094,929 W1,925,798
Changes in overseas branches due to
foreign currency translation............ (291) -- (291) (3,378)
Transfer from loans repurchased........... 93,014 -- 93,014 79,161
Write-offs due to loan restructuring...... (21) -- (21) (20,360)
Current write-offs........................ (65,331) -- (65,331) (1,606,602)
Current provision (reversal).............. 486,105 (3,140) 482,965 551,700
Others.................................... -- -- -- 168,611
---------- ------- ---------- ----------
W1,603,459 W 1,806 W1,605,265 W1,094,930
========== ======= ========== ==========
</Table>
Provisions for possible loan losses as of June 30, 2003 and December 31,
2002 are as follows:
<Table>
<Caption>
MILLIONS OF WON
-----------------------
2003 2002
---------- ----------
Loans
Loans in Won and foreign currency and notes purchased..... W 837,880 W 527,474
Bills purchased........................................... 400,932 39,773
Advances for customers.................................... 91,624 3,803
Domestic import usance bills.............................. 61,254 104,441
Debentures accepted by private subscription............... 205,693 100,777
Other loans............................................... 6,076 313,715
---------- ----------
1,603,459 1,089,983
Other assets................................................ 1,806 4,946
---------- ----------
W1,605,265 W1,094,929
========== ==========
</Table>
As of June 30, 2003, classification of loans and provisions for possible
loan losses are as follows (Millions of Won):
<Table>
<Caption>
PROVISIONS FOR
POSSIBLE LOAN
CLASSIFICATION LOANS(*) LOSSES RATIO (%)
- -------------- ----------- -------------- ---------
Normal.................................................. W38,206,981 W 199,715 0.52
Special attention....................................... 2,153,781 430,482 19.99
Substandard............................................. 1,768,231 610,761 34.54
Doubtful................................................ 526,977 267,944 50.85
Loss.................................................... 94,557 94,557 100.00
Others(**).............................................. 5,802,037 -- --
----------- ---------- ------
W48,552,564 W1,603,459 3.30
=========== ========== ======
</Table>
- ------------
(*) Net of present value discounts.
(**) Loans to or loans guaranteed by the Korean Government.
85
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
The ratio of provisions to total loans and ratio of provisions to
non-performing loans as of June 30, 2003 and December 31, 2002 and 2001 are as
follows (Millions of Won):
<Table>
<Caption>
2003 2002 2001
----------- ----------- -----------
Total loans........................................ W48,552,563 W46,007,214 W49,106,512
Provisions for possible losses..................... 1,603,459 1,089,983 1,835,651
Provision ratio.................................... 3.3 2.4 3.7
Non-performing loans............................... 2,389,765 886,130 2,036,767
Provisions for possible losses..................... 973,262 313,028 1,162,328
Provision ratio.................................... 40.7 35.3 57.1
</Table>
Restructured loans as of June 30, 2003 and December 31, 2002 due to court
receivership, court mediation or other financial restructuring process are as
follows:
<Table>
<Caption>
MILLIONS OF WON
------------------
2003 2002
------- --------
Changes in contractual terms................................ W 200 W 72,154
Exemption................................................... 42,185 --
Conversion to equity investment............................. -- 775,051
------- --------
Total....................................................... W42,385 W847,205
======= ========
</Table>
When the contractual terms (i.e., principal, interest rate, or maturity) of
impaired loans are restructured, the Bank adjusts the carrying amount of the
impaired loans to the present value determined based on the restructured terms.
The Bank recognizes losses arising from the restructuring of the impaired loans
as incurred. Loans restructured due to changes in contractual terms are as
follows (Millions of Won):
<Table>
<Caption>
PERIOD OF RESTRUCTURING
-----------------------
2003 2002
---------- ----------
Beginning
Original amount before restructuring...................... W1,156,979 W2,208,352
Present value............................................. 1,030,024 1,877,125
---------- ----------
Present value discount.................................... 126,955 331,227
---------- ----------
Increase.................................................... 21 20,360
Decrease(amortization)...................................... (14,034) (224,632)
---------- ----------
(14,013) (204,272)
---------- ----------
Ending
Original amount before restructuring...................... 1,120,632 1,156,979
Present value............................................. 1,007,690 1,030,024
---------- ----------
Present value discount.................................... W 112,942 W 126,955
========== ==========
</Table>
The present value discount account is amortized using the effective
interest rate method over the redemption period.
86
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
The Bank's loan portfolio categorized by nation, major customers and
industry as of June 30, 2003 and December 31, 2002 are as follows:
<Table>
<Caption>
MILLIONS OF WON PERCENTAGE (%)
------------------------- --------------
2003 2002 2003.6.30
----------- ----------- --------------
By Nation:
The Republic of Korea............................ W29,598,687 W29,058,776 94.7
Panama........................................... 345,506 368,756 1.1
The United Kingdom............................... 267,897 250,000 0.9
The United States of America..................... 205,157 172,117 0.6
Others........................................... 846,782 658,213 2.7
----------- ----------- -----
W31,264,029 W30,507,862 100.0
=========== =========== =====
</Table>
<Table>
<Caption>
MILLIONS OF WON PERCENTAGE (%)
------------------------- --------------
2003 2002 2003.6.30
----------- ----------- --------------
By Customer:
Small & Medium Industry Promotion Corp. ......... W 3,332,381 W 3,352,770 10.7
Korea Hydro & Nuclear Power Co., Ltd. ........... 789,347 1,299,679 2.5
Korea Deposit Insurance Corp. ................... 1,193,199 1,202,210 3.8
Korea Asset Management Corp. .................... 596,685 730,934 1.9
Korean Airline Co., Ltd. ........................ 750,025 602,616 2.4
Tong Yang Cement Corp. .......................... 519,271 532,992 1.7
Others........................................... 24,083,121 22,786,661 77.0
----------- ----------- -----
W31,264,029 W30,507,862 100.0
=========== =========== =====
</Table>
<Table>
<Caption>
MILLIONS OF WON PERCENTAGE (%)
------------------------- --------------
2003 2002 2003.6.30
----------- ----------- --------------
By Industry:
Manufacturing.................................... W14,359,356 W13,661,997 45.9
Banking and insurance............................ 4,138,805 4,163,668 13.2
Electric, gas and water supply................... 2,434,093 3,149,387 7.8
Transportation and communication................. 3,589,612 3,425,730 11.5
Public administration and national defense....... 3,708,344 3,734,740 11.9
Others........................................... 3,033,819 2,372,340 9.7
----------- ----------- -----
W31,264,029 W30,507,862 100.0
=========== =========== =====
</Table>
87
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
6. PREMISES AND EQUIPMENT:
Premises and equipment as of June 30, 2003 and December 31, 2002 comprise
the following (Millions of Won):
<Table>
<Caption>
ACQUISITION COST OR ACCUMULATED
REVALUATION DEPRECIATION NET BOOK VALUE
------------------- ----------------- -------------------
2003 2002 2003 2002 2003 2002
-------- -------- ------- ------- -------- --------
Land...................... W327,351 W330,630 W -- W -- W327,351 W330,630
Buildings and
structures.............. 357,241 357,592 34,374 29,944 322,867 327,648
Machinery................. 52,505 53,906 41,622 39,409 10,883 14,497
Vehicles.................. 1,362 1,324 996 930 366 394
Construction
in-progress............. 3,243 759 -- -- 3,243 759
Others.................... 26,780 27,690 19,717 19,666 7,063 8,024
-------- -------- ------- ------- -------- --------
W768,482 W771,901 W96,709 W89,949 W671,773 W681,952
======== ======== ======= ======= ======== ========
</Table>
As of June 30, 2003, the government-posted price of the Bank's land
amounted to W237,063 million.
As of June 30, 2003, the Bank's premises, equipment and other assets are
insured against fire and other casualty losses up to approximately W310,730
million.
7. OTHER ASSETS:
Other assets as of June 30, 2003 and December 31, 2002 comprise the
following:
<Table>
<Caption>
MILLIONS OF WON
-----------------------
2003 2002
---------- ----------
Prepaid expenses............................................ W 222,562 W 309,743
Receivables................................................. 2,501,094 1,797,526
Accrued income.............................................. 447,376 431,606
Intangible assets........................................... 49,376 47,662
Deferred income tax assets.................................. 146,834 146,834
Trust account credit........................................ 2,712 --
Others...................................................... 481,766 460,709
---------- ----------
3,851,720 3,194,080
Loss: Provisions for possible losses........................ (1,806) (4,946)
Present value discount...................................... -- (124)
---------- ----------
W3,849,914 W3,189,010
========== ==========
</Table>
88
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
8. DEPOSITS:
Deposits as of June 30, 2003 and December 31, 2002 comprise the following:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -----------------------
2003.6.30 2003 2002
--------------- ---------- ----------
Won currency deposits:
Demand deposits
Checking accounts................................ -- W 2,052 W 1,537
Temporary deposits............................... 0.01 194,733 150,929
Passbook deposits................................ 0.35 52,009 71,891
Others........................................... 0.32 80,728 14,316
---------- ----------
329,522 238,673
---------- ----------
Time and savings deposits
Time deposits.................................... 4.87 3,371,892 3,777,189
Installment savings deposits..................... 6.13 176,770 133,769
Corporate savings deposits....................... 3.60 2,131,899 2,104,439
Savings deposits................................. 2.78 277,396 172,263
Long-term savings for households................. 11.32 178,482 168,930
Others........................................... 9.50 138,398 114,105
---------- ----------
6,274,837 6,470,695
---------- ----------
6,604,359 6,709,368
---------- ----------
Foreign currency deposits:
Checking accounts................................ -- 10,979 46,900
Passbook deposits................................ 0.81 285,010 248,586
Time deposits.................................... 1.47 491,701 213,579
Temporary deposits............................... 1.12 125 146
Others........................................... 0.16 3 1,275
---------- ----------
787,818 510,486
---------- ----------
Negotiable certificates of deposits................... 4.47 1,420,928 1,525,450
---------- ----------
W8,813,105 W8,745,304
========== ==========
</Table>
89
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
The maturities of time and savings deposits in Won and in foreign currency
as of June 30, 2003 are as follows (Millions of Won):
<Table>
<Caption>
INSTALLMENT TIME DEPOSITS IN
MATURING ON OR BEFORE TIME DEPOSITS SAVINGS DEPOSITS FOREIGN CURRENCY TOTAL
- --------------------- ------------- ---------------- ---------------- ----------
Sep. 30, 2003........................ W1,304,445 W 57,002 W368,836 W1,730,283
Dec. 31, 2003........................ 810,706 17,675 103,448 931,829
Jun. 30, 2004........................ 1,014,143 37,041 14,012 1,065,196
Jun. 30, 2005........................ 169,181 56,942 5,405 231,528
Jun. 30, 2006........................ 69,383 8,102 -- 77,485
Jun. 30, 2007........................ 2,128 8 -- 2,136
Jun. 30, 2008........................ 1,906 -- -- 1,906
---------- -------- -------- ----------
W3,371,892 W176,770 W491,701 W4,040,363
========== ======== ======== ==========
</Table>
9. BORROWINGS:
Borrowings as of June 30, 2003 and December 31, 2002 comprise the
following:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -------------------------
2003.6.30 2003 2002
--------------- ----------- -----------
Won currency borrowings
Ministry of Finance and Economy................... 4.55 W 2,093,441 W 2,192,150
Industrial Bank of Korea.......................... 4.36 466,384 476,596
Small & Medium Industry Promotion Fund............ 5.19 267,214 260,203
Ministry of Culture and Tourism................... 3.97 550,003 519,669
Korea Energy Management Corporation............... 3.88 459,505 467,586
Local governments................................. 4.14 78,362 80,848
Others............................................ 2.31-4.64 405,549 367,845
----------- -----------
W 4,320,458 W 4,364,897
-----------
Foreign currency borrowings
Small & Medium Industry Promotion Fund............ 2.79 W 72 W 209
KfW Group in Germany ("KFW")...................... 2.47 30,834 34,472
Asian Development Bank ("ADB").................... 2.03 3,583,514 3,609,587
International Bank for Reconstruction and
Development ("IBRD")........................... 2.29 4,772,895 5,669,560
The Japan Bank for International Cooperation
("JBIC")....................................... 0.83 223,643 229,034
Chase Manhattan Bank.............................. 0.83 442,288 --
The Bank of Korea................................. 1.61 106,080 156,088
Others............................................ 0.92-2.74 7,142,023 7,735,910
----------- -----------
W16,301,349 W17,434,860
----------- ===========
</Table>
90
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -------------------------
2003.6.30 2003 2002
--------------- ----------- -----------
Other borrowings
Bonds sold under repurchase agreements............ 2,856,860 2,333,885
Notes sold........................................ 2,040 2,504
Call money........................................ 1,498,238 322,939
----------- -----------
4,357,138 2,659,328
----------- -----------
W24,978,945 W24,459,085
=========== ===========
</Table>
The repayment of W347,662 million included in the borrowings above are
guaranteed by the Korean Government.
The Bank entered into an agreement with the JBIC (Japan Bank for
International Cooperation) regarding the borrowings amounting to W223,643
million to be used for designated purposes. As of June 30, 2003, the Bank has
local loans denominated in foreign currency and foreign currency loans amounting
to W206,207 million and W17,436 million, respectively, related to these
borrowings.
The maturities of borrowings in Won and in foreign currency as of June 30,
2003 are as follows (Millions of Won):
<Table>
<Caption>
WON CURRENCY FOREIGN CURRENCY
MATURING ON OR BEFORE BORROWINGS BORROWINGS TOTAL
- --------------------- ------------ ---------------- -----------
Sep. 30, 2003...................................... W 150,721 W 3,494,197 W 3,644,918
Dec. 31, 2003...................................... 102,618 1,741,254 1,843,872
Jun. 30, 2004...................................... 217,685 1,366,481 1,584,166
Jun. 30, 2005...................................... 633,486 4,842,345 5,475,831
Jun. 30, 2006...................................... 631,776 935,659 1,567,435
Jun. 30, 2007...................................... 531,704 661,096 1,192,800
Jun. 30, 2008...................................... 545,576 601,551 1,147,127
Thereafter......................................... 1,506,892 2,658,766 4,165,658
---------- ----------- -----------
W4,320,458 W16,301,349 W20,621,807
========== =========== ===========
</Table>
The subordinated debt included in borrowings as of June 30, 2003 comprises
the following:
<Table>
<Caption>
ANNUAL INTEREST
TYPE RATE (%) MILLIONS OF WON CONDITION OF BORROWINGS
- ---- --------------- --------------- -----------------------
Government fund....................... 4.55 W 2,093,171 Installment reimbursement
Agency for International Development
relending facilities................ 1.98 270 "
Asian Development Bank relending
facilities.......................... 2.03 3,583,514 Lump-sum reimbursement
International Bank for Reconstruction
and Development relending
facilities.......................... 2.29 4,772,895 Installment reimbursement
-----------
W10,449,850
===========
</Table>
91
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
10. INDUSTRIAL FINANCE BONDS:
Industrial finance bonds ("IFB") as of June 30, 2003 and December 31, 2002
comprise the following:
<Table>
<Caption>
ANNUAL INTEREST
RATE (%) MILLIONS OF WON
--------------- -------------------------
2003.6.30 2003 2002
--------------- ----------- -----------
IFB in Won.......................................... 6.51 W25,627,581 W24,352,837
IFB in foreign currency............................. 1.70 8,867,625 8,066,690
Offshore IFB in foreign currency.................... 2.18 1,268,192 1,216,557
----------- -----------
35,763,398 33,636,084
----------- -----------
Premiums on IFB................................... 22,135 16,396
Discounts on IFB.................................. (43,036) (52,460)
----------- -----------
W35,742,497 W33,600,020
=========== ===========
</Table>
Under the Korea Development Bank Act, the Bank has authority to issue
industrial finance bonds. The amount of issued bonds and guarantees outstanding
by the Bank is limited to 30 times the amount of paid-in capital and legal
reserve. Bonds purchased or guaranteed by the Korean Government are not included
in the limit. When existing bonds are refinanced or guarantees are executed, the
limit is temporarily not applied. The amount of issued bonds guaranteed by the
Korean Government as of June 30, 2003 amounted to W1,661 million
The Bank acquired W230,911 million of industrial finance bonds as of June
30, 2003. The treasury bonds are deducted from industrial finance bonds.
The maturities of IFB as of June 30, 2003 are as follows (Millions of Won):
<Table>
<Caption>
OFFSHORE IFB
IFB IN FOREIGN IN FOREIGN
MATURING ON OR BEFORE IFB IN WON CURRENCY CURRENCY TOTAL
- --------------------- ----------- -------------- --------------- -----------
Sep. 30, 2003......................... W 3,291,562 W 361,801 W 32,236 W 3,685,599
Dec. 31, 2003......................... 4,225,821 489,313 167,824 4,882,958
Jun. 30, 2004......................... 5,626,752 936,298 601,102 7,164,152
Jun. 30, 2005......................... 6,354,620 1,527,654 67 7,882,341
Jun. 30, 2006......................... 4,731,335 1,578,144 381,633 6,691,112
Jun. 30, 2007......................... 752,268 1,523,714 37,032 2,313,014
Jun. 30, 2008......................... 497,465 1,716,200 47,310 2,260,975
Thereafter............................ 146,480 715,866 -- 862,346
----------- ---------- ---------- -----------
W25,626,303 W8,848,990 W1,267,204 W35,742,497
=========== ========== ========== ===========
</Table>
92
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
11. OTHER LIABILITIES:
Other liabilities as of June 30, 2003 and December 31, 2002 comprise the
following:
<Table>
<Caption>
MILLIONS OF WON
-----------------------
2003 2002
---------- ----------
Payables.................................................... W2,436,171 W1,804,464
Accrued expenses............................................ 889,440 909,732
Advanced income............................................. 76,672 168,004
Guarantee deposits.......................................... 27,919 29,500
Advances received on IFB.................................... 3,620 14,476
Trust account debit......................................... 271,196 249,677
Provisions for possible other losses........................ 84,848 208,358
Others...................................................... 373,201 151,011
---------- ----------
W4,163,067 W3,535,222
========== ==========
</Table>
12. GUARANTEES OUTSTANDING AND COMMITMENTS:
The Bank provides guarantees for its customers. Guarantees outstanding and
the related provisions for possible losses as of June 30, 2003 and December 31,
2002 comprise the following (Millions of Won):
<Table>
<Caption>
PROVISION FOR
GUARANTEES AMOUNT POSSIBLE LOSSES
------------------------ -----------------
2003 2002 2003 2002
----------- ---------- ------- -------
Acceptances.................................. W 979,366 W1,135,796 W45,007 W 237
Guarantees on local borrowings............... 783,076 930,529 1,020 684
Guarantees on indebtedness in foreign
currency................................... 8,790,431 3,435,820 1,423 62,286
Letters of guarantee for importers........... 74,851 37,836 -- 16
----------- ---------- ------- -------
W10,627,724 W5,539,981 W47,450 W63,223
=========== ========== ======= =======
</Table>
93
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
The unsettled guarantees and commitments provided by the Bank as of June
30, 2003 and December 31, 2002 are as follows:
<Table>
<Caption>
MILLIONS OF WON
-------------------------
2003 2002
----------- -----------
Unsettled guarantees
Local letter of credit issuance........................... W 27,962 W 10,224
Foreign letter of credit issuance......................... 1,554,171 1,463,845
Others.................................................... 887,182 760,562
----------- -----------
2,469,315 2,234,631
----------- -----------
Commitments
For loans in Won.......................................... 6,406,980 7,078,917
For loans in foreign currency............................. 666,305 689,436
----------- -----------
7,073,285 7,768,353
----------- -----------
Bonds sold under repurchase agreements...................... 1,299,911 354,728
----------- -----------
W10,842,511 W10,357,712
=========== ===========
</Table>
13. COMMITMENTS AND CONTINGENCIES:
The Bank has entered into agreements to provide certain syndicated loans
with foreign banks. The total amount available under such loans are US$77,466
thousand (equivalent to W92,425 million), of which US$44,599 thousand
(equivalent to W53,211 million) have not been withdrawn by borrowers as of June
30, 2003.
During 1998, the Bank sold with recourse W3,084,141 million of
non-performing loans classified as substandard or below to the Korea Asset
Management Corporation for proceeds amounting to W1,339,629 million. The
resulting loss of W1,744,512 million was recorded as a loss on disposal of loans
during 1998. As of June 30, 2003, the unsettled amount of such loans amounted to
W1,299,911 million, and the provision for possible losses from the disposal of
unsettled loans recorded as other liabilities amounted to W84,848 million.
Loans sold off to KDB First Securitization Specialty Co., Ltd. and others
in accordance with the Asset Securitization Plan as of June 30, 2003 comprise
the following (millions of Won):
<Table>
<Caption>
RETAINED
SUBORDINATED
DISPOSAL DATE BOOK VALUE SELLING PRICE DEBT SECURITIES COLLATERAL(*)
------------------ ---------- ------------- --------------- -------------
KDB First SPC........ June 8, 2000 W 950,627 W 600,000 W201,800 W120,000
KDB Second SPC....... November 8, 2000 914,764 423,600 143,600 80,000
KDB Third SPC........ September 20, 2001 1,793,546 949,900 349,900 185,000
KDB Fifth SPC........ December 13, 2001 765,358 528,400 238,400 100,000
---------- ---------- -------- --------
W4,424,295 W2,501,900 W933,700 W485,000
========== ========== ======== ========
</Table>
- ------------
(*) Investment securities are provided as collateral (Note 4).
94
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
According to the contracts on asset transfers stipulating warranty for the
assets above, the Bank has a responsibility of warranty up to 30 percent of the
proceeds when the principal or a part of the interest is not repaid at the
expected due date of the cash flows payment schedule.
The Bank has provided credit lines to several securitization specialty
companies amounting to W7,073,285 million, of which W54,958 million was
withdrawn as of June 30, 2003.
In response to the generally unstable economic conditions, the Korean
government and the private sector have been implementing structural reforms to
historical business practices. Implementation of these reforms is progressing
slowly, particularly in the areas of restructuring private enterprises and
reforming the banking industry. The Korean government continues to apply
pressure to Korean companies to restructure into more efficient and profitable
firms. The Bank may be either directly or indirectly affected by these generally
unstable economic conditions and the reform program described above. The
accompanying non-consolidated financial statements reflect management's
assessment of the impact to date of the economic situation on the financial
position of the Bank. Actual results may differ materially from management's
current assessment.
The Bank provided loans amounting to W4,508,300 million and securities
amounting to W540,082 million on June 30, 2003 for companies under workout,
court receivership, court mediation and other restructuring process. The Bank
provided W1,227,807 million for provisions for possible loan losses and W27,349
million for present value discount with regard to the above loans and
securities. Actual results of the credit loss from the loans to the customers
may differ from the provisions reserved.
14. DERIVATIVE FINANCIAL INSTRUMENTS AND THE RELATED CONTRACTS:
The Bank utilizes derivative financial instruments to hedge against
financial market risks or for trading purposes.
In case of trading purposes, the Bank uses futures and forward contracts,
swaps, and options, in order to gain a profit from short-term fluctuations of
the underlying value of the derivatives, by forecasting the future interest
rate, exchange rate or other variables affecting the value of the instruments.
Furthermore, the Bank also trades the instruments to hedge against the
derivative financial instruments purchased by the Bank's customers.
Additionally, the trading derivatives include the derivatives used to hedge
the exchange rate of the Bank's foreign currency assets and liabilities and
interest rate of the Bank's loans and borrowings, of which the underlying assets
and liabilities are already valued at fair market value in accordance with the
financial accounting standards generally accepted in the Republic of Korea or
the position hedging transactions in which derivative instruments are not
specifically identified to the underlying transactions.
The hedging instruments generally include the cross currency swaps and/or
interest rate swaps used to hedge the borrowings and bonds denominated in
foreign currency from the exchange rate and/or the interest rate risks. Those
hedging transactions are made with foreign financial institutions and domestic
banks. The hedging instruments also include the interest swaps used to reduce
interest rate risks of the Industrial Finance Bonds issued in Won.
95
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
The unsettled contract amount of the Bank's derivatives and the related
valuation gain (loss) are as follows (Millions of Won):
<Table>
<Caption>
UNSETTLED CONTRACT AMOUNT VALUATION GAIN/LOSS(I/S)
------------------------------------------ -----------------------------------------------
TRADING HEDGING TRADING HEDGING VALUATION
INTEREST RATE TOTAL PURPOSE PURPOSE TOTAL PURPOSE PURPOSE GAIN/LOSS(B/S)
- ------------- ----------- --------------- ---------- -------- -------- -------- --------------
Forward.............. W 3,591,231 W 3,591,231 W -- W (99) W (99) W -- W (99)
Futures.............. 6,860,158 6,860,158 -- 5,081 5,081 -- --
Swap................. 43,826,692 43,570,176 256,516 (135,149) (131,305) (3,844) 185,375
Options
Buy................ 460,332 460,332 -- 3,142 3,142 -- 8,137
Sell............... 540,000 540,000 -- (3,275) (3,275) -- (10,311)
----------- ----------- ---------- -------- -------- -------- --------
55,278,413 55,021,897 256,516 (130,300) (126,456) (3,844) 183,102
----------- ----------- ---------- -------- -------- -------- --------
CURRENCY
Forward.............. 8,457,762 8,457,762 -- 47,316 47,316 -- 48,755
Futures.............. 191,373 191,373 -- 455 455 -- --
Swap................. 15,379,190 14,138,125 1,241,065 (12,130) 14,965 (27,095) (122,831)
Options
Buy................ 584,945 584,945 -- (3,209) (3,209) -- 8,195
Sell............... 797,837 797,837 -- 3,843 3,843 -- (11,211)
----------- ----------- ---------- -------- -------- -------- --------
25,411,107 24,170,042 1,241,065 36,275 63,370 (27,095) (77,092)
----------- ----------- ---------- -------- -------- -------- --------
STOCK PRICE INDEX
Futures.............. 13,779 13,779 -- 550 550 -- --
Options
Buy................ 121,779 121,779 -- 504 504 -- 9,239
Sell............... 294,981 294,981 -- (1,877) (1,877) -- (15,298)
----------- ----------- ---------- -------- -------- -------- --------
430,539 430,539 -- (823) (823) -- (6,059)
----------- ----------- ---------- -------- -------- -------- --------
W81,120,059 W79,622,478 W1,497,581 W(94,848) W(63,909) W(30,939) W 99,951
=========== =========== ========== ======== ======== ======== ========
</Table>
15. EQUITY:
PAID-IN CAPITAL
The Bank increased and decreased its paid-in capital several times
including a W3,000,000 million investment in kind by 127,086,334 shares of Korea
Electric Power Corporation valued at W23,606 per share on June 20, 2001, W50,000
million cash injection on December 29, 2001, and the raising of W100,000 million
and the reduction of W959,800 million paid-in capital for the year ended in
December 31, 2000. Paid-in capital of the Bank as of June 30, 2003 is W7,161,861
million.
96
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
CAPITAL SURPLUS
In accordance with a resolution of the Board of Directors, the Bank
decreased its paid-in capital used to offset accumulated deficit and the capital
surplus of the Bank as of June 30, 2003 are as follows (Millions of Won):
<Table>
<Caption>
DECREASE IN OFFSETTED
PAID-IN ACCUMULATED CAPITAL
RESOLUTION OF BOARD OF DIRECTORS CAPITAL DEFICIT SURPLUS
- -------------------------------- ----------- ----------- -------
October 27, 1998........................................ W4,218,800 W4,184,046 W34,754
November 22, 2000....................................... 959,800 950,181 9,619
---------- ---------- -------
W5,178,600 W5,134,227 W44,373
========== ========== =======
</Table>
LEGAL RESERVE
The Korea Development Bank Act requires the Bank to appropriate net income
as a legal reserve. This reserve can be transferred to paid-in capital or used
to offset accumulated deficit.
OFFSETTING OF ACCUMULATED DEFICIT
In accordance with the Korea Development Bank Act, the Bank offsets
accumulated deficit with reserves. If reserves are insufficient to eliminate the
accumulated deficit, the Korean Government should complement the deficiency.
Offsetted accumulated deficit with the approval of the Korean Government since
2000 are as follows:
<Table>
<Caption>
MILLIONS OF
YEAR APPROVAL DATE ACCOUNTS WON
- ---- ----------------- --------------- -----------
2000.......................................... February 28, 2001 Legal reserve W 456,997
Capital reserve 950,181
----------
W1,407,178
==========
</Table>
16. OTHER NON-INTEREST REVENUE (EXPENSES):
Other non-interest revenue (expenses) for the six-month period ended June
30, 2003 and 2002 comprise the following:
<Table>
<Caption>
MILLIONS OF WON
-------------------
2003 2002
-------- --------
Other non-interest revenue
Gain on foreign currency transactions..................... W221,135 W119,228
Reversal of provision for possible losses on guarantees
outstanding............................................ 15,773 47,706
Trust account management revenue.......................... 15,625 --
Gain on valuation of hedged items......................... 251,551 --
Others.................................................... 110,834 51,426
-------- --------
W614,918 W218,360
======== ========
</Table>
97
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
<Table>
<Caption>
MILLIONS OF WON
-------------------
2003 2002
-------- --------
Other non-interest expense
Loss on foreign currency transactions..................... W224,717 W339,389
Donation.................................................. 14,187 --
Trust account management loss............................. 46 --
Loss on valuation of hedged items......................... 135,190 --
Others.................................................... 29,258 112,623
-------- --------
W403,398 W452,012
======== ========
</Table>
17. GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the six-month period ended June 30,
2003 and 2002 comprise the following:
<Table>
<Caption>
MILLIONS OF WON
-------------------
2003 2002
-------- --------
Salaries.................................................... W 72,620 W 53,395
Retirement allowance........................................ 9,427 7,589
Employee benefits........................................... 6,071 11,379
Rent........................................................ 3,615 3,103
Depreciation................................................ 10,313 9,384
Taxes and dues.............................................. 4,561 4,521
Printing.................................................... 1,859 1,715
Travel...................................................... 1,348 1,561
Commission.................................................. 4,115 3,936
Others...................................................... 23,107 21,284
-------- --------
W137,036 W117,867
======== ========
</Table>
98
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
18. NON-OPERATING INCOME (EXPENSES):
Non-operating income (expenses) for the six-month period ended June 30,
2003 and 2002 comprise the following:
<Table>
<Caption>
MILLIONS OF WON
-------------------
2003 2002
-------- --------
Non-operating income
Gain on disposal of premises and equipment................ W 682 W 21
Rental income............................................. 245 268
Gain on disposal of loans................................. 10,291 55,119
Gain on valuation of securities using the equity method... 281,230 405,371
Gain on available-for-sale securities..................... 57,690 129,411
Gain on disposal of securities under equity method........ 93,743 4,033
Others.................................................... 947 1,464
-------- --------
444,828 595,687
-------- --------
Non-operating expenses
Loss on disposal of premises and equipment................ 36 6,604
Loss on disposal of loans................................. 3,228 115,848
Loss on available-for-sale-securities..................... 398,934 172,497
Others.................................................... 9,505 6,058
-------- --------
411,703 301,007
-------- --------
W 33,125 W294,680
======== ========
</Table>
99
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
19. AVERAGE AMOUNTS OF ASSETS AND LIABILITIES RELATED TO INTEREST INCOME AND
EXPENSES:
Interest income or interest expenses and the average amounts of related
assets or liabilities for the six-month period ended June 30, 2003 and 2002 are
as follows (Millions of Won):
<Table>
<Caption>
2003 2002
-------------------------------- --------------------------------
INTEREST INCOME INTEREST INCOME
AVERAGE AMOUNT OR EXPENSE AVERAGE AMOUNT OR EXPENSE
-------------- --------------- -------------- ---------------
Asset
Due from banks..................... W 1,663,052 W 16,390 W 2,356,050 W 34,813
Securities......................... 13,018,589 303,229 12,320,560 339,636
Loans.............................. 45,517,976 1,052,226 44,846,576 1,298,904
Others............................. 9,822 5,631
---------- ----------
W1,381,667 W1,678,984
========== ==========
Liabilities
Deposits........................... W 8,951,548 W 188,756 W 9,065,474 W 200,437
Borrowings......................... 23,723,221 283,857 20,183,187 336,537
Bonds.............................. 34,739,003 893,991 36,691,731 1,058,182
Others............................. 10,839 44,635
---------- ----------
W1,377,443 W1,639,791
========== ==========
</Table>
20. INCOME TAX EXPENSE:
The statutory income tax rate applicable to the Bank, including resident
tax surcharges, is approximately 29.7%.
Income tax expense for the six-month period ended June 30, 2003 and 2002
comprise the following:
<Table>
<Caption>
MILLIONS OF WON
---------------
2003 2002
------ ------
Income taxes payable........................................ W -- W --
Income taxes for overseas branches.......................... 288 216
---- ----
W288 W216
==== ====
</Table>
100
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
The tax effect on major tax adjustments for the six-month period ended June
30, 2003 and 2002 comprise the following:
<Table>
<Caption>
MILLIONS OF WON
--------------------
2003 2002
--------- --------
Income before income tax expense............................ W(392,041) W112,738
--------- --------
Computed income tax at the expected statutory rate.......... (116,436) 33,483
--------- --------
Temporary differences (tax effect):
Provision for possible loan losses........................ 53,872 (36,189)
Provision for severance benefits.......................... 1,117 --
Loss on settlement of non-performing loans disposed....... (36,682) 32,140
Loss on investments using the equity method............... (538) (33,427)
Write-off of loans........................................ 60,402 --
Provision for guarantees outstanding...................... (4,685) (13,951)
Impairment loss on equity securities...................... (55,175) (2,036)
Impairment loss on debt securities........................ 19,315 (14,151)
Present value discount.................................... (47,199) 7,092
Others.................................................... (288,784) 470,979
--------- --------
(298,357) 410,457
--------- --------
Permanent differences (tax effect):
Dividends received........................................ (12,367) (34,716)
Others.................................................... 28,772 254
--------- --------
16,405 (34,462)
--------- --------
Tax effect of operating loss carry-forward.................. -- 409,478
--------- --------
Income taxes payable........................................ W -- W --
========= ========
</Table>
101
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Changes in temporary differences for the six-month period ended June 30,
2003 are as follows (Millions of Won):
<Table>
<Caption>
BEGINNING ENDING
BALANCE DECREASE INCREASE BALANCE
----------- ----------- ----------- -----------
Accrued severance benefits........... W 5,605 W 794 W 4,554 W 9,365
Acquisition of shares of stock
resulting from the transfer of
capital surplus to common stock.... 92,667 -- 300 92,967
Loss on valuation of investment
securities......................... 11,612 11,600 -- 12
Gain on valuation of trading
securities......................... (160,546) (12,055) (5,169) (153,660)
Impairment loss on investment equity
securities......................... 788,510 435,936 250,160 602,734
Impairment loss on investment debt
securities......................... 445,956 22,312 87,346 510,990
Present value discount............... 215,377 158,920 -- 56,457
Provision for guarantees
outstanding........................ 63,223 63,223 47,450 47,450
Loss on investment valuation by the
equity method...................... (1,168,487) (1,168,487) (1,170,299) (1,170,299)
Provision for possible loan losses... 471,144 471,144 652,532 652,532
Loss on settlement of non-performing
loans disposed..................... 208,358 208,358 84,848 84,848
Write-off of loans................... 1,772,698 -- 203,374 1,976,072
Others............................... 731,583 536,233 (431,691) (236,341)
----------- ----------- ----------- -----------
3,477,700 727,978 (276,595) 2,473,127
Operating loss carry-forward......... 2,741,320 -- 1,387,145 4,128,465
----------- ----------- ----------- -----------
6,219,020 727,978 1,110,550 6,601,592
=========== =========== =========== ===========
Deferred income tax assets (2003).... W 1,847,049 W 216,209 W 329,833 W 1,960,673
=========== =========== =========== ===========
</Table>
Considering the future deductibility of accumulated deficit and temporary
differences from future taxable income, the Bank recorded deferred income tax
assets amounting to W146,834 million out of the total future tax benefits of
W1,847,049 million as of December 31, 2002 and W1,960,673 million as of June 30,
2003.
102
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
21. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES:
Significant assets and liabilities denominated in foreign currencies as of
June 30, 2003 and December 31, 2002 are as follows:
<Table>
<Caption>
THOUSANDS OF U.S.$(*) MILLIONS OF WON EQUIVALENT
----------------------------- ---------------------------
2003 2002 2003 2002
------------- ------------- ------------ ------------
(Assets)
Cash on hand..................... US$ 1,935 US$ 1,540 W 2,309 W 1,849
Due from banks................... 691,789 1,369,083 825,373 1,643,448
Trading securities............... 360,587 323,884 430,216 388,790
Investment securities
(available-for-sale)........... 2,054,131 1,748,506 2,450,784 2,098,907
Investment securities (held-to-
maturity)...................... 704,078 891,838 840,035 1,070,562
Investment securities using the
equity method.................. 99,520 113,774 118,738 136,574
Bills bought..................... 2,457,190 2,536,782 2,931,674 3,045,154
Call loans....................... 1,314,800 540,318 1,568,688 648,598
Loans............................ 13,386,622 13,427,626 15,971,579 16,118,522
Domestic import usance bills..... 3,048,144 2,793,102 3,636,739 3,352,839
Other assets..................... 2,361,062 2,724,690 2,816,982 3,270,718
------------- ------------- ----------- -----------
US$26,479,858 US$26,471,143 W31,593,117 W31,775,961
============= ============= =========== ===========
(Liabilities)
Deposits......................... US$ 768,232 US$ 536,105 W 916,578 W 643,540
Borrowings....................... 13,663,020 14,524,208 16,301,349 17,434,860
Bonds sold under repurchase
agreements..................... 858,413 589,872 1,024,172 708,082
Call money....................... 195,939 269,026 233,775 322,939
Industrial finance bonds
issued......................... 8,478,916 7,714,125 10,116,195 9,260,036
Other liabilities................ 1,775,932 1,746,748 2,118,864 2,096,795
------------- ------------- ----------- -----------
US$25,740,452 US$25,380,084 W30,710,933 W30,466,252
============= ============= =========== ===========
</Table>
- ------------
(*) Assets or liabilities denominated in foreign currencies other than in U.S.
Dollars have been converted into U.S. Dollars by using the exchange rate in
effect on June 30, 2003.
103
THE KOREA DEVELOPMENT BANK
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
22. RELATED PARTY TRANSACTIONS:
Significant loans to related parties as of June 30, 2003 and December 31,
2002 are as follows:
<Table>
<Caption>
MILLIONS OF WON
-----------------------
2003 2002
---------- ----------
The KDB Capital Corp. ...................................... W 297,177 W 325,583
KDB Asia Limited Hong Kong.................................. 23,862 24,008
Daewoo Shipbuilding & Marine Engineering Co., Ltd. ......... 843,496 480,951
Daewoo Securities Co., Ltd. ................................ 200,000 200,000
Pan Ocean Shipping Co., Ltd. ............................... 138,872 180,319
KDB Bank (Hungary) Ltd. .................................... 11,931 --
---------- ----------
W1,515,338 W1,210,861
========== ==========
</Table>
23. OPERATING RESULTS OF TRUST ACCOUNTS:
The income statement of the Trust Accounts for the six-month period ended
June 30, 2003 and 2002 are as follows:
<Table>
<Caption>
MILLIONS OF WON
---------------------------------
2003 2002
--------------- ---------------
(Revenue)
Interest income............................................. W104,644 W 95,733
Gain from securities........................................ 145,124 38,152
Others...................................................... 22,701 5,003
-------- --------
W272,469 W138,888
======== ========
(Expenses)
Dividends of trust profits to beneficiaries................. W164,713 73,135
Commissions paid............................................ 333 143
Loss from securities........................................ 65,035 37,290
Trust fee to the Bank....................................... 15,283 12,087
Provisions for possible loan losses......................... 22,325 6,155
Others...................................................... 4,780 10,078
-------- --------
W272,469 W138,888
======== ========
</Table>
24. SUPPLEMENTAL CASH FLOW INFORMATION:
Major transactions that do not involve cash inflows and cash outflows for
the six-month period ended June 30, 2003 are presented as follows:
<Table>
<Caption>
MILLIONS OF WON
---------------
Loans converted to equity securities........................ W5,253
</Table>
104
THE REPUBLIC OF KOREA
LAND AND HISTORY
TERRITORY AND POPULATION
Located generally south of the 38th parallel on the Korean peninsula, The
Republic of Korea covers about 38,000 square miles, approximately one-fourth of
which is arable. The Republic's population of approximately 48 million has a
literacy rate of approximately 98%. The country's largest city and capital,
Seoul, has a population of about 11 million people.
POLITICAL HISTORY
Dr. Rhee Syngman, who was elected president in each of 1948, 1952, 1956 and
1960, dominated the years after the Republic's founding in 1948. Shortly after
President Rhee's resignation in 1960 in response to student-led demonstrations,
a group of military leaders headed by Park Chung Hee assumed power by coup. The
military leaders established a civilian government, and the country elected Mr.
Park as President in October 1963. President Park served as President until his
assassination in 1979 following a period of increasing strife between the
Government and its critics. The Government declared martial law and formed an
interim government under Prime Minister Choi Kyu Hah, who became the next
President. After clashes between the Government and its critics, President Choi
resigned, and General Chun Doo Hwan, who took control of the Korean army, became
President in 1980.
In late 1980, the country approved, by national referendum, a new
Constitution, providing for indirect election of the President by an electoral
college and for certain democratic reforms, and shortly thereafter, in early
1981, re-elected President Chun. Responding to public demonstrations in 1987,
the legislature revised the Constitution to permit direct election of the
President. In December 1987, Roh Tae Woo won the Presidency by a narrow
plurality, after opposition parties led by Kim Young Sam and Kim Dae Jung failed
to unite behind a single candidate. In February 1990, two opposition political
parties, including the one led by Kim Young Sam, merged into President Roh's
ruling Democratic Liberal Party.
In December 1992, the country elected Kim Young Sam as President. The
election of a civilian and former opposition party leader considerably lessened
the controversy concerning the legitimacy of the political regime. President
Kim's administration reformed the political sector and deregulated and
internationalized the Korean economy.
In December 1997, the country elected Kim Dae Jung as President. President
Kim's party, the Millennium Democratic Party (formerly known as the National
Congress for New Politics), formed a coalition with the United Liberal Democrats
led by Kim Jong Pil, with Kim Jong Pil becoming the first prime minister in
President Kim's administration. The coalition, which temporarily ended before
the election held in April 2000, continued with the appointment of Lee Han Dong
of the United Liberal Democrats as the Prime Minister in June 2000. The
coalition again ended in September 2001.
In December 2002, the country elected Roh Moo Hyun as President. President
Roh began his term on February 25, 2003. The Roh administration has announced
that its key policy priorities will include:
- pursuing a flexible macroeconomic policy mix to ensure stable economic
growth through balanced growth in domestic demand and exports;
- nurturing emerging industries, encouraging research and development, and
improving logistical infrastructure to maximize economic growth
potential;
- expanding the economic participation of women and the elderly, while
establishing a sustainable social welfare system that is consistent with
recent socio-economic progress;
- continuing structural reforms that will result in a transparent,
market-driven economy;
- continuing with inter-Korean cooperation; and
105
- continuing with efforts to resolve the North Korea nuclear issue
peacefully through various diplomatic channels.
GOVERNMENT AND POLITICS
GOVERNMENT AND ADMINISTRATIVE STRUCTURE
Governmental authority in the Republic is centralized and concentrated in a
strong presidency. The President is elected by popular vote and can only serve
one term of five years. The President chairs the State Council, which consists
of the prime minister, the deputy prime ministers, the respective heads of
Government ministries and the ministers of state. The President can select the
members of the State Council and appoint or remove all other Government
officials, except for elected local officials.
The President can veto new legislation and take emergency measures in cases
of natural disaster, serious fiscal or economic crisis, state of war or other
similar circumstances. The President must promptly seek the concurrence of the
National Assembly for any emergency measures taken; failing to do so
automatically invalidates the emergency measures.
The National Assembly exercises the country's legislative power. The
Constitution provides for the direct election of about 85% of the members of the
National Assembly and the distribution of the remaining seats proportionately
among parties winning over 3% of the popular vote. National Assembly members
serve four-year terms. The National Assembly enacts laws, ratifies treaties and
approves the national budget. The executive branch drafts most legislation and
submits it to the National Assembly for approval.
The country's judicial branch comprises the Supreme Court, the
Constitutional Court and lower courts of various levels. The President appoints
the Chief Justice of the Supreme Court and appoints the other Justices of the
Supreme Court upon the recommendation of the Chief Justice. All appointments to
the Supreme Court require the consent of the National Assembly. The Chief
Justice, with the consent of the other Supreme Court Justices, appoints all the
other judges in Korea. Supreme Court Justices serve for six years; all other
judges serve for ten years. Other than the Chief Justice, justices and judges
may be reappointed to successive terms.
The President formally appoints all nine judges of the Constitutional
Court, but three judges must be designated by the National Assembly and three by
the Chief Justice of the Supreme Court. Constitutional Court judges serve for
six years and may be reappointed to successive terms.
Administratively, the Republic comprises nine provinces and seven cities
with provincial status: Seoul, Busan, Daegu, Inchon, Gwangju, Daejon and Ulsan.
From 1961 to 1995, the national government controlled the provinces and the
President appointed provincial officials. Local autonomy, including the election
of provincial officials, was reintroduced in June 1995.
POLITICAL ORGANIZATIONS
Currently, there are three main political parties, the Grand National Party
("GNP"), the Millennium Democratic Party ("MDP") and the Uri Party ("UP") which
is the current ruling party.
As of December 29, 2003, the parties controlled the following number of
seats in the National Assembly:
<Table>
<Caption>
GNP MDP UP OTHERS TOTAL
--- --- --- ------ -----
Number of Seats............................................. 148 60 47 16 271
</Table>
RELATIONS WITH NORTH KOREA
Relations between the Republic and North Korea have been tense over most of
the Republic's history. The Korean War of 1950-1953 began with the invasion of
the Republic by communist forces from
106
North Korea and, following a military stalemate, an armistice was reached
establishing a demilitarized zone monitored by the United Nations in the
vicinity of the 38th parallel.
North Korea maintains a regular military force estimated at more than
1,000,000 troops, mostly concentrated near the northern border of the
demilitarized zone. The Republic's military forces, composed of approximately
690,000 regular troops and almost 3.1 million reserves, maintain a state of
military preparedness along the southern border of the demilitarized zone. The
United States currently maintains approximately 37,000 troops in the Republic.
Over the last few years, relations between the Republic and North Korea
have generally improved, despite occasional difficult periods, such as the June
1999 and June 2002 incidents during which several North Korean naval ships
intruded on the northern boundary of the Republic's territorial waters,
resulting in a series of hostile naval clashes, and the recent events relating
to North Korea's nuclear program discussed below. The Government believes that
general improvement in relations between the Republic and North Korea in the
last several years has stemmed from expectations of increased economic
cooperation. Trade between the two Koreas, which totaled US$287 million in 1995,
increased to US$403 million in 2001. In November 1998, the Hyundai Group began
operating tours for South Koreans to visit the Mount Kumgang region of North
Korea after reaching an agreement for such tours with the North Korean
government. In June 2000, then-President Kim Dae Jung met with North Korea's
leader Kim Jong-Il in Pyongyang, North Korea. This was the first summit meeting
between the leaders of the Republic and North Korea since the nation was divided
in 1945. After four rounds of discussions, the summit meeting resulted in the
joint announcement by then-President Kim Dae Jung and North Korea's leader Kim
Jong-Il that the two nations had reached an accord to promote: (1) the
autonomous pursuit of unification; (2) the reunion of separated families; (3)
the promotion of economic cooperation and exchange in various fields; and (4)
the continuation of dialogue to implement the accord. Since the summit, ten
rounds of ministerial talks have been held through April 2003.
In recent months, however, the level of tension between the two Koreas, as
well as between North Korea and the United States, has increased. In response to
North Korea's admission to the maintenance of a nuclear weapons program in
breach of the peace accord executed in October 1994, the United States, Japan,
the Republic and the European Union (which became party to the 1994 accord in
November 2002) decided to suspend shipments of oil to North Korea called for by
the 1994 accord and reiterated their demands for the dismantling of North
Korea's nuclear weapons program. Following the suspension of oil shipments,
North Korea removed seals and surveillance equipment from its Yongbyon nuclear
power plant and evicted nuclear inspectors from the United Nations International
Atomic Energy Agency (the "IAEA") in December 2002. In January 2003, North Korea
announced its intention to withdraw from the Nuclear Non-Proliferation Treaty,
refusing to abandon its nuclear power and arms program unless the United States
were to execute a non-aggression pact. Media reports have stated that North
Korea has reactivated a reactor at its main nuclear complex, the Yongbyon
nuclear power plant. In February 2003, the IAEA referred the nuclear issue to
the United Nations Security Council. In an effort to secure a peaceful
negotiated resolution to these events, the two Koreas continue to hold
ministerial talks. In addition, in April 2003, the United States, North Korea
and China held tripartite discussions in an effort to resolve issues relating to
North Korea's nuclear weapons program, during which North Korea reportedly
admitted that it had already successfully developed nuclear weapons. Although
both President Roh of the Republic and President Bush of the United States have
pledged their support in principle to a peaceful resolution of the situation,
there can be no assurance that the level of tension will not escalate and that
such escalation will not have a material adverse impact on the Republic's
economy or its ability to obtain future funding. In August 2003, the
representatives of the Republic, the United States, North Korea, China, Japan
and Russia held multilateral talks in an effort to resolve issues relating to
North Korea's nuclear weapons program. While the talks concluded without
resolution, participants in the August meeting indicated a further round of
negotiations may take place in the future.
Over the longer term, reunification of the two Koreas could occur.
Reunification may entail a significant economic commitment by the Republic.
107
FOREIGN RELATIONS AND INTERNATIONAL ORGANIZATIONS
The Republic maintains diplomatic relations with most nations of the world,
most importantly with the United States with which it entered into a mutual
defense treaty and several economic agreements. The Republic also has important
relationships with Japan and China, its largest trading partners after the
United States.
The Republic belongs to a number of supranational organizations, including:
- the International Monetary Fund (the "IMF");
- the World Bank;
- the Asian Development Bank (the "ADB");
- the Multilateral Investment Guarantee Agency;
- the International Finance Corporation;
- the International Development Association;
- the African Development Bank;
- the European Bank for Reconstruction and Development;
- the Bank for International Settlements; and
- the World Trade Organization (the "WTO").
In September 1991, the Republic and North Korea became members of the
United Nations. During the 1996 and 1997 sessions, the Republic served as a
non-permanent member of the United Nations Security Council.
In March 1995, the Republic applied for admission to the Organization for
Economic Cooperation and Development (the "OECD"), which the Republic officially
joined as the twenty-ninth regular member in December 1996.
THE ECONOMY
ECONOMIC DEVELOPMENTS SINCE 1997
In 1997 and 1998, a number of developments described below adversely
affected the Korean economy. Korean companies, including the conglomerates known
as "chaebols" that dominate the Korean economy, banks and other financial
institutions struggled financially, and a significant number of them failed.
Factors that contributed to the financial difficulties included excessive
investment by Korean companies and high levels of debt, including debt
denominated in foreign currencies, incurred by Korean companies. The economic
difficulties of certain Southeast Asian countries beginning in 1997 also
contributed to Korea's problems. During this period, the Republic experienced
significant depreciation of the Won, increases in interest rates, volatile stock
prices, as well as reductions in its foreign currency reserves and reduced
liquidity in the economy. Reflecting these factors, in 1998, GDP contracted by
6.7% at constant market prices, the inflation rate rose to 7.5% from 4.4% in
1997 and the unemployment rate rose to 7.0% from 2.6% in 1997.
However, the Korean economy recovered after 1998 and achieved an increase
in GDP of 10.9% in 1999 at constant market prices. In addition, the Republic
recorded a trade surplus of US$23.9 billion in 1999 as the Republic's economic
recovery led to a 28.4% increase in imports and a 8.6% increase in exports. The
Republic recorded GDP growth of 9.3% and a trade surplus of US$11.8 billion in
2000, GDP growth of 3.1% and a trade surplus of US$9.3 billion in 2001 and GDP
growth of 6.3% (based on preliminary data) and a trade surplus of US$10.3
billion in 2002. At the same time, inflation has been managed at relatively low
levels of 0.8% in 1999, 2.3% in 2000, 4.1% in 2001 and 2.7% in 2002. Moreover,
the unemployment rate has continued to decrease in each year since 1998, to 6.3%
in 1999, 4.1% in 2000,
108
3.8% in 2001 and 3.1% in 2002. Based on preliminary data, GDP growth in the
first half of 2003 was 2.7% at constant market prices. Based on preliminary
data, the Republic's GDP grew approximately 1.9% in the second quarter of 2003,
at constant market price, compared with the second quarter of 2002. In addition,
based on preliminary data, GDP fell 0.7% in the second quarter of 2003 compared
with the first quarter of 2003, which followed 0.4% fall in GDP in the first
quarter of 2003 compared with the fourth quarter of 2002. Based on preliminary
data, the Republic's GDP grew approximately 2.3% in the third quarter of 2003.
Based on preliminary data, the Republic recorded a trade surplus of US$3.3
billion in the first half of 2003. In the first half of 2003, in the inflation
rate was 3.0% and the unemployment rate was 3.3%.
The following table sets forth information regarding certain of the
Republic's key economic indicators for the periods indicated.
<Table>
<Caption>
AS OF OR FOR THE YEAR ENDED DECEMBER 31, AS OF OR FOR THE
------------------------------------------------------- SIX MONTHS ENDED
1997 1998 1999 2000 2001 2002 JUNE 30, 2003
------ ------- ------- ------ ------ -------- ----------------
(IN BILLIONS OF DOLLARS AND TRILLIONS OF WON, EXCEPT PERCENTAGES)
GDP Growth(1)................... 5.0% (6.7)% 10.9% 9.3% 3.1% 6.3%(2) 2.7%(2)
Inflation....................... 4.4% 7.5% 0.8% 2.3% 4.1% 2.7% 3.0%
Unemployment(3)................. 2.6% 7.0% 6.3% 4.1% 3.8% 3.1% 3.3%
Trade Surplus................... $(8.5) $39.0) $23.9 $11.8 $9.3 $10.3 $3.3(2)
Foreign Currency Reserves....... $8.9 $48.5 $74.1 $96.2 $102.8 $121.4 $131.7
External Liabilities............ $159.2 $148.7 $137.1 $131.7 $118.8 $131.0 $144.0
Fiscal Balance.................. W(7.0) W(18.8) W(13.1) W6.5 W7.3 W22.7(2) --
</Table>
- ------------
(1) At constant market prices.
(2) Preliminary.
(3) Average for year.
The Republic's economic and financial difficulties in 1997 and 1998 and its
subsequent recovery are described in more detail below.
Financial Condition of Korean Companies
Beginning in early 1997, a significant number of Korean companies,
including member companies of chaebol groups, experienced financial difficulties
due to excessive investment in some industries, weak export prices and high
levels of debt and foreign currency exposure. In addition, the widespread
practice of cross guarantees among member companies of chaebols meant that the
difficulties of financially weaker companies threatened the financially stronger
companies as well. The reluctance and reduced ability of banks to renew or
extend additional credit exacerbated these problems.
Beginning in early 1997, a number of Korean companies failed, including
companies in the Hanbo Group, the Sammi Group, the Kia Group, the Jinro Group,
the Dainong Group, the Ssang Bang Wool Group, the New Core Group, the Tae-il
Precision Group and the Halla Group. The series of major corporate failures in
1997 and 1998 contributed to increases in the Republic's unemployment rate,
which rose to 8.5% as of January 31, 1999, but decreased to 3.1% as of December
31, 2002 due in large part to the Republic's economic recovery during the
period. In the first half of 2003, the unemployment rate was 3.3%.
In August 1999, Korean creditor financial institutions of the Daewoo Group
agreed to enter into voluntary workout programs for twelve companies of the
Daewoo Group. By the end of March 2000, these creditors approved the workout
programs, which included spin-offs of certain Daewoo Group companies,
debt-for-equity swaps, deferrals of principal and interest payments, reduction
of interest rates and provision of new credits by existing creditors. In
addition, by March 2000, The Korea Asset Management Corporation ("KAMCO")
reached an agreement in principle with foreign creditor financial institutions
of certain Daewoo Group companies to purchase the creditors' claims. An offer to
purchase the claims of foreign creditors was commenced in May 2000, and
approximately US$3.9 billion, or over 90% of eligible
109
claims, was purchased by KAMCO by October 2000. By December 2000, Daewoo
Corporation and Daewoo Heavy Industries Ltd. spun off their respective
operations to newly established operating companies pursuant to their workout
programs. By December 2002, nine Daewoo Group companies, including Daewoo
Engineering & Construction Co., Ltd. and Daewoo International Corporation, each
of which were spun-off from Daewoo Corporation, and Daewoo Shipbuilding & Marine
Engineering Co., Ltd. and Daewoo Heavy Industries & Machinery, Ltd., each of
which were spun-off from Daewoo Heavy Industries, have exited from their
respective workout programs. Additionally, Daewoo Corporation and Daewoo Heavy
Industries are currently in the process of liquidation. The workout programs for
the remaining four Daewoo Group companies are ongoing. Further, Daewoo Motor
Co., Ltd., Korea's second-largest automobile manufacturer, went under court
receivership in November 2000 after it had failed to obtain additional loans
from its main creditor banks and defaulted on its short-term payment of
obligations. As the key element of the restructuring of Daewoo Motor, GM-Daewoo
Auto and Technology ("GMDAT") was established in August 2002 pursuant to a
master agreement between General Motors Corporation ("GM") and certain creditors
of Daewoo Motor. In October 2002, GMDAT acquired certain assets of Daewoo Motor,
and GMDAT commenced operation as a result of a final agreement reached by GM and
the creditors. According to the master agreement, GM and GM's affiliates
ultimately will own 67% of GMDAT and the creditors will own the remaining 33%.
Pursuant to an agreement between GM and the creditors, the creditors agreed to
extend US$2 billion in additional loans to GMDAT, of which certain creditors,
including Woori Bank, Chohung Bank, Korea Exchange Bank and us, have agreed to
provide loans to GMDAT at market interest rates and trade finance facilities in
the aggregate amount of US$1.25 billion, including US$750 million in loans from
us.
In addition to the uncertainties concerning the prospects of the
restructuring of the Daewoo Group companies discussed above, the possibility of
financial difficulties for other conglomerates as well as Korean financial
institutions may negatively affect the Korean economy. For example, the Hyundai
Group has been reported to be struggling with its indebtedness, reported to
amount to approximately US$30 billion, and Hyundai Group's Hyundai Engineering &
Construction Co., Ltd. and Hynix Semiconductor Inc. (formerly known as Hyundai
Electronics Industries Co., Ltd. and disaffiliated from Hyundai Group since June
2001) have been reported to be experiencing liquidity problems. In March, May
and September 2001, creditor financial institutions of the Hyundai Group agreed
to provide financial assistance by way of additional loans, extensions on
maturities of various outstanding payment obligations, debt-for-equity swap
transactions, guarantees of repayment obligations of overseas borrowings and
injections of additional capital into the Hyundai Group companies. In addition,
we established the "Fast Track Debenture Program" to support the corporate
debenture market. Hyundai Engineering & Construction and Hynix Semiconductor
were selected as companies to be included in this program, which commenced in
January 2001 and ended in January 2002. Under this bond purchase program,
selected companies became eligible to refinance through us up to 80% of the
principal amount of their debentures maturing in 2001 through the issuance of
new debentures to us at market interest rates. Despite a US$1.25 billion equity
offering completed in June 2001, Hynix Semiconductor has been reported to
continue to have financial difficulties. In October 2001, creditor financial
institutions of Hynix Semiconductor decided to subject it to the Corporate
Restructuring Promotion Act, which became effective in September 2001. The
Corporate Restructuring Promotion Act allows creditor financial institutions of
a troubled company to freeze and reschedule its debts (including provision of
new credits) upon a resolution by creditors representing at least 75% of the
entire claims amount, as part of efforts to sustain its operations. In June
2002, the creditor financial institutions converted W3.1 trillion in principal
amount of Hynix Semiconductor convertible bonds into equity. As a result, the
creditor financial institutions now control Hynix Semiconductor. The creditor
financial institutions are reportedly considering a wide range of options with
respect to Hynix Semiconductor. In November 2002, an agreement was signed among
Hynix Semiconductor, Hyundai Display Technology, Inc. (a subsidiary of Hynix
Semiconductor) and Beijing Orient Electronics Group with respect to the sale of
Hyundai Display Technology's TFT-LCD business for US$380 million. The creditor
financial institutions of Hynix Semiconductor agreed to extend US$180 million in
loans, including US$100 million from us, to Beijing Orient Electronics Group in
connection with its acquisition of the TFT-LCD business. The extension of
110
the loans and closing of the sale and purchase of the TFT-LCD business was
completed in January 2003. In December 2002, the creditor financial institutions
of Hynix Semiconductor approved a plan that includes a 21:1 reverse stock split
followed by a W1.9 trillion debt-for-equity swap and a rollover to the end of
2006 of W3.0 trillion of Hynix Semiconductor's debt. The plan subsequently was
approved by Hynix Semiconductor's board of directors in January 2003. The
reverse stock split was consummated in March 2003 and the debt-for-equity swap
was consummated in April 2003.
In March 2003, the principal creditor banks of SK Networks Co., Ltd.,
formerly known as SK Global Co., Ltd., commenced corporate restructuring
proceedings against SK Networks after the company admitted that it had falsified
its financial statements. The Korean financial markets have been adversely
affected as a result. On October 27, 2003, SK Networks and its overseas
subsidiaries completed the final major step in the restructuring of indebtedness
of SK Networks and its overseas subsidiaries, including (i) the purchase of
approximately $540 million of the $563 million of total indebtedness of its
overseas subsidiaries held by non-Korean institutions (the "Foreign Exchange");
(ii) the purchase or inclusion in the restructuring plan of SK Networks under
the Corporate Restructuring Promotion Act ("CRPA") of all of the approximately
$126 million of indebtedness of its overseas subsidiaries held by Korean
institutions (the "Korean Exchange"); and (iii) the entering into of the CRPA
Implementation Agreement in respect of the restructuring of the approximately
$1.7 billion of indebtedness of SK Networks. The Foreign Exchange provided for
the assignment to SK Networks of indebtedness of its subsidiaries held by the
participating creditors in exchange for 43% of the principal amount in
promissory notes and 5% of the principal amount in the form of bonds with
Warrants. Concurrent with the Foreign Exchange, all of the indebtedness of SK
Networks and its overseas subsidiaries held by Korean financial institution
creditors was resolved either through the Korean Exchange (on the same basic
economic terms as the Foreign Exchange) or in accordance with the CRPA
Implementation Agreement, entered into on October 27, 2003. Under the CRPA
Implementation Agreement, all of the indebtedness of SK Networks held by the
Korean financial institution creditors was converted into the shares of common
stock, redeemable preferred stock and mandatory convertible bonds of SK
Networks. SK Corp., which is the parent company of SK Networks, also converted
approximately $760 million of its claims against SK Networks into the shares of
common stock of SK Networks in connection with the CRPA Implementation
Agreement.
As of June 30, 2003, Hanaro Telecom, Inc., Korea's second largest Internet
broadband service provider, had W1.7 trillion in outstanding debt, W300 million
of which was due to mature by the end of 2003. On October 21, 2003, shareholders
of Hanaro Telecom voted to sell a 39.6% controlling interest in the company to a
consortium of investors led by American International Group, Inc. ("AIG") and
Newbridge Capital, Inc. ("Newbridge Capital") for approximately $1.1 billion.
Hanaro Telecom received the $1.1 billion payment on October 31, 2003.
Commencing in the second half of 2003, LG Card Co., Ltd., Korea's largest
credit card company in terms of both number of credit card holders and charge
volume, has been experiencing significant liquidity problems. In November 2003,
creditors of LG Card (including us) agreed to provide W2 trillion in new loans
to enable LG Card to resume cash operations. Certain of LG Card's creditors
(including us) also agreed to extend payments on existing debt for one year
after the chairman of LG Group pledged his personal stake in LG Corp, the group
holding company, as collateral. In December 2003, each of Woori Bank, Kookmin
Bank and National Agricultural Cooperative Federation agreed to lend W100
billion to LG Card. These loans will be due in January 2004.
The Government and the private sector have worked together to implement
major reforms in the corporate sector. As part of the corporate sector response
to the financial crisis, all forms of mergers and acquisitions, including
hostile takeovers, were liberalized in May 1998. The Government also required
each of the 64 largest chaebol groups to agree upon capital structure
improvement plans with its lead creditor banks in 1998. These plans specified
annual debt to equity ratio targets for each chaebol, identified its core
business area and established divestiture plans for companies outside its core
business areas.
111
As a result, the average numbers of affiliates of chaebol groups decreased
significantly since 1997 and the debt to equity ratio of listed companies,
excluding financial institutions, improved significantly from 271.4% at the end
of 1997 to 128.0% at the end of 2001. In addition, laws and regulations
progressively limiting, and eventually eliminating, the provision of cross
guarantees among chaebol affiliates were implemented.
Financial Condition of Korean Banks and Other Financial Institutions
The capital adequacy and liquidity of most Korean banks and other financial
institutions have been adversely affected by the financial difficulties of
corporate borrowers, high levels of short-term foreign currency borrowings from
foreign financial institutions and the consideration of non-market oriented
factors in making lending decisions.
The Government in late 1997 and 1998 ordered the closing of many of the
worst affected financial institutions. In addition, the Government became the
controlling shareholder of four large commercial banks, Seoul Bank, Korea First
Bank, Woori Bank and Chohung Bank, by recapitalizing them. In December 1999, the
Government sold a controlling interest in Korea First Bank to Newbridge Capital,
and subsequently, the Government extended an invitation to domestic and foreign
financial institutions to bid for and acquire Seoul Bank. The Government
selected Hana Bank as the acquirer and the Hana Bank-Seoul Bank merger was
consummated in December 2002. The newly merged entity formed the Republic's
third largest commercial bank in terms of total assets. In January 2003, Shinhan
Financial Group Co., Ltd. was selected by the Public Fund Oversight Committee as
the preferred bidder with respect to the sale of the Chohung Bank shares owned
by the Government. In July 2003, the Government agreed to sell a controlling
interest in Chohung Bank to Shinhan Financial Group and in August 2003, Shinhan
Financial Group completed its acquisition of the Chohung Bank shares. In August
2003, Lone Star Funds, an investment firm based in the United States, agreed to
buy a 51% stake in Korea Exchange Bank for approximately W1.4 trillion. In
October 2003, Lone Star Funds completed its W1.07 trillion payment for new
common shares of Korea Exchange Bank. Lone Star Funds paid an additional W308.3
billion to acquire existing shares of Korea Exchange Bank held by each of
Commerzbank, formerly Korea Exchange Bank's largest shareholder, and the
Export-Import Bank of Korea.
Further, to enhance the competitiveness of the Republic's financial
institutions, the Government passed a law in October 2000 permitting the
establishment of financial holding companies. Pursuant to such legislation, the
Government formed a financial holding company, of which the Government is
currently the controlling shareholder and whose holdings include Woori Bank and
several other Korean financial institutions. Korean banks have also pursued
mergers and acquisitions. A merger between H&CB and Kookmin Bank was completed
in October 2001, and the merged entity became the largest bank in the Republic
in terms of total assets.
The Government estimates that, as of December 31, 2002, banks and non-bank
financial institutions held non-performing assets (defined to include loans and
other credits on which interest had not been paid for at least three months)
totaling approximately W31.8 trillion, compared to W39.1 trillion as of December
31, 2001. By June 30, 2003, the Non-Performing Asset Management Fund managed by
KAMCO had purchased approximately W110.3 trillion in principal amount of
non-performing assets from financial institutions for W39.8 trillion. The fund
uses cash and three- to five-year Government-guaranteed notes to pay for its
acquisitions.
In recent years, credit card usage and consumer debt have increased
substantially in Korea. These increases have recently been accompanied by a
significant increase in the rate of delinquencies. The average delinquency rate
among the Republic's nine credit card companies rose to 9.5% as of June 30, 2003
from 5.8% as of December 31, 2001. These events have adversely affected credit
card companies' ability to raise funds. To stabilize the over-leveraged credit
card industry, the Government has proposed an emergency package which would
entail banks and other companies with credit card businesses making significant
capital injections into their respective credit card affiliates.
112
Foreign Currency Reserves and External Liabilities
The Republic's foreign currency reserves have fluctuated in recent years.
The Republic's foreign currency reserves fell 73.2% to US$8.9 billion as of
December 31, 1997 from US$33.2 billion as of December 31, 1996, mostly due to
repatriations by foreign investors of their investments in Korea, repayments of
external debt, reduced availability of credit from foreign sources and
intervention in the foreign currency market to stabilize the Won. The usable
portion of the reserves, defined as the total foreign currency reserves less
amounts on deposit with overseas branches of Korean financial institutions and
swap positions between The Bank of Korea and other central banks, totaled only
US$3.9 billion as of December 18, 1997.
Since the end of 1997, however, the Government's usable foreign currency
reserves have continued to increase, reaching US$150.3 billion as of November
30, 2003, primarily due to continued trade surpluses and capital inflows.
The Republic's total external liabilities, using standards set by the IMF,
totaled US$148.7 billion as of December 31, 1998, US$137.1 billion as of
December 31, 1999, US$131.7 billion as of December 31, 2000, US$118.8 billion as
of December 31, 2001 and US$131.0 billion as of December 31, 2002. Based on
preliminary data, the Republic's total external liabilities, using standards set
by the IMF, totaled US$144.0 billion as of June 30, 2003.
Credit Rating Changes
In October 1997, the Republic's long-term foreign currency rating ceiling
on bond obligations, as announced by Moody's Investors Service, Inc., was A1 and
its long-term foreign currency rating as announced by each of Standard & Poor's
Ratings Services and Fitch International Banking Credit Agency was AA-. Since
that time, the rating agencies have changed the country's ratings significantly.
In 2002, Moody's upgraded the Republic's long-term foreign currency rating to
A3, Fitch IBCA to A and Standard & Poor's to A-. In February 2003, Moody's
Investor Services changed its outlook on the long-term foreign currency rating
of Korea to negative from positive, citing heightened security concerns stemming
from North Korea's nuclear weapons program and increased uncertainty regarding
North Korea's actions and possible responses from the international community.
The table below shows the credit ratings downgrades for the Republic from
December 1997 to January 1998.
<Table>
<Caption>
RATING
------------
DATE RATING AGENCY INSTRUMENT FROM TO
- ---- ----------------- ------------------------------------------------------ ----- -----
December 1997 Moody's Foreign currency rating on bond obligations Baa2 Ba1
Foreign currency rating for long-term bank deposits Ba2 B1
Standard & Poor's Long-term foreign currency rating BBB- B+
Long-term local currency rating A- BBB-
Short-term foreign currency rating A-3 C
Short-term local currency rating A-2 A-3
Fitch IBCA Long-term foreign currency rating BBB- B-
January 1998 Moody's Foreign currency rating for bank deposits B1 Caa1
</Table>
113
The table below shows the credit ratings upgrades for the Republic from
February 1998 to July 2002.
<Table>
<Caption>
RATING
--------------
DATE RATING AGENCY INSTRUMENT FROM TO
- ---- ----------------- ---------------------------------------------- ----- -----
February 1998 Standard & Poor's Long-term foreign currency rating B+ BB+
Long-term local currency rating BBB- BBB+
Short-term foreign currency rating C B
Short-term local currency rating A-3 A-2
Fitch IBCA Long-term foreign currency rating B- BB+
January 1999 Standard & Poor's Long-term foreign currency rating BB+ BBB-
Long-term local currency rating BBB+ A-
Short-term foreign currency rating B A-3
Fitch IBCA Long-term foreign currency rating BB+ BBB-
February 1999 Moody's Foreign currency rating on bond obligations Ba1 Baa3
Foreign currency rating for long-term bank Caa1 Ba2
deposits
June 1999 Fitch IBCA Long-term foreign currency rating BBB- BBB
November 1999 Standard & Poor's Long-term foreign currency rating BBB- BBB
Short-term local currency rating A-2 A-1
December 1999 Moody's Foreign currency rating on bond obligations Baa3 Baa2
March 2000 Fitch IBCA Long-term foreign currency rating BBB BBB+
November 2001 Standard & Poor's Long-term foreign currency rating BBB BBB+
March 2002 Moody's Foreign currency rating on bond obligations Baa2 A3
June 2002 Fitch IBCA Long-term foreign currency rating BBB+ A
July 2002 Standard & Poor's Long-term foreign currency rating BBB+ A-
</Table>
Interest Rate Fluctuations
Due to adverse economic conditions, the depreciation of the Won and the
Government's reform policy, interest rates payable by Korean borrowers increased
substantially, both domestically and internationally, in late 1997 and 1998. The
average annual interest rate on three-year Won-denominated, non-guaranteed
corporate bonds rose from 12.6% as of September 30, 1997 to 29.0% as of December
31, 1997. Since the fourth quarter of 1998, interest rates have fallen
significantly, primarily driven by improved economic conditions and The Bank of
Korea interest rate policy. The average interest rate on three-year
Won-denominated, non-guaranteed corporate bonds fell to 6.5% as of December 23,
2003. Internationally, the spreads over United States treasury bonds on
benchmark dollar-denominated bonds issued by the Republic and Korean financial
institutions and companies have improved since the second half of 1998. If
interest rates were to rise significantly in the future, the debt service costs
of Korean borrowers and the possibility of defaults on debt repayments may
increase.
Exchange Rate Fluctuations
Due to adverse economic conditions and reduced liquidity, the value of the
Won relative to the U.S. dollar and other major foreign currencies declined
substantially in 1997 but generally rose in 1998. Because of market pressure, in
December 1997, the Government allowed the Won to float freely. The market
average exchange rate as announced by the Seoul Money Brokerage Services Ltd.
(formerly the Korea Financial Telecommunications and Clearings Institute) was
W1,415.2 to US$1.00 on December 31, 1997, compared to W914.8 to US$1.00 on
September 30, 1997. The Won's sharp depreciation resulted from, among other
things, significant demand for U.S. dollars and other major foreign currencies
by Korean financial institutions and companies to repay their foreign currency
debts, deteriorating foreign currency holdings of the Republic's financial
institutions, credit rating downgrades experienced by the Republic and Korean
financial institutions and corporations, as well as other external factors,
including currency turmoil in Southeast Asian countries.
114
Due to improved economic conditions and continued trade surpluses, the Won
has generally appreciated against the U.S. dollar since the end of 1997, and as
of December 23, 2003, the market average exchange rate was W1,195.8 to US$1.00.
Won depreciation increases substantially the amount of Won revenue needed
by Korean companies to repay foreign currency-denominated debt, increases the
possibility of defaults and results in higher prices for imports, including key
raw materials such as oil, sugar and flour. On the other hand, Won appreciation
generally has an adverse effect on exports by Korean companies.
Stock Market Volatility
The Korea Composite Stock Price Index declined by over 56% from 647.1 on
September 30, 1997 to 280.0 on June 16, 1998. The index recovered to 937.6 on
April 18, 2002, but fell to 801.9 on December 23, 2003, which still represented
an increase of 186.0% since June 16, 1998.
Significant sales of Korean securities by foreign investors and the
repatriation of the sales proceeds could drive down the value of the Won, reduce
the foreign currency reserves held by financial institutions in the Republic and
hinder the ability of Korean companies to raise capital.
INITIAL REFORM EFFORTS IN 1997
In response to the economic difficulties experienced in 1997, the
Government implemented a range of measures to restore the confidence of
financial market participants in Korea by strengthening the country's economic
fundamentals.
The Government focused its reform measures on restructuring the country's
financial sector. In April 1997, a presidential committee introduced short-term
reform measures, including:
- allowing commercial banks, securities firms and insurance companies to
compete;
- permitting the issuance of financial debentures by commercial banks and
securities firms;
- increasing the size of deposit insurance funds;
- improving public disclosure systems and accounting standards; and
- eliminating interest rate controls.
In June 1997, the Government announced medium- and long-term measures
relating to the restructuring of The Bank of Korea and financial institution
supervisory systems. The Government accelerated implementation of these measures
in connection with the IMF financial aid package and related reforms. For a more
extensive discussion of these measures, see "The Republic of Korea--The
Economy--Post-IMF Reforms--Financial Sector Restructuring".
To support troubled financial institutions and to stabilize the Republic's
financial markets, in August 1997, the Government announced a financial aid
package, including special loans and other measures, for certain commercial and
merchant banks with large amounts of bad loans. The Government also announced
measures to increase the Republic's foreign currency reserves, including
guaranteeing the overseas foreign currency borrowings of Korean commercial
banks.
In October 1997, the Ministry of Finance and Economy established the
Non-Performing Asset Management Fund to assist certain commercial banks and
other financial institutions. The ministry restructured and expanded KAMCO in
November 1997 and mandated it to manage the Non-Performing Asset Management Fund
and purchase and dispose of non-performing assets of financial institutions. In
December 1998, the Government increased the size of the Non-Performing Asset
Management Fund to approximately W33.6 trillion, funded by W32.5 trillion in
proceeds from the issuance of Government guaranteed bonds, a W0.5 trillion loan
from The Korea Development Bank and a W0.6 trillion contribution from other
financial institutions. In August 1999, W12.0 trillion of the Non-Performing
Asset
115
Management Fund was transferred to the Deposit Insurance Fund. The size of the
Non-Performing Asset Management Fund was approximately W22.0 trillion as of
December 31, 2002.
The Non-Performing Asset Management Fund has purchased non-performing
assets from commercial banks and other financial institutions since 1997 as
follows:
<Table>
<Caption>
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
(TRILLIONS OF WON)
Face value of non-performing assets purchased.......... 11 33 18 33 6 4
Amount paid for these non-performing assets............ 7 12 4 13 2 1
</Table>
The fund uses cash and three- to five-year Government guaranteed notes to
pay for its acquisitions.
As uncertainty about the stability of the Republic's financial markets
persisted, in November 1997, the Government announced additional comprehensive
measures to aid the financial sector, including:
- providing faster settlement of bad loans purchased by KAMCO from
financial institutions;
- offering incentives for financial institutions to merge;
- requiring the merger of certain troubled financial institutions with
other financial institutions;
- monitoring the condition of individual financial institutions;
- insuring all amounts deposited with banks, non-bank financial
institutions, and securities investment companies, and all amounts due
from life insurance companies, until the end of 2000;
- increasing the daily exchange rate band within which the Won may float
from 2.25% to 10% (the band was subsequently removed); and
- exploring the expansion of the Republic's foreign currency borrowings
from international capital markets.
IMF FINANCIAL AID PACKAGE
To help address the country's liquidity crisis and its generally difficult
economic situation, the Government sought assistance from the IMF in November
1997 and reached agreement with the IMF on an aid package in December 1997. The
aid package called for the Republic to receive loans totaling US$58 billion from
the IMF, the World Bank, the ADB and the governments of certain countries,
subject to compliance with several conditions. The loans helped to increase the
Republic's foreign currency reserves and support the Republic's banking sector.
The aid package consisted of US$21.0 billion over three years from the IMF
in standby credits (approximately US$19.5 billion of which was disbursed),
US$10.0 billion from the World Bank to support specific structural reform
programs (US$7.0 billion of which was disbursed) and US$4.0 billion from the ADB
to support policy and institutional reforms (US$3.7 billion of which was
disbursed). In addition, Japan, the United States, France, Germany, the United
Kingdom, Italy, Australia, Canada, Belgium, the Netherlands, Sweden, Switzerland
and New Zealand pledged supplemental financing totaling approximately US$23
billion; Korea did not utilize any of the supplemental financing.
Korea had repaid all of the amounts borrowed from the IMF by August 2001,
approximately three years ahead of schedule. As to the amounts borrowed from the
World Bank and the ADB, US$5.2 billion and US$3.7 billion, respectively, were
still outstanding as of June 30, 2003.
POST-IMF REFORMS
Since 1998, the Government has implemented comprehensive programs for
economic reform and recovery aimed at rectifying the causes of the economic and
financial difficulties experienced in 1997 and 1998. The key measures
implemented and the results that have been achieved are discussed below.
116
Financial Sector Restructuring
General Goals. Beginning in late 1997, the Government undertook a
comprehensive restructuring of its financial sector with the following goals:
- improving supervision of the financial sector and strengthening the
legal and regulatory framework for such supervision;
- conforming accounting standards and disclosure rules to international
"best practices";
- requiring the audit of large financial institutions by internationally
recognized accounting firms following auditing standards reflecting
international "best practices";
- upgrading the standards of prudential supervision applicable to
financial institutions;
- strengthening risk management; and
- introducing a stronger market orientation in the activities of financial
institutions.
Financial Support for Financial Institutions. To support troubled
financial institutions, the National Assembly in December 1997 authorized
guarantees of up to US$20 billion of external debt of Korean banks, and in
January 1998, additional guarantees of up to US$7 billion of external debt of
Korean commercial and merchant banks and up to US$8 billion of external debt of
The Bank of Korea. The Government used the guarantees to help Korean financial
institutions with their short-term foreign currency debt. In January 1998, the
Government reached agreement with 13 international creditor banks to extend the
maturity of short-term foreign currency obligations incurred by certain Korean
financial institutions by replacing them with one-, two- and three-year loans
guaranteed by the Government. In March 1998, 134 creditor banks tendered US$21.8
billion of eligible short-term debt in exchange for the guaranteed loans. The
banks received the following guaranteed loans:
<Table>
<Caption>
TERM OF LOAN PRINCIPAL AMOUNT INTEREST RATE
- ------------ ---------------- -------------
One year US$3.8 billion 225 basis points above the six-month London
Interbank Offered Rate ("LIBOR")
Two years US$9.8 billion 250 basis points above six-month LIBOR
Three years US$8.3 billion 275 basis points above six-month LIBOR
</Table>
The two- and three-year loans were permitted to be prepaid at the option of
the obligors prior to maturity in whole or in part without premium or penalty.
The Korean financial institution obligors of the new loans paid fees to the
Government in return for the guarantees. All of the loans have since been
repaid.
In December 1997, the Public Money Management Fund, which manages public
funds, including pension funds of civil servants, acquired approximately W4.4
trillion of subordinated bonds from 27 Korean financial institutions to
supplement their capital base. In addition, The Bank of Korea in December 1997
placed a substantial portion of its official reserves on deposit with overseas
branches of Korean banks.
Legislation. In connection with restructuring the financial sector of the
Republic, the following measures have been adopted through legislation by the
National Assembly:
- amending The Bank of Korea Act to provide for the central bank's
independence, with price stability as its main mandate;
- establishing the Financial Supervisory Commission in April 1998 to
supervise and regulate all financial institutions in Korea and
establishing in January 1999 the Financial Supervisory Service as the
Financial Supervisory Commission's executive arm, thereby consolidating
the functions of a number of previous regulatory bodies;
- introducing measures to deal effectively with unsound financial
institutions, including reducing the capital of financially troubled
institutions and allowing for capital injections by the Government on a
case-by-case basis;
117
- consolidating various deposit insurance institutions into the Korea
Deposit Insurance Corporation ("KDIC") and expanding the sources of
funding for deposit insurance;
- repealing the Republic's usury law that had previously established a
legal maximum interest rate at a ceiling of 40% per annum;
- allowing foreign financial institutions to merge with and acquire
domestic financial institutions;
- strengthening confidentiality protections for private financial
transactions;
- requiring specialized banks and development institutions to comply with
the same prudential standards as commercial banks and the same external
audit requirements as other financial institutions;
- amending the Republic's deposit insurance system, so that all amounts
deposited with Korean banks, financial institutions, securities
companies and insurance companies by July 31, 1998, plus interest, would
be insured until the end of the year 2000. After December 31, 2000, all
deposits at any single financial institution are insured only up to W50
million regardless of the amount deposited; and
- introducing audit committees, compliance officers and internal
compliance rule systems to various financial institutions.
Restructuring and Recapitalizing the Financial Institutions Sector. Since
December 1997, the Government has been restructuring and recapitalizing troubled
financial institutions, including closing insolvent financial institutions and
those failing to carry out rehabilitation plans within specified periods.
In particular:
- The Government became the controlling shareholder of Korea First Bank,
Seoul Bank, Woori Bank and Chohung Bank by recapitalizing them. In
December 1999, the Government sold a controlling interest in Korea First
Bank to Newbridge Capital and, in September 2002, the Government
selected Hana Bank as the acquirer of Seoul Bank. Hana Bank and Seoul
Bank merged in December 2002. In January 2003, Shinhan Financial Group
was selected by the Public Fund Oversight Committee as the preferred
bidder with respect to the sale of the Chohung Bank shares owned by the
Government. In July 2003, the Government agreed to sell a controlling
interest in Chohung Bank to Shinhan Financial Group and in August 2003,
Shinhan Financial Group completed its acquisition of the Chohung Bank
shares. In August 2003, Lone Star Funds, an investment firm based in the
United States, agreed to buy a 51% stake in Korea Exchange Bank for
approximately W1.4 trillion. In October 2003, Lone Star Funds completed
its W1.07 trillion payment for the new common shares of Korea Exchange
Bank. Lone Star Fund paid an additional W308.3 billion to acquire
existing shares of Korea Exchange Bank held by each of Commerzbank,
formerly Korea Exchange Bank's largest shareholder, and the
Export-Import Bank of Korea.
- In June 1998, the Financial Supervisory Commission, after reviewing the
restructuring plans submitted by 12 commercial banks (not including
Seoul Bank and Korea First Bank) that had failed to meet Bank of
International Settlement capital adequacy standards as of December 31,
1997, ordered the suspension of operations of five commercial banks and
the assignment of their assets and liabilities to five other commercial
banks and KAMCO. KAMCO granted the five purchasing banks "putback"
options if the assets deteriorated within six months from the purchase.
The five banks also received compensation from KDIC for certain losses
arising from the purchase and assumption of the assets and liabilities.
In addition, KDIC injected capital into the purchasing banks by buying
subordinated bonds or stocks. The Government allowed the seven other
commercial banks to continue operations after they submitted revised
restructuring or rehabilitation plans. The Government has continued to
monitor the implementation of the restructuring plans and rehabilitation
measures;
118
- Through August 2001, 15 insurance companies have gone through
restructuring. Two surety companies merged to form Seoul Guaranty
Insurance Corporation;
- Through December 2001, seven securities companies, a securities
investment trust company, 122 mutual savings and finance companies,
seven securities investment trust management companies and 407 credit
unions have been closed. One securities company dissolved voluntarily.
Additionally, the Government has overseen the demerger of three
securities investment trust companies pursuant to which each such
securities investment trust company was divided into two companies,
i.e., a securities company and a securities investment management
company; and
- The Government required the Republic's merchant banks to achieve a
capital adequacy ratio of 8% and through December 2001 closed 28
merchant banks which failed to meet such ratio. Six unsound merchant
banks were merged into other financial institutions in line with the
Government's restructuring policy. As of December 31, 2002, the number
of the Republic's merchant banks decreased to three compared with 30 as
of December 31, 1997.
In 1999, (1) Boram Bank merged into Hana Bank, (2) Kangwon Bank, Hyundai
International Merchant Bank and Chungbuk Bank merged into Chohung Bank, (3)
Hanil Bank and the Commercial Bank of Korea merged to form Hanvit Bank and (4)
Korea Long Term Credit Bank merged into Kookmin Bank.
In 1999, 2000 and 2001, the Government injected public funds through KDIC
in the aggregate amount of W3.55 trillion into Korea Life Insurance Co., Ltd.
and in the aggregate amount of W10.25 trillion into Seoul Guaranty Insurance
Corporation for recapitalization. In April 2000, the Government entered into
agreements with each of Korea Life Insurance Co., Ltd. and Seoul Guaranty
Insurance Corporation for the implementation of its management normalization
plan. In December 2002, 51% of Korea Life Insurance Co., Ltd. held by KDIC was
sold to a consortium of buyers led by the Hanwha Group for approximately US$686
million.
The Financial Supervisory Commission generally has expected banks to adhere
to a specific timetable to achieve specified performance objectives, including:
- improving their capital ratios to 6% by March 1999 and to 8% by March
2000;
- improving operating performance to enhance risk management and
profitability; and
- continuing to identify and resolve non-performing loans.
The Financial Supervisory Commission also encouraged banks to increase
their capital ratios to 10% by December 2000.
Regional banks that do not engage in international lending and national
banks that do not lend in excess of W5 billion to individual corporate borrowers
and do not engage in international lending were required to improve their
capital ratios to 4% by March 1999, 6% by March 2000 and 8% by December 2000.
In June 2000, in an effort to enhance the international competitiveness of
the Republic's banks, the Government announced a plan to implement the
second-phase restructuring of the Republic's banks under the following
principles:
- The Government would create various systematic frameworks, including one
for financial holding companies;
- Banks which are not the recipients of the public funds may implement
their own restructuring; and
- The Government would take initiatives in the restructuring of the banks
that have received public funds or in which the Government has
controlling stakes.
119
During 2000, the Government announced further details of the second-phase
restructuring plan for the banks and required seven commercial banks, including
Chohung Bank, Woori Bank, Korea Exchange Bank, Peace Bank of Korea, Kwangju
Bank, Cheju Bank and Kyungnam Bank, into which the Government had injected
public funds or which did not satisfy the minimum 8% BIS capital adequacy ratio,
to submit their respective management improvement plans. The Government
thereafter approved the management improvement plans submitted by Chohung Bank
and Korea Exchange Bank. With respect to the management improvement plans
submitted by the remaining five commercial banks, the Government approved them
on the condition that they become a subsidiary of a financial holding company,
of which the Government is the controlling shareholder. Four of these five
commercial banks became subsidiaries of such financial holding company, which
was established in March 2001. In May 2002, the remaining commercial bank, Cheju
Bank, became a subsidiary of Shinhan Financial Group, a financial holding
company formed by Shinhan Bank, in September 2001. Korean banks have also
pursued mergers and acquisitions. A merger between H&CB and Kookmin Bank was
completed in October 2001 and the merged entity became the largest commercial
bank in the Republic in terms of total assets. Hana Bank and Seoul Bank merged
in December 2002 to create the third largest commercial bank in the Republic in
terms of total assets. In 2003, the Government sold its interests in Chohung
Bank and Lone Star Funds completed its acquisition of the Korea Exchange Bank
shares as discussed above.
The Government released a white paper on the creation, operation and
recovery of public funds. According to the white paper and subsequent release,
as of December 31, 2002, the Government had injected public funds in the
aggregate of W104.0 trillion in the form of bonds issued by KAMCO and KDIC and
guaranteed by the Government, and had spent an additional W55.0 trillion for the
restructuring of the Republic's financial sector. KAMCO had spent approximately
W39.1 trillion (W20.5 trillion by issuance of bonds with the Government's
guarantee), as of December 31, 2002 to purchase non-performing assets from
financial institutions, and KDIC had spent approximately W100.9 trillion (W83.5
trillion by issuance of bonds with government guarantees), as of December 31,
2002, to recapitalize banks and life insurance companies, compensate certain
banks and life insurance companies for their losses incurred in acquiring assets
and liabilities of other banks and life insurance companies and to pay deposits
amounts to depositors of certain failed financial institutions. Through December
31, 2002, KAMCO had recovered W30.1 trillion from the disposition of assets
purchased with public funds, and KDIC had recovered W17.1 trillion from the
disposition of assets purchased with public funds.
In January 2000, the Government announced its intention to restructure
securities investment trust companies, including the recapitalization of Korea
Investment Trust Co., Ltd. and Daehan Investment Trust Co., Ltd., the two
largest securities investment trust companies in Korea. The Government injected
public funds in the amount of W7.9 trillion into Korea Investment Trust and
Daehan Investment Trust from late 1999 to June 2000. These companies had large
exposures to corporate bonds and commercial paper issued by the companies of the
Daewoo Group, and the Government also provided liquidity support in February
2000 to these companies in connection with the redemption required by the
account holders of certain investment trust products sold by them. Each of Korea
Investment Trust and Daehan Investment Trust was divided into a securities
company and an investment trust management company.
Hyundai Investment Trust Securities Co., Ltd., an affiliate of the Hyundai
Group, also experienced financial difficulties as a result of having a large
exposure to debentures issued by the companies of the Daewoo Group. The Hyundai
Group entered into an agreement with the Financial Supervisory Service for the
normalization of Hyundai Investment Trust Securities in May 2000 and announced a
plan to recapitalize Hyundai Investment Trust Securities in June 2000. The
Government is currently seeking other foreign financial organizations that are
interested in acquiring interests in Hyundai Investment Trust Securities and its
subsidiary investment trust management company.
In September 2001, the Corporate Restructuring Promotion Act became
effective. The Corporate Restructuring Promotion Act allows creditor financial
institutions to freeze and restructure the debt of a financially troubled
company that is unable to repay the borrowings from the financial institutions
without additional credit support, upon a resolution by the financial
institutions representing at least 75% of the entire claims amount. A creditor
financial institution which has not participated in the relevant creditor
120
committee or is opposed to the resolutions of the creditor committee (in respect
of the commencement of the management of a failing company, the restructuring of
the failing company's debt or the provision of new credits) may request the
creditor committee to purchase its claims against the failing company, and the
creditor financial institutions that have approved the relevant resolution are
required to purchase such claims, or the relevant creditor committee may request
KAMCO, KDIC or other resolution financial institutions under the Depositor
Protection Act or any other institution designated by the creditor committee to
purchase such claims, at a price to be negotiated with the financial institution
making the purchase request. The Corporate Restructuring Promotion Act is
scheduled to expire on December 31, 2005.
Trade Liberalization
The Republic agreed with the WTO to eliminate trade-related subsidies by
the end of 1998 and phase out the import diversification program, which limits
certain imports mainly from Japan, by the end of 1999. The Government abolished
one type of trade-related subsidy in January 1998, and in March 1998 the
National Assembly passed a bill abolishing two additional subsidies and revising
the terms of another subsidy. The Government phased out the import
diversification program in June 1999.
In January 1998, the Government reduced the number of items subject to
adjustment tariffs, and in August 1998, it submitted to the IMF a plan to
streamline and improve the transparency of import certification procedures.
In February 2003, the Korea-Chile Free Trade Agreement ("Korea-Chile FTA")
was signed between the Republic of Korea and the Republic of Chile. Under the
Korea-Chile FTA, the two nations have agreed to progressively eliminate customs
duties on goods (except certain goods which are subject to further negotiations)
originating from the other in accordance with a specific tariff elimination
schedule. The completion of the Korea-Chile FTA is subject to the Korean
National Assembly's ratification.
Foreign Investment Liberalization
The Government gradually has removed restrictions on foreign investment and
capital market activities. In December 1997, the Government allowed foreigners,
whether individually or in the aggregate, to acquire beneficial ownership of up
to 50% of any class of shares listed on the Korea Stock Exchange. The Government
eliminated, with certain limited exceptions, the aggregate and individual
foreign ownership limits in May 1998. In addition, in July 1998, the Government
eliminated all investment ceilings on the purchase by foreigners of all types of
listed or unlisted bonds and later allowed foreign investment in the Government
and corporate bonds, in money market instruments issued by corporations,
including commercial paper, in certificates of deposit and in repurchase
agreements.
The Government also issued clear guidelines on the investment by foreign
financial institutions in the equity securities of Korean financial institutions
and, in March 1998, allowed foreign banks and brokerage houses to establish
subsidiaries in Korea, subject to guidelines established by the Ministry of
Finance and Economy.
In July 1998, the Government permitted domestic corporations to directly
incur long-term external debt through commercial loans or foreign-currency
denominated bond offerings. This approach deviated from the traditional Korean
policy of channeling international borrowings through domestic financial
institutions for on-lending to the corporate sector.
Corporate Governance and Corporate Structure
In line with the agreement with the IMF, the Government has been stressing
increased transparency in corporate governance, in particular through improved
accounting, disclosure and auditing standards.
121
In line with the Government's reform policy, in late 1997 and 1998, the
National Assembly passed a broad range of measures restructuring the corporate
and financial sectors, including:
- providing tax benefits, such as tax deferrals or exemptions, for mergers
and acquisitions occurring as part of a corporate restructuring;
- rendering interest expenses on excessive corporate borrowing not
deductible for tax purposes beginning in the year 2000 to discourage
excessive borrowing;
- raising the foreign investor shareholding threshold which requires board
approval from the target company from 10% to one-third of the company's
outstanding shares to facilitate the acquisition of Korean companies by
foreign investors (the board approval requirement was subsequently
abolished, thus opening the possibility of hostile takeovers of local
companies by foreigners);
- repealing the mandatory tender offer rule, which previously had required
any acquirer of 25% or more of shares of a corporation listed on the
Korea Stock Exchange or registered in the KOSDAQ Stock Market, Inc. to
make a tender offer bid for more than 50% of the target company's
shares;
- repealing the ceiling on the amount of its own shares that a listed
company may hold;
- strengthening legal protection for minority shareholder interests;
- requiring the preparation of amending the Republic's insolvency laws,
including creating a "management committee" composed of qualified
professionals to assist the district courts' handling of the management
of insolvent companies, limiting the availability of composition
proceedings to large-sized companies by reinforcing eligibility
requirements and expediting the time frames applicable to corporate
reorganization and composition proceedings;
- phasing out by March 2000 outstanding cross-guarantees by one chaebol
member of its affiliates' indebtedness and prohibiting the issuance of
new cross-guarantees;
- requiring filing of quarterly reports by listed companies commencing
year 2000;
- requiring audit committees at Korean companies;
- adopting a new foreign investment law to facilitate foreign investment
by streamlining the investment procedure;
- adopting a law to facilitate the securitization of assets held by the
Republic's corporations and financial institutions; and
- providing the Financial Supervisory Commission with greater authority to
require the restructuring of the Republic's financial institutions.
Furthermore, in 2000 and 2001, the Korean Securities and Exchange Act were
amended several times in order to enhance transparency in corporate governance.
Under such amendments, certain companies listed on the Korea Stock Exchange or
registered on the KOSDAQ are required to establish audit committees and all
companies listed on the Korea Stock Exchange as well as certain companies
registered on the KOSDAQ are required to appoint a specified number of
independent outside directors. Such amendments also elaborate the criteria for
eligibility for appointment as independent outside director and the procedures
by which such outside directors must be nominated and elected.
In 1998, the Government arranged for US$3.3 billion of trade financing,
with maturities of up to one year, for small- and medium-sized companies and
larger companies not affiliated with the top five chaebols. In addition, in
1999, the Government increased the amount of credit guarantees available for
small- and medium-sized companies by W24.0 trillion.
122
Labor Market Reform
Since January 1998, the Government has revised the unemployment insurance
system by, among other things:
- expanding coverage to workers in all companies (with a few statutory
exceptions) starting October 1998;
- increasing minimum benefits to 50% of average monthly wage (based on the
most recent 12-month period), starting March 1998 and 90% of minimum
hourly wage, starting January 2000;
- extending eligibility from March 1998 for unemployment compensation to
those workers who paid unemployment insurance premiums for only six
months as opposed to 12 months; and
- increasing the minimum benefit period from 60 to 90 days, beginning in
January 2000.
In April 1999, unemployment insurance benefits became available to workers
in companies with fewer than five employees and to part-time and temporary
workers. The Government estimated that approximately 360,000 individuals
received W839.3 billion of unemployment benefits in 2002. As of June 30, 2003,
the Government has estimated that approximately 250,000 individuals received
W466.1 billion of unemployment benefits in the first half of 2003.
In January 1998, a tripartite committee of representatives of labor unions,
corporations and the Government was established to implement key labor reforms.
In February 1998, the committee reached agreement on over 100 labor issues and
agreed to implement labor reform measures, including:
- amending the labor laws to enable corporations to lay off workers for
business reasons;
- permitting, starting July 1999, the formation of teachers' unions; and
- allocating up to W5 trillion to stabilize the labor market.
The agreement calls for companies to make all reasonable efforts to avoid
layoffs, consult with a representative of the employees 60 days before the
planned layoffs, notify the Ministry of Labor about the planned layoffs, select
workers to be laid off based on a fair and rational standard and make an effort
to rehire the laid-off workers when business conditions improve. The Government
endorsed the agreement, and the National Assembly passed legislation regarding
the labor reform measures in February 1998.
Since the agreement was announced, one of the labor unions whose
representative participated in the committee rejected certain terms of the
agreement and called for a nationwide strike. Although the strike was
subsequently canceled, members of the union vowed to resist the labor reform
measures, including the layoff of workers for business reasons. In August 1998,
Hyundai Motor Company, which had announced plans for substantial layoffs of
workers due to deteriorating business conditions, agreed to significantly reduce
the number of workers laid off after its labor union staged a prolonged strike
to protest the plans. In September 1998, the representatives of the labor unions
of nine commercial banks of the Republic agreed on a collective bargaining
agreement which enabled the Korean banks to lay off a maximum of 32% of the
workers in connection with the first-phase restructuring of the banks in 1998.
In May 1999, two labor unions and representatives from corporations announced
their intention to withdraw from the committee of labor unions, corporations and
the Government.
In July 2000, the Korean Financial Industry Union, which represents the
employees of 30 financial institutions, urged its members to participate in a
strike to express their opposition to mergers of the banks and the possibility
of further layoffs, when the Government announced its plan to implement the
second-phase restructuring of the Republic's banks, including the promulgation
of a law which allows the formation of financial holding companies. The strike
subsequently was cancelled after the Government and the union leaders reached an
agreement whereby the Government would not require mandatory bank mergers. In
December 2000, members of the Kookmin Bank and H&CB labor union participated in
a strike that lasted seven days, opposing the contemplated merger between the
two banks. In June 2003, member of Chohung Bank's labor union went on strike to
express their opposition to the proposed sale by
123
the KDIC of its interest in the bank to Shinhan Financial Group. In May and
August 2003, freight truck drivers went on strike demanding higher carrying
fees. Actions such as these by labor unions may hinder the implementation of the
labor reform measures and disrupt the Government's plans to create a more
flexible labor market. Much effort is being expended to resolve labor disputes
in a peaceful manner. However, there can be no assurance that further labor
unrest will not occur in the future. Continued labor unrest in key industries of
the Republic may have an adverse effect on the economy.
The functions and prestige of the current tripartite committee may be
strengthened and transformed into an organization that is able to achieve public
consensus more effectively.
Information Provision and Reform Policy Monitoring
To improve transparency and allow market participants to make a more
informed assessment of economic developments in the Republic, Korea agreed to
improve publication and dissemination of its key economic data. The Government
has published the following data since early 1998:
<Table>
<Caption>
DATA FREQUENCY
---- ---------
Foreign Exchange Reserves (including
composition and net forward positions)... Twice monthly (with a five business day
delay)
Financial Institution Data (including non-
performing loans, capital adequacy and
ownership and affiliations).............. Quarterly
Short-term External Debt................... Monthly
</Table>
The Government plans to improve the timeliness of data on local government
finances.
GROSS DOMESTIC PRODUCT AND MAJOR FINANCIAL INDICATORS
GROSS DOMESTIC PRODUCT
Gross domestic product, or GDP, measures the market value of all final
goods and services produced within a country for a given period and reveals
whether a country's productive output rises or falls over time. Economists
present GDP in both current and constant market prices. GDP at current market
prices values a country's output using the actual prices of each year; GDP at
constant market prices values output using the prices from a base year, thereby
eliminating the distorting effects of inflation or deflation.
The following table sets out the composition of the Republic's GDP at
current and constant 1995 market prices and the annual average increase in the
Republic's GDP.
GROSS DOMESTIC PRODUCT(1)
<Table>
<Caption>
AS % OF
GDP
1998 1999 2000 2001 2002(2) 2002(2)
---------- ---------- ---------- ---------- ---------- -------
(BILLIONS OF WON)
Gross Domestic Product at Current
Market Prices:
Private Consumption.............. 242,834.1 271,136.5 299,121.8 326,209.9 358,834.5 60.2
General Government Consumption... 48,782.1 50,089.4 52,479.7 57,179.7 62,968.0 10.6
Gross Domestic Fixed Capital
Formation...................... 132,307.5 134,151.8 148,202.8 148,717.0 159,482.4 26.7
Change in Inventories............ (38,252.7) (5,380.6) (1,033.7) (505.8) (4,158.5) (0.7)
Exports of Goods and Services.... 220,960.8 204,377.6 233,791.7 233,007.3 238,633.7 40.0
Less Imports of Goods and
Services....................... (161,143.5) (171,277.7) (217,844.7) (220,441.7) (230,056.3) (38.6)
Statistical Discrepancy.......... (1,121.7) (352.8) 7,241.5 7,391.1 10,677.3 1.8
---------- ---------- ---------- ---------- ---------- -----
</Table>
124
<Table>
<Caption>
AS % OF
GDP
1998 1999 2000 2001 2002(2) 2002(2)
---------- ---------- ---------- ---------- ---------- -------
(BILLIONS OF WON)
Expenditures on Gross Domestic
Product........................ 444,366.5 482,744.2 521,959.2 551,557.5 596,381.2 100.0
Net Factor Income from the Rest
of the World................... (7,724.7) (6,146.6) (2,731.8) (1.543.1) 500.0 0.1
---------- ---------- ---------- ---------- ---------- -----
Gross National Product(1)........ 436,641.8 476,597.6 519,227.4 550,014.4 596,881.2 100.1
========== ========== ========== ========== ========== =====
Gross Domestic Product at
Constant 1995 Market Prices:
Private Consumption.............. 201,869.3 224,151.8 241,930.5 253,370.7 270,561.2 51.6
General Government Consumption... 39,818.7 40,328.5 40,382.7 40,890.0 42,083.2 8.0
Gross Domestic Fixed Capital
Formation...................... 114,563.5 118,772.9 132,337.3 129,926.6 136,219.6 26.0
Change in Inventories............ (27,626.2) (6,167.7) (7,118.5) (7,727.4) (8,711.5) (1.7)
Exports of Goods and Services.... 175,640.5 203,443.5 245,132.6 246,733.3 283,418.0 54.0
Less Imports of Goods and
Services....................... (109,798.1) (141,443.0) (169,715.7) (164,594.4) (191,512.9) (36.5)
Statistical Discrepancy.......... 242.7 (1,376.7) (4,416.0) (5,218.4) (7,368.0) (1.4)
---------- ---------- ---------- ---------- ---------- -----
Expenditures on Gross Domestic
Product........................ 394,710.4 437,709.4 478,532.9 493,380.3 524,689.4 100.0
Net Factor Income from the Rest
of the World................... (6,589.7) (5,161.9) (2,248.8) (1,206.4) 363.5 0.1
Trading Gains and Losses from
Changes in the Terms of
Trade.......................... (22,094.7) (32,026.3) (61,185.3) (71,399.6) (83,589.8) (16.0)
---------- ---------- ---------- ---------- ---------- -----
Gross National Income(3)......... 366,026.0 400,521.2 415,098.8 420,774.3 441,463.1 84.1
========== ========== ========== ========== ========== =====
Percentage Increase (Decrease) of
GDP over Previous Year At
Current Prices................. (2.0) 8.6 8.1 5.7 8.1
At Constant 1995 Market Prices... (6.7) 10.9 9.3 3.1 6.3
</Table>
- ------------
(1) GDP plus net factor income from the rest of the world is equal to the
Republic's gross national product.
(2) Preliminary.
(3) GDP plus net factor income from the rest of the world and trading gains and
losses from changes in the terms of trade is equal to the Republic's gross
national income.
Source: Monthly Bulletin, March 2003; The Bank of Korea. Monthly Statistics of
Korea, March 2002; Korea National Statistical Office.
125
The following tables set out the Republic's GDP by economic sector at
current and constant 1995 market prices.
GROSS DOMESTIC PRODUCT BY ECONOMIC SECTOR
(AT CURRENT MARKET PRICES)
<Table>
<Caption>
AS % OF
GDP
1998 1999 2000 2001 2002(1) 2002(1)
--------- --------- --------- --------- --------- -------
(BILLIONS OF WON)
Industrial Sectors:
Agriculture, Forestry and
Fisheries............... 21,977.8 24,481.5 24,517.6 23,935.2 23,593.5 4.0
Mining and Manufacturing
Mining and Quarrying.... 1,675.1 1,670.0 1,802.2 1,893.5 2,069.7 0.3
Manufacturing........... 137,152.7 148,402.9 163,283.2 168,160.4 174,247.1 29.2
Construction, Electricity,
Gas and Water
Electricity, Gas and
Water................. 10,867.6 13,014.0 14,374.4 15,591.2 17,401.5 2.9
Construction............ 44,992.6 42,149.3 41,788.0 45,918.4 50,463.0 8.5
Services:
Wholesale and Retail Trade,
Restaurants and
Hotels.................. 45,661.3 54,451.0 63,201.6 67,577.9 71,454.7 12.0
Transportation, Storage
and Communication..... 31,330.4 32,976.3 34,901.1 36,745.7 39,280.4 6.6
Financing, Insurance,
Real Estate and
Business Services..... 86,466.3 95,276.5 98,977.1 105,546.3 127,538.5 21.4
Community, Social and
Personal Services..... 22,141.3 24,806.0 27,484.8 32,375.0 36,820.8 6.2
Producers of Government
Services................... 35,827.1 36,961.5 39,018.5 43,476.7 47,765.8 8.0
Producers of Private
Non-Profit Services to
Households................. 10,895.9 11,470.6 12,320.7 13,410.5 14,659.7 2.5
Import Duties................ 12,966.5 15,606.0 19,446.6 21,028.0 22,391.7 3.8
(Imputed Bank Service
Charge).................... (17,588.1) (18,521.4) (19,156.5) (24,101.4) (31,305.2) (5.2)
--------- --------- --------- --------- --------- -----
Gross Domestic Product at
Current Prices............. 444,366.5 482,744.2 521,959.2 551,557.5 596,381.2 100.0
Net Factor Income from the
Rest of the World.......... (7,724.7) (6,146.6) (2,731.8) (1,543.1) 500.0 (0.1)
--------- --------- --------- --------- --------- -----
Gross National Income at
Current Prices............. 436,641.8 476,597.6 519,227.4 550,014.4 596,881.2 99.9
========= ========= ========= ========= ========= =====
</Table>
- ------------
(1) Preliminary.
Source: Monthly Statistics of Korea, March 2003; Korea National Statistical
Office.
126
GROSS DOMESTIC PRODUCT BY ECONOMIC SECTOR
(AT CONSTANT 1995 MARKET PRICES)
<Table>
<Caption>
AS %
OF GDP
1998 1999 2000 2001 2002(1) 2002(1)
--------- --------- --------- --------- --------- -------
(BILLIONS OF WON)
Industrial Sectors:
Agriculture, Forestry and Fisheries....... 23,569.4 24,833.4 25,318.3 25,789.3 24,719.8 4.7
Mining and Manufacturing
Mining and Quarrying.................... 1,337.6 1,408.8 1,443.9 1,451.8 1,508.5 0.3
Manufacturing........................... 116,734.8 141,295.1 163,733.1 167,172.3 177,737.3 33.9
Construction, Electricity, Gas and Water
Electricity, Gas and Water.............. 9,868.0 10,897.0 12,425.3 13,064.4 14,782.4 2.8
Construction............................ 42,161.3 38,305.8 37,125.3 39,207.0 40,449.1 7.7
Services:
Wholesale and Retail Trade, Restaurants
and Hotels.............................. 46,813.2 53,422.4 58,635.0 60,955.5 64,355.4 12.3
Transportation, Storage and
Communication........................... 30,887.9 35,361.8 41,691.4 46,087.2 49,486.4 9.4
Financing, Insurance, Real Estate and
Business Services....................... 75,956.4 80,097.4 84,060.8 86,572.7 95,751.8 18.2
Community, Social and Personal Services... 18,119.0 20,123.7 21,148.8 22,102.4 24,630.4 4.7
Producers of Government Services............ 28,896.0 29,110.5 29,125.6 29,207.4 29,322.1 5.6
Producers of Private Non-Profit Services to
Households................................ 8,856.2 9,086.8 9,190.9 9,456.7 9,749.3 1.9
Import Duties............................... 7,681.9 10,296.8 12,784.2 12,203.5 14,662.9 2.8
(Imputed Bank Service Charge)............... (16,171.2) (16,530.2) (18,149.6) (19,890.0) (22,465.9) (4.3)
--------- --------- --------- --------- --------- -----
Gross Domestic Product at Constant 1995
Market Prices............................. 394,710.4 437,709.4 478,532.9 493,380.3 524,689.4 100.0
Net Factor Income from the Rest of the
World..................................... (6,589.7) (5,161.9) (2,248.8) (1,206.4) 363.5 0.1
Trading Gains and Losses from Changes in the
Terms of Trade............................ (22,094.7) (32,026.3) (61,185.3) (71,399.6) (83,589.8) (15.9)
--------- --------- --------- --------- --------- -----
Gross National Income at Constant 1995
Market Prices............................. 366,026.0 400,521.2 415,098.8 420,774.3 441,463.1 84.1
========= ========= ========= ========= ========= =====
</Table>
- ------------
(1) Preliminary.
Source: Monthly Bulletin, March 2003; The Bank of Korea.
GDP contracted 6.7% in 1998 at constant market prices. The aggregate of
private and general government consumption expenditures declined by 10.1% and
gross domestic fixed capital formation declined by 21.2%, as facility
investments declined sharply by 38.8% compared with 1997.
In 1999, GDP growth increased to 10.9% at constant market prices. The
aggregate of private and general government consumption expenditures increased
by 9.4% and gross domestic fixed capital formation increased by 3.7%.
In 2000, GDP growth was 9.3% at constant market prices. The aggregate
private and general government consumption expenditures increased by 6.7% and
gross domestic fixed capital formation increased by 11.4%.
GDP growth slowed in 2001 to 3.1% at constant market prices, as aggregate
private and general government consumption expenditures increased by 4.2% and
gross domestic fixed capital formation decreased by 1.8%.
127
Based on preliminary data, GDP growth in 2002 was 6.3% at constant market
prices, as aggregate private and general government consumption expenditures
increased by 6.2% and gross domestic fixed capital formation increased by 4.8%.
Based on preliminary data, GDP growth in the first half of 2003 was 2.7% at
constant market prices, as aggregate private and general government consumption
expenditures decreased by 0.1% and gross domestic fixed capital formation
increased by 4.1%, each compared with the same period in 2002.
PRINCIPAL SECTORS OF THE ECONOMY
Industrial Sectors
The following table sets out production indices for the principal
industrial products of the Republic and their relative contribution to total
industrial production.
INDUSTRIAL PRODUCTION
<Table>
<Caption>
2000
INDEX
WEIGHT(1) 1998 1999 2000 2001 2002
--------- ----- ----- ----- ----- -----
Mining....................................... 36.2 93.9 101.4 100.0 99.9 103.8
Coal....................................... 4.7 106.8 98.8 100.0 94.0 83.4
Metal Ores................................. 0.8 144.6 122.0 100.0 58.1 96.7
Others..................................... 30.7 91.4 101.2 100.0 101.9 107.2
Manufacturing................................ 9,362.9 68.3 85.4 100.0 100.2 108.5
Food Products and Beverages................ 658.8 88.8 97.2 100.0 105.7 108.7
Tobacco Products........................... 53.4 102.8 97.7 100.0 99.6 99.9
Textiles................................... 472.7 94.2 100.1 100.0 90.0 84.6
Apparel and Fur Articles................... 210.3 79.0 87.1 100.0 91.6 98.0
Tanning and Dressing of Leather............ 97.6 107.7 108.4 100.0 94.4 87.6
Wood and Wood and Cork Products............ 62.2 76.6 96.7 100.0 107.2 112.8
Pulp, Paper and Paper Products............. 193.2 86.6 96.3 100.0 99.4 105.3
Publishing, Printing and Reproduction of
Record Media............................ 226.8 100.4 98.2 100.0 102.8 109.3
Coke, Refined Petroleum Products and
Nuclear Fuel............................ 309.9 90.3 98.4 100.0 96.3 88.9
Chemicals and Chemical Products............ 856.9 85.5 94.3 100.0 102.7 109.2
Rubber and Plastic Products................ 429.9 79.7 93.7 100.0 102.5 109.2
Non-Metallic Mineral Products.............. 331.5 87.3 93.8 100.0 102.0 104.2
Basic Metals............................... 566.2 80.7 92.2 100.0 101.3 106.4
Fabricated Metal Products.................. 414.8 90.8 95.4 100.0 92.6 95.6
Machinery and Equipment.................... 812.5 66.2 81.5 100.0 96.9 104.5
Office, Accounting and Computing
Machinery............................... 330.8 30.7 62.2 100.0 100.6 111.4
Electrical Machinery and Apparatus and
Others.................................. 379.8 64.4 82.7 100.0 96.1 104.2
Radio, Television and Communication
Equipment............................... 1,481.0 50.4 74.0 100.0 102.4 131.6
Medical Precision and Optical Instrument,
Watches................................. 105.0 83.1 92.5 100.0 101.6 100.9
Motor Vehicles and Trailers................ 916.1 57.3 87.8 100.0 98.9 107.3
Other Transport Equipment.................. 274.6 100.3 108.8 100.0 119.4 121.8
Furniture and Other Manufactured Goods..... 178.9 88.7 105.2 100.0 95.4 94.6
</Table>
128
<Table>
<Caption>
2000
INDEX
WEIGHT(1) 1998 1999 2000 2001 2002
--------- ----- ----- ----- ----- -----
Electricity and Gas.......................... 600.9 79.4 89.4 100.0 106.9 115.0
All Items.................................... 10,000.0 68.9 85.6 100.0 100.7 108.8
Percentage Increase (Decrease) of All Items
Over Previous Year...................... (6.5) 24.2 16.8 0.7 8.0
</Table>
- ------------
(1) Index weights were established on the basis of an industrial census in 2000
and reflect the average annual value added by production in each of the
classifications shown, expressed as a percentage of total value added in
the mining, manufacturing and electricity and gas industries in that year.
Source: Korea National Statistical Office.
Industrial production declined by 6.5% in 1998 because of the economic
slowdown which depressed domestic demand. Industrial production increased 24.2%
in 1999 because of the Republic's domestic consumption recovery and the general
stabilization in the economy. Industrial production increased by 16.8% in 2000
primarily due to increased exports and high domestic consumption. Industrial
production growth slowed to 1.3% in 2001 because exports decreased while
domestic consumption growth slowed. Industrial production increased by 8.0% in
2002 primarily due to strong domestic consumption and increased exports.
Manufacturing
In 1998, the manufacturing sector contracted by 6.6% compared with 1997. In
1999 and 2000, the manufacturing sector grew by 25.0% and 17.1%, respectively,
due to general recovery from the economic downturn in 1998. In 2001, the
manufacturing sector increased production by 0.9%, and in 2002, the
manufacturing sector increased production by 7.3%. Light industries did not fare
as well as the heavy and chemical industries segment as the economic boom of the
early- and mid-1990s favored the large companies involved in the heavy and
chemical industries. Light industry recorded a 15.5% decline in 1998. In 1999,
light industry recorded an increase of production of 9.6%. In 2000, light
industry recorded an increase of production of 2.8% due to increased production
of clothing, rubber and plastic products. In 2001, light industry recorded a
0.7% decline due to the decreased production of textile, apparel and leather
products. In 2002, light industry recorded a 2.2% increase due to increased
production of food products.
Automobiles. In 1998, domestic auto sales decreased by 48.5% compared to
1997 due to a decrease in real income and rises in unemployment and interest
rates caused by the country's economic restructuring. Exports recorded only
modest growth of 3.4% due to a reduction in demand from developing countries.
Labor unrest at Hyundai Motors, the largest auto maker in Korea, also
contributed to the decrease in automobile production. Overall automobile
production of the Republic in 1998 decreased by 34.0% compared to 1997. In 1999,
automobile production increased by 45.5%, domestic sales recorded an increase of
63.2% and exports recorded an increase of 10.9%, each compared with 1998. In
2000, automobile production increased by 9.6%, domestic sales recorded an
increase of 12.3% and exports recorded an increase of 11.0%, each compared with
1999. In 2001, automobile production decreased by 5.4% compared to 2000. In
2001, domestic sales recorded an increase of 1.5% and exports recorded a
decrease of 10.5%, each compared with 2000. In 2002, automobile production
increased by 6.8%, domestic sales recorded an increase of 11.8% and exports
recorded an increase of 0.6%, each compared with 2001.
Electronics. In 1998, electronics production decreased by 20.1% and
exports decreased by 7.2% compared to 1997 primarily because of continued
oversupply of semiconductor memory chips in the world market. In 1999,
electronics production increased by 43.5% compared to 1998, and exports
increased by 34.2%. The growth in global electronics demand, particularly for
"information technology products", such as semiconductor products, liquid
crystal display devices, mobile phones and personal computers, led this growth.
In 1999, export sales of semiconductor memory chips constituted approximately
37% of the Republic's total exports. In 2000, electronics production increased
by 17.7% and exports increased by 31.0%, each compared with 1999 primarily
because of the growth in global information technology
129
products demand. In 2000, export sales of semiconductor memory chips constituted
approximately 15% of the Republic's total exports. In 2001, electronics
production increased by 11.8% and exports increased by 20.6% compared to 2000
primarily due to the continued growth in global information technology products
demand. In 2001, export sales of semiconductor memory chips constituted
approximately 9.5% of the Republic's total exports. In 2002, electronics
production increased by 15.0% and exports increased by 18.2%, each compared with
2001 primarily due to continued growth in global information technology products
demand. In 2002, export sales of semiconductor memory chips constituted
approximately 11.5% of the Republic's total exports.
Iron and Steel. Crude steel production in 1998 totaled 39.9 million tons,
a decrease of 6.2% from 1997, to rank sixth in the world. Domestic sales
decreased by 36.1% while exports increased 56.6%, largely due to enhanced price
competitiveness because of the devalued won. Overall steel production in 1998
decreased by 12.9% compared to 1997. In 1999, crude steel production increased
by 2.9% compared with 1998. In 2000, crude steel production totaled 43.1 million
tons, an increase of 5.0% from 1999. Domestic sales increased by 13.7% due to
the general stabilization in the economy while exports decreased slightly due to
the oversupply of steel products in the world market. In 2001, crude steel
production totaled 43.8 million tons, an increase of 1.7% from 2000. Domestic
sales and exports slightly decreased due to the oversupply of steel products in
the domestic and world markets. In 2002, crude steel production totaled 45.4
million tons, an increase of 3.5% from 2001. Domestic sales increased slightly
due to the recovery of the domestic economy and exports decreased slightly due
to decreased sales to North America and Europe.
Shipbuilding. Shipbuilding orders in 1998 equaled 8.8 million gross tons,
a decrease of 35.8% compared to 1997. Despite the decrease, Korea recorded the
world's second largest share of shipbuilding orders in 1998. In 1999, the
Republic's shipbuilding orders amounted to 11.8 million tons, which represented
the world's largest share in such year. In 2000, the Republic's shipbuilding
orders amounted to 20.7 million gross tons, an increase of 75.6% compared to
1999. Korea recorded the world's largest share of shipbuilding orders in 2000.
In 2001, the Republic's shipbuilding orders amounted to 11.8 million gross tons,
a decrease of 43.1% compared to 2000 due to decreased exports. In 2002, the
Republic's shipbuilding orders amounted to 9.8 million gross tons, a decrease of
16.9% compared to 2001.
Agriculture, Forestry and Fisheries
The Government's agricultural policy has traditionally focused on:
- grain production;
- development of irrigation systems;
- land consolidation and reclamation;
- seed improvement;
- mechanization measures to combat drought and flood damage; and
- increasing agricultural incomes.
Recently, however, the Government has increased emphasis on cultivating
profitable crops and strengthening international competitiveness in anticipation
of opening the domestic agricultural market.
The production of rice, the largest agricultural product in Korea, totaled
5.1 million tons in 1998, representing a 0.7% decrease compared to 1997. In
1999, rice production increased to 5.3 million tons, a 3.2% increase compared
with 1998. Due to limited crop yields resulting from geographical and physical
constraints, the Republic depends on imports for certain basic foodstuffs. The
Republic's self-sufficiency ratio further decreased from 57.9% in 1997 to 57.6%
in 1998 and 54.2% in 1999. In 2000, the Republic's self sufficiency ratio
slightly increased to 55.6%. In 2001, the Republic's self sufficiency ratio was
56.8%. In 2002, the Republic's self sufficiency ratio was 56.2%.
130
The Government is seeking to develop the fishing industry by encouraging
the building of large fishing vessels and modernizing fishing equipment,
marketing techniques and distribution outlets.
The contribution of the agriculture, forestry and fisheries subsector to
GDP declined, at constant 1995 market prices, from 6.3% in 1994 to 5.2% in 2000
as a result of industrialization. In 2000, the agriculture, forestry and
fisheries subsector posted no significant change from 1999. In 2001, the
agriculture, forestry and fisheries industry increased by 1.2% compared to 2000
due to the increased productions of rice, fruits and corns as well as the
increase of fishing catches. In 2002, the agriculture, forestry and fisheries
industry, which decreased by 4.1% compared to 2001, was affected by unusually
unfavorable weather conditions, including a severe typhoon during the month of
September.
Construction
The construction industry constituted 8.0% of the Republic's GDP in 2001.
In 1998, the construction industry contracted by 8.6% compared with 1997 because
of the economic downturn. In 1999, the construction industry contracted by 10.1%
compared with 1998. In 2000, the construction industry contracted by 3.7%
compared with 1999 due to decreased orders for the construction of homes and
investments in infrastructure. In 2001, the construction industry increased by
5.6% compared with 2000 due to the expansion of residential, commercial and
educational construction and the steady increase of government investments in
infrastructure. In 2002, the construction industry increased by 3.2% compared to
2001 due to the expansion of residential and commercial construction.
Electricity and Gas
The following table sets out the Republic's dependence on imports for
energy consumption.
DEPENDENCE ON IMPORTS FOR ENERGY CONSUMPTION
<Table>
<Caption>
IMPORTS
TOTAL ENERGY DEPENDENCE
CONSUMPTION IMPORTS RATIO
------------- -------- -----------
(MILLIONS OF TONS OF OIL EQUIVALENTS,
EXCEPT RATIOS)
1998........................................................ 165.9 189.7 114.3
1999........................................................ 181.4 201.0 110.8
2000........................................................ 192.9 213.8 110.8
2001........................................................ 198.4 215.4 108.6
2002........................................................ 209.1 215.2 102.9
</Table>
- ------------
Source: Monthly Energy Statistics, March 2003; Korea Energy Economics
Institute.
Korea has no domestic oil or gas production and depends on imported oil and
gas to meet its energy requirements. Accordingly, the international prices of
oil and gas significantly affects the Korean economy. Any significant long-term
increase in the prices of oil and gas will increase inflationary pressures in
Korea and adversely affect the Republic's balance of trade.
131
To reduce its dependence on oil and gas imports, the Government has
encouraged an energy source diversification program emphasizing nuclear energy.
The following table sets out the principal primary sources of energy consumed in
the Republic, expressed in oil equivalents and as a percentage of total energy
consumption.
CONSUMPTION OF ENERGY BY SOURCE
<Table>
<Caption>
COAL PETROLEUM NUCLEAR OTHERS TOTAL
--------------- --------------- --------------- --------------- ----------------
QUANTITY % QUANTITY % QUANTITY % QUANTITY % QUANTITY %
-------- ---- -------- ---- -------- ---- -------- ---- -------- -----
(MILLIONS OF TONS OF OIL EQUIVALENTS, EXCEPT PERCENTAGES)
1998..................... 36.0 21.7 90.6 54.6 22.4 13.5 16.9 10.2 165.9 100.0
1999..................... 38.2 21.0 97.3 53.6 25.8 14.2 20.2 11.1 181.4 100.0
2000..................... 42.9 22.2 100.3 52.0 27.2 14.1 22.5 11.7 192.9 100.0
2001..................... 45.7 23.0 100.4 50.6 28.0 14.1 24.3 12.2 198.4 100.0
2002..................... 49.1 23.5 102.7 49.1 29.8 14.3 27.5 13.2 209.1 100.0
</Table>
- ------------
Source: Monthly Energy Statistics, March 2003; Korea Energy Economics
Institute.
The Republic's first nuclear power plant went into full operation in 1978
with a rated generating capacity of 587 megawatts. Eight more nuclear power
plants were completed between 1982 and 1997, adding 9,733 megawatts of
generating capacity. The Republic's total nuclear power generating capacity is
estimated to be 15,720 megawatts.
Services Sector
In 1998, the services sector was adversely affected by the Republic's
economic downturn. In 1998, the transportation, storage and communications
subsector contracted by 0.8% compared with 1997. In 1999, the transportation,
storage and communications subsector increased by 14.5% compared with 1998. The
transportation, storage and communications sector further increased by 17.9% in
2000 compared with 1999. In 2001, the transportation, storage and communications
sector increased by 10.5% compared with 2000. In 2002, the transportation,
storage and communications sector increased by 7.4% compared with 2001. The
financing, insurance, real estate and business services subsector contracted by
1.9% in 1998 because of the economic downturn. With large increases in
securities trading in 1999, the financing, insurance, real estate and business
services subsector increased by 5.5% compared with 1998. In 2000, the financing,
insurance, real estate and business service subsector increased by 4.9% compared
with 1999. In 2001, the financing, insurance, real estate and business service
subsector increased by 3.9% compared with 2000. In 2002, the financing,
insurance, real estate and business service subsector increased by 8.8% compared
to 2001.
PRICES, WAGES AND EMPLOYMENT
The following table shows selected price and wage indices and unemployment
rates:
<Table>
<Caption>
PRODUCER INCREASE CONSUMER INCREASE INCREASE
PRICE OVER PRICE OVER WAGE OVER UNEMPLOYMENT
INDEX(1) PREVIOUS INDEX(1) PREVIOUS INDEX(1)(2) PREVIOUS RATE(1)(3)
(1995=100) YEAR (%) (2000=100) YEAR (%) (2000=100) YEAR (%) (%)
---------- --------- ---------- --------- ----------- --------- ------------
1997....................... 107.2 3.9 90.2 4.4 84.7 7.0 2.6
1998....................... 120.3 12.2 97.0 7.5 82.1 (2.5) 7.0
1999....................... 117.8 (2.1) 97.8 0.8 92.6 12.1 6.3
2000....................... 120.2 2.0 100.0 2.3 100.0 8.0 4.1
2001....................... 122.5 1.9 104.1 4.1 105.1 5.1 3.8
2002....................... 124.4 1.6 106.9 2.7 116.8 11.2 3.1
</Table>
- ------------
(1) Average for year.
(2) Nominal wage index of earnings in all industries.
132
(3) Expressed as a percentage of the economically active population.
Source: The Bank of Korea; Korea National Statistical Office.
The Government's economic policy has helped keep inflation low. The
inflation rate stood at 4.4% in 1997, 7.5% in 1998, 0.8% in 1999, 2.3% in 2000,
4.1% in 2001 and 2.7% in 2002. In the first half of 2003, the inflation rate was
3.0%.
The economic events in 1997 and 1998 described above led to an increase in
unemployment from 2.6% in 1997 to 6.3% in 1999, but unemployment has since
decreased to 4.1% in 2000, 3.8% in 2001 and 3.1% in 2002. In the first half of
2003, the unemployment rate was 3.3%.
Korea regards its well-educated labor force as one of its principal assets.
From 1992 to 2002, the economically active population of the Republic increased
by 17.4% to 22.9 million, while the number of employees increased by 12.2% to
21.4 million. The economically active population over 15 years old as a
percentage of the total over-15 population has remained between 58% and 63% over
the past decade. Literacy among workers under 50 is almost universal.
For a description of the Republic's unemployment insurance system, see "The
Republic of Korea--The Economy--Post-IMF Reforms--Labor Market Reform".
BALANCE OF PAYMENTS AND FOREIGN TRADE
BALANCE OF PAYMENTS
Balance of payments figures measure the relative flow of goods, services
and capital into and out of the country as represented in the current balance
and the capital balance. The current balance tracks a country's trade in goods
and services and transfer payments and measures whether a country is living
within its income from trading and investments. The capital balance covers all
transactions involving the transfer of capital into and out of the country,
including loans and investments. The overall balance represents the sum of the
current and capital balances. An overall balance surplus indicates a net inflow
of foreign currencies, thereby increasing demand for and strengthening the local
currency. An overall balance deficit indicates a net outflow of foreign
currencies, thereby decreasing demand for and weakening the local currency. The
financial account mirrors the overall balance. If the overall balance is
positive, the surplus, which represents the nation's savings, finances the
overall deficit of the country's trading partners. Accordingly, the financial
account will indicate cash outflows equal to the overall surplus. If, however,
the overall balance is negative, the nation has an international deficit which
must be financed. Accordingly, the financial account will indicate cash inflows
equal to the overall deficit.
133
The following table sets out certain information with respect to the
Republic's balance of payments.
BALANCE OF PAYMENTS
<Table>
<Caption>
DECEMBER 31,
---------------------------------------------------------
CLASSIFICATION 1998 1999 2000 2001 2002
- -------------- --------- --------- --------- --------- ---------
(MILLIONS OF DOLLARS)
Current Account....................... 40,364.9 24,476.7 12,241.2 8,238.9 6,092.1
Goods............................ 41,626.8 28,370.9 16,871.6 13,491.9 14,179.8
Exports(1).................. 132,121.6 145,163.6 175,947.7 151,261.6 162,553.7
Imports(1).................. 90,494.8 116,792.7 159,076.1 137,769.7 148,373.9
Services......................... 1,024.1 (651.0) (2,889.2) (3,827.6) (7,460.6)
Income........................... (5,638.3) (5,159.0) (2,421.3) (1,198.1) 451.4
Current Transfers................ 3,352.3 1,915.8 680.1 (227.3) (1,078.5)
Capital and Financial Account......... (3,196.7) 2,040.3 12,110.0 (3,274.9) 1,523.0
Financial Account(2)............. (3,367.8) 2,429.6 12,725.2 (2,543.9) 2,614.0
Capital Account.................. 171.1 (389.3) (615.2) (731.0) (1,091.0)
Changes in Reserve Assets............. (30,975.0) (22,982.9) (23,771.2) (7,575.8) (11,800.6)
Net Errors and Omissions.............. (6,193.2) (3,534.1) (580.0) 2,611.8 4,185.5
</Table>
- ------------
(1) These entries are derived from trade statistics and are valued on a free on
board basis, meaning that the insurance and freight costs are not included.
(2) Includes borrowings from the IMF, syndicated bank loans and short-term
borrowings.
Source: Monthly Bulletin, February 2003; The Bank of Korea.
The figures for 2002 indicate a current account surplus of approximately
US$6.1 billion. The current account surplus in 2002 decreased in comparison with
the current account surplus in 2001, primarily due to an increase in deficit
from the services account. Based on preliminary data, the current account
surplus for the first six months of 2003 was US$803.1 million.
TRADE BALANCE
Trade balance figures measure the difference between a country's exports
and imports. If exports exceed imports the country has a trade balance surplus
while if imports exceed exports the country has a deficit. A deficit, indicating
that a country's receipts from abroad fall short of its payments to foreigners,
must be financed, rendering the country a debtor nation. A surplus, indicating
that a country's receipts exceed its payments to foreigners, allows the country
to finance its trading partners' net deficit to the extent of the surplus,
rendering the country a creditor nation.
134
The following table summarizes the Republic's trade balance for the periods
indicated:
TRADE BALANCE
<Table>
<Caption>
EXPORTS
BALANCE AS % OF
EXPORTS(1) IMPORTS(2) OF TRADE IMPORTS
---------- ---------- -------- -------
(MILLIONS OF DOLLARS, EXCEPT PERCENTAGES)
1998................................................ 132,313.1 93,281.8 39,031.4 141.8
1999................................................ 143,685.5 119,752.3 23,933.2 120.0
2000................................................ 172,267.5 160,481.0 11,786.5 107.3
2001................................................ 150,439.1 141,097.8 9,341.3 106.6
2002................................................ 162,470.5 152,126.2 10,344.4 106.8
June 30, 2002....................................... 75,908.0 70,979.7 4,928.3 106.9
June 30, 2003....................................... 89,110.2 85,893.7 3,216.6 103.7
</Table>
- ------------
(1) These entries are derived from trade statistics and are valued on a free on
board basis, meaning that the insurance and freight costs are not included.
(2) These entries are derived from customs clearance statistics on a C.I.F.
basis, meaning that the price of goods include insurance and freight cost.
Source: The Bank of Korea.
The Republic, due to its lack of natural resources, relies on extensive
trading activity for growth. The country meets virtually all domestic
requirements for petroleum, wood and rubber with imports, as well as much of its
coal and iron needs. Exports consistently represent a high percentage of GDP;
accordingly, the international economic environment is of crucial importance to
the Republic's economy.
The following tables give information regarding the Republic's exports and
imports by major commodity groups:
EXPORTS BY MAJOR COMMODITY GROUPS (F.O.B.)(1)
<Table>
<Caption>
AS % OF AS % OF
1998 TOTAL 1999 TOTAL 2000
--------- ------- --------- ------- ---------
(MILLIONS OF DOLLARS, EXCEPT PERCENTAGES)
Foods & Consumer Goods........ 2,744.7 2.1 2,951.0 2.1 2,791.9
Raw Materials and Fuels....... 7,385.4 5.6 7,846.7 5.5 11,572.3
Light Industrial Products..... 32,486.0 24.6 29,708.6 20.7 30,286.2
Fibres...................... 1,505.6 1.1 1,390.3 1.0 1,529.8
Cloths...................... 7,850.4 5.9 7,998.2 5.6 8,523.0
Clothing.................... 4,653.3 3.5 4,869.0 3.4 5,024.1
Tires and Tubes............. 1,543.0 1.2 1,485.8 1.0 1,421.4
Heavy & Chemical Industrial
Products.................... 89,697.0 67.8 103,179.2 71.8 127,617.1
Chemical Manufacturing
Products.................. 9,016.8 6.8 9,408.8 6.5 12,144.7
Metal Goods................. 11,118.7 8.4 10,308.4 7.2 11,362.5
Machinery................... 10,064.0 7.6 11,593.7 8.1 11,997.0
Electronics................. 34,284.4 25.9 45,806.7 31.9 62,043.0
Passenger Cars.............. 8,167.1 6.2 9,416.7 6.6 11,101.6
Ship........................ 8,014.1 6.1 7,490.3 5.2 8,229.4
--------- ----- --------- ----- ---------
Total......................... 132,313.1 100.0 143,685.5 100.0 172,267.5
========= ===== ========= ===== =========
<Caption>
AS % OF AS % OF AS % OF
TOTAL 2001 TOTAL 2002 TOTAL
------- --------- ------- --------- -------
(MILLIONS OF DOLLARS, EXCEPT PERCENTAGES)
Foods & Consumer Goods........ 1.6 2,646.2 1.8 2,634.7 1.6
Raw Materials and Fuels....... 6.7 9,999.5 6.6 8,498.1 5.2
Light Industrial Products..... 17.6 26,316.2 17.5 25,479.5 15.7
Fibres...................... 0.9 1,260.5 0.8 1,382.8 0.9
Cloths...................... 4.9 7,011.5 4.7 6,621.4 4.1
Clothing.................... 2.9 4,300.1 2.9 3,946.9 2.4
Tires and Tubes............. 0.8 1,425.7 0.9 1,516.8 0.9
Heavy & Chemical Industrial
Products.................... 74.1 111,477.2 74.1 125,858.3 77.5
Chemical Manufacturing
Products.................. 7.0 10,826.7 7.2 11,845.3 7.3
Metal Goods................. 6.6 10,031.4 6.7 10,312.1 6.4
Machinery................... 7.0 11,640.4 7.7 12,824.6 7.9
Electronics................. 36.0 47,359.7 31.5 56,116.5 34.5
Passenger Cars.............. 6.4 11,450.8 7.6 13,322.3 8.2
Ship........................ 4.8 9,699.2 6.4 10,672.2 6.6
----- --------- ----- --------- -----
Total......................... 100.0 150,439.1 100.0 162,470.5 100.0
===== ========= ===== ========= =====
</Table>
- ------------
(1) These entries are derived from customs clearance statistics. F.O.B. stands
for free on board, meaning that insurance and freight costs are not
included.
Source: Monthly Bulletin, February 2003; The Bank of Korea.
135
IMPORTS BY MAJOR COMMODITY GROUPS (C.I.F.)(1)
<Table>
<Caption>
AS % OF AS % OF AS % OF AS % OF
1998 TOTAL 1999 TOTAL 2000 TOTAL 2001 TOTAL
-------- -------- --------- -------- --------- -------- --------- --------
(MILLIONS OF DOLLARS, EXCEPT PERCENTAGES)
Foods & Consumer Goods............. 12,655.4 13.6 14,011.6 11.7 16,073.7 10.0 16,630.7 11.8
Grain............................ 2,519.9 2.7 2,319.6 1.9 2,438.3 1.5 2,528.8 1.8
Direct Consumption Goods......... 2,372.5 2.5 3,655.9 3.1 4,646.8 2.9 4,786.5 3.4
Durable Goods.................... 6,644.4 7.1 6,396.9 5.3 6,424.0 4.0 6,216.8 4.4
Nondurable Goods................. 1,090.8 1.2 1,623.4 1.4 2,549.3 1.6 3,091.2 2.2
Industrial Materials and Fuels..... 45,593.5 48.9 57,252.9 47.8 78,974.8 49.2 71,929.3 51.0
Crude Oil........................ 11,240.6 12.1 14,782.7 12.3 25,215.6 15.7 21,367.8 15.1
Raw Material for Light
Industry....................... 3,731.8 4.0 4,184.7 3.5 4,844.7 3.0 4,408.8 3.1
Chemical Products................ 7,973.7 8.5 9,796.3 8.2 11,837.6 7.4 11,274.5 8.0
Steel Products................... 3,319.2 3.6 4,750.3 4.0 6,007.0 3.7 5,029.7 3.6
Capital Goods...................... 35,032.9 37.6 48,487.8 40.5 65,432.5 40.8 52,537.8 37.2
Machinery........................ 10,491.5 11.2 13,514.2 11.3 18,425.9 11.5 15,264.2 10.8
Electronic Products.............. 21,583.4 23.1 31,673.1 26.4 43,292.9 27.0 33,839.2 24.0
Transport Equipment.............. 2,137.7 2.3 2,392.5 2.0 2,815.5 1.8 2,648.4 1.9
-------- ----- --------- ----- --------- ----- --------- -----
Total.............................. 93,281.8 100.0 119,752.3 100.0 160,481.0 100.0 141,097.8 100.0
======== ===== ========= ===== ========= ===== ========= =====
<Caption>
AS % OF
2002 TOTAL
--------- --------
Foods & Consumer Goods............. 20,250.9 13.3
Grain............................ 2,665.0 1.8
Direct Consumption Goods......... 5,707.7 3.8
Durable Goods.................... 7,759.7 5.1
Nondurable Goods................. 4,112.3 2.7
Industrial Materials and Fuels..... 73,891.4 48.6
Crude Oil........................ 19,200.3 12.6
Raw Material for Light
Industry....................... 5,320.4 3.5
Chemical Products................ 12,269.2 8.1
Steel Products................... 6,267.8 4.1
Capital Goods...................... 57,983.8 38.1
Machinery........................ 17,998.9 11.8
Electronic Products.............. 35,996.6 23.7
Transport Equipment.............. 3,082.5 2.0
--------- -----
Total.............................. 152,126.2 100.0
========= =====
</Table>
- ------------
(1) These entries are derived from customs clearance statistics. C.I.F. means
that the price of goods include insurance and freight costs.
Source: Monthly Bulletin, February 2003; The Bank of Korea.
In 1998, the Republic recorded a trade surplus of US$39.0 billion due to a
35.5% decrease in imports. The Republic's economic difficulties drove down
imports of all categories of goods. Exports decreased by 2.8% due to decreases
in the country's major export categories.
In 1999, the Republic recorded a trade surplus of US$23.9 billion. Exports
grew by 8.6% and imports grew by 28.4%.
In 2000, the Republic recorded a trade surplus of US$11.8 billion. The
Republic's economic recovery led to a 34.0% increase in imports and a 19.9%
increase in exports, due to an increase in major import and export categories.
In 2001, the Republic recorded a trade surplus of US$9.3 billion. Exports
decreased by 12.7% primarily due to weaker sales of computer products and
imports decreased by 12.1% primarily due to decreased demand for raw materials
and capital goods.
In 2002, the Republic recorded a trade surplus of US$10.3 billion. Exports
increased by 8.0% primarily due to an increase in sales of semiconductors,
automobiles and wireless telecommunication devices and an increase in trade
volume with China and imports increased by 7.8% primarily due to an increase in
purchases of raw materials and machinery.
Based on preliminary data, the Republic recorded a trade surplus of US$3.3
billion in the first half of 2003. Exports increased by 17.5% and imports
increased by 21.0% compared to the corresponding period of 2002.
136
The Republic's largest trading partners, the United States, Japan and China
accounted for the following percentages of the country's imports and exports:
<Table>
<Caption>
1998 1999 2000 2001 2002
----------------- ----------------- ----------------- ----------------- -----------------
EXPORTS IMPORTS EXPORTS IMPORTS EXPORTS IMPORTS EXPORTS IMPORTS EXPORTS IMPORTS
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(%)
United States........ 17.2 21.9 20.5 20.8 21.8 18.2 20.7 15.8 20.2 15.1
Japan................ 9.2 18.1 11.0 20.2 11.9 19.8 11.0 18.9 9.3 19.6
China(1)............. 16.0 7.5 15.8 8.1 16.9 8.8 18.4 10.3 20.9 12.6
<Caption>
JUNE 30, 2003
-----------------
EXPORTS IMPORTS
------- -------
(%)
United States........ 17.9 14.7
Japan................ 9.1 19.7
China(1)............. 23.8 13.1
</Table>
- ------------
(1) Includes Hong Kong.
Source: Ministry of Commerce, Industry and Energy.
In 2002, the outbreak of severe acute respiratory syndrome ("SARS") in Asia
(including China) and other parts of the world increased uncertainty of economic
prospects for affected countries in particular, as well as world economic
prospects in general. Another outbreak of SARS in the future may have an adverse
effect on Korean and world economies.
NON-COMMODITIES TRADE BALANCE
In 1998, the Republic recorded a non-commodities trade deficit in its
current account of approximately US$4.6 billion. In 1999, the non-commodities
trade deficit increased to US$5.8 billion. The non-commodities trade deficit
decreased to US$5.3 billion in 2000 and US$4.4 billion in 2001. In 2002, the
non-commodities trade deficit increased to US$7.0 billion.
FOREIGN CURRENCY RESERVES
The following table shows the Republic's total official foreign currency
reserves:
TOTAL OFFICIAL RESERVES
<Table>
<Caption>
DECEMBER 31,
-----------------------------------------------
1999 2000 2001 2002
--------- --------- ---------- ----------
(MILLIONS OF DOLLARS)
Gold(1)........................................ $ 67.1 $ 67.6 $ 68.3 $ 69.2
Foreign Exchange............................... 73,700.3 95,855.1 102,487.5 120,811.4
--------- --------- ---------- ----------
Total Gold and Foreign Exchange................ 73,767.4 95,922.7 102,555.8 120,880.6
Reserve Position at IMF........................ 286.5 271.8 262.2 520.2
Special Drawing Rights......................... 0.7 3.5 3.3 11.8
--------- --------- ---------- ----------
Total Official Reserves...................... $74,054.5 $96,198.1 $102,821.4 $121,412.5
========= ========= ========== ==========
</Table>
- ------------
(1) For this purpose, domestically-owned gold is valued at US$42.22 per troy
ounce (31.1035 grams) and gold deposited overseas is calculated at cost of
purchase.
Source The Bank of Korea.
The Government's foreign currency reserves increased to US$131.7 billion as
of June 30, 2003 from US$8.9 billion as of December 31, 1997, primarily due to
continued balance of trade surpluses and capital inflows.
137
THE FINANCIAL SYSTEM
STRUCTURE OF THE FINANCIAL SECTOR
The Republic's financial sector includes the following categories of
financial institutions:
- The Bank of Korea;
- banking institutions;
- non-bank financial institutions; and
- other financial entities, including:
--securities institutions;
--credit guarantee institutions;
--venture capital companies; and
--miscellaneous others.
To increase transparency in financial transactions and enhance the
integrity and efficiency of the financial markets, Korean law requires that
financial institutions confirm that their clients use their real names when
transacting business. To ease the liquidity crisis, the Government altered the
real-name financial transactions system during 1998, to allow the sale or
deposit of foreign currencies through domestic financial institutions and the
purchase of certain bonds, including Government bonds, without identification.
The Government also strengthened confidentiality protection for private
financial transactions.
BANKING INDUSTRY
The banking industry comprises commercial banks and specialized banks.
Commercial banks serve the general public and corporate sectors. They include
nationwide banks, regional banks and branches of foreign banks. Regional banks
provide services similar to nationwide banks, but operate in a geographically
restricted region. Branches of foreign banks have operated in Korea since 1967
but provide a relatively small proportion of the country's banking services. As
of December 31, 2002, commercial banks consisted of eight nationwide banks, all
of which have branch networks throughout Korea, six regional banks and 62
branches of foreign banks operated in the country. Nationwide and regional banks
had, in the aggregate, 4,936 domestic branches and offices, 55 overseas
branches, four overseas representative offices and 21 overseas subsidiaries as
of December 31, 2002.
Specialized banks meet the needs of specific sectors of the economy in
accordance with Government policy; they are organized under, or chartered by,
special laws. Specialized banks include:
- The Korea Development Bank;
- The Export-Import Bank of Korea;
- The Industrial Bank of Korea;
- National Agricultural Cooperatives Federation (which merged with the
National Livestock Cooperatives Federation in July 2000); and
- National Federation of Fisheries Cooperatives.
138
The economic difficulties in 1997 and 1998 caused an increase in Korean
banks' non-performing assets and a decline in capital adequacy ratios of Korean
banks. From 1998 through 2002, the Financial Supervisory Commission amended
banking regulations several times to adopt more stringent definitions for
non-performing loans that more closely followed international standards. The new
definitions increased the level of non-performing loans held by banks and other
financial institutions. The following table sets out the total loans and
discounts and non-performing assets of the commercial banking sector.
<Table>
<Caption>
NON-
TOTAL PERFORMING PERCENTAGE
LOANS ASSETS OF TOTAL
------- ------------ ------------
(IN TRILLIONS OF WON) (PERCENTAGE)
December 31, 1999........................................... 328.3 27.4 8.3
December 31, 2000........................................... 361.6 23.9 6.6
December 31, 2001........................................... 379.1 11.0 2.9
December 31, 2002........................................... 464.6 9.0 1.9
June 30, 2003............................................... 489.9 11.3 2.3
</Table>
- ------------
Source: Banking Statistics, February 2003; Financial Supervisory Service.
Most of the growth in total loans since the end of 1999, and in particular,
since the end of 2001, has been attributable to loans to the retail sector,
accounting for 51.8% of total loans as of December 31, 2002, compared to 40.0%
as of December 31, 1999.
A group of the Republic's banks, including eight nationwide commercial
banks, six regional commercial banks and five special banks, posted an aggregate
net profit of W5.0 trillion in 2002, compared to an aggregate net profit of W4.7
trillion in 2001. In the first half of 2003, these banks posted an aggregate net
profit of W0.5 trillion compared to an aggregate net profit of W3.5 trillion in
the first half of 2002, primarily due to increased loan loss provisions for SK
Networks and credit card companies.
NON-BANK FINANCIAL INSTITUTIONS
Non-bank financial institutions include:
- investment institutions, including merchant banks, securities investment
trust companies and the Korea Securities Finance Corporation;
- savings institutions, including trust accounts of banks, mutual savings
and finance companies, credit unions, mutual credit facilities,
community credit cooperatives and postal savings;
- life insurance institutions; and
- credit card companies.
As of June 30, 2003, three merchant banks operated in the country. Since
1998, 28 merchant banks have been closed or merged into commercial banks or
securities firms. As of December 31, 2002, the total assets of Korea's merchant
banks amounted to an aggregate of W2,498.0 billion.
Through December 2001, each of five securities investment trust companies
which managed and sold securities investment trusts was converted into an
investment trust management company which only manages the trusts and a
securities company. As of September 30, 2003, 31 securities investment trust
management companies, which manage the trusts, operate in Korea. Currently,
there is no securities investment trust company that also sells interests in the
trusts in the Republic. As of September 30, 2003, total assets of all the
securities investment trust companies totaled W1,399.6 billion.
Korean banks provide trust account management services pursuant to Korean
law applicable to trusts. Banks segregate trust assets and cannot use them to
satisfy claims of depositors or other creditors. Accordingly, trust accounts
appear separately from banking accounts in the banks' financial statements. As
139
of June 30, 2003, assets of trust accounts of all banks providing trust account
management services totaled W134,598.7 billion.
The country had 115 mutual savings banks as of June 30, 2003, with assets
totaling W26,977.6 billion.
As of June 30, 2003, 11 domestic life insurance institutions, four joint
venture life insurance institutions and eight wholly-owned subsidiaries of
foreign life insurance companies, with assets totaling approximately W169.3
trillion as of June 30, 2003, served the Republic.
As of December 31, 1999, seven credit card companies operated in the
country with loans totaling approximately W18.0 trillion, of which 8.1% were
classified as non-performing loans. As of June 30, 2003 nine credit card
companies operated in the country with loans totaling approximately W85.7
trillion, of which 9.0% were classified as non-performing loans.
MONEY MARKETS
In Korea, the money markets consist of the call market and markets for a
wide range of other short-term financial instruments, including treasury bills,
monetary stabilization bonds, negotiable certificates of deposits, repurchase
agreements and commercial paper.
SECURITIES MARKETS
As of September 30, 2003, 44 domestic securities companies (including joint
venture securities companies) and 17 branches of foreign securities companies
operated in Korea.
The Korea Stock Exchange, a non-profit corporation wholly owned by its
member firms began operations in 1956 and is Korea's only stock exchange. It has
a single trading floor located in Seoul. The exchange imposes daily limits on
share price movements to avoid excessive fluctuation. The Korea Composite Stock
Price Index is comprised of all equities listed on the exchange. The exchange
opened a stock index futures market in May 1996 and an options market in July
1997.
In addition to the Korea Stock Exchange, Korea has two over-the-counter
stock markets. The KOSDAQ Stock Market was established in July 1996, and the OTC
Bulletin Board Market was launched in March 2000 for trading of shares not
listed on either the Korea Stock Exchange or the KOSDAQ Stock Market.
The following table shows the value of the Korea Composite Stock Price
Index as of the dates indicated.
<Table>
December 28, 1998........................................... 562.5
December 28, 1999........................................... 1,028.1
December 26, 2000........................................... 504.6
January 31, 2001.......................................... 617.9
February 28, 2001......................................... 578.1
March 30, 2001............................................ 523.2
April 30, 2001............................................ 577.4
May 31, 2001.............................................. 612.2
June 29, 2001............................................. 595.1
July 31, 2001............................................. 541.6
August 31, 2001........................................... 545.1
September 28, 2001........................................ 479.7
October 31, 2001.......................................... 537.8
November 30, 2001......................................... 643.9
</Table>
140
<Table>
December 28, 2001........................................... 693.7
January 31, 2002.......................................... 748.1
February 28, 2002......................................... 820.0
March 29, 2002............................................ 895.6
April 30, 2002............................................ 842.3
May 31, 2002.............................................. 796.4
June 28, 2002............................................. 742.7
July 31, 2002............................................. 718.0
August 30, 2002........................................... 736.4
September 30, 2002........................................ 646.4
October 31, 2002.......................................... 658.9
November 29, 2002......................................... 724.8
December 30, 2002........................................... 627.6
January 30, 2003.......................................... 591.9
February 28, 2003......................................... 575.4
March 31, 2003............................................ 535.7
April 30, 2003............................................ 599.4
May 30, 2003.............................................. 633.4
June 30, 2003............................................. 669.9
July 31, 2003............................................. 713.5
August 29, 2003........................................... 759.5
September 30, 2003........................................ 697.5
October 31, 2003.......................................... 782.4
November 28, 2003......................................... 796.2
</Table>
On December 27, 1997, the last day of trading in 1997, the index stood at
376.3, a sharp decline from 647.1 on September 30, 1997. The fall resulted from
growing concerns about the Republic's weakening financial and corporate sectors,
the Republic's falling foreign currency reserves, the sharp depreciation of the
Won against the U.S. Dollar and other external factors, such as a sharp decline
in stock prices in Hong Kong on October 24, 1997 and financial turmoil in
Southeast Asian countries. The Korea Composite Stock Price Index rose to 1,028.1
on December 28, 1999, but has since been volatile. The index was 801.9 on
December 23, 2003.
SUPERVISION SYSTEM
The Office of Bank Supervision, the Securities Supervisory Board, the
Insurance Supervisory Board and all other financial sector regulatory bodies
merged in January 1999 to form the Financial Supervisory Commission. The
Financial Supervisory Commission acts as the executive body over the Financial
Supervisory Service. The Financial Supervisory Commission reports to, but
operates independently of, the Prime Minister's office.
The Ministry of Finance and Economy focuses on financial policy, foreign
currency regulations and the approval process for establishing financial
institutions. The Bank of Korea manages monetary policy focusing on price
stabilization.
INSURANCE SYSTEM
The Republic's deposit insurance system insures amounts on deposit with
banks, non-bank financial institutions, securities companies and life insurance
companies.
141
Since January 2001, deposits at any single financial institution are
insured only up to W50 million regardless of the amount deposited.
The Government recently excluded certain deposits, such as repurchase
agreements, from the insurance scheme, expanded the definition of unsound
financial institutions to which the insurance scheme would apply and increased
the insurance premiums payable by insured financial institutions.
MONETARY POLICY
THE BANK OF KOREA
The Bank of Korea was established in 1950 as Korea's central bank and the
country's sole currency issuing bank. A seven-member Monetary Policy Committee,
chaired by the Governor of The Bank of Korea, formulates and controls monetary
and credit policies.
The core inflation rate, which is the consumer price index adjusted to
remove the non-cereal agriculture and petroleum components, is used as The Bank
of Korea's target indicator. To achieve its established inflation target, the
Monetary Policy Committee of The Bank of Korea determines and announces its
overnight call rate target on a monthly basis. The Bank of Korea uses open
market operations as its primary instrument to keep the call rate in line with
the Monetary Policy Committee's target rate. In addition, The Bank of Korea is
able to establish policies regarding its lending to banks in Korea and their
reserve requirements.
INTEREST RATES
Interest rates gradually have been deregulated under a four-stage plan
initiated in August 1991. In July 1997, some elements of the fourth and final
stage of the plan were put in place. As of the end of 2002, all deposit and
lending rates had been deregulated with the exception of those on demand
deposits, which are scheduled to be deregulated in the near future. On July 10,
2003, the Bank of Korea cut its overnight call rate target by a quarter
percentage point to 3.75% from 4.00%.
MONEY SUPPLY
The following table shows the volume of the Republic's money supply:
MONEY SUPPLY
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------------------ JUNE 30,
1998 1999 2000 2001 2002 2003
--------- --------- ------------ --------- --------- ---------
(BILLIONS OF WON)
Money Supply (M1)(1)..... 121,731.1 170,659.4 196,714.5 246,720.5 283,580.8 276,009.5
Quasi-money(2)........... 517,933.2 501,885.0 510,984.4 518,258.8 588,494.8 605,979.6
Money Supply (M2)........ 639,664.3 672,544.4 707,698.9 764,979.3 872,075.6 881.989.1
Percentage Increase
Over Previous
Year................ 23.7% 5.1% 5.2% 8.1% 14.0% 6.7%
</Table>
- ------------
(1) Consists of currency in circulation and demand and instant access savings
deposits at financial institutions.
(2) Includes time and installment savings deposits, marketable instruments,
yield-based dividend instruments and financial debentures, excluding
financial instruments with a maturity of more than two years.
Source: The Bank of Korea.
EXCHANGE CONTROLS
Authorized foreign exchange banks, as approved by the Ministry of Finance
and Economy, handle foreign exchange transactions. The ministry has designated
other types of financial institutions to handle foreign exchange transactions on
a limited basis.
142
Korean laws and regulations generally require the approval of, or a report
to, either the Ministry of Finance and Economy, The Bank of Korea or authorized
foreign exchange banks, as applicable, for issuances of international bonds and
other instruments, overseas investments and certain other transactions involving
foreign exchange payments.
In 1994 and 1995, the Government relaxed regulations of foreign exchange
position ceilings and foreign exchange transaction documentation and created
free Won accounts which may be opened by non-residents at Korean foreign
exchange banks. The Won funds deposited into the free Won accounts may be
converted into foreign currencies and remitted outside Korea without any
governmental approval. In December 1996, after joining the OECD, the Republic
freed the repatriation of investment funds, dividends and profits, as well as
loan repayments and interest payments. The Government continues to reduce
exchange controls in response to changes in the world economy, including the new
trade regime under the WTO, anticipating that such foreign exchange reform will
improve the Republic's competitiveness and encourage strategic alliances between
domestic and foreign entities.
In September 1998 the National Assembly passed the Foreign Exchange
Transaction Act, which became effective in April 1999 and was subsequently
amended in October 2000. In principle, most currency and capital transactions,
including, among others, the following transactions have been liberalized:
- the investment in real property located overseas by Korean companies and
financial institutions;
- the establishment of overseas branches and subsidiaries by Korean
companies and financial institutions;
- the investment by non-residents in deposits and trust products having
more than one year maturities; and
- the issuance of debentures by non-residents in the Korean market.
To minimize the adverse effects from further opening of Korean capital
markets, the Ministry of Finance and Economy is authorized to introduce a
variable deposit requirement system to restrict the influx of short-term
speculative funds.
The Government has also embarked on a second set of liberalization
initiatives starting in January 2001, under which ceilings on international
payments for Korean residents have been eliminated, including overseas travel
expenses, overseas inheritance remittances and emigration expenses. Overseas
deposits, trusts, acquisitions of foreign securities and other foreign capital
transactions made by residents and the making of deposits in Korean currency
made by non-residents have also been liberalized. In line with the foregoing
liberalization, measures will also be adopted to curb illegal foreign exchange
transactions and to stabilize the foreign exchange market.
143
FOREIGN EXCHANGE
The following table shows the exchange rate between the Won and the U.S.
Dollar (in Won per U.S. Dollar) as announced by the Seoul Money Brokerage
Services, Ltd. as of the dates indicated.
EXCHANGE RATES
<Table>
<Caption>
WON/U.S. DOLLAR
EXCHANGE RATE
---------------
December 31, 1996........................................... 844.2
December 31, 1997........................................... 1,415.2
December 31, 1998........................................... 1,207.8
December 30, 1999........................................... 1,145.4
December 29, 2000........................................... 1,259.7
January 31, 2001.......................................... 1,265.5
February 28, 2001......................................... 1,245.7
March 30, 2001............................................ 1,314.0
April 30, 2001............................................ 1,324.7
May 31, 2001.............................................. 1,292.9
June 30, 2001............................................. 1,300.7
July 31, 2001............................................. 1,301.4
August 31, 2001........................................... 1,283.8
September 29, 2001........................................ 1,309.1
October 31, 2001.......................................... 1,296.1
November 30, 2001......................................... 1,274.0
December 31, 2001........................................... 1,326.1
January 31, 2002.......................................... 1,314.8
February 28, 2002......................................... 1,327.7
March 30, 2002............................................ 1,326.4
April 30, 2002............................................ 1,292.2
May 31, 2002.............................................. 1,233.3
June 29, 2002............................................. 1,201.8
July 31, 2002............................................. 1,197.0
August 31, 2002........................................... 1,200.5
September 30, 2002........................................ 1,225.5
October 31, 2002.......................................... 1,233.4
November 30, 2002......................................... 1,208.0
December 31, 2002........................................... 1,200.4
January 30, 2003.......................................... 1,170.5
February 28, 2003......................................... 1,186.8
March 31, 2003............................................ 1,252.9
April 30, 2003............................................ 1,213.1
May 31, 2003.............................................. 1,205.3
June 30, 2003............................................. 1,193.1
July 31, 2003............................................. 1,180.0
August 30, 2003........................................... 1,178.5
</Table>
144
<Table>
<Caption>
WON/U.S. DOLLAR
EXCHANGE RATE
---------------
September 30, 2003........................................ 1,150.2
October 31, 2003.......................................... 1,177.3
November 29, 2003......................................... 1,203.6
</Table>
Prior to November 1997, the Government permitted exchange rates to float
within a daily range of 2.25%. In response to the substantial downward pressures
on the Won caused by the Republic's economic difficulties in late 1997, in
November 1997, the Government expanded the range of permitted daily exchange
rate fluctuations to 10%. The Government eliminated the daily exchange rate band
in December 1997, and the Won now floats according to market forces. The value
of the Won relative to the U.S. dollar depreciated from W888.1 to US$1.00 on
June 30, 1997 to W1,964.8 to US$1.00 on December 24, 1997. Due to improved
economic conditions and increases in trade surplus, the Won has generally
appreciated against the U.S. dollar. The market average exchange rate was
W1,195.8 to US$1.00 on December 23, 2003.
GOVERNMENT FINANCE
The Ministry of Planning and Budget prepares the Government budget, and the
Ministry of Finance and Economy administers the Government's finances.
The Government's fiscal year commences on January 1. The Ministry of
Planning and Budget must submit the budget to the National Assembly not later
than 90 days prior to the start of the fiscal year and may submit supplementary
budgets revising the original budget at any time during the fiscal year.
145
The following table shows consolidated Government revenues and
expenditures.
CONSOLIDATED CENTRAL GOVERNMENT REVENUES AND EXPENDITURES
<Table>
<Caption>
1998 1999 2000 2001 2002
------- ------- ------- ------- -------
(BILLIONS OF WON)
Total Revenues............................... 96,673 107,924 135,811 144,033 158,712
Current Revenues........................... 95,790 106,537 134,415 142,709 157,226
Total Tax Revenues...................... 67,798 75,658 92,935 95,793 103,967
Income Profits and Capital Gains...... 27,975 25,220 35,387 35,638 38,404
Tax on Property....................... 1,379 3,272 4,262 2,920 2,894
Tax on Goods and Services............. 27,159 33,608 38,020 43,818 48,047
Customs Duties........................ 3,836 4,687 5,800 5,923 6,601
Others................................ 7,449 8,871 9,466 7,494 8,021
Social Security Contribution............ 10,512 12,008 14,798 17,538 19,723
Non-Tax Revenues........................ 17,480 18,871 26,682 29,378 33,536
Capital Revenues........................... 883 1,387 1,396 1,324 1,486
Total Expenditures and Net Lending........... 115,430 120,988 129,284 136,765 136,046
Total Expenditures......................... 90,990 101,236 109,443 126,688 135,610
Current Expenditures.................... 70,631 76,798 87,170 101,744 106,255
Goods and Services.................... 21,697 19,772 24,707 26,223 28,629
Interest Payments..................... 3,399 5,884 6,888 7,198 6,846
Subsidies and Other Transfers(1)...... 44,430 49,333 55,114 66,540 68,929
Subsidies............................. 576 432 329 534 768
Other Transfers(1).................... 43,854 48,901 54,785 66,006 68,161
Non-Financial Public Enterprises
Expenditures.......................... 1,105 1,809 461 1,783 1,851
Capital Expenditures....................... 20,359 24,438 22,273 24,944 29,355
Net Lending................................ 24,440 19,752 19,841 10,077 436
</Table>
- ------------
(1) Includes transfers to local governments, non-profit institutions,
households and abroad.
Source: Ministry of Finance and Economy.
The consolidated Government account consists of a General Account, Special
Accounts (including a non-financial public enterprise special account) and
Public Funds. The Government segregates the accounts of certain functions of the
Government into Special Accounts and Public Funds for more effective
administration and fiscal control. The Special Accounts and Public Funds relate
to business type activities, such as economic development, road and railway
construction and maintenance, monopolies, and communications developments and
the administration of loans received from official international financial
organizations and foreign governments.
Revenues derive mainly from national taxes and non-tax revenues.
Expenditures include general administration, national defense, community
service, education, health, social security, certain annuities and pensions and
local finance, which involves the transfer of tax revenues to local governments.
Tax revenues decreased slightly in 1998 because of the country's economic
difficulties. Expenditures increased significantly in 1998 resulting from the
Government's program to restructure the country's economy and its debt
obligations under the financial aid package extended by the IMF. Although the
Government reduced expenditures in other budget areas, such as defense and
general administration, a fiscal deficit was recorded in 1998 equal to
approximately 4.2% of the Republic's GDP, financed in part by approximately
W11.7 trillion of Government bonds issued in the domestic market in 1998.
146
For 1999, revenues increased by approximately 11.6%, which represented
22.4% of the Republic's GDP, due in large part to higher tax and non-tax
revenues. The Government expanded the value added tax base further and reduced
the tax rate on real estate capital gains. The Government imposed modest cuts in
several expenditure categories relative to 1998, including wages and salaries,
purchase of goods and services, capital spending and net lending to help offset
an anticipated increase in interest payments, including the carrying costs for
financial sector restructuring. Fiscal deficit in 1999 decreased to
approximately 2.7% of GDP.
For 2000, revenues increased by approximately 25.8%, which represented
26.0% of the Republic's GDP principally due to higher tax and non-tax revenues.
Tax revenues increased significantly while expenditures increased slightly due
to the country's economic recovery. Principal factors for the tax revenue
increase included:
- increase of corporate tax revenues due to increase of corporate profits;
- expansion of the tax base;
- increase of securities trading tax due to increase of trading volume;
and
- increase of customs duties due to increase of imports.
The Republic had a fiscal surplus of 1.3% in 2000.
For 2001, revenues increased by approximately 6.1%, which represented 26.1%
of the Republic's GDP principally due to higher tax and non-tax revenues. Tax
revenues increased due to the country's economic growth and the accompanying
increase in the overall compensation of workers in Korea. Non-tax revenues
increased due to the sale by the Government of the shares it owns in Korean
companies such as KT Corporation (formerly known as Korea Telecom Corp.) and
Korea Tobacco & Ginseng Corporation as part of the Government's privatization
plans. The Republic had a fiscal surplus of 1.3% in 2001.
For 2002, revenues increased by approximately 10.2%, which represented
26.6% of the Republic's GDP principally due to higher tax and non-tax revenues.
Tax revenues increased due to the country's economic growth and the accompanying
increase in the overall compensation of workers in Korea. Non-tax revenues
increased due to an increase in surplus amounts transferred from The Bank of
Korea. The Republic had a fiscal surplus of 3.8% in 2002.
DEBT
EXTERNAL AND INTERNAL DEBT OF THE GOVERNMENT
The following table sets out, by currency and the equivalent amount in U.S.
Dollars, the estimated outstanding direct external debt of the Government as of
December 31, 2002.
DIRECT EXTERNAL DEBT OF THE GOVERNMENT
<Table>
<Caption>
AMOUNT IN EQUIVALENT
ORIGINAL AMOUNT IN
CURRENCY U.S. DOLLARS(1)
------------ ---------------
(IN MILLIONS)
US$........................................................ US$ 14,255.3 US$14,255.3
German Mark................................................ DM 61.2 32.8
Japanese Yen............................................... Y 109,635.0 925.1
-----------
Total.................................................... US$15,213.2
===========
</Table>
- ------------
(1) Amounts expressed in currencies other than US$ are converted to US$ at the
arbitrage rate announced by the Seoul Money Brokerage Services, Ltd. in
effect on December 31, 2002.
147
The following table summarizes, as of December 31 of the years indicated,
the outstanding direct internal debt of the Republic.
DIRECT INTERNAL DEBT OF THE GOVERNMENT
<Table>
<Caption>
(BILLIONS OF WON)
-----------------
1998........................................................ 47,588.6
1999........................................................ 66,145.3
2000........................................................ 75,847.6
2001........................................................ 87,327.5
2002........................................................ 103,341.3
</Table>
The following table sets out all guarantees by the Government of
indebtedness of others:
<Table>
<Caption>
DECEMBER 31,
--------------------------------
2000 2001 2002
-------- --------- ---------
(BILLIONS OF WON)
Domestic................................................ 70,779.5 103,338.5 100,753.7
External(1)............................................. 3,785.9 3,431.1 1,717.7
-------- --------- ---------
Total................................................. 74,565.4 106,769.6 102,471.4
======== ========= =========
</Table>
- ------------
(1) Converted to Won at foreign exchange banks' telegraphed transfer selling
rates to customers in effect on December 31 of each year.
For further information on the outstanding indebtedness, including
guarantees, of the Republic, see "The Republic of Korea--Tables and
Supplementary Information".
In December 1997, the National Assembly authorized the guarantee of up to
US$20 billion of external debt of Korean banks, and, in January 1998, additional
guarantees of up to US$7 billion of external debt of Korean commercial and
merchant banks and up to US$8 billion of external debt of The Bank of Korea. The
Government guaranteed approximately US$21.8 billion in new one-, two- and three-
year loans that replaced the short-term foreign currency debt of eligible Korean
financial institutions, all of which has subsequently been repaid. For a further
discussion of this program, see "The Republic of Korea--The Economy--Post-IMF
Reforms".
In April 1998, the Government issued US$4.0 billion of U.S.
Dollar-denominated debt securities in addition to the World Bank and ADB
obligations incurred in 1998.
EXTERNAL DEBT
The following table sets out certain information regarding Korea's total
external debt calculated using criteria agreed with the IMF. In particular, this
information includes offshore borrowings by Korean banks,
148
including their overseas branches and subsidiaries, but excludes borrowings by
overseas branches and subsidiaries of Korean companies and deposits in overseas
branches and subsidiaries of Korean banks.
<Table>
<Caption>
DECEMBER 31,
---------------------------------------------
1997 1998 1999 2000 2001 2002
----- ----- ----- ----- ----- -----
(BILLIONS OF DOLLARS)
Total External Liabilities...................... 159.2 148.7 137.1 131.7 118.8 131.0
Long-Term Debt................................ 95.7 118.0 97.8 83.8 77.8 81.2
Public Sector.............................. 22.3 36.6 29.5 28.3 20.8 19.7
Domestic Financial Institutions............ 43.2 45.8 43.5 22.5 20.1 19.3
Korean Branches of Foreign Banks........... 4.4 6.3 4.0 2.6 2.7 3.1
Private Sector............................. 25.9 29.4 29.9 30.4 34.2 39.1
Short-Term Debt............................... 63.6 30.7 39.2 47.9 41.0 49.8
Domestic Financial Institutions............ 27.2 11.3 12.7 15.3 13.1 17.3
Korean Branches of Foreign Banks........... 15.2 7.6 9.8 10.4 9.1 13.9
Private Sector............................. 21.2 11.8 16.7 22.2 18.8 18.6
</Table>
- ------------
Source: Ministry of Finance and Economy.
DEBT RECORD
The Government has always paid when due the full amount of principal of,
interest on, and amortization or sinking fund requirements of, all of its
indebtedness.
149
TABLES AND SUPPLEMENTARY INFORMATION
A. EXTERNAL DEBT OF THE GOVERNMENT
<Table>
<Caption>
RANGE OF PRINCIPAL AMOUNTS
RANGE OF RANGE OF YEARS OF OUTSTANDING AS OF
CURRENCY OF BORROWINGS INTEREST RATES YEARS OF ISSUE MATURITY DECEMBER 31, 2002
- ---------------------- --------------- -------------- --------- -------------------
(%) (MILLIONS OF UNITS)
US$................................. 0.75-9/Floating 1960-1998 2001-2023 US$14,255.3
Japanese Yen........................ 3.25-5 1980-1990 2005-2015 Y 109,635.0
German Mark......................... 2-4.5 1973-1985 2001-2021 DM 61.2
-----------
Total External Funded US$15,213.2
Debt(1)...................
===========
</Table>
- ------------
(1) Amounts expressed in currencies other than US$ are converted to US$ at the
arbitrage rate between foreign currencies announced by the Seoul Money
Brokerage Services, Ltd. in effect on December 31, 2002.
B. EXTERNAL GUARANTEED DEBT OF THE GOVERNMENT
<Table>
<Caption>
PRINCIPAL AMOUNTS
INTEREST YEARS OF YEARS OF OUTSTANDING AS OF
NAME RATES ISSUE MATURITY DECEMBER 31, 2002
---- -------- -------- -------- -----------------
(%) (MILLIONS OF
DOLLARS)
1. BONDS
Total Bonds................................. None
2. BORROWINGS
City of Taegu............................... Floating 1988 2003 1.3
Korea District Heating Corp. ............... Floating 1986 2003 2.9
The Korea Development Bank.................. Floating 1999 2009 190.8
The Korea Development Bank.................. Floating 1998 2003 157.7
Industrial Bank of Korea.................... Floating 1999 2006 1,064.1
-------
Total Borrowings(1)......................... 1,416.8
=======
Total External Guaranteed Debt(1)........... 1,416.8
=======
</Table>
- ------------
(1) Amounts expressed in currencies other than US$ are converted to US$ at the
arbitrage rate between foreign currencies announced by the Seoul Money
Brokerage Services, Ltd. in effect on December 31, 2002.
150
C. INTERNAL DEBT OF THE GOVERNMENT
<Table>
<Caption>
RANGE OF RANGE OF PRINCIPAL AMOUNTS
RANGE OF YEARS OF YEARS OF OUTSTANDING AS OF
TITLE INTEREST RATES ISSUE MATURITY DECEMBER 31, 2002
----- -------------- --------- --------- -----------------
(%) (BILLIONS OF WON)
1. BONDS
Interest-Bearing Treasury Bond for
Cereals Fund...................... 2.0-17.0 1995-1999 2000-2004 1,100.0
Foreign Exchange Stabilization
Bonds............................. 6.97-14.48 1995-2000 2000-2005 15,849.9
Interest-Bearing Treasury Bond for
Treasury Bond Management Fund..... 5.55-18.4 1995-2000 2001-2010 55,615.2
Interest-Bearing Treasury Bond for
National Housing I................ 5.0 1990-2000 1995-2005 22,470.5
Interest-Bearing Treasury Bond for
National Housing II............... 3.0 1983-1999 2003-2019 3,236.1
Non-interest-Bearing Treasury Bond
for Contribution(1)............... -- 1967-1985 -- 11.3
---------
Total Bonds....................... 98,283.0
=========
2. BORROWINGS
Borrowings from The Bank of Korea... 950.0
Borrowings from the Sports Promotion
Fund.............................. 71.3
Borrowings from the Civil Servant
Pension Fund...................... 650.0
Borrowings from the Export Insurance
Fund.............................. 510.0
Borrowings from The Korea
Development Bank.................. 114.2
Authorized Government Debt beyond
Budget Limit...................... 2,762.8
Sub-Total......................... 5,058.3
---------
Total Internal Funded Debt........ 103,341.3
=========
</Table>
- ------------
(1) Interest Rates and Years of Maturity not applicable.
151
D. INTERNAL GUARANTEED DEBT OF THE GOVERNMENT
<Table>
<Caption>
RANGE OF RANGE OF PRINCIPAL AMOUNTS
RANGE OF YEARS OF YEARS OF OUTSTANDING AS OF
NAME INTEREST RATES ISSUE MATURITY DECEMBER 31, 2002
---- -------------- --------- --------- -----------------
(%) (BILLIONS OF WON)
1. BONDS OF GOVERNMENT-AFFILIATED
CORPORATIONS
The Korea Development Bank.......... Floating 1989-1994 2002-2004 4.0
Korea Container Terminal
Authority......................... 6.0% 1993-1996 2002-2005 100.0
Korea Asset Management
Corporation....................... 5.0-12.14% 1997-1999 2002-2004 14,351.3
Korea Deposit Insurance
Corporation....................... 0.0-15% 1998-2001 1995-2008 80,974.4(1)
--------
Total Bonds....................... 95,429.7
========
2. BORROWINGS OF GOVERNMENT-AFFILIATED
CORPORATIONS
Rural Development Corporation and
Federation of Farmland............ 5.5% 1967-1989 2000-2024 226.7
National Agricultural Cooperative
Federation........................ 5.0% 2001 2002 370.0
Others.............................. Floating 1991 1999 1,090.9
--------
Total Borrowings.................. 1,686.6
========
</Table>
- ------------
(1) Over four years beginning in 2003, W49 trillion of such debt will be
converted into direct debt of the Government.
152
DESCRIPTION OF THE SECURITIES
DESCRIPTION OF DEBT SECURITIES
We will issue debt securities under a fiscal agency agreement or
agreements. The description below summarizes the material provisions of the debt
securities and the fiscal agency agreement. Since it is only a summary, the
description may not contain all of the information that may be important to you
as a potential investor in the debt securities. Therefore, we urge you to read
the form of fiscal agency agreement and the form of global debt security before
deciding whether to invest in the debt securities. We have filed a copy of these
documents with the Securities and Exchange Commission as exhibits to the
registration statement of which this prospectus is a part. You should refer to
such exhibits for more complete information.
The financial terms and other specific terms of your debt securities will
be described in the prospectus supplement relating to your debt securities. The
description in the prospectus supplement will supplement this description or, to
the extent inconsistent with this description, replace it.
We will appoint a fiscal agent or agents in connection with debt securities
whose duties will be governed by the fiscal agency agreement. We may replace the
fiscal agent or appoint different fiscal agents for different series of debt
securities.
GENERAL TERMS OF THE DEBT SECURITIES
We may issue debt securities in separate series at various times. The
prospectus supplement that relates to your debt securities will specify some or
all of the following terms:
- the aggregate principal amount;
- the currency of denomination and payment;
- any limitation on principal amount and authorized denominations;
- the percentage of their principal amount at which the debt securities
will be issued;
- the maturity date or dates;
- the interest rate for the debt securities and, if variable, the method
by which the interest rate will be calculated;
- whether any amount payable in respect of the debt securities will be
determined based on an index or formula, and how any such amount will be
determined;
- the dates from which interest, if any, will accrue for payment of
interest and the record dates for any such interest payments;
- where and how we will pay principal and interest;
- whether and in what circumstances the debt securities may be redeemed
before maturity;
- any sinking fund or similar provision;
- whether any part or all of the debt securities will be in the form of a
global security and the circumstances in which a global security is
exchangeable for certificated securities;
- if issued in certificated form, whether the debt securities will be in
bearer form with interest coupons, if any, or in registered form without
interest coupons, or both forms, and any restrictions on exchanges from
one form to the other; and
- other specific provisions.
153
Depending on the terms of the debt securities we issue, the prospectus
supplement relating to the debt securities may also describe applicable U.S.
federal income tax and other considerations additional to the disclosure in this
prospectus.
Unless otherwise specified in the applicable prospectus supplement, we will
maintain at an office in the Borough of Manhattan, The City of New York, a
register for the registration of transfers of debt securities issued in
registered form.
PAYMENTS OF PRINCIPAL, PREMIUM AND INTEREST
On every payment date specified in the relevant prospectus supplement, we
will pay the principal, premium and/or interest due on that date to the
registered holder of the relevant debt security at the close of business on the
related record date. We will make all payments at the place and in the currency
set out in the prospectus supplement. Unless otherwise specified in the relevant
prospectus supplement or the debt securities, we will make payments in U.S.
dollars at the New York office of the fiscal agent or, outside the United
States, at the office of any paying agent. Unless otherwise specified in the
applicable prospectus supplement or debt securities, we will pay interest by
check, payable to the registered holder.
We will make any payments on debt securities in bearer form at the offices
and agencies of the fiscal agent or any other paying agent outside the United
States as we may designate. At the option of the holder of the bearer debt
securities, we will make such payments by check or by transfer to an account
maintained by the holder with a bank located outside of the United States. We
will not make payments on bearer debt securities at the corporate trust office
of the fiscal agent in the United States or at any other paying agency in the
United States. In addition, we will not make any payment by mail to an address
in the United States or by transfer to an account maintained by a holder of
bearer debt securities with a bank in the United States. Nevertheless, we will
make payments on a bearer debt security denominated and payable in U.S. dollars
at an office or agency in the United States if:
- payment outside the United States is illegal or effectively precluded by
exchange controls or other similar restrictions; and
- the payment is then permitted under United States law, without material
adverse consequences to us.
If we issue bearer debt securities, we will designate the offices of at
least one paying agent outside the United States as the location for payment.
REPAYMENT OF FUNDS; PRESCRIPTION
If no one claims money paid by us to the fiscal agent for the payment of
principal or interest in respect of any series of debt securities for two years
after the payment was due and payable, the fiscal agent or paying agent will
repay the money to us. After such repayment, the fiscal agent or paying agent
will not be liable with respect to the amounts so repaid, and you may look only
to us for any payment under the debt securities.
Under Korea law, you will not be permitted to file a claim against us for
payment of principal or interest on any series of debt securities unless you do
so within five years, in the case of principal, and two years, in the case of
interest, from the date on which payment was due.
GLOBAL SECURITIES
The prospectus supplement relating to a series of debt securities will
indicate whether any of that series of debt securities will be represented by a
global security. The prospectus supplement will also describe any unique
specific terms of the depositary arrangement with respect to that series. Unless
otherwise specified in the prospectus supplement, we anticipate that the
following provisions will apply to depositary arrangements.
154
Registered Ownership of the Global Security
The global security will be registered in the name of a depositary
identified in the prospectus supplement, or its nominee, and will be deposited
with the depositary, its nominee or a custodian. The depositary, or its nominee,
will therefore be considered the sole owner or holder of debt securities
represented by the global security for all purposes under the fiscal agency
agreement. Except as specified below or in the applicable prospectus supplement,
beneficial owners:
- will not be entitled to have any of the debt securities represented by
the global security registered in their names;
- will not receive physical delivery of any debt securities in definitive
form;
- will not be considered the owners or holders of the debt securities;
- must rely on the procedures of the depositary and, if applicable, any
participants (institutions that have accounts with the depositary or a
nominee of the depositary, such as securities brokers and dealers) to
exercise any rights of a holder; and
- will receive payments of principal and interest from the depositary or
its participants rather than directly from us.
We understand that, under existing industry practice, the depositary and
participants will allow beneficial owners to take all actions required of, and
exercise all rights granted to, the registered holders of the debt securities.
We will register debt securities in the name of a person other than the
depositary or its nominee only if:
- the depositary for a series of debt securities is unwilling or unable to
continue as depositary; or
- we determine, in our sole discretion, not to have a series of debt
securities represented by a global security.
In either such instance, an owner of a beneficial interest in a global
security will be entitled to registration of a principal amount of debt
securities equal to its beneficial interest in its name and to physical delivery
of the debt securities in definitive form.
Beneficial Interests in and Payments on a Global Security
Only participants, and persons that may hold beneficial interests through
participants, can own a beneficial interest in the global security. The
depositary keeps records of the ownership and transfer of beneficial interests
in the global security by its participants. In turn, participants keep records
of the ownership and transfer of beneficial interests in the global security by
other persons (such as their customers). No other records of the ownership and
transfer of beneficial interests in the global security will be kept.
All payments on a global security will be made to the depositary or its
nominee. When the depositary receives payment of principal or interest on the
global security, we expect the depositary to credit its participants' accounts
with amounts that correspond to their respective beneficial interests in the
global security. We also expect that, after the participants' accounts are
credited, the participants will credit the accounts of the owners of beneficial
interests in the global security with amounts that correspond to the owners'
respective beneficial interests in the global security.
The depositary and its participants establish policies and procedures
governing payments, transfers, exchanges and other important matters that affect
owners of beneficial interests in a global security. The depositary and its
participants may change these policies and procedures from time to time. We have
no responsibility or liability for the records of ownership of beneficial
interests in the global security, or for payments made or not made to owners of
such beneficial interests. We also have no responsibility or
155
liability for any aspect of the relationship between the depositary and its
participants or for any aspect of the relationship between participants and
owners of beneficial interests in the global security.
Bearer Securities
We may issue debt securities in a series in the form of one or more bearer
global debt securities deposited with a common depositary for the Euroclear and
Cedel Bank, or with a nominee identified in the applicable prospectus
supplement. The specific terms and procedures, including the specific terms of
the depositary arrangement, with respect to any portion of a series of debt
securities to be represented by a global security will be described in the
applicable prospectus supplement.
ADDITIONAL AMOUNTS
We will make all payments of principal of, and premium and interest, if
any, on the debt securities without withholding or deducting any present or
future taxes imposed by the Republic or any of its political subdivisions,
unless required by law. If Korean law requires us to deduct or withhold taxes,
we will pay additional amounts as necessary to ensure that you receive the same
amount as you would have received without such withholding or deduction.
We will not pay, however, any additional amounts if you are liable for
Korean tax because:
- you are connected with the Republic other than by merely owning the debt
security or receiving income or payments on the debt security;
- you failed to complete and submit a declaration of your status as a
non-resident of the Republic after we or the relevant tax authority
requested you to do so; or
- you failed to present your debt security for payment within 30 days of
when the payment is due or, if the fiscal agent did not receive the
money prior to the due date, the date notice is given to holders that
the fiscal agent has received the full amount due to holders.
Nevertheless, we will pay additional amounts to the extent you would
have been entitled to such amounts had you presented your debt security
for payment on the last day of the 30-day period.
We will not pay any additional amounts for taxes on the debt securities
except for taxes payable through deduction or withholding from payments of
principal, premium or interest. Examples of the types of taxes for which we will
not pay additional amounts include the following: estate or inheritance taxes,
gift taxes, sales or transfer taxes, personal property or related taxes,
assessments or other governmental charges. We will pay stamp or other similar
taxes that may be imposed by the Republic, the United States or any political
subdivision or taxing authority in one of those two countries on the fiscal
agency agreement or be payable in connection with the issuance of the debt
securities.
STATUS OF DEBT SECURITIES
The debt securities will:
- constitute our direct, unconditional, unsecured and unsubordinated
obligations;
- rank at least equally in right of payment among themselves, regardless
of when issued or currency of payment; and
- rank at least equally in right of payment with all of our other
unsecured and unsubordinated obligations, subject to certain statutory
exceptions under Korean law.
NEGATIVE PLEDGE COVENANT
If any debt securities are outstanding, we will not create or permit any
security interests on our assets as security for any of our indebtedness or
guarantees issued by us, unless the security interest also secures our
obligations under the debt securities.
156
We may, however, create or permit a security interest:
- on any promissory debt securities or commercial paper discounted or
otherwise provided as security to or issued or held by us created in
favor of The Bank of Korea in the normal operation of The Bank of
Korea's discount facilities or facilities for the funding of loans by us
to our customers; or
- on any asset (or documents of title to such asset) incurred when the
asset was purchased or improved to secure payment of the cost of the
activity; or
- of a statutory nature arising in the ordinary course of our business but
unrelated to our activities of borrowing or raising money; or
- on any real estate owned by us imposed by a tenant of such real estate
as security for repayment of any key money paid by the tenant; or
- arising by operation of Korean law or given preference by law following
our failure to meet an obligation, although we will not permit such a
security interest to exist for more than 30 days.
EVENTS OF DEFAULT
Each of the following constitutes an event of default with respect to any
series of debt securities:
1. Non-Payment: we do not pay principal or interest or premium or deposit
any sinking fund payment on any debt securities of the series when due
and such failure to pay continues for 30 days.
2. Breach of Other Obligations: we fail to observe or perform any of the
covenants in the series of debt securities (other than non-payment) for
60 days after written notice of the default is delivered to us at the
corporate trust office of the fiscal agent in New York City by holders
representing at least 10% of the aggregate principal amount of the debt
securities of the series.
3. Cross Default and Cross Acceleration:
- we default on any External Indebtedness, and, as a result, becomes
obligated to pay an amount equal to or greater than US$10,000,000 in
aggregate principal amount prior to its due date; or
- we fail to pay when due, including any grace period, any of our
External Indebtedness in aggregate principal amount equal to or
greater than US$10,000,000 or we fail to pay when requested and
required by the terms thereof any guarantee for External Indebtedness
of another person equal to or greater than US$10,000,000 in aggregate
principal amount.
4. Moratorium/Default:
- the Republic declares a general moratorium on the payment of its
External Indebtedness, including obligations under guarantees;
- the Republic becomes liable to repay prior to maturity any amount of
External Indebtedness, including obligations under guarantees, as a
result of a default under such External Indebtedness or obligations;
or
- the international monetary reserves of the Republic become subject to
a security interest or segregation or other preferential arrangement
for the benefit of any creditors.
5. Bankruptcy:
- we are declared bankrupt or insolvent by any court or administrative
agency with jurisdiction over us;
- we pass a resolution to apply for bankruptcy or to request the
appointment of a receiver or trustee or similar official in
insolvency;
157
- a substantial part of our assets are liquidated; or
- we cease to conduct the banking business.
6. Failure of Support: the Republic fails to provide financial support for
us as required under Article 44 of the KDB Act as of the date of the
debt securities of such series.
7. Control of Assets: the Republic ceases to own or control us (directly
or indirectly).
8. IMF Membership/World Bank Membership: the Republic ceases to be a
member of the IMF or the International Bank for Reconstruction and
Development (World Bank).
For purposes of the foregoing, "External Indebtedness" means any obligation
for the payment or repayment of money borrowed that is denominated in a currency
other than the currency of the Republic.
If an event of default occurs, any holder may declare the principal amount
of debt securities that it holds to be immediately due and payable by written
notice to us and the fiscal agent.
You should note that:
- despite the procedure described above, no debt securities may be
declared due and payable if we cure the applicable event of default
before we receive the written notice from the debt security holder;
- we are not required to provide periodic evidence of the absence of
defaults; and
- the fiscal agency agreement does not require us to notify holders of the
debt securities of an event of default or grant any debt security holder
a right to examine the security register.
MODIFICATIONS AND AMENDMENTS; DEBT SECURITYHOLDERS' MEETINGS
Each holder of a series of debt securities must consent to any amendment or
modification of the terms of that series of debt securities or the fiscal agency
agreement that would, among other things:
- change the stated maturity of the principal of the debt securities or
any installment of interest;
- reduce the principal amount of such series of debt securities or the
portion of the principal amount payable upon acceleration of such debt
securities;
- change the debt security's interest rate or premium payable;
- change the currency of payment of principal, interest or premium;
- amend either the procedures provided for a redemption event or the
definition of a redemption event;
- shorten the period during which we are not allowed to redeem the debt
securities or grant us a right to redeem the debt securities which we
previously did not have; or
- reduce the percentage of the outstanding principal amount needed to
modify or amend the fiscal agency agreement or the terms of such series
of debt securities.
We may, with the exception of the above changes, with the consent of the
holders of at least 66 2/3% in principal amount of the debt securities of a
series that are outstanding, modify and amend other terms of that series of debt
securities.
We may at any time call a meeting of the holders of a series of debt
securities to seek the holders of the debt securities' approval of the
modification, or amendment, or obtain a waiver, of any provision of that series
of debt securities. The meeting will be held at the time and place in the
Borough of Manhattan in New York City as determined by the fiscal agent. The
notice calling the meeting must be given at least 30 days and not more than 60
days prior to the meeting.
158
While an event of default with respect to a series of debt securities is
continuing, holders of at least 10% of the aggregate principal amount of that
series of debt securities may compel the fiscal agent to call a meeting of all
holders of debt securities of that series.
Holders of debt securities who hold, in the aggregate, a majority in
principal amount of the debt securities of the series that are outstanding at
the time will constitute a quorum at a meeting. At the reconvening of any
meeting adjourned for a lack of a quorum, the persons entitled to vote 25% in
principal amount of the debt securities of the series that are outstanding at
the time will constitute a quorum for taking any action set out in the original
notice. To vote at a meeting, a person must either hold outstanding debt
securities of the relevant series or be duly appointed as a proxy for a debt
securityholder. The fiscal agent will make all rules governing the conduct of
any meeting.
The fiscal agency agreement and a series of debt securities may be modified
or amended, without the consent of the holders of the debt securities, to:
- add covenants made by us that benefit holders of the debt securities;
- surrender any right or power given to us;
- secure the debt securities;
- permit registered securities to be exchanged for bearer securities or
relax or eliminate restrictions on the payment of principal, premium or
interest on bearer securities to the extent permitted under United
States Department of Treasury regulations, provided that holders of the
debt securities do not suffer any adverse tax consequences as a result;
and
- cure any ambiguity or correct or supplement any defective provision in
the fiscal agency agreement or the debt securities, without materially
and adversely affecting the interests of the holders of the debt
securities.
FISCAL AGENT
The fiscal agency agreement governs the duties of each fiscal agent. We may
maintain bank accounts and a banking relationship with each fiscal agent. The
fiscal agent is our agent and does not act as a trustee for the holders of the
debt securities.
FURTHER ISSUES OF DEBT SECURITIES
We may, without the consent of the holders of the debt securities, create
and issue additional debt securities with the same terms and conditions as any
series of debt securities (or that are the same except for the amount of the
first interest payment and for the interest paid on the series of debt
securities prior to the issuance of the additional debt securities). We may
consolidate such additional debt securities with the outstanding debt securities
to form a single series.
We may offer additional debt securities with original issue discount
("OID") for U.S. federal income tax purposes as part of a further issue.
Purchasers of debt securities after the date of any further issue will not be
able to differentiate between debt securities sold as part of the further issue
and previously issued debt securities of the same series. If we were to issue
further debt securities with OID, purchasers of debt securities after such
further issue may be required to accrue OID (or greater amounts of OID that they
would otherwise have accrued) with respect to their debt securities. This may
affect the price of outstanding debt securities following a further issue.
Purchasers are advised to consult legal counsel with respect to the implications
of any future decision by us to undertake a further issue of debt securities
with OID.
DESCRIPTION OF WARRANTS
The description below summarizes some of the provisions of warrants for the
purchase of debt securities that we may issue from time to time and of the
warrant agreement. Copies of the forms of
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warrants and the warrant agreement are or will be filed as exhibits to the
registration statement of which this prospectus is a part. Since it is only a
summary, the description may not contain all of the information that is
important to you as a potential investor in the warrants.
The description of the warrants that will be contained in the prospectus
supplement will supplement this description and, to the extent inconsistent with
this description, replace it.
GENERAL TERMS OF THE WARRANTS
Each series of warrants will be issued under a warrant agreement to be
entered into between us and a bank or trust company, as warrant agent. The
prospectus supplement relating to the series of warrants will describe:
- the terms of the debt securities purchasable upon exercise of the
warrants, as described above under "Description of the
Securities--Description of Debt Securities--General Terms of the Debt
Securities";
- the principal amount of debt securities purchasable upon exercise of one
warrant and the exercise price;
- the procedures and conditions for the exercise of the warrants;
- the dates on which the right to exercise the warrants begins and
expires;
- whether and under what conditions the warrants may be terminated or
canceled by us;
- whether and under what conditions the warrants and any debt securities
issued with the warrants will be separately transferable;
- whether the warrants will be issued in bearer or registered form;
- whether the warrants will be exchangeable between registered and bearer
form, and, if issued in registered form, where they may be transferred
and registered; and
- other specific provisions.
TERMS APPLICABLE TO DEBT SECURITIES AND WARRANTS
GOVERNING LAW
The fiscal agency agreement, any warrant agreement and the debt securities
and any warrants will be governed by the laws of the State of New York without
regard to any principles of New York law requiring the application of the laws
of another jurisdiction. Nevertheless, all matters governing our authorization,
execution and delivery of the debt securities and the fiscal agency agreement
and any warrants and warrant agreement by us will be governed by the laws of the
Republic.
JURISDICTION AND CONSENT TO SERVICE
We are owned by a foreign sovereign government and all of our directors and
executive officers and some of the experts named in this prospectus are
residents of Korea. In addition, all or most our assets and the assets of the
people named in the preceding sentence are located outside of the United States.
For that reason, you may have difficultly serving process on us or the
individuals described above in the United States or enforcing in a U.S. court a
U.S.-court judgment based on the U.S. federal securities laws. Our Korean
counsel, Lee & Ko, has informed us that there is doubt regarding the
enforceability in Korea, either in original actions or in actions for the
enforcement of U.S.-court judgments, of civil liabilities based on the U.S.
federal securities laws.
We have appointed the General Manager of our New York Branch, Mr. Seong-Ho
Park, and the Senior Deputy General Manager of our New York Branch, Mr. Jae-Min
Yoon, and each of their successors in the future, as our authorized agents to
receive service of process in any suit which a holder
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of any series of debt securities or warrants may bring in any state or federal
court in New York City and we have accepted the jurisdiction of those courts for
those actions. Our New York Branch is located at 320 Park Avenue, 32nd Floor,
New York, New York 10022. These appointments are irrevocable as long as any
amounts of principal, premium or interest remain payable by us to the Fiscal
Agent under any series of debt securities or any warrants have not expired or
otherwise terminated under their terms. If for any reason either of these two
men ceases to act as our authorized agent or ceases to have an address in
Manhattan, we shall appoint a replacement. The appointment of agents for receipt
of service of process and the acceptance of jurisdiction of state or federal
courts in New York City do not, however, apply to actions brought under the
United States federal securities laws. We may also be sued in courts having
jurisdiction over us located in the Republic.
We will irrevocably consent to any relief and process in connection with a
suit against us in relation to the debt securities or warrants, including the
enforcement or execution of any order or judgment of the court. To the extent
permitted by law, we will waive irrevocably any immunity from jurisdiction to
which we might otherwise be entitled in any suit based on any series of debt
securities or warrants.
FOREIGN EXCHANGE CONTROLS
The Minister of Finance and Economy of Korea must receive a notification
with respect to the issuance by us of debt securities before we may issue debt
securities outside the Republic. After issuance of debt securities outside the
Republic, we are required to notify the Minister of Finance and Economy of such
issuance. No further approval or authorization is required for us to pay
principal of or interest on the debt securities.
DESCRIPTION OF GUARANTEES
The description below summarizes some of the provisions of the guarantees
that we may issue from time to time. Copies of the forms of guarantees are or
will be filed as exhibits to the registration statement of which this prospectus
is a part. Since it is only a summary, the description may not contain all of
the information that is important to you as a potential beneficiary of a
guarantee.
The description of a guarantee that will be contained in the prospectus
supplement will supplement this description and, to the extent inconsistent with
this description, replace it.
GENERAL TERMS OF THE GUARANTEES
Each guarantee will be issued by us as guarantor. The prospectus supplement
relating to a guarantee will specify:
- the relevant obligor and the obligations guaranteed under the guarantee;
- the nature and scope of the guarantee, including whether or not it is
irrevocable and unconditional;
- the status of the guarantee in relation to our other obligations;
- the governing law of the guarantee; and
- other relevant provisions of the guarantee.
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LIMITATIONS ON ISSUANCE OF BEARER DEBT SECURITIES
AND BEARER WARRANTS
Bearer securities will not be offered, sold or delivered in the United
States or its possessions or to a United States person; except in certain
circumstances permitted by United States tax regulations. Bearer securities will
initially be represented by temporary global securities, without interest
coupons, deposited with a common depositary in London for Euroclear and Cedel
Bank for credit to designated accounts. Unless otherwise indicated in the
prospectus supplement:
- each temporary global security will be exchangeable for definitive
bearer securities on or after the date that is 40 days after issuance
only upon receipt of certification of non-United States beneficial
ownership of the temporary global security as provided for in United
States tax regulations, provided that no bearer security will be mailed
or otherwise delivered to any location in the United States in
connection with the exchange; and
- any interest payable on any portion of a temporary global security with
respect to any interest payment date occurring prior to the issuance of
definitive bearer securities will be paid only upon receipt of
certification of non-United States beneficial ownership of the temporary
global security as provided for in United States tax regulations.
Bearer securities, other than temporary global debt securities, and any
related coupons will bear the following legend: "Any United States person who
holds this obligation will be subject to limitations under the United States
federal income tax laws, including the limitations provided in Section 165(j)
and 1287(a) of the Internal Revenue Code." The sections referred to in the
legend provide that, with certain exceptions, a United States person who holds a
bearer security or coupon will not be allowed to deduct any loss realized on the
disposition of the bearer security, and any gain, which might otherwise be
characterized as capital gain, recognized on the disposition will be treated as
ordinary income.
For purposes of this section, "United States person" means:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or organized in or
under the laws of the United States of any political subdivision
thereof; or
- an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
For purposes of this section, "United States" means the United States of
America, including each state and the District of Columbia, its territories,
possessions and other areas subject to its jurisdiction.
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TAXATION
The following discussion summarizes certain Korean and U.S. federal income
tax considerations that may be relevant to you if you invest in debt securities.
This summary is based on laws, regulations, rulings and decisions now in effect,
which may change. Any change could apply retroactively and could affect the
continued validity of this summary.
This summary does not describe all of the tax considerations that may be
relevant to you or your situation, particularly if you are subject to special
tax rules. You should consult your tax adviser about the tax consequences of
holding the debt securities, including the relevance to your particular
situation of the considerations discussed below, as well as of state, local or
other tax laws.
KOREAN TAXATION
The following summary of Korean tax consideration applies to you so long as
you are not:
- a citizen of Korea;
- a resident of Korea;
- a corporation organized under Korean law; or
- maintaining a permanent establishment or a fixed base in Korea for
business, trade or otherwise.
TAX ON INTEREST PAYMENTS
Under current Korean tax laws, when we make payments of interest to you on
the debt securities, no amount will be withheld from such payments for, or on
account of, taxes of any kind imposed, levied, withheld or assessed by Korea or
any political subdivision or taxing authority thereof or therein.
TAX ON CAPITAL GAINS
You will not be subject to any Korean income or withholding taxes in
connection with the sale, exchange or other disposition of a debt security,
provided that the disposition does not involve a transfer within Korea or a
transfer of the debt security to a resident of Korea (or the Korean permanent
establishment of a non-resident). Specifically, if you are a non-resident, the
Special Tax Treatment Control Law exempts you from Korean taxation on any
capital gains that you earn from the transfer of the debt securities outside of
Korea. If you sell or otherwise dispose of debt securities to a Korean resident
or such disposition or sale is made within Korea, any gain realized on the
transaction will be taxable at ordinary Korean withholding tax rates (the lesser
of 27.5% of net gain or 11% of gross sale proceeds with respect to
transactions), unless an exemption is available under an applicable income tax
treaty. For example, if you are a resident of the United States for the purposes
of the income tax treaty currently in force between Korea and the United States,
you are generally entitled to an exemption from Korean taxation in respect of
any gain realized on a disposition of a debt security, regardless of whether the
disposition is to a Korean resident. For more information regarding tax
treaties, please refer to the heading "Tax Treaties" below.
With respect to computing the above-mentioned 27.5% withholding taxes on
net gain, please note that there is no provision under relevant Korean law for
offsetting gains and losses or otherwise aggregating transactions for the
purpose of computing the net gain attributable to sales of the debt securities.
The purchaser of the debt securities or, in the case of the sale of the debt
securities through a securities company in Korea, the securities company through
which such sale is effected, is required under Korean law to withhold the
applicable amount of Korean tax and make payment thereof to the relevant Korean
tax authority. Unless you, as the seller, can claim the benefit of an exemption
or a reduced rate of tax under an applicable tax treaty or in the absence of
producing satisfactory evidence of your acquisition cost in relation to the debt
securities being sold, the purchaser or the securities company, as applicable,
must withhold an amount equal to 11 per cent. of the gross sale proceeds. Any
withheld tax must be paid no later than the tenth day of the month following the
month in which the payment for the purchase of the
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relevant debt securities occurred. Failure to timely transmit the withheld tax
to the Korean tax authorities technically subjects the purchaser or the
securities company to penalties under Korean tax laws.
INHERITANCE TAX AND GIFT TAX
If you die while domiciled in Korea, Korean inheritance tax will be imposed
upon the transfer by succession of any of the debt securities, wherever located,
that you own at the time of death. Furthermore, regardless of where you are
domiciled when you die, Korean inheritance tax will be imposed upon the transfer
by succession of any of the debt securities you own that are located in Korea at
the time of death. Similarly, if you give the debt securities as a gift to any
other person, the donee will be subject to Korean gift tax, based on where you
are domiciled or where the debt securities are located at the time that you make
the gift. The amount, if any, of the applicable inheritance or gift tax imposed
in specific cases depends on the value of the debt securities (or other
property) and the identities of the parties involved.
Under Korean inheritance and gift tax laws, shares issued by Korean
corporations are deemed to be located in Korea irrespective of where they are
physically located or by whom they are owned.
STAMP DUTY
You will not be subject to any Korean transfer tax, stamp duty,
registration duty or similar documentary tax in respect of or in connection with
a transfer of any debt securities or in connection with the exercise of exchange
rights or conversion rights that may be acquired with the debt securities.
GUARANTEES
Any payments by us under our guarantee on the debt securities issued by a
third-party Korean issuer, except payments made in respect of the principal
amount of such guaranteed debt securities (or the issue price if the debt
securities were originally issued at a discount), may be subject to withholding
tax at the rate of 27.5% (including resident surtax) or such lower rate as may
be available under an applicable tax treaty, if any, between Korea and the
country of incorporation or residence of the non-resident holder of the debt
securities who receives our guarantee payments, unless otherwise exempt under
such applicable tax treaty or Korean domestic tax law. Further details of the
tax consequences of the holders of third-party debt securities guaranteed by us
may be provided in the relevant prospectus supplement.
TAX TREATIES
At the date of this prospectus, Korea has tax treaties with, among others,
Australia, Austria, Bangladesh, Belgium, Brazil, Bulgaria, Canada, China, Czech
Republic, Denmark, Egypt, Finland, France, Germany, Hungary, India, Indonesia,
Ireland, Italy, Japan, Luxembourg, Malaysia, Mexico, Mongolia, the Netherlands,
New Zealand, Norway, Pakistan, Philippines, Poland, Republic of Fiji, Romania,
Singapore, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Tunisia, Turkey, the
United Kingdom, the United States of America and Vietnam under which the rate of
withholding tax on interest and dividends is reduced, generally to between 5%
and 15%, and the tax on capital gains is often eliminated.
With respect to any gains subject to Korean withholding tax, as described
under the heading "Tax on Capital Gains" above, you should inquire for yourself
whether you are entitled to the benefit of a tax treaty with Korea. It will be
your responsibility to claim the benefits of any tax treaty that may exist
between your country and Korea in respect of capital gains, and to provide to
the purchaser of the debt securities, or the relevant securities company
handling the debt securities, as applicable, a certificate as to your country of
residence. In the absence of sufficient proof, the purchaser, or the relevant
securities company, as the case may be, must withhold tax at the normal rates.
At present, Korea has not entered into tax treaties regarding inheritance
or gift tax.
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UNITED STATES TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal income tax
considerations that may be relevant to you if you invest in debt securities and
are a U.S. holder. You will be a U.S. holder if you are an individual who is a
citizen or resident of the United States, a U.S. domestic corporation, or any
other person that is subject to U.S. federal income tax on a net income basis in
respect of its investment in a debt security. This summary deals only with U.S.
holders that hold debt securities as capital assets for tax purposes. This
summary does not apply to you if you are an investor that is subject to special
tax rules, such as:
- a bank or thrift;
- a real estate investment trust;
- a regulated investment company;
- an insurance company;
- a dealer in securities or currencies;
- a trader in securities or commodities that elects mark-to-market
treatment;
- a person that will hold debt securities as a hedge against currency risk
or as a position in a straddle or conversion transaction for tax
purposes;
- a tax exempt organization; or
- a person whose functional currency for tax purposes is not the U.S.
dollar.
If you are not a U.S. holder, consult the discussions under the captions
"Non-U.S. Persons" and "Information Reporting and Backup Withholding" below; the
remainder of this summary does not discuss the treatment of persons that are not
U.S. holders.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), its legislative history, existing and proposed regulations promulgated
thereunder, and published rulings and court decisions, all as currently in
effect. These laws are subject to change, possibly on a retroactive basis.
You should consult your tax adviser about the tax consequences of holding
debt securities, including the relevance to your particular situation of the
considerations discussed below, as well as of state, local or other tax laws.
PAYMENTS OR ACCRUALS OF INTEREST
Payments or accruals of "qualified stated interest" (as defined below) on a
debt security will be taxable to you as ordinary interest income at the time
that you receive or accrue such amounts, in accordance with your regular method
of tax accounting. If you use the cash method of tax accounting and you receive
payments of interest pursuant to the terms of a debt security in a currency
other than U.S. dollars, a "foreign currency", the amount of interest income you
will realize will be the U.S. dollar value of the foreign currency payment based
on the exchange rate in effect on the date you receive the payment regardless of
whether you convert the payment into U.S. dollars. If you are an accrual-basis
U.S. holder, the amount of interest income you will realize will be based on the
average exchange rate in effect during the interest accrual period, or with
respect to an interest accrual period that spans two taxable years, at the
average exchange rate for the partial period within the taxable year.
Alternatively, as an accrual-basis U.S. holder you may elect to translate all
interest income on foreign-currency-denominated debt securities at the spot rate
on the last day of the accrual period, or the last day of the taxable year, in
the case of an accrual period that spans more than one taxable year, or on the
date that you receive the interest payment if that date is within five business
days of the end of the accrual period. If you make this election you must apply
it consistently to all debt instruments from year to year and you cannot change
the election without the consent of the Internal Revenue Service. If you use the
accrual method of accounting for tax purposes you will recognize foreign
currency gain or loss on the receipt of a
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foreign currency interest payment if the exchange rate in effect on the date the
payment is received differs from the rate applicable to a previous accrual of
that interest income. This foreign currency gain or loss will be treated as
ordinary income or loss, but generally will not be treated as an adjustment to
interest income received on the debt security.
PURCHASE, SALE AND RETIREMENT OF NOTES
Initially, your tax basis in a debt security generally will equal the cost
of the debt security to you. Your basis will increase by any amounts that you
are required to include in income under the rules governing original issue
discount and market discount, and will decrease by the amount of any amortized
premium and any payments other than qualified stated interest made on the debt
security. The rules for determining these amounts are discussed below. If you
purchase a debt security that is denominated in a foreign currency, the cost to
you, and therefore generally your initial tax basis, will be the U.S. dollar
value of the foreign currency purchase price on the date of purchase calculated
at the exchange rate in effect on that date. If the foreign-currency-denominated
debt security is traded on an established securities market and you are a
cash-basis taxpayer, or if you are an accrual-basis taxpayer that makes a
special election, then you will determine the U.S. dollar value of the cost of
the debt security by translating the amount of the foreign currency that you
paid for the debt security at the spot rate of exchange on the settlement date
of your purchase. The amount of any subsequent adjustments to your tax basis in
a debt security in respect of foreign-currency-denominated original issue
discount, market discount and premium will be determined in the manner described
below. If you convert U.S. dollars into a foreign currency and then immediately
use that foreign currency to purchase a debt security, you generally will not
have any taxable gain or loss as a result of the purchase.
When you sell or exchange a debt security, or if a debt security is
retired, you generally will recognize gain or loss equal to the difference
between the amount you realize on the transaction, less any accrued qualified
stated interest, which will be subject to tax in the manner described above, and
your tax basis in the debt security. If you sell or exchange a debt security for
a foreign currency, or receive foreign currency on the retirement of a debt
security, the amount you will realize for U.S. tax purposes generally will be
the dollar value of the foreign currency that you receive calculated at the
exchange rate in effect on the date the foreign currency debt security is
disposed of or retired. If you dispose of a foreign currency debt security that
is traded on an established securities market and you are a cash-basis U.S.
holder, or if you are an accrual-basis holder that makes a special election,
then you will determine the U.S. dollar value of the amount realized by
translating the amount at the spot rate of exchange on the settlement date of
the sale, exchange or retirement.
The special election available to you if you are an accrual-basis taxpayer
in respect of the purchase and sale of foreign currency debt securities traded
on an established securities market, which is discussed in the two preceding
paragraphs, must be applied consistently to all debt instruments from year to
year and cannot be changed without the consent of the Internal Revenue Service.
Except as discussed below with respect to market discount and foreign
currency gain or loss, the gain or loss that you recognize on the sale, exchange
or retirement of a debt security generally will be long-term capital gain or
loss if you have held the debt security for more than one year. The Code
provides preferential treatment under certain circumstances for net long-term
capital gains recognized by individual investors. Net long-term capital gain
recognized by an individual U.S. holder generally will be subject to a maximum
tax rate of 15% for debt securities held for more than one year. The ability of
U.S. holders to offset capital losses against ordinary income is limited.
Despite the foregoing, the gain or loss that you recognize on the sale,
exchange or retirement of a foreign currency debt security generally will be
treated as ordinary income or loss to the extent that the gain or loss is
attributable to changes in exchange rates during the period in which you held
the debt security. This foreign currency gain or loss will not be treated as an
adjustment to interest income that you receive on the debt security.
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ORIGINAL ISSUE DISCOUNT
If we issue debt securities at a discount from their stated redemption
price at maturity, and the discount is equal to or more than the product of
one-fourth of one percent (0.25%) of the stated redemption price at maturity of
the debt securities multiplied by the number of whole years to their maturity,
the debt securities will be "Original Issue Discount Debt Securities." The
difference between the issue price and their stated redemption price at maturity
will be the "original issue discount." The "issue price" of the debt securities
will be the first price at which a substantial amount of the debt securities are
sold to the public (i.e., excluding sales of debt securities to underwriters,
placement agents, wholesalers, or similar persons). The "stated redemption price
at maturity" will include all payments under the debt securities other than
payments of qualified stated interest. The term "qualified stated interest"
generally means stated interest that is unconditionally payable in cash or
property, other than debt instruments issued by the Company, at least annually
during the entire term of a debt security at a single fixed interest rate or,
subject to certain conditions, based on one or more interest indices.
If you invest in Original Issue Discount Debt Securities you generally will
be subject to the special tax accounting rules for original issue discount
obligations provided by the Internal Revenue Code and certain Treasury
regulations. You should be aware that, as described in greater detail below, if
you invest in an Original Issue Discount Debt Security you generally will be
required to include original issue discount in ordinary gross income for U.S.
federal income tax purposes as it accrues, before you receive the cash
attributable to that income.
In general, and regardless of whether you use the cash or the accrual
method of tax accounting, if you are the holder of an Original Issue Discount
Debt Security with a maturity greater than one year, you will be required to
include in ordinary gross income the sum of the "daily portions" of original
issue discount on that debt security for all days during the taxable year that
you own the debt security. The daily portions of original issue discount on an
Original Issue Discount Debt Security are determined by allocating to each day
in any accrual period a ratable portion of the original issue discount allocable
to that period. Accrual periods may be any length and may vary in length over
the term of an Original Issue Discount Debt Security, so long as no accrual
period is longer than one year and each scheduled payment of principal or
interest occurs on the first or last day of an accrual period. If you are the
initial holder of the debt security, the amount of original issue discount on an
Original Issue Discount Debt Security allocable to each accrual period is
determined by:
(i) multiplying the "adjusted issue price" (as defined below) of the debt
security at the beginning of the accrual period by a fraction, the
numerator of which is the annual yield to maturity of the debt
security and the denominator of which is the number of accrual
periods in a year; and
(ii) subtracting from that product the amount, if any, payable as
qualified stated interest allocable to that accrual period.
In the case of an Original Issue Discount Debt Security that is a
floating-rate debt security, both the "annual yield to maturity" and the
qualified stated interest will be determined for these purposes as though the
debt security had borne interest in all periods at a fixed rate generally equal
to the rate that would be applicable to interest payments on the debt security
on its date of issue or, in the case of some floating-rate debt securities, the
rate that reflects the yield that is reasonably expected for the debt security.
Additional rules may apply if interest on a floating-rate debt security is based
on more than one interest index. The "adjusted issue price" of an Original Issue
Discount Debt Security at the beginning of any accrual period will generally be
the sum of its issue price, including any accrued interest, and the amount of
original issue discount allocable to all prior accrual periods, reduced by the
amount of all payments other than any qualified stated interest payments on the
debt security in all prior accrual periods. All payments on an Original Issue
Discount Debt Security, other than qualified stated interest, will generally be
viewed first as payments of previously accrued original issue discount, to the
extent of the previously accrued discount, with payments considered made from
the earliest accrual periods first, and then as a payment of principal. The
"annual yield to maturity" of a debt security is the discount rate,
appropriately adjusted to reflect the length of accrual periods, that causes the
present value on the issue date of all
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payments on the debt security to equal the issue price. As a result of this
"constant yield" method of including original issue discount income, the amounts
you will be required to include in your gross income if you invest in an
Original Issue Discount Debt Security denominated in U.S. dollars will generally
be less in the early years and greater in the later years than amounts that
would be includible on a straight-line basis.
You generally may make an irrevocable election to include in income your
entire return on a debt security (i.e., the excess of all remaining payments to
be received on the debt security, including payments of qualified stated
interest, over the amount you paid for the debt security) under the constant
yield method described above. For debt securities purchased at a premium or
bearing market discount in your hands, if you make this election you will also
be deemed to have made the election (discussed below under "Premium and Market
Discount") to amortize premium or to accrue market discount in income currently
on a constant yield basis.
In the case of an Original Issue Discount Debt Security that is also a
foreign-currency-denominated debt security, you should determine the U.S. dollar
amount includible as original issue discount for each accrual period by (i)
calculating the amount of original issue discount allocable to each accrual
period in the foreign currency using the constant yield method, and (ii)
translating the foreign currency amount so determined at the average exchange
rate in effect during that accrual period, or, with respect to an interest
accrual period that spans two taxable years, at the average exchange rate for
each partial period. Alternatively, you may translate the foreign currency
amount so determined at the spot rate of exchange on the last day of the accrual
period, or the last day of the taxable year, for an accrual period that spans
two taxable years, or at the spot rate of exchange on the date of receipt, if
that date is within five business days of the last day of the accrual period,
provided that you have made the election described under the caption "Payments
or Accruals of Interest" above. Because exchange rates may fluctuate, if you are
the holder of an Original Issue Discount Debt Security that is also a foreign
currency debt security you may recognize a different amount of original issue
discount income in each accrual period than would be the case if you were the
holder of an otherwise similar Original Issue Discount Debt Security denominated
in U.S. dollars. Upon the receipt of an amount attributable to original issue
discount, whether in connection with a payment of an amount that is not
qualified stated interest or the sale or retirement of the Original Issue
Discount Debt Security, you will recognize ordinary income or loss measured by
the difference between the amount received, translated into U.S. dollars at the
exchange rate in effect on the date of receipt or on the date of disposition of
the Original Issue Discount Debt Security, as the case may be, and the amount
accrued, using the exchange rate applicable to such previous accrual.
If you purchase an Original Issue Discount Debt Security outside of the
initial offering at a cost less than its "remaining redemption amount", or if
you purchase an Original Issue Discount Debt Security in the initial offering at
a price other than the debt security's issue price, you will also generally be
required to include in gross income the daily portions of original issue
discount, calculated as described above. However, if you acquire an Original
Issue Discount Debt Security at a price greater than its adjusted issue price,
you will be entitled to reduce your periodic inclusions of original issue
discount to reflect the premium paid over the adjusted issue price. The
remaining redemption amount for an Original Issue Discount Debt Security is the
total of all future payments to be made on the debt security other than
qualified stated interest.
Certain of the Original Issue Discount Debt Securities may be redeemed
prior to Maturity, either at our option or at the option of the holder, or may
have special repayment or interest rate reset features as indicated in the
pricing supplement. Original Issue Discount Debt Securities containing these
features may be subject to rules that differ from the general rules discussed
above. If you purchase Original Issue Discount Debt Securities with these
features, you should carefully examine the pricing supplement and consult your
tax adviser about their treatment since the tax consequences of original issue
discount will depend, in part, on the particular terms and features of the debt
securities.
168
SHORT-TERM DEBT SECURITIES
The rules described above will also generally apply to Original Issue
Discount Debt Securities with maturities of one year or less ("short-term debt
securities"), but with some modifications.
First, the original issue discount rules treat none of the interest on a
short-term debt security as qualified stated interest, but treat a short-term
debt security as having original issue discount. Thus, all short-term debt
securities will be Original Issue Discount Debt Securities. Except as noted
below, if you are a cash-basis holder of a short-term debt security and you do
not identify the short-term debt security as part of a hedging transaction you
will generally not be required to accrue original issue discount currently, but
you will be required to treat any gain realized on a sale, exchange or
retirement of the debt security as ordinary income to the extent such gain does
not exceed the original issue discount accrued with respect to the debt security
during the period you held the debt security. You may not be allowed to deduct
all of the interest paid or accrued on any indebtedness incurred or maintained
to purchase or carry a short-term debt security until the maturity of the debt
security or its earlier disposition in a taxable transaction. Notwithstanding
the foregoing, if you are a cash-basis U.S. holder of a short-term debt security
you may elect to accrue original issue discount on a current basis, in which
case the limitation on the deductibility of interest described above will not
apply. A U.S. holder using the accrual method of tax accounting and some cash
method holders, including banks, securities dealers, regulated investment
companies and certain trust funds, generally will be required to include
original issue discount on a short-term debt security in gross income on a
current basis. Original issue discount will be treated as accruing for these
purposes on a ratable basis or, at the election of the holder, on a constant
yield basis based on daily compounding.
Second, regardless of whether you are a cash- or accrual-basis holder, if
you are the holder of a short-term debt security you can elect to accrue any
"acquisition discount" with respect to the debt security on a current basis.
Acquisition discount is the excess of the remaining redemption amount of the
debt security at the time of acquisition over the purchase price. Acquisition
discount will be treated as accruing ratably or, at the election of the holder,
under a constant yield method based on daily compounding. If you elect to accrue
acquisition discount, the original issue discount rules will not apply.
Finally, the market discount rules described below will not apply to
short-term debt securities.
As described above, certain of the debt securities may be subject to
special redemption features. These features may affect the determination of
whether a debt security has a maturity of one year or less and thus is a
short-term debt security. If you purchase debt securities with these features,
you should carefully examine the pricing supplement and consult your tax adviser
about these features.
PREMIUM AND MARKET DISCOUNT
If you purchase a debt security at a cost greater than the debt security's
remaining redemption amount, you will be considered to have purchased the debt
security at a premium, and you may elect to amortize the premium as an offset to
interest income, using a constant yield method, over the remaining term of the
debt security. If you make this election, it generally will apply to all debt
instruments that you hold at the time of the election, as well as any debt
instruments that you subsequently acquire. In addition, you may not revoke the
election without the consent of the Internal Revenue Service. If you elect to
amortize the premium you will be required to reduce your tax basis in the debt
security by the amount of the premium amortized during your holding period.
Original Issue Discount Debt Securities purchased at a premium will not be
subject to the original issue discount rules described above. In the case of
premium on a foreign currency debt security, you should calculate the
amortization of the premium in the foreign currency. Amortization deductions
attributable to a period reduce interest payments in respect of that period, and
therefore are translated into U.S. dollars at the rate that you use for those
interest payments. Exchange gain or loss will be realized with respect to
amortized premium on a foreign currency debt security based on the difference
between the exchange rate computed on the date or dates the premium is amortized
against interest payments on the debt security and the exchange rate on the date
when the holder acquired the debt security. For a U.S. holder that does not
elect to amortize
169
premium, the amount of premium will be included in your tax basis when the debt
security matures or is disposed of. Therefore, if you do not elect to amortize
premium and you hold the debt security to maturity, you generally will be
required to treat the premium as capital loss when the debt security matures.
If you purchase a debt security at a price that is lower than the debt
security's remaining redemption amount, or in the case of an Original Issue
Discount Debt Security, the debt security's adjusted issue price, by 0.25% or
more of the remaining redemption amount, or adjusted issue price, multiplied by
the number of remaining whole years to maturity, the debt security will be
considered to bear "market discount" in your hands. In this case, any gain that
you realize on the disposition of the debt security generally will be treated as
ordinary interest income to the extent of the market discount that accrued on
the debt security during your holding period. In addition, you could be required
to defer the deduction of a portion of the interest paid on any indebtedness
that you incurred or continued to purchase or carry the debt security. In
general, market discount will be treated as accruing ratably over the term of
the debt security, or, at your election, under a constant yield method. You must
accrue market discount on a foreign currency debt security in the specified
currency. The amount that you will be required to include in income in respect
of accrued market discount will be the U.S. dollar value of the accrued amount,
generally calculated at the exchange rate in effect on the date that you dispose
of the debt security.
You may elect to include market discount in gross income currently as it
accrues (on either a ratable or constant yield basis), in lieu of treating a
portion of any gain realized on a sale of the debt security as ordinary income.
If you elect to include market discount on a current basis, the interest
deduction deferral rule described above will not apply. If you do make such an
election, it will apply to all market discount debt instruments that you acquire
on or after the first day of the first taxable year to which the election
applies. The election may not be revoked without the consent of the Internal
Revenue Service. Any accrued market discount on a foreign currency debt security
that is currently includible in income will be translated into U.S. dollars at
the average exchange rate for the accrual period (or portion thereof within the
holder's taxable year).
WARRANTS
A description of the tax consequences of an investment in warrants will be
provided in the applicable pricing supplement.
INDEXED NOTES AND OTHER NOTES PROVIDING FOR CONTINGENT PAYMENTS
Special rules govern the tax treatment of debt obligations that provide for
contingent payments ("contingent debt obligations"). These rules generally
require accrual of interest income on a constant yield basis in respect of
contingent debt obligations at a yield determined at the time of issuance of the
obligation, and may require adjustments to these accruals when any contingent
payments are made. In addition, special rules may apply to floating-rate debt
securities if the interest payable on the debt securities is based on more than
one interest index. We will provide a detailed description of the tax
considerations relevant to U.S. holders of any debt securities that are subject
to the special rules discussed in this paragraph in the relevant pricing
supplement.
NON-U.S. PERSONS
The following summary applies to you if you are not a United States person
for U.S. federal income tax purposes.
If you are not a United States person, the interest income and gains that
you derive in respect of the debt securities generally will be exempt from
United States federal income taxes, including withholding tax. However, to
receive this exemption you may be required to satisfy certain certification
requirements of the United States Internal Revenue Service to establish that you
are not a United States person. See "Information Reporting and Backup
Withholding" below.
170
Even if you are not a United States person, you may still be subject to
United States federal income taxes on any interest income you derive in respect
of the debt securities if:
- you are an insurance company carrying on a United States insurance
business, within the meaning of the Code; or
- you have an office or other fixed place of business in the United States
that receives the interest and you earn the interest in the course of
operating (i) a banking, financing or similar business in the United
States or (ii) a corporation the principal business of which is trading
in stock or securities for its own account, and certain other conditions
exist.
If you are not a United States person, any gain you realize on a sale or
exchange of debt securities generally will be exempt from United States federal
income tax, including withholding tax, unless:
- your gain is effectively connected with your conduct of a trade or
business in the United States; or
- you are an individual holder and are present in the United States for
183 days or more in the taxable year of the sale, and either (i) your
gain is attributable to an office or other fixed place of business that
you maintain in the United States or (ii) you have a tax home in the
United States.
A debt security held by an individual holder who at the time of death is a
non-resident alien will not be subject to United States federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The paying agent must file information returns with the United States
Internal Revenue Service in connection with debt security payments made to
certain United States persons. If you are a United States person, you generally
will not be subject to United States backup withholding tax on such payments if
you provide your taxpayer identification number to the paying agent. You may
also be subject to information reporting and backup withholding tax requirements
with respect to the proceeds from a sale of the debt securities. If you are not
a United States person, in order to avoid information reporting and backup
withholding tax requirements you may have to comply with certification
procedures to establish that you are not a United States person.
171
PLAN OF DISTRIBUTION
We may sell or issue the debt securities, warrants or guarantees in any of
three ways:
- through underwriters or dealers;
- directly to one or more purchasers; or
- through agents.
The prospectus supplement relating to a particular series of debt
securities, warrants or guarantees will state:
- the names of any underwriters;
- the purchase price of the securities;
- the proceeds to us from the sale;
- any underwriting discounts and other compensation;
- the initial public offering price;
- any discounts or concessions allowed or paid to dealers; and
- any securities exchanges on which the securities will be listed.
Any underwriter involved in the sale of securities will acquire the
securities for its own account. The underwriters may resell the securities from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale. The securities may be offered to the public either by underwriting
syndicates represented by managing underwriters or by underwriters without a
syndicate. Unless the prospectus supplement states otherwise, certain conditions
must be satisfied before the underwriters become obligated to purchase
securities from us, and they will be obligated to purchase all of the securities
if any are purchased. The underwriters may change any initial public offering
price and any discounts or concessions allowed or reallowed or paid to dealers.
If we sell any securities through agents, the prospectus supplement will
identify the agent and indicate any commissions payable by us. Unless the
prospectus supplement states otherwise, all agents will act on a best efforts
basis and will not acquire the securities for their own account.
We may authorize agents, underwriters or dealers to solicit offers by
certain specified entities to purchase the securities from us at the public
offering price set forth in a prospectus supplement pursuant to delayed delivery
contracts. The prospectus supplement will set out the conditions of the delayed
delivery contracts and the commission receivable by the agents, underwriters or
dealers for soliciting the contracts.
We may offer debt securities as consideration for the purchase of other of
our debt securities, either in connection with a publicly announced tender offer
or in privately negotiated transactions. The offer may be in addition to or in
lieu of sales of debt securities directly or through underwriters or agents. We
may offer guarantees as consideration for transactions involving securities of
other issuers.
Agents and underwriters may be entitled to indemnification by us against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribution from us with respect to certain payments which the
agents or underwriters may be required to make. Agents and underwriters may be
customers of, engage in transactions with, or perform services (including
commercial and investment banking services) for, us in the ordinary course of
business.
172
LEGAL MATTERS
The validity of any particular series of debt securities or warrants issued
with debt securities or any guarantees will be passed upon for us and any
underwriters or agents by United States and Korean counsel identified in the
related prospectus supplement.
AUTHORIZED REPRESENTATIVES IN THE UNITED STATES
Our authorized agents in the United States are Mr. Seong-Ho Park, General
Manager of our New York Branch, or Mr. Jae-Min Yoon, Senior Deputy General
Manager of our New York Branch. The address of our New York Branch is 320 Park
Avenue, 32nd Floor, New York, New York 10022. The authorized representative of
the Republic in the United States is Mr. Hi-Su Lee, Financial Attache, Korean
Consulate General in New York, located at 335 East 45th Street, New York, New
York 10017.
OFFICIAL STATEMENTS AND DOCUMENTS
Our Governor and Chairman of the Board of Directors, in his official
capacity, has supplied the information set forth under "The Korea Development
Bank" (except for the information set out under "The Korea Development
Bank--Business--Government Support and Supervision"). Such information is stated
on his authority.
The Minister of Finance and Economy of The Republic of Korea, in his
official capacity, has supplied the information set out under "The Korea
Development Bank--Business--Government Support and Supervision" and "The
Republic of Korea". Such information is stated on his authority. The documents
identified in the portion of this prospectus captioned "The Republic of Korea"
as the sources of financial or statistical data are official public documents of
the Republic or its agencies and instrumentalities.
EXPERTS
Our financial statements as of and for the years ended December 31, 2001
and 2002 included in this prospectus have been so included in reliance on the
report of Samil Accounting Corporation (a member firm of
PricewaterhouseCoopers), independent accountants, given on the authority of said
firm as experts in auditing and accounting.
FORWARD-LOOKING STATEMENTS
This prospectus includes future expectations, projections or
"forward-looking statements", as defined in Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The words "believe", "expect", "anticipate", "estimate", "project" and
similar words identify forward-looking statements. In addition, all statements
other than statements of historical facts included in this prospectus are
forward-looking statements. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we can give no assurance that
such expectations will prove correct. This prospectus discloses important
factors that could cause actual results to differ materially from our
expectations ("Cautionary Statements"). All subsequent written and oral forward-
looking statements attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the Cautionary Statements.
Factors that could adversely affect the future performance of the Korean
economy include:
- a deterioration of the Korean consumer or corporate sector;
- a failure of the restructuring of large troubled chaebols or companies;
- an increase in non-performing assets or default rates relating to, among
others, loans extended by financial institutions to the retail sector;
173
- an increase in lay-offs or unemployment rates or a reduction in income
levels, which could adversely affect consumer spending or lead to social
or labor unrest;
- a decrease in tax revenues and a substantial increase in the
Government's expenditures for unemployment compensation and other social
programs that together lead to an increased Government budget deficit;
- political uncertainty or increasing strife among and within political
parties in the Republic;
- adverse changes or volatility in commodity prices (including an increase
in oil prices), exchange rates, interest rates, stock markets or foreign
currency reserves;
- increased reliance on exports to service foreign currency debts, which
could cause friction with the Republic's trading partners;
- adverse developments in the economies of countries to which the Republic
exports, such as the United States, China and Japan, or in emerging
market economies in Asia, including China, or elsewhere that result in a
loss of confidence in the Korean economy;
- the continued emergence of China, to the extent its benefits (such as
increased exports to China) are outweighed by its costs (such as
competition in export markets or for foreign investment);
- a deterioration in economic or diplomatic relations between the Republic
and its trading partners or allies, including as a result of trade
disputes or disagreements in foreign policy;
- an increase in the level of tensions or an outbreak of hostilities in
the Korean peninsula or elsewhere in the world, including the Middle
East; and
- the outbreak of SARS in Asia and other parts of the world, which has
increased the uncertainty of world economic prospects in general and
which may continue to have an adverse effect on the world economy.
174
FURTHER INFORMATION
We filed a registration statement with respect to the securities with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
and its related rules and regulations. You can find additional information
concerning ourselves and the securities in the registration statement and any
pre- or post-effective amendment, including its various exhibits, which may be
inspected at the public reference facilities maintained by the Securities and
Exchange Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549.
175
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 11. ESTIMATED EXPENSES.*
It is estimated that our expenses in connection with the sale of the debt
securities, warrants and guarantees hereunder, exclusive of compensation payable
to underwriters and agents, will be as follows:
<Table>
SEC Registration Fee........................................ US$ 242,700
Printing Costs.............................................. 250,000
Legal Fees and Expenses..................................... 450,000
Fiscal Agent Fees and Expenses.............................. 50,000
Blue Sky Fees and Expenses.................................. 50,000
Rating Agencies' Fees....................................... 350,000
Miscellaneous (including amounts to be paid to underwriters
in lieu of reimbursement of certain expenses)............. 800,000
------------
Total.................................................. US$2,192,700
============
</Table>
- ------------
* Based on three underwritten offerings of the debt securities.
UNDERTAKINGS
The Registrant hereby undertakes:
(a) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereto) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in this Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
(b) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and
(c) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(d) For purposes of determining any liability under the Securities Act of
1933, as amended (the "Act"), the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the
Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(e) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-1
CONTENTS
This Registration Statement is comprised of:
(1) Facing Sheet.
(2) Explanatory Note.
(3) Part I, consisting of the Prospectus.
(4) Part II, consisting of pages II-1 to II-9.
(5) The following Exhibits:
<Table>
A-1 -- Form of Underwriting Agreement Standard Terms, incorporated
herein by reference to Exhibit A to the Registration
Statement of The Korea Development Bank (No. 33-38873).
B-1 -- Form of Fiscal Agency Agreement, including forms of Debt
Securities, incorporated herein by reference to Exhibit B-1
to the Registration Statement of The Korea Development Bank
(No. 33-44818).
B-2 -- Form of global Debt Security that bears interest at a fixed
rate, incorporated herein by reference to Exhibit B-2 to the
Registration Statement of The Korea Development Bank (No.
33-38873).
C-1 -- Form of Warrant Agreement, including form of Warrants.*
C-2 -- Form of Guarantee Agreement, including form of Guarantees,
incorporated herein by reference to Exhibit C-2 to the
Registration Statement of The Korea Development Bank (No.
333-97299).
C-3 -- Form of Solicitation Indemnification Agreement, incorporated
herein by reference to Exhibit C-3 to the Registration
Statement of The Korea Development Bank (No. 333-97299).
D-1 -- Consent of the Governor of The Korea Development Bank
(included on page II-4).
D-2 -- Power of Attorney of the Governor of The Korea Development
Bank.
E-1 -- Consent of the Minister of Finance and Economy of The
Republic of Korea (included on Page II-5).
E-2 -- Power of Attorney of the Minister of Finance and Economy of
The Republic of Korea, incorporated herein by reference to
Exhibit E-2 to the Registration Statement of The Korea
Development Bank (No. 333-97299).
F -- Consent of Samil Accounting Corporation.
G-1 -- Letter appointing certain persons as authorized agents of
The Korea Development Bank in the United States.
G-2 -- Letter appointing Authorized Agents of The Republic of Korea
in the United States (included in Exhibit E-2), incorporated
herein by reference to Exhibit G-2 to the Registration
Statement of The Korea Development Bank (No. 333-97299).
H -- The Korea Development Bank Act, incorporated herein by
reference to Exhibit H to the Registration Statement of The
Korea Development Bank (No. 333-6866).
I -- The Enforcement Decree of The Korea Development Bank Act,
incorporated herein by reference to Exhibit I to the
Registration Statement of The Korea Development Bank (No.
333-6866).
J -- The By-laws of The Korea Development Bank, incorporated
herein by reference to Exhibit J to the Registration
Statement of The Korea Development Bank (No. 333-6866).
K-1 -- Form of Prospectus Supplement relating to The Korea
Development Bank's Medium-Term Notes, Series C, Due Not Less
Than Nine Months From Date of Issue (the "Series C Notes"),
incorporated herein by reference to Exhibit K-1 to the
Registration Statement of The Korea Development Bank (No.
333-6866).
K-2 -- Form of Supplement to the Prospectus Supplement relating to
the Korea Development Bank's Series C Notes, incorporated
herein by reference to Exhibit K-2 to the Registration
Statement of The Korea Development Bank (No. 333-6866).
</Table>
II-2
<Table>
L -- Form of Distribution Agreement between The Korea Development
Bank and the Agents named therein relating to the offer and
sale from time to time of the Series C Notes, incorporated
herein by reference to Exhibit L to the Registration
Statement of The Korea Development Bank (No. 333-6866).
M-1 -- Opinion (including consent) of Cleary, Gottlieb, Steen &
Hamilton, 39th Floor, Bank of China Tower, One Garden Road,
Hong Kong, United States counsel to the Bank, in respect of
the legality the Debt Securities (with or without Warrants).
M-2 -- Opinion (including consent) of Lee & Ko, 16th Floor, West
Wing POSCO Center Building, 892, Daechi-4 Dong, Kangnam-Gu,
Seoul, 135-777, The Republic of Korea, Korean counsel to the
Bank, in respect of the legality the Debt Securities (with
or without Warrants).
M-3 -- Opinion (including consent) of Cleary, Gottlieb, Steen &
Hamilton, 39th Floor, Bank of China Tower, One Garden Road,
Hong Kong, United States counsel to the Bank, in respect of
the legality of the Guarantees, incorporated herein by
reference to Exhibit M-3 to the Registration Statement of
The Korea Development Bank (No. 333-97299).
M-4 -- Opinion (including consent) of Cleary, Gottlieb, Steen &
Hamilton, City Place House, 55 Basinghall Street, London
EC2V 5EH, England, English counsel to the Bank, in respect
of the legality of the Guarantees, incorporated herein by
reference to Exhibit M-4 to the Registration Statement of
The Korea Development Bank (No. 333-97299).
M-5 -- Opinion (including consent) of Kim & Chang, Seyang Building,
223 Naeja-dong, Chongro-ku, Seoul, The Republic of Korea,
Korean counsel to the Bank, in respect of the legality of
the Guarantees, incorporated herein by reference to Exhibit
M-5 to the Registration Statement of The Korea Development
Bank (No. 333-97299).
N-1 -- Form of the Series C Note that bears interest at a fixed
rate, incorporated herein by reference to Exhibit N-1 to the
Registration Statement of The Korea Development Bank (No.
333-6866).
N-2 -- Form of the Series C Note that bears interest at a floating
rate, incorporated herein by reference to Exhibit N-2 to the
Registration Statement of The Korea Development Bank (No.
333-6866).
O -- Form of Calculation Agency Agreement between The Korea
Development Bank and the calculation agent named therein
relating to the Series C Notes that bear interest at a
floating rate, incorporated herein by reference to Exhibit O
to the Registration Statement of The Korea Development Bank
(No. 333-6866).
</Table>
- ------------
* May be filed by amendment.
II-3
SIGNATURE OF THE KOREA DEVELOPMENT BANK
Pursuant to the requirements of the Securities Act of 1933, as amended, The
Korea Development Bank has duly caused this Registration Statement or amendment
thereto to be signed on its behalf by the undersigned, thereunto duly
authorized, in The City of New York, New York, on the 30th day of December,
2003.
THE KOREA DEVELOPMENT BANK
By: JICHANG YOO*+
Governor
+By: /s/ BONG-SIK CHOI
-----------------------------------
Bong-Sik Choi
(Attorney-in-fact)
- ------------
* Consent is hereby given to use of his name in connection with the
information specified in this Registration Statement or amendment thereto to
have been supplied by him and stated on his authority.
II-4
SIGNATURE OF THE REPUBLIC OF KOREA
Pursuant to the requirements of the Securities Act of 1933, as amended, The
Republic of Korea has duly caused this Registration Statement or amendment
thereto to be signed on its behalf by the undersigned, thereunto duly
authorized, in The City of New York, New York, on the 30th day of December,
2003.
THE REPUBLIC OF KOREA
By: JIN-PYO KIM*+
Minister of Finance and Economy
+By: /s/ HI-SU LEE
-----------------------------------
Hi-Su Lee
(Attorney-in-fact)
- ------------
* Consent is hereby given to use of his name in connection with the
information specified in this Registration Statement or amendment thereto to
have been supplied by him and stated on his authority.
II-5
SIGNATURE OF AUTHORIZED REPRESENTATIVE
OF THE KOREA DEVELOPMENT BANK
Pursuant to the Securities Act of 1933, as amended, the undersigned, a duly
authorized representative in the United States of The Korea Development Bank,
has signed this Registration Statement or amendment thereto in The City of New
York, New York, on the 30th day of December, 2003.
+By: /s/ SEONG-HO PARK
-----------------------------------
Seong-Ho Park
New York Branch
The Korea Development Bank
II-6
SIGNATURE OF AUTHORIZED REPRESENTATIVE
OF THE KOREA DEVELOPMENT BANK
Pursuant to the Securities Act of 1933, as amended, the undersigned, a duly
authorized representative in the United States of The Korea Development Bank,
has signed this Registration Statement or amendment thereto in The City of New
York, New York, on the 30th day of December, 2003.
+By: /s/ JAE-MIN YOON
-----------------------------------
Jae-Min Yoon
New York Branch
The Korea Development Bank
II-7
SIGNATURE OF AUTHORIZED REPRESENTATIVE
OF THE REPUBLIC OF KOREA
Pursuant to the Securities Act of 1933, as amended, the undersigned, a duly
authorized representative in the United States of The Republic of Korea, has
signed this Registration Statement or amendment thereto in The City of New York,
New York, on the 30th day of December, 2003.
+By: /s/ HI-SU LEE
-----------------------------------
Hi-Su Lee
Financial Attache
Korean Consulate General in New
York
II-8
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT PAGE
- ------- ----
A-1 -- Form of Underwriting Agreement Standard Terms, incorporated
herein by reference to Exhibit A to the Registration
Statement of The Korea Development Bank (No. 33-38873).
B-1 -- Form of Fiscal Agency Agreement, including forms of Debt
Securities, incorporated herein by reference to Exhibit B-1
to the Registration Statement of The Korea Development Bank
(No. 33-44818).
B-2 -- Form of global Debt Security that bears interest at a fixed
rate, incorporated herein by reference to Exhibit B-2 to the
Registration Statement of The Korea Development Bank (No.
33-38873).
C-1 -- Form of Warrant Agreement, including form of Warrants.*
C-2 -- Form of Guarantee Agreement, including form of Guarantees,
incorporated herein by reference to Exhibit C-2 to the
Registration Statement of The Korea Development Bank (No.
333-97299).
C-3 -- Form of Solicitation Indemnification Agreement, incorporated
herein by reference to Exhibit C-3 to the Registration
Statement of The Korea Development Bank (No. 333-97299).
D-1 -- Consent of the Governor of The Korea Development Bank
(included on page II-4).
D-2 -- Power of Attorney of the Governor of The Korea Development
Bank.
E-1 -- Consent of the Minister of Finance and Economy of The
Republic of Korea (included on Page II-5).
E-2 -- Power of Attorney of the Minister of Finance and Economy of
The Republic of Korea, incorporated herein by reference to
Exhibit E-2 to the Registration Statement of The Korea
Development Bank (No. 333-97299).
F -- Consent of Samil Accounting Corporation.
G-1 -- Letter appointing certain persons as authorized agents of
The Korea Development Bank in the United States.
G-2 -- Letter appointing Authorized Agents of The Republic of Korea
in the United States (included in Exhibit E-2), incorporated
herein by reference to Exhibit G-2 to the Registration
Statement of The Korea Development Bank (No. 333-97299).
H -- The Korea Development Bank Act, incorporated herein by
reference to Exhibit H to the Registration Statement of The
Korea Development Bank (No. 333-6866).
I -- The Enforcement Decree of The Korea Development Bank Act,
incorporated herein by reference to Exhibit I to the
Registration Statement of The Korea Development Bank (No.
333-6866).
J -- The By-laws of The Korea Development Bank, incorporated
herein by reference to Exhibit J to the Registration
Statement of The Korea Development Bank (No. 333-6866).
K-1 -- Form of Prospectus Supplement relating to The Korea
Development Bank's Medium-Term Notes, Series C, Due Not Less
Than Nine Months From Date of Issue (the "Series C Notes"),
incorporated herein by reference to Exhibit K-1 to the
Registration Statement of The Korea Development Bank (No.
333-6866).
K-2 -- Form of Supplement to the Prospectus Supplement relating to
the Korea Development Bank's Series C Notes, incorporated
herein by reference to Exhibit K-2 to the Registration
Statement of The Korea Development Bank (No. 333-6866).
L -- Form of Distribution Agreement between The Korea Development
Bank and the Agents named therein relating to the offer an
sale from time to time of the Series C Notes, incorporated
herein by reference to Exhibit L to the Registration
Statement of The Korea Development Bank (No. 333-6866).
</Table>
II-9
<Table>
<Caption>
EXHIBIT PAGE
- ------- ----
M-1 -- Opinion (including consent) of Cleary, Gottlieb, Steen &
Hamilton, 39th Floor, Bank of China Tower, One Garden Road,
Hong Kong, United States counsel to the Bank, in respect of
the legality the Debt Securities (with or without Warrants).
M-2 -- Opinion (including consent) of Lee & Ko, 16th Floor, West
Wing POSCO Center Building, 892, Daechi-4 Dong, Kangnam-Gu,
Seoul, 135-777, The Republic of Korea, Korean counsel to the
Bank, in respect of the legality the Debt Securities (with
or without Warrants).
M-3 -- Opinion (including consent) of Cleary, Gottlieb, Steen &
Hamilton, 39th Floor, Bank of China Tower, One Garden Road,
Hong Kong, United States counsel to the Bank, in respect of
the legality of the Guarantees, incorporated herein by
reference to Exhibit M-3 to the Registration Statement of
The Korea Development Bank (No. 333-97299).
M-4 -- Opinion (including consent) of Cleary, Gottlieb, Steen &
Hamilton, City Place House, 55 Basinghall Street, London
EC2V 5EH, England, English counsel to the Bank, in respect
of the legality of the Guarantees, incorporated herein by
reference to Exhibit M-4 to the Registration Statement of
The Korea Development Bank (No. 333-97299).
M-5 -- Opinion (including consent) of Kim & Chang, Seyang Building,
223 Naeja-dong, Chongro-ku, Seoul, The Republic of Korea,
Korean counsel to the Bank, in respect of the legality of
the Guarantees, incorporated herein by reference to Exhibit
M-5 to the Registration Statement of The Korea Development
Bank (No. 333-97299).
N-1 -- Form of the Series C Note that bears interest at a fixed
rate, incorporated herein by reference to Exhibit N-1 to the
Registration Statement of The Korea Development Bank (No.
333-6866).
N-2 -- Form of the Series C Note that bears interest at a floating
rate, incorporated herein by reference to Exhibit N-2 to the
Registration Statement of The Korea Development Bank (No.
333-6866).
O -- Form of Calculation Agency Agreement between The Korea
Development Bank and the calculation agent named therein
relating to the Series C Notes that bear interest at a
floating rate, incorporated herein by reference to Exhibit O
to the Registration Statement of The Korea Development Bank
(No. 333-6866).
</Table>
- ---------------
* May be filed by amendment.
II-10