As filed with the Securities and Exchange Commission on June 29, 2011
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
OR
For the fiscal year ended December 31, 2010
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, 2010, there were 243,215,844 shares of common stock, par value(Won)5,000 per share, outstanding
(not including 17,895,964 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
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(continued)
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Item 7.A.
Major Shareholders
Item 7.B.
Related Party Transactions
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.
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)1,257.5 to US$1.00, (Won)1,167.6 to US$1.00 and(Won)1,138.9 to US$1.00 at December 31, 2008, 2009 and 2010, 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, 2010 have been translated into United States dollars at the rate of(Won)1,138.9 to US$1.00, the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. and in effect on December 31, 2010.
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, 2009 and 2010 and for each of the years in the three-year period ended December 31, 2010, 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, 2010 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 38 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 income
Non-operating expenses
Income tax expense on continuing operations
Income from continuing operations
Income (loss) from discontinued operations
Net Income
Controlling interest net income
Minority interest net income
Basic income per share from continuing operations
Basic net income per share (2)
Diluted income per share from continuing operations
Diluted net income per share (3)
Dividends per share (4)
U.S. GAAP (5):
Income taxes
Income (loss) from discontinuing operations
Net Income (6)
Attributable to KT stockholders
Attributable to noncontrolling interests
Basic income per share (2)
Diluted income per share (3)
2
Balance Sheet Data
Working capital (7)
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) (8)
Lines in service (thousands) (8)
Lines in service per 100 inhabitants (8)
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
2006
2007
2008
2009
2010
December
2011 (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)1,257.5 to US$1.00, (Won)1,167.6 to US$1.00 and (Won)1,138.9 to US$1.00 at December 31, 2008, 2009 and 2010, 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, 2010 have been translated into United States dollars at the rate of (Won)1,138.9 to US$1.00, the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. and in effect on December 31, 2010.
We make no representation that the Won or Dollar amounts contained in this annual report could have been or could be converted into Dollar or Won, as the case may be, at any particular rate or at all.
Item 3.B. Capitalization and Indebtedness
Not applicable
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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., which subsequently changed its name to LG U+. The merger enables LG U+ 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 U+. We had a market share of 31.6% as of December 31, 2010, making us the second largest mobile telecommunications service provider. SK Telecom had a market share of 50.6% as of December 31, 2010.
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.
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 U+ 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
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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, 2010, we had a market share in local telephone service of 86.3% and a market share in domestic long distance service of 82.2%. 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 U+. 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 43.1% as of December 31, 2010. 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.
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
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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.
Failure to renew existing bandwidth spectrum, acquire adequate additional bandwidth spectrum or use our bandwidth efficiently may adversely affect our mobile telecommunications business and results of operations.
One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth spectrum allocated to the service provider. Our current right to use 40 MHz of bandwidth in the 1.8 GHz spectrum is scheduled to expire at the end of June 2011. We have applied to the Korea Communications Commission to allocate back to us 20 MHz of bandwidth in the 1.8 GHz spectrum, for which we expect to pay a usage fee if reallocated to us. In addition, the Korea Communications Commission allocated 20 MHz of bandwidth in the 900 MHz spectrum to us, which will become effective on July 1, 2011. We expect to pay a portion of the actual sales generated from using the bandwidth in the 900 MHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales as determined by the Korea Communications Commission at the time of allocation. In June 2011, the Korea Communications Commission announced its plan to auction in August 2011 the right to use 20 MHz of bandwidth in the 1.8 GHz spectrum that we are scheduled to relinquish at the end of June 2011, 10 MHz of additional bandwidth in the 800 MHz spectrum and 20 MHz of additional bandwidth in the 2.1 GHz spectrum. According to the plan, a maximum of 20 MHz of bandwidth may be sold to a single service provider, and SK Telecom and we are prohibited from bidding for the 20 MHz bandwidth in the 2.1 GHz spectrum. If we are allocated the bandwidths in the 800 MHz or the 1.8 GHz spectrums, we expect to pay usage fees for such bandwidths. The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have been significant factors in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than voice services. The current trend of increasing data transmission use and the increasing sophistication of multimedia contents are likely to put additional strain on the bandwidth capacity of mobile service providers. In the event we are unable to maintain sufficient bandwidth capacity by renewing existing bandwidth spectrum, receiving additional bandwidth allocation, or cost-effectively implementing technologies that enhance bandwidth usage efficiency, our subscribers may perceive a general decrease in quality of mobile telecommunications services. No assurance can be given that bandwidth constraints will not adversely affect the growth of our mobile telecommunications business.
Termination of our second generation Personal Communications Service (or 2G PCS) services may pose risks to us.
We have been providing our 2G PCS services based on CDMA wireless network standards through our 40 MHz bandwidth in the 1.8 GHz spectrum, which allocation is expected to terminate at the end of June 2011. As part of our decision to apply for reallocation, we have applied to the Korea Communications Commission to terminate our existing 2G PCS services, which we expect to be able
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to terminate in the second half of 2011. Accordingly, our existing 2G PCS subscribers must either convert to our W-CDMA services or switch to other telecommunications companies. As of December 31, 2010, there were 1,393 thousand subscribers of our 2G PCS services. We are offering benefits such as substantial discounts on W-CDMA-compatible handsets and monthly subscription fees starting in March 2011 to encourage our existing subscribers to switch to our W-CDMA services. However, there can be no assurance that we will not incur reputational damage from terminating our 2G PCS services, such termination will not lead to a material decrease in the number of our mobile subscribers, or complaints and other potential actions of our 2G PCS subscribers will not adversely affect our business, financial condition and results of operations.
Introduction of new services poses challenges and risks to us.
The telecommunications industry is characterized by continual advances and improvements in telecommunications technology, and we have been continually researching and implementing technology upgrades and additional telecommunication services to maintain our competitiveness. For example, in March 2005, we acquired a license to provide wireless broadband Internet access (or WiBro) service for(Won)126 billion, and commercially launched our service in June 2006. We completed the upgrade of our 4G WiBro network and expanded our WiBro service coverage to 82 cities nationwide and major highways as of March 2011, which we believe will allow us to provide WiBro services at speeds that are approximately three times faster than our previous 3G network at a lower cost, and had approximately 377 thousand subscribers as of December 31, 2010. In addition, we are currently upgrading our broadband network to enable FTTH connection, which enhances downstream speed 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. No assurance can be given that our new services will gain broad market acceptance such that we will be able to derive revenues from such services to justify the license fee, capital expenditures and other investments required to provide such services.
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 operations.
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 23, 2013. 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.
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
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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. In June 2011, SK Telecom announced tariff reduction measures, including a reduction of the monthly fee by (Won)1,000 for every subscriber, an exemption of usage charges for short text message service, or SMS, up to 50 messages per month and the introduction of flexible service plans for smartphone users. 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 bandwidth in the 900 MHz spectrum to us, 20 MHz of bandwidth in the 800 MHz spectrum to LG U+ (consisting of 15 MHz of bandwidth that is scheduled to be relinquished by SK Telecom by the end of June 2011 following expiration of its license period and 5 MHz of currently unused bandwidth) and 20 MHz of bandwidth in the 2.1 GHz spectrum to SK Telecom, which SK Telecom began using in June 2010. New allocations of bandwidth to us and LG U+ will become effective on July 1, 2011. We expect to pay a portion of the actual sales generated from using the bandwidth in the 900 MHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales as determined by the Korea Communications Commission at the time of allocation. In June 2011, the Korea Communications Commission announced its plan to auction in August 2011 the right to use 20 MHz of bandwidth in the 1.8 GHz spectrum that we are scheduled to relinquish at the end of June 2011, 10 MHz of additional bandwidth in the 800 MHz spectrum and 20 MHz of additional bandwidth in the 2.1 GHz spectrum. According to the plan, a maximum of 20 MHz of bandwidth may be sold to a single service provider, and SK Telecom and we are prohibited from bidding for the 20 MHz bandwidth in the 2.1 GHz spectrum. If we are allocated the bandwidths in the 800 MHz or the 1.8 GHz spectrums, we expect to pay usage fees for such bandwidths. The new allocations of bandwidth 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. In addition, KT Skylife Co. (formerly Korea Digital Satellite
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Broadcasting Co., Ltd.), which became our consolidated subsidiary starting in 2011, offers satellite TV services, which may also be packaged with our IP-TV services. KT Skylife is also subject to the regulation of the Korea Communications Commission pursuant to the Korea Broadcasting Act.
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.”
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. In May 2011, the International Agency for Research on Cancer (“IARC”) announced that it has classified radiofrequency electromagnetic fields associated with wireless phone use as possibly carcinogenic to humans, based on an increased risk for glioma, a malignant type of brain cancer. The IARC is part of the World Health Organization that conducts research on the causes of human cancer and the mechanisms of carcinogenesis, and aims to develop scientific strategies for cancer control. We cannot assure you that such 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.
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
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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)7,248 billion total principal amount of long-term debt (excluding current portion) outstanding as of December 31, 2010, (Won)2,188 billion was denominated in foreign currencies with an average weighted interest rate of 4.70%. The interest rates of such long-term debt denominated in foreign currencies ranged from 0.77% (for US$100 million notes with a floating interest rate of three month London Interbank Offered Rate plus 0.47%) to 16.50% (for Uzbekistani Som 2,259,000 (approximately US$1.4 million) fixed rate notes issued by East Telecom, our subsidiary located in Uzbekistan). See “Item 3. Key Information—Item 3.A. Select Financial Data—Exchange Rate Information”, “Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk.”
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.
Substantially all of our operations, customers and assets are located in Korea. Accordingly, the performance and successful fulfillment of our operational strategies are necessarily dependent on the overall Korean economy and the resulting impact on the demand for telecommunications services. The economic indicators in Korea in recent years have shown mixed signs of growth and uncertainty, and future growth of the economy is subject to many factors beyond our control.
The Korean economy is closely tied to, and is affected by developments in, the global economy. 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. While the rate of deterioration of the global economy slowed in the second half of 2009, with some signs of stabilization and improvement in 2010, the overall prospects for the Korean and global economy in 2011 and beyond remain uncertain. 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:
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;
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adverse changes or volatility in foreign currency reserve levels, commodity prices, exchange rates (including fluctuation of the Dollar or Japanese Yen exchange rates or revaluation of the Chinese renminbi), interest rates, inflation rates or 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 Korean 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;
political uncertainty or increasing strife among or within political parties in Korea;
hostilities or political or social tensions involving oil producing countries in the Middle East and North Africa and any material disruption in the supply of oil or increase in the price of oil;
the occurrence of severe earthquakes, tsunamis and other natural disasters in Korea and other parts of the world, particularly in trading partners (such as the March 2011 earthquake in Japan, which also resulted in the release of radioactive materials from a nuclear plant that had been damaged by the earthquake); and
an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States.
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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 January 2003, North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty. Since the renouncement, Korea, the United States, North Korea, China, Japan and Russia have held numerous rounds of six party multi-lateral talks in an effort to resolve issues relating to North Korea’s nuclear weapons program.
In addition to conducting test flights of long-range missiles, North Korea announced in October 2006 that it had successfully conducted a nuclear test, which increased tensions in the region and elicited strong objections worldwide. In May 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 in June 2009 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. The government formally accused North Korea of causing the sinking in May 2010, and North Korea has denied responsibility for the sinking and has threatened retaliation for any attempt to punish it for the act. On November 23, 2010, North Korean forces fired more than one hundred artillery shells targeting Yeonpyeong Island located near the maritime border between Korea and North Korea on the west coast of the Korean peninsula, killing two Korean soldiers and two civilians as well as causing substantial property damage. Korea responded by firing approximately 80 artillery shells and putting the military on its highest alert level. The Government condemned North Korea for the act and vowed stern retaliation should there be further provocation.
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 political stability in the region. On September 28, 2010, Kim Jong-il, the North Korean ruler who reportedly suffered a stroke in August 2008, named Kim Jong-un, his third son who is reported to be in his twenties, as the vice chairperson of the Central Military Commission and the general of the North Korean army. Although Kim Jong-il has designated his son to be his successor, the implementation of the succession plan remains uncertain. North Korea’s economy also faces severe challenges. In November 2009, the North Korean 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. Such developments may further aggravate social and political tensions within North Korea.
Reunification of the two Koreas could occur in the future. Reunification may entail a significant economic commitment by Korea. In President Lee Myung Bak’s national address on August 15, 2010, he suggested the possible adoption of a reunification tax in order to prepare for long-term economic burden associated with reunification. Such discussions on reunification are very preliminary, and it has not been decided whether or when such tax would be implemented. If a reunification tax is implemented, it may lead to a decrease in domestic consumption, which in turn may have a material adverse effect on the Korean economy. In addition, 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 crisis, high-level contacts between Korea and North Korea break down or military hostilities occur, could have a material adverse effect on our business, financial condition and results of operations.
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Risks Relating to the Securities
If an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs.
Korean law currently limits foreign ownership of the ADSs and our shares. In addition, under our deposit agreement, the depositary bank cannot accept deposits of shares and deliver ADSs representing those shares unless (1) we have consented to such deposit or (2) Korean counsel has advised the depositary bank that the consent required under (1) is no longer required under Korean laws and regulations. Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with our consent for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. The depositary bank has informed us that, at a time it considers to be appropriate, the depositary bank plans to start accepting deposits of shares without our consent and 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.
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.”
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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.
Korean GAAP differs in significant respects from accounting standards applicable in certain other countries, including U.S. GAAP and the International Financial Reporting Standards.
Our financial statements included in this annual report are prepared in accordance with Korean GAAP and reconciled to U.S. GAAP. Korean GAAP differs in significant respects from accounting standards applicable in certain other countries, including U.S. GAAP. See “Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources—U.S. GAAP Reconciliation” and “—Recent Accounting Pronouncements in U.S. GAAP” and Note 38 to Consolidated Financial Statements.
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, including us, will be required to prepare their annual financial statements beginning in 2011 that differ in certain respects from International Financial Reporting Standards (“IFRS”) applied in other countries.
In preparation of such adoption, we began preparing our internal financial statements under both Korean GAAP and Korean IFRS starting in January 2010. Beginning in 2011, we have discontinued reporting under Korean GAAP with reconciliation to U.S. GAAP and instead have commenced reporting under Korean IFRS and we also plan to release annual financial statements prepared pursuant to IFRS as issued by the International Accounting Standards Board, or IASB. Although our accounting department is currently analyzing the effects of adopting IFRS on our annual financial statements, it is not possible to estimate with any degree of certainty the exact impact on our annual financial statements from such adoption because the IFRS accounting policies to be adopted by us for such financial statements have not been finalized. Accordingly, there can be no assurance that the adoption of IFRS will not adversely affect our reporting results of operations or financial condition.
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Forward-looking statements may prove to be inaccurate.
This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.
Item 4. Information on the Company
Item 4.A. History and Development of the Company
In 1981, the Government established us under the Korea Telecom Act to operate the telecommunications services business that it previously directly operated. Under the Korea Telecom Act and the Government-Invested Enterprises Management Basic Act, the Government 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.”
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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:
mobile telecommunications services;
telephone services, including local, domestic long-distance and international long-distance fixed-line and VoIP telephone services and interconnection services to other telecommunications companies;
broadband Internet access service and other Internet-related services, including IP-TV services; and
various other services, including leased line service and other data communication service, satellite service and information technology and network services such as cloud computing 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 31.6% with approximately 16.0 million subscribers as of December 31, 2010;
in the fixed-line telephone services market in Korea, we continue to be the dominant provider with approximately 25.5 million installed lines, of which 16.6 million lines were in service as of December 31, 2010. As of such date, our market share of the local market was 86.3% and our market share of the domestic long-distance market was 82.2%;
we are Korea’s largest broadband Internet access provider with 7.4 million subscribers as of December 31, 2010, representing a market share of 43.1%; and
we are also the leading provider of data communication services in Korea.
For the year ended December 31, 2010, under Korean GAAP, our operating revenues were(Won)21,331 billion, our net income was(Won)1,193 billion and our basic net income per share was (Won)4,803. As of December 31, 2010, our total shareholders’ equity was (Won)11,496 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
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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 2010, we launched a new brand “olleh” 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 telecommunications services, as well as promote development of various applications for such devices. In line with this strategy, we began offering Apple’s iPhone for the first time in Korea on November 28, 2009 and have expanded our offerings of smart phones from other mobile handset manufacturers. 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, competitive data usage rates, call centers dedicated to smart phone users, creative marketing strategies that address our potential customers’ needs and ability to bundle various mobile and fixed-line services. We also plan to further expand our contents and applications for smart phone users and mobile data users by cooperating with application developers in Korea and abroad, in order to further solidify our position as a leader in the convergence market.
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
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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 50.8 million and the number of broadband Internet access subscribers in Korea was 17.2 million as of December 31, 2010. As of December 31, 2010, 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 103.9%, 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 100.4%.
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 U+ and Hansol M.com, and commercial PCS service was launched in October 1997.
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 U+ 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)
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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 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 3 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 based on CDMA wireless network standards that uses portable handsets with long battery life to communicate via low-power antennae. KTF also began offering HSDPA-based IMT-2000 services, which are third-generation, high-capacity wireless Internet and video multimedia communications services based on W-CDMA wireless network standards that allow an operator to provide to its subscribers significantly more bandwidth capacity.
We have been providing our 2G PCS services based on CDMA wireless network standards through our 40 MHz bandwidth in the 1.8 GHz spectrum, which allocation is scheduled to terminate at the end of June 2011. As part of our decision to apply for reallocation, we have applied to the Korea
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Communications Commission to terminate our existing 2G PCS services, which we expect to be able to terminate in the second half of 2011. Accordingly, our existing 2G PCS subscribers must either convert to our W-CDMA services or switch to other telecommunications companies. As of December 31, 2010, there were 1,393 thousand subscribers of our 2G PCS services. We are offering benefits such as substantial discounts on W-CDMA-compatible handsets and monthly subscription fees to encourage our existing subscribers to switch to our W-CDMA services.
Revenues related to mobile service accounted for 33.2% of our operating revenues in 2010. In addition, our goods sold, which are primarily from mobile handset sales, accounted for 20.6% of our operating revenues in 2010. 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 millions) (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 U+ that began its service at around the same time as KTF. As of December 31, 2010, we had approximately 16.0 million subscribers, which was second largest among the three mobile service providers. As of December 31, 2010, we had a market share of 31.6% of the mobile service market.
We market our mobile services primarily through independent exclusive dealers located throughout Korea. As of December 31, 2010, 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
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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, international long-distance services and land-to-mobile interconnection services. These fixed-line telephone services accounted for 20.1% of our operating revenues in 2010. 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)
Our domestic long-distance cable network is entirely made up of fiber optic cable and can carry both voice and data transmissions. Compared to conventional materials such as coaxial cable, fiber optic cable provides significantly greater transmission capacity with less signal fading, thus requiring less frequent amplification. In recent years, we have also increased the proportion of our lines that are connected to exchanges capable of handling digital signal technology. A principal limitation of the older analog technology is that applications other than voice communications, such as the transmission of text and computer data, require either separate networks or conversion equipment. Digital systems permit a range of voice, text and data applications to be transmitted simultaneously on the same network. We completed connection of all installed lines to digital exchanges in June 2003.
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The following table shows the number of minutes of international long-distance calls recorded by us and specific service providers utilizing our international long-distance network in each specified category for each year in the five-year period ended December 31, 2010:
Incoming international long-distance calls
Outgoing international long-distance calls
Total
China (18.5%), United States (17.0%) and Japan (16.8%) accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2010. 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 U+ (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 U+ (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 4.5% of our operating revenues in 2010. 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. As of December 31, 2010, we had approximately 2.7 million subscribers.
Internet Services
Broadband Internet Access Service. Leveraging on our nationwide network of 448,328 kilometers of fiber optic cable network, we have achieved a leading market position in the broadband Internet access market in Korea. We believe we have a competitive advantage over other broadband Internet access service providers because, unlike our competitors, we can utilize our existing networks nationwide to provide broadband Internet access service. Our broadband Internet access service accounted for 9.1% of our operating revenues in 2010. Our principal Internet access services include:
ADSL, VDSL, Ethernet and FTTH services under the “olleh Internet” brand name;
wireless LAN service under the “ollehWiFi” 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 olleh Internet service in fixed-line environments. OllehWiFi enables subscribers to access the Internet at up to 155 Mbps. We sponsored approximately 42,000 hot-spot zones nationwide for wireless connection as of December 31, 2010; and
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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 3 Mbps per user.
We had 7.4 million fixed-line olleh Internet subscribers and approximately 266 thousand ollehWiFi service subscribers as of December 31, 2010. We commercially launched our WiBro service in June 2006, and we had approximately 377 thousand subscribers as of December 31, 2010. We also bundle our WiBro service with olleh Internet and ollehWiFi services at a discount in order to attract additional subscribers.
Our olleh 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 olleh 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 2.9% of our operating revenues in 2010.
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
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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 “olleh 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 catalog 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 2.4 million olleh TV subscribers as of March 31, 2011.
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, 2008, 2009 and 2010, we leased 374,570 lines, 366,191 lines and 303,009 lines to domestic and international businesses. The data communication service accounted for 6.1% of our operating revenues in 2010.
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 operate three satellites, Koreasat 3, Koreasat 5 and Koreasat 6. We launched Koreasat 3 in September 1999. The design life of Koreasat 3 is twelve years, and it will be used to back up the broadcasting services of Koreasat 6 until the end of its fuel life.
We launched Koreasat 5 in August 2006, which replaced Koreasat 2. Koreasat 5, a combined civil and governmental communications satellite, is the first Korean satellite to provide commercial satellite services to neighboring countries, and the service coverage area includes Korea, Japan, Taiwan, the Philippines, the eastern part of China and the far-eastern part of Russia. The design life of Koreasat 5 is fifteen years.
We launched Koreasat 6 (also known as olleh 1) in December 2010 to replace Koreasat 3. The design life of Koreasat 6 is fifteen years. Koreasat 6 began its commercial operation in February 2011 and carries transponders that are used for direct-to-home satellite broadcasting, video distributions and data communications services. Most of the direct-to-home satellite broadcasting transponders are utilized by KT Skylife Co. We also lease satellite capacity from other satellite operators to offer commercial satellite services to both domestic and international customers.
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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 8.0% of our operating revenues for 2010.
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 established KT Estate Inc. in August 2010 to oversee the planning, development and operation of our real estate assets.
We also operate KT Rental, a subsidiary that provides rental cars and equipment. In March 2010, MBK Partners, a private equity firm, and we jointly acquired Kumho Rent-A-Car Co., Ltd. from Korea Express Inc. for (Won)245 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. KT Rental operated approximately 58,800 vehicles as of December 31, 2010 and has a market share of 22.8% of the domestic car rental market in 2010.
Revenues and Rates
The table below shows the percentage of our revenues derived from each category of services for each of the years from 2008 through 2010:
Mobile services
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)
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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.
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 service, we also charge monthly fees, voice calling usage charges and video calling usage charges. Under our standard rate plan for HSDPA-based service, we charge a monthly fee of (Won)12,000, voice calling usage charges of (Won)1.8 per second and video calling usage charges of (Won)3 per second. The following table summarizes charges for our representative HSDPA-based service plans:
Standard Plan
SHOW KING Sponsor Gold—Free 150 (1)
SHOW KING Sponsor Gold—Free 250 (1)
SHOW KING Sponsor Gold—Complete Freedom 150 (1) (2)
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)1.8 per second, 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)
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We also provide plans specially designed for elderly and pre-teen subscribers as well as special discounts to our subscribers with physical disabilities.
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—Value (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 we offer subscribers of our mobile service monthly discount coupons, membership points or movie tickets from such partners as promotional gifts.
In December 2010, we also introduced data-only plans targeting tablet PC users, smart-phone users and other special phone users, offering subscription plans for data transmission amounts ranging from 100MB to 4GB at monthly fees ranging from (Won)5,000 to (Won)35,000.
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.
All calls are currently measured by call pulses. Each pulse is determined by the duration of the call and the time of the day at which the call is made. For instance, during regular service hours, a call pulse is triggered at the beginning of each local telephone call and every three minutes thereafter.
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The rates we charge for local calls are currently subject to approval by the Korea Communications Commission after consultation with the Ministry of Strategy and Finance. The rates are identical for residential and commercial customers. The following table summarizes our local usage rates as of each date on which rates were revised:
Local Usage Charges (per pulse) (1)
Regular service
Public telephone
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, 2010, we had (Won)616 billion of refundable service initiation deposits outstanding and 2,738 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 flat rate and discount plans that we currently offer include the following:
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 HSDPA-based 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 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.
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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
LG U+
The following table shows the usage charge per minute collected from a landline user for a call initiated by a landline user to a mobile service subscriber.
Weekday
Weekend
Evening (1)
We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as expense the amount of interconnection charge paid to the mobile service provider.
Land-to-land and Mobile-to-land Interconnection. For a call initiated by a landline subscriber of our competitor to our fixed-line user, the landline service provider collects from its subscriber its normal rate and remits to us a land-to-land interconnection charge. In addition, for a call initiated by a mobile service subscriber to our landline user, the mobile service provider collects from its subscriber its normal rate and remits to us a mobile-to-land interconnection charge.
The following table shows such interconnection charge per minute collected for a call depending on the type of call, as determined by the Korea Communications Commission.
Local access (1)
Single toll access (2)
Double toll access (3)
Source: The Korea Communications Commission.
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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 of up 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:
olleh Internet Special (1)
olleh Internet Lite (1)
WiBro 1G (2) (6)
WiBro 30G (3) (6)
WiBro 50G (4) (6)
WiBro Unlimited (5) (6)
olleh 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 olleh TV services are subject to approval by the Korea Communications Commission.
The following table summarizes charges for our representative olleh TV service plans:
olleh TV Video-on-Demand
olleh TV Choice (2)
olleh TV Education (3)
olleh TV Thrift (4)
olleh TV Standard (4)
olleh TV Deluxe (4)
olleh TV SkyLife Economy (5)
olleh TV SkyLife Standard (5)
olleh TV SkyLife Premium (5)
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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. 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 basic bundled packages that we currently offer. The packages require subscribers to agree to a subscription period of three years.
Internet / Fixed-Line Phone / Mobile
Internet / IP-TV / Mobile (4)
Internet / Fixed-Line Phone / IP-TV / Mobile (4)
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, a car insurance company and a security company, and our subscribers may elect to receive monthly gift certificates, music downloads, online game money, movie tickets or other benefits from such partnership companies 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.
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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., which subsequently changed its name to LG U+. The merger enables LG U+ 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.
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 U+ 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, 2008
December 31, 2009
December 31, 2010
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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. Our competitors also offer similar plans at competitive rates.
Local Telephone Service. We compete with SK Broadband and LG U+ in the local telephone service business. SK Broadband began providing local telephone service in 1999, followed by LG U+ 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) and the basic monthly charge of our competitors and us is the same at (Won)5,200 depending on location, our competitors’ non-refundable telephone service initiation charges are lower than ours. Our customers pay a non-refundable telephone service initiation charge of (Won)60,000 while customers of our competitors pay a non-refundable telephone service initiation charge of (Won)30,000
Domestic Long-distance Telephone Service. We compete with SK Broadband, LG U+, Onse and SK Telink in the domestic long-distance market. LG U+ 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:
Source: Korea Telecommunications Operators Association.
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, 2010:
30 kilometers or longer
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International Long-Distance Telephone Service. Four companies, SK Broadband, LG U+, Onse and SK Telink, directly compete with us in the international long-distance market. LG U+ 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, 2010:
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 1999, followed by Dreamline, Onse and LG U+. 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 olleh Internet Lite service with three year mandatory subscription period with fees of our competitors for comparable services as of December 31, 2010:
Monthly subscription fee
Monthly modem rental fee
Additional installation fee upon moving
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Data Communication Service. We had a monopoly in domestic data communication service until 1994, when LG U+ 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 U+.
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.
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 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.
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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 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 2010, 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.
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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
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
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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, 2010, 48.52% 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 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. Approximately 70% of our subscribers as of December 31, 2010 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
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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.
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, 2010:
Mobile switching centers
Base station controllers
Base transceiver stations
Indoor and outdoor repeaters
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We have 40 MHz of bandwidth in the 1.8 GHz spectrum to provide PCS services based on CDMA wireless network standards and another 40 MHz of bandwidth in the 2.0 GHz spectrum to provide IMT-2000 services based on W-CDMA wireless network standards. Our current right to use 40 MHz of bandwidth in the 1.8 GHz spectrum is scheduled to expire at the end of June 2011. We have applied to the Korea Communications Commission to allocate back to us 20 MHz of bandwidth in the 1.8 GHz spectrum, for which we expect to pay a usage fee if reallocated to us. In addition, the Korea Communications Commission allocated 20 MHz of bandwidth in the 900 MHz spectrum to us, which will become effective on July 1, 2011. We expect to pay a portion of the actual sales generated from using the bandwidth in the 900 MHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales as determined by the Korea Communications Commission at the time of allocation. In June 2011, the Korea Communications Commission announced its plan to auction in August 2011 the right to use 20 MHz of bandwidth in the 1.8 GHz spectrum that we are scheduled to relinquish at the end of June 2011, 10 MHz of additional bandwidth in the 800 MHz spectrum and 20 MHz of additional bandwidth in the 2.1 GHz spectrum. According to the plan, a maximum of 20 MHz of bandwidth may be sold to a single service provider, and SK Telecom and we are prohibited from bidding for the 20 MHz bandwidth in the 2.1 GHz spectrum. If we are allocated the bandwidths in the 800 MHz or the 1.8 GHz spectrums, we expect to pay usage fees for such bandwidths. 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 24.0 million lines connected to local exchanges and 16.0 million lines connected to toll exchanges as of December 31, 2010.
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, 2010, approximately 85% 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 4.6 Tbps as of December 31, 2010. 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 olleh TV, WiBro, Internet Phone, upgraded VoIP services and other Internet protocol services. As of December 31, 2010, our Internet protocol premium network had 2,224,986 lines installed to provide voice over Internet protocol services and a total capacity to handle up to 595 Gbps of IP-TV, voice and WiBro service traffic.
Access Lines
As of December 31, 2010, we had 14.5 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, 2010, we had approximately 12.7 million broadband lines with speeds of at least 50 Mbps that enable us to deliver broadband Internet access and multimedia content to our customers.
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Transmission Network
Our domestic fiber optic cable network consisted of 484,701 kilometers of fiber optic cables as of December 31, 2010 of which 86,815 kilometers of fiber optic cables are used to connect our backbone network and 397,886 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 315 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 250 Gbps is connected to approximately 180 Internet service providers through our two Internet gateways in Heawha and Guro. In addition, we operate a video backbone with capacity of one Gbps to transmit video signals from Korea to the rest of the world.
Satellites
In order to provide broadcasting, video distribution and broadband data services in select areas, we operate two satellites, Koreasat 3, 5 and 6, launched in 1999, 2006 and 2011, respectively. See “Item 4.B. Business Overview—Our Services—Satellite Services.”
International Submarine Cable Networks
International traffic is handled by telecommunications satellites and submarine cables. Because of the high cost of laying a submarine cable, the usual practice is for multiple carriers to jointly commission a new cable and share the costs and the capacity. We own interests in several international fiber optic submarine cable networks, including:
a 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 1.8% interest in the 39,000-kilometer Southeast Asia-Middle East-Western Europe 3 Cable Network linking 34 countries, activated since December 1999;
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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 5.1% 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 8 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, 2009 and 2010 and the results of our operations for each of the years in the three-year period ended December 31, 2010, in Note 38 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 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
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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;
researching and implementing technology upgrades and additional telecommunication services; and
transition to International Financial Reporting Standards starting in 2011.
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.
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 2008, 1,141 employees 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. In 2010, 123 employees retired under our voluntary early retirement plan. We recorded severance indemnities relating to such voluntary early retirement plan and special voluntary early retirement program of (Won)97 billion in 2008, (Won)878 billion in 2009 and (Won)13 billion in 2010.
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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)110 billion in 2008, (Won)130 billion in 2009 and (Won)150 billion in 2010, and we are obligated to pay the remaining (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.
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 currently bundle our broadband Internet access service with WiBro, IP-TV, fixed-line telephone service, internet phone services 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.”
Researching and Implementing Technology Upgrades and Additional Telecommunication Services
The telecommunications industry is characterized by continual advances and improvements in telecommunications technology, and we have been continually researching and implementing technology upgrades and additional telecommunication services to maintain our competitiveness. For example, in March 2005, we acquired a license to provide WiBro service for (Won)126 billion, and commercially launched the service in June 2006. We completed the upgrade of our 4G WiBro network and expanded our WiBro service coverage to 82 cities nationwide and major highways as of March 2011, which we believe will allow us to provide WiBro services at speeds that are approximately three times faster than our previous 3G network at a lower cost, and had approximately 377 thousand subscribers as of December 31, 2010. In addition, we are currently upgrading our broadband network to enable FTTH connection, which enhances downstream speed 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. We will continue to make capital expenditures, incur research and development expenses and implement technology upgrades and additional telecommunications services in order to effectively implement continual advances and improvements in telecommunications technology.
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Transition to International Financial Reporting Standards Starting in 2011
In March 2007, the Financial Services Commission and the Korea Accounting Institute announced a road map for the adoption of Korean IFRS, pursuant to which all listed companies in Korea, including us, will be required to prepare their annual financial statements beginning in 2011 that differ in certain respects from IFRS applied in other countries.
In preparation of such adoption, we began preparing our internal financial statements under both Korean GAAP and Korean IFRS starting in January 2010. Beginning in 2011, we have discontinued reporting under Korean GAAP with reconciliation to U.S. GAAP and instead have commenced reporting under Korean IFRS and we also plan to release annual financial statements prepared pursuant to IFRS as issued by the IASB. Although our accounting department is currently analyzing the effects of adopting IFRS on our annual financial statements, it is not possible to estimate with any degree of certainty the exact impact on our annual financial statements from such adoption because the IFRS accounting policies to be adopted by us for such financial statements have not been finalized. Accordingly, there can be no assurance that the adoption of IFRS will not adversely affect our reporting results of operations or financial condition.
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;
impairment of investment securities;
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
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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, 2010 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)13 billion as of December 31, 2010.
Useful Lives of Property and Equipment
Property and equipment are depreciated based on the useful lives disclosed in Note 3 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)248 billion in 2010.
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.
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
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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 2010. 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
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 is based on management’s judgment on the expected cash flows of goodwill, taking market demand, competition and other economic factors into consideration.
The determination of impairments of goodwill 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 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.
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
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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;
domestic long-distance service revenues, primarily consisting of (i) monthly usage charges (or fixed monthly charges for discount plans), (ii) interconnection fees we
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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—2009 Compared to 2010
The following table presents selected income statement data and changes therein for 2009 and 2010.
Non-operating expense, net
Income from continuing operations before income tax expense
Net income
The following table presents a breakdown of our operating revenues and changes therein for 2009 and 2010.
Local service revenues
Non-refundable service installation fees
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
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Total operating revenues increased by 8.6%, or(Won)1,687 billion, from (Won)19,644 billion in 2009 to (Won)21,331 billion in 2010 primarily due to increases in our mobile handset sales, other operating revenues and mobile service revenues, the impact of which was partially offset by decreases in our fixed-line telephone service revenues.
Our mobile service revenues increased by 6.6%, or (Won)437 billion, from (Won)6,646 billion in 2009 to(Won)7,083 billion in 2010 primarily due to a 6.8% increase in the number of mobile subscribers from 15.0 million as of December 31, 2009 to 16.0 million as of December 31, 2010.
Our fixed-line telephone service revenues decreased by 9.1%, or (Won)427 billion, from (Won)4,697 billion in 2009 to(Won)4,270 billion in 2010 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 17.3%, or (Won)198 billion, from (Won)1,147 billion in 2009 to(Won)949 billion in 2010 primarily due to an increase in the volume of calls between mobile subscribers, which in turn led to a reduction in the volume of calls between landline users to mobile subscribers.
Local service revenues decreased by 4.2%, or (Won)111 billion, from (Won)2,674 billion in 2009 to (Won)2,563 billion in 2010. The number of local call pulses decreased by 5.2% from 2009 to 2010 primarily due to the substitution effect from increase in usage of mobile telephone services and Internet phone services. However, the effect of such decreases was partially offset by participation by some of our subscribers in optional flat rate plans, as well as an increase in revenues from VoIP services.
Domestic long-distance revenues decreased by 19.8%, or(Won)94 billion, from (Won)475 billion in 2009 to (Won)381 billion in 2010 primarily due to a decrease in the number of domestic long-distance call minutes by 23.2% from 2009 to 2010 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.
Our Internet service revenues increased by 4.8%, or (Won)118 billion, from (Won)2,449 billion in 2009 to (Won)2,567 billion in 2010 primarily due to an increase in the number of IP-TV subscribers from 1.2 million as of December 31, 2009 to 2.1 million as of December 31, 2010. The revenues from broadband Internet access service remained stable at (Won)1,942 billion in 2009 and(Won)1,941 billion in 2010.
Goods Sold
Revenues from goods sold increased by 29.4%, or (Won)998 billion, from (Won)3,397 billion in 2009 to (Won)4,395 billion in 2010 primarily due to an increase in the number of HSDPA-based IMT-2000 service compatible handsets and smart phones sold, including Apple iPhones that we launched in November 2009.
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Data Communications
Data communications service revenues decreased by 0.4%, or (Won)5 billion, from (Won)1,314 billion in 2009 to (Won)1,309 billion in 2010 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 49.6%, or (Won)566 billion, from (Won)1,141 billion in 2009 to (Won)1,707 billion in 2010 primarily due to an increase in sales of our real estate properties.
The following table presents a breakdown of our operating expenses and changes therein for 2009 and 2010.
Salaries and wages
Provision for severance benefits
Employee welfare
Depreciation
Commissions
Interconnection charges
Cost of services
Cost of goods sold
Promotion expenses
Sales commissions
Others (1)
Total operating expenses
Total operating expenses increased by 2.6%, or (Won)483 billion, from (Won)18,673 billion in 2009 to (Won) 19,156 billion in 2010 primarily due to increases in cost of goods sold, cost of services, commissions and promotion expenses, the impact of which was partially offset by decreases in provision for severance benefits related to special voluntary early retirement programs, employee welfare and sales commissions. Specifically:
Cost of goods sold increased by 31.1%, or (Won)968 billion, from (Won)3,119 billion in 2009 to (Won) 4,087 billion in 2010 primarily due to 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, as well as various other smart phones that we launched in 2010.
Cost of services, which primarily relate to purchases of content for IP-TV services, increased by 38.2%, or(Won)222 billion, from (Won)582 billion in 2009 to (Won)804 billion in 2010 primarily due to an increase in sales of pay-per-view programming to IP-TV subscribers.
Our commissions, which primarily relate to payments for third-party outsourcing services, including commissions to the call center staff, increased by 14.9%, or (Won)188 billion, from (Won) 1,262 billion in 2009 to (Won)1,450 billion in 2010 primarily due to outsourcing of our activation and installation activities to third-parties.
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Our promotion expenses, which consist primarily of handset subsidies, increased by 9.4%, or (Won)106 billion, from (Won)1,122 billion in 2009 to(Won)1,228 billion in 2010 primarily due to an increase in the sales volume of HSDPA-compatible handsets and smart phones.
These factors were partially offset by the following:
Our provision for severance benefits decreased by 78.5%, or(Won)885 billion, from (Won)1,128 billion in 2009 to (Won)243 billion in 2010 primarily due to a decrease in provision for severance benefits relating to a special voluntary early retirement program. In December 2009, we held a special voluntary early retirement program in which 5,992 employees participated and received additional financial incentives to retire early, whereas we did not have any such special voluntary early retirement program in 2010.
Employee welfare, which primarily relates to expenditures for employees such as education and healthcare subsidies, decreased by 36.2%, or (Won)213 billion, from (Won)587 billion in 2009 to (Won)374 billion in 2010 primarily due to a change in our compensation policy which reduced certain seasonal bonuses classified as employee welfare, and instead increased benefits classified as salaries.
Sales commissions, which primarily relate to procurement of mobile subscribers and mobile handset sales by our independent dealers, decreased by 10.1%, or (Won)184 billion, from (Won)1,805 billion in 2009 to (Won)1,621 billion in 2010 primarily due to a decrease in the rate of sales commissions we paid to our independent dealers.
Operating Income
Due to the factors described above, our operating income increased by 124.1%, or (Won)1,204 billion, from (Won)971 billion in 2009 to (Won)2,175 billion in 2010. Our operating margin, which is operating income as a percentage of operating revenues, increased from 4.9% in 2009 to 10.2% in 2010.
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 2009 and 2010.
Interest income
Interest expense
Net foreign currency transaction loss
Net foreign currency translation gain
Net gain (loss) on valuation of equity method investments
Net loss on disposal of property and equipment
Net gain (loss) on settlement of derivatives
Net loss on valuation of derivatives
Other bad debts expense
Donations
Net other non-operating revenues (losses)
Net non-operating expenses
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Our net non-operating expenses increased by 144.2%, or (Won)362 billion, from (Won)251 billion in 2009 to (Won)613 billion in 2010 primarily due to our recognition of net other non-operating revenues in 2009 compared to net other non-operating losses in 2010, a decrease in net foreign currency translation gain, a decrease in interest income, an increase in net loss on disposal of property and equipment and an increase in donations, the impact of which was partially offset by a decrease in net loss on valuation of derivatives. Specifically:
We recorded net other non-operating revenues of(Won)230 billion in 2009 compared to net other non-operating losses of (Won)21 billion in 2010 primarily due to refunds of (Won)90 billion to our subscribers of fixed-line telephone services with optional flat rate plans who requested termination of such plans in 2010.
Our net foreign currency translation gain decreased by 84.8%, or (Won)189 billion, from (Won)223 billion in 2009 to(Won)34 billion in 2010 as the Market Average Exchange Rate of the Won against the U.S. dollar appreciated from (Won)1,257.5 to US$1.00 as of December 31, 2008 to (Won) 1,167.6 to US$1.00 as of December 31, 2009 but the level of appreciation decreased during 2010 to(Won)1,138.9 to US$1.00 as of December 31, 2010. The impact of such decrease in net foreign currency translation gain was largely offset by a decrease in net loss on valuation of derivatives discussed below.
Our interest income decreased by 27.5%, or (Won)54 billion, from (Won)197 billion in 2009 to(Won)143 billion in 2010 primarily due to a decrease in our average balance of interest-earning assets from 2009 to 2010, including our holdings of cash and cash equivalents, as well as a general decrease in interest rates in Korea during such periods.
Our net loss on disposal of property and equipment increased by 38.7%, or (Won)46 billion, from (Won)119 billion in 2009 to(Won)165 billion in 2010 primarily due to an increase in equipment disposal, in particular machinery.
Our donations increased by 106.2%, or (Won)42 billion, from (Won)39 billion in 2009 to(Won)81 billion in 2010 primarily due to an increase in our donations to employee welfare funds.
These factors were partially offset by our net loss on valuation of derivatives, which decreased by 95.5%, or (Won)166 billion, from (Won)174 billion in 2009 to (Won)8 billion in 2010 primarily due to a decrease in 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 Tax Expense on Continuing Operations
Our income tax expense on continuing operations increased by 244.4%, or(Won)264 billion, from (Won) 108 billion in 2009 to (Won)372 billion in 2010 primarily due to an increase in income before income tax expense as well as a decrease in tax credit carryforwards and deductions. See Note 26 to the Consolidated Financial Statements. Our effective tax rate increased from 15.0% in 2009 to 23.8% in 2010, primarily due to a decrease in tax credit carryforwards and deductions in 2010. We had net deferred income tax assets of (Won)545 billion as of December 31, 2010.
Due to the factors described above, our net income increased by 95.6%, or (Won)583 billion, from(Won) 610 billion in 2009 to(Won)1,193 billion in 2010. Our net income margin, which is net income as a percentage of operating revenues, increased from 3.1% in 2009 to 5.6% in 2010.
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Segment Results—Personal Customer Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 11.5%, or (Won)1,074 billion, from (Won)9,314 billion in 2009 to (Won)10,388 billion in 2010, primarily due to an increase in the number of mobile subscribers as well as an increase in HSDPA-compatible handsets and smart phones sold.
Our operating income, prior to adjusting for inter-segment transactions, increased by 42.1%, or (Won) 438 billion, from(Won)1,040 billion in 2009 to(Won)1,478 billion in 2010, as the 11.5% increase in the segment’s operating revenues outpaced a 7.7% increase in operating expenses, primarily due to the reasons discussed above. Operating margin, which is operating income as a percentage of total operating revenues prior to adjusting for inter-company sales, increased from 11.2% in 2009 to 14.2% in 2010.
Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 8.4%, or (Won)85 billion, from (Won)1,014 billion in 2009 to (Won)929 billion in 2010. Property and equipment and intangible assets, prior to adjusting for inter-segment transactions, decreased by 1.2%, or (Won)56 billion, from(Won)4,757 billion in 2009 to(Won)4,701 billion in 2010.
Segment Results—Home Customer Group and Enterprise Customer Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 2.6%, or (Won)263 billion, from (Won)10,109 billion in 2009 to (Won)9,846 billion in 2010, primarily due to a decrease in fixed-line telephone service revenues, the impact of which was partially offset by an increase in revenues from Internet-related services.
We recorded operating loss, prior to adjusting for inter-segment transactions, of (Won)44 billion in 2009 compared to operating income of (Won)575 billion in 2010, as the 8.7% decrease in the segment’s operating expenses outpaced a 2.6% decrease in operating revenues, primarily due to the reasons discussed above. Operating margins were (0.4)% in 2009 and 5.8% in 2010.
Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 3.4%, or (Won)69 billion, from (Won)2,055 billion in 2009 to (Won)1,986 billion in 2010. Property and equipment and intangible assets, prior to adjusting for inter-segment transactions, decreased by 2.5%, or (Won)268 billion, from(Won)10,653 billion in 2009 to(Won)10,385 billion in 2010.
Segment Results—Others
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 38.1%, or (Won)922 billion, from (Won)2,424 billion in 2009 to(Won)3,346 billion in 2010, primarily due to an increase in sales of our real estate properties.
We recorded operating loss, prior to adjusting for inter-segment transactions, of (Won)5 billion in 2009 compared to operating income of (Won)149 billion in 2010, as the 38.1% increase in the segment’s operating revenues outpaced a 31.6% increase in operating expenses. Operating margins were (0.2)% in 2009 and 4.5% in 2010.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 28.4%, or(Won)57 billion, from (Won)200 billion in 2009 to (Won)257 billion in 2010. Property and equipment and intangible assets, prior to adjusting for inter-segment transactions, increased by 113.8%, or (Won)705 billion, from (Won)619 billion in 2009 to (Won)1,324 billion in 2010.
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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)
The following table presents a breakdown of our operating revenues and changes therein for 2008 and 2009.
Non-refundable service installation fee
Total operating revenues increased by 0.3%, or (Won)57 billion, from (Won)19,587 billion in 2008 to(Won)19,644 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.
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 mobile subscribers from 14.4 million as of December 31, 2008 to 15.0 million as of December 31, 2009.
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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 olleh 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.
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.
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.
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Other operating revenues increased by 5.6%, or (Won)61 billion, from (Won)1,080 billion in 2008 to (Won)1,141 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.
Severance indemnities
Total operating expenses increased by 2.9%, or (Won)529 billion, from (Won)18,144 billion in 2008 to (Won)18,673 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.
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 through 2009.
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.
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Due to the factors described above, our operating income decreased by 32.7%, or (Won)472 billion, from (Won)1,443 billion in 2008 to(Won)971 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.
The following table presents a breakdown of our non-operating income and expenses on a net basis and changes therein for 2008 and 2009.
Net foreign currency transaction gain (loss)
Net foreign currency translation gain (loss)
Net gain on disposal of equity method investment securities
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.
We did not record any net gain on disposal of equity method investment securities in 2008 compared to net gain on disposal of equity method investment securities of (Won)62 billion in
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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 35.7%, 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, primarily due to higher tax credit carryforwards in 2009 compared to 2008. 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.
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 11.6%, or (Won)968 billion, from (Won)8,346 billion in 2008 to (Won)9,314 billion in 2009, primarily due to an increase in the number of mobile subscribers as well as an increase in HSDPA-compatible handsets and smart phones sold.
Our operating income, prior to adjusting for inter-segment transactions, increased by 129.1%, or (Won)586 billion, from (Won)454 billion in 2008 to(Won)1,040 billion in 2009, as the 11.6% increase in the segment’s operating revenues outpaced a 4.8% increase in operating expenses, primarily due to the reasons discussed above. Operating margin increased from 5.4% in 2008 to 11.2% in 2009.
Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 9.3%, or (Won)104 billion, from (Won)1,118 billion in 2008 to (Won)1,014 billion in 2009. Property and equipment and intangible assets, prior to adjusting for inter-segment transactions, decreased by 3.7%, or(Won)181 billion, from(Won)4,938 billion in 2008 to(Won)4,757 billion in 2009.
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 14.2%, or (Won)1,676 billion, from (Won)11,785 billion in 2008 to (Won)10,109 billion in 2009, primarily due to a decrease in fixed-line telephone service revenues, the impact of which was partially offset by an increase in revenues from Internet-related services.
We recorded operating income, prior to adjusting for inter-segment transactions, of (Won)1,113 billion in 2008 compared to operating loss of(Won)44 billion in 2009, as the 14.2% decrease in the segment’s operating revenues outpaced a 4.9% decrease in operating expenses, primarily due to the reasons discussed above. Operating margins were 9.4% in 2008 and (0.4)% in 2009.
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Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 6.8%, or (Won)150 billion, from (Won)2,205 billion in 2008 to (Won)2,055 billion in 2009. Property and equipment and intangible assets, prior to adjusting for inter-segment transactions, decreased by 1.6%, or (Won)173 billion, from (Won)10,826 billion in 2008 to (Won)10,653 billion in 2009.
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 3.0%, or (Won)70 billion, from (Won)2,354 billion in 2008 to(Won)2,424 billion in 2009, primarily due to an increase in revenues from our media intellectual property rights.
We recorded operating income, prior to adjusting for inter-segment transactions, of (Won)29 billion in 2008 compared to operating loss of (Won)5 billion in 2009, as the 4.4% increase in the segment’s operating expenses outpaced a 3.0% increase in operating revenues, primarily due to the reasons discussed above. Operating margins were 1.2% in 2008 and (0.2)% in 2009.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 26.6%, or (Won)42 billion, from (Won)158 billion in 2008 to (Won)200 billion in 2009. Property and equipment and intangible assets, prior to adjusting for inter-segment transactions, decreased by 6.2%, or (Won)41 billion, from(Won)660 billion in 2008 to (Won)619 billion in 2009.
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)3,362 billion in 2008, (Won)2,774 billion in 2009 and (Won)3,239 billion in 2010 for the acquisition of property and equipment, primarily construction-in-progress. In our financing activities, we used cash of (Won)2,147 billion in 2008, (Won)1,446 billion in 2009 and (Won)1,895 billion in 2010 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)74 billion in 2008, (Won)528 billion in 2009 and (Won)0.3 billion in 2010. Subsequent to such repurchases, we retired most of the treasury shares that we repurchased. We also recorded payments of severance benefits of (Won)221 billion in 2008, (Won)1,345 billion in 2009 and (Won)1,249 billion in 2010. In 2009 and 2010, 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
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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)409 billion in 2008, (Won)229 billion in 2009 and (Won)494 billion in 2010.
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 18 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, 2010:
Contractual Obligations (1)
Long-term debt obligations (including current portion of long-term debt)
Capital lease obligations
Operating lease obligations
Severance payment obligations
Long-term accounts payable—others
Estimate of interest payment based on contractual interest rates effective as of December 31, 2010
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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)513 billion in 2008,(Won)610 billion in 2009 and(Won)1,193 billion in 2010 due to the reasons discussed in Item 5.A. Operating Results. Depreciation and amortization was (Won)3,703 billion in 2008, (Won)3,361 billion in 2009 and (Won)3,285 billion in 2010 primarily reflecting our capital investment activities during the recent years. Aggregate cash proceeds from issuance of bonds and long-term borrowings were (Won)3,780 billion in 2008,(Won)1,499 billion in 2009 and(Won)2,035 billion in 2010. 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, 2010, we held 17,895,964 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, 2010. 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 shareholders’ equity was (Won)11,088 billion as of December 31, 2008, (Won)10,667 billion as of December 31, 2009 and (Won)11,496 billion as of December 31, 2010.
Liquidity
We had a working capital (current assets minus current liabilities) surplus of (Won)1,833 billion as of December 31, 2008, (Won)1,031 billion as of December 31, 2009 and (Won)643 billion as of December 31, 2010. The following table sets forth the summary of our significant current assets for the periods indicated.
Cash and cash equivalents, net
Short-term investment assets
Trade accounts receivable, net
Inventories, net
Our cash, cash equivalents and short-term investment assets maturing within one year totaled (Won)2,308 billion as of December 31, 2008, (Won)1,982 billion as of December 31, 2009 and (Won)1,359 billion
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as of December 31, 2010. Under Korean GAAP, bank deposits and all highly liquid temporary cash instruments within maturities of three months are considered as cash equivalents. Short-term investment assets primarily consist of time and trust deposits with maturities between four to twelve months and short-term loans and current portion of securities such as beneficiary certificates and available-for-sale securities.
The following table sets forth the summary of our significant current liabilities for the periods indicated:
Trade accounts payable
Short-term borrowings
Current portion of bonds and long-term borrowings, net
Other accounts payable
Accrued expenses
As of December 31, 2010, we entered into various commitments with financial institutions totaling (Won)2,722 billion and US$101 million. See Note 18 to the Consolidated Financial Statements. As of December 31, 2010, (Won)563 billion and US$19 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
We used cash of (Won)3,362 billion in 2008, (Won)2,774 billion in 2009 and(Won)3,239 billion in 2010 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 2011, which may be adjusted depending on market conditions and our results of operations. The principal components of our capital investment plans are:
approximately (Won)476 billion in general expansion and modernization of our network infrastructure;
approximately (Won)1,026 billion in capital investments for IMT-2000 (W-CDMA) service;
approximately (Won)100 billion in capital investments for WiBro service;
approximately (Won)186 billion in capital investments for IP-TV service; and
approximately (Won)127 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 4.7% in 2008, 2.8% in 2009 and 2.9% in 2010. 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.”
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Recent Accounting Pronouncements in Korean GAAP
We did not adopt any significant Korean accounting standards issued or revised in 2010.
U.S. GAAP Reconciliation
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. In 2010, we recorded net income of (Won)1,196 billion under U.S. GAAP compared to net income of (Won)1,193 billion under Korean GAAP. Total equity under U.S. GAAP is lower than under Korean GAAP by(Won)478 billion as of December 31, 2008, (Won)211 billion as of December 31, 2009 and (Won)396 billion as of December 31, 2010.
For further discussion of the principal differences between Korean GAAP and U.S. GAAP as they relate to us, see Note 38 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
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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 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 any new standard 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. We adopted the new guidance in 2010 with no material impact 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 adopted ASU No. 2009-13 in 2010 with no material impact on our consolidated financial statements.
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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 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 adopted ASU No. 2009-14 in 2010 with no material 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 became effective on January 1, 2010, with adoption applied prospectively for transfers that occur on and after the effective date. The elimination of the QSPE concept required 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, was 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 became effective on January 1, 2010. We adopted ASU No. 2009-16 and No. 2009-17 in 2010 with no material 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 became 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 adopted this guidance in 2010 with no material impact on our financial statements.
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,
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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 became effective in January 2010. We adopted this guidance in 2010 with no material impact on our consolidated financial statements.
In February 2010, the FASB issued ASU 2010-09 to amend ASC 855, Subsequent Events to address certain implementation issues. The amendments remove the requirement for an SEC filer to disclose a date in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. Additionally, the FASB has clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The amendment is effective for interim or annual periods ending after June 15, 2010. We adopted this guidance in 2010 with no material impact on our consolidated financial statements.
In July 2010, the FASB issued ASU 2010-20 to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. This amendment is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. We adopted ASU 2010-20 in 2010 and disclosed the additional information related to credit risk in our consolidated financial statements.
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 technology strategy center;
a technology development center;
a central R&D laboratory;
a network R&D laboratory; and
an economics and management research laboratory.
As of December 31, 2010, these research centers employed a total of 512 researchers and employees. As of April 30, 2011, our researchers and employees at our research centers had 82 doctoral degrees and 249 master’s degrees. As of December 31, 2010, KT Corporation had 5,945 registered patents domestically and 456 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)283 billion in 2008, (Won)263 billion in 2009 and (Won)295 billion in 2010.
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In recent years, we have focused our research and development efforts in the following areas:
open IP-TV service platform;
smart home solutions;
location-based services and social network services;
cloud service platform;
network technologies for backbone and access network; and
future network structure and 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.
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 more than 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.
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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.
Upon the request of any director, a meeting of the board of directors will be assembled. The chairperson 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 chairperson is one year.
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
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.
Hyun Nak Lee
Consultant, Kyonggi Ilbo
Byong Won Bahk
Visiting Professor, School of Business, Seoul National University
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.
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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.
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.
Hyun-Nak Lee has served as our outside director since March 2011. He is currently a consultant at Kyonggi Ilbo and was formerly a chief executive officer of Kyonggi Ilbo and an executive director and chief editor of Donga Ilbo. Mr. Lee holds a master’s degree in economics from Seoul National University.
Byong-Won Bahk has served as our outside director since March 2011. He is currently a visiting professor at Seoul National University School of Business. He was formerly a vice minister of the Ministry of Finance and Economy, a chief executive officer and chairperson of board of directors at Woori Finance Holdings Co., Ltd. and a chairperson of board of directors at Woori Bank. Mr. Bahk holds a master’s degree in economics from Washington 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
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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 at the shareholders’ meeting, the company enters into such management contract with the Chief Executive Officer. In such case, the chairperson 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
Yu-Yeol Seo
Doo-Whan Choi
Sam-Soo Pyo
Il-Young Kim
Sung-Man Kim
Jung-Hee Song
Han-Suk Kim
Hong-Jin Kim
In-Sung Jeon
Gyoo-Taek Nam
Sang-Jik Lee
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Kyu-Shik Shin
Sang-Hong Lee
Kyung-Soo Lee
Tae-Il Park
Hyun-Mi Yang
Young-Hee Song
Young-Hee Lee
Eun-Hye Kim
Yeon-Hak Kim
Hong-Seok Seo
Yong-Taek Cho
Gil-Joo Lee
Sang-Hyo Kim
Tae-Yol Yoo
Jeong-Tae Park
Jung Hwa
Se-Hyun Oh
Dong-Hyun Han
Tae-Ki Min
Sun-Cheol Gweon
Eun-Soo Park
Hyun-Mo Gu
Kuk-Hyun Kang
Hyung-Wook Kim
Seok-Gyoon Na
Hyun-Suk Lee
Myung-Bum Pyun
Chang-Young Yoon
Won-Sik Han
Seong-Mook Oh
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Tae-Il Kwon
Tae-Hyo Ahn
Bong-Goon Kwak
Hun-Mun Lim
Hye-Jung Park
Yong-Hwa Park
Moon-Chul Jung
Young-Lyoul Lee
Yoon-Mo Jun
Jin-Hoon Kim
Jun-Soo Jung
Jong-Hack Kang
Jung-Won Park
Doo-Soo Jung
Ouk-Young Yoo
Ki-Hun Yoo
Moon-Hwan Lee
Yoon-Sik Jung
Kyung-Seok Park
Young-Sik Park
Dong-Hoon Han
Ki-Soong Jang
Jong-Jin Chae
Ju-Ouk Uhm
Seung-Dong Gye
Hyung-Chul Park
Jin-Sik Park
Sung-Hwan Gong
Pan-Sik Shin
Gang-Geun Lee
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Dong-Myun Lee
Yoon-Young Park
Han-Wook Jung
Sung-Chun Lee
Hong-Bum Jun
Cha-Hyun Yoon
Yung-Sig Yoon
Chan-Kyung Park
Dae-San Lee
Tae-Geun Kim
Jong-Ok Lee
Jong-Seog Koh
Young-Hyun Kim
Sang-Cheon Shim
Jung-Sik Suh
Dong-Shik Yoon
Kyung-Kon Koh
Hyun-Kyu Lee
Jae Lee
Hyung-Joon Kim
Sang-Wook Kim
Young-Mo Kwon
Joon-Shik Park
Gwang-Suk Shin
Sung-Jin Lee
Hwa-Joon Cho
Bum-Joon Kim
Jae-Geun Choi
Hee-Soo Kim
Sa-Il Kwon
Seong-Hoon Shim
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Geun-Mook Cho
Dae-Soo Park
Choong-Seop Lee
Sun-Jong Heo
Item 6.B. Compensation
Compensation of Directors and Executive Officers
In 2010, the total amount of salaries, bonuses (including long-term performance-based incentives for directors) and allowances paid and accrued to all directors and executive officers of KT Corporation for services in all capacities was approximately (Won)42 billion. The aggregate amount accrued by us to provide retirement benefits to such persons was (Won)6 billion in 2010. Starting in 2009, we no longer pay long-term performance-based incentives to our outside directors.
The chairperson 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.
Item 6.C. Board Practices
As of December 31, 2010, 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.
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, Hae-Bang Chung and Hyun-Myung Pyo. The chairperson 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.
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
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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 chairperson 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 chairperson 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, Jong-Hwan Song, Chan-Jin Lee, Hyun-Nak Lee and Byong Won Bahk. The chairperson is Jong-Hwan Song. 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 comprised of E. Han Kim, Hae-Bang Chung, Hyun-Nak Lee and Byong Won Bahk. The chairperson is Hae-Bang Chung. 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;
approving the appointment and recommending the dismissal of the internal auditor;
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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.
Item 6.D. Employees
On a non-consolidated basis, we had 31,155 employees as of December 31, 2010, compared to 30,841 employees as of December 31, 2009 and 35,063 employees as of December 31, 2008. Prior to the merger with KT Corporation, KTF had 2,560 employees as of December 31, 2008.
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 2008, 1,141 employees retired under KT Corporation’s voluntary early retirement plan.
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.
In 2010, 123 employees retired under KT Corporation’s voluntary early retirement plan. We did not have a special voluntary early retirement program in 2010.
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.
As of December 31, 2010, about 78.6% of all employees of KT Corporation were members of the KT Trade Union. On behalf of its members, the Union negotiates with us a collective bargaining agreement every two years, and our current collective bargaining agreement expires on May 23, 2013. 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.
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
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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.
Recent amendments to the Trade Union and Labor Relations Adjustment Act (“Labor Act”), which will become effective on July 1, 2011, allow multiple labor unions to be formed within one company. Therefore, additional labor unions may be formed by our employees. The amended Labor Act also requires such multiple unions to consolidate themselves into a single channel when negotiating with the company on behalf of their members and to enter into a single collective bargaining agreement with the company.
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 1.56% of our issued shares as of December 31, 2010.
In accordance with the National Pension Act of Korea, we contribute an amount equal to 4.5% of an employee’s standard monthly wages, and each employee contributes 4.5% of his or her standard monthly wages, into his or her personal pension account. Our employees, including executive officers as well as non-executive employees, are subject to a pension insurance system, under which we make monthly contributions to the pension accounts of the employees, and upon retirement, such employees are paid the pension amount due from their pension accounts. Prior to January 2011, our executive and non-executive employees were subject to a lump-sum severance payment system, under which they were entitled to receive a lump-sum severance payment upon termination of their employment, based on their length of service and salary level at the time of termination. Starting in January 2011, in accordance with the Korean Employee Retirement Income Security Act, we replaced such lump-sum severance payment system with our current pension insurance system in the form of a defined benefit plan, with a total unfunded portion of approximately (Won)350 billion as of December 31, 2010. Our employees have the option of choosing either the defined benefit plan or the defined contribution plan. Lump-sum severance amounts previously accrued prior to our adoption of the current pension insurance system continue to remain payable. We also provide a wide range of fringe benefits to our employees, including housing, housing loans, company-provided hospitals and schools, a company-sponsored pension program, an employee welfare fund, industrial disaster insurance, cultural and athletic facilities, physical education grants, meal allowances, 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 60 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, 35,033 common shares as of March 31, 2011, 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, 2010:
National Pension Corporation
NTTDoCoMo, 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)10 billion as of December 31, 2008, (Won)10 billion as of December 31, 2009 and (Won)38 billion as of December 31, 2010 in favor of our consolidated subsidiaries. We have also engaged in various transactions with our subsidiaries and affiliated companies. See Notes 18 and 32 to the Consolidated Financial Statements.
In November 2010, we also entered into a contract with Dreamwiz Corp., whose chief executive officer is Mr. Chan Jin Lee who serves as our outside director, to obtain social network-related support services for our website www.olleh.com. The term of the service contract is for a period of five years from November 2010 to November 2015 for an estimated aggregate service fee of (Won)370 million.
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Item 7.C. Interests of Experts and Counsel
Item 8. Financial Information
Item 8.A. Consolidated Statements and Other Financial Information
See “Item 18—Financial Statements” and pages F-1 through F-96.
Legal Proceedings
In November 2009, 56 of our former customers began a claim against us for an aggregate(Won)130 million in damages, alleging that we improperly subscribed them to our optional flat rate plans for fixed-line services without properly obtaining their consent or giving notification. The Seoul Central District Court ruled in favor of us on all claims in May 2011, and the plaintiffs filed an appeal in June 2011.
In connection with this complaint, the Korea Communications Commission investigated our past practices regarding our subscription of customers to optional flat rate plans, and issued an administrative decision in April 2011 which imposed several corrective orders including amendments to our standard terms of use and issuance of an administrative fine of approximately (Won)10 billion. We paid such fines to the Korea Communications Commission and implemented its corrective orders.
We are a defendant in various other 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 have a material adverse effect on our business, financial condition and results of operations.
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.
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Memorandum and Articles of Association—Dividends” and “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares—Dividends and Distributions.”
The Commercial Code provides that shares of a company of the same class must receive equal treatment. However, major shareholders may consent to receive dividend distributions at a lesser rate than minor shareholders. Previously, the Government consented to receiving a smaller dividend compared to other shareholders. The Government no longer holds any interest in us.
Any cash dividends relating to the shares held in the form of ADSs will be paid to the depositary bank in Won. The deposit agreement provides that, except in certain circumstances, cash dividends received by the depositary bank will be converted by the depositary bank into Dollars and distributed to the holders of the ADRs, less withholding tax, other governmental charges and the depositary bank’s fees and expenses. See “Item 12. Description of Securities Other than Equity Securities—Description of the American Depositary Shares—Dividends and Distributions.”
Item 8.B. Significant Changes
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, 2011 was (Won)39,300 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)
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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.
The price of the ADSs on the New York Stock Exchange as of the close of trading on June 28, 2011 was $18.86 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 2006.
2010 (through June 28)
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
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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.
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. The Korea Composite Stock Price Index is calculated using the aggregate value method, in which 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
2005
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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
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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.
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
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Item 9.E. Dilution
Item 9.F. Expenses of the Issuer
Item 10. Additional Information
Item 10.A. Share Capital
Currently, our authorized share capital is 1,000,000,000 shares, which consists of shares of common stock, par value (Won)5,000 per share (“Common Shares”) and shares of non-voting preferred stock, par value(Won)5,000 per share (“Non-Voting Shares”). Common Shares and Non-Voting Shares together are referred to as “Shares.” Under our articles of incorporation, we are authorized to issue Non-Voting Shares up to one-fourth of our total issued capital stock. As of December 31, 2010, 261,111,808 Common Shares were issued, of which 17,895,964 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
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exceed one-half of the annual dividend. We may pay interim dividends in cash once a year to shareholders or registered pledgees who are registered in the registry of shareholders as of June 30 of each fiscal year by a resolution of the board of directors. We have no obligation to pay any annual dividend unclaimed for five years from the payment date.
Under the Commercial Code, we may pay our dividend only out of the excess of our net assets, on a non-consolidated basis, over the sum of (1) our stated capital and (2) the total amount of our capital surplus reserve and legal reserve accumulated up to the end of the relevant dividend period. In addition, we may not pay any dividend unless we have set aside as legal reserve an amount equal to at least 10% of the cash portion of the dividend or unless we have accumulated a legal reserve of not less than one-half of our stated capital. 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;
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issued in order to satisfy specific needs such as strategic alliance, inducement of foreign funds or new technology, improvement of financial structure or other capital raising requirement; or
issued to domestic or foreign financial institutions when necessary for raising funds in emergency cases.
In addition, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of (Won)2,000 billion, to persons other than existing shareholders in 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, 2010, 1.56% 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.
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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;
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.
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Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting shares present or represented at the meeting, where the affirmative votes also represent at least one-fourth of our total voting shares then outstanding. However, under the Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at least two-thirds of the voting shares present or represented at a meeting, where the affirmative votes also represent at least one-third of our total voting shares then outstanding:
amending our articles of incorporation;
removing a director;
reduction of our capital stock;
effecting any dissolution, merger or consolidation of us;
transferring the whole or any significant part of our business;
effecting our acquisition of all of the business of any other company or our acquisition of a part of the business of any other company which will significantly affect our business; or
issuing any new Shares at a price lower than their par value.
In general, holders of Non-Voting Shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders. However, in the case of amendments to our articles of incorporation, any merger or consolidation of us, or in some other cases that affect the rights or interests of the Non-Voting Shares, approval of the holders of Non-Voting Shares is required. We may obtain such approval by a resolution of holders of at least two-thirds of the Non-Voting Shares present or represented at a class meeting of the holders of 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.”
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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.
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.
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Transfer of Shares
Under the Commercial Code, the transfer of Shares is effected by delivery of share certificates. However, to assert shareholders’ rights against us, the transferee must have his name and address registered on our register of shareholders. For this purpose, a shareholder is required to file his name, address and seal with our transfer agent. A non-Korean shareholder may file a specimen signature in place of a seal, unless he is a citizen of a country with a sealing system similar to that of Korea. In addition, a non-resident shareholder must appoint an agent authorized to receive notices on his behalf in Korea and file a mailing address in Korea. The above requirements do not apply to the holders of ADSs.
Under current Korean regulations, Korean securities companies and banks, including licensed branches of non-Korean securities companies and banks, investment management companies, futures trading companies, internationally recognized foreign custodians and the Korea Securities Depository may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of Shares by non-residents or non-Koreans. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”
Our transfer agent is Kookmin Bank, located at 24-3, Yoido-dong, Youngdungpo-ku, Seoul, Korea.
Acquisition of Shares by Us
We may not acquire our own Shares except in limited circumstances, such as a reduction in capital. In addition, 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, 2010, there were 17,895,964 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.
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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.”
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
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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 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
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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;
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
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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 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
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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.
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.
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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 local income tax). 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% (including local income tax) generally will apply. You will not be entitled to claim treaty benefits if you are not the beneficial owner of a dividend.
In order to obtain the benefits of a reduced withholding tax rate under a tax treaty, you must submit to us, prior to the dividend payment date, such evidence of tax residence as may be required by the Korean tax authorities. In the case of ADSs, evidence of tax residence may be submitted to us through the depositary. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have tax withheld at a lower rate.
If we distribute to you free shares representing a transfer of certain capital reserves or asset revaluation reserves into paid-in capital, that distribution may be a deemed dividend subject to Korean tax.
Capital Gains
Capital gain from a sale of shares of common stock will generally be exempt from Korean taxation if you have owned, together with certain related parties, less than 25.0% of our total issued shares during the year of sale and the five calendar years before the year of sale, and the sale is made through the 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 local income tax) 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 local income tax) 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% (including local income tax) 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.
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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.
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;
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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;
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.
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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, 2013 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, and we believe we are eligible for benefits under the Treaty. Based 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.
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U.S. Information Reporting and Backup Withholding Rules
Payments in respect of the shares of common stock or ADSs that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of its non-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.
Item 10.F. Dividends and Paying Agents
See “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends” for information concerning our dividend policies and our payment of dividends. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association—Dividends” for a discussion of 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.
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For details of the assets and liabilities recorded relating to our derivative contracts outstanding as of December 31, 2009 and 2010, see Note 13 to the Consolidated Financial Statements. We recognized a valuation gain of (Won)18 billion and a valuation loss of (Won)191 billion in 2009 and a valuation gain of (Won)40 billion and a valuation loss of (Won)48 billion in 2010.
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.
In 2009 and 2010 we entered into various currency-related derivative contracts with various financial institutions, including the following:
Transaction Type
Financial Institution
Description
Interest rate swap 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.
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The following table summarizes the principal 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, 2010 which are sensitive to exchange rates and/or interest rates. The information is presented in Won, which is our reporting currency.
Local currency:
Fixed rate
Average weighted rate (1)
Variable rate
Foreign currency:
Subtotal
Item 12. Description of Securities Other than Equity Securities
Item 12.A. Debt Securities
Item 12.B. Warrants and Rights
Item 12.C. Other Securities
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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 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.
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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 2010, 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):
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, 2010. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed by, and under the supervision of, our principal executive, principal operating and principal financial officers, and
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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, 2010 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, 2010.
Samil PricewaterhouseCoopers, an independent registered public accounting firm, which also audited our consolidated financial statements as of, and for the year ended December 31, 2010, as stated in their report which is included herein, has issued an attestation report on the effectiveness of our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
The attestation report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting is furnished in Item 18 of this Form 20-F.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the year covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
At our annual shareholders’ meetings in March 2011, our shareholders elected Hyun-Nak Lee and Byong-Won Bahk as members of the Audit Committee. Our Audit Committee is comprised of E. Han Kim, Hae-Bang Chung, Hyun-Nak Lee and Byong Won Bahk. The board of directors has determined that E. Han Kim is the audit committee financial expert.
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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, 2009 and 2010:
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 established pre-approval policies and procedures to pre-approve all audit services to be provided by Samil PricewaterhouseCoopers, our independent registered public accounting firm. Our audit committee’s policy regarding the pre-approval of non-audit services to be provided to us by our independent auditors is that all such services shall be pre-approved by our audit committee. Non-audit services that are prohibited to be provided to us by our independent auditors under the rules of the SEC and applicable law may not be pre-approved. In addition, prior to the granting of any pre-approval, our audit committee must be satisfied that the performance of the services in question will not compromise the independence of our independent registered public accounting firm and does not include delegation of the audit committee’s responsibilities to the management under the Securities Exchange Act of 1934, as amended.
Our audit committee did not pre-approve any non-audit services under the de minimis exception of Rule 2-01 (c)(7)(i)(C) of Regulation S-X as promulgated by the SEC.
Item 16D. Exemptions from the Listing Standards for Audit Committees
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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, 2010:
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
Not Applicable
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
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Compensation Committee
Executive Session
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 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
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Item 17. Financial Statements
Item 18. Financial Statements
AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS OF KT CORPORATION
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Position as of December 31, 2009 and 2010
Consolidated Statements of Income for the Years Ended December 31, 2008, 2009 and 2010
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2009 and 2010
Notes to Consolidated Financial Statements
Item 19. Exhibits
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* Filed previously.
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To the Board of Directors and Stockholders of
In our opinion, the accompanying consolidated statement of financial position and the related consolidated statements of income, changes in shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of KT Corporation and its subsidiaries at December 31, 2010 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the Republic of Korea. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Annual Report on Internal Control over Financial Reporting in Item 15 of Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
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 38 to the consolidated financial statements.
A company’s internal control over financial reporting is a process designed 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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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
Samil PricewaterhouseCoopers
LS Yongsan Tower, 191, Hangangno 2-ga, Yongsan-gu, Seoul 140-702, Korea (Yongsan P.O Box 266, 140-600) www.samil.com
Samil PricewaterhouseCoopers is the Korean network firm of PricewaterhouseCoopers International Limited (PwCIL). “PricewaterhouseCoopers” and “PwC” refer to the network of member firms of PwCIL. Each member firm is a separate legal entity and does not act as an agent of PwCIL or any other member firm.
F-1
being made only in accordance with authorizations of management and directors of the company; and (iii) 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.
/s/ Samil PricewaterhouseCoopers
Seoul Korea
June 28, 2011
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Sungnam, Korea
We have audited the accompanying consolidated Statements of Financial Position of KT Corporation and subsidiaries (the “Company”) as of December 31, 2009, and the related consolidated statements of income, cash flows and change in shareholders’ equity for the years ended December 31, 2009 and 2008. 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 2009 and 2008 consolidated financial statements present fairly, in all material respects, the financial position of KT Corporation and subsidiaries at December 31, 2009, and the results of their operations and their cash flows for the years ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the Republic of Korea.
As discussed in Note 27 to the consolidated financial statements, the accompanying 2009 and 2008 financial statements have been retrospectively adjusted for discontinued operations.
/s/ Deloitte Anjin LLC
Seoul, Korea
June 16, 2010
(June 28, 2011 as to the effects of discontinued operations discussed in Note 27)
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KT Corporation and Subsidiaries
Consolidated Statements of Financial Position
December 31, 2010 and 2009
Assets
Current Assets
Cash and cash equivalents, net (Notes 4, 19 and 31)
Short-term investment assets (Notes 4, 7 and 19)
Trade accounts receivable, net (Notes 19 and 32)
Short-term loans receivable, net (Notes 6, 19 and 32)
Current finance lease receivables, net (Notes 11, 17 and 32)
Other receivables, net (Note 19)
Accrued revenues
Advance payments
Prepaid expenses
Income taxes receivable
Current derivative instruments assets (Note 13)
Current deferred income tax assets (Note 26)
Inventories, net (Notes 5 and 11)
Other current assets (Note 19)
Total current assets
Long-term financial instruments (Note 4)
Available-for-sale securities (Note 7)
Equity-method investments (Note 8)
Held-to-maturity securities (Note 7)
Long-term loans receivable to employees, net
Other investment assets
Property and equipment, net (Notes 9, 11, 12, 17 and 33)
Intangible assets, net (Notes 10, 33 and 36)
Long-term trade accounts and notes receivable, net (Note 32)
Long-term loans receivable, net (Note 6)
Non-current finance lease receivables, net (Notes 11, 17, and 32)
Leasehold rights and deposits
Long-term other receivables, net
Non-current derivative instruments assets (Note 13)
Non-current deferred income tax assets (Note 26)
Exclusive memberships
Other non-current assets
Total non-current assets
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Consolidated Statements of Financial Position (Continued)
Liabilities and Shareholders’ Equity
Current liabilities
Current portion of bond and long-term borrowings, net (Notes 14 and 19)
Trade accounts payable (Notes 19 and 32)
Other accounts payable (Notes 17, 19 and 32)
Advances received
Withholdings (Note 19)
Accrued expenses (Notes 18 and 19)
Income taxes payable
Unearned revenue
Deposits received (Notes 19 and 32)
Current portion of accrued provisions (Note 16)
Current derivative instruments liabilities (Note 13)
Current deferred income tax liabilities (Note 26)
Other current liabilities
Total current liabilities
Bonds payable, net (Notes 14 and 19)
Long-term borrowings, net (Notes 14 and 19)
Provisions for severance benefits, net (Note 15)
Non-current accrued provisions (Note 16)
Long-term deposits received
Non-current derivative instruments liabilities (Note 13)
Long-term other accounts payable, net (Notes 17 and 32)
Long-term trade accounts payable, net (Note 32)
Non-current deferred income tax liabilities (Note 26)
Other non-current liabilities
Total non-current liabilities
Total liabilities
Commitments and Contingencies (Note 18)
F-5
Capital stock
Common stock (Notes 20 and 36)
Total capital stock
Capital surplus
Paid-in capital in excess of par value
Other capital surplus
Total capital surplus
Capital adjustments
Treasury stock (Note 21)
Loss on disposal of treasury stock
Stock options (Note 22)
Other capital adjustments (Notes 22 and 36)
Total capital adjustment
Accumulated other comprehensive income and expense (Note 28)
Gain on translation of foreign operations
Loss on translation of foreign operations
Unrealized gain on valuation of available-for-sale securities
Unrealized loss on valuation of available-for-sale securities
Accumulated comprehensive income of equity-method investees (Note 8)
Accumulated comprehensive expense of equity-method investees (Note 8)
Gain on valuation of derivatives for cash flow hedge (Note 13)
Loss on valuation of derivatives for cash flow hedge (Note 13)
Total accumulated other comprehensive income and expense
Retained earnings (Note 23)
Legal reserve
Voluntary reserves
Unappropriated retained earnings
Total retained earnings.
Minority interest in consolidated subsidiaries
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Consolidated Statements of Income
Years Ended December 31, 2010, 2009 and 2008
Operating revenues (Notes 24, 32 and 33)
Operating expenses (Notes 25 and 32)
Operating income (Note 33)
Foreign currency transaction gain
Foreign currency translation gain (Note 19)
Gain on valuation of equity-method investments (Note 8)
Gain on disposal of property and equipment
Reversal of accrued provisions
Gain on settlement of derivatives
Gain on valuation of derivatives (Note 13)
Other non-operating revenues
Foreign currency transaction loss
Foreign currency translation loss (Note 19)
Loss on valuation of equity-method investments (Note 8)
Loss on disposal of property and equipment
Loss on impairment of property and equipment
Loss on disposal of intangible assets
Loss on settlement of derivatives
Loss on valuation of derivatives (Note 13)
Other non-operating expenses
Income from continuing operations before income taxes
Income tax expense on continuing operations (Note 26)
Income (loss) from discontinued operations (Note 27)
Earnings per share attributable to controlling interest (Note 29)
Basic income per share from continuing operations (in won)
Basic net income per share (in won)
Diluted income per share from continuing operations (in won)
Diluted net income per share (in won)
F-7
Balances as of January 1, 2008 (as reported)
Cumulative effect of changes in accounting policies
As restated
Retained earnings after appropriation
Net income for the year
Acquisition of treasury stock
Disposal of treasury stock
Retirement of treasury stock
Other share-based payments
Other capital adjustments
Acquisition of subsidiaries’ stock and changes in consolidated entities
Changes in the interest in the subsidiaries
Changes in equity-method investees with accumulated comprehensive income
Changes in equity-method investees with accumulated comprehensive expense
Gain on valuation of derivatives for cash flow hedge
Loss on valuation of derivatives for cash flow hedge
Balances as of December 31, 2008
F-8
Consolidated Statements of Changes in Shareholders’ Equity (Continued)
Balances as of January 1, 2009
Issuance of common stock
Consideration for exchange rights
Exercise of exchange rights of exchangeable bonds
Stock options
Other capital adjustments by merger
Balances as of December 31, 2009
F-9
Balances as of January 1, 2010
Retained earnings after appropriations
Appropriations of loss on disposal of treasury stock
Balances as of December 31, 2010
F-10
F-11
Consolidated Statements of Cash Flows
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities
Share-based payments
Amortization of intangible assets
Provision for doubtful accounts
Loss (Gain) on foreign currency translation, net
Loss (Gain) on valuation of equity-method investments, net
Gain on disposal of equity-method investments, net
Loss on impairment of available-for-sale securities
Gain on disposal of available-for-sale securities
Loss on disposal of property and equipment, net
Loss on impairment of intangible assets
Loss on valuation of derivatives, net
F-12
Consolidated Statements of Cash Flows (Continued)
Changes in operating assets and liabilities
Decrease (increase) in trade accounts and notes receivable
Short-term loans granted
Decrease in current finance lease receivables
Decrease(increase) in other accounts receivable
Decrease(increase) in accrued revenue
Increase in advance payments
Increase in prepaid expenses
Decrease(increase) in income taxes receivable
Decrease(increase) in guarantee deposits
Decrease(increase) in derivative instruments assets
Decrease(increase) in other current assets
Decrease(increase) in inventories
Dividend received
Increase in long-term trade accounts and notes receivable
Long-term loans granted
Increase in non-current finance lease receivables
Decrease(increase) in leasehold rights and deposits
Decrease(increase) in deferred income tax assets and liabilities
Decrease(increase) in long-term other accounts receivable
Decrease(increase) in other non-current assets
Increase in trade accounts payable
Increase(decrease) in other accounts payable
Increase(decrease) in advances received
Increase(decrease) in withholdings
Increase(decrease) in accrued expenses
Increase(decrease) in income taxes payable
Increase in unearned revenue
Increase(decrease) in other current liabilities
Increase in deposits received
Increase(decrease) in derivative instruments liabilities
Payment of severance benefits
Decrease(increase) in deposits for severance benefits
Increase(decrease) in contribution to National Pension Fund
Increase(decrease) in accrued provisions
Decrease in refundable deposits for telephone installation
Increase in long-term accounts payable
Increase(decrease) in long-term other payables
Increase(decrease) in other non-current liabilities
F-13
Cash flows from investing activities
Decrease in short-term investment assets
Disposal of available-for-sale securities
Disposal in equity-method investments
Decrease in long-term financial instruments
Collection of held-to-maturity securities
Collection of long-term loans
Disposal of property and equipment
Increase in customers’ contribution to construction costs
Disposal of intangible assets
Disposal of other investment assets
Increase in short-term investment assets
Acquisition of available-for-sale securities
Acquisition of held-to-maturity securities
Acquisition of equity-method investments
Increase in long-term financial instruments
Acquisition of property and equipment
Acquisition of intangible assets
Acquisition of other investment assets
Acquisition of subsidiaries’ assets and liabilities
Cash flows from financing activities
Increase in short-term borrowings, net
Issuance of bonds
Increase in long-term borrowings
Inflows from capital transactions of consolidated entities
Decrease in capital lease liabilities
Payment of current portion of bond and long-term borrowings
Payment of dividends
Outflows from capital transactions of consolidated entities
Net cash used in financing activities
Effect of changes in consolidated entities
Effect of exchange rate on cash
Net increase(decrease) in cash and cash equivalents
Cash and cash equivalents (Note 31)
Beginning of the year
End of the year
F-14
December 31, 2010, 2009 and 2008
1. General information
KT Corporation (the “Controlling Company”) commenced operations on January 1, 1982, when it spun off from the Korea Communications Commission (formerly the Korean Ministry of Information and Communications) to provide telephone services and to engage in the development of advanced communications services under the Act of Telecommunications of Korea.
On October 1, 1997, upon the announcement of the Government-Investment Enterprises Management Basic Act and the Privatization Law, the Controlling Company became a government-funded institution under the Commercial Code of Korea.
On December 23, 1998, the Controlling Company’s shares were listed on the Korea Exchange.
On May 29, 1999, the Controlling Company issued 24,282,195 additional shares and issued American Depository Shares (ADS), representing new shares and government-owned shares, at the New York Stock Exchange and the London Stock Exchange. On July 2, 2001, the ADS representing 55,502,161 government-shares were issued.
In 2002, the Controlling Company acquired 60,294,575 government-owned shares in accordance with the Korean government’s privatization plan. As of December 31, 2010, the Korean government did not own any share in the Controlling Company.
On June 1, 2009, the Controlling Company, as the surviving entity, merged with KT Freetel Co., Ltd. to have competitive advantages in the global trends of convergence between fixed and mobile communication.
The Controlling Company’s shares as of December 31, 2010 are owned as follows:
National Pension Service
Employee Stock Ownership Association
Treasury stock
2. Consolidated Subsidiaries
The consolidated subsidiaries as of December 31, 2010, are as follows:
Subsidiary
Type of Business
Domestic subsidiaries
KT Powertel Co., Ltd. (“KTP”)
F-15
KT Networks Corporation (“KTN”)
Group telephone management
KT Linkus Co., Ltd. (“KTL”)
Public telephone maintenance
KT Submarine Co., Ltd. (“KTSC”)
Submarine cable construction and maintenance
KT Capital Co., Ltd. (“KT Capital”)
Financing service
KT Telecop Co., Ltd. (“KT Telecop”)
Security service
KT Internal Venture Fund No.2
Investment fund
Sofnics, Inc. (“Sofnics”)
Software development and sales
KT Edui Co., Ltd. (formerly, JungBoPremiumEdu Co., Ltd.) (“KT Edui”)
Online education business
KT New Business Fund No. 1
KT DataSystems Co., Ltd. (“KTDS”)
System integration and maintenance
Gyeonggi-KT Green Growth Fund
Venture investment of Green Growth Business
KTC Media Contents Fund 1
New technology investment fund
KTC Media Contents Fund 2
KT Innotz Inc. (“KT Innotz”)
Software development of mobile clouding computer and solution
Vanguard Private Equity Fund (*1)
Corporate restructuring
KT-LIG ACE Private Equity Fund (*1)
KTR Co., Ltd. (“KTR”) (*3)
Rental service
KT Rental Co., Ltd. (“KT Rental”) (*4)
KT Estate Inc. (“KT Estate”)
Residential Building Development and Supply
KT Strategic Investment Fund No.1
KT Hitel Co., Ltd. (“KTH”)
Data communication
KT Commerce Inc. (“KTC”)
B2C, B2B service
KT Tech, Inc. (“KT Tech”)
PCS handset development
KT M Hows Co., Ltd. (“KTF M Hows”)
Mobile marketing
F-16
KT M&S Co., Ltd. (“KT M&S”)
KT Music Corporation (“KT Music”)
Online music production and distribution
Sidus FNH Corporation (“Sidus FNH”)
Sidus FNH Benex Cinema Investment Fund
Movie investment fund
Nasmedia, Inc. (“Nasmedia”)
Online advertisement
Overseas subsidiaries
Korea Telecom Japan Co., Ltd. (“KTJ”, Japan)
Foreign telecommunication business
Korea Telecom China Co., Ltd. (“KTCC”, China)
Super iMax (Uzbekistan)
Wireless high speed internet business
East Telecom (Uzbekistan)
Fixed line telecommunication business
New Telephone Company, Inc. (“NTC”, Rusia)
Helios-TV (Rusia)
Cable TV business
Novaya Svyaz
KTSC Investment Management B.V. (“KTSC”, Netherlands)
Management of investment in Super iMax and East Telecom
Korea Telecom America, Inc. (“KTAI”, America)
PT. KT Indonesia (“KTI”, Indonesia)
The consolidated subsidiaries are determined in accordance with the Enforcement Decree of the Act on External Audit of Stock Companies and SKFAS No. 25, Consolidated Financial Statements.
F-17
Newly consolidated subsidiaries as of December 31, 2010, and subsidiaries consolidated as of December 31, 2009 but excluded as of December 31, 2010, are as follows:
Consolidated subsidiaries
Remarks
KT-LIG ACE Private Equity Fund
KTR Co., Ltd.
KT Estate Inc.
Excluded subsidiary
Doremi Media Co., Ltd
A summary of financial data of the major consolidated subsidiaries as of and for the year ended December 31, 2010 is as follows:
(in millions of Korean won)
KT Powertel Co., Ltd.
KT Networks Corporation
KT Telecop Co., Ltd
KT Hitel Co., Ltd.
KT Tech, Inc.
KT Rental Co., Ltd.
KT Capital Co., Ltd.
KTDS
KT M&S Co., Ltd.
New Telephone Company, Inc.
A summary of financial data of the major consolidated subsidiaries as of and for the year ended December 31, 2010, is presented prior to the elimination of intercompany transactions. The financial data of New Telephone Company, Inc. are based on the consolidated financial statements and the financial data of all others are based on non-consolidated financial statements.
3. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Controlling Company and its subsidiaries (collectively referred to as “the Company”) in the preparation of its financial statements. These policies have been consistently applied to all the years presented, unless otherwise stated.
Basis of Presentation
The Company maintains its accounting records in Korean won and prepares statutory financial statements in Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these 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 from the Korean language financial statements.
F-18
Principles of Consolidation
The fiscal year end of the consolidated subsidiaries is the same as that of the Controlling Company, except for KT Internal Venture Fund No.2 and KTC Media Contents Fund 1. If the fiscal year end of a consolidated subsidiary is different from that of the Controlling Company, the consolidated financial statements are prepared based on the subsidiary’s reliable financial statements as of the fiscal year end of the Controlling Company. Differences in accounting policy between the Company and its consolidated subsidiaries are adjusted during consolidation.
The investment accounts of the Controlling Company and corresponding capital accounts of the subsidiaries are eliminated as of the fiscal year end of the subsidiaries closest to date when the Controlling Company acquires control in the subsidiaries. All significant intercompany transactions and balances with consolidated subsidiaries have been eliminated during consolidation.
When the Company has control over a subsidiary, the Company records differences between the initial investment accounts and corresponding capital accounts of subsidiaries as goodwill or negative goodwill. The goodwill is amortized using the straight-line method over the estimated useful lives, which range from four to ten years. The negative goodwill relating to the expected expense or loss in the future is reversed as a gain when the related expense or loss is actually incurred, whereas the negative goodwill not relating to the certain future expense is amortized over the weighted average useful lives of depreciable non-monetary assets of an acquiree and the amounts of this negative goodwill in excess of the fair value of the total non-monetary assets of an acquiree are recorded as a gain as of the acquisition date. In addition, the differences between the additional investment in the subsidiaries and net assets of the subsidiaries attributable to subsequently acquired controlling interest and differences between the acquisition cost of the investments in the subsidiaries and changes in net assets of the subsidiaries due to certain equity transactions of the subsidiaries including capital increase with consideration are reflected in the capital surplus or capital adjustment.
When the Company gains significant influence over the equity-method investees, the excess of the acquisition cost of an investment in an investee over the Company’s share of the fair value of the identifiable net assets acquired is amortized using the straight-line method over its estimated useful life, not exceeding 20 years. When acquisition cost of investments in an investee is less than the Company’s interest on the fair value of the identifiable net assets acquired, the investment differences relating to the expected expense or loss in the future is reversed as a gain when the related expense or loss is actually incurred. The investment differences not relating to the certain future expense up to fair value of depreciable non-monetary assets of an investee is amortized over the weighted average useful lives of depreciable non-monetary assets of an investee and the remaining amounts of investment difference in excess of the fair value of the total non-monetary assets of an investee are recorded as a gain as of the acquisition date.
Unrealized gains or losses included in inventories and other assets as a result of intercompany transactions are eliminated based on the average gross profit ratio of the corresponding company. Unrealized gains or losses, arising from sales by the Controlling Company to the consolidated subsidiaries, are fully eliminated and charged to the equity of the Controlling Company. Unrealized gains or losses, arising from sales by the consolidated subsidiaries to the Controlling Company, or sales between consolidated subsidiaries, are fully eliminated, and charged to the equity of the Controlling Company and the minority interests, based on the percentage of ownership. Unrealized gains or losses, arising from the transactions between the Company and equity method investees are eliminated in proportion to the Company’s ownership and reflected in equity-method investments.
F-19
Minority interest
The Company records the equity of the consolidated subsidiaries, which is not included in the equity of the Controlling Company, as minority interest in consolidated subsidiaries. In addition, even if the minority interest has a deficit balance, the total comprehensive income is attributed to the owners of the parent and to the minority interests.
Reclassifications of Prior Year Financial Statements
Certain reclassifications have been made in 2008 and 2009 consolidated financial statements to conform to 2010 consolidated financial statement presentation. Such reclassifications did not have an effect on the shareholders’ equity and net income of the Company as of and for the years ended December 31, 2008 and 2009.
Revenue Recognition
Revenue is the gross inflow of economic benefits arising in the ordinary course of the Company’s activities and is measured as the fair value of the consideration received or receivable for the sale of goods and services in the said ordinary course of the Company’s activities. Revenue is shown as net of value-added tax, sales discounts and sales returns. The Company recognizes revenue when the amount of revenue can be reliably measured, and it is probable that future economic benefits will flow into the Company. 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.
Revenue from the sale of goods is recognized when the significant risks and rewards of ownership of goods are transferred to the buyer. Revenue from the rendering of services is recognized under the percentage-of-completion method, under which revenue is generally recognized based on the costs incurred to date as a percentage of the total estimated costs to be incurred.
The Company recognizes revenues from construction contracts using the percentage-of-completion method to determine the amounts to be recognized as revenues in a given period. The stage of completion is measured using the percentage of the total contract costs incurred up to the date of statement of financial position over the total estimated costs for each contract. When the outcome of a construction contract cannot be estimated reliably, the contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable, and contract costs incurred for the period is recognized as an expense.
Interest income is recognized using the effective interest method. Dividend income is recognized when the rights to receive such dividends and amounts thereof are determined.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks, and financial instruments with maturity of three months or less at the time of purchase. These financial instruments are readily convertible into cash without significant transaction costs and bear low risks from changes in value due to interest rate fluctuations.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts and notes receivable. Allowances are calculated based on the estimates made through a reasonable and objective method.
F-20
Inventories
The quantities of inventories are determined using the perpetual method and periodic inventory count, while the costs of inventories are determined using the moving-weighted average method. Goods-in-transit and land use the specific identification method. Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expense. Replacement cost is used for the estimate of the net realizable value of raw materials. Market prices of merchandise and supplies are net realizable value and replacement cost, respectively. If, however, the circumstances which caused the valuation loss cease to exist, the valuation loss is reversed up to the original carrying amount before valuation. The said reversal is deducted from cost of sales.
Investments in Securities
Costs of debt securities and equity securities are determined using the specific identification method and the moving-weighted average method, respectively. Investments in equity securities or debt securities are classified into trading securities, available-for-sale securities and held-to-maturity securities, depending on the acquisition and holding purpose. Investments in equity securities of companies, over which the Company exercises a significant control or influence, are recorded using the equity method of accounting. Trading securities are classified as current assets while available-for-sale securities and held-to-maturity securities are classified as long-term investments, excluding those securities that mature or are certain to be disposed of within one year, which are then classified as current assets.
Held-to-maturity securities are measured at amortized cost while available-for-sale and trading securities are measured at fair value. However, non-marketable securities, classified as available-for-sale securities, are carried at cost when the fair values are not readily determinable.
Gains and losses related to trading securities are recognized in the income statement, while unrealized gains and losses of available-for-sale securities are recognized under other comprehensive income and expense. Realized gains and losses on available-for-sale securities are recognized in the income statement.
Equity-Method Investments
Company reflects any changes in the equity of its equity-method investments after the initial purchase date. Under the equity method, the Company records changes in its proportionate ownership in the book value of the investee in current operations, as capital adjustments or as adjustments to retained earnings, depending on the nature of the underlying change in the book value of the investee. All other changes in equity should be accounted for under other comprehensive income and expense.
F-21
Property, Plant and Equipment
Property, plant and equipment are stated at cost, which includes acquisition cost, production cost and other costs required to prepare the asset for its intended use. It also includes the present value of the estimated cost of dismantling and removing the asset, and restoring the site after the termination of the asset’s useful life, provided it meets the criteria for recognition of provisions.
Property, plant and equipment are stated net of accumulated depreciation calculated by straight-line and declining-balance methods based on following estimated useful lives:
Building
Structures
Equipment
Machinery
Underground access to cable tunnels and concrete and steel telephone poles
Vehicles
Tools
Office equipment
Expenditures incurred after the acquisition or completion of assets are capitalized if they enhance the value of the related assets over their recently appraised value or extend the useful life of the related assets. Routine maintenance and repairs are charged to expense as incurred.
Intangible Assets
Intangible assets are stated at cost, which includes acquisition cost, production cost and other costs required to prepare the asset for its intended use. Intangible assets are stated net of accumulated amortization calculated by straight-line method based on following estimated useful lives:
Goodwill
Industrial property rights
Development Costs
Software
Frequency usage rights
Other intangible assets
Right to use the base stations
Copyrights
Development costs which are individually identifiable and directly related to a new technology or to new products which carry probable future benefits are capitalized as intangible assets. Amortization of development cost begins at the commencement of the commercial production of the related products or use of the related technology.
Goodwill represents the excess of the cost of an acquisition over the fair value of the Controlling Company’s share in the net identifiable assets of the acquired subsidiary or associate at the date of acquisition.
Capitalization of Interest Expense
The Company capitalizes the interest it incurs on borrowings used to finance the cost of manufacturing, acquisition, and construction of inventory and property, plant, and equipment that require more than one year to complete from the initial date of manufacture, acquisition, and construction.
F-22
Government Grants
The Company recognizes government grants, which are to be repaid, as liabilities. The government grants and donations, which are intended to be used for the acquisition of certain assets, are deducted from the cost of the acquired assets. The government grants or donations, received to compensate for specific expenses, are offset against the related expenses. Other government grants or donations, for which the use or purpose is not specified, are recorded as gains from assets received, and are recognized in current operations. Prior to the acquisition of the assets specified, the grant or donation is recorded as deduction from the assets granted. When the related assets are acquired, the amounts are recognized as a deduction from the account under which the assets acquired are recorded and offset against the depreciation expense over the period of the asset’s useful live. After the disposal of the assets specified by the grant or donation, the remaining amounts are deducted or added to the asset’s disposal gain and loss.
Impairment of Assets
When the book value of an asset is significantly greater than its recoverable value due to obsolescence, physical damage or an abrupt decline in the market value of the asset, the said decline in value is deducted from the book value to agree with recoverable amount and is recognized as an asset impairment loss for the period. When the recoverable value subsequently exceeds the book value, the impairment amount is recognized as gain for the period to the extent that the revised book value does not exceed the book value that would have been recorded without the impairment. Reversal of impairment of goodwill is not allowed.
Derivatives
All derivative instruments are accounted for at their fair value according to the rights and obligations associated with the derivative contracts. The resulting changes in fair value of derivative instruments are recognized either under the income statement or shareholders’ equity, depending on whether the derivative instruments qualify as a cash flow hedge. Fair value hedge accounting is applied to a derivative instrument purchased with the purpose of hedging the exposure to changes in the fair value of an asset or a liability or a firm commitment that is attributable to a particular risk. The resulting changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized under the shareholders’ equity under accumulated other comprehensive income and expense.
Income Tax and Deferred Income Tax
Income tax expense includes the current income tax under the relevant income tax law and the changes in deferred tax assets or liabilities. Deferred tax assets and liabilities represent temporary differences between financial reporting and the tax bases of assets and liabilities. Deferred tax assets are recognized for temporary differences which will decrease future taxable income or operating loss to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized. Deferred tax effects applicable to items in the shareholders’ equity are directly reflected in the shareholders’ equity.
Discounts on Debentures
Discounts on debentures are amortized over the term of the debentures using the effective interest rate method. Amortization of the discount is recorded as part of interest expense.
F-23
Accrued Severance Benefits
Employees and directors with at least one year of service are entitled to receive a lump-sum payment upon termination of their employment with the Company based on their length of service and rate of pay at the time of termination. Accrued severance benefits represent the amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the date of statement of financial position.
The domestic subsidiaries have partially funded their accrued severance benefits through severance insurance deposits with an insurance company. Deposits made by the subsidiaries are recorded as deductions from accrued severance benefits. The excess portion of deposits over accrued severance benefits is recorded as other investments.
In addition, the domestic subsidiaries deposit a certain portion of severance benefits to National Pension Service according to National Pension Law. The deposit amount is recorded as a deduction from accrued severance benefits.
Overseas subsidiaries accrue employees’ retirement benefits according to the local regulations in which they operate.
Provisions and Contingent Liabilities
When it is probable that an outflow of economic benefits will occur due to a present obligation resulting from a past event, and whose amount is reasonably estimable, a corresponding amount of provision is recognized in the financial statements. However, when such outflow is dependent upon a future event, is not certain to occur, or cannot be reliably estimated, a disclosure regarding the contingent liability is made in the notes to the financial statements.
Finance Leases
i) The Company as Lessee
The Company accounts for lease transactions as either operating lease or finance lease, depending on the terms of the lease agreement. A finance lease is a lease that transfers substantially all the risks and rewards incidental to the ownership of an asset. The lower of the present value of minimum lease payments and the fair value of the lease asset is recognized as the value of the finance lease asset and liability. Annual minimum lease payments, excluding residual value, are allocated to interest expense, or for the redemption of capital lease liability using the effective interest method.
ii) The Company as Lessor
The Company accounts for lease transactions as finance lease for leases that transfer substantially all of the risks and benefits of ownership of the lease asset to the lessee. The Company recognizes the amount equivalent to the net investment in the lease asset as finance lease receivable. The Company recognizes interest income over lease term using systematic and reasonable method. Interest income is calculated for net finance lease receivable based on effective interest rate. The lease receipt is recorded separately as collection of finance lease receivable and interest income.
Operating Leases
An operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an asset. The annual minimum lease payments, less guaranteed residual value, are charged to expense on a regular basis over the lease term.
F-24
The Company accounts for operating leases as leases that do not transfer substantially all of the risks and benefits of ownership of the lease asset to the lessee. The lease assets are recognized as tangible or intangible assets depending on the nature of the lease assets. The annual minimum lease receipts, less guaranteed residual value, are recognized as revenue over the lease term.
Valuation of Assets and Liabilities at Present Value
Receivables and payables resulting from long-term installment payment transactions, long-term cash loans or other similar borrowings, are valued at their present values, discounted at an appropriate discount rate when the difference between the nominal value and present value is material. The present value discounts are amortized or recovered using the effective interest rate method and are recognized as interest income or expense over the term of the contract.
Translation of Assets and Liabilities Denominated in Foreign Currencies
Monetary assets and liabilities denominated in foreign currencies are translated into Korean won at the rates of exchange in effect at the date of statement of financial position, and the resulting translation gains and losses are recognized in current operations.
Currency Translation for Foreign Operations
Assets and liabilities of a foreign subsidiary or company subject to the equity method of accounting for investments are translated into Korean won at the rates of exchange in effect at the date of statement of financial position, while equity accounts are translated at historical rates, except for the change in retained earnings during the year (current period income or loss) which is the result of the income statement translation process, and income statement accounts at the average rate over the period. Net translation adjustments are allocated to the controlling interest and minority interest and the portions allocated to the controlling interest are accounted for as gain(loss) on translation of foreign operation included in the other comprehensive income. Net translation adjustment of equity-method investees are accounted for as comprehensive income(expensive) of equity-method investees in the other comprehensive income.
Share-based Payments
In the case of equity-settled share-based payment, the fair value of the goods or employee services received in exchange for the grant of the options is recognized as an expense and a capital adjustment. If the fair value of goods or employee services cannot be estimated reliably, the fair value is estimated based on the fair value of the equity granted.
For cash-settled share-based payment, the fair value of the obligation the Company will assume is determined by the fair value of the goods or employee services received in exchange for the grant of the options. Until the liability is settled, the Company is required to measure the fair value at date of statement of financial position and at settlement date. The change in fair value is recognized as an expense.
Share-based payment transactions with an option for the parties to choose between cash and equity settlement are accounted for based on the substance of the transaction.
F-25
Joint Venture
A joint venture is a contractual agreement to establish joint control over business, assets or entities. In case of jointly controlled entities that involve the establishment of a corporation, partnership or other entity in which each participant has an interest, the Company applies the equity method of accounting. As of December 31, 2010, the Company holds 50% of ownership on Kumho Rent-A-Car Global Co., Ltd., and applies the equity method of accounting.
Accounting Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates.
U.S. Dollar Convenience Translation
The December 31, 2010 consolidated financial statements are expressed in Korean Won and have been translated into U.S. dollars at the rate of W1,138.9 to US$1, the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. and in effect on December 31, 2010, solely for the convenience of the reader. These translations 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.
Changes in Accounting Policies
Through December 31, 2008, Korea Accounting Institute and Financial Supervisory Service have issued and revised various Korea accounting standards and the following is a summary of major changes, which are newly adopted by the Company.
Accounting Standards
Key Requirements
As a result of the adoption of the accounting standards, the Company’s net assets at the beginning of 2008 increased by (Won)3,852 million.
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Reconciliation of the differences in accounting policies
For the year ended December 31, 2010, the following adjustments were made on the subsidiaries’ financial statements to reconcile the differences in accounting policies between the Controlling Company and subsidiaries:
KT Linkus Co., Ltd.
4. Restricted Deposits
Restricted deposits as of December 31, 2010 and 2009, are as follows:
Cash and cash equivalents
Long-term investment assets
5. Inventories
Inventories as of December 31, 2010 and 2009, are as follows:
Merchandise
Supplies
6. Loans Receivable
Loans granted by KT Capital and KTR as of December 31, 2010 and 2009, are summarized as follows:
Current
Factoring
Loans
Deferred loan origination fee
Accounts receivable-loans
Loans for installment credit
Deferred incidental expense
Accounts receivable-loans for installment credit
Financial investment for new technology
Financial loans for new technology
F-27
Non-Current
Factoring receivables
New technology financial investment assets
New technology financial loans
7. Securities
Trading securities as of December 31, 2010 and 2009, are as follows:
Beneficiary certificates
The above trading securities are in short-term investment assets in the consolidated statements of financial position and carried at fair value determined based on the trading price as of year-end published by the financial institutes.
Available-for-sale securities as of December 31, 2010 and 2009, are as follows:
Debt securities
The above current available-for-sale securities are included in the short-term investment assets in the consolidated statements of financial position and carried at fair value determined based on the trading price as of fiscal year-end published by the financial institutes.
Non-current
Marketable equity securities 1
Solitech Co., Ltd.
Digital Ocean Co., Ltd. (formerly GaeaSoft Corp.)
Krtnet Corp.
PT. Mobile-8 Telecom Tbk
Show Mirae Asset PEF 1
KOREA CABLE T.V CHUNG-BUK SYSTEM CO., LTD.
Daewoo Securities Green Korea Special Purpose Acquisition Company
Tongyang Value Ocean Special Purpose Acquisition Company
F-28
Non-marketable equity securities 1
Korea Information Certificate Authority, Inc.
Vacom Wireless, Inc.
Neighbor Systems Co., Ltd.
Entaz Co., Ltd.
Smart Channel Co., Ltd.(formerly Mediapuff Plus)2
SBS KT SPC
IBK-Auctus Green Growth PEF
MBC KT SPC
Korea Software Financial Cooperative
Daesung Private Equity Fund
Translink Capital Partners I, L.P. 3
Translink Management II Fund 4
Pacren Walden Ventures Parallel VI-KT, L.P. 4
Sovik Contents Investment Fund
Korea Telecommunications Operators Association
GE Premier 1st CR-REIT
Wooridle Film Investment Fund No. 1 5
Luxpia Co., Ltd.
Leaders PEF
Minigate Co., Ltd
Mirae Asset PEF
BC Card Co., Ltd
SEMI Materials, Co., Ltd
SEJONG Metal Co,. Ltd. (redeemable convertible preferred stock)
Smith & Mobile Inc.
Alti semiconductor Co., Ltd
Alphaasset Sinabro Private Stock Investment Trusts 7th
Enswers Inc.
On Game Network Inc.
Woongjin passone
Wiz communications Co., Ltd
QCP Investment Purpose Company III Inc.
Petra PEF 2nd
Petra PEF 1st
Hyundai-Asan Private Stock Investment Trusts
CJ Venture Investment 12th Global Contents Investment Fund
Enterprise DB Corp.
KDBCJKL PEF 2nd
KoFC-IMM Pioneer Champ 2010-17th Investment Fund
Nexenta Systems, Inc.
SoftBank Commerce Korea
Shinhan Venture Capital Co., Ltd.
Government and public bonds
Tongyang Value Ocean Special Purpose Acquisition Company Convertible bonds
KIC Co., Ltd. Convertible bonds
Foosung Co., Ltd. Convertible bonds
KB2B. Bonds with warrant
Saehacoms Co., Ltd. Bonds with warrant
Probe corp. Convertible bonds
Sejong Metal Co,. Ltd. Bonds with warrant
The fair value of marketable equity securities is determined using quoted market prices as of year end. Non-marketable equity securities are recognized at acquisition cost if the fair value of the securities cannot be reliably measured due to lack
F-29
of basis and experience. But if the reasonably estimated recoverable amounts of non-marketable securities are less than the carrying amounts and the amount of deficiency is material then, the securities are recognized at the recoverable amounts by deducting the deficiency from the carrying amounts directly.
Held-to-maturity securities as of December 31, 2010 and 2009, are as follows:
Current (*)
The current held-to-maturity securities are included in short-term investment assets in the consolidated statements of financial position.
Maturities of debt securities as of December 31, 2010, are as follows:
Within 1 year
Over 1 year and within 5 years
For the years ended December 31, 2010 and 2009, changes in valuation gain or loss on short-term available-for-sale securities are as follows:
2010.1.1
(Won) 7,800
Deferred income tax
2009.1.1
(Won) (2,810)
The amounts are not adjusted for the minority interests in consolidated subsidiaries.
F-30
Equity-method Investments
Equity-method investments as of December 31, 2010 and 2009, are as follows:
(In millions of Korean won)
Investee
Kumho Rent-A-Car Global Co.,Ltd 1, 9
Korea Telecom Directory Co., Ltd.
KBSi Co., Ltd.
CU Industrial Development Co.,Ltd. 8
KTCS Corporation 7, 8
KTIS Corporation 7, 8
Korea Digital Satellite Broadcasting Co., Ltd.11
MOS Facilities Co., Ltd. 8
Kiwoom Investment Co., Ltd.
Korea Information & Technology Fund 10
Exdell Corporation 8
Information Technology Solution Bukbu Corporation8
Information Technology Solution Nambu Corporation8
Information Technology Solution Seobu Corporation8
Information Technology Solution Busan Corporation8
Information Technology Solution Jungbu Corporation8
Information Technology Solution Honam Corporation8
Information Technology Solution Deagu Corporation8
Everyshow
KT-Global New Media Fund
Company K Movie Asset Fund No. 1
Boston Global Film & Contents Fund L.P.
OIC Co., Ltd. (formerly OIC Language Visual Limited)
Mongolian Telecommunications
Metropol Property LLC
WiBro Infra Co., Ltd. 2
Harex Info Tech Inc. 8
Boston Film Fund
KTF-CJ Music Contents Investment Fund
Shinhan-KT Mobilecard Co., Ltd.
KT-DoCoMo Mobile Investment Fund
MetroM Co., Ltd. 8
KDNET Co., Ltd. 8
GOODTECH Co., Ltd. 8
Touchtel Co., Ltd. 8
KNS Co.,Ltd (formerly Excelnet Co., Ltd.)
F-31
KMTEC Co., Ltd. 8
MTT Co., Ltd. 8
Goodmorning F Co., Ltd. 8
BKLCD Co., Ltd.
TPS
ETN
Oscar ent. Co., Ltd.
KT-IMM Investment Fund 2
Ansan U-City BTL 1, 8
Miraeasset Good Company Investment Fund No.3 2
2010 KIF IMM IT Investement Fund 2
Anyang KDC project 2
QCP New technology investment fund 20th 2
Nau IB 7th fund 2
Saehacoms Co., Ltd. 1
Crzyfish, Inc. 1
Haitai Confectionery & Foods Co., Ltd 1, 10
Wooridle Film Investment Fund 3
eNtoB Corp. 4
WMC Co., Ltd. 5
Sky Life Contents Fund 4
Netcom 4
PARANGOYANGI 6
Music City Media Co., Ltd. 6
D&G Star Co., Ltd. 4
Paramount Music Co., Ltd. 4
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The details of changes in differences between the initial purchase price and the Company’s initial proportionate ownership in net book value of the investees ended December 31, 2010 and 2009, are as follows:
Kumho Rent-A-Car
eNtoB Corp.
Haitai Confectionery & Foods Co., Ltd.
Korea Digital Satellite Broadcasting Co., Ltd.
Harex Info Tech Inc.
U-Mobile
OliveNine Entertainment Co., Ltd.
The Contents Entertainment
Doremi Music Publishing Co., Ltd.
There are no unrealized gains and losses arising from intercompany transactions to be eliminated as of December 31, 2010.
F-33
The changes in the book values of equity-method investments for the years ended December 31, 2010 and 2009 are as follows:
Kumho Rent-A-Car Global
CU Industrial Development Co., Ltd.
KTCS Corporation
KTIS Corporation
Korea Digital Satellite Broadcasting Co., Ltd. 1
MOS Facilities Co., Ltd.
Korea Information & Technology Fund
Exdell Corporation
Information Technology Solution Bukbu Corporation
Information Technology Solution Nambu Corporation
Information Technology Solution Seobu Corporation
Information Technology Solution Busan Corporation
Information Technology Solution Jungbu Corporation
Information Technology Solution Honam Corporation
Information Technology Solution Deagu Corporation
Boston Global Film & Contents Fund L.P.1
WiBro Infra Co., Ltd.
MetroM Co., Ltd.
KDNET Co., Ltd.
GOODTECH Co., Ltd.
Touchtel Co., Ltd.
KMTEC Co., Ltd.
MTT Co., Ltd.
Goodmorning F Co., Ltd.
KT-IMM Investment Fund
Ansan U-City BTL 1
Miraeasset Good Company Investment Fund No.3 1
2010 KIF IMM IT Investement Fund 1
Anyang KDC project
QCP New technology investment fund 20th
Nau IB 7th fund 1
Saehacoms Co., Ltd.
Crzyfish, Inc.
Haitai Confectionery & Foods Co., Ltd
Wooridle Film Investment Fund
eNtoB Corp. 1
WMC Co., Ltd.
Sky Life Contents Fund
D&G Star Co., Ltd.
Paramount Music Co., Ltd.
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Boston Global Film & Contents Fund L.P. 1
Wooridle Film Investment Fund 1
Netcom
KTC Media Contents Investment Fund No.1
OLIVE9
U Mobile
KSCALL
KOSNC
KCALL
TMWORLD
UMSNC
Olive Nine Creative Co., Ltd.
Onestone Communication Co., Ltd.
F-35
Market value information of publicly listed investees as of December 31, 2010 and 2009, is as follows:
Financial information of investees as of December 31, 2010 and 2009, are as follows:
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The adjustments made on the financial statements of investees during the application of the equity method of accounting to reconcile their accounting policies with those of the Company as of December 31, 2010 and 2009, and for the years then ended are as follows:
Notes
QCP New technology investment fund 20
The changes in the share of losses not recognized, as the Company discontinued recognizing its share of further losses exceeding its interest in the equity-method investees, as of December 31, 2010 and 2009 are as follows:
Music City Media Co., Ltd.
PARANGOYANGI
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8. Property and Equipment
The changes in property, plant and equipment for the years ended December 31, 2010 and 2009 are as follows:
Balance at 2010.1.1
Acquisition
Disposal
Impairment
Others 1
Balance at 2010.12.31
Acquisition cost
Accumulated depreciation
Accumulated impairment loss
Government grants
Balance at 2009.1.1
Balance at 2009.12.31
As of December 31, 2010, with respect to rental and leasehold contracts, certain land and buildings are pledged for mortgages and leasehold rights, and the maximum pledged amount is (Won)70,704 million (2009: (Won)73,392 million).
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As of December 31, 2010, the value of land based on the posted price issued by the Korean tax authority amounted to (Won)5,412,098 million (2009: (Won)5,549,125 million)
9. Intangible Assets
The changes in intangible assets for the years ended December 31, 2010 and 2009, are as follows:
Amortization
The research and development expense for the years ended December 31, 2010 and 2009, are as follows:
Research expense
Development expense
As a significant expenditure, which is expected to have future economic benefits but is not capitalized in the year incurred because they are not under the Company’s control, training expense amounted to (Won)31,832 million (2009: (Won)23,575 million).
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10. Insurance
As of December 31, 2010, the summary of assets covered under the insurance programs with various insurance companies are as follows:
Insurance type
Buildings
Vessel (vehicles)
11. Government Grants and Customers’ Contribution.
The changes in government grants and customers’ contribution to construction costs which are incurred in acquisition of assets for the years ended December 31, 2010 and 2009, are as follows:
Land
Construction- in-progress
13. Derivatives
During the years ended December 31, 2010, 2009 and 2008, the Company entered into various derivatives contracts with financial institutions as below.
Type of transaction
Financial institution
Interest rate swaps
Merrill Lynch and others
Exchange fixed interest rate for variable
interest rate for a specified period
Currency swaps
Exchange foreign currency cash flow for local currency
cash flow local currency cash flow for a specified period
Combined interest rate currency swap
Exchange foreign currency variable interest rate swaps
for local currency fixed interest rate
Currency forward
Kookmin Bank and others
Exchange a specified currency at the agreed exchange
rate at a specified date
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Details of the above derivative contracts as of December 31, 2010 are as follows:
Counterparty
Merrill Lynch
CITI
Goldman Sachs
JPMorgan
Deutsche Bank
Credit Suisse
UBS AG
BTMU
CA
HSBC
BNP
DBS
ANZ
ABN
Hanabank
Nonghyop
Mizuho
Wooriinvest
Wooribank
Korea Export Insurance Corporation
Kookmin Bank
+ KRW 4.875% x n/N
Daegu Bank
Libor(3M)+4.00
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The assets and liabilities relating to outstanding contracts as of December 31, 2010 and 2009 are as follows:
(In millions of Korean won
and thousands of foreign currencies)
Interest rate swap
Currency swap
Combined interest ratecurrency swap
JPY
19,500,000
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Details of the currency swap and combined interest rate currency swap contracts to which hedge accounting is applied as of December 31, 2010 and 2009, are as follows:
Cash flow hedge
Currency swap 1
Combined
interest rate
currency swap 1
Fair value hedge
Interest rate swap 3
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The valuation gains and losses on the derivatives contracts for years ended December 31, 2010, 2009 and 2008, are as follows:
Type of Transaction
Put option
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14. Bonds payable and long-term borrowings
Bonds Payable
(In millions of Korean won andthousands of foreign currencies)
Type
AnnualInterestRates
MTNP notes 1
Euro bonds
FR notes 2
Libor(3M)
+1.5%
+0.47%
The 132nd Public bond
The 159th Public bond
The 160th Public bond
The 161st Public bond
The 162nd Public bond
The 163rd Public bond
The 164th Public bond
The 165-1st Public bond
The 165-2nd Public bond
The 166-1st Public bond
The 166-2nd Public bond
The 167-1st Public bond
The 167-2nd Public bond
The 168-1st Public bond
The 168-2nd Public bond
The 169th Public bond
The 170th Public bond 2
Tibor(3M)
+0.6%
The 171st Public bond
The 172-1st Public bond 2
The 172-2nd Public bond 2
+1.6%
The 173-1st Public bond
The 173-2nd Public bond
The 174-1st Public bond
The 174-2nd Public bond
The 175-1st Public bond
The 175-2nd Public bond
The 176-1st Public bond
The 176-2nd Public bond
The 176-3rd Public bond
The 177-1st Public bond
The 177-2nd Public bond
The 177-3rd Public bond
The 47-2nd Public bond
The 48th Public bond
The 49th Public bond 2
The 50th Public bond 2
The 51-1st Public bond 2
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(In millions of Korean won and thousands offoreign currencies)
The 51-2nd Public bond
The 52-1st Private bond
The 52-2nd Public bond
The 53-1st Public bond
The 53-2nd Public bond
Public bond
Public bond(19-2nd)
The 10th Public bond
The 11th Private bond
The 12th Public bond
The 13-2nd Public bond
The 14th Public bond
The 15th Public bond
The 16th Public bond
The 17-1st Public bond
The 18-1st Public bond
The 18-2nd Public bond
The 17-2nd Public bond
The 1-2nd Public bond
The 3rd Public bond
The 1th Private bond
The 2nd Private bond
The 4th Public bond
The 5th Private bond
The 6-2nd Public bond
The 7-2nd Public bond
The 8th Private bond
The 9-2nd Public bond
The 11th Public bond
CD(91D)
+1.39%
The 13-1st Public bond
The 14-1st Public bond
The 14-2nd Public bond
The 15th Private bond
MOR(3M)
+1.28%
The 16-1st Public bond
The 16-2nd Public bond
The 17-3rd Public bond
The 18-3rd Public bond
The 18-4th Public bond
The 19-2nd Public bond
The 19-3rd Public bond
The 19-4th Public bond
+1.95%
The 22-1st Public bond
The 22-2nd Public bond
The 22-3rd Public bond
The 23rd Public bond
The 24th Public bond
The 25-1st Public bond
The 25-2nd Public bond
The 26th Public bond
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The 27th Private bond
The 28-1st Public bond
The 28-2nd Public bond
The 29-1st Public bond
The 29-2nd Public bond
The 30-1st Public bond
The 30-2nd Public bond
The 30-3rd Public bond
The 31st Public bond
The 32-1st Public bond
The 32-2nd Public bond
The 32-3rd Public bond
The 33rd Public bond
The 34-1st Public bond
The 34-2nd Public bond
The 35-1st Public bond
The 35-2nd Public bond
The 36-1st Public bond 2
+1.09%
The 36-2nd Public bond
The 36-3rd Public bond
The 37-1st Public bond
The 37-2nd Public bond
The 37-3rd Public bond
The 37-4th Public bond
The 38-1st Public bond
The 38-2nd Public bond
The 38-3rd Public bond
The 39th Public bond
The 40-1st Public bond
The 40-2nd Public bond
The 40-3rd Public bond
The 41-1st Public bond
The 41-2nd Public bond
The 41-3rd Public bond
The 42-1st Public bond
The 42-2nd Public bond
The 42-3rd Public bond
The 1st Private bond
Less: Current portion
Less: Discount on bonds
Net
F-48
Long-term Borrowings
Informatization Promotion Fund 1
Inter-Korean Cooperation Fund 1
Facility and working capital loans
General purpose loans
Commercial papers
Facility loans in foreign currency
Other long-term borrowings in foreign currency
Present value discounts
Repayment Schedule
Repayment schedule of the Company’s bonds and long-term borrowings as of December 31, 2010, is as follows:
Year ending December 31
2011
2012
2013
2014
Thereafter
F-49
15. Accrued Severance Benefits
Changes in accrued severance benefits for the year ended December 31, 2010 and 2009, are as follows:
Decrease
Less : Severance insurance deposits
Less : Cumulative deposits to the National Pension Fund
The estimated value of severance benefits for all employees, as of December 31, 2010, amounts to (Won)1,231,005 million which are fully recognized as accrued severance benefits. In addition, as of December 31, 2010, accrued severance benefits are funded at approximately 70.75% through a severance insurance plan and defined benefit severance pension plan with Samsung Life Insurance.
16. Provisions
Changes in provisions for the years ended December 31, 2010 and 2009, are as follows:
Current portion
Litigation 1
KT members points 2
KT points 3
Call bonus points 4
Olleh club points 5
Sales warranty reserve
Others 7
Non-current portion
Asset retirement obligation 6
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17. Lease
The Company as Lessee
Property and equipment acquired through lease arrangements with GE Capital and others as of December 31, 2010 are as follows:
Finance Lease
Details of finance lease assets as of December 31, 2010 are as follows:
Acquisition costs
Net balance
The related depreciation amounted to (Won)2,029 million for the year ended December 31, 2010.
F-51
Details of future minimum lease payments as of December 31, 2010 under capital lease contracts are summarized below:
Within one year
From one year to five years
Operating Lease
Details of future minimum lease payments as of December 31, 2010 under operating lease contracts are summarized below:
Operating lease expenses incurred for the year ended December 31, 2010 amounted to (Won)28,278 million.
The Company as Lessor
Details of finance lease investments as of December 31, 2010 are as follow:
Bad debts allowances provided for doubtful minimum lease receivables as of December 31, 2010 are as follow:
Annual future lease receipts from operating lease agreements as of December 31, 2010 are as follows:
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18. Commitments and Contingencies
As of December 31, 2010, major commitments with local financial institutions are as follows:
(In millions of Korean won and thousands of foreign currencies)
Bank overdraft
Loan on information and communications fund
Collateralized loan on accounts receivable—trade
Collection for foreign currency denominated checks
Plus commercial papers
Letters of credit
As of December 31, 2010, guarantees received from financial institutions are as follows:
(In millions of Korean won and thousands of foreigncurrencies)
Performance guarantee for construction
Performance guarantee
Bid guarantee
Bonds payable in foreign currency guarantee
Advances received guarantee
General guarantee
Guarantee for import letter of credit
As of December 31, 2010, guarantees provided by the Company for third parties are as follows:
Creditor
Eun-haeng 1-area urban environment Improving project union
Defective guarantee
Permission guarantee and others
Other Project Financing
Employee Stock Ownership
As of December 31, 2010, 127 lawsuits have been filed against the Company as a defendant, with an aggregate amount of (Won)220,300 million. As of December 31, 2010, litigation provision in
F-53
relation to the potential loss amounted to (Won)23,560 million and is recorded as liabilities. The final outcome of these cases cannot yet be determined as of the report date.
As of December 31, 2010, the Company’s investment in Smart Channel Co., Ltd. (formerly Mediapuff Plus) is pledged as collateral for the investee’s borrowings.
As of December 31, 2010, KT Capital has 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 rights over the unsold apartments as collateral.
As of December 31, 2010, KT Rental media, one of the subsidiaries, provided two blank promissory notes to several financial institutions as collaterals for the performance guarantee.
In accordance with the debt covenant between KT Rental and the creditor group consisting of Korea Development Bank and National Federation of Fisheries Cooperatives, KT Rental should maintain its ratio of net borrowings to EBITA(Earnings Before Interest, Tax and Amortization) less than four as of each fiscal year end and report the calculation details of this ratio to an agent bank within 90 days from each fiscal year end. In case, KT Rental can not fulfill this condition, the creditors group is entitled to demand early repayment.
As of December 31, 2010, KT Music recorded accrued expenses of (Won)1,124 million as it is probable that Fair Trade Committee will impose the penalty due to price fixing among the on-line music service providers.
As of December 31, 2010, Telecop Service Co., Ltd. and KT Linkus Co., Ltd. have the joint responsibility to pay for the liabilities that KT Linkus Co., Ltd. incurred before its spin-off. Also, KTR Co., Ltd. and KT Rental Co., Ltd. have the joint responsibility to pay for the liabilities that KT Rental Co., Ltd. incurred before its spin-off.
19. Assets and Liabilities denominated in Foreign Currencies
Major assets and liabilities denominated in foreign currencies as of December 31, 2010 and 2009, are summarized as follows:
Accounts receivable
Loans receivable
Guarantee deposits paid
Accounts payable
F-54
Bonds (par value)
Long-term borrowings
Withholdings
Deposits received
As of December 31, 2010, the Company recognized(Won)65,793 million (2009:(Won)240,925 million) and (Won)31,871 million (2009: (Won)17,893 million) of foreign currency translation gain and loss as non-operating income and expense, respectively.
20. Common Stock
As of December 31, 2010, the Controlling Company’s number of authorized shares is one billion, and the details of common stock are as follows:
Common stock 1
21. Treasury Stock
The details in treasury stock owned by the Controlling Company as of December 31, 2010 and 2009, are as follows:
Number of shares
Amounts (In millions of Korean won)
Treasury stock is expected to be used for stock compensation for the Company’s directors and employees and other purposes.
22. Share-Based Payments
The Company’s share-based compensation programs include the employee stock options and stock grants. The Company measures and recognizes compensation cost for all share-based payment awards made to employees and directors, including grants of employee stock options and employee stock grants.
F-55
The fair value of awards granted that are expected to ultimately vest is recognized as expense over the requisite service periods. The number of options expected to vest equals the total options granted less an estimation of the number of forfeitures expected to occur prior to vesting. The forfeiture rate is calculated based on historical data and is adjusted if actual forfeitures differ significantly from the original estimates. The effect of any change in estimated forfeitures would be recognized through a cumulative adjustment that would be included in compensation cost in the period of the change in estimate.
The Company has granted stock options to its executive officers and directors as of December 31, 2010 in accordance with the stock option plan approved by its board of directors, details of which are as follows:
Grant date
Grantee
Number of basic allocated shares upon grant
Number of additional shares related to business performance upon grant
Number of shares expected to be exercised upon grant
Number of settled or forfeited shares
Number of expired shares as of December 31, 2010
Number of settled or forfeited additional shares related to business performance
Number of allocated shares as of December 31, 2010
Number of additional shares related to business performance as of December 31, 2010
Total number of shares as of December 31, 2010
Number of shares expected to be exercised
Fair value per share (in Korean won)
Total compensation cost (in millions of Korean won)
Exercise price per share
Exercise period
2012.02.04
2015.08.26
Valuation method
Upon exercise, the Company can elect one of the following settlement methods: issuance of new shares, issuance of treasury stock or cash settlement, subject to certain circumstances.
The stock option of KT Hitel is a cash settlement option.
The Company adopted the fair value method to measure compensation costs based on the various valuation assumptions and methods, which are as follows:
Risk free interest rate
Expected duration(year)
Expected volatility
Expected dividend yield ratio
F-56
Of the total compensation costs calculated using the fair value method, the compensation costs recognized for the year ended December 31, 2010 are as follows:
Total compensation costs before adjustment
Total compensation costs cancelled
Total compensation costs after adjustment
Compensation costs recognized in prior periods
Compensation costs recognized in the current period
Compensation costs to be recognized after the current period
Other share-based compensation
The Company provided stock grants subject to both the service period and business performance goals.
The fair value of each stock grant awarded was estimated on the date of grant for performance based grants assuming that performance goals will be achieved. The expected term for grants is generally one year. The stock grants are settled with the new shares issued or treasury stock owned by the Company upon vesting. The fair value is based on the market price of the Company’s stock on the grant date. Compensation cost is recognized over the requisite vesting period and adjusted for actual forfeitures before vesting
The details of stocks grants as of December 31, 2010 are as follows:
4th grant
Estimated number of shares granted
Estimated number of shares to be exercisable
Vesting conditions (both conditions required)
Service condition: 1 year
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)
Above compensation costs were calculated based on the fair value method and were charged to current operations as follows:
Total compensation costs
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23. Retained Earnings
The Commercial Code of the Republic of Korea requires the Controlling Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid until such reserve equals 50% of its issued capital stock. The reserve is not available for the payment of cash dividends, but may be transferred to capital stock with the approval of the Controlling Company’s Board of Directors or used to reduce accumulated deficit, if any, with the ratification of the Controlling Company’s majority shareholders.
The Controlling Company appropriates a certain portion of retained earnings, pursuant to a shareholder resolution, as voluntary reserves. These reserves may be reversed and transferred to unappropriated retained earnings through a resolution of shareholders, and may be distributed as dividends after the reversal.
24. Operating Revenues
Operating revenues for the years ended December 31, 2010, 2009 and 2008 are as follows:
Internet
Fixed-line telephone
PCS
Goods sold 1
Other operating revenues 2
Details of construction contracts, related to the other operating revenue, as of December 31, 2010, 2009 and 2008 are as follows:
and us dollars in thousands)
Bugae-dong, Incheon
Sungsu-dong, Seoul (Factory building)
Garak-dong, Seoul (Office building)
Yeongdeungpo-gu, Seoul (Factory building)
Incheon rural IT facility construction
Pyeongtaek Cheongbuk area land development electrical facility construction
Dang-dong, Gunpo (2)C-1BL apartment IT facility construction Section 4
DC link construction between Jindo and Jeju
11,436
—
(3,609
)
7,827
Submarine cable construction between Wando and Chungsando, Jeonnam
Test solar concentrator
Buoy installation
Ocean Bottom Seismometer
APCN2 submarine cable repair work
Total (Korean won)
Total (USD)
F-58
Sungsu-dong, Seoul (Hyundai apartment)
Deep ocean water intake and drainage facilities construction
Marine research technical service for DC link construction between Jindo and Jeju
Dang-dong, Gunpo (2)C-1BL apartment IT facility construction Section4
TPE submarine cable construction
AAG submarine cable repair work
RJK cable system dismantlement
TPE 3M PLIB construction
Jeongja-dong, Suwon
NAIMS system construction work/ Cable raising and laying
Electrical facility construction Section 1 in Highway between busan- and Ulsan
Maintenance of HVDC submarine cable, construction of protecting facilities for remained section
KOC submarine cable construction
AAG submarine cable construction
JAKABARE cable system PLGR work
Total(Korean won)
Total(USD)
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During the years ended December 31, 2010, 2009 and 2008, the changes in remaining contract balance of major system integration business included in other operating revenue are as follows:
Lease type private investment of advanced U-City broadband information network CCTV Construction, Ansan
Construction of information highway, Busan
Construction and support for infrastructure and service operation of digital textbook research school
Second phase construction of national defense transportation information system
System integration of SMRT Mall IT and advertising facility construction in Seoul Metropolitan Rapid Transit Corporation
Management and operation of SMRT Mall business
Construction of U-City, Hwaseong Dongtan
Extension of combined Wireless communications, The National Emergency Management Agency’s
Second phase in the Establishment of system, National Health Service’s IP customer services
Construction of Frequency resource analysis system
Second phase in the construction of U-City, Hwaseong Dongtan
Adoption of Navy’s main computer system-08
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25. Operating Expenses
Operating expenses for the years ended December 31, 2010, 2009 and 2008 are as follows:
Utilities
Taxes and dues
Rent
Repairs and maintenance
Advertising
Research
International call settlement
Promotion
Sales commission
Less : Transfer to other accounts
26. Income Tax Expense
Income tax expense for the years ended December 31, 2010, 2009 and 2008, consists of:
The components of income tax expense
Current income tax expense
Changes in deferred income tax assets and liabilities related to temporary differences
Changes in deferred income tax assets and liabilities related to tax credits
Changes in deferred income tax assets and liabilities directly reflected in shareholders’ equity
Income tax expense directly added to shareholders’ equity
Income tax expense
Deferred tax assets and liabilities directly reflected in shareholders’ equity
Gain on valuation of available-for-sale securities
Loss on valuation of available-for-sale securities
Increase in equity of associates
Decrease in equity of associates
Gain and loss on valuation of derivatives
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A reconciliation of the income tax expense and the income before income tax expense
Income before income tax expense
Expected tax expense at statutory tax rate
Differences
Non-taxable benefit
Non-deductible expense
Impact of not recording deferred taxes on
certain temporary differences
Changes in tax adjustment, additional income tax and tax refund for prior periods
Tax credit carryforwards and deductions
Changes in tax rates
Others, net
Effective tax rate
Deferred tax assets and liabilities from the tax effects of temporary differences, including available tax credit carryforwards
Deferred tax arising from temporary differences
Allowance for doubtful accounts
Inventory valuation reserve
Available-for-sale securities
Equity method investments
Contribution for construction
Provisions
Provision for severance indemnities
Deposits for severance benefits
Reserve for technology and human resource development
Tax loss carryforwards
Not recognized as deferred income tax assets
Recognized as deferred income tax assets
Deferred tax assets arising from the carryforwards
Total tax credit carryforwards
Net deferred income tax assets
Current deferred income tax assets
Non-current deferred income tax assets
Current deferred income tax liabilities
Non-current deferred income tax liabilities
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Deferred tax arising
from temporary differences
Equity method investment securities
Deferred tax assets
arising from the carryforwards
The possibility of realization on deferred tax asset depends on many factors, such as the Company’s ability, overall economic environment, and industry prospects, within the realization period of temporary differences. The Company assesses such factors periodically, and recognizes the deferred tax assets as of December 31, 2010, as all deductable temporary differences are considered realizable. However, the Company did not recognize the income tax assets resulting from the net operating loss carryforwards and equity-method investments to the extent the Company does not expect the related temporary differences to be reversed within the foreseeable future.
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27. Income From Discontinued Operations
Doremi Media Co., Ltd is excluded from the consolidation as of December 31, 2010. The net income (loss) of Doremi Media and other subsidiaries for the years ended December 31, 2010, 2009 and 2008 are reclassified into income (loss) from discontinued operations, as follows:
Book Value
Assets of discontinued operations
Liabilities of discontinued operations
Operating and non-operating loss
Gain on disposal of discontinued operations
Tax effect
The consolidated statements of income for the years ended December 31, 2009 and 2008 have been retrospectively adjusted for discontinued operations.
28. Comprehensive Income
Comprehensive income for the years ended December 31, 2010, 2009 and 2008 consists of:
Other comprehensive income
Gain on valuation of financial derivatives
Loss on valuation of financial derivatives
Comprehensive income
Attributable to : Equity holders of the parent
Minority interests
29. Earnings Per Share
Basic and diluted earnings per share for the years ended December 31, 2010, 2009 and 2008 are as follows:
Basic earnings per share from continuing operations
(in millions of Korean won, except for per share amounts)
Income from continuing operations attributable to common shares
Weighted-average number of common shares outstanding
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Basic earnings per share from discontinued operations
Income (loss) from discontinued operations attributable to common shares
Basic earnings per share
Net income attributable to common stock
Weighted-average number of common stock outstanding
Weighted-average number of common shares outstanding is adjusted to reflect weighted-average number of treasury stock for the years ended December 31, 2010, 2009 and 2008.
Diluted earnings per share from continuing operations
Income from continuing operations attributable to common stock
Exchangeable bond interest
Adjusted income from continuing operations
Dilutive potential common shares outstanding
Weighted-average number of common shares outstanding and dilutive common shares
Diluted earnings per share from discontinued operations
Net income from discontinued operations attributable to common stock
Adjusted income (loss) from discontinued operations
Diluted earnings per share
Adjusted net income attributable to common stock
Diluted net income per share is calculated by dividing adjusted net income by the weighted average number of common shares outstanding and dilutive common shares. Stock options and other share-based payments, which have no dilutive effect for each reporting period, are excluded from the calculation of diluted earnings per share.
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Potential common shares as of December 31, 2010, 2009 and 2008 are as follows:
IssueDate
Maturity Date
Exercisable Period
Other share-based payment
On maturity date, subject to the
resolution of board of directors
30. Dividends
The details of dividends for common stocks included in the Controlling Company’s non-consolidated statements of appropriations of retained earnings for the years ended December 31, 2010, 2009 and 2008 are as follows:
Number of shares eligible for dividends
Dividend rate
Dividend amount (in millions of Korean won)
Payout ratio (Dividend / Net income)
Dividend yield ratio (Dividend Per Share / Stock price at year end)
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31. Supplemental Cash Flows Information
The cash and cash equivalents stated on statements of cash flows are the same amount of cash and cash equivalents less government grants on statements of financial position.
Significant transactions not affecting cash flows for the years ended December 31, 2010, 2009 and 2008 are as follows:
Reclassification of the current portion of bonds payable
Reclassification of construction-in-progress to property and equipment
Acquisition of equity-method investments through issuance of exchangeable bond
Reissuance of treasury stock in exchange of exchangeable bonds
32. Related Party Transactions
The list of subsidiaries of the Company as of December 31, 2010 is as follows:
Type of control
Subsidiaries
Ultimate Controlling Company
Direct control
Indirect control through KT Hitel
Indirect control through KT Capital
Indirect control through KT Rental
Indirect control through KTSCInvestment Management B.V.
Indirect control through NTSC
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The Controlling Company’s significant transactions and balances with subsidiaries as of December 31, 2010, 2009 and 2008 and for the years then ended are as follows:
KT Telecop Co., Ltd.
2010 Total
2009 Total
2008 Total
Significant balances and transactions among the subsidiaries as of December 31, 2010, 2009 and 2008 and for the years then ended are as follows:
The Controlling Company’s significant transactions and balances with equity-method investees as of December 31, 2010, 2009 and 2008 and for the years then ended are as follows:
Operating Revenue
Operating Expense
Receivables
Payables
Details of the Controlling Company’s ownership in the related parties, acquisition cost, fair value (or net asset) and book values are in Note 2 and Note 8.
Key management compensation for the years ended December 31, 2010, 2009 and 2008 consists of:
Benefits
Salaries, bonuses, other allowances, retirement benefits, medical benefits and others
Compensation expenses
Compensation expenses associated with stock options, stock grants
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Key management consists of vice presidents and higher positions, who have the authority and responsibility for planning, operation and control and are in charge of a business unit or division, and non-permanent directors.
33. Segment Information
The Company’s operating segments are as follows:
Details
Business service
Personal Customer Group (“Personal”)
Home Customer Group (“Home”) Enterprise Customer Group (“Enterprise”)
Details of each segment for the years ended December 31, 2010, 2009 and 2008, are as follows:
Depreciation and Amortization
Property and equipment and Intangible assets
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Information by Industry for the years ended December 31, 2010 and 2009 is as follows:
Assets and liabilities by industry as of December 31, 2010 and 2009
Current assets
Quick assets
Non-current assets
Investments
Property and equipment
Intangible assets
Liabilities
Non-current liabilities
Results of operations by industry for the years ended December 31, 2010, 2009 and 2008
Non-operating revenues
Income from continuing operations before income tax
Income tax on continuing operations
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34. Employee Welfare
Cost on the various employee welfare programs of the Company for the years ended December 31, 2010, 2009 and 2008 totaled (Won)374,300 million, (Won)587,011 million and(Won)565,738 million, respectively.
35. Subsequent Events
Subsequent to December 31, 2010, the Controlling Company has issued the unsecured public bonds as follows:
(in thousands)
Interest
Rate
Repayment Method
USD denominated unsecured public bond (178-1st) with floating rate
USD denominated unsecured public bond (178-2nd) with floating rate
JPY denominated foreign public bond
Unsecured public bond (179t)
Unsecured public bond (180-1st)
Unsecured public bond (180-2nd)
On January 27, 2011 the Controlling Company acquired from Dutch Savings Holdings B.V 5,600,000 of redeemable convertible preferred stock with voting rights and the bonds convertible into 5,600,000 of common stock of Korea Digital Satellite Broadcasting CO., Ltd. for (Won)246,000 million. The accrued interest of (Won)7,969 million are also included in the amount of the convertible bond. Accordingly, the Controlling Company’s ownership in Korea Digital Satellite Broadcasting Co., Ltd. has increased from 32.12% to 46.41%. If the potential voting rights are also considered, the ownership increases to 53.05%.
As approved by the Board of Directors on May 4, 2011, the Company has decided to sell New Telephone Company, Inc. 5,309,189 shares (79.96%) to VIMPEL-COMMUNICATIONS. The selling price is $ 346,628 thousand.
As approved by the Board of Directors on February 3, 2011, KT Capital decided to acquire 1,489,400 of the common stocks of BC Card owned by Shinhan Bank, representing 33.85% of total outstanding shares, for (Won)231,602 million.
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KT Rental and KTR merged on March 1, 2011, as approved by the Board of Directors on January 7, 2011.
36. Merger with KTF
On January 20, 2009, the Controlling Company entered into a merger agreement with KTF, which was subsequently approved by the shareholders on March 27, 2009. On June 1, 2009, the Controlling Company, as the surviving company, merged with KTF.
The Controlling Company issued 0.7192335 share of KT common stock with a par value per share of (Won)5,000 for one share of KTF. However, the Controlling Company did not issue any new common stock for the shares of KTF common stock held by the Controlling Company or for the treasury shares of KTF as of the date of the merger.
Details of merged companies:
CEO
Business
Relationship
KT Corporation (KT)
KT Freetel Co., Ltd. (KTF)
Accounting treatment
As this was a merger between parent and subsidiary, the Controlling Company accounted for the merger using the carrying amounts in its consolidated financial statements and accordingly, the excess of merger consideration given over the carrying amount of net assets acquired was recognized as capital adjustment after offsetting capital surplus, if any, from the similar type of transaction.
Decrease in Minority interest (a):
Changes in equity :
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
Sub-total (b) :
Changes in total equity (a+b):
Changes in goodwill for the year ended December 31, 2010 and 2009 are as follows:
January 1, 2009
The above goodwill includes the goodwill arising from the acquisition of KTF shares by KT in stages and the goodwill recorded in the book of KTF prior to the merger of KT and KTF. Goodwill is amortized on a straight-line basis over ten years and, as of June 30, 2010, the goodwill had been fully amortized.
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Financial statements of the merged companies
Statements of financial position
Investment assets
Total liabilities and equity
Statements of income
37. Adoption of K-IFRS
The Controlling Company plans to prepare its financial statements in accordance with K-IFRS starting from the year ending December 31, 2011. Since “the Roadmap to K-IFRS Adoption” has been announced in March 2007, the Controlling Company organized a task force team, conducted training, and analyzed the impact of the adoption of K-IFRS. The Controlling Company has analyzed the key differences and potential impact on financial statements.
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Significant differences between the accounting policies chosen by the Controlling Company under K-IFRS and under current generally accepted accounting principles in the Republic of Korean (K-GAAP) are as follows:
Initiation fee revenue
Real estate revenue
Customer Loyalty Programmes
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Transfer of financial assets
Employee benefits
Deferred tax
Deferred tax assets or liabilities on investments in subsidiaries and associates are recognized by reflecting the tax consequences of each temporary difference.
An entity shall classify all deferred tax assets and liabilities as non-current.
Deferred tax assets or liabilities on investments in subsidiaries and associates are recognized by the net amount of temporary differences from each investment.
An entity classifies deferred tax assets and liabilities as current or non-current according to the period in which the temporary differences are reversed.
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38. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Company are prepared in accordance with generally accepted accounting principles in the Republic of Korea (“Korean GAAP”), which differs in certain significant respects from generally accepted accounting principles in the United States of America (“U.S. GAAP”). Application of U.S. GAAP would have affected the consolidated financial position of the company and subsidiaries as of December 31, 2010 and 2009 and the related consolidated net income for the three years ended December 31, 2010, 2009 and 2008 to the extent described below.
A description of the significant differences between Korean GAAP and U.S. GAAP as they relate to the Company are discussed in detail below.
(a) Reconciliation of Net Income from Korean GAAP to U.S. GAAP
Note reference
Net income in accordance with Korean GAAP
Adjustments:
Goodwill impairment
Equity in income of affiliates:
Reversal of amortization of goodwill
Impairment loss relating to affiliates
Additional acquisitions of affiliates
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
Loan Impairment
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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(b) Reconciliation of Total Equity from Korean GAAP to U.S. GAAP
Total equity in accordance with Korean GAAP
Equity in earnings of 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
Noncontrolling interest
Total equity as adjusted in accordance with U.S. GAAP
(c) 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 in 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 :
KTSM
KT Music (formerly, “KTF Music Corporation”)
Unlisted :
Olivenine
KTP
SFNH BF-(1)
KT Rental
Vanguard Private Equity Fund
Doremi Media (*1)
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The quoted market values (based on closing KOSDAQ prices) of KTSM and KT Music shares held by the Company are (Won)33,229 million and(Won)39,279 million as of December 31, 2010, respectively.
Presented below is the summarized combined financial information of those entities that are consolidated under Korean GAAP but not for U.S. GAAP, prepared in accordance with Korean GAAP as of December 31, 2010 and 2009, and for each of the three years in the period ended December 31, 2010:
Net assets
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, 2010 and 2009 and condensed consolidated statements of cash flows of the Company under U.S GAAP for the three years in the period ended December 31, 2010 are presented in Note 38(u).
(d) 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 Ventures” 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, 2010 and 2009 are as follows:
Equity securities (available-for-sale)
Debt securities (available-for-sale)
The proceeds from sales of available-for-sale securities were(Won)6,148 million in 2010,(Won)6,833 million in 2009 and 614,405 million in 2008. The realized gains on those sales were (Won)274 million in 2010, (Won)1,716 million in 2009 and (Won)5,587 million in 2008. 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.
(e) Goodwill Impairment including Investor-level Goodwill
Under Korean GAAP, goodwill, which represents the excess of the acquisition cost over the fair value of net identifiable assets acquired, is amortized on a straight-line basis over its estimated economic useful life not exceeding 20 years. When it is no longer probable that goodwill will be recovered from expected future economic benefits, it is expensed immediately. Also, for investments in affiliated companies accounted for using the equity method, the excess of acquisition cost of the affiliates over the Company’s share of their net assets at the acquisition date is amortized by the straight-line method over its estimated useful life.
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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, 2009 and 2010 are as follows (in millions of Korean won):
Balance as of January 1, 2009
Goodwill acquired during the year
Balance as of December 31, 2009
Balance as of December 31, 2010
(f) Loan Impairment
KT Capital Inc., a subsidiary of KT Corporation, estimates the allowances for the doubtful loan receivables based on the forward looking criteria (“FLC’), which is the regulatory guideline for assessing the collectability of the receivables applicable to the financial institutes in Korea, as permitted under Korean GAAP.
However, under U.S. GAAP, the impairment on the loans receivable is recorded when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.
(g) 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 under U.S. GAAP as compared to Korean GAAP. In addition, prior to the fiscal year beginning on or after December 15, 2008, 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.
(h) 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.
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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, 2010 and 2009 are presented below.
Amortizable intangible assets:
Internal-use software
Buildings and facility utilization rights
Amortization expense:
For the year ended December 31, 2010
For the year ended December 31, 2009
For the year ended December 31, 2008
Estimated amortization expense (in millions of Korean won):
Year ending December 31,
2015
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.
(i) 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
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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 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.
Under U.S. GAAP, the useful lives of property and equipment are summarized as follows:
Buildings and structures
Underground access to cable tunnels, and concrete and steel telephone poles
Machinery and equipment
Tools, furniture and fixtures:
Steel safe boxes
Tools, computer equipment, furniture and fixtures
(j) 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.
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Under U.S. GAAP, details of interest capitalization for the years ended December 31, 2010, 2009 and 2008 are as follows (in millions of Korean won):
Total interest costs incurred
Interest capitalized
Amounts charged to expense
(k) 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 for as expenses. However, under U.S. GAAP, the handset subsidy is treated as reduction of revenue in accordance with ASC Topic 605, “Revenue Recognition.”
Under Korean GAAP, the sales of the certain real estate are accounted for as the revenue and the costs of the related real estate are recorded as the cost of sales under certain circumstances permitted under Korean GAAP. However, under U.S. GAAP, gains and losses from the sale of the property used for operation are required to be recorded as a component of operating income in net of the proceeds from the sale and the related costs.
(l) Income Taxes
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, 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
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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.
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.
(m) 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 the 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.
(n) Noncontrolling Interest
Under Korean GAAP, minority interest in consolidated subsidiaries, which is noncontrolling interest under US GAAP, is presented as a separate component of equity in the consolidated balance sheet.
Under U.S. GAAP, as described in Note 38 (r) 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 except for terminology.
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(o) Other
Korean GAAP requires gains and losses from the sale of property and equipment, impairment write-downs and other bad debt expenses to be included as part of non-operating income (expense). Under U.S. GAAP, gains and losses from the sale of property and equipment, impairment write-downs and other bad debt expenses are required to be recorded as a component of operating income.
Under Korean GAAP, purchase of treasury stock is regarded as temporary and does not impact the ownership percentages of stockholders unless there is an explicit purpose of retirement of the repurchased shares in accordance with resolution of board of directors or stockholders’ meeting. Under U.S. GAAP, purchase of treasury stock results in a change of an entity’s ownership structure and ownership percentages of stockholders.
(p) Comprehensive Income
Prior to January 1, 2007, Korean GAAP did not require 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, 2010, 2009 and 2008 is summarized as follows (in millions of Korean won):
Attributable to stockholders :
Net income as attributable to stockholders adjusted in accordance with U.S. GAAP
Other comprehensive income, net of tax :
Foreign currency translation adjustments
Unrealized gains on investments :
Unrealized holding gains (losses), net of tax of (Won)(3,739) million, (Won)384 million and (Won) (1,907) million in 2010, 2009 and 2008, respectively
Reclassification adjustment for losses realized in net earnings due to disposal, net of tax of (Won)88 million, (Won)378 million and (Won)687 million in 2010, 2009 and 2008, respectively
losses on valuation of derivatives for cash flow hedge, net of tax of (Won)(9,915) million, (Won)(5,840) million and(Won)(1,297) million in 2010, 2009 and 2008, respectively
Comprehensive income as adjusted in accordance with U.S. GAAP
Attributable to noncontrolling interest :
Total Comprehensive Income
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(q) Statements of Cash Flows
Statements of cash flows under Korean GAAP include the cash flows of KTSM, KTP, SFNH BF-(1), KT Music (formerly, “KTF Music Corporation”), KTR Co., Ltd, KT Rental, KT-LIG ACE Private Equity Fund, 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.
(r) Significant Recent Accounting Pronouncements
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(s) 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, 2010, 2009 and 2008:
CONSOLIDATED (in millions of Korean won)
Net income from continuing operations
Net income (loss) from discontinued operations
AVERAGE EQUIVALENT SHARES
Shares of common stock outstanding
Dilutive effect of exchangeable bond
Dilutive effect of stock option and grant
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, stock option and other stock compensation using the “if-exchanged method” and the “treasury stock” method if dilutive. 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 or since issued. 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. 43,153 shares, 365,832 shares and 417,785 shares of stock options outstanding as of December 31, 2010, 2009 and 2008, respectively, were not considered when calculating dilutive 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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(t) Condensed Consolidated U.S. GAAP Financial Information
Condensed consolidated balance sheets in accordance with U.S. GAAP as of December 31, 2010 and 2009 are presented as follows (in millions of Korean won):
Accounts receivable—trade
Other current assets
Property and equipment, net
Other assets
Accounts payable—trade
Long-term debt, excluding current portion
Other long-term liabilities
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Condensed consolidated statements of cash flows in accordance with U.S. GAAP for the years ended December 31, 2010, 2009 and 2008 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
Equity in loss of associates
Deferred income tax benefit
Gain on disposition of available-for-sale securities, net
Impairment losses of equity method affiliates
Foreign currency translation loss (gain), net
Loss (Gain) on settlement and valuation of derivatives, net
Changes in assets and liabilities related to operating activities:
Notes and accounts receivable
Notes and long-term accounts receivable
Advance receipts
Payment of severance indemnities
Deposits for severance indemnities
Other, net
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term financial instruments, net
Proceeds from the sale of equity method investments
Acquisition of equity method investment securities
Acquisition of assets and liabilities of consolidated subsidiaries
Net Cash Used in Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings
Repayment of long-term borrowings and current portion of long-term debt
Net Cash Provided by (Used in) Financing Activities
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
Supplemental schedule:
Cash paid for interest (net of amounts capitalized)
Cash paid for income taxes
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39. ADDITIONAL U.S. GAAP DISCLOSURES
(a) Income Tax Expense
The components of income tax expense for the years ended December 31, 2010, 2009 and 2008 are as follows (in millions of Korean won):
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, 2010, 2009 and 2008 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
Non-temporary difference
Changes in deferred income tax unrecognized
Tax rate changes
Actual provision for income taxes
The effective tax rates after adjustments of certain differences between amounts reported for financial accounting and income tax purpose, were approximately 23.8%,12.3% and 23.6% for the years ended December 31, 2010, 2009 and 2008, respectively.
The tax effects of temporary differences that resulted in significant portions of the deferred income tax assets and liabilities at December 31, 2010 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
Total deferred income tax assets
Valuation allowance
Deferred income tax assets
Deferred income tax liabilities:
Accrued interest income
Deferred income tax liabilities
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In 2010 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 2010, the Company was eligible for tax credits of (Won)257,331 million. However, due to the minimum tax provisions, the Company utilized only (Won)150,720 million. The remaining tax credit will expire in 2015. During 2010, the Company concluded that the remaining tax credits 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)88,794 million of the tax credit. The tax loss carryforwards of (Won)266,147 million as of December 31, 2010 will expire through 2020. During 2010, certain subsidiaries including KT Tech did not recognize deferred income tax assets amounting to (Won)57,620 million which resulted from the tax effects of tax loss carryforwards of (Won)261,909 million in excess of taxable differences and future taxable income. The valuation allowances reflect the uncertainty surrounding the Company’s ability to generate sufficient future taxable income in certain tax jurisdictions to utilize its net operating losses and the Company’s ability to generate sufficient capital gains to utilize all capital losses.
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 in which the deferred income tax assets are deductible or utilized, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowance recorded at December 31, 2010 and 2009. The amount of the deferred income tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.
The amount of unrecognized tax benefits that would favorably affect the effective income tax rate was(Won)5,761 million and ((Won)25,872) million for the years ended December 31, 2010 and 2009, respectively. The liability for uncertain tax positions is classified as a non-current liability in accordance with 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)605 million and (Won)347 million in penalties for the years ended December 31, 2010 and 2009, respectively. As of December 31, 2010 and 2009, the Company had (Won)1,514 million and(Won)909 million accrued for the payment of penalties.
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The Company has open tax years ranging from 2006 to 2010, 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.
(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 derivatives within Level 2 of the valuation hierarchy. The derivative financial instruments consist of cross currency interest rate swap and forward. The cross currency interest swaps and forward are valued using valuation 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.
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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, 2010 and 2009, respectively (in millions of Korean won):
ASSETS
• Beneficiary certificates
• Trading securities
• Available-for-sale securities
• Held-to-maturity securities
Derivative instruments assets :
• Interest rate swap
• Currency swap
• Combined interest rate currency swap
• Currency forwards
LIABILITIES
Derivative instruments liabilities :
(ii) Non-recurring Fair Value
In 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
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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 and credit risk.
(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.
The estimated fair values of the Company’s significant financial instruments at December 31, 2010 and 2009 are summarized as follows (in millions of Korean won):
Short-term financial instruments
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):
2016-2020
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(e) Loan Receivables
Loan receivables by type as of December 31, 2010, are as follows:
(in millions of
Korean won)
Loan for installment credit
Accounts receivable-loans for
installment credit
Loan for new technology
New technology financial
investment assets
The Company provides the allowance for the doubtful accounts for overdue receivables based on the aging analysis, historical bad debt experience and other relevant factors.
The aging analysis of loans receivables as of December 31, 2010, is as follows:
Past due but not impaired
Less than 31 days past due
31 ~ 60 days past due
61 ~ 90 days past due
91 ~ 180 days past due
over 180 days
Impaired loan
Impaired loans on individual basis
Impaired loans as a group
The maximum exposure to credit risk of each class of receivables is equal to the book value of each class of receivable as of December 31, 2010.
Credit risk is managed at the company level to minimize the financial loss. Credit risk arises in the ordinary course of transactions and investing activities, where clients or other party fails to discharge an obligation. The Company considers the counterparty’s credit on a periodic basis based on the counterparty’s financial conditions, default history and other important factors. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as outstanding receivables. To minimize such risk, the Company transacts only with financial institutions which have strong credit rating.
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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, 2011