As filed with the Securities and Exchange Commission on June 29, 2010
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
OR
For the fiscal year ended December 31, 2009
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: +82-31-727-0150; 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
New York Stock Exchange, Inc.
New York Stock Exchange, Inc.*
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, 2009, there were 243,196,468 shares of common stock, par value (Won)5,000 per share, outstanding
(not including 17,915,340 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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
i
(continued)
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.
FINANCIAL INFORMATION
Item 8.A.
Consolidated Statements and Other Financial Information
Item 8.B.
Significant Changes
ITEM 9.
THE OFFER AND LISTING
Item 9.A.
Offer and Listing Details
Item 9.B.
Plan of Distribution
Item 9.C.
Markets
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
Item 10.B.
Memorandum and Articles of Association
Item 10.C.
Material Contracts
Item 10.D.
Exchange Controls
Item 10.E.
Taxation
Item 10.F.
Dividends and Paying Agents
Item 10.G.
Statements by Experts
Item 10.H.
Documents on Display
Item 10.I.
Subsidiary Information
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
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ITEM 14.
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.
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G.
CORPORATE GOVERNANCE
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. Our monetary assets and liabilities denominated in foreign currency are translated into Won at the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. on the balance sheet dates, which were, for U.S. dollars,(Won)938.2 to US$1.00, (Won)1,257.5 to US$1.00 and (Won)1,167.6 to US$1.00 at December 31, 2007, 2008 and 2009, respectively. 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, 2009 have been translated into United States dollars at the rate of(Won)1,163.7 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, 2009.
Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.
All market share data contained in this annual report, unless otherwise specified, are based on the number of subscribers announced by the Korea Communications Commission or the Korea Telecommunications Operators Association.
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, 2008 and 2009 and for each of the years in the three-year period ended December 31, 2009, 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, 2009 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 40 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
Non-operating revenues
Non-operating expenses
Income tax expense on continuing operations (2)
Income from continuing operations
Income (loss) from discontinuing operations
Net Income
Attributable to equity holders of the parent
Attributable to noncontrolling interests
Basic income per share from continuing operations
Basic net income per share (3)
Diluted income per share from continuing operations
Diluted net income per share (4)
Dividends per share (5)
U.S. GAAP (6):
Income taxes
Net Income (7)
Attributable to stockholders
Basic income per share (3)
Diluted income per share (4)
2
Balance Sheet Data
Working capital (8)
Net property and equipment
Total assets
Long term debt, excluding current portion
Refundable deposits for telephone installation
Total equity
Stockholders’ equity
Noncontrolling interests
Other Financial Data
Korean GAAP:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Operating Data
Lines installed (thousands) (9)
Lines in service (thousands) (9)
Lines in service per 100 inhabitants (9)
Mobile subscribers (thousands)
Broadband Internet subscribers (thousands)
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Exchange Rate Information
The following table sets out information concerning the market average exchange rate for the periods and dates indicated.
Period
2005
2006
2007
2008
2009
December
2010 (through June 28)
January
February
March
April
May
June (through June 28)
Source: Seoul Money Brokerage Services, Ltd.
Our monetary assets and liabilities denominated in foreign currency are translated into Won at the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. on the balance sheet dates, which were, for U.S. dollars, (Won)938.2 to US$1.00,(Won)1,257.5 to US$1.00 and(Won)1,167.6 to US$1.00 at December 31, 2007, 2008 and 2009, respectively.
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, 2009 have been translated into United States dollars at the rate of (Won)1,163.7 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, 2009.
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.
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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
Competition in the Korean telecommunications industry is intense.
Competition in the telecommunications sector in Korea is intense. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. In particular, SK Telecom Co., Ltd. (or SK Telecom) acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband Co., Ltd. (or SK Broadband). The acquisition enables SK Telecom to provide fixed-line telecommunications, broadband Internet access and Internet television (or IP-TV) services together with its mobile telecommunications services. On January 1, 2010, LG Dacom Corporation (or LG Dacom) and LG Powercom Co., Ltd. (or LG Powercom) merged into LG Telecom Co., Ltd. (or LG Telecom). The merger enables LG Telecom to provide a similar range of services as SK Telecom and us. Our inability to adapt to such changes in the competitive landscape could have a material adverse effect on our business, financial condition and results of operations.
Mobile Service. We provide mobile services based on Code Division Multiple Access (or CDMA) technology and Wideband Code Division Multiple Access (or W-CDMA) technology. Competitors in the mobile telecommunications service industry are SK Telecom and LG Telecom. We had a market share of 31.3% as of December 31, 2009, making us the second largest mobile telecommunications service provider. SK Telecom had a market share of 50.6% as of December 31, 2009.
Mobile subscribers are allowed to switch their service provider while retaining the same mobile phone number. Mobile service providers also grant subsidies to subscribers who purchase new handsets and agree to a minimum subscription period. 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 our net profit margins.
In recent years, SK Telecom and we also launched third-generation mobile telecommunications services, which we believe have further intensified competition between the two companies and resulted in an increase in marketing expenses. We expanded our coverage area of High Speed Downlink Packet Access (or HSDPA)-based IMT-2000 services nationwide in March 2007. 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 to those that we expect to face in implementing this third-generation technology, we cannot assure you that we will continue to be able to successfully compete in third-generation mobile telecommunications services.
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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 Telecom and SK Broadband 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. As of December 31, 2009, we had a market share in local telephone service of 89.9% and a market share in domestic long-distance service of 86.3%. Further increase in competition may decrease our market shares in such businesses.
Internet Services. The Korean broadband Internet access service market has experienced significant growth in the past decade. SK Broadband (formerly Hanarotelecom) entered the broadband market in 1999 offering both Hybrid Fiber Coaxial (or 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 Telecom. In recent years, numerous cable television operators have also begun to offer HFC-based services at rates lower than ours. We had a market share of 42.5% as of December 31, 2009. 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, including IP-TV and Internet phone services, 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 of the Internet industry in Korea has attracted 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.
We may fail to realize the anticipated benefits of the merger of KTF into KT Corporation.
On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger. The success of the merger of KTF with KT Corporation will depend, in part, on our ability to realize the anticipated synergies, growth opportunities and, to a lesser extent, cost savings from combining these two companies. The realization of these anticipated benefits may be impeded, delayed or reduced as a result of numerous factors, some of which are outside our control. These factors include:
difficulties in integrating the operations of KTF with those of KT Corporation, including information systems, personnel, policies and procedures, and in reorganizing or reducing overlapping personnel, operations, marketing networks and administrative functions;
unforeseen contingent risks or latent liabilities relating to the merger that may become apparent in the future;
difficulties in managing a larger business; and
loss of key management personnel or customers.
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Accordingly, we cannot assure you that we will realize the anticipated benefits of the merger or that the merger will not adversely affect our combined business, financial condition and results of operations.
The integration of the operations of KTF into KT Corporation may require significant amounts of time, financial resources and management attention. KT Corporation’s management intends to implement a business plan to effectively combine the operations of KTF with the operations of KT Corporation. If this business plan is not effective in integrating these operations, however, we may not realize the anticipated benefits of the merger. The integration process could also result in the disruption of our ongoing business and information technology systems, or inconsistencies in standards, controls, procedures and policies and a reduction in employee morale, each of which may adversely affect our ability to maintain relationships with customers and to retain key personnel.
In addition, as conditions to the approval of the merger of KTF into KT Corporation, the Korea Communications Commission is requiring us to (i) allow competing service providers to have greater access to our cable tunnels and telephone poles, (ii) improve Public Switched Telephone Network (or PSTN) number portability and voice over Internet protocol (or VoIP) number portability, and (iii) allow competing service providers to access our wireless Internet network. Such conditions may intensify competition in the telecommunications industry, which could have a material adverse effect on the number of our subscribers and results of operations.
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. The license is valid for seven years from the grant date and the license amount is amortized over the remaining contractual life commencing from June 2006. 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 at speeds of 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, to our subscribers who have mobile phone as well as WiBro-enabled laptop computers. We commercially launched our service in June 2006, and we had approximately 287 thousand subscribers as of December 31, 2009. We believe that substantial additional amounts of capital expenditures and research and development will be required to complete the buildout of our WiBro service network, and we plan to spend approximately(Won)265 billion in capital expenditures in 2010 to expand our WiBro service network, which we may adjust subject to market demand. No assurance can be given that the network will gain broad 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 or unrests in recent years, there can be no assurance that we will not experience labor disputes or unrests in the future, 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 May 25, 2011. 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 labor disputes and unrests resulting from disagreements with the labor union in the future.
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The Korean telecommunications and Internet protocol broadcasting industries are subject to extensive Government regulations, and changes in Government policy relating to these industries 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.
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 SK Telecom for mobile service, and the Korea Communications Commission, in consultation with the Ministry of Strategy and Finance, currently approves rates charged by us and SK Telecom for such services. The Korea Communications Commission currently does not regulate our domestic long-distance, international long-distance, broadband internet access and mobile service rates, but the inability to freely set our local telephone service rates may hurt profits from such 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 Government also sets the policies regarding the use of radio frequencies and allocates the spectrum of radio frequencies used for wireless telecommunications. On April 29, 2010, the Korea Communications Commission announced its decision to allocate 20 MHz of spectrum in the 900 MHz band to us, 20 MHz of spectrum in the 800 MHz band to LG Telecom and 40 MHz of spectrum in the 2.1GHz band to SK Telecom. Such new allocations of spectrum will become effective on July 1, 2011. The new allocation of spectrum could increase competition among wireless service providers, which may have an adverse effect on our business.
We also plan to put more focus on the Internet protocol (or IP) media market, and we began offering IP-TV service on November 17, 2008. IP-TV is a service which combines video-on-demand services with real-time high definition broadcasting via broadband networks. The Korea Communications Commission has the authority to regulate the IP media market, including IP-TV services. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IP media broadcasting business must obtain a license from the Korea Communications Commission, and anyone intending to engage in the broadcasting of certain contents must obtain additional approval of the Korea Communications Commission. Although we currently believe that we may freely compete in this market, there can be no assurance that Government regulations and policies will permit us to continue to do so.
Government policies and regulations relating to the above as well as other regulations involving the Korean telecommunications and IP broadcasting industries (including as a result of the implementation of free trade agreements between Korea and other countries, including the United States and the European Union) 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.”
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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. Our business relationships and transactions with our subsidiaries, affiliates and other companies within the KT Group are subject to ongoing scrutiny by the Fair Trade Commission as to, among other things, whether such relationships and transactions constitute undue financial support among companies of the same business group. We are also subject to the fair trade regulations limiting cross-guarantee of debt and cross-shareholdings among member companies of the same group. Any future determination by the Korea Fair Trade Commission that we have engaged in transactions that violate the fair trade laws and regulations may result in fines or other punitive measures and may have a material adverse effect on our reputation and our business.
Concerns that radio frequency emissions may be linked to various health concerns could adversely affect our business and we could be subject to litigation relating to these health concerns.
In the past, allegations that serious health risks may result from the use of wireless telecommunications devices or other transmission equipment have adversely affected share prices of some wireless telecommunications companies in the United States. We cannot assure you that these health concerns will not adversely affect our business. Several class action and personal injury lawsuits have been filed in the United States against several wireless phone manufacturers and carriers, asserting product liability, breach of warranty and other claims relating to radio transmissions to and from wireless phones. Certain of these lawsuits have been dismissed. We could be subject to liability or incur significant costs defending lawsuits brought by our subscribers or other parties who claim to have been harmed by or as a result of our services. In addition, the actual or perceived risk of wireless telecommunications devices could have an adverse effect on us by reducing our number of subscribers or our usage per subscriber.
Disruptions in global credit and financial markets and the resulting governmental actions around the world could have a material adverse impact on our business and the ability to meet our funding needs, and could cause the market value of our securities to decline.
In recent years, disruptions and volatility in the global financial markets have resulted in increases in credit spreads and limitations on the availability of credit. Starting in mid-2007, credit markets in the United States began experiencing difficult conditions and increased volatility, which in turn adversely affected worldwide financial markets. Adverse conditions in the global credit and financial markets were further exacerbated in 2008 by the bankruptcy or acquisition of, and government assistance to, several major U.S. and European financial institutions. These developments resulted in reduced liquidity, greater volatility, widening of credit spreads and a reduction in price transparency in the U.S. and global financial markets.
In response to such developments, legislators and financial regulators in the United States and other jurisdictions, including Korea, implemented a number of policy measures designed to add stability to the financial markets and stimulate the economy, including the provision of direct and indirect assistance to distressed financial institutions. However, while the rate of deterioration of the global economy slowed in the second half of 2009 and into 2010, with some signs of stabilization and improvement, the overall prospects for the Korean and global economy in 2010 and beyond remain uncertain. For example, in November 2009, the Dubai government announced a moratorium on the outstanding debt of Dubai World, a government-affiliated investment company. In addition, many governments worldwide, in particular in Greece and other countries in southern Europe, are showing increasing signs of fiscal stress and may experience difficulties in meeting their debt service
9
requirements. Any of these or other developments could potentially trigger another financial and economic crisis. In addition, while many governments worldwide are considering or are in the process of implementing “exit strategies,” in the form of reduced government spending, higher interest rates or otherwise, with respect to the economic stimulus measures adopted in response to the global financial crisis, such strategies may, for reasons related to timing, magnitude or other factors, have the unintended consequence of prolonging or worsening global economic and financial difficulties. Adverse conditions and uncertainty surrounding the Korean and global economies and financial markets may have a material adverse effect on our business and the ability to meet our funding needs, as well as negatively affect the market prices of the ADSs.
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 telecommunications 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)7,536 billion total long-term debt (excluding current portion) outstanding as of December 31, 2009,(Won)2,788 billion was denominated in foreign currencies with interest rates ranging from 1.06% to 6.50%. 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.”
Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of the shares of our common stock on the KRX KOSPI Market and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the Dollar conversion by the depositary for the ADRs of cash dividends, if any, paid in Won on shares of common stock represented by the ADSs.
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 occurs in Korea. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea. 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 difficulties affecting the U.S. and global financial sectors, adverse conditions and volatility in the worldwide credit and financial markets, fluctuations in oil and commodity prices and the general weakness of the U.S. and global economy have increased the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. Due to recent liquidity and credit concerns and volatility in the global financial markets, the value of the Won relative to the Dollar has also fluctuated significantly in recent years. Furthermore, as a result of adverse global and Korean economic conditions, there has been continuing volatility in the stock prices of Korean companies. The Korea Composite Stock Price Index declined from 1,674.92 on June 30, 2008 to 938.75 on October 24, 2008. On June 28, 2010, the Korea Composite Stock Price Index recovered to 1,732.03. Future declines in the Korea Composite Stock Price Index and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds
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of such sales may adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea, and the ability of Korean companies to raise capital. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.
Developments that could have an adverse impact on Korea’s economy in the future include:
continuing difficulties in the housing and financial sectors in the United States and elsewhere and increased sovereign default risks in select countries and the resulting adverse effects on the global financial markets;
declines in consumer confidence and a slowdown in consumer spending;
adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the Dollar or Japanese Yen exchange rates or revaluation of the Chinese renminbi), interest rates and stock markets;
continuing adverse conditions 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;
increasing delinquencies and credit defaults by retail and small- and medium-sized enterprise borrowers;
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;
social and labor unrest;
substantial decreases in the market prices of Korean real estate;
a decrease in tax revenues and a substantial increase in the Government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased Government budget deficit;
financial problems or lack of progress in the 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 at certain Korean conglomerates;
geo-political uncertainty and risk of further attacks by terrorist groups around the world;
the occurrence of severe health epidemics in Korea 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;
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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 tensions 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 weapons and long-range missile programs and increased uncertainty regarding North Korea’s actions and possible responses from the international community.
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 multi-lateral talks with Korea, the United States, China, Japan and Russia 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 April 2009, North Korea launched a long-range rocket over the Pacific Ocean. Korea, Japan and the United States responded that the launch poses a threat to neighboring nations and that it was in violation of the United Nations Security Council resolution adopted in 2006 against nuclear tests by North Korea, and the United Nations Security Council unanimously passed a resolution that condemned North Korea for the launch and decided to tighten sanctions against North Korea. Subsequently, North Korea announced that it would permanently pull out of the six party talks and restart its nuclear program, and the International Atomic Energy Agency reported that its inspectors had been ordered to remove surveillance devices and other equipment at the Yongbyon nuclear power plant and to leave North Korea. On May 25, 2009, North Korea announced that it had successfully conducted a second nuclear test and test-fired three short-range surface-to-air missiles. In response, the United Nations Security Council unanimously passed a resolution that condemned North Korea for the nuclear test and decided to expand and tighten sanctions against North Korea. In March 2010, a Korean warship was destroyed by an underwater explosion, killing many of the crewmen on board. In May 2010, the Government formally accused North Korea of causing the sinking and is seeking United Nations Security Council sanctions for the act. North Korea has threatened retaliation for any attempt to punish it for the act.
In addition, there recently has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for economic and political stability in the region. In June 2009, U.S. and Korean officials announced that Kim Jong-il, the North Korean ruler who reportedly suffered a stroke in August 2008, designated his third son, who is reportedly in his twenties, to become his successor. The succession plan, however, remains uncertain. In addition, North Korea’s economy faces severe challenges. For example, in November 2009, the North Korean
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government redenominated its currency at a ratio of 100 to 1 as part of a currency reform undertaken in an attempt to control inflation and reduce income gaps. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which led to severe inflation and food shortages. Such developments may further aggravate social and political tensions within North Korea.
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, which may occur, for example, if North Korea experiences a leadership or economic crisis, high-level contacts break down, or military hostilities occur, could have a material adverse effect on our operations and the market value of the ADSs.
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 to 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.
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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 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.
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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 exercised substantial 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 shareholders began electing our directors, who used to be appointed by the Government under the Korea Telecom Act.
Prior to 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, and 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 service providers, five domestic long-distance carriers and numerous international long-distance carriers (including voice resellers) in Korea. In addition, the Government awarded licenses to several service providers to promote competition in other telecommunications business areas such as mobile telephone services and data network services. On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. 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:
Personal Communications Service (or PCS) mobile telecommunications service and third-generation HSDPA-based IMT-2000 wireless Internet and video multimedia communications services;
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 IP-TV services; and
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various other services, including leased line service and other data communication service, satellite service and information technology and network services.
Leveraging on our dominant position in the fixed-line telephone services market and our established customer base in Korea, we have successfully pursued new growth opportunities during the past decade and obtained strong market positions in each of our principal lines of business. In particular:
in the mobile services market in Korea, we achieved a market share of 31.3% with approximately 15.0 million subscribers as of December 31, 2009;
in the fixed-line telephone services market in Korea, we continue to be the dominant provider with approximately 25.9 million installed lines, of which 17.0 million lines were in service as of December 31, 2009. As of such date, our market share of the local market was 89.9% and our market share of the domestic long-distance market was 86.3%;
we are Korea’s largest broadband Internet access provider with 7.0 million subscribers as of December 31, 2009, representing a market share of 42.5%; and
we are also the leading provider of data communication services in Korea.
For the year ended December 31, 2009, under Korean GAAP, our operating revenues were (Won)19,649 billion, our net income was (Won)610 billion and our basic net income per share was (Won)2,254. As of December 31, 2009, our total equity was(Won)10,667 billion.
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. In order to enhance the management efficiencies of our mobile and fixed-line telecommunications operations as well as more effectively respond to the convergence trends in the telecommunications industry, KTF merged into KT Corporation on June 1, 2009, with KT Corporation surviving the merger. We also restructured our organization into three sub-groups, the Home Customer Group, the Personal Customer Group and the Enterprise Customer Group, so that we may more effectively address differing needs of our customer segments. Consistent with our strategic objectives, we aim to pursue growth through the following four core areas:
Home Customer Group. We aim to offer a one-stop-shop that satisfies various information technology and telecommunications needs of a household. In March 2009, we launched a new brand “QOOK” to promote our bundled products, which include broadband Internet access service, IP-TV service, Internet phone service and fixed-line telephone service. We aim to differentiate ourselves from our competitors by providing broadband Internet access service using high-speed fiber-to-the-home (or FTTH) connection and offering Internet phone service with value-added features such as video communication, short message service and phone banking. We also began offering real-time broadcasting service on our IP-TV service starting in November 2008.
Personal Customer Group. Our Personal Customer Group focuses on expanding our wireless data communication business to meet the rising demand for broadband Internet access using advanced wireless data communications devices such as smart phones. We are working closely with handset manufacturers to expand our offerings of smart phones and handsets designed to promote convergence of fixed-line and mobile
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telecommunications services, as well as promote development of various applications for such devices. In line with this strategy, we began offering Apple’s iPhone on November 28, 2009 and have sold more than 700 thousand units within six months of its launch. We believe that our WiBro network, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices, as well as our extensive wireless LAN networks installed nationwide, enable our subscribers to maximize effective usage of their smart phones. We plan to take advantage of our industry-leading network infrastructure to attract more customers as this market further develops. In addition, we aim to further enhance our position in the mobile telecommunications market by leveraging on our strong brand, nationwide marketing network and ability to bundle various mobile and fixed-line services.
Enterprise Customer Group. We aim to provide our corporate customers, small- and medium-sized enterprises and government agencies with one-stop solution services including designing data communications and information technology infrastructure to overseeing their day-to-day operations with the objective of achieving operational efficiencies and cost savings. We provide solutions specifically tailored for individual clients, as well as Internet-based computing services, whereby shared resources, software and information are delivered from our data centers and servers. For example, we designed an urban transit infrastructure maintenance system for the Seoul Metropolitan Rapid Transit Corporation, in which workers are able to utilize their smart phones to report back their maintenance results to the headquarters remotely from the maintenance site. Leveraging our extensive customer base, we plan to further expand the range of innovative solutions for our enterprise customers.
Convergence. We believe that convergence of fixed-line and mobile communications technologies provides a competitive advantage to us because we have the technological know-how and experience to design and construct a unified delivery platform for a new generation of value-added services. We plan to make such platform more readily available to others so that they may create additional contents and convenience solutions such as electronic commerce and digital transaction applications that can be utilized anywhere using various media and communications devices.
The Telecommunications Industry in Korea
The Korean telecommunications industry is one of the most developed in Asia. According to the Korea Communications Commission, the number of mobile subscribers in Korea was 47.9 million and the number of broadband Internet access subscribers in Korea was 16.3 million as of December 31, 2009. As of December 31, 2009, the mobile penetration rate, which is calculated by dividing the number of mobile subscribers (including multiple counting of those who subscribe to more than one mobile service) by the population of Korea, was 98.4%, and the broadband Internet penetration rate, which is calculated by dividing the number of broadband Internet access service subscribers (including multiple counting of those who subscribe to more than one broadband Internet access service) by the number of households in Korea, was 96.6%.
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 Telecom 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. KTF was awarded a license alongside LG Telecom and Hansol M.com, and 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. On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger. KT Corporation, SK Telecom and LG Telecom have invested in networks compatible with Evolution-Data Optimized (or EV-DO) handsets that allow subscribers to enjoy 2.5 generation high speed wireless data services. KT Corporation and SK Telecom also offer third-generation, high-capacity HSDPA-based IMT-2000 wireless Internet and video multimedia communications services that use significantly greater bandwidth capacity.
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)
Broadband Internet Access Market
With the advancement of broadband technology, the Korean broadband Internet access market has experienced significant growth. The principal technologies used in providing high speed Internet access services 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 Unshielded Twisted Pair (or 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 in Korea has been steadily increasing in recent years.
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 2002. Some of the service providers have upgraded their broadband network to provide fiber optic LAN-based service to their subscribers, which further enhances data transmission speed up to 100 Mbps as well as improves connection quality, and enables such service providers to offer video-on-demand services with real-time high definition broadcasting.
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 speeds of up to 155 Mbps, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops, PDAs and
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smart phones 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.
Our Services
Mobile Service
We provide mobile services based on CDMA technology and W-CDMA technology. Prior to the merger of KTF into KT Corporation, we provided such services through KTF, which was formerly a consolidated subsidiary. On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. KTF obtained one of the three licenses to provide nationwide PCS service in June 1996 and began offering PCS service 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. Our PCS service is based on CDMA technology and utilizes 40 MHz of bandwidth in the 1800 MHz frequency. KTF also began offering HSDPA-based IMT-2000 services, which is a third-generation, high-capacity wireless Internet and video multimedia communications technology that allows an operator to provide to its subscribers significantly more bandwidth capacity. We currently offer such services under the brand name “SHOW.”
Revenues related to mobile service accounted for 33.8% of our operating revenues in 2009. In addition, our goods sold, which are primarily from mobile handset sales, accounted for 17.3% of our operating revenues in 2009. The following table shows selected information concerning the usage of our network during the periods indicated and the number of our 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)
We compete with SK Telecom, a mobile service provider that has a longer operating history than us, and LG Telecom that began its service at around the same time as KTF. As of December 31, 2009, we had approximately 15.0 million subscribers, which was second largest among the three mobile service providers. As of December 31, 2009, we had a market share of 31.3% of the mobile service market.
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We market our mobile services primarily through independent exclusive dealers located throughout Korea. As of December 31, 2009, there were approximately 2,200 shops managed by our independent exclusive dealers. In addition to assisting new subscribers to activate mobile service and purchase handsets, authorized dealers are connected to our database and are able to assist customers with account information. Although most of these dealers sell exclusively our products and services, 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 fee, usage charges and length of subscription. The handsets sold by us to the dealers cannot be returned to us 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.
In response to the diversification of our customers’ demands and their increasing sophistication, we have also selectively engaged in opportunities to expand our internal sales channels in recent years. In 2007, we established a wholly-owned subsidiary, KT M&S Co., Ltd., that operates approximately 140 customer plazas that engage in mobile service sales activities as well as provide a one-stop shop for a wide range of other services and products that we offer. We also operate a website to promote and advertise our products and services to the general public and in particular to younger customers who are more familiar with the Internet.
We conduct the screening process for new subscribers with great caution. A potential subscriber must meet all minimum 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.
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 18.0% of our operating revenues in 2009. 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:
Total Korean population (thousands) (1)
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)
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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.
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 five-year period ended December 31, 2009:
Incoming international long-distance calls
Outgoing international long-distance calls
Total
United States (20.9%), Japan (15.4%) and China (18.7%) accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2009. 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.
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 SK Broadband and LG Telecom (offering local, domestic long-distance and international long-distance services), Onse and SK Telink (offering international and domestic long-distance services), and SK Telecom 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 5.8% of our operating revenues in 2009. 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 phone services. The volume of calls made through Internet phone services has significantly increased since Internet phone service was first introduced in Korea in 1998. We provide Internet phone services that enable VoIP phone devices with broadband connection to make domestic and international calls. In order to differentiate our Internet phone services from our competitors’ services, we provide value-added services such as video communication, short message service, phone banking and a variety of traffic and local news information. In March 2009, we changed our brand name to “QOOK Internet Phone.” As of December 31, 2009, we had approximately 1.7 million subscribers.
Internet Services
Broadband Internet Access Service. Leveraging on our nationwide network of 405,528 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
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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 9.8% of our operating revenues in 2009. Our principal Internet access services include:
ADSL, VDSL, Ethernet and FTTH services under the “QOOK Internet” 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, PDAs and smart phones in hot-spot zones and QOOK Internet service in fixed-line environments. Nespot enables subscribers to access the Internet at up to 155 Mbps. We sponsored approximately 13,000 hot-spot zones nationwide for wireless connection as of December 31, 2009; 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 7.0 million fixed-line QOOK Internet subscribers and approximately 296 thousand Nespot service subscribers as of December 31, 2009. We commercially launched our WiBro service in June 2006, and we had approximately 287 thousand subscribers as of December 31, 2009. We also bundle our WiBro service with QOOK Internet and Nespot services at a discount in order to attract additional subscribers.
Our QOOK Internet service utilizes ADSL technology, which 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 QOOK Internet 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.
Other Internet-related Services. Our other Internet-related services focus primarily on providing infrastructure and solutions for business enterprises, as well as IP-TV and network portal services. Our other Internet-related services accounted for 2.6% of our operating revenues in 2009.
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We operate seven 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 wide-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.
We also offer high definition video-on-demand and real-time broadcasting IP-TV services under the brand name “QOOK TV.” Our IP-TV service offers 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 selected media streams on their television. A set-top box provides two-way communications on an IP network and decodes video streaming data. We expanded our IP-TV service to include real-time broadcasting on November 17, 2008. We had 1.2 million QOOK TV subscribers as of December 31, 2009.
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, 2007, 2008 and 2009, we leased 391,383 lines, 386,917 lines and 327,778 lines to domestic and international businesses. The data communication service accounted for 6.7% of our operating revenues in 2009.
We provide dedicated and secure broadband Internet connection service to institutional customers under the “Kornet” brand name. We provide high-speed connection up to 4.2 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 currently have two 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, telecommunications, video distribution and high-speed data communications services. Most of the direct-to-home satellite broadcasting transponders are utilized by Korea Digital Satellite Broadcasting Inc.
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We launched Koreasat 5 in August 2006, which replaced Koreasat 2. Koreasat 5, a combined civil and military communications satellite, is the first Korean satellite to provide commercial satellite services to neighboring countries, and the service zone of the twelve beam repeaters include Japan, China, Taiwan, the Philippines, the eastern part of China and the southern part of Russia. The design life of Koreasat 5 is fifteen years. The design life of Koreasat 3 is twelve years, and we plan to launch Koreasat 6 in November 2010 to replace Koreasat 3. We also lease satellite capacity to offer commercial satellite services to both domestic and international customers.
Miscellaneous Services
We also engage in various business activities that extend beyond telephone services and data communications services, including information technology and network services, real estate development and car rental business. Our miscellaneous services accounted for 5.8% of our operating revenues for 2009.
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 the individual needs of our customers in the public and private sectors.
We own land and real estate in various locations nationwide. Technological developments have enhanced the coverage area of individual telecommunications facilities, which enable us to better utilize our existing land and other real estate holdings. In recent years, we have engaged in the planning and development of commercial and office buildings and condominiums on our unused sites, as well as in the leasing of buildings we own.
We also operate KT Rental, a subsidiary that provides rental cars and equipment. On March 31, 2010, MBK Partners, a private equity firm, and we jointly acquired Kumho Rent-A-Car Co., Ltd. from Korea Express Inc. for(Won)289 billion, with each taking a 50% stake. Kumho Rent-A-Car was subsequently merged with the car rental business unit of KT Rental on June 1, 2010. As a result of the merger, Kumho Rent-A-Car owns approximately 55,000 cars and has a market share of 24% of the domestic car rental market.
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Revenues and Rates
The table below shows the percentage of our revenues derived from each category of services for each of the years from 2007 through 2009:
Mobile service
Fixed-line 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
Other Internet-related services (1)
Goods sold (2)
Data communications service (3)
Miscellaneous services (4)
Mobile Services
We derive revenues from mobile services principally from:
initial subscription fees;
monthly fees;
usage charges for outgoing calls;
usage charges for wireless data transmission;
contents download fees; and
value-added monthly service fees.
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We offer various rate plans, including those that offer a specified number of free airtime minutes per month in return for a higher monthly fee and those that are geared toward business customers. In September 2009, we reduced our initial subscription fee for new subscribers by 20% from(Won)30,000 to (Won)24,000. For our HSDPA-based SHOW service, we also charge monthly fees, voice calling usage charges and video calling usage charges. Under our standard rate plan for HSDPA-based SHOW service, we charge a monthly fee of(Won)12,000, voice calling usage charges of(Won)18 per ten seconds and video calling usage charges of(Won)30 per ten seconds. The following table summarizes charges for our representative HSDPA-based SHOW service plans:
SHOW KING Sponsor Standard
SHOW KING Sponsor Gold—Free 150 (1)
SHOW KING Sponsor Gold—Free 250 (1)
SHOW KING Sponsor Gold—Free 350 (1)
SHOW KING Sponsor Gold—Free 450 (1)
SHOW KING Sponsor Gold—Free 650 (1)
SHOW KING Sponsor Gold—Free 850 (1)
SHOW KING Sponsor Gold—Free 2000 (1)
A subscriber may also subscribe to an individually designed calling rate plan by mixing free voice calling airtime minutes and free text messages at a set monthly fee.
For our PCS service, we charge monthly fees and usage charges. Under our standard rate plan for PCS service, we charge a monthly fee of (Won)12,500 and usage charges of(Won)18 per ten seconds, and the subscriber is provided with five free minutes. The following table summarizes charges for our representative PCS service plans:
Standard
New Double Designated Numbers (1)
Roll Over (Free 200 Minutes) (2)
Roll Over (Free 550 Minutes) (2)
Roll Over (Free 800 Minutes) (2)
We also provide plans specially designed for elderly and pre-teen subscribers as well as special discounts to our subscribers with physical disabilities.
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In September 2009, we also introduced new rate plans specifically for smart phone users. The following table summarizes charges for our representative smart phone service plans:
SHOW Smart Sponsor Free 150 (2)
SHOW Smart Sponsor Free 250 (2)
SHOW Smart Sponsor Free 350 (2)
SHOW Smart Sponsor Free 450 (2)
SHOW Smart Sponsor Free 650 (2)
SHOW Smart Sponsor Free 850 (2)
SHOW KING Sponsor i—Slim (3)
SHOW KING Sponsor i—Lite (3)
SHOW KING Sponsor i—Talk (3)
SHOW KING Sponsor i—Medium (3)
SHOW KING Sponsor i—Special (3)
SHOW KING Sponsor i—Premium (3)
We have entered into arrangements with various partners including a leading discount store, a leading online shopping mall, a cosmetics company, oil refinery companies, an operator of cinema complexes, a leading motor company and Korea Railroad Corporation, and the subscribers of our mobile service may elect to receive monthly discount coupons, membership points or movie tickets in lieu of our monthly rate discounts.
In September 2009, we also launched QOOK&SHOW, a bundled package for individuals with specially designed mobile phones that can be used as an Internet phone and a wireless broadband Internet access device at home and at any wireless LAN zone and as a mobile phone and a wireless broadband Internet access device outside of such locations. Subscribers pay a monthly fee according to the package selected and pay a discounted rate of (Won)13 per 10 seconds instead of the standard W-CDMA rate of (Won)18 per 10 seconds to call a mobile phone and(Won)39 per 3 minutes instead of(Won)18 per 10 seconds to call another landline phone when they are at home or at any wireless LAN zone. In addition, the basic monthly fee of(Won)2,000 for the Internet phone service is waived. QOOK&SHOW subscribers may use wireless broadband Internet access service without any usage charges at home or at any wireless LAN zone. In order to promote our QOOK&SHOW package, we are offering additional incentives to all new subscribers of the package who sign up prior to July 15, 2010. We provide to such subscribers an additional monthly discount of (Won)2,500 as well as provide them with unlimited free calls to our Internet phone subscribers. Such additional discounts and benefits apply during the mandatory subscription period.
Fixed-line Telephone Services
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.
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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.
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
We also charge a monthly basic charge ranging from(Won)3,000 to (Won)5,200, depending on location, and a non-refundable service initiation fee of (Won)60,000 to new subscribers. The non-refundable service initiation fee is waived for the new subscribers who subscribe to our local service through our online application process. Until April 2001, we charged refundable service initiation deposits, which were refunded upon termination of service. As of December 31, 2009, we had (Won)697 billion of refundable service initiation deposits outstanding and 3,087 thousand subscribers who are enrolled under the mandatory deposit plan and are eligible to switch to the no deposit plan and receive their service initiation deposit back (less the non-refundable service initial fees).
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. We are able to set 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
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In recent years, we have begun to offer optional flat rate plans, discount plans and bundled product plans in order to mitigate the impact from lower usage of local and domestic long-distance calls and stabilize our revenues from fixed-line telephone services. For a discussion of our bundled products, see “—Bundled Products.” Some of our new flat rate and discount plans introduced in recent years include the following:
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 domestic 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 domestic long-distance calls at a rate of(Won)39 per three minutes;
starting in June 2008, a subscriber who elects to pay a monthly flat rate of(Won)12,500 is able to make free local and domestic long-distance calls after 9 p.m. on weekdays or at any time on weekends. Each month, the subscriber also receives a free movie ticket and free 60 minutes of land-to-mobile calls. The subscriber is also eligible to receive a discount of up to 20%, subject to the length of the mandatory subscription period;
starting in October 2009, a subscriber who elects to subscribe to our fixed-line phone service for a three year mandatory subscription period is able to make local and domestic long-distance calls at a flat rate of (Won)39 per three minutes; and
starting in October 2009, a subscriber who elects to subscribe to our broadband Internet access service or SHOW mobile service for a three year mandatory subscription period is able to make local, domestic long-distance and land-to-mobile calls of up to (Won)150,000 with a flat rate payment of(Won)50,000 or such calls up to(Won)50,000 with a flat rate payment of(Won)10,000. Standard rates apply to calls that exceed the capped amounts.
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. We are able to set 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
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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. 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.
The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes) to mobile operators for landline to mobile calls.
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.
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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.
Local access (1)
Single toll access (2)
Double toll access (3)
Source: The Korea Communications Commission.
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 monthly fixed fees to customers of broadband Internet service. 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 basis. The rates we charge for broadband Internet access service are subject to approval by the Korea Communications Commission.
The following table summarizes our charges for our representative broadband Internet service plans:
QOOK Internet Special (1)
QOOK Internet Lite (1)
WiBro 1G (2) (6)
WiBro 5G (3) (6)
WiBro 10G (4) (6)
WiBro 30G (5) (6)
QOOK TV Services. We charge our subscribers an installation fee per site of (Won)24,000, a set-top box rental fee ranging from (Won)2,000 to(Won)7,000 on a monthly basis and a monthly subscription fee. The rates we charge for QOOK TV services are subject to approval by the Korea Communications Commission.
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The following table summarizes charges for our representative QOOK TV service plans:
QOOK TV Video-on-Demand
QOOK TV Choice (2)
QOOK TV Education (3)
QOOK TV Thrift (4)
QOOK TV Standard (4)
QOOK TV Deluxe (4)
QOOK TV Skylife Economy (5)
QOOK TV Skylife Standard (5)
QOOK TV Skylife Premium (5)
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 line ranging from(Won)56,000 to (Won)1,940,000 depending on the capacity of the line.
Bundled Products
We utilize our extensive customer relationships and market knowledge to expand our revenue base by cross-selling our telecommunications products and services. We launched a new brand “QOOK” in March 2009 to promote our bundled products, and we plan to gradually unify brand names for our various service offerings as QOOK and SHOW. In order to attract additional subscribers to our new services, we bundle our services, such as our broadband Internet access service with WiBro, IP-TV, Internet phone, fixed-line telephone service and mobile services, at a discount.
The following table summarizes our various bundled packages that we currently offer. The packages require subscribers to agree to a subscription period of three years.
Internet / Internet Phone / Mobile
10% to 50%, subjectto the number ofsubscribers whoparticipate (up to 5mobile numbers)
50%
Internet / Fixed-Line Phone / Mobile
Internet / IP-TV / Mobile (4)
Internet / Internet Phone / IP-TV / Mobile(4)
Internet / Fixed-Line Phone / IP-TV / Mobile (4)
Internet / Fixed-Line or Internet Phone / IP-TV(5)
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In order to promote our bundled packages, we are offering additional incentives to all subscribers who sign up prior to October 15, 2010 to packages that include mobile service with fixed-line phone or Internet phone service. We provide to such subscribers unlimited free voice calling to their immediate family members. Such additional discounts apply during the mandatory subscription period.
We have also entered into partnerships with a leading online shopping mall, an operator of cinema complexes, a satellite broadcasting service operator, a life insurance company and a manufacturer of health drinks, and our subscribers may elect to receive monthly gift certificates, music downloads, online game money or movie tickets with value of up to (Won)50,000 per month in lieu of monthly rate discounts.
We believe that subscribers who sign up for bundled products are less likely to cancel our services than subscribers who subscribe to individual services. Subscription fees paid for our bundled products are allocated to each service in proportion to their fair value and the allocated amount is recognized as revenue according to the revenue recognition policy for each service.
Competition
Competition in the telecommunications sector in Korea is intense. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. In particular, SK Telecom acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband. The acquisition enables SK Telecom to provide fixed-line telecommunications, broadband Internet access and IP-TV services together with its mobile telecommunications services. On January 1, 2010, LG Dacom and LG Powercom merged into LG Telecom Co., Ltd. The merger enables LG Telecom to provide a similar range of services as SK Telecom and us.
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.
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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.
Mobile Service. Competition in the mobile telecommunications industry in Korea is intense among SK Telecom, LG Telecom and us. Such competition has intensified in recent years due to the implementation of mobile number portability, which enabled 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 who agree to minimum subscription periods.
The following table shows the market share in the mobile telecommunications market as of the dates indicated:
December 31, 2007
December 31, 2008
December 31, 2009
We offer various rate plans, including those that offer a specified number of free airtime minutes per month in return for a higher monthly fee and those that are geared toward business customers. Our competitors also offer similar plans at competitive rates.
Local Telephone Service. We compete with SK Broadband and LG Telecom in the local telephone service business. SK Broadband began providing local telephone service in 1999, followed by LG Telecom 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 as of the dates indicated:
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.
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Domestic Long-distance Telephone Service. We compete with SK Broadband, LG Telecom, Onse and SK Telink in the domestic long-distance market. LG Telecom began offering domestic long-distance service in 1996, followed by Onse in 1999 and SK Broadband and SK Telink in 2004. The following table shows the market shares in the domestic long-distance market as of the dates 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 10 seconds with the standard rates of our competitors as of December 31, 2009:
30 kilometers or longer
International Long-Distance Telephone Service. Four companies, SK Broadband, LG Telecom, Onse and SK Telink, directly compete with us in the international long-distance market. LG Telecom began offering international long-distance service in 1991, followed by Onse in 1997 and SK Broadband 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 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, 2009:
United States
Japan
China
Australia
Great Britain
Germany
Broadband Internet Access Service. The Korean broadband Internet access market has experienced significant growth in the past decade. SK Broadband entered the broadband market in 1999 offering both HFC and ADSL services, and we entered the market with our ADSL services in
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1999, followed by Dreamline, Onse and LG Telecom. 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 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 QOOK Internet Lite service with three year mandatory subscription period with fees of our competitors for comparable services as of December 31, 2009:
Monthly subscription fee
Monthly modem rental fee
Additional installation fee upon moving
Data Communication Service. We had a monopoly in domestic data communication service until 1994, when LG Telecom was authorized to provide the leased-line service. The data communications service market has become more competitive with limited growth during the past decade, and we primarily compete with SK Broadband and LG Telecom.
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.
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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. 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 Korea Communications Commission also has the authority to regulate the IP media market, including IP-TV services. We began offering IP-TV services with real-time high definition broadcasting on November 17, 2008. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IP media broadcasting business must obtain a license from the Korea Communications Commission. The ownership of the shares of an IP media broadcasting company by a newspaper, a news agency or a foreigner is limited, and broadcasting of certain contents must obtain additional approval of the Korea Communications Commission.
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
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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 2009, the Korea Communications Commission designated us for local telephone 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 the telecommunications equipment manufacturing business and the 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.
In May 2010, the Korea Communications Commission issued a guideline that limits the marketing expenditure amounts of telecommunication service providers in Korea to 22% of their revenues, with the restrictions applicable to fixed-line and mobile segments to be calculated separately. However, up to(Won)100 billion of the marketing expenditures may be applied to either segment at the discretion of the service provider. The calculation of marketing expenditure amounts under the guideline excludes advertising expenses and the calculation of revenue amounts excludes revenues from handset sales. To encourage compliance with the non-binding guideline, the Korea Communications Commission plans to release the marketing expenditure amounts of each service provider on a quarterly basis. The Korea Communications Commission may periodically adjust the guideline to accommodate changes in market conditions.
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
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recommending to network service providers that they invest in research and development or that they contribute to telecommunications research institutes in Korea.
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, 2009, 46.2% 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
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
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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 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. More than 70% of our subscribers as of December 31, 2009 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 plants 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 networks. 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 Apple Inc.
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Mobile Networks
Our mobile network architecture 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 our mobile networks as of December 31, 2009:
Mobile switching centers
Base station controllers
Base transceiver stations
Indoor and outdoor repeaters
We have 40 MHz of bandwidth in the 1,800 MHz spectrum to provide PCS services based on CDMA wireless network standards and another 40 MHz of bandwidth in the 2,000 MHz spectrum to provide IMT-2000 services based on W-CDMA wireless network standards. We have also installed an intelligent network on our mobile network infrastructure to provide a wide range of advanced call features and value-added services.
Exchanges
Exchanges include local exchanges and “toll” exchanges that connect local exchanges to long-distance transmission facilities. We had 26.0 million lines connected to local exchanges and 1.7 million lines connected to toll exchanges as of December 31, 2009.
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 for building our next generation broadband convergence network by 2021. As of December 31, 2009, approximately 80% 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 4.2 Tbps as of December 31, 2009. 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 QOOK TV, WiBro, QOOK Internet Phone, upgraded VoIP services and other Internet protocol services. As of December 31, 2009, our Internet protocol premium network had 1,227,000 lines installed to provide voice over Internet protocol services and a total capacity to handle up to 415 Gbps of video-on-demand services. We plan to continue to expand our Kornet and Internet protocol premium network in 2010.
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Access Lines
As of December 31, 2009, we had 12.2 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, 2009, we had approximately 10.2 million broadband lines with speeds 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 405,528 kilometers of fiber optic cables as of December 31, 2009 of which 86,814 kilometers of fiber optic cables are used to connect our backbone network and 318,714 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 enhanced our backbone network connecting six major cities in Korea by implementing an optical cross-connector (OXC) architecture in 2008 and are in the process of building 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 55 relay sites.
International Network
Our international network infrastructure consists of both submarine cables and satellite transmission systems, including two submarine cable-landing stations in Busan and Keoje and two satellite teleports in Kumsan and Boeun. Data services such as international private lease circuits, Internet protocol and very small aperture terminals are provided through submarine cables and satellite transmission. In order to guarantee high quality services to our end customers, our submarine cables and satellite transmission systems are linked to various points-of-presence in the United States, Asia and Europe. In addition, our international telecommunications networks are directly linked to approximately 278 telecommunications service providers in various international destinations and are routed through our three international switching centers in Seoul, Daejeon and Busan.
Our international Internet backbone with capacity of 130 Gbps is connected to approximately 190 Internet service providers through our two Internet gateways in Heawha and Guro. In addition, we operate a video backbone with capacity of 665 Mbps to transmit video signals from Korea to the United States, Japan and Singapore.
Satellites
In order to provide broadcasting, video distribution and broadband data services in select areas, we operate two 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.”
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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 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;
a 20.0% interest in the 500-kilometer Korea-Japan Cable Network linking Korea and Japan, activated since March 2002.; and
a 13.1% interest in the 16,500-kilometer Trans Pacific Express Cable Network linking Korea, China, Taiwan and the United States, activated since September 2008.
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
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 total equity as of December 31, 2008 and 2009 and the results of our operations for each of the years in the three-year period ended December 31, 2009, in Note 40 to the Consolidated Financial Statements.
Overview
We are an integrated provider of telecommunications services. Our principal services include mobile service, fixed-line telephone services, Internet services including broadband Internet access service and data communication service. The principal factors affecting our revenues from these
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services have been our rates for, and the usage volume of, these services, as well as the number of subscribers. For information on rates we charge for our services, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates.” We determined our operating segments after the merger with KTF on June 1, 2009 as (i) the Personal Customer Group, which engages in mobile and wireless data communications services, (ii) the Home Customer Group and Enterprise Customer Group, which engage in fixed-line telephone services, Internet services including broadband Internet access service and data communication service, and (iii) others, which include information technology and network services, real estate development and car rental businesses.
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:
merger of KTF into KT Corporation on June 1, 2009;
employee reductions and changes in severance and retirement benefits;
IMT-2000 service license payments;
changes in the rate structure for our services;
developing and launching WiBro service;
deployment of FTTH; and
implementation of IFRS.
As a result of these factors, our financial results in the past may not be indicative of future results or trends in those results.
Merger of KTF into KT Corporation
On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. The merger was consummated pursuant to a “comprehensive stock transfer” under Article 360-15 of the Korean Commercial Code, whereby KTF common stockholders received 0.7192335 share of KT Corporation common stock for every one share of KTF common stock they owned.
The success of the merger of KTF with KT Corporation will depend, in part, on our ability to realize the anticipated synergies, growth opportunities and, to a lesser extent, cost savings from combining these two companies. The realization of these anticipated benefits may be impeded, delayed or reduced as a result of numerous factors, some of which are outside our control. Some of our challenges include difficulties in integrating the operations of KTF with those of KT Corporation, including information systems, personnel, policies and procedures, and in reorganizing or reducing overlapping personnel, operations, marketing networks and administrative functions.
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Employee Reductions and Changes in Severance and Retirement Benefits
We sponsor a voluntary early retirement plan where we provide additional financial incentives for our employees who have been employed by us for more than 20 years to retire early, as part of our efforts to improve operational efficiencies. In 2007 and 2008, 510 employees and 1,141 employees, respectively, retired under our voluntary early retirement plan. In 2009, in addition to our usual voluntary early retirement plan, we held a special voluntary early retirement program in December 2009 where we received applications for voluntary early retirement from employees who had been employed by us for more than 15 years and provided them with additional financial incentives to retire early. The special voluntary early retirement program resulted in the early retirement of 5,992 employees out of 25,340 eligible employees. In aggregate, 6,515 employees retired in 2009 under the voluntary early retirement plan and the special voluntary early retirement program. We recorded severance indemnities relating to such voluntary early retirement plan and special voluntary early retirement program of(Won)41 billion in 2007, (Won)97 billion in 2008 and (Won)878 billion in 2009. We believe that we will be able to achieve additional operational efficiencies starting in 2010 as a result of our optimized employee headcount level.
IMT-2000 Service License Payments
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,(Won)110 billion in 2008 and (Won)130 billion in 2009, and we are obligated to pay the remaining (Won)320 billion as follows:(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. We began offering our HSDPA-based IMT-2000 services nationwide in March 2007 under the brand name “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 increased the portion of fixed income and stabilized 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. We also provide bundled packages of our various services at a discount in order to attract additional subscribers to our new services. We launched a new brand “QOOK” in March 2009 to promote our bundled products, and we currently bundle our broadband Internet access service with WiBro, IP-TV, Internet phone, fixed-line telephone service and mobile services at a discount. For a discussion of adjustments in our rate structure, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates.”
Developing and Launching WiBro Service
In March 2005, we acquired a license to provide wireless broadband Internet access service for(Won)126 billion. The license is valid for seven years from the grant date and the license amount is amortized over the remaining contractual life commencing from June 2006. We commercially launched our Wibro service in June 2006 and had approximately 287 thousand subscribers as of December 31, 2009. We believe that additional amounts of capital expenditures and research and development will
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be required to complete the buildout of our WiBro service network. We plan to spend approximately(Won)265 billion in capital expenditures in 2010 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)301 billion in capital expenditures in 2010 to upgrade our broadband network to FTTH, which we may adjust after periodic assessments.
Transition to IFRS Starting in 2011
In March 2007, the Financial Services Commission and the Korea Accounting Institute announced a road map for the adoption of the Korean equivalent of International Financial Reporting Standards (“Korean IFRS”), pursuant to which all listed companies in Korea will be required to prepare their annual financial statements under Korean IFRS beginning in 2011. All standards and interpretations issued by the International Accounting Standards Board (“IASB”), and the International Financial Reporting Interpretations Committee have been adopted by the Korean IFRS. In preparation of such adoption, we began preparing our internal financial statements under both Korean GAAP and Korean IFRS starting in January 2010.
Critical Accounting Policies
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.
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 and equipment;
impairment of long-lived assets, including goodwill assets;
impairment of investment securities;
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income taxes; and
valuation of derivatives.
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, 2009 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)2.7 billion as of December 31, 2009.
Useful Lives of Property and Equipment
Property 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 purposes 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. A decrease of remaining estimated useful life by one year of our property and equipment would result in an increase of depreciation expense of approximately (Won)373 billion in 2009.
Impairment of Long-lived Assets
Long-lived assets generally consist of property 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.
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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, and 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 2009. The use of different assumptions within our cash flow model could result in different amounts for the IMT-2000 frequency usage right.
Impairment of Goodwill Assets
Goodwill represents the excess of purchase price paid over the fair value assigned to the net assets of acquired businesses. The determination of the fair values of goodwill assets is based on management’s judgment on the expected cash flows of the goodwill assets, taking market demand, competition and other economic factors into consideration.
The determination of impairments of goodwill assets involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment. Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the telecommunications industry, a decline in our expected future cash flows, changes in the future availability of financing, technological obsolescence, discontinuance of services, current replacement costs and prices paid in comparable transactions. The determination of impairment of goodwill assets requires a significant amount of management’s judgment.
We evaluate the carrying value of goodwill annually or more frequently if events or changes in circumstances indicate that the carrying amount may exceed estimated fair value. Goodwill impairment testing is a two-step process. The first step involves determining the fair value of the reporting unit and comparing that to the book value. If the fair value exceeds the book value, then no further testing is required. If the fair value is less than the book value, then a second step is performed. In the second step, the fair values of all of the assets and liabilities of the reporting unit, including those that may not be currently recorded, are determined. The difference between the sum of all of those fair values and the overall reporting unit’s fair value is a new implied goodwill amount that is compared to the recorded goodwill. If implied goodwill is less than the recorded goodwill, then impairment to the recorded goodwill is recorded.
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.
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.
Valuation of Derivatives
We record rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. Gains and losses that result from the change in the fair value of derivative instruments are recognized in current earnings. However, for derivative instruments that qualify for cash flow hedge accounts, the effective portion of the gain or loss on the derivative instruments are recorded as gain (loss) on valuation of derivatives for cash flow hedge included in accumulated other comprehensive income (loss).
Significant management judgment is involved in determining the fair value of derivative instruments. The estimates and assumptions used by our management to determine fair value can be impacted by many factors, such as the credit quality of each derivative counterparty, interest rate, market volatility or the overall condition of the economy and its impact on the capital markets. Any changes in these assumptions could significantly affect the valuation and timing of recognition of valuation losses classified as other than temporary.
Operating Revenues and Operating Expenses
Operating Revenues
Our operating revenues primarily consist of:
fees related to our mobile services, including initial subscription fees, monthly fees, usage charges for outgoing calls, usage charges for wireless data transmission, contents download fees and value-added monthly service fees;
fees from our fixed-line telephone services, including:
local service revenues, primarily consisting of (i) basic monthly charges and monthly usage charges (or fixed monthly charges for discount plans), (ii) revenues from value-added services, including local telephone directory assistance, call waiting and caller identification services, (iii) interconnection fees we charge to fixed-line and mobile service providers for their use of our local network in providing their services and (iv) revenues from local calls placed from public telephones;
non-refundable installation fees;
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domestic long-distance service revenues, primarily consisting of (i) monthly usage charges (or fixed monthly charges for discount plans), (ii) interconnection fees we charge to fixed-line and mobile service providers and voice resellers for their use of our domestic long-distance network in providing their services and (iii) revenues from domestic long-distance calls placed from public telephones;
international long-distance service revenues, primarily consisting of (i) amounts we bill to our customers for outgoing calls made to foreign countries, (ii) amounts we bill to foreign telecommunications carriers for connection to the domestic telephone network in respect of incoming calls at the applicable settlement rate, (iii) amounts we charge to fixed-line and mobile service providers and voice resellers as interconnection fees for using our international network in providing their services and (iv) other revenues, including revenues from international calls placed from public telephones and international leased lines; and
land-to-mobile interconnection revenues;
Internet service revenues which consist of:
broadband Internet access service revenues, primarily consisting of installation fees and basic monthly charges; and
other Internet-related service revenues related to our infrastructure and solution services for business enterprises, IP-TV and network portal services.
revenues from goods sold that are generated primarily through sale of mobile handsets and specially designed phones for fixed-line and mobile convergence services;
data communications service revenues, primarily consisting of installation fees and basic monthly charges for our leased line services and Kornet Internet connection service and revenues from our satellite services; and
miscellaneous revenues that are primarily derived from information technology and network services, real estate development and car rental businesses.
Operating Expenses
Our operating expenses primarily include:
cost of goods sold, primarily consisting of our sale of mobile handsets and specially designed phones for fixed-line mobile convergence services;
depreciation and amortization expenses incurred primarily in connection with our telecommunications network facilities;
salaries and related costs, including severance indemnities that are a lump-sum amount paid to employees upon departure who have been employed by us for more than one year, share-based payments and employee welfare expenses;
sales commissions, primarily consisting of commissions to independent dealers related to procurement of mobile subscribers and mobile handset sales;
commissions, primarily consisting of payments for third-party outsourcing services, including commissions to the call center staff;
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interconnection charges, which are interconnection payments to mobile service providers for calls from landline users and our mobile subscribers to our competitors’ mobile service subscribers; and
promotion expenses that consist primarily of handset subsidies that we offer to purchasers of new handsets who agree to minimum subscription periods.
Operating Results—2008 Compared to 2009
The following table presents selected income statement data and changes therein for 2008 and 2009.
Net non-operating income (expense)
Income from continuing operations before income tax expense
Income tax expense on continuing operations
Net income
The following table presents a breakdown of our operating revenues and changes therein for 2008 and 2009.
Mobile services
Local service revenues
Non-refundable service installation fee
Domestic long-distance revenues
International long-distance revenues
Land-to-mobile interconnection revenues
Broadband internet access service
Other Internet-related services
Goods sold
Data communication services
Other
Total operating revenues
Total operating revenues increased by 0.3%, or(Won)56 billion, from (Won)19,593 billion in 2008 to (Won)19,649 billion in 2009 primarily due to increases in our mobile handset sales, mobile service revenues and other operating revenues, the impact of which was partially offset by decreases in our fixed-line telephone service revenues, Internet service revenues and data communication service revenues.
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Mobile service revenues increased by 3.5%, or(Won)222 billion, from (Won)6,424 billion in 2008 to (Won)6,646 billion in 2009 primarily due to a 4.5% increase in the number of subscribers to 15.0 million as of December 31, 2009 from 14.4 million as of December 31, 2008.
Our fixed-line telephone service revenues decreased by 9.7%, or(Won)503 billion, from (Won)5,200 billion in 2008 to (Won)4,697 billion in 2009 primarily due to decreases in land-to-mobile interconnection revenues, domestic long-distance revenues and local service revenues. Specifically:
Land-to-mobile interconnection revenues decreased by 17.5%, or(Won)244 billion, from (Won)1,391 billion in 2008 to (Won)1,147 billion in 2009 primarily due to an increase in the volume of calls between mobile subscribers, which in turn reduced the volume of calls between landline users to mobile subscribers.
Domestic long-distance revenues decreased by 19.1%, or (Won)112 billion, from (Won)587 billion in 2008 to(Won)475 billion in 2009 primarily due to a decrease in the number of domestic long-distance call minutes in 2009 compared to 2008 primarily due to the substitution effect from increase in usage of mobile telephone services and Internet phone services. The effect of such decreases was partially offset by participation by some of our subscribers in optional flat rate plans.
Local service revenues decreased by 2.8%, or (Won)78 billion, from (Won)2,752 billion in 2008 to(Won)2,674 billion in 2009. The number of local call pulses in 2009 compared to 2008 decreased by 32.5% primarily due to the substitution effect from increase in usage of mobile telephone services and the Internet phone services. However, the effect of such decreases was substantially offset by participation by some of our subscribers in optional flat rate plans, as well as an increase in revenues from value-added services.
Our Internet service revenues decreased by 1.3%, or(Won)32 billion, from (Won)2,481 billion in 2008 to (Won)2,449 billion in 2009 primarily due to a decrease in broadband Internet access service revenues, the impact of which was partially offset by an increase in other Internet-related service revenues. Specifically:
Broadband Internet access service revenues decreased by 4.9%, or(Won)99 billion, from (Won)2,041 billion in 2008 to (Won)1,942 billion in 2009, primarily due to discounts offered to long-term subscribers and bundled products in 2009. The effect of such decreases was offset in part by an increase in the number of fixed-line QOOK Internet subscribers from 6.7 million subscribers as of December 31, 2008 to 7.0 million subscribers as of December 31, 2009.
Other Internet-related service revenues increased by 15.2%, or(Won)67 billion, from (Won)440 billion in 2008 to (Won)507 billion in 2009 primarily due to increases in revenues from our IP-TV services.
Goods Sold
Revenues from goods sold increased by 10.8%, or (Won)331 billion, from(Won)3,066 billion in 2008 to(Won)3,397 billion in 2009 primarily due to an increase in the number of HSDPA-based IMT-2000 service compatible handsets and smart phones sold, including the Apple iPhone that we launched in November 2009.
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Data Communications
Data communications service revenues decreased by 1.6%, or(Won)22 billion, from (Won)1,336 billion in 2008 to (Won)1,314 billion in 2009 primarily due to service fee discounts offered to government agencies and a decrease in revenues related to Kornet broadband Internet connection service to institutional customers resulting from the expiration of certain leased-line contracts.
Others
Other operating revenues increased by 5.5%, or (Won)60 billion, from(Won)1,086 billion in 2008 to(Won)1,146 billion in 2009 primarily due to an increase in revenues from real estate development activities.
The following table presents a breakdown of our operating expenses and changes therein for 2008 and 2009.
Salaries and wages
Severance indemnities
Depreciation
Commissions
Interconnection charges
Cost of goods sold
Promotion expenses
Sales commissions
Others (1)
Total operating expenses
Total operating expenses increased by 2.9%, or (Won)530 billion, from(Won)18,153 billion in 2008 to(Won)18,683 billion in 2009 primarily due to increases in severance indemnities related to special voluntary early retirement programs and cost of goods sold, the impact of which was partially offset by decreases in depreciation, sales commissions and commissions. Specifically:
Our severance indemnities increased significantly by 212.5%, or(Won)767 billion, from (Won)361 billion in 2008 to (Won)1,128 billion in 2009 primarily due to an increase in severance indemnities relating to a special voluntary early retirement program. In December 2009, we held a special voluntary early retirement program where we received applications for voluntary early retirement from employees who had been employed by us for more than 15 years and provided them with additional financial incentives to retire early.
Cost of goods sold increased by 31.9%, or (Won)754 billion, from (Won)2,365 billion in 2008 to(Won)3,119 billion in 2009 primarily due to an increase in the sales of Internet phone handsets as well as an increase in the number of high-end HSDPA-compatible handsets and smart phones sold, including the Apple iPhone that we launched in November 2009.
These factors were partially offset by the following:
Depreciation decreased by 10.6%, or (Won)340 billion, from (Won)3,214 billion in 2008 to (Won)2,874 billion in 2009 reflecting a general decrease in our capital expenditures in recent years.
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Sales commissions, which primarily relate to procurement of mobile subscribers and mobile handset sales by our independent dealers, decreased by 15.3%, or(Won)325 billion, from (Won)2,130 billion in 2008 to (Won)1,805 billion in 2009 primarily due to a decrease in the number of new mobile subscribers.
Operating Income
Due to the factors described above, our operating income decreased by 32.9%, or(Won)474 billion, from (Won)1,440 billion in 2008 to (Won)966 billion in 2009. Our operating margin, which is operating income as a percentage of operating revenues, decreased from 7.4% in 2008 to 4.9% in 2009.
Non-Operating Income (Expenses)
The following table presents a breakdown of our non-operating income and expenses on a net basis and changes therein for 2008 and 2009.
Interest income
Interest expense
Net foreign currency transaction gain (loss)
Net foreign currency translation gain (loss)
Net gain (loss) on disposal of equity method investment securities
Net loss on disposal of property and equipment
Reversal of impairment loss on property and equipment
Net gain on settlement of derivatives
Net gain (loss) on valuation of derivatives
Net other gains (losses)
Net non-operating income (expenses)
Our net non-operating expenses decreased by 65.8%, or (Won)482 billion, from(Won)733 billion in 2008 to (Won)251 billion in 2009 primarily due to net foreign currency translation loss in 2008 compared to net foreign currency translation gain in 2009, an increase in reversal of impairment loss on property and equipment and net loss on disposal of equity method investment securities in 2008 compared to net gain on disposal of equity method investment securities in 2009, the impact of which was partially offset by net gain on valuation of derivatives in 2008 compared to net loss on valuation of derivatives in 2009. Specifically:
We recorded net foreign currency translation loss of (Won)762 billion in 2008 compared to net foreign currency translation gain of (Won)223 billion in 2009 as the Market Average Exchange Rate of the Won against the U.S. dollar depreciated from (Won)938.2 to US$1.00 as of December 31, 2007 to(Won)1,257.5 to US$1.00 as of December 31, 2008 but appreciated to(Won)1,167.6 to US$1.00 as of December 31, 2009. The impact of such foreign currency translation gain/loss was largely offset by loss/gain from valuation of derivatives discussed below.
Our reversal of impairment loss on property and equipment increased sixteen-fold, or(Won)97 billion, from (Won)6 billion in 2008 to (Won)103 billion in 2009 primarily due to an increase in compensation that we received from third parties for relocation of our property and equipment that resulted in impairment loss.
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We recorded net loss on disposal of equity method investment securities of(Won)0.1 billion in 2008 compared to net gain on disposal of equity method investment securities of(Won)62 billion in 2009. We recorded such gain in 2009 primarily due to the sale of our interest in U-Mobile. We sold all of our interest in U-Mobile with a book value of (Won)65 billion for US$100 million to a third party in September 2009.
We recorded net gain on valuation of derivatives of(Won)640 billion in 2008 compared to net loss on valuation of derivatives of(Won)174 billion in 2009 primarily due to gains and losses from our combined interest rate currency swap contracts as the exchange rate of the Won against the U.S. dollar fluctuated as discussed above.
Income Taxes Expense on Continuing Operations
Our income tax expense on continuing operations decreased by 35.8%, or (Won)60 billion, from (Won)168 billion in 2008 to(Won)108 billion in 2009 primarily due to decreases from changes in deferred income tax assets unrecognized related to equity method investment securities as well as tax rate changes, the impact of which was partially offset by a decrease in tax credits. See Note 26 to the Consolidated Financial Statements. Our effective tax rate decreased from 23.7% in 2008 to 15.1% in 2009. We had net deferred income tax assets of (Won)551 billion as of December 31, 2009.
Due to the factors described above, our net income increased by 18.9%, or (Won)97 billion, from(Won)513 billion in 2008 to (Won)610 billion in 2009. Our net income margin, which is net income as a percentage of operating revenues, increased from 2.6% in 2008 to 3.1% in 2009.
Operating Results—2007 Compared to 2008
The following table presents selected income statement data and changes therein for 2007 and 2008.
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The following table presents a breakdown of our operating revenues and changes therein for 2007 and 2008.
Broadband Internet services
Total operating revenues increased by 5.3%, or(Won)979 billion, from (Won)18,614 billion in 2007 to (Won)19,593 billion in 2008 primarily due to increases in our mobile handset sales, mobile service revenues, other operating revenues, Internet service revenues and data communication service revenues, the impact of which was partially offset by a decrease in our fixed-line telephone service revenues.
Mobile service revenues increased by 7.4%, or (Won)443 billion, from(Won)5,981 billion in 2007 to(Won)6,424 billion in 2008 primarily due to a 4.7% increase in the number of subscribers from 13.7 million subscribers as of December 31, 2007 to 14.4 million subscribers as of December 31, 2008, as well as an increase in wireless data usage. The average monthly revenue per subscriber of KT increased from(Won)38,627 in 2007 to (Won)39,487 in 2008.
Our fixed-line telephone service revenues decreased by 7.0%, or(Won)392 billion, from (Won)5,592 billion in 2007 to (Won)5,200 billion in 2008 primarily due to decreases in land-to-mobile interconnection revenues, local service revenues and domestic long-distance revenues. Specifically:
Land-to-mobile interconnection revenues decreased by 12.4%, or(Won)197 billion, from (Won)1,588 billion in 2007 to (Won)1,391 billion in 2008 primarily due to increased volume of calls between mobile subscribers, which in turn reduced the volume of calls between landline users to mobile subscribers.
Local service revenues decreased by 3.6%, or (Won)104 billion, from (Won)2,856 billion in 2007 to(Won)2,752 billion in 2008 primarily due to a 15.2% decrease in the number of local call pulses
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in 2008 compared to 2007 attributable to the substitution effect from increase in usage of mobile telephone services and the Internet phone services. The effects of such decrease was partially offset by participation by some of our subscribers in optional flat rate plans, as well as an increase in revenues from value-added services.
Domestic long-distance revenues decreased by 12.8%, or (Won)86 billion, from (Won)673 billion in 2007 to(Won)587 billion in 2008 primarily due to a decrease in the number of domestic long-distance call minutes in 2008 compared to 2007 primarily due to the substitution effect from increase in usage of mobile telephone services and Internet phone services. The effect of such decrease was partially offset by participation by some of our subscribers in optional flat rate plans.
Our Internet service revenues increased by 4.6%, or(Won)109 billion, from (Won)2,372 billion in 2007 to (Won)2,481 billion in 2008 primarily due to an increase in other Internet-related service revenues, the impact of which was partially offset by a decrease in broadband Internet access service revenues. Specifically:
Other Internet-related service revenues increased by 45.7%, or(Won)138 billion, from (Won)302 billion in 2007 to (Won)440 billion in 2008 primarily due to an increase in revenues related to our Bizmeka service and Internet data centers; and
Broadband Internet access service revenues decreased by 1.4%, or(Won)29 billion, from (Won)2,070 billion in 2007 to (Won)2,041 billion in 2008, primarily due to special discounts offered to long-term subscribers and bundled products in 2008, which was offset in part by an increase in the number of subscribers.
Revenues from goods sold increased by 25.1%, or(Won)615 billion, from (Won)2,451 billion in 2007 to (Won)3,066 billion in 2008 primarily due to an increase in the number of HSDPA-based IMT-2000 service compatible handsets and specially designed phones for fixed-line services sold.
Data communications service revenues increased by 5.1%, or(Won)65 billion, from (Won)1,271 billion in 2007 to (Won)1,336 billion due to an increase in demand for our virtual private network service.
Other operating revenues increased by 14.7%, or (Won)139 billion, from(Won)947 billion in 2007 to(Won)1,086 billion in 2008 primarily due to an increase in revenues from our real estate development activities and KT Capital.
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The following table presents a breakdown of our operating expenses and changes therein for 2007 and 2008.
Total operating expenses increased by 7.7%, or (Won)1,294 billion, from(Won)16,859 billion in 2007 to(Won)18,153 billion in 2008 primarily due to increases in cost of goods sold, promotion expenses, commissions and sales commissions. Specifically:
Our cost of goods sold increased by 26.6%, or (Won)497 billion, from (Won)1,868 billion in 2007 to(Won)2,365 billion in 2008 primarily as a result of an increase in the sales of HSDPA-compatible handsets and specially designed phones for fixed-line services.
Our promotion expenses, which consist primarily of handset subsidies, increased by 44.2%, or(Won)331 billion, from (Won)749 billion in 2007 to (Won)1,080 billion in 2008 primarily due to an increase in the sales volume of HSDPA-compatible handsets.
Our commissions, which primarily relate to payments for third-party outsourcing services, including commissions to the call center staff, increased by 29.1%, or(Won)305 billion, from (Won)1,049 billion in 2007 to (Won)1,354 billion in 2008, primarily due to outsourcing of our activation and installation activities to third-parties.
Our sales commissions, which primarily relate to procurement of mobile subscribers and mobile handset sales by independent dealers, increased by 12.0%, or(Won)228 billion, from (Won)1,902 billion in 2007 to (Won)2,130 billion in 2008, primarily due to an increase in the number of our SHOW subscribers as well as an increase in sales volume of HSDPA-compatible handsets.
Due to the factors described above, our operating income decreased by 17.9%, or(Won)315 billion, from (Won)1,755 billion in 2007 to (Won)1,440 billion in 2008. Our operating margin, which is operating income as a percentage of operating revenues, decreased from 9.4% in 2007 to 7.4% in 2008.
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The following table presents a breakdown of our non-operating income and expenses on a net basis and changes therein for 2007 and 2008.
Net foreign currency translation loss
Gain on disposal of useless materials
Reversal of accrued provisions
Net gain (loss) on settlement of derivatives
Net gain on valuation of derivatives
Net other losses
Net total non-operating income (expenses)
Our net non-operating expenses increased by 146.8%, or (Won)436 billion, from(Won)297 billion in 2007 to (Won)733 billion in 2008 primarily due to an increase in net foreign currency translation loss and a decrease in reversal of accrued provisions, the impact of which was partially offset by a large increase in net gain on valuation of derivatives in 2008. Specifically:
Our net foreign currency translation loss increased significantly by(Won)755 billion, from (Won)7 billion in 2007 to (Won)762 billion in 2008, as the Market Average Exchange Rate of the Won against the U.S. dollar depreciated from(Won)929.6 to US$1.00 as of December 31, 2006 to(Won)938.2 to US$1.00 as of December 31, 2007 and depreciated further to(Won)1,257.5 to US$1.00 as of December 31, 2008. The impact of such foreign currency translation losses was largely offset by gains from valuation of derivatives discussed below.
Our reversal of accrued provisions decreased by 92.2%, or(Won)47 billion, from (Won)51 billion in 2007 to (Won)4 billion in 2008 primarily as a result of a decrease in the amount of reversal of accrued provisions relating to points accrued under our KT membership point program.
Our net gain on valuation of derivatives increased twenty-five fold, or by(Won)615 billion, from (Won)25 billion in 2007 to (Won)640 billion in 2008 primarily due to gains from our combined interest rate currency swap contracts as the exchange rate of the Won against the U.S. dollar depreciated as discussed above.
Our income tax expense on continuing operations decreased by 53.0%, or(Won)189 billion, from (Won)357 billion in 2007 to (Won)168 billion in 2008 primarily due to an increase in tax credits, the impact of which was partially offset by an increase in changes in deferred income tax assets unrecognized related to equity method investment securities as well as an increase in tax rate changes. See Note 26 to the Consolidated Financial Statements. Our effective tax rate decreased from 24.5% in 2007 to 23.7% in 2008. We had net deferred income tax assets of (Won)485 billion as of December 31, 2008.
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Due to the factors described above our net income decreased by 56.2%, or(Won)658 billion, from (Won)1,171 billion in 2007 to (Won)513 billion in 2008. Our net income margin, which is net income as a percentage of operating revenues, decreased from 6.3% in 2007 to 2.6% in 2008.
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
Capital Requirements
Historically, our capital requirements consisted principally of purchases of property and equipment and other assets and repayments of borrowings. In our investing activities, we used cash of (Won)3,636 billion in 2007,(Won)3,362 billion in 2008 and(Won)2,774 billion in 2009 for the acquisition of property and equipment, primarily construction-in-progress. In our financing activities, we used cash of (Won)1,354 billion in 2007,(Won)2,147 billion in 2008 and(Won)1,441 billion in 2009 for repayment of current portion of bonds and long-term borrowings.
In recent years, we have also required capital for acquisitions of treasury shares for retirement and payments of retirement and severance benefits related to our early retirement programs. For the acquisition of treasury shares for retirement, we spent (Won)196 billion in 2007,(Won)74 billion in 2008 and (Won)528 billion in 2009. Subsequent to such repurchases, we retired most of the treasury shares that we repurchased. We also recorded payments of severance indemnities of(Won)104 billion in 2007, (Won)221 billion in 2008 and (Won)1,345 billion in 2009. In 2009, our payments were particularly high due to a special voluntary early retirement program held in December 2009 in which we received applications for voluntary early retirement from employees who had been employed by us for more than 15 years and provided them with additional financial incentives to retire early. The special voluntary early retirement program resulted in the early retirement of 5,992 employees out of 25,340 eligible employees.
From time to time, we may also require capital for investments involving acquisitions, including shares of our affiliates, and strategic relationships. On June 1, 2009, KTF merged into KT Corporation pursuant to a “comprehensive stock transfer” under Article 360-15 of the Korean Commercial Code, whereby KTF common stockholders received 0.7192335 share of KT Corporation common stock for every one share of KTF common stock they owned. We delivered 45,629,480 treasury shares and 700,108 shares of our newly issued common shares to KTF shareholders in connection with the merger.
Our cash dividends amounted to(Won)473 billion in 2007, (Won)409 billion in 2008 and (Won)229 billion in 2009.
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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 purchase of additional treasury shares and shares of our affiliates as well as investments involving acquisitions and strategic relationships. We compete in the telecommunications sector in Korea, which is rapidly evolving. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. 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. We have also provided guarantees to our affiliates. See Note 33(b) to the Consolidated Financial Statements for a disclosure of the guarantees provided.
The following table sets forth selected information regarding our contractual obligations to make future payments as of December 31, 2009:
Contractual Obligations(1) (2)
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, 2009
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. From time to time, we have also disposed of our treasury shares to meet our capital requirements.
Our major sources of cash have been net cash provided by operating activities, including net income, expenses not involving cash payments such as depreciation and amortization, and proceeds from issuance of bonds and long-term borrowings. We expect that these sources will continue to be our principal sources of cash in the future. Net income was(Won)1,171 billion in 2007, (Won)513 billion in 2008 and (Won)610 billion in 2009 due to the reasons discussed in Item 5.A. Operating Results.
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Depreciation and amortization was (Won)3,657 billion in 2007,(Won)3,703 billion in 2008 and(Won)3,361 billion in 2009 primarily reflecting our capital investment activities during the recent years. Aggregate cash proceeds from issuance of bonds and long-term borrowings were (Won)878 billion in 2007,(Won)3,780 billion in 2008 and(Won)1,499 billion in 2009. We also met the capital required for the June 2009 merger with KTF through delivery of 45,629,480 treasury shares and 700,108 shares of our newly issued common shares to KTF shareholders in consideration of the merger. As of December 31, 2009, we held 17,915,340 treasury shares.
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, 2009. However, our ability to rely on some of these alternatives could be affected by factors such as the liquidity of the Korean and the global 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 equity was(Won)11,138 billion as of December 31, 2007,(Won)11,088 billion as of December 31, 2008 and(Won)10,667 billion as of December 31, 2009.
Liquidity
We had a working capital (current assets minus current liabilities) surplus of (Won)564 billion as of December 31, 2007,(Won)1,833 billion as of December 31, 2008 and(Won)1,031 billion as of December 31, 2009. 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
Inventories
Our cash, cash equivalents and short-term investment assets maturing within one year totaled (Won)1,845 billion as of December 31, 2007 and(Won)2,308 billion as of December 31, 2008 and(Won)1,982 billion as of December 31, 2009. 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.
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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 bonds and long-term borrowings
Accounts payable—other
Accrued expenses
As of December 31, 2009, we entered into various commitments with financial institutions totaling (Won)2,289 billion and US$123 million. See Note 33 to the Consolidated Financial Statements. As of December 31, 2009, (Won)298 billion and US$56 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.
Capital Expenditures
Our capital expenditures on property and equipment decreased in recent years. We used cash of(Won)3,636 billion in 2007,(Won)3,362 billion in 2008 and(Won)2,774 billion in 2009 for the acquisition of property and equipment, primarily construction-in-progress.
Our current capital expenditure plan, on a non-consolidated basis, calls for the expenditure of approximately(Won)3,200 billion in 2010. The principal components of our capital investment plans are:
approximately (Won)953 billion in general expansion and modernization of our network infrastructure;
approximately (Won)301 billion in upgrading our broadband network to enable FTTH connection;
approximately (Won)741 billion in capital investments for IMT-2000 (W-CDMA) service;
approximately (Won)265 billion in capital investments for WiBro service;
approximately (Won)188 billion in capital investments for IP-TV service; and
approximately (Won)183 billion in capital investments for development of services over Internet protocol.
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 2.5% in 2007, 4.7% in 2008 and 2.8% in 2009. 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.”
Recent Accounting Pronouncements in Korean GAAP
We did not adopt any significant Korean accounting standards issued or revised in 2009.
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U.S. GAAP Reconciliation
In 2007, we recorded net income of(Won)1,160 billion under U.S. GAAP compared to net income of(Won)1,171 billion under Korean GAAP, primarily because of difference in the treatment of depreciation and reversal of goodwill amortization. In 2008, we recorded net income of (Won)573 billion under U.S. GAAP compared to net income of(Won)513 billion under Korean GAAP, primarily because of difference in the treatment of reversal of goodwill amortization and depreciation. In 2009, we recorded net income of (Won)840 billion under U.S. GAAP compared to net income of(Won)610 billion under Korean GAAP, primarily because of difference in the treatment of service installation fees, reversal of goodwill amortization and depreciation. Total equity under U.S. GAAP is lower than under Korean GAAP by (Won)478 billion as of December 31, 2008 and (Won)211 billion as of December 31, 2009.
For further discussion of the principal differences between Korean GAAP and U.S. GAAP as they relate to us, see Note 40 to the Consolidated Financial Statements.
Recent Accounting Pronouncements in U.S. GAAP
In September 2006, the Financial Accounting Standards Board (“FASB”) issued enhanced guidance for using fair value to measure assets and liabilities by establishing a common definition of fair value, providing a framework for measuring fair value under GAAP, and expanding the disclosure requirements about fair value measurements. In February 2008, the FASB deferred the adoption of such guidance for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. We adopted the fair value guidance for nonfinancial assets and nonfinancial liabilities on January 1, 2009 with no material impact to our consolidated financial statements. In April 2009, the FASB issued additional guidance on fair value, which provided: (a) additional application guidance for estimating fair value when the volume and activity for the asset or liability have greatly decreased and (b) indicators for identifying transactions that are not considered orderly. The additional guidance was effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted the provisions in 2009 with no material impact to our consolidated financial statements.
In December 2007, the FASB issued an amended accounting guidance on business combinations. The guidance revises the method of accounting for a number of aspects of business combinations including acquisition costs, contingencies (including contingent assets, contingent liabilities and contingent purchase price) and post-acquisition exit activities of acquired businesses. We adopted the guidance in 2009 with no material impact to our consolidated financial statements.
In December 2007, the FASB issued new accounting guidance on noncontrolling interests in consolidated financial statements. The new accounting guidance requires that a noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the noncontrolling interest and changes in ownership interests in a subsidiary and requires additional disclosures that identify and distinguish between the interests of the controlling and noncontrolling owners. We retrospectively adopted the presentation and disclosure requirements of the new guidance. The adoption of the new guidance did not have a material effect on our consolidated financial statements.
In March 2008, the FASB issued enhanced guidance for disclosures about derivative instruments and hedging activities by expanding the disclosure requirements regarding: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. In addition, this guidance requires qualitative disclosures about objectives and strategies for using derivatives described in the context of an entity’s
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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. We adopted the new guidance in 2009 with no material impact to our consolidated financial statements.
In April 2008, the FASB amended the factors that we should consider when developing renewal or extension assumptions used in the determination of useful lives of intangible assets. These assumptions should be consistent with the expected cash flow method used to measure the fair value of intangible assets. The amended guidance was applicable prospectively to intangible assets acquired after January 1, 2009 with no material impact to our consolidated financial statements.
In November 2008, the FASB ratified guidance approved by the Emerging Issues Task Force addressing how the business combination and noncontrolling interest guidance issued by the FASB might impact the accounting for equity method investments. The guidance was effective prospectively for new investments acquired in fiscal years beginning on or after December 15, 2008. We adopted the guidance in 2009 with no material impact on our consolidated financial statements.
In July 2009, the FASB issued the FASB Accounting Standard Codification (“Codification” or “ASC”), which became the single source of authoritative U.S. GAAP. Following the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”), which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. We adopted the Codification, as required, for annual periods ending after September 15, 2009. As a result, references to accounting literature contained in our financial disclosures have been updated to reflect the new ASC structure.
In June 2009, the FASB amended the consolidation rules related to Variable Interest Entities (“VIEs”). The new rules expand the primary beneficiary analysis to incorporate a qualitative review of which entity controls and directs the activities of the VIE. The amendments also modify the rules regarding the frequency of ongoing reassessments of whether a company is the primary beneficiary. Under the revised guidance, we are required to perform ongoing reassessments as opposed to only when certain triggering events occur, as was previously required. This guidance will be effective in 2010 and is not expected to have any material effect on our consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU No. 2009-13”). The update addresses how revenues should be allocated among all products and services included in sales arrangements. It establishes a selling price hierarchy for determining the selling price of each product or service, with vendor-specific objective evidence at the highest level, third-party evidence of selling price at the intermediate level, and the best estimate of the selling price at the lowest level. It replaces “fair value” with “selling price” in revenue allocation guidance, eliminates the residual method as an acceptable allocation method and requires the use of the relative selling price method as the basis for allocation. It also significantly expands the disclosure requirements for such arrangements, including, potentially, certain qualitative disclosures. ASU No. 2009-13 will be effective prospectively for sales entered into or materially modified in fiscal years beginning on or after June 15, 2010. The FASB permits early adoption of ASU No. 2009-13, applied retrospectively, to the beginning of the year of adoption. We are currently evaluating the impact on our consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements” (“ASU No. 2009-14”). The update clarifies the guidance for allocating and measuring revenue, including how to identify software that is out of the scope. The update also amends
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accounting and reporting guidance for revenue arrangements involving both tangible products and software that is “more than incidental to the tangible product as a whole.” Such types of software and hardware will be outside of the scope of software revenue guidance, and the hardware components will also be outside of the scope of software revenue guidance and may result in more revenue recognized at the time of the hardware sale. Additional disclosures will discuss allocation of revenue to products and services in sales arrangements and the significant judgments applied in the revenue allocation method, including impacts on the timing and amount of revenue recognition. ASU 2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. ASU No. 2009-14 has the same effective date, including early adoption provisions, as ASU No. 2009-13. We must adopt ASU No. 2009-14 and ASU No. 2009-13 at the same time. We are currently evaluating the impact on our consolidated financial statements.
In December 2009, the FASB issued ASU No. 2009-16, “Transfers and Servicing” (“ASU No. 2009-16”). This update removes the concept of a qualifying special-purpose entity (“QSPE”) and creates more stringent conditions for reporting a transfer of a portion of financial asset as sale. To determine if a transfer is to be accounted for as sale, the transferor must assess whether it and all of the entities included in its consolidated financial statements have surrendered control of the assets. This update is effective from January 1, 2010, with adoption applied prospectively for transfers that occur on and after the effective date. The elimination of the QSPE concept will require an entity to retrospectively assess all current off-balance sheet QSPE structures for consolidation under ASC Topic 810, “Consolidation,” and record a cumulative-effect adjustment to retained earnings for any consolidation change. Retrospective application of ASU No. 2009-16, particularly the QSPE removal, is being assessed as part of the analysis required from ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.”
In December 2009, the FASB issued ASU No. 2009-17. This update addressed the primary beneficiary assessment criteria for determining whether an entity is required to consolidate a VIE. This update requires an entity to determine whether it is the primary beneficiary by performing a qualitative assessment, rather than using the quantitative-based model required under the previous accounting guidance. The qualitative assessment consists of determining whether the entity has both the power to direct the activities that most significantly impact the VIE’s economic performance and has the right to receive benefits or obligation to absorb losses that could potentially be significant to the VIE. This update is effective from January 1, 2010. We are currently evaluating the impact on our consolidated financial statements.
In January 2010, the FASB amended the disclosure guidance related to fair value measurements. The amended disclosure guidance requires new fair value measurement disclosures and clarifies existing fair value measurement disclosure requirements. The amended disclosure guidance related to disclosures about purchases, sales, issuances and settlements of Level 3 instruments will be effective for fiscal years beginning after December 15, 2010. The remaining amended disclosure guidance will be effective for annual reporting periods beginning after December 15, 2009. We are currently evaluating the impact of the amended disclosure guidance related to fair value measurements.
In January 2010, the FASB issued authoritative guidance for improving disclosures about fair value measurements, which requires new and amended disclosure requirements for classes of assets and liabilities, inputs and valuation techniques and transfers between levels of fair value measurements and accounting for distributions to shareholders with components of stock and cash, which clarifies the accounting for distributions to shareholders that offer them the ability to elect to receive their entire distribution in cash or shares of equivalent value. This guidance will be effective beginning in January 2010, and is not expected to have a material effect on our consolidated financial statements.
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Item 5.C. Research and Development, Patents and Licenses, Etc.
In order to maintain our leadership in the converging telecommunications business environment and develop additional platforms, services and applications, we operate:
a central R&D laboratory;
a network R&D laboratory;
a mobile R&D laboratory;
a device R&D center; and
an economics and management research laboratory.
As of December 31, 2009, these research centers employed a total of 680 researchers and employees, of whom 118 had doctoral degrees and 399 had master’s degrees. As of December 31, 2009, KT Corporation had 5,121 registered patents domestically and 460 registered patents internationally.
Under the Information and Communications Industry Promotion Act, 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 Advancement, 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 research and development institutes. Including such contributions, total expenditures on research and development were (Won)291 billion in 2007,(Won)283 billion in 2008 and (Won)263 billion in 2009.
In recent years, we have focused our research and development efforts in the following areas:
fixed mobile multimedia convergence solutions including WiBro, mobile IP-TV, mobile VoIP;
Environmentally-friendly technologies including an intelligent electricity distribution monitoring system;
VoIP solutions and related value-added services;
future network structures and solutions;
home networking solutions for multiple devices including IP-TV, Internet phones and computers;
platform and application services for IP-TV services; and
network technologies for backbone and access network including FTTH solutions.
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.
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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.”
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 non-independent directors, including the Chief Executive Officer; 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 KRX KOSPI Market as of the end of the preceding year exceeds (Won)2,000 billion, which is the case with us, the Commercial Code 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. If the term of office for the director ends before the close of the annual general meeting of shareholders convened with respect to the last fiscal year within such term of office and a new director is appointed, the term of office for such new director will be the remaining term of office of his or her predecessor.
Under the Commercial Code of Korea, 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 non-independent director and all of our outside directors. Our Outside Director Candidate Nominating 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.
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Our current directors are as follows:
Name
Position
Non-Independent Directors (1)
Suk-Chae Lee
Sang-Hoon Lee
Hyun-Myung Pyo
Outside Directors (1)
E. Han Kim
Chairperson of the Board of Directors, Chair Professor, University of Michigan
Jeong-Suk Koh
Chief Executive Officer of Ilshin Investment Co., Ltd.
Joon Park
Professor, Seoul National University
Choon-Ho Lee
Chairperson of the Board of Directors of Korea Educational Broadcasting System
Jeung-Soo Huh
Professor, Kyungpook National University
Jong-Hwan Song
Professor, Myongji University
Hae-Bang Chung
Professor, School of Law, Konkuk University
Chan-Jin Lee
Chief Executive Officer, DreamWiz Inc.
Suk-Chae Lee is a non-independent director and has served as our chief executive officer since January 2009. Prior to joining us, he served as a senior advisor of Bae, Kim & Lee LLC, chief economic advisor to the President of Korea, Minister of Information and Telecommunications and Vice Minister of Finance and Economy. Mr. Lee holds a bachelor’s degree in economics from Seoul National University, an M.A. degree in political economy from Boston University and a Ph.D. degree in economics from Boston University.
Sang-Hoon Lee is a non-independent director and has served as the president of the Enterprise Customer Group since March 2009. He has previously served as senior executive vice president of the Business Development Group and executive vice president of the Business Marketing Unit. Mr. Lee holds a bachelor’s degree in engineering from Seoul National University and both his master’s degree and Ph.D degree in electric engineering from University of Pennsylvania.
Hyun-Myung Pyo is a non-independent director and has served as the president of the Personal Customer Group since December 2009. He has previously served as senior executive vice president of the Corporate Center and senior vice president of the Wibro Business Unit and head of the Marketing Group of KTF. Mr. Pyo holds a bachelor’s degree in electronic engineering from Korea University and both his graduate and Ph.D degrees in electronic engineering from Korea University.
E. Han Kim has served as our outside director since March 2009. He is currently a chair professor of business administration at University of Michigan and has served as outside director of POSCO and Hana Bank. Mr. Kim holds a bachelor’s degree from Rochester University, a master’s degree in business administration from Cornell University and a Ph.D. degree in finance from State University of New York-Buffalo.
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Jeong-Suk Koh has served as our 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.
Joon Park has served as our outside director since January 2009. He is currently a professor at the Seoul National University School of Law. Mr. Park holds a bachelor’s degree in law from Seoul National University and an LL.M. degree in law from Harvard Law School.
Choon-Ho Lee has served as our outside director since March 2009. She is currently the chairperson of the board of directors of Korea Educational Broadcasting System. Ms. Lee has served as a director of the board of Seoul Foundation for Arts and Culture. She holds a bachelor’s degree in politics and foreign affairs from Ewha Womans University and has received both her graduate and Ph.D. degrees in education from Inha University.
Jeung-Soo Huh has served as our outside director since March 2009. He is currently a professor of material science and metallurgical engineering at Kyungpook National University and was formerly a visiting professor at Manchester University. Mr. Huh holds a bachelor’s degree in physical metallurgy from Seoul National University, a graduate degree in material engineering from Seoul National University and a Ph.D. degree in material engineering from Massachusetts Institute of Technology.
Jong-Hwan Song was elected as our outside director in March 2010. He is currently a professor of North Korean studies at Myongji University. Mr. Song holds a bachelor’s degree and a graduate degree in international relations from Seoul National University and a Ph.D. degree in political science from Hanyang University.
Hae-Bang Chung was elected as our outside director in March 2010. He is currently a professor at Konkuk University School of Law. Mr. Chung holds a bachelor’s degree and a graduate degree in law from Seoul National University and a graduate degree in economics from Vanderbilt University.
Chan-Jin Lee was elected as our outside director in March 2010. He is currently the chief executive officer of DreamWiz Inc. and was formerly the chief executive officer of Hancom Inc. Mr. Lee holds a bachelor’s degree in mechanical engineering from Seoul National University.
For the purposes of the Korean Commercial Code, our Chief Executive Officer 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 Chief Executive Officer in accordance with the provisions of the Commercial Code and our articles of incorporation. A candidate for Chief Executive Officer is nominated by a committee formed for that purpose. The Chief Executive Officer Candidate Nominating Committee consists of:
all of our outside directors; and
one non-independent director who is not a candidate.
Under our articles of incorporation, the Chief Executive Officer 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
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at the shareholders’ meeting, the company enters into such management contract with the Chief Executive Officer. In such case, the chairman of the Chief Executive Officer 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 Chief Executive Officer 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 Chief Executive Officer has failed to achieve the management goals, it may propose to dismiss the Chief Executive Officer at a shareholders’ meeting.
Senior Management
Our executive officers consist of President, Senior Executive Vice President, Executive Vice Presidents and Senior Vice Presidents. The executive officers other than the non-independent directors are appointed by the Chief Executive Officer and may serve up to three years.
The current executive officers are as follows:
Name(1)
Title and Responsibilities
Ho-Ick Suk
Seong-Bok Jeong
Doo-Whan Choi
Sam-Soo Pyo
Yu-Yeol Seo
Il-Young Kim
Sung-Man Kim
Young-Whan Kim
Han-Suk Kim
Gyoo-Taek Nam
Yeon-Hak Kim
Hyun-Mi Yang
Young-Hee Song
Young-Hee Lee
Deok-Rae Lim
Sang-Hong Lee
Tae-Il Park
Kyung-Soo Lee
Jong-Ryul Seo
Yong-Taek Cho
Gil-Joo Lee
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Name (1)
Tae-Yol Yoo
Tae-Gyoo Lee
Sang-Hyo Kim
In-Sung Jeon
Jeong-Tae Park
Hyung-Joon Kim
Sang-Cheon Shim
Dong-Hyun Han
Hyun-Mo Gu
Jung-Sik Suh
Tae-Hyo Ahn
Jae-Geun Choi
Sang-Jik Lee
Hun-Mun Lim
Seok-Gyoon Na
Bong-Goon Kwak
Dae-San Lee
Seong-Mook Oh
Jong-Seog Koh
Kyung-Kon Koh
Yoon-Young Park
Dong-Hoon Han
Tae-Poong Kang
Kyung-Choon Shin
Kwan-Young Jung
Ouk-Jung Hwang
In-Kyu Park
Sang-Choon Kim
Ouk-Young Yoo
Yoon-Sik Jung
Seung-Dong Gye
Jong-Jin Chae
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Kyung-Seok Park
Seok-Joon Park
Kie-You Song
Yoon-Hak Bang
Hyung-Oak Park
Pan-Sik Shin
Byoung-Seon Jeon
Young-Goon Yoo
Kyung-Lim Yoon
Dong-Myun Lee
Sun-Cheol Gweon
Yung-Sig Yoon
Ju-Ouk Uhm
Chan-Kyung Park
Il-Sung Nam
Ju-Kyo Shim
Sung-Bum Kim
Young-Lyoul Lee
Choong-Seop Lee
Sun-Jong Heo
Won-Sik Han
Bum-Joon Kim
Jung-Won Park
Jong-Hack Kang
Tae-Geun Kim
Kuk-Hyun Kang
Sa-Il Kwon
Young-Mo Kwon
Tae-Ki Min
Dae-Soo Park
Young-Sik Park
Yong-Hwa Park
Jin-Sik Park
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Hyung-Chul Park
Seong-Hoon Shim
Ki-Hun Yoo
Chang-Young Yoon
Gang-Geun Lee
Sung-Jin Lee
Jong-Ok Lee
Hong-Bum Jun
Doo-Soo Jung
Jun-Soo Jung
Han-Wook Jung
Hwa-Joon Cho
Sang-Wook Kim
Myung-Bum Pyun
Item 6.B. Compensation
Compensation of Directors and Executive Officers
In 2009, the total amount of salaries, bonuses (including long-term performance-based incentives for non-independent directors) and allowances paid and accrued to all non-independent directors and executive officers of KT Corporation for services in all capacities was approximately(Won)18.9 billion. The aggregate amount accrued by us to provide retirement benefits to such persons was(Won)1.1 billion in 2009. Starting in 2009, we no longer pay long-term performance-based incentives to our outside directors.
The chairman of the Chief Executive Officer Candidate Nominating Committee enters into an employment agreement on our behalf with our Chief Executive Officer. The employment agreement sets certain management targets to be achieved by the Chief Executive Officer, including a target for the amount of “EBITDA” to be achieved in each year. EBITDA is defined as earnings before interest, tax, depreciation and amortization. Failure to achieve certain thresholds below the targets will allow the board of directors to take actions with respect to the Chief Executive Officer’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 Chief Executive Officer that provide for similar management targets to be achieved by each of our departments, subsidiaries and regional head offices.
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Item 6.C. Board Practices
As of December 31, 2009, none of our non-independent 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 Nominating Committee
The Outside Director Candidate Nominating Committee consists of one non-independent 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’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 four outside directors, Jeung-Soo Huh, Choon-Ho Lee, Jong-Hwan Song and Chan-Jin Lee. The chairman is Jeung-Soo Huh. The committee’s duties include prior review of the Chief Executive Officer’s management goals, terms and conditions proposed for inclusion in the employment contract of the Chief Executive Officer, including, but not limited to, determining whether the Chief Executive Officer has achieved the management goals, and the determination of compensation of the Chief Executive Officer and the non-independent 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 non-independent directors. The chairman is Suk-Chae Lee. The committee’s duties include the establishment and management of branch offices, the acquisition and disposal of real estate having market value between(Won)15 billion to (Won)30 billion, making investments and providing guarantees up to (Won)30 billion, the disposal and sale of stocks of our subsidiaries, which stocks have a market value of between (Won)15 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, Jeong-Suk Koh, Joon Park, Jong-Hwan Song and Hae-Bang Chung. The chairman is Jeong-Suk Koh. 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 Commercial Code of Korea, we are required to establish an audit committee comprised of three or more outside directors comprised of at least two-thirds of the audit committee members. 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
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comprised of Joon Park, Jeong-Suk Koh, E. Han Kim and Hae-Bang Chung. The chairman is Joon Park. Members of the committee are elected by our shareholders at the shareholders’ meeting. Our internal and external auditors report directly to the committee.
The duties of the committee include:
appointing 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.
Corporate Governance Committee
The Corporate Governance Committee is comprised of four outside directors and one standing director, Choon-Ho Lee, E. Han Kim, Jeung-soo Huh, Chan-Jin Lee and Hyun-Myung Pyo. The chairman is Choon-Ho Lee. The committee is responsible for the review of matters with respect to our Corporate Governance Guidelines and our performance under such guidelines to monitor effectiveness of our corporate governance.
Item 6.D. Employees
On a non-consolidated basis, we had 30,841 employees as of December 31, 2009, compared to 35,063 employees as of December 31, 2008 and 36,913 employees as of December 31, 2007. Prior to the merger with KT Corporation, KTF had 2,560 employees as of December 31,2008, compared to 2,521 employees as of December 31, 2007.
The Voluntary Early Retirement Plans
We sponsor a voluntary early retirement plan where we provide additional financial incentives for our employees to retire early, as part of our efforts to improve operational efficiencies. In 2007 and 2008, 510 employees and 1,141 employees retired under KT Corporation’s voluntary early retirement plan, respectively.
In 2009, we had a voluntary early retirement plan where we received applications from employees who had been employed by us for more than 20 years. In addition, we held a special voluntary early retirement program in the fourth quarter of 2009 where we received applications for voluntary early retirement from employees who had been employed by us for more than 15 years and provided them with additional financial incentives to retire early. In aggregate, 6,515 employees retired in 2009 under the voluntary early retirement plan and the special voluntary early retirement program.
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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, 2009, about 79.7% 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 May 25, 2011. The Union also negotiates with us an annual agreement on wages on behalf of its members. 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 2.91% of our issued shares as of December 31, 2009.
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 order to develop skills of our employees, we require 100 hours of training per year from most of our employees, using individually-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. In addition, we provide tuition and living expense reimbursements to our high potential individuals who pursue graduate programs in Korea and abroad, as well as provide financial assistance to those who pursue work-related professional licenses or participate in after-work study programs.
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Item 6.E. Share Ownership
Common Stock
The persons who are currently our directors held, as a group, 28,073 common shares as of May 31, 2010, the most recent date for which this information is available. The table below shows the ownership of our common shares by directors
Shareholders
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, 2009:
National Pension Corporation
NTT DOCOMO Inc.
Employee stock ownership association
Directors as a group
Public
KT Corporation (held in the form of treasury stock)(1)
Total issued shares
Item 7.B. Related Party Transactions
We have issued guarantees of (Won)113 billion and $31 million as of December 31, 2007, (Won)10 billion as of December 31, 2008 and(Won)10 billion as of December 31, 2009 in favor of our consolidated subsidiaries. We have also engaged in various transactions with our subsidiaries and affiliated companies. See Note 18 to the Consolidated Financial Statements.
Item 7.C. Interests of Experts and Counsel
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Item 8. Financial Information
Item 8.A. Consolidated Statements and Other Financial Information
See “Item 18—Financial Statements” and pages F-1 through F-114.
Legal Proceedings
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.
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.”
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Item 8.B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
Item 9. The Offer and Listing
Item 9.A. Offer and Listing Details
Market Price Information
Our shares were listed on the KRX KOSPI Market on December 23, 1998. The price of the shares on the KRX KOSPI Market as of the close of trading on June 28, 2010 was (Won)45,300 per share. The table below shows the high and low closing prices and the average daily volume of trading activity on the KRX KOSPI Market for the shares.
First quarter
Second quarter
Third quarter
Fourth quarter
Second quarter (through June 28)
ADSs
The outstanding ADSs, each of which represents one-half of one share of our common stock, have been traded on the New York Stock Exchange and the London Stock Exchange since May 25, 1999.
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The price of the ADSs on the New York Stock Exchange as of the close of trading on June 28, 2010 was $19.24 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 KRX KOSPI Market
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 KRX KOSPI Market, the KRX KOSDAQ Market and the KRX Derivatives Market. The Korea Exchange has two trading floors located in Seoul, one for the KRX KOSPI Market and one for the KRX KOSDAQ Market, and one trading floor in Busan for the KRX Derivatives 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 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.
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The KRX KOSPI Market has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security. The KRX KOSPI Market 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 KRX KOSPI Market publishes the Korea Composite Stock Price Index every two seconds, which is an index of all equity securities listed on the KRX KOSPI Market. 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.
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
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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 KRX KOSPI Market 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 KRX KOSPI Market 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 KRX KOSPI Market. 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 KRX KOSPI Market. See “Item 10. Additional Information—Item 10.A. Taxation—Korean Taxation.”
The number of companies listed on the KRX KOSPI Market, 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:
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The Korean securities markets are principally regulated by the Financial Services Commission of Korea and the Financial Investment Services and Capital Markets Act. The Securities and Exchange Act which regulated the securities markets in the past was replaced with the Financial Investment Services and Capital Markets Act on February 4, 2009. The new law, as did the Securities and Exchange Act, 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 KRX KOSPI Market. 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.
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 KRX KOSPI Market or registered on the KRX KOSDAQ Market, 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 KRX KOSPI Market nor registered on the KRX KOSDAQ Market and in bonds which are not listed.
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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 KRX KOSPI Market and this securities company places a sell order with another securities company which is a member of the KRX KOSPI Market, 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 Financial Investment Services and Capital Markets Act, the KRX KOSPI Market 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 KRX KOSPI Market breaches its obligation in connection with a buy order, the KRX KOSPI Market 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 insolvency events. Pursuant to the Financial Investment Services and Capital Markets Act, 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
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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, 2009, 261,111,808 Common Shares were issued, of which 17,915,340 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 Financial Investment Services and Capital Markets 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 Financial Investment Services and Capital Markets Act and the Commercial Code. We have filed a copy of our articles of incorporation as an exhibit 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 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.
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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 KRX KOSPI Market 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 Financial Investment Services and Capital Markets 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;
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.
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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 the 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 Financial Investment Services and Capital Markets 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, 2009, 2.91% 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 Financial Investment Services and Capital Markets 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 shareholders 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 Commercial Code of Korea, 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.
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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 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 absentia 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 KRX KOSPI Market 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 KRX KOSPI Market 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 KRX KOSPI Market for the one week period before the date of the adoption of the relevant board resolution. However, if we or any of the dissenting shareholders do not accept the purchase price calculated using the above method, the rejecting party may request the court to determine 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.
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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.
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 Financial Investment Services and Capital Markets Act, we must file with the Financial Services Commission and the KRX KOSPI Market (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 KRX KOSPI Market.
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.
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Acquisition of Shares by Us
We may not acquire our own Shares except in limited circumstances, such as a reduction in capital. In addition, pursuant to the Financial Investment Services and Capital Markets Act, we may acquire Shares only by (i) purchasing on the KRX KOSPI Market, (ii) a tender offer, or (iii) receiving Shares returned to us upon the cancellation or termination of a trust agreement with a trustee who acquired the Shares by either of the methods indicated above. 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, 2009, there were 17,915,340 treasury shares including shares held by our treasury stock fund.
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
The Merger Agreement between KT Corporation and KTF
On January 20, 2009, KTF and KT Corporation entered into a merger agreement, pursuant to which KTF merged into KT Corporation on June 1, 2009. KTF common stockholder received 0.7192335 share of KT Corporation common stock for every one share of KTF common stock that they owned. KT Corporation waived issuance of any merger consideration in respect of all of the outstanding shares of KTF common stock held by KT Corporation immediately prior to the merger.
Pursuant to the merger agreement, all of the assets, liabilities, rights and obligations (including contractual rights and obligations) of KTF were comprehensively succeeded by KT Corporation. The employees of KTF became employees of KT Corporation as a result of the merger, and the obligations to pay severance payments to those employees were succeeded by KT Corporation.
Under Korean law, holders of shares of KT Corporation or KTF common stock who opposed the merger were entitled to exercise their appraisal rights to purchase their shares, which were set at (Won)38,535 for each share of KT Corporation common stock properly submitted to KT Corporation for appraisal and (Won)29,284 for each share of KTF common stock properly submitted to KTF for appraisal.
KT Corporation delivered 700,108 shares of its newly issued common stock (par value(Won)5,000) and 45,629,480 shares of its treasury shares (par value(Won)5,000) to KTF stockholders listed on the stockholder registry of KTF as of the date of the merger. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Result—Overview—Merger of KTF into KT Corporation.”
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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 Financial Investment Services and Capital Markets 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 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 KRX KOSPI Market within five
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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 KRX KOSPI Market 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. Any person reporting the holding of 5.0% or more of the total issued Equity Securities and any person reporting the change in the ownership interest which equals or exceeds 1.0% of the total issued Equity Securities pursuant to the requirements described above must also deliver a copy of such reports to us.
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 KRX KOSPI Market or the KRX KOSDAQ Market, unless prohibited by specific laws. Foreign investors may trade shares listed on the KRX KOSPI Market or the KRX KOSDAQ Market only through the KRX KOSPI Market or the KRX KOSDAQ Market, 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;
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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;
shares acquired by direct investment as defined in the Foreign Investment Promotion Law;
disposal of shares pursuant to the exercise of appraisal rights of dissenting shareholders;
disposal of shares in connection with a tender offer;
acquisition of shares by a foreign depositary in connection with the issuance of depositary receipts;
acquisition and disposal of shares through overseas stock exchange market if such shares are simultaneously listed on the KRX KOSPI Market or the KRX KOSDAQ Market and such overseas stock exchange; and
arm’s length transactions between foreigners, if all of such foreigners belong to an investment group managed by the same person.
For over-the-counter transactions of shares between foreigners outside the KRX KOSPI Market or the KRX KOSDAQ Market for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, an investment broker licensed in Korea must act as an intermediary. Odd-lot trading of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market must involve a licensed investment trader 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 KRX KOSPI Market or the KRX KOSDAQ Market (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 or who acquire the shares in an over-the-counter transaction or dispose of shares where such acquisition or disposal is deemed to be a foreign direct investment pursuant to the Financial Investment Services and Capital Markets Act. 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 financial investment business entity. 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, corporations incorporated under foreign laws, international organizations, funds and associations as defined under the Financial Investment Services and Capital Markets Act. 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 KRX KOSPI Market or the KRX KOSDAQ Market, 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 KRX KOSPI Market or the KRX KOSDAQ Market (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
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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 KRX KOSPI Market or the KRX KOSDAQ Market 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 investment trader, the investment broker, the Korea Securities Depository or the financial 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, investment traders, investment brokers, the Korea Securities Depository, financial securities companies and internationally recognized custodians that satisfies all relevant requirements under the Financial Investment Services and Capital Markets Act and 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 the Korea Securities Depository, foreign exchange banks including domestic branches of foreign banks, investment traders, investment brokers, collective investment business entities and internationally recognized custodians satisfying the relevant requirements under the Financial Investment Services and Capital Markets Act 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 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 Knowledge Economy. 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 an investment broker or an investment trader. Funds in the foreign currency account may be remitted abroad without any governmental approval.
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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 investment broker or investment trader 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.
Investment brokers and investment traders are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these investment brokers and investment traders 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.
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 22.0% (including resident surtax). 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.
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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 KRX KOSPI Market, and you have no permanent establishment in Korea. 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% (including resident surtax) of the gross realization proceeds or, subject to the production of satisfactory evidence of the acquisition cost and the transaction costs of the ADSs, 22.0% (including resident surtax) 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 KRX KOSPI Market 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 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.
Most tax treaties that Korea has entered into provide exemptions for capital gains tax for capital gains from sale and purchase of shares of common stock. However, Korea’s tax treaties with Japan, Austria, Spain and a few other countries do not provide an exemption from such capital gains tax. For example, Article 13 of Korea’s tax treaty with Japan provides that if a taxpayer holding 25% or more (including those shares held by any related party of the taxpayer) of total issued shares of a company in a taxable year sells 5% or more (including those sold by any related party of the taxpayer) of total issued shares of the same company in the same taxable year, the country where the company is a resident may impose tax on such taxpayer.
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.
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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 KRX KOSPI Market, you will be subject to the 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 KRX KOSPI Market 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.
With respect to transfers of ADSs, a tax ruling recently issued in 2004 by the Korean tax authority appears to hold that depositary receipts (such as the ADSs) constitute share certificates subject to the securities transaction tax. In May 2007, the Seoul Administrative Court held that depositary receipts do not constitute share certificates subject to the securities transaction tax. In 2008, the case was upheld by the Seoul High Court and was further upheld by the Supreme Court. However, as the Supreme Court dismissed the tax authorities’ appeal without ruling on the substantive law issue, it is not clear if the Supreme Court’s decision for this case will serve as the Supreme Court’s precedent on this issue. Even if depositary receipts (such as the ADSs) constitute share certificates subject to the securities transaction tax under the Securities Transaction Tax Law, sale price of ADSs from a transfer of depositary receipts listed on the New York Stock Exchange, the Nasdaq National Market or other qualified foreign exchanges are exempt from the 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;
an insurance company;
a tax-exempt organization;
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;
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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 and are:
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.
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 advisers regarding the treatment of any foreign currency gain or loss on any Won received by 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
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on our audited financial statements and relevant market and shareholder data, we do not anticipate being classified as a PFIC. You should consult your own tax advisers regarding the availability of the reduced dividend tax rate in 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.
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 certain kinds of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Instead of claiming a credit, you may generally elect to deduct such Korean taxes in computing your taxable income provided that you do not elect to claim a foreign tax credit for any foreign income taxes paid or accrued for the relevant tax year. Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain hedged positions in securities and may not be allowed in respect of arrangements in which your expected economic profit is insubstantial. 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.
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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 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 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.
For details of the assets and liabilities recorded relating to our derivative contracts outstanding as of December 31, 2008 and 2009, see Note 33 to the Consolidated Financial Statements. We recognized a valuation gain of (Won)651 billion and a valuation loss of(Won)17 billion in 2008 and a valuation gain of(Won)21 billion and a valuation loss of(Won)191 billion in 2009.
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.
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In 2008 and 2009, we entered into various currency-related derivative contracts with various financial institutions, including the following:
Transaction Type
Financial Institution
Description
Interest rate contracts
Currency swap contracts
Combined interest rate currency swap contracts
Currency forward contracts
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 Merrill Lynch 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.
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, 2009 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
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Item 12.B. Warrants and Rights
Item 12.C. Other Securities
Item 12.D. American Depositary Shares
Fees and Charges
Under the terms of the deposit agreement, holders of our ADSs are required to pay the following service fees to the depositary:
Services
Fees
Issuance of ADSs upon deposit of shares
Delivery of deposited shares against surrender of ADSs
Distribution delivery of ADSs pursuant to sale or exercise of rights
Distributions of dividends
Distribution of securities other than ADSs
Other corporate action involving distributions to shareholders
Holders of our ADSs are also responsible for paying certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:
fees for the transfer and registration of shares charged by the registrar and transfer agent for the shares in Korea (i.e., upon deposit and withdrawal of shares);
expenses incurred for converting foreign currency into U.S. dollars;
expenses for cable, telex and fax transmissions and for delivery of securities;
taxes and duties upon the transfer of securities (i.e., when shares are deposited or withdrawn from deposit); and
fees and expenses incurred in connection with the delivery or servicing of shares on deposit.
Depositary fees payable upon the issuance and surrender of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for surrender. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend, rights), the depositary charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary sends invoices to the applicable record date ADS holders. In the case of
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ADSs held in brokerage and custodian accounts (via the Depository Trust Company, or DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.
In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse to provide the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to such holder of ADSs.
The fees and charges that holders of our ADSs may be required to pay may vary over time and may be changed by us and by the depositary. Holders of our ADSs will receive prior notice of such changes.
Fees and Payments from the Depositary to Us
In 2009, we received the following payments from the depositary:
Reimbursement of NYSE listing fees:
Reimbursement of SEC filing fees:
Reimbursement of settlement infrastructure fees (including maintenance fees):
Reimbursement of proxy process expenses (printing, postage and distribution):
Reimbursement of legal fees:
Contributions toward our investor relations efforts (including non-deal roadshows, investor conferences and investor relations agency fees):
Administrative, compliance and other listing-related costs and expenses
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, 2009. 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
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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, 2009 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, 2009.
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, 2009, 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.
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Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
At our annual shareholders’ meetings in March 2010, our shareholders elected Hae-Bang Chung as a member of the Audit Committee. Our Audit Committee is comprised of Joon Park, Jeong-Suk Koh, E. Han Kim and Hae-Bang Chung. The board of directors has determined that E. Han Kim is the audit committee financial expert.
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, 2008 and 2009:
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.
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
107
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, 2009:
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.
Item 16F. Change in Registrant’s Certifying Accountant
We appointed Samil PricewaterhouseCoopers as our independent registered public accounting firm for the year ending December 31, 2010 with effect from January 1, 2010 at our audit committee meeting on February 11, 2010. The decision to change the independent registered public accounting firm from Deloitte Anjin LLC (“Deloitte”), our previous independent registered public accounting firm, to Samil PricewaterhouseCoopers was consistent with our corporate governance practice of changing audit firms every three years. The decision to appoint Samil PricewaterhouseCoopers as our new independent registered public accounting firm was approved by our audit committee and was reported to our board of directors.
The consolidated financial statements for 2007, 2008 and 2009 were audited by Deloitte. Deloitte was dismissed after the completion of the audit of our consolidated financial statements as of and for the year ended December 31, 2009. The audit report of Deloitte on our consolidated financial statements as of and for the year ended December 31, 2009 prepared in accordance with Korean GAAP did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. Furthermore, in connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2009, there were no disagreements (as described in Item 16F(a)(1)(iv) of Form 20-F) with Deloitte on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte, would have caused Deloitte to make reference to the subject matter of the disagreement in connection with their report. In addition, we confirm that between January 1, 2008 and the date of Deloitte’s dismissal, there were no “reportable events” requiring disclosure pursuant to Item 16F(a)(1)(v) of Form 20-F.
Between January 1, 2008 and the date of appointment of Samil PricewaterhouseCoopers as our independent registered public accounting firm, neither we nor anyone on our behalf has consulted with Samil PricewaterhouseCoopers with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be
108
rendered on our consolidated financial statements, and neither a written report nor oral advice was provided to us that Samil PricewaterhouseCoopers concluded was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue or (ii) any matter that was either the subject of a disagreement, as defined in Item 16F(a)(1)(iv) of Form 20-F and the related instructions to Item 16F, or a reportable event, as defined in Item 16F(a)(1)(v) of Form 20-F.
We provided a copy of this disclosure to Deloitte and requested that Deloitte furnish us with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the statements made above. A copy of Deloitte’s letter dated June 29, 2010 is attached as Exhibit 15.5.
Item 16G. Corporate Governance
The following is a summary of the significant differences between the New York Stock Exchange’s corporate governance standards and those that we follow under Korean law.
NYSE Corporate Governance Standards
KT Corporation’s Corporate Governance Practice
Director Independence
Independent directors must comprise a majority of the board.
The Commercial Code 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 Commercial Code of Korea.
The majority of our board of directors is independent (as defined in accordance with the New York Stock Exchange’s standards), and 8 out of 11 directors are outside directors.
Nomination/Corporate Governance Committee
Compensation Committee
Executive Session
109
Shareholder Approval of Equity Compensation Plan
We currently have two equity compensation plans: one providing for the grant of stock options to officers and non-independent directors; and an employee stock ownership association program.
All material matters related to the granting of 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
Code of Business Conduct and Ethics
110
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 overFinancial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Position as of December 31, 2008 and 2009
Consolidated Statements of Income for the Years Ended December 31, 2007, 2008and 2009
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2008and 2009
Notes to Consolidated Financial Statements
Item 19. Exhibits
111
* Filed previously.
112
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, 2009, 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 Annual 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, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
F-1
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Statements of Financial Position 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, 2009. Our report dated June 16, 2010 expressed an unqualified opinion on those financial statements and included explanatory paragraphs relating to 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 16, 2010
Notice to Readers
This report is effective as of June 16, 2010, the auditors’ report date. Certain subsequent events or circumstances may have occurred between the auditors’ report date and the time the auditors’ report is read. Such events or circumstances could significantly affect the accompanying consolidated financial statements and may result in modification to the auditors’ report.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying Consolidated Statements of Financial Position of KT Corporation and subsidiaries (the “Company”) as of December 31, 2008 and 2009, and the related Consolidated Statements of Income, Cash Flows and Changes in Equity for each of the three years in the period ended December 31, 2009 (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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of KT Corporation and subsidiaries at December 31, 2008 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the Republic of Korea.
Our audit also comprehended the translation of Korean won amounts into U.S. dollar amounts and, in our opinion, such convenience translation has been made in conformity with the basis stated in Note 2 to the consolidated financial statements. Such U.S. dollar amounts are presented solely for the convenience of readers of financial statements.
Accounting principles generally accepted in the Republic of Korea vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 40 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, 2009, 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 16, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
F-3
KT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 2008 AND 2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes 2, 3, 16 and 31)
Short-term investment assets (Notes 3, 6 and 16)
Accounts receivable—trade, less allowance for doubtful accounts of(Won)482,242 million in 2008 and(Won)462,432 million in 2009 (Notes 2, 11, 16, 17 and 32)
Loans, less allowance for doubtful accounts of(Won)4,142 million in 2008 and(Won)12,017 million in 2009 (Notes 2, 5 and 16)
Current finance lease receivables, less allowance for doubtful accounts of(Won)2,355 million in 2008 and(Won)2,675 million in 2009 (Notes 2, 14 and 29)
Accounts receivable—other, less allowance for doubtful accounts of(Won)109,312 million in 2008 and(Won)140,593 million in 2009 (Notes 2, 11 and 16)
Accrued revenues
Advance payments
Prepaid expenses
Prepaid income taxes
Guarantee deposits (Note 16)
Current derivative instruments assets (Notes 2 and 33)
Current deferred income tax assets (Notes 2 and 26)
Inventories (Notes 2, 4 and 29)
Other current assets
Total Current Assets
(Continued)
F-4
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (CONTINUED)
NON-CURRENT ASSETS:
Available-for-sale securities (Notes 2 and 6)
Equity method investment securities (Notes 2 and 7)
Held-to-maturity securities (Notes 2 and 6)
Long-term loans to employees
Long-term financial instruments (Note 3)
Other investment assets
Property and equipment, at cost (Notes 2, 8, 9, 14 and 29)
Less accumulated depreciation
Less accumulated impairment loss
Less contribution for construction
Intangible assets, net (Notes 2 and 10)
Leasehold rights and deposits (Notes 2 and 16)
Long-term accounts receivable—trade, less allowance for doubtful accounts of (Won)13,320 million in 2008 and (Won)8,821 million in 2009 (Notes 2, 11 and 17)
Long-term loans, less allowance for doubtful accounts of(Won)7,734 million in 2008 and(Won)11,439 million in 2009 (Notes 2, 5 and 17)
Non-current finance lease receivables, less allowance for doubtful accounts of (Won)3,642 million in 2008 and (Won)3,725 million in 2009 (Notes 2, 14 and 29)
Non-current deferred income tax assets (Notes 2 and 26)
Long-term accounts receivable—other (Notes 2 and 11)
Non-current derivative instruments assets (Notes 2 and 33)
Other non-current assets
Total Non-current Assets
TOTAL ASSETS
F-5
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable—trade (Notes 11, 16 and 17)
Short-term borrowings (Note 16)
Accounts payable—other (Notes 11, 14, 16 and 17)
Advance receipts
Withholdings (Note 16)
Accrued expenses (Notes 16 and 17)
Income taxes payable (Note 2)
Current portion of bonds and long-term borrowings (Notes 2, 11, 12 and 16)
Unearned revenue
Key money deposits (Notes 16 and 17)
Current derivative instruments liabilities (Notes 2 and 33)
Current accrued provisions (Notes 2 and 13)
Current deferred income tax liabilities (Notes 2 and 26)
Other current liabilities
Total Current Liabilities
NON-CURRENT LIABILITIES:
Bonds (Notes 2, 12 and 16)
Long-term borrowings in Korean won (Notes 2, 11 and 12)
Long-term borrowings in foreign currency
(Notes 2, 12 and 16)
Provisions for severance indemnities (Note 2)
Refundable deposits for telephone installation (Note 15)
Long-term accounts payable—trade (Note 11)
Long-term accounts payable—other (Notes 2, 11 and 14)
Long-term deposits received
Non-current accrued provisions (Notes 2 and 13)
Non-current deferred income tax liabilities (Notes 2 and 26)
Non-current derivative instruments liabilities (Notes 2 and 33)
Other non-current liabilities
Total Non-current Liabilities
Total Liabilities
F-6
EQUITY:
Common Stock (Notes 1 and 18)
Capital Surplus
Capital Adjustments:
Treasury stock (Note 22)
Loss on disposal of treasury stock
Stock options (Notes 2 and 21)
Other share–based payments (Notes 2 and 21)
Other capital adjustments
Total Capital Adjustments
Accumulated Other Comprehensive Income (Note 20) :
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, net (Notes 2 and 6)
Gain on valuation of derivatives for cash flow hedge (Notes 2 and 33)
Loss on valuation of derivatives for cash flow hedge (Notes 2 and 33)
Increase in equity of associates (Notes 2 and 7)
Decrease in equity of associates (Notes 2 and 7)
Total Accumulated Other Comprehensive Income
Retained Earnings
Equity Attributable to Equity Holders of the Parent
Noncontrolling 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, 2007, 2008 AND 2009
OPERATING REVENUES (Notes 2, 17, 23, 24 and 35):
Service
Goods
OPERATING EXPENSES (Notes 2, 17, 25, 35 and 36)
OPERATING INCOME
NON-OPERATING REVENUES:
Dividend income
Foreign currency transaction gain
Foreign currency translation gain (Note 2)
Equity in income of associates (Notes 2 and 7)
Gain on breach of contracts
Gain on disposal of short-term investment assets
Gain on valuation of short-term investment assets
Gain on disposal of available-for-sale securities (Note 6)
Reversal of impairment losses of available-for-sale 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 13)
Amortization of negative goodwill (Notes 2 and 10)
Gain on settlement of derivatives (Note 2)
Gain on valuation of derivatives (Notes 2 and 33)
Other non-operating revenues
Total Non-operating Revenues
F-8
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
NON-OPERATING EXPENSES:
Other bad debt expense (Note 2)
Foreign currency transaction loss
Foreign currency translation loss (Note 2)
Equity in loss of associates (Notes 2 and 7)
Loss on disposal of equity method investment securities
Loss on impairment of equity method investment securities
(Notes 2 and 7)
Donations
Loss on disposal of short-term investment assets
Loss on valuation of short-term investment assets
Loss on disposal of available-for-sale securities (Note 6)
Loss on impairment of available-for-sale securities (Notes 2 and 6)
Loss on impairment of investment assets
Loss on disposal of property and equipment
Loss on impairment of property and equipment (Notes 2 and 8)
Loss on disposal of intangible assets
Loss on impairment of intangible assets (Notes 2 and 10)
Loss on disposal of accounts receivable—trade
Loss on settlement of derivatives (Note 2)
Loss on valuation of derivatives (Notes 2 and 33)
Other non-operating expense
Total Non-operating Expenses
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE
INCOME TAX EXPENSE ON CONTINUING OPERATIONS (Note 26)
NEWLY INCLUDED SUBSIDIARY’S NET LOSS BEFORE ACQUISITION
INCOME FROM CONTINUING OPERATIONS
INCOME (LOSS) FROM DISCONTINUING OPERATIONS (Note 27)
NET INCOME
Attributable to:
EQUITY HOLDERS OF THE PARENT
NONCONTROLLING INTEREST
NET INCOME PER SHARE (Note 28) (*)
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
Amortization
Provision for doubtful accounts
Other bad debt expense
Foreign currency translation loss
Equity in loss of associates
Loss on disposal of available-for-sale securities
Loss on impairment of available-for-sale securities
Loss on impairment of property and equipment
Loss on impairment of intangible assets
Loss on valuation of derivatives
Other non-operating expenses
Income not involving cash receipts:
Foreign currency translation gain
Equity in income of associates
Gain on disposal of available-for-sale securities
Reversal of impairment losses of available-for-sale securities
Amortization of negative goodwill
Gain on valuation of derivatives
F-10
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Changes in assets and liabilities related to operating activities:
Loans
Current finance lease receivables
Accounts receivable—other
Guarantee deposits
Derivative instruments, net
Deferred income tax, net
Leasehold rights and deposits
Long-term accounts receivable—trade
Long-term loans
Non-current finance lease receivables
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—trade
Long-term accounts payable—other
Net Cash Provided by Operating Activities
F-11
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash inflows from investing activities:
Decrease in short-term investment assets
Disposal of available-for-sale securities
Decrease in equity method investment securities
Disposal of equity method investment securities
Collection of held-to-maturity securities
Collection of long-term loans to employees
Disposal of long-term financial instruments
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
Cash outflows for investing activities:
Acquisition of short-term investment assets
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 to employees
Increase in long-term financial instruments
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
F-12
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash inflows from financing activities:
Increase in short-term borrowings
Issuance of bonds
Increase in long-term borrowings
Inflows from capital transactions of consolidated entities
Cash outflows for financing activities:
Repayment of short-term borrowings
Payment of accounts payable – other
Repayment of current portion of bonds and long-term borrowings
Repayment of long-term borrowings
Repayment of bonds
Payment of dividends
Acquisition of treasury stock
Outflows for capital transactions of consolidated entities
Net Cash Provided by (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-13
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2007
Balance as of January 1, 2007 (as reported)
Cumulative effect of changes in accounting policies (Note 2)
As restated
Retained earnings after appropriations
Net income for the year
Disposal of treasury stock
Retirement of treasury stock
Gain (loss) on disposal of treasury stock
Acquisition of subsidiaries’ stock
Increase in subsidiaries’ capital stock
Acquisition of subsidiaries’ treasury stock
Appropriation of subsidiaries’ treasury stock
Changes in consolidated entities
Stock options
Other share-based payment
Gain on translation of foreign operations
Loss on translation of foreign operations
Unrealized gain on valuation of available-for-sale securities
Gain on valuation of derivatives for cash flow hedge
Increase in equity of associates
Decrease in equity of associates
Balance as of December 31, 2007
F-14
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2008
Balance as of January 1, 2008 (as reported)
Unrealized loss on valuation of available-for-sale securities
Loss on valuation of derivatives for cash flow hedge
Balance as of December 31, 2008
F-15
FOR THE YEAR ENDED DECEMBER 31, 2009
Balance as of January 1, 2009 (as reported)
Issuance of common stock
Consideration for exchange rights
Exercise of exchange rights of exchangeable bond
Offset of loss on disposal of treasury stock
Stock option
Change by merger
Balance as of December 31, 2009
F-16
Unrealized gain on valuation of available-for-sale Securities
Unrealized loss on valuation of available-for-sale Securities
F-17
KT CORPORATION AND SUBSIDIAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2009.
KT’s shares as of December 31, 2009 are owned as follows:
National Pension Service
Employee Stock Ownership Association
Treasury stock
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, 2009 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”)
Submarine cable construction and maintenance
KT Commerce Inc. (“KTC”)
KT Tech, Inc. (formerly, “KTF Technologies Inc.”) (“KT Tech”)
F-18
KT Internal Venture Fund No.2
KT M Hows Co., Ltd, (formerly, “KTF M Hows Co., Ltd.”) (“KT M Hows”)
KT Rental Co., Ltd. (“KTR”)
Sidus FNH Corporation (“Sidus FNH”)
Sidus FNH Benex Cinema Investment Fund
KT Capital Co., Ltd. (“KT Capital”)
KT Telecop Co., Ltd. (formerly, “Telecop Service Co., Ltd.”) (“KT Telecop”)
KT M&S Co., Ltd. (formerly, “KTF M&S Co., Ltd.”) (“KT M&S”)
KT Music Corporation (formerly, “KTF Music Corporation”) (“KT Music”)
Online music production and distribution
Korea
Dec.31
Doremi Media Co., Ltd. (“Doremi Media”)
Nasmedia, Inc. (“Nasmedia”)
Sofnics, Inc. (“Sofnics”)
JungBoPremiumEdu Co., Ltd. (“JB Edu”)
KT New Business Fund No. 1
KTDS (formerly, “KT DataSystems Co., Ltd.”)
System integration and maintenance
KTC Media Contents Fund 1
KTC Media Contents Fund 2
Vanguard Private Equity Fund
Gyeonggi-KT Green Growth Fund
Venture investment of Green Growth Business
KT Innotz Inc.
Software development of mobile clouding computer and solution
Korea Telecom America, Inc. (“KTAI”)
Foreign telecommunication business
America
New Telephone Company, Inc. (“NTC”)
Russia
Korea Telecom Japan Co., Ltd. (“KTJ”)
Korea Telecom China Co., Ltd. (“KTCC”)
PT. KT Indonesia (formerly, “PT. KTF Indonesia”)
Indonesia
Super iMax
Wireless high speed internet business
Uzbekistan
East Telecom
Fixed line telecommunication business
KTSC Investment Management B.V.
Management of investment in Super iMax and East Telecom
Netherlands
Helios-TV
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Details of investments in subsidiaries as of December 31, 2007, 2008 and 2009 are as follows:
Primary Business
KTP
Trunk radio system business
KTN
Group telephone management
KTL
Public telephone maintenance
KTH
Data communication
KTSC
KTF (Note 1)
PCS Business
KTC (Note 2)
B2C, B2B service
KT Tech (formerly, “KTF Technologies, Inc.”)
PCS handset development
Investment fund
KT M Hows (formerly, “KTF M Hows Co., Ltd.”)
Mobile marketing
KTR
Rental service
Sidus FNH
Movie production
Sidus FNH Benex Cinema Investment Fund (Note 3)
Movie investment fund
KT Capital (Note 4)
Financing service
KT Telecop (formerly, “Telecop Service Co., Ltd.”)
Security service
Olive Nine (Note 5)
Broadcasting production
KT M&S (formerly, “KTF M&S Co., Ltd.”)
PCS distribution
KT FDS (Note 6)
Software development and system integration
KT Music (formerly, “KTF Music Co., Ltd.”) (Note 7)
Semiconductor and telecommunication equipment manufacture
Doremi Media (Note 8)
Recording device (magneto-optical disk) and music disc manufacture
Nasmedia
Online advertisement
Sofnics
Software development and sales
JB Edu (Note 9)
Online education business
KT New Business Fund No. 1 (Note 10)
KTDS (formerly, “KT DataSystems Co., Ltd.”) (Note 11)
KTC Media Contents Fund 1 (Note 12)
New technology investment fund
KTC Media Contents Fund 2 (Note 13)
Vanguard Private Equity Fund (Note 14)
Corporate restructuring
Gyeonggi-KT Green Growth Fund (Note 15)
KT Innotz Inc. (Note 16)
KTAI
NTC
KTJ
KTCC
Super iMax (Note 17)
East Telecom (Note 17)
Helios-TV (Note 18)
Cable TV business
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Financial Statement Presentation
KT and its domestic subsidiaries maintain their official accounting records in Korean won and prepare 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 KT and subsidiaries (the “Company”) that conform to financial accounting standards and accounting principles in the Republic of Korea may not conform to generally accepted accounting principles in other countries. Accordingly, these consolidated financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying consolidated financial statements have been condensed, restructured and translated into English with certain expanded descriptions from the Korean language financial statements. Certain information included in the Korean language financial statements, but not required for a fair presentation of the Company’s financial position, results of operations, changes in equity or cash flows, is not presented in the accompanying consolidated financial statements. Balance sheet presented for comparative purpose as of December 31, 2008 changed its name into statement of financial position in accordance with the Article 1-2 of the Act on External Audit of Stock Companies, as amended.
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b. Adoption of Statements of Korea Accounting Standards (“SKAS”)
No significant Korea accounting standards issued or revised in 2009 was adopted by the Company.
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, account receivable—other, loans and other), based on collection experience and analysis of the collectability of individual outstanding receivables.
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, 2007, 2008 and 2009 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 statements of financial position. 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.
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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 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. Debt securities, whose maturity dates are due within one year from the end of reporting period, are classified as current assets.
After initial recognition, held-to-maturity securities are stated at amortized cost in the statements of financial position. 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 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 end of reporting period, 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 an unrealized gain or loss related to the impaired available-for-sale
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securities 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.
Reclassification of securities
Trading securities should not be reclassified to other categories of securities. However, when those securities can no longer be held for sale in the near-term to generate profits from short-term price differences, the trading securities can be reclassified as available-for-sale or held-to-maturity securities. When those securities are no longer traded in an active market, such securities are reclassified as available-for-sale securities.
When trading securities are reclassified to other categories, the fair value (latest market value) as of the date of the reclassification becomes new acquisition cost of the security and the security’s unrealized holding gain or loss through the date of the reclassification should be recorded in non-operating revenues or expenses.
g. Equity Method Investment Securities
Investments in equity securities of companies, over which the Company exercises significant influence, are reported using the equity method of accounting.
Accounting for changes in the equity of the investee
Under the equity method of accounting, the Company records changes in its proportionate equity of the net assets of the investee depending on the nature of the underlying changes in the investee as follows; (i) “equity in income (loss) of associates” in the non-operating revenues (expense) for net income (loss) of the investee; (ii) “increase (decrease) in retained earnings of associates” in the retained earnings for changes in beginning retained earnings of the investee; (iii) “increase (decrease) in equity of associates” in the accumulated other comprehensive income (loss) for other changes in 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”.
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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 at financial year-end is considered unrealized gain (loss) and adjusted to equity method investment securities.
Impairment loss on equity method investment securities
When there is objective evidence that the equity method investment securities are impaired and the recoverable amount is lower than the carrying amount of the equity method investment securities, an impairment loss is recognized as “loss on impairment of equity method investment securities” included in non-operating expenses and shall first reduce the unamortized investment difference, if any. When the recoverable amount is recovered after the recognition of impairment loss, the reversal of impairment loss can be recognized as income up to the previously recorded impairment loss. The book value of the equity method investment securities after the reversal of the impairment loss cannot exceed the book value calculated as if the impairment loss had not been originally recognized. The reversal of the impairment loss recognized against the unamortized investment difference is not allowed.
Translation of financial statements of overseas investees
For overseas investees whose financial statements are prepared in foreign currencies, the equity method of accounting is applied after assets and liabilities are translated in accordance with the accounting treatments for the translation of the financial statements of overseas’ subsidiaries for consolidated financial statements. The Company’s proportionate share of the difference between assets net of liabilities and 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.
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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
Structures
Machinery and equipment:
Underground access to cable tunnels, and concrete and steel telephone poles
Machinery
Vehicles
Other property and equipment
Tools
Office equipment
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,(Won)20,676 million and (Won)1,236 million for the years ended December 31, 2007, 2008 and 2009, respectively. 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 years ended December 31, 2007, 2008 and 2009.
i. Intangible Assets
Intangible assets are initially recognized at acquisition cost (purchase cost plus expenditures directly related to preparing the asset ready for use) and subsequently presented at amortized cost using the straight-line method, with amortization beginning when the asset is available for use. 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.
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The Company was elected as a WiBro business provider on January 20, 2005 and paid(Won)125,800 million to the Korea Communications Commission (the “KCC”) 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 had 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 Korea Communications Commission (“KCC”) 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)110 billion and (Won)130 billion was paid in 2008 and 2009, respectively.
Future payment schedule of the license fees as of December 31, 2009 is as follows (in millions of Korean won):
Year ending December 31,
2010
2011
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)9,178 million, (Won)5,865 million and (Won)7,742 million for the years ended December 31, 2007, 2008 and 2009, respectively. There was no reversal of impairment loss for the years ended December 31, 2007, 2008 and 2009.
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 years ended December 31, 2007, 2008 and 2009, the amortization of goodwill of (Won)138,405 million,(Won)145,154 million and (Won)137,487 million, respectively, are included in operating expenses and the reversal of negative goodwill of (Won)518 million,(Won)65 million and nil, respectively, are included in non-operation revenues.
j. Government Subsidies and Others
Government subsidies, including 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
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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 statements of financial position 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 end of reporting period, which were, for U.S. dollars, (Won)938.2: USD 1,(Won)1,257.5: USD 1 and (Won)1,167.6: USD 1 at December 31, 2007, 2008 and 2009, respectively, and the resulting gain (loss) from foreign currency translation is included in non-operating revenues (expenses).
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.
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 end of reporting period and amounted to (Won)1,708,640 million and(Won)1,488,086 million for the years ended December 31, 2008 and 2009, 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.
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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 measured.
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, 2007. As allowed in the transition clause of SKAS No. 22, for employee stock options granted before January 1, 2008, 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, 2008, 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 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, previously recognized compensation costs and corresponding capital adjustments are reversed to capital surplus.
(ii) Other Share-based Payment
Other share-based payments granted on or after January 1, 2007 are measured as below:
For equity-settled share-based payment transactions, the Company measures the goods or services received, and the corresponding increase in equity (capital adjustments), directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity
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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;
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.
(i) Lessees
For operating leases, lease payments excluding guaranteed residual value are recognized as an expense on a straight-line basis over the lease term and contingent rent is expensed as incurred. Finance leases are recognized as assets and liabilities at the lower of fair value of the leased property or the present value of the minimum lease payments discounted using the implicit interest rate of the lessor (or the Company’s incremental borrowing rate if the implicit interest rate is not practicable to determine). Any initial direct costs incurred by the Company are added to the amount recognized as an asset. The depreciation policy for depreciable leased assets is consistent with that for the similar depreciable assets that are owned by the Company. Annual minimum lease payments excluding guaranteed residual value is allocated to interest expense, which is calculated using the effective interest rate, and finance lease repayment amount. Contingent rent relating to finance are charged as expenses in the periods in which they are incurred, however, if the amount is material it is allocated to principal and interest, respectively, over the remaining lease term.
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(ii) Lessors
For operating leases, lease payments on a lease contract are recognized as other revenues on a straight-line basis over the lease term. For finance leases, lessors are required to present finance lease assets as receivables in statements of financial position, at an amount equal to the fair value of the leased property at the inception of lease and required to recognize the lease payments received as repayment of the finance lease receivables and interest income.
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, KCC and other government entities have extensive authority to regulate the Company’s fees. Rates for local call, interconnection and broadband internet access services provided by the Company should be approved by KCC. As for other telecommunication services, the related rates are just required to be reported to KCC.
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 calculated by the ratio of the actual contract costs incurred to date to the estimated total contract costs. As for subscribed construction-type contracts, the Company recognizes revenue using the percentage-of-completion method only for the subscribed portion.
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.
Total consideration for combined services is allocated to each service in proportion to its fair value and the allocated amount is recognized as revenue according to revenue recognition policy for the service.
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 statements of financial position. Deferred income tax asset (liability) which does not relate to specific asset (liability) account in the statements of financial position such as deferred income tax asset recognized for tax loss 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).
F-31
u. Use of Estimates
The Company’s management uses reasonable estimates and assumptions in preparing the accompanying non-consolidated financial statements in accordance with accounting principles generally accepted in the Republic of Korea. The estimates and assumptions can change according to additional experience, 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 end of reporting period 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, 2009, KTC Media Contents Fund 1, KTC Media Contents Fund 2, Vanguard Private Equity Fund, Gyeonggi-KT Green Growth Fund and KT Innotz Inc. are newly included in the consolidation while equity interests in Olive Nine and KT FDS were sold in 2009 and those companies were excluded from the consolidation.
y. Reclassifications of Prior Year Financial Statements
Certain reclassifications have been made in prior year financial statements to conform to classifications used in the current period. Such reclassifications did not have an effect on the net assets and net income of the Company as of and for the year ended December 31, 2007 and 2008.
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 years ended December 31, 2009, have been translated into U.S. dollars at the rate of (Won)1,163.65 to USD1 at December 31, 2009, 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, 2009. 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.
F-32
3. RESTRICTED DEPOSITS
Details of restricted deposits as of December 31, 2008 and 2009 are as follows (in millions of Korean won):
Restricted for research and
development project and construction
Long-term financial instruments
Checking account deposits
and others
4. INVENTORIES
Inventory valuations as of December 31, 2008 and 2009 are summarized as follows (in millions of Korean won):
Merchandise
Supplies
Goods in transit
5. LOANS
Loans as of December 31, 2008 and 2009 are summarized as follows (in millions of Korean won):
a. Loans
Factoring receivables
Allowance for doubtful accounts
Deferred incidental expense (revenue) of loans
Accounts receivable-loans
Loans for installment credit
Accounts receivable-loans for installment credit
New technology financial investment assets
New technology financial loans
Total—loans
Total—allowance for doubtful accounts
F-33
b. Long-term loans
Total—long-term loans
6. SECURITIES
Securities as of December 31, 2008 and 2009 are summarized as follows (in millions of Korean won):
a. Short-term investment assets
Short-term financial instruments
Short-term loans to employee
Beneficiary certificates
Available-for-sale securities (Equity securities)
Available-for-sale securities (Debt securities)
F-34
b. Available-for-sale securities
i) Equity securities
Current assets:
Non-current assets:
Krtnet Corp.
GaeaSoft Corp.
PT.Mobile-8
Solid Technologies, Inc.
Ongamenet Co., Ltd.
Bixolon Co., Ltd.
Shinhan Venture Capital Co., Ltd. (Note 2)
Korea Information Certificate Authority, Inc. (Note 2)
Korea Software Financial Cooperative (“KSFC”) (Note 2)
Digitalinside Co., Ltd. (Note 2)
Vacom Wireless, Inc. (Note 2)
Wiz Communication Co., Ltd. (Note 2)
Korea Telecommunications Operators Association (“KTOA”) (Note 2)
Softbank Korea Co., Ltd. (Note 2)
Binext CT Financial Cooperative (Note 2)
Entaz Co., Ltd. (Note 2)
Luxpia Co., Ltd. (Note 2)
Neighbor Systems Co., Ltd. (Note 2)
Others (Note 2)
Sub total
F-35
MBC-ESS Sports Co., Ltd. (Note 2)
For the year ended December 31, 2009, the Company disposed of its interests in certain investees including Bixolon Co., Ltd. and beneficiary certificates, and recognized gross gains and losses on disposal of available-for-sale securities amounting to (Won)9,496 million and(Won)8 million, respectively. As the estimated recoverable amount of the investments in PT.Mobile-8, MBC-ESS Sports Co., Ltd. and other fell below the acquisition cost and such difference is not deemed recoverable, the Company recognized an impairment loss amounting to (Won)10,102 million for the year ended December 31, 2009.
In accordance with SKAS No. 24 “Preparation and Presentation of Financial Statement II (Financial Industry)”, the gain and loss on disposal of available-for –sale securities amounting to (Won)3,012 million and (Won)2,412 million, recognized by KT Capital are classified as operating revenue and expense, respectively.
F-36
ii) Debt securities
Government and public bonds
Financial bonds of small and medium enterprise
Convertible bonds
Bonds with warrant
iii) Changes in unrealized gains (losses)
Balance at beginning of period
Realized gains on disposal of securities, net
Changes in unrealized gains (losses), net
Balance at end of period
The amounts are not adjusted for the tax effects and noncontrolling interests in consolidated subsidiaries.
F-37
d. Held-to-maturity Securities
Commercial paper
Subordinated bonds
Asset backed securities
New Generation Securitization
Specialty Co., Ltd.
7. EQUITY METHOD INVESTMENT SECURITIES
Investments in securities accounted for using the equity method as of December 31, 2008 and 2009 are summarized as follows (in millions of Korean won):
a. Details of Equity Method Investment Securities
Company K Movie Asset Fund No. 1 (Note 1)
KT-Global New Media Fund
Korea Telephone Directory Co., Ltd. (“KTD”)
Metropol Property LLC
Korea Information Technology Fund
KBSi Co., Ltd.
eNtoB Corp.
Korea Digital Satellite Broadcasting Co., Ltd. (“KDB”)
Sky Life Contents Fund
Everyshow
Kiwoom Investment Co., Ltd.
Goodmorning F Co., Ltd. (Note 3)
F-38
CU Industrial Development Co., Ltd. (formerly, “CURD”) (Note 3)
KTCS Corporation (formerly, “Korea Information Data Corp.”) (Note 3)
KTIS Corporation (formerly, “Korea Information Service Corp.”) (Note 3)
Korea Seoul Contact all Co., Ltd. (Note 3)
Korea Service and Communication Co., Ltd. (Note 3)
Korea Call Center Co., Ltd. (Note 3)
TMWorld Co., Ltd. (Note 3)
Ubiquitous Marketing Service and Communication Co., Ltd. (“UMS&C”) (Note 3)
Exdell Corporation (Note 3)
Information Technology Service Bukbu Corporation (Note 3)
Information Technology Solution Nambu Corporation (Note 3)
Information Technology Solution Seobu Corporation (Note 3)
Information Technology Solution Busan Corporation (Note 3)
Information Technology Solution Jungbu Corporation (Note 3)
Information Technology Solution Honam Corporation (Note 3)
Information Technology Solution Daegu Corporation (Note 3)
MOS facilities Co., Ltd. (formerly, “Mostech Co., Ltd.”) (Note 3)
Wooridul Entertainment Investment Fund-1
Mongolian Telecommunications (“MTC”)
KTC Media Contents Investment Fund No.1 (Note 4)
KTF-CJ Music Contents Investment Fund (Centurion Music 1) (Note 1)
KT-DoCoMo Mobile Investment Fund (formerly, “KTF-DoCoMo Mobile Investment Fund”)
Boston Film Fund (Note 1)
Harex InfoTech Inc.
U-Mobile (Note 3)
Shinhan-KT Mobilecard Co., Ltd. (formerly, “Shinhan-KTF Mobilecard Co., Ltd.”)
Olive Nine Entertainment Co., Ltd. (Note 4)
The Contents Entertainment (Note 4)
Olive Nine Creative Co., Ltd.
Music City China Co., Ltd. (Note 4)
Doremi Music Publishing Co., Ltd. (Note 4)
PARANGOYANGI (Note 4)
Music City Media Co., Ltd. (Note 4)
Dooristar Co., Ltd.
Oscar ent. Co., Ltd.
D&G Star Co., Ltd. (Note 4)
Paramount Music Co., Ltd.
Onestone Communication Co., Ltd. (Note 4)
Netcom
TPS (Note 4)
ETN (Note 4)
F-39
KT-Global New Media Fund (Note 2)
Boston Global Film & Contents Fund Limited Partnership (Note 2)
KTIS Corporation (formerly, “Korea Information Service Corp.”) (Note 5)
KTCS Corporation (formerly, “Korea Information Data Corp.”) (Note 5)
OIC Language Visual Limited (Note 2)
Touchtel Co., Ltd. (Note 3)
Excelnet Co., Ltd. (Note 3)
MTT Co., Ltd. (formerly, “KTT Co., Ltd.”) (Note 3)
KMTEC Co., Ltd. (formerly, “KTTEC Co., Ltd.”) (Note 3)
GOODTECH Co., Ltd. (Note 3)
KDNET Co., Ltd. (formerly, KTNET Co., Ltd.”) (Note 3)
WMC Co., Ltd. (Note 3)
MetroM Co., Ltd. (Note 3)
F-40
BKLCD Co., Ltd. (Note 2)
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, 2008 and 2009 are as follows (in millions of Korean won):
Company K Movie Asset Fund No. 1
KT-Global New Media Fund (Note 1)
KTD (Note 1)
Metropol Property LLC (Note 1)
eNtoB Corp. (Note 1)
KDB (Note 1)
Kiwoom Investment Co., Ltd. (Note 1)
Goodmorning F Co., Ltd.
CU Industrial Development Co., Ltd. (formerly, “CURD”)
KTCS Corporation (formerly, “Korea Information Data Corp.”)
F-41
KTIS Corporation (formerly, “Korea Information Service Corp.”) (Note 1)
Korea Seoul Contact all Co., Ltd.
Korea Service and Communication Co., Ltd.
Korea Call Center Co., Ltd.
TMWorld Co., Ltd.
UMS&C
Exdell Corporation (Note 1)
Information Technology Service Bukbu Corporation
Information Technology Solution Nambu Corporation
Information Technology Solution Seobu Corporation (Note 1)
Information Technology Solution Busan Corporation
Information Technology Solution Jungbu Corporation
Information Technology Solution Honam Corporation
Information Technology Solution Daegu Corporation
MOS facilities Co., Ltd. (formerly, “Mostech Co., Ltd.”) (Note 1)
Wooridul Entertainment Investment Fund-1 (Note 1)
MTC (Note 1)
KTC Media Contents Investment Fund No.1 (Note 1)
KTF-CJ Music Contents Investment Fund (Centurion Music 1)
Boston Film Fund
U-Mobile
Olive Nine Entertainment Co., Ltd. (Note 2)
The Contents Entertainment
Tourtainment Inc.
Music City China Co., Ltd. (Notes1 and 2)
Doremi Music Publishing Co., Ltd. (Notes 1 and 2)
Bluecord Corp. (Notes 1 and 2)
PARANGOYANGI (Notes 1 and 2)
Music City Media Co., Ltd. (Notes 1 and 2)
Dooristar Co., Ltd. (Notes 1 and 2)
Oscar ent. Co., Ltd. (Note 1)
D&G Star Co., Ltd. (Note 1)
Onestone Communication Co., Ltd. (Note 1)
TPS
ETN
F-42
KT-DoCoMo Mobile Investment Fund (formerly, “KTF-DoCoMo Mobile Investment Fund”) (Note 1)
KTD (Notes 1 and 2)
Boston Global Film & Contents Fund Limited Partnership (Notes 1 and 4)
Sky Life Contents Fund (Note 1)
Everyshow (Note 1)
KTCS Corporation (formerly, “Korea Information Data Corp.”) (Note 1)
OIC Language Visual Limited (Note 1)
Wooridul Entertainment Investment Fund-1 (Notes 1 and 4)
Olive Nine(Note 3)
Touchtel Co., Ltd. (Notes 1 and 5)
Excelnet Co., Ltd. (Note 5)
MTT Co., Ltd. (formerly, “KTT Co., Ltd.”) (Notes 1 and 5)
KMTEC Co., Ltd. (formerly, “KTTEC Co., Ltd.”) (Notes 1 and 5)
GOODTECH Co., Ltd. (Notes 1 and 5)
KDNET Co., Ltd. (formerly, KTNET Co., Ltd.”) (Notes 1 and 5)
WMC Co., Ltd. (Notes 1 and 5)
MetroM Co., Ltd. (Notes 1 and 5)
Goodmorning F Co., Ltd. (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)
UMS&C (Note 1)
Information Technology Solution Seobu Corporation
F-43
U-Mobile (Notes 1 and 6)
KTC Media Contents Investment Fund No.1
BKLCD Co., Ltd.
The Contents Entertainment (Note 3)
Olive Nine Creative Co., Ltd. (Note 3)
Paramount Music Co., Ltd. (Note 1)
Onestone Communication Co., Ltd. (Note 7)
F-44
c. Changes in Investment Difference
Changes in investment differences from equity method investment securities for the years ended December 31, 2008 and 2009 are as follows (in millions of Korean won):
Affiliate
KDB
Harex InfoTechInc.
MOS facilities (formerly, “Mostech Co., Ltd.”)
OliveNine Entertainment Co., Ltd.
Doremi Music Publishing Co., Ltd.
D&G Star Co., Ltd.
d. Elimination of Unrealized Gains (Losses)
Unrealized gains (losses) arising from intercompany transactions, which are eliminated, as of December 31, 2009 are nil.
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, 2008 and 2009 are as follows (in millions of Korean won):
KTD
PARANGOYANGI
Music City Media Co., Ltd.
Olive Nine Entertainment Co., Ltd.
F-45
f. Condensed Financial Information of The Investees (in millions of Korean won):
KTIS Corporation (formerly, “Korea Information Service Corp.”)
TMworld Co., Ltd.
Exdell Corporation
MOS facilities Co., Ltd. (formerly, “Mostech Co., Ltd.”)
MTC
Onestone Communication Co., Ltd.
F-46
Boston Global Film & Contents Fund Limited Partnership
OIC Language Visual Limited
Touchtel Co., Ltd.
Excelnet Co., Ltd.
MTT Co., Ltd. (formerly, “KTT Co., Ltd.”)
KMTEC Co., Ltd. (formerly, “KTTEC Co., Ltd.”)
GOODTECH Co., Ltd.
KDNET Co., Ltd. (formerly, KTNET Co., Ltd.”)
WMC Co., Ltd.
MetroM Co., Ltd.
F-47
8. PROPERTY AND EQUIPMENT
Land (Note 2)
Buildings (Note 2)
Construction- in-progress
9. CONTRIBUTION FOR CONSTRUCTION
Changes in contribution for construction primarily consists of government subsidies which was used in the acquisition of property and equipment for the years ended December 31, 2008 and 2009 are as follows (in millions of Korean won):
Construction-in-progress
F-48
10. INTANGIBLE ASSETS
Goodwill
Negative goodwill
Development costs
The Company’s research and ordinary development expenses amounted to (Won)283,147 million and (Won)263,213 million for the years ended December 31, 2008 and 2009, respectively.
Oilve Nine
KT FDS
KT Music (formerly, “KTF Music”)
JB Edu
F-49
11. PRESENT VALUE OF ASSETS AND LIABILITIES
Assets and liabilities measured at present value as of December 31, 2008 and 2009 are as follows (in millions of Korean won):
Accounts
Accounts receivable–trade
Accounts receivable–other
Long-term accounts receivable–trade
Long-term accounts receivable–other
Accounts payable–trade
Accounts payable–other
Long-term accounts payable–trade
Long-term accounts payable–other
Long-term borrowings
Current portion of long-term borrowings
F-50
12. LONG-TERM DEBT
a. Bonds
Bonds as of December 31, 2008 and 2009 are summarized as follows (in millions of Korean won and thousands of foreign currencies):
Company
Type
Repayment method
KT
(USD 200,000)
(JPY 12,500,000)
(USD 50,000)
(USD 110,000)
F-51
(USD 175,000
)
(JPY 7,000,000
(USD 95,000
KT Capital
CD(91D)+2.10%
Less current portion
Long-term portion
Discount on bonds
Net
F-52
F-53
Capital
1.28%
2.10%
F-54
KT M&S
b. Long-term Borrowings in Korean Won
Long-term borrowings in Korean won as of December 31, 2008 and 2009 are as follows (in millions of Korean won):
Informatization Promotion Fund (Note 1 and 2)
Inter-Korean Cooperation Fund (Note 1)
Facility and working capital loans
General purpose loans
Commercial papers
Less Current portion
Less present value discount
F-55
c. Long-term Borrowings in Foreign Currency
Long-term borrowings in foreign currency as of December 31, 2008 and 2009 are as follows (in millions of Korean won and thousands of foreign currencies):
d. Repayment Schedule
Repayment schedule of the Company’s long-term debt as of December 31, 2009 is as follows (in millions of Korean won):
2012
2013
2014
Thereafter
F-56
13. PROVISIONS
Changes in provisions for the years ended December 31, 2008 and 2009 are as follows (in millions of Korean won):
Current portion:
Litigation (Note 1)
KT members points (Note 2)
KT points (Note 4)
Call bonus points (Note 5)
Sales warranty (Note 3)
Non-current portion:
Asset retirement obligation (Note 6)
Let’s 010 call bonus points (Note 5)
F-57
14. LEASE
a. Lessees
Property and equipment acquired through lease arrangements with GE Capital and others as of December 31, 2008 and 2009 are as follows:
1) Finance Lease
Property and equipment acquired through finance lease arrangements with GE Capital as of December 31, 2008 and 2009 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, 2009 are as follows (in millions of Korean won):
2011~2014
Less amounts representing interest
Principal amount
2) Operating Lease
Annual future lease payments of operating lease arrangements with HP Financial Co., Ltd. and others as of December 31, 2009 are as follows (in millions of Korean won):
F-58
b. Lessors
The present values of minimum lease payments and gross investments in the leased assets provided by the Company as of December 31, 2009 are as follows (in millions of Korean won):
Annual future lease receipts from operating lease arrangements to be recognized by the Company as of December 31, 2009 are as follows (in millions of Korean won):
15. 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.
F-59
16. 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, 2008 and 2009 are summarized as follows (in millions of Korean won and thousands of foreign currencies):
Assets:
Deposits provided
Liabilities:
Bonds and long-term borrowings
Total liabilities
F-60
17. TRANSACTIONS AND BALANCES WITH RELATED PARTIES
KT’s significant account balances with related parties as of December 31, 2008 and 2009 are summarized as follows (in millions of Korean won):
Related party
Subsidiary:
KT Tech (formerly, “KTF Technologies Inc.”)
Equity method investees:
F-61
Significant transactions between KT and its related parties for the years ended December 31, 2007, 2008 and 2009 are summarized as follows (in millions of Korean won):
Transactions
Account
Compensation to KT’s key management personnel for the years ended December 31, 2007, 2008 and 2009 are as follows (in millions of Korean won):
Benefits
Share-based payments
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.
F-62
Significant account balances amongst subsidiaries as of December 31, 2008 and 2009 are as follows (in millions of Korea won):
Creditor
Debtor
Significant transactions amongst subsidiaries for the years ended December 31, 2007, 2008 and 2009 are as follows (in millions of Korea won):
Seller
Purchaser
KT Tech (formerly, “KTF Technologies Co., Ltd.)
As of December 31, 2009, the Company has provided guarantees for related parties as follows (in millions of Korean won):
Guarantor
18. COMMON STOCK AND CAPITAL SURPLUS
As of December 31, 2009, the Company’s number of shares authorized are 1,000,000,000 shares with par value of(Won)5,000 per share.
As of December 31, 2008 and 2009, the number of shares issued by the Company are 273,535,700 and 261,111,808 shares, respectively, and the common stock amounted to(Won)1,560,998 million and(Won)1,564,499 million, respectively. As allowed by the Securities Exchange Law, the Company retired 38,663,959 and 51,787,959 treasury shares by charges against retained earnings through December 31, 2008 and 2009, respectively. 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.
19. 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.
F-63
20. COMPREHENSIVE INCOME
Comprehensive income for the years ended December 31, 2007, 2008 and 2009 are as follows (in millions of Korean won):
Cumulative effect of changes in accounting policies
Other comprehensive income (loss):
(Tax effect:(Won)5,005 million for 2007, ((Won)3,632) million for 2008 and(Won)3,945 million for 2009)
Unrealized gain on available-for-sale securities
(Tax effect:(Won)1,189 million for 2007,(Won)2,988 million for 2008 and ((Won)1,793) million for 2009)
Unrealized loss on available-for-sale securities
(Tax effect:(Won)1,872 million for 2008 and ((Won)1,858) million for 2009
Unrealized gain on valuation of derivatives
(Tax effect: ((Won)768) million for 2007, ((Won)2,288) million for 2008 and ((Won)400) million for 2009)
Unrealized loss on valuation of derivatives
(Tax effect:(Won)4,989 million for 2008 and ((Won)1,003) million for 2009)
(Tax effect: ((Won)2,789) million for 2007,(Won)3,779 million for 2008 and ((Won)240) million for 2009)
(Tax effect: ((Won)4,942) million for 2007, ((Won)6,517) million for 2008 and(Won)215 million for 2009)
Comprehensive income
Attributable to: Equity holders of the parent
Noncontrolling interest
F-64
21. SHARE-BASED PAYMENT
The Company granted stock options to its executive officers and directors as of December 31, 2009 in accordance with the stock option plan approved by its board of directors of which details are as follows:
Grant date
Grantee
Outside directors
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 expired shares as of December 31, 2009
Number of allocated shares as of December 31, 2009
Number of additional shares related to business performance as of December 31, 2009
Number of shares expected to be exercised
Fair value (in Korean won)
Total compensation cost (in millions of Korean won)
Exercise price (in Korean won)
Exercise period
~Dec. 26, 2009
~Sep.16, 2010
~Dec.12, 2010
~Feb. 4, 2012
~Apr. 28, 2012
~Mar. 25, 2010
~Sep. 8, 2010
~Mar. 4, 2012
Valuation method
method
Upon exercise, the Company can elect one of the following settlement methods; an issuance of new shares, a provision of treasury stocks or cash settlement (cash and provision of treasury stocks) subject to its circumstances.
F-65
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%
~ 42.13%
~ 35.92%
Expected dividend yield ratio
Of total compensation costs calculated using the fair value method, the compensation costs recognized through December 31, 2009 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 to be recognized
Details of stock grants to directors including chief executive officer are as follows:
2nd grant
3rd grant
KTF-2nd grant (Note)
Estimated number of shares granted
Vesting conditions
Service condition: six months
Non-market performance condition:
achievement of performance
Fair value per option (in Korean won)
Total compensation costs (in Korean won)
Estimated exercise date (exercise date)
F-66
Above compensation costs were calculated based on the fair value method and charged to current operations for the year ended December 31, 2009 as follows (in millions of Korean won):
Total compensation costs
Compensation costs recognized in the current period
Compensation costs to be recognized after the current period
22. TREASURY STOCK
Changes in KT’s treasury stock for the years ended December 31, 2008 and 2009 are as follows (in millions of Korean won except for share data):
Direct purchase by the Financial Investment Services and Capital Markets Act (formerly, “Securities and Exchange Act“)
Indirect purchase through trust agreement and other
Above treasury stocks are expected to be used for the stock compensation to the Company’s directors and employees and other purposes.
F-67
23. OPERATING REVENUES
Operating revenues for the years ended December 31, 2007, 2008 and 2009 are as follows (in millions of Korean won):
Internet services
Telephone services
PCS services
24. CONSTRUCTION CONTRACTS
Details of construction contracts as of December 31, 2007, 2008 and 2009 are as follows (in millions of Korean won):
Jungja Dong, Suwon
Sungsu Dong, Seoul
Bugae Dong, Incheon
Sungsu-dong, Seoul
(factory building)
Sungsu-dong, Seoul (factory building)
Garak-dong, Seoul (office building)
F-68
25. OPERATING EXPENSES
Operating expenses for the years ended December 31, 2007, 2008 and 2009 are as follows (in millions of Korean won):
Employee welfare
Travel
Communications
Electric and water charges
Taxes and dues
Publications
Rent
Repairs
Maintenance
Automobile maintenance
Advertising
Education and training
Praise and reward
Research
Development
Cost of services
International settlement payment
Promotion
Sales commission
Less : transfer to other accounts
F-69
26. INCOME TAX EXPENSE
Components of income tax expense for the years ended December 31, 2007, 2008 and 2009 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) (Note)
Income tax expense directly reflected in stockholders’ equity
Income tax expense
Ending deferred income tax assets
Beginning 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 income from continuing operations before income tax expense for the years ended December 31, 2007, 2008 and 2009 are as follows (in millions of Korean won):
Income tax expense at statutory income tax rate
(For 2007: Less than(Won)100 million: 14.3%
Over (Won)100 million: 27.5%
For 2008: Less than (Won)200 million: 12.1%
Over (Won)200 million: 27.5%
For 2009: Less than (Won)200 million: 12.1%
Over (Won)200 million: 24.2%)
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
Additional income tax and tax refund for prior years
Tax rate changes
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c. Changes in temporary differences, including tax loss and credits carryforwards, and deferred income tax assets (liabilities) for the years ended December 31, 2008 and 2009 are as follows (in millions of Korean won):
(Deductible temporary differences)
Derivative instruments
Equity method investment securities
Contribution for construction
Provisions
Provision for severance indemnities
Not recognized as deferred income tax assets (Note 2)
Recognized as deferred income tax assets
Tax rate (Note 3)
Deferred income tax assets
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(Taxable temporary differences)
Accrued interest income
Reserve for technology and human resource development
Not recognized as deferred income tax liabilities (Note 2)
Recognized as deferred income tax liabilities
Deferred income tax liabilities
(Tax loss carryforwards)
Total loss carryforwards
Not recognized as deferred income tax assets (Note 4)
(Tax credit carryforwards)
Total tax credit
Not recognized as deferred income tax assets
Deferred income tax assets, net
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d. Deferred income tax assets (liabilities) and income tax benefits (expenses) added to (deducted from) stockholders’ equity as of December 31, 2008 and 2009 are as follows (in millions of Korean won):
Gain on disposal of treasury stock (capital surplus)
Other capital adjustment
Gain on valuation of available-for-sale securities
Loss on valuation of available-for-sale securities
27. INCOME FROM DISCONTINUING OPERATIONS
Korea Telecom Venture Fund No.1 (the “Fund”) and KTPI were excluded from the consolidation as of December 31, 2007. Olive Nine and KT FDS are excluded from the consolidation as of December 31, 2009. Their net income (loss) for the years ended December 31, 2007, 2008 and 2009 were reclassified into income (loss) from discontinuing operations as follows (in millions of Korean won):
[Book value]
Assets of discontinuing operations
Liabilities of discontinuing operations
[Income (loss) from discontinuing operations]
Operating and non-operating income (loss)
Reversal of cumulative loss from discontinuing operation (Note 1)
Gain on disposal of discontinuing operations
Tax effect
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28. INCOME PER SHARE
The Company’s net income per share for the years ended December 31, 2007, 2008 and 2009 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)
c. Basic Net Income Per Share
d. Diluted Income Per Share From Continuing Operations
Interest on exchangeable bonds
Adjusted income from continuing operations
Number of shares with dilutive effects
e. Diluted Income Per Share From Discontinuing Operations
Adjusted income from discontinuing operations
Diluted income (loss) per share from discontinuing operations(in Korean won)
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f. Diluted Net Income Per Share
Adjusted net income
Basic net income per share is computed on the basis of the weighted-average number of common shares outstanding which is adjusted to include the number of common shares outstanding at the beginning of the years (208,095,178 shares, 203,686,823 shares and 202,035,296 shares as of January 1, 2007, 2008 and 2009, respectively) and weighted average number of treasury stock acquired for the years ended December 31, 2007, 2008 and 2009 (1,495,884 shares, 795,808 shares and (17,477,400) shares for the years ended December 31, 2007, 2008 and 2009, respectively).
For the purpose of calculating diluted net income per share, all dilutive potential common shares were added to net income attributable to common share holders and the weighted average number of shares outstanding, respectively. Diluted net income per share is calculated by dividing adjusted net income by the weighted average number of common shares and all dilutive potential common shares. Dilutive effect resulted from the exchangeable bonds which were issued and also exchanged for the year ended December 31, 2009. Stock options and other share-based payments have no dilutive effect and are excluded from the calculation of diluted net income per share.
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(Note) Potential common shares as of December 31, 2007, 2008 and 2009 are as follows:
Parvalue
Issue date
Maturity
ExercisablePeriod
(Note 7)
March 29, 2007
March 27, 2008
On maturity date, subject to the resolution of board of directors
23,925
—
June 20,2007
In 2010
11,790
29,481
13,345
May 7,2009
29,055
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29. INSURANCE
As of December 31, 2009, 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
Finance lease receivables
Vessel (vehicles)
30. DIVIDENDS
Details of KT’s dividends for common stocks for the years ended December 31, 2007, 2008 and 2009 are as follows (in Korean won except for share data):
a. Dividends
Dividends per share (dividend ratio)
Number of shares outstanding (Note)
Dividend
b. Dividend Payout Ratios
Net income (Attributable to equity holders of the parent)
Payout ratio
c. Dividend Yield Ratios
Dividends per share
Stock price at the end of the year
Dividend yield ratio
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31. 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, 2007, 2008 and 2009 are detailed as follows (in millions of Korean won):
Construction in progress transferred to property and equipment and other accounts
Acquisition of equity method investment securities by issuance of exchangeable bond (Note)
Reissuing of treasury stock by exchange of exchangeable bond (Note)
Increase in capital by merger with KTF
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
32. 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.
The Company filed for judicial review of the fine imposed by FTC relating to local telephone services amounting to(Won)113,048 million to the Supreme Court. On June 23, 2009, the Supreme court finally confirmed that the FTC’s calculation for the fine needed to be revisited and, in response to the recalculation by FTC, the Company recorded (Won)18,088 million as non-operating income, which resulted from the recalculated fine amounting to (Won)94,960 million, and also recorded its interest totaling(Won)16,552 million as interest income, respectively.
The Company is also in various litigation as a defendant in other cases of which claim amounts totaled(Won)46,993 million (105 cases) as of December 31, 2009. The Company accrued(Won)17,010 million as provisions related to the litigation as of December 31, 2009. However, the final result of this litigation cannot be presently determined.
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b. Commitments with Financial Institutions
As of December 31, 2009, 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
Letters of credit
Collection for foreign currency denominated checks
Working capital loans
General loans
Corporate bonds
Local credit agreements
Short-term finance
Guarantee
Financial institution
Performance guarantee for construction
Korea Software Financial Cooperative and others
(Won)230,594
KT, KTP, KTN, KTL, KTSC, KT Capital, KTT, Sofnics, JB Edu, Nasmedia and KTF M Hows
General guarantee
Loss on sale of accounts receivable from the transfer of those receivables amounted to (Won)719 million for the year ended December 31, 2009, and accounts receivable sold but not matured as of December 31, 2009 are (Won)17,851 million.
c. Put and Call Combination Contract with Woori Investment & Securities Co., Ltd.
On December 27, 2005, the Company and JPMorgan Chase Bank, N.A. entered into a “Put and Call Combination” contract based on the shares of Korea Digital Satellite Broadcasting (“KDB”), an equity method investee, and the contract expired on December 26, 2008.
On December 26, 2008, the Company and Woori Investment & Securities Co., Ltd. which acquired KDB shares from JP Morgan Whitefriars Inc. entered into a “Put and Call Combination” contract based on the shares of KDB. Under this contract, during the period from December 26, 2009 to December 26, 2011, KT has the option to acquire 9,200,000 shares of KDB that were purchased by Woori Investment & Securities Co., Ltd. on December 26, 2008, and Woori Investment & Securities Co., Ltd. has the option to exercise the put option on such KDB shares to KT on December 26, 2011. The exercise price under the contract for both KT and Woori Investment & Securities Co., Ltd. is (Won)46,000 million. The Company exercised this call option on February 26, 2010.
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d. Payment of a Handset Subsidy to PCS or WiBro Users
According to the provisions of the Telecommunications Business Law (“TBL”), the Company has provided a onetime handset subsidy to eligible mobile phone users, who have subscribed to the Company’s service or any other mobile carriers for 18 consecutive months, within the next two years from March 27, 2006 to March 26, 2008.
Above handset subsidy program was terminated effective March 27, 2008, however the Company currently provides a variety of handset subsidy programs to PCS or WiBro subscribers according to its operation policy and sets forth the programs in details in the service agreement. The handset subsidy provided by the Company is expensed as incurred.
e. Loan Commitment
KT Capital entered into an agreement with construction developers to provide a loan covering up to(Won)38,000 million when the construction developers cannot redeem the project financing loan for construction at a maturity date due to the unsold apartments. Under the agreement, KT Capital has the right to get the unsold apartment as collateral.
f. Uncollected Promissory Notes
As of December 31, 2009, the Company is planning to take legal proceedings in regards to 5 missing notes along with the respective issuer bank of the notes.
Doremi media, one of subsidiaries, provided a blank note to Korea Credit Guarantee Fund as collateral for the long-term borrowings.
33. DERIVATIVES
For the years ended December 31, 2007, 2008 and 2009, the Company entered into various derivatives contracts with financial institutions. Details of these derivative contracts are as follows:
Type of transaction
Interest rate swap
Currency swap
Combined interest rate currency swap
Currency forward
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The assets and liabilities recorded relating to the outstanding contracts as of December 31, 2008 and 2009 are as follows (in millions of Korean won and thousands of foreign currencies):
USD 100,000
Currency swap (Note)
Combined interest rate currency swap (Note)
Put Option
USD 1,785,201
JPY 19,520,000
USD 1,760,208JPY 19,500,000
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Details of the foreign currency swap contracts, combined interest rate currency swap contracts and interest rate swap contracts to which cash flow hedge and fair value hedge accounting are applied as of December 31, 2008 and 2009 are as follows (in millions of Korean won and thousands of foreign currencies):
Contract date
Maturity date
Cash flow hedge
Currency swap(Note 2)
Combined interest rate currency swap (Note 2)
Fair value hedge
Interest rate swap (Note 3)
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The valuation gains and losses on the derivative contracts for the years ended December 31, 2007, 2008 and 2009 are as follows (in millions of Korean won):
Type of Transaction
Currency forwards
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34. MERGER WITH KTF
On January 20, 2009, the Company entered into the merger agreement with KTF and on March 27, 2009, the merger was approved in its stockholders’ meeting. On June 1, 2009, the Company, as an existing company, merged with KTF.
The Company delivered 0.7192335 shares of KT common stock (face value (Won)5,000) for every one share of KTF. However, the Company did not deliver any new common stock to the shares of KTF common stock held by the Company (114,235,723 shares) and all the treasury shares of KTF (9,623,143 shares) as of the date of the merger.
a. Details of Combined Companies
CEO
Business
Relationship
b. Accounting Treatment
As this is a merger between parent and subsidiary, the excess of merger consideration given over carrying amount of KTF net assets additionally acquired was recognized as capital adjustment after offsetting capital surplus, if any, from the same type of transaction. (in millions of Korean won)
Details
Decrease in noncontrolling interest (a)
Increase in equity holders of the parent (b)
Increase in common stock
Decrease in treasury stock
Decrease in gain on disposal of treasury stock
Decrease in accumulated other comprehensive income
Decrease in capital adjustments
Changes in total equity (a + b)
c. Goodwill
Changes in goodwill for the years ended December 31, 2009 is as follows (in millions of Korean won):
January 1, 2009
Goodwill is amortized on a straight-line basis over 10 years and as of December 31, 2009, the remaining amortization period of goodwill is six months.
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d. Financial Statements of Combined Companies
[Statements of financial position] (in millions of Korean won) :
Current assets
Investment assets
Property and equipment
Intangible asset
Current liabilities
Non-current liabilities
TOTAL LIABILITIES
[Statements of income] (in millions of Korean won) :
Non-operating Revenues
Non-operating Expenses
Income tax Expenses
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35. SEGMENT INFORMATION
The Company determined its operating segments after the merger with KTF on June 1, 2009 as follows:
Business service
Personal Customer Group (“Personal”)
Home Customer Group (“Home”)
Enterprise Customer Group (“Enterprise”)
a. Details of each segment for the years ended December 31, 2007, 2008 and 2009 are as follows (in millions of Korean won):
Total sales
Property and equipment and intangible assets
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b. Information by Industry
Assets and liabilities by industry as of December 31, 2008 and 2009 are as follows (in millions of Korean won):
Quick assets
Non-current assets
Investments
Intangible assets
Results of operations by industry for the years ended December 31, 2008 and 2009 are as follows (in millions of Korean won):
Newly included subsidiary’s net loss before acquisition
Income from discontinuing operations
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36. VALUE ADDED INFORMATION
Value added information included in operating expenses for the years ended December 31, 2007, 2008 and 2009 are as follows (in millions of Korean won):
37. EMPLOYEE WELFARE
Employee welfare through various plans spent by the Company for the years ended December 31, 2008 and 2009 totaled(Won)565,797 million and (Won)587,033 million, respectively.
The Company donates cash to Employee Welfare Foundation each year. The related expenses recognized for the years ended December 31, 2008 and 2009 amounted to (Won)74,300 million and(Won)35,017 million, respectively.
38. SHARE PURCHASE AGREEMENT TO ACQUIRE KEUM HO RENT A CAR CO., LTD.
On December 30, 2009, the Company and MBK Partners 2nd Private Equity Fund entered into a share purchase agreement to jointly acquire Keum Ho Rent A Car Co., Ltd. from Korea Express Inc. The acquisition will be completed during 2010 upon payment of acquisition cost in exchange of transfer of shares of Keum Ho Rent A Car Co., Ltd. from Korea Express Inc. after due diligence.
39. PRE-DISCLOSURES OF IMPACT FROM TRANSITION TO K-IFRS
The Company plans to prepare its financial statements using K-IFRS starting from the year ending December 31, 2011. In October 2007, the Company set up the basic plan to adopt K-IFRS and as of December 31, 2009 it is analyzing the impact from the adoption of K-IFRS and is the developing necessary infrastructure to support and sustain its conversion to K-IFRS
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40. 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 in the reconciliation tables below. Other differences do not have a significant effect on either consolidated net income or total equity.
The effects of the significant adjustments to net income for the years ended December 31, 2007, 2008 and 2009 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):
Net income in accordance with Korean GAAP
Adjustments:
Goodwill impairment
Equity in income of associates:
Reversal of amortization of goodwill
Impairment loss relating to equity investee
Additional acquisitions of equity investees
Interest capitalization (including related depreciation), net
Service installation fees
Deferred income tax—methodology difference
Deferred income tax effects of U.S. GAAP adjustments
Capitalized foreign exchange transactions, net
Miscellaneous accounts
Noncontrolling interest income
Net income as adjusted in accordance with U.S. GAAP
Net income attributable to stockholders
Net income attributable to noncontrolling interest
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The effects of the significant adjustments to total equity for the years ended December 31, 2008 and 2009 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):
Total equity in accordance with Korean GAAP
Equity in earnings of equity method affiliates:
Reversal of goodwill amortization
Different useful life of intangibles
Interest capitalization, net
Deferred tax—methodology difference
Deferred tax effects of U.S. GAAP adjustments
Total equity as adjusted in accordance with U.S. GAAP
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
KT Music (formerly, “KTF Music Corporation”)
Unlisted :
SFNH BF-(1)
Doremi Media
The quoted market values (based on closing KOSDAQ prices) of KTSC and KT Music shares held by the Company are (Won)24,578 million and(Won)52,587 million as of December 31, 2009, respectively.
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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, 2008 and 2009, and for each of the three years in the period ended December 31, 2009 (in millions of Korean won):
Net assets
Net cash used in financing activities
Effect of changes in consolidated entities
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Condensed consolidated balance sheets as of December 31, 2008 and 2009, changes in consolidated total equity 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, 2009 are presented in Note 40 r.
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 ASC Topic 323 “Investments Equity Method and Joint Venture” and ASC Topic 325 “Investments Other.”
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 ASC Topic 320 “Debt and Equity Securities.” This guidance 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.
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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 ASC Topic 320 at December 31, 2008 and 2009 are 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)1,181,025 million in 2007,(Won)614,405 million in 2008 and(Won)6,833 million in 2009. The realized gains on those sales were(Won)11,428 million in 2007,(Won)5,587 million in 2008 and(Won)1,716 million in 2009. The average-cost method is used to calculate gains or losses from the sale of available-for-sale securities.
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 recoveries of impaired available-for-sale securities amounted to (Won)76 million in 2007. However, such differences have not been reconciled for U.S. GAAP purposes, since the amounts are immaterial and nil in 2008 and 2009.
The Company has not included the disclosure requirements related to investments’ gross unrealized losses and fair value, since the amounts were immaterial.
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
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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 ASC Topic 350, “Intangibles—Goodwill and Other”, 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 ASC Topic 323. 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 Personal Customer Group for the years ended December 31, 2008 and 2009 are as follows (in millions of Korean won):
Balance as of January 1, 2008
Goodwill acquired during the year
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, including the potential equity ownership, of investee gains and losses, and 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 a 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
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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, 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 asset 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, the Company amortizes the frequency usage right of 2G over the remaining useful life under U.S. GAAP beginning from the year ended December 31, 2006.
In addition, the frequency usage right related to the third generation (“3G”) acquired in 2000 has been accounted for in the same manner under Korean GAAP and U.S. GAAP.
Identifiable intangible assets determined in accordance with U.S. GAAP as of December 31, 2008 and 2009 are presented below.
Amortizable intangible assets:
Internal-use software
Buildings and facility utilization rights
Amortization expense:
For the year ended December 31, 2007
For the year ended December 31, 2008
For the year ended December 31, 2009
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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:
Buildings and structures
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, 2007, 2008 and 2009 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 PCS and leased-line services are recognized as revenue when installation and initiation services are rendered.
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. In 2009, due to a change in the market condition the Company changed the estimate of the expected terms of customer relationships of telephone, PCS, and leased-line service from 15 years to 11 years, from 4 years to 2 years and from 3 years to 6 years, respectively. The change in the estimated expected terms of customer relationships is accounted for as a change in accounting estimate on a prospective basis effective January 1, 2009 under the accounting standard related to change in accounting estimates. As a result, net income for the year ended December 31, 2009 increased by(Won)153 billion.
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 ASC Topic 605, “Revenue Recognition.”
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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 any longer 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, 2008 and 2009, respectively.
Under Korean GAAP, in accordance with SKAS No. 16, effective from January 1, 2005, the Company did not recognize deferred income tax liabilities related to equity in gains of affiliates when 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. According to the transition rule of the statement, Korean GAAP prior year financial statements have been restated. However, in 2008 the KAI opinion 06-2 was slightly amended as described in Note 2 (b), in which temporary differences arising from certain transactions under SKAS No. 16, such as elimination of inter-company transactions through equity method, should be separately treated as an individual basis when they are recognized in the consolidated financial statements. Consequently,
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there is no GAAP difference as of December 31, 2008 and 2009, respectively, in terms of the recognition of temporary differences arising from certain transactions mentioned above.
Under U.S. GAAP, on January 1, 2007, the Company adopted accounting guidance which clarifies the accounting guidance for uncertainties in income taxes. The guidance 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 the accounting guidance, 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.
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. Noncontrolling interest
Under Korean GAAP, noncontrolling interest in consolidated subsidiaries is presented as a separate component of equity in the consolidated balance sheet.
Under U.S. GAAP, as described in Note 40 (p) in 2009 the Company retrospectively adopted the presentation and disclosure provisions of new accounting guidance on a noncontrolling interest in its consolidated financial statements, which required noncontrolling interest to be presented as a separate component of equity in the consolidated financial statements as well as modified the presentation of net income and other comprehensive income to be attributed to controlling and noncontrolling interest. Consequently, there is no GAAP difference any longer in terms of presentation of noncontrolling interest in the consolidated financial statements.
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m. 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.
n. Comprehensive Income
Prior to January 1, 2007, Korean GAAP did not require the presentation of 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 any longer in terms of disclosure of comprehensive income and its components.
Under U.S. GAAP, comprehensive income and its components must be presented in the financial statements. Comprehensive income includes all changes in total 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 December 31, 2007, 2008 and 2009 are summarized as follows (in millions of Korean won):
Attributable to stockholders :
Other comprehensive income, net of tax :
Foreign currency translation adjustments
Unrealized gains on investments :
Unrealized holding gains(losses), net of tax of(Won)1,023 million, ((Won)1,907) million and (Won)384 million in 2007, 2008 and 2009, respectively
Reclassification adjustment for losses realized in net earning due to disposal, net of tax of(Won)1,004 million, (Won)687 million and (Won)378 million in 2007, 2008 and 2009, respectively
Gains(losses) on valuation of derivatives for cash flow hedge, net of tax of(Won)768 million, ((Won)1,297) million and ((Won)5,840) million in 2007, 2008 and 2009, respectively
Comprehensive income as adjusted in accordance with U.S. GAAP
Attributable to noncontrolling interest :
Total Comprehensive Income
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o. Statements of Cash Flows
Statements of cash flows under Korean GAAP include the cash flows of KTSC, KTP, SFNH BF-(1), KT Music (formerly, “KTF Music Corporation”), Vanguard Private Equity Fund 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 assets 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 a 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.
p. Significant New Accounting Pronouncements
In March 2008, the FASB issued enhanced guidance for disclosures about derivative instruments and hedging activities by expanding the disclosure requirements regarding: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. In
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addition, this guidance 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. The Company adopted the new guidance in 2009 with no material impact to the consolidated financial statements.
In October 2009, the FASB issued ASU 2009-13 “Multiple-Deliverable Revenue Arrangements.” The update addresses how revenues should be allocated among all products and services included in sales arrangements. It establishes a selling price hierarchy for determining the selling price of each product or service, with vendor-specific objective evidence (“VSOE”) at the highest level, third-party evidence of selling price at the intermediate level, and a best estimate of the selling price at the lowest level. It replaces “fair value” with “selling price” in revenue allocation guidance, eliminates the residual method as an acceptable allocation method, and requires the use of the relative selling price method as the basis for allocation. It also significantly expands the disclosure requirements for such arrangements, including, potentially, certain qualitative disclosures. ASU 2009-13 will be effective prospectively for sales entered into or materially modified in fiscal years beginning on or after
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June 15, 2010. The FASB permits early adoption of ASU 2009-13, applied retrospectively, to the beginning of the year of adoption. Management is currently evaluating the impact on the consolidated financial statements.
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q. Income per Share
The following table sets forth the computation of basic and diluted income per share attributable to stockholders for the years ended December 31, 2007, 2008 and 2009:
CONSOLIDATED(in millions of Korean won)
Net income (loss) from discontinuing operations
AVERAGE EQUIVALENT SHARES
Shares of common stock outstanding
Dilutive effect of exchangeable bond
Total average equivalent shares
PER SHARE AMOUNTS(in Korean won)
Net income per share
Basic income per share is computed on the basis of the weighted-average number of common stock outstanding. Diluted income per share is computed on the basis of the weighted-average number of common stock outstanding plus the effect of outstanding exchangeable bonds using the “if-exchanged method”. The denominator of the diluted income 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 exchangeable bonds. Stock options were not considered when calculating diluted income 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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r. Condensed Consolidated U.S. GAAP Financial Information
Condensed consolidated balance sheets in accordance with U.S. GAAP as of December 31, 2008 and 2009 are presented as follows (in millions of Korean won):
Total current assets
Property and equipment, net
Other assets
Total current liabilities
Long-term debt, excluding current portion
Other long-term liabilities
Total liabilities and equity
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Changes in consolidated total equity in accordance with U.S. GAAP for the years ended December 31, 2007, 2008 and 2009 are as follows (in millions of Korean won):
Beginning of the year
Unrealized gains on investments, net of tax
Unrealized gains on valuation of derivatives, net of tax
Sale of treasury stock, net
Adoption of FIN 48
Other, net of tax
End of the year
Changes in comprehensive income
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Condensed consolidated statements of cash flows in accordance with U.S. GAAP for the years ended December 31, 2007, 2008 and 2009 are set out below (in millions of Korean won):
CASH FLOWS FROM OPERATING ACTIVITIES :
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income tax 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
Notes and accounts receivable
Notes and long-term accounts receivable
Accounts payable
Other, net
CASH FLOWS FROM INVESTING ACTIVITIES :
Acquisition of property and equipment
Disposal of property and equipment
Decrease (increase) in short-term financial instruments, net
CASH FLOWS FROM FINANCING ACTIVITIES :
Repayment of long-term borrowings and current portion of long-term debt
Outflows from capital transactions of consolidated entities
Supplemental schedule:
Cash paid for interest (net of amounts capitalized)
Cash paid for income taxes
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41. ADDITIONAL U.S. GAAP DISCLOSURES
a. Income Tax Expense
The components of income tax expense for the years ended December 31, 2007, 2008 and 2009 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, 2007, 2008 and 2009 for the following reasons (in millions of Korean won):
Provision for income taxes at statutory tax rates
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 19.9%, 23.6% and 12.3% for the years ended December 31, 2007, 2008 and 2009, respectively.
The tax effects of temporary differences that resulted in significant portions of the deferred income tax assets and liabilities at December 31, 2008 and 2009, 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
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In 2008 and 2009, valuation allowances were recognized by certain subsidiaries 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 2009, the Company was eligible for tax credits of (Won)276,332 million. However, due to the minimum tax provisions, the Company utilized only(Won)80,349 million. The remaining tax credit will expire in 2014. During 2009, 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)169,122 million of the tax credit. The tax loss carryforwards of(Won)281,201 million as of December 31, 2009 will expire through 2019. During 2009, certain subsidiaries including KT Tech did not recognize deferred income tax assets amounting to (Won)61,642 million which resulted from the tax effects of tax loss carryforwards of(Won)280,194 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 differences 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.
The amount of unrecognized tax benefits that would favorably affect the effective income tax rate was(Won)784 million and ((Won)25,872) million for the years ended December 31, 2008 and 2009, respectively. The liability for uncertain tax positions is classified as a non-current liability in accordance the guidance.
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,
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 for settlement
Balance at December 31,
The Company’s practice is to classify interest on uncertain tax positions in non-operating expense whereas penalties are classified in income tax expense. The Company recognized (Won)295 million and(Won)347 million in penalties for the years ended December 31, 2008 and 2009, respectively. As of December 31, 2008 and 2009, the Company had (Won)683 million and (Won)909 million accrued for the payment of penalties.
The Company has open tax years ranging from 2005 to 2009, by which its 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.
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b. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). GAAP establishes a valuation hierarchy for prioritizing the inputs and the hierarchy places greater emphasis on the use of observable market inputs and less emphasis on unobservable inputs. When determining fair value, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of the hierarchy are as follows: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Following is a description of the valuation methodologies the Company used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
(i) Recurring Fair Value
Securities
The Company classifies its securities within Level 1 of the valuation hierarchy where quoted prices are available in an active market. The Company generally classifies its securities within Level 2 of the valuation hierarchy where quoted market prices are not available. If quoted market prices are not available, the Company determines the fair value of its securities using pricing models, quoted prices of securities with similar characteristics or discounted cash flow models.
Derivatives
The Company generally classifies derivatives within Level 2 of the valuation hierarchy. The derivative financial instruments consist of cross currency interest rate swap and put option contracts. The cross currency interest swaps are valued using internal models that use as their basis readily observable market inputs, such as time value, forward interest rates, volatility factors and current and forward market prices for foreign currency.
The Company classifies put option within Level 3 of the valuation hierarchy. The put option is valued using internal model with significant unobservable inputs as Level 3 of the valuation hierarchy. The fair value of the put option is measured using Black-Sholes option pricing model that utilizes unobservable inputs such as expectation about dividend and future volatility. In addition, considering the fair value measurement, management judgments are applied to assess the appropriate level of valuation adjustments to reflect counterparty credit quality and the Company’s own nonperformance risk, where relevant.
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The following fair value hierarchy table presents information regarding the assets and liabilities measured at fair value on a recurring basis as of December 31, 2008 and 2009, respectively (in millions of Korean won):
• Beneficiary certificates
• Available-for-sale securities :
• Held-to-maturity securities
Derivative instruments assets :
• Currency swap
• Combined interest rate currency swap
• Put option
LIABILITIES
Derivative instruments liabilities :
• Interest rate swap
• Currency forwards
• Trading securities
• Available-for-sale securities
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The following table provides a reconciliation of the beginning and ending balances for the years ended December 31, 2008 and 2009 of the Company’s put option, as the option is measured at fair value using significant unobservable inputs (in millions of Korean won):
Balances at January 1, 2008
Unrealized gain included in earnings
Unrealized gain (loss) included in other comprehensive income
Purchases, sales, issuances and settlements, net
Transfer in and/or out of Level 3
Balances at December 31, 2008
Balances at January 1, 2009
Balances at December 31, 2009
(ii) Non-recurring Fair Value
As discussed in Note 40,p(i), “Significant New Accounting Pronouncements,” on January 1, 2009 the Company adopted the provisions of the authoritative guidance on fair value measurements for nonfinancial assets and nonfinancial liabilities that the Company does not recognize or disclose at fair value on a recurring basis (at least annually). These include reporting units measured at fair value in a goodwill impairment test, other nonfinancial assets or liabilities measured at fair value for impairment testing, and nonfinancial assets acquired and liabilities assumed in a business combination. In connection with the adoption of this guidance the Company analyzed and evaluated them to determine whether nonfinancial assets and liabilities had any evidences of impairment. As a result of the evaluation, the Company noted that it currently does not have significant non-financial assets or non-financial liabilities that are required to be measured at fair value on a non-recurring basis.
c. 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, accounts payable and short-term borrowings
The carrying amount approximates fair value due to the short-term maturity of these instruments.
(ii) 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.
(iii) 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.
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The estimated fair values of the Company’s significant financial instruments at December 31, 2008 and 2009 are summarized as follows (in millions of Korean won):
Loans to employees
Long-term debt, including current portion
d. 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):
2015-2019
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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.
/s/ Suk-Chae Lee
Date: June 29, 2010