As filed with the Securities and Exchange Commission on April 28, 2017
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
OR
Commission file number 1-14926
KT Corporation
(Exact name of Registrant as specified in its charter)
KT Gwanghwamun Building East
33, Jong-ro 3-Gil, Jongno-gu
03155 Seoul, Korea
(Address of principal executive offices)
Kwang Suk Shin
Telephone:+82-31-727-0114; E-mail: ks.shin@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, 2016, there were 244,971,643 ordinary shares, par value￦5,000 per share, outstanding
(not including 16,140,165 ordinary shares held by the registrant 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 ☒ 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 ☒
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 ☒ 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, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing. U.S. GAAP ☐ IFRS ☒ Other ☐
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 ☒
TABLE OF CONTENTS
PRESENTATION
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 4A.
ITEM 5.
ITEM 6.
i
(continued)
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
PART II
ITEM 13.
ii
ITEM 14.
ITEM 15.
ITEM 16.
PART III
ITEM 17.
ITEM 18.
ITEM 19.
SIGNATURES
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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,￦1,099.2 to US$1.00,￦1,172.0 to US$1.00 and￦1,208.5 to US$1.00 on December 31, 2014, 2015 and 2016, 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, 2016 have been translated into United States dollars at the rate of￦1,208.5 to US$1.00, the Market Average Exchange Rate in effect on December 30, 2016.
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 (“Consolidated Financial Statements”) as of December 31, 2015 and 2016 and for each of the years in the three-year period ended December 31, 2016, 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, 2016 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, 2016, 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, in connection with the exercise of early redemption rights for certain commercial paper guaranteed by KT ENGCORE Co., Ltd. (formerly known as KT ENS Corporation until April 2015) (“KT ENGCORE”), our previously consolidated subsidiary until August 2014, 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 for the year ended December 31, 2013 (which were issued on April 28, 2014), which were not reflected in our financial statements prepared in accordance with K-IFRS for the year ended December 31, 2013 (which were issued on March 13, 2014) as it was not possible to make a reasonable estimate of the liabilities at the time of issuing the K-IFRS financial statements. We subsequently reflected such losses in our K-IFRS financial statements for the year ended December 31, 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 withK-IFRS. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results—Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS” for additional information.
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 (benefit)
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
Other financial assets
Current income tax assets
Inventories, net
Other current assets
Total current assets
Non-current assets:
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
Borrowings
Other financial liabilities
Current income tax liabilities
Provisions
Deferred income
Other current liabilities
Total current liabilities
Non-current liabilities:
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
Share capital
Share premium
Retained earnings
Accumulated other comprehensive income (expense)
Other components of equity
Total equity
Total liabilities and equity
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Consolidated statement of cash flow data
Net cash generated from operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Operating Data
Lines installed (thousands) (2)
Lines in service (thousands) (2)
Lines in service per 100 inhabitants (2)
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
2010
2011
2012
2013
2014
2015
2016
November
December
2017 (through April 25)
January
February
March
April (through April 25)
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, ￦1,099.2 to US$1.00, ￦1,172.0 to US$1.00 and ￦1,208.5 to US$1.00, at December 31, 2014, 2015 and 2016, 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, 2016 have been translated into United States dollars at the rate of ￦1,208.5 to US$1.00, the Market Average Exchange Rate in effect on December 30, 2016.
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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 Company and 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. (“SK Telecom”) acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband Co., Ltd. (“SK Broadband”). The acquisition enabled SK Telecom to provide fixed-line telecommunications, broadband Internet access and Internet Protocol Television (“IPTV”) services together with its mobile telecommunications services. In January 2010, LG Dacom Corporation (“LG Dacom”) and LG Powercom Co., Ltd. (“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, has 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(“W-CDMA”) technology and Long-Term Evolution (“LTE”) technology. Competitors in the mobile telecommunications service industry are SK Telecom and LG U+. We had a market share of 30.6% as of December 31, 2016, making us the second largest mobile telecommunications service provider in Korea. SK Telecom had a market share of 49.1% as of December 31, 2016. 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. Such mobile number portability and handset subsidies previously intensified competition among the mobile service providers and increased their marketing expenses. In addition, wide variation in subsidy amounts paid to subscribers led to concerns relating to consumer discrimination over time. Consequently, in order to enhance transparency in subsidy amounts paid to
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subscribers, the Act on Improvement of Mobile Telecommunication Device Distribution System (the “Handset Distribution Reform Act”), which limits the amount of handset subsidies offered by service providers, was enacted in October 2014. As a result, price competition through handset subsidies has become less prevalent. However, if regulations are amended to allow a greater amount of subsidies and mobile service providers adopt a strategy of expanding market share through price competition, it could lead to a decrease in our net profit margins.
Since 2011, SK Telecom, LG U+ and we have launched fourth-generation (“4G”) mobile telecommunications services based on LTE technology, which 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. Furthermore, as SK Telecom, LG U+ and we continue to compete to improve network quality in order to accommodate increased data usage of subscribers, we may incur significant expenses to acquire additional bandwidth spectrums and various fixed assets. We believe that the continuing intense competition among major telecommunications operators in Korea 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, Sejong Telecom, Inc. (formerly, 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 services. As of December 31, 2016, we had a market share in local telephone service of 80.6% and a market share in domestic long-distance service of 78.9%. Further increase in competition may decrease our market shares in such services. As part of our efforts to improve our operational efficiencies, we transferred all operations relating to fixed-line sales activities (including on-site sales, line activation, after service, and customer center operations) to our subsidiaries in 2014.
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 (“HFC”) and Asymmetric Digital Subscriber Line (“ADSL”) services. We also began offering broadband Internet access service in 1999, followed by Dreamline, Sejong 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 41.4% as of December 31, 2016. 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 IPTV 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 domestic and international competitors newly enter the Internet industry in Korea or expand product offerings such as gigabit Internet service. 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.
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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 a service provider. We currently use 40 MHz of bandwidth in the 2.1 GHz spectrum, of which 20 MHz is used for our 4G LTE services and the remaining 20 MHz of bandwidth for our IMT-2000 services based on W-CDMA wireless network standards. We also use 20 MHz of bandwidth in the 900 MHz spectrum and 35 MHz of bandwidth in the 1.8 GHz spectrum for our 4G LTE services. We also use 20 MHz of bandwidth in the 1.8 GHz spectrum, which we acquired in May 2016 for our Wideband LTE-A services. For more information on our licenses to bandwidth spectrum, see “Item 4. Information on the Company—Item 4.D. Property, Plants and Equipment—Mobile Networks.”
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. Furthermore, we may be required to pay a substantial amount to acquire bandwidth capacity in order to meet increasing bandwidth demand, which may adversely affect our financial condition and results of operations.
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 (“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 506,000 subscribers as of December 31, 2016. The number of our WiBro subscribers decreased in 2016 compared to 2015, as more WiBro subscribers chose to access the Internet using our 4G LTE network rather than WiBro following the proliferation of 4G LTE services since 2013. Furthermore, we focused our subscriber retention efforts during 2016 on our mobile subscribers rather than our WiBro subscribers. We are also continually upgrading our broadband network to enable better fiber-to-the-home (“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 IPTV, 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
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commercial 4G LTE services in the Seoul metropolitan area in January 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 thanW-CDMA, generally providing a downloading speed of 75 Mbps per 10 MHz. We introduced the GiGA LTE service in June 2015, linking “Wideband LTE-A X4” and wireless LAN service (“WiFi”) signals and thereby increasing data transmission speed to up to 1.17 Gbps for downloading. In addition, our use of 20 MHz of bandwidth in the 1.8 GHZ spectrum, acquired in May 2016, further enhances the quality of our LTE services through intra-band carrier aggregation technology. We believe that the faster data transmission speed of the LTE network allows us to offer significantly improved wireless data transmission services with faster wireless access to multimedia content. Accordingly, we have made extensive efforts to develop advanced technologies as well as to provide a variety of services with enhanced speed, latency and connectivity. However, 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 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. On August 20, 2015, we and our consolidated subsidiary, KT Hitel Co., Ltd., sold the entire 100% stake of KT Capital Co., Ltd. to JCF III K Holdings LLC for a total of ￦299 billion. 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. (“KT Skylife”), a provider of satellite TV service which may also be packaged with our IPTV 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 50.3% interest in KT Skylife as of December 31, 2016. In March 2015, KT Media Hub Co., Ltd. was merged into KT Corporation to increase management efficiency and promote synergy among our existing businesses.
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
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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 extended 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 November 15, 2017. Although we have been able to reach collective bargaining agreements and wage agreements with our labor union in recent years, there can be no assurance that we will not experience labor disputes and unrests resulting from disagreements with the labor union in the future.
The Korean telecommunications and Internet protocol broadcasting industries are subject to extensive Government regulations, and changes in Government policy relating to these industries could have a material adverse effect on our operations and financial condition.
The Government, primarily through the 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 whose rates and general terms of service must be approved by the MSIP. In recent years, the MSIP had 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 tariffs fornon-regulated services. As a result of discussions with the MSIP, after a series of reductions, we completely abolished our activation fee relating to our mobile services in March 2015. In December 2015, we decided to lower our early termination fee to 25.1% of the existing fees relating to our broadband Internet access service, Internet phone or IPTV or such products bundled with our fixed-line telephone service. We implemented such policy in July 2016. 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.
The MSIP may revoke our licenses or suspend any of our businesses if we fail to comply with its rules, regulations and corrective orders, including the rules restricting beneficial ownership and control or any violation of the conditions of our licenses. Alternatively, in lieu of suspension of our business, the MSIP may levy a monetary penalty of up to 3.0% of the average of our annual revenue
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for the preceding three fiscal years. For example, in December 2013, the KCC 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. In March 2014, the MSIP imposed a 45-day suspension on each of us, SK Telecom and LG U+ from accepting 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. In August 2014, the KCC again imposed a combined fine of approximately ￦58 billion on SK Telecom, LG U+ and us (our fine being approximately ￦11 billion) for providing excessive handset subsidies, and also imposed temporary suspensions on accepting new subscribers for seven days on SK Telecom and LG U+. In December 2014, the KCC further imposed a fine of approximately ￦8 billion on each of SK Telecom, LG U+ and us for providing excessive handset subsidies and in March 2015, the KCC again imposed a combined fine of approximately ￦34 billion on SK Telecom, LG U+ and us (our fine being approximately ￦9 billion) for violation of regulations relating to handset sales, in connection with a used handset buyback program that we and the other telecommunications operators were promoting. On March 12, 2015, the KCC imposed a fine of ￦870 million for violation of restrictions on handset subsidies relating to our compensation program for used handsets. On June 24, 2015, the KCC imposed a fine of￦52 million for violating privacy related regulations and undermining consumer interests. On July 31, 2015 and January 19, 2016, the KCC imposed a fine of ￦350 million and￦560 million, respectively, on us for infringing upon consumer interests by advertising false and exaggerated information about bundled products. On March 8, 2016, the KCC imposed a fine of ￦32 million on us for offering excessively reduced rates and waivers to certain customers. On December 6, 2016, the KCC imposed a combined fine of approximately ￦10.7 billion on SK Telecom, LG U+, SK Broadband, t-broad, D’live, CJ HelloVision and us (our fine being approximately￦2.3 billion) and ordered to take corrective measures for providing excessive promotional gifts to bundled products customers. For more information about the penalties imposed for violating Government regulations, see “Item 8. Financial Information—Item 8.A. Consolidated Statements and Other Financial Information—Legal Proceedings.” The revocation of our licenses, suspension of our business or imposition of monetary penalties by the MSIP could have a material adverse effect on our business.
On October 1, 2014, the Handset Distribution Reform Act went into effect. The Handset Distribution Reform Act regulates, among other matters, the sale and subsidies of mobile devices such as smartphones, with one of its purposes being to induce telecommunication operators to compete in lowering the costs of communications and encourage the manufacturers to reduce handset factory prices, while improving service quality. Under the Handset Distribution Reform Act, consumers may not be discriminated in terms of subsidies based on their age, place of residence or monthly subscription plan when using their existing mobile phones, buying a new phone or switching their mobile carriers. Furthermore, everyone, regardless of their status, is entitled to receive either a handset subsidy for the purchase of mobile phone models that were launched within the last 15 months, or a tariff discount (with the current discount rate set at 20%, effective since April 24, 2015). The maximum amount of handset subsidy that telecommunications operators and handset manufacturers may offer is determined by Korean telecommunication regulators (such limit to be determined between ￦250,000 and ￦350,000, and may be adjusted every six months, with the current limit set at ￦330,000, effective since April 8, 2015). Telecommunications operators are also required to publicly announce the amount of handset subsidy that they offer, which may not be readjusted within one week after such announcement. In addition, telecommunications operators are prohibited from using misleading or exaggerated advertisements, such as advertisements that mobile phones are free without adequately explaining that it is preconditioned on signing up for high-priced monthly subscription plans.
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The Government also sets the policies regarding the use of radio frequencies and allocates the spectrum of radio frequencies used for wireless telecommunications by an auction process or by a planned allocation. For a discussion of the Government’s recent policies and practices on bandwidth spectrum allocation, see “—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 (“IP”) media market, and we began offering IPTV services in November 2008. IPTV 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 IPTV services. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IPTV services business must first obtain a license from the MSIP. Moreover, anyone intending to provide linear channel programs focused on news or contents that generally combine news, culture entertainment, and any other similar contents with IPTV providers, must obtain approval from the KCC. Furthermore, anyone intending to provide contents relating to the introduction of consumer products and other similar marketing linear channel programs with IPTV providers must obtain additional approval from the MSIP. In addition, KT Skylife (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 IPTV services. KT Skylife is also subject to regulation by the MSIP and the KCC pursuant to the Korea Broadcasting Act. In March 2015, amendments to the Internet Multimedia Broadcasting Business Act were promulgated. Under such amendments, a single pay TV operator (including its affiliates) may not have more than one-third of the market share of all pay TV subscribers in Korea. The restriction on market share is in effect until June 27, 2018.
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) could impose restrictions on our business operations, which could have a material adverse effect on our operations and financial condition, and may also change in ways that could materially and adversely affect us. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation.”
The pending legal cases against Mr. Suk-chae Lee, our former chief executive officer, and other former executive officers or directors—and related adverse publicity—could have a material adverse effect on our business, reputation and stock price.
In April 2014, the Seoul Central District prosecutor’s office charged Mr. Suk-chae Lee, our former chief executive officer who resigned in November 2013, with embezzlement and breach of fiduciary duty. Mr. Il Yung Kim, our former standing director and former president of the KT Corporate Center, was charged as a co-conspirator in the breach of fiduciary duty by Mr. Lee, and Mr. Yu-yeol Seo, our former president of Home Business Group, was charged as a co-conspirator in Mr. Lee’s embezzlement. On September 24, 2015, the Seoul District Court acquitted Mr. Lee of the charges of embezzlement and breach of fiduciary duty. Mr. Kim and Mr. Seo were also acquitted of the conspiracy charges. The prosecution has appealed the judgments and on May 27, 2016, the Seoul High Court found Mr. Lee and Mr. Seo guilty of embezzlement and sentenced them to 18 months of prison term, to be suspended for 2 years, for having embezzled and created off-the-books funds of ￦1.1 billion between 2009 and 2013, using such funds for personal purposes such as payments at weddings and funerals of Mr. Lee’s friends and acquaintances and Mr. Seo’s living and entertainment expenses. However, Mr. Lee and Mr. Kim were acquitted on the charge of breach of fiduciary duty. All of these
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judgments have been appealed by the prosecution as well as Mr. Lee and Mr. Seo, and are currently pending before the Supreme Court of Korea.
The legal cases against Mr. Lee, Mr. Seo, and Mr. Kim do not involve charges of wrongdoing by us. Nevertheless, an adverse determination in any such case or proceeding may harm our reputation and adversely affect the trading price of our shares. The outcome of any related claims, investigations and proceedings is inherently uncertain and there can be no assurance that any further developments in the legal proceedings against Mr. Lee, Mr. Seo, and Mr. Kim, including adverse publicity, will not adversely affect our business, reputation or stock price.
Our charitable donations, employment of certain individuals and engagement of an advertising agency connected to a scandal involving Ms. Soon-sil Choi, a confidante of former President Geun-hye Park, could have a material adverse effect on our business, reputation and stock price.
In March 2017, the Constitutional Court of Korea found that many Korean corporations, including the Company, made donations to two non-profit foundations, Mir Foundation and K-Sports Foundation, at former President Park’s request. Our contributions comprised ￦1.1 billion of the total￦48.6 billion given to Mir Foundation and ￦700 million of the total ￦28.8 billion given to K-Sports Foundation. The Constitutional Court also found that, at the requests of an aide of former President Park, we hired (and later promoted) two individuals, Mr. Dong-Soo Lee and Ms. Hye-Sung Shin: Mr. Lee as the head of a business unit in charge of our marketing and advertisement campaigns and Ms. Shin to another position in the same business unit. Subsequently, the same aide of former President Park also requested Mr. Lee and our other officers to award advertising contracts to Playground Communications Co., Ltd. (“Playground”), an advertising agency over which Ms. Soon-sil Choi, a confidante of former President Park, effectively owns 70% equity interest, according to the Constitutional Court. Playground was awarded seven advertising contracts for a total of approximately ￦6.8 billion in 2016, amounting to approximately 3.7% of our annual advertising spending in 2016. In 2016, our payments to Playground amounted to approximately ￦517 million. We have not awarded additional advertising contract to Playground since September 2016, and Mr. Lee and Ms. Shin resigned from the Company in November 2016 and March 2016, respectively.
In April 2017, the Korean prosecution indicted former President Park on charges of bribery and coercion, among others. The coercion charge against former President Park includes, among other matters, charges relating to the: (i) employment and promotions of Mr. Lee and Ms. Shin at KT Corporation, (ii) entry into advertising contracts with Playground and (iii) donations to Mir Foundation and K-Sports Foundation by us and other Korean corporations. We cannot be certain at this time how the above-described matters and the publicity around them will develop. While we have not been charged with wrongdoing in connection with the above-mentioned matters, related allegations, claims, investigations and proceedings remain a possibility, and we cannot provide any assurances as to likely outcomes. There can be no assurance that any further developments relating to the above-mentioned matters, including adverse publicity, will not adversely affect our business, reputation or stock price.
The reported investigation, insolvency proceedings of and any adverse publicity associated with our previous subsidiary, KT ENGCORE, could have a material adverse effect on our business, reputation and stock price.
An employee of KT ENGCORE, our consolidated subsidiary until August 2014, and several companies, some of which are KT ENGCORE’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 ENGCORE. KT ENGCORE’s management neither had knowledge of nor approved such transactions. On February 11, 2014, police
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raided the offices of the subcontractors in connection with their investigation of the loans. Upon discovery of the incident, KT ENGCORE immediately suspended the employee in question without pay, pending the results of the investigations for any further disciplinary actions. The employee and several other persons involved in the incident were sentenced to prison terms by the Seoul Central District Court in August 2014 and by the appellate court subsequently.
In March 2014, KT ENGCORE 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 ENGCORE. KT ENGCORE faced difficulties in preventing such exercise of redemption rights following the above incident, and we declined to provide additional financial support to KT ENGCORE to repay the redeemed commercial paper. In August 2014, the Seoul Central District Court approved KT ENGCORE’s restructuring plan, and determined that KT ENGCORE is only responsible for 15% to 20% of the borrowings which remain unpaid, or approximately ￦46 billion. Pursuant to the plan, KT ENGCORE is expected to repay all of its currently outstanding obligations. The banks had appealed the decision of the Seoul Central District Court, and it was determined that KT ENGCORE is responsible for 30% to 40% of the borrowings which remain unpaid. The court decision was appealed and in February 2017, the Seoul High Court found that KT ENGCORE is responsible for 40% of the borrowings which remain unpaid. The appellate court decision was appealed to the Supreme Court of Korea. While KT ENGCORE’s restructuring is unlikely to have a material impact on our results of operations or financial condition on a consolidated basis, as KT ENGCORE has not been our consolidated subsidiary since 2014 due to its filing for court receivership, and our interest in KT ENGCORE was classified as available-for-sale securities, any future legal proceedings against KT ENGCORE 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 civil litigation, and if our efforts to protect personal information of our subscribers are unsuccessful, future issues may result in further government enforcement actions and civil 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, manufacturing defects 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 third-party individuals in connection with the alleged theft of personal 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 29,800 of our mobile phone
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subscribers filed a total of 16 lawsuits against us in connection with the N-STEP hackings, alleging that we failed to protect their personal information, and are seeking total damages of approximately ￦15 billion. From August 2014 to October 2016, various district courts have awarded damages of ￦100,000 per plaintiff for 14 of the cases involving a total of approximately 29,000 of the subscribers, resulting in damages of approximately ￦3 billion to us, while the remaining trials are currently ongoing at various district courts. We have appealed the district courts’ decisions. In January 2017, we won one of the appeals and such appellate court decision was appealed to the Supreme Court. The other appeals are currently ongoing at the Seoul High Court.
Furthermore, in March 2014, the police arrested three third-party 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. Since the incident, approximately 15,000 subscribers filed 22 lawsuits against us in connection with the information theft, seeking total damages of approximately￦7 billion. From November 2016 to February 2017, we won 14 trials, lost two trials and the remaining six trials are currently ongoing at various district courts. The plaintiffs of 10 of the 14 cases have appealed the district courts’ decisions to the Seoul High Court. We appealed the district courts’ decisions of the two trials where we lost. In June 2014, we were fined ￦85 million by the KCC and were ordered to take corrective measures in connection with the most recent hacking incident. We filed an administrative appeal in August 2014 in connection with the KCC fine and prevailed. The KCC appealed the administrative decision and the appeal is currently ongoing at the Seoul High Court.
We are unable to predict with any meaningful 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 regarding 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.
We are subject to various laws and regulations in Korea and other jurisdictions, including the Monopoly Regulation and Fair Trade Act of Korea and other laws and regulations governing our business activities and acts of our management and employees.
Our business operations and acts of our management, employees and other relevant parties are subject to various laws and regulations in and outside Korea. These laws are complicated and sometimes conflicting and our efforts to comply with these laws could increase our cost of doing business, restrict our business activities and expose us or our employees to legal sanctions and liabilities.
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, as well as requiring disclosure of the status of such cross-shareholdings. 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
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group. For example, in 2015, we were fined ￦2 billion by the Korea Fair Trade Commission for using monopolistic status to exclude competitors in the corporate messaging business. In 2016, we were issued consent orders by the Korea Fair Trade Commission for unfairly comparative advertisements on quality and coverage of our LTE service. 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.
Certain of our business activities or acts of our management, employees or other relevant parties, including, without limitation, investigations, claims or legal proceedings involving our former chief executive officer Mr. Lee and incidents relating to the employment of certain executives and execution of certain advertising contracts described above, may raise concerns about compliance with laws of Korea and other relevant jurisdictions, including the United States. These various and sometimes conflicting laws and regulations include the U.S. Foreign Corrupt Practices Act and other laws prohibiting corrupt payments to governmental officials and commercial counterparties. Compliance with complex Korean and foreign laws and regulations that apply to our operations increases our cost of doing business. Failure to comply with these laws and regulations could also result in fines, penalties and criminal sanctions against us, our officers, or our employees, prohibitions on conduct of our business, and damage to our reputation. Criminal or civil investigation by Korean or other authorities may result in a material impact to our business or reputation, which in turn could impact our relationships with certain of our customers and business partners, and which potentially could give rise to additional regulatory inquiries in Korea or elsewhere. Defending us against any allegations or charges of wrongdoing also could be both costly and time-consuming, and could significantly divert the efforts and resources of our management and other personnel. There can be no assurance that we or our employees and other relevant parties will always be in full compliance with these laws and regulations, or that future legal or regulatory developments applicable to us will not have an adverse impact on our business, reputation or stock price.
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. In addition, to protect pre-school and elementary school children, the Office of Education in Gyeonggi-do, one of Korea’s highly populated provinces, implemented an ordinance named “Protective Ordinance for Social Groups Vulnerable to Electromagnetic Radiation” in April 2016. The ordinance prohibits installation of cellular towers near pre-schools and elementary schools in Gyeonggi-do. In December 2016, the minister of the MSIP filed a petition with the Supreme Court to invalidate the ordinance. Certain legislators of Gyeonggi-do announced a plan to file a criminal complaint against the minister of the MSIP. 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.
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Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on the results of our operations and on the prices of our securities.
Substantially all of our revenues are denominated in Won. Depreciation of the Won may materially affect the results of our operations because, among other things, it causes an increase in the amount of Won required by us to make interest and principal payments on our foreign-currency-denominated debt, the costs of telecommunications equipment that we purchase from overseas sources, net settlement payments to foreign carriers and certain payments related to our derivative instruments entered into for foreign exchange risk hedging purposes. Of the ￦8,121 billion total book value of debentures and borrowings outstanding as of December 31, 2016, ￦3,072 billion was denominated in foreign currencies. The interest rates of such debt denominated in foreign currencies ranged from 0.48% (Japanese Yen 15 billion bond issued in 2015) to 6.50% (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.A. Selected 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—Exchange Rate Risk.”
Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of our ordinary shares on the KRX Korea Composite Stock Price Index (“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 American Depositary Receipts (“ADRs”) of cash dividends, if any, paid in Won on our ordinary shares represented by the ADSs.
We may be exposed to potential claims for unpaid wages and become subject to additional labor costs arising from the Supreme Court of Korea’s interpretation of ordinary wages.
Under the Labor Standards Act, an employee’s “ordinary wage” is a key legal construct used to calculate many statutory benefits and entitlements in Korea. Increasing or decreasing the amount of compensation included in employees’ ordinary wages has the effect of increasing or decreasing the amounts of various statutory entitlements that are calculated based on “ordinary wage,” such as overtime premium pay. Under guidelines previously issued by the Ministry of Employment and Labor, prior to the Supreme Court decision described below, an employee’s ordinary wage included base salary and certain fixed monthly allowances for work performed overtime during night shifts and holidays. Prior to the Supreme Court of Korea’s decision described below, companies in Korea had typically interpreted these guidelines as excluding from the scope of ordinary wages fixed bonuses that are paid other than on a monthly basis, namely on a bi-monthly, quarterly or biannual basis.
On December 18, 2013, the Supreme Court of Korea ruled that regular bonuses (including those that are paid other than on a monthly basis) shall be deemed ordinary wages if these bonuses are paid “regularly” and “uniformly” on a “fixed basis” notwithstanding differential amounts based on seniority. Under this decision, any collective bargaining agreement or labor-management agreement which attempts to exclude such regular bonuses from employees’ ordinary wages will be deemed void for violation of the mandatory provisions of Korean law. However, the Supreme Court of Korea further ruled that, in certain limited situations, an employee’s claim of underpayment under the expanded scope of ordinary wages for the past three years may be denied based on the principles of good faith, even though the claim is raised within the statute of limitations period. Following this Supreme Court
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decision, the Ministry of Employment and Labor issued a Guideline for Labor and Management on Ordinary Wages on January 23, 2014. A bill for amendment to the Labor Standard Act, which includes a definition of “ordinary wages” as “entire money and valuables determined in advance to be provided to the employee by the employer as wages, regardless of its name, in exchange of the prescribed or total work of the employee,” is currently pending at the sub-committee level of the National Assembly.
While we currently are not subject to any claims of underpayment from our current or former employees, the Supreme Court decision may result in additional labor costs for us in the form of additional payments required under the expanded scope of ordinary wages, both those incurred during the past three years and those to be incurred in the future. Any such additional payments may have an adverse effect on our financial condition and results of operation.
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 or political 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 and domestic political scandals.
The Korean economy is closely integrated with, and is significantly affected by, developments in the global economy and financial markets. Substantial uncertainties remain for the global and Korean economy in the form of anticipated tightening of the U.S. monetary policy, continued fiscal and financial challenges for the European, U.S. and global economies, fluctuations in oil and commodity prices, signs of cooling of the Chinese economy and a rise of military and political tension in the Middle East, the Eastern Europe and former members of the Soviet Union. Accordingly, the overall prospects for the Korean and global economy in 2017 and beyond remain uncertain. Any future deterioration of the global economy may have an adverse impact on the Korean economy, which in turn could adversely affect our business, financial condition and results of operations. As Korea’s economy is highly dependent on the health and direction of the global economy, investors’ reactions to developments in one country can have adverse effects on the securities price of companies in other countries. Factors that determine economic and business cycles of the Korean or global economy are for the most part beyond our control and inherently uncertain. In light of the high level of interdependence of the global economy, any of the foregoing developments could have a material adverse effect on the Korean economy and financial markets, and in turn on the our business and profitability.
In November 2016, the prosecutor’s office indicted a confidante of former President Geun-hye Park, Ms. Soon-sil Choi, who had allegedly used her ties with the former President to extort donations from Korean conglomerates for two non-profit foundations over which she is purported to have substantial influence, and a number of current and former presidential aides on charges of, among others, abuse of power, coercion and leaking classified documents. On November 30, 2016, a special independent prosecutor was appointed to conduct an investigation of the extent of the former President’s involvement. On December 9, 2016, the National Assembly voted in favor of impeaching former President Park for a number of alleged constitutional and criminal violations including violation of the Constitution and abuse of power by allowing her confidante to exert influence on state affairs and letting senior presidential aides help her extort from companies.
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On March 10, 2017, the Constitutional Court of Korea upheld the constitutionality of the impeachment, removing former President Park from office. One of the findings of the Constitutional Court was that the former President, through her aides and Ms. Choi, coerced major Korean corporations, including us, to make donations to Mir Foundation and K-Sports Foundation. According to the Constitutional Court, such corporations contributed a total of ￦48.6 billion to Mir Foundation between November 2015 and December 2015 and a total of￦28.8 billion to K-Sports Foundation between February 2016 and August 2016. Former President Park, Ms. Choi, and other associated government officials are currently awaiting trials under charges of bribery, abuse of power or extortion, among other offenses.
A special presidential election is scheduled to be held on May 9, 2017. There is no assurance that such political development as well as ongoing trials and investigations of former President Park and other individuals will not have a material adverse effect on the Korean economy and us.
Developments that could have an adverse impact on Korea’s economy in the future also include:
continued volatility or deterioration in Korea’s credit and capital markets;
difficulties in the financial sectors in Europe, China and elsewhere and increased sovereign default risks in selected countries and the resulting adverse effects on the global financial markets;
global market volatility in connection with “Brexit,” the United Kingdom’s vote to leave the European Union in a referendum held in June 2016 and the subsequent decision by the Prime Minister of the United Kingdom to initiate a two-year process to complete the United Kingdom’s exit by mid-2019;
adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. dollar, the Euro 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 and regions that are important export markets for Korea, such as the United States, Europe, 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;
social and labor unrest;
increases in social expenditures to support an aging population in Korea or decreases in economic productivity due to the declining population size in Korea;
the economic impact of any pending or future free trade agreements;
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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, including the recent Ebola, Middle East Respiratory Syndrome and Zika virus outbreaks;
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 and the recent diplomatic tension between Korea and China with respect to the deployment of the Terminal High Altitude Area Defense (THAAD) system in Korea;
political uncertainty or increasing strife among or within political parties in Korea, and political gridlock within the Government or in the legislature, which prevent or disrupt timely and effective policy making;
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 countries in the Middle East and North Africa and any material disruption in the supply of oil or significant decrease 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, there continues to be uncertainty regarding the long-term stability of North Korea’s political leadership since the succession of Kim Jong-un to power following the death of his father in December 2011, which has raised concerns with respect to the political and economic future of the region.
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:
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. Subsequently, North Korea continued to engage in provocative behaviors. In January 2016, North Korea announced that it had successfully tested a hydrogen bomb, its fourth nuclear test and allegedly first test using hydrogen, which is more explosive than plutonium. In February 2016, North Korea tested its intercontinental ballistic missile technology and launched a long-range missile, which it claimed to have launched a satellite into orbit. In response, the Government condemned the provocations and flagrant violations of relevant United Nations Security Council resolutions and withdrew Korean personnel from the inter-Korea Kaesong industrial complex (the “Complex”) and announced its closing. In March 2016, the United Nations Security Council unanimously passed a resolution condemning North Korea’s actions and significantly expanding the scope of sanctions applicable to North Korea. In September 2016, North Korea announced that it had successfully tested a nuclear warhead that could be mounted on ballistic
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missiles. In response, the Government condemned the test, and in November 2016, the United Nations Security Council unanimously passed a resolution imposing additional sanctions on North Korea. In March 2017, North Korea launched four midrange missiles aimed at the U.S. military bases in Japan, which landed off the east coast of the Korean peninsula. In late March 2017, the United States sanctioned 11 North Korean individuals and one North Korean coal company for their ties to North Korea’s nuclear weapons program. In April 2017, North Korea launched two ballistic missiles which landed off the east coast of the Korean peninsula. In response to the missile launches, representatives of the Government, the United States and China expressed their plans to impose stronger sanctions on North Korea.
In August 2015, two Korean soldiers were injured in a landmine explosion near the South Korean demilitarized zone. Claiming the landmines were set by North Koreans, the South Korean army re-initiated its propaganda program toward North Korea utilizing loudspeakers near the demilitarized zone. In retaliation, the North Korean army fired artillery rounds on the loudspeakers, resulting in the highest level of military readiness for both Koreas. High-ranking officials from the Government and North Korea subsequently met for discussions intending to diffuse military tensions and released a joint statement whereby, among other things, North Korea expressed regret over the landmine explosions that wounded the Korean soldiers.
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 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, which may further aggravate social and political pressure within North Korea. There can be no assurance that the level of tension affecting the Korean peninsula will not escalate in the future. Any further increase in tensions such as North Korea’s belligerent tactics, dissolution of high level contacts between Korea and North Korea or occurrence of military hostilities, could have a material adverse effect on our business, results of operations and financial condition.
In addition, since 2005, we have provided fixed-line telephone services, through various fixed-line telephone equipment that we installed, to certain South Korean companies located at the Complex, which was established pursuant to an agreement made during the summit meeting of the two Koreas in June 2000. The Complex was the largest economic project between the two Koreas and was designed to combine the Republic’s capital and entrepreneurial expertise with the availability of land and labor of North Korea.
For the year ended December 31, 2015, our revenue from the services provided for the Complex was approximately US$1.0 million. We had no revenue from such services for the year ended December 31, 2016. Our investment in the Complex was approximately US$1.6 million as of December 31, 2015 and we have not made additional investments since the closure of the Complex. However, our services have been suspended since February 11, 2016 following the Government’s decision to halt operations of the Complex to impede North Korea’s utilization of funds from the Complex to finance its nuclear and missile programs. No assurance can be given that we will not experience any material losses as a result of the suspension of this project or failure of the project as a result of a breakdown or escalation of hostilities in the relationship between the Republic and North Korea.
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Korea’s legislation allowing class action suits related to securities transactions may expose us to additional litigation risk.
The Securities-related Class Action Act of Korea enacted in January 2004 allows class action suits to be brought by shareholders of companies (including us) listed on the KRX KOSPI Market for losses incurred in connection with purchases and sales of securities and other securities transactions arising from (1) false or inaccurate statements provided in the registration statements, prospectuses, business reports, audit reports, semi-annual or quarterly reports and material fact reports and omission of material information in such documents, (2) insider trading, (3) market manipulation and (4) unfair trading. This law permits 50 or more shareholders who collectively hold 0.01% of the shares of a company to bring a class action suit against, among others, the issuer and its directors and officers. Because of the relatively recent enactment of the act, there is not enough judicial precedent to predict how the courts will apply the law. Litigation can be time-consuming and expensive to resolve, and can divert management time and attention from business operation. We are not aware of any basis upon which such suit may be brought against us, nor are any such suits pending or threatened. Any such litigation brought against us could have a material adverse effect on our business, financial condition and results of operations.
We are generally subject to Korean corporate governance and disclosure standards, which differ in significant respects from those in other countries.
Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies which differ in some respects from standards applicable in other countries, including the United States. As a reporting company registered with the Securities and Exchange Commission and listed on the New York Stock Exchange, we are, and will continue to be, subject to certain corporate governance standards as mandated by the Sarbanes-Oxley Act of 2002, as amended. However, foreign private issuers, including us, are exempt from certain corporate governance standards required under the Sarbanes-Oxley Act or the rules of the New York Stock Exchange. For a description of significant differences in corporate governance standards, see “Item 16G. Corporate Governance.” There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public or non-public companies in other countries.
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,
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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. 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 ordinary shares 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 ordinary shares 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 ordinary shares 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.
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Forward-looking statements may prove to be inaccurate.
This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about us and the industries in which we operate. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.
Item 4. Information on the Company
Item 4.A. History and Development of the Company
In 1981, the Government established us under the Korea Telecom Act to operate the telecommunications services business that it previously directly operated. Under the Korea Telecom Act and the Government-Invested Enterprises Management Basic Act, the Government exercised substantial control over our business and affairs. Effective October 1, 1997, the Korea Telecom Act was repealed and the Government-Invested Enterprises Management Basic Act became inapplicable to us. As a result, we became a corporation under the Commercial Code, and our corporate organization and shareholders’ rights were governed by the Privatization Law and the Commercial Code. Among other things, we began to exercise greater autonomy in setting our annual budget and making investments in the telecommunications industry, and our shareholders began electing our directors, who 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 1990s. 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. Information on the Company—Item 4.B. Business Overview—Competition.”
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Our legal and commercial name is KT Corporation. Our principal executive offices are located at KT Gwanghwamun Building East, 33, Jong-ro 3-gil, Jongno-gu, 03155, Seoul, Korea and our telephone number is (8231) 727-0114.
Item 4.B. Business Overview
We are the leading telecommunications service provider in Korea and one of the largest and most advanced in Asia. As an integrated telecommunications service provider, our principal services include:
mobile voice and data telecommunications services based on 3G W-CDMA technology and 4G LTE technology;
fixed-line services, which include:
telephone services, including local, domestic long-distance and international long-distance fixed-line and Voice over Internet Protocol (“VoIP”) telephone services (i.e., provision of communication services over the Internet, and not over the fixed-line network) and interconnection services to other telecommunications companies;
broadband Internet access service and other Internet-related services, including IPTV services; and
data communication services, including leased line service and dedicated broadband Internet connection service to institutional customers;
credit card processing and other financial services through BC Card Co., Ltd.; and
various other services, including satellite service (through KT Sat Co., Ltd.) and information technology, real estate business (through KT Estate Inc.), satellite TV service (through KT Skylife), 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 30.6% with approximately 18.9 million subscribers as of December 31, 2016;
in the fixed-line telephone services market in Korea, we continue to be the dominant provider with approximately 24.9 million installed lines, of which approximately 11.9 million lines were in service as of December 31, 2016. As of such date, our market share of the local market was 80.6% and our market share of the domestic long-distance market was 78.9%;
we are Korea’s largest broadband Internet access provider with approximately 8.5 million subscribers (excluding WiBro and ollehWiFi subscribers) as of December 31, 2016, representing a market share of 41.4%; and
we are also the leading provider of data communication services in Korea.
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For the year ended December 31, 2016, our operating revenues were ￦23,121 billion, our profit for the period was ￦795 billion and our basic profit per share was ￦2,893. As of December 31, 2016, our total assets were ￦30,664 billion, total liabilities were ￦17,882 billion and total equity was ￦12,783 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. As part of our efforts to improve our operational efficiencies, we transferred all operations relating to fixed-line sales activities (including on-site sales, line activation, after service, and customer center operations) to our subsidiaries in 2014.
Since 2016, our main strategical focus was on promotion of services that converge information & communication technology with other fields such as energy, security, media, healthcare and transportation, utilizing our fixed-line and wireless infrastructure installed for our olleh GiGA Internet Service and LTE mobile services. In addition, we have focused on artificial intelligence and big data and plan to leverage our platforms like IPTV and network assets to introduce innovative convergence services. For example, we launched “GiGA Genie” using an artificial-intelligence based IPTV set-top box that allows users to voice-command to watch TV, use the Internet and control other Internet-connected appliances. In addition, the first Internet-only bank in Korea, called K bank, over which we own a minority interest, began operation in April 2017 and seeks to operate as a virtual bank whose operation is based on its mobile application and the Internet, while promoting greater user accessibility through the convenience stores of one of our other consortium members. K bank also plans to differentiate itself from other conventional banks by utilizing big data and offering competitive products and interest rates. Our strategical focus on convergence services builds on our “GiGAtopia” corporate vision, which refers to our goal to create a world where humans and all things are connected through ultra-fast “GiGA” infrastructure and ICT eco-system, enhanced by convergence services, industrial development and innovation. We launched our olleh GiGA Internet service, which provides transmission speed of up to 1 Gbps, in October 2014 (“olleh GiGA Internet Service”). In June 2015, we also announced the mobile data service known as “GiGA LTE,” which utilizes multipath transmission control protocol (MPTCP) technology. We continue to expand GiGA coverage, initially focusing on metropolitan areas, and further expand to other regions in Korea. By promoting our convergence services, we aim to contribute in changing the current subsidy-based Korean telecommunication market competition to one based on innovative technology, products and enhanced services.
We believe development of fifth-generation (“5G”) technology will be a key driver for future innovations, fueled also by the increasing importance of big data. With our leadership in providing highly advanced 4G LTE services, we have made extensive efforts to develop and present various further advanced technologies. At the PyeongChang 2018 Winter Olympics, our goal is to unveil the world’s first 5G services at a pre-commercial level. We are planning to showcase a variety of services with enhanced speed, latency, and connectivity, such as broadcasting from the viewpoint of players with a360-degree panoramic view or broadcasting from multiple viewpoints. As an official telecommunications services partner of the PyeongChang 2018 Winter Olympics, we will make our utmost efforts to realize the vision of 5G and capture truly memorable moments of the Olympics. In this effort, we announced our plan to commercialize the 5G services by 2019, one year ahead of our initial plan.
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In 2016, we organized our business into six business groups, the Marketing Group, the Customer Group, the Enterprise Business Group, the Global Business Group, the Future Convergence Business Group and the Platform Business 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. We aim to pursue the following strategies 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 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 to promote development of various applications for such devices.
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 2016, we launched Y24 plans which offer discounted fees and tailored data offerings for customers of age 24 or younger. We aim to differentiate ourselves from our competitors by providing broadband Internet access service using high-speed FTTH connection and offering Internet phone service with value-added features such as video communication, short message service and phone banking. We began offering real-time broadcasting service on our IPTV service in November 2008 and we were the first in the IPTV industry to achieve 7 million subscribers in 2016.
We believe that convergence of fixed-line and mobile communications technologies provides a competitive advantage to us because we have the technological know-how and experience to design and construct a unified delivery platform for a new generation of value-added services. We plan to make such platform more readily available to others so that they may create additional contents and convenience solutions such as electronic commerce and digital transaction applications that can be utilized anywhere using various media and communications devices.
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.
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Enterprise Business Group. Through our Enterprise Business Group, we aim to provide our large corporate, small- andmedium-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. Furthermore, in conjunction with our Future Convergence Business Group, we seek to expand our operations in the fields of smart energy, unified security systems and oversized data management.
Global Business Group. Through our Global Business Group, we are expanding our global operations by designing, developing and optimizing ICT services, cloud computing, data centers, our GiGA solutions and other global network services, in conjunction with overseas network operators and other global telecommunications companies. To this end, we have established or acquired overseas branches or subsidiaries in target countries to design and construct telecommunication networks and develop information & communication technology convergence products, as well as seeking further overseas opportunities working with quality Korean small- and medium-sized enterprises.
Future Convergence Business Group. Due to the saturation within the Korean telecommunication market and limitations on growth in the traditional telecommunications services market, through our Future Convergence Business Group, we aim to concentrate our existing business capabilities in achieving new synergies by converging information & communication technology with other fields, such as smart energy, unified security systems, next-generation media, healthcare and intelligent traffic control. In the field of smart energy, through our convergence energy optimization project named “KT Micro-Energy Grid System,” we seek to contribute in preventing energy crisis and to increase energy efficiency. In the field of unified security systems, we seek to contribute to the establishment of national response systems for natural and other disasters, as well as enhancing personal and corporate security. For example, we plan to launch an artificial-intelligence based security system, called “GiGAeyes”, which analyzes surveillance video and autonomously detects suspicious activities. In the field of next-generation media, we seek to contribute to the development of next-generation media contents and new media technology, thereby supporting the expansion of Korean media contents to overseas markets. We are also seeking ways to develop personalized treatment systems to provide enhanced healthcare, as well as creating intelligent traffic control systems to reduce traffic.
Platform Business Group. Through our Platform Business Group, we strive to transform into a platform-based business focusing on online-to-offline commerce, financial technology (“Fintech”) and Internet of Things (“IoT”). As part of our Fintech business initiatives, in 2016, we launched an online payment application, which provides a method of online authentication that uses biometric data such as finger prints or voice instead of complex passwords. With regard to IoT, we will continue to deploy the Industrial IoT business model, which explores opportunities to converge services with other industries. We also plan to strengthen our IoT service relating to household goods.
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 61.3 million and the number of broadband Internet access subscribers in Korea was 20.5 million as of December 31, 2016. As of December 31, 2016, the mobile penetration rate, which is calculated by dividing the number of mobile subscriber accounts (including multiple counting of those who subscribe to more than one mobile service) by the
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population of Korea, was 118.6%, and the broadband Internet penetration rate, which is calculated by dividing the number of broadband Internet access service subscriber accounts (including multiple counting of those who subscribe to more than one broadband Internet access service) by the number of households in Korea, was 108.5%.
Mobile Telecommunications Service Market
The Korean cellular market was formally established in 1984 when SK Telecom, formerly Korea Mobile Telecom, became the first mobile telephone operator in Korea. SK Telecom remained the only cellular operator in Korea until Shinsegi Telecom began service in 1994. In order to encourage further market growth and competition, the 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 4G 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 (for downloading), 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. We expanded our wideband LTE services to all of Korea in July 2014. 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 (for downloading), and began additionally interconnecting 10 MHz of bandwidth in the 2.1 GHz spectrum in January 2015 to support transmission speed of up to 300 Mbps (for downloading) under the “Wideband LTE-A X4” service. In June 2015, we commercialized GiGA LTE services which link “Wideband LTE-A X4” and our WiFi network to provide a faster WiFi connection in June 2015. In 2016, we won various awards for our GiGA LTE services and agreed to provide GiGA LTE technology to Turk Telekom Group, a leading telecommunications provider in Turkey. As of December 31, 2016, the number of LTE subscribers in Korea exceeded 46 million. Due to the high mobile penetration rate in Korea, we expect the growth of new subscribers to be limited.
In April 2014, LG U+, SK Telecom and we began offering various unlimited mobile service packages, offering mobile subscribers with unlimited voice calls, text messaging, and LTE data. We believe that the continuing intense competition among major telecommunications operators in Korea and the resulting pressure on our fees may have a material adverse impact on our results of operations.
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The table below gives the subscription and penetration information of the mobile telecommunications industry for the periods indicated:
Total Korean Population (thousands) (1)
Mobile Subscribers (thousands) (2)
Mobile Subscriber Growth Rate
Mobile Penetration (3)
Broadband Internet Access Market
With the advancement of broadband technology, the Korean broadband Internet access market has experienced significant growth. The principal technologies used in providing high speed Internet access services are xDSL, HFC and fiber optic LAN. xDSL refers to various types of digital subscriber lines, including ADSL and VDSL. xDSL offers an access solution over existing telephone lines using a specialized modem while HFC service involves the use of two-way cable networks. Fiber optic LAN is a technology that combines fiber optic cables and Unshielded Twisted Pair (“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 1 Gbps 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 WiFi with speed of up to 1.3 Gbps, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops and smartphones in hot-spot zones and at home. In addition, we expect our competitors would focus their attention on upgrading data transmission capacity of their Internet services as we continue our efforts to enhance transmission capacity of our Internet services in 2017. See “—Our Services—Fixed-line Services—Internet Services.”
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
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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. We began offering “WidebandLTE-A X4” services in January 2015 and also launched “GiGA LTE” services which links “Wideband LTE-A X4” and our WiFi network to provide a faster WiFi connection in June 2015.
Revenues related to mobile service accounted for 31.9% of our operating revenues in 2016. In addition, our goods sold, which are primarily from mobile handset sales, accounted for 12.1% of our operating revenues in 2016. 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:
Average Monthly Revenue per Subscriber (1)
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+ which began its service at around the same time as KTF. As of December 31, 2016, we had approximately 18.9 million subscribers, or a market share of 30.6%, which was the 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, 2016, there were approximately 2,700 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 their 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. On October 1, 2014, the Handset Distribution Reform Act, which regulates the sale and subsidies of mobile telecommunication devices, went into effect. See “—Regulation—Rates”.
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 260 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.
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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.
Fixed-line Services
We provide a variety of fixed-line communication services, including various telephone services, broadband and other Internet services and data communication services.
Fixed-line Telephone Services
We utilize our extensive nationwide telephone network to provide fixed-line telephone services, which consist of local, domestic long-distance, international long-distance services and land-to-mobile interconnection services. These fixed-line telephone services accounted for 8.9% of our operating revenues in 2016. 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, has led to significant decreases in our domestic long-distance call minutes and local call pulses.
Total Korean population (thousands) (1)
Lines in service per 100 inhabitants (3)
Fiber optic cable (kilometers)
Number of public telephones installed (thousands)
Domestic long-distance call minutes (millions)(4)
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.
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The following table shows the number of minutes of international long-distance calls recorded by us and specific service providers utilizing our international long-distance network in each specified category for each year in the five-year period ended December 31, 2016:
Incoming international long-distance calls
Outgoing international long-distance calls
Total
Japan (30.9%), China (23.4%) and the United States (9.1%) accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2016. 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 international long-distance services, and transmitting calls to and from their mobile networks), Sejong and SK Telink (offering international and domestic long-distance services), and SK Telecom. We recognize asland-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, 2016, we had approximately 3.4 million subscribers.
Internet Services
Broadband Internet Access Service. Leveraging on our nationwide network of over 730,000 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 8.8% of our operating revenues in 2016. Our principal Internet access services include:
ADSL, VDSL, Ethernet and FTTH services under the “olleh Internet” and “olleh GiGA Internet” brand names;
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 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 1.3 Gbps. We sponsored approximately 107,000 hot-spot zones nationwide for wireless connection as of December 31, 2016; and
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olleh 4G WiBro Internet access service, which enables two-way WiBro Internet access to portable computers, mobile phones and other portable devices at a speed averaging 6 Mbps per user.
We had approximately 8.5 million broadband Internet subscribers and approximately 1.5 million ollehWiFi service subscribers as of December 31, 2016. We commercially launched our WiBro service in June 2006, and we had approximately 506,000 subscribers as of December 31, 2016. We launched our olleh GiGA Internet Service, which provides transmission speed of up to 1 Gbps, and had approximately 2.4 million subscribers as of December 31, 2016. We also bundle our WiBro service with olleh Internet and ollehWiFi services at a discount in order to attract additional subscribers.
Our olleh Internet service utilizes ADSL technology, which is a technology that converts existing copper twisted-pair telephone lines into access paths for multimedia and high-speed data communications. ADSL transforms the existing public telephone network from one limited to voice, text and low-resolution graphics to a system capable of bringing multimedia to subscriber premises without new cabling. The asymmetric design optimizes the bandwidth by maximizing the downstream speed for downloading information from the Internet. While ADSL technology was commercially introduced after HFC-based technology, it has surpassed HFC to become the prevalent access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in July 2002. We are continually upgrading our broadband network to enable better FTTH connection, which further enhances data transmission speed of up to 1 Gbps 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 IPTV, and other digital media content with higher stability.
The high-speed downstream rates can reach up to 100 Mbps for VDSL and 1 Gbps for FTTH. We plan to offer data transmission speed of up to 1 Gbps, regardless of medium, by the end of 2017. In October 2016, we commercialized GiGA Wire 2.0 Internet service solutions on copper wires to provide data transmission speed of up to 1 Gbps. We plan to launch an Internet service based on UTP with data transmission speed of up to 1 Gbps. Downstream rates depend on a number of factors. For a constant wire gage, 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. 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 IPTV and network portal services. Our other Internet-related services accounted for 7.8% of our operating revenues in 2016.
We operate 10 data centers located throughout Korea and provide a wide range of computing services to companies which need servers, storage and leased lines. 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 data centers are designed to meet international standards, and are equipped with temperature and humidity control systems, regulated and reliable power supplies, mechanical equipment, fire detection and suppression equipment, security monitoring and wide-bandwidth connections to the Internet. Data centers allow corporations to outsource their application and server hardware management.
Our 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
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customers’ network equipment at our 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 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 commercializebusiness-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 IPTV services under the brand name “olleh TV,” and began offering ultra-high-definition (“UHD”) IPTV services, which offer resolutions up to four times those offered under high-definition television services, under the brand name “olleh GiGA UHD TV” starting in September 2014. Our IPTV 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 to browse the catalog of digital media contents and view selected media streams on their television. A set-top box provides two-way communications on an IP network and decodes video streaming data. We had approximately 7 million olleh TV subscribers as of December 31, 2016. In December 2015, amendments to the Internet Multimedia Broadcasting Business Act were promulgated. Under such amendments, a single broadcasting operator, together with its affiliates, may not have more than one-third of the market share of all paid broadcasting subscribers in Korea. The market share restriction will be in effect until June 27, 2018.
Data Communication Services
Our data communication services involve 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, 2016, we leased over 249,817 lines to domestic and international businesses. The data communication service accounted for 4.4% of our operating revenues in 2016.
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 9.0 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
Our financial services accounted for 15.4% of our operating revenues in 2016. To further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services, we, through our former subsidiary KT Capital Co., Ltd., acquired 1,622,520 additional shares of common stock of BC Card Co., Ltd. from Woori Bank, Busan Bank and Shinhan Card 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
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￦287 billion, and owned a 69.5 % interest in BC Card Co., Ltd. as of December 31, 2016. BC Card Co., Ltd. offers various credit card and related financial services. BC Card Co., Ltd. had consolidated operating revenues of ￦3,568 billion and net income of ￦163 billion for the year ended December 31, 2016 and consolidated assets of ￦ 3,651 billion and liabilities of￦2,602 billion as of December 31, 2016. 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. To focus on our core telecommunications business, we and our consolidated subsidiary, KT Hitel Co., Ltd., disposed of the entire 100% stake in KT Capital Co., Ltd. in August 2015 for a total of￦299 billion.
In November 2015, the Government announced plans to introduce Internet-only banks and granted preliminary approval to two consortiums, K bank consortium and Kakao Bank consortium. The K bank consortium, over which we own a minority interest as one of 20 shareholding companies including Woori Bank, NH Investment & Securities, Co., Ltd., GS Retail Co., Ltd. and Hanwha Life Insurance Co., Ltd., received the final approval from the Government to operate the first Internet-only bank in Korea in December 2016. The Kakao Bank consortium, K bank’s competitor, received the final approval from the Government in April 2017. K bank began its operation in April 2017 and seeks to operate as a virtual bank whose operation is based on its mobile application and the Internet, while promoting greater user accessibility through the convenience stores of one of our other consortium members. K bank also plans to differentiate itself from other conventional banks by utilizing big data and offering competitive products and interest rates. Under the current Korean law, as a non-financial institution, we are not allowed to own in excess of 4% voting interest in K bank, and our combined voting and non-voting interest may not exceed 10%. In 2016, the National Assembly did not adopt a pending bill which would have allowed non-financial institutions to own more than 4% interest in Internet banks.
Other Businesses
We also engage in various business activities that extend beyond telephone services and data communication services, including satellite services, information technology and network services, satellite TV services, with the consolidation of KT Skylife starting in January 2011, and media contents business with the establishment of KT Media Hub Co., Ltd. in December 2012. We merged KT Media Hub Co., Ltd. into KT Corporation in March 2015, to enhance shareholder value by increasing management efficiency and promoting synergy among our existing businesses. Our other businesses accounted for 10.6% of our operating revenues for 2016.
We provide transponder leasing, broadcasting, video distribution and data communication services through Koreasat 5, Koreasat 6 and Koreasat 8 (also known as ABS-2). We also lease satellite capacity from other satellite operators to offer satellite services to both domestic and international customers.
In August 2006, we launched Koreasat 5, a combined civil and governmental communications satellite with a design life of 15 years, to replace Koreasat 2 (launched in 1996 with a design life of ten years). In December 2010, we launched Koreasat 6, with a design life of 15 years, to replace Koreasat 3 (originally 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 communication services. Most of the direct-to-home satellite broadcasting transponders are utilized by KT Skylife. In August 2010, we procured from Asia Broadcast Satellite Holdings, Ltd. (“ABS”), a Hong Kong-based satellite operator, four transponders on ABS-1 satellite and eight additional transponders on ABS-2 satellite in order to
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provide satellite services with a broader global scope. In the second half of 2014, we exchanged our ownership rights of four transponders on ABS-1 with ownership rights of four transponders on ABS-2 satellite. As a result, we own 12 transponders on ABS-2 satellite (also called Koreasat 8).
Two additional satellites, one to expand satellite services in various regions and the other to replace Koreasat 5, are expected to be launched in 2017.
We entered into an agreement with ABS to sell Koreasat 3 to ABS, as Koreasat 3 was expected to reach the end of its design life. In December 2013, the MSIP declared the sales contract regarding Koreasat 3 null and void on the ground that the said contract was made without prior government approval. Shortly after, ABS filed a request for arbitration against us and KT SAT Co., Ltd. and we, together with KT SAT Co., Ltd., have been involved in the International Chamber of Commerce arbitration against ABS.
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.
We offer a broad array of integrated information technology and network services to our business customers. Our range of services includes consulting, designing, building and maintaining systems and communication networks that satisfy the individual needs of our customers in the public and private sectors.
We own land and real estate in various locations nationwide. Technological developments have enhanced the coverage area of individual telecommunications facilities, which enable us to better utilize our existing land and other real estate holdings. In recent years, we have engaged in the planning and development of commercial and office buildings and condominiums on our unused sites, as well as in the leasing of buildings we own. We established KT Estate Inc. in August 2010 to oversee the planning, development and operation of our real estate assets, 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 Inc.’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 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 50.3% interest in KT Skylife as of December 31, 2016. KT Skylife offers satellite TV services, which may also be packaged with our IPTV services as further described below.
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Revenues and Rates
The table below shows the percentage of our revenues derived from each category of services for each of the years from 2014 to 2016:
Mobile services
Fixed-line services
Fixed-line telephone services:
Monthly basic charges
Monthly usage charges
Sub-total
Internet services:
Broadband Internet access service
Other Internet-related services (1)
Data communication services(2)
Goods sold (3)
Financial services
Other businesses (4)
Operating revenues
Mobile Services
We derive revenues from mobile services principally from:
monthly fees;
usage charges for outgoing calls;
usage charges for wireless data transmission;
contents download fees;
value-added monthly service fees; and
mobile-to-mobile interconnection charges.
We offer various rate plans, including those that offer a specified amount of free data transmission per month in return for higher monthly fees as well as plans that are geared toward business customers. We completely abolished our activation fee in March 2015.
We introduced rate plans specifically for smartphone users starting in September 2009. We also introduced new rate plans specifically for LTE phone users in connection with the rollout of our 4G LTE services in January 2012. In June 2013, we introduced the Everyone olleh rate plan, which
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permits users to make unlimited voice calls within our wireless network, and the Fixed-Line and Wireless Unlimited rate plan, which permits users to make unlimited voice calls within both our fixed-line and wireless networks. We began offering LTE unlimited data plans in March 2014, which allows unlimited LTE data usage within certain transmission speeds after the monthly quota at the highest LTE data transmission speed has been exhausted. Starting from November 2014, we began offering our major smartphone plans at discounted rates which were previously offered only to subscribers who signed on for mandatory subscription periods ranging from one to two years, thereby eliminating the need to sign on for any mandatory subscription period to benefit from our discounted plans and removing any early termination penalties. We believe such changes allow our subscribers a wider flexibility in choosing their mobile plans based on their needs. In May 2015, we began offering the LTE data choice plan, through which users choose a 300MB to unlimited monthly quota for data transmission and enjoy unlimited voice calls and messages. With the LTE data choice plan, we also introduced the “Push-and-Pull” service, which allows users to carry over unused data to the following month or pull up additional data from the following month’s allotment. In March 2016, we began offering the Y24 plans for customers under the age of 24. Many of the Y24 plans offer free data transmission for three hours a day and additional data service at discounted rates.
The following table summarizes the charges associated with our representative LTE smartphone service plans:
LTE data choice 299
LTE data choice 349
LTE data choice 399
LTE data choice 449
LTE data choice 499
LTE data choice 599
LTE data choice 699
LTE data choice 999
Device insurance
We also provide plans specially designed for elderly and pre-teen subscribers as well as special discounts to subscribers with physical disabilities. Plans specialized for feature phone users such as a standard rate plan are provided as well. Under the standard rate plan, we charge a monthly fee of ￦11,000, a voice calling usage charge of ￦1.8 per second and a video calling usage charge of ￦3 per second, without any free voice or video call airtime minutes.
We also offer plans for new devices such as tablets and wearable devices. Since 2010, we have been offering a specialized plan for tablets which provides a 1.6GB to unlimited monthly quota of data transmission for a monthly fee of ￦18,000 to ￦99,900. In November 2014, we began offering a specialized plan for wearable devices, which charges a fixed monthly fee of ￦8,000 for a 100MB monthly quota of data transmission and 50 minutes of voice calls. For other new devices, we also provide a data sharing service that allows users to share data provided as part of their smartphone plans with other devices.
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
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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.
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:
SK Telecom
LG U+
KT
We recognize as mobile-to-mobileinterconnection 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.
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, 2016, we had ￦368 billion in refundable service initiation deposits outstanding and 1.7 million 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 initiation 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.
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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 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;
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; and
a subscriber who elects to pay a monthly flat rate ranging from ￦7,500 to ￦15,000, depending on the types of calls the subscriber wishes to make, is able to use 3,000 minutes per month of local, domestic long-distance, land-to-VoIP andland-to-KT mobile calls.
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.
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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.
Land-to-mobile Interconnection. We provide other telecommunications service providers, including mobile operators and other fixed-line operators, interconnection to our fixed-line network. For a call initiated by a landline user to a mobile service subscriber, we collect from the landline user theland-to-mobile usage charge and remit to the mobile service provider a land-to-mobileinterconnection 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:
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.
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The following table shows such interconnection charge per minute collected for a call depending on the type of call, as determined by the MSIP:
Local access (1)
Single toll access (2)
Double toll access (3)
Broadband Internet Access Service. We offer broadband Internet access service that primarily uses existing telephone lines to provide both voice and data transmission. We charge monthly fixed fees to customers of broadband Internet service. In addition, we charge customers aone-time installation fee per site of ￦20,000 and modem rental fee of up to ￦8,000 on a monthly basis. Our fixed-line broadband internet service plans range from￦30,000 to ￦50,000 per month and our wireless broadband Internet service plans range from ￦10,000 to￦30,000 per month.
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 ￦9,000 on a monthly basis and a monthly subscription fee. The rates we charge for olleh TV services are subject to approval by the MSIP. Our olleh TV service plans range from ￦15,000 to ￦50,000 per month.
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, the type of the 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 IPTV, Internet phone, fixed-line telephone service and mobile services, at a discount.
The following table summarizes our various basic bundled packages that we currently offer. The packages require subscribers to agree to a subscription period of three years:
Mobile Monthly Fee
Internet / Internet Phone / Mobile
Internet / Fixed-Line Phone / Mobile
Internet / IPTV / Mobile (1)
Internet / Fixed-Line Phone / IPTV / 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 IPTV 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+ to provide a similar range of services as SK Telecom and us. Furthermore, telecommunications providers are competing to be the first to introduce innovative services such as those based on 5G technologies.
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 4G mobile services based on LTE technology by SK Telecom, LG U+ and us. The price competition through handset subsidies has become less prevalent since the enactment of the Handset Distribution Reform Act in October 2014, which limits the maximum amount of handset subsidies.
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The following table shows the market shares in the mobile telecommunications market as of the dates indicated:
December 31, 2014
December 31, 2015
December 31, 2016
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+, Sejong and SK Telink in the domestic long-distance market. LG U+ began offering domestic long-distance service in 1996, followed by Sejong 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, 2016:
30 kilometers or longer
International Long-Distance Telephone Service. Four companies, SK Broadband, LG U+, Sejong 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 Sejong 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, 2016:
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, Sejong and LG U+. In addition, the entry of cable television providers that offer HFC-based broadband Internet access services at rates lower than ours has increased competition in the broadband Internet access market. We expect industry consolidation among our competitors in the near future, and smaller competitors in the broadband market today may become larger competitors.
The following table shows the market share in the broadband Internet access market as of the dates indicated:
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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, 2016:
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 services 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.
In November 2015, the Government announced plans to introduce Internet-only banks and granted preliminary approval to two consortiums, K bank consortium and Kakao Bank consortium. The K bank consortium, over which we own a minority interest as one of 20 shareholding companies including Woori Bank, NH Investment & Securities, Co., Ltd., GS Retail Co., Ltd. and Hanwha Life Insurance Co., Ltd., received the final approval from the Government to operate the first Internet-only bank in Korea in December 2016. The Kakao Bank consortium, K bank’s competitor, received the final approval from the Government in April 2017. K bank began its operation in April 2017 and seeks to operate as a virtual bank whose operation is based on its mobile application and the Internet, while promoting greater user accessibility through the convenience stores of one of our other consortium members. K bank also plans to differentiate itself from other conventional banks by utilizing big data and offering competitive products and interest rates.
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 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 suspension and termination of network
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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, establishment and administration of policies governing telecommunications service fees, value-added service providers and specific service providers, as well as supervision of 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 of Korea 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 Act on Promotion of Information and Communications Network Utilization and Information Protection, etc., telecommunications service providers are also required to protect personal information of their customers. Generally, when a telecommunications service provider intends to collect or use its customer’s personal information, such telecommunications service provider, with certain exceptions, must notify and receive the customers’ consent in relation to the purpose of collection, the use of the collected personal information, types of personal information collected and period during which the personal information will be possessed and used. Korean telecommunications providers may not use their customers’ personal information for any purpose other than the purpose their customers have consented to. In addition, there are various internal processes that the telecommunications providers are mandated to install in order to collect and handle personal information of their customers.
The MSIP also has the authority to regulate the IP media market, including IPTV services. We began offering IPTV 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. In March 2015, amendments to the Internet Multimedia Broadcasting Business Act were promulgated. Under such amendments, a single broadcasting operator together with their affiliates may not have more than one-third of the market share of all paid broadcasting subscribers in Korea. The restriction on market share will be in effect until June 27, 2018.
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
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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.
On October 1, 2014, the Handset Distribution Reform Act, which seeks to lower the cost of communication for the general public and reduce handset factory prices by establishing fair and transparent order in the distribution of mobile telecommunication devices, went into effect. The Handset Distribution Reform Act regulates, among other matters, the sale and subsidies of mobile devices such as smartphones, with one of its purposes being to induce telecommunication operators to compete in lowering the costs of communications and encourage the manufacturers to reduce handset factory prices, while improving service quality. Under the Handset Distribution Reform Act, consumers may not be discriminated in terms of subsidies based on their age, place of residence or monthly subscription plan when using their existing mobile phones, buying a new phone or switching their mobile carriers. Furthermore, everyone, regardless of their status, is entitled to receive either a handset subsidy for the purchase of mobile phone models that were launched within the last 15 months, or a tariff discount (with the current discount rate set at 20%, effective since April 24, 2015). The maximum amount of handset subsidy that telecommunications operators and handset manufacturers may offer is determined by Korean telecommunication regulators (such limit to be determined between ￦250,000 and￦350,000, and may be adjusted every six months, with the current limit set at￦330,000, effective since April 8, 2015). Telecommunications operators are also required to publicly announce the amount of handset subsidy that they offer, which may not be readjusted within one week after such announcement. In addition, telecommunications operators are prohibited from using misleading or exaggerated advertisements, such as advertisements that mobile phones are free without adequately explaining that it is preconditioned on signing up for high-priced monthly subscription plans.
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
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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, except for discount services for persons with disabilities and for certain low-income persons, 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. As for the costs and losses recognized by a universal service provider in connection with providing discount services for persons with disabilities and for certain low-income persons, such costs and losses will be borne by such universal service provider.
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 other 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
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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, 2016, 49.0% 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.
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 83% of our subscribers as of December 31, 2016 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 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
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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.
Patents and Licensed Technology
The ability to obtain and protect intellectual property rights to the latest telecommunications technology is important for our business. We own or have licenses to various patents and trademarks in Korea and overseas, and have applications for patents pending in Korea and other select countries such as the United States, Europe, China and Japan. A majority of our patents registered in Korea and overseas relate to our wireless and fixed-line telecommunications, media and IoT technologies. In addition, we operate several research and development (“R&D”) laboratories to develop latest technology and additional platforms, as described in “Item 5.C. Research and Development, Patents and Licenses, Etc.” We license our intellectual property rights to third parties in return for periodic royal payments. We currently do not license any material technologies or patents from third parties.
Seasonality of the Business
Our main business generally does not experience significant seasonality.
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. As of December 31, 2016, the net book value of our property and equipment was ￦14,312 billion, of which ￦3,434 billion is accounted for the net book value of our land, buildings and structures. As of December 31, 2016, the net book value of investment property, which is accounted for separately from our property and equipment was ￦1,148 billion. Other than described in this annual report, no significant amount of our properties is leased. There are no material encumbrances on our properties including the fixed assets below.
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.
We have a license to use 40 MHz of bandwidth in the 2.1 GHz spectrum, of which 20 MHZ is used to provide IMT-2000 services based on W-CDMA wireless network standards and the remaining 20 MHZ for our 4G LTE services. Such license was renewed in December 2016, and we are required to pay approximately ￦569 billion for use of such bandwidth during the license period of 5 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. 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.
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 have not utilized 10 MHz of bandwidth in the 800 MHz spectrum due to the unavailability of requisite technologies and have recorded impairment for the non-usage.
In August 2013, MSIP 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. 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.
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In May 2016, the MSIP auctioned 40 MHz of bandwidth in the 700 MHz spectrum, 20 MHz of bandwidth in the 1.8 GHz spectrum, 20 MHz of bandwidth in the 2.1 GHz spectrum, 40 MHz of bandwidth in the 2.6 GHz spectrum and 20 MHz of bandwidth in the 2.6 GHz spectrum. We acquired the right to use 20 MHz of bandwidth in the 1.8 GHz spectrum for which we are required to pay a total usage fee of approximately ￦470 billion during a license period of 10 years. SK Telecom acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum and 20 MHz of bandwidth in the 2.6 GHz spectrum and LG U+ acquired the right to use 20 MHz of bandwidth in the 2.1 GHz spectrum. The right to use 40 MHz of bandwidth in the 700 MHz spectrum was not purchased by any company. We currently use 20 MHz of bandwidth in the 1.8 GHz spectrum to provide Wideband LTE-A services.
Exchanges
Exchanges include local exchanges and “toll” exchanges that connect local exchanges to long-distance transmission facilities. We had 25 million lines connected to local exchanges and 2.2 million lines connected to toll exchanges as of December 31, 2016.
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 IP platform in preparation for building our next generation broadband convergence network by 2021. As of December 31, 2016, 100% of our lines connected to toll exchanges are compatible to IP platform.
Internet Backbone
Our Internet backbone network, called KORNET, has the capacity to handle aggregate traffic of our broadband Internet access subscribers, data centers and Internet exchange system at any given moment of up to 8.9 Tbps as of December 31, 2016. 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 IP premium network that enables us to more reliably support olleh TV, WiBro, Internet Phone, upgraded VoIP services and other IP services. As of December 31, 2016, our IP premium network had 2,941 lines installed to provide 3G and LTE mobile data services, 3,147 lines installed to provide IPTV services and a total capacity to handle up to 2.8 Tbps of IPTV, voice, mobile data, virtual private network (VPN) and WiBro service traffic.
Access Lines
As of December 31, 2016, we had 19.3 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, 2016, we had approximately 18.9 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 over 730,000 kilometers of fiber optic cables as of December 31, 2016 of which approximately 116,000 kilometers of fiber optic cables are used to connect our backbone network and approximately 616,000 kilometers are used to connect the backbone network to our subscribers. Our backbone network utilizes 64 Tbp 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
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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. During 2013, we completed the construction of our next generation broadband convergence network by installing carrier ethernet architecture.
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, 2016.
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, IP 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 210 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 879 Gbps is connected to approximately 200 Internet service providers through our two Internet gateways in Hyehwa and Guro. In addition, we operate a video backbone with capacity of 1.5 Gbps to transmit video signals from Korea to the rest of the world.
Satellites
Koreasat 5 (launched in 2006), Koreasat 6 (launched in 2010), and Koreasat 8 (launched in 2014 and of which we own 12 transponders) are all in operation, providing broadcasting, video distribution and broadband data services in selected areas. Two additional satellites (provisionally called Koreasat 5A and Koreasat 7) are expected to be launched in 2017. If launched successfully, Koreasat 5A will replace Koreasat 5. The rights and interests regarding Koreasat 3 are currently subject to an International Chamber of Commerce arbitration. See “—Item 4.B. Business Overview—Our Services—Other Businesses” and “Item 8. Financial Information—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 1.7% interest in the 39,000-kilometer Southeast Asia-Middle East-Western Europe 3 Cable Network linking 34 countries, activated since December 1999;
a 4.0% 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;
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a 20.0% interest in the 500-kilometer Korea-Japan Cable Network linking Korea and Japan, activated since March 2002;
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;
a 8.5% interest in the 11,000-kilometer Asia Pacific Gateway linking Korea, China, Japan, Thailand, Taiwan, Hong Kong, Vietnam, Singapore and Malaysia, activated since October 2016; and
a 16.7% interest in the 14,000-kilometer New Cross Pacific linking Korea, China, Japan, Taiwan and the United States, which is expected to be activated in the fourth quarter of 2017.
We have also invested in four 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 and fixed-line services, including fixed-line telephone services, 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 addition, we derive revenues from handset sales and non-telecommunications services, including financial services.
In 2016, we determined our operating segments for financial reporting purposes as the following:
the Customer/Marketing Group, which engages in providing various telecommunication services to individual/home/corporate customers and the convergence business,
the Finance Group, which engages in providing various financial services such as credit card services,
the Satellite TV Group, which engages in satellite TV services, and
the Others Group, which includes security services, satellite service, information technology and network services, global business services that provides global network services to multinational or domestic corporate customers and telecommunications companies and other services provided by our subsidiaries.
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Prior to 2016, we had three operating segments: (i) Customer/Marketing Group, (ii) Finance Group and (iii) Others Group. In 2016, our satellite TV services was classified as a new segment, the Satellite TV Group, in accordance with the requirements of IFRS 8 (Operating Segments). The segment results for 2014, 2015 and 2016 are reported in accordance with the current segment classification of four operating segments. See Note 32 to the Consolidated Financial Statements.
We disposed of our interests in two of our subsidiaries, KT Rental Co., Ltd. and KT Capital Co., Ltd., in June 2015 and August 2015, respectively. The profit and loss on the related operations of KT Rental Co., Ltd. and KT Capital Co., Ltd. are presented as discontinued operations. See Note 39 to the Consolidated Financial Statements.
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 or political 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;
employee reductions and changes in severance and retirement benefits;
acquisition of new bandwidths and usage fees for such bandwidths;
changes in the rate structure for our services;
handset subsidies; and
researching and implementing technology upgrades and additional telecommunication services such as 5G technologies.
As a result of these factors, our financial results in the past may not be indicative of future results or trends in those results.
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 October 2011, we, through our former subsidiary KT Capital Co., Ltd., acquired an additional 1,622,520 common shares of BC Card Co., Ltd. from Woori Bank, Busan Bank and Shinhan Card 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 38.9%, 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 69.5% interest in BC Card Co., Ltd. as of December 31, 2016. The profit and loss on the related operations of KT Capital Co. Ltd. are presented as discontinued operations. See Note 39 to the Consolidated Financial Statements.
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in October 2014, we acquired 4,000,000 treasury shares of ktis Corporation, an equity-method investee which provides telephone number directory services, for approximately ￦14 billion (and the book value of the company being￦36 billion at the time of the consolidation), thereby increasing our ownership percentage to 30.0% of all issued and outstanding capital as of December 31, 2015 and making it our consolidated subsidiary as a result of deemed control starting from October 2014. See Note 1 to the Consolidated Financial Statements.
in October 2014, we, through our subsidiary KT Hitel Co., Ltd., acquired 4,800,000 treasury shares of ktcs Corporation, an equity-method investee which provides telephone number directory services, for approximately ￦14 billion (and the book value of the company being ￦37 billion at the time of consolidation), thereby increasing our ownership percentage to 30.9% of all issued and outstanding capital as of December 31, 2015 and making it our consolidated subsidiary as a result of deemed control starting from October 2014. See Note 1 to the Consolidated Financial Statements.
starting in July 2012, KT Rental Co., Ltd., our then-58.0% owned subsidiary, became our consolidated subsidiary as a result of the acquisition of KT Rental Co., Ltd.’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 Co., Ltd. pursuant to a shareholders’ agreement being resolved as a result. The sale of KT Rental Co., Ltd. to the Lotte Group for ￦1.01 trillion (with proceeds to KT Corporation being ￦763 billion) was completed in June 2015. The profit and loss on the related operations of KT Rental Co. Ltd. are presented as discontinued operations. See Note 39 to the Consolidated Financial Statements.
Our financial condition and results of operations may be affected as a result of such acquisitions, disposals or consolidation. Furthermore, pursuing acquisitions, joint venture and certain investment 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.
Employee Reductions and Changes in Severance and Retirement Benefits
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 2014, 2015 and 2016, 41, 33 and 5 employees, respectively, retired under our voluntary early retirement plan. In April 2014, in addition to our usual voluntary early retirement plan, we held a special voluntary early retirement program where we provided 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. The special voluntary early retirement program resulted in the early retirement of 8,304 employees in 2014. Our payments of severance benefits amounted to ￦1,427 billion in 2014, ￦118 billion in 2015 and ￦122 billion in 2016. In 2014, our severance payments were particularly high due to the special voluntary early retirement program. There was no such special retirement program in 2015 and 2016.
Acquisition of New Bandwidth and Usage Fees for Such Bandwidths
One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth spectrum allocated to a 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 MSIP 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. In March 2014, our wideband LTE services covered five metropolitan cities in Korea, and we expanded our wideband LTE services to all of Korea in July 2014. 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, and began additionally interconnecting 10 MHz of bandwidth in the 2.1 GHz spectrum in January 2015 to support transmission speed of up to 300 Mbps under the “Wideband LTE-A X4” service.
In May 2016, the MSIP auctioned 40 MHz of bandwidth in the 700 MHz spectrum, 20 MHz of bandwidth in the 1.8 GHz spectrum, 20 MHz of bandwidth in the 2.1 GHz spectrum, 40 MHz of bandwidth in the 2.6 GHz spectrum and 20 MHz of bandwidth in the 2.6 GHz spectrum. We acquired the right to use 20 MHz of bandwidth in the 1.8 GHz spectrum for which we are required to pay a total usage fee of approximately￦470 billion during a license period of 10 years. SK Telecom acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum and 20 MHz of bandwidth in the 2.6 GHz spectrum and LG U+ acquired the right to use 20 MHz of bandwidth in the 2.1 GHz spectrum. The right to use 40 MHz of bandwidth in the 700 MHz spectrum was not purchased by any company. We currently use 20 MHz of bandwidth in the 1.8 GHz spectrum to provide Wideband LTE-A services.
Changes in the Rate Structure for Our Services
Periodically, we adjust our rate structure for our services. For example, we completely abolished our mobile activation fee in March 2015 in line with government policy objectives. 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 IPTV, Internet phone, fixed-line telephone service, WiBro, and mobile services, at a discount.
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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. We began providing such handset subsidies, which increased, and may in the future increase, our marketing expenses. We provide handset subsidies 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. This subsidy amount is 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. In May 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 included initial commissions, monthly commissions and retention commissions paid to our authorized dealers and subscribers, including handset subsidies, but did not include advertising expenses. While the guideline was not binding, we, as well as our competitors, nonetheless tried to adhere to such guideline when feasible. Furthermore, failure to comply with rules, regulations and corrective orders may lead to suspension of our business or imposition of monetary penalties.
For example, in December 2013, the KCC 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. In March 2014, the MSIP imposed a 45-day suspension on each of us, SK Telecom and LG U+ from accepting new subscribers as a result of continuing to offer excessive handset subsidies to new subscribers, despite the order from the KCC prohibiting such subsidies. In August 2014, the KCC imposed a combined fine of approximately ￦58 billion on SK Telecom, LG U+ and us (our fine being approximately ￦11 billion) for providing excessive handset subsidies, and also imposed temporary suspensions on accepting new subscribers for seven days on SK Telecom and LG U+. In December 2014, the KCC imposed a fine of approximately ￦8 billion on each of SK Telecom, LG U+ and us for providing excessive handset subsidies. In March 2015, the KCC also imposed a combined fine of approximately ￦34 billion on SK Telecom, LG U+ and us (our fine being approximately ￦9 billion) for violation of regulations relating to handset sales, in connection with a used handset buyback program that we and the other telecommunications operators were promoting. On March 12, 2015, the KCC imposed a fine of ￦870 million for violation of restrictions on handset subsidies relating to our compensation program for used handsets. Any further suspension of our business or imposition of monetary penalties by the Government could have a material adverse effect on our business.
Furthermore, on October 1, 2014, the Handset Distribution Reform Act, which seeks to lower the cost of communication for the general public and reduce handset factory prices by establishing fair and transparent order in the distribution of mobile telecommunication devices, went into effect. The
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Handset Distribution Reform Act regulates, among other matters, the sale and subsidies of mobile devices such as smartphones, with one of its purposes being to induce telecommunication operators to compete in lowering the costs of communications and encourage the manufacturers to reduce handset factory prices, while improving service quality. Under the Handset Distribution Reform Act, consumers may not be discriminated in terms of subsidies based on their age, place of residence or monthly subscription plan when using their existing mobile phones, buying a new phone or switching their mobile carriers. Furthermore, everyone, regardless of their status, is entitled to receive either a handset subsidy for the purchase of mobile phone models that were launched within the last 15 months, or a tariff discount (with the current discount rate set at 20%, effective since April 24, 2015). The maximum amount of handset subsidy that telecommunications operators and handset manufacturers may offer is determined by Korean telecommunication regulators (such limit to be determined between ￦250,000 and ￦350,000, and may be adjusted every six months, with the current limit set at ￦330,000, effective since April 8, 2015). Telecommunications operators are also required to publicly announce the amount of handset subsidy that they offer, which may not be readjusted within one week after such announcement. In addition, telecommunications operators are prohibited from using misleading or exaggerated advertisements, such as advertisements that mobile phones are free without adequately explaining that it is preconditioned on signing up for high-priced monthly subscription plans.
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 continually upgrading our broadband network to enable better FTTH connection, which provides speed of up to 1 Gbps and better 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 IPTV, 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 in January 2012. We completed the expansion of our 4G LTE service coverage nationwide in October 2012. We commenced providing wideband LTE services in September 2013, which we expanded nationwide in July 2014, and commercialized Wideband LTE-A services in March 2014, and began additionally interconnecting 10 MHz of bandwidth in the 2.1 GHz spectrum in January 2015 to support transmission speed of up to 300 Mbps under the “Wideband LTE-A X4” service, 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.
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The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. To aid in that understanding, our management has identified “critical accounting estimates.” These estimates have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.
These critical accounting estimates include:
allowances for doubtful accounts;
useful lives of property, equipment, intangible assets and investment property;
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;
post-employment benefit liabilities; and
provisions.
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, 2016 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
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, Equipment, Intangible Assets and Investment Property
Property and equipment, intangible assets and investment properties (excluding land, condominium memberships, golf club memberships and broadcasting concession) are depreciated
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using the straight-line method over their useful lives as disclosed in Note 3.8 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 ￦208 billion in 2016.
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 ranging from 4.36% to 12.72% (depending on the segment) to the estimated future cash flows based on financial budgets for the next five years. An annual growth rate of 0.0% was 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. For example, in 2015, we recognized ￦185 billion of impairment loss in connection with the non-usage of 10 MHz of bandwidth in the 800 MHz spectrum. We also recognized ￦33 billion of impairment loss on inventory and tangible and intangible assets in connection with the close of the trunk radio system business of KT Powertel Co., Ltd. in 2015.
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. For example, in 2016, we recognized impairment losses of ￦132 billion on goodwill allocated to KT Skylife primarily due to a decrease in the expected recoverable amount resulting from a decrease in KT Skylife’s market value in 2016. See Note 12 of the Consolidated Financial Statements.
Valuation and Impairment of Financial Assets
The fair value of financial instruments, including derivative instruments, which 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
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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.
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.
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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 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 retirement 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 16 to the Consolidated Financial Statements.
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 FSCMA.
In relation to presentation of operating profit, certain accounts or transactions which are included in operating income or expenses under IFRS as issued by the IASB, are excluded from operating income or expenses under K-IFRS. 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, in connection with the exercise of early redemption rights for certain commercial paper guaranteed by KT ENGCORE, our previously 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 for the year ended December 31, 2013 (which were issued on April 28, 2014), which were not reflected in our financial statements prepared in accordance with K-IFRS for the year ended December 31, 2013 (which were issued on March 13, 2014) as it was
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not possible to make a reasonable estimate of the liabilities at the time of issuing the K-IFRS financial statements. We subsequently reflected such losses in our K-IFRS financial statements for the year ended December 31, 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, 2014, 2015 and 2016 to our 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 (loss) 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 (loss) under K-IFRS
Net income (loss) under IFRS as issued by the IASB
Profit before income tax
Guarantee liabilities and loss (KT ENGCORE)
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 2016, and which have not been adopted early by us, see Note 2.2 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 monthly fees, usage charges for outgoing calls, usage charges for wireless data transmission, contents download fees, mobile-to-mobile interconnection revenues and value-added monthly service fees;
fees from our fixed-line services, including:
fees from our fixed-line telephone services, which include:
monthly basic charges, which are one-time or monthly fixed charges primarily consisting of(i) non-refundable installation fees; and (ii) basic monthly charges from local telephone services (or fixed monthly charges for discount plans);
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monthly usage charges, which are usage fees based on the amount of services used, primarily consisting of (i) monthly usage charges for local telephone and domestic long distance services; (ii) international long-distance service revenues, (primarily (a) amounts we bill to our customers for outgoing calls made to foreign countries, (b) amounts we bill to foreign telecommunications carriers for connection to the domestic telephone network in respect of incoming calls at the applicable settlement rate, and (c) other revenues, including revenues from international leased lines); (iii) land-to-mobile and land-to-land interconnection revenues; (iv) interconnection fees we charge to fixed-line and mobile service providers and voice resellers for their use of our local, domestic long-distance and international networks in providing their services; and
other revenues from (i) value-added services, including “1588” intelligent network call services, local telephone directory assistance, call waiting and caller identification services; and (ii) local, domestic long-distance and international calls placed from public telephones.
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, IPTV and network portal services;
data communication 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;
revenues from goods sold that are generated primarily by sale of mobile handsets and specially designed phones for fixed-line and mobile convergence services, net of any subsidies paid directly to customers, as well as certain sales by our consolidated subsidiaries, such as sale of real estate properties relating to real estate developments by KT Estate Inc.;
financial service revenues, primarily consisting of fees from credit card services provided by BC Card Co., Ltd., our consolidated subsidiary; and
other revenues that are primarily derived from information technology and network services, satellite services and security services.
Operating Expenses
Our operating expenses primarily include:
salaries and wages, including post-employment benefits, termination benefits (including severance benefits for voluntary and special early retirements) and share-based payments;
depreciation expenses incurred primarily in connection with our telecommunications network facilities;
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purchase of inventories, primarily consisting of inventories purchased for our sale of mobile handsets and specially designed phones for fixed-line mobile convergence services, and changes of inventories, which reflects increases or decreases of inventories during the applicable period;
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;
sales commissions, primarily consisting of sales commissions to third-party dealers related to procurement of mobile subscribers and mobile handset sales;
commissions, primarily consisting of commission-based payments for certain third-party outsourcing services, including commissions to the outsourced call center staff;
service cost, primarily consisting of payments for certain 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—2015 Compared to 2016
The following table presents selected income statement data and changes therein for 2015 and 2016:
Operating profit (loss)
Income from joint ventures and associates
Profit (loss) for the period from continuing operations
Profit from discontinued operations
Profit (Loss) for the period
N.M. means not meaningful.
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The following table presents a breakdown of our operating revenues and changes therein for 2015 and 2016:
Monthly Basic Charges
Monthly Usage Charges
Other Internet-related services
Data communication services
Sale of goods
Other
Total operating revenues
Total operating revenues increased by 1.9%, or ￦421 billion, from ￦22,700 billion in 2015 to ￦23,121 billion in 2016 primarily due to increases in the revenues from our Internet services and mobile services, the impact of which was offset in part by a decrease in the revenues from our fixed-line telephone services.
Our mobile services revenues increased by 1.5%, or ￦106 billion, from ￦7,260 billion in 2015 to ￦7,366 billion in 2016 primarily due to a 4.7% increase in our mobile subscribers from approximately 18,038,000 as of December 31, 2015 to approximately 18,892,000 as of December 31, 2016. Such increase in our mobile subscribers was slightly enhanced by an increase in our average revenue per user. However, the magnitude of the increase in our average revenue per user in 2016 was smaller, as compared to 2015 because many of our new mobile subscribers in 2016 purchased economical rate plans for their secondary mobile devices. Accordingly, although the increase in our mobile subscribers in 2016 was larger, as compared to 2015, the increase in our mobile services revenues in 2016 was smaller than the increase in our mobile services revenues in 2015 primarily due to a decrease in the magnitude of the increase in our average revenue per user in 2016, as compared to 2015.
Our fixed-line services revenues in the aggregate increased by 2.4%, or ￦162 billion, from ￦6,755 billion in 2015 to￦6,917 billion in 2016 primarily due to an increase in Internet services revenues, the impact of which was partially offset by decreases in our fixed-line telephone services revenues and data communication services revenues.
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Fixed-line Telephone Services. Our fixed-line telephone services revenues decreased by 11.4%, or ￦265 billion, from￦2,318 billion in 2015 to￦2,053 billion in 2016 due to decreases in monthly usage charges, other fixed-line telephone services revenues and monthly basic charges. Specifically:
Monthly usage charges decreased by 16.3%, or￦167 billion, from￦1,022 billion in 2015 to￦855 billion in 2016 primarily due to the continuing decrease in the usage of fixed-line services resulting from the continuing increase in the usage of mobile telephone services, Internet phone services and other VoIP services such as Kakao Talk, Line and Skype, which led to a decrease in domestic long-distance call minutes from 2.1 billion in 2015 to 1.5 billion in 2016 and a decrease in local call pulses from 3.0 billion in 2015 to 2.2 billion in 2016.
Other fixed-line telephone service revenue decreased by 10.1%, or ￦65 billion, from ￦646 billion in 2015 to ￦581 billion in 2016 primarily due to the continuing erosion of fixed-line services, including public telephones, by mobile telephone services, Internet phone services and other VoIP services, as well as a decrease in the number of lines in service from 2015 to 2016.
Monthly basic charges decreased by 5.2%, or￦34 billion, from￦650 billion in 2015 to￦616 billion in 2016 primarily due to a decrease in the number of our telephone lines in service from 12.4 million in 2015 to 11.9 million in 2016.
Internet Services. Our Internet service revenues increased by 14.2%, or ￦478 billion, from￦3,361 billion in 2015 to￦3,829 billion in 2016 primarily due to an increase in the number of IPTV subscribers from approximately 6.6 million as of December 31, 2015 to approximately 7.0 million as of December 31, 2016 and an increase in the number of our olleh GiGA Internet Service subscribers from approximately 1.0 million as of December 31, 2015 to approximately 2.4 million as of December 31, 2016.
Data Communication Services. Our data communication services revenues decreased by 4.7%, or ￦51 billion, from ￦1,076 billion in 2015 to ￦1,025 billion in 2016 primarily due to a decrease in revenues from our leased lines, resulting from increased competition in the data communications market in Korea.
Sale of Goods
Revenues from sale of goods increased by 1.9%, or ￦52 billion, from ￦2,756 billion in 2015 to ￦2,808 billion in 2016 primarily due to an increase in revenues from development and sale of real estate by KT Estate Inc. which was partially offset by a decrease in the sale of mobile handsets in 2016 compared to 2015. The number of mobile handsets sold in 2016 decreased largely due to order cancellation and customer returns of Samsung Galaxy Note 7 handsets, caused by the handsets’ explosive battery issue.
Financial services revenues increased by 2.4%, or ￦85 billion, from ￦3,483 billion in 2015 to ￦3,568 billion in 2016 primarily due to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd., primarily as a result of increased usage of credit cards.
Other operating revenues increased by 0.7%, or ￦16 billion, from ￦2,446 billion in 2015 to ￦2,462 billion in 2016 primarily due to increases in revenues from our real estate lease business and systems integration business.
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The following table presents a breakdown of our operating expenses and changes therein for 2015 and 2016:
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 0.7%, or ￦158 billion, from ￦21,623 billion in 2015 to ￦21,781 billion in 2016 primarily due to increases in changes of inventories, salaries and wages and service cost, the impact of which was largely offset by decreases in purchase of inventories and certain other operating expenses described below. Specifically:
Changes of inventories, which reflects inventory changes during a period by calculating inventories at the beginning of period minus those at the end of period, amounted to ￦(198) billion in 2015 and ￦162 billion in 2016, which means inventories decreased by ￦162 billion in 2016 while they increased by ￦198 billion in 2015. This was primarily due to a decrease in purchase of handsets in 2016 compared to 2015 as described below, which was offset in large part by a decrease in the sale of handsets in 2016 compared to 2015. Cost of sale of goods (which is the sum of changes of inventories and purchase of inventories) in 2016 decreased by 5.2% to ￦3,569 billion from￦3,765 billion in 2015, primarily reflecting a decrease in the cost of handsets and the decreased handset sales, in each case in 2016 compared to 2015. The decreases in the cost of handsets and handset sales were primarily due to a decrease in sales of new handset models (which generally have higher prices than older models) such as Galaxy Note 7 due to the models’ mechanical defects as explained below in connection with the decrease in purchase of inventories in 2016 compared to 2015.
Salaries and wages increased by 5.3%, or￦175 billion, from￦3,303 billion in 2015 to￦3,478 billion in 2016 primarily due to an increase in salaries and wages based on seniority and promotions.
Service cost, increased by 13.6%, or￦158 billion, from￦1,164 billion in 2015 to￦1,322 billion in 2016, primarily due to an increase in service costs relating to our IPTV and mobile services such as purchases of contents to meet increased and diversified
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demand from customers and an increase in installation fees as more sophisticated technologies and corresponding higher fees were required for the installation of certain new equipment and facilities.
These factors were partially offset by the following:
Purchase of inventories decreased by 14.0%, or￦556 billion, from￦3,963 billion in 2015 to￦3,407 billion in 2016 primarily due to a decrease in the total number of mobile handsets (mostly smartphones) purchased, which was largely attributable to the returns of Samsung Galaxy Note 7 handsets, which had an explosive battery issue, to the manufacturer. We purchased Galaxy Note 7 handsets for sale to customers but when our customers returned the handsets or cancelled orders, we returned those handsets to the manufacturer resulting in the reduction in purchase of inventories. We recognize the purchase of mobile handsets as operating expenses during the period when such handsets are purchased regardless of whether they are actually sold during that period. As a result, the periods when purchase of inventories is recognized and when the revenue from their sales is recognized could be different.
Other operating expenses decreased by 6.1%, or￦250 billion, from￦4,092 billion in 2015 to￦3,842 billion in 2016, primarily due to decreases in installation fees of and insurance premiums. Installation fees decreased by 37.2%, or ￦93 billion, from ￦249 billion in 2015 to ￦157 billion in 2016, primarily due to the consolidation of KT Service Bukbu Co., Ltd. and KT Service Nambu Co., Ltd. in August 2015. The installation fees that we previously paid to the two subsidiaries before consolidation were no longer recognized as installation fees upon consolidation; instead, installation expenses incurred by the subsidiaries have been classified as other expenses such as salaries and wages. Insurance premiums decreased by 15.6%, or ￦33 billion, from ￦211 billion in 2015 to ￦178 billion in 2016, primarily due to a decrease in insurance premium rates for our handsets.
Operating Profit
Due to the factors described above, our operating profit increased by 24.4%, or ￦263 billion, from ￦1,077 billion in 2015 to ￦1,340 billion in 2016. Our operating margin, which is operating profit as a percentage of operating revenues, was 4.7% in 2015 and 5.8% in 2016.
Finance Income (Costs)
The following table presents a breakdown of our finance income and costs and changes therein for 2015 and 2016:
Interest income
Interest expense
Net foreign currency transaction gain (loss)
Net foreign currency translation gain (loss)
Net gain (loss) on settlement of derivatives
Net gain on valuation of derivatives
Net other finance costs (1)
Net finance costs
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Our net finance costs decreased by 41.1%, or ￦153 billion, from ￦372 billion in 2015 to ￦219 billion in 2016, primarily due to decreases in net foreign currency translation loss and interest expense and an increase in interest income, the impact of which was partially offset by a decrease in net gain on valuation of derivatives. Specifically:
Our net foreign currency translation loss decreased by 32.9%, or ￦54 billion, from ￦164 billion in 2015 to ￦110 billion in 2016, primarily due to smaller depreciation of the Won against the U.S. dollar and the Japanese Yen in 2016 compared to 2015. The Market Average Exchange Rate of the Won against the U.S. dollar depreciated from ￦1,099.2 to US$1.00 as of December 31, 2014 to ￦1,172.0 to US$1.00 as of December 31, 2015 and ￦1,208.5 to US$1.00 as of December 30, 2016. In general, we recognize net foreign currency translation loss when the Won depreciates against foreign currencies, especially the U.S. dollar, primarily because of our foreign currency-denominated debt and foreign currency-denominated payables to overseas equipment sellers and foreign carriers. In 2016, the impact of such net foreign currency translation loss was largely offset by the decrease in net gain on valuation of derivatives discussed below.
Our interest expense decreased by 12.7%, or￦49 billion, from￦386 billion in 2015 to￦337 billion in 2016 primarily due to a decrease in borrowings and, to a lesser extent, decreased interest rates.
Our interest income increased by 65.7%, or￦46 billion, from￦70 billion in 2015 to￦116 billion in 2016 primarily due to an increase in the average balance of interest-bearing financial assets we held, including as a result of an increase in interest rate payment received in connection with reimbursement of certain value added tax in 2016.
Our net gain on valuation of derivatives decreased by 22.1%, or ￦31 billion, from ￦140 billion in 2015 to ￦109 billion in 2016, primarily due to a decrease in gains from our currency swap contracts as a result of smaller depreciation of the Won against the Japanese Yen and the U.S. dollar in 2016 compared to 2015. We entered into derivative instruments for foreign exchange risk hedging purposes and generally recognize net gain on valuation of derivatives when the Won depreciates against foreign currencies as described above in the explanation of foreign currency translation loss.
Income from Joint Ventures and Associates
Income from joint ventures and associates decreased by 50.0%, or ￦3 billion, from￦6 billion in 2015 to￦3 billion in 2016, primarily due to a loss from joint ventures and associates recognized in connection with a sale of certain real estate by our wholly-owned subsidiary KT Estate Inc. to one of our associates and joint ventures, K-Realty Rental Housing REIT 2.
Income Tax Expense
Income tax expense increased by 44.5%, or ￦101 billion, from￦227 billion in 2015 to￦328 billion in 2016, primarily due to an increase in profit before income tax, which increased by ￦412 billion, from￦711 billion in 2015 and￦1,123 billion in 2016. See Note 28 to the Consolidated Financial Statements.
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Profit from Discontinued Operations
We did not have any profit from discontinued operations in 2016, whereas our profit from discontinued operations in 2015 was ￦141 billion, primarily due to recognition of net proceeds from the sale of capital stock of KT Rental Co., Ltd and KT Capital Co., Ltd. as profit from discontinued operations in 2015.
Profit (Loss) for the Period
Due to the factors described above, our profit for the period increased by 27.2%, or￦170 billion, from￦625 billion of profit in 2015 to ￦795 billion of profit in 2016. Our net profit margin, which is net profit for the period as a percentage of operating revenues was 2.8% in 2015 and 3.5% in 2016.
Segment Results—Customer/Marketing Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased slightly by 0.1%, or ￦14 billion, from ￦16,130 billion in 2015 to ￦16,144 billion in 2016 primarily due to increase in revenues from our Internet services and mobile services, primarily due to an increase in subscribers, which was partially offset by a decrease in the fixed-line services revenues, all as described above.
Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 28.6%, or ￦233 billion, from ￦817 billion in 2015 to￦1,050 billion in 2016, as the segment’s operating expenses decreased by￦219 billion while the segment’s operating revenue increased by￦14 billion as described above. For this segment, operating margin, which is operating income as a percentage of total operating revenues prior to adjusting for inter-segment transactions, was 5.1% in 2015 and 6.5% in 2016.
Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 1.0%, or ￦28 billion, from￦2,898 billion in 2015 to￦2,870 billion in 2016.
Segment Results—Finance Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 1.9%, or ￦65 billion, from￦3,513 billion in 2015 to￦3,578 billion in 2016 primarily due to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd, as described above.
Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 25.6%, or ￦72 billion, from ￦281 billion in 2015 to ￦209 billion in 2016, as the ￦137 billion increase in operating expenses outpaced the ￦65 billion increase in the segment’s operating revenues. Operating margin for this segment decreased from 8.0% in 2015 to 5.8% in 2016.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 16.0%, or ￦4 billion, from￦25 billion in 2015 to￦29 billion in 2016.
Segment Results—Satellite TV Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, slightly increased by 0.1%, or ￦0.4 billion, from ￦668.5 billion in 2015 to￦668.9 billion in 2016, primarily due to an increase in revenues from an increase in the number of TV shopping channels and other fee-generating platforms.
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Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 18.1%, or ￦18 billion, from ￦98 billion in 2015 to ￦80 billion in 2016, as the ￦18 billion increase in operating expenses outpaced the ￦0.4 billion increase in the segment’s operating revenues. Operating margin for this segment decreased from 14.6% in 2015 to 12.0% in 2016.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 3.1%, or ￦3 billion, from￦96 billion in 2015 to￦99 billion in 2016.
Segment Results—Others
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 3.1%, or ￦192 billion, from￦6,116 billion in 2015 to￦6,308 billion in 2016, primarily due to increases in revenues of KT Estate Inc. from the development and sale of real estate.
For this segment, prior to adjusting for inter-segment transactions, we recorded an operating loss of ￦100 billion in 2015, compared to an operating income of ￦40 billion in 2016, as the ￦192 billion increase in operating revenues outpaced the ￦52 billion increase in the segment’s operating expenses in 2016. For this segment, operating loss margin (operating loss as a percentage of total operating revenues prior to adjusting for inter-segment transactions) was 1.6% in 2015 and the operating margin was 0.6% in 2016.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 7.6%, or￦24 billion, from￦315 billion in 2015 to￦339 billion in 2016.
Operating Results—2014 Compared to 2015
The following table presents selected income statement data and changes therein for 2014 and 2015:
Profit (loss) for the period
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The following table presents a breakdown of our operating revenues and changes therein for 2014 and 2015:
Total operating revenues increased by 0.4%, or ￦87 billion, from ￦22,613 billion in 2014 to ￦22,700 billion in 2015 primarily due to increases in our Internet services revenues, financial services revenues and other service revenues, the impact of which was largely offset by decreases in sale of goods revenues and fixed-line telephone services revenues.
Our mobile services revenues increased by 2.2%, or ￦156 billion, from ￦7,104 billion in 2014 to ￦7,260 billion in 2015 primarily due to a 4.1% increase in our mobile subscribers from approximately 17,300,000 as of December 31, 2014 to approximately 18,038,000 as of December 31, 2015. Such increase in our mobile subscribers was further enhanced by an increase in our average revenue per user, resulting from the increase of LTE users and increased sale of higher rate plans.
Our fixed-line services revenues decreased by 1.5%, or ￦100 billion, from ￦6,855 billion in 2014 to ￦6,755 billion in 2015 primarily due to decreases in fixed-line telephone services revenues and, to a lesser extent, data communication services revenues, the impact of which was partially offset by an increase in our Internet services revenues.
Fixed-line Telephone Services. Our fixed-line telephone services revenues decreased by 11.2%, or ￦293 billion, from ￦2,611 billion in 2014 to￦2,318 billion in 2015 primarily due to decreases in monthly usage charges, monthly basic charges and other fixed-line telephone services revenues. Specifically:
Monthly usage charges decreased by 17.4%, or￦216 billion, from￦1,238 billion in 2014 to￦1,022 billion in 2015 primarily due to the continuing decrease in the usage of fixed-line services resulting from the increased usage of mobile telephone services, Internet phone
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services and other VoIP services such as Kakao Talk, Line and Skype, which led to a decrease in domestic long-distance call minutes from 2.7 billion in 2014 to 2.1 billion in 2015 and a decrease in local call pulses from 4.0 billion in 2014 to 3.0 billion in 2015.
Monthly basic charges decreased by 6.5%, or￦45 billion, from￦695 billion in 2014 to￦650 billion in 2015 primarily due to a decrease in the number of our telephone lines in service from 13.7 million in 2014 to 12.4 million in 2015.
Other fixed-line telephone services revenue decreased by 4.7%, or ￦32 billion, from ￦678 billion in 2014 to ￦646 billion in 2015 primarily due to the continuing erosion of fixed-line services, including public telephones, by mobile telephone services, Internet phone services and other VoIP services, as well as a decrease in the number of lines in service from 2014 to 2015.
Internet Services. Our Internet services revenues increased by 8.6%, or ￦266 billion, from ￦3,095 billion in 2014 to ￦3,361 billion in 2015 primarily due to an increase in the number of IPTV subscribers from 5.9 million as of December 31, 2014 to 6.6 million as of December 31, 2015 and an increase in the number of our olleh GiGA Internet Service subscribers from approximately 117,000 as of December 31, 2014 to approximately 1.0 million as of December 31, 2015.
Data Communication Services. Our data communication services revenues decreased by 6.4%, or￦73 billion, from￦1,149 billion in 2014 to￦1,076 billion in 2015 primarily due to a decrease in revenues from our leased lines, resulting from increased competition in the data communications market in Korea.
Revenues from sale of goods decreased by 15.3%, or ￦496 billion, from ￦3,252 billion in 2014 to￦2,756 billion in 2015 primarily due to a decrease in the number of handsets sold in 2015 as well as a difference in how we have paid handset subsidies since October 2014. The Handset Distribution Reform Act, which became effective October 2014, requires mobile service providers, including us, to pay handset subsidies directly to subscribers and disclose such subsidy amounts to the public. Prior to the enactment of the Handset Distribution Reform Act, we and other mobile service providers provided sales commissions to third-party vendors who then provided subscribers handset subsidies as well as other marketing and promotional activities at such vendors’ own discretion. However, since October 2014, we and other mobile service providers have provided handset subsidies provided directly to customers. Handset subsidies provided directly to customers are not recognized as part of handset sales revenue (revenue is recognized net of such subsidy amount), whereas handset subsidies paid through third-party vendors were recognized as revenue and also as operating expense (sales commissions). As a result, revenues from sale of goods decreased in 2015 compared to 2014 as handset subsidies were not recognized as revenue. The revenue decrease in 2015 was also attributable to a decrease in the total number of mobile handsets (primarily smartphones) sold.
Financial services revenues increased by 6.4%, or ￦211 billion, from ￦3,272 billion in 2014 to￦3,483 billion in 2015 primarily due to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd., primarily as a result of increased usage of credit cards, as well as an increase in disposal of available-for-sale financial assets, primarily related to the sale of capital stock in MasterCard, previously owned by BC Card Co., Ltd.
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Other operating revenues increased by 14.8%, or ￦316 billion, from ￦2,130 billion in 2014 to￦2,446 billion in 2015 primarily due to the inclusion of the full-year revenues in 2015 of ktcs Corporation and ktis Corporation, which became our consolidated subsidiaries as of October 2014. Both ktcs Corporation and ktis Corporation derive revenue mainly from operation of customer service centers for our mobile and fixed-line customers.
The following table presents a breakdown of our operating expenses and changes therein for 2014 and 2015:
Total operating expenses decreased by 7.6%, or ￦1,769 billion, from ￦23,392 billion in 2014 to ￦21,623 billion in 2015 primarily due to decreases in sales commissions, salaries and wages, and changes of inventories, the impact of which was partially offset by increases in purchase of inventories and commissions. Specifically:
Sales commissions, which primarily relate to commissions paid to third-party vendors for procurement of subscribers and other promotions as well as sales of mobile handsets and mobile and fixed-line service products, decreased by 29.4%, or ￦772 billion, from ￦2,629 billion in 2014 to￦1,857 billion in 2015, primarily due to a decrease in the number of mobile subscribers that third-party vendors procured and a decrease in the number of mobile handsets sold.
Salaries and wages decreased by 15.7%, or￦616 billion, from￦3,919 billion in 2014 to￦3,303 billion in 2015 primarily due to an increase in severance benefits relating to the special voluntary early retirement program in 2014 while there was no such special retirement program in 2015, as well as a decrease in the number of employees resulting from the 2014 special retirement program as described in “—Overview—Employee Reductions and Changes in Severance and Retirement Benefits” above. Such decrease in salaries and wages was partially offset by an increase in salaries in 2015 resulting from the inclusion of ktis Corporation and ktcs Corporation as consolidated subsidiaries in October 2014.
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Changes of inventories, which reflects inventory changes during a period by calculating inventories at the beginning of period minus those at the end of period, amounted to ￦255 billion in 2014 and ￦(198) billion in 2015, which means inventories increased by ￦198 billion in 2015 while they decreased by ￦255 billion in 2014. This was primarily due to a decrease in the number of handset units sold in 2015 compared to 2014, as well as an increase in purchase of handsets in 2015 compared to 2014 as described below. Cost of sale of goods (which is the sum of changes of inventories and purchase of inventories) amounted to ￦3,764 billion and￦3,765 billion in 2014 and 2015, respectively, reflecting an increase in cost of sale of goods for certain equipment and other goods sold by our subsidiaries, which was mostly offset by a decrease in cost of sale of goods resulting from the decreased handset sales, in each case in 2015 compared to 2014.
Purchase of inventories increased by 12.9%, or￦454 billion, from￦3,509 billion in 2014 to￦3,963 billion in 2015 primarily due to an increase in the total number of smartphones purchased, which was primarily attributable to handset makers’ introduction of new products, including iPhone 6S and Galaxy S6 in 2015, and also mobile handsets needed for the business of kt M mobile, which was newly established in April 2015.
Commissions, primarily consisting of commission-based payments for certain third-party outsourcing services, including commissions to the outsourced call center staff, decreased by 23.5%, or ￦318 billion, from ￦1,355 billion in 2014 to ￦1,037 billion in 2015, primarily due to elimination of commission amounts, as adjustments on consolidation, paid to ktis Corporation and ktcs Corporation, which provide call center services, as they became consolidated subsidiaries in October 2014.
Due to the factors described above, we recorded an operating loss of ￦779 billion in 2014, compared to an operating profit of ￦1,077 billion in 2015. Our operating margin, which is operating profit as a percentage of operating revenues, was (3.4)% in 2014 and 4.7% in 2015.
The following table presents a breakdown of our finance income and costs and changes therein for 2014 and 2015:
Net loss on settlement of derivatives
Net gain (loss) on valuation of derivatives
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Our net finance costs decreased by 31.0%, or￦167 billion, from￦539 billion in 2014 to￦372 billion in 2015, primarily due to decreases in interest expense and net other finance costs and an increase in net gain on valuation of derivatives, the impact of which was partially offset by an increase in net foreign currency translation loss. Specifically:
Our interest expense decreased by 18.7%, or￦89 billion, from￦475 billion in 2014 to￦386 billion in 2015 primarily due to a decrease in borrowings and, to a lesser extent, decreased interest rates.
Our net other finance costs decreased by 98.0%, or￦97 billion, from￦99 billion in 2014 to￦2 billion in 2015 primarily due to ￦83 billion reduction in impairment loss on available-for sale financial assets, as a loss was recognized for the equity securities of KT ENGCORE and Ustream Korea Inc. in 2014 while there was no such loss in 2015, and a decrease in the cost of securitization of receivables due to lower interest rates in 2015.
Our net gain on valuation of derivatives increased by 105.9%, or ￦72 billion, from ￦68 billion in 2014 to ￦140 billion in 2015, primarily due to an increase in gains from our currency swap contracts as a result of larger depreciation of the Won against the U.S. dollar and the Japanese Yen in 2015 compared to 2014. We entered into derivative instruments for foreign exchange risk hedging purposes and generally recognize net gain on valuation of derivatives when the Won depreciates against foreign currencies as described below in the explanation of reasons for the change in net foreign currency translation loss in 2015 compared to 2014.
Our net foreign currency translation loss increased by 80.2%, or ￦73 billion, from ￦91 billion in 2014 to ￦164 billion in 2015, primarily due to larger depreciation of the Won against the U.S. dollar and the Japanese Yen in 2015 compared to 2014. The Market Average Exchange Rate of the Won against the U.S. dollar depreciated from ￦1,055.3 to US$1.00 as of December 31, 2013 to ￦1,099.2 to US$1.00 as of December 31, 2014 and ￦1,172.0 to US$1.00 as of December 31, 2015. In general, we recognize net foreign currency translation loss when the Won depreciates against foreign currencies, especially the U.S. dollar, primarily because of our foreign currency-denominated debt and foreign currency-denominated payables to overseas equipment sellers and foreign carriers. In 2015, the impact of such net foreign currency translation loss was largely offset by the net gain on valuation of derivatives discussed above.
Income from joint ventures and associates decreased by 68.4%, or ￦13 billion, from ￦19 billion in 2014 to ￦6 billion in 2015, primarily due to a decrease in net income of KT-SB Venture Investment, which resulted in the corresponding decrease in our share of such net income.
We recognized an income tax expense of￦227 billion in 2015, compared to an income tax benefit of ￦271 billion in 2014, primarily due to the recognition of profit from continuing operations before income tax of ￦711 billion in 2015, compared to the recognition of loss from continuing operations before income tax of ￦1,299 billion in 2014. See Note 28 to the Consolidated Financial Statements. We had net deferred income tax assets of ￦935 billion as of December 31, 2014 and ￦716 billion as of December 31, 2015.
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Our profit from discontinued operations increased by 64.0%, or ￦55 billion, from ￦86 billion in 2014 to ￦141 billion in 2015, primarily due to recognition of net proceeds from the sale of capital stock of KT Rental Co., Ltd and KT Capital Co., Ltd. as profit from discontinued operations in 2015. The revenue and expenses of discontinued operations decreased by 51.0% and 47.8%, or￦570 billion and￦490 billion, respectively, as KT Rental Co., Ltd. and KT Capital Co., Ltd. were excluded from discontinued operations subsequent to their sales in May and August 2015, respectively.
Due to the factors described above, our profit for the period increased by 166.4%, or￦1,566 billion, from￦941 billion of loss in 2014 to ￦625 billion of profit in 2015. Our net loss margin, which is loss for the period as a percentage of operating revenues, was 4.2% in 2014. Our net profit margin, which is net profit for the period as a percentage of operating revenues was 2.8% in 2015.
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 3.9%, or ￦655 billion, from￦16,785 billion in 2014 to￦16,130 billion in 2015 primarily due to a decrease in revenues from sales of mobile handsets as a result of decreases in both the number of handset units sold and the average unit price, as well as the impact of handset subsidies directly provided to subscribers, resulting in a decrease in operating revenues starting from October 2014 as described above.
We recorded operating loss for this segment of ￦427 billion in 2014 and operating income for this segment of ￦817 billion in 2015 (in each case, prior to adjusting for inter-segment transactions), as the segment’s operating expenses decreased by￦1,899 billion which was partially off-set by the ￦655 billion decrease in the segment’s operating revenue, primarily due to the reasons discussed above. For this segment, operating loss margin, which is operating loss as a percentage of total operating revenues prior to adjusting for inter-segment transactions, was 2.5% in 2014 and operating margin, which is operating income as a percentage of total operating revenues prior to adjusting for inter-segment transactions, was 5.1% in 2015.
Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 0.5%, or ￦15 billion, from ￦2,913 billion in 2014 to ￦2,898 billion in 2015.
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 6.6%, or ￦217 billion, from ￦3,296 billion in 2014 to ￦3,513 billion in 2015 primarily due to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd, as discussed above.
Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 69.3%, or ￦115 billion, from￦166 billion in 2014 to￦281 billion in 2015, as the ￦217 billion increase in the segment’s operating revenues outpaced ￦102 billion increase in operating expenses primarily due to the reasons discussed earlier. Operating margin for this segment increased from 5.0% in 2014 to 8.0% in 2015.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 4.2%, or￦1 billion, from￦24 billion in 2014 to￦25 billion in 2015.
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Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 2.0%, or ￦13 billion, from￦656 billion in 2014 to￦669 billion in 2015, primarily due to an increase in revenues from TV shopping channels.
Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 42.0%, or ￦29 billion, from￦69 billion in 2014 to￦98 billion in 2015, as the ￦16 billion decrease in operating expenses outpaced the ￦13 billion increase in the segment’s operating revenues. Operating margin for this segment increased from 10.5% in 2014 to 14.6% in 2015.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 12.9%, or ￦11 billion, from ￦85 billion in 2014 to￦96 billion in 2015.
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 25.9%, or ￦1,259 billion, from ￦4,857 billion in 2014 to￦6,116 billion in 2015, primarily due to the inclusion of the global business services to this segment. The Enterprise Business Segment, of which the global business services were part prior to 2015, was split into two segments: the Customer/Marketing Group and the Others Group. See “—Overview.”
Our operating loss for this segment, prior to adjusting for inter-segment transactions, decreased from ￦558 billion in 2014 to￦100 billion in 2015, as the ￦1,259 billion increase in operating revenues outpaced the ￦801 billion increase in the segment’s operating expenses in 2015. For this segment, the operating loss margin (operating loss as a percentage of total operating revenues prior to adjusting for inter-segment transactions) was 11.5% in 2014 and 1.6% in 2015.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 5.7%, or ￦17 billion, from￦298 billion in 2014 to￦315 billion in 2015.
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 ￦2,853 billion in 2014,￦3,116 billion in 2015 and￦2,764 billion in 2016 for the acquisition of property and equipment and investment properties, primarily construction-in-progress. In our financing activities, we used cash of￦8,757 billion in 2014,￦6,648 billion in 2015 and￦1,769 billion in 2016 for repayment of borrowings and debentures.
In recent years, we have also required capital for payments of retirement and severance benefits related to our early retirement programs. We recorded cash outflows from payments of severance benefits of ￦1,427 billion in 2014, ￦118 billion in 2015 and￦122 billion in 2016. In 2014,
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our payments were particularly high due to the special voluntary early retirement program held in April 2014 described in “—Overview—Employee Reductions and Changes in Severance and Retirement Benefits” above.
From time to time, we may also require capital for investments involving acquisitions, including shares of our affiliates, and strategic relationships. For example, in October 2011, we, through our former subsidiary KT Capital Co., Ltd., acquired an additional 1,622,520 common shares of BC Card Co., Ltd. from Woori Bank, Busan Bank and Shinhan Card 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 69.5% interest in BC Card Co., Ltd. as of December 31, 2016. Any such additional investments or acquisitions may require significant capital.
Our cash dividends paid to shareholders andnon-controlling interests amounted to ￦223 billion in 2014, ￦42 billion in 2015 and￦184 billion in 2016.
We anticipate that capital expenditures and 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 19 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, 2016:
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)
Asset retirement obligations
Long-term accounts payable—others
Estimate of interest payment based on contractual interest rates effective as of December 31, 2016
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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. We recorded a loss for the period of ￦941 billion in 2014, a profit for the period of ￦625 billion in 2015 and a profit for the period of ￦795 billion in 2016 due to the reasons discussed in Item 5.A. Operating Results. Non-cash expense adjustments in our statement of cash flows from depreciation and amortization of intangible assets was ￦3,855 billion in 2014, ￦3,640 billion in 2015 and ￦3,422 billion in 2016, 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 borrowings and debentures were ￦10,037 billion in 2014, ￦5,675 billion in 2015 and ￦1,123 billion in 2016. As of December 31, 2016, we held 16,140,165 treasury shares.
Since 2012, we have disposed 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 19 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 (i) three series of notes for an aggregate amount of Japanese Yen 30 billion in January 2013, (ii) three series of notes for an aggregate amount of￦410 billion in April 2013, (iii) US$300 million floating rate notes due 2018 in August 2013, (iv) ￦300 billion of commercial paper due 2019 in February 2014, (v) US$650 million of 1.750% notes due 2017 and US$350 million of 2.625% notes due 2019 in April 2014, (vi) three series of notes for an aggregate amount of ￦450 billion in January 2015, (vii) Japanese Yen 15 billion of 0.48% notes due 2018 in February 2015 and (viii) US$400 million of 2.500% notes due 2026 in July 2016. See Note 15 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 ￦11,788 billion as of December 31, 2014, ￦12,156 billion as of December 31, 2015 and ￦12,783 billion as of December 31, 2016.
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Liquidity
We had a working capital (current assets minus current liabilities) deficit of ￦1,213 billion as of December 31, 2014 and ￦56 billion as of December 31, 2015 and a working capital surplus of ￦193 billion as of December 31, 2016. The following table sets forth the summary of our significant current assets for the periods indicated:
Our cash and cash equivalents totaled ￦1,889 billion as of December 31, 2014, ￦2,559 billion as of December 31, 2015 and ￦2,900 billion as of December 31, 2016. 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. Other current financial assets primarily consist of financial instruments,available-for-sale financial assets and derivatives used for hedge.
The following table sets forth the summary of our significant current liabilities for the periods indicated:
As of December 31, 2016, we entered into various commitments with financial institutions totaling ￦3,418 billion and US$251 million. See Note 19 to the Consolidated Financial Statements. As of December 31, 2016, ￦563 billion and US$205 million 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￦2,853 billion in 2014,￦3,116 billion in 2015 and￦2,764 billion in 2016 for the acquisition of property, plant and equipment and investment property, primarily construction-in-progress.
Our current capital expenditure plan, on a separate basis, calls for the expenditure of approximately ￦2,400 billion in 2017, which may be adjusted depending on market conditions and our results of operations. The principal components of our capital investment plans are:
approximately ￦1,155 billion in capital investments for our access network;
approximately ￦515 billion in capital investments for our backbone network;
approximately ￦360 billion in capital investments for our business-to-business services; and
approximately ￦370 billion in capital investments for other services including R&D costs.
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Inflation
We do not consider that inflation in Korea has had a material impact on our results of operations in recent years. According to data published by the Bank of Korea, annual inflation in Korea was 1.3% in 2014, 0.7% in 2015 and 1.0% in 2016. 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 or political conditions in Korea deteriorate.”
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, 2016, KT Corporation had 5,037 registered patents domestically and 1,074 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 ￦479 billion in 2014, ￦225 billion in 2015 and ￦204 billion in 2016.
In recent years, we have focused our research and development efforts in the following areas:
simplifying complex core networks and reducing costs;
integrating in-building management solutions for fixed-line and wireless networks;
aggregating heterogeneous wireless access for double network throughput;
a broadband Internet solution that is 10 times faster using legacy copper and fiber lines;
a telecommunication cloud solution which combines network resource virtualization with cloud computing resource;
finding solutions for ultra-definition television set top box and additional solutions for smart IPTV;
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smart home networking solutions for multiple devices, such as smartphones, tablets, computers and IPTV, as well as electric home appliances;
environment-friendly energy technologies including a smart-grid platform;
core technologies for convergence services such as IoT, big data, security, networked automobiles, healthcare andbio-informatics; and
creating a new convergence business model based on ICT and incubating new businesses.
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 standing 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 exceed ￦2,000 billion as of the end of the preceding year, which is the case with us, the Commercial Code of Korea requires such company to have more than three outside directors, with outside directors being the majority of the board of 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 shareholders’ meeting 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.
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Under the Commercial Code of Korea, we must establish a committee to nominate candidates for outside directors within the board of directors, and outside directors must make up 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 standing director and all of our outside directors, other than for election of an outside director resulting from the expiration of the term of the office, in which case such outside director whose term is expiring may not be a member of the committee. 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 assembled. The chairperson of the board of directors is elected from among the outside directors by a resolution of the board of directors. The term of office of the chairperson is one year.
Our current directors are as follows:
Name
Position
Standing Directors (1)
Chang-Gyu Hwang
Chief Executive Officer
Heon Moon Lim
President
Hyeon Mo Ku
President, Chief Operating Officer
Outside Directors (1)
Do Kyun Song
Senior Advisor, Bae, Kim & Lee LLC
Sang Kyun Cha
Professor, Department of Electrical and Computer Engineering, Seoul National University
Jong-Gu Kim
Corporate lawyer, New Dimension Law Group
Suk-Gwon Chang
Dean, School of Business, Hanyang University
Dae-Geun Park
Professor, Department of Economics and Finance, Hanyang University
Dong-Wook Chung
Senior Counsel, Law Firm Kim, Choi & Lim
Gae-Min Lee
Former Editor-in-Chief, The Korea Economic Daily
Il Im
Professor, Business Administration, Yonsei University
Chang-Gyu Hwang has served as our standing director since 2014 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
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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.
Heon Moon Lim has served as our standing director since 2014 and has served as our president and chief marketing officer since December 2015. He has previously served as a senior executive vice president of our Customer Business Group and an executive vice president of our Telecom & Convergence Business Group and Home Business Group. Mr. Lim holds a bachelor’s degree in business administration from Yonsei University and a Ph.D. in business administration from Seoul National University.
Hyeon Mo Ku has served as our standing director since March 2016 and has served as our president and chief operating officer since December 2015. He has previously served as chief secretary to our chief executive officer since 2014. Before that, he served as chief operating officer of the Telecom & Convergence Business department. Mr. Ku holds a bachelor’s degree in Industrial Engineering from Seoul National University and a Ph. D. in Management Engineering from Korea Advanced Institute of Science and Technology.
Do Kyun Song has served as our outside director since March 2013. He is currently a senior 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 Hankuk University of Foreign Studies.
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., a next-generation memory database management system development company in the United States which was acquired by SAP AG in 2005, and was subsequently transformed into SAP Labs Korea, Inc. Mr. Cha holds a bachelor’s degree in electronic engineering from Seoul National University and a Ph.D. in database systems from Stanford University.
Jong-Gu Kim has served as our outside director since March 2014. He is currently a corporate lawyer at 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 degree in law from Seoul National University and a Ph.D. in law from Dongguk University.
Suk-Gwon Chang has served as our outside director since March 2014. He is currently the dean of the School of Business at Hanyang University. 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 and a Ph.D. in management science from Korea Advanced Institute of Science and Technology.
Dae-Geun Park has served as our outside director since March 2014. He is currently a professor of economics and finance at Hanyang University and the director of Hanyang Economic Research Institute. Mr. Park was formerly a 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 and a Ph.D. in economics from Harvard University.
Dong-Wook Chung has served as our outside director since March 2015. He is currently a senior counsel to the law firm of Kim, Choi & Lim. Mr. Chung was formerly a prosecutor at the Seoul High Prosecutor’s Office and the chief prosecutor at the Bucheon Branch of the Incheon District Prosecutor’s Office. Mr. Chung holds a bachelor’s degree and a master’s degree in law from Seoul National University.
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Gae-Min Lee has served as our outside director since March 2017. He was formerly an advisor to the Korea News Editors’ Association Fund, editor-in-chief of The Korea Economic Daily and chief executive officer of Hankyung.com. Mr. Lee holds a bachelor’s degree and a Ph.D. in Economics from Kyung Hee University.
Il Im has served as our outside director since March 2017. He is currently a professor of business administration at Yonsei University and Fall Committee Chair of the Korea Society of Management Information System. Mr. Im was formerly a professor of Information Systems Department at New Jersey Institute of Technology. Mr. Im holds a bachelor’s degree in business administration from Seoul National University and a Ph. D in information systems from the University of Southern California.
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 standing 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 KT Corporation and the candidate covering our management objectives to the shareholders’ meeting at the time of candidate nomination to the meeting. When the draft management contract has been approved at the shareholders’ meeting, we enter into such management contract with the chief executive officer. In such case, the chairperson of the Chief Executive Officer Candidate Nominating Committee, on our behalf, 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 presidents and senior executive vice presidents. The executive officers other than the standing directors are appointed by the chief executive officer.
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The current executive officers are as follows:
Name (1)
Title and Responsibilities
Seong-Mok Oh
Soo-Ho Maeng
Cheol-Soo Kim
Mun-Whan Lee
Dong-Myun Lee
Kyoung-Lim Yun
Sang-Bong Nam
Dae-San Lee
In-Hoe Kim
Kyu-Taek Nam
Item 6.B. Compensation
Compensation of Directors
In 2016, 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 ￦4.1 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 2016 was recorded at ￦642 million.
The compensation of our directors and executive officers who received total annual compensation exceeding ￦500 million in 2016 was as follows:
Composition of TotalCompensation
Hyun Mo Ku
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
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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 at 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, 2016, none of our standing or outside directors maintained directors’ service contracts with us or with any of our subsidiaries providing for benefits upon termination of employment.
Corporate Governance Committee
The Corporate Governance Committee is comprised of four outside directors and one standing director, Suk-Gwon Chang, Do Kyun Song, Jong-Gu Kim, Gae-Min Lee and Hyeon Mo Ku. 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. The committee members are elected by the board after the annual meeting, and the term of the committee members is one year.
Outside Director Candidate Nominating Committee
The Outside Director Candidate Nominating Committee consists of one standing director and all of our outside directors, other than for election of an outside director resulting from the expiration of the term of the office, in which case such outside director whose term is expiring may not be a member of the committee. The committee’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 shareholders’ meeting. 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, Dong-Wook Chung, Do Kyun Song, Suk-Gwon Chang and Il Im. The chairperson is Dong-Wook Chung. 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 for the chief executive officer and the standing directors. The committee members are elected by the board after the closing of the annual meeting, and the term of the committee members is one year.
Executive Committee
The Executive Committee is currently comprised of Chung-Gyu Hwang, Heon Moon Lim and Hyeon Mo Ku. The chairperson isChang-Gyu Hwang. The committee’s duties include the establishment and management of branch offices, the disposal and sale of stocks of our subsidiaries, which have a market value between ￦15 billion and￦30 billion, provided that no change of control
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with respect to such subsidiary occurs as a result of such disposal or sale for stocks with market value of ￦10 billion or more, making investments and providing guarantees between ￦15 billion to ￦30 billion, the acquisition and disposal of real estate having market value between ￦15 billion to￦30 billion, 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, Dae-Geun Park, Do Kyun Song, Gae-Min Lee and Il Im. The chairperson is Dae-Geun Park. This committee’s duties include reviews of 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 one year.
Sustainability Management Committee
The Sustainability Management Committee is currently comprised of four outside directors and one standing director, Sang Kyun Cha, Dong-Wook Chung, Suk-Gwon Chang, Il Im and Heon Moon Lim. The chairperson is Sang Kyun Cha. The committee’s duties include reviews of sustainable management results, establishment of medium- and long-term sustainable management strategies and regular reporting and risk management of sustainable management activities. The committee members are elected by the board after the annual meeting, and the term of the committee members is 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 and at least two-thirds of the audit committee members are required to be outside directors. Audit Committee members must also meet the applicable independence criteria set forth under the rules and regulations of the Sarbanes-Oxley Act of 2002. The committee is currently comprised of Jong-Gu Kim, Sang Kyun Cha, Dae-Geun Park and Dong-Wook Chung. The chairperson is Jong-Gu Kim and the financial expert is Dae-Geun Park. Members of the committee are elected by our shareholders at the shareholders’ meeting. Our internal and external auditors report directly to the committee.
The duties of the committee include:
appointing independent auditors;
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.
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In addition, regarding the shareholders’ meeting, the committee may examine the agenda, 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 23,575 employees as of December 31, 2016, compared to 23,531 employees as of December 31, 2015 and 23,371 employees as of December 31, 2014.
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 2014, 2015, and 2016, 41, 33 and 5 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 provided our employees with incentives to retire early as part of our efforts to improve operational efficiencies. Our employees were 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 program. The special voluntary early retirement program resulted in the early retirement of 8,304 employees in 2014. We paid ￦1,215 billion as severance benefits in connection with our early retirement programs during 2014, which was financed through cash on hand and bond issuances.
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 ofnon-core businesses and reducing our employee base.
As of December 31, 2016, about 78% 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 November 15, 2017. 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.
The Trade Union and Labor Relations Adjustment Act (“Labor Act”) 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 July 2011. The 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, 2016, and will expire on December 31, 2017.
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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 0.53% of our issued shares as of December 31, 2016.
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 asnon-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 ￦1,414 billion as of December 31, 2016. 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.”
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 76 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 employees who pursue graduate programs in Korea and abroad, as well as provide financial assistance to those who pursue work-related professional licenses or participate in after-work study programs.
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Item 6.E. Share Ownership
Ordinary Shares
The persons who currently serve as our directors held, as a group, 47,615 ordinary shares as of April 25, 2017, the most recent date for which this information is available. The table below shows the ownership of our ordinary shares by directors:
Shareholders
Stock Options
We have not granted any stock options to our current directors and executive officers.
Item 7. Major Shareholders and Related Party Transactions
Item 7.A. Major Shareholders
The following table sets forth certain information relating to the shareholders of our ordinary shares as of December 31, 2016:
National Pension Corporation
NTTDoCoMo, Inc.
Silchester International Investors LLP
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 33 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
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Item 8. Financial Information
Item 8.A. Consolidated Statements and Other Financial Information
See “Item 18. Financial Statements” and pages F-1 through F- 98.
Legal Proceedings
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 in September 2012, the Seoul High Court 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. In February 2014, we filed another appeal with respect to the administrative fine with the Supreme Court of Korea and filed for a stay of execution with respect to the corrective order in March 2014, which was accepted and became effective in April 2014. The appeal is currently ongoing. The outcome of this case will not result in any fine in addition to the fine we already paid in September 2012.
In December 2013, the KCC 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 accepting 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. In August 2014, the KCC imposed a fine of approximately ￦58 billion on SK Telecom, LG U+ and us (our fine being approximately ￦11 billion) for continuing to provide excessive subsidies to new subscribers. In December 2014, the KCC further imposed a fine of approximately￦8 billion on each of SK Telecom, LG U+ and us for providing excessive handset subsidies. In March 2015, the KCC also imposed a combined fine of approximately ￦34 billion on SK Telecom, LG U+ and us (our fine being approximately ￦9 billion) for violation of regulations relating to handset sales, in connection with a used handset buyback program that we and the other telecommunications operators were promoting. On June 24, 2015, the KCC imposed a fine of ￦52 million for violating privacy related regulations and undermining consumer interests. On July 31, 2015 and January 19, 2016, the KCC imposed a fine of￦350 million and￦560 million, respectively, on us for infringing upon consumer interests by advertising false and exaggerated information about bundled products. On March 8, 2016, the KCC imposed a fine of ￦32 million on us for offering excessively reduced rates and waivers to certain customers. On December 6, 2016, the KCC imposed a combined fine of approximately ￦10.7 billion on SK Telecom, LG U+, SK Broadband, t-broad, D’live, CJ HelloVision and us (our fine being approximately￦2.3 million) and ordered to take corrective measures for providing excessive promotional gifts to bundled products customers. We have paid all of such fines as of the date hereof.
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In July 2012, the police arrested two third-party individuals in connection with the alleged theft of personal 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 ourN-STEP. Since the incident, approximately 29,800 of our mobile phone subscribers filed a total of 16 lawsuits against us in connection with the N-STEP hackings, alleging that we failed to protect their personal information, and are seeking total damages of approximately ￦15 billion. From August 2014 to October 2016, various district courts have awarded damages of ￦100,000 per plaintiff for 14 of the cases involving a total of approximately 29,000 of the subscribers, resulting in damages of approximately ￦3 billion to us, while the remaining trials are currently ongoing at various district courts. We have appealed the district courts’ decisions. In January 2017, we won one of the appeals and such appellate court decision was appealed to the Supreme Court. The other appeals are currently ongoing at the Seoul High Court.
Furthermore, in March 2014, the police arrested three third-party 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. Since the incident, approximately 15,000 subscribers filed 22 lawsuits against us in connection with the information theft, seeking total damages of approximately ￦7 billion. The trials are currently ongoing at various district courts. From November 2016 to February 2017, we won 14 trials, lost two trials and the remaining six trials are currently ongoing at various district courts. The plaintiffs of 10 of the 14 cases have appealed the district courts’ decisions to the Seoul High Court. We appealed the district courts’ decisions of the two trials where we lost. In June 2014, we were fined ￦85 million by the KCC and were ordered to take corrective measures in connection with the most recent hacking incident. We filed an administrative appeal in August 2014 in connection with the KCC fine and prevailed. The KCC appealed the administrative decision and the appeal is currently ongoing at the Seoul High Court.
In December 2013, the MSIP declared that the contracts over our sale of Koreasat 3 were null and void, on the grounds that the satellite was sold without obtaining proper government approval. We are currently involved in an International Chamber of Commerce arbitration against ABS over the Koreasat 3 satellite ownership and contract violation claims.
In 2009, we entered into a contract with Enspert, Co., Ltd.(“Enspert”), a consumer electronics manufacturer, to purchase approximately 200,000 tablet PCs. Due to defects with the tablet PCs, we cancelled our contract and the outstanding order for approximately 170,000 tablet PCs, for which we would have paid approximately￦51 billion. In June 2014, the Korea Fair Trade Commission imposed a fine of approximately ￦2 billion on us, finding that we cancelled our contract with Enspert without cause. We appealed such decision but the decision was confirmed by the Seoul High Court and the Supreme Court in May 2016 and September 2016, respectively. Due to the absence of relevant lawsuits, it has not been determined whether the contract cancellation was in violation of other applicable laws, including the Fair Transactions in Subcontracting Act. We plan to vigorously defend ourselves in case of lawsuits, but we may incur additional damages and losses which are difficult to predict at this time.
We are a defendant in various other court proceedings involving claims for civil damages arising in the ordinary course of our business. We are a defendant in an ongoing court proceeding filed by the Industrial Bank of Korea on March 18, 2015. In connection with the filing of court receivership by KT ENGCORE, Industrial Bank of Korea claims that we are liable for ￦10 billion of the￦65.8 billion asset-backed commercial papers of a renewable energy project for which KT ENGCORE was a contractor and guarantor.
As of December 31, 2016, we have established provisions relating to litigations of ￦19 billion. See Note 19 to the Consolidated Financial Statements. While we are unable to predict the ultimate
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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 ordinary shares to shareholders of record on December 31 of the years indicated and the interim dividends declared on the outstanding ordinary shares to shareholders of record on June 30 of the years indicated:
Year
If sufficient profits are available, the board of directors may propose annual dividends on the outstanding ordinary shares, 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 ordinary share 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—Item 12.D. American Depositary Shares.”
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—Item 12.D. American Depositary Shares.”
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.
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Item 9. The Offer and Listing
Item 9.A. Offer and Listing Details
Market Price Information
Our shares were listed on the 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 25, 2017 was ￦31,450 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 2012:
First quarter
Second quarter
Third quarter
Fourth quarter
Second quarter (through April 25)
ADSs
The outstanding ADSs, each of which represents one-half of one share of our ordinary share, have been traded on the New York Stock Exchange and the London Stock Exchange since May 25, 1999 until September 18, 2015, the date on which the ADSs were delisted from the London Stock Exchange. The ADSs, including those previously listed on the London Stock Exchange, continue to be tradable on the New York Stock Exchange.
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The price of the ADSs on the New York Stock Exchange as of the close of trading on April 25, 2017 was $16.08 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 2012:
April (through April 25))
Item 9.B. Plan of Distribution
Item 9.C. Markets
The KRX KOSPI Market
On January 27, 2005, the Korea Exchange was established pursuant to the Korea Securities and Futures Exchange Act through the consolidation of the Korea Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock Market, Inc. (the “KOSDAQ”) and the KOSDAQ Committee within the Korea Securities Dealers Association, which was in charge of the management of the KOSDAQ. There are 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.
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The KRX KOSPI Market has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security. The KRX KOSPI Market also restricts share price movements. All listed companies are required to file accounting reports annually and quarterly and to release immediately all information that may affect trading in a security.
The KRX KOSPI Market publishes the KOSPI every ten seconds, which is an index of all equity securities listed on the KRX KOSPI Market. The KOSPI 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 KOSPI are set out in the following table together with the associated dividend yields and price earnings ratios:
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
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Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period; since the calendar year is the accounting period for the majority of listed companies, this may account for the drop in the KOSPI 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 30% 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 also be imposed on transfer of these shares and securities on the KRX KOSPI Market. See “Item 10. Additional Information—Item 10.E. Taxation—Korean Taxation.”
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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 ordinary shares, par value ￦5,000 per share (“Ordinary Shares”) and shares of non-voting preferred stock, par value ￦5,000 per share (“Non-Voting Shares”). Ordinary 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 share capital. As of December 31, 2016, 261,111,808 Ordinary Shares were issued, of which 16,140,165 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 Ordinary Shares are fully-paid andnon-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 share capital, 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 Ordinary Shares represented by the ADSs have the same dividend rights as other outstanding Ordinary Shares.
Holders of Non-Voting Shares are entitled to receive dividends in priority to the holders of Ordinary 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 Ordinary Shares exceed those on the Non-Voting Shares, theNon-Voting Shares will also participate in the distribution of such excess dividend amount in the same proportion as the Ordinary 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 Ordinary 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 share capital 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, 2016, 0.53% of the issued Shares were held by members of our employee stock ownership association.
Limitation on Shareholdings
The Telecommunications Business Act permits maximum aggregate foreign shareholding in us to be 49.0% of our total issued and outstanding Shares with voting rights (including equivalent securities with voting rights, e.g., depositary certificates and certain other equity interests). For the purposes of the foregoing, a shareholder is a “foreign shareholder” if such shareholder is: (1) a foreign person; (2) a foreign government; or (3) a company whose largest shareholder is a foreign person (including any “specially related persons” as determined under the Financial Investment Services and Capital Markets Act) or a foreign government, in circumstances where (i) such foreign person or foreign government holds, in aggregate, 15.0% or more of such company’s total voting shares, and (ii) such company holds at least 1.0% of our total issued and outstanding Shares with voting rights. For
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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 Ordinary 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 Ordinary 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 office in Seoul, or if necessary, may be held elsewhere.
Voting Rights
Holders of our Ordinary Shares are entitled to one vote for each Ordinary Share, except that voting rights of Ordinary Shares held by us, or by a corporate shareholder that is more than 10.0% owned by us either directly or indirectly, may not be exercised. The Commercial Code permits cumulative voting, under which voting method each shareholder has multiple voting rights corresponding to the number of directors to be appointed in the voting and may exercise all voting
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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 share capital;
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 signedwrite-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 desire 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 Ordinary Shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote the Ordinary Shares underlying their ADSs. See “Item 12. Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares.”
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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 ordinary shares 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.
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
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registered on our register of shareholders. For this purpose, a shareholder is required to file his name, address and seal with our transfer agent. Anon-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, anon-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 ofnon-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 ornon-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, 2016, there were 16,140,165 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, 2012, other than in the ordinary course of our business. For information regarding our agreements and transactions with certain related parties, see “Item 7. Major Shareholders and Related Party Transactions—Item 7.B. Related Party Transactions” and Note 36 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. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources.”
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Item 10.D. Exchange Controls
General
The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree (collectively the “Foreign Exchange Transaction Laws”) regulate investment in Korean securities bynon-residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws, non-residents may invest in Korean securities only in compliance with the provisions of, and to the extent specifically allowed by, these laws or otherwise permitted by the Ministry of Strategy and Finance. The Financial Services Commission has also adopted, pursuant to its authority under the Korean Financial Investment Services and Capital Markets Act, regulations that control investment by foreigners in Korean securities and regulate the issuance of securities outside Korea by Korean companies.
Under the Foreign Exchange Transaction Laws, if the Government deems that certain emergency circumstances, including, but not limited to, the outbreak of natural calamities, wars or grave and sudden changes in domestic or foreign economies, are likely to occur, the Ministry of Strategy and Finance may temporarily suspend the transactions where Foreign Exchange Transaction Laws are applicable, or impose an obligation to deposit or sell capital to certain Korean governmental agencies or financial institutions. In addition, if the Government deems that it is confronted or is likely to be confronted with serious difficulty in movement of capital between Korea and abroad which will bring serious obstacles in carrying out its currency policies, exchange rate policies and other macroeconomic policies, the Ministry of Strategy and Finance may take measures to require any person who performs transactions to deposit such capital to certain Korean governmental agencies or financial institutions.
Government Review of Issuance of ADSs
In order for us to issue shares represented by ADSs, we are required to file a prior report of the issuance with the Ministry of Strategy and Finance if our securities and borrowings denominated in foreign currencies issued during the one-year period preceding such filing date exceed US$30 million in aggregate. No further Korean governmental approval is necessary for the initial offering and issuance of the ADSs.
Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with the consent of us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We can give no assurance that we would grant our consent, if our consent is required. Therefore, a holder of ADRs who surrenders ADRs and withdraws shares may not be permitted subsequently to deposit those shares and obtain ADRs.
Reporting Requirements for Holders of Substantial Interests
Any person whose direct or beneficial ownership of shares, whether in the form of shares or ADSs, certificates representing the rights to subscribe for Shares and equity-related debt securities including convertible bonds and bonds with warrants (collectively, the “Equity Securities”) together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person accounts for 5.0% or more of the total issued Equity Securities is required to report the status of the holdings to the Financial Services Commission and the KRX KOSPI Market within
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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;
acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends;
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over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded;
shares acquired by 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.
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
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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 satisfy 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 anon-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 Trade Industry & Energy. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign shareholding restrictions in the event that the restrictions are prescribed in each specific law which regulates the business of the Korean company. A foreigner who has acquired our ordinary shares in excess of this ceiling may not exercise his voting rights with respect to our ordinary shares exceeding the limit.
Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at an investment broker or an investment trader. Funds in the foreign currency account may be remitted abroad without any governmental approval.
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Dividends on Shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any shares held by a non-resident of Korea must be deposited either in a Won account with the investor’s investment broker or investment trader or his Won Account. Funds in the investor’s Won Account may be transferred to his foreign currency account or withdrawn for local living expenses up to certain limitations. Funds in the Won Account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.
Investment brokers and investment traders are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these investment brokers and investment traders may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors, without the investors having to open their own accounts with foreign exchange banks.
Item 10.E. Taxation
The following summary is based upon tax laws of the United States and the Republic of Korea as in effect on the date of this annual report on Form 20-F, and is subject to any change in United States or Korean law that may come into effect after such date. Investors in the ordinary shares 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 Ordinary Shares or ADSs
Unless an applicable tax treaty provides otherwise, we will deduct Korean withholding tax from dividends paid to you either in cash or shares at a rate of 22.0% (including local income tax). If you are a resident of a country that has entered into a tax treaty with Korea, you may qualify for a reduced rate of Korean withholding tax under such a treaty. For example, if you are a qualified resident of the United States for purposes of the US-Korea Tax Treaty (the “Treaty”) and you are the beneficial owner of a dividend, a reduced withholding tax rate of 16.5% (including local income tax) generally will apply. You will not be entitled to claim treaty benefits if you are not the beneficial owner of a dividend.
In order to obtain the benefits of a reduced withholding tax rate under a tax treaty, you must submit to us, prior to the dividend payment date, an application for entitlement to a reduced tax rate. If you hold ADSs and receive the dividends through a depositary, you are not required to submit the application for entitlement to a reduced tax rate. If you are an overseas investment vehicle (an “OIV”),
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which is defined as an organization established in a non-Korean jurisdiction that manages funds collected through investment solicitation by way of acquiring, disposing, or otherwise investing in any such assets and distributes the yield therefrom to investors), you must submit to us a report of the OIV and a schedule of beneficial owners together with their applications for entitlement to a reduced tax rate, which you should collect from each beneficial owner. 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 gains from a sale of ordinary shares 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 gains 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 gains from a sale of ADSs, or ordinary shares that you acquired as a result of a withdrawal, your gain will be calculated based on your cost of acquiring the ADSs representing the ordinary shares, 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 gains, 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, or ordinary shares that you acquire as a result of a withdrawal, and you sell your ordinary shares or ADSs, the purchaser or, in the case of a sale of ordinary shares 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 from taxation under an applicable tax treaty or produce satisfactory evidence of your acquisition cost and the transaction costs for the ordinary shares or ADSs. In order to obtain the benefit of an exemption from 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. If you are an OIV, you must submit to us a report of the OIV and a schedule of beneficial owners together with their applications for exception, which you should collect from each beneficial owner. 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 of ordinary shares. 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
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those shares held by any related party of the taxpayer) of total issued shares of a company in a taxable year sells 5% or more (including those sold by any related party of the taxpayer) of total issued shares of the same company in the same taxable year, the country where the company is a resident may impose tax on such taxpayer.
Inheritance Tax and Gift Tax
Korean inheritance tax is imposed upon (a) all assets (wherever located) of the deceased if at the time of his death he was domiciled in Korea or had resided in Korea for a continuous period of one year or more immediately prior to his death 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, thenon-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 ordinary shares 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 ordinary shares 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
The following discussion describes the material United States federal income tax consequences of the ownership of our ADSs and ordinary shares as of the date hereof. This discussion deals only with ADSs and ordinary shares that are held as capital assets by a United States Holder (as defined below). In addition, the discussion set forth below is applicable only to United States Holders (i) who are residents of the United States for purposes of the current Treaty, (ii) whose ADSs or ordinary shares are not, for purposes of the Treaty, effectively connected with a permanent establishment in Korea and (iii) who otherwise qualify for the full benefits of the Treaty.
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As used herein, the term “United States Holder” means a beneficial owner of our ADSs or ordinary shares that is, for United States federal income tax purposes, any of the following:
an individual citizen or resident of the United States;
a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
an estate the income of which is subject to United States federal income taxation regardless of its source; or
a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.
This discussion is based upon provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in United States federal income tax consequences different from those summarized below. In addition, this discussion is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.
This discussion does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:
a dealer in securities or currencies;
a financial institution;
a regulated investment company;
a real estate investment trust;
an insurance company;
a tax-exempt organization;
a person holding our ADSs or ordinary shares as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle;
a trader in securities that has elected the mark-to-market method of accounting for your securities;
a person liable for alternative minimum tax;
a person who owns or is deemed to own 10% or more of our voting stock;
a partnership or other pass-through entity for United States federal income tax purposes; or
a person whose “functional currency” is not the United States dollar.
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If a partnership (or other entity treated as a partnership for United States federal income tax purposes) holds our ADSs or ordinary shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our ADSs or ordinary shares, you should consult your tax advisors.
This discussion does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances and does not address the Medicare tax on net investment income or the effects of any state, local or non-United States tax laws. If you are considering the purchase of our ADSs or ordinary shares, you should consult your own tax advisors concerning the particular United States federal income tax consequences to you of the purchase, ownership and disposition of our ADSs or ordinary shares, as well as the consequences to you arising under other United States federal tax laws and the laws of any other taxing jurisdiction.
If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying ordinary shares that are represented by such ADSs.Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax.
Taxation of Dividends
The gross amount of distributions on the ADSs or ordinary shares (including any amounts withheld to reflect Korean withholding taxes) will be taxable as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, the distribution will first be treated as a tax-free return of capital, causing a reduction in the tax basis of the ADSs or ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain recognized on a sale or exchange. We do not, however, expect to determine earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend.
Any dividends that you receive (including any withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of ordinary shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code. With respect to non-corporate United States investors, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States which the United States Treasury Department determines to be satisfactory for these purposes and which includes an exchange of information provision. The United States Treasury Department has determined that the current income tax treaty between the United States and Korea meets these requirements, and we believe we are eligible for the benefits of that treaty. However, non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisors regarding the application of these rules to your particular circumstances.
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Non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a passive foreign investment company in the taxable year in which such dividends are paid or in the preceding taxable year (see “—Passive Foreign Investment Company” below).
The amount of any dividend paid in Won will equal the United States dollar value of the Won received calculated by reference to the exchange rate in effect on the date the dividend is received by you, in the case of ordinary shares, or by the depositary, in the case of ADSs, regardless of whether the Won are converted into United States dollars. If the Won received as a dividend are converted into United States dollars on the date they are received, you generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If the Won received as a dividend are not converted into United States dollars on the date of receipt, you will have a basis in the Won equal to their United States dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Won will be treated as United States source ordinary income or loss.
Subject to certain conditions and limitations (including a minimum holding period requirement), Korean withholding taxes on dividends may be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADSs or ordinary shares will be treated as income from sources outside the United States and will generally constitute passive category income. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.
Passive Foreign Investment Company
We do not believe that we were, for United States federal income tax purposes, a passive foreign investment company (a “PFIC”) for the most recent taxable year, and we expect to operate in such a manner so as not to become a PFIC. If, however, we are or become a PFIC, you could be subject to additional United States federal income taxes on gain recognized with respect to the ADSs or ordinary shares and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules.
Taxation of Capital Gains
For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of the ADSs or ordinary shares in an amount equal to the difference between the amount realized for the ADSs or ordinary shares and your tax basis in the ADSs or ordinary shares. Such gain or loss will generally be capital gain or loss and will generally be long-term capital gain or loss if you have held the ADSs or ordinary shares for more than one year. Long-term capital gains of non-corporate United States Holders (including individuals) are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as United States source gain or loss.
You should note that any Korean securities transaction tax will not be treated as a creditable foreign tax for United States federal income tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under the Code.
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Information Reporting and Backup Withholding
In general, information reporting will apply to dividends in respect of our ADSs or ordinary shares and the proceeds from the sale, exchange or other disposition of our ADSs or ordinary shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of exempt status or fail to report in full dividend and interest income.
Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.
Item 10.F. Dividends and Paying Agents
See “Item 8. Financial Information—Item 8.A. Consolidated Statements and Other Financial Information—Dividends” for information concerning our dividend policies and our payment of dividends. See “—Item 10.B. Memorandum and Articles of Association—Dividends” for a discussion of the process by which dividends are paid on our ordinary shares. See “Item 12. Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares” 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 division conducts financial risk management and assessment. Upon identification and evaluation of our risk exposures, 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.
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For our trading financial instruments, we recognized a valuation gain of ￦1 billion and a valuation loss of ￦1 billion in 2014, a valuation gain of ￦0 and a valuation loss of ￦2 billion in 2015 and a valuation gain of ￦1 billion and a valuation loss of ￦8 billion in 2016. For our hedging derivative contracts, we recognized a valuation gain of ￦93 billion, a valuation loss of￦25 billion and accumulated other comprehensive income of ￦22 billion in 2014, a valuation gain of ￦142 billion, a valuation loss of ￦2 billion and accumulated other comprehensive income of ￦148 billion in 2015 and a valuation gain of ￦109 billion, a valuation loss of ￦0.1 billion and accumulated other comprehensive income of ￦85 billion in 2016. For further details regarding the assets, liabilities, gains and losses recorded relating to our derivative contracts outstanding as of December 31, 2014, 2015 and 2016, see Note 7 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 U.S. 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, 2014, 2015 and 2016:
(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
Myanmar Kyat
Tanzanian Shilling
Botswana Pula
Hong Kong Dollar
Bangladeshi Taka
Colombian Peso
Polish Zloty
Vietnamese Dong
Swiss Franc
As of December 31, 2014, 2015 and 2016, 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 ￦45 billion, ￦52 billion and￦28 billion, respectively, and total equity by ￦38 billion, ￦46 billion and￦24 billion, respectively, with a 10% decrease in the exchange rate having the opposite effect. The foregoing sensitivity analysis assumes that all variables other than
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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 34 to the Consolidated Financial Statements.
Interest Rate Risk
We are also subject to market risk exposure arising from changing interest rates. A reduction of interest rates increases the fair value of our debt portfolio, which is primarily of a fixed interest nature. We use, to a limited extent, interest rate swap contracts and combined interest rate and currency swap contracts to reduce interest rate volatility on some of our debt and manage our interest expense by achieving a balanced mixture of floating and fixed rate debt. We entered into several interest rate swap contracts 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, 2016 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, 2014, 2015 and 2016, a 100 basis point increase in the market interest rate, with all other variables held constant, would have decreased our profit before income tax by ￦5 billion,￦4 billion and￦3 billion, respectively. As of December 31, 2014, a 100 basis point increase in the market interest rate, with all other variables held constant, would have increased our shareholders’ equity by ￦5 billion. As of December 31, 2015 and 2016, such increase, with all other variables held constant, would have decreased our shareholders’ equity by ￦245 million and ￦2 billion, respectively.
As of December 31, 2014, 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 ￦5 billion. As of December 31, 2015 and 2016, such decrease, with all other variables held constant, would have increased our profit before income tax by ￦4 billion and￦3 billion, respectively. As of December 31, 2014, 2015 and 2016, a 100 basis point decrease in the market interest rates, with all other variables held constant, would have decreased our shareholders’ equity by ￦11 billion, ￦6 billion and
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￦5 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, 2014, 2015 and 2016, a 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 ￦7 billion, ￦3 billion and￦0.5 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);
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expenses incurred for converting foreign currency into U.S. dollars;
expenses for cable, telex and fax transmissions and for delivery of securities;
taxes and duties upon the transfer of securities (i.e., when shares are deposited or withdrawn from deposit); and
fees and expenses incurred in connection with the delivery or servicing of shares on deposit.
Depositary fees payable upon the issuance and surrender of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for surrender. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend rights), the depositary charges the applicable fee to the ADS record-date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary sends invoices to the applicable record-date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via the Depository Trust Company, or DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.
In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse to provide the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to such holder of ADSs.
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 2016, 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 2016 in respect of 2015)
Contributions toward our investor relations efforts (including non-deal roadshows, investor conferences and investor relations agency fees)
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Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Disclosure Controls and Procedures
Our management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2016. 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, 2016. 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.
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Our management has performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016, utilizing the criteria discussed in the Internal Control—Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, we concluded that our internal control over financial reporting was effective as of December 31, 2016.
Samil PricewaterhouseCoopers, an independent registered public accounting firm, which also audited our consolidated financial statements as of, and for the year ended December 31, 2016, as stated in their report which is included herein, has issued an attestation report on the effectiveness of our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
The attestation report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting is furnished in Item 18 of this Form 20-F.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Our Audit Committee is comprised of Jong-Gu Kim, Sang Kyun Cha, Dae-Geun Park and Dong-Wook Chung. The board of directors has determined that Dae-Geun Park is the audit committee financial expert. Dae-Geun Park is independent as such term is defined in Section 303A.02 of the NYSE Listed Company Manual, Rule 10A-3 under the Exchange Act and the Korea Stock Exchange listing standards.
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.
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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, 2015 and 2016. Such fees exclude the fees billed for work associated with our foreign subsidiaries which Samil PricewaterhouseCoopers did not provide services and with our former subsidiaries.
Audit fees (1)
Audit-related fees
Tax fees (2)
All other fees (3)
Total fees
Audit CommitteePre-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
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Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth the repurchases of ordinary shares by us or any affiliated purchasers during the fiscal year ended December 31, 2016:
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 Rule10b-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
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
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Compensation Committee
Executive Session
Shareholder Approval of Equity Compensation Plan
We currently have two equity compensation plans: one providing for the grant of stock options to officers and standing directors; and an employee stock ownership association program.
All material matters related to the granting stock options are provided in our articles of incorporation, and any amendments to the articles of incorporation are subject to shareholders’ approval. Matters related to the employee stock ownership association program are not subject to shareholders’ approval under Korean law.
Corporate Governance Guidelines
Code of Business Conduct and Ethics
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, 2015 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2014, 2015 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2014, 2015 and 2016
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2014, 2015 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2015 and 2016
Notes to Consolidated Financial Statements
Item 19. Exhibits
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* Filed previously.
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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, 2017
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INDEX TO FINANCIAL STATEMENTS
F-1
To the Board of Directors and Stockholders of KT Corporation
In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of operations, of comprehensive income(loss), 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, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, 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, 2016, based on criteria established in Internal Control-Integrated Framework 2013 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, 2017
F-2
KT Corporation and Subsidiaries
Consolidated Statements of Financial Position
December 31, 2015 and 2016
Assets
Current assets
Non-current assets
Investment properties, net
Investments in associates and joint ventures
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Consolidated Statements of Financial Position (continued)
Liabilities and Equity
Current liabilities
Non-current liabilities
Net defined benefit liabilities
Equity attribute to owners of the Parent Company
Accumulated other comprehensive income
F-4
Consolidated Statements of Operations
Years ended December 31, 2014, 2015 and 2016
Share of net profits of associates and joint ventures
Profit (loss) before income tax expense (benefit)
Profit (loss) from the continuing operations
Discontinued Operations
Owners of the Controlling Company
Loss from discontinued operations
Earnings (loss) per share attributable to the equity holders of the Controlling Company during the year (in Korean won):
F-5
Consolidated Statements of Comprehensive Income (Loss)
Other comprehensive income
Items that will not be reclassfied to profit or loss:
Remeasurements of the net defined benefit liability
Shares of remeasurement gain (loss) from associates and joint ventures
Items that may be subsequently reclassified to profit or loss:
Changes in value ofavailable-for-sale financial assets
Other comprehensive income from available-for salefinancial assets reclassified to loss
Net gains on cashflow hedges
Other comprehensive income from cashflow hedges reclassified to loss
Shares of other comprehensive income from associates and joint ventures
Currency translation differences
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
Total comprehensive income for the year attributable to:
F-6
Consolidated Statements of Changes in Equity
Notes
Balance at January 1, 2014
Comprehensive income
Valuation gains (losses) on cashflow hedge
Shares of other comprehensive income of associates and joint ventures
Shares of loss on remeasurements of associates and joint ventures
Transactions with equity holders
Dividends paid by the Controlling Company
Dividends paid to non-controlling interest of subsidiaries
Appropriation of retained earnings related to loss on disposal of treasury stock
Changes in consolidation scope
Changes in ownership interest in subsidiaries
New shares of subsidiary issued to non-controlling interest
Balance at December 31, 2014
F-7
Consolidated Statements of Changes in Equity (Continued)
Balance at January 1, 2015
Profit for the year
Valuation gains on cashflow hedge
Balance at December 31, 2015
F-8
Attributable to owners of the Controlling Company
Share
capital
Balance at January 1, 2016
Valuation losses on cashflow hedge
Shares of gain on remeasurements of associates and joint ventures
Balance at December 31, 2016
F-9
Consolidated Statements of Cash Flows
Cash flows from operating activities
Cash generated from operations
Interest paid
Interest received
Dividends received
Income tax paid
Net cash inflow from operating activities
Cash flows from investing activities
Collection of loans
Grant of loans
Disposal of derivatives
Disposal ofavailable-for-sale financial assets
Acquisition ofavailable-for-sale financial assets
Disposal of investments in associates and joint ventures
Acquisition of investments in associates and joint ventures
Disposal of current and non-current financial instruments
Acquisition of current and non-current financial instruments
Disposal of property and equipment and investment properties
Acquisition of property and equipment and investment properties
Disposal of intangible assets
Acquisition of intangible assets
Cash inflow(outflow) from disposal of subsidiaries, net
Cash inflow(outflow) from acquisition of subsidiaries, net
Net cash outflow from investing activities
Cash flows from financing activities
Proceeds from borrowings and debentures
Repayments of borrowings and debentures
Settlement of derivative assets and liabilities, net
Disposal of treasury stock
Cash inflow from capital transactions with Non-controllinginterest
Cash outflow from capital transactions with Non-controllinginterest
Dividends paid to shareholders
Decrease in finance leases liabilities
Net cash inflow(outflow) from financing activities
Effect of exchange rate change on cash and cash equivalents
Net increase(decrease) in cash and cash equivalents
Beginning of the year
End of the year
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December 31, 2014, 2015 and 2016
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 56 controlled subsidiaries as described in Note 1.2 (collectively referred to as the “Group”).
The Controlling Company
KT Corporation (the “Controlling Company”) commenced operations on January 1, 1982, when it spun off from the Korea Communications Commission (formerly the Korean Ministry of Information and Communications) to provide telephone services and to engage in the development of advanced communications services under the Act of Telecommunications of Korea. 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 Controlling Company became a government-funded institution under the Commercial Code of Korea.
On December 23, 1998, the Controlling Company’s shares were listed on the Korea Exchange.
On May 29, 1999, the Controlling Company issued 24,282,195 additional shares and issued American Depository Shares (ADS), representing new shares and government-owned shares, at the New York Stock Exchange. On July 2, 2001, the additional ADS representing 55,502,161 government-owned shares were issued at the New York Stock Exchange.
In 2002, the Controlling Company acquired the entire government-owned shares in accordance with the Korean government’s privatization plan.
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Consolidated Subsidiaries
The consolidated subsidiaries as of December 31, 2015 and 2016, are as follows:
KT Powertel Co., Ltd.2
KT Linkus Co., Ltd.
KT Submarine Co., Ltd.2,5
KT Telecop Co., Ltd.
KT Hitel Co., Ltd.
KT Service Bukbu Co., Ltd.
KT Service Nambu Co., Ltd.
KT Commerce Inc.
KT New Business Fund No.1
KT Strategic Investment Fund No.1
KT Strategic Investment Fund No.2
KT Strategic Investment Fund No.3
BC Card Co., Ltd.
VP Inc.
H&C Network
BC Card China Co., Ltd.
INITECH Co., Ltd.5
Smartro Co., Ltd.
KTDS Co., Ltd.5
KT M Hows Co., Ltd.
KT M&S Co., Ltd.
KT Music Corporation4
KT Skylife Co., Ltd.5
Skylife TV Co., Ltd.
KT Estate Inc.
KT AMC Co., Ltd.
NEXR Co., Ltd.
KTSB Data service
KT Innoedu Co., Ltd.
KT Sat Co., Ltd.
Nasmedia, Inc.3
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KT Sports
KT Music Contents Fund No.1
KT-Michigan Global Content Fund
Autopion Co., Ltd.
KTCS Corporation2,5
KTIS Corporation2,5
KT M mobile
KT Investment Co., Ltd.
NgeneBio4
Whowho&Company Co., Ltd.
KT Rwanda Networks Ltd.
AOS Ltd.
KT Belgium
KT ORS Belgium
Korea Telecom Japan Co., Ltd.
KBTO sp.zo.o.
Korea Telecom China Co., Ltd.
KT Dutch B.V
Super iMax LLC
East Telecom LLC
Korea Telecom America, Inc.
PT. KT Indonesia
PT. BC Card Asia Pacific
KT Hongkong Telecommunications Co., Ltd.
N SEARCH MARKETING Corp.
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Changes in scope of consolidation in 2016 are as follows:
Included
Excluded
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Summarized information for consolidated subsidiaries as of and for the years ended December 31, 2014, 2015 and 2016, is as follows:
Profit (loss)
for the year
KT Powertel Co., Ltd.
KT Submarine Co., Ltd.
KT Hitel Co.,Ltd.1
KT Capital Co., Ltd.1
BC Card Co., Ltd.1
H&C Network1
Nasmedia, Inc.
Sofnics, Inc.
KTDS Co., Ltd1.
KT Music Corporation
KT Skylife Co., Ltd.1
KT Estate Inc.1
KTSB Dataservice
Centios Co., Ltd 1
Enswers Inc.
Ustream Inc.
KT Rental1
KT Media Hub Co., Ltd.
Best Partners Co., Ltd.
T-ON Telecom
KTCS Corporation1
KTIS Corporation
KT Dutch B.V.1
Africa Olleh Services Ltd.
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KT Service Bukbu Co., Ltd2
KT Service Nambu Co., Ltd2
KTDS Co., Ltd.1
NgeneBio
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Nasmedia, Inc.1
KT Investment Co., Ltd.1
KT Belguium
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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 years presented, unless otherwise stated.
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.
Certain accounts within the consolidated statement of financial position as of December 31, 2015 presented for comparative purpose have been reclassified in accordance with presentation method used in consolidated statement of financial position as of December 31, 2016. These reclassifications do not have any impacts on net asset and profit or loss reported as of and for the year ended December 31, 2015.
(1) New standards and amendments adopted by the Group
The Group has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2016. The adoption of these amendments did not have any material impact on the consolidated financial statements.
- Disclosure Initiative – Amendments to IAS 1, Presentation of Financial Statements
Amendment to IAS 1, Presentation of Financial Statementsclarifies that materiality applies to the exclusion or inclusion or aggregation of the disclosures in the notes and also, clarifies that the share of OCI arising from equity-accounted should be presented in total for items which will and will not be reclassified to profit or loss. Additional amendments are made in relation to a particular order of the notes and other.
- Clarification of Acceptable methods of Depreciation and Amortization – Amendments to IAS 16, Property, plant and equipment, and IAS 38, Intangible assets: Amortization based on revenue
Amendments to IAS 16, Property, plant and equipment clarify that a revenue-based method should not be used to calculate the depreciation of items of property, plant and equipment. IAS 38, Intangible assets: Amortization based on revenue now includes a rebuttable presumption that the amortization of intangible assets based on revenue is inappropriate. This presumption can be overcome if either; the intangible asset is expressed as a measure of revenue, or it can be shown that revenue and the consumption of economic benefits generated by the asset are highly correlated.
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- Investment entities: Applying the Consolidation Exception – Amendments to IFRS 10, Consolidated Financial Statements, IAS 28, Investment in Associates and Joint Ventures, and IFRS 12, Disclosures of Interests in Other Entities
- Annual Improvements to IFRSs 2012-2014 Cycle
Annual Improvements to IFRSs 2012-2014 Cycle consist of the following amendments. The application does not have a material impact on the consolidated financial statements.
(2) New standards, amendments and interpretations not yet adopted
Certain new accounting standards and interpretations that have been published that are not mandatory for December 31, 2016 reporting periods and have not been early adopted by the Group are set out below.
- Amendments to IAS 7, Statement of Cash Flows
Amendments to IAS 7, Statement of Cash Flows requires to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including
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both changes arising from cash flows and non-cash flows. The Group will apply this amendment for annual reporting periods beginning on or after January 1, 2017. The Group does not expect the amendments to have a significant impact on the consolidated financial statements.
- Amendments to IFRS 2, Share-based Payment
Amendments to IFRS 2 clarify accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. Also, the amendments clarify that the measurement approach should treat the terms and conditions of a cash-settled award in the same way as for an equity-settled award. The Group will apply the amendments for annual periods beginning on or after January 1, 2018. The Group does not expect the amendments to have a significant impact on the consolidated financial statements.
- IFRS 9, Financial Instruments
The new standard for financial instruments issued on September 25, 2015 are effective for annual periods beginning on or after January 1, 2018 with early application permitted. This standard will replace IAS 39, Financial Instruments: Recognition and Measurement. The Group will apply the standards for annual periods beginning on or after January 1, 2018.
The standard requires retrospective application with some exceptions. For example, an entity is not required to restate prior period in relation to classification and measurement (including impairment) of financial instruments. The standard requires prospective application of its hedge accounting requirements for all hedging relationships except the accounting for time value of options and other exceptions.
IFRS 9, Financial Instruments requires all financial assets to be classified and measured on the basis of the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial assets. A new impairment model, an expected credit loss model, is introduced and any subsequent changes in expected credit losses will be recognized in profit or loss. Also, hedge accounting rules are amended to extend the hedging relationship, which consists only of eligible hedging instruments and hedged items, qualifies for hedge accounting.
An effective implementation of IFRS 9 requires preparation processes including financial impact assessment, accounting policy establishment, accounting system development and the system stabilization. The impact on the Group’s financial statements due to the application of the standard is dependent on judgements made in applying the standard, financial instruments held by the Group and macroeconomic variables. The following areas are likely to be affected in general with the implementation of IFRS 9. The Group is in preparation for analyzing the effects to the consolidated financial statement.
(a) Classification and Measurement of Financial Assets
When implementing IFRS 9, the classification of financial assets will be driven by the Group’s business model for managing the financial assets and contractual terms of cash flow. The following table shows the classification of financial assets measured subsequently at amortized cost, at fair value through other comprehensive income and at fair value through profit or loss. For hybrid (combined) instruments, if the Group is unable to measure an embedded derivative separately from its host contract, financial assets with embedded derivatives are classified in their entirety.
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Business model for thecontractual cash flows
characteristics
Solely represent payments ofprincipal and interest
All other
With the implementation of IFRS 9, the criteria to classify the financial assets at amortized cost or at fair value through other comprehensive income are more strictly applied than the criteria applied with IAS 39. Accordingly, the financial assets at fair value through profit or loss may increase by implementing IFRS 9 and may result an extended fluctuation in profit or loss.
As of December 31, 2016, the Group owns loans and receivables of ￦9,653,443 million and financial assets available-for-sales of ￦404,774 million.
According to IFRS 9, equity instruments that are not held for trading, the Group can make an irrevocable election at initial recognition to classify the instruments as assets measured at fair value through other comprehensive income, which all subsequent changes in fair value being recognized in other comprehensive income and not recycled to profit or loss. As at December 31, 2016, the Group holds equity instruments of ￦378,090 million classified as financial assets available-for-sale.
According to IFRS 9, debt instruments those contractual cash flows do not represent solely payments of principal and interest and held for trading, and equity instruments that are not designated as instruments measured at fair value through other comprehensive income are measured at fair value through profit or loss.
(b) Impairment: Financial Assets and Contract Assets
IFRS 9 sets out a new forward looking ‘expected loss’ impairment model which replaces the incurred loss model under IAS 39 and applies to:
And the Group could recognize credit losses early in accordance with IAS 39. The Group holds debt instrument of ￦9,683,586 million (Loan and trade receivables of￦9,653,443 million, Held-to-maturity ￦30,143 million). For this assets, the Group provides loss allowance of ￦612,487 million.
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(c) Hedge Accounting
Hedge accounting mechanics (fair value hedges, cash flow hedges and hedge of net investments in a foreign operations) required by IAS 39 remains unchanged in IFRS 9, however, the new hedge accounting rules will align the accounting for hedging instruments more closely with the Group’s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. IFRS 9 allows more hedging instruments and hedged items to qualify for hedge accounting, and relaxes the hedge accounting requirement by removing two hedge effectiveness tests that are a prospective test to ensure that the hedging relationship is expected to be highly effective and a quantitative retrospective test (within range of 80-120 %) to ensure that the hedging relationship has been highly effective throughout the reporting period. As of December 31, 2016, the Group applies the hedge accounting to its assets and liabilities that amount to￦227,318 million and ￦14,928 million respectively.
- IFRS 15 Revenue from Contracts with Customers
The Group will apply IFRS 15 Revenue from Contracts with Customers issued on November 6, 2015 for annual reporting periods beginning on or after January 1, 2018. This standard replaces IAS 18, Revenue, IAS 11, Construction Contracts, SIC-31, Revenue-Barter Transactions Involving Advertising Services, IFRIC 13, Customer Loyalty Programs, IFRIC 15 Agreements for the Construction of Real Estate and IFRIC 18 Transfers of assets from customers. The Group must apply IFRS 15, Revenue from Contracts with Customers within annual reporting periods beginning on or after January 1, 2018, and will apply the standard retrospectively to prior reporting period presented in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors and apply simplified transition method with no restatement for completed contracts and other as of January 1, 2017.
The new standard is based on the principle that revenue is recognized when control of a good or service transfers to a customer so the notion of control replaces the existing notion of risks and rewards. A new five-step process must be applied before revenue from contract with customer can be recognized:
The Group had organized separate Task Force team for implementation of IFRS 15 since December 31, 2014 for preparation of implementing IFRS 15 Revenue from Contracts with Customers. Also, the Group has been developing the internal control system and constructs accounting process system by analyzing the Group’s revenue structure with accounting firm and computation expert. IFRS 15 will affect not only accounting method but also the general business practice including strategy for sales and business attitude. Therefore, the Group opens an orientation program for both Group’s directors and employees, and periodically reports to the managements about plan for implementation and progress.
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As at the December 31, 2016 the Group is analyzing the effects on the consolidated financial statement with the implementation of IFRS 15. The Group plans to complete the detailed analysis on financial effects of applying the standard by March 31, 2018. The Group identified the following areas are likely to be affected in general.
The Group provides telecommunication services and sells handsets as their main business. With the implementation of IFRS 15, the Group identifies performance obligations with a customer such as providing telecommunication services, selling handsets and other. The timing of revenue recognition depends on a performance obligation is satisfied at a point in time or over time. Where a performance obligation is satisfied over time, the related revenue is also recognized over time.
With implementation of IFRS 15, the Group allocates the transaction price to each performance obligation identified in a contract based on the relative stand-alone selling prices of the goods or services being provided to the customer. To allocate the transaction price to each performance obligation on a relative stand-alone price basis, the Group determines the stand-alone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocate the transaction price in proportion to those stand-alone selling price. The stand-alone selling price is the price at which the Group would sell a promised good or service separately to the customer. The best evidence of a stand-alone selling price is the observable price of a good or service when the Group sells that good or service separately in similar circumstances and to similar customers.
The Group pays the commission fees when new customer subscribe for telecommunication services. The incremental costs of obtaining a contract are those commission fees that the Group incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained.
According to IFRS 15, the Group recognizes as an asset the incremental cost of obtaining contract and amortize it through the contract period. However, as a practical expedient, the Group may recognize the incremental costs of obtaining a contracts as an expense when incurred if the amortization period of the asset is one year or less.
The Group has prepared the consolidated financial statements in accordance with IFRS 10, Consolidated Financial Statements.
(1) Subsidiaries
Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity.
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Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
The acquisition method of accounting is used to account for business combinations by the Group. 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 measured initially at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. All other non-controlling interests are measured at fair values, unless otherwise required by other standards. Acquisition-related costs are expensed as incurred.
The excess of consideration transferred, amount of any non-controlling interest in the acquired entity and acquisition-date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognized directly in profit or loss as a bargain purchase.
Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
(2) Changes in ownership interests in subsidiaries without change of control
Any difference between the amount of the adjustment to non-controlling interest that do not result in a loss of control and any consideration paid or received is recognized in a separate reserve within equity attributable to owners of the Controlling Group.
(3) Disposal of subsidiaries
When the Group ceases to consolidate for a subsidiary because of a loss of control, any retained interest in the subsidiary is remeasured to its fair value with the change in carrying amount recognized in profit or loss.
(4) Associates
Associates are all entities over which the Group has significant influence, and 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 amount as impairment loss.
(5) Joint arrangement
A joint arrangement, wherein two or more parties have joint control, is classified as either a joint operation or a joint venture. A joint operator recognizes its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets,
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liabilities, revenues and expenses. A joint venture has rights to the net assets relating to the joint venture and accounts for that investment using the equity method.
Information of each operating segment is reported in a manner consistent with the business segment reporting provided to the chief operating decision-maker (Note 32). The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments.
(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 each entity operates (the “functional currency’). The consolidated financial statements are presented in Korean won, which is the Controlling Company’s functional and presentation currency.
(2) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognized in profit or loss.
Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as available-for-sale financial assets are recognized in other comprehensive income.
(3) Translation to the presentation currency
The results and financial position of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
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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(1) Classification and measurement
The Group classifies its financial assets into 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 way purchases and sales of financial assets are recognized on trade-date, the date on which the Group commits to purchase or sell the asset.
At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. And, loans and receivables and held-to-maturity investments are subsequently carried at amortized cost using the effective interest method.
Gains or losses arising from changes in the fair value of financial assets at fair value through profit or loss are recognized in profit or loss within other income or other expenses. Gains or losses arising from changes in the available-for-sale financial assets are recognized in other comprehensive income, and amounts are reclassified to profit or loss when the associated assets are sold or impaired.
(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 criteria that the Group uses to determine that there is objective evidence of an impairment loss include:
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(3) Derecognition
If the Group transfers a financial asset and the transfer does not result in derecognition because the Group 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.
(4) Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount reported in the statements of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty.
Derivatives are initially recognized at fair value on the date when a derivative contract is entered into and are subsequently remeasured at their fair value. Changes in the fair value of the derivatives that are not qualified for hedge accounting are recognized in the statement of profit or loss within ‘other income (expenses)’ and ‘finance income (expenses)’ according to the nature of transactions.
If the Group uses a valuation technique that incorporates data not obtained from observable markets for the fair value at initial recognition of the financial instrument, there may be a difference between the transaction price and the amount determined using that valuation technique (Day 1 profit and loss). In these circumstances, the fair value of the financial instrument is recognized as the transaction price and the difference is amortized by using the straight-line method over the life of the financial instrument. If the fair value of the financial instrument is subsequently determined using observable market inputs, the remaining deferred amount is recognized in profit or loss in the statement of profit or loss.
The Group applies cash flow hedge accounting to hedge the risks of foreign exchange and interest rates of the variable rate foreign currency bonds. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately as finance income (expenses) in the statement of profit or loss. Amounts of changes in fair value of effective hedging instruments accumulated in other comprehensive income are recognized as ‘finance income (expenses)’ 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 ‘finance income (expenses)’.
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.
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Inventories are stated at the lower of cost and net realizable value. Cost is determined using the moving average method, except for inventories in-transit which is determined using the specific identification method.
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.
Property, plant 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.
Depreciation of all property, plant, and equipment, except for land is calculated using the straight-line method to allocate their cost, net of their residual values, over their estimated useful lives, as follows:
Buildings
Structures
Machinery and equipment
(Telecommunications equipment and others)
Vehicles
Tools
Office equipment
The depreciation method, residual values and useful lives of property, plant and equipment are reviewed at the end of each reporting period and, if appropriate, accounted for as changes in accounting estimates.
Investment property is a property held to earn rentals or for capital appreciation or both. An 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.
(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 annually for impairment and carried at cost less accumulated impairment losses.
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(2) Intangible assets except goodwill
Intangible assets, except for goodwill, are initially recognized at its historical cost, and carried at cost less accumulated amortization and accumulated impairment losses. Membership rights (condominium membership and golf membership) and broadcast rights that have an indefinite useful life are not subject to amortization because there is no foreseeable limit to the period over which the assets are expected to be utilized. The Group amortizes intangible assets with a limited useful life using the straight-line method over the following periods:
Development costs
Software
Industrial property rights
Frequency usage rights
Others1
General and specific borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Other borrowing costs are expensed in the period in which they are incurred.
Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants related to assets are presented in the statement of financial position by setting up the grant as deferred income that is recognized in profit or loss on a systematic basis over the useful life of the asset. Grants related to income are presented as a credit in the statement of profit or loss within ‘other income’.
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested 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 the end of reporting period.
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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 that the Group designated as 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.
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 profit or loss as ‘finance costs’, together with interest expenses recognized from other financial liabilities.
(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.
Financial guarantees 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’:
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
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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.
(1) Post-employment benefits
The Group operates 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. Generally, post-employment benefits are payable after the completion of employment, and the benefit amount depended on the employee’s age, periods of service or salary levels. 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 that are denominated in the currency in which the benefits will be paid, and that have terms approximating to the terms of the related obligation. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the period in which they occur, directly in other comprehensive income.
Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognized immediately in profit or loss as past service costs.
(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.
Equity-settled share-based payment is recognized at fair value of equity instruments on grant date, and employee benefit expense is recognized over the vesting period. At the end of each period, the Group revises its estimates of the number of options that are expected to vest based on thenon-market vesting and service conditions. It recognizes the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.
When the options are exercised, the Group issues new shares. The proceeds received, net of any directly attributable transaction costs, are recognized as share capital (nominal value) and share premium.
F-31
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.
(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. Finance leases are capitalized as lease assets and liabilities at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments.
(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.
The Group classifies ordinary shares as equity. Where the Controlling Company purchases its own shares, the consideration paid, including any directly attributable incremental costs, is deducted from equity until the share are cancelled or reissued. When these treasury shares are reissued, any consideration received is including in equity attributable to the equity holders of the Controlling Company.
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. Amounts disclosed as revenue are net of value added taxes, returns, rebates and discounts and after elimination of intra-group 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 Group; 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.
F-32
(1) Rendering 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 such as information technology and network services, satellite service, security service and others, 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. 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 credit card business are 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 an accrual basis.
(5) Royalty income
Royalty income is recognized on an accrual basis in accordance with the substance of the relevant agreements.
(6) Dividend income
Dividend income is recognized when the right to receive payment is established.
F-33
(7) Customer loyalty program
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.
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 profit or loss, 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.
Management periodically evaluates tax policies that are applied in tax returns in which applicable tax regulation is subject to interpretation. The Group recognizes current income tax on the basis of the amount expected to be paid to the tax authorities.
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 if it is probable that future taxable amount will be available to utilize those temporary differences and losses.
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.
Dividend distribution to the Group’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the Group’s shareholders.
F-34
The issuance of the December 31, 2016 financial statements of the Group was approved by the directors on April 28, 2017.
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.
The Group tests whether goodwill has suffered any impairment on an annual basis. The recoverable amount of cash-generating units (CGUs) is determined based on value-in-use calculations (Note 12).
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 (Note 28).
If certain portion of the taxable income is not used for investments or increase in wages or dividends in accordance with the Tax System For Recirculation of Corporate Income, the Group is liable to pay additional income tax calculated based on the tax laws. The new tax system is effective for three years from 2015. Accordingly, the measurement of current and deferred income tax is affected by the tax effects from the new system. As the Group’s income tax is dependent on the investments, increase in wages and dividends, there is an uncertainty in measuring the final tax effects.
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 35).
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.
F-35
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 17).
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.
As described in Note 16, the Group records provisions for litigation and assets retirement obligations as of the end of the reporting period. The provisions are estimated based on the factors such as the historical experiences.
Depreciation on the property and equipment, intangible assets and investment property, 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.
Financial instruments by category as of December 31, 2015 and 2016, are as follows:
Loans
and
receivables
Assets at fairvalue throughprofit
and loss
Available-
for-sale
Held-to-
Maturity
Trade and other receivables
Liabilities atfair valuethrough profit
Derivatives
used forhedge
F-36
Assets at fair
value throughprofit
Gains or losses arising from financial instruments by category for the years ended December 31, 2014, 2015 and 2016, are as follows:
Loans and receivables
Interest income1, 4
Loss on foreign currency transaction
Gain on foreign currency translation
Loss on disposal
Loss on valuation
Assets at fair value through profit or loss
Gain(loss) on disposal
Derivatives used for hedging
Loss on transaction
Gain on valuation
Other comprehensive income for the year2
Reclassified to profit or loss from other comprehensive income for the year2,3
Available-for-sale
Interest income1,4
Dividend income
Impairment loss
Reclassified to profit or loss from other comprehensive income for the year2
Held-to-Maturity
F-37
Liabilities at fair value through profit and loss
Gain(loss) on valuation
Gain(loss) on transactions
Financial liabilities at amortized cost
Interest expense4
Gain(loss) foreign currency transaction
Loss foreign currency translation
Other liabilities
Financial guarantee gain
Restricted cash and cash equivalents as of December 31, 2015 and 2016, are as follows:
Restricted cash and
cash equivalents
Cash and cash equivalents in the statement of financial position equal to cash and cash equivalents in the statement of cash flows.
F-38
Trade and other receivables as of December 31, 2015 and 2016, are as follows:
(In millions of
Korean won)
amounts
Allowancefor
doubtful
accounts
Present
valuediscount
Carrying
amount
Trade receivables
Other receivables
The fair values of trade and other receivables with original maturities less than one year equal to their carrying amounts because the discounting effect is immaterial. The fair value of trade and other 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 interest rate.
Details of changes in Allowance for doubtful accounts the years ended December 31, 2015 and 2016, are as follows:
Beginning balance
Ending balance
F-39
Provisions for impairment on trade and other receivables are recognized as operating expenses, other expenses and finance costs.
Details of aging analysis of trade receivables as of December 31, 2015 and 2016, are as follows:
Neither past due nor impaired
Past due and impaired
Up to 6 months
6 months to 12 months
Over 12 months
Less: Allowance for doubtful accounts
Details of other receivables as of December 31, 2015 and 2016, are as follows:
Receivables1
Accrued income
Refundable deposits
Loans receivable
Finance lease receivables
Details of aging analysis of other receivables as of December 31, 2015 and 2016, are as follows:
The maximum exposure of trade and other receivables to credit risk is the carrying amount of each class of receivables mentioned above as of December 31, 2016.
F-40
Details of other financial assets and liabilities as of December 31, 2015 and 2016, are as follows:
Financial assets at fair value through profit or loss
Derivatives used for hedge
Financial instruments1
Available-for-sale financial assets1
Held-to-maturityinvestments
Less: Non-current
Current
Financial liabilities at fair value through the profit or loss
Other financial liabilities2
Financial instruments at fair value through profit or loss as of December 31, 2015 and 2016, are as follows:
Financial instruments at fair value through profit and loss
Other derivatives liabilities
The valuation gains and losses on financial assets held for trading for the years ended December 31, 2014, 2015 and 2016, are as follows:
Interest rate swap
Other derivatives
F-41
The valuation gains and losses on financial instruments at fair value through profit or loss for the years ended December 31, 2014, 2015 and 2016, are as follows:
The maximum exposure of debt securities of financial instruments at fair value through profit or loss to credit risk is carrying amount as of December 31, 2016.
The valuation gains and losses on financial assets and liabilities at fair value through profit or loss and held for trading for the years ended December 31, 2014, 2015 and 2016, are as follows:
Financial assets and liabilities at fair value through profit or loss
Valuation gains and losses on financial assets
Held for trading
Derivatives used for hedge as of December 31, 2015 and 2016, are as follows:
Interest rate swap1
Currency swap2
Currency forwards3
Less: non-current
F-42
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.
The valuation gains and losses on the derivatives contracts for the years ended December 31, 2014, 2015 and 2016, are as follows:
comprehensiveincome1
Currency swap
Currency forwards
The ineffective portion recognized in profit or loss on the cash flow hedge is valuation gain of￦1,637 million for the current period (2014: valuation income of ￦1,178 million, 2015: valuation gain of ￦2,663 million).
Details ofavailable-for-sale financial assets as of December 31, 2015, and 2016 are as follows:
Marketable equity securities
Non-marketable equity securities
Debt securities
F-43
Changes ofavailable-for-sale financial assets for the years ended December 31, 2015, and 2016 are as follows:
Beginning
Acquisition
Disposal
Valuation1
Impairment
Reclassification
Changes in scope of consolidation
Ending
The maximum exposure of debt securities of available-for-sale financial assets to credit risk is carrying amount as of December 31, 2016.
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.
None of the available-for-sale financial assets are past due and the impaired assets amount to ￦788 million as of December 31, 2016.
Investment in Korea Software Financial Cooperative amounting to ￦1,000 million is provided as collateral as consideration for payment guarantees provided by Korea Software Financial Cooperative (Note 19).
Inventories as of December 31, 2015 and 2016, are as follows:
Merchandise
Cost of inventories recognized as expenses for the year ended December 31, 2016, amounts to ￦3,589,809 million (2014: ￦3,823,397 million, 2015: ￦3,760,892 million) and reversal of valuation loss on inventory recognized amounts to ￦20,223 million for year ended December 31, 2016 (2014: reversal of valuation allowance of ￦59,973 million, 2015: valuation loss on inventory amounts to ￦4,116 million).
F-44
Other assets and liabilities as of December 31, 2015 and 2016, are as follows:
Other assets
Advance payments
Prepaid expenses
Advances received
Withholdings
Unearned revenue
Changes in property, plant and equipment for the years ended December 31, 2015 and 2016, are as follows:
structures
Acquisition cost
Less: Accumulated depreciation
(including accumulated impairment loss and others)
Beginning, net
Disposal/Abandonment
Transfer in (out)
Inclusion in scope of consolidation
Exclusion from scope of consolidation
Ending, net
F-45
Less: Accumulated depreciation (including accumulated impairment loss and others)
Disposal and termination
Impairment (Recovery of impairment)
Details of property, plant and equipment provided as collateral as of December 31, 2015 and 2016, are as follows:
Land and Buildings
Related
line item
Secured
party
The borrowing costs capitalized for qualifying assets amount to￦16,451 million (2015: ￦11,877 million) in 2016. The interest rate applied to calculate the capitalized borrowing costs in 2016 is 2.29% to 3.50% (2015: 2.46% to 4.07%).
F-46
Changes in investment properties for the years ended December 31, 2015 and 2016, are as follows:
Construction-in-
progress
Transfer
The fair value of investment properties is￦2,340,893 million as of December 31, 2016 (2015: ￦2,645,246 million). The fair value of investment properties is estimated based on the expected cash flow.
Rental income from investment properties is￦184,670 million in 2016 (2015: ￦184,819 million) and direct operating expenses (including repairs and maintenance) arising from investment properties that generated rental income during the period are recognized as operating expenses.
Details of investment properties provided as collateral as of December 31, 2015 and 2016, are as follows:
account
F-47
Changes in intangible assets for the years ended December 31, 2015 and 2016, are as follows:
Frequency
usage rights
Less: Accumulated amortization (including accumulated impairment loss and others)
Amortization
Impairment1
Exclusion in scope of consolidation
Acquisition and capital expenditure1
Less; Accumulated amortization (including accumulated impairment loss and others)
F-48
The carrying amount of membership rights with indefinite useful life not subject to amortization is￦128,539 million (2015: ￦122,829 million) as of December 31, 2016.
Goodwill is allocated to the Group’s cash-generating unit which is identified by operating segments. As of December 31, 2016, goodwill allocated to each cash-generation unit is as follows:
(In millions of Korean won)
Cash generating Unit
Marketing/Customer
Telecom Wireless business1
Finance
BC Card Co., Ltd.2
KT Skylife Co., Ltd.3
N SEARCH MARKETING Corporation4
As a result of the impairment test, the Group recognized the impairment losses of ￦131,600 million on goodwill allocated to Satellite TV segment. It resulted from reflecting market circumstances where the competition with other players such as the internet providers, IPTV and Cable TV operators becomes more intense. The impairment loss was recognized as operating expenses in the consolidated statement of operations. The Group considers that the carrying amount of other cash generating units does not exceed the recoverable amount of the CGUs.
F-49
Details of associates as of December 31, 2016, are as follows:
Korea Information & Technology Fund
KT-SB Venture Investment1
Mongolian Telecommunications
KT Wibro Infra Co., Ltd.
KT-CKP New Media Investment Fund
Changes in investments in associates and joint ventures for the years ended December 31, 2015 and 2016, are as follows:
KT-SB Venture Investment
F-50
Summarized financial information of associates and joint ventures as of and for the years ended December 31, 2015 and 2016, is as follows:
Non-current
assets
liabilities
F-51
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, 2015 and 2016, are as follows:
Marketable investments in associates and joint ventures as of December 31, 2015 and 2016, are as follows:
Due to discontinuance of equity method of accounting, the Group has not recognized loss from associates and joint ventures of ￦1,354 million for the year (2014: ￦11,425 million, 2015:￦601 million,). The accumulated comprehensive loss of associates and joint ventures as of December 31, 2016, which was not recognized by the Group is ￦18,096 million (2014: ￦50,996 million, 2015: ￦51,597 million).
F-52
Details of trade and other payables as of December 31, 2015 and 2016, are as follows:
Trade payables
Other payables
Details of other payables as of December 31, 2015 and 2016 are as follows:
Non-tradepayables1
Accrued expenses
Operating deposits
Details of borrowings as of December 31, 2015 and 2016, are as follows:
Debentures
Annual interest
rates
Foreign
currency
Korean
won
MTNP notes1
MTNP notes
FR notes2
The 173-2nd Public bond
The 176-3rd Public bond
F-53
The 177-3rd Public bond
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 186-1st Public bond
The 186-2nd Public bond
The 186-3rd Public bond
The 186-4th Public bond
The 187-1st Public bond
The 187-2nd Public bond
The 187-3rd Public bond
The 187-4th Public bond
The 188-1st Public bond
The 188-2nd Public bond
The 188-3rd Public bond
The 189-1st Public bond
The 189-2nd Public bond
The 189-3rd Public bond
The 189-4th Public bond
Unsecured public bond in won
The 17th unsecured bond
Less: Current portion
Discount on bonds
F-54
Short-term borrowings
Operational
Long-term borrowings
Export-Import Bank of Korea
Shinhan Bank
KEB Hana Bank
Woori Bank
NongHyup Bank
Korea Development Bank
Kookmin Bank
NH Investment & Security Co., Ltd.
and other2
F-55
Repayment schedule of the Group’s borrowings including the portion of current liabilities as of December 31, 2016, is as follows:
Jan 1, 2017 ~ Dec 31, 2017
Jan 1, 2018 ~ Dec 31, 2018
Jan 1, 2019 ~ Dec 31, 2019
Jan 1, 2020 ~ Dec 31, 2020
After 2021
Carrying amount and fair value of the Group’s debentures and borrowings as of December 31, 2015 and 2016, are as follows:
Amount
Fair
Value
Long-term borrowings (Including current portion of long-term borrowings)
The fair values of debentures 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 1.36% ~ 3.95% as of December 31, 2016 (2015: 1.03% ~ 4.20%).
F-56
Changes in provisions for the years ended December 31, 2015 and 2016, are as follows:
Increase (transfer)
Usage
Reversal
Increase (Transfer)
The amounts recognized in the statement of financial position are determined as follows:
Present value of defined benefit obligations
Fair value of plan assets
Liabilities
Changes in the defined benefit obligations for the years ended December 31, 2015 and 2016, are as follows:
Current service cost
Benefit paid
Changes due to settlements of plan
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
F-57
Changes in the fair value of plan assets for the years ended December 31, 2015 and 2016, are as follows:
Return on plan assets (excluding amounts included in interest income)
Benefits paid
Employer contributions
Amounts recognized in the statements of operations for the years ended December 31, 2014 and 2015, 2016 are as follows:
Net Interest cost
Losses on settlements
Transfer out
Transfer to discontinued operation
Total expenses
Principal actuarial assumptions used are as follows:
Discount rate
Future salary increase
The sensitivity of the defined benefit obligations as of December 31, 2016, to changes in the principal assumptions is:
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.
The above sensitivity analyses are based on 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
F-58
Employee Retirement Benefit Security Act. Expected contributions to post-employment benefit plans for the year ending December 31, 2017, are￦160,301 million.
Expected maturity analysis of undiscounted pension benefits as of December 31, 2016, is as follows:
Less than
1 year
Between
1 and 2 years
2 and 5 years
Pension benefits
The weighted average duration of the defined benefit obligations is 8.5 years.
Recognized expense related to the defined contribution plan for the year ended December 31, 2016, is ￦46,023 million (2014: ￦25,423, 2015:￦35,699 million).
As of December 31, 2016, major commitments with local financial institutions are as follows:
Bank overdraft
Commercial papers Factoring
Collateralized loan on accounts receivable-trade
Collateralized loan on electronic accounts receivable-trade
Plus electronic notes payable
Loans for working capital
Green energy factoring
FX forward trading commitment
Facility loans
Facility loans on ships
Inter-Korean Cooperation Fund
F-59
As of December 31, 2016, guarantees received from financial institutions are as follows:
(In millions of Korean won and
foreign currencies in thousands)
Performance guarantee
Seoul Guarantee Insurance and others
Guarantee for import letters of credit
Counter guarantee
Guarantee for payment in foreign currency
Export-Import Bank of Korea and others
Guarantee for advances received
Comprehensive credit line
Guarantee for payment in local currency
Bid guarantee
Performance guarantee / Warranty guarantee
Guarantee for advances received/others
Korea Software Financial Cooperative and others
Warranty guarantee
Guarantees for licensing
Guarantees for public sale
Guarantees for deposits
As of December 31, 2016, guarantees provided by the Group for third parties, are as follows:
July 31, 2015
~ Nov. 30, 2017
The Controlling Company is jointly and severally obligated with KT Sat Co., Ltd. to pay KT Sat Co., Ltd.’s liabilities prior to spin-off. As of December 31, 2016, the Controlling Company and KT Sat Co., Ltd. are jointly and severally liable for reimbursement of￦6,004 million.
For the year ended December 31, 2016, the Group entered into agreements with Olleh KT Twenty-fifth to Twenty-sixth Securitization Specialty Co., Ltd. and GIGA LTE Twenty-seventh to Thirtieth Securitization Specialty Co., Ltd. (2015: Olleh KT Nineteenth to Twenty-fourth Securitization Specialty Co., Ltd.), and disposed its trade receivables related to handset sales. The Group also made asset management agreements with each securitization specialty company and will receive the related management fees.
F-60
As of December 31, 2016, the Group is a defendant in 181 lawsuits with the total claimed amount of￦77,461 million (2015: ￦85,833 million). As of December 31, 2016, litigation provisions of￦19,038 million for various pending lawsuits and unasserted claims are recorded as liabilities for potential loss in the ordinary course of business. The Company cannot yet predict the final outcomes of the cases because these matters involve significant uncertainties related to the legal theory or the nature of the claims as well as the complexity of the facts.
According to the financial and other covenants included in certain debentures 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 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, 2015 and 2016, are as follows:
Acquisition costs
Net balance
As of December 31, 2016, the Group recognized financial lease assets as other property, plant and equipment. The related depreciation amounted to ￦50,704 million (2015: ￦72,297 million) for the year ended December 31, 2016.
Details of future minimum lease payments as of December 31, 2015 and 2016, 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
F-61
Operating Lease
Details of future minimum lease payments as of December 31, 2015 and 2016, under operating lease contracts are summarized below:
Thereafter
Operating lease expenses incurred for the years ended December 31, 2014, 2015 and 2016, amounted to ￦125,430 million, ￦111,776 million, and ￦121,852 million, respectively.
As of December 31, 2015 and 2016, the Controlling Company’s number of authorized shares is one billion.
Number of
outstandingshares
Par value
per share
(Korean won)
Ordinary shares
(in millions of
Ordinary shares1
Details of retained earnings as of December 31, 2015 and 2016, are as follows:
Legal reserve1
Voluntary reserves2
Unappropriated retained earnings
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As of December 31, 2015 and 2016, the details of the Controlling Company’s accumulated other comprehensive income are as follows:
Changes in investments in associates and joint ventures
Loss on derivatives valuation
Gain of valuation onavailable-for-sale
Foreign currency translation adjustment
Changes in accumulated other comprehensive income for the years ended December 31, 2015 and 2016, are as follows:
Gain or loss on derivatives valuation
Gain or loss of valuation onavailable-for-sale
As of December 31, 2015 and 2016, the other components of equity are as follows:
Treasury stock1
Loss on disposal of treasury stock2
Share-based payments
Others3
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As of December 31, 2015 and 2016, the details of treasury stock are as follows:
Number of shares
Amounts (In millions of Korean won)
Treasury stock is expected to be used for the stock compensation for the Group’s directors and employees and other purposes.
Details of share-based payments as of December 31, 2016, are as follows:
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
Changes in the number of stock options and the weighted-average exercise price as of December 31, 2015 and 2016, are as follows:
8th grant
9th grant
10th grant
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Operating revenues for the years ended December 31, 2014, 2015 and 2016, are as follows:
Services provided
Operating expenses for the years ended December 31, 2014, 2015 and 2016, are as follows:
Amortization of intangible assets
International interconnection fee
Utilities
Taxes and dues
Rent
Insurance premium
Installation fee
Advertising expenses
Research and development expenses
Card service cost
Details of employee benefits for the years ended December 31, 2014, 2015 and 2016, 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
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Details of financial income for the years ended December 31, 2014, 2015 and 2016, are as follows:
Gain on foreign currency transactions
Gain on settlement of derivatives
Gain on valuation of derivatives
Details of financial expenses for the years ended December 31, 2014, 2015 and 2016, are as follows:
Interest expenses
Loss on foreign currency transactions
Loss on foreign currency translation
Loss on settlement of derivatives
Loss on valuation of derivatives
Loss on disposal of trade receivables
Impairment loss onavailable-for-sale financial assets
The analysis of deferred tax assets and deferred tax liabilities as of December 31, 2015 and 2016, is 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 after offsetting
Deferred tax liabilities after offsetting
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The gross movements on the deferred income tax account for the years ended December 31, 2015 and 2016, are calculated as follows:
Charged(credited) to the statement of operations
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:
Statement of
operations
Derivative instruments
Available-for-sale financial assets
Investment in subsidiaries, associates and joint ventures
Advanced depreciation provision
Deposits for severance benefits
Reserve for technology and human resource development
Derivatives instruments
Provisions for impairment on trade receivables
Inventory valuation
Contribution for construction
Property, plant and equipment
Retirement benefit obligations
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Withholding of facilities expenses
Accrued payroll expenses
Deduction of installment receivables
Assets retirement obligation
Gain or loss foreign currency translation
Deferred revenue
Real-estate sales
Tax credit carryforwards
Accumulated deficit
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The tax impacts recognized directly to equity as of December 31, 2014, 2015 and 2016, are as follows:
Before
recognition
Available-for-salevaluation gain(loss)
Hedge instruments valuation gain(loss)
Remeasurements from net defined benefit liabilities
Shares of gain(loss) of associates and joint ventures
Foreign Currency Translation adjustment
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Details of income tax expense (benefit) for the years ended December 31, 2014, 2015 and 2016, are calculated as follows:
Current income tax expense(benefit)
Impact of change in deferred taxes
Income tax expense(benefit)
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 entities as follows:
Profit(loss) before income tax expense(benefit)
Statutory income tax expense(benefit)
Tax effect
Income not taxable for taxation purposes
Non-deductible expenses
Tax credit
Additional payment of income taxes
Tax effect and adjustment on consolidation
Goodwill impairment
Eliminated dividend income from subsidiaries
Changes of out-side tax effect
Basic earnings per share is calculated by dividing the profit from operations attributable to equity holders of the Controlling Company by the weighted average number of ordinary shares outstanding during the period, excluding ordinary shares purchased by the Group and held as treasury stock.
Basic earnings per share from operations for the years ended December 31, 2014, 2015 and 2016, is calculated as follows:
Profit(loss) attributable to ordinary shares (in millions of Korean won)
Profit(loss) from continuing operations attributable to ordinary shares
Profit from discontinued operations attributable to ordinary shares
Weighted average number of ordinary shares outstanding (in number of shares)
Basic earnings(loss) per share (in Korean won)
Basic earnings(loss) per share from continuing operations
Basic earnings per share from discontinued operations
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Diluted earnings per share from operations is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Controlling Company has dilutive potential ordinary shares from redeemable convertible preferred stocks from stock options.
Diluted earnings per share from operations for the years ended December 31, 2014, 2015 and 2016 is calculated as follows:
Adjusted net income attributable to ordinary shares (in millions of Korean won)
Diluted profit(loss) attributable to ordinary shares (in millions of Korean won)
Diluted profit(loss) from continuing operations attributable to ordinary shares
Diluted income from discontinued operations attributable to ordinary shares
Number of dilutive potential ordinary shares outstanding (in number of shares)
Diluted earnings(loss) per share (in Korean won)
Diluted earnings(loss) per share from continuing operations
Diluted earnings per share from discontinued operations
The dividends paid by the Controlling Company in 2016 and 2014 were ￦122,425 million (￦500 per share) and ￦195,112 million (￦800 per share), respectively. There were no dividends paid in 2015. A dividend in respect of the year ended December 31, 2016, of ￦800 per share, amounting to a total dividend of ￦195,977 million, was approved at the shareholders’ meeting on March 24, 2017.
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Cash flows from operating activities for the years ended December 31, 2014, 2015 and 2016, are as follows:
1. Profit(loss) for the year
2. Adjustments to reconcile net income
Dividends income
Provision for severance benefits
Impairment losses on trade receivables
Share of net profit of associates and joint ventures
Gain on disposal of associates and joint ventures
Impairment loss of associates and joint ventures
Gain on disposal of subsidiaries
Loss on disposal of property, plant and equipment and investment in properties
Loss on disposal of intangible assets
Loss on impairment of intangible assets
Impairment losses onavailable-for-sale financial assets
Gain on disposal ofavailable-for-sale financial assets
3. Changes in operating assets and liabilities
Decrease in trade receivables
Decrease(increase) in other receivables
Decrease(increase) in other current assets
Increase in other non-current assets
Decrease(increase) in inventories
Increase(decrease) in trade payables
Increase(decrease) in other payables
Increase(decrease) in other current liabilities
Increase in other non-current liabilities
Increase(decrease) in provisions
Increase(decrease) in deferred revenue
Decrease(increase) in plan assets
Payment of severance benefits
4. Cash generated from operations (1+2+3)
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The Group made agreements with securitization specialty companies and disposed of its trade receivables related to handset sales (Note 19). Cash flows from the disposals are presented in cash generated from operations.
Significant transactions not affecting cash flows for the years ended December 31, 2014, 2015 and 2016, are as follows:
Reclassification of the current portion of debentures
Reclassification ofconstruction-in-progress to property, plant and equipment
Reclassification of accounts payable from property, plant and equipment
Reclassification of accounts payable from intangible assets
Reclassification of payable from defined benefit liability
Reclassification of payable from plan assets
Exercise of convertible bonds
The Group’s operating segments are as follows:
Details
Business service
Customer/Marketing
Satellite TV
Satellite broadcasting business
All other segments
Details of each segment for the years ended December 31, 2014, 2015 and 2016, are as follows:
Operating
revenues
income(loss)
andAmortization
Satellite TV1
All other segments1
Elimination
Consolidated amount
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and Amortization
income
Operating revenues for the year ended December 31, 2014, 2015 and 2016 andnon-current assets as of December 31, 2015 and 2016 by geographical regions, are as follows:
Non-current assets1
Domestic
Overseas
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The list of related party of the Group as of December 31, 2016, is as follows:
Associates and joint ventures
Outstanding balances of receivables and payables in relations to transactions with related parties as of December 31, 2015 and 2016, are as follows:
payables
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Significant transactions with related parties for the years ended December 31, 2014, 2015 and 2016, are as follows:
Total3
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Associates and
joint ventures
Information Technology
Solution Nambu Corporation1
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Key management compensation for the years ended December 31, 2014, 2015 and 2016, consists of:
Salaries and other short-term benefits
Post-employment benefits
Stock-based compensation
Fund transactions with related parties for the years ended December 31, 2015 and 2016, are as follows:
KT-DSC creative economy youthstart-up investment fund
Smart Channel Co., Ltd.1
Korea Electronic Vehicle Charging Service
2010 KIF-IMM IT Investment Fund2
KTC-NP-Growth Champ 2011-2 PEF2
Korea Information & Technology Investment Fund
Exdell Corporation
KT Service Bukbu3
Information Technology Solution Nambu Corporation3
Information Technology Solution Seobu Corporation3
Information Technology Solution Busan Corporation3
KT Service Nambu3
Information Technology Solution Honam Corporation2
Information Technology Solution Daegu Corporation2
KT-SB Venture Investment Fund
K-Realty CR-REITsNo.1
Daiwon Broadcasting Co., Ltd.
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PT. Mitra Transaksi Indonesia
K-REALTY RENTAL HOUSING REIT 2
AI RESEARCH INSTITUTE
KT-IBKC future investment fund 1
Gyeonggi-KT Yoojin Superman Fund
FUNDA Co., Ltd.
(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.
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,
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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, 2014, 2015 and 2016, 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:
2014.12.31
2015.12.31
2016.12.31
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.
Details of financial assets and liabilities in foreign currencies as of December 31, 2014, 2015 and 2016, are as follows:
USD
SDR1
JPY
GBP
EUR
DZD2
CNY
UZS3
RWF4
IDR5
MMK6
TZS7
BWP8
HKD
BDT9
COP10
PLN11
VND12
CHF
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(iii) Price risk
As of December 31, 2014, 2015 and 2016, 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) Cash flow and fair value interest rate risk
The Group’s interest rate risk arises from liabilities in foreign currency such as foreign currency debentures. Debentures in foreign currency issued at variable rates expose the Group to cash flow interest rate risk which is partially offset by swap transactions. Debentures 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, 2014, 2015 and 2016, 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:
Fluctuation of
interest rate
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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, 2015 and 2016, maximum exposure to credit risk is as follows.
Cash equivalents(except cash on hand)
Derivative used for hedging
Time deposits and others
Held-to-maturity financial assets
Financial guarantee contracts1
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 (including interest expenses) into relevant maturity groups based on the remaining period at the date of the end of each reporting period to the contractual maturity date. These amounts are contractual undiscounted cash flows.
Borrowings(including debentures)
Other non-derivative financial liabilities
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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.
More than
5 years
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, 2015 and 2016, are as follows:
Debt-to-equityratio
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, 2015 and 2016, are as follows:
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:
Net amountspresented inthe statementof financial
position
Derivative assets for hedging purpose1
Trade receivables2
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The Group’s recognized financial liabilities subject to enforceable master netting arrangements or similar agreements are as follows:
Gross
offset
Net
Derivative liabilities for hedging purpose1
Trade payables2
Other payables2
Grossassets
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Carrying amount and fair value of financial instruments by category as of December 31, 2015 and 2016, are as follows:
Financial assets
Cash and cash equivalents1
Trade and other receivables1
Financial instruments at fair value through profit or loss
Derivative financial instruments for hedging purpose
Time deposits and others1
Held-to-maturity
Available-for-sale financial assets2
Financial liabilities
Trade and other liabilities1
Other1
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Available-for-sale financial assets measured at cost as of December 31, 2015 and 2016, are as follows:
K-Bank
IBK-AUCTUS Green Growth Private Equity Fund
CBC II Fund
TRANSLINK No.2 Fund
WALDEN No.6 Fund
Storm IV Fund
The range of cash flow 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.
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:
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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, 2015 and 2016, are as follows:
Recurring fair value measurements
Derivative financial assets for hedging purpose
Disclosed fair value
Investment properties1
Financial liabilities at fair value through profit or loss
Derivative financial liabilities for hedging purpose
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There are no transfers between Level 1 and Level 2 of the fair value hierarchy for the recurring fair value measurements.
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Financial assetsat fair valuethrough
profit or loss
Amount recognized in profit or loss
Amount recognized in other comprehensive income
Purchases
Sales
Settlement
Change in scope of consolidation
at fair valuethrough
Other derivative
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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, 2015 and 2016, are as follows:
Held for trading financial assets
Other derivative assets
Investment properties
Other derivative financial liabilities
Discounted cash flow model
Comparable Company Analysis
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The Group uses external experts that perform the fair value measurements required for financial reporting purposes. External experts report directly to the chief financial officer (CFO), and discusses valuation processes and results with the CFO in line with the Group’s reporting dates.
In the case that the Group values 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 instruments. However, in the case that inputs of the valuation techniques become observable in markets, the remaining deferred difference is immediately recognized in full in profit for the year.
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In relation to this, details and changes of the total deferred difference for the years ended December 31, 2015 and 2016, are as follows:
New transactions
(1) N SEARCH MARKETING Corporation
The Controlling Company acquired 17,393 shares (33.3%) of N SEARCH MARKETING Corporation for strengthen online advertisement business. Nasmedia, Inc. a subsidiary of the Group, acquired 34,787 shares (66.7%) of N SEARCH MARKETING Corp. on October 10, 2016.
N SEARCH MARKETING Corporation became a subsidiary as a result of this acquisition transaction accounted for in accordance with IFRS 3 Business Combinations.
As a result of applying acquisition method, the Group recognized an identifiable intangible assets of ￦18,049 million and goodwill of￦42,745 million. The goodwill of ￦42,745 million arising from the acquisition is attributable to economies of scale expected from combining the operations of the Group and N SEARCH MARKETING Corporation.
Details of the consideration transferred, fair value of the acquired identifiable assets and liabilities and goodwill at the acquisition date are as follows:
Consideration transferred (a)
Recognized amounts of assets acquired and liabilities assumed1
Tangible assets
Intangible assets
Total amounts of identifiable assets and liabilities measured at fair value (b)
Goodwill (a-b)
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After the acquisition date, the operating revenue and profit for the year for consolidation of N SEARCH MARKETING Corporation before the elimination of related party transactions with its subsidiaries are ￦8,193 million and￦731 million, respectively. If N SEARCH MARKETING Corporation was consolidated on January 1, 2016, the operating revenue and profit for the year included in consolidated statements of profit or loss would have been ￦31,418 million and ￦4,927 million, respectively.
The fair value of trade accounts receivable and others acquired from N SEARCH MARKETING Corporation is￦33,826 million, and all are deemed collectible.
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 entity and how the structured entity is 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
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Details of scale of unconsolidated structured entities and nature of the risks associated with an entity’s interests in unconsolidated structured entities as of December 31, 2015 and 2016, are as follows:
Total amount of Unconsolidated Structured Entities
Assets recognized in statement of financial position
Maximum loss exposure1
Investment Assets
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Profit or loss allocated to non-controlling interests and accumulated non-controlling interests of subsidiaries that are material to the Group for the years ended December 31, 2014, 2015 and 2016 is as follows:
Non-
controllingInterestsrate(%)
Dividend paidto non-
controllinginterests
KT Skylife Co., Ltd.
KT Rental
KT Hitel Co.,Ltd.
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The summarized financial information for each subsidiary with non-controlling interests that are material to the Group before inter-company eliminations is as follows:
Summarized consolidated statements of financial position as of December 31, 2014, 2015 and 2016, are as follows:
BC Card
Co., Ltd.
KT Powertel
KT Hitel
Non-controlling Interests rate(%)
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 dividend paid tonon-controlling interests
Dividend paid to non-controlling interests
Net (decrease)/increase in cash and cash equivalents
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KT Telecop
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The effect of changes in the ownership interest on the equity attributable to owners of the Group during 2014, 2015 and 2016 is summarized as follows:
Carrying amount of non-controlling interests acquired
Consideration paid to non-controlling interests
Excess of consideration paid recognized in parent’s equity
The Group disposed of KT Rental, a subsidiary of the Group, on June 3, 2015, and KT Capital Co., Ltd. on August 20, 2015. The profit and loss on the related operations of KT Rental and KT Capital Co., Ltd. are presented as discontinued operations and the related financial information is as follows:
Profit and loss from discontinued operations for the years ended December 31, 2014 and 2015 are as follows:
Expenses
Profit on disposal of discontinued operations
Profit before tax of discontinued operations
Income tax expense
Profit for the period from discontinued operations
Cash flows from discontinued operations for the years ended December 31, 2014 and 2015 are as follows:
Net cash flows
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