As filed with the Securities and Exchange Commission on April 28, 2014
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
OR
For the fiscal year ended December 31, 2013
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)
90, Buljeong-ro
Bundang-gu, Seongnam-si, Gyeonggi-do
463-711 Korea
(Address of principal executive offices)
In Hoe Kim
Telephone: +82-31-727-0114; E-mail: ian.ihkim@kt.com
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Name of each exchange on which registered
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
As of December 31, 2013, there were 261,111,808 shares of common stock, par value￦5,000 per share, outstanding (not including 17,308,160 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 x Other ¨
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 ¨
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 7.C.
Interests of Experts and Counsel
ITEM 8.
FINANCIAL INFORMATION
Item 8.A.
Consolidated Statements and Other Financial Information
Item 8.B.
Significant Changes
ITEM 9.
THE OFFER AND LISTING
Item 9.A.
Offer and Listing Details
Item 9.B.
Plan of Distribution
Item 9.C.
Markets
Item 9.D.
Selling Shareholders
Item 9.E.
Dilution
Item 9.F.
Expenses of the Issuer
ITEM 10.
ADDITIONAL INFORMATION
Item 10.A.
Share Capital
Item 10.B.
Memorandum and Articles of Association
Item 10.C.
Material Contracts
Item 10.D.
Exchange Controls
Item 10.E.
Taxation
Item 10.F.
Dividends and Paying Agents
Item 10.G.
Statements by Experts
Item 10.H.
Documents on Display
Item 10.I.
Subsidiary Information
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Item 12.A.
Debt Securities
Item 12.B.
Warrants and Rights
Item 12.C.
Other Securities
Item 12.D.
American Depositary Shares
PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
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ITEM 14.
ITEM 15.
ITEM 16.
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
ITEM 16H.
PART III
ITEM 17.
ITEM 18.
ITEM 19.
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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 “￦” 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. (the “Market Average Exchange Rate”) on the balance sheet dates, which were, for U.S. dollars,￦1,153.3 to US$1.00,￦1,071.1 to US$1.00 and￦1,055.3 to US$1.00 at December 31, 2011, 2012 and 2013, 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, 2013 have been translated into United States dollars at the rate of￦1,055.3 to US$1.00, the Market Average Exchange Rate in effect on December 31, 2013.
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 (the “KCC”) 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, 2011, 2012 and 2013 and for each of the years in the three-year period ended December 31, 2013, and the report of the independent registered public accounting firm on these statements included herein. These audited financial statements and the related notes have been prepared under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The selected consolidated financial data for the three years ended December 31, 2013 have been derived from our audited consolidated financial statements.
In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with IFRS as adopted by the Republic of Korea (“K-IFRS”), which we are required to file with the Financial Services Commission and the Korea Exchange under the Financial Investment Services and Capital Markets Act of Korea (“FSCMA”). English translations of such financial statements are furnished to the Securities and Exchange Commission under Form 6-K. During the three years ended December 31, 2013, we are required to adopt certain amendments and interpretations to K-IFRS, relating to presentation of operating profit. Additionally, under K-IFRS, revenue from the development and sale of real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB, revenue from the development and sale of real estate is recognized when an individual unit of residential real estate is delivered to the buyer. Furthermore, due to a subsequent event in which early redemption rights were exercised for certain commercial paper guaranteed by KT ENS Corporation (“KT ENS”), our consolidated subsidiary, we recognized financial losses relating to the resulting estimation of guarantee liabilities in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB, which were not reflected in our financial statements prepared in accordance with K-IFRS, which were issued on March 13, 2014. As a result, the presentation of operating results in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB included in this annual report differs from the presentation of operating results in our consolidated statements of operations prepared in accordance with K-IFRS. See “Item 5.A. Operating Results—Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS” for additional information. In accordance with rule amendments adopted by the U.S. Securities and Exchange Commission which became effective on March 4, 2008, we are not required to provide a reconciliation to U.S. GAAP.
The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and related notes included in this annual report.
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Consolidated statement of operations data
Continuing Operations:
Operating revenue
Revenue
Others
Operating expenses
Operating profit
Finance income
Finance costs
Income from jointly controlled entities and associates
Profit (loss) from continuing operations before income tax
Income tax expense
Profit (loss) for the year from the continuing operations
Discontinued operations:
Profit (loss) from discontinued operations
Profit (loss) for the year
Profit (loss) for the year attributable to:
Equity holders of the parent company
Profit (loss) from continuing operations
Non-controlling interest
Profit from continuing operations
Earnings per share attributable to the equity holders of the Parent Company during the period (in won):
Basic earnings (loss) per share
From continuing operations
From discontinued operations
Diluted earnings (loss) per share
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Consolidated statement of financial position data
Assets:
Current assets:
Cash and cash equivalents
Trade and other receivables, net
Short-term loans, net
Current finance lease receivables, net
Other financial assets
Current income tax assets
Inventories, net
Other current assets
Total current assets
Non-current assets:
Long-term loans, net
Non-current finance lease receivables, net
Property and equipment, net
Investment property, net
Intangible assets, net
Investments in jointly controlled entities and associates
Deferred income tax assets
Other non-current assets
Total non-current assets
Total assets
Liabilities and Equity:
Current liabilities:
Trade and other payables
Current finance lease liabilities, net
Borrowings
Other financial liabilities
Current income tax liabilities
Provisions
Deferred income
Other current liabilities
Total current liabilities
Non-current liabilities:
Non-current finance lease liabilities, net
Retirement benefit liabilities
Deferred income tax liabilities
Other non-current liabilities
Total non-current liabilities
Total liabilities
Equity attributable to owners of the Parent Company
Paid-in capital
Capital stock
Share premium
Retained earnings
Accumulated other comprehensive income (expense)
Other components of equity
Total equity
Total liabilities and equity
4
Consolidated statement of cash flow data
Net cash generated from operating activities
Net cash (used in) investing activities
Net cash provided by (used in) financing activities
Operating Data
Lines installed (thousands) (3)
Lines in service (thousands) (3)
Lines in service per 100 inhabitants (3)
Mobile subscribers (thousands)
Broadband Internet subscribers (thousands)
Exchange Rate Information
The following table sets out information concerning the Market Average Exchange Rate for the periods and dates indicated:
Period
2009
2010
2011
2012
2013
November
December
2014 (through April 28)
January
February
March
April (through April 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 on the balance sheet dates, which were, for U.S. dollars, ￦1,153.3 to US$1.00, ￦1,071.1 to US$1.00 and ￦1,055.3 to US$1.00 at December 31, 2011, 2012 and 2013, 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, 2013 have been translated into United States dollars at the rate of ￦1,055.3 to US$1.00, the Market Average Exchange Rate in effect on December 31, 2013.
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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
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 enabled SK Telecom to provide fixed-line telecommunications, broadband Internet access and Internet television (or IP-TV) services together with its mobile telecommunications services. In January 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 enabled 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.
In addition to our competition with integrated telecommunications service providers, we face increasing competition from specific service providers, such as Internet phone service providers, Internet text message service providers, voice resellers and call-back service providers. In recent years, the increasing popularity of Internet phone and free text message services, such as Skype and Kakao Talk, have had a negative impact on demand for our telecommunications and text message services while creating additional data transmission usage by our Internet and mobile subscribers. 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 Wideband Code Division Multiple Access (or W-CDMA) technology and Long-Term Evolution (or LTE) technology. Competitors in the mobile telecommunications service industry are SK Telecom and LG U+. We had a market share of 30.1% as of December 31, 2013, making us the second largest mobile telecommunications service provider in Korea. SK Telecom had a market share of 50.0% as of December 31, 2013.
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.
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Since 2011, SK Telecom, LG U+ and we have launched fourth-generation mobile telecommunications services based on LTE technology, which we believe has further intensified competition among the three companies and resulted in an increase in marketing expenses and capital expenditures related to implementing and providing 4G LTE services. SK Telecom and LG U+ began providing 4G LTE services in July 2011, and we commenced providing commercial 4G LTE services on January 3, 2012 utilizing our bandwidths in the 1.8 GHz spectrum that became available upon termination of our 2G services based on Code Division Multiple Access (or CDMA) technology. In September 2013, we commenced providing wideband LTE services, which utilizes our adjoining 20 MHz of bandwidth in the 1.8 GHz spectrum to provide transmission speed of up to 150 Mbps, twice faster than those offered under standard LTE services. SK Telecom also began providing its wideband LTE services in September 2013 and LG U+ commenced providing its wideband LTE services in January 2014. As of March 1, 2014, our wideband LTE services covered five metropolitan cities in Korea, and we expect to expand our wideband LTE services to all of Korea by July 2014. As of December 31, 2013, the number of our LTE subscribers exceeded 7.8 million. Furthermore, in March 2014, we commercialized advanced wideband LTE (“Wideband LTE-A”) services, which interconnects our 20 MHz of bandwidth in the 1.8 GHz spectrum used to offer wideband LTE services with the 10 MHz of bandwidth in the 900 MHz spectrum used to offer standard LTE services by utilizing inter-band carrier aggregation technology to support transmission speed of up to 225 Mbps.
On April 2, 2014, LG U+ launched Korea’s first unlimited mobile service package, offering mobile subscribers with unlimited voice calls, text messaging, and LTE data at fees between￦80,000 to ￦85,000 per month. Commencing on April 3, 2014, SK Telecom launched three different types of unlimited LTE data plans, which provide mobile subscribers with unlimited amounts of LTE data, voice calls, and text massaging. On April 7, 2014, we began offering mobile subscribers with unlimited LTE data, voice calls, and text messaging packages at fees of ￦70,000 per month. Although we expect that SK Telecom and LG U+ will face similar challenges to those that we expect to face in offering LTE services and in implementing improvements to LTE technology, such as increased fees and expenses and unforeseeable market responses to the new technology, we cannot assure you that we will continue to be able to successfully compete in fourth-generation mobile telecommunications services. Furthermore, we believe that the continuing intense competition among major telecommunications operators in Korea and the resulting pressure on our fees, including from offerings of unlimited usage plans, may have a material adverse impact on our results of operations.
Fixed-line Telephone Services. Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. Since then, various competitors have entered the local, domestic long-distance and international long-distance telephone service markets in Korea, which have eroded our market shares. LG 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 international long-distance telephone services. We also compete with specific service providers, such as Internet phone service providers, voice resellers and call-back service providers, that offer 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, 2013, we had a market share in local telephone service of 81.4% and a market share in domestic long distance service of 78.7%. Further increase in competition may decrease our market shares in such businesses. As part of our efforts to improve our operational efficiencies, we announced on April 8, 2014 that we will transfer any operations relating to fixed-line sales activities (including on-site sales, line activation, after service, and customer center operations) to our subsidiaries.
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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, 2013. 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.
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. We have a license to use 40 MHz of bandwidth in the 2.1 GHz spectrum that we use to provide IMT-2000 services based on W-CDMA wireless network standards. Such license expires in December 2016, and we are required to pay approximately ￦1.3 trillion during the license period of 15 years. In April 2010, the KCC announced its decision to allocate 20 MHz of bandwidth in the 900 MHz spectrum to us, which became effective in July 2011, for which we are required 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 that was determined by the KCC at the time of allocation. In June 2011, our right to use 40 MHz of bandwidth in the 1.8 GHz spectrum expired, and the KCC allocated back to us the right to use 20 MHz of such bandwidth in the 1.8 GHz spectrum upon expiration pursuant to our application, for which we are required to pay a portion of the actual sales generated from using the bandwidth in the 1.8 GHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales that was determined by the KCC at the time of allocation.
In August 2011, the KCC auctioned the right to use the remaining 20 MHz of bandwidth in the 1.8 GHz spectrum that we relinquished, 10 MHz of additional bandwidth in the 800 MHz spectrum and 20 MHz of additional bandwidth in the 2.1 GHz spectrum. We acquired the right to use the 10 MHz of bandwidth in the 800 MHz spectrum, for which we are required to pay a total usage fee of ￦261 billion during the license period of 10 years, SK Telecom acquired the right to use the 20 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use the 20 MHz of bandwidth in the 2.1 GHz spectrum. We began using the 20 MHz of bandwidth in the 1.8 GHz spectrum, which became available upon termination of our 2G services, to provide our 4G LTE services starting in January 2012, and also began using the 20 MHz of bandwidth in the 900 MHz spectrum to provide our 4G LTE services starting in September 2013. We expect to utilize the newly allocated bandwidth in the 800 MHz spectrum to further expand our 4G LTE services in the future, if necessary.
In August 2013, the Ministry of Science, ICT and Future Planning further auctioned 50 MHz of bandwidth in the 1.8 GHz spectrum, which had been used by governmental entities such as the
8
military, and 80 MHz of bandwidth in the 2.6 GHz spectrum, which had been used for digital multimedia broadcasting services. We acquired the right to use 15 MHz of bandwidth in the 1.8 GHz spectrum, for which we are required to pay a total usage fee of approximately ￦900 billion during a license period of eight years. SK Telecom acquired the right to use 35 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum. Acquiring the right to use additional bandwidth in the 1.8 GHz spectrum has enabled us to provide Wideband LTE services beginning in September 2013, as 15 MHz of the newly acquired bandwidth in the 1.8 GHz spectrum was adjacent to our existing 20 Mhz of bandwidth in the 1.8 GHz spectrum.
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.
Introduction of new services, including our 4G LTE 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 ￦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 84 cities nationwide and major highways in March 2011, which we believe allows 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 845,000 subscribers as of December 31, 2013. The number of our WiBro subscribers decreased in 2013 compared to 2012, as more WiBro subscribers chose to access the internet using our 4G LTE network rather than WiBro following the introduction and proliferation of 4G LTE services during 2012 and 2013. Furthermore, we focused our subscriber retention efforts during 2013 on our mobile subscribers rather than our WiBro subscribers. We are also upgrading our broadband network to enable FTTH connection, which enhances data transmission 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 also enables us to deliver digital media content, such as IP-TV, with higher stability.
In addition, we have been building more advanced mobile telecommunications networks based on LTE technology, which is generally referred to as 4G technology, and commenced providing commercial 4G LTE services in the Seoul metropolitan area on January 3, 2012. We completed the expansion of our 4G LTE service coverage nationwide in October 2012. Several wireless carriers in the United States, Europe and Asia commenced LTE services in recent years and LTE technology is currently widely accepted as the standard 4G technology. LTE technology enables data to be transmitted faster than W-CDMA, up to 150 Mbps for downloading and up to 50 Mbps for uploading. We believe that the faster data transmission speed of the LTE network, combined with our existing 4G nationwide WiBro network, allows us to offer significantly improved wireless data transmission services
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with faster wireless access to multimedia 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.
We may not be able to successfully pursue our strategy to acquire businesses and enter into joint ventures that complement or diversify our current business, and we may need to incur additional debt to finance such expansion activities.
One key aspect of our overall business strategy calls for acquisitions of businesses and entering into joint ventures that complement or diversify our current business. In October 2011, we, through our subsidiary KT Capital Co., Ltd., acquired 1,622,520 common shares of BC Card Co., Ltd. to further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately ￦287 billion, and owned a 69.54% interest in BC Card Co., Ltd. as of December 31, 2013. In January 2011, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that were convertible into 5,600,000 shares of common stock of KT Skylife Co., Ltd., a provider of satellite TV service which may also be packaged with our IP-TV services, from Dutch Savings Holdings B.V. for approximately ￦246 billion. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 50.1% interest in KT Skylife Co., Ltd. as of December 31, 2013.
While we plan to continue our search for other suitable acquisition and joint venture opportunities, we cannot provide assurance that we will be able to identify additional attractive opportunities or that we will successfully complete the transactions, without encountering administrative, technical, political, financial or other difficulties, or at all. Even if we were to successfully complete the transactions, success of an acquisition or a joint venture depends largely on our ability to achieve the anticipated synergies, cost savings and growth opportunities from integrating the business of the acquired company or the joint venture with our business. There can be no assurance that we will achieve the anticipated benefits of the transaction, which may adversely affect our business, financial condition and results of operations.
Pursuing acquisitions or joint venture transactions also requires significant capital, and as we pursue further growth opportunities for the future, we may need to raise additional capital through incurring loans or through issuances of bonds or other securities in the international capital markets.
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, 2015.Although we have been able to reach collective bargaining agreements and wage agreements with our labor union in recent years, there can be no assurance that we will not experience labor disputes and unrests resulting from disagreements with the labor union in the future.
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The Korean telecommunications and Internet protocol broadcasting industries are subject to extensive Government regulations, and changes in Government policy relating to these industries could have a material adverse effect on our operations and financial condition.
The Government, primarily through the Ministry of Science, ICT & Future Planning (the “MSIP”) (ICT standing for Information & Communication Technology) and the KCC, has authority to regulate the telecommunications industry. Until March 2013, regulation of the telecommunications industry had mainly been the responsibility of the KCC. With the establishment of the newly created MSIP on March 23, 2013, however, such regulatory responsibility has mostly been transferred to the MSIP. The MSIP’s policy is to promote competition in the Korean telecommunications markets through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors.
Under current Government regulations, if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the MSIP, it must obtain prior approval from the MSIP for the rates and the general terms for that service. Each year the MSIP designates service providers the rates and the general terms of which must be approved by the MSIP. In recent years, the KCC had so designated us for local telephone service and SK Telecom for mobile service, and the MSIP, in consultation with the Ministry of Strategy and Finance, currently approves rates charged by us and SK Telecom for such services.
The MSIP 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 MSIP. In addition, the MSIP may periodically announce public policy guidelines or suggestions that we take into consideration in setting our tariff for non-regulated services. In June 2011, upon recommendation of the KCC, SK Telecom announced tariff reduction measures, including a reduction of the monthly fee by ￦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. In August 2011, after discussions with the KCC, we announced the adoption of various tariff reduction measures, including a reduction of the monthly fee by ￦1,000 for every mobile subscriber (effective October 21, 2011), an exemption of usage charges for SMS, of up to 50 messages per month (effective November 1, 2011) and the introduction of customized flat rate plans for smartphone users (effective October 24, 2011). The MSIP, which took over the KCC’s tariff regulation function in March 2013, is planning to gradually reduce and abolish activation fees by 2015. Pursuant to this policy objective, the MSIP discussed with us, LG U+, and SK Telecom gradually reducing and abolishing activation fees and as a result of the discussions, in August 2013, we, LG U+ and SK Telecom reduced activation fees by 40%. We reduced our activation fee by ￦9,600 (from ￦24,000 to ￦14,400) and SK Telecom and LG U+ reduced their activation fee by ￦15,840 (from ￦39,600 to ￦23,760) and ￦12,000 (from ￦30,000 to ￦18,000), respectively. On January 1, 2014, the MSIP announced its plans to further reduce activation fees in the second half of 2014 so that such fees would be reduced to 50% of the current fee levels, and we expect the remaining activation fees to be abolished by 2015. There can be no assurance that we will not adopt other tariff-reducing measures in the future to comply with the Government’s public policy guidelines or suggestions.
Based on investigations conducted in December 2012 and January 2013, the KCC imposed a combined fine of approximately ￦12 billion on SK Telecom, LG U+ and us in January 2013 (our fine being approximately ￦2.9 billion), for providing subsidies that were higher than those allowed under
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current regulations to new mobile phone purchasers and subscribers, and also imposed temporary suspensions from recruiting new subscribers ranging from 20 days to 24 days. In March 2013, the KCC again imposed a combined fine of approximately ￦5 billion on SK Telecom, LG U+ and us (our fine being approximately ￦1.6 billion) for continuing to offer subsidies during the suspension period. In July 2013, the KCC imposed a combined fine of approximately ￦67 billion on SK Telecom, LG U+ and us (our fine being approximately ￦20 billion) and also imposed a seven day suspension on us from recruiting new subscribers, also in connection with providing excessive handset subsidies to new subscribers. In December 2013, the KCC again imposed a combined fine of approximately ￦106 billion on SK Telecom, LG U+ and us (our fine being approximately ￦30 billion), which is the largest fine ever imposed by the KCC on local mobile operators for providing excessive subsidies to new subscribers. On March 7, 2014, the MSIP imposed a temporary suspension on us for 45 days (from March 13, 2014 to April 26, 2014), SK Telecom for 45 days (from April 5, 2014 to May 19, 2014), and LG U+ for 45 days (from March 13, 2014 to April 4, 2014 and again from April 27, 2014 to May 18, 2014) from recruiting new subscribers as a result of continuing to offer excessive handset subsidies to new subscribers, despite the order from the KCC prohibiting such subsidies. Additionally, the MSIP announced that it plans to bring criminal charges with fines of up to ￦150 million and imprisonment of less than three years against any carrier and responsible personnel that fails to adhere to the suspension or continues to offer illegal subsidies after the suspension is completed.
President Park Geun-hye, who took office on February 25, 2013 as the 18th President of Korea, announced that the new Government will work toward reducing telecommunications service charges and promoting transparency in the decision making of telecommunications service providers. Accordingly, the new Government has set detailed policy objectives to (1) gradually reduce and abolish activation fees by 2015, (2) expand mobile virtual network operator and mobile voice over Internet protocol (“m-VoIP”) service, (3) intensify regulations on handset subsidies and (4) construct a data-based tariff system. If the new Government goes forward with its new telecommunications policy, it will increase competition among wireless service providers and our business and our profitability may be adversely affected.
The Government also sets the policies regarding the use of radio frequencies and allocates the spectrum of radio frequencies used for wireless telecommunications. For a discussion of the Government’s recent policies and practices on bandwidth spectrum allocation, see “Item 3. Key information—Item 3.D. Risk Factors—“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.” 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 services in November 2008. IP-TV is a service which combines video-on-demand services with real-time high definition broadcasting via broadband networks. The MSIP and the KCC have the authority to regulate IP-TV services. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IP-TV services business must first obtain a license from the MSIP. Moreover, anyone intending to provide contents focused on news or contents that generally combine news, culture entertainment, and any other similar contents with IP-TV providers, must obtain approval from the KCC. Furthermore, anyone intending to provide contents relating to the introduction of consumer products and other similar marketing content with IP-TV providers must obtain additional approval from the MSIP. In addition, KT Skylife Co. (formerly Korea Digital Satellite Broadcasting Co., Ltd.), which became our consolidated subsidiary starting in January 2011, offers satellite TV services, which may also be packaged with our IP-TV services. KT Skylife is also subject to regulation by the MSIP and the KCC pursuant to the Korea Broadcasting Act.
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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 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 debt guarantees for other domestic member companies of the same group and cross-shareholdings among domestic member companies of the same group. Additionally, we are subject to a prohibition, in effect since July 25, 2014, against circular shareholding among any three or more entities within our business 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.
The reported investigations of and any adverse publicity associated with Mr. Suk-Chae Lee, our former Chief Executive Officer, and our other former executive officers or directors could have a material adverse effect on our business, reputation and stock price.
On November 12, 2013, Mr. Suk-Chae Lee resigned from his position as the president and chief executive officer of KT Corporation following the investigation by prosecutors for alleged embezzlement and breach of fiduciary duty. A warrant for Mr. Lee’s arrest and detainment was submitted for approval to the Seoul Central District Court on January 2, 2014, but was denied on January 15, 2014, due to lack of ascertainable evidence for his arrest. On April 15, 2014, the Seoul Central District prosecutor’s office charged Mr. Lee with embezzlement and breach of fiduciary duty, and also charged Mr. Il Yung Kim, our former non-independent director and former president of the KT Corporate Center, as a co-conspirator in the breach of fiduciary duty by Mr. Lee. On April 16, 2014, the Seoul Central District prosecutor’s office also arrested Mr. Yu-Yeol Seo, our former president of Home Business Group, for his alleged participation in Mr. Lee’s embezzlement. The investigations against these former employees are still ongoing, and we cannot be certain at this time what the outcome will be. However, there can be no assurance that any further developments in these investigations will not adversely affect our business or cause our stock price to decline.
The reported investigation of and any adverse publicity associated with one of our subsidiaries could have a material adverse effect on our business, reputation and stock price.
An employee of KT ENS and several companies, some of which are KT ENS’s subcontractors, allegedly worked together to forge documents, including a forged proof of accounts receivable, to incur borrowings, of which￦290 billion remains unpaid, from 16 Korean banks since 2008 in over 460 transactions, which were allegedly secured by the forged accounts receivable and endorsed by KT ENS. KT ENS’s management neither had knowledge of nor approved such transactions. On February 11, 2014, police raided the offices of the subcontractors in connection with their investigation
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of the loans. Upon discovery of the incident, KT ENS immediately suspended the employee in question without pay, pending the results of the investigations for any further disciplinary actions. The employee and seven other persons are currently under arrest, and authorities believe that some of these subcontractors have since fled Korea with a large portion of the borrowed money. The banks are demanding that KT ENS, and possibly KT Corporation, be held liable for the repayment of the loans. However, KT ENS and KT Corporation disclaim any responsibility for the employee’s personal misconduct and these transactions, and believe that the banks should be held responsible for failing to detect the fraud while screening the loan applications, given the lack of a board resolution in connection with such sizable loans, as well as the fact that the seal used in connection with the loans bore KT ENS’s former name, KT Networks, and is no longer legally effective.
On March 12, 2014, KT ENS filed for court receivership with the Seoul Central District Court, based on its inability to pay approximately ￦49 billion in commercial paper that became due after early redemption rights were exercised. The commercial paper had been issued in connection with construction of a solar power plant by a contractor of the project and guaranteed by KT ENS. KT ENS faced difficulties in preventing such exercise of redemption rights following the above incident, and we declined to provide additional financial support to KT ENS to repay the redeemed commercial paper. While KT ENS’s filing for court receivership is unlikely to have a material impact on our results of operations or financial condition on a consolidated basis, as KT ENS’s revenue for 2013 was approximately 2.0% of our consolidated revenues for 2013, any future legal proceedings against KT ENS and/or us may lead to significant losses. Such losses, as well as any adverse publicity associated with the incident, could have a material adverse effect on our business, reputation and stock price.
The data breach incidents involving us in recent years have resulted in government investigations and private litigation, and if our efforts to protect the personal information of our subscribers are unsuccessful, future issues may result in further government enforcement actions and private litigation and may significantly impact our results of operation and reputation.
The nature of our business involves the receipt and storage of personal information of our subscribers. The uninterrupted operation of our information systems and confidentiality of the customer information that resides in such systems are critical to our successful operations. As such, we have a program in place to detect and respond to data security incidents. However, even though we may take all steps we believe are necessary to protect personal information, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to circumvent our security measures to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff. In addition, because the techniques used to obtain unauthorized access or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures.
For example, in July 2012, the police arrested two individuals in connection with the alleged theft of personal account information relating to approximately 8.7 million of our mobile phone subscribers. The individuals in question stole personal information through a series of hackings starting from February 2012 into our New Service and Technology Evolution Program (“N-STEP”), our mobile customer information system. Since the incident, approximately 30,000 mobile phone subscribers filed lawsuits against us in connection with the N-STEP hackings, alleging that we failed to protect their personal information, and are seeking a total of approximately ￦15 billion in damages. The trials are currently ongoing at various district courts.
Furthermore, in March 2014, the police arrested three individuals in connection with their alleged theft of personal information relating to approximately 9.8 million of our subscribers. The
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individuals in question stole the personal information of our subscribers through a series of hackings into our main homepage starting from February 2014. On March 19, 2014, approximately 100 individuals collectively filed a lawsuit against us in Seoul Central District Court, seeking damages of approximately ￦200,000 per person. According to news reports, several other subscribers and third party organizations have filed lawsuits against us in connection with the incident, which we are not yet able to confirm as we have not yet received any official notice from the courts regarding these additional lawsuits. As part of an ongoing public-private task force investigation into the recent hacking incidents, the MSIP announced in March 2014 that it confirmed that hackers accessed our websites more than 12 million times using automated hacking programs in the three months prior to the announcement. On March 17, 2014, the KCC announced and the MSIP further announced that we may be fined up to ￦100 million in light of the most recent hacking incident.
We are unable to predict with any degree of certainty the outcome of these incidents at this time, including the scope of investigations or the maximum potential exposure. However, if we experience additional significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be subject to additional government enforcement actions, regulatory sanctions and litigation in the future. In addition, our mobile phone subscribers could lose confidence in our ability to protect their information, which could cause them to discontinue using our services altogether. Furthermore, adverse final determinations, decisions or resolutions in such matters could encourage other parties to bring related claims and actions against us. Accordingly, the outcome of these incidents may materially and adversely impact our business, reputation, results of operations and financial condition.
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 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
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sources, net settlement payments to foreign carriers and certain payments related to our derivative instruments entered into for foreign exchange risk hedging purposes. Of the ￦8,490 billion total principal amount of long-term borrowings (less current portion) outstanding as of December 31, 2013, ￦1,726 billion was denominated in foreign currencies with an average weighted interest rate of 3.52%. The interest rates of such long-term debt (less current portion) denominated in foreign currencies ranged from 0.59% (Japanese Yen 5 billion bond issued in 2013) to 6.50% (for US$100 million fixed rate notes due 2034 issued under our medium-term note program). Upon identification and evaluation of our currency risk exposures, we, having considered various circumstances, enter into derivative financial instruments to try to manage some of such risks. Although the impact of exchange rate fluctuations has in the past been partially mitigated by such strategies, our results of operations have historically been affected by exchange rate fluctuations and there can be no assurance that such strategies will be sufficient to reduce or eliminate the adverse impact of such fluctuations in the future. 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 Korean economy is subject to many factors beyond our control, including developments in the global economy.
In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices and the general weakness of the U.S. and global economy have contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. The value of the Won relative to major foreign currencies in general and the U.S. dollar in particular has also fluctuated widely. See “Item 3.A. Selected Financial Data—Exchange Rates.” A depreciation of the Won increases the cost of imported goods and services and the Won revenue needed by Korean companies to service foreign currency denominated debt. An appreciation of the Won, on the other hand, causes export products of Korean companies to be less competitive by raising their prices in terms of the relevant foreign currency and reduces the Won value of such export sales. Furthermore, as a result of adverse global and Korean economic conditions, there has been an overall decline and continuing volatility in the stock prices of Korean companies. The Korea Composite Stock Price Index, or KOSPI, declined from 1,897.1 on December 31, 2007 to 938.8 on October 24, 2008. While the KOSPI has recovered since 2008, closing at 1,969.3 on April 28, 2014, there is no guarantee that the stock prices of Korean companies will not decline again in the future. Future declines in the KOSPI and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds of such sales may continue to adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea, and the ability of Korean companies to raise capital. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.
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Developments that could have an adverse impact on Korea’s economy in the future include:
difficulties in the financial sectors in Europe and elsewhere and increased sovereign default risks in selected countries and the resulting adverse effects on the global financial markets;
timing and potential economic impact of a future scale-down by the U.S. Federal Reserve of its “quantitative easing” stimulus program;
adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. dollar or Japanese Yen exchange rates or revaluation of the Chinese Renminbi), interest rates, inflation rates or stock markets;
increasing levels of household debt;
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;
further decreases in the market prices of Korean real estate;
increasing delinquencies and credit defaults by consumer and small- and medium-sized enterprise borrowers;
declines in consumer confidence and a slowdown in consumer spending;
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);
social and labor unrest;
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 Korean government budget deficit;
financial problems or lack of progress in the restructuring of large troubled companies, their suppliers or the financial sector;
loss of investor confidence arising from corporate accounting irregularities or corporate governance issues at certain Korean companies;
the economic impact of any pending or future free trade agreements;
geo-political uncertainty and risk of further attacks by terrorist groups around the world;
the occurrence of severe health epidemics in Korea or other parts of the world;
deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy;
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political uncertainty or increasing strife among or within political parties in Korea;
natural disasters that have a significant adverse economic or other impact on Korea or its major trading partners;
hostilities or political or social tensions involving oil producing countries in the Middle East or North Africa and any material disruption in the supply of oil or increase in the price of oil; and
an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States.
Escalations in tensions with North Korea could have an adverse effect on us.
Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of future events. In particular, since the death of Kim Jong-il in December 2011, there has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for political and economic stability in the region. Although Kim Jong-il’s third son, Kim Jong-eun, has assumed power as his father’s designated successor, the long-term outcome of such leadership transition remains uncertain.
In addition, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and long-range missile programs as well as its hostile military actions against Korea. Some of the significant incidents in recent years include the following:
In April 2013, North Korea blocked access to the inter-Korean industrial complex in its border city of Gaeseong to South Koreans, while the U.S. deployed nuclear-capable stealth bombers and destroyers to Korean air and sea space;
In March 2013, North Korea stated that it had entered “a state of war” with Korea, declaring the 1953 armistice invalid, and put its artillery at the highest level of combat readiness to protest the Korea-United States allies’ military drills and additional sanctions imposed on North Korea for its missile and nuclear tests;
North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty in January 2003 and conducted three rounds of nuclear tests between October 2006 to February 2013, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council unanimously passed resolutions that condemned North Korea for the nuclear tests and expanded sanctions against North Korea, most recently in March 2013;
In December 2012, North Korea launched a satellite into orbit using a long-range rocket, despite concerns in the international community that such a launch would be in violation of the agreement with the United States as well as United Nations Security Council resolutions that prohibit North Korea from conducting launches that use ballistic missile technology; and
In March 2010, a Korean naval vessel was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korea of causing the sinking, while North Korea denied responsibility. Moreover, in November 2010, North Korea fired more than one hundred artillery shells that hit Korea’s Yeonpyeong Island near
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the Northern Limit Line, which acts as the de facto maritime boundary between Korea and North Korea on the west coast of the Korean peninsula, causing casualties and significant property damage. The Government condemned North Korea for the attack and vowed stern retaliation should there be further provocation.
North Korea’s economy also faces severe challenges. For example, 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. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which led to severe inflation and food shortages. Such developments may further aggravate social and political tensions within North Korea.
There can be no assurance that the level of tension on the Korean peninsula will not escalate in the future. Any further increase in tensions, 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, results of operations and financial condition.
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 MSIP 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.
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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 MSIP 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. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.”
Holders of ADSs will not be able to exercise appraisal 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 appraisal rights unless he has withdrawn the underlying common stock and become our direct shareholder. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.”
An investor may not be able to exercise preemptive rights for additional shares and may suffer dilution of his equity interest in us.
The Commercial Code of Korea and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the depositary bank, after consultation with us, may make the rights available to an ADS holder or use reasonable efforts to dispose of the rights on behalf of the ADS holder and make the net proceeds available to the ADS holder. The depositary bank, however, is not required to make available to an ADS holder any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:
a registration statement filed by us under the Securities Act of 1933, as amended, is in effect with respect to those shares; or
the offering and sale of those shares is exempt from or is not subject to the registration requirements of the Securities Act.
We are under no obligation to file any registration statement. If a registration statement is required for an ADS holder to exercise preemptive rights but is not filed by us, the ADS holder will not be able to exercise his preemptive rights for additional shares. As a result, the ADS holder may suffer dilution of his equity interest in us.
Forward-looking statements may prove to be inaccurate.
This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not
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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 had previously been 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. In June 2009, KTF, a subsidiary providing mobile telephone services, merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. See “Item 4.B. Business Overview—Competition.”
Our legal and commercial name is KT Corporation. Our principal executive offices are located at 90, Buljeong-ro, Bundang-gu, Seongnam-si, Gyeonggi-do, Korea, and our telephone number is (8231) 727-0150.
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;
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broadband Internet access service and other Internet-related services, including IP-TV services;
credit card processing and other financial services through KT Capital Co., Ltd. and BC Card Co., Ltd.;
automobile rental services through KT Rental Co., Ltd.; and
various other services, including leased line service and other data communication service, satellite service and information technology, real estate business, satellite TV service, media contents business 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 30.1% with approximately 16.5 million subscribers as of December 31, 2013;
in the fixed-line telephone services market in Korea, we continue to be the dominant provider with approximately 24.3 million installed lines, of which 14.0 million lines were in service as of December 31, 2013. As of such date, our market share of the local market was 81.6% and our market share of the domestic long-distance market was 79.1%;
we are Korea’s largest broadband Internet access provider with 8.1 million subscribers as of December 31, 2013, 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, 2013, our operating revenues were ￦24,058 billion, our loss for the period was ￦88 billion and our basic loss per share was ￦779. As of December 31, 2013, our total assets were ￦34,850 billion, total liabilities were ￦22,013 billion and total equity was ￦12,837 billion.
Business Strategy
We believe the telecommunications market in Korea is nearing saturation, despite certain areas of growth remaining due to Korea’s growing economy, consumers’ willingness to adopt new technologies, relatively high income and a relatively large middle class. To maintain our competitiveness, we believe we need to pursue growth in other areas, while maintaining our strength in existing businesses. 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 in June 2009, with KT Corporation surviving the merger. In 2014, we restructured our organization into four business groups, the Marketing Group, the Customer Group, the Global & Enterprise Group and the Future Convergence Strategy Group, so that we may achieve higher synergies, more effectively address differing needs of our customer segments, as well as strengthen our competitiveness and discover new growth opportunities. As part of our efforts to improve our operational efficiencies, we announced on April 8, 2014 that we will transfer any operations relating to fixed-line sales activities (including on-site sales, line activation, after service, and customer center operations) to our subsidiaries.
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We also established subsidiaries to oversee our media contents, satellite and real estate operations, and expanded the number of specialized employees for each business, to further strengthen such operations and to pursue strategic alliances with other global corporates. To seek further growth in a stagnant telecommunications market, we aim to become a global media distribution company, and utilizing our synergies, we intend to focus on developing the media contents, finance, security and automobile rental business and the expanding convergence market, as well as diversifying our portfolio into the advertising, education, health care and energy industries. Using our strong fixed-line/wireless and clouding technologies, we also aim to contribute to a global market environment for active distribution of media contents, applications and solutions. Consistent with our overall goals, we aim to pursue the following strategy for our business groups:
Marketing Group. Through our Marketing Group, we aim to expand our telecommunication and convergence operations by (i) improving our fixed-line and wireless telecommunication market shares and average revenue per user, (ii) developing business strategies and plans specifically related to telecommunications and convergence, (iii) strengthening our competitiveness over products, customer service and other related services and (iv) developing and executing efficient marketing strategies. We also focus on expanding our wireless data communication business to meet the rising demand for broadband Internet access using advanced wireless data communications devices such as smartphones. We are working closely with handset manufacturers to expand our offerings of smartphones 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 in November 2009 and have expanded our offerings of smartphones 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 smartphones. 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 smartphone 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 smartphone 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.
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.
We believe that convergence of fixed-line and mobile communications technologies provides a competitive advantage to us because we have the technological know-how and experience to design and construct a unified delivery platform for a new generation of value-added services. We plan to make such platform more readily available to others so
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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.
Customer Group. Through our Customer Group, we aim to improve our marketing and customer service efforts for all of our products and services by (i) planning and executing strategy for each product that we offer and our marketing efforts, (ii) contributing to expanding our market share by strengthening our marketing and customer service efforts, and (iii) maximizing customer satisfaction by providing high quality customer service.
Global & Enterprise Group. Through our Global & Enterprise Group, we aim to provide our corporate, small- and medium-sized enterprise and government agency customers with one-stop solution services, including designing data communications and information technology infrastructure and overseeing their day-to-day operations with the objective of achieving operational efficiencies and cost savings, as well as establishing and executing business plans for our global operations by (i) establishing active marketing strategy for expanding into the global market and (ii) entering into alliances and joint ventures with international corporates and agencies.
To that end, 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 smartphones 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.
Future Convergence Strategy Group. Due to the saturation within the Korean telecommunication market and limitations on growth in the traditional telecommunications services market, through our Future Convergence Strategy Group, we aim to concentrate our existing business capabilities in discovering new growth opportunities and expand our telecommunication capabilities.
The Telecommunications Industry in Korea
The Korean telecommunications industry is one of the most developed in Asia. According to the MSIP, the number of mobile subscribers in Korea was 54.7 million and the number of broadband Internet access subscribers in Korea was 18.7 million as of December 31, 2013. As of December 31, 2013, 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 106.9%, 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 102.9%.
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
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further market growth and competition, the Government awarded three 2G licenses in June 1996. KTF was awarded a license alongside LG U+ and Hansol M.com, and commercial 2G 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. In June 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger. KT Corporation and SK Telecom offer third-generation, high-capacity HSDPA-based IMT-2000 wireless Internet and video multimedia communications services that use significantly greater bandwidth capacity. In July 2011, SK Telecom and LG U+ began offering fourth-generation communications services based on LTE technology, which enables data transmission at a speed faster than W-CDMA or WiBro networks, and we began our 4G LTE services in January 2012. Additionally, in September 2013, we commenced providing wideband LTE services, which utilizes our adjoining 20 MHz of bandwidths in the 1.8 GHz spectrum to provide transmission speed of up to 150 Mbps, twice faster than those offered under standard LTE services. SK Telecom also began providing its wideband LTE services in September 2013 and LG U+ commenced providing its wideband LTE services in January 2014. As of March 1, 2014, our wideband LTE services covered five metropolitan cities in Korea, and we expect to expand our wideband LTE services to all of Korea by July 2014. As of December 31, 2013, the number of our LTE subscribers exceeded 7.8 million. Furthermore, in March 2014, we commercialized Wideband LTE-A services, which interconnects our 20 MHz of bandwidth in the 1.8 GHz spectrum used to offer wideband LTE services with the 10 MHz of bandwidth in the 900 MHz spectrum used to offer standard LTE services by utilizing inter-band carrier aggregation technology to support transmission speed of up to 225 Mbps.
On April 2, 2014, LG U+ launched Korea’s first unlimited mobile service package, offering mobile subscribers with unlimited voice calls, text messaging, and LTE data at fees between￦80,000 to ￦85,000 per month. Commencing on April 3, 2014, SK Telecom launched three different types of unlimited LTE data plans, which provide mobile subscribers with unlimited amounts of LTE data, voice calls, and text massaging. On April 7, 2014, we began offering mobile subscribers with unlimited LTE data, voice calls, and text messaging packages at fees of ￦70,000 per month. We believe that the continuing intense competition among major telecommunications operators in Korea and the resulting pressure on our fees, including from offerings of unlimited usage plans, may have a material adverse impact on our results of operations.
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 on providing wireless Internet connection capabilities. They have introduced wireless LAN service with speed of up to 300 Mbps, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops, PDAs and smartphones 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 W-CDMA technology and LTE technology. Prior to the merger of KTF into KT Corporation, we provided such services through KTF, which was formerly a consolidated subsidiary. KTF obtained one of the three licenses to provide nationwide 2G service in June 1996 and began offering 2G service in October 1997. In June 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. We currently offer 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. In January 2012, we also began offering 4G LTE services following the termination of our 2G services. We completed the expansion of our 4G LTE service coverage nationwide in October 2012 and commenced providing wideband LTE services in September 2013, and commercialized Wideband LTE-A services in March 2014, as discussed above.
Revenues related to mobile service accounted for 27.9% of our operating revenues in 2013. In addition, our goods sold, which are primarily from mobile handset sales, accounted for 16.9% of our
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operating revenues in 2013. 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)
Average Monthly Outgoing Minutes per Subscriber(1)
Average Monthly Revenue per Subscriber (2)
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, 2013, we had approximately 16.5 million subscribers, or a market share of 30.1%, which was second largest among the three mobile service providers.
We market our mobile services primarily through independent exclusive dealers located throughout Korea. As of December 31, 2013, there were approximately 2,300 shops managed by our independent exclusive dealers. In addition to assisting new subscribers to activate mobile service and purchase handsets, authorized dealers are connected to our database and are able to assist customers with account information. Although most of these dealers sell exclusively our products and services, sub-dealers hired by exclusive dealers may sell products and services offered by other mobile telecommunications service providers. Authorized dealers are entitled to a commission for each new subscriber registered, as well as ongoing commissions for the first five years based primarily on the subscriber’s monthly fee, usage charges and length of subscription. The handsets sold by us to the dealers cannot be returned to us unless they are defective. If a handset is defective, it may be exchanged for a new one within 14 days from the date of purchase.
In response to the diversification of our customers’ demands and their increasing sophistication, we have also selectively engaged in opportunities to expand our internal sales channels in recent years. In 2007, we established a wholly-owned subsidiary, KT M&S Co., Ltd., that operates approximately 194 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
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accounted for 12.4% of our operating revenues in 2013. 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. In recent years, the proliferation of mobile phones, as well as the availability of increasingly lower wireless pricing plans, some of which include unlimited voice minutes, have led to significant decreases in our domestic long-distance call minutes and local call pulses.
Total Korean population (thousands) (1)
Lines installed (thousands) (2)
Lines in service (thousands) (2)
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. All of our lines 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.
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, 2013:
Incoming international long-distance calls
Outgoing international long-distance calls
Total
Japan (23.2%), China (15.3%) and the United States (11.5%) accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2013. In recent years, the volume of our incoming calls has 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
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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). Revenues from a landline user for a call initiated by a landline user to a mobile service subscriber (land-to-mobile interconnection) accounted for 2.3% of our operating revenues in 2013. 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, 2013, we had approximately 3.5 million subscribers.
Internet Services
Broadband Internet Access Service. Leveraging on our nationwide network of 636,347 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 8.4% of our operating revenues in 2013. Our principal Internet access services include:
ADSL, VDSL, Ethernet and FTTH services under the “olleh Internet” brand name;
wireless LAN service (or WiFi) 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 smartphones in hot-spot zones and olleh Internet service in fixed-line environments. OllehWiFi enables subscribers to access the Internet at a speed of up to 150 Mbps. We sponsored approximately 114,000 hot-spot zones nationwide for wireless connection as of December 31, 2013; and
olleh 4G 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 5 Mbps per user.
We had approximately 8.1 million fixed-line olleh Internet subscribers and approximately 142,000 ollehWiFi service subscribers as of December 31, 2013. We commercially launched our WiBro service in June 2006, and we had approximately 846,000 subscribers as of December 31, 2013. 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
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2002. We are currently upgrading our broadband network to enable FTTH connection, which further enhances data transmission speed of 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, and other digital media content with higher stability.
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 4.1% of our operating revenues in 2013.
We operate seven Internet data centers located throughout Korea and provide a wide range of computing services to companies which need servers, storage 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 to outsource their application and server hardware management.
Our Internet data centers offer network outsourcing services, server operation services and system support services. Our network outsourcing services include co-location, which is the installation of our customers’ network equipment at our Internet data centers. Co-location is designed to increase customers’ Internet connection speed and reduce connection time and costs by directly connecting the customers’ server to the Internet backbone switch at our Internet data centers. Our server operation services include optimal server management service and technical support service we provide with respect to the leased servers that are linked directly to our Internet backbone switch. We also lease servers and network equipment for a fixed monthly fee. Our system support services include providing system resources for a wide range of Internet computing services, such as application transfer, network storage, video streaming and application download, as well as sending short text messages and messages containing multimedia objects, such as images, audio and video.
We also offer a service called Bizmeka to develop and commercialize business-to-business solutions targeting small- and medium-sized business enterprises in Korea. Bizmeka is an applied application service provider which provides industry standard and specialized business solutions, including integrated business administration solutions and intranet collaboration solutions.
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 or on a pay-per-view basis. Through a digital set-top box that we rent to our customers, our customers are able
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to browse the catalogue of digital media contents and view selected media streams on their television. A set-top box provides two-way communications on an IP network and decodes video streaming data. We expanded our IP-TV service to include real-time broadcasting in November 2008. We had 4.97 million olleh TV subscribers as of December 31, 2013.
Data Communications Service
Our data communications 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, 2011, 2012 and 2013, we leased 286,302 lines, 246,951 lines and 235,147 lines to domestic and international businesses. The data communication service accounted for 5.0% of our operating revenues in 2013.
We provide dedicated and secure broadband Internet connection service to institutional customers under the “Kornet” brand name. We provide high-speed connection up to 10.0 Gbps connected to our internet backbone network with capacity of 6.6 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.
Financial Services
To further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services, we, through our subsidiary KT Capital Co., Ltd., acquired 1,622,520 additional shares of common stock of BC Card Co., Ltd. from Woori Bank for approximately ￦252 billion in October 2011. As we were deemed to have control over BC Card Co., Ltd., it became our consolidated subsidiary starting in October 2011. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately ￦287 billion, and owned a 69.54% interest in BC Card Co., Ltd. as of December 31, 2013. BC Card Co., Ltd. offers various credit card and related financial services. KT Capital had consolidated operating revenues of￦3,317 billion and net income of ￦129 billion for the year ended December 31, 2013 and consolidated assets of ￦5,462 billion and liabilities of ￦4,759 billion as of December 31, 2013. In March 2014, the investment business division of KT Capital Co., Ltd., including 3,059,560 common shares of BC Card Co., Ltd. that KT Capital Co., Ltd. held, was spun off and merged into KT Corporation, to further strengthen the synergy between telecommunication and finance operations within the KT group and increase shareholder value. Financial Services accounted for 13.6% of our operating revenues in 2013.
Automobile Rental Services
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 ￦263 billion, with each taking a 50% stake. Kumho Rent-A-Car was subsequently merged with the car rental business unit of KT Rental in June 2010. KT Rental became a consolidated subsidiary starting in 2012, as the restriction on our controlling power over KT Rental pursuant to a shareholders’ agreement was resolved as a result of the acquisition of KT Rental’s common stock by Hana Daetoo Securities Co., Ltd. and other investors from the then-second largest shareholder in July 2012. KT Rental operated approximately 91,700 vehicles as of December 31, 2013 and has a market share of 24.7% of the domestic car rental market in 2013. See Note 37 to the Consolidated Financial Statements. Automobile rental services accounted for 2.5% of our operating revenues in 2013.
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Miscellaneous Businesses
We also engage in various business activities that extend beyond telephone services and data communications services, including satellite services, information technology and network services, real estate development, satellite TV services, with the consolidation of KT Skylife Co. starting in January 2011, and media contents business with the establishment of KT Media Hub Co., Ltd. in December 2012. As of December 31, 2013, KT Media Hub Co., Ltd. had revenues of ￦305 billion. Our miscellaneous businesses accounted for 9.2% of our operating revenues for 2013.
We provide transponder leasing, broadcasting, video distribution and data communications services through our satellites. We currently operate two satellites, Koreasat 5 and Koreasat 6 (also known as olleh 1), and own interests in two additional satellites, Koreasat 7 (also known as ABS-1) and Koreasat 8 (also known as ABS-2). In August 2006, we launched Koreasat 5 to replace Koreasat 2 (also known as Mugunghwa 2, launched in 1996 with a design life of ten years). 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 15 years, and it currently remains in operation.
We launched Koreasat 6 in December 2010, with a design life of 15 years, to replace Koreasat 3 (also known as Mugunghwa 3, launched in 1999 with a design life of 12 years). Koreasat 6 began its commercial operation in February 2011 and carries transponders that are mainly 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 satellite services to both domestic and international customers. In August 2010, we procured from Asia Broadcast Satellite (“ABS”), a Hong Kong-based satellite operator, four transponders on the ABS-1 satellite and an additional eight transponders on the ABS-2 satellite in order to provide global satellite services. ABS-1 began its operations in September 2010 and ABS-2 launched its operations in February 2014. We sold to ABS the Mugunghwa 2 satellite in May 2010 and the Mugunghwa 3 satellite in September 2011 for a combined price of approximately ￦5 billion, as the satellites had reached the end of their design lives.
In December 2012, we spun-off our satellite service business by establishing KT Sat Co., Ltd., in an effort to enhance operational specialization and to foster management efficiency, enabling us to respond more promptly to the changing market environments and increasing competitiveness.
In December 2013, the MSIP declared that the contract over our sale of Mugunghwa 3 was null and void, on the grounds that the satellite was sold without obtaining proper government approval, and ordered us to take corrective measures. We are currently involved in arbitration proceedings against ABS at the International Court of Arbitration of the International Chamber of Commerce and the American Arbitration Association over the Mugunghwa 3 satellite ownership rights and contract violation claims.
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,
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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, and established KT AMC, an asset management company, in September 2011 as a subsidiary of KT Estate Inc. to create additional synergies with our real estate assets. We made a contribution in-kind of ￦1,254 billion to KT Estate Inc. in December 2012 to further strengthen KT Estate’s competitiveness and to better utilize our assets.
To respond to the trend of convergence in the telecommunications and broadcasting industries, and to seek additional synergies with our existing operations, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that were convertible into 5,600,000 shares of common stock of KT Skylife Co., Ltd. from Dutch Savings Holdings B.V. in January 2011 for approximately ￦246 billion. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 50.1% interest in KT Skylife Co., Ltd. as of December 31, 2013. KT Skylife offers satellite TV services, which may also be packaged with our IP-TV services as further described below, and had consolidated operating revenues of ￦630 billion and net income of ￦73 billion for the year ended December 31, 2013 and consolidated assets of ￦685 billion and liabilities of ￦283 billion as of December 31, 2013.
In December 2012, we also established KT Media Hub Co., Ltd., a subsidiary that specializes in the development of media contents, with a cash capital contribution of￦80 billion. We believe that the media contents business will be a future growth opportunity for us, and this subsidiary further enhances our specialization in the media contents business. It also allows us to better adapt to the rapidly changing market environment in the field.
Revenues and Rates
The table below shows the percentage of our revenues derived from each category of services for each of the years from 2011 to 2013:
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)
Financial services
Automobile rental services (4)
Miscellaneous businesses (5)
Operating revenues
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Mobile Services
We derive revenues from mobile services principally from:
activation 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 activation fee for new subscribers by 20% from ￦30,000 to￦24,000. In August 2013, we, SK Telecom, and LG U+ reduced the activation fee for new subscribers by approximately 40%. Our activation fee was reduced from ￦24,000 to￦14,400, SK Telecom’s activation fee was reduced from ￦39,600 to ￦23,760, and LG U+’s activation fee was reduced from ￦30,000 to ￦18,000. On January 1, 2014, the MSIP announced its plans to further reduce activation fees in the second half of 2014 so that such fees would be reduced to 50% of the current fee levels, and we expect our remaining activation fees to be abolished by 2015. In August 2011, we announced the adoption of various tariff reduction measures, including a reduction of the monthly fee by ￦1,000 for every mobile subscriber (effective October 21, 2011), an exemption of usage charges for SMS of up to 50 messages per month (effective November 1, 2011) and the introduction of customized flat rate plans for smartphone users (effective October 24, 2011). We currently only offer our standard rate plan for our HSDPA-based service. Under our standard rate plan we charge a monthly fee of ￦11,000, voice calling usage charges of ￦1.8 per second and video calling usage charges of ￦3 per second, without any free voice or video call airtime minutes.
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. We also provide plans specially designed for elderly and pre-teen subscribers as well as special discounts to our subscribers with physical disabilities.
We introduced rate plans specifically for smartphone users starting in September 2009. In June 2013, we introduced the Everyone olleh rate plan, which permits users to make unlimited voice calls within our wireless network, and the Fixed-Line & Wireless Unlimited rate plan, which permits
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users to make unlimited voice calls within both our fixed-line and wireless networks. The following table summarizes the charges associated with our representative smartphone service plans:
i-teen (3)
i-Slim (3)
i-Lite (3)
i-Talk (3)
i-Value (3)
i-Medium (3)
i-Special (3)
i-Premium (3)
Everyone olleh 35(3G)
Everyone olleh 45(3G)
Everyone olleh 55(3G)
Fixed-Line & Wireless Unlimited 67(3G)(4)
Fixed-Line & Wireless Unlimited 77(3G)(4)
Fixed-Line & Wireless Unlimited 97(3G)(4)
Fixed-Line & Wireless Unlimited 129(3G) (4) (5)
In connection with the rollout of our 4G LTE services in January 2012, we also introduced new rate plans specifically for LTE phone users. For a limited time between February and April 2013, we also offered LTE rate plans with unlimited data usage. The following table summarizes charges for our representative LTE service plans:
LTE-340
LTE-420
LTE-520
LTE-620
LTE-720
LTE-G550
LTE-G650
LTE-G750
LTE-850
LTE-1000
LTE-1250
LTE -35 (3)
LTE-45 (3)
LTE-55 (3)
LTE-67 (3)
LTE-77 (3)
LTE-79 (3) (4)
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LTE-97 (3)
LTE-129 (3) (4)
Wideband Safe Unlimited 67 (5)
Wideband Safe Unlimited 77 (5)
We have entered into arrangements with various partners including a leading discount store, a leading online shopping mall, several leading banks, an operator of cinema complexes, a leading automobile manufacturing 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 3G data-only plans targeting tablet PC users, smartphone users and other special phone users, offering subscription plans for data transmission amounts ranging from 1 GB to 4GB at monthly fees ranging from￦25,000 to ￦49,000.
In June 2012, we introduced LTE data-only plans, in both basic and various discounted packages, which provides 1.5 GB to 6 GB of data at monthly fees ranging from ￦25,000 to ￦49,000. The following table summarizes charges for our representative data-only plans:
olleh Lifetime Data-Only Pricing Plan
olleh Lifetime Data 1G (2) (3)
olleh Lifetime Data 2G (2) (3)
olleh Lifetime Data 4G (2) (3)
Pricing Plan for LTE Pad users
LTE Lifetime Data Basic 1.5G (1) (2) (5)
LTE Lifetime Data Basic 3G (1) (2) (5)
LTE Lifetime Data Basic 6G (1) (2) (5)
LTE Lifetime Data Safe Blocking 1.5G (3) (4) (5)
LTE Lifetime Data Safe Blocking 3G (3) (4) (5)
LTE Lifetime Data Safe Blocking 6G (3) (4) (5)
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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.
The rates we charge for local calls are currently subject to approval by the MSIP after consultation with the Ministry of Strategy and Finance. The rates are identical for residential and commercial customers. 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. Our current local usage rates, which have been in effect since May 2002, are ￦39 per pulse for regular service and￦70 per pulse for public telephones. For local calls, a pulse is triggered at the beginning of each local call and every three minutes thereafter from 8:00 a.m. to 9:00 p.m. on weekdays and every 258 seconds thereafter on holidays and from 9:00 p.m. to 8:00 a.m. on weekdays.
We also charge a monthly basic charge ranging from ￦3,000 to ￦5,200, depending on location, and a non-refundable service initiation fee of￦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, 2013, we had ￦467 billion in refundable service initiation deposits outstanding and 2,162 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 MSIP.
Our current basic domestic long-distance rates, which have been in effect since November 2001, are￦39 per three minutes for distances of up to 30 kilometers and ￦14.5 per ten seconds (equivalent to ￦261 per three minutes) for distances in excess of 30 kilometers. For domestic long-distance calls for distances of up to 30 kilometers, a pulse is triggered at the beginning of each call and every three minutes thereafter. For domestic long-distance calls for distances in excess of 30 kilometers, a pulse is triggered at the beginning of each call and every 10 seconds thereafter. Rates for domestic long-distance calls for distances up to 30 kilometers are currently discounted by an adjustment in the period between pulses, by approximately 11% (utilizing a pulse rate of 200 seconds) from 6:00 a.m. to midnight on holidays and from 6:00 a.m. to 8:00 a.m. on weekdays, and by approximately 43% (utilizing a pulse rate of 258 seconds) from midnight to 6:00 a.m. every day. Rates for domestic long-distance calls for distances in excess of 30 kilometers are currently discounted by
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approximately 10% (utilizing a rate of ￦13.1 per ten seconds) from 6:00 a.m. to midnight on holidays and from 6:00 a.m. to 8:00 a.m. on weekdays, and by approximately 30% (utilizing a rate of ￦10.2 per ten seconds) from midnight to 6:00 a.m. every day.
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:
a subscriber who elects to pay a monthly flat rate of￦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;
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 ￦39 per three minutes; and
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 ￦150,000 with a flat rate payment of ￦50,000 or such calls up to￦50,000 with a flat rate payment of ￦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 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 MSIP.
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 at the applicable settlement rate specified under the agreement with the foreign carrier. We have entered into numerous bilateral agreements with foreign carriers. We negotiate the settlement rates under these agreements with each foreign carrier, subject to the MSIP’s 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 monthly or 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 MSIP periodically issues orders setting the interconnection charge calculation method applicable to interconnections with mobile service providers. The MSIP 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+
Since September 2004, the usage charges per minute collected from a landline user for a call initiated by a landline user to a mobile service subscriber are ￦87.0 during weekdays,￦82.0 during weekends and￦77.2 during evenings (defined as 12:00 a.m. to 6:00 a.m. every day). 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 KCC:
Local access (1)
Single toll access (2)
Double toll access (3)
Mobile-to-mobile Interconnection. For a call initiated by a mobile subscriber of our competitor to our mobile subscriber, the mobile service provider collects from its subscriber its normal rate and remits to us a mobile-to-mobile interconnection charge. In addition, for a call initiated by our mobile subscriber to a mobile subscriber of our competitor, we collect from our subscriber our normal rate and remit to the mobile service provider a mobile-to-mobile interconnection charge.
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The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes) to mobile operators, and the charges received per minute (exclusive of value-added taxes) from mobile operators for mobile to mobile calls:
KT
We recognize as mobile-to-mobile interconnection revenue the entire amount of the usage charge collected from the mobile user and recognize as expense the amount of interconnection charge paid to the mobile service provider.
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 ￦30,000 and modem rental fee of up to￦8,000 on a monthly basis.
The following table summarizes our charges for our representative broadband Internet service plans:
Maximum Service Speed
olleh Internet Special (1) (6)
olleh Internet Lite (1) (6)
WiBro 10G (2) (6)
WiBro 20G (3) (6)
WiBro 30G (4) (6)
WiBro 50G (5) (6)
olleh TV Services. We charge our subscribers an installation fee per site of ￦24,000, which is waived with a three-year contract, a set-top box rental fee ranging from￦2,000 to ￦8,000 on a monthly basis and a monthly subscription fee. The rates we charge for olleh TV services are subject to approval by the MSIP.
The following table summarizes charges for our representative olleh TV service plans:
olleh TV Live Choice (2)
olleh TV Live Education (3)
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olleh TV Live Thrift (4)
olleh TV Live Standard (4)
olleh TV Live Deluxe (4)
olleh TV SkyLife Economy (5)
olleh TV SkyLife Standard (5)
olleh TV SkyLife Premium (5)
olleh TV Mobile (6)
Olleh TV Live All-right (7)
Olleh TV Skylife All-right (7)
Data Communication Service
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￦56,000 to ￦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 IP-TV, Internet phone, fixed-line telephone service, WiBro, 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:
Mobile Monthly Fee
Internet / Internet Phone / Mobile
Internet / Fixed-Line Phone / Mobile
Internet / IP-TV / Mobile (1)
Internet / Fixed-Line Phone / IP-TV / Mobile (1)
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We believe that subscribers who sign up for bundled products are less likely to cancel our services than subscribers who subscribe to individual services. Subscription fees paid for our bundled products are allocated to each service in proportion to their fair value and the allocated amount is recognized as revenue according to the revenue recognition policy for each service.
Competition
Competition in the telecommunications sector in Korea is intense. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. In particular, SK Telecom acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband. The acquisition enabled SK Telecom to provide fixed-line telecommunications, broadband Internet access and IP-TV services together with its mobile telecommunications services. In January 2010, LG Dacom and LG Powercom merged into LG Telecom Co., Ltd., which subsequently changed its name to LG U+. The merger enabled LG U+ provide a similar range of services as SK Telecom and us.
Under the Framework Act of Telecommunications and the Telecommunications Business Act, 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 the MSIP’s 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, which require advance approval from the MSIP. 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 local telephone service and cellular service markets, respectively, 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 KCC has also issued guidelines on fair competition of the telecommunications companies. If any telecommunications service provider breaches the guidelines, the KCC 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 and the recent rollout of fourth-generation mobile services based on LTE technology by SK Telecom, LG U+ and us.
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The following table shows the market shares in the mobile telecommunications market as of the dates indicated:
December 31, 2011
December 31, 2012
December 31, 2013
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 us in terms of our revenues from fixed-line telephone services. We expect this trend to continue.
The following table shows the market shares 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 ￦39 per pulse (generally three minutes), our competitors’ non-refundable telephone service initiation charges are lower than ours. Our customers pay a non-refundable telephone service initiation charge of ￦60,000 while customers of our competitors pay a non-refundable telephone service initiation charge of ￦30,000. Also, the basic monthly charge of our competitors is ￦4,500 compared to our basic charge of ￦5,200.
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:
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Our competitors and we charge ￦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, 2013:
30 kilometers or longer
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 for 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, 2013:
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.
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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, 2013:
Monthly subscription fee
Monthly modem rental fee
Additional installation fee upon moving
Data Communication Service. We had a monopoly in domestic data communication service until 1994, when LG 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 MSIP. 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
With the establishment of the MSIP in March 2013, many of the regulatory responsibilities formerly handled by the KCC have been transferred to the MSIP. Under the Framework Act of Telecommunications and the Telecommunications Business Act, the MSIP now has comprehensive regulatory authority over the telecommunications industry and all network service providers.
The MSIP has assumed primary policy and regulatory responsibility for matters such as: (i) licensing of network service providers (the MSIP authorizes the licensing of Internet Protocol Television (“IPTV”) service providers and, with the consent of the KCC, authorizes the licensing of satellite broadcasting companies); (ii) regulation of mergers and acquisitions, as well as license
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suspension and termination of network service providers; (iii) providing oversight on foreign ownership ratios in network service providers; and (iv) reviewing telecommunication matters as they relate to the public interest and approving ancillary telecommunication business activities. Additionally, the MSIP is responsible for a broad range of other policy and regulatory matters, including the administration and supervision of regulatory reporting by telecommunications companies, examination and analysis of accounting and business management practices in the industry, establishing and administering policies governing telecommunications service fees, value-added service providers and specific service providers, as well as supervising reporting requirements of standard telecommunications service/user contracts.
Under the revised supervisory framework, a network service provider must be licensed by the MSIP. Our license as a network service provider permits us to engage in a wide range of telecommunications services.
The KCC’s overall policy role is to play a key role in regulatory activities aimed at protecting service users in the broadcast and telecommunications market and it continues to be responsible for investigations and sanctions regarding violations by telecommunications companies, as well as for mediating disputes between service providers and users. The KCC is established under the direct jurisdiction of the President and is comprised of five standing commissioners. Commissioners of the KCC are appointed by the President, and the appointment of the Chairperson must be approved at a confirmation hearing at the National Assembly.
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 MSIP 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 in November 2008. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IP media broadcasting business must obtain a license from the MSIP. The ownership of the shares of an IP media broadcasting company by a newspaper, a news agency or a foreigner is limited.
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 MSIP 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 MSIP, it must obtain prior approval from the MSIP for the rates and the general terms for that service. Each year the MSIP designates the service providers and the types of services for which the rates and the general terms must be approved by the MSIP. In 2013, the MSIP designated us for local telephone service and SK Telecom for mobile service, which currently remains in effect. The MSIP, 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.
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Other Activities
A network service provider, such as us, must obtain the permission of the MSIP in order to:
engage in certain businesses specified 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.
By submitting a report to the MSIP, a network service provider may enter into arrangements for services to be furnished to its customers by a different telecommunications service provider and, in connection therewith, may provide its telecommunications services to, or authorize the use of all or a portion of its telecommunications facilities by, such other telecommunications service provider. The MSIP can revoke our licenses or order the suspension of any of our businesses if we do not comply with the regulations of the MSIP under the Telecommunications Business Act.
In May 2010, the KCC issued a guideline that limits the marketing expenditure amounts of telecommunication service providers in Korea to 20% of their revenues, with the restrictions applicable to fixed-line and mobile segments to be calculated separately. However, as of October 2013, up to ￦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. The MSIP may adjust the guideline to accommodate changes in market conditions.
The responsibilities of the MSIP 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, 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 MSIP 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 MSIP.
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A network service provider must permit other network service providers, as designated by the MSIP, 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 MSIP and be settled, by fair and proper methods.
In addition, we are required to lease to other companies our fixed-lines that connect subscribers to our network. This system, which is called local loop unbundling, is intended to prevent excessive investment in local loops. This system requires us to lease the portion of our copper lines that represent our excess capacity to other companies upon their request at rates that are determined by the MSIP 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, if any, are recognized as revenues from miscellaneous businesses.
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 (1) it holds less than 1.0% of our total issued and outstanding shares with voting rights or (2) if the largest shareholder of such company is a government or foreign entity of a country that is a counterparty to a free trade agreement with Korea, as publicly announced by the MSIP, and the MSIP determines that the fact that such foreign government or entity holds a 15.0% or greater shareholding in such company does not present a risk of harm to the public interest. (However, the calculation of the above-referenced 49% ceiling will apply to: (x) any foreign entities that have entered into any major management-related agreement with a network service provider or the shareholder(s) thereof; and (y) foreign entities that have entered into any agreement pertaining to the settlement of fees relating to the handling of international electronic telecommunications services). As of December 31, 2013, 40.08% 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 MSIP 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 MSIP may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. 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 MSIP may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less.
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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 70.2% of our subscribers as of December 31, 2013 pay through the direct-debit service. Accounts of subscribers who fail to pay our invoice are transferred to a collection agency, which sends out a notice of payment. If such charges are not paid after notice, we cease to provide outgoing service to such subscribers after a period of time determined by the type of subscribed service. If charges are still not paid two to three months after outgoing service is cut off, we cease all services to such subscribers. After service is ceased, the overdue charges that are not collected by the collection agency are written off.
Insurance
We carry insurance against loss or damage to all significant buildings and automobiles. Except for our insurance coverage of our satellites and Internet data centers, we do not carry insurance covering losses to outside plants or to equipment because we believe the cost of such insurance is excessive and the risk of material loss or damage is insignificant. We do not have any provisions or reserves against such loss or damage. We do not carry any business interruption insurance.
We provide co-location and a variety of value-added services including server-hosting services to a number of corporations whose business largely depends on critical data operated on our servers or on their servers located at our data centers. Any disruptions, interruptions, physical or electronic data loss, delays or slowdowns in communication connections could expose us to potential liabilities for losses relating to the disrupted businesses of our customers relying on our services.
Information Technology and Operational Systems
Enhancement of our information technology and operational systems and efficient utilization of such systems are important in effectively promoting our core strategies. We are committed to continually investing in and enhancing our information technology systems, which provide support to many aspects of our businesses. In order to respond more effectively to a changing business environment, a new enterprise resource planning system (the “New ERP System”) was completed and implemented during the second half of 2012. The New ERP System has contributed to enhancing various aspects of our internal processes and control systems, and we are establishing various plans to effectively utilize the New ERP System and to stabilize our internal control processes in connection with the New ERP System.
Item 4.C. Organizational Structure
These matters are discussed under Item 4.B. where relevant.
Item 4.D. Property, Plants and Equipment
Our principal fixed asset is our integrated telecommunications networks. In addition, we own buildings and real estate throughout Korea.
Our fixed-line equipment vendors and mobile equipment suppliers include well-known international and local suppliers such as Samsung Electronics, LG Electronics, Cisco Systems and Apple Inc.
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Mobile Networks
Our mobile network architecture includes the following components:
cell sites, which are physical locations equipped with base transceiver stations consisting of transmitters, receivers and other equipment used to communicate through radio channels with subscribers’ mobile telephone handsets within the range of a cell;
base station controllers, which connect to and control, the base transceiver stations;
mobile switching centers, which in turn control the base station controllers and the routing of telephone calls; and
transmission lines, which connect the mobile switching centers, base station controllers, base transceiver stations and the public switched telephone network.
The following table lists selected information regarding our mobile networks as of December 31, 2013:
Mobile switching centers
Base station controllers
Base transceiver stations
Indoor and outdoor repeaters
We have a license to use 40 MHz of bandwidth in the 2.1 GHz spectrum that we use to provide IMT-2000 services based on W-CDMA wireless network standards. Such license expires in December 2016, and we are required to pay approximately ￦1.3 trillion for use of such bandwidth during the license period of 15 years. In April 2010, the KCC announced its decision to allocate 20 MHz of bandwidth in the 900 MHz spectrum to us, which became effective in July 2011, for which we are required 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 that was determined by the KCC at the time of allocation. In June 2011, our right to use 40 MHz of bandwidth in the 1.8 GHz spectrum expired, and the KCC allocated back to us the right to use 20 MHz of such bandwidth in the 1.8 GHz spectrum upon expiration pursuant to our application, for which we are required to pay a portion of the actual sales generated from using the bandwidth in the 1.8 GHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales that was determined by the KCC at the time of allocation.
In August 2011, the KCC auctioned the right to use the remaining 20 MHz of bandwidth in the 1.8 GHz spectrum that we relinquished, 10 MHz of additional bandwidth in the 800 MHz spectrum and 20 MHz of additional bandwidth in the 2.1 GHz spectrum. We acquired the right to use the 10 MHz of bandwidth in the 800 MHz spectrum, for which we are required to pay a total usage fee of ￦261 billion during the license period of 10 years, SK Telecom acquired the right to use the 20 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use the 20 MHz of bandwidth in the 2.1 GHz spectrum. We began using the 20 MHz of bandwidth in the 1.8 GHz spectrum, which became available upon termination of our 2G services, to provide our 4G LTE services starting in January 2012, and commenced providing wideband LTE services in September 2013 and commercialized Wideband LTE-A services in March 2014.
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Exchanges
Exchanges include local exchanges and “toll” exchanges that connect local exchanges to long-distance transmission facilities. We had 24.2 million lines connected to local exchanges and 1.6 million lines connected to toll exchanges as of December 31, 2013.
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, 2013, approximately 97% 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 aggregate traffic of our broadband Internet access subscribers, Internet data centers and Internet exchange system at any given moment of up to 6.6 Tbps as of December 31, 2013. 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, 2013, our Internet protocol premium network had 1,032 lines installed to provide voice over Internet protocol services and a total capacity to handle up to 1.4 Tbps of IP-TV, voice and WiBro service traffic.
Access Lines
As of December 31, 2013, we had 16.0 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, 2013, we had approximately 14.4 million broadband lines with speed of at least 50 Mbps that enable us to deliver broadband Internet access and multimedia content to our customers.
Transmission Network
Our domestic fiber optic cable network consisted of 636,347 kilometers of fiber optic cables as of December 31, 2013 of which 116,117 kilometers of fiber optic cables are used to connect our backbone network and 520,230 kilometers are used to connect the backbone network to our subscribers. Our backbone network utilizes 64Tbp Long-haul Reconfigurable Optical Add Drop Multiplexer (“ROADM”) technology for connecting cities. ROADM technology improves bandwidth efficiency by enabling data to be transmitted from multiple signals across one fiber strand in a cable and 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) and access network by implementing multi-service provisioning platform (“MSPP”) architecture in 2008. We are in the process of building our next generation broadband convergence network by installing carrier ethernet architecture in 2014.
Our extensive domestic long-distance network is supplemented by our fully digital domestic microwave network, which consisted of 55 relay sites as of December 31, 2013.
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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 240 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 542 Gbps is connected to approximately 180 Internet service providers through our two Internet gateways in Hyehwa 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 5 and 6, launched in 2006 and 2010, respectively, and own certain of the transponders in two additional satellites, ABS-1 launched in 2010 and ABS-2 launched in February 2014. Additionally, we are currently undergoing international arbitration proceedings with ABS over the Mugunghwa 3 satellite, which we sold to ABS in 2011. See “Item 4.B. Business Overview—Our Services—Miscellaneous Businesses” and “Item 8.A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings.”
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;
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.
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We have also invested in eight 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 IFRS as issued by the IASB.
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.” In 2012, we determined our operating segments for financial reporting purposes as (i) the Telecommunication & Convergence Customer Group, which engages in providing various telecommunication services to individual/home customers and the convergence business, (ii) the Global & Enterprise Customer Group, which engages in telecommunication services for the global market and corporate customers, as well as data communication service, (iii) the Finance/Rental Business Group, which engages in providing various financial services such as credit card and lending, as well as automobile rental and leasing business and (iv) others, which include security services, satellite service, information technology and network services, satellite TV service and real estate development businesses.
One of the major factors contributing to our historical performance was the growth of the Korean economy, and our future performance will depend at least in part on Korea’s general economic growth and prospects. For a description of recent developments that have had and may continue to have an adverse effect on our results of operations and financial condition, see “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.” A number of other developments have had or are expected to have a material impact on our results of operations, financial condition and capital expenditures. These developments include:
acquisitions and disposals of interests in subsidiaries and joint ventures;
usage fees for bandwidths;
changes in the rate structure for our services;
handset subsidies; and
researching and implementing technology upgrades and additional telecommunication services.
As a result of these factors, our financial results in the past may not be indicative of future results or trends in those results.
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Acquisitions and Disposals of Interests in Subsidiaries and Joint Ventures
One key aspect of our overall business strategy calls for acquisitions of businesses and entering into joint ventures that complement or diversify our current business, as well as disposal or termination of such businesses from time to time. The following summarizes our recent acquisitions and disposals:
in January 2011, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that were convertible into 5,600,000 shares of common stock of KT Skylife Co., Ltd. from Dutch Savings Holdings B.V. in January 2011 for approximately ￦246 billion, to respond to the trend of convergence in the telecommunications and broadcasting industries, and to seek additional synergies with our existing operations. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 50.1% interest in KT Skylife Co., Ltd. as of December 31, 2013;
in June and October 2011, we sold a total of 5,309,189 common shares of New Telephone Company, Inc., representing all of our interests in New Telephone Company, Inc., for approximately ￦380 billion. Located in Russia, New Telephone Company, Inc. had previously been our consolidated subsidiary providing fixed-line telephone services in Vladivostok, and our decision to dispose of our interest in that company was in part affected by the changing landscape in the Russian telecommunications market, where telecommunications service providers were becoming more nationalized and increasing rapidly in size as a result;
in October 2011, we, through our subsidiary KT Capital Co., Ltd., acquired an additional 1,622,520 common shares of BC Card Co., Ltd. from Woori Bank for approximately ￦252 billion, to further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services, thereby increasing our ownership interest in BC Card Co., Ltd. to 38.86%, making it our consolidated subsidiary as a result of deemed control starting in October 2011. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately ￦287 billion, and owned a 69.54% interest in BC Card Co., Ltd. as of December 31, 2013; and
starting in July 2012, KT Rental Co., Ltd., our 58.0% owned subsidiary, became our consolidated subsidiary as a result of the acquisition of KT Rental’s common stock by Hana Daetoo Securities Co., Ltd. and other investors from the then-second largest shareholder in July 2012, and the restriction on our control over KT Rental pursuant to a shareholders’ agreement being resolved as a result.
Our financial condition and results of operations may be affected as a result of such acquisitions, disposals or consolidation. Furthermore, pursuing acquisitions or joint venture transactions also requires significant capital, and as we pursue further growth opportunities for the future, we may need to raise additional capital by incurring loans or through the issuances of bonds or other securities in the international capital markets, which may lead to increased levels of debt and debt servicing costs in the future.
Bandwidth Usage Fees
One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth spectrum allocated to the service provider. The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have been significant
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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 content is likely to put additional strain on the bandwidth capacity of mobile service providers. We have acquired various licenses in recent years to secure additional bandwidth capacity to provide our broad range of services, for which we typically pay a portion of the actual sales generated from using the bandwidth during the license period as a usage fee, as well as a portion of expected sales as determined by the KCC at the time of allocation. In August 2013, the Ministry of Science, ICT and Future Planning further auctioned 50 MHz of bandwidth in the 1.8 GHz spectrum, which had been used by governmental entities such as the military, and 80 MHz of bandwidth in the 2.6 GHz spectrum, which had been used for digital multimedia broadcasting services. We acquired the right to use 15 MHz of bandwidth in the 1.8 GHz spectrum, for which we are required to pay a total usage fee of approximately ￦900 billion during a license period of eight years. SK Telecom acquired the right to use 35 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum. In September 2013, we commenced providing wideband LTE services, which utilizes our adjoining 20 MHz of bandwidth in the 1.8 GHz spectrum to provide transmission speed of up to 150 Mbps, twice faster than those offered under standard LTE services. SK Telecom also began providing its wideband LTE services in September 2013 and LG U+ commenced providing its wideband LTE services in January 2014. As of March 1, 2014, our wideband LTE services covered five metropolitan cities in Korea, and we expect to expand our wideband LTE services to all of Korea by July 2014. As of December 31, 2013, the number of our LTE subscribers exceeded 7.8 million. Furthermore, in March 2014, we commercialized advanced wideband LTE (“Wideband LTE-A”) services, which interconnects our 20 MHz of bandwidth in the 1.8 GHz spectrum used to offer wideband LTE services with the 10 MHz of bandwidth in the 900 MHz spectrum used to offer standard LTE services by utilizing inter-band carrier aggregation technology to support transmission speed of up to 225 Mbps.
Changes in the Rate Structure for Our Services
Periodically, we adjust 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 offer various 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 IP-TV, Internet phone, fixed-line telephone service, WiBro, and mobile services, at a discount.
The MSIP, in consultation with the Ministry of Strategy and Finance, currently approves rates charged by us for local telephone service. In addition, the MSIP currently does not regulate our domestic long-distance, international long-distance, broadband internet access and mobile service rates, but it periodically announces public policy guidelines or suggestions on tariffs for non-regulated services, which we have followed in the past. For a discussion of adjustments in our rate structure, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates.”
Handset Subsidies
In March 2008, the Government removed a prohibition on the provision of handset subsidies and allowed mobile service providers to subsidize the purchase of new handsets by certain qualifying customers. In order to compete more effectively, we began providing such handset subsidies, which have increased, and may continue to increase, our marketing expenses. We provide handset subsidies
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to subscribers who agree to use our service for a predetermined service period and purchase handsets on an installment basis. Generally, handset subsidies may be provided to any subscriber that uses our service and purchases handsets either directly from us or through third parties. Since we do not recognize revenues from sales of handsets by third parties, the trends between our handset sales and our provision for handset subsidies are not necessarily correlated. The amount recognized as a provision for handset subsidies is our best estimate of the expenditure required to settle current obligations to relevant subscribers at the end of the reporting period, which is calculated as the sum of the present values of the monthly balances for handset subsidies over the relevant service periods, taking into account the customer retention rate for relevant subscribers. On May 13, 2010, the KCC announced a guideline recommending that telecommunication service providers limit their marketing expenses to 22.0% of their annual sales, and the limit was subsequently lowered to 20.0% of their annual sales for the years 2013, 2012 and 2011. Such marketing expenses include initial commissions, monthly commissions and retention commissions paid to our authorized dealers and subscribers, including handset subsidies, but do not include advertising expenses. This guideline remains effective. While the guideline is not binding, we, as well as our competitors, nonetheless try to adhere to such guideline when feasible, which may have a material adverse effect on our businesses and results of operations. Furthermore, failure to comply with rules, regulations and corrective orders may lead to suspension of our business or imposition of monetary penalties.
For example, based on investigations conducted in December 2012 and January 2013, the KCC imposed a combined fine of approximately ￦12 billion on SK Telecom, LG U+ and us in January 2013 (our fine being approximately ￦2.9 billion), for providing subsidies that were higher than those allowed under current regulations to new mobile phone purchasers and subscribers, and also imposed temporary suspensions from recruiting new subscribers ranging from 20 days to 24 days. In March 2013, the KCC again imposed a combined fine of approximately ￦5 billion on SK Telecom, LG U+ and us (our fine being approximately ￦1.6 billion) for continuing to offer subsidies during the suspension period. In July 2013, the KCC imposed a combined fine of approximately ￦67 billion on SK Telecom, LG U+ and us (our fine being approximately ￦20 billion) and also imposed a seven day suspension on us from recruiting new subscribers, also in connection with providing excessive handset subsidies to new subscribers. In December 2013, the KCC again imposed a combined fine of approximately ￦106 billion on SK Telecom, LG U+ and us (our fine being approximately ￦30 billion), which is the largest fine ever imposed by the KCC on local mobile operators for providing excessive subsidies to new subscribers. On March 7, 2014, the MSIP imposed a temporary suspension on us for 45 days (from March 13, 2014 to April 26, 2014), SK Telecom for 45 days (from April 5, 2014 to May 19, 2014), and LG U+ for 45 days (from March 13, 2014 to April 4, 2014 and again from April 27, 2014 to May 18, 2014) from recruiting new subscribers as a result of continuing to offer excessive handset subsidies to new subscribers, despite the order from the KCC prohibiting such subsidies, which is the longest suspension period imposed on us by the Government for providing discriminatory subsidies to subscribers. We expect that the business suspension imposed on us, as well as the continuing restriction by the Government on subsidies we provide, will have an adverse effect on our operating revenues for the first quarter of 2014. Any further suspension of our business or imposition of monetary penalties by the Government could have a material adverse effect on our business.
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, we are currently upgrading our broadband network to enable FTTH connection, which provides speed of up to 100 Mbps and better connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the
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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, and other digital media content with stronger stability.
In addition, we have been building more advanced mobile telecommunications networks based on LTE technology, which is generally referred to as 4G technology, and commenced providing commercial 4G LTE services in the Seoul metropolitan area on January 3, 2012. We completed the expansion of our 4G LTE service coverage nationwide in October 2012. Several wireless carriers in the United States, Europe and Asia commenced LTE services in recent years and LTE technology is currently widely accepted as the standard 4G technology. LTE technology enables data to be transmitted faster than W-CDMA, up to 150 Mbps for downloading and up to 50 Mbps for uploading. We expect that the faster data transmission speed of the LTE network, combined with our existing 4G nationwide WiBro network, will allow us to offer significantly improved wireless data transmission services, providing our subscribers with faster wireless access to multimedia content. In January 2012, we also began offering 4G LTE services following the termination of our 2G services. We completed the expansion of our 4G LTE service coverage nationwide in October 2012 and commenced providing wideband LTE services in September 2013, and commercialized Wideband LTE-A services in March 2014, as discussed above.
Critical Accounting Policies
We have prepared our consolidated financial statements in accordance with IFRS as issued by the IASB. These accounting principles require our management to make certain 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;
valuation and impairment of investment securities;
income taxes;
deferred revenue relating to service installation fees and initial subscription fees;
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post-employment benefit liabilities;
provisions; and
employee reductions and changes in severance and retirement benefits.
Allowances for Doubtful Accounts
Allowance for doubtful accounts is our best estimate of the amount of impairment losses incurred on our existing notes and accounts receivable. We determine the allowance for doubtful notes and accounts receivable based on an aging analysis of balances, historical write-off experience, customer’s or counterparty’s credit ratings and changes in payment terms. 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 our trade and other receivables in the three-year period ended December 31, 2013 are summarized as follows:
Balance at beginning of year
Provision
Reversal or written-off
Changes in the scope of consolidation
Balance at end of year
Changes in the allowances for doubtful accounts for our loans receivables in the three-year period ended December 31, 2013 are summarized as follows:
If economic or specific industry trends change, we would adjust our allowances for doubtful accounts by recording additional expense or benefit.
Useful Lives of Property and Equipment
Property and equipment are depreciated using the straight-line method over their useful lives as disclosed in Note 2.11 to the Consolidated Financial Statements. An asset’s residual value and useful lives are reviewed and adjusted at the end of each financial reporting period, and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes. 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 ￦286 billion in 2013.
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Impairment of Long-Lived Assets, including Goodwill
Long-lived assets generally consist of property and equipment and intangible assets, including goodwill. 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 recognized when the asset’s recoverable amount is less than its carrying amount. The recoverable amount of a long-lived asset is the greater of an asset’s fair value less costs to sell and its value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The recoverable amounts of cash-generating units are based on their value in use calculated by applying the annual discount rate of 9.4% to the estimated future cash flows based on financial budgets for the next five years. Annual growth rates ranging from 0.0% to 2.0% were applied for the cash flows expected to be incurred after five years. 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 estimated recovery value.
Goodwill represents the excess of purchase price paid over the fair value assigned to the identifiable 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 the cash-generating units to which the goodwill is allocated, 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.
Valuation and Impairment of Financial Assets
The fair value of financial instruments, including derivative instruments, that are not traded in an active market is determined by using valuation techniques. Our management uses its judgment to select a variety of methods and makes assumptions that are mainly based on market conditions existing at the end of each reporting period.
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 a change in the fair value of derivative instruments are recognized in current earnings. However, for derivative instruments that qualify for cash flow hedge accounting, the effective portion of the gain or loss on the derivative instruments are recorded as gain or loss on valuation of derivatives for cash flow hedge included in accumulated other comprehensive income or loss, as applicable.
For financial assets, including assets carried at amortized cost and those classified as available-for-sale, we make an annual assessment at the end of each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. For financial assets carried at amortized cost and available-for-sale debt assets, such asset is considered impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events (a “loss event”) that occurred after the initial recognition of the financial asset, which had an impact on the estimated future cash flows of the financial asset that can reliably be estimated. For equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost, in addition to circumstances described below, may be considered as evidence that the asset is impaired.
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For assets carried at amortized cost, the amount of impairment is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the asset’s original effective interest rate, and the carrying amount of the asset is reduced and the amount of loss is recognized in the statement of income. Loss on such asset may also be measured based on observable market price if there is an active market for the asset. For assets classified as available-for-sale, the cumulative loss, measured as the difference between the acquisition cost and the current fair value and recognized as accumulated other comprehensive income, less any impairment loss on such financial asset previously recognized in profit or loss, is removed from equity and recognized in the statement of income.
Significant management judgment is involved in evaluating whether a loss event has occurred. The estimates and assumptions used by management to evaluate whether a loss event has occurred 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, breach of contract such as default or delinquency in payments, disappearance of an active market for the financial asset and other adverse changes in the payment status of borrowers in the portfolio. 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 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 assessing the realizability of deferred tax assets 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.
Deferred Revenue relating to Service Installation Fees and Initial Subscription Fees
We charge service installation fees and initial subscription fees related to activation of many of our services, which are deferred and recognized as revenue over the expected terms of customer relationships. Our estimate of expected terms of customer relationship is based on the historical rate, which may differ in the future. If the management’s estimation is amended, it may cause significant differences in the timing of revenue recognition and amount recognized.
Post-employment Benefit Liabilities
Our accounting of post-employment benefits, which mainly consist of a defined benefit plan (we began offering a defined contribution plan in December 2012), involves judgments about uncertain events including discount rates, life expectancy and future pay inflation. Any changes in these assumptions will impact the carrying amount of the defined benefit liability. The discount rates used to determine the present value of estimated future cash outflows expected to be required to settle the defined benefit liability, are determined at the end of each reporting period by reference to the yield at the reporting date on high-quality corporate bonds that have maturity dates approximating the terms of
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our benefits obligations and that are denominated in the same currency in which the benefits are expected to be paid. Other key assumptions for defined benefit liability are based in part on current market conditions. For defined contribution plans, we pay contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis, and we have no further payment obligations once the contributions have been paid.
We recognize provisions at the end of the reporting period when we have a present legal or constructive obligation, such as litigation or assets requirement obligations, as a result of past events and an outflow of resources required to settle the obligation is probable and can be reliably estimated. We measure provisions at the present value of the expenditures expected to be required to settle the obligation, which are estimated based on factors such as historical experience. We do not recognize provisions for future operating losses and recognize as interest expense any increase in the provisions due to passage of time. See Notes 2.22, 3.7 and 17 to the Consolidated Financial Statements.
Employee Reductions and Changes in Severance and Retirement Benefits
In April 2014, we announced the commencement of a special voluntary early retirement program where we provide employees who had been employed by us for more than 15 years with additional financial incentives to retire early or employment for two years at certain of our subsidiaries or affiliates. On April 23, 2014, our human resources committee determined that 8,304 employees will retire through this special early retirement program. We expect to record approximately ￦1.2 trillion as severance indemnity in connection with this special early retirement program, all of which is expected to be recorded during 2014.
Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS
In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with K-IFRS, which we are required to file with the Financial Services Commission and the Korea Exchange under the Financial Investment Services and Capital Markets Act of Korea.
During the three years ended December 31, 2013, we are required to adopt certain amendments and interpretations to K-IFRS, relating to presentation of operating profit. Additionally, under K-IFRS, revenue from the development and sale of real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB, revenue from the development and sale of real estate is recognized when an individual unit of residential real estate is delivered to the buyer. Furthermore, due to a subsequent event in which early redemption rights were exercised for certain commercial paper guaranteed by KT ENS, our consolidated subsidiary, we recognized financial losses relating to the resulting estimation of guarantee liabilities in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB, which were not reflected in our financial statements prepared in accordance with K-IFRS, which were issued on March 13, 2014. As a result, the presentation of operating results in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB included in this annual report differs from the presentation of operating results in our consolidated statements of operations prepared in accordance with K-IFRS. The table below sets forth a reconciliation of our operating profit and net income or loss as presented in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB for each of the years ended December 31, 2011, 2012 and 2013 to our
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operating profit and net income or loss in our consolidated statements of operations prepared in accordance with K-IFRS, for each of the corresponding years, taking into account such differences:
Operating profit under IFRS as issued by the IASB
Effect of changes in operating income presentation
Revenue recognition of development and sale of real estate
Operating profit under K-IFRS
Net income(loss) under IFRS as issued by the IASB
Profit before income tax
Guarantee liabilities and loss (KT ENS)
Income tax
Net income(loss) under K-IFRS
Recent Accounting Pronouncements under IFRS
For a summary of new standards, amendments and interpretations issued under IFRS as issued by the IASB but not effective for 2013, and which have not been adopted early by us, see Note 2 to the Consolidated Financial Statements.
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 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
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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;
financial service revenues, primarily consisting of fees from credit card services provided by BC Card Co., Ltd., which became our consolidated subsidiary starting in October 2011;
automobile rental service revenues, primarily consisting of fees generated from automobile rentals and leases by KT Rental Co., Ltd., which became our consolidated subsidiary starting in July 2012; and
miscellaneous revenues that are primarily derived from information technology and network services, satellite services, security services and real estate development.
Operating Expenses
Our operating expenses primarily include:
purchase of inventories, primarily consisting of our sale of mobile handsets and specially designed phones for fixed-line mobile convergence services;
salaries and wages, including post-employment benefits, termination benefits and share-based payments;
depreciation expenses incurred primarily in connection with our telecommunications network facilities;
sales commissions, primarily consisting of commissions to independent dealers related to procurement of mobile subscribers and mobile handset sales;
commissions, primarily consisting of commission-based payments for third-party outsourcing services, including commissions to the call center staff;
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card service costs, primarily consisting of costs in connection with credit card services provided by BC Card Co., Ltd., including fees paid to member credit card companies in our network for marketing expenses and for costs associated with the present value and default risks of installment card charges which are borne by such member companies;
service cost, primarily consisting of payments for third-party outsourcing services, including payments for software development and design, data analysis and processing, and installment and maintenance of IT and satellite equipment; and
interconnection charges, which are interconnection payments to telecommunication service providers for calls from landline users and our mobile subscribers to our competitors’ subscribers.
Operating Results—2012 Compared to 2013
The following table presents selected income statement data and changes therein for 2012 and 2013:
Profit from continuing operations before income tax
Profit for the period from continuing operations
Profit from discontinued operations
Profit for the period
N.A. means not available.
The following table presents a breakdown of our operating revenues and changes therein for 2012 and 2013:
Local service revenues
Non-refundable service installation fees
Domestic long-distance revenues
International long-distance revenues
Land-to-mobile interconnection revenues
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Broadband internet access service
Other Internet-related services
Sale of goods
Data communication services
Automobile rental service
Other
Total operating revenues
Total operating revenues decreased by 2.4%, or ￦586 billion, from ￦24,644 billion in 2012 to￦24,058 billion in 2013 primarily due to decreases in our sale of goods, fixed-line telephone service revenues and data communication services revenues, the impact of which was partially offset by increases in our automobile rental service revenues and mobile service revenues.
Our mobile service revenues increased by 2.0%, or ￦133 billion, from ￦6,578 billion in 2012 to ￦6,711 billion in 2013 primarily due to the launching of our wideband LTE services in September 2013, and the corresponding increase in our average revenue per user, as wideband LTE service products generally have higher rates due to the greater amount of data included in such rates. Such increase in average revenue per user was partially offset by a 0.3% decrease in our mobile subscribers from approximately 16,502,000 as of December 31, 2012 to approximately 16,454,000 in December 31, 2013.
Our fixed-line telephone service revenues decreased by 11.6%, or ￦390 billion, from￦3,374 billion in 2012 to￦2,984 billion in 2013 primarily due to decreases in local service revenues, land-to-mobile interconnection revenues, and international and domestic long-distance revenues. Specifically:
Local service revenues decreased by 8.4%, or￦169 billion, from￦2,019 billion in 2012 to￦1,850 billion in 2013. The number of local call pulses decreased by 19.4% from 2012 to 2013, and the number of lines in service decreased by 7.2% from 2012 to 2013, primarily due to the continuing substitution effect from increase in usage of mobile telephone services, Internet phone services and other VoIP services such as Kakaotalk, Line and Skype.
Land-to-mobile interconnection revenues decreased by 17.9%, or ￦119 billion, from ￦663 billion in 2012 to ￦544 billion in 2013 primarily due to a decrease in the number of calls made from landline users to mobile subscribers in 2013 compared to 2012. We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user for a call initiated by a landline user to a mobile service subscriber.
International long-distance revenues decreased by 12.8%, or ￦50 billion, from ￦392 billion in 2012 to￦342 billion in 2013 primarily due to a decrease in the outgoing
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international long-distance call minutes by 15.7% from 2012 to 2013, primarily due to the continuing substitution effect from increase in usage of Internet phone services and other VoIP services such as Kakaotalk, Line and Skype, as well as a 7.2% decrease in the number of lines in service from 2012 to 2013.
Domestic long-distance revenues decreased by 17.5%, or￦47 billion, from ￦268 billion in 2012 to ￦221 billion in 2013 primarily due to a decrease in the number of domestic long-distance call minutes by 20.2% from 2012 to 2013, primarily due to the continuing substitution effect from increase in usage of mobile telephone services, Internet phone services and other VoIP services such as Kakaotalk, Line and Skype, as well as a 7.2% decrease in the number of lines in service from 2012 to 2013.
Our Internet service revenues increased by 3.0%, or ￦86 billion, from ￦2,910 billion in 2012 to￦2,996 billion in 2013 primarily due to an increase in the number of IP-TV subscribers from 4.0 million as of December 31, 2012 to 5.0 million as of December 31, 2013, the impact of which was offset in part by an increase in our IP-TV subscribers who participate in bundled products that offer discounts when subscribing to our other services, and an increase in the number of our broadband subscribers from 8.0 million as of December 31, 2012 to 8.1 million as of December 31, 2013.
Sale of Goods
Revenues from sale of goods decreased by 11.4%, or ￦524 billion, from ￦4,590 billion in 2012 to ￦4,066 billion in 2013 primarily due to a decrease in the number of smartphones sold, resulting from increased competition in the mobile handset market, as well as business suspensions imposed on us by the KCC during 2013 in connection with excessive handset subsidies as discussed above.
Data Communications
Data communications service revenues decreased by 8.4%, or ￦110 billion, from￦1,309 billion in 2012 to￦1,199 billion in 2013 primarily due to a decrease in revenues from our leased lines, resulting from increased competition in the telecommunications market in Korea.
Financial service revenues decreased by 1.4%, or ￦46 billion, from ￦3,320 billion in 2012 to￦3,274 billion in 2013 primarily due to a decrease in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd., resulting from a decrease in the rate of commission BC Card. Co., Ltd. charges for purchases, which in turn resulted from increased competition in the financial services market during 2013.
Automobile Rental
Automobile rental revenues increased by 139.5%, or ￦353 billion, from ￦253 billion in 2012 to￦606 billion in 2013 primarily due to the recognition of full year income from KT Rental Co., Ltd. in 2013, which became our consolidated subsidiary and related revenues became a part of our consolidated revenue starting in July 2012, following the acquisition of KT Rental’s common stock by Hana Daetoo Securities Co., Ltd. and other investors from the second largest shareholder in July 2012, and the restriction on our control over KT Rental pursuant to a shareholders’ agreement being removed as a result. See Note 37 to the Consolidated Financial Statements.
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Other operating revenues decreased by 3.8%, or ￦88 billion, from ￦2,310 billion in 2012 to￦2,222 billion in 2013 primarily due to a 19.3%, ￦57 billion, or decrease in operating revenues from KT Telecop Co., Ltd., our subsidiary specializing in security services.
The following table presents a breakdown of our operating expenses and changes therein for 2012 and 2013:
Salaries and wages
Depreciation
Commissions
Interconnection charges
Purchase of inventories
Changes of inventories
Sales commission
Service cost
Card service costs
Others (1)
Total operating expenses
Total operating expenses increased by 3.4%, or ￦770 billion, from ￦22,964 billion in 2012 to￦23,734 billion in 2013 primarily due to increases in other operating expenses, change of inventories, service costs, depreciation and salaries and wages, the impact of which was partially offset by a decrease in purchase of inventories. Specifically:
Other operating expenses increased by 17.5%, or￦664 billion, from￦3,789 billion in 2012 to￦4,453 billion in 2013, primarily due to loss on disposal of approximately￦277 billion in 2013 in connection with the expenses incurred for our business support system project, as well as loss on disposal of approximately ￦220 billion in 2013 on our obsolete tangible and intangible assets.
We recorded an increase in inventories of ￦259 billion in 2012, compared to a decrease of ￦321 billion in 2013, primarily due to temporary year-end accounting treatment of inventories for a shipment of smartphones which were in transit at the end of 2012, as well as an increase in impairment loss by ￦66 billion on our merchandise inventories incurred in 2013 compared to 2012.
Service cost increased by 45.1%, or ￦570 billion, from ￦1,264 billion in 2012 to ￦1,834 billion in 2013 as a result of increases in expenses relating to our systems/network integration business and expenses relating to purchase of multimedia contents from third-party developers.
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Depreciation expenses increased by 7.4%, or ￦214 billion, from ￦2,894 billion in 2012 to ￦3,108 billion in 2013 primarily due to an increase in depreciation expenses of ￦271 billion from a full-year recognition of depreciation expenses of KT Rental’s operating assets, which became our consolidated subsidiary starting in July 2012 as described above.
Salaries and wages increased by 6.2%, or ￦192 billion, from ￦3,097 billion in 2012 to ￦3,289 billion in 2013 primarily due to an increase in the number of our employees resulting from our newly consolidated subsidiaries in 2013, as well as an increase in salaries and severance benefits in 2013.
These factors were partially offset by the following:
Our operating expenses related to purchase of inventories decreased by 26.5%, or ￦1,285 billion, from ￦4,851 billion in 2012 to￦3,566 billion in 2013 primarily due to a decrease in the number of smartphones sold as discussed above.
Operating Profit
Due to the factors described above, our operating profit decreased by 80.8%, or ￦1,357 billion, from ￦1,680 billion in 2012 to￦323 billion in 2013. Our operating margin, which is operating profit as a percentage of operating revenues, decreased from 6.8% in 2012 to 1.3% in 2013.
Finance Income (Costs)
The following table presents a breakdown of our finance income and costs and changes therein for 2012 and 2013:
Interest income
Interest expense
Net foreign currency transaction gain (loss)
Net foreign currency translation gain (loss)
Net loss on settlement of derivatives
Net gain (loss) on valuation of derivatives
Net other finance costs
Net finance costs
Our net finance costs increased by 30.0%, or ￦85 billion, from ￦283 billion in 2012 to￦368 billion in 2013 primarily due to decreases in net foreign currency translation gain and interest income, the impact of which was partially offset by a decrease in net loss on valuation of derivatives. Specifically:
Our net foreign currency translation gain decreased by 61.4%, or ￦159 billion, from ￦259 billion in 2012 to￦100 billion in 2013, as the Market Average Exchange Rate of the Won against the U.S. dollar appreciated from ￦1,153.3 to US$1.00 as of December 31, 2011 to ￦1,071.1 to US$1.00 as of December 31, 2012, and further appreciated at a lesser pace
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to ￦1,055.3 to US$1.00 as of December 31, 2013. The impact of such decrease in net foreign currency translation gain was partially offset by a decrease in net loss on valuation of derivatives discussed below.
Our interest income decreased by 46.3%, or ￦94 billion, from ￦203 billion in 2012 to ￦109 billion in 2013 primarily due to a decrease in our average balance of interest-earning assets from 2012 to 2013, resulting from a reduction in our accounts receivables from our handset sales in 2013 due to the reasons discussed above, as well as a decrease in general interest rates from 2012 to 2013.
Net loss on valuation of derivatives decreased by 56.4%, or ￦136 billion, from ￦241 billion in 2012 to￦105 billion in 2013, primarily due to a decrease in losses from our currency swap contracts due to the lower rate of appreciation of the exchange rates of the Won against the Japanese Yen and the U.S. dollar from December 31, 2012 to December 31, 2013.
Income (Loss) from Jointly Controlled Entities and Associates
Income from jointly controlled entities and associates decreased by 61.1%, or ￦11 billion, from￦18 billion in 2012 to￦7 billion in 2013, primarily due to the loss of income recognized under this line item from KT Rental in 2013, as it became our consolidated subsidiary in July 2012, and we recorded an income of ￦9 billion from KT Rental in 2012, as any associated gains from KT Rental until July 2012 were recognized under this line item.
Income Tax Expense
Our income tax expense decreased by 82.0%, or ￦228 billion, from ￦278 billion in 2012 to￦50 billion in 2013 primarily due to our recognition of a loss from continuing operations before income tax of ￦38 billion in 2013 compared to a profit from continuing operation of ￦1,415 billion in 2012. We incurred a tax expense despite incurring a loss before income tax in 2013, as we, in preparing our consolidated financial statements, aggregate the tax results of ourselves and our subsidiaries, which had taxable income. See Note 29 to the Consolidated Financial Statements. We had an effective tax rate of 19.6% in 2012. We had net deferred income tax assets of ￦537 billion as of December 31, 2013.
Profit from Discontinued Operations
We recognized a loss from discontinued operations of ￦32 billion in 2012, compared to none in 2013, primarily due to the loss recognized from our sale of our 93.8% interest in KT Tech, Inc. in August 2012, as well as our share of net loss of KT Tech, Inc. until the completion of sale, which we recorded under this category in 2012, whereas there were no discontinued operations in 2013 which required recognition of income or loss under this category. See Note 40 to the Consolidated Financial Statements.
Profit for the Period
Due to the factors described above, we recorded a profit for the period of ￦1,105 billion in 2012, compared to a loss of ￦88 billion in 2013. Our net income margin, which is profit for the period as a percentage of operating revenues, was 4.5% in 2012, and our net loss margin, which is loss for the period as a percentage of operating revenues, was 0.4% in 2013.
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Segment Results—Telecommunication & Convergence Customer Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 6.2%, or ￦994 billion, from ￦15,932 billion in 2012 to ￦14,938 billion in 2013, primarily due to a decrease in revenues from individual fixed-line telephone subscribers.
Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 92.9%, or ￦681 billion, from ￦733 billion in 2012 to ￦52 billion in 2013, as the 6.2% decrease in the segment’s operating revenues outpaced a 2.1% decrease 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, decreased from 4.6% in 2012 to 0.3% in 2013.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased slightly by 0.2%, or ￦5 billion, from ￦2,440 billion in 2012 to ￦2,445 billion in 2013.
Segment Results—Global & Enterprise Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 0.5%, or ￦14 billion, from ￦2,931 billion in 2012 to￦2,917 billion in 2013, primarily due to the spin-offs of KT Sat Co., Ltd., KT Estate Inc. and KT Media Hub Co., Ltd. during 2013 and the corresponding decrease in operating revenues from such subsidiaries which were recognized under this segment.
Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 27.8%, or ￦91 billion, from ￦327 billion in 2012 to ￦236 billion in 2013, as operating revenues decreased by 0.5% while operating expenses increased by 3.0%, primarily due to an increase in rental expenses recognized under this segment in connection with the sale and leaseback transactions of certain real estate properties which occurred during 2011 and 2012. Operating margin decreased from 11.2% in 2012 to 8.1% in 2013.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 0.2%, or ￦1 billion, from ￦485 billion in 2012 to ￦486 billion in 2013.
Segment Results—Finance/Rental Business Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 9.0%, or ￦336 billion, from ￦3,717 billion in 2012 to ￦4,053 billion in 2013, primarily due to the consolidation of full year revenues in 2013 from KT Rental Co., Ltd. which became our consolidated subsidiary starting in July 2012.
Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 51.4%, or ￦95 billion, from ￦185 billion in 2012 to ￦280 billion in 2013, as the 9.0% increase in the segment’s operating revenues outpaced a 6.8% increase in operating expenses, primarily due to the reasons discussed above. Operating margin increased from 5.0% in 2012 to 6.9% in 2013.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 119.8%, or￦218 billion, from ￦182 billion in 2012 to ￦400 billion in 2013, primarily due to the effect of full-year consolidation of KT Rental Co., Ltd. and the related assets in 2013 as described above, as well as additional purchases of automobiles by KT Rental Co., Ltd. during 2013 which increased the depreciable asset base.
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Segment Results—Others
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 19.8%, or ￦842 billion, from ￦4,252 billion in 2012 to ￦5,094 billion in 2013, primarily due to the spin-offs of KT Sat Co., Ltd., KT Estate Inc. and KT Media Hub Co., Ltd. during 2013 and the corresponding recognition of operating revenues from such subsidiaries under this segment.
Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 245.8%, or ￦204 billion, from ￦83 billion in 2012 to ￦287 billion in 2013, as the 19.8% increase in the segment’s operating revenues outpaced a 15.3% increase in operating expenses, primarily due to the reasons discussed above. The operating margin increased from 2.0% in 2012 to 5.6% in 2013.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 58.5%, or ￦86 billion, from ￦147 billion in 2012 to ￦233 billion in 2013, primarily due to the increase in depreciable assets under this segment due to the spin-off of subsidiaries as discussed above.
Operating Results—2011 Compared to 2012
The following table presents selected income statement data and changes therein for 2011 and 2012:
Income (loss) from jointly controlled entities and associates
Profits for the year from continuing operations
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The following table presents a breakdown of our operating revenues and changes therein for 2011 and 2012:
Total operating revenues increased by 11.6%, or ￦2,556 billion, from ￦22,088 billion in 2011 to ￦24,644 billion in 2012 primarily due to increases in our financial service revenues, other revenues and automobile rental service revenues, the impact of which was partially offset by decreases in our fixed-line telephone service revenues and mobile service revenues.
Our mobile service revenues decreased by 3.4%, or ￦235 billion, from ￦6,813 billion in 2011 to ￦6,578 billion in 2012 primarily due to various rate reduction measures we adopted in August 2011 upon discussion with the KCC, in particular for those applicable to 3G smartphones, the impact of which was further enhanced by a decrease in our mobile subscribers from 16.6 million as of December 31, 2011 to 16.5 million as of December 31, 2012. For a discussion of reduction in rates for our mobile services, see “Item 4.B.—Business Overview—Revenues and Rates—Mobile Services.”
Our fixed-line telephone service revenues decreased by 11.5%, or ￦438 billion, from ￦3,812 billion in 2011 to￦3,374 billion in 2012 primarily due to decreases in local service revenues, land-to-mobile interconnection revenues and domestic long-distance revenues. Specifically:
Local service revenues decreased by 11.7%, or￦267 billion, from￦2,286 billion in 2011 to￦2,019 billion in 2012. The number of local call pulses decreased by 9.3% from 2011 to 2012, and the number of lines in service decreased by 4.9% from 2011 to 2012, primarily due to the substitution effect from increase in usage of mobile telephone services and Internet phone services.
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Land-to-mobile interconnection revenues decreased by 15.2%, or ￦119 billion, from ￦782 billion in 2011 to￦663 billion in 2012 primarily due to a decrease in the number of calls made from landline users to mobile subscribers in 2012 compared to 2011. We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user for a call initiated by a landline user to a mobile service subscriber.
Domestic long-distance revenues decreased by 13.0%, or￦40 billion, from ￦308 billion in 2011 to ￦268 billion in 2012 primarily due to a decrease in the number of domestic long-distance call minutes by 7.7% from 2011 to 2012, primarily due to the substitution effect from increase in usage of mobile telephone services and Internet phone services, as well as a 4.9% decrease in the number of lines in service from 2011 to 2012.
Our Internet service revenues increased by 6.4%, or ￦175 billion, from ￦2,735 billion in 2011 to ￦2,910 billion in 2012 primarily due to an increase in the number of our broadband subscribers from 7.8 million as of December 31, 2011 to 8.0 million as of December 31, 2012, and an increase in the number of IP-TV subscribers from 3.1 million as of December 31, 2011 to 4.0 million as of December 31, 2012, the impact of which was offset in part by an increase in our IP-TV subscribers who participate in bundled products that offer discounts when subscribing to our other services.
Revenues from sale of goods increased by 5.0%, or ￦221 billion, from ￦4,369 billion in 2011 to ￦4,590 billion in 2012 primarily due to an increase in the number of smartphones sold, in particular LTE smartphones, that had relatively higher prices.
Data communications service revenues increased by 3.0%, or ￦38 billion, from ￦1,271 billion in 2011 to￦1,309 billion in 2012 primarily due to an increase in revenues from our network equipment installment, lease and maintenance services, primarily those relating to our IP-based integrated control solutions and equipment.
Financial service revenues increased by 233.3%, or ￦2,324 billion, from ￦996 billion in 2011 to￦3,320 billion in 2012 primarily due to the recognition of full year income from BC Card Co., Ltd. in 2012, which became our consolidated subsidiary and related revenues became a part of our consolidated revenue starting in October 2011.
We did not record any automobile rental service revenues in 2011, while we recorded revenues of ￦253 billion in 2012, due to the consolidation of KT Rental Co., Ltd. starting in July 2012 as a result of acquisition of KT Rental’s common stock by Hana Daetoo Securities Co., Ltd. and other investors from the second largest shareholder in July 2012, and the restriction on our control over KT Rental pursuant to a shareholders’ agreement being removed as a result. See Note 37 to the Consolidated Financial Statements.
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Other operating revenues increased by 10.5%, or ￦220 billion, from ￦2,090 billion in 2011 to￦2,310 billion in 2012 primarily due to a ￦112 billion increase in revenues (after intercompany elimination) from H&C Network, which provides call center services to BC Card Co., Ltd. and other financial service providers, as a result of the recognition of full year income from H&C Network in 2012, which became our consolidated subsidiary and related revenues became a part of our consolidated revenue starting in October 2011, a￦85 billion increase in revenues from KT Skylife as a result of an increase in subscribers in 2012 compared to 2011, and the increases in related installment fees and home shopping network sales, and a ￦56 billion increase in revenues from KT Networks Corporation (which changed its name to KT ENS Corporation in 2013) as a result of an increase in our network construction projects as well as sales in our ecologically safe or “green” information technology equipment. Such increases were offset in part by a ￦47 billion decrease in gains from sale and leaseback of land and buildings to our equity-method investee or special purpose companies specializing in real estate investments, from ￦298 billion in 2011 to ￦251 billion in 2012. See Note 26 to the Consolidated Financial Statements.
The following table presents a breakdown of our operating expenses and changes therein for 2011 and 2012:
Total operating expenses increased by 14.2%, or ￦2,863 billion, from ￦20,101 billion in 2011 to￦22,964 billion in 2012 primarily due to increases in card service costs, purchase of handsets, sales commission and depreciation, the impact of which was partially offset by decreases in change of inventories and interconnection charges. Specifically:
Card service costs increased by 291.4%, or￦2,063 billion, from￦708 billion in 2011 to￦2,771 billion in 2012 primarily due to the consolidation of the full year expenses of BC Card Co., Ltd. in 2012 compared to only three months of expenses in 2011 as described above.
Our operating expenses related to purchase of inventories increased by 7.3%, or ￦332 billion, from ￦4,519 billion in 2011 to￦4,851 billion in 2012 primarily due to an increase in
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the number of smart phones sold. However, the rate of increase in our expenses relating to purchase of handsets was higher than the rate of increase in our revenues relating to sale of goods, due to the decrease in our margins as a result of increased competition.
Sales commissions, which primarily relate to commissions to our third-party vendors for sales of mobile handsets and mobile and fixed-line service products, increased by 19.6%, or ￦365 billion, from ￦1,865 billion in 2011 to ￦2,230 billion in 2012 primarily due to increases in sales of our LTE mobile service products and LTE smartphones by such third-party vendors, as a result of increases in our total mobile subscribers and subscribers switching to LTE services in 2012.
Depreciation expenses increased by 9.4%, or ￦249 billion, from ￦2,645 billion in 2011 to ￦2,894 billion in 2012 primarily due to an increase in depreciation expenses of ￦175 billion from depreciation expenses of KT Rental’s operating assets, which became our consolidated subsidiary starting in July 2012 as explained above, as well as an increase in depreciation expenses of￦84 billion from an increase in capital expenditures made by KT Corporation, primarily for LTE-related structures.
We recorded operating expenses relating to changes of inventories, which represent a decrease in our inventories, of ￦36 billion in 2011, compared to an increase in inventories of ￦259 billion in 2012, primarily due to temporary year-end accounting treatment of inventories for a shipment of smartphones which were in transit at the end of the year.
Interconnection charges decreased by 19.3%, or￦215 billion, from￦1,116 billion in 2011 to￦901 billion in 2012 primarily due to decreases in land-to-mobile and mobile-to-mobile interconnection rates charged by other telecommunications operators or are set by the KCC, as applicable, as well as a decrease in the number of calls made from fixed-line phones to mobile phones.
Due to the factors described above, our operating profit decreased by 15.5%, or ￦307 billion, from￦1,987 billion in 2011 to￦1,680 billion in 2012. Our operating margin, which is operating profit as a percentage of operating revenues, decreased from 9.0% in 2011 to 6.8% in 2012.
The following table presents a breakdown of our finance income and costs and changes therein for 2011 and 2012:
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Our net finance costs decreased by 23.9%, or￦89 billion, from ￦372 billion in 2011 to ￦283 billion in 2012 primarily due to our recognition of net foreign currency translation loss in 2011 compared to a net gain in 2012 and an increase in interest income, the impact of which was partially offset by our recognition of net gain on valuation of derivatives in 2011, compared to a net loss in 2012. Specifically:
We recorded net foreign currency translation loss of￦80 billion in 2011 compared to net foreign currency translation gain of￦259 billion in 2012 as the Market Average Exchange Rate of the Won against the U.S. dollar depreciated from ￦1,138.9 to US$1.00 as of December 31, 2010 to ￦1,153.3 to US$1.00 as of December 31, 2011 but it appreciated to ￦1,071.1 to US$1.00 as of December 31, 2012. The impact of such net foreign currency translation gain was partially offset by a net loss on valuation of derivatives discussed below.
Our interest income increased by 33.6%, or ￦51 billion, from ￦152 billion in 2011 to ￦203 billion in 2012 primarily due to an increase in our average balance of interest-earning assets from 2011 to 2012, including our holdings of cash and cash equivalents.
We recorded net gain on valuation of derivatives of￦55 billion in 2011 compared to net loss on valuation of derivatives of￦241 billion in 2012, primarily due to an increase in losses from our currency swap contracts due to the appreciation of the exchange rates of the Won against the Japanese Yen and the U.S. dollar from December 31, 2011 to December 31, 2012, whereas we recorded gains in our currency swap contracts in 2011 due to the depreciation of the Won against the U.S. dollar and the Japanese Yen during 2011.
We recorded a loss from jointly controlled entities and associates of ￦6 billion in 2011 compared to a gain from jointly controlled entities and associates of ￦18 billion in 2012 primarily due to a gain of ￦9 billion recorded in connection with our share of KT Rental’s net income until July 2012 (KT Rental became our consolidated subsidiary starting in July 2012 as described above, and any associated gains until July 2012 are recognized under this category), whereas the loss in 2011 primarily resulted from a one-time unrealized loss of￦30 billion recorded in connection with the sale and leaseback of certain of our properties to K-REALTY CR-REIT I, our equity-method investee specializing in real estate investments established in December 2011.
Our income tax expense decreased by 12.6%, or ￦40 billion, from ￦318 billion in 2011 to￦278 billion in 2012 primarily due to a decrease in our profit from continuing operations before income tax by 12.1%, or ￦194 billion, from ￦1,609 billion in 2011 to ￦1,415 billion in 2012. See Note 29 to the Consolidated Financial Statements. As a result of the foregoing, our effective tax rate decreased from 19.8% in 2011 to 19.6% in 2012. We had net deferred income tax assets of ￦473 billion as of December 31, 2012.
We recognized profit from discontinued operations of ￦165 billion in 2011, compared to loss from discontinued operations of ￦32 billion in 2012, primarily due to profits recognized from our sale of our 79.96% controlling interest in New Telephone Company to Vimpel-Communications in June and
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October 2011, as well as our share of net income of New Telephone Company until the completion of sale, and the loss recognized from our sale of our 93.8% interest in KT Tech, Inc. in August 2012, as well as our share of net loss of KT Tech, Inc. until the completion of sale, which we recorded under this category. See Note 40 to the Consolidated Financial Statements.
Due to the factors described above, our profit for the period decreased by 24.1%, or￦350 billion, from￦1,455 billion in 2011 to￦1,105 billion in 2012. Our net income margin, which is profit for the period as a percentage of operating revenues, decreased from 6.6% in 2011 to 4.5% in 2012.
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 1.4%, or ￦224 billion, from ￦16,156 billion in 2011 to ￦15,932 billion in 2012, primarily due to a decrease in revenues from individual fixed-line telephone subscribers as well as decrease in revenues from our mobile services resulting from a reduction in our mobile service charges.
Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 35.7%, or ￦407 billion, from ￦1,140 billion in 2011 to￦733 billion in 2012, as the segment recorded a 1.4% decrease in operating revenues while recording a 1.2% 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, decreased from 7.1% in 2011 to 4.6% in 2012.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 4.7%, or ￦110 billion, from ￦2,330 billion in 2011 to ￦2,440 billion in 2012, primarily due to an increase in capital expenditures made for structures relating to our LTE network.
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 7.5%, or ￦236 billion, from ￦3,167 billion in 2011 to ￦2,931 billion in 2012, primarily due to a decrease in revenues from sales of tangible assets (such as real estate and copper from our decommissioned telephone cables that are recognized in this segment) in 2012 compared to 2011, primarily due to adverse real estate and metal market conditions in 2012.
Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 37.8%, or ￦199 billion, from ￦526 billion in 2011 to ￦327 billion in 2012, as the 7.5% decrease in the segment’s operating revenues outpaced a 1.4% decrease in operating expenses, primarily due to the reasons discussed above. Operating margin decreased from 16.6% in 2011 to 11.2% in 2012.
Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 4.0%, or ￦20 billion, from ￦505 billion in 2011 to ￦485 billion in 2012, primarily due to the spin-off of our satellite business by establishing KT Sat Co., Ltd. in December 2012, and the resulting reduction in related depreciable assets.
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 267.7%, or ￦2,706 billion, from ￦1,011 billion in 2011 to ￦3,717 billion in 2012,
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primarily due to the consolidation of full year revenues in 2012 from BC Card Co., Ltd. which became our consolidated subsidiary starting in October 2011 and revenues from KT Rental Co., Ltd. which became our consolidated subsidiary starting in July 2012, as described above.
Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 400.0%, or ￦148 billion, from￦37 billion in 2011 to￦185 billion in 2012, as the 267.7% increase in the segment’s operating revenues outpaced the 262.6% 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 3.7% in 2011 to 5.0% in 2012.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 970.6%, or ￦165 billion, from ￦17 billion in 2011 to ￦182 billion in 2012, primarily due to the effect of consolidation of KT Rental Co., Ltd. and the related assets starting in July 2012 as described above.
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 5.3%, or ￦213 billion, from ￦4,039 billion in 2011 to ￦4,252 billion in 2012, primarily due to increases in revenues from H&C Network Co., Ltd. and KT Skylife Co., Ltd. as discussed above.
Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 21.0%, or ￦22 billion, from￦105 billion in 2011 to￦83 billion in 2012, as the 5.3% increase in operating revenues was outpaced by a 6.0% increase in operating expenses, primarily due to the reasons discussed above. Operating margin decreased from 2.6% in 2011 to 2.0% in 2012.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 20.5%, or ￦25 billion, from￦122 billion in 2011 to￦147 billion in 2012, primarily due to an increase in 2012 of depreciable assets owned by KT Skylife such as home satellite equipment, as a result of an increase in subscribers.
Item 5.B. Liquidity and Capital Resources
The following table sets forth the summary of our cash flows for the periods indicated:
Net cash provided by operating activities
Net cash used in investing activities
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 ￦3,236 billion in 2011,￦3,760 billion in 2012 and￦3,088 billion in 2013 for the acquisition of property and equipment and investment property, primarily construction-in-progress. In our financing activities, we used cash of ￦6,058 billion in 2011, ￦4,591 billion in 2012 and ￦5,956 billion in 2013 for repayment of borrowings and bonds.
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In recent years, we have also required capital for payments of retirement and severance benefits related to our early retirement programs. We recorded payments of severance benefits of ￦235 billion in 2011, ￦111 billion in 2012 and ￦371 billion in 2013.
From time to time, we may also require capital for investments involving acquisitions, including shares of our affiliates, and strategic relationships. For example, we acquired redeemable convertible preferred stock with voting rights and convertible bonds of KT Skylife for ￦246 billion in January 2011, which increased our interest in the company from 32.1% to 53.1% subsequent to exercise of conversion rights. In October 2011, we, through our subsidiary KT Capital Co., Ltd., acquired an additional 1,622,520 common shares of BC Card Co., Ltd. from Woori Bank for approximately ￦252 billion. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately ￦287 billion, and owned a 69.54% interest in BC Card Co., Ltd. as of December 31, 2013. Any such additional investments or acquisitions may require significant capital.
Our cash dividends paid to shareholders and non-controlling interests amounted to ￦595 billion in 2011, ￦498 billion in 2012 and ￦511 billion in 2013.
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 shares of our affiliates as well as investments involving acquisitions and strategic relationships. We compete in the telecommunications sector in Korea, which is rapidly evolving. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. We may need to incur additional capital expenditures to keep up with unexpected developments in rapidly evolving telecommunications technology. There can be no assurance that we will be able to secure funds on satisfactory terms from financial institutions or other sources that are sufficient for our unanticipated needs.
Payments of contractual obligations and commitments will also require considerable resources. In our ordinary course of business, we routinely enter into commercial commitments for various aspects of our operations, including repair and maintenance. We have also provided guarantees to our affiliates. See Note 20 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, 2013:
Contractual Obligations (1)
Long-term debt obligations (including current portion of long-term debt)
Capital lease obligations (including any interests)
Operating lease obligations
Severance payment obligations (2)
Long-term accounts payable—others
Estimate of interest payment based on contractual interest rates effective as of December 31, 2013
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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 profits for the period, expenses not involving cash payments such as depreciation and amortization, and proceeds from issuance of bonds and borrowings. We expect that these sources will continue to be our principal sources of cash in the future. Profit for the period was ￦1,455 billion in 2011 and ￦1,105 billion in 2012, and we recorded a loss for the period of ￦88 billion in 2013 due to the reasons discussed in Item 5.A. Operating Results. Depreciation and amortization of intangible assets was ￦2,996 billion in 2011, ￦3,314 billion in 2012 and ￦3,621 billion in 2013 primarily reflecting our capital investment activities during the recent years, including our purchase of bandwidths for our operations, investments in LTE-related structures and acquisition of real estate. Cash proceeds from issuance of bonds and borrowings were ￦7,262 billion in 2011,￦4,259 billion in 2012 and ￦6,200 billion in 2013. As of December 31, 2013, we held 17,308,160 treasury shares.
In 2013, we spun off a portion of our trade receivables relating to handset sales to several special purpose companies, as part of our efforts to improve our cash and asset management. We also entered into asset management agreements with each of these special purpose companies, and will be receiving management fees from such companies. See Note 20 to the Consolidated Financial Statements.
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 successfully issued US$350 million of 3.875% notes due 2017 in January 2012, three series of notes for an aggregate amount of Japanese Yen 30 billion in January 2013, three series of notes for an aggregate amount of ￦410 billion in April 2013, US$300 million floating rate notes due 2018 in August 2013 and￦300 billion of commercial paper due 2019 in February 2014. See Note 41 to the Consolidated Financial Statements. However, our ability to rely on some of these alternatives could be affected by factors such as the liquidity of the Korean and the global financial markets, prevailing interest rates, our credit rating and the Government’s policies regarding Won currency and foreign currency borrowings. Other factors which could materially affect our liquidity in the future include unanticipated increase in capital expenditures and decrease in cash provided by operations resulting from a significant decrease in demand for our services. We may also need to raise additional capital sooner than we expect in order to fund unanticipated investments and acquisitions.
Our total equity was ￦12,588 billion as of December 31, 2011, ￦13,218 billion as of December 31, 2012 and ￦12,837 billion as of December 31, 2013.
Liquidity
We had a working capital (current assets minus current liabilities) surplus of ￦1,067 billion as of December 31, 2011, deficit of ￦750 billion as of December 31, 2012 and deficit of ￦1,252 billion as of December 31, 2013. The following table sets forth the summary of our significant current assets for the periods indicated:
Short-term loans receivables, net
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Our cash, cash equivalents and net short-term loans receivable maturing within one year totaled ￦2,160 billion as of December 31, 2011, ￦2,726 billion as of December 31, 2012 and ￦2,910 billion as of December 31, 2013. Under IFRS as issued by IASB, bank deposits held at call and all other highly liquid temporary cash instruments within maturities of three months are considered as cash equivalents. Short-term loans receivables primarily consist of loans and other non-derivative financial assets with fixed or determinable payments that are not quoted in an active market with maturities of twelve months or less.
The following table sets forth the summary of our significant current liabilities for the periods indicated:
As of December 31, 2013, we entered into various commitments with financial institutions totaling ￦2,892 billion and US$81 million. See Note 20 to the Consolidated Financial Statements. As of December 31, 2013, ￦155 billion was used 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 ￦3,236 billion in 2011, ￦3,760 billion in 2012 and ￦3,088 billion in 2013 for the acquisition of property and equipment and investment property, primarily construction-in-progress.
Our current capital expenditure plan, on a non-consolidated basis, calls for the expenditure of approximately￦2,700 billion in 2014, which may be adjusted depending on market conditions and our results of operations. The principal components of our capital investment plans are:
approximately ￦1,014 billion in general expansion and modernization of our wireless network infrastructure (including approximately ￦978 billion in capital investments for LTE service);
approximately ￦1,209 billion for general expansion and modernization of our fixed-line network infrastructure; and
approximately ￦477 billion in capital investments for our other services, including overhead costs.
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 4.0% in 2011, 2.2% in 2012 and 1.3% in 2013. 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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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 new business development and incubation center;
an infrastructure R&D laboratory;
a service R&D laboratory; and
a convergence R&D laboratory.
As of December 31, 2013, KT Corporation had 5,183 registered patents domestically and 808 registered patents internationally.
The MSIP has the authority to recommend to network service providers that they provide funds for national research and development of telecommunications technology and related projects. The required annual contribution is 0.5% (0.75% for market dominant service providers like us) of revenues attributable to key communications services (excluding revenues from telecommunications service using an allotted frequency if the consideration for such allotted frequency has been paid) from wireless subscribers for the previous year, and is applicable only to those network service providers who have at least ￦30 billion in total sales for the previous year and have recorded no net loss in the current period. Under the policy, the maximum amount of the annual contribution to be made cannot exceed 70.0% of the net profit for the corresponding period of each company. Including such contributions, total expenditures (which include capitalized expenses) on research and development were ￦304 billion in 2011, ￦476 billion in 2012 and￦309 billion in 2013.
In recent years, we have focused our research and development efforts in the following areas:
simplifying complex core networks and reducing costs;
combining in-building management solutions for fixed-line and wireless networks;
combining operation management systems for fixed-line and wireless networks;
finding solutions for ultra-definition television set top box and additional solutions for smart IPTV;
aggregating heterogeneous wireless access for double network throughput;
a broadband internet solution that is 10 times faster using legacy copper and fiber lines;
a smart-grid platform for global energy control operation centers from South Korea to Finland;
a telecommunication cloud solution which combines network resource virtualization with cloud computing resource; and
creating a new convergence business model based on Information Communication Technology (ICT) and incubating new businesses.
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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 ￦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 a director is up to three years, but the term is extended to the close of the annual shareholders’ meeting convened with respect to the last full fiscal year of a director’s term of office. If the term of office for a director is not completed and ends before the close of the annual general meeting of shareholders convened with respect to the last full fiscal year of such director’s term of office and a new director is appointed in his or her place, the term of office for such replacement director will coincide with the uncompleted remaining term of office of his or her predecessor.
Under the Commercial Code of Korea, we must establish a committee to nominate candidates for outside directors within the board of directors, and outside directors must make up more 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, other than for election of an outside director resulting from the expiration of the term of the office, in which case such outside director whose term is expiring may not be a member of the committee. Our Outside Director Candidate Nominating Committee nominates outside director candidates for appointment at the general shareholders’ meeting.
Upon the request of any director (to the extent that the board of directors does not separately authorize only a particular director to make such request), a meeting of the board of directors will be
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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 for one year.
Our current directors are as follows:
Name
Position
Non-Independent Directors (1)
Chang-Gyu Hwang
Chief Executive Officer
Hoon Han
Senior Executive Vice President
Heon Moon Lim
Outside Directors (1)
Do Kyun Song
Chairperson of the Board of Directors, Advisor, Bae, Kim & Lee LLC
Keuk Je Sung
Professor, Graduate School of Pan Pacific International Studies, Kyunghee University
Sang Kyun Cha
Professor, Department of Electrical and Computer Engineering, Seoul National University
Jong-Goo Kim
Of Counsel, New Dimension Law Group
Chu-Hwan Yim
Honorary President, Korean Institute of Communications and Information Sciences
Pil Hwa Yoo
Professor, Graduate School of Business, Sungkyunkwan University
Suk-Gwon Chang
Professor, Department of Business Administration, Hanyang University
Dae-Keun Park
Professor, Department of Economics and Finance, Hanyang University
Chang-Gyu Hwang is a non-independent director and has served as our chief executive officer since January 2014. Prior to joining us, he served as a Distinguished Chair Professor at Sungkyunkwan University, president and National Chief Technology Officer of the Office of Strategic Research and Development Planning at the former Ministry of Knowledge and Economy, president and chief technology officer of the Corporate Technology Office at Samsung Electronics Co., Ltd. and as president and chief executive officer of the Semiconductor Business at Samsung Electronics Co., Ltd. Mr. Hwang holds a bachelor’s degree and a master’s degree in electric engineering from Seoul National University and a Ph.D. in electronic and computer engineering from the University of Massachusetts, Amherst.
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Hoon Han is a non-independent director and has served as the senior executive vice president of the Corporate Planning Group since February 2014. He has previously served as the chairperson of the board of directors of Spatial Information Industry Promotion Institute, chief executive officer of KT Networks and as executive director of KT’s Home Consumer Strategy department. Mr. Han holds a bachelor’s degree in industrial engineering from Seoul National University, a master’s degree in industrial engineering from Korea Advanced Institute of Science and Technology, and a Ph.D. in engineering economic systems from Stanford University.
Heon Moon Lim is a non-independent director and has served as senior executive vice president of KT’s Customer Business Group since February 2014. He has previously served as a professor of economics and management at Chungnam University, executive director for KT’s Telecom & Convergence department, and as executive director of KT’s Home Consumer department. Mr. Lim holds a bachelor’s degree in business administration from Yonsei University and a Ph.D. in business administration from Seoul National University.
Do Kyun Song has served as our outside director since March 2013. He is currently an advisor to the law firm of Bae, Kim & Lee LLC. He was formerly a standing member of the KCC and the chief executive officer of Seoul Broadcasting System Co., Ltd. Mr. Song holds a bachelor’s degree in Spanish literature from Hanguk University of Foreign Studies.
Keuk Je Sung has served as our outside director since March 2012. He is currently a professor at Kyunghee University Graduate School of Pan-Pacific International Studies. He was formerly Korea’s chief negotiator to the World Trade Organization’s General Agreement on Trade in Services. Mr. Sung holds a Ph.D. in managerial economics and decision sciences from Kellogg Graduate School of Business at Northwestern University.
Sang Kyun Cha has served as our outside director since March 2012. He is currently a Professor of Electrical and Computer Engineering at Seoul National University. Previously, he founded Transact In Memory, Inc. in the United States, which was acquired by SAP AG in 2005, and was subsequently transformed into SAP Labs Korea, Inc. He continues to serve as a director of SAP Labs Korea, Inc. Mr. Cha holds a Ph.D. in database systems from Stanford University.
Jong-Goo Kim has served as our outside director since March 2014. He is currently of counsel to the New Dimension Law Group. Previously, he served as the minister of the Ministry of Justice and as the head of the Seoul Supreme Prosecutors’ Office. Mr. Kim holds both a bachelor’s and a master’s degree in law from Seoul National University and a Ph.D. in law from Dongguk University.
Chu-Hwan Yim has served as our outside director since March 2014. He is currently an honorary president of the Korean Institute of Communications and Information Sciences and is currently serving as an outside director for Korea Electric Power Corporation. Mr. Yim was formerly the president of Korea Digital Cable Laboratories, president of Electronics and Telecommunications Research Institute, and secretary general of the Telecommunications Technology Association. Mr. Yim holds both a bachelor’s and a master’s degree in industrial education from Seoul National University and a Ph.D. in telecommunication systems from Technical University of Braunshweig.
Pil Hwa Yoo has served as our outside director since March 2014 and is a current member of our audit committee. He is also the dean and professor of marketing at the Graduate School of Business at Sungkyunkwan University and serves as an outside director for Kyobo Life Insurance Co. Ltd. Mr. Yoo was formerly the vice president of Korean Academic Society of Business Administration and an editor of Korea Management Review. Mr. Yoo holds a bachelor’s degree in business administration from Seoul National University, a master’s degree in business from Northwestern University and a Ph.D. from Harvard University.
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Suk-Gwon Chang has served as our outside director since March 2014. He is currently a professor of business administration at Hanyang University and the president of the Korea Operations Research and Management Science Society. Mr. Chang was formerly the dean of Hanyang Cyber University Graduate School and the president of the Korea Association for Telecommunication Policy and Korea Media Management Association. Mr. Chang holds a bachelor’s degree in industrial engineering from Seoul National University, a master’s degree in industrial engineering from Korea Advanced Institute of Science and Technology, and a Ph.D. in management science from Korea Advanced Institute of Science and Technology.
Dae-Keun Park has served as our outside director since March 2014. He is currently a professor of economics and finance at Hanyang University, chair of the Financial Development Review Committee at the Financial Services Commission and director of Hanyang Economic Research Institute. Mr. Park was formerly vice president of the Korea Finance and Money Association and a member of the Steering Committee at the Korea Finance Corporation. Mr. Park holds a bachelor’s degree in economics from Seoul National University, a master’s degree in management science from Korea Advanced Institute of Science and Technology and a Ph.D. in economics from Harvard University.
For the purposes of the Korean Commercial Code, our Chief Executive Officer is deemed to be the “representative director” who is authorized to perform all judicial and extra-judicial acts relating to our business. Our shareholders elect the Chief Executive Officer in accordance with the provisions of the Commercial Code and our articles of incorporation. A candidate for Chief Executive Officer is nominated by a committee formed for that purpose. The Chief Executive Officer Candidate Nominating Committee consists of:
all of our outside directors; and
one non-independent director who is not a candidate.
Under our articles of incorporation, the Chief Executive Officer Candidate Nominating Committee must submit a draft management contract between the company and the candidate covering the management objectives of the company to the shareholders’ meeting at the time of nomination of the candidate to the meeting. When the draft management contract has been approved 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 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.
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The current executive officers are as follows:
Name (1)
Title and Responsibilities
Kyu-Taek Nam
Kyu-Shik Shin
Seong-Mook Oh
Ki Chul Kim
In-Sung Jun
Jeong-Tae Park
Hae-Jung Park
Jong-Jin Chae
Cha-Hyun Yoon
Dong-Myun Lee
Yoon-Young Park
Kyoung-Lim Yun
Mun-Whan Lee
Bum-Joon Kim
In-Hoe Kim
Kwang-Suk Shin
Dong-Hoon Han
Sang-Bong Nam
Tae-Yol Yoo
Hyeon-Mo Ku
Dae-San Lee
Yun-Su Kim
Jae-Hyeon Kim
Young-Sik Park
Jin-Chul Kim
Myung-Beom Pyun
Dae-Gi Gong
Hyon-Seog Lee
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Hee-Youp Chang
Seong-Yll Cheon
Hong-Jae Lee
Gang-Geun Lee
Dong-Kwang Kim
Hyeong-Chul Park
Youn-Mo Jeon
Dae-Su Park
Jun-Su Jeong
Seung-Gyum Kim
Sung-Kyu Yang
Kook-Hyun Kang
Jong-Jin Park
Hyoung-Wook Kim
Bong-Goon Kwak
Hye-Jeong Yun
Hee Kyoung Song
Ki-Jong Moon
Yang-Hwan Ryoo
Jae-Gyo Kim
Yoon-Sik Jeong
Tae-Sung Lim
Pan-Sik Shin
Jae-Yoon Park
Cheol-Gyu Lee
Chang-Seok Seo
Mi-Na Oh
Young-Hyun Kim
Young-Sik Kim
Ho-Won Moon
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Jong-Ok Park
June-Keun Kim
Sang-Yong Lee
Yi-Shik Kim
Dong-Sik Yun
Ji-Yun Kim
Young-Myoung Kim
Hong-Beom Jeon
Sook-Kyung Sung
Seong-Choon Lee
Ji-Hie Kim
Jae-Ho Song
Seong-Hoon Kim
Dong-Seope Park
Pill-Jai Lee
Jeff Kahng
Weon-Kyung Kim
Doo-Seong Cheon
Jae-Eui Choi
Hoon Cho
Eung-Ho Lee
Min-Woo Seo
Hyun-Yok Sheen
Won-Sic Hahn
Han-Sup Lee
Young-Pil Park
Young-Ho Oh
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Byung-Sam Park
Hee-Su Kim
Kyung-Joon Lee
Hwa Jung
Sang-Wook Seo
Hyo-Sill Kim
Jae-Yon Cha
Item 6.B. Compensation
Compensation of Directors
In 2013, the total amount of salaries, bonuses (including long-term performance-based incentives for directors) and allowances paid to all directors of KT Corporation for services in all capacities was approximately ￦6.2 billion, which were paid on a cash basis.
Until February 2010, we had no incentive based compensation program for outside directors. Instead, compensation was paid to outside directors in fixed amounts as an allowance for any expenses they incurred in executing their duties. The board of directors introduced a new compensation program for outside directors in March 2010, which consists of cash and stock grants and requires a one year lock-up period, at a ratio of 3 to 1. The total cash basis remuneration for outside directors for 2013 was recorded at ￦639 million.
The compensation of our directors and executive officers who received total annual compensation exceeding ￦500 million in 2013 were as follows:
Composition ofTotal Compensation
Lee, Seok Chae
Former Representative
Director
Pyo, Hyeon Myeong
Kim, II Yeong
Lee, Sang Hun
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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, 2013, 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 non-independent director, Suk-Gwon Chang, Do Kyun Song, Sang Kyun Cha, Dae-Keun Park and Hoon Han. The chairperson is Suk-Gwon Chang. 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 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 to the shareholders at the general meeting of shareholders. 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, Chu-Hwan Yim, Do Kyun Song, Pil Hwa Yoo and Suk-Gwon Chang. The chairperson is Chu-Hwan Yim. The committee’s duties include prior review of the Chief Executive Officer’s management goals, terms and conditions proposed for inclusion in the management 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-independentdirectors. 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 Chang-Gyu Hwang. The committee’s duties include the establishment and management
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of branch offices, the acquisition and disposal of real estate having market value between￦15 billion to ￦30 billion, making investments and providing guarantees between ￦15 billion to￦30 billion, the disposal and sale of stocks of our subsidiaries, which stocks have a market value of between ￦15 billion and ￦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 ￦100 million to ￦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, Keuk Je Sung, Jong-Goo Kim, Chu-Hwan Yim and Dae-Keun Park. The chairperson is Keuk Je Sung. 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 and our articles of incorporation, 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 Jong-Goo Kim, Keuk Je Sung, Sang Kyun Cha and Pil Hwa Yoo. The chairperson is Jong-Goo Kim and the financial expert is Pil Hwa Yoo. 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;
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 32,451 employees as of December 31, 2013, compared to 32,186 employees as of December 31, 2012 and 31,981 employees as of December 31, 2011.
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Voluntary Early Retirement Plans
We regularly sponsor voluntary early retirement plans where we provide additional financial incentives for our employees to retire early, as part of our efforts to improve operational efficiencies. In 2011, 2012 and 2013, 314, 183 and 269 employees, respectively, retired under this program.
In April 2014, we announced the commencement of a special early retirement program for employees who have been employed by us for more than 15 years. This special early retirement program provides our employees with incentives to retire early as part of our efforts to improve operational efficiencies. Our employees will be offered the option of either receiving additional severance payment or employment for two years at certain of our subsidiaries or affiliates as part of the special retirement scheme. On April 23, 2014, our human resources committee determined that 8,304 employees will retire through this special early retirement program. We expect to record approximately￦1.2 trillion as severance indemnity in connection with this special early retirement program, all of which is expected to be recorded during 2014.
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, 2013, about 78.0% of the 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, 2015. 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 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 became 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. Pursuant to such amendments, our employees formed a new labor union called “KT New Union” in August 2011. 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. As a result of the recent consolidation of labor unions, KT Trade Union was selected as the bargaining representative of the labor unions. Its term as the bargaining representative will last for two years from January 1, 2014, and will expire on December 31, 2015.
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 1.05% of our issued shares as of December 31, 2013.
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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 April 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 April 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, and also introduced a defined contribution plan in December 2012, with a total combined unfunded portion of approximately ￦586 billion as of December 31, 2013. 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.
Item 6.E. Share Ownership
Common Stock
The persons who are currently our directors held, as a group, 5,599 common shares as of March 31, 2014, the most recent date for which this information is available. The table below shows the ownership of our common shares by directors:
Shareholders
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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, 2013:
National Pension Corporation
NTTDoCoMo, Inc.
Employee stock ownership association
Directors as a group
Public
KT Corporation (held in the form of treasury stock)
Total issued shares
Item 7.B. Related Party Transactions
We have engaged in various transactions with our subsidiaries and affiliated companies. See Note 34 to the Consolidated Financial Statements. We have not issued any guarantees in favor of our consolidated subsidiaries.
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-95.
Legal Proceedings
In November 2009, 56 of our former customers began a claim against us for an aggregate ￦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 our favor on all claims in May 2011, and the plaintiffs filed an appeal in June 2011. The Seoul High Court overruled the plaintiffs’ appeal in December 2011, and the plaintiffs subsequently filed an appeal to the Supreme Court of Korea. In March 2012, the Supreme Court of Korea denied the plaintiffs’ appeal. In connection with this complaint, the KCC 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 ￦10 billion. We paid such fines to the KCC and implemented its corrective orders.
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As part of our decision to apply for reallocation of the 20 MHz bandwidth in the 1.8 GHz spectrum, we applied to the KCC to terminate our 2G services, and on November 23, 2011, the KCC approved our plan. However, on November 30, 2011, approximately 900 of our 2G service subscribers filed a class-action suit against the KCC for its approval of our plan, claiming that we used improper means to reduce our 2G subscribers to comply with regulatory requirements before terminating the 2G PSC services and that the KCC did not consider such factor in approving our plan. On December 6, 2011, the Seoul Administrative Court issued a preliminary injunction, which temporarily suspended our termination of the 2G services until the case went to trial. We immediately appealed the decision and the Seoul High Court overruled the preliminary injunction on December 26, 2011 and reinstated the KCC’s approval. Accordingly, we terminated our 2G services in the Seoul metropolitan area and began the termination process for the rest of Korea on January 3, 2012. On January 12, 2012, the 2G subscribers filed an appeal of the Seoul High Court’s decision with the Supreme Court of Korea, and on February 1, 2012, the Supreme Court of Korea denied such appeal. On January 17, 2012, trial for the original class-action suit filed by the 2G subscribers began in the Seoul Administrative Court. On May 8, 2012, the Seoul Administrative court ruled in our favor on all claims and the plaintiffs subsequently filed an appeal with the Seoul High Court. On September 15, 2012, the Seoul High Court denied the plaintiffs’ appeal, and the plaintiffs appealed the decision to the Supreme Court of Korea. On February 15, 2013, the Supreme Court of Korea denied the plaintiffs’ appeal. On May 24, 2013, three other appeals by plaintiffs involving the termination of our 2G services were denied by the Supreme Court of Korea. Currently, there are no other pending disputes with respect to these claims.
In July 2012, the Fair Trade Commission issued to us an administrative fine of approximately￦5 billion as well as certain corrective orders, after investigating certain pricing and subsidy practices of mobile service carriers and handset manufacturers. Samsung Electronics Co., Ltd., LG Electronics Co., Ltd., Pantech Curitel Co., Ltd., SK Telecom and LG U+ were also issued administrative fines as a result of the investigation. We filed for a stay of execution of the Fair Trade Commission’s decision, and on January 18, 2013, the Supreme Court of Korea granted a stay of execution with respect to the corrective order, and denied the stay of execution with respect to the administrative fine. We paid the entire fine in September 2012. In September 2012, we filed a lawsuit with the Seoul High Court against the Fair Trade Commission to appeal the administrative fine and the corrective order, and on February 6, 2014, the Seoul High Court ruled against us on our appeal. On February 18, 2014, we filed another appeal with respect to the administrative fine with the Supreme Court of Korea and plan to file for a stay of execution with respect to the corrective order. The outcome of this case will not result in any fine in addition to the fine we already paid in September 2012.
Based on investigations conducted in December 2012 and January 2013, the KCC imposed a combined fine of approximately ￦12 billion on SK Telecom, LG U+ and us in January 2013 (our fine being approximately ￦2.9 billion), for providing subsidies that were higher than those allowed under current regulations to new mobile phone purchasers and subscribers, and also imposed temporary suspensions from recruiting new subscribers ranging from 20 days to 24 days. In March 2013, the KCC again imposed a combined fine of approximately ￦5 billion on SK Telecom, LG U+ and us (our fine being approximately ￦1.6 billion) for continuing to offer subsidies during the suspension period. In July 2013, the KCC imposed a combined fine of approximately ￦67 billion on SK Telecom, LG U+ and us (our fine being approximately ￦20 billion) and also imposed a seven day suspension on us from recruiting new subscribers, also in connection with providing excessive handset subsidies to new subscribers. In December 2013, the KCC again imposed a combined fine of approximately ￦106 billion on SK Telecom, LG U+ and us (our fine being approximately ￦30 billion), which is the largest fine ever imposed by the KCC on local mobile operators for providing excessive subsidies to new subscribers. On March 7, 2014, the MSIP imposed a temporary suspension on us for 45 days (from March 13, 2014 to April 26, 2014), SK Telecom for 45 days (from April 5, 2014 to May 19, 2014), and LG U+ for 45 days (from March 13, 2014 to April 4, 2014 and again from April 27, 2014 to May 18, 2014) from recruiting new subscribers as a result of continuing to offer excessive handset subsidies to
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new subscribers, despite the order from the KCC prohibiting such subsidies. Additionally, the MSIP announced that it plans to bring criminal charges with fines of up to ￦150 million and imprisonment of less than three years against any carrier and responsible personnel that fails to adhere to the suspension or continues to offer illegal subsidies after the suspension is completed.
In July 2012, the police arrested two individuals in connection with the alleged theft of personal account information relating to approximately 8.7 million of our mobile phone subscribers. The individuals in question stole personal information through a series of hackings starting from February 2012 into our New Service and Technology Evolution Program (“N-STEP”), our mobile customer information system. Since the incident, approximately 30,000 mobile phone subscribers filed lawsuits against us in connection with the N-STEP hackings, alleging that we failed to protect their personal information, and are seeking a total of approximately ￦15 billion in damages. The trials are currently ongoing at various district courts.
Furthermore, in March 2014, the police arrested three individuals in connection with their alleged theft of personal information relating to approximately 9.8 million of our subscribers. The individuals in question stole the personal information of our subscribers through a series of hackings into our main homepage starting from February 2014. On March 19, 2014, approximately 100 individuals collectively filed a lawsuit against us in Seoul Central District Court, seeking damages of approximately￦200,000 per person. According to news reports, several other subscribers and third party organizations have filed lawsuits against us in connection with the incident, which we are not yet able to confirm as we have not yet received any official notice from the courts regarding these additional lawsuits. As part of an ongoing public-private task force investigation into the recent hacking incidents, the MSIP announced in March 2014 that it confirmed that hackers accessed our websites more than 12 million times using automated hacking programs in the three months prior to the announcement. On March 17, 2014, the KCC announced and the MSIP further announced that we may be fined up to ￦100 million in light of the most recent hacking incident.
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
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If sufficient profits are available, the Board of Directors may propose annual dividends on the outstanding common stock, which our shareholders must approve by a resolution at the ordinary general meeting of shareholders. This meeting is generally held in March of the following year and if our shareholders at such ordinary general meeting of shareholders approve the annual dividend, we must pay such dividend within one month following the date of such resolution. Typically, we pay such dividends shortly after the meeting. The declaration of annual dividends is subject to the vote of our shareholders, and consequently, there can be no assurance as to the amount of dividends per common stock or that any such dividends will be declared. Interim dividends paid in cash can be declared by a resolution of the board of directors. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association—Dividends” and “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares—Dividends and Distributions.”
The Commercial Code provides that shares of a company of the same class must receive equal treatment. However, major shareholders may consent to receive dividend distributions at a lesser rate than minor shareholders. Previously, the Government consented to receiving a smaller dividend compared to other shareholders. The Government no longer holds any interest in us.
Any cash dividends relating to the shares held in the form of ADSs will be paid to the depositary bank in Won. The deposit agreement provides that, except in certain circumstances, cash dividends received by the depositary bank will be converted by the depositary bank into Dollars and distributed to the holders of the ADRs, less withholding tax, other governmental charges and the depositary bank’s fees and expenses. See “Item 12. Description of Securities Other than Equity Securities—Description of the American Depositary Shares—Dividends and Distributions.”
Item 8.B. Significant Changes
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 April 28, 2014 was ￦32,600 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 since January 2009:
First quarter
Second quarter
Third quarter
Fourth quarter
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Second quarter (through April 28)
ADSs
The outstanding ADSs, each of which represents one-half of one share of our common stock, have been traded on the New York Stock Exchange and the London Stock Exchange since May 25, 1999.
The price of the ADSs on the New York Stock Exchange as of the close of trading on April 25, 2014 was $15.36 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 2009:
2014 (through April 25)
Second quarter (through April 25)
April (through April 25)
Source:New York Stock Exchange.
Item 9.B. Plan of Distribution
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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 four different markets operated by the Korea Exchange: the KRX KOSPI Market, the KRX KOSDAQ Market, the KRX KONEX Market and the KRX Derivatives Market. The Korea Exchange has three trading floors located in Seoul, one for the KRX KOSPI Market, one for the KRX KOSDAQ Market, one for the KRX KONEX 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 & Medium Business Corporation, (iii) the Korea Securities Finance Corporation and (iv) the Korea Financial Investment 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 KRX KOSPI Market publishes the Korea Composite Stock Price Index every ten 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
100
2001
2002
2003
2004
2005
2006
2007
2008
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￦5,000
￦5,000 to less than ￦10,000
￦10,000 to less than ￦50,000
￦50,000 to less than ￦100,000
￦100,000 to less than ￦500,000
￦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
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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:
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.
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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.
Foreign investors are 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.
Foreign investors are 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. Foreigners are 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.
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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￦50 million in case of the securities company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. Pursuant to the Financial Investment Services and Capital Markets Act, securities companies are required to deposit the cash received from its customers to the extent the amount not covered by the insurance with the Korea Securities Finance Corporation, a special entity established pursuant to the Securities and Exchange Act.
Set-off or attachment of cash deposits by securities companies is prohibited. The premiums related to this insurance are paid by securities companies.
Item 9.D. Selling Shareholders
Item 9.E. Dilution
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 ￦5,000 per share (“Common Shares”) and shares of non-voting preferred stock, par value ￦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, 2013, 261,111,808 Common Shares were issued, of which 17,308,160 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.
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We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. No dividends are distributed with respect to shares held by us or our treasury stock fund. The Common Shares represented by the ADSs have the same dividend rights as other outstanding Common Shares.
Holders of Non-Voting Shares are entitled to receive dividends in priority to the holders of Common Shares in an amount of not less than 9% of the par value of the Non-Voting Shares as determined by the board of directors at the time of their issuance, provided that if the dividends on the Common Shares exceed those on the Non-Voting Shares, the Non-Voting Shares will also participate in the distribution of such excess dividend amount in the same proportion as the Common Shares. If the amount available for dividends is less than the aggregate amount of such minimum dividend, the holders of Non-Voting Shares will be entitled to receive such accumulated unpaid dividend in priority to the holders of Common Shares from the dividends payable in respect of the next fiscal year.
We declare dividends annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record as of the end of the preceding fiscal year. We may distribute the annual dividend in cash or in Shares. However, a dividend of Shares must be distributed at par value. If the market price of the Shares is less than their par value, dividends in Shares may not exceed one-half of the annual dividend. We may pay interim dividends in cash once a year to shareholders or registered pledgees who are registered in the registry of shareholders as of June 30 of each fiscal year by a resolution of the board of directors. We have no obligation to pay any annual dividend unclaimed for five years from the payment date.
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 earned surplus reserve (the “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 earned surplus reserve an amount equal to at least 10% of the cash portion of the dividend or unless we have accumulated an earned surplus reserve of not less than one-half of our stated capital. We may not use the Legal Reserve to pay cash dividends but may transfer amounts from the Legal Reserve to capital stock or use the 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 the 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
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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 Articles 4 and 119 of 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 pursuant to Article 165-6 of the Financial Investment Services and Capital Markets Act, the amount of which is no more than 10% of the issued Shares;
issued in order to satisfy specific needs such as strategic alliance, inducement of foreign funds or new technology, improvement of financial structure or other capital raising requirement; or
issued to domestic or foreign financial institutions when necessary for raising funds in emergency cases.
In addition, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of ￦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, 2013, 1.05% 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
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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, both of conditions (i) and (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. 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 MSIP may require corrective measures to comply with the ownership restrictions.
General Meeting of Shareholders
We hold the annual general meeting of shareholders within three months after the end of each fiscal year. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:
as necessary;
at the request of shareholders of an aggregate of 3.0% or more of our issued Common Shares;
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.
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 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%
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owned by us either directly or indirectly, may not be exercised. The Commercial Code permits cumulative voting, under which voting method each shareholder has multiple voting rights corresponding to the number of directors to be appointed in the voting and may exercise all voting rights cumulatively to elect one director. Our articles of incorporation permit cumulative voting at our shareholders’ meeting. Under the Commercial Code of Korea, any shareholder holding shares equivalent to not less than 1/100 of the total number of shares issued may apply to us for selecting and appointing such directors by cumulative voting.
Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting shares present or represented at the meeting, where the affirmative votes also represent at least one-fourth of our total voting shares then outstanding. However, under the Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at least two-thirds of the voting shares present or represented at a meeting, where the affirmative votes also represent at least one-third of our total voting shares then outstanding:
amending our articles of incorporation;
removing a director;
reduction of our capital stock;
effecting any dissolution, merger or consolidation of us;
transferring the whole or any significant part of our business;
effecting our acquisition of all of the business of any other company or our acquisition of a part of the business of any other company which will significantly affect our business; or
issuing any new Shares at a price lower than their par value.
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.
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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Appraisal 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 appraisal 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 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 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, Gukjegeumyung-ro, Yeongdeungpo-gu, Seoul, Korea.
Acquisition of Shares by Us
Under the Commercial Code, we may acquire our own Shares by (i) purchasing on the KRX KOSPI Market, or (ii) purchasing from shareholders on a pro rata basis in accordance with the number of shares held by each shareholder. 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. Moreover, we must acquire our own Shares from dissenting shareholders who exercise their appraisal rights.
Under the Financial Investment Services and Capital Markets Act, we may acquire Shares only by (i) purchasing on the KRX KOSPI Market, (ii) purchasing from shareholders on a pro rata basis in accordance with the number of shares held by each shareholder, 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.
In general, corporate entities in which we own a 50.0% or more equity interest may not acquire our Shares.
As of December 31, 2013, there were 17,221,575 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
We have not entered into any material contracts since January 1, 2010, other than in the ordinary course of our business. For information regarding our agreements and transactions with
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certain related parties, see “Item 7.B. Related Party Transactions” and Note 34 to the Consolidated Financial Statements. For a description of certain agreements entered into during the past two years related to our capital commitments and obligations, see “Item 5.B. Liquidity and Capital Resources.”
Item 10.D. Exchange Controls
General
The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree (collectively the “Foreign Exchange Transaction Laws”) regulate investment in Korean securities by non-residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws, non-residents may invest in Korean securities only in compliance with the provisions of, and to the extent specifically allowed by, these laws or otherwise permitted by the Ministry of Strategy and Finance. The Financial Services Commission has also adopted, pursuant to its authority under the Korean Financial Investment Services and Capital Markets Act, regulations that control investment by foreigners in Korean securities and regulate the issuance of securities outside Korea by Korean companies.
Under the Foreign Exchange Transaction Laws, if the Government deems that certain emergency circumstances, including, but not limited to, the outbreak of natural calamities, wars or grave and sudden changes in domestic or foreign economies, are likely to occur, the Ministry of Strategy and Finance may temporarily suspend the transactions where Foreign Exchange Transaction Laws are applicable, or impose an obligation to deposit or sell capital to certain Korean governmental agencies or financial institutions. In addition, if the Government deems that it is confronted or is likely to be confronted with serious difficulty in movement of capital between Korea and abroad which will bring serious obstacles in carrying out its currency policies, exchange rate policies and other macroeconomic policies, the Ministry of Strategy and Finance may take measures to require any person who performs transactions to deposit such capital to certain Korean governmental agencies or financial institutions.
Government Review of Issuance of ADSs
In order for us to issue shares represented by ADSs, we are required to file a prior report of the issuance with the Ministry of Strategy and Finance if our securities and borrowings denominated in foreign currencies issued during the one-year period preceding such filing date exceed US$30 million in aggregate. No further Korean governmental approval is necessary for the initial offering and issuance of the ADSs.
Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with the consent of us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We can give no assurance that we would grant our consent, if our consent is required. Therefore, a holder of ADRs who surrenders ADRs and withdraws shares may not be permitted subsequently to deposit those shares and obtain ADRs.
Reporting Requirements for Holders of Substantial Interests
Any person whose direct or beneficial ownership of shares, whether in the form of shares or ADSs, certificates representing the rights to subscribe for Shares and equity-related debt securities
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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 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;
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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 foreign direct investment as defined in the Foreign Investment Promotion Act;
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;
acquisition and disposal of shares through alternative trading systems (ATS);
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 a foreign direct investment as defined in the Foreign Investment Promotion Act. Upon registration, the Financial Supervisory Service will issue to the foreign investor an investment registration certificate that must be presented each time the foreign investor opens a brokerage account with a financial investment business entity. Foreigners eligible to obtain an investment registration certificate include foreign nationals who are individuals residing abroad for more than six months, foreign governments, foreign municipal authorities, foreign public institutions, corporations incorporated under foreign laws, international organizations, funds and associations as defined under the Financial Investment Services and Capital Markets Act. All Korean offices of a foreign corporation as a group are treated as a separate entity from the offices of the corporation outside Korea. However, a foreign corporation or depositary bank issuing depositary receipts may obtain one or more investment registration certificates in its name in certain circumstances as described in the relevant regulations.
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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 may 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.
Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only the Korea Securities Depository, foreign exchange banks including domestic branches of foreign banks, investment traders, investment brokers, collective investment business entities and internationally recognized custodians satisfying the relevant requirements under the Financial Investment Services and Capital Markets Act are eligible to act as a custodian of shares for a non-resident or foreign investor. A foreign investor must ensure that his custodian deposits its shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor of the Financial Supervisory Service in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.
Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40.0% ceiling on the acquisition of shares by foreigners in the aggregate and a ceiling on the acquisition of shares by a single foreign investor pursuant to the articles of incorporation of such corporation. Currently, Korea Electric Power Corporation is the only designated public corporation which has set such a ceiling. Furthermore, an investment by a foreign investor of not less than 10.0% of the issued shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Act, which is, in general, subject to the report to, and acceptance, by the Ministry of Knowledge Economy. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign shareholding restrictions in the event that the restrictions are prescribed in each specific law which regulates the business of the Korean company. A foreigner who has acquired shares of our common stock in excess of this ceiling may not exercise his voting rights with respect to the shares of our common stock exceeding the limit.
Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the
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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.
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.
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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 Korean taxation 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 are subject to Korean taxation on capital gains from a sale of ADSs, shares of common stock that you acquire as a result of a withdrawal, and 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.
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.
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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 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 Seoul Administrative Court’s holding was upheld by the Seoul High Court and was further upheld by the Supreme Court. Subsequent to this series of rulings, however, the Securities Transaction Tax Law was amended to expressly provide that depositary receipts constituted a form of share certificates subject to the securities transaction tax. However, the sale price of ADSs from a transfer of depositary receipts listed on the New York Stock Exchange, the Nasdaq National Market or other qualified foreign exchanges are exempt from the securities transaction tax.
United States Federal Income Taxation
This summary describes the material U.S. federal income tax consequences to you, if you are a U.S. holder (as defined below), of owning our shares of common stock or ADSs. This summary applies to you only if you hold shares of common stock or ADSs as capital assets for tax purposes. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as:
a dealer in securities or currencies;
a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;
a bank;
an insurance company;
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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.
Further, this summary does not address the alternative minimum tax, the Medicare tax on net investment income or other aspects of U.S. federal income or state and local taxation that may be relevant to a holder in light of such holder’s particular circumstances.
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;
an entity treated as a U.S. domestic corporation; or
otherwise subject to U.S. federal income tax on a net income basis with respect to income from the shares of common stock or ADSs.
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds shares of common stock or ADSs, the U.S. federal income tax treatment of a partner will depend upon the status of the partnership and the activities of the partner. A partner of a partnership holding shares of common stock or ADSs should consult its own tax adviser regarding the U.S. federal income tax consequences to the partner of the acquisition, ownership and disposition by the partnership of 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
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dividend, regardless of whether the payment is in fact converted into U.S. dollars. If such a dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. holders should consult their own tax advisers regarding the treatment of any foreign currency gain or loss on any Won received by U.S. holders that are converted into U.S. dollars on a date subsequent to receipt.
Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual with respect to the ADSs and common stock will be subject to taxation at the reduced rates applicable to capital gains 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.
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The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions involve the application of complex rules that depend on a U.S. holder’s particular circumstances. You should consult your own tax advisers regarding the creditability or deductibility of such taxes.
U.S. Information Reporting and Backup Withholding Rules
Payments in respect of the shares of common stock or ADSs that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of its non-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.
Item 10.F. Dividends and Paying Agents
See “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends” for information concerning our dividend policies and our payment of dividends. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association—Dividends” for a discussion of 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 securities. Our long-term financial policies are annually reported to our Board of Directors, and our Finance Office conducts financial risk management and assessment. Upon identification and evaluation of our risk exposures,
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we, having considered various circumstances, enter into derivative financial instruments to try to manage some of such risks. 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 largely for hedging purposes.
For our trading financial instruments, we recognized a valuation gain of ￦13 billion and a valuation loss of ￦0 billion in 2011, a valuation gain of ￦0 billion and a valuation loss of￦0 billion in 2012 and a valuation gain of ￦4 billion and a valuation loss of ￦10 billion in 2013. For our hedging derivative contracts, we recognized a valuation gain of ￦53 billion, a valuation loss of ￦9 billion and accumulated other comprehensive income of ￦83 billion in 2011, a valuation gain of ￦0 billion, a valuation loss of ￦241 billion and accumulated other comprehensive expense of ￦171 billion in 2012 and a valuation gain of ￦0 billion, a valuation loss of ￦97 billion and accumulated other comprehensive expense of ￦95 billion in 2013. For further details regarding the assets, liabilities, gains and losses recorded relating to our derivative contracts outstanding as of December 31, 2011, 2012 and 2013, see Note 8 to the Consolidated Financial Statements.
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. We have entered into several currency swap contracts, combined interest currency swap contracts and currency forward contracts to hedge our foreign currency risks.
The following table shows our assets and liabilities denominated in foreign currency as of December 31, 2011, 2012 and 2013:
(in thousands of foreign currencies)
U.S. Dollar
Special Drawing Right
Japanese Yen
British Pound
Euro
Algerian Dinar
Chinese Yuan
Uzbekistani Som
Rwandan Franc
Indonesian Rupiah
As of December 31, 2011, 2012 and 2013, a 10% increase in the exchange rate between the Won and all foreign currencies, with all other variables held constant, would have decreased our income before income tax by ￦57 billion, ￦65 billion and ￦46 billion, respectively, and total equity by ￦50 billion, ￦52 billion and ￦48 billion, respectively, with a 10% decrease in the exchange rate having the opposite effect. The foregoing sensitivity analysis assumes that all variables other than foreign exchange rates are held constant, and as such, does not reflect any correlation between foreign exchange rates and other variables, nor our decision to decrease the risk. See Note 35 to the Consolidated Financial Statements.
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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 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 to hedge our interest rate risk.
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, 2013 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
As of December 31, 2011 and 2012 a 100 basis point increase in the market interest rates, with all other variables held constant, would have decreased our profit before income tax by ￦2 billion and ￦562 million, respectively and increased our profit before income tax by ￦10 billion, as of December 31, 2013. As of December 31, 2011 and 2012, a 100 basis point increase in the market interest rates, with all other variables held constant would have decreased total equity by￦581 million and ￦368 million, respectively and increased our total equity by ￦13 billion, as of December 31, 2013.
As of December 31, 2011, 2012 and 2013, a 100 basis point decrease in the market interest rates, with all other variables held constant, would have decreased our profit before income tax by ￦13 billion, ￦5 billion and ￦17 billion, respectively, and total equity by ￦14 billion, ￦5 billion and ￦19 billion, respectively. The foregoing sensitivity analysis assumes that all variables other than market interest rates are held constant, and as such, does not reflect any correlation between market interest rates and other variables, nor our decision to decrease the risk, but reflects the effects of derivative contracts in place at the time of conducting the analysis.
Equity Price Risk
We are also subject to market risk exposure arising from changes in the equity securities market, which affect the fair value of our equity portfolio. As of December 31, 2011, 2012 and 2013, a
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10% increase in the equity indices where our marketable equity securities are listed, with all other variables held constant, would have increased our total equity by ￦10 billion, ￦5 billion and ￦6 billion, respectively, with a 10% decrease in the equity index having the opposite effect. The foregoing sensitivity analysis assumes that all variables other than changes in the equity index are held constant, and that our marketable equity instruments had moved according to the historical correlation to the index, and as such, does not reflect any correlation between the equity index and other variables.
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
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.
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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.
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 2013, we received the following payments, after deduction of applicable U.S. taxes, 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 (reimbursement received in April 2014 in respect of 2013)
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
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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, 2013. 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 December 31, 2013. 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. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed by, and under the supervision of, our principal executive, principal operating and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Originally issued in 1992, the “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “1992 Framework”) was amended in May 2013 (as amended, the “2013 Framework”), with application of the 1992 Framework available until December 15, 2014, after which only the 2013 Framework will be available. Our management has completed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2013 based on criteria in the 1992 Framework. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2013. We expect to conduct our assessment of the effectiveness of our internal control over financial reporting based on the 2013 Framework for the year ended December 31, 2014.
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Samil PricewaterhouseCoopers, an independent registered public accounting firm, which also audited our consolidated financial statements as of, and for the year ended December 31, 2013, 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
We completed the implementation of the New ERP System in July 2012, and changed, established or reevaluated any related parts in our internal control over financial reporting accordingly. We also conducted evaluations prior to and after the implementation of the New ERP System, and confirmed that our internal control over financial reporting remains effective.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
In March 2014, our shareholders elected Keuk Je Sung, Jong-Goo Kim and Pil Hwa Yoo as members of the Audit Committee at our annual shareholders’ meeting. Our Audit Committee is comprised of Sang Kyun Cha, Keuk Je Sung, Jong-Goo Kim and Pil Hwa Yoo. The board of directors has determined that Pil Hwa Yoo is the audit committee financial expert.
Item 16B. Code of Ethics
We have adopted a code of ethics, as defined in Item 16B. of Form 20-F under the Securities Exchange Act of 1934, as amended. Our code of ethics applies to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, as well as to our directors, other officers and employees. Our code of ethics is available on our web site at www.kt.com. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website.
Item 16C. Principal Accountant Fees and Services
Audit and Non-Audit Fees
The following table sets forth the fees billed to us by Samil PricewaterhouseCoopers, our independent registered public accounting firm, during the fiscal year ended December 31, 2012 and 2013:
Audit fees (1)
Audit-related fees
Tax fees (2)
Other fees
Total fees
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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 registered public accounting firm 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 registered public accounting firm 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
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, 2013:
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
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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
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.
Nominating/Corporate Governance Committee
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.
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Corporate Governance Guidelines
Code of Business Conduct and Ethics
Item 16H. Mine Safety Disclosure
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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, 2012 and 2013
Consolidated Statements of Operations for the Years Ended December 31, 2011, 2012 and 2013
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2012 and 2013
Consolidated Statements of Changes in Shareholder’s Equity for the Years Ended December 31, 2011, 2012 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2012 and 2013
Notes to Consolidated Financial Statements
Item 19. Exhibits
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* Filed previously.
131
INDEX TO FINANCIAL STATEMENTS
Consolidated Statements of Operations for the years ended December 31, 2011, 2012 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, 2012 and 2013
Consolidated Statements of Changes in Shareholder’s Equity for the years ended December 31, 2011, 2012 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2012 and 2013
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To the Board of Directors and Stockholders of
In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of operations, of comprehensive income, of 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, 2013 and 2012 , and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework 1992 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 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 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 audits 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 opinions.
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 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
April 28, 2014
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KT Corporation and Subsidiaries
Consolidated Statements of Financial Position
December 31, 2012 and 2013
(in millions of Korean won)
Assets
Current assets
Non-current assets
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Consolidated Statements of Financial Position (continued)
Liabilities and Equity
Current liabilities
Deferred revenue
Non-current liabilities
Defined benefit liabilities, net
Accumulated other comprehensive income
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Operations
Years ended December 31, 2011, 2012 and 2013
(in millions of Korean won, exceptper share amounts)
Continuing Operations
Income(loss) from jointly controlled entities and associates
Profit(loss) from continuing operations before income tax
Profit(loss) for the year from the continuing operations
Discontinued Operations
Profit(loss) from discontinued operations
Profit(loss) for the year
Profit(loss) for the year attributable to:
Equity holders of the Parent Company
Profit(loss) from continuing operations
Loss from discontinued operations
Earnings(loss) per share attributable to the equity holders of the Parent Company during the year (in won):
Basic earnings(loss) per share
Diluted earnings(loss) per share
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Consolidated Statements of Comprehensive Income
Other comprehensive income
Items not reclassifiable subsequently to profit or loss:
Remeasurements of the net defined benefit liability
Shares of remeasurement loss from jointly controlled entities and associates
Items reclassifiable subsequently to profit or loss:
Changes in value of available-for-sale financial assets
Other comprehensive income from available-for sale financial assets reclassified to income
Net gains(losses) on cashflow hedges
Other comprehensive income from cashflow hedges reclassified to income
Shares of other comprehensive income from jointly controlled entities and associates
Currency translation differences
Other comprehensive income after income tax for the year
Total comprehensive income for the year
Comprehensive income for the year attributable to:
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Consolidated Statements of Changes in Shareholder’s Equity
Balance at January 1, 2011
Effect of the retrospective application of IFRS 10
Adjusted balances
Comprehensive income
Profit for the year
Valuation gains(losses) on cashflow hedge
Shares of other comprehensive income of jointly controlled entities and associates
Shares of gain on remeasurements of jointly controlled entities and associates
Transactions with equity holders
Appropriations of loss on disposal of treasury stock
Changes in consolidation scope
Change in ownership interest in subsidiaries
Balance at December 31, 2011
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Consolidated Statements of Changes in Shareholder’s Equity (Continued)
Balance at January 1, 2012
Disposal of treasury stock
Balance at December 31, 2012
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Balance at January 1, 2013
Balance at December 31, 2013
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(in thousands of U.S dollars)(Unaudited), (Note 2)
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Consolidated Statements of Cash Flows
(Unaudited)
(Note 2)
Cash flows from operating activities
Cash generated from operations
Interest paid
Interest received
Dividends received
Income tax paid
Cash flows from investing activities
Collection of loans
Origination of loans
Disposal of available-for-sale financial assets
Acquisition of available-for-sale financial assets
Disposal of investments in jointly controlled entities and associates
Acquisition of investments in jointly controlled entities and associates
Disposal of current and non-current financial instruments
Acquisition of current and non-current financial instruments
Disposal of property, equipment and investment property
Acquisition of property and equipment and investment property
Disposal of intangible assets
Acquisition of intangible assets
Increase in cash due to exclusion from consolidation scope
Cash inflow (outflow) from changes in scope of consolidation
Cash flows from financing activities
Proceeds from borrowings and bonds
Repayments of borrowings and bonds
Settlement of derivative assets and liabilities, net
Cash inflow from consolidated capital transaction
Cash outflow from consolidated capital transaction
Dividends paid to shareholders
Decrease in finance leases liabilities
Effect of exchange rate change on cash and cash equivalents
Net increase in cash and cash equivalents
Beginning of the year
End of the year
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December 31, 2011, 2012 and 2013
1. General Information
The consolidated financial statements include the accounts of KT Corporation, which is the controlling company as defined under IFRS 10,Consolidated Financial Statements, and its 68 controlled subsidiaries as described in Note 1.2 (collectively referred to as the “Group”).
The Controlling Company
KT Corporation (the “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. The headquarters are located in Seongnam City, Gyeonggi Province, Republic of Korea, and the address of its registered head office is 90, Buljeong-ro, Bundang-gu, Seongnam City, Gyeonggi Province.
On October 1, 1997, upon the announcement of the Government-Investment Enterprises Management Basic Act and the Privatization Law, the Company became a government-funded institution under the Commercial Code of Korea.
On December 23, 1998, the Company’s shares were listed on the Korea Exchange.
On May 29, 1999, the 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 additional ADS representing 55,502,161 government-owned shares were issued at the New York Stock Exchange and London Stock Exchange.
In 2002, the Company acquired the entire government-owned shares in accordance with the Korean government’s privatization plan. As of the end of the reporting period, the Korean government does not own any shares in the Company.
Consolidated Subsidiaries
The consolidated subsidiaries as of December 31, 2013, are as follows:
Type of Business
Subsidiary
KT Powertel Co., Ltd. 2
KT ENS Corporation (formerly KT Networks Corporation)
KT Linkus Co., Ltd.
KT Submarine Co., Ltd. 2
KT Telecop Co., Ltd.
KT Hitel Co., Ltd.
KT Commerce Inc.
KT Capital Co., Ltd.
KT New Business Fund No.1
Gyeonggi-KT Green Growth Fund
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KTC Media Contents Fund 2
KT Strategic Investment Fund No.1
KT Strategic Investment Fund No.2
BC Card Co., Ltd.
VP Inc.
H&C Network
BC Card China Co., Ltd.
INITECH Co., Ltd.
InitechSmartro Holdings Co., Ltd.
Smartro Co., Ltd.
Sidus FNH Corporation
Sofnics, Inc.
KTDS Co., Ltd.
KT M Hows Co., Ltd.
KT M&S Co., Ltd.
KT Music Corporation
KT Skylife Co., Ltd.
Korea HD Broadcasting Corp.
KT Estate Inc.
KT AMC Co., Ltd.
NEXR Co., Ltd.
KTSB Data service Co., Ltd.
KT Cloudware Corporation
CENTIOS Co., Ltd.
Centios Philippines, Inc.
Enswers Inc. 3
Soompi USA, LLC
KT OIC Co., Ltd.
Ustream Inc.
Incheonucity Co., Ltd.
KT Innoedu Co., Ltd. 3
KT Rental
KT Auto Lease Corporation
Kumho Rent a car (Vietnam) Co. Ltd.
KT Rental Auto Care Corporation
KT Sat Co., Ltd.
KT Media Hub Co. Ltd.
Best Partners Co., Ltd.
Nasmedia, Inc. 3
T-ON Telecom
KT Sports
KT Music Contents Fund No.1
Consus Changwon Private Estate Investment Trust
KT-Michigan Global Contents Fund
Autopion Co. Ltd.
GreenPoint Co., Ltd.
K-REALTY CR-REIT IV
K-REALTY REIT V
Olleh Rwanda Networks Ltd.
KT Belgium
KT ORS Belgium
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Korea Telecom Japan Co., Ltd.
Korea Telecom China Co., Ltd.
KT Dutch B.V
Super iMax, LLC
East Telecom, LLC
Korea Telecom America, Inc.
PT. KT Indonesia
Changes in scope of consolidation in 2013 are as follows:
Changes
Subsidiaries
Reason
Included
Excluded
A summary of financial data of the major consolidated subsidiaries as of and for the years ended December 31, 2011, 2012 and 2013, are as follows:
KT Powertel Co., Ltd.
KT Submarine Co., Ltd
KT Hitel Co., Ltd. 1
KT Tech, Inc.
KT Capital Co., Ltd. 1
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H&C Network 1,2
Nasmedia, Inc.
KT Edui Co., Ltd.
KT Innotz Inc.
KT Skylife Co., Ltd. 1,2
KT Estate Inc. 1
NEXR Co., Ltd. 2
KTSB Dataservice Co., Ltd. 2
KT Cloudware Corporation 2
CENTIOS Co., Ltd. 2
Enswers Inc. 1,2
KT OIC Co., Ltd. 2
KT Dutch B.V. (formerly KTSC Investment Management B.V) 1
KT Submarine Co., Ltd.
KT Hitel Co.,Ltd. 1
H&C Network 1
KT Music Corporation 1
KT Skylife Co., Ltd. 1
KTSB Dataservice
CENTIOS Co., Ltd 1
Enswers Inc. 1
KT Innoedu Co., Ltd. 2
KT Rental 1,2
KT Media Hub Co., Ltd. 2
KT Sat Co., Ltd. 2
Best Partners Co., Ltd. 2
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Centios Co., Ltd 1
KT Innoedu Co., Ltd.
KT Rental 1
KT Media Hub Co., Ltd.
T-ON Telecom 2
KT Sports 2
KT Music Contents Fund No.1 2
KT-Michigan Global Contents Fund 2
Autopion Co., Ltd. 2
Olleh Rwanda Networks Ltd. 2
KT Belguium 2
KT ORS Belgium 2
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Group in the preparation of its financial statements. These policies have been consistently applied to all the periods presented, unless otherwise stated.
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2.1 Basis of Preparation
The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards(“IFRS”) as issued by the International Accounting Standards Board (“IASB”)
The preparation of the consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3.
2.2 Changes in Accounting Policy and Disclosures
(1) New standards and amendments adopted by the Group
The Group adopted the following amended and enacted standards for the annual period beginning on January 1, 2013:
—Amendment to IAS 1, Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income
The amendment requires entities to group items presented in other comprehensive income based on whether they are potentially reclassifiable to profit or loss subsequently. The Group applied the amendment retroactively and there is no impact of the application of this amendment on its total comprehensive income or loss.
—Amendment to IAS 19, Employee Benefits
The amendment requires entities to immediately recognize all actuarial gains and losses incurred in other comprehensive income or loss. All past service costs incurred are immediately recognized in accordance with the change of the plan, and the previous separate calculation of the interest cost and the expected returns on plan assets has been revised to calculate net interest expense (income) by applying the discount rate used in the defined benefit obligation measurement in the net defined benefit liabilities (assets). The Group applies the amendment retroactively and the comparative consolidated statements of operations and consolidated statements of comprehensive income are restated by reflecting adjustments resulting from the retrospective application.
—IFRS 10, Consolidated Financial Statements
IFRS 10, Consolidated Financial Statements, introduces a single control concept and provides additional guidance for evaluating control.
As a result of the adoption of IFRS 10, the Group consolidated KT Submarine Co., Ltd. by virtue of de-facto control because the Group is able to exercise the majority voting rights in its decision-making process considering historical voting pattern at the shareholders’ meeting, although the Group has 36.9% of ownership (39.34% including treasury stocks). KT Submarine Co., Ltd. was classified as an associate in accordance with the previous standard and accounted for using the equity method. Accordingly, the comparative consolidated financial statements were retrospectively adjusted and restated as if the Group obtained control over the entity from the initial acquisition of its interest.
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Results of retrospective application of amendment to IAS 19 and IFRS 10 are as follows.
(in millions of Korean won, except per share amounts)
Basic earnings per share (in won)
—IFRS 11, Joint Arrangements
IFRS 11, Joint Arrangements, reflects the substance of joint arrangements and focuses on the rights and obligations of the parties to the joint arrangements rather than on the legal forms of the arrangements. Joint arrangements are classified into joint operations or joint ventures. The adoption of this standard does not have an impact on the consolidated financial statements.
—IFRS 12, Disclosures of Interests in Other Entities
IFRS 12, Disclosure of Interests in Other Entities, provides disclosure requirements for all types of equity investments in other entities including subsidiaries, associates, joint ventures and unconsolidated structured entities (Notes 14, 38 and 39).
—IFRS 13, Fair Value Measurement
IFRS 13, Fair Value Measurement, provides a precise definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRS. The Group has applied this standard prospectively according to the transitional provisions of IFRS 13 and there is no material impact of the application of this standard on the consolidated financial statements.
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(2) New standards, amendments and interpretations not yet adopted
New standards, amendments and interpretations effective for annual periods beginning after January 1, 2013, and not early adopted by the Group are as follows:
—Amendment to IFRS 10, Consolidated Financial Statements
Amendment to IFRS 10, Consolidated Financial Statements, provides that, if a parent company qualifies as an investment entity, it is required to measure its investments in subsidiaries at fair value through profit and loss instead of consolidating these subsidiaries in its consolidated financial statements. The amendment does not apply for a parent of an investment entity if the parent itself is not an investment entity. This amendment is effective for annual periods beginning on or after January 1, 2014, with early adoption permitted. The Group expects that the application of this amendment would not have a material impact on its consolidated financial statements.
—Amendment to IAS 32, Financial Instruments: Presentation
Amendment to IAS 32, Financial Instruments: Presentation, provides that the right to offset must not be contingent on a future event and must be legally enforceable in all of circumstances; and if an entity can settle amounts in a manner such that outcome is, in effect, equivalent to net settlement, the entity will meet the net settlement criterion. This amendment is effective for annual periods beginning on or after January 1, 2014, and the Group is assessing the impact of application of this amendment on its consolidated financial statements.
—Amendment to IAS 39, Financial Instruments: Recognition and Measurement
Amendment to IAS 39, Financial Instruments: Recognition and Measurement, allows the continuation of hedge accounting for a derivative that has been designated as a hedging instrument in a circumstance in which that derivative is novated to a central counterparty (CCP) as a consequence of laws or regulations. This amendment is effective for annual periods beginning on or after January 1, 2014, with early adoption permitted. The Group is assessing the impact of application of this amendment on its consolidated financial statements.
—Enactment of IFRIC interpretations 2121, Levies
IFRIC interpretations 2121, Levies, are applied to a liability to pay a levy imposed by a government in accordance with the legislation. The interpretation requires that the liability to pay a levy, which is not income tax, is recognized when the activity that triggers the payment of the levy occurs, as identified by the legislation (the obligating event). This interpretation is effective for annual periods beginning on or after January 1, 2014, with early adoption permitted. The Group expects that the application of this interpretation would not have a material impact on its consolidated financial statements.
2.3 Consolidation
The Group has prepared the consolidated financial statements in accordance with IFRS 10, Consolidated Financial Statements.
(1) Subsidiaries
Subsidiaries are all entities (including special purpose entities) over which the Group has control. The Group controls the corresponding investee when the Group is exposed to, or has rights to,
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variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Consolidation of a subsidiary begins from the date the Group obtains control of the subsidiary and is deconsolidated when the subsidiary ceases when the Group loses control of the subsidiary.
The Group applies the acquisition method to account for business combinations. The consideration transferred is measured at the fair values of the assets transferred, and identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are initially measured at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognized amounts of acquiree’s identifiable net assets. All other non-controlling interests are measured at their acquisition-date fair values, unless another measurement basis is required by IFRSs. Acquisition-related costs are expensed as incurred.
Goodwill is recognized as the excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree, and the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree over the identifiable net assets acquired. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss.
Balances of receivables and payables, income and expenses and unrealized gains and losses on transactions between the Company’s subsidiaries are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.
(2) Changes in ownership interests in subsidiaries without change of control
In transactions with non-controlling interests, which do not result in loss of control, the Group recognizes directly in equity any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received, and attribute it to the owners of the parent.
(3) Disposal of subsidiaries
If the Group loses control of a subsidiary, any investment continuously retained in the subsidiary is re-measured to its fair value at the date when control is lost and any resulting differences are recognized in profit or loss.
(4) Associates
Associates are all entities over which the Group has significant influence which is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Investments in associates are initially recognized at acquisition cost using the equity method. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. If there is any objective evidence that the investment in the associate is impaired, the Group recognizes the difference between the recoverable amount of the associate and its book value as impairment loss.
(5) Jointly controlled entities
A joint arrangement of which two or more parties have joint control is classified as either a joint operation or a joint venture. A joint operator has rights to the assets, and obligations for the liabilities,
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relating to the joint operation and recognizes the assets, liabilities, revenues and expenses relating to its interest in a joint operation. A joint venture has rights to the net assets relating to the joint venture and accounts for that investment using the equity method.
2.4 Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (Note 33). The chief operating decision-maker is responsible for making strategic decisions on resource allocation and performance assessment of the operating segments.
2.5 Foreign Currency Translation
(1) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Korean won, which is the Company’s functional and presentation currency.
(2) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation when items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss.
Exchange differences arising on non-monetary financial assets and liabilities such as equity instruments at fair value through profit or loss and available-for-sale equity instruments are recognized in profit or loss and included in other comprehensive income, respectively, as part of the fair value gain or loss.
(3) Translation into presentation currency
Different functional currencies are translated into presentation currency using the following procedures.
Assets and liabilities at the closing rate at the date of that statement of financial position
Income and expenses at average rate for the period
Equity at historical rate
All resulting exchange differences are recognised in other comprehensive income
2.6 Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of less than three months.
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2.7 Financial Assets
(1) Classification and measurement
The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, available-for-sale financial assets, loans and receivables, and held-to-maturity financial assets. Regular purchases and sales of financial assets are recognized on trade date.
At initial recognition, financial assets are measured at fair value plus, in the case of financial assets not carried at fair value through profit or loss, transaction costs. Transaction costs of financial assets carried at fair value through profit or loss are expensed in the statement of income. After the initial recognition, available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables, and held-to-maturity investments are subsequently carried at amortized cost using the effective interest rate method.
Changes in fair value of financial assets at fair value through profit or loss are recognized in profit or loss and changes in fair value of available-for-sale financial assets are recognized in other comprehensive income. When the available-for-sale financial assets are sold or impaired, the fair value adjustments recorded in equity are reclassified into profit or loss.
(2) Impairment
The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or a group of financial assets that can be reliably estimated.
Impairment of loans and receivables is presented as a deduction in an allowance account. Impairment of other financial assets is directly deducted from their carrying amount. The Group writes off financial assets when the assets are determined to be no longer recoverable.
The objective evidence that a financial asset is impaired includes significant financial difficulty of the issuer or obligor; a delinquency in interest or principal payments over three months; or the disappearance of an active market for that financial asset because of financial difficulties. A decline in the fair value of an available-for-sale equity instrument by more than 30% from its cost or a prolonged decline below its cost for more than six months is also objective evidence of impairment.
(3) Derecognition
If the Group transfers a financial asset and the transfer does not result in derecognition because the Company has retained substantially of all risks and rewards of ownership of the transferred asset due to a recourse in the event the debtor defaults, the Group continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received. The related financial liability is classified as ‘borrowings’ in the statement of financial position (Note 16).
2.8 Derivative Instruments
Derivatives are initially recognized at fair value on the date when a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of the
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derivatives that are not qualified for hedge accounting are recognized in the statement of income within ‘finance income (expenses)’ according to the nature of transactions.
The Group applies cash flow hedge accounting for hedging price changes risks on forecast purchases of inventories. The effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income and the ineffective portion is recognized in ‘operating income (expenses)’. Amounts of changes in fair value of effective hedging instruments accumulated in other comprehensive income are included in the initial measurement of the cost of non-financial assets as hedging transactions and recognized as ‘cost of sales’ for the periods when the corresponding transactions affect profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that is reported in other comprehensive income is recognized as ‘operating income (expenses)’.
The Group applies fair value hedge accounting for hedging fixed interest risks on borrowings. The effective portion of changes in fair value of derivatives that are designated and qualify as fair value hedges is recognized as ’finance cost’, and the ineffective portion is recognized as ‘operating income (expenses)’. However, changes in the fair value of the hedged items attributable to hedged risk are recognized as ‘finance cost’.
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to profit or loss over the period to maturity.
2.9 Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted-average method, except for inventories in-transit which is determined using the specific identification method.
2.10 Non-current Assets (or Disposal Group) Held-for-sale
Non-current assets (or disposal group) are classified as assets held-for-sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. The assets are measured at the lower amount between their carrying amount and the fair value less costs to sell.
2.11 Property and Equipment
Property and equipment are stated at its cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditures that is directly attributable to the acquisition of the items.
The fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred if a reasonable estimate of fair value can be made. In periods subsequent to initial measurement, we recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate.
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Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate the difference between their cost and their residual values over their estimated useful lives, as follows:
Estimated Useful Lives
Buildings
Structures
Machinery and equipment
(Telecommunications equipment and others)
Vehicles
Tools
Office equipment
The depreciation method, residual values and useful lives of property and equipment are reviewed at the end of each reporting period and, if appropriate, accounted for as changes in accounting estimates.
2.12 Investment Property
Property held to earn rentals or for capital appreciation or both is classified as investment property. Investment property is measured initially at its cost. After recognition as an asset, investment property is carried at cost less accumulated depreciation and impairment losses. Investment property, except for land, is depreciated using the straight-line method over their useful lives from 10 to 40 years.
2.13 Intangible Assets
(1) Goodwill
Goodwill is measured as explained in Note 2.3 (1) and goodwill arising from acquisition of subsidiaries and business are included in intangible assets. Goodwill is tested at least annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. The calculation of the gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the acquirer’s cash-generating units, or groups of cash-generating units (“CGU”), that is expected to benefit from the synergies of the combination. Goodwill is monitored at the operating segment level.
Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed.
(2) Intangible assets except goodwill
Separately acquired Intangible assets except for goodwill are shown at historical cost. These assets have definite useful lives and are carried at historical cost less accumulated amortization. Assets with definite useful lives are amortized using the straight-line method according to the estimated useful lives presented below. However, facility usage rights (condominium membership and golf membership) and broadcast license are regarded as intangible assets with indefinite useful life and not amortized, because there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows.
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The estimated useful life used for amortizing intangible assets is as follows:
Development costs
Goodwill
Software
Industrial property rights
Frequency usage rights
Others 1
(3) Research and development costs
Expenditure on research is recognized as an expense as incurred. If the expense as incurred that is identifiable and when the probable future economic benefits are expected, the cost for the new merchandises and technology is recognized as intangible assets when all the following criteria are met:
It is technically feasible to complete the intangible asset so that it will be available for use;
Management intends to complete the intangible asset and use or sell it;
There is the ability to use or sell the intangible asset;
It can be demonstrated how the intangible asset will generate probable future economic benefits;
Adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available; and
The expenditure attributable to the intangible asset during its development can be reliably measured
Other development expenditures that do not meet these criteria are recognized as expenses as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Capitalized development costs, which are stated as intangible assets, are amortized using the straight-line method when the assets are available for use and are tested for impairment.
2.14 Borrowing Costs
Borrowing costs incurred in the acquisition or construction of a qualifying asset are capitalized in the period when it is prepared for its intended use, and investment income earned on the temporary investment of borrowings made specifically for the purpose obtaining a qualifying asset is deducted from the borrowing costs eligible for capitalization during the period. Other borrowing costs are recognized as expenses for the period in which they are incurred.
2.15 Government Grants
Government grants related to assets are recognized in profit or loss on a systematic and rational basis over the useful life of the asset by setting up the grant as deferred income, and government grants related to income are deferred and recognized in the statement of income as part of operating income for the period in which the related expenses for the purpose of the government grants are incurred.
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2.16 Impairment of Non-Financial Assets
Goodwill or intangible assets with indefinite useful lives are not subject to amortization and are tested at least annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Non-financial assets, other than goodwill, that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.
2.17 Financial Liabilities
Financial liabilities at fair value through profit or loss are financial instruments held for trading. Financial liabilities are classified in this category if incurred principally for the purpose of repurchasing them in the near term. Derivatives that are not designated as hedges or bifurcated from financial instruments containing embedded derivatives are also categorized as held-for-trading.
The Group classifies non-derivative financial liabilities, except for financial liabilities at fair value through profit or loss, financial guarantee contracts and financial liabilities that arise when a transfer of financial assets does not qualify for derecognition, as financial liabilities carried at amortized cost and presented as ‘trade payables’, ‘borrowings’, and ‘other financial liabilities’ in the statement of financial position.
Preferred shares that provide for a mandatory redemption at a particular date are classified as liabilities. Interest expenses on these preferred shares calculated using the effective interest method are recognized in the statement of income as ‘finance costs’, together with interest expenses recognized on other financial liabilities.
The Group’s financial liabilities at fair value through profit or loss are financial instruments held for trading and designated as financial liabilities at fair value through profit or loss. Financial liabilities held for trading are financial liabilities that are incurred principally for the purpose of repurchasing them in the near term and derivatives that are not designated as hedges or bifurcated from financial instruments containing embedded derivatives. Financial liabilities at fair value through profit or loss are structured financial liabilities containing embedded derivatives issued by the Group.
As it was unable to measure the embedded derivatives separately from its host contract, the Group designated the entire hybrid contact as at fair value through profit or loss. The financial liability that the Group designated as at fair value through profit or loss is a foreign convertible bond.
(2) Derecognition
Financial liabilities are removed from the statement of financial position when it is extinguished, for example, when the obligation specified in the contract is discharged, cancelled or expired or when the terms of an existing financial liability are substantially modified.
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2.18 Financial Guarantee Contracts
Financial guarantee contracts provided by the Group are initially measured at fair value on the date the guarantee was given. Subsequent to initial recognition, the Group’s liabilities under such guarantees are measured at the higher of the amounts below and recognized as ‘other financial liabilities’:
the amount determined in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets; or
the initial amount, less accumulated amortization recognized in accordance with IAS 18, Revenue.
2.19 Compound Financial Instruments
Compound financial instruments are convertible bonds that can be converted into equity instruments at the option of the holder. The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially on the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.
2.20 Employee Benefits
(1) Post-employment benefits
The Group has both defined benefit and defined contribution plans.
A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The contributions are recognized as employee benefit expenses when an employee has rendered service.
A defined benefit plan is a pension plan that is not a defined contribution plan. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds and that have terms to maturity approximating to the terms of the related pension obligation. The remeasurement of the net defined benefit liability is recognized in other comprehensive income.
If any plan amendments, curtailments, or settlements occur, past service costs or any gains or losses on settlement are recognized as profit or loss for the year.
(2) Termination benefits
Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits at the earlier of the following dates: when the entity can no longer withdraw the offer of those benefits or when the entity recognizes costs for a restructuring.
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2.21 Share-based payments
Equity-settled share-based payments granted to employees are estimated at the grant date fair value of equity instruments and recognized as employee benefit expenses over the vesting period. The number of equity instruments expected to vest is remeasured with consideration to non-market vesting conditions at the end of the reporting period, with any changes from the original measurement recognized in the profit for the year and equity.
When the options are exercised, the Company issues new shares. The proceeds received, net of any directly attributable transaction costs, are recognized as share capital (nominal value) and share premium.
2.22 Provisions
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation and the increase in the provision due to passage of time is recognized as interest expense.
2.23 Leases
(1) Lessee
A lease is an agreement, whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time. Leases where all the risks and rewards of ownership are not transferred to the Group are classified as operating leases. Lease payments under operating leases are recognized as expenses on a straight-line basis over the lease term.
Leases where the Group has substantially all the risks and rewards of ownership are classified as finance leases and recognized as lease assets and liabilities at the lower of the fair value of the leased property and the present value of the minimum lease payments on the opening date of the lease period.
(2) Lessor
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership at the inception of the lease. A lease other than a finance lease is classified as an operating lease. Lease income from operating leases is recognized in income on a straight-line basis over the lease term. Initial direct costs incurred by the lessor in negotiating and arranging an operating lease is added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income.
2.24 Capital Stock
Common stocks are classified as equity.
Where the Company purchases its own equity share capital, the consideration paid, including any directly attributable incremental costs, is deducted from equity attributable to the Company’s equity holders until the stocks are cancelled or reissued. Where such shares are subsequently reissued, any consideration received is included in equity attributable to the Company’s equity holders.
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2.25 Revenue Recognition
Revenue is measured at the fair value of the consideration received or receivable for the sale of goods or rendering of services arising from the normal activities of the Group. It is stated as net of value added taxes, returns, rebates and discounts, after elimination of intra-company transactions.
The Group recognizes revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Group’s activities, as described below. The Group bases its estimate on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.
(1) Sales of Services
When providing interconnection or telecommunications service to a customer based on service plans, the related revenue is recognized at the time service is provided. If the customer uses the telecommunications equipment according to the service plans, the related revenue is recognized on straight-line basis over the contract period. Revenue related to the other telecommunications services is recognized when the service is provided to the customer.
For other services, when the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with such a transaction is recognized by reference to the stage of performance of the services. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue is recognized only to the extent of the expenses recognized that are recoverable.
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.
(2) Sales of goods
The Group sells a range of handsets and other telephone products. Revenue from the sale of goods is recognized when products are delivered to the purchaser.
(3) Interest income
Interest income is recognized using the effective interest method according to the time passed. When a loan and receivable is impaired, the Group reduces the carrying amount to its recoverable amount and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognized using the original effective interest rate.
(4) Commission fees
Commission fees related to the credit card business is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be reliably measured. Revenues from acquiree fee, agent fee, optional service fees, member service fees and credit card service charge are measured at the fair value of the consideration received and recognized on a accrual basis.
(5) Royalty income
Royalty income is recognized on an accrual basis in accordance with the substance of the relevant agreements.
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(6) Dividend income
Dividend income is recognized when the right to receive payment is established.
(7) Customer loyalty programme
The Group operates a customer loyalty program where customers accumulate points for purchases made which entitle them to discounts on future purchases. The reward points are recognized as a separately identifiable component of the initial sale transaction. The fair value of the consideration received or receivable in respect of the initial sale is allocated between the reward points and the other components of the sale. The fair value of the reward points is measured by taking into account the proportion of the reward points that are not expected to be redeemed by customers. Revenue from the reward points is recognized when the points are redeemed.
2.26 Current and Deferred Income Tax
The tax expense for the period consists of current and deferred tax. Tax is recognized on the profit for the period in the statement of income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. The tax expense is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period.
Deferred tax is recognized for temporary differences arising between the tax bases of assets and liabilities and their carrying amounts as expected tax consequences at the recovery or settlement of the carrying amounts of the assets and liabilities. However, deferred tax assets and liabilities are not recognized if they arise from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.
Deferred tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized.
Deferred tax liability is recognized for taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint ventures, except to the extent that the Group 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. In addition, deferred tax asset is recognized for deductible temporary differences arising from such investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
2.27 Deferred Loan Fees and Costs
Loan origination fees in relation to loan origination process such as upfront fee, are deferred and amortized over the life of the loan as an adjustment to the yield of the loan using the effective interest rate method. Loan origination costs, which relates to loan origination activities such as commissions to brokers, are deferred and amortized over the life of the loan as an adjustment to the yield of the loan, using the effective interest rate method, if the future economic benefit related costs incurred can be matched with each loan.
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In addition, the deferred loan origination fees and costs are offset and the net amounts are presented in the consolidated statement of financial position.
2.28 Non-current Assets Held for Sale and Discontinued Operations
When a component of the Group representing a separate major line of business or geographical area of operation has been disposed of, or is subject to a sale plan involving loss of control of a subsidiary, the Group discloses in the statement of income the post-tax profit or loss of discontinued operations and the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or group to be sold constituting the discontinued operation. The net cash flows attributable to the operating, investing and financing activities of discontinued operations are presented in the notes to the financial statements (Note 40).
2.29 Dividend
Dividend distribution to the Company’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the Company’s shareholders.
2.30 Approval of Issuance of the Financial Statements
The issuance of the December 31, 2013 financial statements of the Company was approved by the directors on April 11, 2014.
2.31 US Dollar Convenience Translation
The December 31, 2013 consolidated financial statements are expressed in Korean Won and have been translated into U.S. dollars at the rate of ￦1,055.3 to US$1, the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. and in effect on December 31, 2013, 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.
3. Critical Accounting Estimates and Assumptions
The Group makes estimates and assumptions concerning the future. The estimates and assumptions are continuously evaluated with consideration to factors such as events reasonably predictable in the foreseeable future within the present circumstance according to historical experience. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.
3.1 Impairment of Goodwill
The Group tests whether goodwill has suffered any impairment annually and also when there are indications that an asset may be impaired. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations (Note 13).
3.2 Income Taxes
The Group is operating in numerous countries and the income generated from these operations is subject to income taxes based on tax laws and interpretations of tax authorities in numerous jurisdictions. There are many transactions and calculations for which the ultimate tax determination is uncertain.
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3.3 Fair Value of Derivatives and Financial Instruments
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period (Note 36).
3.4 Allowance for Doubtful Accounts
The Group recognizes provisions for accounting of estimated loss in customers’ insolvency. When the allowance for doubtful accounts is estimated, it is based on the aging analysis of trade receivables balances, incurred loss experience, customers’ credit rates and changes of payment terms. If the customer’s financial position becomes worse, the actual loss amount will be increased more than the estimated.
3.5 Net defined benefit liability
The present value of net defined benefit liability depends on a number of factors that are determined on an actuarial basis using a number of assumptions including the discount rate (Note 18).
3.6 Deferred Revenue
Service installation fees and initial subscription fees related to activation of service are deferred and recognized as revenue over the expected terms of customer relationships. The estimate of expected terms of customer relationship is based on the historical rate. If management’s estimation is amended, it may cause significant differences in the timing of revenue recognition and amount recognized.
3.7 Provisions
As described in Note 17, the Group records provisions for litigation and asset retirement obligations as of the end of the reporting period. The provisions are estimated based on the factors such as the historical experiences.
3.8 Useful lives of Property and Equipment and Investment Property
Depreciation on property and equipment excluding land, condominium memberships, golf club memberships, and broadcasting concession is calculated using the straight-line method over their useful lives. The estimated useful lives are determined based on expected usage of the assets and the estimates can be materially affected by technical changes and other factors. The Group will increase depreciation if the useful lives are considered shorter than the previously estimated useful lives.
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4. Financial Instruments by category
Financial instruments by category as of December 31, 2012 and 2013, are as follows:
(In millions of Korean won)
Financial assets
Trade and other receivables
Loans receivable
Finance lease receivables
Financial liabilities
Finance lease liabilities
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Income or expense (gain or loss) by financial instrument category for the years ended December 31, 2011, 2012 and 2013, are as follows:
Loans and receivables
Interest income 1
Foreign currency transaction gain(loss)
Foreign currency translation gain(loss)
Loss on disposal
Loss on valuation
Assets at fair value through the profit and loss
Dividend income
Gain(loss) on disposal
Gain(loss) on valuation
Derivatives used for hedging
Transaction gain(loss)
Other comprehensive income(loss) 2
Reclassified to profit or loss from other comprehensive income2,3
Available-for-sale
Gain on disposal
Impairment loss
Reclassified to profit or loss from other comprehensive income2
Liabilities at fair value through the profit and loss
Foreign currency transaction loss
Gain on valuation
Financial liabilities at amortized cost
Interest expense 1,4
Other liabilities
Financial guarantee gain or loss
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5. Cash and Cash Equivalents
Cash and cash equivalents as of December 31, 2012 and 2013, are as follows:
Cash on hand
Cash in banks
Money market trust
Other financial instruments
Cash and cash equivalents in the statement of financial position equal cash and cash equivalents in the statements of cash flows.
Restricted cash and cash equivalents as of December 31, 2012 and 2013, are as follows:
6. Trade and Other Receivables
Trade and other receivables as of December 31, 2012 and 2013, are as follows:
Trade receivables
Other receivables
The fair values of trade and other receivables with original maturities less than one year equal their carrying values because the discounting effect is immaterial. The fair value of trade and other
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receivables with original maturities longer than one year, which are mainly from sales of goods, is determined discounting the expected future cash flow at the weighted average borrowing rate.
Details of changes in allowance for doubtful accounts for the years ended December 31, 2012 and 2013, are as follows:
Beginning balance
Ending balance
Provisions for doubtful trade and other receivables are recognized as operating expenses or finance costs.
Details of aging analysis of trade receivables as of December 31, 2012 and 2013, are as follows:
Neither past due nor impaired
Past due and impaired
Up to six months
Six months to twelve months
Over twelve months
Allowance for doubtful accounts
The detail of other receivables as of December 31, 2012 and 2013, are as follows:
Loans
Receivables 1
Accrued income
Refundable deposits
Allowance
Current
Non-current
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Details of aging analysis of other receivables as of December 31, 2012 and 2013, are as follows:
The maximum exposure of trade and other receivables to credit risk is the carrying value of each class of receivables mentioned above as of December 31, 2013. As of December 31, 2013, the Company is provided with guarantees of￦667,817 million by Seoul Guarantee Insurance related to the collection of certain accounts receivable arising from the handset sales.
7. Loans Receivable
Loans receivable are from the Group’s Finance/Rental Business Group, which provides credit card, loan and lease services. Loans receivable as of December 31, 2012 and 2013, are as follows:
Factoring receivables
Loans for installment credit
Deferred loan origination costs
Non-Current
New technology financial investment assets
New technology financial loans
The fair values of trade and other receivables with maturities less than one year equal their carrying values because the discounting effect is immaterial. The fair value of loans receivables is determined discounting the future cash flow at the weighted average borrowing rate.
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Beginning
Ending
Provisions for doubtful loans receivable are recognized as operating expenses.
Details of aging analysis of loans receivables as of December 31, 2012 and 2013, are as follows:
The maximum exposure of loans receivables to credit risk is carrying value as of December 31, 2013.
8. Other Financial Assets and Liabilities
Other financial assets and liabilities as of December 31, 2012 and 2013, are as follows:
Derivatives used for hedge
Financial instruments 1
Available-for-sale financial assets
Held-to-maturity investments
Less: Non-current
Financial guarantee liabilities 2
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Financial instruments at fair value through the profit and loss as of December 31, 2012 and 2013, are as follows:
Financial instruments held for trading
Interest rate swap
Currency swap
Currency forward
Other derivatives
Financial instruments at fair value through the profit and loss
The valuation gains and losses on financial instruments held for trading for the years ended December 31, 2011, 2012 and 2013, are as follows:
The valuation gains and losses on financial instruments at fair value through the profit and loss for the years ended December 31, 2011, 2012 and 2013, are as follows:
Foreign currency translation gain
Gain on transactions
Gain on valuations
The maximum exposure of debt securities of financial instruments at fair value through the profit and loss to credit risk is carrying value as of December 31, 2013.
Derivatives used for hedge as of December 31, 2012 and 2013, are as follows:
Interest rate swap 1
Currency swap 2
The full value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and, as a current asset or liability, if the maturity of the hedged item is less than 12 months.
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The valuation gains and losses on the derivatives contracts for the years ended December 31, 2011, 2012 and 2013, are as follows:
(in millions of Koreanwon)
Type of Transaction
The ineffective portion recognized in profit or loss on the cash flow hedge is valuation loss of￦1,241 million for the current period (2011: valuation profit of ￦2,714 million, 2012: valuation loss of ￦29,183 million).
Details of available-for-sale financial assets as of December 31, 2012 and 2013, are as follows:
Marketable equity securities
Non-marketable equity securities
Marketable debt securities
Non-marketable debt securities
Changes of available-for-sale financial assets for the years ended December 31, 2012 and 2013, are as follows:
Acquisition
Disposal
Valuation 1
Impairment
Reclassification
Changes in scope of consolidation
The maximum exposure of debt securities of available-for-sale financial assets to credit risk is carrying value as of December 31, 2013.
Available-for-sale financial assets are measured at fair value. However, non-marketable equity securities that do not have quoted market prices in an active market and the fair value of which cannot be reliably measured are recognized at cost and the impairment loss is recognized if any.
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9. Inventories
Inventories as of December 31, 2012 and 2013, are as follows:
Merchandise
Goods in transit
Cost of inventories and valuation loss on inventory write-downs recognized as expenses amount to ￦3,797,973 million (2011:￦4,530,779 million, 2012:￦4,568,286 million) and￦88,946 million, respectively, during the year (2011: ￦23,877 million, 2012: ￦23,931 million).
10. Other Assets and Liabilities
Other assets and liabilities as of December 31, 2012 and 2013, are as follows:
Other assets
Advance payments
Prepaid expenses
Advances received
Withholdings
Unearned revenue
11. Property and Equipment
The changes in property and equipment for the years ended December 31, 2012 and 2013, are as follows:
Acquisition cost
Accumulated depreciation (including accumulated impairment loss and others)
Balance at 2012.1.1
Disposal/Abandonment 1
Transfer in (out)
Inclusion in scope of consolidation 2
Exclusion from scope of consolidation
Balance at 2012.12.31
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Balance at 2013.1.1
Disposal/Abandonment
Inclusion in scope of consolidation
Balance at 2013.12.31
Details of property, plant and equipment provided as collateral as of December 31, 2012 and 2013, are as follows:
The borrowing costs capitalized for qualifying assets amount to￦20,144 million (2011:￦14,675 million, 2012:￦12,126 million) in 2013. The interest rate applied to calculate the capitalized borrowing costs in 2013 is 3.95% to 4.44%. (2012: 4.46% to 4.89%).
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12. Investment Property
The changes in investment property for years ended December 31, 2012 and 2013, are as follows:
Accumulated depreciation
Disposal 1
Transfer
The fair value of investment property is ￦2,051,183 million as of December 31, 2013 (2012: ￦2,335,642 million). The fair value of investment property is estimated based on the expected cash flow.
Rental income from investment property is ￦197,673 million in 2013 (2011:￦150,752 million, 2012:￦203,328 million) and direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period are recognized as operating expenses.
Details of investment property provided as collaterals as of December 31, 2012 and 2013, are as follows:
Collateralfor
Land
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13. Intangible Assets
The changes in intangible assets for the years ended December 31, 2012 and 2013, are as follows:
Accumulated amortization (including accumulated impairment loss and others)
Acquisition 1
Disposal /Abandonment
Amortization
Exclusion in scope of consolidation
Disposal / Abandonment
The carrying value of facility usage rights with indefinite useful life not subject to amortization is￦150,654 million (2012:￦160,299 million) as of December 31, 2013.
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Goodwill is allocated to the Group’s cash-generating unit. As of December 31, 2013, goodwill allocated to each cash-generation unit is as follows:
Telecom wireless business & Convergence/Customer1
Finance and Rental
KT Rental 2
BC Card Co., Ltd. 3
KT Skylife Co., Ltd. 4
KT Powertel Co., Ltd. and others
As a result of the impairment test, the Group recognized the impairment losses of ￦12,954 million on goodwill allocated to Enswers Inc. and others and recognized the losses as operating expenses in the consolidated statement of the income. The Group considers that the carrying value of other cash generating units does not exceed the recoverable amount of the CGUs.
14. Investments in Associates and Jointly Controlled Entities
Details of associates as of December 31, 2013, are as follows:
(a) Associates
Company
Location
Date of financialstatements
KTCS Corporation 1
KTIS Corporation 1
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Korea Information & Technology Fund
KT-SB Venture Investment 2
Boston Global Film & Contents Fund L.P
Mongolian Telecommunications
Metropol Property LLC
KT Wibro Infra Co., Ltd.
QTT Global (Group) Company Limited
The changes in investments in associates and jointly controlled entities for the years ended December 31, 2012 and 2013, are as follows:
KTCS Corporation
KTIS Corporation
KT-SB Venture Investment
SMART CHANNEL Co., Ltd.
KTF-CJ Music Contents Investment Fund 3
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KTF-CJ Music Contents Investment Fund
KT-CKP new media Investment Fund
The summary of financial information of associates and joint ventures as of and for the years ended December 31, 2012 and 2013, follows:
Boston Global Film & Contents Fund L.P.
KT Wibro Infra Co., Ltd
K-Realty CR-REITs No.1
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Details of a reconciliation of the summarized financial information to the carrying amount of interests in the associates and joint ventures as of and for the years end December 31, 2012 and 2013, are as follows:
KTIS Corporation 2
KT-SB Venture Investment 3
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Marketable investments in associates and joint ventures as of December 31, 2012 and 2013, are as follows:
The Group has not recognized loss from associates and jointly controlled entities of ￦17,428 million for the year (2011: ￦5,633 million, 2012: ￦7,308 million). The accumulated comprehensive loss of joint ventures and associates as of December 31, 2013, which was not recognized by the Group is ￦39,571 million (2011: ￦15,490 million, 2012:￦22,143 million).
The following equity securities owned by the Company are pledged as collateral for the investee’s borrowings:
Investee
Investments in associate
15. Trade and other payables
The Group’s trade and other payables as of December 31, 2012 and 2013, are as follows:
Trade payables
Other payables
Details of other payables as of December 31, 2012 and 2013, are as follows:
Non-trade payables 1
Accrued expenses
Operating deposits
Less: non-current
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16. Bonds Payable and Borrowings
Details of bonds payable and borrowings as of December 31, 2012 and 2013, are as follows:
Bonds Payable
(in millions of Korean won and
thousands of foreign currencies)
Type
MTNP notes 1
Reg S bonds
FR notes
FR notes 2
Japanese yen bonds
The 159th Public bond
The 163rd Public bond
The 165-2nd Public bond
The 167-2nd Public bond
The 168-2nd Public bond
The 171st Public bond
The 173-1st Public bond
The 173-2nd Public bond
The 175-2nd 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 178-1st Public bond 2
The 178-2nd Public bond 2
The 179th Public bond
The 180-1st Public bond
The 180-2nd Public bond
The 181-1st Public bond
The 181-2nd Public bond
The 181-3rd Public bond
The 182-1st Public bond
The 182-2nd Public bond
The 183-1st Public bond
The 183-2nd Public bond
The 183-3rd Public bond
The 184-1st Public bond
The 184-2nd Public bond
The 184-3rd Public bond
The 185-1st Public bond
The 185-2nd Public bond
The 51-2nd Public bond
The 52-2nd Public bond
The 26th Public bond
The 27th Public bond
The 17-3rd Public bond
The 18-4th Public bond
The 32-2nd Public bond
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The 32-3rd Public bond
The 33rd Public bond
The 34-2nd Public bond
The 35-2nd Public bond
The 36-2nd Public bond
The 36-3rd Public bond
The 37-3rd Public bond
The 37-4th Public bond
The 38-3rd Public bond
The 39th Public bond
The 40-2nd Public bond
The 40-3rd 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 43-1st Public bond
The 43-2nd Public bond
The 43-3rd Public bond
The 44-2nd Public bond
The 44-3rd Public bond
The 45th Private bond
The 46-1st Public bond
The 46-2nd Public bond
The 46-3rd Public bond
The 46-4th Public bond
The 47th Public bond
The 48th Public bond
The 49th Public bond
The 50-1st Public bond
The 50-2nd Public bond
The 51-1st Public bond
The 52-1st Public bond
The 53rd Public bond
The 54th Public bond
The 55-1st Public bond
The 55-2nd Public bond
The 55-3rd Public bond
The 56th Public bond
The 57-1st Public bond
The 57-2nd Public bond
The 57-3rd Public bond
The 58-1st Public bond
The 58-2nd Public bond
The 59-1st Public bond
The 59-2nd Public bond
The 59-3rd Public bond
The 60th Public bond
The 61st Public bond
The 62-1st Public bond
The 62-2nd Public bond
The 63rd Public bond
The 64-1st Public bond
The 64-2nd Public bond
The 65th Public bond
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The 66th Public bond
The 67-1st Public bond
The 67-2nd Public bond
The 67-3rd Public bond
The 68-1st Public bond
The 68-2nd Public bond
The 69-1st Public bond
The 69-2nd Public bond
The 69-3rd Public bond
The 70-1st Public bond
The 70-2nd Public bond
The 71-1st Public bond
The 71-2nd Public bond
The 72-1st Public bond
The 72-2nd Public bond
Asset backed short-term bond
Unsecured private convertible bond 3
Unsecured public bond in won
The 16th unsecured bond
The 1st convertible preferred stock 3
The 32-1st Public bond
The 17-2nd Public bond
The 27-2nd Public bond
The 28-1st Public bond
The 28-2nd Public bond
The 29th Public bond
The 30th Public bond
The 31-1st Public bond
The 31-2nd Public bond
The 34th Public bond
The 35th Public bond
The 36th Public bond
The 37th Public bond
The 38-1st Public bond
The 38-2nd Public bond
The 2nd unsecured convertible bond 3
The 8th unsecured convertible bond 3
Less: Current portion
Discount on bonds
Conversion right adjustment
Add: Premium on bonds redemption
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Issue date
Issue price
Coupon rate
Guaranteed margin ratio
Conversion period
Conversion price
Short-term borrowings
(in millions of Korean won andthousands of foreign currencies)
Financial institution
Shinhan Bank
Samsung Securities
Woori Bank
+1.33%
Korea Exchange Bank
Kookmin Bank
Citibank
KTB Investment & Securities
Hanyang Securities
SK Securities
Korea Development Bank
Hana Bank
IBK Bank
Daegu Bank
DGB Capital
NH Investment & Securities
HYUNDAI Securities
Dongbu Securities
Woori Investment & Securities
Korea Money Brokerage Corporation
Meritz Securities
Others 2
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Long-term borrowings
Export-Import Bank of Korea
National Federation of Fisheries Cooperatives
NH Bank
Industrial Bank of Korea
Cardnet
IBK Securities
Shinhan invest corp
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Issue price (per share)
Number of share issued
Conversion price (per share)
Exercisable date of conversion rights
From the issuedate to2018.08.14
From the issuedate to2019.11.24
From the issuedate to2021.11.30
From the issuedate to2013.12.21
From one yearafter the issuedate until exercisedate
Redemption price
Issue price +5% compoundannual interest
Issue price +1% compoundannual interest
not converted
+ 5% compoundannual interest
less dividendsreceived
Exercisable date of redemption Rights
From threeyears after theissue date to2018.08.14
From threeyears after theissue date to2019.11.24
From threeyears after theissue date to2021.11.30
From twoyears after theissue date to2013.12.21
From five years(2016.01.20) afterthe issue date upto 3 months
Repayment schedule of the Group’s bonds payable and borrowings including the portion of current liabilities as of December 31, 2013, is as follows:
2014
2015
2016
2017
Thereafter
Book value and fair value of the Group’s bonds payable and borrowings as of December 31, 2012 and 2013, are as follows:
Bonds payable
Long-term borrowings (Including current borrowings)
The fair values of bonds payable and long-term borrowings are calculated by discounting the expected future cash flows at weighted average borrowing rate. The weighted average borrowing rate is approximately 4.53% as of December 31, 2013 (2012: 4.56%).
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17. Provisions
The changes in provisions during the years ended December 31, 2012 and 2013, are as follows:
Increase(Transfer)
Usage
Reversal
Current portion
Non-current portion
Increase (Transfer)
18. Net Defined Benefit Liabilities
The amounts recognized in the statements of financial position are determined as follows:
Present value of defined benefit obligations
Fair value of plan assets
Liabilities
The changes in the defined benefit obligations for the years ended December 31, 2012 and 2013, are as follows:
Current service cost
Benefit paid
Gains on settlements of plan 1
Changes due to settlements of plan 1
Remeasurements:
Actuarial gains and losses arising from changes in demographic assumptions
Actuarial gains and losses arising from changes in financial assumptions
Actuarial gains and losses arising from experience adjustments
Changes in scope of Consolidation
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Changes in the fair value of plan assets for the years ended December 31, 2012 and 2013, are as follows:
Return on plan assets (excluding amounts included in interest income)
Benefits paid
Employer contributions
Amounts recognized in the statement of income for the years ended December 31, 2011, 2012 and 2013, are as follows:
Interest cost
Costs(gains) on settlements
Transfer out
Total expenses
Principal actuarial assumptions used are as follows:
Discount rate
Future salary increase
Also, the life expectancy is based on the data provided by Korea Insurance Development Institute.
As of December 31, 2013, all of the plan assets are invested in guaranteed financial instruments.
The sensitivity of the defined benefit obligation as of December 31, 2013, to changes in the weighted principal assumptions is:
(in percentage, in millions of Korean won)
Salary growth rate
A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings.
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The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. The sensitivity of the defined benefit obligation to changes in principal actuarial assumptions is calculated using the projected unit credit method, the same method applied when calculating the defined benefit obligations recognized on the statement of financial position.
The Group annually reviews funding levels of plan assets and has plan asset policies that require maintaining the funding level of the Group equal to or more than the level required under the Employee Retirement Benefit Security Act. Expected contributions to post-employment benefit plans for the year ending December 31, 2014, are ￦219,753 million.
Expected maturity analysis of undiscounted pension benefits as of December 31, 2013, is as follows:
Pension benefits
The weighted average duration of the defined benefit obligations is 9.06 years.
19. Defined Contribution Plan
Recognized expense related to the defined contribution plan for the year ended December 31, 2013, is￦23,857 million (2012:￦1,703 million, 2011:￦230 million).
20. Commitments and Contingencies
As of December 31, 2013, major commitments with local financial institutions are as follows:
Bank overdraft
Commercial paper factoring
Loan on information and communications fund
Green energy factoring
Collateralized loan on accounts receivable-trade
Purchase commitment for foreign currency checks
Plus electronic notes payable
Loans for working capital
Comprehensive credit line
Foreign currency transaction
Credit line for call loan
As of December 31, 2013, guarantees received from financial institutions are as follows:
Performance guarantee
Warranty guarantee
Guarantee for advances received
Bid guarantee
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Guarantees for accounts receivable from the handset sales
Performance guarantee/Warranty guarantee
Prepayment and other guarantee
Guarantee for payment in local currency
Guarantee for payment in foreign currency
Guarantee for import letters of credit
Performance guarantees
Guarantees for licensing
Guarantees for deposits
Details of collateral that KT Capital Co., Ltd., a subsidiary, is provided with by third parties as of December 31, 2013, are as follows:
Details
Amounts
Credits
As of December 31, 2013, guarantees provided by the Group for a third party, are as follows:
Individuals with the right of ownership of Gimhae apartment
Ssangyong Information & Communication Corporation
Other Project Financing 1
As of December 31, 2013, the Company has provided a payment guarantee to Smart Channel Co., Ltd(“Smart Channel”). The Company pledged investment securities in Smart Channel Co., Ltd. as collateral to the creditors of Smart Channel (Note 14). Furthermore, the Company recorded allowance for doubtful receivables of ￦49,362 million against other receivables from Smart Channel.
The Company is jointly and severally obligated with KT Sat Co., Ltd. to pay KT Sat Co., Ltd.’s outstanding liabilities as of December 4, 2012, spin-off date. As of December 31, 2013, the Company and KT Sat Co., Ltd. are jointly and severally liable for ￦7,949 million of KT Sat Co., Ltd.’s outstanding liabilities.
For the year ended December 31, 2013, the Company made agreements with the Securitization Specialty Companies Olleh KT Seventh to twelfth Securitization Specialty Co., Ltd. (in
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2012: Olleh KT First to Sixth Securitization Specialty Co., Ltd.), and disposed of its trade receivables related to handset sales. The Company also made asset management agreements with each securitization specialty company and will receive the related management fees.
On March 6, 2014, the website of the Company was accessed by unauthorized person and personal information of our customers was stolen by hackers. There is one lawsuit against the Company over this breach seeking damages of approximately￦20 million. The resolution of the lawsuit cannot yet be reasonably predicted. Also, there may be more lawsuits filed against the Company in the future. However, the size and result of any potential lawsuits cannot yet be reasonably predicted.
As of December 31, 2013, the Group is a defendant in 279 lawsuits, with an aggregate amount of ￦159,434 million. As of December 31, 2013, litigation provisions of ￦39,115 million for various pending lawsuits and unasserted claims are recorded as liabilities for potential loss in the ordinary course of business. On January 24, 2014, the Company lost a lawsuit in relation to the interconnection with SK Telecom Co., Ltd. and recognized expenses of￦34,636 million relative to this in the 2013 statement of operations. The Company appealed to the Supreme Court and the final outcome of this case cannot yet be predicted.
According to the financial and other covenants included in certain bonds and borrowings, the Group is required to maintain certain financial ratios such as debt to equity ratio, use the funds for the designated purpose and report to the creditors periodically. The covenant also contains restriction on provision of additional collateral and disposal of certain assets. The bond holders may request early repayment upon non-compliance of such covenants. As of December 31, 2013, the Group is in compliance with the related covenants.
KT ENS, a wholly owned subsidiary, has been under investigation by the police and prosecutor’s office due to the allegation in which suppliers of KT ENS borrowed loans from several financial institutions collateralizing accounts receivable from KT ENS, however such collateralized accounts receivable are allegedly fictitious. The investigation has been ongoing to determine the authenticity of the accounts receivable from KT ENS and reasonable due care exercised by financial institutions to approve such loans in their loan approval process. There may be lawsuits depending on the outcome of this investigation. The Group expects the impact of this investigation on the financial statements will not be significant, but the final result cannot be reasonably predicted.
Asia Broadcast Satellite Holdings, Ltd.(ABS) filed an arbitration against the Company and KT Sat, a subsidiary of the Company at The International Court of Arbitration of the International Chamber of Commerce on December 31, 2013, claiming on the ownership of satellite Mugunghwa and compensation of damages due to the breach of sales contract of the satellite, Mugunghwa, In addition, ABS filed an arbitration against the Company and KT Sat, a subsidiary of the Company, at International Centre for Dispute Resolution of the American Arbitration Association on December 24, 2013, claiming on the compensation of damages arising from the breach of entrustment contract. The outcome of these arbitrations cannot yet be reasonably predicted.
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21. Lease
The Group’s non-cancellable lease arrangements are as follows:
The Group as the Lessee
Finance Lease
Details of finance lease assets as of December 31, 2012 and 2013, are as follows:
Acquisition costs
Net balance
As of December 31, 2013, the Group recognizes financial lease assets as other property and equipment.
Details of future minimum lease payments as of December 31, 2012 and 2013, under finance lease contracts are summarized below:
Total amount of minimum lease payments
Within one year
From one year to five years
Unrealized interest expense
Net amount of minimum lease payments
Operating Lease
Details of future minimum lease payments as of December 31, 2012 and 2013, under operating lease contracts are summarized below:
Operating lease expenses incurred for the years ended December 31, 2012 and 2013, amounted to ￦41,999 million,￦61,201 million and￦77,657 million respectively.
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The Group as the Lessor
Details of finance lease assets as of December 31, 2012, are as follows:
Details of finance lease assets as of December 31, 2013, are as follows:
Details of bad debt allowance for finance lease receivables as of December 31, 2012 and 2013, are as follows:
Details of operating lease assets as of December 31, 2012 and 2013, are as follows:
Details of future minimum lease payments as of December 31, 2011, 2012 and 2013, under operating lease contracts are summarized below:
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22. Capital Stock
As of December 31, 2012 and 2013, the Company’s number of authorized shares is one billion.
Common stock 1
23. Retained Earnings
Details of retained earnings as of December 31, 2012 and 2013, are as follows:
Legal reserve 1
Voluntary reserves 2
Unappropriated retained earnings
24. Accumulated Other Comprehensive Income and Other Components of Equity
As of December 31, 2012 and 2013, the details of the Group’s accumulated other comprehensive income attributable to owners of the Company are as follows:
Investments in associates and joint ventures
Gain or loss on derivatives
Foreign currency translation adjustment
Changes in accumulated other comprehensive income for the years ended December 31, 2012 and 2013, are as follows:
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As of December 31, 2012 and 2013, the Group’s other components of equity are as follows:
Treasury stock
Gain(loss) on disposal of treasury stock 1
Share-based payments
As of December 31, 2012 and 2013, the details of treasury stock are as follows:
Number of shares
Amounts (In millions of Korean won)
Treasury stock is expected to be used as stock compensation for the Company’s directors and employees and other purposes.
25. Share-Based Payments
The details of share-based payments as of December 31, 2013, are as follows:
7th
Grant date
Grantee
Vesting conditions
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)
Valuation method
The changes in the number of stock options and the weighted-average exercise price, as of December 31, 2012 and 2013, are as follows:
5th grant
6th grant
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7th grant
26. Operating Revenues
Operating revenues for the years ended December 31, 2011, 2012 and 2013, are as follows:
Sales of services
Others 1, 2, 3
27. Operating Expenses
Operating expenses for the years ended December 31, 2011, 2012 and 2013, are as follows:
Amortization of intangible assets
Commissions 1
International interconnection fee
Service Cost
Utilities
Taxes and Dues
Rent
Insurance premium
Installation fee
Advertising expenses
Research and development
Expenses
Card service cost
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Details of salaries and wages for the years ended December 31, 2011, 2012 and 2013, are as follows:
Short-term employee benefits
Post-employment benefits(Defined benefit plan)
Post-employment benefits(Defined contribution plan)
Post-employment benefits (Others)
Share-based payment
28. Financial Income and Expenses
Details of financial income for the years ended December 31, 2011, 2012 and 2013, are as follows:
Foreign currency transaction gain
Gain on settlement of derivatives
Gain on valuation of derivatives
Details of financial expenses for the years ended December 31, 2011, 2012 and 2013, are as follows:
Foreign currency translation loss
Loss on settlement of derivatives
Loss on valuation of derivatives
29. Deferred Income Tax and Income Tax Expense
The analyses of deferred tax assets and deferred tax liabilities as of December 31, 2012 and 2013, are as follows:
Deferred tax assets
Deferred tax assets to be recovered within 12 months
Deferred tax assets to be recovered after more than 12 months
Deferred tax liabilities
Deferred tax liability to be recovered within 12 months
Deferred tax liability to be recovered after more than 12 months
Deferred tax assets (liabilities), net
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The gross movements on the deferred income tax account for the years ended December 31, 2012 and 2013, are calculated as follows:
Charged(credited) to the income statement
Charged(credited) to other comprehensive income
The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:
Derivative financial assets
Investment in joint venture and associates
Deposits for severance benefits
Reserve for technology and human resource development
Derivatives
Inventory valuation
Contribution for construction
Retirement benefit obligations
Withholding of facilities expenses
Accrued payroll expenses
Deduction of installment receivables
Present value discount
Assets retirement obligation
Gain or loss foreign currency translation
Real-estate sales
Tax credit carryforwards
Foreign operation translation difference
Net balance 1
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The tax impacts directly to equity as of December 31, 2011, 2012 and 2013, are as follows
(in millions ofKorean won)
Available-for-sale valuation gain (loss)
Hedge instruments valuation gain (loss)
Remeasurements from net defined benefit liabilities
Shares of gain(loss) of joint ventures and associates
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Details of income tax expenses for the years ended December 31, 2011, 2012 and 2013, are calculated as follows:
Current income tax expenses
Adjustments of the current income tax expenses of prior year
Impact of change in temporary difference
Impact of change in tax rate
Total income tax expense
Income tax expense from continued operations
Income tax expense for discontinued operations
The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows:
Profit from continuing operations before income tax expenses
Expected tax expense at statutory tax rate
Tax effects of Income not subject to tax
Expenses not deductible for tax purposes
Tax credit carry forwards and deductions
Supplementary pay of corporation tax
Changes in unrealizable deferred tax assets
Deferred tax effects due to changes in tax rates and others
Tax effect and adjustment on consolidation
Income tax expenses for continuing operations
30. Earnings Per Share
Calculation of earnings per share for the years ended December 31, 2011, 2012 and 2013, is as follows:
Basic earnings per share is calculated by dividing the profit from operations attributable to equity holders of the Company by the weighted average number of common stocks outstanding during the period, excluding common stocks purchased by the Company and held as treasury stock (Note 24).
Basic earnings per share from operations for the years ended December 31, 2012 and 2013, is calculated as follows:
Profit (loss) from continuing operations attributable to common stock(in millions of Korean won)
Profit (loss) from discontinued operations attributable to common stock(in millions of Korean won)
Weighted average number of common stock outstanding
Basic earnings (loss) per share from continuing operations(in Korean won)
Basic earnings (loss) per share from discontinued operations(in Korean won)
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Diluted earnings per share from operations are calculated by adjusting the weighted average number of common stocks outstanding to assume conversion of all dilutive potential common stocks. The Company has dilutive potential common stocks from stock options.
Diluted earnings per share from operations for the years ended December 31, 2011, 2012 and 2013, is calculated as follows:
Adjusted profit(loss) from continuing operations attributable to common stock(in millions of Korean won)
Adjusted profit(loss) from discontinued operations attributable to common stock(in millions of Korean won)
Number of dilutive potential common shares outstanding
Weighted-average number of common shares outstanding and dilutive common shares
Diluted earnings per share
Diluted earnings per share from continuing operations(in Korean won)
Diluted earnings per share from discontinued operations(in Korean won)
31. Dividend
The dividends paid by the Controlling Company in 2011, 2012 and 2013 were ￦586,150 (￦2,410 per share),￦486,602 million (￦2,000 per share) and￦487,445 million (￦2,000 per share), respectively. A dividend in respect of the year ended December 31, 2013, of ￦800 per share, amounting to a total dividend of ￦195,112 million, was approved at the shareholders’ meeting on March 21, 2014. These consolidated financial statements do not reflect this dividend payable.
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32. Cash Generated from Operations
Cash flows from operating activities for the years ended December 31, 2011, 2012 and 2013, are as follows:
1. Profit(loss) for the year
2. Adjustments to reconcile net income (loss)
Income tax expenses
Provision for severance benefits
Bad debt expense
Gain on disposal of jointly controlled entities and associates
Impairment loss on jointly controlled entities and associates
Gain or loss on disposal of property and equipment
Gains or loss on disposition of intangible assets
Loss on impairment of intangible assets
Gain or loss on valuation of derivatives
3. Changes in operating assets and liabilities
Decrease(increase) in trade receivables
Decrease(increase) in other receivables
Decrease(increase) in loans receivable
Decrease(increase) in finance lease receivables
Increase in other assets
Decrease(increase) in inventories
Increase(decrease) in trade payables
Increase(decrease) in other payables
Increase(decrease) in other liabilities
Increase(decrease) in provisions
Increase(decrease) in deferred revenue
Decrease(increase) in plan assets
Payment of severance benefits
4. Net cash provided by operating activities (1+2+3)
The Company entered into agreements with securitization specialty companies and disposed of its trade receivables related to handset sales (Note 20). Cash flows from the disposals are presented as cash generated from operations.
Significant transactions not affecting cash flows for the years ended December 31, 2011, 2012 and 2013, are as follows:
Reclassification of the current portion of bonds payable
Reclassification of construction-in-progress to property and equipment
Reclassification of provisions
Reclassification of accounts payable from property and equipment
Reclassification of accounts payable from intangible assets
Write-off of loans and receivables
Transfer of prepaid lease
Valuation of available-for-sale financial assets
Contributions in kind of non-controlling interest
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33. Segment Information
The Group’s operating segments are as follows:
Business service
Telecom & Convergence/ Customer Group
Global & Enterprise Group
Finance / Rental Business Group
Details of each segment for the years ended December 31, 2011, 2012, and 2013 are as follows:
Telecom & Convergence/Customer
Global & Enterprise
Finance/Rental
Adjustment 1
Consolidated amount
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The regional segment information provided to the management for the reportable segments as of December 31, 2011, 2012 and 2013, and for the years ended December 31, 2012 and 2013, are as follows:
Domestic
Overseas
Assets and liabilities of each segments as of December 2012 and 2013, are as follows:
Short-term loans
Inventories
Long-term loans
Property, equipment and intangible assets (including investment property)
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34. Related Party Transactions
The list of related parties of the Group as of December 31, 2013, is as follows:
Type of control
Related parties
Associates and jointly controlled entities
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The related receivables and payables as of December 31, 2012 and 2013, are as follows:
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Significant transactions with related parties for the years ended December 31, 2011, 2012 and 2013, are as follows:
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Key management compensation for the years ended December 31, 2011, 2012 and 2013, consists of:
Salaries and other short-term benefits
Stock-based compensation
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Fund transactions with related parties for the years ended December 31, 2011, 2012, 2013, are as follows:
Payment guarantees and collateral provided by the Group
As of December 31, 2013, based on the investors’ agreement, the Company has an obligation to provide funding to Smart Channel Co., Ltd. if Smart Channel Co, Ltd. is unable to fulfill its obligation. The Company pledged investment securities in Smart Channel Co., Ltd. as collateral (Note 14).
There are no collateral and payment guarantees provided by the related parties.
35. Financial risk management
(1) Financial risk factors
The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.
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The Group’s financial policy is set up in the long-term perspective and annually reported to the Board of Directors. The financial risk management is carried out by the Value Management Office, which identifies, evaluates and hedges financial risks. The treasury department in the Value Management Office considers various finance market conditions to estimate the effect from the market changes.
1) Market risk
The Group’s market risk management focuses on controlling the extent of exposure to the risk in order to minimize revenue volatility. Market risk is a risk that decreases value or profit of the Group’s portfolio due to changes in market interest rate, foreign exchange rate and other factors.
(i) Sensitivity analysis
Sensitivity analysis is performed for each type of market risk to which the Group is exposed. Reasonably possible changes in the relevant risk variable such as prevailing market interest rates, currency rates, equity prices or commodity prices are estimated and if the rate of change in the underlying risk variable is stable, the Group does not alter the chosen reasonably possible change in the risk variable. The reasonably possible change does not include remote or ‘worst case’ scenarios or ‘stress tests’.
(ii) Foreign exchange risk
The Group is exposed to foreign exchange risk arising from operating, investing and financing activities. Foreign exchange risk is managed within the range of the possible effect on the Group’s cash flows. Foreign exchange risk unaffecting the Group’s cash flows is not hedged but can be hedged at a particular situation.
As of December 31, 2011, 2012 and 2013, if the foreign exchange rate had strengthened/weakened by 10% with all other variables held constant, the effects on profit before income tax and shareholders’ equity would have been as follows:
The above analysis is a simple sensitivity analysis which assumes that all the variables other than foreign exchange rates are held constant. Therefore, the analysis does not reflect any correlation between foreign exchange rates and other variables, nor the management’s decision to decrease the risk.
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Details of foreign assets and liabilities of the Group as of December 31, 2011, 2012 and 2013, are as follows:
(in thousands ofForeign currencies)
USD
SDR
JPY
GBP
EUR
DZD
CNY
UZS
RWF
IDR
(iii) Price risk
As of December 31, 2011, 2012 and 2013, the Group is exposed to equity securities price risk because the securities held by the Group are traded in active markets. If the market prices had increased/decreased by 10% with all other variables held constant, the effects on profit before income tax and shareholders’ equity would have been as follows:
The above analysis is based on the assumption that the equity index had increased/decreased by 10% with all other variables held constant and all the Group’s marketable equity instruments had moved according to the historical correlation with the index.
(iv) Cashflow and fair value interest rate risk
The Group’s interest rate risk arises from liabilities in foreign currency such as foreign currency bonds payable. Bonds payable in foreign currency issued at variable rates expose the Group to cash flow interest rate risk which is partially offset by swap transactions. Bonds payable and borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group sets the policy and operates to minimize the uncertainty of the changes in interest rates and financial costs.
As of December 31, 2011, 2012 and 2013, if the market interest rate had increased/decreased by 100bp with other variables held constant, the effects on profit before income tax and shareholders’ equity would be as follows:
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The above analysis is a simple sensitivity analysis which assumes that all the variables other than market interest rates are held constant. Therefore, the analysis does not reflect any correlation between market interest rates and other variables, nor the management’s decision to decrease the risk.
2) Credit risk
Credit risk is managed on the Group basis with the purpose of minimizing financial loss. Credit risk arises from the normal transactions and investing activities, where clients or other party fails to discharge an obligation on contract conditions. To manage credit risk, the Group considers the counterparty’s credit 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, only the financial institutions with strong credit ratings are accepted.
As of December 31, 2012 and 2013, maximum exposure to credit risk is as follows:
Cash equivalents(except cash on hand)
Trade and other receivables 1
Financial assets at fair value through the profit or loss
Derivative used for hedging
Time deposits and others
Held-to-maturity financial assets
Financial guarantee contracts 2
Performance guarantee contracts 2
3) Liquidity risk
The Group manages its liquidity risk by liquidity strategy and plans. The Group considers the maturity of financial assets and financial liabilities and the estimated cash flows from operations.
The table below analyzes the Group’s liabilities into relevant maturity groups based on the remaining period at the date of the end of each reporting period to the contractual maturity date as of December 31, 2012 and 2013. These amounts are contractual undiscounted cash flows.
Finance lease payables
Borrowings(including bonds payable)
Other non-derivative financial liabilities
Financial guarantee contracts 1
Performance guarantee contracts 1
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Total amount guaranteed by the Group according to guarantee contracts. Cash flow from financial guarantee contracts is classified as the maturity group in the earliest period when the financial guarantee contracts can be executed.
Borrowings(including bond payables)
Cash outflow and inflow of derivatives settled gross or net are undiscounted contractual cash flow and can differ from the amount in the financial statements.
Outflow
Inflow
(2) Disclosure of capital management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other shareholders and to maintain an optimal capital structure to reduce the cost of capital.
The Group’s capital structure consists of liabilities including borrowings, cash and cash equivalents, and shareholders’ equity. The treasury department monitors the Group’s capital structure and considers cost of capital and risks related each capital component.
The debt-to-equity ratios as of December 31, 2012 and 2013, are as follows:
Debt-to-equity ratio
The Group manages capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings less cash and cash equivalents. Total capital is calculated as ‘equity’ in the statement of financial position plus net debt.
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The gearing ratios as of December 31, 2012 and 2013, are as follows:
(in millions of Korean won, %)
Total borrowings
Less: cash and cash equivalents
Net debt
Total capital
Gearing ratio
(3) Offsetting Financial Assets and Financial Liabilities
Details of the Group’s recognized financial assets subject to enforceable master netting arrangements or similar agreements are as follows:
Derivative assets for hedging purpose 1
Trade receivables 2
The Group’s recognized financial liabilities subject to enforceable master netting arrangements or similar agreements are as follows:
Derivative liabilities for hedging purpose 1
Trade payables 2
Other payables 2
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36. Fair Value
(1) Fair Value of Financial Instruments by Category
Carrying amount and fair value of financial instruments by category as of December 31, 2012 and 2013, are as follows:
Cash and cash equivalents 1
Financial instruments at fair value through profit or loss
Derivative financial instruments for hedging purpose
Time deposits and others 1
Available-for-sale financial assets 2
Trade and other liabilities 1
Financial lease liabilities
Financial guarantee liability 1
Other financial liabilities 1
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(2) Financial Instruments Measured at Cost
Available-for-sale financial assets measured at cost as of December 31, 2012 and 2013, are as follows:
SBS KT SPC
MBC KT SPC
KBS KT SPC
IBK-AUCTUS Green Growth Private Equity Fund
KOCREF REITs
Presto Private Equity Fund
Enterprise DB(Convertible Preferred Stock)
The 1st Praxis PE
Soulbay Indochina Private Equity Fund
AMOGREENTECH
Kokam Co., Ltd.
Channel A
Nexenta Systems(Convertible Preferred Stock)
KOFSGSK Corporate’s Financial Stabilization Private Equity Fund
Kamur Private Equity Fund No.1(Partnership enterprises)
JTBC
CSTV
Shinhan K2 Secondary Fund
JKL Private Equity Fund No.4
JKL-Quintessa Private Equity Fund
Minigate(Convertible Preferred Stock)
United Turnaround PEF No.3
Newkyunggi Resort Corp
Nexenta Systems
Goods Flow Co., Ltd.
Mirae Asset Good Company Secondary Investment Fund
Innopolis-CJ Bio Healthcare Fund
KaKao Co., Ltd
The range of cashflow estimates is significant and the probabilities of the various estimates cannot be reasonably assessed and therefore these instruments are measured at cost.
The Group does not have any plans to dispose of the above-mentioned equities instruments in the near future. These instruments will be measured at fair value when the Group can develop a reliable estimate of the fair value.
(3) Fair Value Hierarchy
Assets measured at fair value or for which the fair value is disclosed are categorized within the fair value hierarchy, and the defined levels are as follows:
Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1)
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, prices) or indirectly (that is, derived from prices) (Level 2)
Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3)
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Fair value hierarchy classifications of the financial assets and financial liabilities that are measured at fair value or its fair value is disclosed as of December 31, 2013, are as follows:
Recurring fair value measurements
Financial assets at fair value through profit or loss
Derivative financial assets for hedging purpose
Disclosed fair value
Jointly controlled entities and associates
Investment property 1
Financial liabilities at fair value through profit or loss
Derivative financial liabilities for hedging purpose
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(4) Transfers Between Fair Value Hierarchy Levels of Recurring Fair Value Measurements
(a) Details of transfers between Level 1 and Level 2 of the fair value hierarchy for the recurring fair value measurements are as follows:
There are no transfers between Level 1 and Level 2 of the fair value hierarchy for the recurring fair value measurements.
(b) Details of changes in Level 3 of the fair value hierarchy for the recurring fair value measurements are as follows:
Amount recognized in profit or loss 1
Amount recognized in other comprehensive income 2
Purchases
Sales
Transfer into Level 3 (From Cost method)
Amount recognized in other comprehensive income2
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(5) Valuation Technique and the Inputs
Valuation techniques and inputs used in the recurring, non-recurring fair value measurements and disclosed fair values categorized within Level 2 and Level 3 of the fair value hierarchy as of December 31, 2012 and 2013, are as follows:
Valuation
techniques
Held for trading financial assets
Other derivative assets
Investment property
Financial liabilities designated as at fair value through profit or loss
Disclosed fair valueBorrowings
Interest rate and currency swap
Monte-Carlo Simulation
Option model (binomial trees)
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(6) Gains and losses on valuation at the transaction date
In the case that the Group estimates the fair value of derivative financial instruments using inputs not based on observable market data, and the fair value calculated by the said valuation technique differs from the transaction price, then the fair value of the financial instruments is recognized as the transaction price. The difference between the fair value at initial recognition and the transaction price is deferred and amortized using a straight-line method by maturity of the financial instrument. However, in the case that inputs of the valuation techniques become observable in the markets, the remaining deferred difference is immediately recognized in full in profit for the year.
In relation to this, details and changes of the total deferred difference for the years ended December 31, 2012 and 2013, are as follows:
New transactions
37. Business Combination
(1) KT Rental Co., Ltd.
On July 2012, the restriction on controlling power of the Company under the shareholders’ agreement between the Company and the second major shareholder was lifted, and therefore KT rental became a subsidiary. These transactions were accounted for in accordance with IFRS 3, Business Combinations. As a result of applying acquisition method, the Company recognized goodwill of ￦131,426 million.
Details of the consideration transferred, fair value of the acquired identifiable assets and liabilities and goodwill at the acquisition date are as follows:
Fair value of existing shares before business combination
Consideration transferred (a)
Recognized amounts of assets acquired and liabilities assumed1
Financial lease receivables
Tangible assets (rental vehicle, others)
Intangible assets (orders on hand, customer relationship, others)
Retirement benefit obligation
The net of total amounts of identifiable assets and liabilities measured at fair value (b)
Non-controlling interests 2 (c)
Goodwill (a-b+c)
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As described in Note 14, the previously held interest in KT Rental Co., Ltd. was measured at fair value, and the Company recognized other income of ￦126,011 million arising from the value measurement on acquisition.
After the acquisition date, the operating revenue and net income for consolidation of KT Rental Co., Ltd. before the elimination of related party transactions with its subsidiaries are ￦368,228 million and ￦11,072 million, respectively. If KT Rental Co., Ltd. was consolidated on January 1, 2012, the operating revenue and net income included in consolidated income statement would have been ￦715,604 million and￦25,995 million, respectively.
The fair value of trade accounts receivable and others acquired from KT Rental Co., Ltd. is￦120,964 million, but the full contract value is ￦132,915 million. The uncollectible amounts from these receivables are expected to be ￦11,951 million.
38. Interests in Unconsolidated Structured Entities
Details of information about its interests in unconsolidated structured entities, which the Group does not have control over, including the nature, purpose and activities of the structured entities and how the structured entities are financed, are as follows:
Remarks
Nature, Purpose, Activities and Others
Real estate finance
PEF and investment funds
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M&A finance
Asset securitization
Total amount of Unconsolidated Structured Entities
Assets recognized in statement of financial position
Jointly investment entities and associates
Maximum loss exposure 1
Investment Assets
Credit grants
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39. Information About Non-controlling Interests
Summarized Financial Information on Subsidiaries
The summarized financial information for each subsidiary with non-controlling interests that are material to the Group before inter-company eliminations as of December 31, 2011, 2012 and 2013, are as follows:
Non-controlling Interests
Equity
Accumulated non-controlling interests
Profit or loss for the year
Total comprehensive income
The profit or loss allocated to non-controlling interests
Cash flows from financing activities before dividends paid to non-controlling interests
Dividends paid to non-controlling interests
Net (decrease)/increase in cash and cash equivalents
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Transactions with Non-controlling Interests
The effects of changes in the ownership interest on the equity attributable to owners of the Company during the year are summarized as follows:
Carrying amount of non-controlling interests acquired1
Consideration paid to non-controlling interests2
Excess of consideration paid recognized in parent’s equity
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40. Discontinued Operations
As approved by the Company’s Board of Directors on August 9, 2012, the Company decided to sell KT Tech, Inc., its subsidiary, and discontinued the operations related to handset development. KT-Tech’s liquidation procedure has been completed and KT Tech’s electrical operating performance was reflected in profit or loss from discontinued operations.
Income and loss from discontinued operations for the year ended December 31, 2012, are as follows:
Expense
Income from discontinued operations before income taxes
Income (loss) from discontinued operations
Cash flows from discontinued operations for the year ended December 31, 2012, are as follows:
Changes in foreign exchange rates
Total cash flows
41. Subsequent Events
The investment business division of KT Capital Co., Ltd., a consolidated subsidiary, was spun off and merged with the Company on March 13, 2014.
Subsequent to December 31, 2013, the Company has issued commercial paper securities, as follows:
Commercial paper securities
Subsequent to December 31, 2013, the Company has decided to acquire these debts, as follows:
(in millions of Korean won)Original debtor
Creditor
Malou (1st)
Korean alpha solar (2nd)
On March 12, 2014, KT ENS has filed for court receivership after failing to pay ￦49,106 million of commercial paper. There may be lawsuits against KT ENS on this matter in the future, and the effect of this matter cannot be reasonably predicted.
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KT Skylife and NDS Limited have had a dispute on the right to use of conditional access system provided by NDS Limited and business interruption of KT Skylife. On February 24, 2014, KT Skylife and NDS Limited sent the first written form of compensation for the damages to the other party. KT Skylife and NDS Limited have requested ￦33,457 million and￦28,163 million, respectively, with 6% of annual interest rate to the other party.
As of March 7, 2014, the Ministry of Science, ICT, and Future Planning banned the mobile carriers including the Company from subscribing new customers and selling handsets to the existing customers. These mobile carriers are those who violated the prohibition released by the Korea Communications Commission and provided discriminative subsidy on handsets. This ban on the Company lasts for 45 days, from March 13, 2014 to April 26, 2014.
In April 2014, the Company announced that it will discontinue operations related to fixed-line sales activities such as on-site sales, activation, after service and customer centers. These operations will be outsourced to certain of subsidiaries and associates of the Company. On April 23, 2014, the Company determined that 8,304 employees will retire through its special early retirement program. It is expected to record approximately ￦1.2 trillion as severance indemnity in connection with the special early retirement program, all of which is expected to be recorded during 2014.
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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/ CHANG-GYU HWANG
Date: April 28, 2014