As filed with the Securities and Exchange Commission on June 30, 2008
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
OR
For the fiscal year ended December 31, 2007
Date of event requiring this shell company report
For the transition period from to
Commission file number 1-14926
KT Corporation
(Exact name of Registrant as specified in its charter)
206 Jungja-dong
Bundang-ku, Sungnam, Gyunggi-do
463-711 Korea
(Address of principal executive offices)
Thomas Bum Joon Kim
Telephone: +82-31-727-0950 to 0959; E-mail: thomaskim@kt.com
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Name of each exchange on which registered
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
As of December 31, 2007, there were 203,686,823 shares of common stock, par value Won 5,000 per share, outstanding (not including 71,515,577 shares of common stock held by the company as treasury shares)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing. U.S. GAAP ¨ IFRS ¨ Other x
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 x
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
TABLE OF CONTENTS
PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGERS AND ADVISERS
Item 1.A.
Directors and Senior Management
Item 1.B.
Advisers
Item 1.C.
Auditors
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Item 2.A.
Offer Statistics
Item 2.B.
Method and Expected Timetable
ITEM 3.
KEY INFORMATION
Item 3.A.
Selected Financial Data
Item 3.B.
Capitalization and Indebtedness
Item 3.C.
Reasons for the Offer and Use of Proceeds
Item 3.D.
Risk Factors
ITEM 4.
INFORMATION ON THE COMPANY
Item 4.A.
History and Development of the Company
Item 4.B.
Business Overview
Item 4.C.
Organizational Structure
Item 4.D.
Property, Plants and Equipment
ITEM 4A.
UNRESOLVED STAFF COMMENTS
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Item 5.A.
Operating Results
Item 5.B.
Liquidity and Capital Resources
Item 5.C.
Research and Development, Patents and Licenses, Etc.
Item 5.D.
Trend Information
Item 5.E.
Off-balance Sheet Arrangements
Item 5.F.
Tabular Disclosure of Contractual Obligations
Item 5.G.
Safe Harbor
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Item 6.A.
Item 6.B.
Compensation
Item 6.C.
Board Practices
Item 6.D.
Employees
Item 6.E.
Share Ownership
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Item 7.A.
Major Shareholders
Item 7.B.
Related Party Transactions
Item 7.C.
Interests of Experts and Counsel
ITEM 8.
Item 8.A.
Item 8.B.
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ITEM 9.
THE OFFER AND LISTING
Item 9.A.
Item 9.B.
Item 9.C.
Item 9.D.
Item 9.E.
Item 9.F.
ITEM 10.
ADDITIONAL INFORMATION
Item 10.A.
Item 10.B.
Item 10.C.
Item 10.D.
Item 10.E.
Item 10.F.
Item 10.G.
Item 10.H.
Item 10.I.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Item 12.A.
Item 12.B.
Item 12.C.
Item 12.D.
PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15.
CONTROLS AND PROCEDURES
ITEM 16.
[RESERVED]
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B.
CODE OF ETHICS
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
PART III
ITEM 17.
FINANCIAL STATEMENTS
ITEM 18.
ITEM 19.
EXHIBITS
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PRESENTATION
All references to “Korea” or the “Republic” contained in this annual report mean the Republic of Korea. All references to the “Government” are to the government of the Republic of Korea. All references to “we,” “us” or the “Company” are to KT Corporation and, as the context may require, its subsidiaries.
All references to “Won” or “(Won)” in this annual report are to the currency of the Republic and all references to “Dollars,” “$,” “US$” or “U.S. dollars” are to the currency of the United States of America. Unless otherwise indicated, translations of Won amounts into Dollars in this annual report were made at the noon buying rate in The City of New York for cable transfers in Won per US$1.00 as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, the translations of Won into Dollars were made at the noon buying rate in effect on December 31, 2007, which was Won 935.8 to US$1.00.
Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.
Through December 31, 2007, the Korea Accounting Standards Board has issued Statements of Korea Accounting Standards (“SKAS”) No. 1 through No. 25. Among these statements, SKAS No. 1 through No. 10 and SKAS No. 12 through No. 20 are required to be applied in the prior periods. Although SKAS No. 11 and SKAS No. 21 through No. 25 are required to be applied starting in 2007, the accompanying consolidated financial statements as of December 31, 2006 and 2007 and for the years ended December 31, 2005, 2006 and 2007 have been reclassified in accordance with Statements of Korea Accounting Standards No. 16 and No. 21 for comparison purposes.
In addition, we have reclassified certain of our accounts effective January 1, 2007, and we have made the corresponding reclassification to our 2005 and 2006 accounts in the accompanying consolidated financial statements.
Item 1. Identity of Directors, Senior Managers and Advisers
Item 1.A. Directors and Senior Management
Not applicable.
Item 1.B. Advisers
Item 1.C. Auditors
Item 2. Offer Statistics and Expected Timetable
Item 2.A. Offer Statistics
Item 2.B. Method and Expected Timetable
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Item 3. Key Information
Item 3.A. Selected Financial Data
You should read the selected consolidated financial data below in conjunction with the Consolidated Financial Statements as of December 31, 2006 and 2007 and for each of the years in the three-year period ended December 31, 2007, and the reports of the independent registered public accounting firms on these statements included herein. The selected consolidated financial data for the five years ended December 31, 2007 are derived from our audited consolidated financial statements.
Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in Korea (“Korean GAAP”), which differ in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). See Note 36 to the Consolidated Financial Statements for a description of the nature and the effect of such differences.
Income Statement Data
Korean GAAP(1):
Operating revenues
Operating expenses
Operating income
Donations and contribution payments(2)
Gain (loss) on disposition of available-for-sale securities(3)
Income taxes(4)(5)
Income from continuing operations
Income (loss) from discontinuing operations
Net Income
Attributable to equity holders of the parent
Attributable to minority interests
Basic income per share from continuing operations
Basic net income per share(6)
Diluted income per share from continuing operations
Diluted net income per share(7)
Dividends per share(8)
U.S. GAAP(9):
Income taxes
Net income
Basic income per share(6)
Diluted income per share(7)
2
Balance Sheet Data
Working capital(10)
Net property and equipment
Total assets
Long term debt, excluding current portion
Refundable deposits for telephone installation
Total stockholders’ equity
Other Financial Data
Korean GAAP:
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Operating Data
Lines installed (thousands)(11)
Lines in service (thousands)(11)
Lines in service per 100 inhabitants(12)
Mobile subscribers (thousands)(13)
Broadband Internet subscribers (thousands)
Through December 31, 2007, the Korea Accounting Standards Board has issued Statements of Korea Accounting Standards (“SKAS”) No. 1 through No. 25. Among these statements, SKAS No. 1 through No. 10 and SKAS No. 12 through No. 20 are required to be applied in the prior periods. Although SKAS No. 11 and SKAS No. 21 through No. 25 are required to be applied starting in the current period, the balances of 2005, 2006 and 2007 have been reclassified in accordance with Statements of Korea Accounting
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Standards No. 16 and No. 21. In addition, we have reclassified certain of our accounts effective January 1, 2007, and we have made the corresponding reclassification to our 2005 and 2006 accounts.
4
Exchange Rate Information
The following table sets out information concerning the noon buying rate for the periods and dates indicated.
Period
2003
2004
2005
2006
2007
December
2008 (through June 27)
January
February
March
April
May
June (through June 27)
Our consolidated financial statements are expressed in Won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 2007 have been translated into United States dollars at the rate of Won 935.8 to US$1.00, the noon buying rate in the City of New York for cable transfers in Won as certified for customs purposes by the Federal Reserve Bank of New York at December 31, 2007, the last day in 2007 for which such rate is available. We make no representation that the Won or Dollar amounts contained in this annual report could have been or could be converted into Dollar or Won, as the case may be, at any particular rate or at all.
Item 3.B. Capitalization and Indebtedness
Not applicable
Item 3.C. Reasons for the Offer and Use of Proceeds
Item 3.D. Risk Factors
You should carefully consider the following factors.
Risks Relating to Our Business
Increased competition in Korea has had and may continue to have an adverse effect on our results of operations and financial condition.
The telecommunications sector in Korea is rapidly evolving. We face increasing competition from new entrants to the telecommunications market, and we expect the number and the identity of service providers in the market to continue to change. Future business combinations and alliances in the telecommunications industry
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may create significant new competitors. In particular, the Ministry of Information and Communication conditionally approved SK Telecom’s acquisition of a controlling minority stake of approximately 39% of the issued and outstanding share capital of Hanarotelecom Incorporated. The acquisition would enable SK Telecom to provide fixed-line telecommunications, broadband Internet access and Internet television (or IP-TV) services together with its mobile telecommunications services. In addition, advances in technology as well as changes in the regulatory environment are also occurring. Any significant changes in the competitive landscape of the telecommunications sector and our inability to adapt to such changes could have a material adverse effect on our business, financial condition and results of operations.
Fixed-line Telephone Services. Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. Since then, various competitors have entered the local, domestic long-distance and international long-distance telephone service markets in Korea, which have eroded our market shares. LG DACOM Corporation and Hanarotelecom currently provide local, domestic long-distance and international long-distance telephone services. In addition, Onse Telecom Corporation and SK Telink, Inc. currently provide domestic long-distance and international long-distance telephone services. Starting in 1998, specific service providers, such as Internet phone service providers, voice resellers and call-back service providers, also began offering international long-distance service in Korea. While we offer our own Internet phone service, the entry of these and other potential competitors into the local, domestic long-distance and international long-distance telephone service markets has had and may continue to have a material adverse effect on our revenues and profitability from these businesses. We had a market share in local telephone service of 90.4% as of December 31, 2007 in terms of number of subscribers estimated by us and a market share in domestic long-distance service of 85.4% in 2007 in terms of number of subscribers estimated by us. We cannot give assurance that we will be able to maintain our share of these businesses at or above current levels.
Mobile Service. KTF, our consolidated subsidiary in which we owned a 53.0% interest as of December 31, 2007, provides mobile services based on Code Division Multiple Access (“CDMA”) technology and Wideband Code Division Multiple Access (“W-CDMA”) technology. Competitors in the mobile telecommunications service industry are SK Telecom and LG Telecom. KTF (including resale subscribers of KT Corporation) had a market share of 31.5% as of December 31, 2007 in terms of the number of mobile service subscribers in Korea announced by the Korea Communications Commission, making KTF the second largest mobile telecommunications service provider. SK Telecom had a market share of 50.5% as of December 31, 2007.
Starting in January 2004 for SK Telecom subscribers, July 2004 for KTF subscribers and January 2005 for LG Telecom subscribers, mobile subscribers have been allowed to switch their service provider while retaining the same mobile phone number. In addition, all new subscribers of mobile services and existing subscribers who elect to receive a new mobile number, as well as those switching to a third-generation mobile service, are given the uniform mobile code of “010” as the first three digits of their mobile numbers without regard to the mobile service provider. In recent years, mobile service providers began granting subsidies to subscribers who purchase new handsets. KTF currently provides subsidies between Won 80,000 to Won 360,000 to subscribers for purchase of mobile handsets based on a subscription period between 12 to 24 months. Mobile number portability and handset subsidies have intensified competition among the mobile service providers and increased their marketing expenses. If the mobile service providers adopt a strategy of expanding market share through price competition, it could lead to a decrease in the net profit margins of KTF.
In recent years, KTF and SK Telecom also launched their third-generation mobile telecommunications services, which we believe have further intensified competition between the two companies and resulted in an increase in their marketing expenses. KTF expanded its coverage area of High Speed Downlink Packet Access (or HSDPA)-based IMT-2000 services to 84 cities in December 2006 and nationwide in March 2007 under the brand name “SHOW.” IMT-2000 is a third-generation, high-capacity wireless communications technology, which allows operators to provide to their customers significantly more bandwidth capacity. Although we expect that SK Telecom will face similar challenges that we expect to face in implementing this third-generation
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technology, we cannot assure you that KTF will continue to be able to successfully compete with SK Telecom. KTF’s inability to compete effectively with SK Telecom could have a material adverse effect on its financial condition and results of operations. See “—Implementation of the IMT-2000 technology poses challenges and risks to us.”
Internet Services. The Korean broadband Internet access service market has experienced significant growth since Korea Thrunet first introduced its Hybrid Fiber Coaxial (or HFC) based service in 1998. Hanarotelecom entered the broadband market in 1999 offering both HFC and Asymmetric Digital Subscriber Line (or ADSL) services. We also began offering broadband Internet access service in 1999, followed by Dreamline, Onse and LG DACOM. In recent years, numerous cable television operators have also begun HFC-based services at rates lower than ours. We had a market share of 44.3% as of December 31, 2007 based on the number of subscribers in Korea estimated by us. As a result of having to compete with a number of competitors and the maturing of the Internet access service market, we currently encounter and we expect to encounter pressure to increase marketing expenses in the future.
The market for other Internet-related services in Korea is also very competitive. We anticipate that competition will continue to intensify as the usage and popularity of the Internet grows and as new domestic and international competitors enter the Internet industry in Korea. The substantial growth and potential size of the Internet industry in Korea have drawn many competitors and as a result may lead to increasing price competition to provide Internet-related services. Increased competition in the Internet industry could have a material adverse effect on the number of subscribers of our Internet-related service and on our results of operations.
Implementation of the IMT-2000 technology poses challenges and risks to us.
We acquired the right to purchase one of three licenses to provide IMT-2000 services on December 15, 2000, as a member of a consortium of companies including KT Corporation and KTF. In March 2001, KT ICOM, a company created by the consortium, paid half of the Won 1.3 trillion license fee payable to the Korea Communications Commission. KTF, which subsequently merged with KT ICOM, paid Won 90 billion in 2007 and is obligated to pay the remaining Won 560 billion as follows: Won 110 billion in 2008, Won 130 billion in 2009, Won 150 billion in 2010 and Won 170 billion in 2011. This payable accrues interest at the applicable three-year Government bond interest rate minus 0.75%. The accrued interest is paid on an annual basis to the Korea Communications Commission.
KTF expanded its coverage area of HSDPA-based IMT-2000 services to 84 cities in December 2006 and began offering nationwide services in March 2007 under the brand name “SHOW.” HSDPA-based IMT-2000 services present risks and challenges to our business, any or all of which, if realized or not addressed, may have a material adverse effect on our financial condition and results of operations. We expect KTF to leverage its existing mobile network and 2.5-generation technology to minimize its capital expenditures and other costs related to developing HSDPA-based IMT-2000 services. However, we believe KTF will still require substantial amounts of capital expenditures to maintain and enhance its HSDPA-based IMT-2000 network. No assurance can be given that KTF will be able to derive revenues from HSDPA-based IMT-2000 services to justify the license fee, capital expenditures and other investments required for such service. KTF’s HSDPA-based IMT-2000 services may not be commercially successful if there are unfavorable market conditions or weak service demand.
Our WiBro service poses challenges and risks to us.
In March 2005, we acquired a license to provide wireless broadband Internet access service for Won 126 billion. Wireless broadband Internet access (or WiBro) service, enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 1 Mbps per user. A subscriber is able to access the WiBro service network during transit up to 120 kilometers per hour. We positioned WiBro service to provide Internet Protocol (IP)-based triple-play services, which are voice, data and video. We conducted trial service of WiBro service in parts of Seoul and Gyunggi Province starting in April 2006
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and commercially launched our service in these areas in June 2006. We expanded the service to all of metropolitan Seoul and select universities in Gyunggi Province in April 2007, and we plan to expand the service to the neighboring cities of Seoul by October 2008. We believe that substantial additional amounts of capital expenditures and research and development will be required to complete buildout of our WiBro service network, and we plan to spend approximately Won 120 billion in capital expenditures in 2008 to expand our WiBro service network, which we may adjust subject to market demand. No assurance can be given that the network will gain market acceptance such that we will be able to derive revenues from WiBro service to justify the license fee, capital expenditures and other investments required to provide such service.
Disputes with our labor union may disrupt our business operations.
In the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing of non-core businesses and reducing our employee base. Although we have not experienced any significant labor disputes and unrests during the past six years, there can be no assurance that we will not experience in the future labor disputes and unrests, including expanded protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operation.
We also negotiate collective bargaining agreements every two years with our labor union and annually negotiate a wage agreement. Our current collective bargaining agreement expires on November 12, 2009. Although we have been able to reach collective bargaining agreements and wage agreements with our labor union in recent years, there can be no assurance that we will not experience in the future labor disputes and unrests resulting from disagreements with the labor union.
The Korean telecommunications industry has been subject to the Government’s regulation, and change in Government policy relating to the industry could have a material adverse effect on our operations and financial condition.
The Government, primarily through the Korea Communications Commission, has authority to regulate the telecommunications industry. The Korea Communications Commission’s policy is to promote competition in the Korean telecommunications markets through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors. The Korea Communications Commission, in consultation with the Ministry of Strategy and Finance, currently approves local service rates and broadband Internet access service rates charged by us and mobile service rates charged by SK Telecom. Under current Government regulations, if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the Korea Communications Commission, it must obtain prior approval from the Korea Communications Commission for the rates and the general terms for that service. Each year the Korea Communications Commission designates service providers the rates and the general terms of which must be approved by the Korea Communications Commission. In recent years, the Korea Communications Commission has so designated us for local telephone service and broadband Internet access service and SK Telecom for mobile service. The inability to freely set our local telephone service and broadband Internet access rates may hurt the profit from that business and impede our ability to compete effectively against our competitors. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation— Rates.” The form of our standard agreement for providing local network service and each agreement for interconnection with other service providers are also subject to approval by the Korea Communications Commission. The Korea Communications Commission currently does not regulate our domestic long-distance, international long-distance and mobile service rates.
Furthermore, the Ministry of Information and Communication, prior to being replaced by the Korea Communications Commission, announced a “road map” in March 2007 highlighting upcoming revisions in regulations to promote deregulation of the telecommunications industry. The road map included allowing telecommunications service providers to bundle their services, such as broadband Internet access service, mobile
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telephone service and fixed-line telephone service, at a discounted rate from July 2007, provided that we and SK Telecom, which are designated as market-dominating business entities under the Telecommunications Business Act, allow other competitors to employ the services provided by us and SK Telecom, respectively, so that the competitors can provide similar discounted package services. The road map also included plans to amend the regulations and provisions under the Telecommunications Business Act to permit licensed transmission service providers to offer local, domestic long-distance and international long-distance telephone services, as well as broadband Internet access and Internet phone services, without the need to obtain further approval from the Ministry of Information and Communication. Under the new administration of President Lee Myung Bak, the Korea Communications Commission is reconsidering many aspects of the road map as well as other regulations of the telecommunications industry, and there can be no assurance that the road map will continue to be implemented as proposed by the Ministry of Information and Communication under the previous administration.
We also plan to put more focus on entering the IP media market, including offering IP-TV. IP-TV is a service which combines telecommunications and broadcasting, offering traditional Internet services and video-on-demand services as well as real-time high definition broadcasting via broadband networks. The Korean Internet Multimedia Broadcasting Business Act was passed on December 2007, and the Government is currently reviewing the relevant administrative steps necessary to implement the legislation. We will strive to enter the IP-TV market early, but we may need to adjust the timing depending on governmental regulations and policies. In addition, although we currently believe that we will be able to compete in this market, there can be no assurance that the Government regulations and policies will permit us to do so.
Government policies and regulations relating to the above as well as other regulations involving the telecommunications industry (including as a result of the implementation of free trade agreements between Korea and other countries, including the United States) may change, which could have a material adverse effect on our operations and financial condition. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation.”
We are subject to various regulations under the Monopoly Regulation and Fair Trade Act.
The Monopoly Regulation and Fair Trade Act provides for various regulations and restrictions on large business groups enforced by the Korea Fair Trade Commission. The Korea Fair Trade Commission initially designated us as a large business group under the Monopoly Regulation and Fair Trade Act on April 1, 2002, which subjects us to regulations prohibiting, among other things, our cross guarantees of debt and cross shareholdings by members of a business group.
In July 2004, the Korea Fair Trade Commission began an antitrust investigation into alleged unfair collaborative practices of us, Hanarotelecom, LG DACOM and Onse in local, domestic long-distance and international long-distance telephone service markets, as well as in broadband Internet access and Internet leased line service markets. On May 25, 2005, the Korea Fair Trade Commission imposed fines of Won 116 billion on us, Won 2 billion on Hanarotelecom and Won 1 billion on LG DACOM, claiming that we and these other companies engaged in unfair collaborative practices in local telephone and Internet leased line service markets. On September 14, 2005, the Korea Fair Trade Commission imposed an additional fine of Won 24 billion on us for our alleged unfair collaborative practices in domestic and international long-distance telephone service markets. We were following administrative guidelines from the Ministry of Information and Communication, which had advised that we, as a dominant service provider in these markets, assist late market entrants in order to promote a more competitive local telephone service market in Korea. The legality of such administrative guidelines from the Ministry of Information and Communication has been disputed by the Korea Fair Trade Commission. We filed for judicial review of administrative actions related to local, domestic long-distance and international long-distance telephone service markets, and the Seoul High Court rendered its decision on August 22, 2007 in which it overturned the Korea Fair Trade Commission’s order to pay Won 113 billion in fines on the basis that the Korea Fair Trade Commission’s calculation of fines did not consider (i) the correct period of our engagement in unfair collaborative practices, (ii) the extent of benefits obtained by us from engaging in such practices and (iii) the fact that we were following administrative guidelines issued by the Ministry of Information
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and Communication. Both the Korea Fair Trade Commission and we have appealed the Seoul High Court’s decision to the Supreme Court of Korea, and the case is currently pending. We cannot give any assurance that the ultimate outcome of the lawsuit or related future actions will be favorable to us or reduce the amount of fine imposed on us. In response to the initial ruling by the Korea Fair Trade Commission, we have recorded Won 140 billion as taxes and due under operating expenses in 2005 and paid such amount in 2006. There can be no assurance that any future investigations by the Korea Fair Trade Commission on alleged unfair collaborative price-fixing practices will not have a material adverse effect on our financial condition or results of operations. See “Item 8. Financial Information—Item 8.A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on the results of our operations and on the prices of our securities.
Substantially all of our revenues are denominated in Won. Depreciation of the Won may materially affect the results of our operations because, among other things, it causes an increase in the amount of Won required by us to make interest and principal payments on our foreign-currency-denominated debt, the costs of equipment that we purchase from overseas sources, net settlement payments to foreign carriers and administrations and certain payments related to our derivative instruments entered into for foreign exchange risk hedging purposes. Of the Won 6,383 billion total long-term debt (excluding current portion) outstanding as of December 31, 2007, Won 1,431 billion was denominated in foreign currencies with interest rates ranging from 4.9% to 8.2%. See “Item 3. Key Information—Item 3.A. Select Financial Data—Exchange Rate Information” and Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources.” Risks Relating to Korea
Risks Relating to Korea
Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.
We are incorporated in Korea and a significant portion of our operations is based in Korea. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea. The economic indicators in Korea in recent years have shown mixed signs, and future growth of the Korean economy is subject to many factors beyond our control. Recent developments in the Middle East including the war in Iraq and its aftermath, higher oil prices, the general weakness of the global economy due in part to problems in the U.S. mortgage and housing markets and the reduced availability of credit have increased the uncertainty of global economic prospects and may continue to adversely affect the Korean economy. Any future deterioration of the Korean and global economy could adversely affect our business, financial condition and results of operations.
Developments that could have an adverse impact on Korea’s economy include:
a slowdown in consumer spending and the overall economy;
adverse changes or volatility in foreign currency reserve levels, commodity prices, exchange rates, interest rates or stock markets;
adverse developments in the economies of countries that are important export markets for Korea, such as the United States, Japan and China, or in emerging market economies in Asia or elsewhere;
the continued emergence of the Chinese economy, 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 and the relocation of the manufacturing base from Korea to China);
the economic impact of any pending or future free trade agreements, including the Free Trade Agreement recently negotiated with the United States;
social and labor unrest;
substantial decreases in the market prices of Korean real estate;
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a decrease in tax revenues and a substantial increase in the Government’s expenditures for unemployment compensation and other social programs that, together, would lead to an increased government budget deficit;
financial problems or lack of progress in restructuring of Korean conglomerates, other large troubled companies, their suppliers or the financial sector;
loss of investor confidence arising from corporate accounting irregularities and corporate governance issues of certain Korean conglomerates;
geo-political uncertainty and risk of further attacks by terrorist groups around the world;
the recurrence of severe acute respiratory syndrome or an outbreak of avian flu in Asia and other parts of the world;
deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from trade disputes or disagreements in foreign policy;
political uncertainty or increasing strife among or within political parties in Korea;
hostilities involving oil producing countries in the Middle East and any material disruption in the supply of oil or increase in the price of oil; and
an increase in the level of tension or an outbreak of hostilities between North Korea and Korea or the United States.
Escalations in tensions with North Korea could have an adverse effect on us.
Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. In recent years, there have been heightened security concerns stemming from North Korea’s nuclear weapon and long-range missile programs and increased uncertainty regarding North Korea’s actions and possible responses from the international community. In December 2002, North Korea removed the seals and surveillance equipment from its Yongbyon nuclear power plant and evicted inspectors from the United Nations International Atomic Energy Agency. In January 2003, North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty. Since the renouncement, Korea, the United States, North Korea, China, Japan and Russia have held numerous rounds of six party multi-lateral talks in an effort to resolve issues relating to North Korea’s nuclear weapons program.
In addition to conducting test flights of long-range missiles, North Korea announced in October 2006 that it had successfully conducted a nuclear test, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council passed a resolution that prohibits any United Nations member state from conducting transactions with North Korea in connection with any large scale arms and material or technology related to missile development or weapons of mass destruction and from providing luxury goods to North Korea, imposes an asset freeze and travel ban on persons associated with North Korea’s weapons program, and calls upon all United Nations member states to take cooperative action, including through inspection of cargo to or from North Korea. In response, North Korea agreed in February 2007 at the six-party talks to shut down and seal the Yongbyon nuclear facility, including the reprocessing facility, and readmit international inspectors to conduct all necessary monitoring and verifications. In October 2007, Korea and North Korea held a summit meeting to discuss easing tensions and fostering peace on the Korean peninsula. Mr. Lee Myung Bak, who became the President of Korea in February 2008, has announced that he is willing to hold a summit meeting if the meeting leads North Korea to discontinue its nuclear weapons program.
Despite these recent initiatives, there can be no assurance that the level of tension on the Korean peninsula will not escalate in the future. Any further increase in tension, including a breakdown of high-level contacts between Korea and North Korea or occurrence of military hostilities, could have a material adverse effect on our operations and the market value of the securities.
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Risks Relating to the Securities
If an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs.
Korean law currently limits foreign ownership of the ADSs and our shares. In addition, under our deposit agreement, the depositary bank cannot accept deposits of shares and deliver ADSs representing those shares unless (1) we have consented to such deposit or (2) Korean counsel has advised the depositary bank that the consent required under (1) is no longer required under Korean laws and regulations. Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with our consent for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. The depositary bank has informed us that, at a time it considers to be appropriate, the depositary bank plans to start accepting deposits of shares without our consent and deliver ADSs representing those shares up to the amount allowed under current Korean laws and regulations. Until such time, however, the depositary bank will continue to obtain our consent for such deposits of shares and delivery of ADSs, which we may not provide. Consequently, if an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”
A foreign investor may not be able to exercise voting rights with respect to common shares exceeding the number of common shares held by our largest domestic shareholder.
Under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 5.0% or more of our total shares and was our largest shareholder on or prior to May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. Under the Telecommunications Business Act, the Korea Communications Commission may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. In addition, the Foreign Investment Promotion Act prohibits any foreign shareholder from being our largest shareholder if such shareholder owns 5.0% or more of our shares with voting rights. In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, such foreign shareholder may not be able to exercise voting rights with respect to common shares exceeding such threshold. The Korea Communications Commission may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less.
Holders of ADSs will not be able to exercise dissenter’s rights unless they have withdrawn the underlying common stock and become our direct shareholders.
In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their shares under Korean law. A holder of ADSs will not be able to exercise dissenter’s rights unless he has withdrawn the underlying common stock and become our direct shareholder. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.”
An investor may not be able to exercise preemptive rights for additional shares and may suffer dilution of his equity interest in us.
The Commercial Code of Korea and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the depositary bank, after consultation with us, may make the rights available to an ADS
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holder or use reasonable efforts to dispose of the rights on behalf of the ADS holder and make the net proceeds available to the ADS holder. The depositary bank, however, is not required to make available to an ADS holder any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:
a registration statement filed by us under the Securities Act of 1933, as amended, is in effect with respect to those shares; or
the offering and sale of those shares is exempt from or is not subject to the registration requirements of the Securities Act.
We are under no obligation to file any registration statement. If a registration statement is required for an ADS holder to exercise preemptive rights but is not filed by us, the ADS holder will not be able to exercise his preemptive rights for additional shares. As a result, the ADS holder may suffer dilution of his equity interest in us.
Forward-looking statements may prove to be inaccurate.
This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.
Item 4. Information on the Company
Item 4.A. History and Development of the Company
In 1981, the Government established us under the Korea Telecom Act to operate the telecommunications services business that it previously directly operated. Under the Korea Telecom Act and the Government-Invested Enterprises Management Basic Act, the Government had a greater control over our business and affairs. Effective October 1, 1997, the Korea Telecom Act was repealed and the Government-Invested Enterprises Management Basic Act became inapplicable to us. As a result, we became a corporation under the Commercial Code, and our corporate organization and shareholders’ rights were governed by the Privatization Law and the Commercial Code. Among other things, we began to exercise greater autonomy in setting our annual budget and making investments in the telecommunications industry, and our directors, who used to be appointed by the Government under the Korea Telecom Act, are now elected by our shareholders.
Until 1993, the Government owned all of the issued shares of our common stock. From 1993 through May 2002, the Government disposed of all of its equity interest in us. With the completion of disposition of the Government’s ownership interest in us in May 2002, the Privatization Law ceased to apply to us in August 2002. We amended our legal name from Korea Telecom Corp. to KT Corporation in March 2002.
Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. The Government began to introduce competition in the telecommunications services market in the early 1990’s. As a result, including ourselves, there are currently three local telephone
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service providers, five domestic long-distance carriers and numerous international long-distance carriers (including voice resellers) in Korea. In addition, the Government has awarded licenses to several new service providers to enhance the competition in other telecommunications business areas such as mobile telephone services and data network services. See “Item 4.B. Business Overview—Competition.”
Our legal and commercial name is KT Corporation. Our principal executive offices are located at 206 Jungja-dong, Bundang-ku, Sungnam, Gyunggi-do, Korea, and our telephone number is (8231) 727-0114.
Item 4.B. Business Overview
We are the leading telecommunications service provider in Korea and one of the largest and most advanced in Asia. As an integrated telecommunications service provider, our principal services include:
telephone services, including local, domestic long-distance and international long-distance fixed-line telephone services and interconnection services to other telecommunications companies;
broadband Internet access service and other Internet-related services, including video-on-demand services;
PCS mobile telecommunications service and third-generation HSDPA-based IMT-2000 wireless Internet and video multimedia communications services through our subsidiary, KTF; and
various other services, including leased line service and other data communication service, satellite service and information technology and network services.
We own substantially all of the domestic public exchanges, the nationwide network of local telephone lines, the principal public long-distance telephone transmission facilities and the principal data communications network in Korea, as well as two satellites in operation. In addition, through KTF, we operate nationwide PCS and HSDPA-based IMT-2000 networks.
Historically, we have derived a substantial majority of our revenues from fixed-line telephone services. However, as our traditional businesses have matured and new technologies have become available, we have successfully leveraged our nationwide network, strong brand name and established customer base in Korea to pursue new growth opportunities.
We are focusing on building upon our strong position in each of our principal lines of business:
We are currently the dominant provider of fixed-line telephone services in Korea with approximately 26.7 million installed lines, of which 20.0 million lines were in service as of December 31, 2007. As of December 31, 2007, our market share of the local market was 90.4% based on the number of local fixed-line subscribers estimated by us. Based on number of subscribers in 2007 estimated by us, our market share of the domestic long-distance market was 85.4%;
We are Korea’s largest broadband Internet access provider in terms of subscribers, with 6.5 million subscribers as of December 31, 2007, representing a market share of 44.3% in Korea based on the number of Internet subscribers estimated by us;
We are Korea’s second largest mobile telecommunications service provider. KTF, our consolidated subsidiary, had approximately 13.7 million subscribers (including our resale subscribers) as of December 31, 2007, representing a market share of 31.5% of the total mobile service market in Korea based on the number of mobile subscribers announced by the Korea Communications Commission; and
We are also the leading provider of data communication service in Korea.
For the year ended December 31, 2007, under Korean GAAP our operating revenues were Won 18,660 billion, our net income was Won 1,171 billion and our basic net income per share was Won 5,112. As of December 31, 2007, our total stockholders’ equity was Won 11,138 billion.
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The Telecommunications Industry in Korea
The Korean telecommunications industry is one of the most developed in Asia in terms of broadband Internet and mobile penetration rates. As of December 31, 2007, the broadband Internet penetration rate, which is calculated by dividing the number of broadband Internet access service subscribers by the number of households in Korea, was 90.8%, and the mobile penetration rate, which is calculated by dividing the number of mobile subscribers by the population of Korea, was 89.8%. According to the Korea Communications Commission, the number of broadband Internet access subscribers totaled 14.7 million as of December 31, 2007 and the number of mobile subscribers totaled 43.5 million as of such date.
The Korea Communications Commission has the primary responsibility for regulating the telecommunications industry in Korea. See “—Regulation.”
Broadband Internet Access Market
With advancement of broadband technology, the Korean broadband Internet access market has experienced significant growth. Broadband Internet connection can be achieved through satellite, terrestrial wireless and fiber optic-based solutions. However, the principal technologies used in the provision of high speed Internet access are xDSL, HFC and fiber optic LAN. xDSL refers to various types of digital subscriber lines, including ADSL and VDSL. xDSL offers an access solution over existing telephone lines using a specialized modem while HFC service involves the use of two-way cable networks. Fiber optic LAN is a technology that combines fiber optic cables and UTP cables. Fiber optic cables are connected to residential and commercial buildings with UTP cable-based LAN capabilities. While xDSL and HFC are more widely used technologies because of their relative reliability, ease of provisioning and cost effectiveness, fiber optic LAN usage has been steadily increasing in recent years. As of December 31, 2007, almost a third of the total subscribers of broadband Internet access service in Korea rely on fiber optic LAN technology.
Since the subscribers of two-way cable networks share a limited bandwidth, the downstream speed tends to slow down as the number of subscribers increases, thereby decreasing the quality of HFC-based service. While xDSL technology was commercially introduced after HFC technology, it has surpassed HFC to become the prevalent broadband access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in July 2002. In recent years, certain service providers have been upgrading their broadband network to provide fiber optic LAN-based service to their subscribers, which further enhance data transmission speed up to 100 Mbps, as well as improve connection quality.
In recent years, Broadband Internet access service providers and mobile telecommunications service providers have focused their attention to provide wireless Internet connection capabilities. They have introduced wireless LAN service with speed of up to 54 Mbps, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops or PDAs in hot-spot zones and at home. Some service providers have also developed wireless Internet networks to provide WiBro service, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 1 Mbps per user. Commercial WiBro service was launched in parts of Seoul and Gyunggi Province in June 2006. We expanded the service to all of metropolitan Seoul and select universities in Gyunggi Province in April 2007, and we plan to expand the service to the neighboring cities of Seoul by October 2008.
Mobile Telecommunications Service Market
The Korean cellular market was formally established in 1984 when SK Telecom, formerly Korea Mobile Telecom, became the first mobile telephone operator in Korea. SK Telecom remained the only cellular operator in Korea until Shinsegi Telecomm began service in 1994. In order to encourage further market growth and competition, the Ministry of Information and Communication awarded three PCS licenses in June 1996. Our mobile subsidiary, KTF, was awarded a license alongside LG Telecom and Hansol M.com. Commercial PCS service was launched in October 1997.
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Since the introduction of three new operators in 1997, the Korean mobile market has undergone consolidation and significant growth. Following SK Telecom’s purchase of a controlling stake in Shinsegi, we acquired a 47.9% interest in Hansol M.com in 2000 and renamed the company KT M.com. KT M.com merged into KTF in May 2001 and Shinsegi merged into SK Telecom in January 2002. The table below gives the subscription and penetration information of the mobile telecommunications industry for the periods indicated:
Total Korean Population(1)
Mobile Subscribers(2)
Mobile Subscriber Growth Rate
Mobile Penetration(3)
Korea’s highly developed mobile market also extends into an advanced mobile data market. Mobile Internet service in Korea has grown rapidly since its introduction in 2001. All the mobile operators have developed extensive mobile data and Internet service portals. Korean operators have also invested in networks compatible with Evolution-Data Optimized (or EV-DO) handsets which allow subscribers to enjoy 2.5 generation high speed wireless data services. They also offer third-generation, high-capacity HSDPA-based IMT-2000 wireless Internet and video multimedia communications services which use significantly greater bandwidth capacity.
Business Strategy
We believe the telecommunications market in Korea will continue to expand due to Korea’s growing economy, consumers’ willingness to adopt new technologies, relatively high income and a relatively large middle class. We also believe that the convergence of communications technologies will provide a competitive advantage to incumbent telecommunications service providers with existing infrastructure, which are able to design and construct sophisticated and nationwide networks capable of serving as a common delivery platform for a broad range of services and enhance value for our customers. Consistent with our strategic objectives, we aim to pursue growth in the following four core areas:
Delivery. We aim to maintain our market leadership positions in traditional telecommunications service areas and leverage our dominant subscriber base when offering a new generation of services such as WiBro service, HSDPA-based IMT-2000 service, services over the Internet protocol and broadband Internet access service with our fiber-to-the-home (or FTTH) connection. We will also focus on meeting our customers’ increasing demand for ubiquitous access to mobile data communications and integrated fixed-line and wireless telecommunications services. We plan to use our extensive customer relationships and market knowledge to expand our revenue bases by cross-selling our telecommunications products and services. For example, starting in the second half of 2007, we began bundling our services, such as our Megapass broadband Internet access service with WiBro, Mega TV and SHOW services, at a discount in order to attract additional subscribers to our new services.
Media Entertainment. We plan to focus on entering the IP media market and expanding our partnerships with digital media content providers. We began providing standard definition video-on-demand services to customers of our Megapass services in June 2004, and we started providing high definition video-on-demand services under the new brand name “MegaTV” in June 2007. We expect to expand our MegaTV service to include IP-TV service as soon as the administrative steps necessary to implement the recently enacted Korean Internet Multimedia Broadcasting Business Act are completed. We will continue our efforts to enhance our ability to provide unique digital media contents, including through acquisitions of leading contents production companies in Korea.
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Convenience Solutions. Our vision is to provide our customers with one-stop service for convenience solutions that will enhance their lifestyle. We plan to expand our scope of services to incorporate convenience solutions such as online education programs that are delivered to various media and communications devices, video home security and real estate maintenance services, either internally or through our subsidiaries or strategic alliances with specialists.
Business Solutions. We also aim to provide our corporate customers with a one-stop shop for customized information and technology solutions. We will focus on developing network-related information and technology services such as managed network, contact center and data center services. We will also continue to develop existing services such as Bizmeka (business solutions targeting small- and medium-sized enterprises) and Internet data centers, as well as introduce new services that can take advantage of our competitive strengths and capture the growth potential that new businesses offer, such as participating in building information and technology infrastructure for ubiquitous city development projects.
Our Services
Telephone Services
Fixed-line Telephone Services. We utilize our extensive nationwide telephone network to provide fixed-line telephone services, which consist of local, domestic long-distance and international long-distance services. These fixed-line telephone services accounted for 21.2% of our operating revenues in 2007. Our telephone network includes exchanges, long-distance transmission equipment and fiber optic and copper cables. The following table gives some basic measures of the development of our telephone system:
Lines installed (thousands)(2)
Lines in service (thousands)(2)
Lines in service per 100 inhabitants(3)
Fiber optic cable (kilometers)
Number of public telephones installed (thousands)
Domestic long-distance call minutes (millions)(4)(5)
Local call pulses (millions)(4)
Our domestic long-distance cable network is entirely made up of fiber optic cable and can carry both voice and data transmissions. Compared to conventional materials such as coaxial cable, fiber optic cable provides significantly greater transmission capacity with less signal fading, thus requiring less frequent amplification. In recent years, we have also increased the proportion of our lines that are connected to exchanges capable of handling digital signal technology. A principal limitation of the older analog technology is that applications other than voice communications, such as the transmission of text and computer data, require either separate networks or conversion equipment. Digital systems permit a range of voice, text and data applications to be transmitted simultaneously on the same network. We completed connection of all installed lines to digital exchanges in June 2003.
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The following table shows the number of minutes of international long-distance calls recorded by us and specific service providers utilizing our international long-distance network in each specified category for each year in the four-year period ended December 31, 2007:
Incoming international long-distance calls
Outgoing international long-distance calls
Total
United States (19.4%), Japan (12.6%) and China (14.4%) accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2007. In recent years, the volume of our incoming calls exceeded the volume of our outgoing calls. The agreed settlement rate is applied to the call minutes to determine the applicable net settlement payment.
We also provide Internet phone service for international long-distance calls. Despite the inconvenience of having to dial many numbers to access the Internet phone service, the volume of international long-distance calls made on Internet phone services, measured in terms of call minutes, has significantly increased since Internet phone service was first introduced in Korea in March 1998. Our Internet phone service also competes with international long-distance services provided by various voice resellers.
Interconnection. Under the Telecommunications Business Act, we are required to permit other service providers to interconnect to our fixed-line network. Currently, the principal users of this interconnection capacity include Hanarotelecom and LG DACOM (offering local, domestic long-distance and international long-distance services), Onse and SK Telink (offering international and domestic long-distance services), and SK Telecom, KTF and LG Telecom (transmitting calls to and from their mobile networks). We expect that interconnection revenues and payments will remain important for our results of operations. In recent years, revenues from a landline user for a call initiated by a landline user to a mobile service subscriber (land-to-mobile interconnection) have become a significant portion of our results of operations, accounting for 8.5% of our operating revenues in 2007. We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as an expense the amount of interconnection charge paid to the mobile service provider.
Internet Services
Broadband Internet Access Service. Leveraging on our nationwide network of 267,421 kilometers of fiber optic cable network, we have achieved a leading market position in the broadband Internet access market in Korea. We believe we have a competitive advantage over other broadband Internet access service providers because, unlike our competitors, we can utilize our existing networks nationwide to provide broadband Internet access service. Our broadband Internet access service accounted for 11.1% of our operating revenues in 2007. Our principal Internet access services include:
xDSL, Ethernet and FTTH services under the “Megapass” brand name;
wireless LAN service under the “Nespot” brand name, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops and PDAs in hot-spot zones and Megapass service in fixed-line environments; and
WiBro Internet access service, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 1 Mbps per user.
We had 6.5 million fixed-line Megapass broadband Internet subscribers as of December 31, 2007. We also had 0.4 million Nespot service subscribers as of December 31, 2007. We conducted trial service of WiBro
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service in parts of Seoul and Gyunggi Province starting in April 2006 and commercially launched our service in these areas in June 2006. Due to the limited service coverage, we have approximately 106,000 subscribers of WiBro service as of December 31, 2007. We expanded the service to all of metropolitan Seoul and select universities in Gyunggi Province in April 2007, and we plan to expand the service to the neighboring cities of Seoul by October 2008. Starting in the second half of 2007, we began bundling our WiBro service with Megapass and Nespot broadband Internet access services at a discount in order to attract additional subscribers.
xDSL refers to various types of digital subscriber lines, including ADSL and VDSL. ADSL is a technology that converts existing copper twisted-pair telephone lines into access paths for multimedia and high-speed data communications. ADSL transforms the existing public telephone network from one limited to voice, text and low-resolution graphics to a system capable of bringing multimedia to subscriber premises without new cabling. The asymmetric design optimizes the bandwidth by maximizing the downstream speed for downloading information from the Internet. While ADSL technology was commercially introduced after HFC-based technology, it has surpassed HFC to become the prevalent access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in July 2002. We are currently upgrading our broadband network to enable FTTH connection, which further enhances downstream speed up to 100 Mbps and connection quality.
FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such as IP-TV service and delivery of other digital media content.
The high-speed downstream rates can reach up to 8 Mbps for ADSL and 100 Mbps for VDSL and FTTH. Downstream rates depend on a number of factors. For a constant wire gauge, the data rate decreases as the length of the copper wire increases. Generally, if the separation between the telephone office and the subscriber is greater than four kilometers, line attenuation is so severe that broadband speeds can no longer be achieved. Approximately 95% of the households subscribing to our basic local telephone service are located within a four kilometer radius of our telephone offices, making our Megapass service available to most of the Korean population. Fiber-optic cable used by FTTH, on the other hand, uses laser light to carry signals that travel long distances inside fiber optic cable without degradation.
Our Megapass Ntopia service connects fiber-optic cables to apartment complexes and buildings with LAN capabilities. This technology allows data transmission speed of up to 100 Mbps. Because the service is UTP cable-based, a subscriber is directly connected to the Internet whenever his or her personal computer is in operation. We began offering our Megapass Ntopia service in November 2000.
In February 2002, we launched a wireless LAN service called Nespot, which provides laptops and PDAs wireless access to high speed Internet in hot-spot zones and Megapass service in fixed-line environments. Nespot enables subscribers to access the Internet at up to 54 Mbps. We sponsored approximately 10,600 hot-spot zones nationwide for wireless connection as of December 31, 2007. We extended the Nespot service in 2003 through the launch of Nespot Swing, which allows users with PDA phones to connect to the Internet even outside the Nespot hotspots through KTF’s wireless data service specifically designed for PDAs.
In June 2006, we also launched our WiBro service, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 1 Mbps per user. A subscriber is able to access the WiBro service network during transit up to 120 kilometers per hour. We positioned WiBro service to provide IP-based triple play services, which are voice, data and video.
Miscellaneous Internet-related Services. Our Internet-related services focus primarily on providing infrastructure and solutions for business enterprises, as well as IP-TV and video-on-demand services. Our Internet-related services accounted for 2.3% of our operating revenues in 2007.
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We provide dedicated and secure broadband Internet connection service to institutional customers under the “Kornet” brand name. We provide high-speed connection up to 2.2 Tbps, as well as rent to our customers and install necessary routers to ensure reliable Internet connection and enhanced security. We provide discount rates to qualified customers, including small- and medium-sized enterprises, businesses engaging in Internet access services and government agencies.
We operate eight Internet data centers located throughout Korea and provide a wide range of computing services to companies which need servers, storages and leased lines. Internet data centers are facilities used to house, protect and maintain network server computers that store and deliver Internet and other network content, such as web pages, applications and data. Our Internet data centers are designed to meet international standards, and are equipped with temperature control systems, regulated and reliable power supplies, fire detection and suppression equipment, security monitoring and high-bandwidth connections to the Internet. Internet data centers allow corporations or Internet service providers to outsource their application and server hardware management.
Our Internet data centers offer network outsourcing services, server operation services and system support services. Our network outsourcing services include co-location, which is the installation of our customers’ network equipment at our Internet data centers. Co-location is designed to increase customers’ Internet connection speed and reduce connection time and costs by directly connecting the customers’ server to the Internet backbone switch at our Internet data centers. Our server operation services include optimal server management service and technical support service we provide with respect to the leased servers that are linked directly to our Internet backbone switch. We also lease servers and network equipment for a fixed monthly fee. Our system support services include providing system resources for a wide range of Internet computing services, such as application transfer, network storage, video streaming and application download, as well as sending short text messages and messages containing multimedia objects, such as images, audio and video.
We also offer a service called Bizmeka to develop and commercialize business-to-business solutions targeting small- and medium-sized business enterprises in Korea. Bizmeka is an applied application service provider which provides industry-specific business solutions, including customer database management and electronic data interchange.
In addition, we began providing standard definition video-on-demand services to customers of our Megapass services in June 2004, and high definition video-on-demand services in July 2007. We began promoting video-on-demand services under the new brand name “MegaTV” in June 2007. Our MegaTV subscribers are offered access to an array of digital media contents, including movies, sports, news, educational programs and TV replay, for a fixed monthly fee. Through a digital set-top box that we rent to our customers, our customers are able to browse the catalogue of digital media contents and view the selected media streams on their television. A set-top box provides two-way communications on an IP network and decodes video streaming data. We rent the set-top boxes free of charge to our customers who sign up for a three-year subscription period. We expect to expand our MegaTV service to include IP-TV service as soon as the administrative steps necessary to implement the recently enacted Korean Internet Multimedia Broadcasting Business Act are completed.
Mobile Service
KTF, one of our consolidated subsidiaries in which we owned a 53.0% interest as of December 31, 2007, obtained one of the three licenses to provide nationwide PCS service in June 1996 and began offering PCS service in all major population centers in Korea in October 1997. PCS service is a digital wireless telephone and data transmission system that uses portable handsets with long battery life to communicate via low-power antennae. KTF’s PCS service uses CDMA technology and utilizes 20 MHz of bandwidth in the 1800 MHz frequency. In May 2001, KTF launched its 2.5 generation high speed wireless data services. Subscribers who have EV-DO-compatible handsets are able to enjoy high speed multimedia services including voice, data and video transmission. KTF also expanded its coverage area of HSDPA-based IMT-2000 services to 84 cities in December 2006 and nationwide in March 2007. HSDPA-based IMT-2000 is a third-generation, high-capacity
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wireless Internet and video multimedia communications technology which allows an operator to provide to its subscribers significant more bandwidth capacity. KTF currently offers such services under the brand name “SHOW.”
We entered into an air-time reselling arrangement with KTF in July 1999, under the brand name “Let’s 010,” through which we use our extensive marketing network and strong brand name to attract subscribers who can utilize the mobile networks of KTF. We bill directly to our resale subscribers for their usage of KTF’s mobile networks and collect all fees and charges relating to such usage, including initial subscription fees, monthly access fees and usage charges for outgoing calls, wireless data communications and value-added monthly services. We had approximately 2.9 million resale subscribers who utilized KTF’s network as of December 31, 2007.
Revenues related to mobile service accounted for 31.5% of our operating revenues in 2007. The following table shows selected information concerning the usage of KTF’s network during the periods indicated and the number of KTF’s subscribers as of the end of such periods:
Outgoing Minutes (in thousands)(1)
Average Monthly Outgoing Minutes per Subscriber(1) (2)
Average Monthly Revenue per Subscriber(1)(3)
Number of Subscribers (in thousands)(4)
KTF competes with SK Telecom, a mobile service provider that has a longer operating history than KTF, and LG Telecom, that began its service at around the same time as KTF. As of December 31, 2007, KTF had approximately 13.7 million subscribers (including resale subscribers of KT Corporation), which was second largest among the three mobile service providers. As of December 31, 2007, in terms of number of subscribers announced by the Korea Communications Commission, KTF had a market share of 31.5% of the mobile service market. Among KTF’s 13.7 million subscribers (including resale subscribers of KT Corporation), 3.2 million subscribers signed up for SHOW as of December 31, 2007, representing a market share of 56.2% in terms of number of subscribers using third-generation HSDPA-based IMT-2000 service as estimated by KTF.
Starting in January 2004 for SK Telecom subscribers, July 2004 for KTF subscribers and January 2005 for LG Telecom subscribers, mobile subscribers have been allowed to switch their service provider while retaining the same mobile phone number. In addition, all new subscribers of mobile services and existing subscribers who elect to receive a new mobile number, as well as those switching to a third-generation mobile service, are given the uniform mobile code of “010” as the first three digits of their mobile numbers without regard to the mobile service provider.
KTF markets its services through two channels: (1) exclusive dealers and (2) the marketing network of KT Corporation pursuant to air-time reselling arrangements with us. The primary distribution channels of KTF are its independent exclusive dealers located throughout Korea. As of December 31, 2007, there were 1,774 shops
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managed by independent exclusive dealers of KTF. In addition to assisting new subscribers to activate mobile service and purchase handsets, authorized dealers are connected to the database of KTF and are able to assist customers with account information. Although most of these dealers sell exclusively products and services of KTF, sub-dealers hired by exclusive dealers may sell products and services offered by other mobile telecommunications service providers. Authorized dealers are entitled to a commission for each new subscriber registered, as well as ongoing commissions for the first five years based primarily on the subscriber’s monthly access fee, usage charges and length of subscription. The handsets sold by KTF to the dealers cannot be returned to KTF unless they are defective. If a handset is defective, it may be exchanged for a new one within 14 days from the date of purchase.
KTF does not require its subscribers to make facility deposits or take out facility insurance policies with the Korea Guarantee Insurance Company, unless a subscriber purchased his or her handset through the installment payment plan. In such a situation, facility insurance is required and the subscriber typically pays a one-time insurance fee ranging from Won 10,000 to Won 20,000. KTF conducts the screening process for new subscribers with great caution. A potential subscriber must meet all internal credit criteria before receiving mobile service. The procedure includes checking the history of non-payment and credit information from banks and credit agencies such as the National Information and Credit Evaluation Corporation. Applicants who do not meet the minimum criteria can only subscribe to the mobile service by using a pre-paid card.
Data Communication Service
Our data communication service involves offering exclusive lines that allow point-to-point connection for voice and data traffic between two or more geographically separate points. As of December 31, 2005, 2006 and 2007, we leased 410,073 lines, 400,287 lines and 391,383 lines to domestic businesses, including 230 international leased lines on December 31, 2007. The data communication service accounted for 6.8% of our operating revenues in 2007.
We currently have two telecommunications satellites in operation, Koreasat 3 and Koreasat 5. We launched Koreasat 3 in September 1999. Koreasat 3 carries transponders that are used for direct-to-home satellite broadcasting, telecommunication operations, video distribution and high-speed data communication services for sparsely populated areas. All direct-to-home satellite broadcasting transponders are currently utilized by Korea Digital Satellite Broadcasting Inc. The expected orbital life of Koreasat 3 is approximately 12 years.
We launched Koreasat 5 in August 2006, which replaced Koreasat 2. Koreasat 5 is a telecommunication satellite with 24 transponders that are used for domestic or Asia-Pacific regional satellite telecommunication services. The expected orbital life of Koreasat 5 is approximately 15 years.
Miscellaneous Services
We provide various services that extend beyond telephone services and data communications services, including:
information technology and network services; and
services provided by KTH.
Our miscellaneous services accounted for 5.8% of our operating revenues for 2007.
Information Technology and Network Services. We offer a broad array of integrated information technology and network services to our business customers. Our range of services include consulting, designing, building and maintaining systems and communication networks that satisfy individual needs of our customers in the public and the private sector.
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KTH. KTH is a consolidated subsidiary in which we owned a 65.9% interest as of December 31, 2007, and its services include operating paran.com (formerly hanmir.com) portal site and developing on-line contents including on-line games and video-on-demand. KTH plans to focus its efforts on making paran.com portal site compatible for new media environment and strengthening its competitiveness in providing diverse on-line contents while maintaining its profitability.
Revenues and Rates
The table below shows the percentage of our revenues derived from each category of services for each of the years from 2005 through 2007:
Telephone services:
Local service
Non-refundable service initiation fees
Domestic long-distance service
International long-distance service
Land-to-mobile interconnection
Sub-total
Internet services:
Broadband Internet access service
Miscellaneous Internet-related services(1)
Mobile service
Sales of goods(2)
Other services:
Data communications service
Miscellaneous(3)
Local Telephone Service. Our revenues from local telephone service consist primarily of:
Service initiation fees for new lines;
Monthly basic charges; and
Monthly usage charges based on the number of call pulses.
All calls are currently measured by call pulses. Each pulse is determined by the duration of the call and the time of the day at which the call is made. For instance, during regular service hours, a call pulse is triggered at the beginning of each local telephone call and every three minutes thereafter.
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The rates we charge for local calls are currently subject to approval by the Korea Communications Commission after consultation with the Ministry of Strategy and Finance. The rates are identical for residential and commercial customers. The following table summarizes our local usage rates as of each date on which rates were revised:
Local Usage Charges (per pulse)(1)
Regular service
Public telephone
Before September 1998, in addition to a non-refundable service initiation fee of Won 8,000 and a monthly basic charge, a customer was required to pay at the time of a telephone service initiation a non-interest-bearing refundable deposit. The deposit ranged from Won 122,000 to Won 242,000 depending on the size of the local calling area in which the phone was installed. In September 1998, we implemented an alternative telephone service initiation charge system that allowed our customers to choose between the original service plan and a second service plan. The charges under each plan were as follows:
Rates from September 1998 to April 14, 2001
Original Plan
Second Plan
Between Won 122,000 to Won 242,000, depending on location
Won 8,000
Won 100,000
Between Won 1,500 to Won 2,500, depending on location
Between Won 2,000 to Won 4,000, depending on location
Through April 14, 2001, approximately 7.1 million customers switched to or enrolled under the second plan. To each of our customers switching plans, we refunded between Won 30,000 and Won 150,000 of their telephone service initiation deposits while keeping Won 92,000, reflecting the Won 100,000 non-refundable telephone service initiation fee under the second plan minus the Won 8,000 non-refundable service initiation fee paid under the original plan.
Starting on April 15, 2001, we implemented a new telephone service initiation charge system. The changes are as follows:
Rates Starting April 15, 2001
New Plan
Won 60,000 (including value added tax)
Between Won 3,000 to Won 5,200, depending on location
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All new customers subscribing to our local service on or after April 15, 2001 are enrolled under the new plan. Our existing customers who are enrolled in the original plan may switch to the new plan and receive their service initiation deposit back (less Won 52,000, reflecting the Won 60,000 non-refundable service initiation fee paid under the new plan minus the Won 8,000 non-refundable service initiation fee paid under the original plan). Our existing customers who switched to or enrolled under the second plan cannot switch to the new plan.
Starting in November 2007, we began waiving the Won 60,000 non-refundable service initiation fee for new subscribers who subscribe to our local service through our online application process.
As of December 31, 2007, we had Won 841 billion of refundable service initiation deposits outstanding and 3,816 thousand subscribers who are enrolled under the mandatory deposit plan and eligible to switch to the no deposit plan and receive their service initiation deposit back (less Won 52,000 as described above). The total refund amount (excluding the non-refundable telephone service initiation fees retained by us) to customers choosing to switch to the no deposit plan or terminate the local telephone service in 2007 amounted to Won 66 billion. As of December 31, 2007, we had 16.2 million subscribers who are enrolled under the second plan or the new plan.
Domestic Long-distance Telephone Service. Our revenues from domestic long-distance service consist of charges for calls placed, charged for the duration, time of day and day of the week a call is placed, and the distance covered by the call. Since January 1998, we have been setting our own rates for domestic long-distance service without approval from the Korea Communications Commission.
The following table summarizes our domestic long-distance rates as of each date on which rates were revised. These charges do not reflect discounts applicable to calls made during off-peak hours or holidays.
Domestic Long-Distance Charges
(per three minutes)(1)(2)
Up to 30 km
Up to 100 km
100 km or longer
In recent years, we have begun to offer optional flat rate plans and discount plans in order to mitigate the impact from lower usage charges of local and domestic long-distance calls and stabilize our revenues from fixed-line telephone services. Some of our new plans introduced in recent years include the following:
starting in September 2006, a subscriber who elects to pay the monthly average of the past six months of local and domestic long-distance usage amounts plus an extra monthly change of Won 500 is able to make free local and domestic long-distance calls up to twice the historical minutes. A subscriber who elects to pay an extra monthly charge of Won 1,000 is able to make free calls up to three times the historical minutes. Usage minutes exceeding these free amounts are charged at a 50.0% discount;
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starting in May 2007, a subscriber who is older than 65 years is eligible to receive a 30.0% discount on fixed-line local call charges and a 20.0% discount on land-to-mobile interconnection usage charges for calls made to his or her children;
starting in November 2007, a subscriber who elects to pay an additional monthly flat rate of Won 3,000 is able to make local and long-distance calls at a flat rate of Won 39 per call without regard to length of the call;
starting in November 2007, a subscriber who elects to pay an additional monthly flat rate of Won 2,000 is able to make long-distance calls nationwide at a rate of Won 39 per three minutes; and
starting in November 2007, a subscriber who elects to pay a monthly flat rate of Won 10,000 to Won 35,000 (which includes monthly basic charge) is able to make free local and domestic long-distance calls of between 150 minutes to 660 minutes per month.
International Long-distance Service. Our revenues from international long-distance service consist of:
amounts we bill to customers for outgoing calls made to foreign countries (including customers who make calls to Korea from foreign countries under our home country direct-dial service);
amounts we bill to foreign telecommunications carriers and administrations for connection to the Korean telephone network in respect of incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service); and
other revenues, including revenues from international calls placed from public telephones.
We bill outgoing calls made by customers in Korea (and calls made to Korea from foreign countries under our home country direct-dial service) in accordance with our international long-distance rate schedule for the country called. These rates vary depending on the time of day at which a call is placed. We bill outgoing international calls on the basis of one-second increments. Since January 1998, we have been setting our own rates for international long-distance service without approval from the Korea Communications Commission.
For incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service), we receive settlement payments from the relevant foreign carrier or administration at the applicable settlement rate specified under the agreement with the foreign entity. We have entered into numerous bilateral agreements with foreign carriers and administrations. We negotiate the settlement rates under these agreements with each foreign carrier, subject to Korea Communications Commission approval. It is the practice among international carriers for the carrier in the country in which the call is billed to collect payments due in respect of the use of overseas networks. Although we record the gross amounts due to and from us in our financial statements, we make settlements with most carriers quarterly on a net basis.
Interconnection.We provide other telecommunications service providers, including mobile operators and other fixed-line operators, interconnection to our fixed-line network.
Land-to-mobile Interconnection. For a call initiated by a landline user to a mobile service subscriber, we collect from the landline user the land-to-mobile usage charge and remit to the mobile service provider a land-to-mobile interconnection charge. The Korea Communications Commission periodically issues orders setting the interconnection charge calculation method applicable to interconnections with mobile service providers. Starting in 2004, the Korea Communications Commission determines the land to mobile interconnection charge by calculating the long run incremental cost of mobile service providers, taking into consideration technology development and future expected costs.
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The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes) to mobile operators for landline to mobile calls. We expect the Korea Communications Commission to determine the rates applicable for 2008 in the second half of 2008. Upon its determination, the rate will be applied retroactively starting January 1, 2008.
SK Telecom
KTF
LG Telecom
The following table shows the usage charge per minute collected from a landline user for a call initiated by a landline user to a mobile service subscriber.
Weekday
Weekend
Evening(1)
We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as expense the amount of interconnection charge paid to the mobile service provider.
Land-to-land and Mobile-to-land Interconnection. For a call initiated by a landline subscriber of our competitor to our fixed-line user, the landline service provider collects from its subscriber its normal rate and remits to us a land-to-land interconnection charge. In addition, for a call initiated by a mobile service subscriber to our landline user, the mobile service provider collects from its subscriber its normal rate and remits to us a mobile-to-land interconnection charge.
The following table shows such interconnection charge per minute collected for a call depending on the type of call, as determined by the Korea Communications Commission. We expect the Korea Communications Commission to determine the rates applicable for 2008 in the second half of 2008. Upon its determination, the rate will be applied retroactively starting January 1, 2008.
Local access(1)
Single toll access(2)
Double toll access(3)
Broadband Internet Access Service. We offer broadband Internet access service that primarily uses existing telephone lines to provide both voice and data transmission. We charge customers of broadband Internet service monthly fixed fees. In addition, we charge customers a one time installation fee per site of Won 30,000 and modem rental fee ranging from Won 3,000 to Won 8,000 on a monthly fixed basis. The rates we charge for broadband Internet access service are subject to approval by the Korea Communications Commission.
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The following table summarizes our charges for various broadband Internet services as of December 31, 2007:
Megapass Special
Megapass Premium
Megapass Lite
Megapass Ntopia
WiBro Slim(2)(6)
WiBro Basic(3)(6)
WiBro Special(4)(6)
WiBro Premium(5)(6)
Mobile Service and Mobile Handset Sales
Our operating revenues from mobile resale service are generated through our air-time reselling arrangement with KTF. Our mobile handset sales are also included in our consolidated operating revenues as sales of goods. In addition, KTF, one of our consolidated subsidiaries in which we owned a 53.0% interest as of December 31, 2007, derive revenues from mobile service principally from:
initial subscription fees;
monthly access fees;
usage charges for outgoing calls;
usage charges for wireless data transmission; and
value-added monthly service fees.
KTF may set these fees and charges, including any promotional rates, without approval from the Korea Communications Commission. Like all Korean mobile service providers, KTF does not charge its customers for incoming calls. Instead, KTF receives interconnection charges from us for calls initiated from our fixed-line network to its mobile network (which are eliminated in consolidation) and interconnection charges from other mobile and fixed-line service operators for calls initiated by their subscribers.
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KTF offers various rate plans, including those that offer a specified number of free airtime minutes per month in return for a higher monthly access fee and those that are geared toward business customers. KTF charges an initial subscription fee of Won 30,000 to new subscribers. Under the standard rate plan for PCS service, KTF charges a monthly access fee of Won 13,000 and usage charges of Won 18 per ten seconds, and the subscriber is provided with 10 free minutes. Under the standard rate plan for HSDPA-based SHOW service, KTF charges a monthly access fee of Won 12,000 and usage charges of Won 18 per ten seconds, but no free minutes are offered.
In order to promote its mobile services, KTF acquires mobile handsets in bulk for resale to its subscribers. Until March 26, 2006, KTF and its competitors were restricted from selling handsets to subscribers at prices below the prices at which they purchased the handsets from manufacturers, except in cases of certain PDA phones and W-CDMA phones. In recent years, mobile service providers began granting subsidies to subscribers who purchase new handsets. KTF currently provides subsidies between Won 80,000 to Won 360,000 to subscribers for purchase of mobile handsets based on a subscription period between 12 to 24 months.
We charge customers of domestic leased-lines on a monthly fixed-cost basis based on the distance of the leased line, the capacity of the line measured in bits per second (“bps”), the type of line provided and whether the service site is local or long-distance. In addition, we charge customers a one-time installation fee per site ranging from Won 56,000 to Won 1,940,000 depending on the capacity of the line.
Competition
The telecommunications sector in Korea is rapidly evolving. We face increasing competition from new entrants to the telecommunications market, and we expect the number and the identity of service providers in the market to continue to change. Future business combinations and alliances in the telecommunications industry may create significant new competitors. In particular, the Ministry of Information and Communication conditionally approved SK Telecom’s acquisition of a controlling minority stake of approximately 39% of the issued and outstanding share capital of Hanarotelecom Incorporated. The acquisition would enable SK Telecom to provide fixed-line telecommunications, broadband Internet access and IP-TV services together with its mobile telecommunications services.
Under the Telecommunications Basic Law and the Telecommunications Business Law, telecommunications service providers in Korea are currently classified into network service providers, value-added service providers and specific service providers. See “—Regulation.”
Network Service Providers
All network service providers in Korea are permitted to set the rates for international or domestic long-distance services on their own without Korea Communications Commission approval. Many of our competitors have set their rates lower than ours. Currently, we can compete freely with other providers on the basis of rates in all services except for rates we charge for local calls and broadband Internet access service, which require advance approval from the Korea Communications Commission. In all service areas, we compete by endeavoring to provide superior customer service and superior technical quality, taking advantage of our broad customer base and our ability to provide various telecommunication services.
We and SK Telecom have been designated as market-dominating business entities in the respective markets under the Telecommunications Business Act. Under this Act, a market-dominating business entity may not engage in any act of abuse, such as unreasonably interfering with business activities of other business entities, hindering unfairly the entry of newcomers or substantially restricting competition to the detriment of the interests of consumers. The Korea Communications Commission has also issued guidelines on fair competition of the telecommunications companies. If any telecommunications service provider breaches the guidelines, the Korea Communications Commission may take necessary corrective measures against it after a hearing at which the service provider may defend its action.
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Local Telephone Service. We compete with Hanarotelecom and LG DACOM in the local telephone service business. Hanarotelecom began providing local telephone service in 1999, followed by LG DACOM in 2004. In addition, the services provided by mobile service providers have had a material adverse effect on KT Corporation in terms of our revenues from fixed-line telephone services. We expect this trend to continue.
The following table shows the market share in the local telephone service market in terms of number of subscribers estimated by us as of the dates indicated:
December 31, 2005
December 31, 2006
December 31, 2007
Although the local usage charge of our competitors and us is the same at Won 39 per pulse (generally three minutes), our competitors’ non-refundable telephone service initiation charge and basic monthly charge are lower than ours. Our customers pay a non-refundable telephone service initiation charge of Won 60,000 and a basic monthly charge of up to Won 5,200 depending on location. On the other hand, customers of our competitors pay a non-refundable telephone service initiation charge of Won 30,000 and a basic monthly charge of up to Won 5,200 depending on location.
Domestic Long-distance Telephone Service. We compete with LG DACOM, Onse, Hanarotelecom and SK Telink in the domestic long-distance market. LG DACOM began offering domestic long-distance service in 1996, followed by Onse in 1999 and Hanarotelecom and SK Telink in 2004. The following table shows the market shares in the domestic long-distance market in terms of number of subscribers estimated by us for the years indicated:
Our competitors and we charge Won 39 per three minutes for domestic long-distance calls up to 30 kilometers. For domestic long-distance calls greater than 30 kilometers, our competitors typically charge between 3% to 5% less than us. The following table is a comparison of our standard long-distance usage charges per three minutes with the standard rates of our competitors as of December 31, 2007:
30 kilometers or longer
International Long-Distance Telephone Service. Four companies, LG DACOM, Onse, Hanarotelecom and SK Telink, directly compete with us in the international long-distance market. LG DACOM began offering international long-distance service in 1991, followed by Onse in 1997 and Hanarotelecom in 2004. SK Telink, which only provides Internet phone service, entered the international long-distance market in 2003 and offers its services at rates lower than those of network-based international long-distance telephone services. The entry of Internet phone service providers and other telecommunications service providers, such as voice resellers, that can
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offer telecommunications services at rates lower than ours has increased competition in the international long-distance market and adversely affected our revenues and profitability from international long-distance services. See “— Specific Service Providers.”
Our competitors generally charge less than us for international long-distance calls. The following table is a comparison of our standard long-distance usage charges per one minute with the standard rates of our competitors as of December 31, 2007:
United States
Japan
China
Australia
Great Britain
Germany
Broadband Internet Access Service. The Korean broadband Internet access market has experienced significant growth since Korea Thrunet first introduced its HFC-based service in 1998. Hanarotelecom entered the broadband market in 1999 offering both HFC and ADSL services, and we entered the market with our ADSL services in 1999, followed by Dreamline, Onse, LG Powercom and LG DACOM. In addition, the entry of cable television providers that offer HFC-based broadband Internet access services at rates lower than ours has increased competition in the broadband Internet access market. We expect industry consolidation among our competitors in the near future, and smaller competitors in the broadband market today may become larger competitors.
The following table shows the market share in the broadband Internet access market in terms of number of subscribers estimated by us as of the dates indicated:
Our competitors generally charge less than us for broadband Internet access service. The following table is a comparison of fees for our Megapass Lite service with three year mandatory subscription period with fees of our competitors for comparable services as of December 31, 2007:
Monthly subscription fee
Monthly modem rental fee
Additional installation fee upon moving
Mobile Service. Competition in the mobile telecommunications industry in Korea is intense among SK Telecom, KTF and LG Telecom. Such competition intensified in recent years due to the implementation of mobile number portability, which enables mobile subscribers to switch their service provider while retaining the same mobile phone number, as well as payments of handset subsidies to purchasers of new handsets.
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The following table shows the market share in the mobile telecommunications market in terms of number of subscribers announced by the Korea Communications Commission as of the dates indicated:
The following table shows the market share of third-generation HSDPA-based IMT-2000 service in terms of number of subscribers announced by the Korea Communications Commission as of December 31, 2007:
KTF offers various rate plans, including those that offer a specified number of free airtime minutes per month in return for a higher monthly access fee and those that are geared toward business customers. Our competitors also offer similar plans at competitive rates.
Data Communication Service. We had a monopoly in domestic data communication service until 1994, when LG DACOM was authorized to provide the leased-line service.
Value-Added Service Providers
Value-added service providers may commence operations following filing of a report to the Korea Communications Commission. The scope of business of a value-added service provider includes specific value-added telecommunications activities (other than services reserved for network service providers), such as data communications utilizing telecommunications facilities leased from network service providers.
Specific Service Providers
Specific service providers, such as Internet phone service providers and voice resellers, started operations in Korea in 1998. We began providing Internet phone service for international long-distance calls in May 1998. Our Internet phone service also competes with international long-distance services provided by voice resellers who have also seen sharp increases in demand for their services.
Foreign Competition
Under the multilateral agreement on basic telecommunications services among the members of the WTO, effective November 27, 1997, the Government of Korea agreed to gradually reduce the restrictions on foreign and individual shareholdings in KT Corporation and other network service providers in Korea. Currently, the Telecommunications Business Law limits aggregate ownership of shares with voting rights (including equivalent securities with voting rights, such as depository certificates and certain other equity interests, and all references to “shares with voting rights” include such equivalent securities) in network service providers (including us) by foreign shareholders to 49.0% of issued shares with voting rights. In addition, the Telecommunications Business Law and the Foreign Investment Promotion Act prohibit a foreign shareholder from being our largest shareholder if such shareholder holds 5.0% or more of our shares. See “—Regulation—Foreign Investment.” While the WTO Agreement enables us to seek foreign investors and strategic partners and to more easily take advantage of opportunities for investments in overseas telecommunications projects, it may also benefit our competitors and further intensify competition in the domestic market.
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Regulation
Under the Telecommunications Basic Law and the Telecommunications Business Law, telecommunications service providers are currently classified into three categories:
network service providers, such as us, which typically provide telecommunications services with their own telecommunications networks and related facilities. Their services may include local, domestic long-distance and international long-distance telephone services, mobile communications service, paging service and trunked radio system service;
value-added service providers, which provide telecommunications services other than those services specified for network service providers, such as data communications using telecommunications facilities leased from network service providers; and
specific service providers, which may occupy a middle ground between network service providers and value-added service providers and are broadly defined by law as telecommunications service providers that provide network services using the telecommunications network facilities or services of network service providers.
Under the Telecommunications Basic Law and the Telecommunications Business Law, the Korea Communications Commission has comprehensive regulatory authority over the telecommunications industry and all network service providers. Under the new administration of President Lee Myung Bak, many functions previously undertaken by the Ministry of Information and Communication were transferred to the Korea Communications Commission, including approving rates of dominant service providers and regulating general terms of telecommunications services provided by network service providers. The Korea Communications Commission is established under the direct jurisdiction of the President and is comprised of five standing commissioners. Commissioners of the Korea Communications Commission are appointed by the President, and the appointment of the Chairperson must be approved at a confirmation hearing at the National Assembly. The Korea Communications Commission’s policy is to promote competition in the Korean telecommunications markets through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors. A network service provider must be licensed by the Korea Communications Commission. Our license as a network service provider permits us to engage in a wide range of telecommunications services.
Under the Use and Protection of Credit Information Act, telecommunications service providers are also required to disclose personal credit information of their customers only for the purpose of validating and maintaining telecommunications service agreements. Korean telecommunications service providers may use their customers’ credit information only to the extent allowed by the Use and Protection of Credit Information Act, which has gained greater importance in recent years due to the occurrence of personal information leakage incidents.
The Ministry of Information and Communication, prior to being replaced by the Korea Communications Commission, announced a “road map” in March 2007 highlighting upcoming revisions in regulations to promote deregulation of the telecommunications industry. The road map included allowing telecommunications service providers to bundle their services, such as broadband Internet access service, mobile telephone service and fixed-line telephone service, at a discounted rate starting in July 2007, provided that we and SK Telecom, which are designated as market-dominating business entities under the Telecommunications Business Law, allow other competitors to employ the services provided by us and SK Telecom, respectively, so that the competitors can provide similar discounted package services. The road map included plans to amend the regulations and provisions under the Telecommunications Business Law to permit licensed transmission service providers to offer local, domestic long-distance and international long-distance telephone services, as well as broadband Internet access and Internet phone services, without the need to obtain further approval from the Ministry of Information and Communication. Under the new administration of President Lee Myung Bak, the Korea
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Communications Commission is reconsidering many aspects of the roadmap as well as other regulations of the telecommunications industry, and there can be no assurance that the roadmap will continue to be implemented as proposed by the Ministry of Information and Communication under the previous administration.
Rates
Under current regulations implementing the Telecommunications Business Act, a network service provider may set its rates at its discretion, although it must report to the Korea Communications Commission the rates and the general terms and conditions for each type of network service provided by it. There is, however, one exception to this general rule: if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the Korea Communications Commission, it must obtain prior approval from the Korea Communications Commission for the rates and the general terms for that service. Each year the Korea Communications Commission designates the service providers and the types of services for which the rates and the general terms must be approved by the Korea Communications Commission. In 2007, the Korea Communications Commission designated us for local telephone service and broadband Internet access service and SK Telecom for cellular service. The Korea Communications Commission, in consultation with the Ministry of Strategy and Finance, is required to approve the rates proposed by a network service provider if (1) the proposed rates are appropriate, fair and reasonable and (2) the calculation method for the rates are appropriate and transparent.
Other Activities
A network service provider, such as us, must obtain the permission of the Korea Communications Commission in order to:
engage in certain businesses specified in the Presidential Decree under the Telecommunications Business Act, such as telecommunications equipment manufacturing business and telecommunications network construction business;
change the conditions for its licenses;
transfer, terminate, suspend or spin off all or a part of the business for which it is licensed;
acquire all or a part of the business of another network service provider; or
enter into a merger with another network service provider.
A telephone service provider may provide some network services using the equipment it currently has by submitting a report to the Korea Communications Commission. The Korea Communications Commission can revoke our licenses or order the suspension of any of our businesses if we do not comply with the regulations of the Korea Communications Commission under the Telecommunications Business Law.
The responsibilities of the Korea Communications Commission also include:
formulating the basic plan for the telecommunications industry; and
preparing periodic reports to the National Assembly of Korea regarding developments in the telecommunications industry.
The responsibilities of the Ministry of Knowledge Economy include:
drafting and implementing plans for developing telecommunications technology;
fostering and providing guidance to institutions and entities that conduct research relating to telecommunications; and
recommending to network service providers that they invest in research and development or that they contribute to telecommunications research institutes in Korea.
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In addition, since January 2000, all network service providers (other than regional paging service providers) are obligated to contribute toward the supply of “universal” telecommunications services in Korea. Telecommunications service providers designated as “universal service providers” by the Korea Communications Commission are required to provide universal telecommunications services such as local services, local public telephone services, discount services for persons with disabilities and for certain low-income persons, telecommunications services for remote islands and wireless communication services for ships. We have been designated as a universal service provider. The costs and losses recognized by universal service providers in connection with providing these universal telecommunications services will be shared on an annual basis by all network service providers (other than regional paging service providers), including us, on a pro rata basis based on their respective net annual revenue calculated pursuant to a formula set by the Korea Communications Commission.
Due to the amendment of the Telecommunications Business Law, effective April 9, 2001, a network service provider must permit other network service providers to co-use wirelines connecting the switching equipment to end-users, upon the request of such other network service providers. In addition, a network service provider may permit other network service providers to co-use its wireless communication systems upon the request of any of such other network service providers. The compensation method for the co-use must be determined by the Korea Communications Commission and be settled, by fair and proper methods.
In addition, starting April 2002, we are required to lease to other companies our fixed-lines that connect subscribers to our network. This system, which is called local loop unbundling, is intended to prevent excessive investment in local loops. This system requires us to lease the portion of our copper lines that represent our excess capacity to other companies upon their request at rates that are determined by the Korea Communications Commission based on our cost, and taking into consideration an appropriate rate of return, to enable them to provide voice and broadband services. Revenues from local loop unbundling are recognized as revenues from miscellaneous services.
Foreign Investment
The Telecommunications Business Act restricts the ownership and control of network service providers by foreign shareholders. Foreigners, foreign governments and “foreign invested companies” may not own more than 49.0% of the issued shares with voting rights of a network service provider, including us, and a foreign shareholder may not become our largest shareholder if such shareholder holds 5.0% or more of our shares. For purposes of the Telecommunications Business Act, the term “foreign invested company” means a company in which foreigners and foreign governments hold 15.0% or more shares with voting rights in the aggregate and a foreigner or a foreign government is the largest shareholder, provided, however, that such company will not be counted as a foreign shareholder for the purposes of the above-referenced 49.0% limit if it holds less than 1.0% of our total issued and outstanding shares with voting rights. As of December 31, 2007, 45.5% of our common shares were owned by foreign investors. In the event that a network service provider violates the shareholding restrictions, its foreign shareholders cannot exercise voting rights for their shares in excess of such limitation, and the Korea Communications Commission may require corrective measures be taken to comply with the ownership restrictions. There is no restriction on foreign ownership for specific service providers and value-added service providers.
Individual Shareholding Limit
The Privatization Law ceased to apply to us in August 2002, and ceiling on individual shareholding specified in the articles of incorporation has been eliminated. Under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 5.0% or more of our total shares and was our largest shareholder on or prior to May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. In addition, under the Telecommunications Business Act, the Korea Communications Commission may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. In addition, the Foreign Investment Promotion Act
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prohibits any foreign shareholder from being our largest shareholder, if such shareholder owns 5.0% or more of our shares with voting rights. In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, the Telecommunications Business Act restricts such foreign shareholder from exercising his or her voting rights with respect to common shares exceeding such threshold. The Korea Communications Commission may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less.
Customers and Customer Billing
We typically charge residential subscribers and business subscribers similar rates for services provided. On a case-by-case basis, we also provide discount rates for some of our high-volume business subscribers. We bill all of our customers on a monthly basis. Our customers may make payment at either payment points such as local post offices, banks or our service offices, through a direct-debit service that automatically deducts the monthly payment from a subscriber’s designated bank account, or through a direct-charge service that automatically charges the monthly payment to a subscriber’s designated credit card account. Approximately 73% of our subscribers pay through the direct-debit service. Accounts of subscribers who fail to pay our invoice are transferred to a collection agency, which sends out a notice of payment. If such charges are not paid after notice, we cease to provide outgoing service to such subscribers after a period of time determined by the type of subscribed service. If charges are still not paid two to three months after outgoing service is cut off, we cease all services to such subscribers. After service is ceased, the overdue charges that are not collected by the collection agency are written off.
Insurance
We carry insurance against loss or damage to all significant buildings and automobiles. Except for our insurance coverage of our satellites and Internet data centers, we do not carry insurance covering losses to outside plant or to equipment because we believe the cost of such insurance is excessive and the risk of material loss or damage is insignificant. We do not have any provisions or reserves against such loss or damage. We do not carry any business interruption insurance.
We provide co-location and a variety of value-added services including server-hosting services to a number of corporations whose business largely depends on critical data operated on our servers or on their servers located at our data centers. Any disruptions, interruptions, physical or electronic data loss, delays or slow down in communication connections could expose us to potential liabilities for losses relating to the disrupted businesses of our customers relying on our services.
Item 4.C. Organizational Structure
These matters are discussed under Item 4.B. where relevant.
Item 4.D.Property, Plants and Equipment
Our principal fixed asset is our integrated telecommunications network that consists of exchanges and transmission equipment, access lines, backbone network, and mobile network of KTF. In addition, we own buildings and real estate throughout Korea.
Our fixed-line equipment vendors and mobile equipment suppliers include well-known international and local suppliers such as Samsung Electronics, LG Electronics, Cisco Systems and Alcatel-Lucent.
Exchanges
Exchanges include local exchanges and “toll” exchanges that connect local exchanges to long-distance transmission facilities. We had 26.6 million lines connected to local exchanges and 2.1 million lines connected to toll exchanges as of December 31, 2007.
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All of our exchanges are fully automatic. We completed replacement of all electromechanical analog exchanges with digital exchanges in June 2003 in order to provide higher speed and larger volume services. Starting in 2006, we also began conversion of our exchanges to be compatible to Internet protocol platform in preparation of building our next generation broadband convergence network by 2015. As of December 31, 2007, approximately 13% of our lines connected to toll exchanges are compatible to Internet protocol platform.
Internet Backbone
Our Internet backbone network, called KORNET, has the capacity to handle an aggregate traffic of our broadband Internet access subscribers, Internet data centers and Internet exchange system at any given moment of up to 2.2 Tbps as of December 31, 2007. We have set up contingent plans to prepare against various incidents that could affect reliable Internet access service. Starting in 2005, we have also begun deploying our Internet protocol premium network that enables us to more reliably support Mega TV, WiBro and other Internet protocol services. As of December 31, 2007, our Internet protocol premium network had 130,000 lines installed to provide voice over Internet protocol services and a total capacity to handle up to 332.6 Gbps of video-on-demand services. We plan to continue to expand our Internet protocol premium network in 2008.
Access Lines
As of December 31, 2007, we had 11.2 million access lines installed, which allow us to reach virtually all homes and businesses in Korea. As part of our broadband deployment strategy, we have upgraded many of our access lines by equipping them with broadband capability using xDSL and FTTH technology. As of December 31, 2007, we had approximately 6.3 million broadband lines with speed of at least 50 Mbps that enable us to deliver broadband Internet access and multimedia content to our customers.
Transmission Network
Our domestic fiber optic cable network consisted of 267,421 kilometers of fiber optic cables as of December 31, 2007, of which 74,371 kilometers of fiber optic cables are used to connect our backbone network and 193,050 kilometers are used to connect the backbone network to our subscribers. Our backbone network utilizes dense wavelength division multiplexing technology for connecting major cities as well as optical add-drop multiplexer technology for connecting neighboring cities. Dense wavelength division multiplexing technology improves bandwidth efficiency by enabling transmission of data from multiple signals across one fiber strand in a cable by carrying each signal on a separate wavelength. We plan to simplify and enhance our backbone network connecting six major cities in Korea by implementing an optical cross-connector (OXO) architecture by the end of 2008, as well as prepare to build our next generation broadband convergence network through installation of network equipment utilizing optical reconfigurable add-drop multiplexer technology and multi-service provisioning platform.
Our extensive domestic long-distance network is supplemented by our fully digital domestic microwave network, which consists of 56 relay sites.
International Network
Our international network infrastructure consists of both submarine cables and satellite transmission systems, which link our domestic network directly to 247 telecommunications service providers in various international destinations.
International calls are routed between Korea and international destinations through our three international switching centers located in Seoul, Daejeon and Busan. Each center had four international gateway switches with a combined call capacity of approximately 96 million calls per month as of December 31, 2007.
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Telecommunications Satellites
In order to provide broadcasting, video distribution and broadband data services in select areas, we operate two telecommunications satellites, Koreasat 3 and 5, launched in 1999 and 2006, respectively. These two satellites are expected to reach the end of their normal operational lives in 2011 and 2021, respectively. See “Item 4.B. Business Overview—Our Services—Satellite Services.”
Mobile Networks
Mobile network architecture of KTF includes the following components:
cell sites, which are physical locations equipped with base transceiver stations consisting of transmitters, receivers and other equipment used to communicate through radio channels with subscribers’ mobile telephone handsets within the range of a cell;
base station controllers, which connect to and control, the base transceiver stations;
mobile switching centers, which in turn control the base station controllers and the routing of telephone calls; and
transmission lines, which connect the mobile switching centers, base station controllers, base transceiver stations and the public switched telephone network.
The following table lists selected information regarding mobile networks of KTF as of December 31, 2007:
Mobile switching centers
Base station controllers
Base transceiver stations
Indoor and outdoor repeaters
KTF has 20 MHz of bandwidth in the 1,800 MHz spectrum to provide PCS services based on CDMA wireless network standards and another 20 MHz of bandwidth in the 2,000 MHz spectrum to provide IMT-2000 services based on W-CDMA wireless network standards. KTF has also installed an intelligent network on our mobile network infrastructure to provide a wide range of advanced call features and value-added services.
International Submarine Cable Networks
International traffic is handled by telecommunications satellites and submarine cables. Because of the high cost of laying a submarine cable, the usual practice is for multiple carriers to jointly commission a new cable and share the costs and the capacity. We own interests in several international fiber optic submarine cable networks, including:
a 20.9% interest in the 1,762-kilometer R-J-K fiber optic submarine cable network connecting Korea, Japan and Russia, activated since January 1995;
a 2.3% interest in the 12,083-kilometer Asia Pacific Cable Network connecting Korea, Japan and Hong Kong with six Southeast Asian countries and Australia, activated since January 1997;
a 1.4% interest in the 29,000-kilometer FLAG Europe-Asia network connecting Korea, Southeast Asia, the Middle East and Europe, activated since April 1997;
a 1.9% interest in the 39,000-kilometer Southeast Asia-Middle East-Western Europe 3 Cable Network linking 34 countries, activated since December 1999;
a 6.7% interest in the 30,444-kilometer China-U.S. Cable Network linking Korea, China, Japan, Taiwan and the United States, activated since January 2000;
a 2.5% interest in the 19,000-kilometer Asia Pacific Cable Network 2 connecting Korea, China, Japan, Taiwan, Hong Kong, Philippines, Singapore and Malaysia, activated since December 2001; and
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a 20.0% interest in the 500-kilometer Korea-Japan Cable Network linking Korea and Japan, activated since March 2002.
We have also invested in 15 other international fiber optic submarine cables around the world.
Item 4A. Unresolved Staff Comments
We do not have any unresolved comments from the Securities and Exchange Commission staff regarding our periodic reports under the Exchange Act of 1934.
Item 5. Operating and Financial Review and Prospects
Item 5.A. Operating Results
Overview
We are an integrated provider of telecommunications services. Our principal services include fixed-line telephone services, Internet services including broadband Internet access service, mobile service through our consolidated subsidiary and data communication service. The principal factors affecting our revenues from these services have been our rates for, and the volume of usage of, these services, as well as the number of subscribers. For information on rates we charge for telephone services, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates—Telephone Services.”
Historically, our revenues were derived principally from telephone services which consist of local, domestic long-distance and international long-distance services and land-to-mobile interconnection service. In recent years we have been deriving an increasing portion of our operating revenues from Internet services and mobile service.
The following table shows, for each of the years in the three-year period ended December 31, 2007, our operating revenues, expenses and operating income determined in accordance with Korean GAAP, and each amount as a percentage of consolidated operating revenues.
Operating revenues:
Non-refundable service installation fees
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Sale of goods(2)
Others:
Data communication service(3)
Miscellaneous(4)
Total operating revenues
Operating expenses:
Salaries and related costs
Depreciation and amortization
Other operating and maintenance(5)
Total operating expenses
We have two reportable operating segments—a wireline communications segment and a mobile services segment. Wireline communications include all services provided to fixed line customers, including Internet access services, data communication services, leased line services and telephone services. Mobile services include both PCS service and IMT-2000 service. All financial information included in the wireline communications segment discussion is based on non-consolidated financial statements of KT Corporation prior to elimination of intercompany transactions. All financial information included in the mobile service segment discussion is based on non-consolidated financial statements of KTF prior to elimination of intercompany transactions. The operations of all other entities which fall below the reporting thresholds are included in the “Miscellaneous” segment, and include entities providing, among others, submarine cable construction and group telephone management.
One of the major factors contributing to our historical performance was the growth of the Korean economy, and our future performance will depend at least in part on Korea’s general economic growth and prospects. For a description of recent developments that have had and may continue to have an adverse effect on our results of operations and financial condition, see “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.” A number of other developments have had or are expected to have a material impact on our results of operations, financial condition and capital expenditures. These developments include:
developing and implementing IMT-2000 services;
changes in the rate structure for local, domestic long-distance and international long-distance telephone services;
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fines imposed by the Korea Fair Trade Commission;
developing and launching WiBro service; and
deployment of FTTH.
As a result of these factors, our financial results in the past may not be indicative of future results or trends in those results.
Developing and Implementing IMT-2000 Services
IMT-2000 presents risks and challenges to our business, any or all of which if realized or not addressed may have a material adverse effect on our financial condition and results of operations. We expect KTF to leverage its existing mobile network and 2.5-generation technology to minimize its capital expenditures and other costs related to developing HSDPA-based IMT-2000 services. However, we believe KTF will still require substantial amounts of capital expenditures to maintain and enhance its HSDPA-based IMT-2000 network. KTF expanded its coverage area of HSDPA-based IMT-2000 services to 84 cities in December 2006 and began offering nationwide services in March 2007 under the brandname “SHOW.”
Changes in the Rate Structure for Our Services
Periodically, we change our rate structure for our services. In order to mitigate the impact from lower usage charges of local and domestic long-distance calls, we have increased our basic monthly charges and began offering optional flat rate plans for our fixed-line subscribers. Such adjustments in the rate structure have had a positive effect on our financial condition by increasing the portion of fixed income and stabilizing our cash flow. In addition, because the growing use of mobile telecommunications services has decreased the usage of our fixed-line telephone services, we believe we are able to maximize our revenues from fixed-line telephone services by adjusting the rate structure so as to increase our basic monthly charges. Starting in the second half of 2007, we also began bundling our services, such as our Megapass broadband Internet access service with WiBro and Mega TV services, at a discount in order to attract additional subscribers to our new services. For a discussion of adjustments in our rate structure, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates—Telephone Services.”
Fines for Unfair Collaborative Practices Imposed by the Korea Fair Trade Commission
In July 2004, the Korea Fair Trade Commission began an antitrust investigation into alleged unfair collaborative practices of us, Hanarotelecom, LG DACOM and Onse in local, domestic long-distance and international long-distance telephone service markets, as well as in broadband Internet access and Internet leased line service markets. On May 25, 2005, the Korea Fair Trade Commission imposed a fine of Won 116 billion on us, claiming that we engaged in unfair collaborative practices in local telephone and Internet leased line service markets. On September 14, 2005, the Korea Fair Trade Commission imposed an additional fine of Won 24 billion on us for our alleged unfair collaborative practices in domestic and international long-distance telephone service markets. We filed for judicial review of administrative actions related to local, domestic long-distance and international long-distance telephone service markets, and the Seoul High Court rendered its decision on
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August 22, 2007 in which it overturned the Korea Fair Trade Commission’s order to pay Won 113 billion in fines on the basis that the Korea Fair Trade Commission’s calculation of fines did not consider (i) the correct period of our engagement in unfair collaborative practices, (ii) the extent of benefits obtained by us from engaging in such practices and (iii) the fact that we were following administrative guidelines issued by the Ministry of Information and Communication. Both the Korea Fair Trade Commission and we have appealed the Seoul High Court’s decision to the Supreme Court of Korea, and the case is currently pending. In response to the initial ruling by the Korea Fair Trade Commission, we recorded Won 140 billion as taxes and dues under operating expenses in 2005 and paid such amount in 2006. We cannot provide any assurance that the ultimate outcome of the lawsuit or related future actions will be favorable to us or that they will not have a material adverse effect on our financial condition or results of operations. See “Item 8. Financial Information—Item 8.A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
Developing and Launching WiBro Service
In March 2005, we acquired a license to provide wireless broadband Internet access service for Won 126 billion. We conducted trial service of WiBro service in parts of Seoul and Gyunggi Province starting in April 2006 and commercially launched our service in these areas in June 2006. We expanded the service to all of metropolitan Seoul and select universities in Gyunggi Province in April 2007, and we plan to expand the service to the neighboring cities of Seoul by October 2008. We believe that substantial additional amounts of capital expenditures and research and development will be required to complete buildout of our WiBro service network. We spent approximately Won 111 billion in capital expenditures in 2007 and plan to spend approximately Won 120 billion in capital expenditures in 2008 to expand our WiBro service network, which we may adjust subject to market demand.
Upgrading of Broadband Network to FTTH
FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such as IP-TV service and delivery of other digital media content. We are currently upgrading our broadband network to enable FTTH connection, which enhances downstream speed up to 100 Mbps and connection quality. We are planning to spend approximately Won 1.2 trillion in capital expenditures by 2010 to upgrade our broadband network to FTTH, which we may adjust after periodic assessments.
Critical Accounting Policies
The following discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with Korean GAAP. Korean GAAP varies in certain significant respects from accounting principles generally accepted in the United States of America. We have summarized these differences and their effect on our stockholders’ equity as of December 31, 2006 and 2007 and the results of our operations for each of the years in the three-year period ended December 31, 2007, in Note 36 to the Consolidated Financial Statements.
The preparation of financial statements in conformity with Korean GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the years reported. We based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ from those estimates under different assumptions and conditions.
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The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. To aid in that understanding, our management has identified “critical accounting estimates.” These estimates have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.
These critical accounting estimates include:
allowances for doubtful accounts;
useful lives of property, plant and equipment;
impairment of long-lived assets, including the IMT-2000 frequency usage right;
impairment of investment securities; and
income taxes
Allowances for doubtful accounts
Allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing notes and accounts receivable. We determine the allowance for doubtful notes and accounts receivable based on an analysis of portfolio quality and historical write-off experience. Account balances are charged off against the allowance when all means of collection have been exhausted and the potential for recovery is considered remote. Our past experience shows that the possibility of collection is remote after three years of collection effort.
Changes in the allowances for doubtful accounts for each of the years in the three-year period ended December 31, 2007 are summarized as follows:
Balance at beginning of year
Provision
Write-offs
Balance at end of year
If economic or specific industry trends change, we would adjust our allowances for doubtful accounts by recording additional expense or benefit. Our study shows that a 5.0% decrease or increase in the historical write-off experience would increase or decrease the provision for doubtful accounts by approximately Won 41 billion as of December 31, 2007.
Useful lives of property, plant and equipment
Property, plant and equipment are depreciated based on the useful lives disclosed in Note 2(h) to the Consolidated Financial Statements. Generally, the useful lives are estimated at the time the asset is acquired and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes. In certain cases and as permitted under Korean GAAP, those useful lives used for accounting purpose are different from the estimated economic lives of the related asset. In addition, the estimated lives of certain other assets, including underground access to cable tunnels, and concrete and steel telephone poles are based on rates established by a ruling by the Korean National Tax Service (which is also applicable under Korean GAAP). If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation expense in future periods. For example, effective January 1, 2005, we reduced the useful
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life of modems from six years to three years as a result of rapid technology development. Such adjustment increased our depreciation expense by approximately Won 59 billion in 2005, Won 57 billion in 2006 and Won 35 billion in 2007, as compared to amount which would have been reported using the previous useful life. A decrease of remaining estimated useful life by one year of our property, plant and equipment would result in an increase of depreciation expense of approximately Won 239 billion in 2007.
Impairment of long-lived assets including the IMT-2000 frequency usage right
Long-lived assets generally consist of property, plant and equipment and intangible assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, we evaluate our long-lived assets for impairment each year as part of our annual forecasting process. An impairment loss would be considered when estimated undiscounted future net cash flow expected to result from the use of the asset and its eventual disposition are less than its carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Our intangible assets include the IMT-2000 frequency usage right, which has a contractual life of 13 years and is amortized from the date commercial service is initiated through the end of its contractual life, which is November 2016. We started to amortize this frequency usage right in December 2003. Because IMT-2000 presents risks and challenges to our business, any or all of which, if realized or not properly addressed, may have a material adverse effect on our financial condition and results of operations, we review the IMT-2000 frequency usage right for impairment on an annual basis. In connection with our review, we utilize the estimated long-term revenue and cash flow forecasts developed as part of our planning process. The results of our review using the testing method described above did not indicate any need to impair the IMT-2000 frequency usage right in 2007. The use of different assumptions within our cash flow model could result in different amounts for the IMT-2000 frequency usage right.
Impairment of investment securities
For investments in companies, whether or not publicly held, that are not controlled, but under our significant influence, we utilize the equity method of accounting. Under the equity method of accounting, our initial investment is recorded at cost and is subsequently increased to reflect our share of the investee income and reduced to reflect our share of the investee losses or dividends received. Any excess in our acquisition cost over our share of the investee’s identifiable net assets is generally recorded as investor-level goodwill or other intangibles and amortized by the straight-line method over the estimated useful life. The amortization of investor-level goodwill or other intangibles is recorded against the equity income (losses) of affiliates.
Under U.S. GAAP, when events or circumstances indicate that the carrying amount of an equity method investment may not be recoverable, we review the investment for other-than-temporary impairment. As part of this review, the investee’s operating results, net asset value and future performance forecasts as well as general market conditions are taken into consideration. If we believe, based on this review, that the market value of our investment may realistically be expected to recover, the loss will continue to be classified as temporary. If economic or specific industry trends worsen beyond our estimates, valuation losses previously determined to be recoverable may need to be charged as a valuation loss in equity income (losses) of affiliates.
Significant management judgment is involved in the evaluation of declines in value of individual investments. The estimates and assumptions used by management to evaluate declines in value can be impacted by many factors, such as the financial condition, earnings capacity and near-term prospects of the company in which we have invested and, for publicly-traded securities, the length of time and the extent to which fair value has been less than cost. The evaluation of these investments is also subject to the overall condition of the economy and its impact on the capital markets.
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Income Taxes
We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for the future tax consequences of events that have been reflected in our financial statements or tax returns. This process requires management to make assessments regarding the timing and probability of the tax impact. Actual income taxes could vary from these estimates due to future changes in income tax law or unpredicted results from the final determination of each year’s liability by taxing authorities.
We believe that the accounting estimate related to establishing tax valuation allowances is a “critical accounting estimate” because: (1) it requires management to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities, and (2) the impact that changes in actual performance versus these estimates could have on the realization of tax benefits as reported in our results of operations could be material. Management’s assumptions require significant judgment because actual performance has fluctuated in the past and may continue to do so.
Under Korean GAAP, recognition of deferred tax benefit from equity in losses of affiliates requires realization of the benefit within the near future, which is construed to mean five years. We do not believe it is probable to realize such benefit from KT Corporation’s investor-level goodwill amortization expenses within five years. Accordingly, we wrote off the related deferred income tax assets in the amount of Won 57 billion in 2005, Won 26 billion in 2006 and Won 38 billion in 2007 by taking charge to deferred income tax expense.
Under U.S. GAAP, deferred tax assets are recognized for the excess of the tax basis over the amount for financial reporting of domestic and foreign investments accounted for on the equity method (except for corporate joint ventures). We purchased additional shares of KTF in 2006, which became a consolidated subsidiary under U.S. GAAP as of August 20, 2006. We had recognized deferred tax assets amounting to Won 417 billion as of August 20, 2006 relating to the basis difference for our investment in KTF while being accounted for under the equity method. As a result of consolidation of KTF, the deferred tax assets can no longer be recorded since it is not apparent that the temporary difference will reverse in the foreseeable future. We eliminated the deferred tax assets with the corresponding charge applied to an increase of goodwill as part of purchase accounting and the initial consolidation of KTF under U.S. GAAP.
Adoption of New Accounting Standards and Reclassification of Financial Statements
In addition, we have reclassified certain of our accounts effective January 1, 2007, and we have made the corresponding reclassification to our 2005 and 2006 consolidated financial statements. The effects of the adoption of new accounting standards and certain reclassifications on our 2005 and 2006 accounts are summarized as follows:
For the Year Ended December 31, 2005
Operating revenue
Non-operating revenue
Non-operating expense
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Income from continuing operations before income tax expense
Income tax expense on continuing operations
Loss from discontinuing operations
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Effect of changes in consolidated entities
Net decrease in cash and cash equivalents
As of or For the Year Ended December 31, 2006
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total liabilities
Common stock
Capital surplus
Capital adjustments
Accumulated other comprehensive income
Retained earnings
Minority interest
Total equity
Total liabilities and equity
Net increase in cash and cash equivalents
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We have adopted new accounting standards and reclassified certain of our accounts effective January 1, 2007, and we have made the corresponding reclassification to our 2005 and 2006 consolidated financial statements. Our discussion of operating results is prepared using the reclassified consolidated financial statements. See “—Adoption of New Accounting Standards and Reclassification of Financial Statements” for the effects of the adoption of new accounting standards and certain reclassifications of our 2005 and 2006 accounts.
Telephone Service Revenues
Local Service Revenues. Local service revenues include basic monthly charges and monthly usage charges from local telephone service and revenues from other value-added services, including local telephone directory assistance, call waiting and caller identification services. In addition, we charge interconnection fees to fixed-line competitors and mobile service providers whenever fixed-line competitors and mobile service providers use our local network in providing their services. Basic monthly charges vary depending on the location of the customer and the telephone installation charge system selected by the customer, and monthly usage charges are based on the number of call pulses. Service revenues from local service vary principally depending on the number of lines in service, the number of new lines placed in service, rates and the volume of calls. All lines in service are subject to measured service under which call pulses are a function of the number of calls made, each call’s duration and the time of day at which each call is made. Revenues from local calls placed from public telephones are also included in local service revenues.
In 2006, we had local service revenues of Won 2,909 billion, representing a decrease of 0.6% compared to 2005 local service revenues of Won 2,926 billion. The decrease in local service revenues in 2006 was due principally to a 12.8% decrease in the number of local call pulses in 2006 compared to 2005 attributable to the increase in usage of mobile telephone services and the Internet. Effects from such decrease were partially offset by an increase in revenues from interconnection fees, as well as an increase in revenues from value-added services such as local telephone directory assistance.
In 2007, we had local service revenues of Won 2,856 billion, representing a decrease of 1.8% compared to 2006 local service revenues of Won 2,909 billion. The decrease in local service revenues in 2007 was due principally to a 9.3% decrease in the number of local call pulses in 2007 compared to 2006, which was attributable to the continuing substitution effect from increase in usage of mobile telephone services and the Internet.
Non-refundable Service Installation Fee. We implemented a new telephone installation charge system in April 2001, pursuant to which new customers who did not previously subscribe to our local service must pay a Won 60,000 non-refundable installation fee. We also recognize such non-refundable installation fee as revenue. See “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates—Telephone Services—Local Telephone Service.” We recognized as revenue Won 70 billion in non-refundable service installation fees in 2005, Won 46 billion in 2006 and Won 43 billion in 2007.
Domestic Long-distance Revenues. Service revenues from domestic long-distance service depend on rates, the number of call minutes, and the distance and the time of day each call is made. In addition, we charge interconnection fees to fixed-line competitors, mobile service providers and voice resellers whenever they use our domestic long-distance network in providing their services. Domestic long-distance revenues include revenues from domestic long-distance calls placed from public telephones. Revenues from domestic long-distance service have decreased in recent years and are accounting for a smaller portion of our consolidated operating revenues.
In 2006, we had domestic long-distance revenues of Won 711 billion, representing a decrease of 7.7% from 2005 domestic long-distance revenues of Won 770 billion. The decrease in domestic long-distance revenues in
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2006 was due principally to the substitution effect from increase in usage of mobile telephone services and the Internet. The number of domestic call minutes in 2006 compared to 2005 increased primarily as a result of our implementation of the optional flat rate plan in September 2006.
In 2007, we had domestic long-distance revenues of Won 673 billion, representing a decrease of 5.3% from 2006 domestic long-distance revenues of Won 711 billion. The decrease in domestic long-distance revenues in 2007 was due principally to a decrease in the number of domestic long-distance call minutes in 2007 compared to 2006 primarily due to continuing substitution effect from increase in usage of mobile telephone services and the Internet.
International Long-distance Revenues. Service revenues from international long-distance service consist of:
amounts we bill to our customers for outgoing calls made to foreign countries (including customers who make calls to Korea from foreign countries under our home country direct-dial service);
amounts we bill to foreign telecommunications carriers and administrations for connection to the Korean telephone network in respect of incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service);
amounts we charge to fixed-line competitors, mobile service providers and voice resellers as interconnection fees for using our international network in providing their services; and
other revenues, including revenues from international calls placed from public telephones and international leased lines.
Outgoing calls made by customers in Korea (and by customers from foreign countries under our home country direct-dial service) are billed in accordance with our rate schedule for the country called, under which rates vary depending on the time of day when a call is placed. Incoming calls are billed by us to the relevant foreign carrier or administration at the applicable settlement rate specified under the relevant agreement with the foreign entity. International long-distance calls to and from the United States, Japan and China in the aggregate accounted for approximately 46.4% of our total international long-distance call minutes in 2007. See “Item 4. Information on the Company—Item 4.B. Business Overview—Our Services—Telephone Services—Fixed-line Telephone Services.”
In 2006, we had international long-distance revenues of Won 386 billion, representing a decrease of 5.6% compared to 2005 international long-distance revenues of Won 409 billion. Our international long-distance revenues decreased in 2006 primarily due to a 10.4% decrease in the number of international long-distance call minutes in 2006 compared to 2005 resulting from continued increase in usage of mobile phone service and the Internet to make international long distance calls. Effects from such decrease were partially offset by an increase in revenues from our Internet phone service.
In 2007, we had international long-distance revenues of Won 432 billion, representing an increase of 11.9% compared to 2006 international long-distance revenues of Won 386 billion. Our international long-distance revenues increased in 2007 primarily due to an increase in the number of international long-distance call minutes in 2007 compared to 2006 resulting from an increase in traffic from specific service providers utilizing our international long-distance network.
Land-to-mobile Interconnection Revenues. When a landline user initiates a call to a mobile subscriber, we record the entire amount of the usage charges for these calls in land-to-mobile interconnection revenues and pay an interconnection charge to the relevant mobile service provider. See “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates—Telephone Services—Interconnection.”
In 2006, we had land-to-mobile interconnection revenues of Won 1,765 billion, representing an increase of 2.9% from 2005 interconnection revenues of Won 1,715 billion, primarily due to increased volume of calls between landline users to mobile subscribers.
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In 2007, we had land-to-mobile interconnection revenues of Won 1,588 billion, representing a decrease of 10.0% from 2006 interconnection revenues of Won 1,765 billion, primarily due to increased volume of calls between mobile subscribers, which in turn reduced volume of calls between landline users to mobile subscribers.
Internet Service Revenues
Broadband Internet access service accounted for 12.8% of our operating revenues in 2005, 12.1% in 2006 and 11.1% in 2007. Miscellaneous Internet-related services include broadband Internet connection service to institutional customers under the “Kornet” brand name and services provided by our Internet data centers and bizmeka.com.
Broadband Internet Access Service Revenues. Broadband Internet access service revenues include basic monthly charges for fixed-line broadband service and wireless LAN service, as well as applicable one-time installation fees. We do not charge usage fees to our subscribers of broadband Internet access service.
Broadband Internet access service revenues decreased by 2.5% to Won 2,149 billion in 2006 compared to Won 2,204 billion in 2005, primarily due to special discounts and waivers on modem rental fees offered to long-term subscribers in 2006, which more than offset the impact from an increase in the number of subscribers.
Broadband Internet access service revenues decreased by 3.5% to Won 2,074 billion in 2007 from Won 2,149 billion in 2006 primarily due to special discounts provided to long-term subscribers in 2007, which was offset in part by an increase in the number of subscribers.
Miscellaneous Internet-related Service Revenues. Miscellaneous Internet-related service revenues increased by 14.2% to Won 322 billion in 2006 from Won 282 billion in 2005 primarily due to an increase in revenues related to our Internet data centers and Bizmeka service. Miscellaneous Internet-related service revenues increased by 31.7% to Won 424 billion in 2007 from Won 322 billion in 2006, primarily due to an increase in revenues related to our Internet data centers and Bizmeka service.
Mobile Revenues
Our revenues from mobile service are generated through our consolidated subsidiary KTF and our mobile resale service. We derive revenues principally from:
Mobile service revenues increased by 5.3% to Won 5,510 billion in 2006 from Won 5,233 billion in 2005, primarily due to a 5.0% increase in the number of subscribers, including resale subscribers of KT Corporation, to 12.9 million subscribers as of December 31, 2006 compared to 12.3 million subscribers as of December 31, 2005. The average monthly revenue per subscriber of KTF decreased to Won 38,768 in 2006 from Won 40,570 in 2005.
Mobile service revenues increased by 6.6% to Won 5,875 billion in 2007 from Won 5,510 billion in 2006, primarily due to a 6.2% increase in the number of subscribers, including resale subscribers of KT Corporation, to 13.7 million as of December 31, 2007 compared to 12.9 million as of December 31, 2006. The average monthly revenue per subscriber of KTF increased to Won 39,852 in 2007 from Won 38,768 in 2006.
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Sale of Goods
Our revenues from sale of goods are generated through sale of mobile handsets through our consolidated subsidiary KTF and our mobile resale service and sale of specially designed handsets.
Revenues from sale of goods increased by 25.0% to Won 1,889 billion in 2006 from Won 1,511 billion in 2005, primarily due to an increase in the number of new handsets sold due to issuances of handset subsidies starting on March 27, 2006.
Revenues from sale of goods increased by 23.0% to Won 2,324 billion in 2007 from Won 1,889 billion in 2006. Revenues from sale of goods increased in 2007 due primarily to an increase in the number of HSDPA-based IMT-2000 service compatible handsets.
Other Revenues
Other revenues consist primarily of revenues from data communications service, satellite service, and miscellaneous services such as information technology and network services and services provided by KTH.
Revenues from data communications service include basic monthly charges of leased lines based on their distance, the capacity of the line and the type of line provided, and applicable one-time installation fees, as well as revenues from our satellite service. Data communications service revenues decreased by 5.6% in 2006 to Won 1,284 billion from Won 1,360 billion in 2005 primarily as a result of increased competition among leased line service providers. Data communications service revenues further decreased by 1.0% in 2007 to Won 1,271 billion from Won 1,284 billion in 2006 due to such increased competition.
Revenues from miscellaneous services increased by 19.9% to Won 854 billion in 2006 from Won 712 billion in 2005 and increased further by 28.8% to Won 1,100 billion in 2007, primarily due to an increase in revenues from information technology and network services and services provided by KTH.
Salaries and Related Costs
The principal components of salaries and related costs are salaries and wages, provisions for retirement and severance benefits and employee benefits. Employee benefits include meal subsidies and commuting subsidies. The retirement and severance benefit is a lump-sum amount paid to employees who have been employed by us for more than one year when they leave.
In 2006, salaries and related costs were Won 2,993 billion, representing a 1.7% decrease from Won 3,046 billion in 2005, primarily as a result of a decrease in employee benefits expense and provision for retirement and severance benefits, partially offset by an increase in salaries and wages. We recorded a payment of one-time bonuses of Won 91 billion and contribution of approximately 2.3 million treasury shares to our employee stock ownership association in August 2005 and recorded Won 92 billion as employee benefits expense, compared to no such expenses in 2006.
In 2007, salaries and related costs were Won 3,133 billion, representing a 4.7% increase from Won 2,993 billion in 2006, primarily due to an increase in provisions for severance indemnities resulting from an increase in the average salary rate compared to the prior year.
Wireline Communications. In 2006, salaries and related costs decreased by 1.0% to Won 2,585 billion from Won 2,612 billion in 2005, primarily as a result of a decrease in employee benefits expense and provision for retirement and severance benefits, partially offset by an increase in salaries and wages. In 2007, salaries and related costs increased by 3.4% to Won 2,672 billion from Won 2,585 billion in 2006, primarily as a result of an increase in provisions for severance indemnities.
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Mobile Service. In 2006, salaries and related costs amounted to Won 216 billion, which represented no change from 2005. The number of employees at KTF increased by 0.5% to 2,505 as of December 31, 2006 compared to 2,492 as of December 31, 2005. In 2007, salaries and related costs increased by 6.4% to Won 230 billion from Won 216 billion in 2006, primarily as a result of an increase in the number of employees to 2,586 as of December 31, 2007 compared to 2,505 as of December 31, 2006.
Depreciation and Amortization
Depreciation and amortization expense amounted to Won 3,557 billion in 2006, which represented no change from 2005. In 2007, depreciation and amortization expense increased by 1.3% to Won 3,602 billion from Won 3,557 billion in 2006.
Wireline Communications. In 2006, depreciation and amortization expense decreased by 2.4% to Won 2,121 billion from Won 2,174 billion in 2005 due primarily to a decrease in capital expenditures on property and equipment in recent years as a result of a more efficient utilization of our facilities. Such effects more than offset an increase in our depreciation expenses in 2006 arising from a change in accounting estimate. In 2007, depreciation and amortization expense increased by 0.7% to Won 2,135 billion from Won 2,121 billion in 2006 due primarily to an expansion of its network facilities.
Mobile Service. In 2006, depreciation and amortization expense decreased by 0.3% to Won 1,135 billion from Won 1,138 billion in 2005. In 2007, depreciation and amortization expense increased by 0.7 % to Won 1,142 billion from Won 1,135 billion in 2006.
Other Operating and Maintenance Expenses
The largest components of other operating and maintenance expenses are commissions and cost of services, cost of mobile handsets, interconnection payments and repairs and maintenance costs. The following table shows other operating and maintenance expenses broken down by major components and the percentage changes in these expenses for each of the years in the three-year period ended December 31, 2007.
Commissions, cost of services and settlement payments
Cost of goods sold
Interconnection charge
Repairs and maintenance
Miscellaneous expenses
Commissions, cost of services and settlement payments consist principally of commissions related to mobile handset sales, information technology and network services and production of prepaid phone cards and payments to foreign carriers and administrations for provision of international long-distance service pursuant to service agreements. In 2006, our commissions, cost of services and settlement payments increased by 18.9% to Won 3,200 billion from Won 2,692 billion in 2005, primarily due to a 31.4% increase in commissions to mobile sales agents to Won 1,348 billion resulting from an increase in competition among mobile service providers and a 24.0% increase in commission for information technology and network services and other miscellaneous services to Won 606 billion primarily due to an increase in outsourcing such services to third-party service providers. In 2007, our commissions, cost of services and settlement payments increased by 26.3% to Won 4,043 billion from Won 3,200 billion in 2006, primarily due to a 41.1% increase in commissions to mobile sales agents to Won 1,902 billion resulting primarily from an increase in sales volume of HSDPA-compatible handsets and a
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28.1% increase in commission for information technology and network services and other miscellaneous services to Won 777 billion primarily due to continuing reliance on third-party outsourcing of such services.
Our cost of goods sold consists primarily of mobile handsets sold through our consolidated subsidiary KTF and our mobile resale service. In 2006, cost of goods sold increased by 15.1% to Won 1,682 billion from Won 1,461 billion in 2005 primarily due to an increase in the number of new handsets sold due to issuances of handset subsidies starting on March 27, 2006. In 2007, cost of goods sold increased by 13.7% to Won 1,912 billion from Won 1,682 billion in 2006 primarily as a result of an increase in the number of HSDPA-compatible handsets sold.
We recognize as an expense the interconnection payments to mobile service providers for calls from landline users and mobile subscribers of KTF to mobile service subscribers. Our interconnection charges increased by 11.0% to Won 1,178 billion in 2006 from Won 1,061 billion in 2005 primarily due to an increase in the amount of call traffic to mobile subscribers, which more than offset a slight decrease in the interconnection charges we paid per minute to mobile service providers. In 2007, our interconnection charges increased by 1.9% to Won 1,200 billion from Won 1,178 billion in 2006 primarily due to continued increase in the amount of call traffic to mobile subscribers. For a discussion of the interconnection payment calculation methodology, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates—Telephone Services—Interconnection.”
In 2006, our repair and maintenance expenses increased by 14.6% to Won 705 billion from won 615 billion in 2005 primarily as a result of increase in repair and maintenance activities related to our broadband Internet service network. In 2007, our repair and maintenance expenses decreased by 13.3% to Won 611 billion from Won 705 billion in 2006 primarily due to a decrease in repair and maintenance activities related to our broadband Internet network.
Wireline Communications. The largest components of other operating and maintenance expenses are commissions and settlement payments, interconnection payments for landline to mobile calls and repair and maintenance expenses. Other operating and maintenance expenses decreased by 1.7% in 2006 to Won 5,394 billion from Won 5,488 billion in 2005. In 2007, other operating and maintenance expenses increased by 5.6% to Won 5,696 billion from Won 5,394 billion in 2006.
Mobile Service. The largest components of other operating and maintenance expenses are cost of goods sold, sales promotion and advertisement costs, interconnection payments and commissions (including commissions related to mobile handset sales). In 2006, other operating and maintenance expenses increased by 15.9% to Won 4,488 billion from Won 3,873 billion in 2005. In 2007, other operating and maintenance expenses increased by 22.1% to Won 5,481 billion from Won 4,488 billion in 2006 primarily due to an increase in cost of goods sold and marketing expenses related to the promotion of SHOW services.
Operating Income
Operating income decreased by 1.2% to Won 2,383 billion in 2006 from Won 2,411 billion in 2005, as the increase in operating expenses more than offset the increase in revenues described above. Accordingly, our operating margin decreased to 13.4% in 2006 from 14.0% in 2005. Operating income decreased by 26.8% in 2007 to Won 1,745 billion from Won 2,383 billion in 2006, as the increase in operating expenses more than offset the increase in revenues described above. Accordingly, our operating margin decreased to 9.4% in 2007 from 13.4% in 2006.
Wireline Communications. In 2006, operating income increased by 6.8% to Won 1,756 billion from Won 1,644 billion in 2005 as the decrease in operating expenses described above more than offset the decrease in operating revenues described above. Operating margin increased to 14.8% in 2006 from 13.8% in 2005. In 2007, operating income decreased by 18.3% to Won 1,434 billion from Won 1,756 billion in 2006 as the increase in operating expenses more than offset the increase in revenues described above. Operating margin decreased to 12.0% in 2007 from 14.8% in 2006.
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Mobile Service. In 2006, operating income decreased by 16.5% to Won 689 billion from Won 825 billion in 2005 as the increase in operating expenses described above more than offset the increase in operating revenues described above. Operating margin decreased to 10.6% in 2006 from 13.8% in 2005. In 2007, operating income decreased by 36.0% to Won 441 billion from Won 689 billion in 2006 as the increase in operating expenses more than offset the increase in revenues described above. Operating margin decreased to 6.0% in 2007 from 10.6% in 2006.
In 2006, our income tax expense was Won 476 billion and our effective tax rate was 24.0%, compared to our income tax expense of Won 399 billion and our effective tax rate of 22.6% in 2005. We recognized investment tax credit of Won 161 billion in 2006. In 2007, our income tax expense was Won 357 billion and our effective tax rate was 24.6%, and we recognized investment tax credit of Won 114 billion.
We had net deferred income tax assets of Won 349 billion as of December 31, 2007.
Wireline Communications. Income tax expense decreased by 0.9% to Won 341 billion in 2006 from Won 344 billion in 2005, primarily due to a tax refund for prior periods deducted from income tax expenses in 2006, which more than offset the effect from an increase in earnings before income taxes to Won 1,574 billion in 2006 from Won 1,376 billion in 2005. In 2007, income tax expense decreased by 14.1% to Won 293 billion from Won 341 billion in 2006, primarily due to a decrease in earnings before income tax to Won 1,250 billion from Won 1,574 billion in 2006.
Mobile Services. Income tax expense increased by 88.7% to Won 117 billion in 2006 from Won 62 billion in 2005, primarily due to a higher effective tax rate resulting from an increase in fines from the Korea Communications Commission and the Korea Fair Trade Commission that are not recognized as tax deductible expenses. In 2007, income tax expense decreased by 63.4% to Won 43 billion from Won 117 billion in 2006, primarily due to a decrease in earnings before income tax to Won 287 billion in 2007 from Won 529 billion in 2006.
In 2006, our net income increased by 11.0% to Won 1,510 billion from Won 1,360 billion in 2005 primarily as a result of a decrease in interest expense, an increase in net foreign currency transaction and translation gains, a decrease in provision for other bad debt expense and a decrease in net loss on disposition of property, plant and equipment, which more than offset the impact of a 2.1% decrease in operating income discussed above as well as an increase in net loss on valuation and settlement of derivatives.
Our interest expense decreased by 18.6% to Won 499 billion in 2006 from Won 613 billion in 2005 primarily due to reduction of our long-term debt in 2006. Our long-term debt, excluding current portion, decreased to Won 6,097 billion as of December 31, 2006 compared to Won 7,360 billion as of December 31, 2005. We recorded a 114.5% increase in net gain on foreign exchange translation and transaction to Won 136 billion in 2006 from Won 63 billion in 2005 primarily resulting from the greater appreciation of the Won against the Dollar in 2006 compared to 2005. In terms of the noon buying rate, the Won appreciated against the Dollar from Won 1,010.0 to US$1.00 as of December 30, 2005 to Won 930.0 to US$1.00 as of December 29, 2006. We decreased our other bad debt expense by 73.2% to Won 19 billion in 2006 from Won 71 billion in 2005. A substantial portion of provision for other bad debt expense in 2005 was related to accounts receivable from Korea Digital Broadcasting. We did not record any such provision in 2006 due to improvement of Korea Digital Broadcasting’s financial conditions. We recorded a 31.6% decrease in net loss on disposition of property, plant and equipment to Won 99 billion in 2006 from Won 145 billion in 2005 primarily due to a decrease in disposal of property, plant and equipment that were considered obsolete or useless in 2006 compared to 2005. We recorded an 872.6% increase in net loss on valuation and settlement of derivatives to Won 95 billion in 2006 from Won 10 billion in 2005 primarily resulting from the greater appreciation of the Won against the Dollar in 2006 compared to 2005.
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In 2007, our net income decreased by 22.4% to Won 1,171 billion from Won 1,510 billion in 2006 primarily as a result of a 26.8% decrease in operating income discussed above, a net loss on foreign exchange translation and transaction in 2007 compared to a net gain in 2006 and a decrease in net gain on disposal of available-for-sale securities, the effects of which were offset in part by a net gain on valuation and settlement of derivatives in 2007 compared to a net loss in 2006, a gain from discontinuing operations in 2007 compared to no such gain in 2006, an increase in interest income and a decrease in interest expenses.
We recorded a net loss on foreign exchange translation and transaction of Won 13 billion in 2007 compared to a net gain of Won 136 billion in 2006 primarily as a result of the depreciation of the Korean Won against the Dollar in 2007 compared to appreciation in 2006. In terms of the noon buying rate, the Won depreciated against the Dollar from Won 930.0 to US$1.00 as of December 29, 2006 to Won 935.8 to US$1.00 as of December 31, 2007. Our net gain on disposal of available-for-sale securities decreased by 88.4% in 2007 to Won 9 billion from Won 78 billion in 2006 primarily as a result of a decrease in disposal of such securities in 2007 compared to 2006. We recorded a net gain on valuation and settlement of derivatives of Won 23 billion in 2007 compared to a net loss of Won 95 billion in 2006 primarily resulting from the depreciation of the Korean Won against the Dollar in 2007 compared to appreciation in 2006. We recorded a gain of Won 74 billion in 2007 as non-operating revenues from discontinuing operations of Korea Telecom Philippines Inc. and Korea Telecom Venture Fund No. 1, primarily due to reversal of cumulative loss from such operations. Our interest income increased by 39.2% in 2007 to Won 156 billion from Won 112 billion in 2006 primarily as a result of an increase in our interest-earning assets, as well as a general increase in market interest rates in Korea in 2007. Our interest expenses decreased by 6.6% in 2007 to Won 466 billion from Won 499 billion in 2006 primarily as a result of a decrease in our borrowing amounts.
Wireline Communications. In 2006, net income increased by 19.5% to Won 1,233 billion from Won 1,032 billion in 2005, and decreased by 22.4% in 2007 to Won 958 billion from Won 1,233 billion in 2006 primarily as a result of the reasons discussed above.
Mobile Service. In 2006, net income decreased by 24.7% to Won 412 billion from Won 547 billion in 2005 primarily as a result of a 16.4% decrease in operating income in 2006 discussed above. In 2007, net income decreased by 40.7% to Won 244 billion from Won 412 billion in 2006 primarily as a result of a 36.0% decrease in operating income in 2007 discussed above.
Inflation
We do not consider that inflation in Korea has had a material impact on our results of operations in recent years. Inflation in Korea was 2.7% in 2005, 2.2% in 2006 and 2.5% in 2007. See “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.”
Item 5.B. Liquidity and Capital Resources
The following table sets forth the summary of our cash flows determined in accordance with Korean GAAP for the periods indicated.
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Net increase (decrease) in cash and cash equivalents
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Capital Requirements
Historically, uses of cash and cash equivalents consisted principally of purchases of property, plant and equipment and other assets and payments of long-term debt. In recent years, we have also used cash for acquisition of treasury shares and shares of our affiliates and payment of retirement and severance benefits for early retirement programs. From time to time, we may also require capital for investments involving acquisitions and strategic relationships.
Net cash used in investing activities was Won 2,526 billion in 2005, Won 3,061 billion in 2006 and Won 3,449 billion in 2007, including additions to property, plants and equipment of Won 2,871 billion in 2005, Won 3,518 billion in 2006 and Won 3,636 billion in 2007.
In our financing activities, we used cash of Won 4,903 billion in 2005, Won 1,284 billion in 2006 and 1,359 billion in 2007 for repayment of outstanding long-term debt. In November 2004, substantially all of the holders of convertible notes due 2007 elected to exercise their option to redeem the notes, and we repaid the principal amount of US$1.1 billion on January 4, 2005. On the same day, we also used US$500 million to repay the principal amount of bonds issued to Microsoft Corporation. In addition, we used Won 1,323 billion on May 25, 2005 to repay the outstanding principal of and accrued interest on convertible bonds issued to domestic investors in May 2002.
From time to time, we have also required capital needs for acquisition of treasury shares and shares of our affiliates and payment of retirement and severance benefits for early retirement programs. We spent Won 214 billion in 2006 and Won 196 billion in 2007 for acquisition of treasury shares. In addition, we spent Won 364 billion in 2006 to acquire additional equity interest in consolidated subsidiaries, including Won 358 billion to purchase 12,489,850 shares of KTF. In June 2008, our board of directors resolved to purchase an additional 1,666,700 treasury shares on the Korea Exchange by September 2008. We plan to retire the treasury shares upon completion of such share repurchase.
Payments of cash dividends amounted to Won 632 billion in 2005, Won 426 billion in 2006 and Won 473 billion in 2007.
We anticipate that capital expenditures, and, to a lesser extent, repayment of outstanding contractual obligations and commitments will represent the most significant use of funds for the next several years. We may also require capital for investments involving acquisitions and strategic relationships, as well as the purchase of additional treasury shares and shares of our affiliates.
We compete in the telecommunications sector in Korea, which is rapidly evolving. We also face increasing competition from new entrants to the market. We may need to incur additional capital expenditures to keep up with unexpected developments in rapidly evolving telecommunications technology. There can be no assurance that we will be able to secure funds on satisfactory terms from financial institutions or other sources that are sufficient for our unanticipated needs.
Payments of contractual obligations and commitments will also require considerable resources. In our ordinary course of business, we routinely enter into commercial commitments for various aspects of our operations, including repair and maintenance. As of December 31, 2007, we had various contractual obligations and commitments which are more fully disclosed in the notes to our consolidated financial statements.
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The following table sets forth selected information regarding our contractual obligations to make future payments as of December 31, 2007:
Contractual Obligations(1)
Long-term debt obligations (including current portion of long-term debt)
Capital lease obligations
Operating lease obligations
Severance payment obligations
Long-term accounts payable—others
Estimate of interest payment based on contractual interest rates effective as of December 31, 2007
Capital Resources
We have traditionally met our working capital and other capital requirements principally from cash provided by operations, while raising the remainder of our requirements primarily through debt financing. Our major sources of cash have been net cash provided by operating activities, including net income and expenses not involving cash payments such as depreciation and amortization, and proceeds of long-term debt. We expect that these sources will continue to be our principal sources of cash in the future. Net income was Won 1,360 billion in 2005, Won 1,510 billion in 2006 and Won 1,171 billion in 2007 due to the reasons discussed in Item 5.A. Operating Results, depreciation and amortization remained relatively stable at Won 3,639 billion in 2005, Won 3,618 billion in 2006 and Won 3,657 billion in 2007 primarily reflecting our capital investment activities during the past three years, and aggregate cash proceeds from long-term debt were Won 1,764 billion in 2005, Won 285 billion in 2006 and Won 878 billion in 2007. We periodically adjust our long-term debt financing depending on changes in our capital requirements.
We believe that we have sufficient working capital available to us for our current requirements and that we have a variety of alternatives available to us to satisfy our financial requirements to the extent that they are not met by funds generated by operations, including the issuance of debt securities and bank borrowings denominated in Won and various foreign currencies. For example, we updated our Medium Term Note program in June 2005 from US$1 billion to US$2 billion, of which US$700 million remained unused as of December 31, 2007. However, our ability to rely on some of these alternatives could be affected by factors such as the liquidity of the Korean and other financial markets, prevailing interest rates, our credit rating and the Government’s policies regarding Won currency and foreign currency borrowings. Other factors which could materially affect our liquidity in the future include unanticipated increase in capital expenditures and decrease in cash provided by operations resulting from a significant decrease in demand for our services. We may also need to raise additional capital sooner than we expect in order to fund unanticipated investments and acquisitions.
Our total stockholders’ equity increased from Won 10,390 billion as of December 31, 2005 to Won 10,697 billion as of December 31, 2006 and Won 11,138 billion as of December 31, 2007, primarily as a result of net earnings.
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Liquidity
We had a working capital (current assets minus current liabilities) surplus of Won 1,309 billion as of December 31, 2005, Won 558 billion as of December 31, 2006 and Won 564 billion as of December 31, 2007. The following table sets forth the summary of our significant current assets for the periods indicated.
Cash and cash equivalents
Short-term investment assets
Accounts receivable—trade
Accounts receivable—other
Our cash, cash equivalents and short-term investment assets maturing within one year totaled Won 2,577 billion as of December 31, 2005, Won 2,500 billion as of December 31, 2006 and Won 1,845 billion as of December 31, 2007. Under Korean GAAP, bank deposits and all highly liquid temporary cash instruments within maturities of three months are considered as cash equivalents. Short-term investment assets primarily consist of time and trust deposits with maturities between four to twelve months and short-term loans and current portion of securities such as beneficiary certificates and available-for-sale securities.
The following table sets forth the summary of our significant current liabilities for the periods indicated:
Accounts payable—trade
Short-term borrowings
Current portion of long-term debt
Accounts payable—other
Accrued expenses
As of December 31, 2007, we had bank overdraft agreements for borrowings up to Won 964 billion, commercial paper issuance agreements for borrowings up to Won 431 billion, bill discounting agreements for borrowings up to Won 10 billion, loans on checking account up to Won 7 billion, working capital loan up to Won 2 billion, collateral loan agreements on accounts receivables for borrowings up to Won 760 billion, letters of credit agreements for borrowings up to US$65 million and a collection agreement for foreign-currency denominated checks up to US$1 million. As of December 31, 2007, Won 88 billion and US$4 million were outstanding under these facilities. We have not had, and do not believe that we will have, difficulty gaining access to short-term financing sufficient to meet our current requirements. We issued guarantees in favor of our consolidated subsidiaries’ indebtedness and contract performance of Won 113 billion and US$31 million as of December 31, 2007.
Capital Expenditures
Capital expenditures on property, plants and equipment in 2007 totaled Won 3,636 billion compared to Won 3,518 billion in 2006 and Won 2,871 billion in 2005.
Our current capital expenditure plan (including expenditures on property, plants and equipment) calls for the expenditure of approximately Won 3,580 billion in 2008 (including approximately Won 950 billion by KTF). The principal components of our capital investment plans are:
Won 1,157 billion in general expansion and modernization of our network infrastructure;
Won 280 billion in upgrading our broadband network to enable FTTH connection;
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Won 682 billion in capital investments for IMT-2000 (W-CDMA) service;
Won 120 billion in capital investments for WiBro service;
Won 280 billion in capital investments for IP-TV service; and
Won 54 billion in capital investments for development of services over Internet protocol.
We expect that KTF will obtain the necessary capital for its investments from financial institutions. There can be no assurance, however, that KTF will be able to secure sufficient funds on satisfactory terms from these or other sources, and KTF’s failure to secure funds for its capital expenditures and ongoing operating costs may have a material adverse effect on its financial condition and results of operations. We are not under any obligation to fund capital expenditures of KTF or any other consolidated subsidiary if these consolidated subsidiaries are unable to obtain necessary capital through operations or from financial institutions.
Recent Accounting Pronouncements in Korean GAAP
Effective January 1, 2007, we adopted Statements of Korean Accounting Standards No. 11 “Discontinuing Operations,” No. 21 “Preparation and Presentation of Financial Statements I,” No. 22 “Share-based Payment,” No. 23 “Earnings Per Share,” No. 24 “Preparation and Presentation of Financial Statements II” and No. 25 “Consolidated Financial Statements.”The adoption of these standards did not have a significant impact on our consolidated financial statements. For the effects of the adoption of new accounting standards and certain reclassifications on our 2005 and 2006 accounts, see “—Item 5.A. Operating Results—Reclassification of Prior Year Financial Statements.”
U.S. GAAP Reconciliation
In 2005, we recorded net earnings of Won 1,149 billion under U.S. GAAP compared to net income (attributable to equity holders of the parent) of Won 1,085 billion under Korean GAAP, primarily because of difference in the treatment of reversal of goodwill amortization relating to equity method investments, depreciation and deferred income tax. In 2006, we recorded net earnings of Won 1,329 billion under U.S. GAAP compared to net income (attributable to equity holders of the parent) of Won 1,292 billion under Korean GAAP, primarily because of difference in the treatment of depreciation and reversal of goodwill amortization relating to equity method investments. In 2007, we recorded net earnings of Won 1,069 billion under U.S. GAAP compared to net income (attributable to equity holders of the parent) of Won 1,056 billion under Korean GAAP, primarily because of difference in the treatment of depreciation, reversal of goodwill amortization relating to equity method investments and the timing of recognition of service installation fees.
Stockholders’ equity under U.S. GAAP is lower than under Korean GAAP by Won 2,659 billion as of December 31, 2006 and Won 2,700 billion as of December 31, 2007 primarily as a result of:
the difference in the treatment of minority interests;
the difference in the treatment of impairment loss relating to equity investees;
the difference in the treatment of deferred service installation fees; and
the difference in the treatment of depreciation,
which more than offset the effect of:
other differences in the treatment of equity in earnings of equity method affiliates; and
the aggregate effect of deferred income taxes recognized under U.S. GAAP.
For further discussion of the principal differences between Korean GAAP and U.S. GAAP as they relate to us, see Note 36 to the Consolidated Financial Statements.
Recent Accounting Pronouncements in U.S. GAAP
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) which provides a consistent definition of fair value which focuses on exit price
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and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. SFAS No. 157 requires expanded disclosures about fair value measurements and establishes a three-level hierarchy for fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The standard also requires that a company use its own nonperformance risk when measuring liabilities carried at fair value, including derivatives. In February 2008, the FASB approved a FASB Staff Position (FSP) that permits companies to partially defer the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The FSP did not permit companies to defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. SFAS No. 157 is effective for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually for financial statements issued for fiscal years beginning after November 15, 2007. The provisions of SFAS No. 157 will be applied prospectively. We intend to defer adoption of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis and are currently evaluating the effects, if any, that SFAS No. 157 may have on our financial condition and results of operations.
In September 2006, the FASB ratified EITF Issue No. 06-1, “Accounting for Consideration Given by a Service Provider to a Manufacturer or Reseller of Equipment Necessary for an End-Customer to Receive Service from the Service Provider” (EITF No. 06-1), which provides guidance regarding whether the consideration given by a service provider to a manufacturer or reseller of specialized equipment should be characterized as a reduction of revenue or as an expense. EITF No. 06-1 is effective for the first annual reporting period beginning after June 15, 2007. Entities are required to recognize the effects of applying this issue as a change in accounting principle through retrospective application to all prior periods unless it is impracticable to do so. We estimate that upon adoption, this guidance will not have a material effect on our financial condition and results of operations.
In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities—including an Amendment of SFAS No. 115” (SFAS No. 159), which permits an entity to measure certain financial assets and financial liabilities at fair value that are not currently required to be measured at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS No. 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities. The Statement also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election. SFAS No. 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. We do not expect the adoption of this standard to have a material impact on our financial condition and results of operations.
In June 2007, the FASB ratified Emerging Issue Task Force (EITF) Issue No. 07-3, “Accounting for Nonrefundable Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF 07-3), requiring that nonrefundable advance payments for future research and development activities be deferred and capitalized. Such amounts should be expensed as the related goods are delivered or the related services are performed. The Statement is effective for fiscal years beginning after December 15, 2007. We estimate that upon adoption, this guidance will not have a material effect on our financial condition and results of operations.
In June 2007, the FASB ratified EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11), which requires entities to record to additional paid-in capital the tax benefits on dividends or dividend equivalents that are charged to retained earnings for certain share-based awards. In a share-based payment arrangement, employees may receive dividends or dividend equivalents on awards of nonvested equity shares, nonvested equity share units during the vesting period, and share options until the exercise date. Generally, the payment of such dividends can be treated as deductible compensation for tax purposes. The amount of tax benefits recognized in additional paid-in capital should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 is effective for fiscal years beginning after December 15, 2007. We estimate that upon adoption, this guidance will not have a material effect on our financial condition and results of operations.
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In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)) which retained the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but SFAS No. 141(R) changed the method of applying the acquisition method in a number of significant aspects. SFAS No. 141(R) will require that: (1) for all business combinations, the acquirer records all assets and liabilities of the acquired business, including goodwill, generally at their fair values; (2) certain contingent assets and liabilities acquired be recognized at their fair values on the acquisition date; (3) contingent consideration be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settled; (4) acquisition-related transaction and restructuring costs be expensed rather than treated as part of the cost of the acquisition and included in the amount recorded for assets acquired; (5) in step acquisitions, previous equity interests in an acquiree held prior to obtaining control be re-measured to their acquisition-date fair values, with any gain or loss recognized in earnings; and (6) when making adjustments to finalize initial accounting, companies revise any previously issued post-acquisition financial information in future financial statements to reflect any adjustments as if they had been recorded on the acquisition date. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS No. 141(R) amends SFAS No. 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of this statement should also apply the provisions of SFAS No. 141(R). This standard will be applied to all future business combinations after December 31, 2008.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51” (SFAS No. 160) which amends ARB 51 to establish new standards that will govern the accounting for and reporting of noncontrolling interests in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Also, SFAS No. 160 requires that: (1) noncontrolling interest, previously referred to as minority interest, be reported as part of equity in the consolidated financial statements; (2) losses be allocated to the noncontrolling interest even when such allocation might result in a deficit balance, reducing the losses attributed to the controlling interest; (3) changes in ownership interests be treated as equity transactions if control is maintained; and, (4) upon a loss of control, any gain or loss on the interest sold be recognized in earnings. SFAS No. 160 is effective on a prospective basis for all fiscal years beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which will be applied retrospectively. We are currently evaluating the effects, if any, that SFAS No. 160 may have on our financial condition and results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133” (SFAS No. 161), that expands the disclosure requirements of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133). SFAS No. 161 requires additional disclosures regarding: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. In addition, SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives described in the context of an entity’s risk exposures, quantitative disclosures about the location and fair value of derivative instruments and associated gains and losses, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162) that is intended to improve financial reporting by identifying a consistent framework, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS No. 162 is effective 60 days following the Securities and Exchanges Commission's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.”
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In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60” (SFAS No. 163) that clarifies how FASB Statement No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities and also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures about the insurance enterprise’s risk-management activities and requires that disclosures about the risk-management activities of the insurance enterprise be effective for the first period beginning after issuance of this Statement. Except for those disclosures, earlier application is not permitted. We are currently evaluating the effects, if any, that SFAS No. 163 may have on our financial condition and results of operations.
Item 5.C. Research and Development, Patents and Licenses, Etc.
In order to conduct our research and develop applications of new technology for the Korean telecommunications system, we operate:
a future technology laboratory;
a platform laboratory;
an infrastructure laboratory;
a marketing laboratory; and
a network technology laboratory.
At December 31, 2007, these research centers employed a total of 724 researchers and employees, of whom 129 had doctoral degrees and 478 had master’s degrees. As of December 31, 2007, KT Corporation had 5,978 registered patents and 9,849 patents pending domestically and had 649 registered patents and 1,402 patents pending internationally.
Under the Telecommunications Basic Law, network service providers and specific service providers are obligated to contribute 0.75% and 0.5% of their total annual revenues, respectively, to the Institute of Information Technology Assessment, which uses the fund to promote research and development in information technology. We make contributions as a network service provider and specific service provider to the Korean government (Information and Telecommunication Improvement Fund), the Korea Electronic Telecommunication Research Institute and other institutes. Including such contributions, total expenditures on research and development were Won 324 billion in 2005, Won 282 billion in 2006 and Won 291 billion in 2007.
In recent years, we have focused our research and development efforts in the following areas:
development of ubiquitous web services and semantic web services;
voice recognition technology for KT WiBro terminal;
voice over Internet protocol solutions and related value-added services;
next generation network structures and solutions;
next generation wireless Internet evolution technologies such as WiBro, HSDPA and Femtocell;
application services for MegaTV IP-TV services; and
technology for deployment of FTTH in select locations.
Item 5.D. Trend Information
These matters are discussed under Item 5.A. above where relevant.
Item 5.E.Off-balance Sheet Arrangements
These matters are discussed under Item 5.B. above where relevant.
Item 5.F. Tabular Disclosure of Contractual Obligations
Item 5.G. Safe Harbor
See “Item 3. Key Information—Item 3.D. Risk Factors—Forward-looking statements may prove to be inaccurate.”
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Item 6. Directors, Senior Management and Employees
Item 6.A.Directors and Senior Management
Directors
Our board of directors has the ultimate responsibility for the administration of our affairs. Our articles of incorporation provide for a board of directors consisting of:
up to three standing directors, including the President; and
up to eight outside directors.
All of our directors are elected at the general shareholders’ meeting. If the total assets of a company listed on the Stock Market Division of the Korea Exchange as of the end of the preceding year exceeds Won 2,000 billion, which is the case with us, the Securities and Exchange Act of Korea requires such company to have more than three outside directors with at least half of its total directors being outside directors. The term of office for all directors is up to three years, but the term is extended to the close of the annual shareholders’ meeting convened with respect to the last fiscal year of the term.
Under the Securities and Exchange Act, we must establish a committee to nominate candidates for outside directors within the board of directors, and outside directors must make up not less than half of the total members of the outside director candidate nominating committee. According to our articles of incorporation, such committee must consist of one standing director and all of our outside directors. Our Outside Director Candidate Recommendation Committee nominates outside director candidates for appointment at the general shareholders’ meeting.
One-third of the outside directors must be up for election in any given year. Upon the request of any director, a meeting of the board of directors will be assembled. The chairman of the board of directors is elected from among the outside directors by a resolution of the board of directors. The term of office of the chairman is one year.
Our current directors are as follows:
Name
Position
Standing Directors(1)
Joong-Soo Nam
Jong-Lok Yoon
Jeong-Soo Suh
Outside Directors(1)
Jeong-Ro Yoon
Chairperson of the Board of Directors,
Professor, Korea Advanced Institute of Science and Technology
Kon-Sik Kim
Jong-Kyoo Yoon
Jeong-Suk Koh
Gyu-Taeg Oh
Do-Whan Kim
Paul C. Yi (Chang Yop Yi)
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Joong-Soo Nam is a standing director and has served as president and chief executive officer of KT Corporation since August 2005. He has also served as president and chief executive officer of KTF from January 2003 to July 2005. Prior to joining KTF, he served as an executive vice president and chief financial officer of KT Corporation. Mr. Nam holds a bachelor’s degree in business administration from Seoul National University, an M.B.A. degree from The Fuqua School of Business of Duke University and a Ph.D. degree in business administration from University of Massachusetts.
Jong-Lok Yoon is a standing director and has served as senior executive vice president of the Growing Business Group since November 2006. He has previously served as senior executive vice president of the Research and Development Group and executive vice president of the New Business Planning Group and the Marketing Group. Mr. Yoon holds a bachelor’s degree in air telecommunication engineering from Hankuk Aviation University and a master’s degree in electronic engineering from Yonsei University.
Jeong-Soo Suh is a standing director and has served as senior executive vice president of the Corporate Strategy Group since September 2005. He has previously served as senior vice president of the Planning and Coordination Office and a chief financial officer of KT Corporation. Mr. Suh holds a bachelor’s degree in economics from Sungkyunkwan University and an M.B.A. degree from Yonsei University.
Jeong-Ro Yoon has served as outside director since March 2004. She is currently a professor of humanities and social sciences at Korea Advanced Institute of Science and Technology and has served as vice president of Korean Sociological Association. Ms. Yoon holds a bachelor’s degree in sociology from Seoul National University and has received both her graduate and Ph.D. degrees in sociology from Harvard University.
Kon-Sik Kim has served as outside director since March 2004. He is currently a professor of law at Seoul National University and has served as a visiting lecturer at University of Washington. Mr. Kim holds a bachelor’s degree in law from Seoul National University and a J.D. degree and a Ph.D. degree in law from University of Washington.
Jong-Kyoo Yoon has served as outside director since March 2006. He is currently senior counsel of Kim & Chang and has served as senior executive vice president of Kookmin Bank. Mr. Yoon holds a bachelor’s degree and a Ph.D degree in business administration from Sungkyunkwan University and an M.B.A. degree from Seoul National University.
Jeong-Suk Koh has served as outside director since February 2008. He is currently chief executive officer of Ilshin Investment Co., Ltd. and was formerly a management consultant at McKinsey & Company. Mr. Koh holds a bachelor’s degree in business administration from Seoul National University, a master’s degree in management science from Korea Advanced Institute of Science and Technology and a doctoral degree from Massachusetts Institute of Technology.
Gyu-Taeg Oh has served as outside director since February 2008. He is currently a professor of business administration at Chung-Ang University. Mr. Oh holds a bachelor’s degree in economics from Seoul National University and a Ph.D. degree in economics from Yale University.
Do-Whan Kim has served as outside director since March 2003. He is currently a professor of business management at Sejong University and was formerly a senior research fellow at Korea Information Society Development Institute. Mr. Kim holds a bachelor’s degree in business administration from Sungkyunkwan University, a graduate degree in management science from Korea Advanced Institute of Science and Technology and a Ph.D. degree in managerial economics and decision science from Northwestern University.
Paul C. Yi (Chang Yop Yi) has served as outside director since March 2007. He is currently chief executive officer of Coca-Cola Korea Company Ltd. and has served as chief executive officer of Nongshim Kellogg Co., Ltd. and as head of the Korean branch of Hershey Foods Corporation. Mr. Yi holds a bachelor’s degree in accounting from University of Texas at Austin and an M.B.A. degree from Columbia Business School.
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For the purposes of the Korean Commercial Code, our President is deemed to be the “representative director” who is authorized to perform all judicial and extra-judicial acts relating to our business. Our shareholders elect the President in accordance with the provisions of the Commercial Code and our articles of incorporation. A candidate for President is nominated by a committee formed for that purpose. The president candidate nominating committee consists of:
all of our outside directors;
one person who is designated by the board of directors from among the ex-presidents; and
one civilian designated by outside directors, except former and present officers and employees of telecom carriers competing with us, their affiliates, our officers and employees and government officers.
Under our articles of incorporation, the president candidate nominating committee must submit a draft management contract between the company and the candidate covering the management objectives of the company to the shareholders’ meeting at the time of nomination of the candidate to the meeting. When the draft management contract has been approved at the shareholders’ meeting, the company enters into such management contract with the president. In such case, the chairman of the president candidate nominating committee, on behalf of the company, signs the management contract.
The board of directors may conduct performance review discussions to determine if the new president performed his or her duties under the management contract, or hire a professional evaluation agency for such purpose. If the board of directors determines, based on the results of the performance review, that the new president has failed to achieve the management goals, it may propose to dismiss the president at a shareholders’ meeting.
Senior Management
Our executive officers consist of Senior Executive Vice President, Executive Vice Presidents, Senior Vice Presidents and Vice Presidents. The executive officers other than the standing directors are appointed by the President and may serve up to three years. Our Chief Financial Officer is Soo-Ho Maeng, Executive Vice President of the Financial Management Office.
The current executive officers are as follows:
Name(1)
Title and Responsibilities
Hee-Kyun Park
Senior Executive Vice President, Management Support Group
Haing Min Kwon
Executive Vice President, Group Strategy CFT Office
Soo-Ho Maeng
Executive Vice President, Financial Management Office
Byung-Woo Lee
Executive Vice President, Marketing Group
Young-Whan Kim
Executive Vice President, Business Group
Gwang-Ju Seo
Executive Vice President, Network Group
Han-Suk Kim
Executive Vice President, Global Business Unit
Sung-Man Kim
Executive Vice President, Metropolitan North Regional Business Unit
Byoung-Kon Shin
Executive Vice President, Metropolitan South Regional Business Unit
Tae-Yol Yoo
Senior Vice President, Chungnam Regional Business Unit
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Seok-Keun Oh
Senior Vice President, Corporate Relations Support Office
Won-Joong Song
Ouk-Jung Hwang
Senior Vice President, Real Assets Management Office
Ok-Kie Lee
Senior Vice President, Information and Technology Strategy and Planning Unit
Gil-Joo Lee
In-Kyu Park
Dong-Myun Lee
Senior Vice President, Next Generation Development Task Force Team
Young-Hee Lee
Senior Vice President, Future Technology Laboratory
Jeong-Tae Park
Sang-Hong Lee
Yu-Yeol Seo
Senior Vice President, Marketing Strategy Business Unit
Kyung-Choon Shin
Senior Vice President, Operation Innovation Business Unit
Byoung-Seon Jeon
Jong-Jin Chae
Senior Vice President, Corporate Customer Business Unit
In-Sung Jeon
Senior Vice President, Networked Information Technology Business Planning Unit
Tae-Il Park
Senior Vice President, Network Management Business Unit
Sun-Cheol Gweon
Senior Vice President, Technology Engineering Business Unit
Dong-Hoon Han
Senior Vice President, Technology Support Business Unit
Yoon-Hak Bang
Senior Vice President, Network Technology Laboratory
Sang-Eun Woo
Senior Vice President, Metropolitan West Regional Business Unit
Sang-Heon Song
Senior Vice President, Busan Regional Business Unit
Kie-You Song
Senior Vice President, Jeonnam Regional Business Unit
Dae-Jeon Roh
Senior Vice President, Daegu Regional Business Unit
Deok-Rae Lim
Sung-Ho Myung
Senior Vice President, Jeonbuk Regional Business Unit
Young-Goon Yoo
Senior Vice President, Kangwon Regional Business Unit
Chun Hong Choi
Senior Vice President, Chungbuk Regional Business Unit
Tae-Ho Kim
Won-Sang Park
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Yong-Seog Choi
Il-Sung Nam
Vice President, Human Resources Development Center
Sang-Choon Kim
Yoon-Young Park
Vice President Next Generation Business Task Force Team
Ju-Kyo Shim
Myung-Dong Kim
Kyung-Seok Park
Vice President, Corporate Customer Service Business Unit
Yong-Sik Yoon
Hyung-Oak Park
Vice President, Technology Engineering Business Unit
Pan-Sik Shin
Sang-Won Seo
Vice President, Information and Technology Business Unit
Joun-Il Ku
Young-Nam Lee
Sang-Hoon Lee
Senior Executive Vice President, secondment to Telecodia
Suk-Joon Park
Senior Vice President, research leave to Korea National Defense University
Tae-Poong Kang
Senior Vice President, research leave to Duke University
Deok-Kyum Kim
Senior Vice President, research leave to Sejong Institute
Young-Gwun Kim
Hoon Han
Executive Vice President, Strategy Planning Office
Dong-Hyun Han
Senior Vice President, Business Structure Planning Office
Jae-Hong Yoon
Do-Hwan Choi
Senior Executive Vice President, New Business Group
Kyung-Lim Yoon
Hyun-Myung Pyo
Man-Ho Jung
Tae-Soo Jung
Senior Vice President, Service Development Business Unit
Bum-Joon Kim
Chan-Kyung Park
Young-Lyoul Lee
Tae Jin Kang
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Item 6.B. Compensation
Compensation of Directors and Executive Officers
In 2007, the total amount of salaries, bonuses (including long-term performance-based incentives for standing directors) and allowances paid and accrued to all standing directors and executive officers of KT Corporation for services in all capacities was approximately Won 17 billion. The aggregate amount accrued by us to provide retirement benefits to such persons was Won 1.7 billion in 2007. Outside directors do not receive salaries or retirement and severance benefits, but we pay long-term performance-based incentives as well as expenses related to the execution of their duties.
The chairman of the president nominating committee enters into an employment agreement on our behalf with our current President. The employment agreement sets certain management targets to be achieved by the President, including a target for the amount of “economic value added” to be achieved in each year. Economic value added is defined as net operating profits after tax minus the cost of capital. Failure to achieve certain thresholds below the targets will allow the board of directors to take actions with respect to the President’s employment, including proposing to the shareholders’ meeting an early termination of his employment. In addition, the head of each of our functional departments, the president of each of our subsidiaries and the heads of each regional head office have entered into employment agreements with the President that provides for similar management targets to be achieved by each of our departments, subsidiaries and regional head offices.
Item 6.C. Board Practices
As of December 31, 2007, none of our standing or outside directors maintained directors’ service contracts with us or with any of our subsidiaries providing for benefits upon termination of employment.
Outside Director Candidate Recommendation Committee
The Outside Director Candidate Recommendation Committee consists of one standing director and all of our outside directors, other than for election of an outside director resulting from the expiration of the term of the office, in which case such outside director whose term is expiring may not be a member of the committee. The committee formed in connection with the recommendation of outside director candidates in February 2008 is comprised of Jeong-Ro Yoon, Do-Whan Kim, Kon-Sik Kim, Jong-Kyoo Yoon, Paul C. Yi and Jeong-Soo Suh, and the chairman was Jeong-Ro Yoon. The committee’s duties include reviewing the qualifications of potential candidates and proposing nominees to serve as outside directors on our board of directors. The committee members’ terms expire immediately after the adjournment of the shareholders’ meeting where the outside directors are elected.
Evaluation and Compensation Committee
The Evaluation and Compensation Committee is currently comprised of five outside directors, Jong-Kyoo Yoon, Jeong-Ro Yoon, Do-Whan Kim, Jeong-Suk Koh and Gyu-Taeg Oh. The chairman is Jong-Kyoo Yoon. The committee’s duties include the appointment of an outside management evaluation consulting firm, prior review of the President’s management goals, terms and conditions proposed for inclusion in the employment contract of the President, including, but not limited to, determining whether the President has achieved the management goals, and the determination of compensation of the President and the standing directors. The committee members are elected by the board after the closing of the annual meeting, and the term of the committee members is for one year.
Executive Committee
The Executive Committee is currently comprised of all of the standing directors. The chairman is Joong-Soo Nam. The committee’s duties include the establishment and management of branch offices, the acquisition and disposal of real estate having market value between Won 10 billion to Won 30 billion, making investments and
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providing guarantees up to Won 10 billion, the disposal and sale of stocks of our subsidiaries, which stocks have a market value of between Won 10 billion and Won 30 billion, provided that no change of control with respect to such subsidiary occurs as a result of such disposal or sale, the authorization of charitable contributions between Won 100 million to Won 1 billion and the issuance of certain debt securities.
Related-Party Transactions Committee
The Related-Party Transactions Committee is currently comprised of four outside directors, Kon-Sik Kim, Do-Whan Kim, Paul C. Yi and Jeong-Suk Koh. The chairman is Kon-Sik Kim. This committee reviews transactions between KT Corporation and its subsidiaries and ensures compliance with applicable antitrust laws. The committee members are elected by the board after the annual meeting, and the term of the committee members is for one year.
Audit Committee
Under the Securities and Exchange Act of Korea, we are required to establish an audit committee comprised of three or more outside directors. Audit Committee members must also meet the applicable independence criteria set forth under the rules and regulations of the Sarbanes-Oxley Act of 2002. The committee is currently comprised of Do-Whan Kim, Jeong-Ro Yoon, Jong-Kyoo Yoon and Gyu-Taeg Oh. The chairman is Do-Whan Kim. Members of the committee are elected by our shareholders at the shareholder’s meeting. Our internal and external auditor report directly to the committee.
The duties of the committee include:
engaging independent auditors;
evaluating performance of independent auditors;
approving services to be provided by the independent auditors;
reviewing annual financial statements;
reviewing audit results and reports;
reviewing and evaluating our system of internal controls and policies; and
examining improprieties or suspected improprieties.
In addition, in connection with the shareholders’ meeting, the committee examines the agenda for, and financial statement and other reports to be submitted by the board of directors, at each shareholders’ meeting.
Differences in Corporate Governance Practices
Pursuant to the rules of the New York Stock Exchange applicable to foreign private issuers like us that are listed on the New York Stock Exchange, we are required to disclose significant differences between the New York Stock Exchange’s corporate governance standards and those that we follow under Korean law and in accordance with our own internal procedures. The following is a summary of such significant differences.
NYSE Corporate Governance Standards
KT Corporation’s Corporate Governance Practice
Director Independence
Independent directors must comprise a majority of the board.
The Securities and Exchange Act of Korea requires that our board of directors must comprise no less than a majority of outside directors. Our outside directors must meet the criteria for outside directorship set forth under the Securities and Exchange Act of Korea.
The majority of our board of directors is independent (as defined in accordance with the New York Stock Exchange’s standards), and 7 out of 10 directors are outside directors.
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Nomination/Corporate Governance Committee
Listed companies must have a nomination/corporate governance committee composed entirely of independent directors.
Compensation Committee
Listed companies must have a compensation committee composed entirely of independent directors.
Executive Session
Listed companies must hold meetings solely attended by non-management directors to more effectively check and balance management directors.
Listed companies must have an audit committee that is composed of more than three directors and satisfy the requirements of Rule 10A-3 under the Exchange Act.
Shareholder Approval of Equity Compensation Plan
Listed companies must allow its shareholders to exercise their voting rights with respect to any material revision to the company’s equity compensation plan.
We currently have two equity compensation plans: one providing for the grant of stock options to officers and directors; and an employee stock ownership association program.
All material matters related to the granting stock options are provided in our articles of incorporation, and any amendments to the articles of incorporation are subject to shareholders’ approval. Matters related to the employee stock ownership association program are not subject to shareholders’ approval under Korean law.
Corporate Governance Guidelines
Listed companies must adopt and disclose corporate governance guidelines.
Code of Business Conduct and Ethics
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for executive officers.
Item 6.D. Employees
KT Corporation had 36,913 employees as of December 31, 2007, compared to 37,514 employees as of December 31, 2006 and 37,904 employees as of December 31, 2005. KTF had 2,583 employees as of December 31, 2007, compared to 2,505 employees as of December 31, 2006 and 2,492 employees as of December 31, 2005.
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The Voluntary Early Retirement Programs
We sponsor voluntary early retirement programs where we provide additional financial incentives for our employees to retire early, as part of our efforts to improve operational efficiencies. In 2005, 118 employees retired under KT Corporation’s voluntary early retirement plan. Another 564 employees and 538 employees retired under KT Corporation’s voluntary early retirement plan in 2006 and 2007, respectively.
Labor Relations
We consider our current relations with our work force to be good. However, in the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing of non-core businesses and reducing our employee base.
Under Korean labor law, our employees are permitted to strike. However, because the maintenance of our network is in the public interest, the Government has the authority to mediate or arbitrate any strike, as well as any disagreement involving the collective bargaining process. Criminal proceedings may be brought against any party refusing Government mediation or arbitration. The current collective bargaining agreement provides that even in the event of a strike, the minimum number of employees necessary to operate the telecommunications business must continue to work.
As of December 31, 2007, about 80.6% of all employees of KT Corporation were members of the KT Trade Union. On behalf of its members, the Union negotiates with us a collective bargaining agreement every two years, and our current collective bargaining agreement expires on November 12, 2009. The Union also negotiates with us an annual agreement on wages on behalf of its members. Our annual agreement on wages for 2007 provided for an increase in base salary of 2.6%. Under the Act of the Promotion of Worker’s Participation and Cooperation, our Employee-Employer Cooperation Committees, which are composed of representatives of management and labor for each business unit and regional office, meet quarterly to discuss employee grievances, working conditions and potential employee-initiated improvements in service or management.
Employee Stock Ownership and Benefits
We have an employee stock ownership association, which may purchase on behalf of its members up to 20.0% of any of our shares offered publicly in Korea. The employee stock ownership association owned 5.6% of our issued shares as of December 31, 2007.
We maintain a retirement and severance plan, as required by Korean labor law. Employees terminating their employment after one year or more of service are entitled to receive a lump-sum payment based upon the length of their service and their wage rates, with adjustments, at the time of termination. We make provision for our obligations under the retirement plan. In addition, we provide a wide range of fringe benefits to our employees, including physical education grants, meal allowances, housing, housing loans, medical examinations and training and resort centers. See “Item 5. Operating and Financial Review and Prospects—Item. 5.A. Operating Results—Salaries and Related Costs.”
Employee Training
The objective of our training program is to develop information and technology specialists who are able to create value for our customers. In recent years, we have been focusing our efforts on development of (i) consultants who interact closely with our customers such as sales professionals and information and technology supporters, (ii) key management professionals and (iii) professionals who are dedicated to developing, marketing and servicing new growth businesses such as WiBro or IP-TV. In order to develop skills of our employees, we require 100 hours of training per year from most of our employees, using personally-tailored curriculums based on individual assessments. We also operate Cyber Academy to provide online classes to our employees, as well as offer various foreign language classes to our employees and their families. We also provide tuition and living expense reimbursements to our key employees who pursue graduate programs in Korea
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and abroad, as well as provide financial assistance to those who pursue work-related professional licenses or participate in after-work study programs. We spent Won 24 billion in employee training in 2007.
Item 6.E. Share Ownership
Common Stock
The persons who are currently our directors held, as a group, 64,241 common shares as of April 10, 2008, the most recent date for which this information is available. This represented approximately 0.02% of our outstanding common shares as of April 10, 2008. The table below shows the ownership of our common shares by directors.
Shareholders
Paul Chang Yi (Chang Yub Yi)
Do-Hwan Kim
Stock Options
We have not granted any stock options to our current directors and executive officers.
Item 7. Major Shareholders and Related Party Transactions
Item 7.A. Major Shareholders
The following table sets forth certain information relating to the shareholders of our common stock as of December 31, 2007:
Employee stock ownership association
National Pension Corporation
Directors as a group
Public
KT Corporation (held in the form of treasury stock)(1)
Total issued shares
Before 1993, the Government owned all of our shares. Since 1993, the Government has gradually reduced its ownership and completed the disposition of its ownership interest in us in May 2002.
For a discussion of our relationship with the Government, see “Item 4. Information on the Company—Item 4.B. Business Overview—Relationship with the Government.” For a discussion of the Government’s dispositions and plans for future dispositions of shares, see “Item 4. Information on the Company—Item 4.C. Organizational Structure.”
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Item 7.B. Related Party Transactions
We have issued guarantees of Won 43 billion as of December 31, 2005, Won 35 billion as of December 31, 2006 and Won 113 billion and $31 million as of December 31, 2007, in favor of our consolidated subsidiaries. We have also engaged in various transactions with our subsidiaries and affiliated companies. See Note 16 to the Consolidated Financial Statements.
Item 7.C. Interests of Experts and Counsel
Item 8. Financial Information
Item 8.A. Consolidated Statements and Other Financial Information
See “Item 18—Financial Statements” and pages F-1 through F-111.
Legal Proceedings
Dispute with the Korea Fair Trade Commission
In July 2004, the Korea Fair Trade Commission began an antitrust investigation into alleged unfair collaborative practices of us, Hanarotelecom, LG DACOM and Onse in local, domestic long-distance and international long-distance telephone service markets, as well as in broadband Internet access and Internet leased line service markets. On May 25, 2005, the Korea Fair Trade Commission imposed fines of Won 116 billion on us, Won 2 billion on Hanarotelecom and Won 1 billion on LG DACOM, claiming that we and these other companies engaged in unfair collaborative practices in local telephone and Internet leased line service markets. On September 14, 2005, the Korea Fair Trade Commission imposed an additional fine of Won 24 billion on us for our alleged unfair collaborative practices in domestic and international long-distance telephone service markets. We were following administrative guidelines from the Ministry of Information and Communication, which had advised that we, as a dominant service provider in these telephone service markets, assist late market entrants in order to promote more competitive telephone service markets in Korea. The legality of such administrative guidelines from the Ministry of Information and Communication has been disputed by the Korea Fair Trade Commission. We filed for judicial review of administrative actions related to local, domestic long-distance and international long-distance telephone service markets, and the Seoul High Court rendered its decision on August 22, 2007 in which it overturned the Korea Fair Trade Commission’s order to pay Won 113 billion in fines on the basis that the Korea Fair Trade Commission’s calculation of fines did not consider (i) the correct period of our engagement in unfair collaborative practices, (ii) the extent of benefits obtained by us from engaging in such practices and (iii) the fact that we were following administrative guidelines issued by the Ministry of Information and Communication. Both the Korea Fair Trade Commission and we have appealed the Seoul High Court’s decision to the Supreme Court of Korea, and the case is currently pending therein.
Miscellaneous
We are a defendant in various court proceedings involving claims for civil damages arising in the ordinary course of our business. While we are unable to predict the ultimate disposition of these claims, in the opinion of our management, the ultimate disposition of these claims will not, taken as a whole, have a material adverse effect on us.
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Dividends
The table below sets out the annual dividends declared on the outstanding common stock to shareholders of record on December 31 of the years indicated and the interim dividends declared on the outstanding common stock to shareholders of record on June 30 of the years indicated.
Year
If sufficient profits are available, the Board of Directors may propose annual dividends on the outstanding common stock, which our shareholders must approve by a resolution at the ordinary general meeting of shareholders. This meeting is generally held in March of the following year and if our shareholders at such ordinary general meeting of shareholders approve the annual dividend, we must pay such dividend within one month following the date of such resolution. Typically, we pay such dividends shortly after the meeting. The declaration of annual dividends is subject to the vote of our shareholders, and consequently, there can be no assurance as to the amount of dividends per common stock or that any such dividends will be declared. Interim dividends paid in cash can be declared by a resolution of the board of directors. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association—Dividends” and “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares—Dividends and Distributions.”
The Commercial Code provides that shares of a company of the same class must receive equal treatment. However, major shareholders may consent to receive dividend distributions at a lesser rate than minor shareholders. Previously, the Government consented to receiving a smaller dividend compared to other shareholders. The Government no longer holds any interest in us.
Any cash dividends relating to the shares held in the form of ADSs will be paid to the depositary bank in Won. The deposit agreement provides that, except in certain circumstances, cash dividends received by the depositary bank will be converted by the depositary bank into Dollars and distributed to the holders of the ADRs, less withholding tax, other governmental charges and the depositary bank’s fees and expenses. See “Item 12. Description of Securities Other than Equity Securities—Description of the American Depositary Shares—Dividends and Distributions.”
Item 8.B. Significant Changes
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Item 9. The Offer and Listing
Item 9.A. Offer and Listing Details
Market Price Information
Our shares were listed on the Stock Market Division of the Korea Exchange on December 23, 1998. The price of the shares on the Stock Market Division of the Korea Exchange as of the close of trading on June 27, 2008 was Won 44,800 per share. The table below shows the high and low closing prices and the average daily volume of trading activity on the Stock Market Division of the Korea Exchange for the shares.
First quarter
Second quarter
Third quarter
Fourth quarter
Second quarter (through June 27)
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ADSs
The outstanding ADSs, each of which represents one-half of one share of our common stock, are traded on the New York Stock Exchange and the London Stock Exchange since May 25, 1999.
The price of the ADSs on the New York Stock Exchange as of the close of trading on June 27, 2008 was $21.26 per ADS. The table below shows the high and low trading prices and the average daily volume of trading activity on the New York Stock Exchange for our ADSs since January 2004.
Item 9.B. Plan of Distribution
Item 9.C. Markets
The Stock Market Division of the Korea Exchange
On January 27, 2005, the Korea Exchange was established pursuant to the Korea Securities and Futures Exchange Act through the consolidation of the Korea Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock Market, Inc. (the “KOSDAQ”) and the KOSDAQ Committee within the Korea Securities Dealers Association, which was in charge of the management of the KOSDAQ. There are three different markets operated by the Korea Exchange: the Stock Market, the KOSDAQ Market and the Futures Market. The Korea Exchange has two trading floors located in Seoul, one for the Stock Market and one for the KOSDAQ Market, and one trading floor in Busan for the Futures Market. The Korea Exchange is a limited liability company, the shares of which are held by (i) securities companies and futures companies that were formerly members of the Korea Stock Exchange or the Korea Futures Exchange, (ii) the Small Business Corporation, (iii) the Korea Securities Finance Corporation and (iv) the Korea Securities Dealers Association. Currently, the Korea Exchange
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is the only stock exchange in Korea and is operated by membership, having as its members most of the Korean securities companies and some Korean branches of foreign securities companies.
The Stock Market Division of the Korea Exchange has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security. The Stock Market Division of the Korea Exchange also restricts share price movements. All listed companies are required to file accounting reports annually and quarterly and to release immediately all information that may affect trading in a security.
The Government has in the past exerted, and continues to exert, substantial influence over many aspects of the private sector business community which can have the intention or effect of depressing or boosting the market. In the past, the Government has informally both encouraged and restricted the declaration and payment of dividends, induced mergers to reduce what it considers excess capacity in a particular industry and induced private companies to offer publicly their securities.
The Stock Market Division of the Korea Exchange publishes the Korea Composite Stock Price Index every two seconds, which is an index of all equity securities listed on the Stock Market Division of the Korea Exchange. On January 1, 1983, the method of computing the Korea Composite Stock Price Index was changed from the Dow Jones method to the aggregate value method. In the new method, the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.
Movements in Korea Composite Stock Price Index are set out in the following table together with the associated dividend yields and price earnings ratios.
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
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Source: The Stock Market Division of the Korea Exchange
Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period; since the calendar year is the accounting period for the majority of listed companies, this may account for the drop in the Korea Composite Stock Price Index between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.
With certain exceptions, principally to take account of a share being quoted “ex-dividend” and “ex-rights,” permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the Stock Market Division of the Korea Exchange to 15% of the previous day’s closing price of the shares, rounded down as set out below:
Previous Days’ Closing Price
Less than (Won)5,000
(Won)5,000 to less than (Won)10,000
(Won)10,000 to less than (Won)50,000
(Won)50,000 to less than (Won)100,000
(Won)100,000 to less than (Won)500,000
(Won)500,000 or more
As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.
Due to a deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the Stock Market Division of the Korea Exchange by the securities companies. In addition, a securities transaction tax will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares at the rate of 0.15% if such transfer is made through the Stock Market Division of the Korea Exchange. A special agricultural and fishery tax of 0.15% of the sales prices will also be imposed on transfer of these shares and securities on the Stock Market Division of the Korea Exchange. See “Item 10. Additional Information—Item 10.A. Taxation—Korean Taxation.”
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The number of companies listed on the Stock Market Division of the Korea Exchange, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods are set forth in the following table:
The Korean securities markets are principally regulated by the Financial Services Commission of Korea and the Securities and Exchange Act. The Securities and Exchange Act was amended fundamentally numerous times in recent years to broaden the scope and improve the effectiveness of official supervision of the securities markets. As amended, the law imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation, takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests.
Further Opening of the Korean Securities Market
A stock index futures market was opened on May 3, 1996 and a stock index option market was opened on July 7, 1997, in each case at the Stock Market Division of the Korea Exchange. Remittance and repatriation of funds in connection with investment in stock index futures and options are subject to regulations similar to those that govern remittance and repatriation in the context of foreign investment in Korean stocks.
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Starting from May 1, 1996, foreign investors were permitted to invest in warrants representing the right to subscribe for shares of a company listed on the Stock Market Division of the Korea Exchange or registered on the KOSDAQ Market Division of the Korea Exchange, subject to certain investment limitations. A foreign investor may not acquire such warrants with respect to shares of a class of a company for which the ceiling on aggregate investment by foreigners has been reached or exceeded.
As of December 30, 1997, foreign investors were permitted to invest in all types of corporate bonds, bonds issued by national or local governments and bonds issued in accordance with certain special laws without being subject to any aggregate or individual investment ceiling. The Financial Services Commission sets forth procedural requirements for such investments. The Government announced on February 8, 1998 its plans for the liberalization of the money market with respect to investment in money market instruments by foreigners in 1998. According to the plan, foreigners have been permitted to invest in money market instruments issued by corporations, including commercial paper, starting February 16, 1998 with no restrictions as to the amount. Starting May 25, 1998, foreigners have been permitted to invest in certificates of deposit and repurchase agreements.
Currently, foreigners are permitted to invest in securities including shares of all Korean companies which are not listed on the Stock Market Division of the Korea Exchange nor registered on the KOSDAQ Market Division of the Korea Exchange and in bonds which are not listed.
Protection of Customer’s Interest in Case of Insolvency of Securities Companies
Under Korean law, the relationship between a customer and a securities company in connection with a securities sell or buy order is deemed to be consignment and the securities acquired by a consignment agent (i.e., the securities company) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving a securities company, the customer of the securities company is entitled to the proceeds of the securities sold by the securities company.
When a customer places a sell order with a securities company which is not a member of the Stock Market Division of the Korea Exchange and this securities company places a sell order with another securities company which is a member of the Stock Market Division of the Korea Exchange, the customer is still entitled to the proceeds of the securities sold received by the non-member company from the member company regardless of the bankruptcy or reorganization of the non-member company.
Under the Securities and Exchange Act, the Stock Market Division of the Korea Exchange is obliged to indemnify any loss or damage incurred by a counterparty as a result of a breach by its members. If a securities company which is a member of the Stock Market Division of the Korea Exchange breaches its obligation in connection with a buy order, the Stock Market Division of the Korea Exchange is obliged to pay the purchase price on behalf of the breaching member. Therefore, the customer can acquire the securities that have been ordered to be purchased by the breaching member.
When a customer places a buy order with a non-member company and the non-member company places a buy order with a member company, the customer has the legal right to the securities received by the non-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and the non-member company’s creditors are concerned.
As the cash deposited with a securities company is regarded as belonging to the securities company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the securities company if a bankruptcy or reorganization procedure is instituted against the securities company and, therefore, can suffer from loss or damage as a result. However, the Depositor Protection Act provides that Korea Deposit Insurance Corporation will, upon the request of the investors, pay investors up to Won 50 million in case of the securities company’s bankruptcy, liquidation, cancellation of securities business license or other
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insolvency events. Pursuant to the Securities and Exchange Act, as amended, securities companies are required to deposit the cash received from its customers to the extent the amount not covered by the insurance with the Korea Securities Finance Corporation, a special entity established pursuant to the Securities and Exchange Act.
Set-off or attachment of cash deposits by securities companies is prohibited. The premiums related to this insurance are paid by securities companies.
Item 9.D. Selling Shareholders
Item 9.E. Dilution
Item 9.F. Expenses of the Issuer
Item 10. Additional Information
Item 10.A. Share Capital
Currently, our authorized share capital is 1,000,000,000 shares, which consists of shares of common stock, par value Won 5,000 per share (“Common Shares”) and shares of non-voting preferred stock, par value Won 5,000 per share (“Non-Voting Shares”). Common Shares and Non-Voting Shares together are referred to as “Shares.” Under our articles of incorporation, we are authorized to issue Non-Voting Shares up to one-fourth of our total issued capital stock. As of December 31, 2007, 275,202,400 Common Shares were issued, of which 71,515,577 shares were held by the treasury stock fund or us as treasury shares. We have never issued any Non-Voting Shares. All of the issued Common Shares are fully-paid and non-assessable and are in registered form. We issue share certificates in denominations of 1, 5, 10, 50, 100, 500, 1,000 and 10,000 shares.
Item 10.B. Memorandum and Articles of Association
This section provides information relating to our capital stock, including brief summaries of material provisions of our articles of incorporation, the Korean Securities and Exchange Act of 1962 (the “Securities and Exchange Act”), the Commercial Code and related laws of Korea, all as currently in effect. The following summaries are subject to, and are qualified in their entirety by reference to, our articles of incorporation and the applicable provisions of the Securities and Exchange Act and the Commercial Code. We have filed copies of our articles of incorporation and these laws as exhibits to registration statements under the Securities Act or the Securities Exchange Act previously filed by us.
We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. No dividends are distributed with respect to shares held by us or our treasury stock fund. The Common Shares represented by the ADSs have the same dividend rights as other outstanding Common Shares.
Holders of Non-Voting Shares are entitled to receive dividends in priority to the holders of Common Shares in an amount of not less than 9% of the par value of the Non-Voting Shares as determined by the board of directors at the time of their issuance, provided that if the dividends on the Common Shares exceed those on the Non-Voting Shares, the Non-Voting Shares will also participate in the distribution of such excess dividend amount in the same proportion as the Common Shares. If the amount available for dividends is less than the
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aggregate amount of such minimum dividend, the holders of Non-Voting Shares will be entitled to receive such accumulated unpaid dividend in priority to the holders of Common Shares from the dividends payable in respect of the next fiscal year.
We declare dividends annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record as of the end of the preceding fiscal year. We may distribute the annual dividend in cash or in Shares. However, a dividend of Shares must be distributed at par value. If the market price of the Shares is less than their par value, dividends in Shares may not exceed one-half of the annual dividend. We may pay interim dividends in cash once a year to shareholders or registered pledgees who are registered in the registry of shareholders as of June 30 of each fiscal year by a resolution of the board of directors. We have no obligation to pay any annual dividend unclaimed for five years from the payment date.
Under the Commercial Code, we may pay our dividend only out of the excess of our net assets, on a non-consolidated basis, over the sum of (1) our stated capital and (2) the total amount of our capital surplus reserve and legal reserve accumulated up to the end of the relevant dividend period. In addition, we may not pay any dividend unless we have set aside as legal reserve an amount equal to at least 10% of the cash portion of the dividend or unless we have accumulated a legal reserve of not less than one-half of our stated capital. Financial Services Commission regulations applicable to companies listed on the Stock Market Division of the Korea Exchange requires us to set aside specified amounts as financial structure improvement reserve until the ratio of our shareholders’ equity to the total assets reaches 30.0%. We may not use legal reserve to pay cash dividends but may transfer amounts from legal reserve to capital stock or use legal reserve to reduce an accumulated deficit.
Distribution of Free Shares
In addition to paying dividends in Shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from our capital surplus or legal reserve to our stated capital in the form of free shares. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings.
Preemptive Rights and Issuance of Additional Shares
We may issue authorized but unissued shares at times and, unless otherwise provided in the Commercial Code, on terms our board of directors may determine. Subject to the limitation described in “Limitation on Shareholdings” below, all our shareholders are generally entitled to subscribe for any newly issued Shares in proportion to their existing shareholdings. We must offer new Shares on uniform terms to all shareholders who have preemptive rights and are listed on our shareholders’ register as of the relevant record date. Under the Commercial Code, we may vary, without shareholders’ approval, the terms of these preemptive rights for different classes of shares. We must give notice to all persons who are entitled to exercise preemptive rights regarding new Shares and their transferability at least two weeks before the relevant record date. Our board of directors may determine how to distribute Shares for which preemptive rights have not been exercised or where fractions of Shares occur.
Under the Commercial Code, it is required that the new Shares, convertible bonds or bonds with warrants be issued to persons other than the existing shareholders solely for the purpose of achieving managerial objectives. Under our articles of incorporation, we may issue new Shares pursuant to a board resolution to persons other than existing shareholders, who in these circumstances will not have preemptive rights, if the new Shares are:
publicly offered pursuant to the Securities and Exchange Act;
issued to members of our employee stock ownership association;
represented by depositary receipts;
issued upon exercise of stock options granted to our officers and employees;
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issued through an offering to public investors, the amount of which is no more than 10% of the issued Shares;
issued in order to satisfy specific needs such as strategic alliance, inducement of foreign funds or new technology, improvement of financial structure or other capital raising requirement; or
issued to domestic or foreign financial institutions when necessary for raising funds in emergency cases.
In addition, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of Won 2,000 billion, to persons other than existing shareholders in situations described above.
Members of our employee stock ownership association, whether or not they are our shareholders, generally have a preemptive right to subscribe for up to 20.0% of the Shares publicly offered pursuant to the Securities and Exchange Act. This right is exercisable only to the extent that the total number of Shares so acquired and held by members of our employee stock ownership association does not then exceed 20.0% of the total number of Shares then issued (including in such total both: (i) all issued and outstanding Shares at the time the preemptive rights are exercised; and (ii) all Shares to be newly issued in the applicable share issuance transaction in connection with which such preemptive rights are exercised). As of December 31, 2007, 5.6% of the issued Shares were held by members of our employee stock ownership association.
Limitation on Shareholdings
The Telecommunications Business Act permits maximum aggregate foreign shareholding in us to be 49.0% of our total issued and outstanding Shares with voting rights (including equivalent securities with voting rights, e.g., depositary certificates and certain other equity interests). For the purposes of the foregoing, a shareholder is a “foreign shareholder” if such shareholder is: (1) a foreign person; (2) a foreign government; or (3) a company whose largest shareholder is a foreign person (including any “specially related persons” as determined under the Securities and Exchange Act) or a foreign government, in circumstances where (i) such foreign person or foreign government holds, in aggregate, 15.0% or more of such company’s total voting shares, and (ii) such company holds at least 1.0% of our total issued and outstanding Shares with voting rights. For the avoidance of doubt, all of conditions (i) to (ii) in the foregoing item (3) must exist for such a company to be counted as a “foreign shareholder” for the purposes of calculating whether the 49.0% foreign shareholding threshold is reached under the Telecommunications Business Act. In addition, the Telecommunications Business Act prohibits a foreign shareholder from being our largest shareholder if such shareholder owns 5.0% or more of our Shares with voting rights. For the purposes of this restriction, any two or more foreign persons or foreign governments who enter into an agreement to act in concert in the exercise of their voting rights will be counted together and prohibited from becoming our largest shareholder in the event that they collectively hold 5.0% or more of our Shares. The Foreign Investment Promotion Act also prohibits any foreign shareholder from being our largest shareholder, if such shareholder owns 5.0% or more of our Shares with voting rights. For the purposes of this restriction under the Foreign Investment Promotion Act, a “foreign shareholder” is defined in the same manner as described above with respect to the foreign shareholding restriction under the Telecommunications Business Act, provided, however, that no exception is made under the Foreign Investment Promotion Act regulations for companies that own less than 1.0% of our Shares (see item (3)(ii) above in this paragraph). A foreigner who has acquired the Shares in excess of such ceiling described above may not exercise its voting rights for shares in excess of such limitation, and the Korea Communications Commission may require corrective measures to comply with the ownership restrictions.
General Meeting of Shareholders
We hold the annual general meeting of shareholders within three months after the end of each fiscal year. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:
as necessary;
at the request of holders of an aggregate of 3.0% or more of our issued Common Shares;
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at the request of shareholders holding an aggregate of 1.5% or more of our issued Shares for at least six months; or
at the request of our audit committee.
Holders of Non-Voting Shares may request a general meeting of shareholders only after the Non-Voting Shares become entitled to vote or are enfranchised, as described under “—Voting Rights” below.
We must give shareholders written notice setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders. However, for holders of less than 1.0% of the total number of issued and outstanding Common Shares, we may give notice by placing at least two public notices in at least two daily newspapers at least two weeks in advance of the meeting. Currently, we use Seoul Shinmun, Maeil Business Newspaper and The Korea Economic Daily published in Seoul for this purpose. Shareholders not on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting. Holders of Non-Voting Shares, unless enfranchised, are not entitled to receive notice of general meetings of shareholders, but may attend such meetings.
Our general meetings of shareholders are held at our head office, in Sungnam, or if necessary, may be held anywhere near our head office or in Seoul.
Voting Rights
Holders of our Common Shares are entitled to one vote for each Common Share, except that voting rights of Common Shares held by us, or by a corporate shareholder that is more than 10.0% owned by us either directly or indirectly, may not be exercised. The Commercial Code permits cumulative voting, under which voting method each shareholder has multiple voting rights corresponding to the number of directors to be appointed in the voting and may exercise all voting rights cumulatively to elect one director. Our articles of incorporation permit cumulative voting at our shareholders’ meeting. Under the Securities and Exchange Act, any shareholder holding shares equivalent to not less than 1/100 of the total number of shares issued may apply to us for selecting and appointing such directors by cumulative voting.
Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting shares present or represented at the meeting, where the affirmative votes also represent at least one-fourth of our total voting shares then outstanding. However, under the Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at least two-thirds of the voting shares present or represented at a meeting, where the affirmative votes also represent at least one-third of our total voting shares then outstanding:
amending our articles of incorporation;
removing a director;
reduction of our capital stock;
effecting any dissolution, merger or consolidation of us;
transferring the whole or any significant part of our business;
effecting our acquisition of all of the business of any other company or our acquisition of a part of the business of any other company which will significantly affect our business; or
issuing any new Shares at a price lower than their par value.
In general, holders of Non-Voting Shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders. However, in the case of amendments to our articles of incorporation, any merger or consolidation of us, or in some other cases that affect the rights or interests of the Non-Voting Shares, approval of the holders of Non-Voting Shares is required. We may obtain such approval by a resolution of holders of at least two-thirds of the Non-Voting Shares present or represented at a class meeting of the holders of
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Non-Voting Shares, where the affirmative votes also represent at least one-third of our total outstanding Non-Voting Shares. In addition, if we are unable to pay dividends on Non-Voting Shares as provided in our articles of incorporation, the holders of Non-Voting Shares will become enfranchised and will be entitled to exercise voting rights until those dividends are paid. The holders of enfranchised Non-Voting Shares have the same rights as holders of Common Shares to request, receive notice of, attend and vote at a general meeting of shareholders.
Shareholders may exercise their voting rights by proxy. The proxy must present a document evidencing an appropriate power of attorney prior to the start of the general meeting of shareholders. Additionally, shareholders may exercise their voting rights in abstentia by submission of signed write-in voting forms. To make it possible for our shareholders to proceed with voting on a write-in basis, we are required to attach the appropriate write-in voting form and related informational material to the notices distributed to shareholders for convening the relevant general meeting of shareholders. Any of our shareholders who desires to vote on such write-in basis must submit their completed and signed write-in voting forms to us no later than one day prior to the date that the relevant general meeting of shareholders is convened.
Holders of ADRs exercise their voting rights through the ADR depositary, an agent of which is the record holder of the underlying Common Shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote the Common Shares underlying their ADSs. See “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares—Voting Rights.”
Rights of Dissenting Shareholders
In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their Shares. To exercise this right, shareholders must submit to us a written notice of their intention to dissent before the general meeting of shareholders. Within 20 days after the relevant resolution is passed at a meeting, the dissenting shareholders must request us in writing to purchase their Shares. We are obligated to purchase the Shares of dissenting shareholders within one month after the expiration of the 20-day period. The purchase price for the Shares is required to be determined through negotiation between the dissenting shareholders and us. If we cannot agree on a price through negotiation, the purchase price will be the average of (1) the weighted average of the daily Share prices on the Stock Market Division of the Korea Exchange for the two-month period before the date of the adoption of the relevant board resolution, (2) the weighted average of the daily Share price on the Stock Market Division of the Korea Exchange for the one month period before the date of the adoption of the relevant board resolution and (3) the weighted average of the daily Share price on the Stock Market Division of the Korea Exchange for the one week period before the date of the adoption of the relevant board resolution. However, the Financial Services Commission may intervene to adjust this price if we or any group of shareholders who hold in aggregate 30.0% or more of the total number of Shares that we are requested to purchase from dissenting shareholders do not accept the purchase price. Holders of ADSs will not be able to exercise dissenter’s rights unless they have withdrawn the underlying common stock and become our direct shareholders.
Register of Shareholders and Record Dates
Our transfer agent, Kookmin Bank, maintains the register of our shareholders at its office in Seoul, Korea. It registers transfers of Shares on the register of shareholders on presentation of the Share certificates.
The record date for annual dividends is December 31. For the purpose of determining the shareholders entitled to annual dividends, the register of shareholders may be closed for the period from the day after the record date to January 31 of the following year. Further, for the purpose of determining the shareholders entitled to some other rights pertaining to the Shares, we may, on at least two weeks’ public notice, set a record date and/or close the register of shareholders for not more than three months. The trading of Shares and the delivery of share certificates may continue while the register of shareholders is closed.
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Annual Reports
At least one week before the annual general meeting of shareholders, we must make our annual report and audited non-consolidated financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of annual reports, the audited non-consolidated financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.
Under the Securities and Exchange Act, we must file with the Financial Services Commission and the Stock Market Division of the Korea Exchange (1) an annual report within 90 days after the end of our fiscal year and (2) interim reports with respect to the three month period, six month period and nine month period from the beginning of each fiscal year within 45 calendar days following the end of each period. Copies of these reports are or will be available for public inspection at the Financial Services Commission and the Stock Market Division of the Korea Exchange.
Transfer of Shares
Under the Commercial Code, the transfer of Shares is effected by delivery of share certificates. However, to assert shareholders’ rights against us, the transferee must have his name and address registered on our register of shareholders. For this purpose, a shareholder is required to file his name, address and seal with our transfer agent. A non-Korean shareholder may file a specimen signature in place of a seal, unless he is a citizen of a country with a sealing system similar to that of Korea. In addition, a non-resident shareholder must appoint an agent authorized to receive notices on his behalf in Korea and file a mailing address in Korea. The above requirements do not apply to the holders of ADSs.
Under current Korean regulations, Korean securities companies and banks, including licensed branches of non-Korean securities companies and banks, investment management companies, futures trading companies, internationally recognized foreign custodians and the Korea Securities Depository may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of Shares by non-residents or non-Koreans. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”
Our transfer agent is Kookmin Bank, located at 24-3, Yoido-dong, Youngdungpo-ku, Seoul, Korea.
Acquisition of Shares by Us
We may not acquire our own Shares except in limited circumstances, such as a reduction in capital. In addition, we may acquire Shares (including equivalent securities with voting rights, e.g., depository certificates and certain other equity interests), directly or indirectly through a trustee pursuant to the Trust Business Act Supervisory Regulations, through purchases on the Stock Market Division of the Korea Exchange or through a tender offer. We may also acquire interests in our own Shares pursuant to (i) a trust agreement entered into with a asset management company established under the Indirect Investment Asset Management Business Act or with a trust company established under the Trust Business Act or (ii) indirectly by a contract for acquisition of shares issued by an investment company established under the Indirect Investment Asset Management Business Act and which investment company may from time to time hold Shares issued by us. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year, subject to certain procedural requirements, provided that, in case of acquisition of our own Shares by us for the purpose of cancellation, the aggregate purchase price may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year minus certain reserves.
In general, corporate entities in which we own a 50.0% or more equity interest may not acquire our Shares.
As of December 31, 2007, there were 71,515,577 treasury shares. Our treasury stock fund held 1,259,170 treasury shares as of December 31, 2007.
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Liquidation Rights
In the event of our liquidation, after payment of all debts, liquidation expenses and taxes, our remaining assets will be distributed among shareholders in proportion to their shareholdings. Holders of Non-Voting Shares have no preference in liquidation.
Item 10.C. Material Contracts
None.
Item 10.D. Exchange Controls
General
The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree (collectively the “Foreign Exchange Transaction Laws”) regulate investment in Korean securities by non-residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws, non-residents may invest in Korean securities only in compliance with the provisions of, and to the extent specifically allowed by, these laws or otherwise permitted by the Ministry of Strategy and Finance. The Financial Services Commission has also adopted, pursuant to its authority under the Korean Securities and Exchange Act, regulations that control investment by foreigners in Korean securities and regulate the issuance of securities outside Korea by Korean companies.
Under the Foreign Exchange Transaction Laws, if the Government deems that certain emergency circumstances, including, but not limited to, the outbreak of natural calamities, wars or grave and sudden changes in domestic or foreign economies, are likely to occur, the Ministry of Strategy and Finance may temporarily suspend the transactions where Foreign Exchange Transaction Laws are applicable, or impose an obligation to deposit or sell capital to certain Korean governmental agencies or financial institutions. In addition, if the Government deems that it is confronted or is likely to be confronted with serious difficulty in movement of capital between Korea and abroad which will bring serious obstacles in carrying out its currency policies, exchange rate policies and other macroeconomic policies, the Ministry of Strategy and Finance may take measures to require any person who performs transactions to deposit such capital to certain Korean governmental agencies or financial institutions.
Government Review of Issuance of ADSs
In order for us to issue shares represented by ADSs, we are required to file a prior report of the issuance with the Ministry of Strategy and Finance if our securities and borrowings denominated in foreign currencies issued during the one-year period preceding such filing date exceed US$30 million in aggregate. No further Korean governmental approval is necessary for the initial offering and issuance of the ADSs.
Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with the consent of us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We can give no assurance that we would grant our consent, if our consent is required. Therefore, a holder of ADRs who surrenders ADRs and withdraws shares may not be permitted subsequently to deposit those shares and obtain ADRs.
Reporting Requirements for Holders of Substantial Interests
Any person whose direct or beneficial ownership of shares, whether in the form of shares or ADSs, certificates representing the rights to subscribe for Shares and equity-related debt securities including convertible
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bonds and bonds with warrants (collectively, the “Equity Securities”) together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person accounts for 5.0% or more of the total issued Equity Securities is required to report the status of the holdings to the Financial Services Commission and the Stock Market Division of the Korea Exchange within five business days after reaching the 5.0% ownership interest. In addition, any change in the ownership interest subsequent to the report which equals or exceeds 1.0% of the total issued Equity Securities is required to be reported to the Financial Services Commission and the Stock Market Division of the Korea Exchange within five business days from the date of the change. The required information to be included in the 5.0% report may be different if the acquisition of such shareholding interest is for the purpose of exercising influence over the management, as opposed to an acquisition for investment purposes.
Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment and may result in a loss of voting rights with respect to the unreported ownership of Equity Securities exceeding 5.0%. Furthermore, the Financial Services Commission may issue an order to dispose of non-reported Equity Securities.
Restrictions Applicable to ADSs
No Korean governmental approval is necessary for the sale and purchase of ADSs in the secondary market outside Korea or for the withdrawal of shares underlying ADSs and the delivery inside Korea of shares in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration certificate from the Financial Supervisory Service as described below. In general, the acquisition of the shares by a foreigner must be reported by the foreigner or his standing proxy in Korea immediately to the Governor of the Financial Supervisory Service; provided, however, that in cases where a foreigner acquires shares through the exercise of rights as a holder of ADSs (or other depositary certificates), the foreigner must cause such report to the Governor of the Financial Supervisory Service to be filed by the Korea Securities Depository.
Persons who have acquired shares as a result of the withdrawal of shares underlying the ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further governmental approval.
Restrictions Applicable to Shares
As a result of amendments to the Foreign Exchange Transaction Laws and Financial Services Commission regulations adopted in connection with the stock market opening from January 1992, which we refer to collectively as the Investment Rules, foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the Stock Market Division of the Korea Exchange or registered on the KOSDAQ Market Division of the Korea Exchange, unless prohibited by specific laws. Foreign investors may trade shares listed on the Stock Market Division of the Korea Exchange or registered on the KOSDAQ Market Division of the Korea Exchange only through the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange, except in limited circumstances, including:
odd-lot trading of shares;
acquisition of shares (“Converted Shares”) by exercise of warrant, conversion right under convertible bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company;
acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends; and
over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded.
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For over-the-counter transactions of shares between foreigners outside the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, a securities company licensed in Korea must act as an intermediary. Odd-lot trading of shares outside the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange must involve a licensed securities company in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions through borrowing shares from a securities company with respect to shares which are subject to a foreign ownership limit.
The Investment Rules require a foreign investor who wishes to invest in shares on the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange (including Converted Shares) to register its identity with the Financial Supervisory Service prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition of the Converted Shares. Upon registration, the Financial Supervisory Service will issue to the foreign investor an investment registration certificate that must be presented each time the foreign investor opens a brokerage account with a securities company. Foreigners eligible to obtain an investment registration certificate include foreign nationals who are individuals residing abroad for more than six months, foreign governments, foreign municipal authorities, foreign public institutions, international financial institutions or similar international organizations, corporations incorporated under foreign laws and any person in any additional category designated by decree of the Ministry of Strategy and Finance. All Korean offices of a foreign corporation as a group are treated as a separate entity from the offices of the corporation outside Korea. However, a foreign corporation or depositary bank issuing depositary receipts may obtain one or more investment registration certificates in its name in certain circumstances as described in the relevant regulations.
Upon a foreign investor’s purchase of shares through the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange, no separate report by the investor is required because the investment registration certificate system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange (as discussed above) must be reported by the foreign investor or his standing proxy to the Governor of the Financial Supervisory Service at the time of each such acquisition or sale; provided, however, that in cases where a foreigner acquires shares through the exercise of rights as a holder of ADSs (or other depositary certificates), the foreigner must cause such report to the Governor of the Financial Supervisory Service to be filed by the Korea Securities Depository; and further provided that a foreign investor must ensure that any acquisition or sale by it of shares outside the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange in the case of trades in connection with a tender offer, odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the Governor of the Financial Supervisory Service by the securities company engaged to facilitate such transaction. A foreign investor must appoint one or more standing proxies from among the Korea Securities Depository, foreign exchange banks, including domestic branches of foreign banks, securities companies, including domestic branches of foreign securities companies, asset management companies, futures trading companies and internationally recognized custodians that will act as a standing proxy to exercise shareholders’ rights or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the Governor of the Financial Supervisory Service in cases deemed inevitable by reason of conflict between laws of Korea and the home country of the foreign investor.
Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only foreign exchange banks, including domestic branches of foreign banks, securities companies, including domestic branches of foreign securities companies, the Korea Securities Depository, asset management companies, futures trading companies and internationally recognized custodians are eligible to act as a custodian of shares for a non-resident or foreign investor. A foreign investor must ensure that his custodian deposits its
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shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor of the Financial Supervisory Service in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.
Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40.0% ceiling on the acquisition of shares by foreigners in the aggregate and a ceiling on the acquisition of shares by a single foreign investor pursuant to the articles of incorporation of such corporation. Currently, Korea Electric Power Corporation is the only designated public corporation which has set such a ceiling. Furthermore, an investment by a foreign investor of not less than 10.0% of the issued shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Act, which is, in general, subject to the report to, and acceptance, by the Ministry of Commerce, Industry and Energy. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign shareholding restrictions in the event that the restrictions are prescribed in each specific law which regulates the business of the Korean company. A foreigner who has acquired shares of our common stock in excess of this ceiling may not exercise his voting rights with respect to the shares of our common stock exceeding the limit.
Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at a securities company. Funds in the foreign currency account may be remitted abroad without any governmental approval.
Dividends on Shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any shares held by a non-resident of Korea must be deposited either in a Won account with the investor’s securities company or his Won Account. Funds in the investor’s Won Account may be transferred to his foreign currency account or withdrawn for local living expenses up to certain limitations. Funds in the Won Account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.
The securities companies and asset management companies are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these securities companies and asset management companies may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors, without the investors having to open their own accounts with foreign exchange banks.
Item 10.E. Taxation
The following summary is based upon tax laws of the United States and the Republic of Korea as in effect on the date of this annual report on Form 20-F, and is subject to any change in United States or Korean law that may come into effect after such date. Investors in the shares of common stock or ADSs are advised to consult their own tax advisers as to the United States, Korean or other tax consequences of the purchase, ownership and disposition of such securities, including the effect of any national, state or local tax laws.
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Korean Taxation
The following summary of Korean tax considerations applies to you as long as you are not:
a resident of Korea;
a corporation organized under Korean law; or
engaged in a trade or business in Korea through a permanent establishment or a fixed base.
Shares or ADSs
Dividends on Shares of Common Stock or ADSs
Unless an applicable tax treaty provides otherwise, we will deduct Korean withholding tax from dividends paid to you either in cash or shares at a rate of 27.5%. If you are a resident of a country that has entered into a tax treaty with Korea, you may qualify for a reduced rate of Korean withholding tax under such a treaty. For example, if you are a qualified resident of the United States for purposes of the US-Korea Tax Treaty (the “Treaty”) and you are the beneficial owner of a dividend, a reduced withholding tax rate of 16.5% generally will apply. You will not be entitled to claim treaty benefits if you are not the beneficial owner of a dividend.
In order to obtain the benefits of a reduced withholding tax rate under a tax treaty, you must submit to us, prior to the dividend payment date, such evidence of tax residence as may be required by the Korean tax authorities. In the case of ADSs, evidence of tax residence may be submitted to us through the depositary. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have tax withheld at a lower rate.
If we distribute to you free shares representing a transfer of certain capital reserves or asset revaluation reserves into paid-in capital, that distribution may be a deemed dividend subject to Korean tax.
Capital Gains
Capital gain from a sale of shares of common stock will generally be exempt from Korean taxation if you have owned, together with certain related parties, less than 25.0% of our total issued shares during the year of sale and the five calendar years before the year of sale, and the sale is made through the Stock Market Division of the Korea Exchange. Capital gain earned by a non-Korean holder from a sale of ADSs outside of Korea are exempt from Korean taxation by virtue of the Special Tax Treatment Control Law of Korea (the “STTCL”), provided that the issuance of the ADSs is deemed to be an overseas issuance under the STTCL.
If you are subject to tax on capital gain from a sale of ADSs, or shares of common stock that you acquired as a result of a withdrawal, your gain will be calculated based on your cost of acquiring the ADSs representing the shares of common stock, although there are no specific Korean tax provisions or rulings on this issue. In the absence of the application of a tax treaty that exempts tax on capital gain, the amount of Korean tax imposed on such capital gains will be the lesser of 11.0% of the gross realization proceeds or, subject to the production of satisfactory evidence of the acquisition cost and the transaction costs of the ADSs, 27.5% of the net capital gain.
If you sell your shares of common stock or ADSs, the purchaser or, in the case of a sale of shares of common stock on the Stock Market Division of the Korea Exchange or through a licensed securities company in Korea, the licensed securities company, is required to withhold Korean tax from the sales price in an amount equal to 11% of the gross realization proceeds and to make payment thereof to the Korean tax authorities, unless you establish your entitlement to an exemption of taxation under an applicable tax treaty or produce satisfactory evidence of your acquisition cost and the transaction costs for the shares of common stock or ADSs. In order to obtain the benefit of an exemption of tax pursuant to a tax treaty, you must submit to the purchaser or the securities company (or through the depositary), as the case may be, prior to the first payment, an exemption application, together with a certificate of your tax residence issued by a competent authority of your residence
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country. This requirement will not apply to exemptions under Korean tax law. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have taxes withheld at a lower rate.
Inheritance Tax and Gift Tax
Korean inheritance tax is imposed upon (a) all assets (wherever located) of the deceased if at the time of his death he was domiciled in Korea and (b) all property located in Korea which passes on death (irrespective of the domicile of the deceased). Gift tax is imposed in similar circumstances to the above. Taxes are currently imposed at the rate of 10% to 50% if the value of the relevant property is above a certain limit and vary according to the identity of the parties involved.
Under Korean Inheritance and Gift Tax Law, shares issued by a Korean corporation are deemed located in Korea irrespective of where they are physically located or by whom they are owned. It remains unclear whether, for Korean inheritance and gift tax purposes, a non-resident holder of ADSs will be treated as the owner of the shares underlying the ADSs. If such non-resident is treated as the owner of the shares, the heir or donee of such non-resident (or in certain circumstances, the non-resident as the donor) will be subject to Korean inheritance or gift tax at the same rate as described above.
Securities Transaction Tax
If you transfer shares of common stock on the Stock Market Division of the Korea Exchange, you will be subject to securities transaction tax at a rate of 0.15% and an agriculture and fishery special tax at a rate of 0.15%, calculated based on the sales price of the shares. If you transfer shares of common stock and your transfer is not made on the Stock Market Division of the Korea Exchange you will generally be subject to the securities transaction tax at a rate of 0.5% and will generally not be subject to the agriculture and fishery special tax. Transfers of ADSs will not be subject to either the securities transaction tax or the agriculture and fishery special tax.
With respect to transfer of ADSs, a tax ruling recently issued by the Korean tax authority appears to hold that depositary receipts (such as the ADSs) constitute share certificates subject to the securities transaction tax; provided that, under the Securities Transaction Tax Law, the transfer of depositary receipts listed on the New York Stock Exchange, the Nasdaq National Market or other qualified foreign exchanges is exempt from the securities transaction tax. In the past, only depositary receipts listed on foreign stock exchanges were exempt from securities transaction tax. However, a Korean court ruled on May 17, 2007 that all depositary receipts, regardless of whether such depositary receipts are listed on any foreign stock exchange, are exempt from securities transaction tax. Such court decision is presently being appealed by the relevant tax office. In the event the Supreme Court of Korea affirms such decision, it is expected that all depositary receipts, even if not listed on a foreign stock exchange, will be exempt from securities transaction tax.
United States Federal Income Taxation
This summary describes the material U.S. federal income tax consequences to you, if you are a U.S. holder (as defined below), of owning our shares of common stock or ADSs. This summary applies to you only if you hold shares of common stock or ADSs as capital assets for tax purposes. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as:
a dealer in securities or currencies;
a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;
a bank;
a life insurance company;
a tax-exempt organization;
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a person that holds shares of common stock or ADSs that are a hedge or that are hedged against interest rate or currency risks;
a person that holds shares of common stock or ADSs as part of a straddle or conversion transaction for tax purposes;
a person whose functional currency for tax purposes is not the U.S. dollar; or
a person that owns or is deemed to own 10% or more of any class of our stock.
This summary is based on laws, treaties and regulatory interpretations in effect on the date hereof, all of which are subject to change, possibly on a retroactive basis.
Please consult your own tax advisers concerning the U.S. federal, state, local and other national tax consequences of purchasing, owning and disposing of shares of common stock or ADSs in your particular circumstances.
For purposes of this summary, you are a “U.S. holder” if you are a beneficial owner of shares of common stock or ADSs that is:
a citizen or resident of the United States;
a U.S. domestic corporation; or
subject to U.S. federal income tax on a net income basis with respect to income from the shares of common stock or ADSs.
The Shares of Common Stock and ADSs
In general, if you hold ADSs, you will be treated as the holder of the shares of common stock represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if you exchange an ADS for the shares of common stock represented by that ADS.
The gross amount of cash dividends that you receive (prior to deduction of Korean taxes) generally will be subject to U.S. federal income taxation as foreign source dividend income. Dividends paid in Won will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your (or, in the case of ADSs, the depositary’s) receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. If such a dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. holders should consult their own tax advisors regarding the treatment of any foreign currency gain or loss on any Won received by a U.S. holders that are converted into U.S. dollars on a date subsequent to receipt.
Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2011 with respect to the ADSs and common stock will be subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends.” Dividends paid on the ADSs and common stock will be treated as qualified dividends if (i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service has approved for the purposes of the qualified dividend rules and (ii) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”). The income tax treaty between Korea and the United States (the “Treaty”) has been approved for the purposes of the qualified dividend rules. Based on our audited financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2006 or 2007 taxable
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year. In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for our 2008 taxable year. You should consult your own tax advisers regarding the availability of the reduced dividend tax rate in the light of your own particular circumstances.
Distributions of additional shares in respect of shares of common stock or ADSs that are made as part of a pro-rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.
Sales and Other Dispositions
For U.S. federal income tax purposes, gain or loss that you realize on the sale or other disposition of shares of common stock or ADSs will be capital gain or loss, and will be long-term capital gain or loss if the shares of common stock or ADSs were held for more than one year. Your ability to offset capital losses against ordinary income is limited. Long-term capital gain recognized by an individual U.S. holder generally is subject to taxation at reduced rates.
Foreign Tax Credit Considerations
You should consult your own tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits, including the possible adverse impact of failing to take advantage of benefits under the income tax treaty between the United States and Korea. If no such rules apply, you generally may claim a credit, up to any applicable reduced rates provided under the Treaty, against your U.S. federal income tax liability for Korean taxes withheld from dividends on shares of common stock or ADSs, so long as you have owned the shares of common stock or ADSs (and not entered into specified kinds of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Instead of claiming a credit, you may, at your election, deduct such Korean taxes in computing your taxable income, subject to generally applicable limitations under U.S. tax law. You may not be able to use the foreign tax credit associated with any Korean withholding tax imposed on a distribution of additional shares that is not subject to U.S. tax unless you can use the credit against United States tax due on other foreign-source income.
Any Korean securities transaction tax or agriculture and fishery special tax that you pay will not be creditable for foreign tax credit purposes.
The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions involve the application of complex rules that depend on a U.S. holder’s particular circumstances. You should consult your own tax advisers regarding the creditability or deductibility of such taxes.
U.S. Information Reporting and Backup Withholding Rules
Payments in respect of the shares of common stock or ADSs that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of its non-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.
Item 10.F.Dividends and Paying Agents
See “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends” for information concerning our dividend policies and our payment of dividends. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association—Dividends” for a discussion of
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the process by which dividends are paid on our common shares. See “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares—Dividends and Distributions” for a discussion of the process by which dividends are paid on our ADSs. The paying agent for payment of our dividends on ADSs in the United States is Citibank, N.A.
Item 10.G.Statements by Experts
Item 10.H.Documents on Display
We are subject to the information requirements of the U.S. Securities Exchange Act of 1934, as amended, and, in accordance therewith, are required to file reports, including annual reports on Form 20-F, and other information with the U.S. Securities and Exchange Commission. These materials, including this annual report and the exhibits thereto, may be inspected and copied at the Commission’s public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further information on the public reference rooms. We are required to make filings with the Commission by electronic means, which will be available to the public over the Internet at the Commission’s web site at http://www.sec.gov.
Item 10.I. Subsidiary Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to foreign exchange rate and interest rate risks primarily associated with underlying liabilities, and to equity price risk as a result of our investment in equity-linked securities. Following evaluation of these positions, we (including KTF) selectively enter into derivative financial instruments to manage the related risk exposures. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. The activities of our finance division are subject to policies approved by our foreign exchange and interest rate risk management committee. These policies address the use of derivative financial instruments, including the approval of counterparties, setting of limits and investment of excess liquidity. Our general policy is to hold or issue derivative financial instruments only for hedging purposes.
Exchange Rate Risk
Substantially all of our cash flow is denominated in Won. We are exposed to foreign exchange risk related to foreign currency denominated liabilities and anticipated foreign exchange payments. Anticipated foreign exchange payments, mostly in Dollars, relate primarily to payments of foreign currency denominated debt, net settlements paid to foreign telecommunication carriers and payments for equipment purchased from foreign suppliers.
94
In 2006 and 2007, we entered into various currency-related derivative contracts with various financial institutions, including the following:
Transaction Type
Financial Institution
Description
Currency swap contracts
Combined interest rate and currency swap contracts
Currency forward contracts
Currency futures contracts
Currency option contracts
In 2006, we recognized a valuation loss of Won 85 billion relating to the above contracts. In 2007, we recognized a valuation gain of Won 38 billion and a valuation loss of Won 5 billion in our current earnings and recognized a valuation gain of Won 3 billion in our accumulated other comprehensive income relating to the above contracts. For details of the assets and liabilities recorded relating to above contracts outstanding as of December 31, 2006 and 2007, see Note 32 to the Consolidated Financial Statements.
Interest Rate Risk
We are also subject to market risk exposure arising from changing interest rates. A reduction of interest rates increases the fair value of our debt portfolio, which is primarily of a fixed interest nature. We use, to a limited extent, interest rate swap contracts and combined interest rate and currency swap contracts to reduce interest rate volatility on some of our debt and manage our interest expense by achieving a balanced mixture of floating and fixed rate debt. We entered into several interest rate swap contracts with JP Morgan and others in which we exchange fixed interest rate payments with variable interest rate payments for a specified period, as well as entered into the combined interest rate and currency swap contracts described above.
Under our interest rate swap contracts, we recognized a valuation gain of Won 9 billion and a valuation loss of Won 1 billion in 2006 and a valuation gain of Won 2 billion and a valuation loss of Won 11 billion in 2007. For details of the assets and liabilities recorded relating to our interest rate swap contracts outstanding as of December 31, 2006 and 2007, see Note 32 to the Consolidated Financial Statements.
95
The following table summarizes the carrying amounts, fair values, principal cash flows by maturity date and weighted average interest rates of our short-term and long-term liabilities as of December 31, 2007 which are sensitive to exchange rates and/or interest rates. The information is presented in Won, which is our reporting currency.
Local currency:
Fixed rate
Average weighted rate(1)
Variable rate
Foreign currency:
Subtotal
Item 12. Description of Securities Other than Equity Securities
Item 12.A. Debt Securities
Item 12.B. Warrants and Rights
Item 12.C. Other Securities
Item 12.D. American Depositary Shares
96
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Disclosure Controls and Procedures
Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2007. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed by, and under the supervision of, our principal executive, principal operating and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management has completed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2007 based on criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2007.
97
Deloitte Anjin LLC, an independent registered public accounting firm, which also audited our consolidated financial statements as of, and for the year ended December 31, 2007, as stated in their report which is included herein, has issued an attestation report on the effectiveness of our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
The attestation report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting is furnished in Item 18 of this Form 20-F.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the year covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
At our annual shareholders’ meeting in February 2008, our shareholders elected Gyu-Taeg Oh as a member of the Audit Committee. Our Audit Committee is comprised of Do-Whan Kim, Jeong-Ro Yoon, Jong-Kyoo Yoon and Gyu-Taeg Oh. In addition, they determined and designated that Jong-Kyoo Yoon and Gyu-Taeg Oh are “audit committee financial experts” within the meaning of this Item 16A. The board of directors have approved this newly elected Audit Committee, and reaffirmed the determination by our shareholders that Jong-Kyoo Yoon and Gyu-Taeg Oh are audit committee financial experts and further determined that they are independent within the meaning of applicable SEC rules and the listing standards of the New York Stock Exchange.
Item 16B. Code of Ethics
We have adopted a code of ethics, as defined in Item 16B. of Form 20-F under the Securities Exchange Act of 1934, as amended. Our code of ethics applies to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, as well as to our directors, other officers and employees. Our code of ethics is available on our web site at www.kt.com. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our web site.
Item 16C. Principal Accountant Fees and Services
Audit and Non-Audit Fees
The following table sets forth the fees billed to us by our independent auditors during the fiscal year ended December 31, 2006 and 2007:
Audit fees
Audit-related fees
Tax fees
Other fees
Total fees
Audit fees in the above table are the aggregate fees billed by our auditors in connection with the audit of our annual financial statements and the review of our interim financial statements.
98
Audit Committee Pre-Approval Policies and Procedures
Our audit committee has not established pre-approval policies and procedures for the engagement of our independent auditors for services. Our audit committee instead expressly approves on a case-by-case basis any engagement of our independent auditors for audit and non-audit services provided to our consolidated subsidiaries or us.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth the repurchases of common shares by us or any affiliated purchasers during the fiscal year ended December 31, 2007:
January 1 to January 31
February 1 to February 29
March 1 to March 31
April 1 to April 30
May 1 to May 31
June 1 to June 30
July 1 to July 31
August 1 to August 31
September 1 to September 30
October 1 to October 31
November 1 to November 30
December 1 to December 31
Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.
99
Item 17. Financial Statements
Item 18. Financial Statements
AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS OF KT CORPORATION
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and 2007
Consolidated Statements of Income for the Years Ended December 31, 2005, 2006 and 2007
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2006 and 2007
Notes to Consolidated Financial Statements
AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS OF KT FREETEL CO., LTD.
Consolidated Balance Sheets as of December 31, 2005 and 2006
Consolidated Statements of Income for the Years Ended December 31, 2004, 2005 and 2006
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2004, 2005 and 2006
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and 2006
Item 19. Exhibits
100
101
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
To the Board of Directors and Stockholders of
Sungnam, Korea
We have audited the internal control over financial reporting of KT Corporation and subsidiaries (the “Company”) as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting in Item 15. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets and the related Consolidated Statements of Income, Cash Flows, and Changes in Equity of the Company as of and for the year ended December 31, 2007. Our report dated June 20, 2008 expressed an unqualified opinion on those financial statements and included an explanatory paragraph relating to the adoption of Statements of Korean Accounting Standards, reclassification of certain accounts in prior periods to conform to current period’s presentation, our audit comprehending the convenience translation of Korean won amounts to U.S. dollar amounts and information relating to the nature and effect of differences between accounting principles generally accepted in the Republic of Korea and accounting principles generally accepted in the United States of America.
/s/ Deloitte Anjin LLC
Seoul, Korea
June 20, 2008
F-1
We have audited the accompanying Consolidated Balance Sheet of KT Corporation and subsidiaries (the “Company”) as of December 31, 2007, and the related Consolidated Statements of Income, Cash Flows and Changes in Equity for year then ended (all expressed in Korean won). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of the Company for the years ended December 31, 2005 and 2006, respectively, before the effects of the adjustments to retrospectively apply the adoption of Statements of Korean Accounting Standards and reclassification of certain accounts as discussed in Note 2 to the consolidated financial statements were audited by other auditors whose report, dated May 25, 2007, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of KT Corporation and subsidiaries at December 31, 2007, and the results of their operations and their cash flows for year then ended, in conformity with accounting principles generally accepted in the Republic of Korea.
As discussed in Note 2 to the consolidated financial statements, we have also audited the adjustments to the 2005 and 2006 consolidated financial statements to retrospectively apply the adoption of Statements of Korean Accounting Standards and reclassify certain accounts in prior periods to conform to current period’s presentation. Our procedures included (1) comparing the adjustment amounts to the Company's underlying analysis, and (2) testing the mathematical accuracy of the underlying analysis, and (3) on a test basis compared the adjustments to the Company's supporting documentation. In our opinion, such retrospective adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2005 and 2006 consolidated financial statements of the Company other than with respect to the retrospective adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2005 and 2006 consolidated financial statements taken as a whole.
Our audit also comprehended the translation of Korean won amounts into U.S. dollar amounts and, in our opinion, such convenience translation has been made in conformity with the basis stated in Note 2 to the consolidated financial statements. Such U.S. dollar amounts are presented solely for the convenience of readers of financial statements.
According principles generally accepted in the Republic of Korea vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 36 to the consolidated financial statements.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 20, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
F-2
The Board of Directors and Stockholders
KT Corporation:
We have audited, before the effects of the adjustments and disclosures to retrospectively apply the changes in accounting and reclassifications described in note 2, the accompanying consolidated balance sheet of KT Corporation and subsidiaries (the “Company”) as of December 31, 2006, and the related consolidated statements of earnings and retained earnings and cash flows for the years ended December 31, 2005 and 2006, expressed in Korean Won. The 2005 and 2006 consolidated financial statements before the effects of the adjustments and reclassifications discussed in note 2 are not presented herein. The 2005 and 2006 consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We did not audit the financial statements of KT Freetel Co., Ltd. (“KTF”), a 44.6% and 52.2% owned subsidiary at December 31, 2005 and 2006, respectively, as of and for the years ended December 31, 2005 and 2006. The financial statements of KTF, which are included in the consolidated financial statements of the Company, reflect total assets constituting 32.5% as of December 31, 2006, and total revenues constituting 30.8% and 32.6% for the years ended December 31, 2005 and 2006, respectively, of the related consolidated totals before the effects of the adjustments and reclassifications discussed in note 2. Those financial statements were audited by other auditors whose report has been furnished to us, and our report, insofar as it relates to the amounts included for KTF, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the 2005 and 2006 consolidated financial statements, before the effects of the adjustments and disclosures to retrospectively apply the changes in accounting and reclassifications described in note 2, present fairly, in all material respects, the financial position of the Company as of December 31, 2006, and the results of its operations and its cash flows for the years ended December 31, 2005 and 2006 in accordance with accounting principles generally accepted in the Republic of Korea.
Accounting principles generally accepted in the Republic of Korea vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 36 to the consolidated financial statements.
We were not engaged to audit, review, or apply any procedures to the adjustments and disclosures to retrospectively apply the changes in accounting and reclassifications described in note 2 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments and disclosures were audited by a successor auditor.
/s/KPMG Samjong Accounting Corp.
May 25, 2007
F-3
KT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2006 and 2007
ASSETS
CURRENT ASSETS :
Cash and cash equivalents (Notes 2, 15 and 30)
Short-term investment assets (Notes 3, 5 and 15)
Accounts receivable—trade, less allowance for doubtful accounts of (Won)563,103 million in 2006 and (Won)485,111million in 2007 (Notes 2, 10 and 16)
Loans (Notes 2 and 15)
Accounts receivable—other, less allowance for doubtful accounts of (Won)96,948 million in 2006 and (Won)93,561million in 2007 (Notes 2, 10 and 15)
Accrued revenues
Advance payments
Prepaid expenses
Prepaid income taxes
Guarantee deposits (Note 15)
Derivative instruments assets (Notes 2 and 32)
Current portion of deferred income tax assets (Notes 2 and 25)
Inventories (Notes 2, 4 and 28)
Other current assets
Total Current Assets
(Continued)
F-4
Consolidated Balance Sheets (Continued)
NON-CURRENT ASSETS :
Available-for-sale securities (Notes 2 and 5)
Equity method investment securities (Notes 2 and 6)
Held-to-maturity securities (Notes 2 and 5)
Long-term loans to employees
Long-term financial instruments (Note 3)
Other investment assets
Property and equipment, at cost (Notes 2, 7, 8, 13 and 28)
Less accumulated depreciation
Less accumulated impairment loss
Less contribution for construction
Intangible assets, net (Notes 2 and 9)
Leasehold rights and deposits (Notes 2 and 15)
Long-term accounts receivable—trade (Notes 2 and 10)
Long-term loans (Note 2)
Deferred income tax assets (Notes 2 and 25)
Long-term accounts receivable—other (Notes 2 and 10)
Other non-current assets
Total Non-current Assets
TOTAL ASSETS
F-5
LIABILITIES AND EQUITY
CURRENT LIABILITIES :
Accounts payable—trade (Notes 15 and 16)
Short-term borrowings (Note 15)
Accounts payable—other (Notes 10, 13, 15 and 16)
Advance receipts
Withholdings (Note 15)
Accrued expenses (Note 15)
Income taxes payable (Note 2)
Current portion of long-term debt (Notes 2, 10, 11 and 15)
Unearned revenue
Key money deposits (Note 16)
Derivative instruments liabilities (Notes 2 and 32)
Current portion of accrued provisions (Notes 2 and 12)
Current portion of deferred income tax liabilities (Notes 2 and 25)
Other current liabilities
Total Current Liabilities
NON-CURRENT LIABILITIES :
Bonds (Notes 2, 11 and 15)
Long-term borrowings in Korean Won (Notes 2, 10 and 11)
Long-term borrowings in foreign currency (Notes 2, 11 and 15)
Provisions for severance indemnities (Note 2)
Refundable deposits for telephone installation (Note 14)
Long-term accounts payable—other (Notes 2, 10 and 13)
Long-term deposits received
Accrued provisions (Notes 2 and 12)
Deferred income tax liabilities (Notes 2 and 25)
Other long-term liabilities
Total Non-current Liabilities
Total Liabilities
F-6
EQUITY :
Common Stock (Notes 1 and 17)
Capital Surplus (Notes 17)
Capital Adjustments:
Treasury stock (Note 21)
Stock options (Notes 2 and 20)
Stock grants (Notes 2 and 20)
Total Capital Adjustments
Accumulated Other Comprehensive Income (Note 19)
Gain on translation of foreign operations (Note 2)
Loss on translation of foreign operations (Note 2)
Unrealized gain on valuation of available-for-sale securities (Notes 2 and 5)
Unrealized gain on valuation of derivatives (Notes 2 and 32)
Increase in equity of associates (Notes 2 and 6)
Decrease in equity of associates (Notes 2 and 6)
Total Accumulated Other Comprehensive Income
Minority Interest
Total Equity
TOTAL LIABILITIES AND EQUITY
See accompanying notes to consolidated financial statements
F-7
Consolidated Statements of Income
For the Years Ended December 31, 2005, 2006 and 2007
OPERATING REVENUES (Notes 2, 16, 22, 23 and 33)
Service revenue
PCS handset sales
OPERATING EXPENSES (Notes 2, 16, 24 and 34)
OPERATING INCOME
NON-OPERATING REVENUES :
Interest income
Dividend income
Foreign currency transaction gain
Foreign currency translation gain (Note 2)
Equity in income of associates (Notes 2 and 6)
Gain on breach of contracts
Gain on disposal of useless materials
Gain on disposal of short-term investments
Gain on valuation of short-term investments
Gain on disposal of available-for-sale securities (Note 5)
Reversal of impairment losses of available-for-sale securities (Notes 2 and 5)
Reversal of impairment losses of held-to-maturity securities (Note 2)
Gain on disposal of equity method investment securities
Gain on disposal of property and equipment
Gain on disposal of intangible assets
Reversal of accrued provisions (Note 12)
Amortization of negative goodwill (Notes 2 and 9)
Gain on settlement of derivatives (Note 2)
Gain on valuation of derivatives (Notes 2 and 32)
Other non-operating revenue
Total Non-operating Revenues
F-8
Consolidated Statements of Income (Continued)
NON-OPERATING EXPENSES :
Interest expense
Other bad debt expense (Note 2)
Foreign currency transaction loss
Foreign currency translation loss (Note 2)
Equity in loss of associates (Notes 2 and 6)
Loss on disposal of equity method investment securities
Contribution payments for research and development
Donations
Loss on disposal of short-term investment
Loss on disposal of available-for-sale securities (Note 5)
Loss on Impairment of available-for-sale securities (Notes 2 and 5)
Loss on impairment of held-to-maturity securities
Loss on impairment of investment assets
Loss on disposal of property and equipment
Loss on impairment of property and equipment (Notes 2 and 7)
Loss on disposal of intangible assets
Loss on impairment of intangible assets (Notes 2 and 9)
Loss on disposal of accounts receivable—trade
Loss on lease cancellation
Loss on settlement of derivatives (Note 2)
Loss on valuation of derivatives (Notes 2 and 32)
Other non-operating expense
Total Non-operating Expenses
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE
INCOME TAX EXPENSE ON CONTINUING OPERATIONS (Note 25)
NEWLY INCLUDED SUBSIDIARY’S NET LOSS BEFORE ACQUISITION
INCOME FROM CONTINUING OPERATIONS
INCOME (LOSS) FROM DISCONTINUING OPERATIONS (Note 26)
NET INCOME
Attributable to :
EQUITY HOLDERS OF THE PARENT
MINORITY INTEREST
NET INCOME PER SHARE (Note 27)(*)
Basic income per share from continuing operations (in Korean won)
Basic net income per share (in Korean won)
Diluted income per share from continuing operations (in Korean won)
Diluted net income per share (in Korean won)
F-9
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES :
Expenses not involving cash payments :
Share-based payment
Accrued severance indemnities
Depreciation
Amortization
Provision for doubtful accounts
Foreign currency translation loss
Other bad debt expense
Loss on disposal of short-term investments
Loss on disposal of available-for-sale securities
Loss on impairment of available-for-sale securities
Loss on impairment of investments
Equity in loss of associates
Loss on impairment of property and equipment
Loss on impairment of intangible assets
Loss on settlement of derivatives
Loss on valuation of derivatives
Other non-operating expenses
Income not involving cash receipts :
Foreign currency translation gain
Gain on disposal of available-for-sale securities
Equity in income of associates
Gain on settlement of derivatives
Gain on valuation of derivatives
Amortization of negative goodwill
Reversal of impairment losses of available-for-sale securities
Reversal of impairment losses of held-to-maturity securities
Other non-operating revenues
F-10
Consolidated Statements of Cash Flows (Continued)
Changes in assets and liabilities related to operating activities :
Loans
Guarantee deposits
Derivative instruments, net
Deferred income tax, net
Other quick assets
Inventories
Leasehold rights and deposits
Long-term accounts receivable—trade
Long-term loans
Long-term accounts receivable—other
Withholdings
Income taxes payable
Key money deposits
Accrued provisions
Payment of severance indemnities
Deposits for severance indemnities
Contribution to National Pension Fund
Long-term accounts payable—other
Other non-current liabilities
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES :
Cash inflows from investing activities :
Decrease in short-term financial instruments
Disposal of available-for-sale securities
Decrease in equity method investment securities
Collection of held-to-maturity securities
Collection of long-term loans
Decrease in other investment assets
Disposal of land
Disposal of buildings
Disposal of structures
Disposal of machinery
Disposal of vehicles
Disposal of other property and equipment
Disposal of construction- in-progress
Increase of contribution for construction
Disposal of intangible assets
F-11
Cash outflows for investing activities :
Acquisition of short-term financial instruments
Acquisition of available-for-sale securities
Acquisition of equity method investment securities
Acquisition of assets and liabilities of consolidated subsidiaries
Acquisition of held-to-maturity securities
Increase in long-term loans
Increase in long-term investment assets
Increase in other investment assets
Acquisition of land
Acquisition of buildings
Acquisition of structures
Acquisition of machinery
Acquisition of vehicles
Acquisition of other property and equipment
Acquisition of construction-in-progress
Acquisition of intangible assets
Net Cash Used in Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES :
Cash inflows from financing activities :
Increase in short-term borrowings
Issuance of bonds
Increase in long-term borrowings
Capital transactions in consolidated entities including disposal of treasury stock
Cash outflows for financing activities :
Repayment of short-term borrowings
Payment of accounts payable—other
Repayment of current portion of long-term debt
Repayment of long-term borrowings
Repayment of bonds
Increase in accounts receivable—trade
Payment of dividends
Loss on translation of foreign operations
Acquisition of treasury stock
Capital transactions in consolidated entities including acquisition of treasury stock and dividend
Net Cash Used in Financing Activities
EFFECT OF CHANGES IN CONSOLIDATED ENTITIES
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR
CASH AND CASH EQUIVALENTS AT END OF THE YEAR
F-12
Consolidated Statements of Changes In Equity
(In millions of Korean won)
Balance as of January 1, 2005 (as reported)
Retained earnings after appropriations
Net income for the period
Disposal of treasury stock
Loss on disposal of treasury stock
Acquisition of subsidiaries’ stock
Increase in subsidiaries’ capital stock
Disposal of subsidiaries’ treasury stock
Retirement of subsidiaries’ treasury stock
Changes in consolidated entities
Stock options
Gain (loss) in translation of foreign operations
Gain on valuation of available-for-sale securities
Increase in equity of associates
Others
Balance as of December 31, 2005
F-13
Consolidated Statements of Changes In Equity (Continued)
For the Year Ended December 31, 2006
Balance as of January 1, 2006 (as reported)
Retirement of treasury stock
Appropriation of loss on disposal of treasury stock
Appropriation of subsidiaries’ treasury stock
Balance as of December 31, 2006
F-14
For the Year Ended December 31, 2007
Balance as of January 1, 2007 (as reported)
Acquisition of subsidiaries’ treasury stock
Stock grants
Gain on translation of foreign operations
Gain on valuation of available-for-sale Securities
Gain on valuation of derivatives for cash flow hedge
Decrease in equity of associates
Balance as of December 31, 2007
F-15
(In thousands of U.S. dollars)
Gain (loss) on valuation of available-for-sale Securities
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1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
a. Parent
KT Corporation (“KT”) commenced operations on January 1, 1982 through the segregation of specified operations from the Korean Ministry of Information and Communication (the "MIC") for the purpose of contributing to the convenience in national life and improvement of public welfare through rational management of the public telecommunication business and improvement of telecommunication technology under the Korea Telecom Act.
Upon the announcements of the Government-Invested Enterprises Management Basic Act and the Privatization Law, as of October 1, 1997, KT became a government invested institution regulated by the Korean Commercial Code and KT’s shares were listed on the Korea Exchange (formerly “Korea Stock Exchange”) on December 23, 1998. KT issued 24,282,195 additional shares on May 29, 1999 and issued American Depository Shares (“ADS”), representing these new shares and government-owned shares on the New York Stock Exchange and the London Exchange. On July 2, 2001, additional ADS representing 55,502,161 government-owned shares were issued.
In 2002, KT acquired its 60,294,575 government-owned shares according to the government’s privatization plan for government-owned companies and there is no government-owned share as of December 31, 2007.
KT’s shares as of December 31, 2007 are owned as follows:
Employee Stock Ownership Association
National Pension Service
Treasury stock
Prior to 1991, KT was the only telecommunication service provider in Korea. Since then, several new providers have entered the markets, as licensed by the MIC; an international call service by LG Dacom, the second telecommunication service provider, in December 1991, and local call service by Hanaro Telecom, the second local call provider, in 1999. Onse Telecom also entered a long-distance call service after its international call service. The entry of these new providers into the markets resulted in severe competition in fixed-line telephone services and high speed internet services in which large growth is not expected in the future. In order to develop new business areas, KT commercialized the Wireless Broadband Internet (“WiBro”) service in 2006 and launched new products such as mixed products which combine certain previous services and Internet Contests On Demand (“ICOD”) services under the new brand name “MegaTV” in 2007.
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Notes to Consolidated Financial Statements—(Continued)
b. Consolidated Subsidiaries
The consolidated financial statements included the subsidiaries of which KT is the largest stockholder with more than 30% of ownership interests. The consolidated subsidiaries as of December 31, 2007 are as follows:
Subsidiary
Primary business
Location
Financialyear end
KT Powertel Co., Ltd. (“KTP”)
KT Networks Corporation (“KTN”)
KT Linkus Co., Ltd. (“KTL”)
KT Hitel Co., Ltd. (“KTH”)
KT Submarine Co., Ltd. (“KTSC”)
KT Freetel Co., Ltd. (“KTF”)
KT Commerce Inc. (“KTC”)
KTF Technologies Inc. (“KTFT”)
KT Internal Venture Fund No.2
KTF M Hows Co., Ltd.
KT Rental Co., Ltd. (“KTR”)
Sidus FNH Corporation
Sidus FNH Benex Cinema Investment Fund
KT Capital Co., Ltd.
Telecop Service Co., Ltd. (“TSC”)
Olive Nine Co., Ltd.
KTF M&S Co., Ltd.
KT FDS Co., Ltd.
Bluecord Technology Co., Ltd.
Doremi Media Co., Ltd.
Korea Telecom America, Inc. (“KTAI”)
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New Telephone Company, Inc. (“NTC”)
Korea Telecom Japan Co., Ltd. (“KTJ”)
Korea Telecom China Co., Ltd. (“KTCC”)
PT. KTF Indonesia
Super iMax
East Telecom
KTSC Investment Management B.V.
Netherlands
Dec.31
Details of investments in subsidiaries as of December 31, 2005, 2006 and 2007 are as follows :
Primary Business
KTP
KTN
KTL
KTH
KTSC
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KTC (Note 1)
KTFT
KTF M Hows (Note 2)
KTR
Sidus FNH (Note 3)
Sidus FNH Benex Cinema Investment Fund (Note 4)
KT Capital (Note 5)
TSC (Note 6)
Olive Nine. (Note 7)
KTF M&S (Note 8)
KT FDS (Note 9)
Bluecord Technology (Note 10)
Semiconductor and telecommunication
equipment manufacture
Doremi Media (Note 11)
Korea Telecom Venture Fund No.1 (Note 12)
KTAI
KTPI (Note 13)
NTC
KTJ
KTCC
PT. KTF Indonesia (Note 14)
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Super iMax (Note 15)
East Telecom (Note 16)
KTSC Investment Management B.V. (Note 17)
(Note 1) KTC is owned 19.0% by KT and 81.0% by KTH, respectively.
(Note 2) KTF M Hows is owned 51% by KTF.
(Note 3) Sidus FNH Corporation is owned 35.7% by KT and 15.3% by KTF, respectively.
(Note 4) Sidus FNH Benex Cinema Investment Fund is owned 13.3% by KT, 6.7% by KTF, 3.3% by KTH and 20.0% by Sidus FNH Corporation, respectively.
(Note 5) On December 1, 2006, KTR was spun off into KTR and KT Capital Co., Ltd.
(Note 6) On November 14, 2006, TSC was incorporated through the spin-off from KTL.
(Note 7) In 2006, KT acquired 8,750,000 shares or 19.7% ownership interest of Olive Nine Co., Ltd. amounting to (Won)22,000 million. As KT holds rights to appoint the majority of the members of the board of directors of Olive Nine Co., Ltd., it is determined that Olive Nine Co., Ltd. is controlled by KT and included in the consolidated subsidiaries. In addition, for the year ended December 31, 2007, Olive Nine Co., Ltd. issued new shares due to the exercise of stock options by its employees. As a result, KT’s ownership interest in Olive Nine Co., Ltd. as of December 31, 2007 has decreased from 19.7% to 19.2%.
(Note 8) In January 2007, KTF M&S was incorporated as a wholly owned subsidiary of KTF.
(Note 9) In 2007, KT acquired 100% ownership of KT FDS for (Won)9,008 million.
(Note 10) In December 2007, KTF acquired 35.28% ownership interest of Bluecord Technology Co., Ltd.
(Note 11) Doremi Media Co., Ltd. is owned 64.24% by Bluecord Technology Co., Ltd.
(Note 12) This fund was dissolved in August 2007 and KT’s ownership interest was all collected.
(Note 13) KTPI was dissolved as of December 31, 2007 according to the resolution by KT’s board of directors at October 25, 2007 and is expected to be liquidated in 2008.
(Note 14) KTF Indonesia is owned 99.0% by KTF.
(Note 15) In 2007, KT acquired 60% ownership interest of Super iMax in Uzbekistan for (Won)1,321 million.
(Note 16) In 2007, KT acquired 51% ownership interest of East Telecom in Uzbekistan for (Won)14,515 million.
(Note 17) In 2007, KT established KTSC Investment Management B.V. in the Netherlands to manage its investments in certain subsidiaries and acquired a 60% ownership interest of this company for (Won)15 million.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Financial Statement Presentation
The Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. To conform more closely to presentations customary in filings with the Securities and Exchange Commission of the United States of America, the accompanying consolidated financial statements have been restructured and translated into English for the convenience of the readers of financial statements. Certain supplementary information included in the statutory Korean language consolidated financial statements, not required for a fair presentation of the Company and its subsidiaries’ financial position or result of operations, is not presented in the accompanying consolidated financial statements.
b. Adoption of Statements of Korea Accounting Standards (“SKAS”)
Through December 31, 2007, the Korea Accounting Standards Board (“KASB”) has issued Statements of Korea Accounting Standards (“SKAS’s”) No. 1 through No. 25 to revise the previous Financial Accounting Standards. Among these statements, SKAS No. 1 through No. 20 (excluding No. 11) should be applied in the prior periods whereas SKAS No. 11 and No. 21 through No. 25 shall be applied from the current period. Application of these SKAS’s has no material impact on the Company’s consolidated financial statements for the current period.
Summary of major changes from the application of new SKAS’s during the current period are as follows:
SKAS
Summary of major changes
No. 11 “Discontinuing Operations”
• Present income (loss) from discontinuing operations and continuing operations separately on the face of the income statement.
• Disclose the details of discontinuing operations in the notes to the financial statements of the period in which the initial disclosure event of a discontinuing operation occurs.
• Reclassify into income (loss) from discontinuing operations in the comparative financial statements of the period in which an initial disclosure event occurs any income or loss that arose in the prior period(s) from the discontinuing operation.
No. 21 “Preparation and Presentation of Financial Statements I”
• Separate previous investment assets into investment assets and other non-current assets.
• Separate previous capital adjustments into capital adjustments and accumulated other comprehensive income (loss).
• Include statement of changes in equity in the set of financial statements.
• Disclose the details of comprehensive income in the notes.
No. 22 “Share-based Payment”
• Record compensation cost for stock appreciation right settled by treasury stock in equity.
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• Provide detail guidelines about vesting conditions.
• Do not allow measurement by intrinsic value for cash settled share-based payment (except for non-public companies).
• Do not re-measure share-based payment transactions previously granted upon initial public offerings (IPO).
No. 23 “Earnings Per Share”
• Do not require non-public companies (except for those in the process of IPO) to disclose earnings per share (under the previous Interpretation, only dilutive earnings per share could be omitted).
• Clarify calculation methods for basic earnings per share and outstanding average common stock.
• Present earnings per share on the face of the income statement.
No. 24 “Preparation and Presentation of Financial Statements II”
• Provide basic rules on the classification of accounts in the financial statements of financial institutions.
No. 25 “Consolidated Financial Statements”
• Present negative minority interest as a deductive item in equity.
• Present income (loss) attributable to equity holders of the parent and minority interest separately on the face of the income statement.
In addition, any additional income taxes and tax refunds attributable to prior periods are included in income tax expense for the current period in accordance with the amendment of SKAS No. 16 “Income Taxes”.
Such adoptions of new SKAS’s and amendments to SKAS’s did not have an effect on the net assets as of December 31, 2006 and 2007 and net income of the Company for each of the three years in the period ended December 31, 2007. The changes of accounting are retroactively applied in the accompanying consolidated financial statements for the prior periods in accordance with SKAS No. 21 and SKAS No. 16.
c. Cash and Cash Equivalents
Cash and cash equivalents includes cash, substitute securities including checks issued by others, and checking accounts, ordinary deposits and financial instruments, which can be easily converted into cash and whose value changes due to changes in interest rates are not material, with maturities (or date of redemption) of three months or less upon acquisition.
d. Allowance for Doubtful Accounts
An allowance for doubtful accounts is provided to cover estimated losses on receivables (account receivable—trade, accounts receivable—other, loans and other), based on collection experience and analysis of the collectability of individual outstanding receivables.
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Changes in the allowance for doubtful accounts for accounts receivable—trade and loans for each of the three years in the period ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
Balance at the beginning of year
Balance at the end of year
e. Inventories
Inventories, which consist mainly of supplies for telecommunication facilities and PCS handsets for sales, are stated at the acquisition cost, with cost determined using the moving average method, except for goods-in-transit and land for construction for which cost are determined using the specific identification method. During the year, perpetual inventory systems are used to value inventories, which are adjusted to physical inventory counts performed at the end of the year. When the market value of inventories (net realizable value for merchandise and current replacement cost for supplies) is less than the carrying value, carrying value is stated at the lower of cost or market. The lower of cost or market method is applied by group of inventories and loss on inventory valuation is presented as a deductive item from inventories and charged to operating expenses. However, when the circumstances that previously caused inventories to be written down below cost no longer exist and the new market value of inventories subsequently recovers, the valuation loss is reversed to the extent of the original valuation loss and the reversal is deducted from operating expenses.
f. Securities (excluding the equity method investment securities)
Debt and equity securities are initially stated at the market value of consideration given for acquisition (market value of securities acquired if market value of consideration given is not available) plus incidental costs attributable to the acquisition of the securities and are classified into trading, available-for-sale and held-to-maturity securities depending on the purpose and nature of acquisition. Trading securities are presented as short-term investments while available-for-sale securities and held-to-maturity securities are presented as short-term investments or long-term investment securities depending on their nature in the balance sheet. The moving average method for equity securities and the specific identification method for debt securities are used to determine the cost of securities for the calculation of gain (loss) on disposal of those securities.
- Trading securities
Securities that are bought and held principally for the purpose of selling them in the near term with active and frequent buying and selling, including securities which consist of a portfolio of securities with the clear objective of generating profits on short-term differences in price, are classified as trading securities. Trading securities are recorded at their fair value and unrealized gains or losses from trading securities are recorded as gain (loss) on valuation of trading securities included in the non-operating revenues (expenses).
- Held-to-maturity securities
Debt securities that have fixed or determinable payments with a fixed maturity are classified as held-to-maturity securities only if the Company has both the positive intent and ability to hold those securities to maturity. However, debt securities, whose maturity dates are due within one year from the balance sheet date are classified as current assets.
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After initial recognition, held-to-maturity securities are stated at amortized cost in the balance sheet. When held-to-maturity securities are measured at amortized costs, the difference between their acquisition cost and face value is amortized using the effective interest rate method and the amortization is included in the cost and interest income.
When the possibility of not being able to collect the principal and interest of held-to-maturity securities according to the terms of the contracts is highly likely, the difference between the recoverable amount (the present value of expected cash flows using the effective interest rate upon acquisition of the securities) and book value are recorded as loss on impairment of held-to-maturity securities included in the non-operating expenses and the held-to-maturity securities are stated at the recoverable amount after impairment loss. If the value of impaired securities subsequently recovers and the recovery can be objectively related to an event occurring after the impairment loss was recognized, the reversal of impairment loss are recorded as reversal of impairment loss on held-to-maturity securities included in non-operating revenues. However, the resulting carrying amount after the reversal of impairment loss shall not exceed the amortized cost that would have been measured, at the date of the reversal, if no impairment loss were recognized.
- Available-for-sale securities
Debt and equity securities that do not fall under the classifications of trading or held-to-maturity securities are categorized and presented as available-for-sale securities included in investment assets. However, if an available-for-sale security matures or it is certain that such security will be disposed of within one year from the balance sheet date, it is classified as a current asset.
Available-for-sale securities are recorded at fair value. Unrealized gain or loss from available-for-sale securities are presented as gain or loss on valuation of available-for-sale securities included in accumulated other comprehensive income of stockholders’ equity. In addition, accumulated gain or loss on valuation of available-for-sale securities are reflected in either gain or loss on disposal of available-for-sale securities or loss on impairment of available-for-sale securities upon disposal or recognition of impairment of the securities. However, available-for-sale equity securities that are not marketable and whose fair value cannot be reliably measured are recorded at acquisition cost.
When there is objective evidence that the available-for-sale securities are impaired and the recoverable amount is lower than the cost (amortized cost for debt securities) of the available-for-sale securities, an impairment loss is recognized as loss on impairment of available-for-sale securities of non-operating expenses and the related unrealized gain or loss remaining in stockholders’ equity is adjusted to the impairment loss. If the value of impaired securities subsequently recovers and the recovery can be objectively related to an event occurring after the impairment loss was recognized, the reversal of impairment loss can be recognized up to the previously recorded impairment loss as a reversal of loss on impairment of available-for-sale securities included in non-operating revenues. However, if the fair value increases after the impairment loss is recognized but does not relate to the recovery of impairment loss as described above, the increase in fair value is recorded in stockholders’ equity.
g. Equity Method Investment Securities
Investments in equity securities of companies, over which the Company exercises significant influence, are reported using the equity method of accounting.
- Accounting for changes in the equity of the investee
Under the equity method of accounting, the Company records changes in its proportionate equity of the net assets of the investee depending on the nature of the underlying changes in the investee as follows; (i) “equity in
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income (loss) of associates” in the non-operating revenues (expense) for net income (loss) of the investee; (ii) “increase (decrease) in retained earnings of associates” in the retained earnings for changes in beginning retained earnings of the investee; (iii) “increase (decrease) in equity of associates” in the accumulated other comprehensive income (loss) for other changes in stockholders’ equity of the investee.
When the equity method investee’s unappropriated retained earnings carried over from prior period changes due to significant error corrections, the Company records the changes in equity as “equity in income (loss) of associates” included in the non-operating revenues (expenses) unless the impact of the changes on the Company’s consolidated financial statements is significant. If the changes results from the changes in accounting policies of the equity method investee, they are reflected in the unappropriated retained earnings carried over from prior period in accordance with SKAS on changes in accounting policy and errors corrections. When the investee declares cash dividends, the dividends to be received are deducted directly from equity method investment securities.
- Treatment of investment difference
Difference between the acquisition cost and the Company’s proportionate equity in the fair value of net assets of the investee upon acquisition (“Investment difference”) are considered as (negative) goodwill and accounted for in accordance with accounting standards for business combination. The goodwill portion which is amortized over useful lives (4~10 years) on a straight line method and the negative goodwill portion which is amortized over the weighted average useful lives of depreciable non-monetary assets of the investee are included in “equity in income (loss) of associates”.
When the Company’s equity interest in the investee increases due to an increase (or decrease) in contributed capital with (or without) consideration, the changes in the Company’s proportionate equity in the investee is accounted for as investment difference. If the Company’s equity interest decreases, the changes are accounted for as “gain (loss) on disposal of the equity method investment securities”.
- Difference between the fair value and book value of net assets of the investee
Upon acquisition of the equity method investment securities, the Company’s proportionate shares in the differences between the fair values and book values of the identifiable assets and liabilities of the investee are amortized/reversed and included in “equity in income (loss) of associates” in accordance with the investee’s methods of accounting for the assets and liabilities.
- Elimination of unrealized gain or loss from intercompany transactions
The Company’s proportionate share in the gain (loss) arising from transactions between the Company and the investee, which remains in the book value of assets held as of balance sheet date is considered unrealized gain (loss) and adjusted to equity method investment securities.
- Impairment loss on equity method investment securities
When there is objective evidence that the equity method investment securities are impaired and the recoverable amount is lower than the carrying amount of the equity method investment securities, an impairment loss is recognized as “loss on impairment of equity method investment securities” included in non-operating expenses and shall first reduce the unamortized investment difference, if any. When the recoverable amount is recovered after the recognition of impairment loss, the reversal of impairment loss can be recognized as income
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up to the previously recorded impairment loss. The book value of the equity method investment securities after the reversal of the impairment loss cannot exceed the book value calculated as if the impairment loss had not been originally recognized. The reversal of the impairment loss recognized against the unamortized investment difference is not allowed.
- Translation of financial statements of overseas investees
For overseas investees whose financial statements are prepared in foreign currencies, the equity method of accounting is applied after assets and liabilities are translated in accordance with the accounting treatments for the translation of the financial statements of overseas’ subsidiaries for consolidated financial statements. The Company’s proportionate share of the difference between assets net of liabilities and stockholders’ equity after translation into Korean won is accounted for as “increase (decrease) in equity of associates” included in the accumulated other comprehensive income (loss).
h. Property and Equipment
Property and equipment are stated at cost (acquisition cost or manufacturing cost plus expenditures directly related to preparing the asset ready for use), except for those contributed by the government and stated at amounts revalued on January 1, 1982, and assets acquired from investment in kind, by donation or free of charge in other ways are stated at fair value as an acquisition cost. Expenditures after acquisition or completion that increase future economic benefit in excess of the most recently assessed capability level of the asset are capitalized; other expenditures are charged to expense as incurred. Borrowing costs in relation to the manufacture, purchase, construction or development of assets are charged to current operations.
Depreciation is computed by the declining-balance method (except for buildings, structures, underground access to cable tunnels, and concrete and steel telephone poles that are depreciated using the straight-line method) based on the following useful lives of the related units of property and equipment and the accumulated depreciation and impairment are directly deducted from the related assets.
Buildings and structures
Machinery and equipment:
Underground access to cable tunnels, and concrete and steel telephone poles
Other
Vehicles
Tools, furniture and fixtures
When the expected future cash flow from use or disposal of the property and equipment is lower than the carrying amount due to obsolescence, physical damage and other, the carrying amount is adjusted to the recoverable amount (the higher of net sales price or value in use) and the difference is recognized as an impairment loss. The Company recorded loss on impairment of property and equipment totaling (Won)7,990 million for the year ended December 31, 2007. Meanwhile, when the recoverable amount subsequently exceeds the carrying amount of the impaired asset, the excess is recorded as a reversal of impairment loss to the extent that the reversed asset does not exceed the carrying amount before previous impairment as adjusted by depreciation. There was no reversal of impairment loss for the year ended December 31, 2007.
i. Intangible Assets
Intangible assets are initially recognized at acquisition cost (purchase cost plus expenditures directly related to preparing the asset ready for use) and subsequently presented at amortized cost using the straight-line method,
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with amortization beginning when the asset is available for use. Meanwhile, rights to utilize buildings and facilities and copyrights are amortized over 30 or 50 years since the Company has contractual or lawful exclusive rights to them.
Intangible assets are amortized based on the following useful lives:
Research and development cost
Goodwill and negative goodwill
Software
Industrial rights
Frequency usage rights
of service commencement or 13
Other intangible assets
Research related costs are generally expensed as operating expenses. Development costs which meet certain requirements and from which future economic benefit is certain are capitalized as intangible assets and the amortization over the estimated useful lives is recorded as operating expenses. Development costs associated with new telecommunication businesses such as Integrated Customer Information System (ICIS) and Broadband Integrated Services Digital Network (B-ISDN) and software such as Integrated Logistics Information System, Information Superhighway and Enterprise Resource Planning (ERP) are accounted for as intangible assets.
The Company was elected as a WiBro business provider on January 20, 2005 and paid (Won)125,800 million to the MIC in exchange for the usage right to frequency range of 2331.5~2358.5 Mhz obtained on March 30, 2005. The rights have a contractual life of 7 years from the grant date and are amortized over the remaining contractual life commencing from June 30, 2006 when commercial service was initiated.
On December 15, 2000, KTF acquired the license to provide third generation mobile services utilizing 2GHz frequency band (“IMT-2000 service”) for which a total payment of (Won)1,300 billion is to be paid to MIC as a license fee. KTF paid (Won)650 billion out of the total license fee on March 20, 2001 and the remaining balance of (Won)650 billion is required to be paid including interest for five years from 2007 to 2011 of which (Won)90 billion was paid in 2007. As of December 31, 2007, the unpaid license fees amounting to (Won)515,208 million (including current portion of (Won)108,920 million), net of present value discount of (Won)44,792 million (including current portion of (Won)1,080 million), are recorded as current or non-current liabilities. Interest rate applied to these accounts payable—other is the average of three-year Government bond interest rates as of 21st day of each month from March of prior year to February of current year minus 0.75%.
Future payment schedule of the license fees as of December 31, 2007 is as follows (in millions of Korean won):
Year ending December 31,
2008
2009
2010
2011
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The Company tests for impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the recoverable amount of the assets. When the recoverable amount (the higher of net sales price or value in use) of intangible assets is significantly lower than the carrying amount due to obsolescence, and other, the difference is recognized as an impairment loss. When the recoverable amount subsequently exceeds the carrying amount of the impaired asset, the excess is recorded as a reversal of impairment loss to the extent that the reversed asset does not exceed the carrying amount before the previous impairment as adjusted for amortization. The Company recorded loss on impairment of intangible assets totaling (Won)8,957 million for the year ended December 31, 2007. There was no reversal of impairment loss for the year ended December 31, 2007.
Goodwill, which represents the excess of the acquisition cost over the fair value of net identifiable assets acquired related to entities that are being consolidated, is amortized on a straight-line basis over a reasonable period. However, if the recoverable amount is significantly lower than the book value, an impairment loss on goodwill is charged against current earnings. Negative goodwill, which represents the excess of the fair value of net identifiable assets acquired over the acquisition cost, is recorded as a contra account (reduction) to intangible assets. For the year ended December 31, 2007, the amortization of goodwill of (Won)138,405 million is included in operating expenses and the reversal of negative goodwill of (Won)518 million is included in non-operating revenues.
j. Contributions for Construction and Others
Government subsidies and contributions for construction granted for the purpose of acquisition of certain assets are recorded as a deduction from the assets granted or other assets acquired for the temporary use of the assets granted. When the related assets are acquired, they are recorded as a deduction from the acquired assets and offset against the depreciation of the acquired assets over their useful lives. In addition, government subsidies and contributions for construction without any repayment obligation is offset against the related expenses for which they are intended to compensate, however, if there is no matching expense, they are recorded as operating or non-operating revenue depending on whether they are directly related to the Company’s principal operating activities. Government subsidies and contributions for construction with a repayment obligation are recorded as a liability.
k. Present Value Discount for Assets and Liabilities
Receivables or payables from long-term installment transactions, long-term loans/borrowings or the other similar transactions are stated at present value which is determined by discounting total amounts receivable or payable in the future using the effective interest rate, if the nominal value is significantly different from the present value. The discount or premium resulting from the determination of present value should be reported in the balance sheet as a direct deduction from or addition to the nominal value of the related receivables or payables and the amortization by the effective interest rate method is included in the period income (loss).
l. Translation of Assets and Liabilities Denominated in Foreign Currency
Transactions denominated in foreign currencies are recorded in Korean won translated at the exchange rate prevailing on the transaction date and the resulting gain (loss) from foreign currency transactions is included in non-operating revenues (expenses). Monetary assets and liabilities denominated in foreign currency are translated into Korean won at the Base Rates announced by Seoul Money Brokerage Services, Ltd. on the balance sheet dates, which were, for U.S. dollars, (Won)1,013.0: USD 1, (Won)929.6: USD 1 and (Won)938.2: USD 1 at December 31, 2005, 2006 and 2007, respectively, and the resulting gain (loss) from foreign currency translation is included in non-operating revenues (expenses).
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m. Convertible and Exchangeable Bonds
The proceeds from issuance of convertible bonds are allocated between the conversion right and the debt issued. When additional amount is paid upon maturity to guarantee certain yield rate, the redemption premium is recognized as an addition to the convertible bonds and the conversion right, which represents the difference between the issue price of the convertible bonds and the present value of normal bonds, is accounted for as capital surplus. The redemption premium, the conversion right and the expenses incurred for the issuance of the bonds are adjusted to the bonds and amortized to interest expense using the effective interest rate method over the redemption period of the convertible bonds.
Effective January 1, 2003, the Company adopted SKAS No. 9, “Convertible Securities” which requires the separate recognition of the capital features. However, as allowed by the transaction clause of the Statement, the Company recorded the exchangeable bonds issued prior to the effective date as a single accounting unit. Meanwhile, the exchangeable bonds were fully redeemed by the Company on December 29, 2006.
n. Provisions for Severance Indemnities
In accordance with KT and its domestic subsidiaries’ policies, all employees with more than one year of service are entitled to receive lump-sum severance payments upon termination of their employment, based on their current rates of salary and length of service. The accrual for severance indemnities is computed as if all employees were to terminate at the balance sheet dates and amounted to (Won)1,308,069 million and (Won)1,566,313 million for the years ended December 31, 2006 and 2007, respectively.
The Company has insured a portion of its obligations for severance indemnities by making deposits, that will be directly paid to employees, with Samsung Life Insurance and other and records them as deposits for severance insurance deposits which is directly deducted from the accrued severance indemnities.
o. Provisions
The Company recognizes a provision for a liability with uncertain timing or amount when (1) there is a present obligation of the Company arising from past events, (2) it is highly likely that an outflow of resources will be required to settle the obligation, and (3) the amount for the settlement of the obligation can be reliably measurable.
If there is a significant difference between the nominal value and present value of such provision, the provision is stated at the present value of the expenditures expected to be required to settle the obligation.
p. Derivative Instruments
The Company records rights and obligations arising from derivative instruments in assets and liabilities, which are stated at fair value. Gains and losses that result from the changes in the fair value of derivative instruments are recognized in current earnings. However, for derivative instruments that cash flow hedge accounting applies to, the effective portion of the gain or loss on the derivatives instruments are recorded as gain (loss) on valuation of derivatives included in the accumulated other comprehensive income (loss).
q. Share-based Payment
The Company’s share-based payment transactions are accounted for in accordance with SKAS No.22 “Share-based Payment” which is effective from fiscal year beginning on or after December 31, 2006. As allowed
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in the transition clause of SKAS No. 22, for employee stock options granted before January 1, 2007, the Company accounts for them in accordance with Interpretation No. 39-35 “Accounting for Stock Options”.
(i) Stock options
The Company has granted stock options to its executive officers and directors prior to January 1, 2007, and for equity-settled stock options, the Company records compensation expenses which are allocated over the period in which the options vest with the corresponding credit to the stock options of the capital adjustments. When the options are exercised with the issuance of new shares, the difference between the exercise price plus the stock option cost recorded in the capital adjustments account and the par value of the new shares issued, is recorded as additional paid-in capital. In the event the Company grants stock options based on cash-settled share-based payment, the Company records compensation expenses which are allocated over the period in which the options vest with the corresponding liability recorded.
When stock options are forfeited because the specified vesting requirements are not satisfied, previously recognized compensation costs are reversed to earnings and the corresponding capital adjustments or liabilities are reversed as well. When stock options expire unexercised, previously recognized compensation costs and corresponding capital adjustments are reversed to capital surplus.
(ii) Share-based payments
Share-based payments granted on or after January 1, 2007 are measured as below:
For equity-settled share-based payment transactions, the Company measures the goods or services received, and the corresponding increase in equity (capital adjustments), directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the Company measures the value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.
For cash-settled share-based payment transactions, the Company measures the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the Company re-measures the fair value of the liability at each reporting date and at the date of settlement, with any changes in value recognized in profit or loss for the period.
For share-based payment transactions in which the terms of the arrangement provide either the Company or the supplier of goods or services with a choice of whether the Company settles the transaction in cash or by issuing equity instruments, the Company is required to account for that transaction, or the components of that transaction, as a cash-settled share-based payment transaction if, and to the extent that, the Company has incurred a liability to settle in cash (or other assets), or as an equity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred.
r. Accounting for Leases
A lease is classified as a finance lease or an operating lease depending on the extent of transfer to the Company of the risks and rewards incidental to ownership. If a lease meets any one of the following criteria, it is accounted for as a finance lease:
The lease transfers ownership of the asset to the lessee by the end of the lease term;
The lessee has the option to purchase the asset at a bargain price and it is certain that the option will be exercised;
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The lease term is for the major part (75% or more) of the economic life of the asset even if title is not transferred;
At the date of lease commencement the present value of the minimum lease payments amounts to at least substantially all (90% or more) of the fair value of the leased asset; or
The leased assets are of such a specialized nature that only the Company can use them without major modifications.
All other leases are treated as operating leases.
For operating leases, lease payments excluding guaranteed residual value are recognized as an expense on a straight-line basis over the lease term and contingent rent is expensed as incurred. Finance leases are recognized as assets and liabilities at the lower of fair value of the leased property or the present value of the minimum lease payments discounted using the implicit interest rate of the lessor (or the Company’s incremental borrowing rate if the implicit interest rate is not practicable to determine). Any initial direct costs incurred by the Company are added to the amount recognized as an asset. The depreciation policy for depreciable leased assets is consistent with that for the similar depreciable assets that are owned by the Company. Annual minimum lease payments excluding guaranteed residual value is allocated to interest expense, which is calculated using the effective interest rate, and finance lease repayment amount. Contingent rent relating to finance are charged as expenses in the periods in which they are incurred, however, if the amount is material it is allocated to principal and interest, respectively, over the remaining lease term.
s. Revenue Recognition
The Company’s service revenues, which include revenues derived from telephone services, internet services and data services, are recognized on a service-rendered basis. In connection with such services, the MIC and other government entities have extensive authority to regulate the Company’s fees. The MIC has responsibility for approving rates for local service and interconnection and broadband internet access services provided by the Company. As for other telecommunication services, the related rates are just required to be reported to the MIC.
The Company recognizes sales on PCS handsets when these are delivered to the dealers. In addition, the Company’s construction revenue is recognized by reference to the percentage of completion of the contract which is calculating the ratio of the actual contract costs incurred to date to the estimated total contract costs.
Meanwhile, the Company recognizes sales revenues on a gross basis when the Company is the primary obligor in the transactions with customers and if the Company merely acts as an agent for the buyer or seller from whom it earns a commission, then the sales revenues are recognized on a net basis.
t. Income Taxes
When the Company recognizes deferred income tax assets or liabilities for the temporary differences between the carrying amount of an asset and liability and tax base, a deferred income tax liability for taxable temporary difference is fully recognized except to the extent in accordance with income tax related SKAS while a deferred tax asset for deductible temporary difference is recognized to the extent that it is almost certain that taxable profit will be available against which the deductible temporary difference can be utilized. Deferred income tax asset (liability) is classified as current or non-current asset (liability) depending on the classification of related asset (liability) in the balance sheet. Deferred income tax asset (liability) which does not relate to specific asset (liability) account in the balance sheet such as deferred income tax asset recognized for tax loss
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carryforwards is classified as current or non-current asset (liability) depending on the expected reversal period. Deferred income tax assets and liabilities in the same tax jurisdiction and in the same current or non-current classification are presented on a net basis. Current and deferred income tax expense are included in income tax expense in the statement of operations and additional income taxes or tax refunds for the prior periods are included in income tax expense for the current period when recognized. However, income taxes resulting from transactions or events, which were directly recognized in stockholders’ equity in current or prior periods, or business combinations are directly adjusted to equity account or goodwill (or negative goodwill).
The Company early adopted the Korea Accounting Institute (“KAI”) Opinion 06-2 “Deferred Income Taxes on Investments in Subsidiaries, Associates and Interests in Joint Ventures,” in 2006, which requires the Company to consider the temporary differences from investments in subsidiaries, associates and interest in joint ventures as a whole instead of segregating them subject to their nature in determining whether or not to recognize their income tax effect.
u. Use of Estimates
The Company’s management uses reasonable estimates and assumptions in preparing the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the Republic of Korea. The estimates and assumptions can change according to additional experiences, changes in circumstances, new information and other and may be different from actual results.
v. Elimination of Inter-Company Unrealized Gain/Loss
Unrealized gains and losses included in the inventories, property and equipment and other which were acquired by transactions amongst KT and subsidiaries are fully eliminated using the gross margin ratio of the transactions and the gains and losses on disposal.
w. Translation of Overseas Subsidiaries’ Financial Statements
For overseas subsidiaries whose financial statements are prepared in foreign currencies, assets and liabilities are translated at the exchange rate at the consolidated balance sheet date and statement of income items are translated at the average exchange rate for the respective fiscal period. Net translation adjustments are recorded as gain (loss) on translation of foreign operations included in the accumulated other comprehensive income.
x. Changes in Consolidated Entities
For the year ended December 31, 2007, KTF M&S, KT FDS, Bluecord Technology Corp., Doremi Media Co.,Ltd., KTSC IM B.V. Super iMAX and East Telecom are newly acquired in 2007 and included in the consolidation. Meanwhile, Korea Telecom Venture Fund No.1, which was dissolved and in which interests were collected in 2007, and Korea Telecom Philippines, Inc., which will be liquidated in 2008, is excluded from the consolidation.
In addition, when a subsidiary is acquired during the year, it is presented in the consolidated statements of income as though it had been acquired at the beginning of the year, and its earning (loss) prior to acquisition is separately presented as a deductive (additive) line item in the consolidated statements of income.
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y. Adoption of New Accounting Standards and Reclassifications of Financial Statements
The Company made adjustments to the 2005 and 2006 consolidated financial statements to retrospectively apply the adoption of Statements of Korean Accounting Standards and reclassify certain accounts in prior periods to conform to current period’s presentation. Such reclassification did not have an effect on the net assets as of December 31, 2006 and net income of the Company for the years ended December 31, 2005 and 2006. Additionally, the Company made an adjustment to the consolidated statements of cash flows due to the change of policy in 2007 and reclassified prior periods to be in conformity with current year presentation. (in millions of Korean won):
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z. Basis of Translating Consolidated Financial Statements
The consolidated financial statements are expressed in Korean won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 2007, have been translated into U.S. dollars at the rate of (Won)935.8 to USD1, the noon buying rate in the City of New York for cable transfers in Korean won as certified for customs purposes by the Federal Reserve Bank of New York on the last business day of the year ended December 31, 2007. The translation should not be construed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any other rate.
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3. RESTRICTED DEPOSITS
Details of restricted deposits as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
Short-term financial instruments
Long-term financial instruments
Checking account deposit
and others
4. INVENTORIES
Inventory valuations as of December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
Merchandise
Supplies
5. SECURITIES
Securities as of December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
a. Short-term Investments
Short-term loans
Beneficiary certificates
Available-for-sale securities (Equity securities)
Available-for-sale securities (Debt securities)
Held-to-maturity securities
b. Trading Securities
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c. Available-for-sale Securities
Equity securities
Current assets:
Beneficiary certificates and others
Sub total
Non-current assets:
Krtnet Corp.
GaeaSoft Corp.
Zakang Inc.
Geotel Corp.
PT.Mobile
Dalsvyaz
Solid Technologies, Inc.
Eluon Corporation
Zmos Technology, Inc. (Note 2)
Shinhan Venture Capital Co., Ltd. (Note 2)
MBC-ESS Sport (Note 2)
KTB Network Co., Ltd. (Note 2)
Korea Information Certificate Authority, Inc. (Note 2)
KM Credit Information Inc. (Note 2)
Korea Software Financial Cooperative (“KSFC”) (Note 2)
EST Soft Corp. (Note 2)
Digitalinside Co., Ltd. (Note 2)
Vacom, Wireless Inc. (Note 2)
CXP, Inc. (Note 2)
Ongamenet Co., Ltd. (Note 2)
CEC Mobile (Note 2)
NETS Co., Ltd. (Note 2)
Korea Smart Card Co., Ltd. (Note 2)
Metrix Corporation Inc. (Note 2)
Wiz Communication Co., Ltd. (Note 2)
MIC2001-4TG Venture (Note 2)
Korea Telecommunications Operators Association (“KTOA”) (Note 2)
Prime Venture Capital Corp. (Note 2)
DirectMedia Co., Ltd. (Note 2)
Ncerti Co., Ltd. (Note 2)
ICO Global Communication Ltd. (Note 2)
Softbank Korea Co., Ltd. (Note 2)
Binext CT Financial Cooperative (Note 2)
Entaz Co., Ltd. (Note 2)
KBSN (formerly “KBSsky”) (Note 2)
Anyusernet Co., Ltd. (Note 2)
Carpoint Co., Ltd. (Note 2)
Others (Note 2)
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Infravalley,lnc.
PT.Mobile-8
EST Soft Corp.
Ongamenet Co., Ltd.
Cape Industries Ltd.
Bixolon Co., Ltd.
Sesil Corporation.
Luxpia Co., Ltd. (Note 2)
Paramount Music Co., Ltd. (Note 2)
Neighbor Systems Co., Ltd. (Note 2)
Digital Multimedia Interactive Co., Ltd. (Note 2)
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For the year ended December 31, 2007, the Company disposed of its investments in Pivotec Co., Ltd., KINX Co., Ltd. and other investments and recognized gross gains and losses on disposal of available-for-sale securities amounting to (Won)9,664 million and (Won)828 million, respectively. The impairment loss on the investment in KTFEN Co., Ltd., which was previously recognized due to the decline in the recoverable amount, was reversed by (Won)76 million up to the acquisition cost for the year ended December 31, 2007 since the recoverable amount was recovered. As the estimated recoverable amount of the investment in Macom Co., Ltd. fell below the acquisition cost and such difference is not deemed recoverable, the Company recognized an impairment loss amounting to (Won)1,809 million for the year ended December 31, 2007.
For the year ended December 31, 2007, Korea Telecom Venture Fund No.1 (the “Fund”) was excluded from the Company’s consolidation and, accordingly, the Fund’s investment in KBSN (formerly “KBSsky”), Anyusernet Co., Ltd., Carpoint Co., Ltd. and other were removed from available-for-sale securities.
Debt securities
Government and public bonds
National and local governments
Bond fund
SKG
Korea Exchange bank Pro New MMF3
BS clean MMF AT-3
Bonds with warrant
Nexpop Inc.
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Convertible bonds
Changes in unrealized gain (loss)
Balance at beginning of the year
Realized losses (gains) on disposal of securities, net
Changes in unrealized gains (losses), net
Balance at end of the year
The amounts are not adjusted for the tax effects and minority interests in consolidated subsidiaries.
d. Held-to-maturity Securities
Subordinated bonds
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Asset backed securities
6. EQUITY METHOD INVESTMENT SECURITIES
a. Details of Equity Method Investment Securities
Details of investments in securities accounted for using the equity method as of December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
Korea Telephone Directory Co., Ltd. (“KTD”)
Korea Information Technology Fund
KBSi Co., Ltd.
Kiwoom Investment Co. Ltd. (formerly, “Korea IT Venture Partners Inc”)
Korea Digital Satellite Broadcasting Co., Ltd. (“KDB”)
eNtoB Corp.
Sky Life Contents Fund
Goodmorning F Co., Ltd. (Note 1)
Korea New Realty Development and Construction Co., Ltd. (“KNRDC”) (Note 1)
Korea Information Data Corp. (“KID”) (Note 1)
Korea Information Service Corp. (“KIS”) (Note 1)
Korea Seoul Contact all Co., Ltd. (Note 1)
Korea Service and Communication Co., Ltd. (Note 1)
Korea Call Center Co., Ltd. (Note 1)
TMWorld Co., Ltd. (Note 1)
Ubiquitous Marketing Service and Communication Co., Ltd. (“UMS&C”) (Note 1)
Mostech Co., Ltd. (Note 1)
Pivotec Co., Ltd. (Note 1)
Mongolian Telecommunications (“MTC”)
KTF-CJ Music Contents Investment Fund (formerly, “Centurion Music 1”) (Note 4)
Boston Film Fund (Note 6)
AGA Company
Harex InfoTech Inc
Olive Nine Entertainment Co., Ltd. (Note 7)
Olive Nine Creative Co., Ltd.
The Contents Entertainment (Note 9)
Tourtainment, Inc.
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Exdell Corporation (Notes 1 and 2)
Information Technology Service Kangbuk Corporation (Notes 1 and 2)
Information Technology Solution Nambu Corporation (Notes 1 and 2)
Information Technology Solution Seobu Corporation (Notes 1 and 2)
Information Technology Solution Busan Corporation (Notes 1 and 2)
Information Technology Solution Jungbu Corporation (Notes 1 and 2)
Information Technology Solution Honam Corporation (Notes 1 and 2)
Information Technology Solution Daegu Corporation (Notes 1 and 2)
Korea Telecom Philippines, Inc. (“KTPI”) (Note 3)
KTF-DoCoMo Mobile Investment Fund (Note 5)
Harex InfoTech Inc.
Olive Nine Entertainment Co., Ltd. (Notes 7 and 9)
Music City China Co., Ltd (Notes 8 and 9)
Doremi Music Publishing Co., Ltd (Notes 8 and 9)
Bluecord Corp. (Notes 8 and 9)
PARANGOYANGI (Notes 8 and 9)
Music City Media Co., Ltd. (Notes 8 and 9)
Dooristar Co., Ltd.(Note 8)
Oscar ent. Co., Ltd. (Note 8)
Netcom
TPS (Note 9)
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b. Changes in Carrying Amount Resulting from the Equity Method
Changes in carrying amount resulting from the equity method of accounting for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won):
KTD
Korea Information Technology Fund.
KDB
Kiwoom Investment Co., Ltd. (formerly, “Korea IT Venture Partners Inc”)
Goodmorning F Co., Ltd.
KNRDC
KID
KIS
Korea Seoul Contact all Co., Ltd.
Korea Service and Communication Co., Ltd.
Korea Call Center Co., Ltd.
TMworld Co., Ltd.
UMS&C
Mostech Co., Ltd.
Pivotec Co., Ltd.
MTC
KTF-CJ Music Contents Investment Fund (formerly, “Centurion Music 1”)
Boston Film Fund
Olive Nine Entertainment Co., Ltd.
The Contents Entertainment
KTICC Company
Banktown Co., Ltd.
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KTD (Note 1)
eNtoB Corp. (Note 1)
KDB (Note 1)
Kiwoom Investment Co., Ltd. (formerly, “Korea IT Venture Partners Inc”) (Note 1)
TMWorld Co., Ltd.
Exdell Corporation (Note 1)
Information Technology Service Kangbuk Corporation (Note 1)
Information Technology Solution Nambu Corporation (Note 1)
Information Technology Solution Seobu Corporation (Note 1)
Information Technology Solution Busan Corporation (Note 1)
Information Technology Solution Jungbu Corporation (Note 1)
Information Technology Solution Honam Corporation (Note 1)
Information Technology Solution Daegu Corporation (Note 1)
Pivotec Co., Ltd. (Note 2)
KTPI (Note 3)
MTC (Note 1)
KTF-CJ Music Contents Investment Fund (formerly, “Centurion Music 1”) (Note 1)
KTF-DoCoMo Mobile Investment Fund (Note 1)
Boston Film Fund (Note 1)
Music City China Co., Ltd. (Note 1)
Doremi Music Publishing Co., Ltd. (Note 1)
Bluecord Corp. (Note 1)
PARANGOYANGI (Note 1)
Music City Media Co,, Ltd. (Notes 1 and 3)
Dooristar Co., Ltd. (Note 1)
Oscar Ent. Co., Ltd. (Note 1)
TPS
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c. Changes in Investment Difference
Changes in investment differences from equity method investment securities for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won) :
Affiliate
OliveNine Entertainment Co., Ltd.
Hallim Venture Capital
Doremi Music Publishing Co., Ltd.
d. Elimination of Unrealized Gains (Losses)
Details of unrealized gains (losses) arising from intercompany transactions, which are eliminated, as of December 31, 2007 are as follows (in millions of Korean won):
Company
Bluecord Corp.
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e. Cumulative Changes in the Company’s Equity in Net Asset Value of The Investee’s Not Recognized
Cumulative changes in the Company’s equity in net asset value of the investees not recognized due to the discontinuance of the equity method of accounting as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
f. Condensed Financial Information of The Investees
Condensed financial information of the investees in which investments are accounted for using the equity method of accounting as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
Kiwoom Investment Co., Ltd. (formerly, “Korea IT Venture Partners Inc”).
KTF-CJ Music Contents Investment Fund (Centurion Music 1)
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Exdell Corporation
Information Technology Service Kangbuk Corporation
Information Technology Solution Nambu Corporation
Information Technology Solution Seobu Corporation
Information Technology Solution Busan Corporation
Information Technology Solution Jungbu Corporation
Information Technology Solution Honam Corporation
Information Technology Solution Daegu Corporation
KTPI
KTF-DoCoMo Mobile Investment Fund
Harex InfoTech Inc.,
PARANGOYANGI
Music City Media Co., Ltd.
Dooristar Co., Ltd.
Oscar ent. Co., Ltd.
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7. PROPERTY AND EQUIPMENT
Changes in property and equipment for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won):
Land (Note 3)
Buildings (Note 3)
Structures
Machinery
Construction- in-progress
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8. CONTRIBUTION FOR CONSTRUCTION
Changes in contribution for construction which was used in the acquisition of property and equipment for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won):
Buildings
Construction-in-progress
9. INTANGIBLE ASSETS
Changes in intangible assets for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won):
Goodwill
Negative goodwill
Development costs
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The Company’s research and ordinary development expenses amounted to (Won)281,745 million and (Won)291,010 million for the years ended December 31, 2006 and 2007, respectively.
Details of goodwill and negative goodwill as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
Sidus FNH
Oilve Nine
KT FDS
Bluecord Technology
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10. PRESENT VALUE OF ASSETS AND LIABILITIES
Assets and liabilities measured at present value as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
Accounts
Long-term borrowings
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11. LONG-TERM DEBT
a. Bonds
Bonds as of December 31, 2006 and 2007 are summarized as follows (in thousands of U.S. dollars and millions of Korean won):
KT
F-53
Olive Nine
Less current portion
Long-term portion
Conversion right adjustment
Repayment premium
Discount on bonds
Net
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(USD 600,000)
(USD 400,000)
(USD 200,000)
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Type
KT Capital
Issued amount (in Korean won)
Stated interest rate (%)
3%
Guaranteed yield rate (%)
10%
Conversion price (in Korean won)
(Won)1,584 per share
Convertible period
February 17, 2007~February 16, 2009
Number of total convertible shares
2,525,252 shares
Converted shares
631,313 shares
Unconverted shares
1,893,939 shares
Exercise price (in Korean won)
Exercise period
Number of total exercisable shares
Exercised shares
Unexercised shares
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b. Long-term Borrowings in Korean Won
Long-term borrowings in Korean won as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
Informatization Promotion Fund
Inter-Korean Cooperation Fund
Facility and working capital loans
General purpose loans
Commercial papers
Less Current portion
Less present value discount
Above Informatization Promotion Funds are repayable in installments for three years after two year grace period and Inter-Korean Cooperation Fund is repayable in installments for thirteen years after seven year grace period.
c. Long-term Borrowings in Foreign Currency
Long-term borrowings in foreign currency as of December 31, 2006 and 2007 are as follows (in millions of Korean won, thousands of U.S. dollars and thousands of Russian rubles):
New Telephone Company, Inc.
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d. Repayment Schedule
Repayment schedule of the Company’s long-term debt as of December 31, 2007 is as follows (in millions of Korean won):
Year ending
December 31,
2012
Thereafter
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12. PROVISIONS
Changes in provisions for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won):
Current portion:
Litigation (Note 1)
KT members points (Note 2)
Sales warranty (Note 3)
Non-current portion:
Call bonus points (land line) (Note 4)
Let’s 010 call bonus points (Note 5)
Call bonus points (Note 4)
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13. LEASE
a. Capital Lease
Property and equipment acquired through capital lease agreements with GE Capital and other as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
Acquisition cost
Accumulated depreciation
Net balance
Annual future lease payments of such leases as of December 31, 2007 are as follows (in millions of Korean won):
Less amounts representing interest
Principal amount
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b. Operating Lease in Foreign Currency
KTSC entered operating lease agreement with KT Shipping S.A. on February 27, 1997 to lease a ship (8,323 ton) for installation and maintenance of submarine cable. Total lease fee of USD 95,418 thousand is payable in thirty equal semi annual installments from April 17, 1998 to April 20, 2013. Annual future lease payments under the operating lease as of December 31, 2007 are as follows (in millions of Korean won and thousand of U.S. dollars):
14. REFUNDABLE DEPOSITS FOR TELEPHONE INSTALLATION
Through September 15, 1998, the Company received deposits for telephone installation in accordance with the Korea Public Telecommunication Business Law. Such deposits (which are reflected as a liability) are to be refunded without interest to the telephone subscribers upon termination of service.
Beginning on September 15, 1998, the Company allowed customers to choose between alternative plans for basic telephone service. Under such plans, customers were permitted the option to either place fully refundable deposits or pay a reduced non-refundable service initiation fee. Effective April 15, 2001, all new customers are required to pay a non-refundable service initiation fee.
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15. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES
Significant assets and liabilities denominated in foreign currencies (excluding those held by overseas subsidiaries) as of December 31, 2006 and 2007 are summarized as follows (in millions of Korean won and thousands of foreign currencies):
Assets:
Deposits provided
JPY
SDR
EUR
15,980
20,923
18,965
19,033
286
Liabilities:
Current portion of long-term liabilities
Bonds (par value)
GBP
268,369
19,202
1,534
—
AUD
KWD
882,321
16,350
678
112
194
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16. TRANSACTIONS AND BALANCES WITH RELATED PARTIES
KT and subsidiaries have engaged in various business transactions amongst themselves and equity method investees. The transactions include providing PCS network capacities, system and network integration service, public telephone maintenance service, 114 call center operation service and other.
Significant transactions between KT and its related parties for the years ended December 31, 2005, 2006 and 2007 are summarized as follows (in millions of Korean won):
Related party
Transactions
Account
Subsidiary:
KTC
Equity method investee:
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KT’s significant account balances with related parties as of December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
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Compensation to KT’s key management personnel for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won):
Benefits
Salaries, bonuses and other allowances, retirement benefits, medical benefits and other
KT considers its management of vice president or higher, who have the authority and responsibility for planning, operation and control and are in charge of business or division unit, and non-permanent directors as key management personnel.
Significant account balances amongst subsidiaries as of December 31, 2006 and 2007 are as follows (in millions of Korea won):
Creditor
Significant transactions amongst subsidiaries for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korea won):
Seller
Purchaser
As of December 31, 2007, the Company has provided guarantees for related parties as follows (in millions of Korean won and thousands of U.S. dollars):
Guarantor
17. COMMON STOCK AND CAPITAL SURPLUS
As of December 31, 2007, the Company’s number of shares authorized are 1,000,000,000 shares with par value of (Won)5,000 per share.
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As of December 31, 2006 and 2007, the number of shares issued by the Company are 279,627,400 shares and 275,202,400 shares, respectively, and the common stock amounted to (Won)1,560,998 million. As allowed by the Securities Exchange Law, the Company retired 4,425,000 treasury stocks for the year ended December 31, 2007 in addition to the 32,572,259 treasury stock retired through December 31, 2006 by charges against retained earnings. Therefore, the common stock amount differs from the amount resulting from multiplying the number of shares issued by (Won)5,000 par value of common stock.
Capital surplus as of December 31, 2006 and 2007 is summarized as follows (in millions of Korean won):
Paid-in capital in excess of par value
Acquisition of additional equity interest in consolidated subsidiaries
Others (Note)
18. RETAINED EARNINGS RESTRICTED IN USE
Retained earnings appropriated to the legal reserve cannot be used as cash dividends under the applicable laws and regulations. The Korean Commercial Code requires the Company to appropriate an amount equal to at least 10% of the cash dividend amount to a legal reserve at the end of the year for each accounting period until the reserve equals 50% of stated capital. The legal reserve may be used to reduce a deficit or may be transferred to capital.
In accordance with the relevant tax laws, the Company is allowed to appropriate a reserve for technology and human resource development to recognize certain tax deductible benefits through the early recognition of future expenditures for tax purposes. This reserve used for its original purpose and the remaining balance after use are restored to retained earnings and may be used for dividends in accordance with the relevant tax laws.
19. COMPREHENSIVE INCOME
Comprehensive income for the year ended December 31, 2007 is as follows (in millions of Korean won):
Other comprehensive income (loss),:
Loss on translation of foreign operations (Tax effect: (Won)5,005 million)
Unrealized loss on available-for-sale securities (Tax effect: (Won)1,189 million)
Increase in equity of associates (Tax effect: ((Won)2,789) million)
Decrease in equity of associates (Tax effect: ((Won)4,942) million)
Unrealized gain on valuation of derivatives (Tax effect: ((Won)768) million)
Comprehensive income
Attributable to : Equity holders of the parent
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20. SHARE-BASED PAYMENT
KT granted stock options to its executive officers and directors through 2006 in accordance with the stock option plan approved by its board of directors of which details are as follows:
Grant date
Grantee
Number of basic allocated shares upon grant
Number of additional shares related to business performance upon grant
Number of shares expected to be exercised upon grant
Number of settled or forfeited shares
Number of allocated shares as of December 31, 2007
Number of additional shares related to business performance as of December 31, 2007
Number of shares expected to be exercised
Fair value (in Korean won)
Total compensation cost (in millions of Korean won)
~ Dec. 26, 2009
~Sep.16, 2010
~ Dec.12, 2010
~ Feb. 4, 2012
~ Apr. 28, 2012
Valuation method
Upon exercise, the Company can elect one of the following settlement methods; an issuance of new shares, a provision of treasury stock or cash settlement (cash and provision of treasury stock) subject to its circumstances.
KT adopted the fair value method to measure compensation costs based on the following valuation assumptions and methods are as follows:
Risk free interest rate
Expected duration
5.5 years
Expected volatility
~ 49.90%
~ 33.90%
~35.92%
Expected dividend yield ratio
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Of total compensation costs calculated using the fair value method, the compensation costs recognized through December 31, 2007 are as follows (in millions of Korean won):
Total compensation costs before adjustment
Total compensation costs cancelled
Total compensation costs after adjustment
Compensation costs recognized in prior periods
Compensation costs already recognized but expired
Compensation costs to be reflected in the current period
Compensation costs recognized in the current period
Compensation costs to be recognized after the current period
Details of stock grants to directors including chief executive officer during 2007 are as follows:
1st grant
March 29, 2007
Registered directors
Estimated number of shares granted upon grant
23,925 shares
Vesting Conditions
Service condition: one year
Non-market performance condition:
achievement of performance
Fair value per option (in Korean won)
(Won)42,706
Total compensation costs (in Korean won)
(Won)1,022 million
Estimated exercise date
March 29, 2008
Fair value method
Above compensation costs were calculated based on the fair value method and charged to current operations for the year ended December 31, 2007 as follows (in millions of Korean won):
Total compensation costs
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21. TREASURY STOCK
Changes in KT’s treasury stock for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won except for share data):
Direct purchase by the Securities and Exchange Act
Indirect purchase through trust agreement and other
22. OPERATING REVENUES
Operating revenues for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
Internet services
Data communication services
Telephone services
PCS services
PCS handsets sales
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23. CONSTRUCTION CONTRACTS
Details of construction contracts as of December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
Jungja Dong, Suwon
Sungsu Dong, Seoul
Bugae Dong, Incheon
Gaya Dong, Busan
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24. OPERATING EXPENSES
Operating expenses for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
Salaries and wages
Provision for severance indemnities
Employee welfare
Travel
Communications
Electric and water charges
Fuel expense
Taxes and dues
Publications
Rent
Repairs
Maintenance
Automobile maintenance
Commissions
Facilitation
Advertising
Education and training
Survey and analysis
Praise and reward
Registration fee and legal cost
Research
Development
Interconnection charges
Cost of services
International settlement payment
Promotion
Sales commission
Less : transfer to other accounts
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25. INCOME TAX EXPENSE
Components of income tax expense for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
Current income tax expense(including additional income taxes and tax refunds)
Changes in deferred income tax assets and liabilities related to temporary differences (including tax loss and credits carryforwards)
Income tax expense directly reflected in stockholders’ equity
Income tax expense
Changes in deferred income tax assets related to temporary differences for the year ended December 31, 2007 is as follows (in millions of Korean won):
Beginning deferred income tax assets
Ending deferred income tax assets
Changes in deferred income tax assets (liabilities) directly added to (deducted from) stockholders’ equity
Changes in deferred income tax assets
An explanation of the relationship between income tax expense and accounting income before income tax expense for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won) :
Income tax expense at statutory income tax rate (14.3% of taxable income less than (Won)100 million and 27.5% of taxable income exceeding (Won)100 million)
Differences (Note)
Effective tax rates
(Note) Differences :
Non-temporary difference
Changes in deferred income tax assets (liabilities) unrecognized related to equity method investment securities
Tax credit for investment
Other tax credits
Additional income tax and tax refund for prior periods
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Changes in temporary differences, including tax loss and credits carryforwards, and deferred income tax assets (liabilities) for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won):
(Deductible temporary differences)
Allowance for doubtful accounts
Derivatives
Available-for-sale securities
Equity method investment securities
Contribution for construction
Accrued expense
Provisions
(Taxable temporary differences)
Accrued income
Reserve for technology and human resource development
Deferred income tax assets from temporary differences
Deferred income tax assets from tax loss carry forwards
Deferred income tax assets from tax credit carryforwards
Deferred income tax assets
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Equity method investment securities (Note 2)
Not recognized as deferred income tax assets (Note 4)
Recognized as deferred income tax assets
Tax rate (Note 3)
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Accrued interest income
Not recognized as deferred income tax liabilities
Recognized as deferred income tax liabilities
Deferred income tax liabilities
(Tax loss carryforwards)
Total loss carryforwards
Not recognized as deferred income tax assets (Note 5)
(Tax credit carryforwards)
Total tax credit
Not recognized as deferred income tax assets
Deferred income tax assets, net
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Deferred income tax assets (liabilities) and income tax benefit (expense) added to (deducted from) stockholders’ equity as of December 31, 2006 and 2007 are as follows (in millions of Korean won):
Gain on disposal of treasury stock (capital surplus)
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26. INCOME FROM DISCONTINUING OPERATIONS
Korea Telecom Venture Fund No.1 (the “Fund”), which was dissolved in August 2007, and KTPI, which is scheduled to be liquidated in 2008, are excluded from the consolidation as of December 31, 2007. The Fund and KTPI’s net income (loss) for the years ended December 31, 2005, 2006 and 2007 are reclassified into income (loss) from discounting operations as follows:
Operating and non-operating Income (loss) from discontinuing operations
Reversal of cumulative loss from discontinuing operations (Note 1)
Income (loss) from discontinuing operations (Note 2)
27. INCOME PER SHARE
The Company’s net income per share for the years ended December 31, 2005, 2006 and 2007 are computed as follows (in millions of Korean won, except for per share data):
a. Basic Income Per Share From Continuing Operations
Net income from continuing operations
Weighted average number of common stock outstanding
b. Basic Income Per Share From Discontinuing Operations
Net income from discontinuing operations
Basic income per share
from discontinuing operations (in Korean won)
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c. Basic Net Income Per Share
d. Diluted Income Per Share From Continuing Operations
Interest on exchangeable bonds
Adjusted income from continuing operations
Weighted average number of common stockoutstanding
Number of shares with dilutive effects
e. Diluted Income Per Share From Discontinuing Operations
Net income (loss) from discontinuing operations
Adjusted income from discontinuing operations
Diluted income (loss) per share from discontinuing operations (in Korean won)
f. Diluted Net Income Per Share
Adjusted net income
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For the purpose of calculating diluted income per share, interest expense for exchangeable bonds multiplied by (1-marginal tax rate) and all dilutive potential common stock were added to net income attributable to common stock holders and the weighted average number of shares outstanding, respectively. Diluted income per share is calculated by dividing adjusted income by the weighted average number of common stock and all dilutive potential common stock. Share-based payments have no dilutive effect and are excluded from the calculation of diluted income per share.
(Note) Potential common stock as of December 31, 2007 are as follows:
Parvalue
Issue date
Maturity date
Exercisable Period
Stock option
Increase in the number of exercisable shares by 1/3 every year after two years from grant date
From 2 years after grant date till maturity date
On maturity date, subject to the resolution of board of directors
28. INSURANCE
As of December 31, 2007, certain assets are insured with Samsung Fire and Marine Insurance Co., Ltd. and other insurance companies as follows (in millions of Korean won):
Risk covered
Capital lease receivable
Vessel (vehicles)
Equipment usage rights
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29. DIVIDENDS
Details of KT’s dividends for common stocks for the years ended December 31, 2005, 2006 and 2007 are as follows (in Korean won except for share data):
a. Interim Dividends
Dividends per share (dividend ratio)
Number of shares outstanding (Note)
b. Dividends
(Note) 71,792,753 shares, 71,532,222 shares and 71,515,577 shares of treasury stock as of December 31, 2005, 2006 and 2007, respectively, are excluded.
c. Dividend Payout Ratios
Net income (Attributable to equity holders of the parent)
Payout ratio
d. Dividend Yield Ratios
Dividends per share
Stock price at the end of the year
Dividend yield ratio
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30. STATEMENTS OF CASH FLOWS
The statements of cash flows have been presented using the indirect method. Significant non-cash transactions for the years ended December 31, 2005, 2006 and 2007 are detailed as follows (in millions of Korean won):
Construction in progress transferred to property and equipment and other accounts
Long-term payable under a put and call agreement
Transfer of trade accounts and notes receivable to held-to-maturity securities
Conversion of convertible notes
Transferred to newly included subsidiary’s net income or loss before acquisition :
Bad debt
Foreign currency translation gains
Gain on disposal of trading securities
Other bad debt
Loss on disposal of property
Impairment loss on investment assets
Impairment loss on intangible assets
31. COMMITMENTS AND CONTINGENCIES
a. Legal Matters
On May 25, 2005, the Fair Trade Commission (“FTC”) imposed a fine of (Won)116,168 million to the Company related to local telephone services and leased line services for internet cafes. On September 14, 2005, the FTC imposed an additional fine of (Won)24,258 million to the Company related to domestic and international long-distance services. The Company expensed these fines for the year ended December 31, 2005. As of December 31, 2007, the Company has appealed certain portion of the fine imposed by the FTC amounting to (Won)132,332 million to the Supreme Court. However, the final result of this appeal cannot be presently determined.
The Company is also in various litigation as a defendant in other cases of which claim amounts totaled (Won)70,651 million (109 cases) as of December 31, 2007. The Company accrued (Won)32,849 million as provisions related to the litigation as of December 31, 2007. However, the final result of this litigation cannot be presently determined.
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b. Commitments with Financial Institutions
As of December 31, 2007, major commitments with local financial institutions are as follows (in millions of Korean won and thousands of foreign currencies)
Commitment
Related companies
Bank overdraft
Commercial paper issuance
Collateralized loan on accounts receivable—trade
Note discount
Loans on checking account during the day
Letters of credit
Working capital loans
Collection for foreign currency denominated checks
As of December 31, 2007, the Company has construction performance guarantee agreements with Korea Software Financial Cooperative and other four financial institutions with guarantee limits of USD 7,673 thousand, SAR (Saudi Arabia Riyal) 735 thousand and (Won)180,955 million. In addition, Export-Import Bank of Korea and Kookmin Bank provide guarantees for the Company’s bid process and delay in payment of corporate income tax with guarantee limits of USD 580 thousand and (Won)155,858 million.
Loss on sale of accounts receivable from the transfer of those receivables amounted to (Won)492 million for the year ended December 31, 2007, and accounts receivable sold but not matured as of December 31, 2007 are (Won)26,813 million.
c. Stockholders’ Agreement between KT and NTT DoCoMo
In December 2005, KTF and NTT DoCoMo Inc. (“DoCoMo”) entered into a strategic alliance. As part of this strategic alliance, DoCoMo acquired a 10% equity interest in KTF (20,176,309 shares). In addition, on December 26, 2005, KT and DoCoMo entered into a stockholders’ agreement related to shares of KTF. Under the stockholders’ agreement, DoCoMo has the right to put its 20,176,309 shares for the acquisition amount plus interests to KT if an agreed target network coverage for W-CDMA service within Korea is not met by December 31, 2008. However, as of August 3, 2007, KTF reached the target network coverage mentioned above, and the right of DoCoMo to put its shares to KT has been now extinguished.
d. Put and Call Combination Contract with JPMorgan Chase Bank
On December 27, 2005, the Company and JPMorgan Chase Bank entered into a “Put and Call Combination” contract based on the shares of Korea Digital Satellite Broadcasting (“KDB”), an equity method investee. Under this contract, during the period from December 29, 2007 to December 29, 2008, KT has the option to acquire 9,200,000 shares of KDB that were purchased by JP Morgan Whiterfriars Inc. on December 28, 2005. Otherwise, JPMorgan Chase Bank has the option to exercise the put option on such KDB shares to KT on December 29, 2008. The exercise price under the contract for both KT and JPMorgan Chase Bank is (Won)46,000 million.
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e. Payment of a Handset Subsidy to Mobile Phone Users
According to the revised provisions of the Telecommunications Business Law (“TBL”), the Company is allowed to provide a one time handset subsidy to eligible mobile phone users within the next two years from March 27, 2006 to March 26, 2008. Pursuant to the TBL, the Company may establish its subsidy policy regarding the eligibility criteria and amount of payment. Consistent with the TBL, the Company provides a subsidy for mobile phone users who have subscribed to the Company’s service or any other mobile carriers for 18 consecutive months. Moreover, the Company has the right to discontinue the payment depending on marketing strategies, if necessary. However, the Company is required to report changes in the service agreement, should they take place, to the Ministry of Information and Communication within 30 days of the effective date.
32. DERIVATIVES
For the years ended December 31, 2005, 2006 and 2007, the Company entered into various derivatives contracts with financial institutions. Details of these derivative contracts are as follows:
Type of transaction
Financial institution
Interest rate swap
JP Morgan and others
Currency swap
Exchange foreign currency cash flow for local currency
cash flow local currency cash flow for a specified period
Combined interest rate currency swap
Merrill Lynch and others
Currency forward
Kookmin Bank
Currency future
Dongyang Futures
Trading Co., Ltd.
Currency option
Shinhan Bank
The assets and liabilities recorded relating to the outstanding contracts as of December 31, 2006 and 2007 are as follows (in millions of Korean won and thousands of U.S. dollars):
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Above foreign currency swap contract is to hedge the risk of variability of future cash flows from fixed rate foreign currency (USD) bonds and as of December 31, 2007, the gain on valuation of the swap contract amounting to (Won)2,024 million, net of income tax effect, is included in accumulated other comprehensive income and for the year ended December 31, 2007 the loss on valuation of the swap contract totaling (Won)2,280 million is recognized in current operations as a result of foreign currency translation gain from foreign currency (USD) bonds. In applying cash flow hedge accounting, the Company hedges its exposures to cash flow fluctuation to April 11, 2012. Approximately (Won)802 million of net derivative gain included in accumulated other comprehensive income at December 31, 2007 is expected to be reclassified into current operations within 12 months from that date.
The valuation gains and losses on the derivative contracts for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
Combined interest rate
currency swap
Currency futures
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Currency forwards
33. SEGMENT INFORMATION
The Company has two operating segments, fixed-line telecommunication services and PCS services. Fixed-line telecommunication services include telephone services, internet services, data communication services and leased line services. PCS services include IMT-2000 services, and submarine cable construction and maintenance, intercommunication system management are all included in other segment.
Details of each segment for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
Total sales
Internal sales
Net sales
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34. VALUE ADDED INFORMATION
Value added information included in operating expenses for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
Salaries
Severance indemnities
35. EMPLOYEE WELFARE
Employee welfare through various plans spent by the Company for the years ended December 31, 2005, 2006 and 2007 totaled (Won)596,151 million, (Won)527,062 million and (Won)528,902 million, respectively.
Meanwhile, the Company donates cash to Employee Welfare Foundation each year. The related expenses recognized for the years ended December 31, 2005, 2006 and 2007 amounted to (Won)50,000 million, (Won)64,710 million and (Won)84,500 million, respectively.
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36. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Korea (“Korean GAAP”), which differ in certain respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). The significant differences are described below. Other differences do not have a significant effect on either consolidated net income or stockholders’ equity.
a. Companies Included in Consolidation
Under Korean GAAP, all majority-owned subsidiaries and entities of which the Company or a controlled subsidiary owns more than 30% of total outstanding voting stock and is the largest stockholder are consolidated. However, U.S. GAAP generally requires that majority-owned subsidiaries be consolidated and that an entity which the Company has significant influence, generally including those in which it owns 20-50% of total outstanding voting stock, should not be consolidated; rather that entity should be accounted for under the equity method of accounting.
The following table shows the Company’s percentage of ownership and carrying value of each of its affiliates that are excluded from consolidation under U.S. GAAP and instead are accounted for under the equity method (in millions of Korean won):
Entity
Listed :
Olivenine
Unlisted :
SFNH BF-(1)
Doremi Media
The quoted market values (based on closing KOSDAQ prices) of KTSC, Olivenine and Bluecord Technology shares held by the Company is (Won)14,424 million, (Won)20,169 million and (Won)22,898 million as of December 31, 2007, respectively.
As discussed at Note 36 c, for the year ended December 31, 2005, the Company recognized an other-than-temporary impairment loss under U.S. GAAP amounting to (Won)9,595 million relating to KTSC due to the significant decrease of the quoted market value.
The Company acquired additional shares of KTF during the period from February 28, 2006 to September 15, 2006. The Company’s ownership percentage of KTF increased from 44.6% to 50.8% as a result of the series of acquisition. Percentage of ownership exceeded 50% as of August 21, 2006 and accordingly, the Company became the majority stockholder and began to consolidate the financial statements of KTF under U.S. GAAP which were previously accounted for using the equity method until August 20, 2006.
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Condensed balance sheet data of KTF as of August 20, 2006 under U.S. GAAP is as follows (in millions of Korean won):
Total current assets
Property and equipment, net
Other assets
Accounts payable
Total current liabilities
Long-term debt, excluding current portion
Minority interest in consolidated subsidiaries
Stockholders’ equity
Total liabilities, minority interest and stockholders’ equity
The acquisition was accounted for as a step acquisition. The purchase price of additional shares was (Won)357,582 million including direct costs of acquisition, and goodwill amounting to (Won)484,599 million was recognized as a result of purchase price allocation. Deferred income tax assets amounting to (Won)416,928 million relating to the basis difference for its investment in KTF while being accounted for under the equity method was derecognized as it is not apparent that the temporary difference will reverse in the foreseeable future and was included in the determination of the total purchase price. Percentage of ownership of KTF is 52.2% as of December 28, 2006 due to the purchase and retirement of treasury stock by KTF. The purchase and retirement of treasury stock is considered a separate step acquisition for which consideration was (Won)164,884 million resulting in additional goodwill of (Won)23,212 million.
The following unaudited pro forma financial information presents the combined results of operations of the Company and KTF in accordance with U.S. GAAP as if the acquisition of KTF had occurred at January 1, 2005 and 2006 (in millions of Korean won except per share data).
Net revenue
Net earnings
Net earnings per share:
Basic (in Korean won)
Diluted (in Korean won)
KTF purchased and retired 2,979,000 shares of treasury stock on November 13, 2007. Due to this purchase and retirement of treasury stock by KTF, the percentage of ownership of KTF is 53.0% as of December 31, 2007 and the Company recognized additional goodwill accounting to (Won)18,745 million.
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KTFT (owned 73.1% by KTF), KTFM (owned 51.0% by KTF), and KTFI (owned 99.0% by KTF), are consolidated by KTF, accordingly these companies were consolidated in the Company’s consolidated financial statements beginning August 21, 2006. In addition, as of August 21, 2006, Sidus FNH, which is owned by KT and KTF by 35.7% and 15.3%, respectively, was consolidated.
Presented below is the summarized combined financial information of those entities that are consolidated under Korea GAAP but not for U.S. GAAP, prepared in accordance with Korean GAAP as of December 31, 2006 and 2007, and for each of the three years in the period ended December 31, 2007. As KTF became a consolidated subsidiary as of August 21, 2006, the condensed balance sheet information as of December 31, 2006 does not include the balances of KTF. In addition, the condensed income statement information for 2006 includes operational results of KTF for the period from January 1, 2006 through August 20, 2006 (in millions of Korean won).
Net assets
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
The Company’s proportionate share of U.S. GAAP adjustments of KTF, KTSC, KTFT, KTFM, KTFI, Sidus FNH, KTP and SFNH BF-(1), Olivenine, Bluecord Technology and Doremi Media for periods prior to consolidation are presented in the line item “U.S. GAAP adjustments of equity method affiliates” in the U.S. GAAP reconciliation of net earnings and stockholders' equity for the applicable periods. Condensed consolidated balance sheets as of December 31, 2006 and 2007, and condensed consolidated statements of cash flows of the Company under U.S. GAAP for each of the three years in the period ended December 31, 2007 are presented in Note 36 t.
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b. Debt and Equity Securities
Under Korean GAAP, non-marketable securities classified as available-for-sale securities are carried at cost or fair value if applicable with unrealized holding gains and losses reported as a capital adjustment, net of tax. For U.S. GAAP purposes, investment in non-marketable equity securities are accounted for under the cost method or the equity method of accounting in accordance with Accounting Principles Board Opinion (“APB”) No. 18.
Under Korean GAAP, available-for-sale securities, whose likelihood of being disposed within one year from the balance sheet date is probable, are classified as current. Under U.S. GAAP, when the disposition of available-for-sale securities within one year is reasonably expected, available-for-sale securities are classified as current.
For U.S. GAAP purposes, the Company accounts for marketable equity and debt investments under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” SFAS No. 115 requires that marketable equity securities and all debt securities be classified in three categories and accounted for as follows:
Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost.
Debt and equity securities that are bought and held principally for the purpose of selling in the short term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity until realized.
Information under U.S. GAAP with respect to investments under SFAS No. 115 at December 31, 2006 and 2007 is as follows (in millions of Korean won):
Equity securities (available-for-sale)
Debt securities (available-for-sale)
The proceeds from sales of available-for-sale securities were (Won)906,395 million in 2005, (Won)690,177 million in 2006 and (Won)1,181,025 million in 2007. The realized gains on those sales were (Won)26,184 million in 2005, (Won)68,293 million in 2006 and (Won)11,428 million in 2007. The average-cost method is used to calculate gains or losses from the sale of available-for-sale securities.
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Under Korean GAAP, when the subsequent recoveries of impaired available-for-sale securities and held-to-maturity securities result in an increase of their carrying amount, the recovery gains are reported in current operations up to the previously recognized impairment loss as reversal of loss on impairment of investment securities.
Under U.S. GAAP, the subsequent increase in carrying amount of the impaired and written down held-to-maturity securities is not allowed. The subsequent increase in fair value of available-for-sale securities is reported in other comprehensive income.
The subsequent recovery of the impaired held-to-maturity securities amounted to (Won)12,493 million in 2006, while the subsequent recoveries of impaired available-for-sale securities amounted to (Won)227 million in 2006 and (Won)76 million in 2007. However, such differences have not been recognized for U.S. GAAP purposes, since the amounts are immaterial.
On November 3, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) SFAS 115-1 and SFAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP nullifies certain requirements of Emerging Issue Task Force (EITF) Issue No. 03-1 and supersedes EITF Abstracts, Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” This FSP carries forward the disclosure requirements included in EITF Issue No. 03-1. The Company has not included the disclosure requirements of EITF Issue No. 03-1 related to investments’ gross unrealized losses and fair value, since the amounts were immaterial. These pronouncements were effective for fiscal years beginning after December 15, 2005.
c. Goodwill Impairment including Investor-level Goodwill
Under Korean GAAP, goodwill, which represents the excess of the acquisition cost over the fair value of net identifiable assets acquired, is amortized on a straight-line basis over its estimated economic useful life not exceeding 20 years. When it is no longer probable that goodwill will be recovered from expected future economic benefits, it is expensed immediately. Also, for investments in affiliated companies accounted for using the equity method, the excess of acquisition cost of the affiliates over the Company’s share of their net assets at the acquisition date is amortized by the straight-line method over its estimated useful life.
Under U.S. GAAP, goodwill and indefinite-lived intangible assets are not amortized, but instead are tested for impairment at least annually. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill is tested for impairment on an annual basis by comparing the fair value of the Company’s reporting units to their carrying amounts. The investor-level goodwill is tested for impairment in accordance with APB No. 18. The investor-level goodwill, which is recorded only at the investor’s financial statements, represents the excess of the acquisition cost of equity method investees over the fair value of investor’s share of net identifiable assets acquired.
The changes in the carrying amount of goodwill which is recorded in the PCS segment for the years ended December 31, 2006 and 2007 are as follows (in millions of Korean won):
Balance as of January 1, 2006
Goodwill acquired during the year
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d. Equity Method Accounting
Under Korean GAAP, a put and call combination contract should be recorded as a right and obligation of the Company to acquire shares in accordance with the terms of the contract. Accordingly, the Company recorded the right and obligation of the option contract as additional equity method investment securities and long-term accounts payable.
Under U.S. GAAP, the potential equity ownership that may become available to the Company upon exercise of the option is not recorded prior to exercise, as the Company does not have legal ownership of the underlying shares. However, based on the nature of the Company’s arrangement to potentially acquire additional shares in KDB, the Company has resumed recognition of its share of investee losses, and during 2005, recorded losses incurred from the date that its existing investment was reduced to nil. Therefore, the amount recognized in earnings under U.S. GAAP is the same as that recognized under Korean GAAP, except for the effect of other differences described herein.
e. Additional Equity Investments in and Transactions of Subsidiaries
Under Korean GAAP, subsequent to acquiring a controlling financial interest in a subsidiary, additional equity investments by the Company in subsidiaries stock and other equity transactions of subsidiaries are accounted for assuming such transactions occur as of the date of audited or reviewed financial statements of the acquired subsidiary closest to the date of acquisition. In addition, the difference between the Company’s cost of the acquired additional interest and the corresponding share of stockholders’ equity of the acquired subsidiary is presented as an adjustment to capital surplus.
Under U.S. GAAP, such equity investments in and transactions of affiliates and subsidiaries are recorded and accounted for as of the date the transaction occurs. As a result, the Company has a different basis in its equity investments in the subsidiaries under Korean GAAP as compared to U.S. GAAP. Therefore, any gains or losses recorded by the Company (which are recorded as capital transactions in stockholders’ equity) when an equity investee sells shares of its stock will be different under U.S. GAAP as compared to Korean GAAP. In addition, under U.S. GAAP, the cost of an additional equity interest would be allocated based on the fair value of net tangible and identifiable assets acquired and liabilities assumed, with the excess allocated to goodwill.
f. Intangible Assets
Under Korean GAAP, prior to January 1, 2003, development costs and organization costs were deferred and amortized over estimated useful lives provided such costs are recoverable from future earnings. Effective January 1, 2003, the Company adopted SKAS No. 3 “Intangible Assets”, which requires organization costs to be expensed as incurred. As allowed by the transition clause of the statement, development costs prior to January 1, 2003 were not applied to the statement. All of these costs are expensed as incurred under U.S. GAAP except for capitalized internal-use software development costs. Therefore, accounting for such costs under Korean GAAP is consistent with U.S. GAAP for periods after adoption of SKAS No. 3. The variance between Korean GAAP and U.S. GAAP due to development costs incurred before January 1, 2003 was fully reconciled by the end of 2005 as the assets became fully amortized under Korean GAAP. Consequently, as of December 31, 2005, there is no reconciling item in stockholders’ equity relating to GAAP difference for intangible assets.
However, in 2006 as KTF became a consolidated subsidiary of the Company as of August 21, 2006, KTF held frequency usage rights which were capitalized prior to January 1, 2003 under Korean GAAP. Accordingly, the reconciliation amounts reflected in stockholders’ equity as of December 31, 2006 and 2007 relate to differences in accounting for frequency usage rights held by KTF.
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Under Korean GAAP, the frequency usage right related to the second generation (“2G”) paid by the initial stockholders to obtain the operating licenses prior to the establishment of KTM.Com Co., Ltd. ("KTM"), which was merged into KTF in 2001, was not recognized as an intangible asset in applying purchase accounting of KTM by KT in 2000.
Under U.S. GAAP, the 2G frequency usage right was considered as indefinite lived intangible assets and thus in the process of purchase accounting of KTM, KT recognized the frequency usage right at fair value. However, on December 31, 2005, the Korea Communication Act (“Act”) was revised effective July 1, 2006. Under the revised Act, the frequency usage right of 2G will expire by June 2011. Thus, KTF amortizes the frequency usage right of 2G over the remaining useful life under U.S. GAAP for the years ended December 31, 2006 and 2007.
Identifiable intangible assets determined in accordance with U.S. GAAP as of December 31, 2006 and 2007 are presented below. As KTF became a consolidated subsidiary of KT as of August 21, 2006, the balances as of December 31, 2006 includes intangibles held by KTF and the amortization expense for the year ended December 31, 2006 reflects amortization expense relating to intangibles assets of KTF for the period from August 21, 2006 to December 31, 2006.
Amortized intangible assets:
Internal-use software
Buildings and facility utilization rights
Amortization expense:
For the year ended December 31, 2006
For the year ended December 31, 2007
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Estimated amortization expense (in millions of Korean won):
The weighted-average amortization period of total amortized intangible assets, internal-use software, frequency usage rights and utilization rights are 9 years, 6 years, 11 years and 20 years, respectively. The Company has no identifiable intangible assets that are not subject to amortization.
g. Depreciation
In 1995, KT adopted a method of depreciation, as allowed under Korean GAAP, whereby property and equipment placed in service at any time during the first half of the year received a full year of depreciation expense, and property and equipment placed in service at any time during the second half of the year received one-half year of depreciation. Also, as permitted under Korean GAAP, depreciation of these assets was based on lives which are shorter than their economic useful lives. In 1996, KT adopted the policy, also acceptable under Korean GAAP, whereby property and equipment is depreciated from the actual date it is placed in service, while continuing to use useful lives which are shorter than the economic useful lives of such assets. In 1998, under Korean GAAP, as required under a ruling by the National Tax Service (which is also applicable under Korean GAAP), the Company changed the estimated useful lives of certain assets, including underground access to cable tunnels and concrete and steel telephone poles acquired after 1995, from 6 years to periods ranging from 20 years to 40 years, and changed the depreciation method from the declining-balance method to the straight-line method.
In 1999, under Korean GAAP, the Company changed its depreciation method for buildings and structures acquired before December 31, 1994, from the declining-balance method to the straight-line method in order to be consistent with the method applied to buildings and structures acquired after January 1, 1995.
Under U.S. GAAP, property and equipment is generally depreciated over its estimated useful life in a systematic and rational manner. In addition, the depreciation method in the year of acquisition based on the Company's in-service dates for its capital additions in 1995 described above, does not comply with U.S. GAAP in that significant depreciation expense is recognized prior to the actual use of the asset. The change in estimated useful lives in 1998, and the changes in 1998 and 1999 from the declining-balance method to the straight-line method would also not be appropriate under U.S. GAAP. Accordingly, adjustments have been reflected for U.S. GAAP purposes for the effect of each of these items.
Under U.S. GAAP, property and equipment is generally depreciated by using the declining-balance method except for the assets of certain subsidiaries, buildings and structures acquired in 1995 and thereafter which are depreciated using the straight-line method.
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Under U.S. GAAP, the useful lives of property and equipment are summarized as follows:
Estimated Useful Lives
Machinery and equipment
Tools, furniture and fixtures:
Steel safe boxes
Tools, computer equipment, furniture and fixtures
h. Interest Capitalization
Under Korean GAAP, prior to January 1, 2003, interest was capitalized on borrowings related to the construction of all property and equipment and IMT-2000 frequency usage right, incurred prior to completing the acquisition, as part of the cost of such assets. Effective January 1, 2003, Korean GAAP was revised to allow a company to charge such interest expense to current operations. For Korean GAAP purpose, the Company adopted in 2003 the accounting policy not to capitalize such financing costs prospectively.
Under U.S. GAAP, interest costs related to certain assets that are routinely manufactured or otherwise produced in large quantities on a regular basis are not in the scope of interest capitalization. In addition, interest is capitalized in the amount that would have theoretically been avoided had expenditures not been made for assets which require a period of time to get them ready for their intended use.
Under U.S. GAAP, details of interest capitalization for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
Total interest costs incurred
Interest capitalized
Amounts charged to expense
i. Revenue Recognition
Under Korean GAAP, non-refundable service installation fees for telephone and initial subscription fees for broadband internet access and PCS services are recognized as revenue when installation and initiation services are rendered. The related direct incremental acquisition costs are expensed as incurred.
Under U.S. GAAP, service installation fees and initial subscription fees related to activation of service are deferred and recognized as revenue over the expected terms of customer relationships. The expected terms of customer relationships for telephone, broadband internet access and leased-line service, and PCS are 15 years, 3 years and 4 years, respectively. The related incremental direct costs related to customer acquisition are deferred and recognized over the period of the customer relationship.
Under Korean GAAP, handset subsidy paid by the Company is accounted as expenses. However, under U.S. GAAP, the handset subsidy is treated as reduction of revenue in accordance with EITF Issue No. 01-09 “Accounting for Consideration Given by a Vendor to a Customer”.
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j. Income Taxes
Under Korean GAAP, effective January 1, 2005, due to the adoption of SKAS No. 16 “Income Taxes”,deferred income taxes are recognized on the temporary difference related to unrealized gains and losses on investment securities that are reported as a separate component of stockholders’ equity. Any adjustments to income tax provision attributable to prior years are included in income tax expense (benefit). Consequently, there is no GAAP difference as of December 31, 2006 and 2007, respectively, in terms of deferred income taxes on unrealized gains and losses on investment securities.
Under U.S. GAAP, deferred income taxes are recognized on the temporary difference related to unrealized gains and losses on investment securities that are reported as other comprehensive income. Any adjustments to income tax provision attributable to prior years are included in income tax expense (benefit).
Under Korean GAAP, recognition of deferred income tax benefit from equity in losses of affiliates requires realization of the benefit within the near future, which is interpreted to mean within 5 years. The Company does not believe it is probable to realize such benefit within 5 years.
Under U.S. GAAP, deferred income tax assets are recognized for an excess of the tax basis over the amount for financial reporting of domestic and foreign investments accounted for on the equity method (except for corporate joint ventures). However, deferred income tax assets related to consolidated subsidiaries are recognized only “if it is apparent that the temporary difference will reverse in the foreseeable future.”
Under Korean GAAP, prior to January 1, 2005, all deferred income tax assets and liabilities were recorded as non-current. Effective January 1, 2005, per SKAS No. 16, deferred income tax assets and liabilities shall be classified as current or non-current based on the classification of the related assets or liabilities for financial reporting or the expected reversal date of the temporary difference. As a result of adoption of SKAS No. 16, there is no difference between Korean GAAP and U.S. GAAP as of December 31, 2006 and 2007, respectively.
Under Korean GAAP, in accordance with SKAS No. 16, effective from January 1, 2005, the Company did not recognize deferred income tax liabilities of (Won)21,363 million related to equity in gains of affiliates as of December 31, 2006 since it is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Under U.S. GAAP, deferred income tax liabilities are fully recognized for an excess of the amount for financial reporting over the tax basis of an investment in domestic subsidiaries and corporate joint ventures, unless the investment in the subsidiary can be recovered tax-free under local tax laws and management expects that it will ultimately use that means. However, deferred income tax liabilities are not recognized in an investment in a more than 50 percent-owned foreign subsidiary or foreign corporate joint venture that is essentially permanent in duration.
In 2006 the Company adopted KAI opinion 06-2 “Deferred Tax Accounting for Investments in Subsidiaries, Affiliated Companies Accounted for Using the Equity Method, and Interest in Joint Ventures”. This statement requires recognition of deferred income tax asset or liability based on net of all temporary differences arising from the same subsidiary or investee rather than on an individual basis. With this adoption, income tax expenses and income taxes reflected in other comprehensive income in 2005 decreased by (Won)33,508 million and (Won)6,320 million, respectively. According to the transition rule of the statement, Korean GAAP prior year financial statements have been restated.
Under U.S. GAAP, effective January 1, 2007 the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which supplements SFAS No. 109 “Accounting for
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Income Taxes” (SFAS No. 109), by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires that the tax effect(s) of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the tax position are to be recognized. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustment would be recorded directly to retained earnings and reported as a change in accounting principle. As a result of the adoption of FIN 48 as of January 1, 2007, the Company recorded a decrease to retained earnings of (Won)58,667 million as a cumulative effect of a change in accounting principle with an increase to the liability amounting to (Won)67,142 million for uncertain tax positions and an increase to the deferred income tax asset amounting to (Won)8,475 million.
k. Foreign Currency Transactions
Under Korean GAAP, prior to January 1, 2003, all unrealized foreign currency translation gains and losses on monetary assets and liabilities, except for amounts included in the cost of property and equipment, were included in results of operations. Effective January 1, 2003 the Company adopted SKAS No. 7, “Capitalization of Financing Costs”. As allowed by the standard, the Company elected to include all unrealized foreign currency translation gains and losses (including property and equipment) in the results of operations.
Under U.S. GAAP, all foreign exchange transaction gains and losses (referred to as translation gains and losses under Korean GAAP) are included in the results of operations for the current period and therefore, the amounts included in property and equipment and related depreciation expense under Korean GAAP are reversed.
Under Korean GAAP, the convertible notes denominated in a foreign currency are regarded as non-monetary liabilities since they have equity-like characteristics, and the Company does not recognize the associated foreign currency translation gain and loss.
Under U.S. GAAP, the convertible notes denominated in a foreign currency are translated at the rate of exchange on the balance sheet date, and the resulting foreign currency transaction gain and loss is included in the results of operations.
l. Convertible Notes
Under Korean GAAP, prior to January 1, 2003, the convertible notes entered into between KT and KTF during 2002 were treated as long-term investment securities and were reported at cost. However, effective January 1, 2003, the Company adopted SKAS No. 9, “Convertible Securities”, which requires that convertible notes be categorized as available-for-sale securities and reported at fair value. The Company recognizes interest income on convertible notes as determined using the effective interest method and unrealized holding gain and losses of the difference between fair value and book value as a component of stockholders’ equity. However, since these convertible notes are between the parent and a consolidated subsidiary under Korean GAAP, the convertible notes and related interest income/expense are eliminated in consolidation. All the convertible notes, which were issued by KTF in 2002, were redeemed for cash on their maturity date (November 29, 2005).
For U.S. GAAP purposes, convertible notes are considered a hybrid instrument with a conversion option embedded in the debt instrument. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, the conversion option is bifurcated from the debt instrument and accounted for
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separately. The conversion option is recorded at fair value with gains and losses included in earnings. The debt instrument is classified as an available-for-sale debt security and reported at fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity. As mentioned above, the face value of notes of (Won)370,000 million were repaid on November 29, 2005, and the Company does not have any convertible notes as of December 31, 2006 and 2007.
m. Minority Interest in Consolidated Subsidiaries
Under Korean GAAP, minority interests in consolidated subsidiaries are presented as a component of stockholders’ equity in the consolidated balance sheet.
Under U.S. GAAP, minority interests in consolidated subsidiaries are not included in stockholders’ equity; rather, it is presented between liabilities and stockholders’ equity item in the consolidated balance sheet.
The differences relating to minority interest in net profit between Korean GAAP and U.S. GAAP consist of reconciliation items affecting non-wholly-owned subsidiaries that are allocable to the minority interest holders.
n. Stockholder’s Agreement between KT and DoCoMo
Under Korean GAAP, stockholders’ agreement between the Company and DoCoMo is regarded as a contingency which does not require recognition other than disclosure.
Under U.S. GAAP, the agreement is regarded as a guarantee provided by the Company to DoCoMo on behalf of KTF and is subject to FIN 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Upon commencement of the guarantee, the Company evaluated fair value of the guarantee and obtained fair value. However, the fair value of the guarantee was immaterial and the Company did not record the guarantee.
o. Other
Korean GAAP requires gains and losses from the sale of property and equipment and impairment write-downs to be included as part of non-operating revenues (expenses). Under U.S. GAAP, gains and losses from the sale of property and equipment and impairment write-downs are required to be recorded as a component of operating income.
Under Korean GAAP, purchase of treasury stock is regarded as temporary and does not impact the ownership percentages of stockholders unless there is an explicit purpose of retirement of the repurchased shares in accordance with resolution of board of directors or stockholders' meeting. Under U.S. GAAP, purchase of treasury stock results in a change of an entity's ownership structure and ownership percentages of stockholders.
p. Comprehensive Income
Prior to January 1, 2007, Korean GAAP did not require to present comprehensive income, however, effective January 1, 2007, the Company adopted SKAS No. 21, “Preparation and Presentation of Financial Statements 1”, which requires separate disclosure of the details of comprehensive income. Consequently, there is no GAAP difference as of December 31, 2007, in terms of disclosure of comprehensive income and its components.
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Under U.S. GAAP, comprehensive income and its components must be presented in the financial statements. Comprehensive income includes all changes in stockholders’ equity during a period except those resulting from investments by, or distributions to, owners, including certain items not included in the current results of operations.
Comprehensive income for the years ended and accumulated other comprehensive income balances as of December 31, 2005, 2006 and 2007 are summarized as follows (in millions of Korean won):
Net earnings as adjusted in accordance with U.S. GAAP
Other comprehensive income, net of tax :
Foreign currency translation adjustments
Unrealized gains on investments :
Unrealized holding gains, net of tax of (Won)26,509 million, (Won)1,351 million and (Won)1,023 million in 2005, 2006 and 2007, respectively
Less : reclassification adjustment for gains (losses) realized in net earning due to disposal, net of tax of ((Won)7,021) million, (Won)39 million and (Won)1,004 million in 2005, 2006 and 2007, respectively
Unrealized gains on valuation of derivatives, net of tax of (Won)768 million in 2007
Comprehensive income as adjusted in accordance with U.S. GAAP
Accumulated other comprehensive income (loss) balances:
Unrealized gains on investments
Unrealized gains on valuation of derivatives
q. Statements of Cash Flows
Statements of cash flows under Korean GAAP include the cash flows of KTSC, KTP, SFNH BF-(1), Olivenine, Bluecord Technology and Doremi Media, which are accounted for under the equity method under U.S. GAAP.
Under Korean GAAP, cash flows from contributions that are restricted for the purposes of constructing are included in investing activities. For U.S. GAAP purposes, those cash flows are included in financing activities. In addition, under Korean GAAP cash flows from initial consolidation or deconsolidation of subsidiary is presented as a separate line whereas for U.S. GAAP purposes, it is categorized as investing activities net of cash paid or received.
r. Significant New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) which provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs.
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SFAS No. 157 requires expanded disclosures about fair value measurements and establishes a three-level hierarchy for fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The standard also requires that a company use its own nonperformance risk when measuring liabilities carried at fair value, including derivatives. In February 2008, the FASB approved FSP No. 157-2, “Effective Date of FASB Statement No. 157”(FSP No. 157-2), that permits companies to partially defer the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The FSP did not permit companies to defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. SFAS No. 157 is effective for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually for financial statements issued for fiscal years beginning after November 15, 2007. The provisions of SFAS No. 157 will be applied prospectively. Management intends to defer adoption of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis and is currently evaluating the effects, if any, that SFAS No. 157 may have on the Company’s financial condition and results of operations.
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s. U.S. GAAP Reconciliations
The effects of the significant adjustments to net earnings and stockholders' equity for the years ended December 31, 2005, 2006 and 2007 which would be required if U.S. GAAP were to be applied instead of Korean GAAP are summarized as follows (in millions of Korean won except per share data):
Net income (attributable to equity holders of the parent) in accordance with Korean GAAP
Adjustments:
U.S. GAAP adjustments of equity method affiliates
Equity in income of associates:
Reversal of amortization of goodwill
Impairment loss relating to equity investee
Additional acquisitions of equity investees
Intangible assets
Property and equipment
Interest capitalization (including related depreciation), net
Capitalized foreign exchange transactions, net
Service installation fees
Deferred income tax—methodology difference
Deferred income tax effects of U.S. GAAP adjustments
Miscellaneous accounts
Foreign currency translation of convertible notes
Convertible notes of KTF
Minority interest income
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The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2005, 2006 and 2007:
CONSOLIDATED
Earnings from continuing operations
Earnings (loss) from discontinuing operations
Net earnings available
AVERAGE EQUIVALENT SHARES
Shares of common stock outstanding
Dilutive effect of convertible notes
Total average equivalent shares
PER SHARE AMOUNTS
Net earnings per share
Basic earnings per share is computed on the basis of the weighted-average number of common stock outstanding. Diluted earnings per share is computed on the basis of the weighted-average number of common stock outstanding plus the effect of outstanding convertible notes using the “if-converted method”. The denominator of the diluted earnings per share computation is adjusted to include the number of additional common stock that would have been outstanding had the dilutive potential common stock been issued at the beginning of the period. In addition, the numerator is adjusted to include the after-tax amount of interest and foreign currency translation gain (loss) recognized associated with the convertible notes. Stock options were not considered when calculating diluted earnings per share because the exercise price of the stock options was greater than the average market price of the shares and, therefore, the effect would have been antidilutive.
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Stockholders’ equity in accordance with Korean GAAP
Goodwill impairment
Reversal of goodwill amortization
Different useful life of intangibles
Interest capitalization, net
Deferred tax—methodology difference
Deferred tax effects of U.S. GAAP adjustments
Stockholders’ equity as adjusted in accordance with U.S. GAAP
t. Condensed Consolidated U.S. GAAP Financial Information
Condensed consolidated balance sheets in accordance with U.S. GAAP as of December 31, 2006 and 2007 are presented as follows (in millions of Korean won):
Investments
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Changes in consolidated stockholders’ equity in accordance with U.S. GAAP for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
Beginning of the year
Unrealized gains on investments, net of tax
Sale (purchase) of treasury stock, net
Adoption of FIN 48
Other, net of tax
End of the year
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Condensed consolidated statements of cash flows in accordance with U.S. GAAP for the years ended December 31, 2005, 2006 and 2007, respectively, are set out below (in millions of Korean won):
Adjustments to reconcile net earnings to net cash provided by operating activities:
Deferred income tax expense (benefit)
Gain on disposition of available-for-sale securities, net
Impairment losses of equity method affiliates
Foreign currency translation gain (loss), net
Gain (loss) on settlement and valuation of derivatives, net
Minority interest in earnings of consolidated subsidiaries
Changes in assets and liabilities related to operating activities:
Notes and accounts receivable
Notes and long-term accounts receivable
Other, net
Acquisition of property and equipment
Disposal of property and equipment
Decrease (increase) in short-term financial instruments, net
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Repayment of long-term borrowings and current portion of long-term debt
Inflows (outflows) from capital transactions of consolidated entities
Supplemental schedule:
Cash paid for interest (net of amounts capitalized)
Cash paid for income taxes
37. ADDITIONAL U.S. GAAP DISCLOSURES
a. Income Tax Expense
The components of income tax expense for the years ended December 31, 2005, 2006 and 2007 are as follows (in millions of Korean won):
Current income tax expense
Substantially all income before income taxes and related income tax expense (benefit) are attributable to domestic operations. The provision for income taxes using statutory tax rates differs from the actual provision for the years ended December 31, 2005, 2006 and 2007 for the following reasons (in millions of Korean won):
Provision for income taxes at statutory tax rates
Investment tax credits
Additional income tax payment (refund) related to prior year
Changes in deferred income tax unrecognized
Actual provision for income taxes
The effective tax rates after adjustments of certain differences between amounts reported for financial accounting and income tax purpose, were approximately 23.6%, 20.1% and 18.8% for the years ended December 31, 2005, 2006 and 2007, respectively.
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The tax effects of temporary differences that resulted in significant portions of the deferred income tax assets and liabilities at December 31, 2006 and 2007, computed under U.S. GAAP, and a description of financial statement items that created these differences are as follows (in millions of Korean won):
Deferred income tax assets:
Investment securities
Tax credit carryforwards
Tax loss carryforwards
Total deferred income tax assets
Valuation allowance
Deferred income tax liabilities:
Net deferred income tax assets
In 2006 and 2007, valuation allowance were recognized by KTR and TSC, consolidated subsidiaries of KT, respectively, as realization of deferred income tax asset was not assessed as more likely than not mainly due to lack of expected future taxable income.
In 2007, the Company was eligible for investment tax credits of (Won)232,615 million. However, due to the minimum tax provisions, the Company utilized only (Won)121,159 million. The remaining tax credit will expire in 2012. During 2007, the Company concluded that the remaining tax credit was more likely than not of realization in the future based on future taxable income estimates. As a result, the Company recorded an income tax benefit of (Won)71,555 million of the tax credit. The tax loss carryforwards of (Won)67,377 million as of December 31, 2007 will expire in 2012. During 2007, certain subsidiaries including TSC did not recognize deferred income tax assets amounting to (Won)10,568 million which resulted from the tax effects of tax loss carryforwards of (Won)38,408 million in excess of taxable differences and future taxable income.
In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differenced become deductible and tax carryforwards are utilizable. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred income tax assets are deductible, management believes that it is more likely than not the Company will realize the benefits of these deductible differences and tax carryforwards.
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Upon adoption of FIN 48 as of January 1, 2007, the Company recorded a decrease to retained earnings of (Won)58,667 million as a cumulative effect of the liability for uncertain tax positions. At January 1, 2007, the Company had (Won)67,142 million of total gross unrecognized tax benefits, of which (Won)46,386 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. At December 31, 2007, the amount of unrecognized tax benefits that would favorably affect the effective income tax rate in future periods was (Won)441 million. These amounts consider the guidance in FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48.” The liability for uncertain tax positions is classified as a non-current liability.
A reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period is as follows (in millions of Korean won):
Balance at January 1, 2007
Additions to tax positions recorded during the current year
Additions to tax positions recorded during prior years
Reductions to tax positions recorded during prior years
Reductions in tax positions due to lapse of statutory limitations
Reductions for settlement
Balance at December 31, 2007
The Company’s practice is to classify interest on uncertain tax positions in interest income (expense) and penalties in non-operating expense. The Company recognized (Won)311 million in penalties in 2007. As of December 31, 2007, the Company had (Won)477 million accrued for the payment of penalties.
The Company has open tax years ranging from 2003 to 2007, by which our taxes remain subject to examination. However, the Company does not anticipate that the total amount of unrecognized tax benefits will significantly change in the next 12 months.
b. Fair Value of Financial Instruments
The following method and assumptions were used to estimate the fair value of each significant class of financial instrument for which it was practicable to estimate such value:
(i) Cash and cash equivalents, short-term financial instruments, accounts receivable, available-for-sale securities, accounts payable, short-term borrowings and accrued expense
The carrying amount approximates fair value due to the short-term maturity of these instruments.
(ii) Investment securities
The fair value of equity securities of non-affiliates and debt securities are estimated based on quoted market prices. For those investments for which there were no quoted market prices, a reasonable estimate of fair value could not be made without incurring excessive costs.
(iii) Loans to employees
The carrying amount of short-term loans approximates fair value due to the short term maturities of these loans. The fair value of long-term loans is estimated based on discounted cash flows using current rates offered for loans of the similar remaining maturities.
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(iv) Long-term debt
The fair value of the long-term debt, including current portion, is estimated based on quoted market prices for the same or similar issues or on the current rates offered for debt of the same remaining maturities.
(v) Derivative instruments
The fair values of derivative instruments are estimated using available market information and appropriate valuation methodologies.
The estimated fair values of the Company’s significant financial instruments at December 31, 2006 and 2007 are summarized as follows (in millions of Korean won):
Trading securities
• Practicable to estimate fair value
• Not practicable
Derivative instruments—asset
Loans to employees
Derivative instruments—liability
Long-term debt, including current portion
c. Accrued Severance Indemnities
The Company expects to pay the following future benefits to its employees upon their normal retirement age (in millions of Korean won):
2013-2017
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To the Shareholders and Board of Directors of
KT Freetel Co., Ltd.:
We have audited the accompanying consolidated balance sheets of KT Freetel Co., Ltd. (“KT Freetel”) and its subsidiaries (collectively referred to as the “Company”) as of December 31, 2005 and 2006, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2006, all expressed in Korean won. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Company as of December 31, 2005 and 2006, and the results of its operations, the changes in its shareholders’ equity and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the Republic of Korea.
Our audits also comprehended the translation of Korean Won amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 2. Such U.S. dollar amounts are presented solely for the convenience of readers of financial statements.
Accounting practices generally accepted in the Republic of Korea vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 22 for which 2005 information was restated to the consolidated financial statements.
As discussed in Note 22, the information previously reported under accounting principles generally accepted in the United States of America has been restated.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by Committee of Sponsoring Organization of the Treadway Commission and our report dated May 21, 2007 expressed an unqualified opinion thereon.
May 21, 2007
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KT FREETEL CO., LTD. AND SUBSIDIARIES
As of December 31, 2005 and 2006
CURRENT ASSETS:
Short-term investment securities (Note 6)
Trade accounts and notes receivable, net of allowance for doubtful accounts of (Won)148,756 million in 2005 and (Won)214,650 million in 2006, and net of discount on present value of (Won)4,088 million in 2005 and (Won)4,154 million in 2006 (Notes 2, 4 and 19)
Accounts receivable-other, net of allowance for doubtful accounts of (Won)9,576 million in 2005 and (Won)9,820 million in 2006 (Notes 2 and 19)
Inventories, net of allowance for valuation loss of (Won)13,187 million in 2005 and (Won)16,645 million in 2006 (Note 2)
Short-term loans (Note 5)
Current portion of deferred income tax assets (Note 17)
NON-CURRENT ASSETS:
Long-term investment securities (Note 7)
Investment securities using the equity method (Note 8)
Long—term trade accounts and notes receivable, net of discount on present value of (Won)4,565 million in 2005 and (Won)4,686 million in 2006 (Note 2)
Long-term loans (Note 5)
Deferred income tax assets (Note 17)
Property and equipment, net (Notes 9 and 21)
Intangibles (Note 10)
Total Non-Current Assets
Total Assets
A-2
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 11)
Trade accounts and notes payable (Note 19)
Current portion of long-term debt (Note 11)
Current portion of debentures, net of discount on debentures of (Won)418 million in 2005 and (Won)236 million in 2006 (Note 12)
Accounts payable-other (Note 19)
Income tax payable
Current portion of long-term account payable-other, net of present value of (Won)884 million in 2006 (Note 14)
Current portion of reserve for liabilities (Note 15)
LONG-TERM LIABILITIES:
Long-term debt (Note11)
Debentures, net of discount on debentures of (Won) 3,305 million in 2005 and (Won)1,841 million in 2006 (Note 12)
Long-term accounts payable-other, net of present value of (Won)90,460 million in 2005 and (Won)66,123 million in 2006 (Note 14)
Accrued severance indemnities, net (Note 2)
Reserve for liabilities (Note 15)
Total Long-term Liabilities
SHAREHOLDERS’ EQUITY:
Common stock (Note 16)
Capital surplus (Note 16)
Capital adjustments:
Treasury stock (Note 16)
Equity in capital adjustment of affiliates, net (Note 8)
Gain on valuation of available-for-sale securities (Notes 6 and 7)
Stock compensation (Note 16)
Foreign-based operation’s translation adjustment
Total Capital adjustments
Minority interests
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See accompanying notes to consolidated financial statements.
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For the Years Ended December 31, 2004, 2005 and 2006
OPERATING REVENUE (Notes 18, 19 and 21)
OPERATING EXPENSES (Notes 18 and 19)
OTHER INCOME (EXPENSES), NET:
Rental income
Gain on foreign currency transactions, net
Gain on foreign currency translation, net
Loss on disposal of trade accounts and notes receivable (Note 4)
Equity in earnings (losses) of affiliates, net(Note 8)
Gain on disposal of short-term investment securities, net
Gain (loss) on disposal of long-term investment securities, net
Loss on disposal of property and equipment, net
Impairment loss on investment securities (Note 7)
Loss on valuation of currency options
Loss on valuation of currency swap (Note 13)
Loss on transaction of currency options
Impairment loss on intangibles (Note 10)
Loss on cancellation of a lease
ORDINARY INCOME
INCOME TAX EXPENSE (Note 17)
MINORITY INTERESTS IN NET INCOME OF CONSOLIDATED SUBSIDIARIES
EARNINGS PER SHARE (Note 2)
DILUTED EARNINGS PER SHARE (Note 2)
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Consolidated Statements of Shareholders’ Equity
Balance at January 1, 2004
Net income for 2004
Effect of changes in consolidated subsidiaries
Purchase of treasury stock
Compensation expense resulting from stock options
Equity in capital surplus of affiliates
Loss on valuation of available-for- sale securities
Effect of changes in minority interests
Balance at December 31, 2004
Net income for 2005
Paid-in capital increase
Equity in capital adjustment of affiliates
Gain on valuation of available-for- sale securities
Balance at December 31, 2005
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Consolidated Statements of Shareholders’ Equity (Continued)
Adjustments increased paid-in capital expenses
Net income for 2006
Balance at December 31, 2006
Translation into U.S. Dollars (In thousands) (Note 2)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Addition of expenses not involving cash outflows:
Amortization of intangibles
Long-term accrued interest
Amortization of discounts on debentures
Amortization of discounts on long-term accounts payable-other
Loss on disposal of trade accounts and notes receivable
Loss on disposal of long-term investment securities, net
Stock compensation
Impairment loss on investment securities
Equity in losses of affiliates, net
Bad debt expense
Loss on valuation of currency swap
Minority interest in net income of consolidated subsidiaries
Impairment loss on intangibles
Loss on valuation of inventories
Deduction of revenues not involving cash inflows:
Interest income (present value)
Gain on disposal of long-term investment securities, net
Equity in earnings of affiliates, net
Cancellation of stock options
Changes in assets and liabilities resulting from operations:
Decrease (Increase) in trade accounts and notes receivable
Decrease (Increase) in accounts receivable-other
Decrease (Increase) in prepaid expenses
Decrease (Increase) in inventories
Decrease (Increase) in long-term trade accounts and receivables
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Decrease (Increase) in deferred income tax assets
Decrease (Increase) in other current assets
Decrease in trade accounts and notes payable
Increase (Decrease) in accounts payable-other
Increase (Decrease) in accrued expenses
Increase (Decrease) in withholdings
Increase (Decrease) in income tax payable
Increase (Decrease) in reserve for liabilities
Increase (Decrease) in other current liabilities
Decrease in other long-term liabilities
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash inflows from investing activities
Withdrawal of short-term financial instruments
Proceeds from sale of short-term investment securities
Collection of short-term loans
Proceeds from sale of long-term investment securities
Withdrawal of guarantee deposits
Proceeds from disposal of property and equipment
Proceeds from disposal of intangibles
Cash outflow from investing activities
Purchase of short-term financial instruments
Purchase of short-term investment securities
Purchase of long-term investment securities
Purchase of investment securities using equity method
Payment of guarantee deposits
Increase in intangibles
Lending of long-term loans
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash inflows from financing activities
Proceeds from short-term borrowings
Proceeds from issuance of debentures
Proceeds from long-term debt
Cash outflows from financing activities
Taking over trade accounts and notes receivable
Repayment of current portion of debentures
Net cash provided by (used in) financing activities
NET INCREASE IN CASH AND CASH EQUIVALENTS
INCREASE (DECREASE) FROM CHANGES IN CONSOLIDATED SUBSIDIARIES
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
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Supplemental Disclosures of Cash Flow Information
TRANSACTIONS NOT INVOLVING CASH:
Transfer of trade accounts and notes receivable to long-term investment securities
Transfer of long-term investment securities to investment securities using the equity method
Transfer of long-term loans to short-term loans
Transfer of property and equipment to accounts receivable-other
Transfer of long-term debt to current portion
Transfer of debentures to current portion
Transfer of long-term obligation under capital lease to current portion
Transfer of reserve for liability to current portion of reserve for liability
Recognition of gain(loss) on valuation of investment securities as capital adjustments
Transfer of long-term account payable-other to current portion
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1. GENERAL:
(1) KT Freetel Co., Ltd.
KT Freetel Co., Ltd. (“KT Freetel”) was incorporated on January 3, 1997, under the Commercial Code of the Republic of Korea, and listed on the Korean Securities Dealers Association Automated Quotation System (the “KOSDAQ”) in December 1999. On April 19, 2004, KT Freetel transferred its listing from the KOSDAQ to the Korea Stock Exchange. KT Freetel is currently engaged in providing personal communications service (“PCS”), value added services, and sale and lease of personal communication devices in Korea. KT Corporation is the parent company. As of December 31, 2006, KT Corporation consolidates KT Freetel as KT Corporation acquired additional 12,489,850 shares (representing 7.64 percent of the total outstanding shares) through the year then ended.
As of December 31, 2006, the shareholders of KT Freetel are as follows:
NTT DoCoMo Inc
Qualcomm Incorporated
Microsoft Corp.
(2) Consolidated Subsidiary
The consolidated financial statements include the accounts of KT Freetel and its controlled subsidiaries, except that company whose total assets as of December 31 of the prior year are less than (Won)7,000 million are excluded from consolidation. Generally, control is deemed to exist when the investor has more than 50 percent of the total outstanding voting stock or when the investor is the largest shareholder and owns more than 30 percent of the total outstanding voting stock.
The consolidated financial statements include the accounts of KT Freetel and the controlled subsidiaries listed below (collectively referred to as the “Company”), of which KT Freetel owns a majority of the issued shares. All inter-company accounts and transactions have been eliminated in consolidation.
KTF Technologies Co., Ltd.
(“KTF Technologies”)
PT KTF Indonesia.
(“KTF Indonesia”)
KTFMhows Co., Ltd.
(“KTFMhows”)
On November 30, 2002, KT Freetel exercised the conversion right of convertible bonds at (Won)5,000 per share to acquire an additional 400,000 shares of common stock of KTF Technologies. The acquisition of KTF
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Technologies was recorded in accordance with the purchase method of accounting. As a result of this acquisition, KT Freetel recorded (Won)3,258 million of negative goodwill for the fair value of KTF Technologies’ net assets in excess of the acquisition cost. Negative goodwill is recognized as income on a systematic basis over the remaining weighted average useful life (5 years) of the identifiable acquired depreciable or amortizable assets.
On June 17, 2004, September 30, 2005 and March 23, 2006, KT Freetel acquired KTF Technologies’ minority interests, which represent the subsidiary’s outstanding common stocks of 13.35 percent, 2.30 percent and 1.88 percent, respectively. As a result of these acquisitions, KT Freetel recorded the excess of the acquisition cost over the book value of KTF Technologies’ net assets to capital surplus of (Won)953 million in 2004 and the excess of the book value of KTF Technologies’ net assets over the acquisition costs to capital surplus of (Won)580 million in 2005 and the excess of the acquisition cost over the book value of KTF Technologies’ net assets to capital surplus of (Won)1,132 million in 2006.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Financial Statement Presentation
The Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements for the convenience of the readers of financial statements.
The accompanying consolidated financial statements are stated in Korean Won, the currency of the country in which the Company is incorporated and operates. The convenience translation of Korean Won amounts into U.S. dollar amounts is included solely for the convenience of readers outside of the republic of Korea and has been made at the noon buying rate of (Won)930.00 to US$1.00 at December 31, 2006 in the City of New York for cable transfers in won as certified for customs purposes by the Federal Reserve Bank of New York. Such translations should not be construed as representations that the Korean Won amounts could be converted at that or any other rate.
Significant accounting policies followed by the Company in preparing the accompanying consolidated financial statements are summarized as follows:
Adoption of Newly Effective Statements of Korea Accounting Standards
The Company prepared its financial statements in accordance with the revised Statements of Korea Accounting Standards (“SKAS”), which are effective from January 1, 2006. The revised accounting standards include SKAS No.18—“Interest in Joint Ventures”, No.19—“Lease”, and No.20—“Related Party Disclosures”. However, adoption of the revised accounting standards did not have a material effect on the Company’s net income or net assets.
Use of Estimates
The preparation of financial statements in accordance with Korean GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and may affect amounts reported in future periods. Management believes that the estimates are reasonable.
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Revenue Recognition
The Company’s revenues are principally derived from sales of PCS handsets and PCS service revenues, which consist of non-refundable activation fees, fixed monthly access fees and usage charges. The Company recognizes sales on PCS handsets when these are delivered to the dealers, fixed monthly access fees in the period of service, and usage charges and non-refundable activation fees at the time services are rendered. Each revenue element sold by the Company has its own standalone value to the customer, objective and reliable evidence of fair value, and the delivery or performance of related undelivered item(s), if any, is considered probable and substantially in the control of the Company. In addition, the Company provides handset subsidies, call bonus mileages, and warranties on PCS handsets, none of which cause deferral of revenue as such items are accounted for separately as described in Note 2 (“Handset Subsidies”) and Note 15 (“Reserve for Liabilities”).
Trade Accounts and Notes Receivable and Accounts Receivables-Other
Trade accounts and notes receivable represents PCS handset and PCS service revenues recognized in the billing system which are directly billed to the customers, while accounts receivable-other mainly comprised of, among others, activation fees and PCS service revenues recognized but billed to dealers on a installment basis.
Handset Subsidies
Effective March 27, 2006, the Telecommunication Law of Korea was revised to allow wireless carriers to provide handset subsidies to customers who have maintained their wireless account with the same carrier for 18 months or longer. The Company commenced its handset subsidy program on the effective date of the revised Telecommunication Law and included a clause in the service contract which allows the Company to change the terms of its subsidy program, including the Company's ability to terminate the program at any time after a thirty day notice to its customers. Under this subsidy program, the Company provides handset subsidies to customers that have maintained their wireless account with any one carrier for 18 months or longer during the past 2 years. Handset subsidies given for the new or renewed customer relationship are expensed (“sales promotion”) as incurred. In the event that the Company provides illegal handset subsidies to customers, Korea Communications Commission may assess fines and penalties.
Cash and Cash Equivalents
Cash and cash equivalents are bank deposits and short-term money market instruments that can be easily converted into cash and whose risk of value fluctuation arising from changes of interest rates is not material. Only investments with maturities of three months or less from the acquisition date are included in cash equivalents.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is provided based on the estimated loss on uncollectible accounts and historical bad debt experience.
Changes in allowance for doubtful trade accounts and notes receivable and accounts receivable-other for the years ended December 31, 2004, 2005 and 2006 are summarized as follows (Won in millions):
Beginning of year
End of year
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Inventories are stated at the lower of cost or net realizable value, cost being determined using the average cost method. If the net realizable value of inventories is lower than cost, inventories are adjusted to net realizable value and the valuation loss of inventory which is the difference between cost and revalued amount is charged to current operations.
When circumstances that previously caused valuation loss of inventory on the application of lower of cost or net realizable value cease to exist, so as to cause an increase net realizable value above the carrying amount, the valuation loss shall be (1) reversed to the extent that the carrying amount after such reversal does not exceed the original carrying amount before adjusting for the loss and (2) subtracted from cost of inventories sold.
Inventories as of December 31, 2005 and 2006 consist of the following (Won in millions):
Finished goods
Raw material
Stored goods
Allowance for valuation loss
Investment Securities Other than those Accounted for Using the Equity Method
(1) Classification of Securities
The Company classifies securities into one of the three categories: trading, held-to-maturity or available-for-sale. Trading securities are those that were acquired principally to generate profits from short-term fluctuations in prices. Held-to-maturity securities are those with fixed and determinable payments and fixed maturity that an enterprise has the positive intent and ability to hold to maturity. Available-for-sale securities are those not classified as either held-to-maturity or trading securities. Trading securities are classified as short-term investment securities, whereas available-for-sale securities and held-to-maturity securities are classified as long-term investment securities, except for those maturity dates or whose likelihood of being disposed of are within one year from balance sheet date, which are classified as short-term investment securities.
(2) Valuation of Securities
Securities are recognized initially at cost, which includes the market value of the consideration given and incidental expenses. If the market price of the consideration given is not available, the market prices of the securities purchased are used as the basis of measurement. If neither the market price of the consideration given nor those of the acquired securities are available, the acquisition cost is measured at the best estimate of its fair value.
After initial recognition, held-to-maturity securities are valued at amortized cost. The difference between their acquisition costs and face values is amortized over the remaining term of the securities by applying the effective interest method and added to or subtracted from the acquisition costs and interest income of the remaining period. Trading securities are valued at fair value, with unrealized gains or losses included in current
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operations. Available-for-sale securities are also valued at fair value, with unrealized gains or losses included in capital adjustments, until the securities are sold or if the securities are determined to be impaired and the lump-sum cumulative amount of capital adjustments are reflected in current operations. However, available-for-sale securities that are not traded in an active market and whose fair values cannot be reliably estimated are accounted under the cost method. For those securities that are traded in an active market (marketable securities), fair values refer to the quoted market prices, which are measured as the closing price at the balance sheet date.
Securities are evaluated at each balance sheet date to determine whether there is any objective evidence of impairment loss. When any such evidence exists, unless there is a clear counter-evidence that recognition of impairment is unnecessary, the Company estimates the recoverable amount of the impaired security and recognizes any impairment loss in current operations. The amount of impairment loss of held-to-maturity securities or non-marketable equity securities is measured as the difference between the recoverable amount and the carrying amount. The recoverable amount of held-to-maturity securities is the present value of expected future cash flows discounted at the securities’ original effective interest rate. For available-for-sale debt or equity securities, the amount of impairment loss to be recognized in the current period is determined by subtracting the amount of impairment loss of the debt or equity security from the amount of amortized cost in excess of the recoverable amount for debt securities or from the amount of acquisition cost in excess of fair value for equity securities.
If the realizable value subsequently recovers, in case of a security stated at fair value, the increase in value is recorded in current operations, up to the amount of the previously recognized impairment loss, while a security stated at amortized cost or acquisition cost, the increase in value is recorded in current operations, so that its recovered value does not exceed what its amortized cost would be as of the recovery date if there had been no impairment loss.
Investment Securities Using the Equity Method
Equity securities held for investments in companies in which the Company is able to exercise significant influence over the investees are accounted for using the equity method. In addition, subsidiaries with total assets as of the prior year end of less than (Won)7,000 million are accounted for using the equity method. The Company’s share in net income or net loss of investees is reflected in current operations. Changes in the retained earnings, capital surplus or other capital accounts of investees are accounted for as an adjustment to retained earnings or to capital adjustments.
Property and Equipment
Property and equipment are stated at cost. Routine maintenance and repairs are expensed as incurred. Expenditures that result in enhancement of the value or extension of the useful lives of the facilities involved are capitalized as additions to property and equipment.
Depreciation is computed using the straight-line method based on the estimated useful lives of the assets as follows:
Estimated useful lives
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Capitalization of Financing Costs
Interest expense, discount and other financial charges, including certain foreign exchange translation gains and losses on borrowings associated with the manufacture, purchase, or construction of property and equipment, incurred prior to the completion of the acquisition, were capitalized until the year ended December 31, 2002, and are no longer capitalized commencing from January 1, 2003 as allowed by SKAS No. 7.
Long-Lived Assets
Long-lived assets are subject to review for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Leases
Lease agreements that include a bargain purchase option, which results in the transfer of ownership by the end of the lease term, have a term equal to at least 75 percent of the estimated economic life of the leased property or where the present value of the minimum lease payments at the beginning of the lease term equals or exceeds 90 percent of the fair value of the leased property are accounted for as capital leases. All other leases are accounted for as operating leases. Assets and liabilities related to capital leases are recorded as property and equipment and long-term debt, respectively, and the related interest is calculated using the effective interest rate method. In respect to operating leases, the future minimum lease payments are expensed ratably over the lease term while contingent rentals are expensed as incurred.
Intangibles
Intangible assets are stated at cost, net of accumulated amortization computed using the straight-line method over the useful lives of the assets as described below.
Frequency use rights
Intellectual property rights
Facility use rights
Long-term Trade Accounts and Notes Receivable
Long-term trade accounts and notes receivable arising from long-term contracts are recorded at the net present value of future cash flows, calculated using the effective interest rate at the time of the contract execution. The difference between the nominal value and the present value of these accounts and notes receivable is amortized over the contract period using the effective interest rate method. The amortization is recognized as interest income.
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Long-term trade accounts and notes receivable, composed of handset installment receivables, as of December 31, 2005 and 2006 is recorded at net present value using the weighted average borrowing interest rate as follows (Won in millions):
Long-term trade accounts and notes receivable
Discount
Discounts on Debentures
Discounts on debentures are amortized over the redemption period of the debentures using the effective interest rate method. Amortization of discounts is recognized as interest expense.
Accrued Severance Indemnities
All employees with more than one year of service are entitled to receive a lump-sum payment upon termination of their employment with the Company, based on their length of service and rate of pay at the time of termination. The severance indemnities that would be payable assuming all eligible employees were to resign at the balance sheet date amount to (Won)41,465 million and (Won)44,365 million as of December 31, 2005 and 2006, respectively.
Changes in accrued severance indemnities for the years ended December 31, 2004, 2005 and 2006 are as follows (Won in millions):
Severance payments
Provision(*)
Other changes
Foreign Currency Translation of Foreign Subsidiaries
In translating the foreign currency financial statements of the Company’s overseas subsidiaries into Korean won, the Company presents the translation gain or loss as a foreign- based operation’s translation adjustment in the capital adjustment section of the balance sheet. The translation gain or loss arises from the application of different exchanges rates; the year-end rate for balance sheet items except shareholders’ equity, the historical rate for shareholders’ equity and average rate for statement of income items.
Accounting for Foreign Currency Transactions and Translation
The Company maintains its accounts in Korean won. Transactions in foreign currencies are recorded in Korean won based on the prevailing rates of exchange on the transaction date. Monetary accounts with balances
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denominated in foreign currencies are recorded and reported in the accompanying financial statements at the exchange rates prevailing at the balance sheet date and the translation gains or losses are reflected in current operations. The balances have been translated using the rate of (Won)1,013.00 and (Won)929.60 to US$ 1.00 at December 31, 2005 and 2006, respectively.
Accounting for Derivative Instruments
All derivative instruments are accounted for at fair value with the valuation gain or loss recorded as an asset or liability. If the derivative instruments are not part of a transaction qualifying as a hedge, the adjustment to fair value is reflected in current operations. The accounting for derivative transactions that are part of a qualified hedge based on both the purpose of the transaction and meeting the specified criteria for hedge accounting differs depending on whether the transaction is a fair value hedge or a cash flow hedge. Fair value hedge accounting is applied to a derivative instrument designated as hedging the exposure to changes in the fair value of an asset or a liability or a firm commitment (i.e. hedged item) that is attributable to a particular risk. The gain or loss on both the hedging derivative instruments and the hedged item attributable to the hedged risk is reflected in current operations. Cash flow hedge accounting is applied to a derivative instrument designated as hedging the exposure to variability in expected future cash flows of an asset or liability or a forecasted transaction that is attributable to a particular risk. The effective portion of gain or loss on a derivative instrument designated as a cash flow hedge is recorded as capital adjustment and the ineffective portion is recorded in current operations. The effective portion of gain or loss recorded as a capital adjustment is reclassified to current earnings in the same period during which the hedged forecasted transaction affects earnings. If the hedged transaction results in the acquisition of an asset or the incurrence of a liability, the gain or loss in capital adjustment is added to or deducted from the asset or the liability.
Income Tax
The provision for income tax consists of the corporate income tax and resident surtax currently payable and changes in deferred income taxes for the period. The Company recognizes deferred taxes arising from temporary differences between amounts reported for financial accounting and income tax purposes. Deferred income taxes will be offset against those incurred in the future, if any. Deferred income taxes are recalculated based on the actual rate, effective at each balance sheet date.
Stock Compensation Expense
The Company uses the fair value based method of accounting for its employee stock option compensation plan (see Note 16). Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. For stock options, fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, expected dividends and the current risk-free interest rate for the expected life of the option. The computed deferred compensation expenses are allocated over the contracted vesting period. When the stock options are exercised with the issuance of new shares, the difference between the exercise price plus the stock option cost recorded in the capital adjustment account and the par value of the new shares issued, is recorded as additional paid-in capital (See Note 16).
Basic and Diluted Ordinary Income per Share and Earnings per Share
Ordinary income per share and earnings per share are computed by dividing ordinary income (after deducting the income tax effect) and net income by the weighted average number of common shares outstanding
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during the period. The weighted average number of shares used in computing earnings and ordinary income (after deducting the income tax effect) per share was 183,802 thousand, 181,629 thousand and 201,086 thousand shares for the years ended December 31, 2004, 2005 and 2006, respectively.
Diluted ordinary income per share and earnings per share are computed by dividing diluted ordinary income (after deducting the income tax effect) and net income by the weighted average diluted number of common shares outstanding, which includes the additional common share that would have been outstanding if the dilutive potential common shares had been issued during the period. The weighted average number of shares used in computing diluted earnings and ordinary income (after deducting the income tax effect) per share was 193,748 thousand, 181,629 thousand and 201,086 thousand shares for the years ended December 31, 2004, 2005 and 2006, respectively. Diluted ordinary income (after deducting the income tax effect) and earnings were (Won)297,334 million, (Won)547,297 million and (Won)412,001 million for the years ended December 31, 2004, 2005 and 2006, respectively.
The dilutive potential shares as of December 31, 2006 are as follows:
3. RESTRICTED DEPOSITS:
As of December 31, 2005 and 2006, deposits under long-term financial instruments amounting to (Won)20 million, are subject to withdrawal restriction as collateral for borrowings and guarantee of checking accounts.
4. DISPOSAL OF TRADE ACCOUNTS AND NOTES RECEIVABLE:
On December 19, 2003, the Company transferred PCS service receivable accounts with a total balance of (Won)253,247 million as of October 31, 2003 to Shinhan Bank Trust. The Company received (Won)200,000 million of cash and (Won)53,247 million of beneficiary certificate as a result of transferring such PCS service receivable accounts, for which the outstanding balance is revolved on a continuous basis through February 28, 2007 with Shinhan Bank Trust. In connection with revolving the outstanding balance of PCS service receivable accounts, the Company recognized a “loss on disposal of trade accounts and notes receivable” of (Won)11,816 million, (Won)11,862 million, and (Won)10,881 million for the years ended December 31, 2004, 2005 and 2006, respectively.
KTF 3rd SPC exercised its call option on Asset Based Securitization (“ABS”) on December 21, 2006. In accordance with the related contract between the Company and Shinhan Bank Trust, the Company paid cash of (Won)200,000 million and disposed (Won)18,386 million of beneficiary certificate to Shinhan Bank Trust and the Company received trade receivables transferred from Shinhan Bank worth (Won)218,970 million.
5. LOANS TO EMPLOYEES:
As of December 31, 2005 and 2006, the Company has provided loans to its employees for housing and purchase of KT Freetel’s stock with the balance of (Won)1,144 million and (Won)901 million, respectively, in short-term loans and (Won)1,640 million and (Won)344 million, respectively, in long-term loans.
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6. SHORT-TERM INVESTMENT SECURITIES:
(1) Short-term investment securities as of December 31, 2005 and 2006 are as follows (Won in millions):
Trading securities:
Available-for-sale securities:
Government bonds
Gain on valuation, before tax effect, of available-for-sales security is recorded in capital adjustments.
7. LONG-TERM INVESTMENT SECURITIES:
(1) Long-term investment securities as of December 31, 2005 and 2006 are as follows (Won in millions):
Listed equity securities
Non-listed equity securities
Investments in funds
Held-to maturity securities:
(2) Listed equity securities as of December 31, 2005 and 2006 are as follows (Won in millions):
Gaeasoft Co., Ltd.
KRTnet Corp.
Geotel Co., Ltd.
PT. Mobil-8
Gain or loss on valuation, before tax effect, of listed equity securities is included in capital adjustments.
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(3) Non-listed equity securities as of December 31, 2005 and 2006 are as follows (Won in millions):
Mondex Korea Co., Ltd.
Internet Metix Inc.
Geotel Co., Ltd.(*2)
Inews24. Co., Ltd.
The Radio News Co., Ltd.
Prime Venture Capital Co., Ltd.
Onse Telecom Corp.
NAZCA Entertainment Co., Ltd.
Toysoft Co., Ltd
Ohmylove Co., Ltd.
IMM Investment Corp.
Vacom Wireless, Inc.
WIZcommunications Co., Ltd.
Intromobile Co., Ltd.
Korea Smart Card Co., Ltd.
Directmedia Co., Ltd.
Ncerti Co., Ltd.(*1)
Neighbor System, Inc.
Entaz Co., Ltd.
PT. Mobil-8(*2)
In 2004, 2005 and 2006, the Company recognized an impairment loss of (Won)3,378 million, (Won)332 million and (Won)586 million, respectively, on non-listed equity securities of which the net equity value had declined compared to the acquisition cost and it is not expected to recover.
(4) Investments in funds as of December 31, 2005 and 2006 are as follows (Won in millions):
CEC Mobile Ltd.
Engineering Financial Cooperative
MIC2001-4TG Venture
Cinema party Fund
KTOA
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(5) Debt securities as of December 31, 2005 and 2006 are as follows (Won in millions):
Government bonds.
(6) Maturities of debt securities as of December 31, 2006 are as follows (Won in millions):
(7) Held-to-maturity securities as of December 31, 2005 and 2006 are as follows (Won in millions):
The Company acquired the above beneficiary certificates issued by Shinhan Bank Trust in relation to the disposal of trade accounts and notes receivable (See Note 4). The Company disposed these securities on December 21, 2006 and recognized gain on disposal of short-term investment securities of (Won)584 million.
8. INVESTMENT SECURITIES USING THE EQUITY METHOD:
(1) Investment securities using the equity method as of December 31, 2005 and 2006 are as follows (Won in millions):
Korea Digital Satellite Broadcasting Co., Ltd.
KTFMhows Co., Ltd.(*)
Harex Info Tech Ltd.
Korea IT Fund
Korea Telecom Strategy Fund
ENtoB Corp.
Boston Enterprise Partners(*)
Sidus FNH Corp.
KTF-CJ Music Contents Investment Fund (Centurion music 1)(*)
SidusFNH-BENEX Cinema Fund1
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Together with KT Corporation’s ownership, KT Freetel is able to exercise significant influence over Korea Digital Satellite Broadcasting Co., Ltd., Korea IT Fund, Korea Telecom Strategy Fund, ENtoB Corp, Sidus FNH and SidusFNH-BENEX Cinema Fund1.
The Company discontinued accounting its investment in Korea Digital Satellite Broadcasting Co., Ltd. (KDB) under the equity method since the net book value of such investee is below zero. The unrecognized equity losses not reported in the accompanying financial statements are (Won)440 million and (Won)674 million for the years ended December 31, 2005 and 2006, respectively.
(2) Details of valuation using the equity method for the year ended December 31, 2006 are as follows (Won in millions):
Boston Enterprise Partners
KTF-CJ Music Contents Investment Fund(Centurion music 1)
The Company recognized equity in capital adjustment of affiliate of (Won)29 million which were recorded in capital adjustments as of December 31, 2006.
(3) Changes in the difference between acquisition cost and net asset value at the acquisition date during 2006 are as follows (Won in millions):
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(4) The key financials of investees accounted for using the equity method as of and for the year ended December 31, 2006 are as follows (Won in millions):
9. PROPERTY AND EQUIPMENT:
Changes in property and equipment for the years ended December 31, 2005 and 2006 are as follows (Won in millions):
<2005>
Land
Construction in progress
Less: Accumulated depreciation
Accumulated impairment loss
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<2006>
The market value of the Company’s land based on the official price of land (published by the Ministry of Construction and Traffic) is (Won)142,528 million as of December 31, 2006.
Depreciable assets are insured against fire and other casualty losses up to (Won)1,042,036 million as of December 31, 2006.
10. INTANGIBLES:
(1) Changes in intangibles for the years ended December 31, 2005 and 2006 are as follows (Won in millions):
The Company recognized impairment loss on intangibles of (Won)3,762 million.
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The Company recognized impairment loss on intangibles of (Won)9,047 million.
(2) Ordinary development costs of (Won)9,652 million and (Won)7,303 million were charged to expense for the years ended December 31, 2005 and 2006, respectively.
(3) On December 15, 2000, KT ICOM acquired the license to provide third generation mobile services utilizing 2GHz frequency band (“IMT-2000 service”) with W-CDMA technology. KT ICOM paid (Won)650 billion of the total license fee of (Won)1,300 billion on March 20, 2001 and the remaining balance was required to be paid including interest for the period from 2007 to 2011. On December 4, 2001, MIC granted the license to KT ICOM and assigned the related frequency band, giving KT ICOM the right to provide IMT-2000 services using W-CDMA technology for 15 years from that date.
On March 6, 2003, KT ICOM was merged into the Company, and the Company started to provide IMT-2000 service on December 28, 2003.
11. BORROWINGS:
(1) Short-term borrowings as of December 31, 2005 and 2006 are as follows (Won in millions, JPY in millions, EUR in thousands, U.S dollars in thousands):
Discounted promissory notes
Usance letter of credit
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(2) Long-term debt as of December 31, 2005 and 2006 are as follows (Won in millions):
General loans
Less : Current portion
Payment schedules for the Company’s long-term debt as of December 31, 2006 are as follows (Won in millions):
12. DEBENTURES:
(1) General debentures as of December 31, 2005 and 2006 are as follows (Won in millions, JPY in millions):
Due date
20th
23rd
42nd
44th
45th
46th
47-1st
47-2nd
48th
Less: Discount on debentures
Less: Current portion
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(2) Payment schedules for the Company’s debentures as of December 31, 2006 are as follows (Won in millions):
13. DERIVATIVES:
The Company has entered into currency swap contract and interest rate swap contract with Korea Exchange Bank to hedge economically the risk exposure of fluctuations in the fair value of certain short-term borrowings and interests (denominated in US dollars) due to the changes in the related foreign currency exchange rate. The currency swap contracts as of December 31, 2006 are as follows (Won in millions):
Term
Contract
amount
Swap amount
Contract rate
Fair value
2006.5.23-2007.5.18
The Company will repay (Won)10,000 million instead of US$ 10,525,208 on maturity date under the currency swap contract. In relation to the above currency swap contracts, the Company recognized the related loss on valuation of currency swap of (Won)216 million for the year ended 2006 as other expense.
The interest swap contracts as of December 31, 2006 are as follows (Won in millions):
Interest rate buy ((Won))
Interest rate sell (US$)
(Won)10,000
14. LONG-TERM ACCOUNTS PAYABLE-OTHER:
Long-term accounts payable-other is related to the purchase of frequency use right and required to be paid including applicable interest from 2007 to 2011.
Long-term accounts payable-other as of December 31, 2005 and 2006 is stated at net present value of future cash flows, calculated using the effective interest rate of 9.93 percent at the time of receipt of frequency use license. The Company’s long-term accounts payable-other is as follows (Won in millions):
Long-term accounts payable-other
Less : discount (*)
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Maturities of the Company's long-term accounts payable-other as of December 31, 2006 are as follows (Won in millions):
15. RESERVE FOR LIABILITIES:
(1) The Company has accounted for the call bonus mileage and warranty, which the Company is obliged to pay to its customers, as reserve for liabilities. Warranties related to sales of handset are one year and are recorded as liability based on the management’s estimate according to the historical experience. Changes in reserve for liabilities for the year ended December 31, 2006 are summarized as follows (Won in millions):
Payment
Less : current portion
(2) Call bonus mileages provided by the Company expires in 5 years from the date when call bonus mileages are earned. The Company expects its call bonus mileages to be used as follows (Won in millions):
16. SHAREHOLDERS’ EQUITY:
(1) Capital stock
The Company has authorized 400,000,000 shares of (Won)5,000 par value common stock and issued 195,701,091 shares as of December 31, 2006.
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The changes in capital stock for the year ended December 31, 2006 are as follows (Won in millions except par value):
Date
Cause of changes
August 2, 2006
Settlement of paid-in
capital increase
December 28, 2006
Retirement of
treasury stock
(2) Treasury stock
In 2005, the Company reissued 225,308 shares of treasury stock to the Employee Stock Ownership Plan (“ESOP”). The fair value of such treasury stocks at the time of their reissuance totaled (Won)5,160 million and is recorded as salaries and wages. The difference between the acquisition cost and the fair value amounting to (Won)2,478 million is recorded as capital adjustments.
As of December 31, 2006, the Company holds 61,273 shares of treasury (Won in millions).
Acquisition
Retirement
(3) Stock Option Plan
The Company entered into stock option agreements with the Chief Executive Officer and senior managers. The stock option will be vested after two years from the date of grant and can be exercised for five years from the date when they are vested. Upon the exercise of stock options, the Company will issue its common stocks.
The changes in stock options for the year ended December 31, 2006 are as follows (Won in millions):
Outstanding at beginning of year
Granted
Forfeited or expired
Outstanding at end of year
Exercisable at end of year
The details of the outstanding stock options as of December 31, 20006 are as follows:
Grant Date
Employee
2001.3.29
2002.3.25
2003.9.8
2005.3.4
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The Company values stock options granted based on the fair value method (see Note 2). Total compensation expense of (Won)5,316 million is allocated over the vesting period, and the compensation expense charged to operations for the year ended December 31, 2006 are (Won)304 million. As of December 31, 2006, approximately 19,299,709 shares of common stocks have been reserved for issuance under the stock option plan.
The principal assumptions made in relation to estimation of compensation expense for the stock options are as follows:
Risk-free interest rate (%)
Expected life (years)
Expected forfeitures per year (%)
Volatility (%)
Fair value per option
Total compensation cost (Won in millions)
17. INCOME TAX AND DEFERRED INCOME TAXES:
(1) The statutory corporate income tax rate, including resident surtax, applicable to the Company is approximately 29.7 percent in 2004, and 27.5 percent in 2005 and 2006. Income tax expense for the years ended December 31, 2004, 2005 and 2006 is as follows (Won in millions):
Income before income tax
Permanent differences
Temporary differences, net
Taxable income before tax loss carryforward
Tax loss carryforward
Taxable income
Tax rate (%)
Tax calculated on taxable income
Tax credit
Income tax currently payable
Decrease (Increase) in deferred income taxes:
Temporary differences
Utilization of accumulated tax losses carried forward
Utilization of accumulated tax credit carried forward
Income tax expense directly reflected to capital
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(2) Changes in deferred income taxes for the years ended December 31, 2004, 2005 and 2006 are as follows (Won in millions):
Increase(Decrease)
Decrease from changes in consolidated subsidiaries
Less: current portion
(3) The tax effects of each type of temporary difference that gave rise to a significant portion of the deferred tax assets and liabilities in 2005 and 2006 are as follows (Won in millions):
Current
Inventory
Tax and dues
Non-current
Long-term investment securities
18. OPERATING REVENUE AND EXPENSES:
(1) Operating revenue for the years ended December 31, 2004, 2005 and 2006 consist of the following (Won in millions):
PCS service
Sales of PCS handsets
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(2) Operating expenses for the years ended December 31, 2004, 2005 and 2006 are summarized below (Won in millions).
Lease
Tax and dues(*)
Leased line charges
Ordinary development costs
Sales promotion
Sales commissions
Advertisements
Water and electricity
Cost of PCS handset sales
19. RELATED PARTY TRANSACTIONS:
(1) Related parties are as follows:
Parent company
Affiliates
Korea Digital Satellite Broadcasting Co., Ltd, Hares Info Tech Ltd,
Korea IT Fund, Korea Telecom Strategy Fund, ENtoB Corp,
Boston Enterprise Partners, Sidus FNH Corp, KTF-CJ Music Contents Investment Fund, SidusFNH-BENEX Cinema Fund
Subsidiaries of the parent company
KT Networks Co., Ltd, KT Hitel Co., Ltd, KT Powertel Co., LTd,
Korea Telecom Japan, KT Submarine Co., LTd, KT Linkus Co., Ltd,
KT Commerce, Inc, KT Rental Co., Ltd, KTCC Co., Ltd, NTC Co., LTd
Internal corporate Venture Fund 1,2, KTAI Co., Ltd, KTPI Co., Ltd, Olive Nine Co., Ltd, Telecop Service Co., Ltd, KT Capital Co., Ltd
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(2) Transactions with related parties for the years ended December 31, 2004, 2005 and 2006 are as follows (Won in millions):
Revenues:
Transaction
Interconnection charges and others
KT Networks
KT Hitel
”
Expenses:
Leased line charges and others
20. SIGNIFICANT CONTRACTS AND CONTINGENT LIABILITIES:
(1) In 1997, the Company entered into an air-time resale agreement with KT Corporation whereby KT Corporation provides wireless services using the Company’s telecommunications network. As a compensation for providing telecommunications network, the Company receives certain amount of fee calculated based on the outgoing calls generated from KT Corporation’s subscribers multiplied by a rate per minute.
(2) As of December 31, 2006, the Company is involved in 26 lawsuits as the defendant for total claims of (Won)11,018 million and has filed 16 lawsuits as the plaintiff for the total claims of (Won)5,919 million. The Company’s management believes that the outcome of these lawsuits will not have a material impact on the financial statements.
21. SEGMENT INFORMATION:
The Company has two reportable operating segments: PCS service and sales of PCS handsets. The segments are managed separately based on the difference in products and services. The accounting policies of the segments are the same as those described in Note 2.
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Details of the Company’s business segment operations for the years ended December 31, 2004, 2005 and 2006 are as follows (Won in millions):
Ordinary income
Property and equipment, net(*)
Capital expenditures
22. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES:
Accounting practices used by the Company in preparing the accompanying financial statements in conformity with generally accepted accounting principles in the Republic of Korea (“Korean GAAP”), but do not conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). The significant differences applicable to the Company are described below. Other differences do not have a significant effect on either net income or shareholders’ equity.
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(1) Restatement of previously reported US GAAP information
In the process of preparing the consolidated financial statements as of and for the year ended December 31, 2006, the Company identified errors in its reconciliation to US GAAP as of and for the year ended December 31, 2005. The errors relate to the application of Statement of Financial Accounting Standards (“SFAS”) No. 141 Business Combination (“SFAS No. 141”) and Statement of Financial Accounting Standards (“SFAS”) No. 109 Accounting for Income Tax (“SFAS No. 109”) in connection with the Company’s merger with KTM.Com Co., Ltd. in 2001 (the “Merger”).
As stated in Note 22 (9), under U.S. GAAP, assets and liabilities related to the Merger were transferred from KTM.Com Co., Ltd. to the Company at fair value and the difference between the fair value of capital stock issued and the fair value of net assets transferred was recorded as intangible assets and goodwill (for which there was no tax base). The Company also recorded deferred tax liabilities for the goodwill and intangible assets against its additional paid in capital. However, under SFAS No. 109, no deferred taxes should be recognized for such goodwill. In addition, under SFAS 141, the deferred tax liabilities recorded for intangible assets should have been recorded against goodwill and not against additional paid in capital. As a result, the US GAAP amounts previously reported as of December 31, 2005 have been restated as follows (Won in million):
Shareholder’s equity based on U.S. GAAP as previously reported
Effect of restatement:
Adjustment for correction of errors in connection with Merger
Shareholder’s equity based on U.S. GAAP as restated
Long-term liabilities
Total liabilities and Minority interest in consolidated subsidiaries
Under Korean GAAP, as explained in Note 1(2) to the consolidated financial statements, investments in subsidiaries and controlled entities are consolidated, except for companies with total assets as of the prior year end of less than (Won)7,000 million. Generally, substantial control is deemed to exist when the investor is the largest shareholder and owns more than 30 percent of total outstanding voting stock. However, U.S. GAAP generally requires that all majority-owned subsidiaries be consolidated and that any entity of which the Company owns twenty to fifty percent of total outstanding voting stock not be consolidated; rather that entity should be accounted for under the equity method.
Under U.S. GAAP, if a business enterprise has a controlling financial interest in a variable interest entity, which is defined by FASB Interpretation No. 46 Revised ("FIN 46R"), the assets, liabilities and results of the
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activities of the variable interest entity should be included in the consolidated financial statements with those of the business enterprise. Under the Korean GAAP, there is no specific provision for the accounting treatment of variable interest entities.
(3) Capitalization of foreign currency translation gain (loss)
As explained in Note 2, under previous Korean GAAP, certain unrealized foreign currency translation gains and losses were excluded from the results of operations and included in the cost of property and equipment. However, under U.S. GAAP, all unrealized foreign currency translation gains and losses on monetary assets and liabilities are to be included in the current year’s results of operations.
The amounts of foreign currency translation gains and losses included in property and equipment under previous Korean GAAP were adjusted to comply with U.S. GAAP.
(4) Interest Capitalization
As explained in Note 2, the Company elected, under Korean GAAP, starting from January 1, 2003, to no longer capitalize interest expense. However, under U.S. GAAP, the Company’s policy is to capitalize interest that would have theoretically been avoided had expenditures not been made for assets, which require a period of time to get them ready for their intended uses.
(5) Licensing Cost
Under Korean GAAP, the licensing cost paid by the initial shareholders to obtain the operating licenses prior to the establishment of the Company were not recorded in the accounts of the Company.
Under U.S. GAAP, licensing costs were accounted for as an intangible asset and capital surplus at the time of establishment of the Company.
Since the Company determined the useful life of licensing cost of second generation (“2G”) service to be indefinite, the Company determined not to amortize the related costs until December 31, 2005.
On December 31, 2005, the Korea Communication Act (“Act”) was revised, which is effective July 1, 2006. Under the Act, the right of the use of frequency for second generation (“2G”) will be expired by June, 2011. As such, the Company is amortizing licensing cost of 2G of (Won)162,708 million over remaining useful life and amortization expenses for the year ended 2006 is (Won)29,583 million.
(6) Deferred Charges
Deferred charges in intangibles consist primarily of development costs. The development costs which are recoverable from future earnings are deferred under Korean GAAP.
Under U.S. GAAP, development costs are charged to expenses when incurred and are classified as operating expenses.
(7) Revenue Recognition
Under Korean GAAP, activation fees are recorded as revenue when billed and the related direct incremental acquisition costs are expensed as incurred.
Under U.S. GAAP, such amounts are deferred and recognized over the period of the customer relationship.
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(8) Handset Subsidies to Long-time Mobile Subscribers
Under Korean GAAP, handset subsidies are recorded as operating expenses. Under US GAAP, such amounts are recorded as reduction of revenue.
(9) Merger with KTM.Com Co., Ltd.
Under Korean GAAP, as KT Freetel and KTM.Com Co., Ltd. were subsidiaries of KT Corporation prior to merger, assets and liabilities were transferred from KTM.Com Co., Ltd. to KT Freetel at book value and the difference between the par value of capital stock issued and the value of net assets transferred was recorded in the capital surplus account.
Under U.S. GAAP, as KT Freetel and KTM.Com Co., Ltd. were not subsidiaries but equity method investees of KT Corporation prior to merger, assets and liabilities were transferred from KTM.Com Co., Ltd. to KT Freetel at fair value and the difference between the fair value of capital stock issued and the fair value of net assets transferred was recorded as intangible assets and goodwill.
The Company classified the intangible assets into three components: subscriber base, licensing cost and goodwill.
(10) Merger with KT ICOM
Under Korean GAAP, as KT Freetel and KT ICOM were subsidiaries of KT Corporation prior to the merger, assets and liabilities were transferred from KT ICOM to KT Freetel at book value as shown in the consolidated financial statements of KT Corporation and the difference between the par value of capital stock issued and the value of net assets transferred was recorded in the capital surplus account.
The merger was not accounted for as a merger of entities under common control as KT Freetel and KT ICOM are not subsidiaries of KT Corporation under U.S. GAAP.
Under U.S. GAAP, assets and liabilities were transferred from KT ICOM to KT Freetel at fair value. As the fair value of net assets transferred amounting to (Won)228,244 million exceed the fair value of capital stock issued amounting to (Won)190,755 million, the non-current assets of (Won)37,489 million were reduced proportionally.
(11) Goodwill and Other Intangibles
Under Korean GAAP, the purchase price over the fair value of net assets being acquired was recorded as goodwill and it is amortized over 20 years. Impairment loss is recognized when the carrying amount of goodwill exceeds the fair value.
Under SFAS No. 142—“Goodwill and Intangible Assets”, intangible assets with finite lives continue to be amortized over their useful economic lives. Goodwill and intangible assets with indefinite lives are not amortized, but tested for impairment, at least annually.
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In accordance with SFAS No. 142, the goodwill and intangibles acquired from KTM.Com and KT ICOM and amortization expense for the years ended December 31, 2004, 2005 and 2006 are as follows (Won in millions):
KTM .Com
Subscriber base
Licensing cost
KT ICOM
This goodwill and licensing cost were amortized over the estimated periods to be benefited until 2001 before the adoption of SFAS No. 142.
On December 31, 2005, the Korea Communication Act (“Act”) was revised, which is effective July 1, 2006. Under the Act, the right of the use of frequency for second generation (“2G”) will be expired by June, 2011. As such, the Company will amortize licensing cost of 2G of (Won)80,208 million over remaining useful life.
(12) Disposal of Trade Accounts and Notes Receivable
Under Korean GAAP, the transaction between KT Freetel and Shinhan Bank Trust is recorded as a sale of trade accounts and notes receivable. Under U.S. GAAP, this transaction does not qualify for sale accounting and as such, the transaction is classified as borrowings.
(13) Investor-level goodwill
Under Korean GAAP, for investments in affiliated companies accounted for using the equity method, the excess of acquisition cost of the affiliates over the Company’s share of their net assets at the acquisition date is being amortized by the straight-line method over its estimated useful life. Under U.S. GAAP, the investor-level goodwill is not amortized, but instead tested for impairment in accordance with APB No. 18. The investor-level goodwill which is recorded only at the investor’s financial statements represents the excess of the acquisition cost of equity method investees over the fair value of investor’s share of net identifiable assets acquired.
(14) Additional Equity Investment in Subsidiaries
Under Korean GAAP, when additional interest is acquired after acquiring a majority interest in a subsidiary, the differences between the Company’s acquisition cost of the additional interest and the corresponding carrying amount of the acquired additional interest in a subsidiary is presented as an adjustment to capital surplus. Under U.S. GAAP, the cost of an additional interest would be allocated based on the fair value of net assets at the time the additional interest is acquired, with the excess allocated to goodwill.
(15) Minority Interests in Consolidated Subsidiary
Under Korean GAAP, minority interests in consolidated subsidiaries are presented as a component of shareholders’ equity in the consolidated balance sheets. Under U.S. GAAP, minority interests in consolidated subsidiaries are not included in shareholders’ equity; rather, it is presented between liabilities and shareholders’ equity item in the consolidated balance sheets.
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(16) Accrued Severance Benefits
Under the Korean labor law, employees with more than one year of service are entitled to receive a lump sum payment upon voluntary or involuntary termination of their employment. The amount of the benefit is based on the terminated employee’s length of employment and rate of pay prior to termination. Korean GAAP requires that a company record the vested benefit obligation at the balance sheet date assuming all employees were to terminate their employment as of that date. The change in the vested benefit obligation during the year is recorded as the current year’s severance expense.
Under US GAAP, the accrual for severance indemnities is also computed as if all employees were to terminate at the balance sheet date as allowed under EITF 88-1, “Determination of Vested Benefit Obligation for a Defined Benefit Pension Plan.”
The Company expects to pay the following future benefits over next 10 years to its employees upon their normal retirement age (Won in million):
Prior to 2014
2014
2015
2017
The above amounts were determined based on the employees’ current salary rates and the number of service years that will be accumulated upon their expected retirement date. These amounts do not include amounts that might be paid to employees that will cease working with the Company before their normal retirement age.
(17) Comprehensive Income
Under Korean GAAP, there is no requirement to present comprehensive income. U.S. GAAP requires the presentation of comprehensive income and its components in the financial statements. Comprehensive income includes all changes in shareholders’ equity during a period except those resulting from investment by, or distribution to owners, including certain items not included in the current year’s results of operations.
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Comprehensive income for the years ended December 31, 2004, 2005 and 2006 and accumulated other comprehensive income balance as of December 31, 2004, 2005 and 2006 is summarized as follows:
Net income as adjusted in accordance with U.S. GAAP
Other comprehensive income, net of tax:
Unrealized gain (loss) on investments, net of tax of (Won)697 million in 2004, (Won)990 million in 2005 and (Won)1,860 million in 2006
Realized gain (loss) included in earnings due to sale of investment securities, net of tax of (Won)1,240 million in 2005 and (Won)1,524 million in 2006
Accumulated other comprehensive income (loss) balance
Unrealized gain (loss) on investments(*)
(18) New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. We are required to adopt FIN 48 effective January 1, 2007. The cumulative effect of initially adopting FIN 48 will be recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized upon adoption of FIN 48. We are currently evaluating the impact this new standard will have on our future results of operations and financial position.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurement (SFAS No. 157). SFAS No. 157 expands disclosures about fair value measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. We are required to adopt SFAS No. 157 effective January 1, 2008 on a prospective basis. We are currently evaluating the impact this new standard will have on our future results of operations and financial position.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at initial recognition of the asset or liability or upon a remeasurement event that gives rise to new-basis accounting. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159
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is effective for fiscal years beginning after November 15, 2007 and may be adopted earlier but only if the adoption is in the first quarter of the fiscal year. We are currently assessing whether adoption of SFAS 159 will have an impact on our financial statements.
(19) Effect on Net Earnings and Shareholders’ Equity
The effects of the significant adjustments to net earnings and shareholders’ equity that are required if U.S. GAAP were applied instead of Korean GAAP are summarized as follows (Won in millions, except per share amounts):
Net income under Korean GAAP
(3) Capitalization of foreign currency translation gain (loss), net
(4) Interest capitalization
(5) Licensing cost
(6) Deferred charges(*1)
(7) Revenue recognition
(11) Amortization of subscriber base
(12) Disposal of trade accounts and notes receivable
Deferred tax effect of U.S. GAAP adjustments
Adjusted net income under U.S. GAAP
Basic earnings per share
Diluted earnings per share
Shareholders’ equity under Korean GAAP
(6) Deferred charges
(9) Merger with KTM.Com(*2)
(14) Additional equity investment in subsidiaries
(15) Minority interests in consolidated subsidiary
Deferred tax effect of U.S.GAAP adjustments
Shareholders’ equity under U.S. GAAP
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The condensed balance sheets in accordance with U.S. GAAP as of December 31, 2005 and 2006 are as follows (Won in millions):
Shareholders' equity
The following table reconciles cash flows from operating, investing and financing activities for the years ended December 31, 2004, 2005 and 2006 under Korean GAAP, as reported in the consolidated financial statements to cash flows from operating, investing and financing activities for the years ended December 31, 2004, 2005 and 2006 under U.S. GAAP (in millions of Korean won) :
Cash flows from operating activities based on Korean GAAP
Adjustments :
Asset securitization transactions
Difference of Consolidation scope (Note1)
Cash flows from operating activities based on U.S. GAAP
Cash flows from investing activities based on Korean GAAP
Cash flows from investing activities based on U.S. GAAP
Cash flows from financing activities based on Korean GAAP
Cash flows from financing activities based on U.S. GAAP
Cash and cash equivalents at end of the year based on Korean GAAP
Cash and cash equivalents at end of the year based on U.S. GAAP
(Note1) Reconciling items affecting cash flows related to difference in consolidation between Korean GAAP and U.S. GAAP (See Note 22 (2)).
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(20) Additional acquisition of the Company’s common stocks by KT Corporation (Unaudited)
KT Corporation acquired additional shares of KTF during the period from February 28, 2006 to September 15, 2006. KT Corporation’s ownership percentage of KTF increased from 44.6% to 50.8% as a result of the series of acquisition. Percentage of ownership exceeded 50% as of August 20, 2006 and accordingly, KT Corporation became the majority shareholder and began to consolidate the financial statements of KTF which were previously accounted for using the equity method until August 19, 2006. Percentage of ownership of KTF is 52.2% as of December 31, 2006 due to retirement of treasury stock by KTF.
Condensed statements of income and condensed statements of cash flows pre and post of August 20, 2006 under Korean GAAP are as follows (Won in millions, except per share amounts):
Condensed statement of income
Other expenses, net
Income tax expenses
Minority interests in net income (loss) of consolidated subsidiaries
Earnings per share
Condensed statement of cash flows:
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The effects of the significant adjustments to net earnings that are required if U.S. GAAP were applied instead of Korean GAAP are summarized as follows (Won in millions, except per share amounts):
(13) Investor- level goodwill
The following table reconciles cash flows from operating, investing and financing activities for the period from January 1, 2006 to August 20, 2006 and from August 21, 2006 to December 31, 2006 under Korean GAAP, as reported in the consolidated financial statements to cash flows from operating, investing and financing activities for the period from January 1, 2006 to August 20, 2006 and from August 21, 2006 to December 31, 2006 under U.S. GAAP (in millions of Korean won):
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
KT CORPORATION
(Registrant)
Date: June 30, 2008
Exhibit Index