As filed with the Securities and Exchange Commission on April 27, 2012
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
OR
For the fiscal year ended December 31, 2011
Date of event requiring this shell company report
For the transition period from to
Commission file number 1-14926
KT Corporation
(Exact name of Registrant as specified in its charter)
206 Jungja-dong
Bundang-gu, Sungnam-si, Gyeonggi-do
463-711 Korea
(Address of principal executive offices)
Thomas Bum Joon Kim
Telephone: +82-31-727-0150; E-mail: thomaskim@kt.com
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Name of each exchange on which registered
New York Stock Exchange, Inc.
New York Stock Exchange, Inc.*
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
As of December 31, 2011, there were 261,111,808 shares of common stock, par value(Won)5,000 per share, outstanding (not including 17,897,147 shares of common stock held by the company as treasury shares)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAP ¨ IFRS x Other ¨
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
TABLE OF CONTENTS
PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGERS AND ADVISERS
Item 1.A.
Directors and Senior Management
Item 1.B.
Advisers
Item 1.C.
Auditors
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Method and Expected Timetable
ITEM 3.
KEY INFORMATION
Item 3.A.
Selected Financial Data
Item 3.B.
Capitalization and Indebtedness
Item 3.C.
Reasons for the Offer and Use of Proceeds
Item 3.D.
Risk Factors
ITEM 4.
INFORMATION ON THE COMPANY
Item 4.A.
History and Development of the Company
Item 4.B.
Business Overview
Item 4.C.
Organizational Structure
Item 4.D.
Property, Plants and Equipment
ITEM 4A.
UNRESOLVED STAFF COMMENTS
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Item 5.A.
Operating Results
Item 5.B.
Liquidity and Capital Resources
Item 5.C.
Research and Development, Patents and Licenses, Etc.
Item 5.D.
Trend Information
Item 5.E.
Off-balance Sheet Arrangements
Item 5.F.
Tabular Disclosure of Contractual Obligations
Item 5.G.
Safe Harbor
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Item 6.A.
Item 6.B.
Compensation
Item 6.C.
Board Practices
Item 6.D.
Employees
Item 6.E.
Share Ownership
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(continued)
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Item 7.A.
Major Shareholders
Item 7.B.
Related Party Transactions
Item 7.C.
Interests of Experts and Counsel
ITEM 8.
FINANCIAL INFORMATION
Item 8.A.
Consolidated Statements and Other Financial Information
ITEM 9.
THE OFFER AND LISTING
Item 9.A.
Offer and Listing Details
Item 9.B.
Plan of Distribution
Item 9.C.
Markets
Item 9.D.
Selling Shareholders
Item 9.E.
Dilution
Item 9.F.
Expenses of the Issuer
ITEM 10.
ADDITIONAL INFORMATION
Item 10.A.
Share Capital
Item 10.B.
Memorandum and Articles of Association
Item 10.C.
Material Contracts
Item 10.D.
Exchange Controls
Item 10.E.
Taxation
Item 10.F.
Dividends and Paying Agents
Item 10.G.
Statements by Experts
Item 10.H.
Documents on Display
Item 10.I.
Subsidiary Information
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Item 12.A.
Debt Securities
Item 12.B.
Warrants and Rights
Item 12.C.
Other Securities
Item 12.D.
American Depositary Shares
PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
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ITEM 14.
ITEM 15.
CONTROLS AND PROCEDURES
ITEM 16.
[Reserved]
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B.
CODE OF ETHICS
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
ITEM 16H.
PART III
ITEM 17.
ITEM 18.
ITEM 19.
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PRESENTATION
All references to “Korea” or the “Republic” contained in this annual report mean the Republic of Korea. All references to the “Government” are to the government of the Republic of Korea. All references to “we,” “us” or the “Company” are to KT Corporation and, as the context may require, its subsidiaries.
All references to “Won” or “(Won)” in this annual report are to the currency of the Republic and all references to “Dollars,” “$,” “US$” or “U.S. dollars” are to the currency of the United States of America. Our monetary assets and liabilities denominated in foreign currency are translated into Won at the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. (the “Market Average Exchange Rate”) on the balance sheet dates, which were, for U.S. dollars,(Won)1,138.9 to US$1.00 and(Won)1,153.3 to US$1.00 at December 31, 2010 and 2011, 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, 2011 have been translated into United States dollars at the rate of(Won)1,153.3 to US$1.00, the Market Average Exchange Rate in effect on December 31, 2011.
Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.
All market share data contained in this annual report, unless otherwise specified, are based on the number of subscribers announced by the Korea Communications Commission or the Korea Telecommunications Operators Association.
Item 1. Identity of Directors, Senior Managers and Advisers
Item 1.A. Directors and Senior Management
Not applicable.
Item 1.B. Advisers
Item 1.C. Auditors
Item 2. Offer Statistics and Expected Timetable
Item 2.A. Offer Statistics
Item 2.B. Method and Expected Timetable
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Item 3. Key Information
Item 3.A. Selected Financial Data
You should read the selected consolidated financial data below in conjunction with the Consolidated Financial Statements as of December 31, 2010 and 2011 and for each of the years in the two-year period ended December 31, 2011, 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 IFRS as issued by the IASB. The selected consolidated financial data for the two years ended December 31, 2011 have been derived from our audited consolidated financial statements.
In accordance with rule amendments adopted by the U.S. Securities and Exchange Commission which became effective on March 4, 2008, we are not required to provide a reconciliation to U.S. GAAP. Furthermore, pursuant to the transitional relief granted by the U.S. Securities and Exchange Commission in respect of the first-time application of IFRS, no audited financial statements and financial information prepared under IFRS for the year ended December 31, 2009 have been included in this annual report.
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.
Consolidated statement of income data
Continuing Operations:
Operating revenue
Operating expenses
Operating profit
Finance income
Finance expenses
Income (loss) from jointly controlled entities and associates
Profit from continuing operations before income tax
Income tax expense
Profit for the period from the continuing operations
Discontinued operations:
Profit from discontinued operations
Profit for the period
Profit for the period attributable to:
Equity holders of the parent company
Profit from continuing operations
Non-controlling interest
Earnings per share attributable to the equity holders of the Parent Company during the period (in won):
Basic earnings per share
From continuing operations
From discontinued operations
Diluted earnings per share
2
Consolidated statement of financial position data
Assets:
Current assets:
Cash and cash equivalents
Trade and other receivables, net
Short-term loans, net
Current finance lease receivables, net
Other financial assets
Current income tax assets
Inventories, net
Other current assets
Total current assets
Non-current assets:
Long-term loans, net
Non-current finance lease receivables, net
Property and equipment, net
Investment property, net
Intangible assets, net
Investments in jointly controlled entities and associates
Deferred income tax assets
Other non-current assets
Total non-current assets
Total assets
Liabilities and Equity:
Current liabilities:
Trade and other payables
Current finance lease liabilities, net
Borrowings
Other financial liabilities
Current income tax liabilities
Provisions
Deferred income
Other current liabilities
Total current liabilities
Non-current liabilities:
Non-current finance lease liabilities, net
Retirement benefit liabilities
Deferred income tax liabilities
Other non-current liabilities
Total non-current liabilities
Total liabilities
Equity attributable to owners of the Parent Company
Paid-in capital
Capital stock
Share premium
Retained earnings
Accumulated other comprehensive income (expense)
Other components of equity
Total equity
Total liabilities and shareholders’ equity
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Consolidated statement of cash flow data
Net cash generated from operating activities
Net cash (used in) investing activities
Net cash provided by (used in) financing activities
Operating Data
Lines installed (thousands) (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
2007
2008
2009
2010
2011
December
2012 (through April 26)
January
February
March
April (through April 26)
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, (Won)1,138.9 to US$1.00 and (Won)1,153.3 to US$1.00 at December 31, 2010 and 2011, 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, 2011 have been translated into United States dollars at the rate of (Won)1,153.3 to US$1.00, the Market Average Exchange Rate in effect on December 31, 2011.
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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
Not applicable
Item 3.C. Reasons for the Offer and Use of Proceeds
Item 3.D. Risk Factors
You should carefully consider the following factors.
Risks Relating to Our Business
Competition in the Korean telecommunications industry is intense.
Competition in the telecommunications sector in Korea is intense. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. In particular, SK Telecom Co., Ltd. (or SK Telecom) acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband Co., Ltd. (or SK Broadband). The acquisition enables SK Telecom to provide fixed-line telecommunications, broadband Internet access and Internet television (or IP-TV) services together with its mobile telecommunications services. On January 1, 2010, LG Dacom Corporation (or LG Dacom) and LG Powercom Co., Ltd. (or LG Powercom) merged into LG Telecom Co., Ltd., which subsequently changed its name to LG U+. The merger enables LG U+ to provide a similar range of services as SK Telecom and us. Our inability to adapt to such changes in the competitive landscape could have a material adverse effect on our business, financial condition and results of operations.
In addition to our competition with integrated telecommunications service providers, we face increasing competition from specific service providers, such as Internet phone service providers, Internet text message service providers, voice resellers and call-back service providers. In recent years, the increasing popularity of Internet phone and free text message services, such as Skype and Kakao Talk, have had a negative impact on demand for our telecommunications and text message services while creating additional data transmission usage by our Internet and mobile subscribers. Our inability to adapt to such changes in the competitive landscape could have a material adverse effect on our business, financial condition and results of operations.
Mobile Service. We provide mobile services based on Wideband Code Division Multiple Access (or W-CDMA) technology and Long-Term Evolution (or LTE) technology. Competitors in the mobile telecommunications service industry are SK Telecom and LG U+. We had a market share of 31.5% as of December 31, 2011, making us the second largest mobile telecommunications service provider in Korea. SK Telecom had a market share of 50.6% as of December 31, 2011.
Mobile subscribers are allowed to switch their service provider while retaining the same mobile phone number. Mobile service providers also grant subsidies to subscribers who purchase new handsets and agree to a minimum subscription period. Mobile number portability and handset subsidies have intensified competition among the mobile service providers and increased their marketing expenses. If the mobile service providers adopt a strategy of expanding market share through price competition, it could lead to a decrease in our net profit margins.
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Since 2011, SK Telecom, LG U+ and we have launched fourth-generation mobile telecommunications services based on LTE technology, which we believe has further intensified competition among the three companies and resulted in an increase in marketing expenses and capital expenditures related to implementing and providing 4G LTE services. SK Telecom and LG U+ began providing 4G LTE services in July 2011, and we commenced providing commercial 4G LTE services on January 3, 2012 utilizing our bandwidths in the 1.8 GHz spectrum that became available upon termination of our 2G services based on Code Division Multiple Access (or CDMA) technology. Although we expect that SK Telecom and LG U+ will face similar challenges to those that we expect to face in implementing this fourth-generation technology, we cannot assure you that we will continue to be able to successfully compete in fourth-generation mobile telecommunications services.
Fixed-line Telephone Services. Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. Since then, various competitors have entered the local, domestic long-distance and international long-distance telephone service markets in Korea, which have eroded our market shares. LG U+ and SK Broadband currently provide local, domestic long-distance and international long-distance telephone services. In addition, Onse Telecom Corporation and SK Telink, Inc. currently provide domestic long-distance and international long-distance telephone services. We also compete with specific service providers, such as Internet phone service providers, voice resellers and call-back service providers, that offer international long-distance service in Korea. While we offer our own Internet phone service, the entry of these and other potential competitors into the local, domestic long-distance and international long-distance telephone service markets has had and may continue to have a material adverse effect on our revenues and profitability from these businesses. As of December 31, 2011, we had a market share in local telephone service of 84.3% and a market share in domestic long distance service of 80.5%. Further increase in competition may decrease our market shares in such businesses.
Internet Services. The Korean broadband Internet access service market has experienced significant growth in the past decade. SK Broadband (formerly Hanarotelecom) entered the broadband market in 1999 offering both Hybrid Fiber Coaxial (or HFC) and Asymmetric Digital Subscriber Line (or ADSL) services. We also began offering broadband Internet access service in 1999, followed by Dreamline, Onse and LG U+. In recent years, numerous cable television operators have also begun to offer HFC-based services at rates lower than ours. We had a market share of 43.8% as of December 31, 2011. As a result of having to compete with a number of competitors and the maturing of the Internet access service market, we currently encounter, and we expect to encounter, pressure to increase marketing expenses in the future.
The market for other Internet-related services in Korea, including IP-TV and Internet phone services, is also very competitive. We anticipate that competition will continue to intensify as the usage and popularity of the Internet grows and as new domestic and international competitors enter the Internet industry in Korea. The substantial growth of the Internet industry in Korea has attracted many competitors and as a result may lead to increasing price competition to provide Internet-related services. Increased competition in the Internet industry could have a material adverse effect on the number of subscribers of our Internet-related service and on our results of operations.
Failure to renew existing bandwidth spectrum, acquire adequate additional bandwidth spectrum or use our bandwidth efficiently may adversely affect our mobile telecommunications business and results of operations.
One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth spectrum allocated to the service provider. We have a license to use 40 MHz of bandwidth in the 2.1 GHz spectrum that we use to provide IMT-2000 services based on W-CDMA wireless network standards. Such license expires in December 2016, and we are required to pay approximately (Won)1.3 trillion during the license period of 15 years. In April 2010, the Korea Communications
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Commission 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 will 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 Korea Communications Commission 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 Korea Communications Commission 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 will 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 Korea Communications Commission at the time of allocation.
In August 2011, the Korea Communications Commission 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 will pay a total usage fee of (Won)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 bandwidth in the 2.1 GHz spectrum. We began using the 20 MHz of bandwidth in the 1.8 GHz spectrum, which became available upon termination of our 2G PCS services, to provide our 4G LTE services starting in January 2012, and expect to utilize the newly allocated bandwidths in the 800 MHz and 900 MHz spectrums to further expand our 4G LTE services in the future, if necessary.
The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have been significant factors in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than voice services. The current trend of increasing data transmission use and the increasing sophistication of multimedia contents are likely to put additional strain on the bandwidth capacity of mobile service providers. In the event we are unable to maintain sufficient bandwidth capacity by renewing existing bandwidth spectrum, receiving additional bandwidth allocation, or cost-effectively implementing technologies that enhance bandwidth usage efficiency, our subscribers may perceive a general decrease in quality of mobile telecommunications services. No assurance can be given that bandwidth constraints will not adversely affect the growth of our mobile telecommunications business.
Introduction of new services, including our 4G LTE services, poses challenges and risks to us.
The telecommunications industry is characterized by continual advances and improvements in telecommunications technology, and we have been continually researching and implementing technology upgrades and additional telecommunication services to maintain our competitiveness. For example, in March 2005, we acquired a license to provide wireless broadband Internet access (or WiBro) service for (Won)126 billion, and commercially launched our service in June 2006. We completed the upgrade of our 4G WiBro network and expanded our WiBro service coverage to 82 cities nationwide and major highways as of March 2011, which we believe 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 740,000 subscribers as of December 31, 2011. We are also upgrading our broadband network to enable FTTH connection, which enhances downstream speed and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such as IP-TV service and delivery of other digital media content.
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In addition, we have been building more advanced mobile telecommunications networks based on LTE technology, which is generally referred to as a 4G technology, and commenced providing commercial 4G LTE services in the Seoul metropolitan area on January 3, 2012. We completed the expansion of our 4G LTE service coverage to 84 cities throughout Korea in April 2012. Several wireless carriers in the United States, Europe and Asia commenced LTE services in recent years and LTE technology is expected to be widely accepted as the standard 4G technology. LTE technology enables data to be transmitted faster than W-CDMA, up to 75 Mbps for downloading and up to 37.5 Mbps for uploading. We expect that the faster data transmission speed of the LTE network, combined with our existing 4G nationwide WiBro network, will allow us to offer significantly improved wireless data transmission services, providing our subscribers with faster wireless access to multimedia content. 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.
Termination of our second generation Personal Communications Service (or 2G PCS) services may pose risks to us.
As part of our decision to apply for reallocation of the 20 MHz bandwidth in the 1.8 GHz spectrum, we applied to the Korea Communications Commission to terminate our 2G PCS services, and on November 23, 2011, the Korea Communications Commission approved our plan. However, on November 30, 2011, approximately 900 of our 2G PCS service subscribers filed a class-action suit against the Korea Communications Commission for its approval of our plan, claiming that we used improper means to reduce our 2G PCS subscribers to comply with regulatory requirements before terminating the 2G PSC services and that the Korea Communications Commission did not consider such factor in approving our plan. On December 6, 2011, the Seoul Administrative Court issued a preliminary injunction, which temporarily suspended our termination of the 2G PCS services until the case went to trial. We immediately appealed the decision and the Seoul High Court overruled the preliminary injunction on December 26, 2011 and reinstated the Korea Communications Commission’s approval. Accordingly, we terminated our 2G PCS services in the Seoul metropolitan area and began the termination process for the rest of Korea on January 3, 2012. On January 12, 2012, the 2G subscribers filed an appeal of the Seoul High Court’s decision with the Supreme Court of Korea, and on February 1, 2012, the Supreme Court of Korea denied such appeal. On January 17, 2012, trial for the original class-action suit filed by the 2G subscribers began in the Seoul Administrative Court. The outcome of the trial, and any effect it may have on us, cannot be determined at this time. There can be no assurance that we will not incur reputational damage from terminating our 2G PCS services, or that further complaints and other potential actions of our 2G PCS subscribers will not adversely affect our business, financial condition and results of operations.
We may not be able to successfully pursue our strategy to acquire businesses and enter into joint ventures that complement or diversify our current business, and we may need to incur additional debt to finance such expansion activities.
One key aspect of our overall business strategy calls for acquisitions of businesses and entering into joint ventures that complement or diversify our current business. In October 2011, we, through our subsidiary KT Capital Co., Ltd., acquired 1,622,520 common shares of BC Card Co., Ltd. to further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services. In December 2011, we entered into a memorandum of understanding for a strategic partnership with, and acquisition of shares of, Telkom SA Limited, a South African comprehensive telecommunications service provider. In January 2011, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that are convertible into 5,600,000 shares of common stock of KT Skylife Co., Ltd., a provider of satellite TV service which may also be packaged with our IP-TV services, from Dutch Savings Holdings
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B.V. for approximately (Won)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 Co., Ltd. as of December 31, 2011.
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, including the proposed transaction with Telkom SA Limited, 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. The proposed transaction with Telkom SA Limited may also require significant capital resources if the acquisition is eventually successful. However, we cannot guarantee that such capital will be available when needed due to conditions in the capital markets, or that even if such capital is available, it will be available on commercially acceptable terms or in sufficient amounts to make the expenditures required.
Disputes with our labor union may disrupt our business operations.
In the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing of non-core businesses and reducing our employee base. Although we have not experienced any significant labor disputes or unrests in recent years, there can be no assurance that we will not experience labor disputes or unrests in the future, including expanded protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operations.
We also negotiate collective bargaining agreements every two years with our labor union and annually negotiate a wage agreement. Our current collective bargaining agreement expires on May 23, 2013. Although we have been able to reach collective bargaining agreements and wage agreements with our labor union in recent years, there can be no assurance that we will not experience labor disputes and unrests resulting from disagreements with the labor union in the future.
The Korean telecommunications and Internet protocol broadcasting industries are subject to extensive Government regulations, and changes in Government policy relating to these industries could have a material adverse effect on our operations and financial condition.
The Government, primarily through the Korea Communications Commission, has authority to regulate the telecommunications industry. The Korea Communications Commission’s policy is to promote competition in the Korean telecommunications markets through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors.
Under current Government regulations, if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the Korea Communications Commission, it must obtain prior approval from the Korea Communications Commission for the rates and the general terms for that service. Each year the Korea Communications Commission designates service providers the rates and the general
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terms of which must be approved by the Korea Communications Commission. In recent years, the Korea Communications Commission has so designated us for local telephone service and SK Telecom for mobile service, and the Korea Communications Commission, in consultation with the Ministry of Strategy and Finance, currently approves rates charged by us and SK Telecom for such services.
The Korea Communications Commission currently does not regulate our domestic long-distance, international long-distance, broadband internet access and mobile service rates, but the inability to freely set our local telephone service rates may hurt profits from such business and impede our ability to compete effectively against our competitors. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation—Rates.” The form of our standard agreement for providing local network service and each agreement for interconnection with other service providers are also subject to approval by the Korea Communications Commission. In addition, the Korea Communications Commission may periodically announce public policy guidelines or suggestions that we take into consideration in setting our tariff for non-regulated services. In June 2011, upon recommendation of the Korea Communications Commission, SK Telecom announced tariff reduction measures, including a reduction of the monthly fee by (Won)1,000 for every subscriber, an exemption of usage charges for short text message service, or SMS, up to 50 messages per month and the introduction of flexible service plans for smart phone users. In August 2011, after discussions with the Korea Communications Commission, we announced the adoption of various tariff reduction measures, including a reduction of the monthly fee by (Won)1,000 for every mobile subscriber (effective October 21, 2011), an exemption of usage charges for SMS, of up to 50 messages per month (effective November 1, 2011) and the introduction of customized fixed rate plans for smart phone users (effective October 24, 2011). There can be no assurance that we will not adopt other tariff-reducing measures in the future to comply with the Korea Communications Commission’s public policy guidelines or suggestions.
The Government also sets the policies regarding the use of radio frequencies and allocates the spectrum of radio frequencies used for wireless telecommunications. For a discussion of the Government’s recent policies and practices on bandwidth spectrum allocation, see “Item 3. Key information—Item 3.D. Risk Factors—“Failure to renew existing bandwidth spectrum, acquire adequate additional bandwidth spectrum or use our bandwidth efficiently may adversely affect our mobile telecommunications business and results of operations.” The new allocations of bandwidth could increase competition among wireless service providers, which may have an adverse effect on our business.
We also plan to put more focus on the Internet protocol (or IP) media market, and we began offering IP-TV service on November 17, 2008. IP-TV is a service which combines video-on-demand services with real-time high definition broadcasting via broadband networks. The Korea Communications Commission has the authority to regulate the IP media market, including IP-TV services. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IP media broadcasting business must obtain a license from the Korea Communications Commission, and anyone intending to engage in the broadcasting of certain contents must obtain additional approval of the Korea Communications Commission. In addition, KT Skylife Co. (formerly Korea Digital Satellite Broadcasting Co., Ltd.), which became our consolidated subsidiary starting in January 2011, offers satellite TV services, which may also be packaged with our IP-TV services. KT Skylife is also subject to the regulation of the Korea Communications Commission pursuant to the Korea Broadcasting Act.
Government policies and regulations relating to the above as well as other regulations involving the Korean telecommunications and IP broadcasting industries (including as a result of the implementation of free trade agreements between Korea and other countries, including the United States and the European Union) may change, which could have a material adverse effect on our operations and financial condition. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation.”
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We are subject to various regulations under the Monopoly Regulation and Fair Trade Act.
The Monopoly Regulation and Fair Trade Act provides for various regulations and restrictions on large business groups enforced by the Korea Fair Trade Commission. The Korea Fair Trade Commission initially designated us as a large business group under the Monopoly Regulation and Fair Trade Act on April 1, 2002. Our business relationships and transactions with our subsidiaries, affiliates and other companies within the KT Group are subject to ongoing scrutiny by the Fair Trade Commission as to, among other things, whether such relationships and transactions constitute undue financial support among companies of the same business group. We are also subject to the fair trade regulations limiting cross-guarantee of debt and cross-shareholdings among member companies of the same group. Any future determination by the Korea Fair Trade Commission that we have engaged in transactions that violate the fair trade laws and regulations may result in fines or other punitive measures and may have a material adverse effect on our reputation and our business.
Concerns that radio frequency emissions may be linked to various health concerns could adversely affect our business and we could be subject to litigation relating to these health concerns.
In the past, allegations that serious health risks may result from the use of wireless telecommunications devices or other transmission equipment have adversely affected share prices of some wireless telecommunications companies in the United States. In May 2011, the International Agency for Research on Cancer (“IARC”) announced that it has classified radiofrequency electromagnetic fields associated with wireless phone use as possibly carcinogenic to humans, based on an increased risk for glioma, a malignant type of brain cancer. The IARC is part of the World Health Organization that conducts research on the causes of human cancer and the mechanisms of carcinogenesis, and aims to develop scientific strategies for cancer control. We cannot assure you that such health concerns will not adversely affect our business. Several class action and personal injury lawsuits have been filed in the United States against several wireless phone manufacturers and carriers, asserting product liability, breach of warranty and other claims relating to radio transmissions to and from wireless phones. Certain of these lawsuits have been dismissed. We could be subject to liability or incur significant costs defending lawsuits brought by our subscribers or other parties who claim to have been harmed by or as a result of our services. In addition, the actual or perceived risk of wireless telecommunications devices could have an adverse effect on us by reducing our number of subscribers or our usage per subscriber.
Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on the results of our operations and on the prices of our securities.
Substantially all of our revenues are denominated in Won. Depreciation of the Won may materially affect the results of our operations because, among other things, it causes an increase in the amount of Won required by us to make interest and principal payments on our foreign-currency-denominated debt, the costs of telecommunications equipment that we purchase from overseas 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 (Won)8,918 billion total principal amount of long-term borrowings (less current portion) outstanding as of December 31, 2011, (Won)2,596 billion was denominated in foreign currencies with an average weighted interest rate of 3.93%. The interest rates of such long-term debt denominated in foreign currencies ranged from 1.05% (for US$100 million floating rate notes due 2013 with an interest rate of three month London Interbank Offered Rate plus 0.47%) to 6.50% (for US$100 million fixed rate notes due 2034 issued under our medium-term note program). See “Item 3. Key Information—Item 3.A. Select Financial Data—
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Exchange Rate Information”, “Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk.”
Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of the shares of our common stock on the KRX KOSPI Market and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the Dollar conversion by the depositary for the ADRs of cash dividends, if any, paid in Won on shares of common stock represented by the ADSs.
Risks Relating to Korea
Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.
Substantially all of our operations, customers and assets are located in Korea. Accordingly, the performance and successful fulfillment of our operational strategies are necessarily dependent on the overall Korean economy and the resulting impact on the demand for telecommunications services. The economic indicators in Korea in recent years have shown mixed signs of growth and uncertainty, and future growth of the economy is subject to many factors beyond our control.
In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices and the general weakness of the U.S. and global economy have contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. From the second half of 2008 to the first half of 2010, the value of the Won relative to major foreign currencies in general and the U.S. dollar in particular fluctuated widely. While such fluctuations generally stabilized in the second half of 2010 and into 2011, there has been increased volatility in the value of the Won in recent months reflecting the general volatility in the global financial markets. There is no guarantee that they will not occur again in the future. “Item 3. Key Information—Item 3.A. Select Financial Data—Exchange Rate Information” A depreciation of the Won increases the cost of imported goods and services and the Won revenue needed by Korean companies to service foreign currency-denominated debt. An appreciation of the Won, on the other hand, causes export products of Korean companies to be less competitive by raising their prices in terms of the relevant foreign currency and reduces the Won value of such export sales. Furthermore, as a result of adverse global and Korean economic conditions, there has been an overall decline and continuing volatility in the stock prices of Korean companies. The Korea Composite Stock Price Index (known as the “KOSPI”) declined from 1,897.1 on December 31, 2007 to 938.8 on October 24, 2008. While the KOSPI have recovered since 2008, there has been increased volatility in the KOSPI in recent months, particularly following the downgrading by Standard & Poor’s Rating Services of the long-term sovereign credit rating of the United States to “AA+” from “AAA” in August 2011 and in light of the financial difficulties affecting many other governments worldwide, in particular Greece, Portugal, Spain, Italy and other countries in Europe. There is no guarantee that the stock prices of Korean companies will not decline again in the future. Future declines in the KOSPI and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds of such sales may continue to adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea, and the ability of Korean companies to raise capital. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.
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Developments that could have an adverse impact on Korea’s economy in the future include:
difficulties in the financial sectors in Europe and elsewhere and increased sovereign default risks in select countries and the resulting adverse effects on the global financial markets;
declines in consumer confidence and a slowdown in consumer spending;
adverse changes or volatility in foreign currency reserve levels, commodity prices, exchange rates (including fluctuation of the Dollar or Japanese Yen exchange rates or revaluation of the Chinese renminbi), interest rates, inflation rates or stock markets;
continuing adverse conditions in the economies of countries that are important export markets for Korea, such as the United States, Japan and China, or in emerging market economies in Asia or elsewhere;
increasing delinquencies and credit defaults by retail and small- and medium-sized enterprise borrowers;
the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China);
the economic impact of any pending or future free trade agreements;
social and labor unrest;
substantial decreases in the market prices of Korean real estate;
a decrease in tax revenues and a substantial increase in the Korean government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased government budget deficit;
financial problems or lack of progress in the restructuring of Korean conglomerates, other large troubled companies, their suppliers or the financial sector;
loss of investor confidence arising from corporate accounting irregularities and corporate governance issues at certain Korean conglomerates;
geo-political uncertainty and risk of further attacks by terrorist groups around the world;
the occurrence of severe health epidemics in Korea and other parts of the world;
deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from trade disputes or disagreements in foreign policy;
political uncertainty or increasing strife among or within political parties in Korea;
hostilities or political or social tensions involving oil producing countries in the Middle East and North Africa and any material disruption in the supply of oil or increase in the price of oil;
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the occurrence of severe earthquakes, tsunamis and other natural disasters in Korea and other parts of the world, particularly in trading partners (such as the March 2011 earthquake in Japan, which also resulted in the release of radioactive materials from a nuclear plant that had been damaged by the earthquake); and
an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States.
Escalations in tensions with North Korea could have an adverse effect on us.
Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. In particular, since the death of Kim Jong-il in December 2011, there has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for political and economic stability in the region. Although Kim Jong-il designated his third son, Kim Jong-eun, as his successor prior to his death, the eventual outcome of such leadership transition remains uncertain. Only limited information is available about Kim Jong-eun, who is reported to be in his late twenties, and it remains unclear which individuals or factions, if any, will share political power with Kim Jong-eun or assume the leadership if the transition is not successful.
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. North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty in January 2003 followed by a nuclear test in October 2006, which increased tensions in the region and elicited strong objections worldwide. In May 2009, North Korea announced that it had successfully conducted a second nuclear test and test-fired three short-range surface-to-air missiles. In response, the United Nations Security Council unanimously passed a resolution that condemned North Korea for the nuclear test and decided to expand and tighten sanctions against North Korea. In March 2010, a Korean warship was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korea of causing the sinking, while North Korea has denied responsibility. In November 2010, North Korea reportedly fired more than one hundred artillery shells that hit Korea’s Yeonpyeong Island near the maritime border between Korea and North Korea on the west coast of Korea, killing two Korean soldiers and two civilians, wounding many others and causing significant property damage. The Government condemned North Korea for the attack and vowed stern retaliation should there be further provocation. On April 13, 2012, North Korea launched a long-range rocket over the Yellow Sea. Korea, Japan and the United States condemned the launch and the United Nations Security Council adopted a chairman’s statement condemning North Korea for the launch.
North Korea’s economy also faces severe challenges. In November 2009, the North Korean government redenominated its currency at a ratio of 100 to 1 as part of a currency reform undertaken in an attempt to control inflation and reduce income gaps. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which led to severe inflation and food shortages. Such developments may further aggravate social and political tensions within North Korea. There can be no assurance that the level of tension on the Korean peninsula will not escalate in the future. Any further increase in tensions could have a material adverse effect on the Korean economy and on our business, results of operations and financial condition.
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Risks Relating to the Securities
If an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs.
Korean law currently limits foreign ownership of the ADSs and our shares. In addition, under our deposit agreement, the depositary bank cannot accept deposits of shares and deliver ADSs representing those shares unless (1) we have consented to such deposit or (2) Korean counsel has advised the depositary bank that the consent required under (1) is no longer required under Korean laws and regulations. Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with our consent for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. The depositary bank has informed us that, at a time it considers to be appropriate, the depositary bank plans to start accepting deposits of shares without our consent and to deliver ADSs representing those shares up to the amount allowed under current Korean laws and regulations. Until such time, however, the depositary bank will continue to obtain our consent for such deposits of shares and delivery of ADSs, which we may not provide. Consequently, if an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”
A foreign investor may not be able to exercise voting rights with respect to common shares exceeding the number of common shares held by our largest domestic shareholder.
Under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 5.0% or more of our total shares and was our largest shareholder on or prior to May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. Under the Telecommunications Business Act, the Korea Communications Commission may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. In addition, the Foreign Investment Promotion Act prohibits any foreign shareholder from being our largest shareholder if such shareholder owns 5.0% or more of our shares with voting rights. In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, such foreign shareholder may not be able to exercise voting rights with respect to common shares exceeding such threshold. The Korea Communications Commission may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less.
Holders of ADSs will not be able to exercise dissenter’s rights unless they have withdrawn the underlying common stock and become our direct shareholders.
In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their shares under Korean law. A holder of ADSs will not be able to exercise dissenter’s rights unless he has withdrawn the underlying common stock and become our direct shareholder. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.”
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An investor may not be able to exercise preemptive rights for additional shares and may suffer dilution of his equity interest in us.
The Commercial Code of Korea and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the depositary bank, after consultation with us, may make the rights available to an ADS holder or use reasonable efforts to dispose of the rights on behalf of the ADS holder and make the net proceeds available to the ADS holder. The depositary bank, however, is not required to make available to an ADS holder any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:
a registration statement filed by us under the Securities Act of 1933, as amended, is in effect with respect to those shares; or
the offering and sale of those shares is exempt from or is not subject to the registration requirements of the Securities Act.
We are under no obligation to file any registration statement. If a registration statement is required for an ADS holder to exercise preemptive rights but is not filed by us, the ADS holder will not be able to exercise his preemptive rights for additional shares. As a result, the ADS holder may suffer dilution of his equity interest in us.
Forward-looking statements may prove to be inaccurate.
This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.
Item 4. Information on the Company
Item 4.A. History and Development of the Company
In 1981, the Government established us under the Korea Telecom Act to operate the telecommunications services business that it previously directly operated. Under the Korea Telecom Act and the Government-Invested Enterprises Management Basic Act, the Government exercised substantial control over our business and affairs. Effective October 1, 1997, the Korea Telecom Act was repealed and the Government-Invested Enterprises Management Basic Act became inapplicable
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to us. As a result, we became a corporation under the Commercial Code, and our corporate organization and shareholders’ rights were governed by the Privatization Law and the Commercial Code. Among other things, we began to exercise greater autonomy in setting our annual budget and making investments in the telecommunications industry, and our shareholders began electing our directors, who used to be appointed by the Government under the Korea Telecom Act.
Prior to 1993, the Government owned all of the issued shares of our common stock. From 1993 through May 2002, the Government disposed of all of its equity interest in us, and the Privatization Law ceased to apply to us in August 2002. We amended our legal name from Korea Telecom Corp. to KT Corporation in March 2002.
Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. The Government began to introduce competition in the telecommunications services market in the early 1990’s. As a result, including ourselves, there are currently three local telephone service providers, five domestic long-distance carriers and numerous international long-distance carriers (including voice resellers) in Korea. In addition, the Government awarded licenses to several service providers to promote competition in other telecommunications business areas such as mobile telephone services and data network services. On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. See “Item 4.B. Business Overview—Competition.”
Our legal and commercial name is KT Corporation. Our principal executive offices are located at 206 Jungja-dong, Bundang-gu, Sungnam-si, Gyeonggi-do, Korea, and our telephone number is (8231) 727-0114.
Item 4.B. Business Overview
We are the leading telecommunications service provider in Korea and one of the largest and most advanced in Asia. As an integrated telecommunications service provider, our principal services include:
mobile telecommunications services;
telephone services, including local, domestic long-distance and international long-distance fixed-line and VoIP telephone services and interconnection services to other telecommunications companies;
broadband Internet access service and other Internet-related services, including IP-TV services; and
various other services, including leased line service and other data communication service, satellite service, credit card business and information technology and network services such as cloud computing services.
Leveraging on our dominant position in the fixed-line telephone services market and our established customer base in Korea, we have successfully pursued new growth opportunities during the past decade and obtained strong market positions in each of our principal lines of business. In particular:
in the mobile services market in Korea, we achieved a market share of 31.5% with approximately 16.5 million subscribers as of December 31, 2011;
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in the fixed-line telephone services market in Korea, we continue to be the dominant provider with approximately 24.0 million installed lines, of which 15.8 million lines were in service as of December 31, 2011. As of such date, our market share of the local market was 84.3% and our market share of the domestic long-distance market was 80.5%;
we are Korea’s largest broadband Internet access provider with 7.8 million subscribers as of December 31, 2011, representing a market share of 43.8%; and
we are also the leading provider of data communication services in Korea.
For the year ended December 31, 2011, our operating revenues were (Won)21,990 billion, our profit for the period was (Won)1,452 billion and our basic earnings per share was(Won)5,946. As of December 31, 2011, our total equity was (Won)12,538 billion.
Business Strategy
We believe the telecommunications market in Korea will continue to expand due to Korea’s growing economy, consumers’ willingness to adopt new technologies, relatively high income and a relatively large middle class. In order to enhance the management efficiencies of our mobile and fixed-line telecommunications operations as well as more effectively respond to the convergence trends in the telecommunications industry, KTF merged into KT Corporation on June 1, 2009, with KT Corporation surviving the merger. We also restructured our organization into three sub-groups, the Home Customer Group, the Personal Customer Group and the Global & Enterprise Customer Group, so that we may more effectively address differing needs of our customer segments. Consistent with our strategic objectives, we aim to pursue growth through the following four core areas:
Home Customer Group. We aim to offer a one-stop-shop that satisfies various information technology and telecommunications needs of a household. In 2010, we launched a new brand “olleh” to promote our bundled products, which include broadband Internet access service, IP-TV service, Internet phone service and fixed-line telephone service. We aim to differentiate ourselves from our competitors by providing broadband Internet access service using high-speed fiber-to-the-home (or FTTH) connection and offering Internet phone service with value-added features such as video communication, short message service and phone banking. We also began offering real-time broadcasting service on our IP-TV service starting in November 2008.
Personal Customer Group. Our Personal Customer Group focuses on expanding our wireless data communication business to meet the rising demand for broadband Internet access using advanced wireless data communications devices such as smart phones. We are working closely with handset manufacturers to expand our offerings of smart phones and handsets designed to promote convergence of fixed-line and mobile telecommunications services, as well as promote development of various applications for such devices. In line with this strategy, we began offering Apple’s iPhone for the first time in Korea on November 28, 2009 and have expanded our offerings of smart phones from other mobile handset manufacturers. We believe that our WiBro network, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices, as well as our extensive wireless LAN networks installed nationwide, enable our subscribers to maximize effective usage of their smart phones. We plan to take advantage of our industry-leading network infrastructure to attract more customers as this market further develops. In addition, we aim to further enhance our position in the mobile telecommunications market by leveraging on our strong brand, nationwide marketing network, competitive data usage rates, call centers dedicated to
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smart phone users, creative marketing strategies that address our potential customers’ needs and ability to bundle various mobile and fixed-line services. We also plan to further expand our contents and applications for smart phone users and mobile data users by cooperating with application developers in Korea and abroad, in order to further solidify our position as a leader in the convergence market.
Global & Enterprise Customer Group. We aim to provide our corporate customers, small- and medium-sized enterprises and government agencies with one-stop solution services including designing data communications and information technology infrastructure to overseeing their day-to-day operations with the objective of achieving operational efficiencies and cost savings. We provide solutions specifically tailored for individual clients, as well as Internet-based computing services, whereby shared resources, software and information are delivered from our data centers and servers. For example, we designed an urban transit infrastructure maintenance system for the Seoul Metropolitan Rapid Transit Corporation, in which workers are able to utilize their smart phones to report back their maintenance results to the headquarters remotely from the maintenance site. Leveraging our extensive customer base, we plan to further expand the range of innovative solutions for our enterprise customers.
Convergence. We believe that convergence of fixed-line and mobile communications technologies provides a competitive advantage to us because we have the technological know-how and experience to design and construct a unified delivery platform for a new generation of value-added services. We plan to make such platform more readily available to others so that they may create additional contents and convenience solutions such as electronic commerce and digital transaction applications that can be utilized anywhere using various media and communications devices.
The Telecommunications Industry in Korea
The Korean telecommunications industry is one of the most developed in Asia. According to the Korea Communications Commission, the number of mobile subscribers in Korea was 52.5 million and the number of broadband Internet access subscribers in Korea was 17.9 million as of December 31, 2011. As of December 31, 2011, the mobile penetration rate, which is calculated by dividing the number of mobile subscribers (including multiple counting of those who subscribe to more than one mobile service) by the population of Korea, was 107.2%, and the broadband Internet penetration rate, which is calculated by dividing the number of broadband Internet access service subscribers (including multiple counting of those who subscribe to more than one broadband Internet access service) by the number of households in Korea, was 102.8%.
Mobile Telecommunications Service Market
The Korean cellular market was formally established in 1984 when SK Telecom, formerly Korea Mobile Telecom, became the first mobile telephone operator in Korea. SK Telecom remained the only cellular operator in Korea until Shinsegi Telecom began service in 1994. In order to encourage further market growth and competition, the Ministry of Information and Communication awarded three PCS licenses in June 1996. KTF was awarded a license alongside LG U+ and Hansol M.com, and commercial PCS service was launched in October 1997.
Since the introduction of three new operators in 1997, the Korean mobile market has undergone consolidation and significant growth. Following SK Telecom’s purchase of a controlling stake in Shinsegi, we acquired a 47.9% interest in Hansol M.com in 2000 and renamed the company KT M.com. KT M.com merged into KTF in May 2001 and Shinsegi merged into SK Telecom in
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January 2002. On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger. KT Corporation and SK Telecom offer third-generation, high-capacity HSDPA-based IMT-2000 wireless Internet and video multimedia communications services that use significantly greater bandwidth capacity. In July 2011, SK Telecom and LG U+ began offering fourth-generation communications services based on LTE technology, which enables data transmission at a speed faster than W-CDMA or WiBro networks, and we began our 4G LTE services in January 2012.
The table below gives the subscription and penetration information of the mobile telecommunications industry for the periods indicated:
Total Korean Population (1)
Mobile Subscribers (2)
Mobile Subscriber Growth Rate
Mobile Penetration (3)
Broadband Internet Access Market
With the advancement of broadband technology, the Korean broadband Internet access market has experienced significant growth. The principal technologies used in providing high speed Internet access services are xDSL, HFC and fiber optic LAN. xDSL refers to various types of digital subscriber lines, including ADSL and VDSL. xDSL offers an access solution over existing telephone lines using a specialized modem while HFC service involves the use of two-way cable networks. Fiber optic LAN is a technology that combines fiber optic cables and Unshielded Twisted Pair (or UTP) cables. Fiber optic cables are connected to residential and commercial buildings with UTP cable-based LAN capabilities. While xDSL and HFC are more widely used technologies because of their relative reliability, ease of provisioning and cost effectiveness, fiber optic LAN usage in Korea has been steadily increasing in recent years.
Since the subscribers of two-way cable networks share a limited bandwidth, the downstream speed tends to slow down as the number of subscribers increases, thereby decreasing the quality of HFC-based service. While xDSL technology was commercially introduced after HFC technology, it has surpassed HFC to become the prevalent broadband access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in 2002. Some of the service providers have upgraded their broadband network to provide fiber optic LAN-based service to their subscribers, which further enhances data transmission speed up to 100 Mbps as well as improves connection quality, and enables such service providers to offer video-on-demand services with real-time high definition broadcasting.
In recent years, broadband Internet access service providers and mobile telecommunications service providers have focused their attention to provide wireless Internet connection capabilities. They have introduced wireless LAN service with speeds of up to 155 Mbps, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops, PDAs and smart phones in hot-spot zones and at home. Some service providers have also developed wireless Internet networks to provide WiBro service, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 3 Mbps.
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Our Services
Mobile Service
We provide mobile services based on W-CDMA technology and LTE technology. Prior to the merger of KTF into KT Corporation, we provided such services through KTF, which was formerly a consolidated subsidiary. KTF obtained one of the three licenses to provide nationwide PCS service in June 1996 and began offering PCS service in October 1997. On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. 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 that allow an operator to provide to its subscribers significantly more bandwidth capacity. In January 2012, we also began offering 4G LTE services under the brand name “WARP,” following the termination of our 2G PCS services. We completed the expansion of our 4G LTE service coverage to 84 cities throughout Korea in April 2012.
Revenues related to mobile service accounted for 31.0% of our operating revenues in 2011. In addition, our goods sold, which are primarily from mobile handset sales, accounted for 19.9% of our operating revenues in 2011. The following table shows selected information concerning the usage of our network during the periods indicated and the number of our subscribers as of the end of such periods:
Outgoing Minutes (in millions)
Average Monthly Outgoing Minutes per Subscriber(1)
Average Monthly Revenue per Subscriber (2)
Number of Subscribers (in thousands)
We compete with SK Telecom, a mobile service provider that has a longer operating history than us, and LG U+ that began its service at around the same time as KTF. As of December 31, 2011, we had approximately 16.5 million subscribers, or a market share of 31.5%, which was second largest among the three mobile service providers.
We market our mobile services primarily through independent exclusive dealers located throughout Korea. As of December 31, 2011, there were approximately 2,200 shops managed by our independent exclusive dealers. In addition to assisting new subscribers to activate mobile service and purchase handsets, authorized dealers are connected to our database and are able to assist customers with account information. Although most of these dealers sell exclusively our products and services, sub-dealers hired by exclusive dealers may sell products and services offered by other mobile telecommunications service providers. Authorized dealers are entitled to a commission for each new subscriber registered, as well as ongoing commissions for the first five years based primarily on the subscriber’s monthly fee, usage charges and length of subscription. The handsets sold by us to the dealers cannot be returned to us unless they are defective. If a handset is defective, it may be exchanged for a new one within 14 days from the date of purchase.
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In response to the diversification of our customers’ demands and their increasing sophistication, we have also selectively engaged in opportunities to expand our internal sales channels in recent years. In 2007, we established a wholly-owned subsidiary, KT M&S Co., Ltd., that operates approximately 140 customer plazas that engage in mobile service sales activities as well as provide a one-stop shop for a wide range of other services and products that we offer. We also operate a website to promote and advertise our products and services to the general public and in particular to younger customers who are more familiar with the Internet.
We conduct the screening process for new subscribers with great caution. A potential subscriber must meet all minimum credit criteria before receiving mobile service. The procedure includes checking the history of non-payment and credit information from banks and credit agencies such as the National Information and Credit Evaluation Corporation. Applicants who do not meet the minimum criteria can only subscribe to the mobile service by using a pre-paid card.
Telephone Services
Fixed-line Telephone Services. We utilize our extensive nationwide telephone network to provide fixed-line telephone services, which consist of local, domestic long-distance, international long-distance services and land-to-mobile interconnection services. These fixed-line telephone services accounted for 17.3% of our operating revenues in 2011. Our telephone network includes exchanges, long-distance transmission equipment and fiber optic and copper cables. The following table gives some basic measures of the development of our telephone system:
Total Korean population (thousands) (1)
Lines in service per 100 inhabitants (3)
Fiber optic cable (kilometers)
Number of public telephones installed (thousands)
Domestic long-distance call minutes (millions) (4) (5)
Local call pulses (millions) (4)
Our domestic long-distance cable network is entirely made up of fiber optic cable and can carry both voice and data transmissions. Compared to conventional materials such as coaxial cable, fiber optic cable provides significantly greater transmission capacity with less signal fading, thus requiring less frequent amplification. 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, 2011:
Incoming international long-distance calls
Outgoing international long-distance calls
Total
Japan (18.5%), China (17.4%) and United States (13.4%) accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2011. In recent years, the volume of our incoming calls exceeded the volume of our outgoing calls. The agreed settlement rate is applied to the call minutes to determine the applicable net settlement payment.
Interconnection. Under the Telecommunications Business Act, we are required to permit other service providers to interconnect to our fixed-line network. Currently, the principal users of this interconnection capacity include SK Broadband and LG U+ (offering local, domestic long-distance and international long-distance services), Onse and SK Telink (offering international and domestic long-distance services), and SK Telecom and LG U+ (transmitting calls to and from their mobile networks). We expect that interconnection revenues and payments will remain important for our results of operations. In recent years, revenues from a landline user for a call initiated by a landline user to a mobile service subscriber (land-to-mobile interconnection) have become a significant portion of our results of operations, accounting for 3.5% of our operating revenues in 2011. We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as an expense the amount of interconnection charge paid to the mobile service provider.
Internet phone services. The volume of calls made through Internet phone services has significantly increased since Internet phone service was first introduced in Korea in 1998. We provide Internet phone services that enable VoIP phone devices with broadband connection to make domestic and international calls. In order to differentiate our Internet phone services from our competitors’ services, we provide value-added services such as video communication, short message service, phone banking and a variety of traffic and local news information. As of December 31, 2011, we had approximately 3.2 million subscribers.
Internet Services
Broadband Internet Access Service. Leveraging on our nationwide network of 527,188 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 8.5% of our operating revenues in 2011. Our principal Internet access services include:
ADSL, VDSL, Ethernet and FTTH services under the “olleh Internet” brand name;
wireless LAN service (or WiFi) under the “ollehWiFi” brand name, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops, PDAs and smart phones in hot-spot zones and olleh Internet service in fixed-line environments. OllehWiFi enables subscribers to access the Internet at up to 155 Mbps. We sponsored approximately 100,000 hot-spot zones nationwide for wireless connection as of December 31, 2011; and
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olleh 4G WiBro Internet access service, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 5 Mbps per user.
We had 7.8 million fixed-line olleh Internet subscribers and approximately 221 thousand ollehWiFi service subscribers as of December 31, 2011. We commercially launched our WiBro service in June 2006, and we had approximately 740,000 subscribers as of December 31, 2011. We also bundle our WiBro service with olleh Internet and ollehWiFi services at a discount in order to attract additional subscribers.
Our olleh Internet service utilizes ADSL technology, which is a technology that converts existing copper twisted-pair telephone lines into access paths for multimedia and high-speed data communications. ADSL transforms the existing public telephone network from one limited to voice, text and low-resolution graphics to a system capable of bringing multimedia to subscriber premises without new cabling. The asymmetric design optimizes the bandwidth by maximizing the downstream speed for downloading information from the Internet. While ADSL technology was commercially introduced after HFC-based technology, it has surpassed HFC to become the prevalent access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in July 2002. We are currently upgrading our broadband network to enable FTTH connection, which further enhances downstream speed up to 100 Mbps and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such as IP-TV service and delivery of other digital media content.
The high-speed downstream rates can reach up to 8 Mbps for ADSL and 100 Mbps for VDSL and FTTH. Downstream rates depend on a number of factors. For a constant wire gauge, the data rate decreases as the length of the copper wire increases. Generally, if the separation between the telephone office and the subscriber is greater than four kilometers, line attenuation is so severe that broadband speeds can no longer be achieved. Approximately 95% of the households subscribing to our basic local telephone service are located within a four kilometer radius of our telephone offices, making our olleh Internet service available to most of the Korean population. Fiber-optic cable used by FTTH, on the other hand, uses laser light to carry signals that travel long distances inside fiber optic cable without degradation.
Other Internet-related Services. Our other Internet-related services focus primarily on providing infrastructure and solutions for business enterprises, as well as IP-TV and network portal services. Our other Internet-related services accounted for 3.9% of our operating revenues in 2011.
We operate seven Internet data centers located throughout Korea and provide a wide range of computing services to companies which need servers, storages and leased lines. Internet data centers are facilities used to house, protect and maintain network server computers that store and deliver Internet and other network content, such as web pages, applications and data. Our Internet data centers are designed to meet international standards, and are equipped with temperature control systems, regulated and reliable power supplies, fire detection and suppression equipment, security monitoring and wide-bandwidth connections to the Internet. Internet data centers allow corporations or Internet service providers to outsource their application and server hardware management.
Our Internet data centers offer network outsourcing services, server operation services and system support services. Our network outsourcing services include co-location, which is the installation of our customers’ network equipment at our Internet data centers. Co-location is designed to increase
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customers’ Internet connection speed and reduce connection time and costs by directly connecting the customers’ server to the Internet backbone switch at our Internet data centers. Our server operation services include optimal server management service and technical support service we provide with respect to the leased servers that are linked directly to our Internet backbone switch. We also lease servers and network equipment for a fixed monthly fee. Our system support services include providing system resources for a wide range of Internet computing services, such as application transfer, network storage, video streaming and application download, as well as sending short text messages and messages containing multimedia objects, such as images, audio and video.
We also offer a service called Bizmeka to develop and commercialize business-to-business solutions targeting small- and medium-sized business enterprises in Korea. Bizmeka is an applied application service provider which provides industry-specific business solutions, including customer database management and electronic data interchange.
We also offer high definition video-on-demand and real-time broadcasting IP-TV services under the brand name “olleh TV.” Our IP-TV service offers access to an array of digital media contents, including movies, sports, news, educational programs and TV replay, for a fixed monthly fee. Through a digital set-top box that we rent to our customers, our customers are able to browse the catalog of digital media contents and view selected media streams on their television. A set-top box provides two-way communications on an IP network and decodes video streaming data. We expanded our IP-TV service to include real-time broadcasting in November 2008. We had 3.1 million olleh TV subscribers as of December 31, 2011.
Data Communication Service
Our data communication service involves offering exclusive lines that allow point-to-point connection for voice and data traffic between two or more geographically separate points. As of December 31, 2009, 2010 and 2011, we leased 366,191 lines, 303,009 lines and 276,147 lines to domestic and international businesses. The data communication service accounted for 5.8% of our operating revenues in 2011.
We provide dedicated and secure broadband Internet connection service to institutional customers under the “Kornet” brand name. We provide high-speed connection up to 5.1 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.
Satellite Service
We provide transponder leasing, broadcasting, video distribution and data communications services through our satellites. We currently operate two satellites, Koreasat 5 and Koreasat 6 (also known as olleh 1), and own interests in two additional satellites, ABS-1 (also known as Koreasat 7) and ABS-2 (also known as Koreasat 8). In August 2006, we launched Koreasat 5. Koreasat 5, a combined civil and governmental communications satellite, is the first Korean satellite to provide commercial satellite services to neighboring countries, and the service coverage area includes Korea, Japan, Taiwan, the Philippines, the eastern part of China and the far-eastern part of Russia. The design life of Koreasat 5 is fifteen years.
We launched Koreasat 6 in December 2010, with a design life of fifteen years. Koreasat 6 began its commercial operation in February 2011 and carries transponders that are used for direct-to-home satellite broadcasting, video distributions and data communications services. Most of the direct-to-home satellite broadcasting transponders are utilized by KT Skylife Co. We also lease
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satellite capacity from other satellite operators to offer commercial satellite services to both domestic and international customers. In August 2010, we procured from Asia Broadcast Satellite four transponders on the ABS-1 satellite and an additional eight transponders on the ABS-2 satellite. ABS-1 began operation in September 2010, and ABS-2 is under construction and is expected to be launched during the first half of 2013.
Miscellaneous Services
We also engage in various business activities that extend beyond telephone services and data communications services, including information technology and network services, real estate development, car rental business, satellite TV services, with the consolidation of KT Skylife Co. starting in January 2011 and credit card services, with the consolidation of BC Card Co., Ltd. starting in October 2011. Our miscellaneous services accounted for 13.6% of our operating revenues for 2011.
We offer a broad array of integrated information technology and network services to our business customers. Our range of services include consulting, designing, building and maintaining systems and communication networks that satisfy the individual needs of our customers in the public and private sectors.
We own land and real estate in various locations nationwide. Technological developments have enhanced the coverage area of individual telecommunications facilities, which enable us to better utilize our existing land and other real estate holdings. In recent years, we have engaged in the planning and development of commercial and office buildings and condominiums on our unused sites, as well as in the leasing of buildings we own. We established KT Estate Inc. in August 2010 to oversee the planning, development and operation of our real estate assets, 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 also operate KT Rental, a subsidiary that provides rental cars and equipment. In March 2010, MBK Partners, a private equity firm, and we jointly acquired Kumho Rent-A-Car Co., Ltd. from Korea Express Inc. for (Won)263 billion, with each taking a 50% stake. Kumho Rent-A-Car was subsequently merged with the car rental business unit of KT Rental on June 1, 2010. KT Rental operated approximately 59,600 vehicles as of December 31, 2011 and has a market share of 21.2% of the domestic car rental market in 2011.
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 are convertible into 5,600,000 shares of common stock of KT Skylife Co., Ltd. from Dutch Savings Holdings B.V. in January 2011 for approximately(Won)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 Co., Ltd. as of December 31, 2011. KT Skylife offers satellite TV services, which may also be packaged with our IP-TV services as further described below, and had consolidated sales of (Won)485 billion and net income of (Won)27 billion for the year ended December 31, 2011 and consolidated assets of (Won)550 billion and liabilities of (Won)258 billion as of December 31, 2011.
To further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services, we, through our subsidiary KT Capital Co., Ltd., acquired 1,622,520 additional shares of common stock of BC Card Co., Ltd. from Woori Bank for approximately (Won)252 billion in October 2011. The acquisition increased our ownership interest in BC Card Co., Ltd. to 38.86% as of December 31, 2011, and as we were deemed to have control over BC Card Co., Ltd., it became our consolidated subsidiary starting in October 2011. BC Card Co., Ltd.
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offers various credit card and related services, and had consolidated sales of (Won)3,150 billion and net income of (Won)106 billion for the year ended December 31, 2011 and consolidated assets of (Won)1,874 billion and liabilities of(Won)1,366 billion as of December 31, 2011. See Note 37 to the Consolidated Financial Statements.
Revenues and Rates
The table below shows the percentage of our revenues derived from each category of services for 2010 and 2011:
Mobile services
Fixed-line telephone services:
Local service
Non-refundable service initiation fees
Domestic long-distance service
International long-distance service
Land-to-mobile interconnection
Sub-total
Internet services:
Broadband Internet access service
Other Internet-related services (1)
Goods sold (2)
Data communications service (3)
Miscellaneous services (4)
Operating revenues
Mobile Services
We derive revenues from mobile services principally from:
initial subscription fees;
monthly fees;
usage charges for outgoing calls;
usage charges for wireless data transmission;
contents download fees; and
value-added monthly service fees.
We offer various rate plans, including those that offer a specified number of free airtime minutes per month in return for a higher monthly fee and those that are geared toward business
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customers. In September 2009, we reduced our initial subscription fee for new subscribers by 20% from (Won)30,000 to (Won)24,000. In August 2011, we announced the adoption of various tariff reduction measures, including a reduction of the monthly fee by (Won)1,000 for every mobile subscriber (effective October 21, 2011), an exemption of usage charges for SMS of up to 50 messages per month (effective November 1, 2011) and the introduction of customized fixed rate plans for smart phone users (effective October 24, 2011). For our HSDPA-based service, we also charge monthly fees, voice calling usage charges and video calling usage charges. Under our standard rate plan for HSDPA-based service, we charge a monthly fee of(Won)11,000, voice calling usage charges of (Won)1.8 per second and video calling usage charges of (Won)3 per second. The following table summarizes charges for our representative HSDPA-based service plans:
Standard Plan
SHOW KING Sponsor Gold—Voice 150 (1)
SHOW KING Sponsor Gold—Voice 250 (1)
SHOW KING Sponsor Gold—Complete Freedom 150 (1) (2)
SHOW KING Sponsor Gold—Voice 350 (1)
SHOW KING Sponsor Gold—Voice 450 (1)
SHOW KING Sponsor Gold—Voice 650 (1)
SHOW KING Sponsor Gold—Voice 850 (1)
SHOW KING Sponsor Gold—Voice 2000 (1)
A subscriber may also subscribe to an individually designed calling rate plan by mixing free voice calling airtime minutes and free text messages at a set monthly fee. We also provide plans specially designed for elderly and pre-teen subscribers as well as special discounts to our subscribers with physical disabilities.
In September 2009, we also introduced new rate plans specifically for smart phone users. The following table summarizes charges for our representative smart phone service plans:
SHOW Smart Sponsor Voice 150 (2)
SHOW Smart Sponsor Voice 250 (2)
SHOW Smart Sponsor Voice 350 (2)
SHOW Smart Sponsor Voice 450 (2)
SHOW Smart Sponsor Voice 650 (2)
SHOW Smart Sponsor Voice 850 (2)
SHOW KING Sponsor i—Slim (3)
SHOW KING Sponsor i—Lite (3)
SHOW KING Sponsor i—Talk (3)
SHOW KING Sponsor i—Value (3)
SHOW KING Sponsor i—Medium (3)
SHOW KING Sponsor i—Special (3)
SHOW KING Sponsor i—Premium (3)
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In connection with the rollout of our 4G LTE services in January 2012, we also introduced new rate plans specifically for LTE phone users. The following table summarizes charges for our representative LTE service plans:
LTE-340
LTE-420
LTE-520
LTE-620
LTE-720
LTE-850
LTE-1000
We have entered into arrangements with various partners including a leading discount store, a leading online shopping mall, several leading banks, an operator of cinema complexes, a leading automobile manufacturing company and Korea Railroad Corporation, and we offer subscribers of our mobile service monthly discount coupons, membership points or movie tickets from such partners as promotional gifts.
In December 2010, we also introduced data-only plans targeting tablet PC users, smart-phone users and other special phone users, offering subscription plans for data transmission amounts ranging from 100MB to 4GB at monthly fees ranging from (Won)10,000 to (Won)35,000.
Fixed-line Telephone Services
Local Telephone Service. Our revenues from local telephone service consist primarily of:
Service initiation fees for new lines;
Monthly basic charges; and
Monthly usage charges based on the number of call pulses.
All calls are currently measured by call pulses. Each pulse is determined by the duration of the call and the time of the day at which the call is made. For instance, during regular service hours, a call pulse is triggered at the beginning of each local telephone call and every three minutes thereafter.
The rates we charge for local calls are currently subject to approval by the Korea Communications Commission after consultation with the Ministry of Strategy and Finance. The rates are identical for residential and commercial customers. The following table summarizes our local usage rates as of each date on which rates were revised:
Local Usage Charges (per pulse) (1)
Regular service
Public telephone
Since January 1, 1990, usage charges for local service in those metropolitan areas subject to measured service have been based on the number of pulses, which are a function of the duration and number of calls, and per pulse rates. Before
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We also charge a monthly basic charge ranging from (Won)3,000 to (Won)5,200, depending on location, and a non-refundable service initiation fee of (Won)60,000 to new subscribers. The non-refundable service initiation fee is waived for the new subscribers who subscribe to our local service through our online application process. Until April 2001, we charged refundable service initiation deposits, which were refunded upon termination of service. As of December 31, 2011, we had (Won)555 billion of refundable service initiation deposits outstanding and 2,523 thousand subscribers who are enrolled under the mandatory deposit plan and are eligible to switch to the no deposit plan and receive their service initiation deposit back (less the non-refundable service initial fees).
Domestic Long-distance Telephone Service. Our revenues from domestic long-distance service consist of charges for calls placed, charged for the duration, time of day and day of the week a call is placed, and the distance covered by the call. We are able to set our own rates for domestic long-distance service without approval from the Korea Communications Commission.
The following table summarizes our domestic long-distance rates as of each date on which rates were revised. These charges do not reflect discounts applicable to calls made during off-peak hours or holidays.
Domestic Long-Distance Charges (per three minutes) (1) (2)
Up to 30 km
Up to 100 km
100 km or longer
In recent years, we have begun to offer optional flat rate plans, discount plans and bundled product plans in order to mitigate the impact from lower usage of local and domestic long-distance calls and stabilize our revenues from fixed-line telephone services. For a discussion of our bundled products, see “—Bundled Products.” Some of our flat rate and discount plans that we currently offer include the following:
starting in June 2008, a subscriber who elects to pay a monthly flat rate of (Won)12,500 is able to make free local and domestic long-distance calls after 9 p.m. on weekdays or at any time on weekends. Each month, the subscriber also receives a free movie ticket and free 60 minutes of land-to-mobile calls. The subscriber is also eligible to receive a discount of up to 20%, subject to the length of the mandatory subscription period;
starting in October 2009, a subscriber who elects to subscribe to our fixed-line phone service for a three year mandatory subscription period is able to make local and domestic long-distance calls at a flat rate of (Won)39 per three minutes; and
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starting in October 2009, a subscriber who elects to subscribe to our broadband Internet access service or HSDPA-based mobile service for a three year mandatory subscription period is able to make local, domestic long-distance and land-to-mobile calls of up to (Won)150,000 with a flat rate payment of (Won)50,000 or such calls up to (Won)50,000 with a flat rate payment of (Won)10,000. Standard rates apply to calls that exceed the capped amounts.
International Long-distance Service. Our revenues from international long-distance service consist of:
amounts we bill to customers for outgoing calls made to foreign countries (including customers who make calls to Korea from foreign countries under our home country direct-dial service);
amounts we bill to foreign telecommunications carriers for connection to the Korean telephone network in respect of incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service); and
other revenues, including revenues from international calls placed from public telephones.
We bill outgoing calls made by customers in Korea (and calls made to Korea from foreign countries under our home country direct-dial service) in accordance with our international long-distance rate schedule for the country called. These rates vary depending on the time of day at which a call is placed. We bill outgoing international calls on the basis of one-second increments. We are able to set our own rates for international long-distance service without approval from the Korea Communications Commission.
For incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service), we receive settlement payments from the relevant foreign carrier 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 Korea Communications Commission approval. It is the practice among international carriers for the carrier in the country in which the call is billed to collect payments due in respect of the use of overseas networks. Although we record the gross amounts due to and from us in our financial statements, we make settlements with most carriers monthly or quarterly on a net basis.
Interconnection. We provide other telecommunications service providers, including mobile operators and other fixed-line operators, interconnection to our fixed-line network.
Land-to-mobile Interconnection. For a call initiated by a landline user to a mobile service subscriber, we collect from the landline user the land-to-mobile usage charge and remit to the mobile service provider a land-to-mobile interconnection charge. The Korea Communications Commission periodically issues orders setting the interconnection charge calculation method applicable to interconnections with mobile service providers. The Korea Communications Commission determines the land to mobile interconnection charge by calculating the long run incremental cost of mobile service providers, taking into consideration technology development and future expected costs.
The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes) to mobile operators for landline to mobile calls.
SK Telecom
LG U+
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The following table shows the usage charge per minute collected from a landline user for a call initiated by a landline user to a mobile service subscriber.
Weekday
Weekend
Evening (1)
We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as expense the amount of interconnection charge paid to the mobile service provider.
Land-to-land and Mobile-to-land Interconnection. For a call initiated by a landline subscriber of our competitor to our fixed-line user, the landline service provider collects from its subscriber its normal rate and remits to us a land-to-land interconnection charge. In addition, for a call initiated by a mobile service subscriber to our landline user, the mobile service provider collects from its subscriber its normal rate and remits to us a mobile-to-land interconnection charge.
The following table shows such interconnection charge per minute collected for a call depending on the type of call, as determined by the Korea Communications Commission.
Local access (1)
Single toll access (2)
Double toll access (3)
Source: The Korea Communications Commission.
Mobile-to-mobile Interconnection. For a call initiated by a mobile subscriber of our competitor to our mobile subscriber, the mobile service provider collects from its subscriber its normal rate and remits to us a mobile-to-mobile interconnection charge. In addition, for a call initiated by our mobile subscriber to a mobile subscriber to 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.
KT
We recognize as mobile-to-mobile interconnection revenue the entire amount of the usage charge collected from the mobile user and recognize as expense the amount of interconnection charge paid to the mobile service provider.
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Broadband Internet Access Service. We offer broadband Internet access service that primarily uses existing telephone lines to provide both voice and data transmission. We charge monthly fixed fees to customers of broadband Internet service. In addition, we charge customers a one time installation fee per site of (Won)30,000 and modem rental fee of up to (Won)8,000 on a monthly basis. The rates we charge for broadband Internet access service are subject to approval by the Korea Communications Commission.
The following table summarizes our charges for our representative broadband Internet service plans:
Maximum Service Speed
olleh Internet Special (1) (6)
olleh Internet Lite (1) (6)
WiBro 10G (2) (6)
WiBro 20G (3) (6)
WiBro 30G (4) (6)
WiBro 50G (5) (6)
olleh TV Services. We charge our subscribers an installation fee per site of (Won)24,000, a set-top box rental fee ranging from (Won)2,000 to (Won)7,000 on a monthly basis and a monthly subscription fee. The rates we charge for olleh TV services are subject to approval by the Korea Communications Commission.
The following table summarizes charges for our representative olleh TV service plans:
olleh TV Video-On-Demand
olleh TV Live Choice (3)
olleh TV Live Education (4)
olleh TV Live Thrift (5)
olleh TV Live Standard (5)
olleh TV Live Deluxe (5)
olleh TV SkyLife Economy (6)
olleh TV SkyLife Standard (6)
olleh TV SkyLife Premium (6)
olleh TV Now (7)
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We charge customers of domestic leased-lines on a monthly fixed-cost basis based on the distance of the leased line, the capacity of the line measured in bits per second (“bps”), the type of line provided and whether the service site is local or long-distance. In addition, we charge customers a one-time installation fee per line ranging from (Won)56,000 to (Won)1,940,000 depending on the capacity of the line.
Bundled Products
We utilize our extensive customer relationships and market knowledge to expand our revenue base by cross-selling our telecommunications products and services. In order to attract additional subscribers to our new services, we bundle our services, such as our broadband Internet access service with WiBro, IP-TV, Internet phone, fixed-line telephone service and mobile services, at a discount.
The following table summarizes our various basic bundled packages that we currently offer. The packages require subscribers to agree to a subscription period of three years.
Mobile Monthly Fee
Internet / Internet Phone / Mobile
Internet / Fixed-Line Phone / Mobile
Internet / IP-TV / Mobile (1)
Internet / Fixed-Line Phone / IP-TV / Mobile (1)
We have also entered into partnerships with a leading online shopping mall, an operator of cinema complexes, a satellite broadcasting service operator, a life insurance company, a car insurance company and a security company, and our subscribers may elect to receive monthly gift certificates, music downloads, online game money, movie tickets or other benefits from such partnership companies with value of up to (Won)50,000 per month in lieu of monthly rate discounts.
We believe that subscribers who sign up for bundled products are less likely to cancel our services than subscribers who subscribe to individual services. Subscription fees paid for our bundled products are allocated to each service in proportion to their fair value and the allocated amount is recognized as revenue according to the revenue recognition policy for each service.
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
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of the Korean telecommunications industry. In particular, SK Telecom acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband. The acquisition enables SK Telecom to provide fixed-line telecommunications, broadband Internet access and IP-TV services together with its mobile telecommunications services. On January 1, 2010, LG Dacom and LG Powercom merged into LG Telecom Co., Ltd., which subsequently changed its name to LG U+. The merger enables LG U+ provide a similar range of services as SK Telecom and us.
Under the Telecommunications Basic Law and the Telecommunications Business Law, telecommunications service providers in Korea are currently classified into network service providers, value-added service providers and specific service providers. See “—Regulation.”
Network Service Providers
All network service providers in Korea are permitted to set the rates for international or domestic long-distance services on their own without Korea Communications Commission approval. Many of our competitors have set their rates lower than ours. Currently, we can compete freely with other providers on the basis of rates in all services except for rates we charge for local calls and broadband Internet access service, which require advance approval from the Korea Communications Commission. In all service areas, we compete by endeavoring to provide superior customer service and superior technical quality, taking advantage of our broad customer base and our ability to provide various telecommunication services.
We and SK Telecom have been designated as market-dominating business entities in the respective markets under the Telecommunications Business Act. Under this Act, a market-dominating business entity may not engage in any act of abuse, such as unreasonably interfering with business activities of other business entities, hindering unfairly the entry of newcomers or substantially restricting competition to the detriment of the interests of consumers. The Korea Communications Commission has also issued guidelines on fair competition of the telecommunications companies. If any telecommunications service provider breaches the guidelines, the Korea Communications Commission may take necessary corrective measures against it after a hearing at which the service provider may defend its action.
Mobile Service. Competition in the mobile telecommunications industry in Korea is intense among SK Telecom, LG U+ and us. Such competition has intensified in recent years due to the implementation of mobile number portability, which enabled mobile subscribers to switch their service provider while retaining the same mobile phone number, as well as payments of handset subsidies to purchasers of new handsets who agree to minimum subscription periods and the recent rollout of fourth-generation mobile services based on LTE technology by SK Telecom, LG U+ and us.
The following table shows the market shares in the mobile telecommunications market as of the dates indicated:
December 31, 2009
December 31, 2010
December 31, 2011
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.
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Local Telephone Service. We compete with SK Broadband and LG U+ in the local telephone service business. SK Broadband began providing local telephone service in 1999, followed by LG U+ in 2004. In addition, the services provided by mobile service providers have had a material adverse effect on KT Corporation in terms of our revenues from fixed-line telephone services. We expect this trend to continue.
The following table shows the market 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 (Won)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(Won)60,000 while customers of our competitors pay a non-refundable telephone service initiation charge of (Won)30,000. Also, the basic monthly charge of our competitors is (Won)4,500 compared to our basic charge of (Won)5,200.
Domestic Long-distance Telephone Service. We compete with SK Broadband, LG U+, Onse and SK Telink in the domestic long-distance market. LG U+ began offering domestic long-distance service in 1996, followed by Onse in 1999 and SK Broadband and SK Telink in 2004. The following table shows the market shares in the domestic long-distance market as of the dates indicated:
Our competitors and we charge (Won)39 per three minutes for domestic long-distance calls up to 30 kilometers. For domestic long-distance calls greater than 30 kilometers, our competitors typically charge between 3% to 5% less than us. The following table is a comparison of our standard long-distance usage charges per 10 seconds with the standard rates of our competitors as of December 31, 2011:
30 kilometers or longer
International Long-Distance Telephone Service. Four companies, SK Broadband, LG U+, Onse and SK Telink, directly compete with us in the international long-distance market. LG U+ began offering international long-distance service in 1991, followed by Onse in 1997 and SK Broadband in
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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, 2011:
United States
Japan
China
Australia
Great Britain
Germany
Broadband Internet Access Service. The Korean broadband Internet access market has experienced significant growth in the past decade. SK Broadband entered the broadband market in 1999 offering both HFC and ADSL services, and we entered the market with our ADSL services in 1999, followed by Dreamline, Onse and LG U+. In addition, the entry of cable television providers that offer HFC-based broadband Internet access services at rates lower than ours has increased competition in the broadband Internet access market. We expect industry consolidation among our competitors in the near future, and smaller competitors in the broadband market today may become larger competitors.
The following table shows the market share in the broadband Internet access market as of the dates indicated:
Our competitors generally charge less than us for broadband Internet access service. The following table is a comparison of fees for our olleh Internet Lite service with three year mandatory subscription period with fees of our competitors for comparable services as of December 31, 2011:
Monthly subscription fee
Monthly modem rental fee
Additional installation fee upon moving
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Data Communication Service. We had a monopoly in domestic data communication service until 1994, when LG U+ was authorized to provide the leased-line service. The data communications service market has become more competitive with limited growth during the past decade, and we primarily compete with SK Broadband and LG U+.
Value-Added Service Providers
Value-added service providers may commence operations following filing of a report to the Korea Communications Commission. The scope of business of a value-added service provider includes specific value-added telecommunications activities (other than services reserved for network service providers), such as data communications utilizing telecommunications facilities leased from network service providers.
Specific Service Providers
Specific service providers, such as Internet phone service providers and voice resellers, started operations in Korea in 1998. We began providing Internet phone service for international long-distance calls in May 1998. Our Internet phone service also competes with international long-distance services provided by voice resellers who have also seen sharp increases in demand for their services.
Regulation
Under the Telecommunications Basic Law and the Telecommunications Business Law, telecommunications service providers are currently classified into three categories:
network service providers, such as us, which typically provide telecommunications services with their own telecommunications networks and related facilities. Their services may include local, domestic long-distance and international long-distance telephone services, mobile communications service, paging service and trunked radio system service;
value-added service providers, which provide telecommunications services other than those services specified for network service providers, such as data communications using telecommunications facilities leased from network service providers; and
specific service providers, which are broadly defined by law as telecommunications service providers that provide network services using the telecommunications network facilities or services of network service providers.
Under the Telecommunications Basic Law and the Telecommunications Business Law, the Korea Communications Commission has comprehensive regulatory authority over the telecommunications industry and all network service providers. The Korea Communications Commission is established under the direct jurisdiction of the President and is comprised of five standing commissioners. Commissioners of the Korea Communications Commission are appointed by the President, and the appointment of the Chairperson must be approved at a confirmation hearing at the National Assembly. The Korea Communications Commission’s policy is to promote competition in the Korean telecommunications markets through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors. A network service provider must be licensed by the Korea Communications Commission. Our license as a network service provider permits us to engage in a wide range of telecommunications services.
Under the Use and Protection of Credit Information Act, telecommunications service providers are also required to disclose personal credit information of their customers only for the purpose of
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validating and maintaining telecommunications service agreements. Korean telecommunications service providers may use their customers’ credit information only to the extent allowed by the Use and Protection of Credit Information Act, which has gained greater importance in recent years due to the occurrence of personal information leakage incidents.
The Korea Communications Commission also has the authority to regulate the IP media market, including IP-TV services. We began offering IP-TV services with real-time high definition broadcasting on November 17, 2008. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IP media broadcasting business must obtain a license from the Korea Communications Commission. The ownership of the shares of an IP media broadcasting company by a newspaper, a news agency or a foreigner is limited, and broadcasting of certain contents must obtain additional approval of the Korea Communications Commission.
Rates
Under current regulations implementing the Telecommunications Business Act, a network service provider may set its rates at its discretion, although it must report to the Korea Communications Commission the rates and the general terms and conditions for each type of network service provided by it. There is, however, one exception to this general rule: if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the Korea Communications Commission, it must obtain prior approval from the Korea Communications Commission for the rates and the general terms for that service. Each year the Korea Communications Commission designates the service providers and the types of services for which the rates and the general terms must be approved by the Korea Communications Commission. In 2011, the Korea Communications Commission designated us for local telephone service and SK Telecom for cellular service. The Korea Communications Commission, in consultation with the Ministry of Strategy and Finance, is required to approve the rates proposed by a network service provider if (1) the proposed rates are appropriate, fair and reasonable and (2) the calculation method for the rates are appropriate and transparent.
Other Activities
A network service provider, such as us, must obtain the permission of the Korea Communications Commission in order to:
engage in certain businesses specified in the Presidential Decree under the Telecommunications Business Act, such as the telecommunications equipment manufacturing business and the telecommunications network construction business;
change the conditions for its licenses;
transfer, terminate, suspend or spin off all or a part of the business for which it is licensed;
acquire all or a part of the business of another network service provider; or
enter into a merger with another network service provider.
A telephone service provider may provide some network services using the equipment it currently has by submitting a report to the Korea Communications Commission. The Korea Communications Commission can revoke our licenses or order the suspension of any of our businesses if we do not comply with the regulations of the Korea Communications Commission under the Telecommunications Business Law.
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The responsibilities of the Korea Communications Commission also include:
formulating the basic plan for the telecommunications industry; and
preparing periodic reports to the National Assembly of Korea regarding developments in the telecommunications industry.
In July 2011, the Korea Communications Commission 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, up to (Won)150 billion of the marketing expenditures may be applied to either segment at the discretion of the service provider. The calculation of marketing expenditure amounts under the guideline excludes advertising expenses and the calculation of revenue amounts excludes revenues from handset sales. To encourage compliance with the non-binding guideline, the Korea Communications Commission plans to release the marketing expenditure amounts of each service provider on a quarterly basis. The Korea Communications Commission may periodically adjust the guideline to accommodate changes in market conditions.
The responsibilities of the Ministry of Knowledge Economy include:
drafting and implementing plans for developing telecommunications technology;
fostering and providing guidance to institutions and entities that conduct research relating to telecommunications; and
recommending to network service providers that they invest in research and development or that they contribute to telecommunications research institutes in Korea.
In addition, since January 2000, all network service providers (other than regional paging service providers) are obligated to contribute toward the supply of “universal” telecommunications services in Korea. Telecommunications service providers designated as “universal service providers” by the Korea Communications Commission are required to provide universal telecommunications services such as local services, local public telephone services, discount services for persons with disabilities and for certain low-income persons, telecommunications services for remote islands and wireless communication services for ships. We have been designated as a universal service provider. The costs and losses recognized by universal service providers in connection with providing these universal telecommunications services will be shared on an annual basis by all network service providers (other than regional paging service providers), including us, on a pro rata basis based on their respective net annual revenue calculated pursuant to a formula set by the Korea Communications Commission.
Due to the amendment of the Telecommunications Business Law, effective April 9, 2001, a network service provider must permit other network service providers to co-use wirelines connecting the switching equipment to end-users, upon the request of such other network service providers. In addition, a network service provider may permit other network service providers to co-use its wireless communication systems upon the request of any of such other network service providers. The compensation method for the co-use must be determined by the Korea Communications Commission and be settled, by fair and proper methods.
In addition, starting April 2002, we are required to lease to other companies our fixed-lines that connect subscribers to our network. This system, which is called local loop unbundling, is intended to prevent excessive investment in local loops. This system requires us to lease the portion of our copper
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lines that represent our excess capacity to other companies upon their request at rates that are determined by the Korea Communications Commission based on our cost, and taking into consideration an appropriate rate of return, to enable them to provide voice and broadband services. Revenues from local loop unbundling are recognized as revenues from miscellaneous services.
Foreign Investment
The Telecommunications Business Act restricts the ownership and control of network service providers by foreign shareholders. Foreigners, foreign governments and “foreign invested companies” may not own more than 49.0% of the issued shares with voting rights of a network service provider, including us, and a foreign shareholder may not become our largest shareholder if such shareholder holds 5.0% or more of our shares. For purposes of the Telecommunications Business Act, the term “foreign invested company” means a company in which foreigners and foreign governments hold 15.0% or more shares with voting rights in the aggregate and a foreigner or a foreign government is the largest shareholder, provided, however, that such company will not be counted as a foreign shareholder for the purposes of the above-referenced 49.0% limit if it holds less than 1.0% of our total issued and outstanding shares with voting rights. As of December 31, 2011, 48.32% of our common shares were owned by foreign investors. In the event that a network service provider violates the shareholding restrictions, its foreign shareholders cannot exercise voting rights for their shares in excess of such limitation, and the Korea Communications Commission may require corrective measures be taken to comply with the ownership restrictions. There is no restriction on foreign ownership for specific service providers and value-added service providers.
Individual Shareholding Limit
Under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 5.0% or more of our total shares and was our largest shareholder on or prior to May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. In addition, under the Telecommunications Business Act, the Korea Communications Commission may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. In addition, the Foreign Investment Promotion Act prohibits any foreign shareholder from being our largest shareholder, if such shareholder owns 5.0% or more of our shares with voting rights. In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, the Telecommunications Business Act restricts such foreign shareholder from exercising his or her voting rights with respect to common shares exceeding such threshold. The Korea Communications Commission may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less.
Customers and Customer Billing
We typically charge residential subscribers and business subscribers similar rates for services provided. On a case-by-case basis, we also provide discount rates for some of our high-volume business subscribers. We bill all of our customers on a monthly basis. Our customers may make payment at either payment points such as local post offices, banks or our service offices, through a direct-debit service that automatically deducts the monthly payment from a subscriber’s designated bank account, or through a direct-charge service that automatically charges the monthly payment to a subscriber’s designated credit card account. Approximately 70% of our subscribers as of December 31, 2011 pay through the direct-debit service. Accounts of subscribers who fail to pay our invoice are transferred to a collection agency, which sends out a notice of payment. If such charges are not paid after notice, we cease to provide outgoing service to such subscribers after a period of
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time determined by the type of subscribed service. If charges are still not paid two to three months after outgoing service is cut off, we cease all services to such subscribers. After service is ceased, the overdue charges that are not collected by the collection agency are written off.
Insurance
We carry insurance against loss or damage to all significant buildings and automobiles. Except for our insurance coverage of our satellites and Internet data centers, we do not carry insurance covering losses to outside plants or to equipment because we believe the cost of such insurance is excessive and the risk of material loss or damage is insignificant. We do not have any provisions or reserves against such loss or damage. We do not carry any business interruption insurance.
We provide co-location and a variety of value-added services including server-hosting services to a number of corporations whose business largely depends on critical data operated on our servers or on their servers located at our data centers. Any disruptions, interruptions, physical or electronic data loss, delays or slow down in communication connections could expose us to potential liabilities for losses relating to the disrupted businesses of our customers relying on our services.
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, we are currently pursuing major upgrades to our company-wide business information technology and operational systems, and as the first stage of such upgrades, a new enterprise resource planning system (the “New ERP System”) is expected to be completed and implemented during the second half of 2012. The New ERP System is expected to enhance various aspects of our internal processes and control systems, and we are establishing various plans to effectively implement the New ERP System and to stabilize our internal control processes during the transition period. We also expect to gradually implement other upgrades to our information technology and operational systems in the near future.
Item 4.C. Organizational Structure
These matters are discussed under Item 4.B. where relevant.
Item 4.D. Property, Plants and Equipment
Our principal fixed asset is our integrated telecommunications networks. In addition, we own buildings and real estate throughout Korea.
Our fixed-line equipment vendors and mobile equipment suppliers include well-known international and local suppliers such as Samsung Electronics, LG Electronics, Cisco Systems and Apple Inc.
Mobile Networks
Our mobile network architecture includes the following components:
cell sites, which are physical locations equipped with base transceiver stations consisting of transmitters, receivers and other equipment used to communicate through radio channels with subscribers’ mobile telephone handsets within the range of a cell;
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base station controllers, which connect to and control, the base transceiver stations;
mobile switching centers, which in turn control the base station controllers and the routing of telephone calls; and
transmission lines, which connect the mobile switching centers, base station controllers, base transceiver stations and the public switched telephone network.
The following table lists selected information regarding our mobile networks as of December 31, 2011:
Mobile switching centers
Base station controllers
Base transceiver stations
Indoor and outdoor repeaters
We have a license to use 40 MHz of bandwidth in the 2.1 GHz spectrum that we use to provide IMT-2000 services based on W-CDMA wireless network standards. Such license expires in December 2016, and we will pay approximately (Won)1.3 trillion for use of such bandwidth during the license period of 15 years. In April 2010, the Korea Communications Commission 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 will 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 Korea Communications Commission 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 Korea Communications Commission 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 will 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 Korea Communications Commission at the time of allocation
In August 2011, the Korea Communications Commission 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 will pay a total usage fee of (Won)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 bandwidth in the 2.1 GHz spectrum. We began using the 20 MHz of bandwidth in the 1.8 GHz spectrum, which became available upon termination of our 2G PCS services, to provide our 4G LTE services starting in January 2012, and expect to utilize the newly allocated bandwidths in the 800 MHz and 900 MHz spectrums to further expand our 4G LTE services in the future, if necessary. Furthermore, in anticipation of a significant increase in data transmission traffic in the near future due to the changing mobile usage environment, we are seeking to maximize the utilization of our W-CDMA, Wibro and WiFi networks to provide better internet access for our customers, as well as applying our Cloud Communication Center technology to our 4G LTE services during 2012. Cloud Communications Center technology, which we applied to our 3G networks in Seoul and other metropolitan areas during 2011, allows faster and more stable access to the internet by dissipating heavy data traffic through utilization of virtual communication centers. We have also installed an intelligent network on our mobile network infrastructure to provide a wide range of advanced call features and value-added services.
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Exchanges
Exchanges include local exchanges and “toll” exchanges that connect local exchanges to long-distance transmission facilities. We had 24.0 million lines connected to local exchanges and 2.7 million lines connected to toll exchanges as of December 31, 2011.
All of our exchanges are fully automatic. We completed replacement of all electromechanical analog exchanges with digital exchanges in June 2003 in order to provide higher speed and larger volume services. Starting in 2006, we also began conversion of our exchanges to be compatible to Internet protocol platform in preparation for building our next generation broadband convergence network by 2021. As of December 31, 2011, approximately 85% of our lines connected to toll exchanges are compatible to Internet protocol platform.
Internet Backbone
Our Internet backbone network, called KORNET, has the capacity to handle an aggregate traffic of our broadband Internet access subscribers, Internet data centers and Internet exchange system at any given moment of up to 5.1 Tbps as of December 31, 2011. We have set up contingent plans to prepare against various incidents that could affect reliable Internet access service. Starting in 2005, we have also begun deploying our Internet protocol premium network that enables us to more reliably support olleh TV, WiBro, Internet Phone, upgraded VoIP services and other Internet protocol services. As of December 31, 2011, our Internet protocol premium network had 1,032 lines installed to provide voice over Internet protocol services and a total capacity to handle up to 940 Gbps of IP-TV, voice and WiBro service traffic.
Access Lines
As of December 31, 2011, we had 15.1 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, 2011, we had approximately 13.4 million broadband lines with speeds of at least 50 Mbps that enable us to deliver broadband Internet access and multimedia content to our customers.
Transmission Network
Our domestic fiber optic cable network consisted of 527,188 kilometers of fiber optic cables as of December 31, 2011 of which 98,048 kilometers of fiber optic cables are used to connect our backbone network and 429,140 kilometers are used to connect the backbone network to our subscribers. Our backbone network utilizes dense wavelength division multiplexing technology for connecting major cities as well as optical add-drop multiplexer technology for connecting neighboring cities. Dense wavelength division multiplexing technology improves bandwidth efficiency by enabling transmission of data from multiple signals across one fiber strand in a cable by carrying each signal on a separate wavelength. We enhanced our backbone network connecting six major cities in Korea by implementing an optical cross-connector (OXC) architecture in 2008 and are in the process of building our next generation broadband convergence network through installation of network equipment utilizing optical reconfigurable add-drop multiplexer technology and multi-service provisioning platform.
Our extensive domestic long-distance network is supplemented by our fully digital domestic microwave network, which consisted of 55 relay sites as of December 31, 2011.
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International Network
Our international network infrastructure consists of both submarine cables and satellite transmission systems, including two submarine cable-landing stations in Busan and Keoje and two satellite teleports in Kumsan and Boeun. Data services such as international private lease circuits, Internet protocol and very small aperture terminals are provided through submarine cables and satellite transmission. In order to guarantee high quality services to our end customers, our submarine cables and satellite transmission systems are linked to various points-of-presence in the United States, Asia and Europe. In addition, our international telecommunications networks are directly linked to approximately 315 telecommunications service providers in various international destinations and are routed through our three international switching centers in Seoul, Daejeon and Busan.
Our international Internet backbone with capacity of 270 Gbps is connected to approximately 180 Internet service providers through our two Internet gateways in Heawha and Guro. In addition, we operate a video backbone with capacity of one Gbps to transmit video signals from Korea to the rest of the world.
Satellites
In order to provide broadcasting, video distribution and broadband data services in select areas, we operate two satellites, Koreasat 5 and 6, launched in 2006 and 2011, respectively, and own interests in two additional satellites, ABS-1 launched in September 2011 and ABS-2 expected to be launched in 2013. See “Item 4.B. Business Overview—Our Services—Satellite Services.”
International Submarine Cable Networks
International traffic is handled by telecommunications satellites and submarine cables. Because of the high cost of laying a submarine cable, the usual practice is for multiple carriers to jointly commission a new cable and share the costs and the capacity. We own interests in several international fiber optic submarine cable networks, including:
a 1.4% interest in the 29,000-kilometer FLAG Europe-Asia network connecting Korea, Southeast Asia, the Middle East and Europe, activated since April 1997;
a 1.8% interest in the 39,000-kilometer Southeast Asia-Middle East-Western Europe 3 Cable Network linking 34 countries, activated since December 1999;
a 6.7% interest in the 30,444-kilometer China-U.S. Cable Network linking Korea, China, Japan, Taiwan and the United States, activated since January 2000;
a 5.1% interest in the 19,000-kilometer Asia Pacific Cable Network 2 connecting Korea, China, Japan, Taiwan, Hong Kong, Philippines, Singapore and Malaysia, activated since December 2001;
a 20.0% interest in the 500-kilometer Korea-Japan Cable Network linking Korea and Japan, activated since March 2002; and
a 13.1% interest in the 16,500-kilometer Trans Pacific Express Cable Network linking Korea, China, Taiwan and the United States, activated since September 2008.
We have also invested in 8 other international fiber optic submarine cables around the world.
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Item 4A. Unresolved Staff Comments
We do not have any unresolved comments from the Securities and Exchange Commission staff regarding our periodic reports under the Exchange Act of 1934.
Item 5. Operating and Financial Review and Prospects
Item 5.A. Operating Results
The following discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB.
Overview
We are an integrated provider of telecommunications services. Our principal services include mobile service, fixed-line telephone services, Internet services including broadband Internet access service and data communication service. The principal factors affecting our revenues from these services have been our rates for, and the usage volume of, these services, as well as the number of subscribers. For information on rates we charge for our services, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates.” We determined our operating segments after the merger with KTF on June 1, 2009 as (i) the Personal Customer Group, which engages in mobile and wireless data communications services, (ii) the Home/Global & Enterprise Customer Group, which engage in fixed-line telephone services, Internet services including broadband Internet access service and data communication service, and (iii) others, which include information technology and network services, real estate development and car rental businesses.
One of the major factors contributing to our historical performance was the growth of the Korean economy, and our future performance will depend at least in part on Korea’s general economic growth and prospects. For a description of recent developments that have had and may continue to have an adverse effect on our results of operations and financial condition, see “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.” A number of other developments have had or are expected to have a material impact on our results of operations, financial condition and capital expenditures. These developments include:
acquisitions and disposals of interests in subsidiaries and joint ventures;
employee reductions and changes in severance and retirement benefits;
usage fees for bandwidths;
changes in the rate structure for our services; and
researching and implementing technology upgrades and additional telecommunication services.
As a result of these factors, our financial results in the past may not be indicative of future results or trends in those results.
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
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termination of such businesses from time to time. The following summarizes our recent acquisitions and disposals:
in January 2011, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that are convertible into 5,600,000 shares of common stock of KT Skylife Co., Ltd. from Dutch Savings Holdings B.V. in January 2011 for approximately (Won)246 billion, to respond to the trend of convergence in the telecommunications and broadcasting industries, and to seek additional synergies with our existing operations. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 50.3% interest in KT Skylife Co., Ltd. as of December 31, 2011;
in June and October 2011, we sold a total of 5,309,189 common shares of New Telephone Company, Inc., representing all of our interests in New Telephone Company, Inc., for approximately (Won)380 billion. Located in Russia, New Telephone Company, Inc. had previously been our consolidated subsidiary providing fixed-line telephone services in Vladivostok, and our decision to dispose of our interest in that company was in part affected by the changing landscape in the Russian telecommunications market, where telecommunications service providers were becoming more nationalized and increasing rapidly in size as a result;
in October 2011, we, through our subsidiary KT Capital Co., Ltd., acquired an additional 1,622,520 common shares of BC Card Co., Ltd. from Woori Bank for approximately (Won)252 billion, to further diversify our business and to create synergies through utilization of our mobile telecommunications network in financial services, thereby increasing our ownership interest in BC Card Co., Ltd. to 38.86%, making it our consolidated subsidiary as a result of deemed control; and
in December 2011, we entered into a memorandum of understanding for a strategic partnership with, and acquisition of shares of, Telkom SA Limited, a South African comprehensive telecommunications service provider. The proposed transaction with Telkom SA Limited may require significant capital resources if the acquisition is eventually successful.
Our financial condition and results of operations may be affected as a result of such acquisitions or disposals. Furthermore, pursuing acquisitions or joint venture transactions also requires significant capital, and as we pursue further growth opportunities for the future, we may need to raise additional capital by incurring loans or through the issuances of bonds or other securities in the international capital markets, which may lead to increased levels of debt and debt servicing costs in the future.
Employee Reductions and Changes in Severance and Retirement Benefits
We sponsor a voluntary early retirement plan where we provide additional financial incentives for our employees who have been employed by us for more than 20 years to retire early, as part of our efforts to improve operational efficiencies. In 2009, in addition to our usual voluntary early retirement plan, we held a special voluntary early retirement program in December 2009 where we received applications for voluntary early retirement from employees who had been employed by us for more than 15 years and provided them with additional financial incentives to retire early. The special voluntary early retirement program resulted in the early retirement of 5,992 employees out of 25,340 eligible employees. In aggregate, 6,515 employees retired in 2009 under the voluntary early retirement plan and the special voluntary early retirement program. In 2010 and 2011, 124 and 334 employees, respectively, retired under our voluntary early retirement plan.
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Bandwidth Usage Fees
One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth spectrum allocated to the service provider. The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have been significant 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 Korea Communications Commission at the time of allocation. For a description of our licenses, see “Item 4.D.—Property, Plants and Equipment—Mobile Networks.” In order to continue to maintain sufficient bandwidth capacity, we will require additional capital to renew existing bandwidth spectrum or receive additional bandwidth allocation, or cost-effectively implement technologies that enhance bandwidth usage efficiency.
Changes in the Rate Structure for Our Services
Periodically, we adjust our rate structure for our services. In order to mitigate the impact from lower usage charges of local and domestic long-distance calls, we have increased our basic monthly charges and offer various optional flat rate plans for our fixed-line subscribers. Such adjustments in the rate structure have increased the portion of fixed income and stabilized our cash flow. In addition, because the growing use of mobile telecommunications services has decreased the usage of our fixed-line telephone services, we believe we are able to maximize our revenues from fixed-line telephone services by adjusting the rate structure so as to increase our basic monthly charges. We also provide bundled packages of our various services at a discount in order to attract additional subscribers to our new services. We currently bundle our broadband Internet access service with WiBro, IP-TV, fixed-line telephone service, internet phone services and mobile services at a discount.
The Korea Communications Commission, in consultation with the Ministry of Strategy and Finance, currently approves rates charged by us for local telephone service. In addition, the Korea Communications Commission 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.”
Researching and Implementing Technology Upgrades and Additional Telecommunication Services
The telecommunications industry is characterized by continual advances and improvements in telecommunications technology, and we have been continually researching and implementing technology upgrades and additional telecommunication services to maintain our competitiveness. For example, we are currently upgrading our broadband network to enable FTTH connection, which enhances downstream speed and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such as IP-TV service and delivery of other digital media content. In addition, we have been building more advanced mobile telecommunications networks based on LTE technology, which is generally referred
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to as a 4G technology, and commenced providing commercial 4G LTE services in the Seoul metropolitan area on January 3, 2012. We completed the expansion of our 4G LTE service coverage to 84 cities throughout Korea in April 2012. LTE technology enables data to be transmitted at speeds faster than W-CDMA, up to 75 Mbps for downloading and up to 37.5 Mbps for uploading. We expect that the faster data transmission speed of the LTE network, combined with our existing 4G nationwide WiBro network, will allow us to offer significantly improved wireless data transmission services, providing our subscribers with faster wireless access to multimedia content. We will continue to make capital expenditures, incur research and development expenses and implement technology upgrades and additional telecommunications services in order to effectively implement continual advances and improvements in telecommunications technology.
Critical Accounting Policies
We have prepared our consolidated financial statements in accordance with IFRS as issued by the IASB. These accounting principles require our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the years reported. We based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ from those estimates under different assumptions and conditions.
The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. To aid in that understanding, our management has identified “critical accounting estimates.” These estimates have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.
These critical accounting estimates include:
allowances for doubtful accounts;
useful lives of property and equipment;
impairment of long-lived assets, including goodwill;
valuation and impairment of investment securities;
income taxes;
deferred revenue relating to service installation fees and initial subscription fees;
defined benefit liability; 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
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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 during 2010 and 2011 are summarized as follows:
Balance at beginning of year
Provision
Reversal or written-off
Changes in the scope of consolidation
Others
Balance at end of year
Changes in the allowances for doubtful accounts for our loans receivables during 2010 and 2011 are summarized as follows:
If economic or specific industry trends change, we would adjust our allowances for doubtful accounts by recording additional expense or benefit. Our study shows that a 5.0% decrease or increase in the historical write-off experience would increase or decrease the provision for doubtful accounts by approximately(Won)1 billion as of December 31, 2011.
Useful Lives of Property and Equipment
Property and equipment are depreciated using the straight-line method over their useful lives as disclosed in Note 2.11 to the Consolidated Financial Statements. An asset’s residual value and useful lives are reviewed and adjusted at the end of each financial reporting period, and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation expense in future periods. A decrease of remaining estimated useful life by one year of our property and equipment would result in an increase of depreciation expense of approximately (Won)193 billion in 2011.
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
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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 determined based on value-in-use calculations, which require the use of estimates. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated recovery value.
Goodwill represents the excess of purchase price paid over the fair value assigned to the identifiable net assets of acquired businesses. The determination of the fair values of goodwill is based on management’s judgment on the expected cash flows of the cash-generating units to which the goodwill is allocated, taking market demand, competition and other economic factors into consideration. The determination of impairments of goodwill involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment. Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the telecommunications industry, a decline in our expected future cash flows, changes in the future availability of financing, technological obsolescence, discontinuance of services, current replacement costs and prices paid in comparable transactions. The determination of impairment of goodwill requires a significant amount of management’s judgment.
Valuation and Impairment of Financial Assets
The fair value of financial instruments, including derivative instruments, that are not traded in an active market is determined by using valuation techniques. Our management uses its judgment to select a variety of methods and makes assumptions that are mainly based on market conditions existing at the end of each reporting period.
We record rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. Gains and losses that result from a change in the fair value of derivative instruments are recognized in current earnings. However, for derivative instruments that qualify for cash flow hedge accounting, the effective portion of the gain or loss on the derivative instruments are recorded as gain or loss on valuation of derivatives for cash flow hedge included in accumulated other comprehensive income or loss, as applicable.
For financial assets, including assets carried at amortized cost and those classified as available-for-sale, we make an annual assessment at the end of each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. For financial assets carried at amortized cost and available-for-sale debt assets, such asset is considered impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events (a “loss event”) that occurred after the initial recognition of the financial asset, which had an impact on the estimated future cash flows of the financial asset that can reliably be estimated. For equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost, in addition to circumstances described below, may be considered as evidence that the asset is impaired.
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
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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, less any impairment loss on such financial asset previously recognized in profit or loss, is removed from equity and recognized in the statement of income.
Significant management judgment is involved in evaluating whether a loss event has occurred. The estimates and assumptions used by management to evaluate whether a loss event has occurred can be impacted by many factors, such as the financial condition, earnings capacity and near-term prospects of the company in which we have invested, breach of contract such as default or delinquency in payments, disappearance of an active market for the financial asset and other adverse changes in the payment status of borrowers in the portfolio. The evaluation of these investments is also subject to the overall condition of the economy and its impact on the capital markets.
Income Taxes
We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for the future tax consequences of events that have been reflected in our financial statements or tax returns. This process requires management to make assessments regarding the timing and probability of the tax impact. Actual income taxes could vary from these estimates due to future changes in income tax law or unpredicted results from the final determination of each year’s liability by taxing authorities.
We believe that the accounting estimate related to assessing the realizability of deferred tax assets is a “critical accounting estimate” because: (1) it requires management to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities, and (2) the impact that changes in actual performance versus these estimates could have on the realization of tax benefits as reported in our results of operations could be material. Management’s assumptions require significant judgment because actual performance has fluctuated in the past and may continue to do so.
Deferred Revenue relating to Service Installation Fees and Initial Subscription Fees
We charge service installation fees and initial subscription fees related to activation of many of our services, which are deferred and recognized as revenue over the expected terms of customer relationships. Our estimate of expected terms of customer relationship is based on the historical rate, which may differ in the future. If the management’s estimation is amended, it may cause significant differences in the timing of revenue recognition and amount recognized.
Defined Benefit Liability
Our accounting of employee benefits, which mainly consist of a defined benefit plan, involves judgments about uncertain events including discount rates, life expectancy, future pay inflation and expected rate of return on plan assets. 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.
We recognize provisions at the end of the reporting period when we have a present legal or constructive obligation, such as litigation or assets requirement obligations, as a result of past events
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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 2.23, 3.7 and 18 to the Consolidated Financial Statements.
Operating Revenues and Operating Expenses
Operating Revenues
Our operating revenues primarily consist of:
fees related to our mobile services, including initial subscription fees, monthly fees, usage charges for outgoing calls, usage charges for wireless data transmission, contents download fees and value-added monthly service fees;
fees from our fixed-line telephone services, including:
local service revenues, primarily consisting of (i) basic monthly charges and monthly usage charges (or fixed monthly charges for discount plans), (ii) revenues from value-added services, including local telephone directory assistance, call waiting and caller identification services, (iii) interconnection fees we charge to fixed-line and mobile service providers for their use of our local network in providing their services and (iv) revenues from local calls placed from public telephones;
non-refundable installation fees;
domestic long-distance service revenues, primarily consisting of (i) monthly usage charges (or fixed monthly charges for discount plans), (ii) interconnection fees we charge to fixed-line and mobile service providers and voice resellers for their use of our domestic long-distance network in providing their services and (iii) revenues from domestic long-distance calls placed from public telephones;
international long-distance service revenues, primarily consisting of (i) amounts we bill to our customers for outgoing calls made to foreign countries, (ii) amounts we bill to foreign telecommunications carriers for connection to the domestic telephone network in respect of incoming calls at the applicable settlement rate, (iii) amounts we charge to fixed-line and mobile service providers and voice resellers as interconnection fees for using our international network in providing their services and (iv) other revenues, including revenues from international calls placed from public telephones and international leased lines; and
land-to-mobile interconnection revenues;
Internet service revenues which consist of:
broadband Internet access service revenues, primarily consisting of installation fees and basic monthly charges; and
other Internet-related service revenues related to our infrastructure and solution services for business enterprises, IP-TV and network portal services;
revenues from goods sold that are generated primarily through sale of mobile handsets and specially designed phones for fixed-line and mobile convergence services;
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data communications service revenues, primarily consisting of installation fees and basic monthly charges for our leased line services and Kornet Internet connection service and revenues from our satellite services; and
miscellaneous revenues that are primarily derived from credit card services, information technology and network services, satellite services, real estate development and car rental businesses.
Operating Expenses
Our operating expenses primarily include:
purchase of handsets, primarily consisting of our sale of mobile handsets and specially designed phones for fixed-line mobile convergence services;
salaries and wages, including post-employment benefits, termination benefits and share-based payments;
depreciation expenses incurred primarily in connection with our telecommunications network facilities;
sales commissions, primarily consisting of commissions to independent dealers related to procurement of mobile subscribers and mobile handset sales;
commissions, primarily consisting of payments for third-party outsourcing services, including commissions to the call center staff; and
interconnection charges, which are interconnection payments to mobile service providers for calls from landline users and our mobile subscribers to our competitors’ mobile service subscribers.
Operating Results—2010 Compared to 2011
The following table presents selected income statement data and changes therein for 2010 and 2011.
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The following table presents a breakdown of our operating revenues and changes therein for 2010 and 2011.
Local service revenues
Non-refundable service installation fees
Domestic long-distance revenues
International long-distance revenues
Land-to-mobile interconnection revenues
Broadband internet access service
Other Internet-related services
Sale of goods
Data communication services
Other
Total operating revenues
Total operating revenues increased by 8.2%, or (Won)1,664 billion, from (Won)20,326 billion in 2010 to(Won)21,990 billion in 2011 primarily due to increases in our other operating revenues and sale of goods relating to mobile handset sales, the impact of which was partially offset by a decrease in our fixed-line telephone service revenues.
Our mobile service revenues decreased by 1.9%, or (Won)131 billion, from (Won)6,944 billion in 2010 to(Won)6,813 billion in 2011 primarily due to various rate reduction measures we adopted in August 2011 upon discussion with the Korea Communications Commission, the impact of which was offset in part by an increase in our mobile subscribers from 16.0 million as of December 31, 2010 to 16.6 million as of December 31, 2011. For a discussion of reduction in rates for our mobile services, see “Item 4.B.—Business Overview—Revenues and Rates—Mobile Services.”
Our fixed-line telephone service revenues decreased by 12.2%, or (Won)529 billion, from(Won)4,341 billion in 2010 to(Won)3,812 billion in 2011 primarily due to decreases in local service revenues, land-to-mobile interconnection revenues and domestic long-distance revenues. Specifically:
Local service revenues decreased by 11.0%, or (Won)282 billion, from (Won)2,568 billion in 2010 to (Won)2,286 billion in 2011. The number of local call pulses decreased by 16.0% from 2010 to 2011 primarily due to the substitution effect from increase in usage of mobile telephone services and Internet phone services. However, the effect of such decreases was partially offset by participation by some of our subscribers in optional flat rate plans, as well as an increase in revenues from VoIP services.
Land-to-mobile interconnection revenues decreased by 17.6%, or (Won)167 billion, from (Won)949 billion in 2010 to(Won)782 billion in 2011 primarily due to a decrease in land-to-mobile interconnection rates for 2011 as well as a decrease in the volume of calls between landline users to mobile subscribers.
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Domestic long-distance revenues decreased by 23.6%, or(Won)95 billion, from (Won)403 billion in 2010 to (Won)308 billion in 2011 primarily due to a decrease in the number of domestic long-distance call minutes by 10.2% from 2010 to 2011, primarily due to the substitution effect from increase in usage of mobile telephone services and Internet phone services, as well as an increase in our fixed-line subscribers who terminated their subscription to our optional flat rate plans, and a decrease in interconnection rates received by approximately 2.0% from 2010 to 2011.
Our Internet service revenues increased by 6.0%, or (Won)155 billion, from (Won)2,580 billion in 2010 to(Won)2,735 billion in 2011 primarily due to an increase in the number of IP-TV subscribers from 2.1 million as of December 31, 2010 to 3.1 million as of December 31, 2011, the impact of which was offset in part by an increase in our IP-TV subscribers who participate in bundled products that offer discounts when subscribing to our other services. The revenues from broadband Internet access service decreased by 1.7%, or (Won)32 billion, from (Won)1,900 billion in 2010 to (Won)1,868 billion in 2011.
Sale of Goods
Revenues from sale of goods increased by 12.3%, or (Won)480 billion, from (Won)3,899 billion in 2010 to (Won)4,379 billion in 2011 primarily due to an increase in the number of smart phones sold that had relatively higher margins.
Data Communications
Data communications service revenues decreased by 2.1%, or (Won)27 billion, from (Won)1,298 billion in 2010 to(Won)1,271 billion in 2011 primarily due to service fee discounts offered to government agencies and a decrease in revenues related to Kornet broadband Internet connection service to institutional customers resulting from the expiration of certain leased-line contracts.
Other operating revenues increased by 135.8%, or (Won)1,716 billion, from (Won)1,264 billion in 2010 to (Won)2,980 billion in 2011 primarily due to consolidation of the revenues of BC Card Co., Ltd. (which had revenues of (Won)3,205 billion in 2011) starting in October 1, 2011 and KT Skylife Co., Ltd. (which had revenues of (Won)485 billion in 2011) starting on January 1, 2011, as well as revenue of(Won)298 billion recorded in connection with the sale and leaseback of certain of our properties to K-REALTY CR-REIT I, our equity-method investee specializing in real estate investments established in December 2011.
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The following table presents a breakdown of our operating expenses and changes therein for 2010 and 2011.
Salaries and wages
Depreciation
Commissions
Interconnection charges
Purchase of handsets
Sales commission
Research and development expenses
Others (1)
Total operating expenses
Total operating expenses increased by 9.3%, or (Won)1,698 billion, from (Won)18,318 billion in 2010 to (Won)20,016 billion in 2011 primarily due to increases in other operating expenses (which includes service expenses, commissions paid on credit card services and international roaming connection charges), salaries and wages, commissions and purchase of handsets, the impact of which was partially offset by decreases in depreciation, research and development expenses and interconnection charges. Specifically:
Other operating expenses increased by 37.5%, or(Won)1,544 billion, from (Won)4,112 billion in 2010 to (Won)5,656 billion in 2011 primarily due to (Won)714 billion in commissions paid on credit card services in 2011, whereas there was no such expense in 2010, as a result of consolidation of the expenses of BC Card Co., Ltd. starting in October 1, 2011, a 33.0%, or (Won)333 billion, increase in service expenses from (Won)1,008 billion in 2010 to (Won)1,341 billion in 2011 as a result of increases in expenses relating to our systems/network integration business and to purchase of multimedia contents from third-party developers and a 17.2%, or (Won)49 billion, increase in international roaming connection charges paid to overseas mobile operators, from (Won)285 billion in 2010 to (Won)334 billion in 2011, as a result of an increase in our smartphone users who use roaming services while traveling abroad.
Salaries and wages increased by 8.9%, or (Won)233 billion, from (Won)2,623 billion in 2010 to (Won)2,856 billion in 2011 primarily due to an increase in the number of our consolidated employees, as a result of additional consolidated subsidiaries in 2011, including BC Card Co., Ltd. and KT Skylife Co., Ltd. and an increase in average wages.
Commissions, which primarily relate to payments for third-party outsourcing services, including commissions to the call center staff and building security, and discounts on our installment receivables on mobile and fixed-line contracts, increased by 12.2%, or (Won)157 billion, from (Won)1,292 billion in 2010 to (Won)1,449 billion in 2011 primarily due to an increase in discounts on installment receivables as a result of an increase in our mobile subscribers in 2011 and an increase in commissions paid for outsourcing of building security on our real estate holdings.
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Our operating expenses related to purchase of handsets increased by 6.6%, or (Won)265 billion, from (Won)3,985 billion in 2010 to(Won)4,250 billion in 2011 primarily due to an increase in the number of smart phones sold.
These factors were partially offset by the following:
Depreciation decreased by 7.6%, or (Won)217 billion, from (Won)2,864 billion in 2010 to(Won)2,647 billion in 2011 primarily due to the one-time effect of the shortening of estimated useful lives of assets in the Personal Customer Group, which is prospectively applicable from January 1, 2010, the transition date of IFRS, resulting in more assets fully depreciated in 2010 and less assets subject to depreciation in 2011.
Research and development expenses decreased by 42.5%, or(Won)130 billion, from (Won)306 billion in 2010 to (Won)176 billion in 2011 primarily due to an internal reorganization of our research and development staff, which decreased the number of departments and employees whose expenses are categorized in this category.
Interconnection charges decreased by 9.0%, or (Won)110 billion, from (Won)1,226 billion in 2010 to (Won)1,116 billion in 2011 primarily due to decreases in land-to-mobile and land-to-land interconnection rates applicable during 2011 compared to 2010.
Operating Profit
Due to the factors described above, our operating profit decreased by 1.7%, or (Won)34 billion, from (Won)2,008 billion in 2010 to(Won)1,974 billion in 2011. Our operating margin, which is operating profit as a percentage of operating revenues, decreased from 9.9% in 2010 to 9.0% in 2011.
Finance Income (Expenses)
The following table presents a breakdown of our finance income and expenses on a net basis and changes therein for 2010 and 2011.
Interest income
Interest expense
Net foreign currency transaction gain (loss)
Net foreign currency translation gain (loss)
Net loss on settlement of derivatives
Net gain on valuation of derivatives
Net other finance expenses
Net finance expenses
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Our net finance expenses increased by 3.9%, or(Won)14 billion, from (Won)359 billion in 2010 to (Won)373 billion in 2011 primarily due to our recognition of net foreign currency translation gain in 2010 compared to a net loss in 2011 and an increase in net loss on settlement of derivatives, the impact of which was partially offset by an increase in interest income and an increase in net gain on valuation of derivatives. Specifically:
We recorded net foreign currency translation gain of(Won)33 billion in 2010 compared to net foreign currency translation loss of (Won)79 billion in 2011 as the Market Average Exchange Rate of the Won against the U.S. dollar appreciated from (Won)1,167.6 to US$1.00 as of December 31, 2009 to (Won)1,138.9 to US$1.00 as of December 31, 2010 but it depreciated to (Won)1,153.3 to US$1.00 as of December 31, 2011. The impact of such net foreign currency translation loss was partially offset by an increase in net gain on valuation of derivatives discussed below.
Our net loss on settlement of derivatives increased by twenty-six fold or (Won)26 billion, from (Won)1 billion in 2010 to(Won)27 billion in 2011 primarily due to a significant increase in the size of our settled derivative contracts in 2011 compared to 2010.
Our interest income increased by 55.7%, or (Won)54 billion, from (Won)97 billion in 2010 to(Won)151 billion in 2011 primarily due to an increase in our average balance of interest-earning assets from 2010 to 2011, including our holdings of cash and cash equivalents.
Our net gain on valuation of derivatives, which increased by 685.7%, or (Won)48 billion, from (Won)7 billion in 2010 to(Won)55 billion in 2011 primarily due to an increase in gains from our combined interest rate currency swap contracts due to the depreciation of the exchange rates of the Won against the Japanese Yen and the U.S. dollar from December 31, 2010 to December 31, 2011.
Income (Loss) from Jointly Controlled Entities and Associates
We recorded income from jointly controlled entities and associates of (Won)33 billion in 2010 compared to loss from jointly controlled entities and associates of (Won)3 billion in 2011 primarily due to an unrealized loss of (Won)30 billion recorded in connection with the sale and leaseback of certain of our properties to K-REALTY CR-REIT I, our equity-method investee specializing in real estate investments established in December 2011.
Income Tax Expense
Our income tax expense decreased by 20.1%, or (Won)79 billion, from (Won)396 billion in 2010 to (Won)317 billion in 2011 primarily due to an increase in tax credit carryforwards and deductions, as well as a decrease in profits from continuing operations before income tax. See Note 30 to the Consolidated Financial Statements. Our effective tax rate decreased from 23.6% in 2010 to 19.8% in 2011, primarily due to an increase in tax credit carryforwards and deductions in 2011. We had net deferred income tax assets of (Won)405 billion as of December 31, 2011.
Profit from Discontinued Operations
Our profit from discontinued operations increased by 469.9%, or (Won)141 billion, from (Won)30 billion in 2010 to(Won)171 billion in 2011 primarily due to profits recognized from our sale of a 72.96% controlling interest in New Telephone Company to Vimpel-Communications in October 2011, as well as our share of net income of New Telephone Company until the completion of sale, which we recorded under this category. See Note 38 to the Consolidated Financial Statements.
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Profit for the Period
Due to the factors described above, our profit for the period increased by 10.4%, or(Won)137 billion, from (Won)1,315 billion in 2010 to (Won)1,452 billion in 2011. Our net income margin, which is profit for the period as a percentage of operating revenues, increased from 6.5% in 2010 to 6.6% in 2011.
Segment Results—Personal Customer Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 3.2%, or (Won)311 billion, from (Won)9,715 billion in 2010 to (Won)10,026 billion in 2011, primarily due to an increase in the number of mobile subscribers as well as an increase in smart phones sold.
Our operating profit for this segment, prior to adjusting for inter-segment transactions, increased by 20.6%, or (Won)185 billion, from (Won)902 billion in 2010 to (Won)1,087 billion in 2011, as the 3.2% increase in the segment’s operating revenues outpaced a 1.4% increase in operating expenses, primarily due to the reasons discussed above. Operating margin, which is operating income as a percentage of total operating revenues prior to adjusting for inter-company sales, increased from 9.3% in 2010 to 10.8% in 2011.
Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 14.9%, or (Won)206 billion, from (Won)1,383 billion in 2010 to (Won)1,177 billion in 2011, primarily due to the effect of the shortening of estimated useful lives of assets in the Personal Customer Group as described above.
Segment Results—Home/Global & Enterprise Customer Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, decreased by 0.5%, or (Won)53 billion, from (Won)10,194 billion in 2010 to (Won)10,141 billion in 2011, primarily due to a decrease in fixed-line telephone service revenues, the impact of which was partially offset by an increase in revenues from Internet-related services.
Our operating profit for this segment, prior to adjusting for inter-segment transactions, decreased by 14.0%, or (Won)153 billion, from (Won)1,092 billion in 2010 to (Won)939 billion in 2011, as the segment recorded a 0.5% decrease in operating revenues while recording a 1.1% increase in operating expenses, primarily due to the reasons discussed above. Operating margin decreased from 10.7% in 2010 to 9.3% in 2011.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 0.3%, or (Won)5 billion, from (Won)1,656 billion in 2010 to (Won)1,660 billion in 2011.
Segment Results—Others
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 72.9%, or (Won)1,979 billion, from(Won)2,717 billion in 2010 to(Won)4,696 billion in 2011, primarily due to consolidation of the revenues of KT Skylife starting on January 1, 2011 and of BC Card Co., Ltd. and its subsidiaries starting on October 1, 2011.
Our operating profit for this segment, prior to adjusting for inter-segment transactions, increased by 58.4%, or (Won)39 billion, from (Won)67 billion in 2010 to (Won)106 billion in 2011, as the segment recorded a 72.9% increase in operating revenues while recording a 73.2% increase in operating expenses, primarily due to the reasons discussed above. Operating margin decreased from 2.5% in 2010 to 2.3% in 2011.
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Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 54.3%, or (Won)45 billion, from (Won)84 billion in 2010 to (Won)129 billion in 2011.
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 (Won)2,713 billion in 2010 and (Won)3,208 billion in 2011 for the acquisition of property and equipment, primarily construction-in-progress. In our financing activities, we used cash of(Won)5,576 billion in 2010 and(Won)6,025 billion in 2011 for repayment of borrowings and bonds.
In recent years, we have also required capital for payments of retirement and severance benefits related to our early retirement programs. We recorded payments of severance benefits of (Won)956 billion in 2010 and (Won)235 billion in 2011. In 2010, our payments were particularly high due to a special voluntary early retirement program held in December 2009 in which we received applications for voluntary early retirement from employees who had been employed by us for more than 15 years and provided them with additional financial incentives to retire early. The special voluntary early retirement program resulted in the early retirement of 5,992 employees out of 25,340 eligible employees.
From time to time, we may also require capital for investments involving acquisitions, including shares of our affiliates, and strategic relationships. For example, we acquired redeemable convertible preferred stock with voting rights and convertible bonds of KT Skylife for(Won)246 billion in January 2011, which increased our interest in the company from 32.1% to 53.1% subsequent to exercise of conversion rights.
Our cash dividends paid to shareholders and non-controlling interests amounted to(Won)493 billion in 2010 and (Won)595 billion in 2011.
We anticipate that capital expenditures, and, to a lesser extent, repayment of outstanding contractual obligations and commitments will represent the most significant use of funds for the next several years. We may also require capital for purchase of shares of our affiliates as well as investments involving acquisitions and strategic relationships. We compete in the telecommunications sector in Korea, which is rapidly evolving. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. We may need to incur additional capital expenditures to keep up with unexpected developments in rapidly evolving telecommunications technology. There can be no assurance that we will be able to secure funds on satisfactory terms from financial institutions or other sources that are sufficient for our unanticipated needs.
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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 20 to the Consolidated Financial Statements for a disclosure of the guarantees provided.
The following table sets forth selected information regarding our contractual obligations to make future payments as of December 31, 2011:
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
Long-term accounts payable—others
Estimate of interest payment based on contractual interest rates effective as of December 31, 2011
Capital Resources
We have traditionally met our working capital and other capital requirements principally from cash provided by operations, while raising the remainder of our requirements primarily through debt financing. From time to time, we have also disposed of our treasury shares to meet our capital requirements.
Our major sources of cash have been net cash provided by operating activities, including profits for the period, expenses not involving cash payments such as depreciation and amortization, and proceeds from issuance of bonds and borrowings. We expect that these sources will continue to be our principal sources of cash in the future. Profit for the period was (Won)1,315 billion in 2010 and (Won)1,452 billion in 2011 due to the reasons discussed in Item 5.A. Operating Results. Depreciation and amortization of intangible assets was (Won)3,239 billion in 2010 and (Won)2,992 billion in 2011 primarily reflecting our capital investment activities during the recent years. Cash proceeds from issuance of bonds and borrowings were (Won)5,699 billion in 2010 and (Won)7,225 billion in 2011. As of December 31, 2011, we held 17,897,147 treasury shares.
We believe that we have sufficient working capital available to us for our current requirements and that we have a variety of alternatives available to us to satisfy our financial requirements to the extent that they are not met by funds generated by operations, including the issuance of debt securities and bank borrowings denominated in Won and various foreign currencies. For example, we successfully issued US$350 million of 3.875% notes due 2017 in January 2012. 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
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provided by operations resulting from a significant decrease in demand for our services. We may also need to raise additional capital sooner than we expect in order to fund unanticipated investments and acquisitions.
Our total equity was (Won)11,354 billion as of December 31, 2010 and (Won)12,538 billion as of December 31, 2011.
Liquidity
We had a working capital (current assets minus current liabilities) deficit of (Won)365 billion as of December 31, 2010 and surplus of (Won)1,046 billion as of December 31, 2011. The following table sets forth the summary of our significant current assets for the periods indicated.
Short-term loans receivables, net
Our cash, cash equivalents and net short-term loans receivable maturing within one year totaled (Won)1,887 billion as of December 31, 2010 and (Won)2,143 billion as of December 31, 2011. Under IFRS as issued by IASB, bank deposits held at call and all other highly liquid temporary cash instruments within maturities of three months are considered as cash equivalents. Short-term loans receivables primarily consist of loans and other non-derivative financial assets with fixed or determinable payments that are not quoted in an active market with maturities of twelve months or less.
The following table sets forth the summary of our significant current liabilities for the periods indicated:
As of December 31, 2011, we entered into various commitments with financial institutions totaling (Won)2,778 billion and US$85 million. See Note 20 to the Consolidated Financial Statements. As of December 31, 2011, (Won)115 billion and US$14 million were 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 (Won)2,713 billion in 2010 and (Won)3,208 billion in 2011 for the acquisition of property and equipment, primarily construction-in-progress.
Our current capital expenditure plan, on a non-consolidated basis, calls for the expenditure of approximately (Won)3,500 billion in 2012, which may be adjusted depending on market conditions and our results of operations. The principal components of our capital investment plans are:
approximately (Won)1,786 billion in general expansion and modernization of our wireless network infrastructure (including approximately (Won)1,000 billion in capital investments for LTE service);
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approximately (Won)1,157 billion for general expansion and modernization of our fixed-line network infrastructure; and
approximately (Won)557 billion in capital investments for our other services, including overhead costs.
Inflation
We do not consider that inflation in Korea has had a material impact on our results of operations in recent years. Inflation in Korea was 2.9% in 2010 and 4.3% in 2011. See “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.”
Recent Accounting Pronouncements under IFRS
For a summary of new standards, amendments and interpretations issued under IFRS but not effective for 2011 and which have not been adopted early by us, see note 2.1 to the Consolidated Financial Statements.
For a summary of standards and exceptions applied by us in connection with the transition to IFRS starting in 2011, see note 4 to the Consolidated Financial Statements.
Item 5.C. Research and Development, Patents and Licenses, Etc.
In order to maintain our leadership in the converging telecommunications business environment and develop additional platforms, services and applications, we operate:
a technology strategy office;
a technology development office;
a central R&D laboratory;
a network R&D laboratory; and
a smart grid development center.
As of December 31, 2011, our Advanced Institute of Technology employed a total of 435 researchers and employees. As of December 31, 2011, our researchers and employees at our research centers had 72 doctoral degrees and 231 master’s degrees. As of December 31, 2011, KT Corporation had 5,350 registered patents domestically and 489 registered patents internationally.
Under the Information and Communications Industry Promotion Act, network service providers and specific service providers are obligated to contribute 0.75% and 0.5% of their total annual revenues, respectively, to the Institute of Information Technology Advancement, which uses the fund to promote research and development in information technology. We make contributions as a network service provider and specific service provider to the Korean government (Information and Telecommunication Improvement Fund), the Korea Electronic Telecommunication Research Institute and other research and development institutes. Including such contributions, total expenditures on research and development were (Won)306 billion in 2010 and (Won)176 billion in 2011.
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In recent years, we have focused our research and development efforts in the following areas:
open telecommunications service platforms;
development of ubiquitous services and platforms relating to health care systems;
intelligent knowledge and smart interaction technologies;
various n-screen services, which allows purchased content to be viewed on multiple devices and platforms;
smart network architecture;
future network structure and solutions; and
green energy solutions, including smart grid technologies.
Item 5.D. Trend Information
These matters are discussed under Item 5.A. above where relevant.
Item 5.E. Off-balance Sheet Arrangements
These matters are discussed under Item 5.B. above where relevant.
Item 5.F. Tabular Disclosure of Contractual Obligations
Item 5.G. Safe Harbor
See “Item 3. Key Information—Item 3.D. Risk Factors—Forward-looking statements may prove to be inaccurate.”
Item 6. Directors, Senior Management and Employees
Item 6.A. Directors and Senior Management
Directors
Our board of directors has the ultimate responsibility for the administration of our affairs. Our articles of incorporation provide for a board of directors consisting of:
up to three non-independent directors, including the Chief Executive Officer; and
up to eight outside directors.
All of our directors are elected at the general shareholders’ meeting. If the total assets of a company listed on the KRX KOSPI Market as of the end of the preceding year exceeds (Won)2,000 billion, which is the case with us, the Commercial Code of Korea requires such company to have more than three outside directors with more than half of its total directors being outside directors. The term of office for all directors is up to three years, but the term is extended to the close of the annual
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shareholders’ meeting convened with respect to the last fiscal year of the term. If the term of office for the director ends before the close of the annual general meeting of shareholders convened with respect to the last fiscal year within such director’s term of office and a new director is appointed in his or her place, the term of office for such new director will be the remaining term of office of his or her predecessor.
Under the Commercial Code of Korea, we must establish a committee to nominate candidates for outside directors within the board of directors, and outside directors must make up not less than half of the total members of the outside director candidate nominating committee. According to our articles of incorporation, such committee must consist of one non-independent director and all of our outside directors. Our Outside Director Candidate Nominating Committee nominates outside director candidates for appointment at the general shareholders’ meeting.
Upon the request of any director, a meeting of the board of directors will be assembled. The chairperson of the board of directors is elected from among the outside directors by a resolution of the board of directors. The term of office of the chairperson is for one year.
Our current directors are as follows:
Name
Position
Non-Independent Directors (1)
Suk-Chae Lee
Sang-Hoon Lee
Hyun-Myung Pyo
Outside Directors (1)
E. Han Kim
Chairperson of the Board of Directors, Professor, University of Michigan
Choon-Ho Lee
Chairperson of the Board of Directors of Korea Educational Broadcasting System
Jong-Hwan Song
Professor, Myongji University
Hyun Nak Lee
Professor, Sejong University
Byong Won Bahk
Chairperson, Korean Federation of Banks
Keuk Je Sung
Professor, Graduate School of Pan-Pacific International Studies, Kyunghee University
Sang Kyun Cha
Professor, Department of Electrical and Computer Engineering, Seoul National University
Suk-Chae Lee is a non-independent director and has served as our chief executive officer since January 2009. Prior to joining us, he served as a senior advisor of Bae, Kim & Lee LLC, chief economic advisor to the President of Korea, Minister of Information and Telecommunications and Vice Minister of Finance and Economy. Mr. Lee holds a bachelor’s degree in economics from Seoul National University, an M.A. degree in political economy from Boston University and a Ph.D. degree in economics from Boston University.
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Sang-Hoon Lee is a non-independent director and has served as the president of the Global & Enterprise Group since March 2009. He has previously served as senior executive vice president of the Business Development Group and executive vice president of the Business Marketing Unit. Mr. Lee holds a bachelor’s degree in engineering from Seoul National University and both his master’s degree and Ph.D degree in electric engineering from University of Pennsylvania.
Hyun-Myung Pyo is a non-independent director and has served as the president of the Personal Customer Group since December 2009. He has previously served as senior executive vice president of the Corporate Center and senior vice president of the WiBro Business Unit and head of the Marketing Group of KTF. Mr. Pyo holds a bachelor’s degree in electronic engineering from Korea University and both his graduate and Ph.D degrees in electronic engineering from Korea University.
E. Han Kim has served as our outside director since March 2009. He is currently a professor of business administration at University of Michigan and has served as outside director of POSCO and Hana Bank. Mr. Kim holds a bachelor’s degree from Rochester University, a master’s degree in business administration from Cornell University and a Ph.D. degree in finance from State University of New York-Buffalo.
Choon-Ho Lee has served as our outside director since March 2009. She is currently the chairperson of the board of directors of Korea Educational Broadcasting System. Ms. Lee has served as a director of the board of Seoul Foundation for Arts and Culture. She holds a bachelor’s degree in politics and foreign affairs from Ewha Womans University and has received both her graduate and Ph.D. degrees in education from Inha University.
Jong-Hwan Song has served as our outside director since March 2010. He is currently a professor of North Korean studies at Myongji University. Mr. Song holds a bachelor’s degree and a graduate degree in international relations from Seoul National University and a Ph.D. degree in political science from Hanyang University.
Hyun-Nak Lee has served as our outside director since March 2011. He is currently a professor at Sejong University, and was formerly a chief executive officer of Kyonggi Ilbo and an executive director and chief editor of Donga Ilbo. Mr. Lee holds a bachelor’s degree in economics from Seoul National University.
Byong-Won Bahk has served as our outside director since March 2011. He is currently a chairperson of Korean Federation of Banks. He was formerly a vice minister of the Ministry of Finance and Economy, a chief executive officer and chairperson of board of directors at Woori Finance Holdings Co., Ltd. and a chairperson of board of directors at Woori Bank. Mr. Bahk holds a master’s degree in economics from Washington University.
Keuk Je Sung has served as our outside director since March 2012. He is currently a professor at Kyunghee University Graduate School of Pan-Pacific International Studies. He was formerly Korea’s chief negotiator to the World Trade Organization’s General Agreement on Trade in Services. Mr. Sung holds a Ph.D. degree in economics from Northwestern University.
Sang Kyun Cha has served as our outside director since March 2012. He is currently a professor of electrical and computer engineering at Seoul National University. He was formerly a founder and currently an outside director of Transact In Memory, Inc. (currently SAP Labs Korea). Mr. Cha holds a Ph.D. degree in database systems from Stanford University.
For the purposes of the Korean Commercial Code, our Chief Executive Officer is deemed to be the “representative director” who is authorized to perform all judicial and extra-judicial acts relating to
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our business. Our shareholders elect the Chief Executive Officer in accordance with the provisions of the Commercial Code and our articles of incorporation. A candidate for Chief Executive Officer is nominated by a committee formed for that purpose. The Chief Executive Officer Candidate Nominating Committee consists of:
all of our outside directors; and
one non-independent director who is not a candidate.
Under our articles of incorporation, the Chief Executive Officer Candidate Nominating Committee must submit a draft management contract between the company and the candidate covering the management objectives of the company to the shareholders’ meeting at the time of nomination of the candidate to the meeting. When the draft management contract has been approved at the shareholders’ meeting, the company enters into such management contract with the Chief Executive Officer. In such case, the chairperson of the Chief Executive Officer Candidate Nominating Committee, on behalf of the company, signs the management contract.
The board of directors may conduct performance review discussions to determine if the new Chief Executive Officer performed his or her duties under the management contract, or hire a professional evaluation agency for such purpose. If the board of directors determines, based on the results of the performance review, that the new Chief Executive Officer has failed to achieve the management goals, it may propose to dismiss the Chief Executive Officer at a shareholders’ meeting.
Senior Management
Our executive officers consist of President, Senior Executive Vice President, Executive Vice Presidents and Senior Vice Presidents. The executive officers other than the non-independent directors are appointed by the Chief Executive Officer and may serve up to three years.
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The current executive officers are as follows:
Name(1)
Title and Responsibilities
Sung-Bok Jung
Yu-Yeol Seo
Il-Yung Kim
Yeon-Hak Kim
Hong-Jin Kim
Won-Ki Hong
Sung-Man Kim
Jung-Hee Song
Hong-Seok Seo
In-Sung Jun
Joo-Sung Kim
Jeong-Tae Park
Se-Hyun Oh
Kyu-Taek Nam
Sun-Cheol Gweon
Sang-Jik Lee
Tae-Hyo Ahn
Heon-Moon Lim
Jong-Jin Chae
Dong-Hoon Han
Kyu-Shik Shin
Dong-Myun Lee
Kyeong-Soo Lee
Seong-Mok Oh
Tae-Il Park
Hyun-Mi Yang
Young-Hee Song
Tae-Yol Yoo
Bum-Joon Kim
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Seok-Keun Oh
Gil-Joo Lee
Jae-Geun Choi
Sang-Hyo Kim
Young-Hui Lee
Sa-Il Kwon
Eun-Hye Kim
Yun-Su Kim
Hwa Jung
Sangwook Seo
Byung-Ho Nam
Eung-Ho Lee
Eun-Soo Park
Kuk-Hyun Kang
Hyung-Wook Kim
Hyeon-Mo Ku
Hyon-Seog Lee
Chang-Young Yoon
Myung-Bum Pyun
Jae-Hyeon Kim
Bong-Goon Kwak
Young-Lyoul Lee
Hae-Jung Park
Seung-Dong Gye
Yong-Hwa Park
Youn-Mo Jeon
Jong-Hack Kang
Jun-Su Jeong
Wook-Yeong Ryu
Doo-Soo Chung
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Jin-Hoon Kim
Young-Beum Joo
Jin-Chul Kim
Pan-Sik Shin
Moon-Hwan Lee
Won-Sik Han
Jun-Sick Bahk
Jung-Sub Kwak
Hyung-Joon Kim
Sang-Wook Kim
Dae-Su Park
Jae-Gyo Kim
Yoon-Sik Jeong
Kyung-Seok Park
Young-Sik Park
Young-Taik Kim
Gang-Geun Lee
Hong-Jae Lee
Hyung-Chul Park
Tae-Il Kwon
Sung-Hwan Gong
Yoon-Young Park
Han-Wook Jung
Sung-Chun Lee
Jin-Soo Sohn
Jae-Yoon Park
Cha-Hyun Yoon
Yung-Sig Yoon
Young-Hyun Kim
Chan-Kyung Park
Tae-Geun Kim
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Cheol-Gyu Lee
Kun-Muk Cho
Hyeon-Kyu Lee
Jae Lee
Moon-Chul Jung
Ji-Yun Kim
Dong-Sik Yun
Kyung-Kon Koh
Jae-Ho Jang
Sang-Yong Lee
Young-Soo Woo
Hyo-Sill Kim
Gwang-Suk Shin
Seong-Jin Lee
Hee-Su Kim
Choong-Seop Lee
Young-Pil Park
Yong-Seok Yoon
Sang-Pyo Kwon
Kwang-Jin Oh
Pill-Jai Lee
Sung-Hoon Shim
Ki-Soong Jang
Jung-Won Park
Hong-Beom Jeon
Dae-San Lee
Seok-Gyoon Na
Item 6.B. Compensation
Compensation of Directors
In 2011, the total amount of salaries, bonuses (including long-term performance-based incentives for directors) and allowances paid and accrued to all directors of KT Corporation for services in all capacities was approximately (Won)5 billion. The aggregate amount accrued by us to provide retirement benefits to such persons was (Won)270 million in 2011. Starting in 2009, we no longer pay long-term performance-based incentives to our outside directors.
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The chairperson of the Chief Executive Officer Candidate Nominating Committee enters into an employment agreement on our behalf with our Chief Executive Officer. The employment agreement sets certain management targets to be achieved by the Chief Executive Officer, including a target for the amount of “EBITDA” to be achieved in each year. EBITDA is defined as earnings before interest, tax, depreciation and amortization. Failure to achieve certain thresholds below the targets will allow the board of directors to take actions with respect to the Chief Executive Officer’s employment, including proposing to the shareholders’ meeting an early termination of his employment. In addition, the head of each of our functional departments, the president of each of our subsidiaries and the heads of each regional head office have entered into employment agreements with the Chief Executive Officer that provide for similar management targets to be achieved by each of our departments, subsidiaries and regional head offices.
Item 6.C. Board Practices
As of December 31, 2011, none of our non-independent or outside directors maintained directors’ service contracts with us or with any of our subsidiaries providing for benefits upon termination of employment.
Corporate Governance Committee
The Corporate Governance Committee is comprised of four outside directors and one non-independent director, Choon-Ho Lee, E. Han Kim, Sang Kyun Cha and Hyun-Myung Pyo. The chairperson is Choon-Ho Lee. The committee is responsible for the review of matters with respect to our Corporate Governance Guidelines and our performance under such guidelines to monitor effectiveness of our corporate governance.
Outside Director Candidate Nominating Committee
The Outside Director Candidate Nominating Committee consists of one non-independent director and all of our outside directors, other than for election of an outside director resulting from the expiration of the term of the office, in which case such outside director whose term is expiring may not be a member of the committee. The committee’s duties include reviewing the qualifications of potential candidates and proposing nominees to serve as outside directors on our board of directors to the shareholders at the general meeting of shareholders. The committee members’ terms expire immediately after the adjournment of the shareholders’ meeting where the outside directors are elected.
Evaluation and Compensation Committee
The Evaluation and Compensation Committee is currently comprised of four outside directors, Hyun-Nak Lee, Choon-Ho Lee, Jong-Hwan Song and Keuk Je Sung. The chairperson is Hyun-Nak Lee. The committee’s duties include prior review of the Chief Executive Officer’s management goals, terms and conditions proposed for inclusion in the management contract of the Chief Executive Officer, including, but not limited to, determining whether the Chief Executive Officer has achieved the management goals, and the determination of compensation of the Chief Executive Officer and the non-independent directors. The committee members are elected by the board after the closing of the annual meeting, and the term of the committee members is for one year.
Executive Committee
The Executive Committee is currently comprised of all of the non-independent directors. The chairperson is Suk-Chae Lee. The committee’s duties include the establishment and management of
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branch offices, the acquisition and disposal of real estate having market value between(Won)15 billion to (Won)30 billion, making investments and providing guarantees up to (Won)30 billion, the disposal and sale of stocks of our subsidiaries, which stocks have a market value of between (Won)15 billion and (Won)30 billion, provided that no change of control with respect to such subsidiary occurs as a result of such disposal or sale, the authorization of charitable contributions between (Won)100 million to (Won)1 billion and the issuance of certain debt securities.
Related-Party Transactions Committee
The Related-Party Transactions Committee is currently comprised of four outside directors, Jong-Hwan Song, Byong Won Bahk, Keuk Je Sung and Sang Kyun Cha. The chairperson is Jong-Hwan Song. This committee reviews transactions between KT Corporation and its subsidiaries and ensures compliance with applicable antitrust laws. The committee members are elected by the board after the annual meeting, and the term of the committee members is for one year.
Audit Committee
Under the Commercial Code of Korea, we are required to establish an audit committee comprised of three or more outside directors comprised of at least two-thirds of the audit committee members. Audit Committee members must also meet the applicable independence criteria set forth under the rules and regulations of the Sarbanes-Oxley Act of 2002. The committee is currently comprised of Hyun-Nak Lee, E. Han Kim and Byong Won Bahk. The chairperson is Hyun-Nak Lee. Members of the committee are elected by our shareholders at the shareholders’ meeting. Our internal and external auditors report directly to the committee.
The duties of the committee include:
appointing independent auditors;
approving the appointment and recommending the dismissal of the internal auditor;
evaluating performance of independent auditors;
approving services to be provided by the independent auditors;
reviewing annual financial statements;
reviewing audit results and reports;
reviewing and evaluating our system of internal controls and policies; and
examining improprieties or suspected improprieties.
In addition, in connection with the shareholders’ meeting, the committee examines the agenda for, and financial statement and other reports to be submitted by the board of directors, at each shareholders’ meeting.
Item 6.D. Employees
On a non-consolidated basis, we had 31,215 employees as of December 31, 2011, compared to 31,155 employees as of December 31, 2010 and 30,841 employees as of December 31, 2009.
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The Voluntary Early Retirement Plans
We sponsor a voluntary early retirement plan where we provide additional financial incentives for our employees to retire early, as part of our efforts to improve operational efficiencies. In 2008, 1,141 employees retired under KT Corporation’s voluntary early retirement plan.
In 2009, we had a voluntary early retirement plan where we received applications from employees who had been employed by us for more than 20 years. In addition, we held a special voluntary early retirement program in the fourth quarter of 2009 where we received applications for voluntary early retirement from employees who had been employed by us for more than 15 years and provided them with additional financial incentives to retire early. In aggregate, 6,515 employees retired in 2009 under the voluntary early retirement plan and the special voluntary early retirement program.
In 2010 and 2011, 124 and 334 employees, respectively, retired under KT Corporation’s voluntary early retirement plan. We did not have a special voluntary early retirement program in 2010 or 2011.
Labor Relations
We consider our current relations with our work force to be good. However, in the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing of non-core businesses and reducing our employee base.
As of December 31, 2011, about 78.5% of all employees of KT Corporation were members of the KT Trade Union. On behalf of its members, the Union negotiates with us a collective bargaining agreement every two years, and our current collective bargaining agreement expires on May 23, 2013. The current collective bargaining agreement provides that even in the event of a strike, the minimum number of employees necessary to operate the telecommunications business must continue to work.
The Union also negotiates with us an annual agreement on wages on behalf of its members. Under the Act of the Promotion of Worker’s Participation and Cooperation, our Employee-Employer Cooperation Committees, which are composed of representatives of management and labor for each business unit and regional office, meet quarterly to discuss employee grievances, working conditions and potential employee-initiated improvements in service or management.
Recent amendments to the Trade Union and Labor Relations Adjustment Act (“Labor Act”), which became effective on July 1, 2011, allow multiple labor unions to be formed within one company. Therefore, additional labor unions may be formed by our employees. Pursuant to such amendments, our employees formed a new labor union called “KT New Union” in August 2011. The amended Labor Act also requires such multiple unions to consolidate themselves into a single channel when negotiating with the company on behalf of their members and to enter into a single collective bargaining agreement with the company.
Employee Stock Ownership and Benefits
We have an employee stock ownership association, which may purchase on behalf of its members up to 20.0% of any of our shares offered publicly in Korea. The employee stock ownership association owned 1.36% of our issued shares as of December 31, 2011.
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
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as well as non-executive employees, are subject to a pension insurance system, under which we make monthly contributions to the pension accounts of the employees, and upon retirement, such employees are paid the pension amount due from their pension accounts. Prior to April 2011, our executive and non-executive employees were subject to a lump-sum severance payment system, under which they were entitled to receive a lump-sum severance payment upon termination of their employment, based on their length of service and salary level at the time of termination. Starting in April 2011, in accordance with the Korean Employee Retirement Income Security Act, we replaced such lump-sum severance payment system with our current pension insurance system in the form of a defined benefit plan, with a total unfunded portion of approximately (Won)426 billion as of December 31, 2011. Lump-sum severance amounts previously accrued prior to our adoption of the current pension insurance system continue to remain payable. We also provide a wide range of fringe benefits to our employees, including housing, housing loans, company-provided hospitals and schools, a company-sponsored pension program, an employee welfare fund, industrial disaster insurance, cultural and athletic facilities, physical education grants, meal allowances, medical examinations and training and resort centers. See “Item 5. Operating and Financial Review and Prospects—Item. 5.A. Operating Results—Salaries and Related Costs.”
Employee Training
The objective of our training program is to develop information and technology specialists who are able to create value for our customers. In order to develop skills of our employees, we require 60 hours of training per year from most of our employees, using individually-tailored curriculums based on individual assessments. We also operate Cyber Academy to provide online classes to our employees, as well as offer various foreign language classes to our employees. In addition, we provide tuition and living expense reimbursements to our high potential individuals who pursue graduate programs in Korea and abroad, as well as provide financial assistance to those who pursue work-related professional licenses or participate in after-work study programs.
Item 6.E. Share Ownership
Common Stock
The persons who are currently our directors held, as a group, 57,339 common shares as of March 31, 2012, the most recent date for which this information is available. The table below shows the ownership of our common shares by directors:
Shareholders
Hae-Bang Chung
Stock Options
We have not granted any stock options to our current directors and executive officers.
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Item 7. Major Shareholders and Related Party Transactions
Item 7.A. Major Shareholders
The following table sets forth certain information relating to the shareholders of our common stock as of December 31, 2011:
National Pension Corporation
NTTDoCoMo, Inc.
Employee stock ownership association
Directors as a group
Public
KT Corporation (held in the form of treasury stock)(1)
Total issued shares
Item 7.B. Related Party Transactions
We have engaged in various transactions with our subsidiaries and affiliated companies. See Notes 35 to the Consolidated Financial Statements. We have not issued any guarantees in favor of our consolidated subsidiaries.
Item 7.C. Interests of Experts and Counsel
Item 8. Financial Information
Item 8.A. Consolidated Statements and Other Financial Information
See “Item 18—Financial Statements” and pages F-1 through F-96.
Legal Proceedings
In November 2009, 56 of our former customers began a claim against us for an aggregate (Won)130 million in damages, alleging that we improperly subscribed them to our optional flat rate plans for fixed-line services without properly obtaining their consent or giving notification. The Seoul Central District Court ruled in favor of us on all claims in May 2011, and the plaintiffs filed an appeal in June 2011. The Seoul High Court overruled the plaintiffs’ appeal in December 2011, and the plaintiffs subsequently filed an appeal to the Supreme Court of Korea. In March 2012, the Supreme Court of Korea denied the plaintiffs’ appeal. In connection with this complaint, the Korea Communications Commission investigated our past practices regarding our subscription of customers to optional flat rate plans, and issued an administrative decision in April 2011 which imposed several corrective orders including amendments to our standard terms of use and issuance of an administrative fine of approximately (Won)10 billion. We paid such fines to the Korea Communications Commission and implemented its corrective orders.
As part of our decision to apply for reallocation of the 20 MHz bandwidth in the 1.8 GHz spectrum, we applied to the Korea Communications Commission to terminate our 2G PCS services,
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and on November 23, 2011, the Korea Communications Commission approved our plan. However, on November 30, 2011, approximately 900 of our 2G PCS service subscribers filed a class-action suit against the Korea Communications Commission for its approval of our plan, claiming that we used improper means to reduce our 2G PCS subscribers to comply with regulatory requirements before terminating the 2G PSC services and that the Korea Communications Commission did not consider such factor in approving our plan. On December 6, 2011, the Seoul Administrative Court issued a preliminary injunction, which temporarily suspended our termination of the 2G PCS services until the case went to trial. We immediately appealed the decision and the Seoul High Court overruled the preliminary injunction on December 26, 2011 and reinstated the Korea Communications Commission’s approval. Accordingly, we terminated our 2G PCS services in the Seoul metropolitan area and began the termination process for the rest of Korea on January 3, 2012. On January 12, 2012, the 2G subscribers filed an appeal of the Seoul High Court’s decision with the Supreme Court of Korea, and on February 1, 2012, the Supreme Court of Korea denied such appeal. On January 17, 2012, trial for the original class-action suit filed by the 2G subscribers began in the Seoul Administrative Court. The outcome of the trial, and any effect it may have on us, cannot be determined at this time.
In March 2012, the Fair Trade Commission issued an administrative fine of approximately (Won)5 billion, 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 expect to pay such fines in the second half of 2012.
We are a defendant in various other court proceedings involving claims for civil damages arising in the ordinary course of our business. While we are unable to predict the ultimate disposition of these claims, in the opinion of our management, the ultimate disposition of these claims will not have a material adverse effect on our business, financial condition and results of operations.
Dividends
The table below sets out the annual dividends declared on the outstanding common stock to shareholders of record on December 31 of the years indicated and the interim dividends declared on the outstanding common stock to shareholders of record on June 30 of the years indicated.
Year
If sufficient profits are available, the Board of Directors may propose annual dividends on the outstanding common stock, which our shareholders must approve by a resolution at the ordinary general meeting of shareholders. This meeting is generally held in March of the following year and if our shareholders at such ordinary general meeting of shareholders approve the annual dividend, we must pay such dividend within one month following the date of such resolution. Typically, we pay such dividends shortly after the meeting. The declaration of annual dividends is subject to the vote of our shareholders, and consequently, there can be no assurance as to the amount of dividends per common stock or that any such dividends will be declared. Interim dividends paid in cash can be declared by a resolution of the board of directors. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association—Dividends” and “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares—Dividends and Distributions.”
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The Commercial Code provides that shares of a company of the same class must receive equal treatment. However, major shareholders may consent to receive dividend distributions at a lesser rate than minor shareholders. Previously, the Government consented to receiving a smaller dividend compared to other shareholders. The Government no longer holds any interest in us.
Any cash dividends relating to the shares held in the form of ADSs will be paid to the depositary bank in Won. The deposit agreement provides that, except in certain circumstances, cash dividends received by the depositary bank will be converted by the depositary bank into Dollars and distributed to the holders of the ADRs, less withholding tax, other governmental charges and the depositary bank’s fees and expenses. See “Item 12. Description of Securities Other than Equity Securities—Description of the American Depositary Shares—Dividends and Distributions.”
Item 8.B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
Item 9. The Offer and Listing
Item 9.A. Offer and Listing Details
Market Price Information
Our shares were listed on the KRX KOSPI Market on December 23, 1998. The price of the shares on the KRX KOSPI Market as of the close of trading on April 26, 2012 was (Won)29,650 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 2007.
First quarter
Second quarter
Third quarter
Fourth quarter
Second quarter (through April 26)
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ADSs
The outstanding ADSs, each of which represents one-half of one share of our common stock, have been traded on the New York Stock Exchange and the London Stock Exchange since May 25, 1999.
The price of the ADSs on the New York Stock Exchange as of the close of trading on April 26, 2012 was $12.93 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 2007.
Item 9.B. Plan of Distribution
Item 9.C. Markets
The KRX KOSPI Market
On January 27, 2005, the Korea Exchange was established pursuant to the Korea Securities and Futures Exchange Act through the consolidation of the Korea Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock Market, Inc. (the “KOSDAQ”) and the KOSDAQ Committee within the Korea Securities Dealers Association, which was in charge of the management of the KOSDAQ. There are three different markets operated by the Korea Exchange: the KRX KOSPI Market, the KRX KOSDAQ Market and the KRX Derivatives Market. The Korea Exchange has two trading floors located in Seoul, one for the KRX KOSPI Market and one for the KRX KOSDAQ Market, and one trading floor in Busan for the KRX Derivatives Market. The Korea Exchange is a limited liability company, the shares of which are held by (i) securities companies and futures companies that were formerly members of the Korea Stock Exchange or the Korea Futures Exchange, (ii) the Small Business Corporation, (iii) the Korea Securities Finance Corporation and (iv) the Korea Securities Dealers
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Association. Currently, the Korea Exchange is the only stock exchange in Korea and is operated by membership, having as its members most of the Korean securities companies and some Korean branches of foreign securities companies.
The KRX KOSPI Market has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security. The KRX KOSPI Market also restricts share price movements. All listed companies are required to file accounting reports annually and quarterly and to release immediately all information that may affect trading in a security.
The Government has in the past exerted, and continues to exert, substantial influence over many aspects of the private sector business community which can have the intention or effect of depressing or boosting the market. In the past, the Government has informally both encouraged and restricted the declaration and payment of dividends, induced mergers to reduce what it considers excess capacity in a particular industry and induced private companies to offer publicly their securities.
The KRX KOSPI Market publishes the Korea Composite Stock Price Index every two seconds, which is an index of all equity securities listed on the KRX KOSPI Market. The Korea Composite Stock Price Index is calculated using the aggregate value method, in which the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.
Movements in Korea Composite Stock Price Index are set out in the following table together with the associated dividend yields and price earnings ratios.
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
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Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period; since the calendar year is the accounting period for the majority of listed companies, this may account for the drop in the Korea Composite Stock Price Index between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.
With certain exceptions, principally to take account of a share being quoted “ex-dividend” and “ex-rights,” permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the KRX KOSPI Market to 15% of the previous day’s closing price of the shares, rounded down as set out below:
Previous Days’ Closing Price
Less than(Won)5,000
(Won)5,000 to less than (Won)10,000
(Won)10,000 to less than (Won)50,000
(Won)50,000 to less than (Won)100,000
(Won)100,000 to less than (Won)500,000
(Won)500,000 or more
As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.
Due to a deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the KRX KOSPI Market by the securities companies. In addition, a securities transaction tax will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares at the rate of 0.15% if such transfer is made through the KRX KOSPI Market. A special agricultural and fishery tax of 0.15% of the sales prices will also be imposed on transfer of these shares and securities on the KRX KOSPI Market. See “Item 10. Additional Information—Item 10.A. Taxation—Korean Taxation.”
The number of companies listed on the KRX KOSPI Market, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods are set forth in the following table:
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The Korean securities markets are principally regulated by the Financial Services Commission of Korea and the Financial Investment Services and Capital Markets Act. The Securities and Exchange Act which regulated the securities markets in the past was replaced with the Financial Investment Services and Capital Markets Act on February 4, 2009. The new law, as did the Securities and Exchange Act, imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation, takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests.
Further Opening of the Korean Securities Market
A stock index futures market was opened on May 3, 1996 and a stock index option market was opened on July 7, 1997, in each case at the KRX KOSPI Market. Remittance and repatriation of funds in connection with investment in stock index futures and options are subject to regulations similar to those that govern remittance and repatriation in the context of foreign investment in Korean stocks.
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.
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Currently, foreigners are permitted to invest in securities including shares of all Korean companies which are not listed on the KRX KOSPI Market nor registered on the KRX KOSDAQ Market and in bonds which are not listed.
Protection of Customer’s Interest in Case of Insolvency of Securities Companies
Under Korean law, the relationship between a customer and a securities company in connection with a securities sell or buy order is deemed to be consignment and the securities acquired by a consignment agent (i.e., the securities company) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving a securities company, the customer of the securities company is entitled to the proceeds of the securities sold by the securities company.
When a customer places a sell order with a securities company which is not a member of the KRX KOSPI Market and this securities company places a sell order with another securities company which is a member of the KRX KOSPI Market, the customer is still entitled to the proceeds of the securities sold received by the non-member company from the member company regardless of the bankruptcy or reorganization of the non-member company.
Under the Financial Investment Services and Capital Markets Act, the KRX KOSPI Market is obliged to indemnify any loss or damage incurred by a counterparty as a result of a breach by its members. If a securities company which is a member of the KRX KOSPI Market breaches its obligation in connection with a buy order, the KRX KOSPI Market is obliged to pay the purchase price on behalf of the breaching member. Therefore, the customer can acquire the securities that have been ordered to be purchased by the breaching member.
When a customer places a buy order with a non-member company and the non-member company places a buy order with a member company, the customer has the legal right to the securities received by the non-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and the non-member company’s creditors are concerned.
As the cash deposited with a securities company is regarded as belonging to the securities company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the securities company if a bankruptcy or reorganization procedure is instituted against the securities company and, therefore, can suffer from loss or damage as a result. However, the Depositor Protection Act provides that Korea Deposit Insurance Corporation will, upon the request of the investors, pay investors up to (Won)50 million in case of the securities company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. Pursuant to the Financial Investment Services and Capital Markets Act, securities companies are required to deposit the cash received from its customers to the extent the amount not covered by the insurance with the Korea Securities Finance Corporation, a special entity established pursuant to the Securities and Exchange Act
Set-off or attachment of cash deposits by securities companies is prohibited. The premiums related to this insurance are paid by securities companies.
Item 9.D. Selling Shareholders
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Item 9.E. Dilution
Item 9.F. Expenses of the Issuer
Item 10. Additional Information
Item 10.A. Share Capital
Currently, our authorized share capital is 1,000,000,000 shares, which consists of shares of common stock, par value (Won)5,000 per share (“Common Shares”) and shares of non-voting preferred stock, par value(Won)5,000 per share (“Non-Voting Shares”). Common Shares and Non-Voting Shares together are referred to as “Shares.” Under our articles of incorporation, we are authorized to issue Non-Voting Shares up to one-fourth of our total issued capital stock. As of December 31, 2011, 261,111,808 Common Shares were issued, of which 17,897,147 shares were held by the treasury stock fund or us as treasury shares. We have never issued any Non-Voting Shares. All of the issued Common Shares are fully-paid and non-assessable and are in registered form. We issue share certificates in denominations of 1, 5, 10, 50, 100, 500, 1,000 and 10,000 shares.
Item 10.B. Memorandum and Articles of Association
This section provides information relating to our capital stock, including brief summaries of material provisions of our articles of incorporation, the Financial Investment Services and Capital Markets Act, the Commercial Code and related laws of Korea, all as currently in effect. The following summaries are subject to, and are qualified in their entirety by reference to, our articles of incorporation and the applicable provisions of the Financial Investment Services and Capital Markets Act and the Commercial Code. We have filed a copy of our articles of incorporation as an exhibit to registration statements under the Securities Act or the Securities Exchange Act previously filed by us.
We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. No dividends are distributed with respect to shares held by us or our treasury stock fund. The Common Shares represented by the ADSs have the same dividend rights as other outstanding Common Shares.
Holders of Non-Voting Shares are entitled to receive dividends in priority to the holders of Common Shares in an amount of not less than 9% of the par value of the Non-Voting Shares as determined by the board of directors at the time of their issuance, provided that if the dividends on the Common Shares exceed those on the Non-Voting Shares, the Non-Voting Shares will also participate in the distribution of such excess dividend amount in the same proportion as the Common Shares. If the amount available for dividends is less than the aggregate amount of such minimum dividend, the holders of Non-Voting Shares will be entitled to receive such accumulated unpaid dividend in priority to the holders of Common Shares from the dividends payable in respect of the next fiscal year.
We declare dividends annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record as of the end of the preceding fiscal year. We may distribute the annual dividend in cash or in Shares. However, a dividend of Shares must be distributed
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at par value. If the market price of the Shares is less than their par value, dividends in Shares may not exceed one-half of the annual dividend. We may pay interim dividends in cash once a year to shareholders or registered pledgees who are registered in the registry of shareholders as of June 30 of each fiscal year by a resolution of the board of directors. We have no obligation to pay any annual dividend unclaimed for five years from the payment date.
Under the Commercial Code, we may pay our dividend only out of the excess of our net assets, on a non-consolidated basis, over the sum of (1) our stated capital and (2) the total amount of our capital surplus reserve and legal reserve accumulated up to the end of the relevant dividend period. In addition, we may not pay any dividend unless we have set aside as legal reserve an amount equal to at least 10% of the cash portion of the dividend or unless we have accumulated a legal reserve of not less than one-half of our stated capital. We may not use legal reserve to pay cash dividends but may transfer amounts from legal reserve to capital stock or use legal reserve to reduce an accumulated deficit.
Distribution of Free Shares
In addition to paying dividends in Shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from our capital surplus or legal reserve to our stated capital in the form of free shares. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings.
Preemptive Rights and Issuance of Additional Shares
We may issue authorized but unissued shares at times and, unless otherwise provided in the Commercial Code, on terms our board of directors may determine. Subject to the limitation described in “Limitation on Shareholdings” below, all our shareholders are generally entitled to subscribe for any newly issued Shares in proportion to their existing shareholdings. We must offer new Shares on uniform terms to all shareholders who have preemptive rights and are listed on our shareholders’ register as of the relevant record date. Under the Commercial Code, we may vary, without shareholders’ approval, the terms of these preemptive rights for different classes of shares. We must give notice to all persons who are entitled to exercise preemptive rights regarding new Shares and their transferability at least two weeks before the relevant record date. Our board of directors may determine how to distribute Shares for which preemptive rights have not been exercised or where fractions of Shares occur.
Under the Commercial Code, it is required that the new Shares, convertible bonds or bonds with warrants be issued to persons other than the existing shareholders solely for the purpose of achieving managerial objectives. Under our articles of incorporation, we may issue new Shares pursuant to a board resolution to persons other than existing shareholders, who in these circumstances will not have preemptive rights, if the new Shares are:
publicly offered pursuant to the Financial Investment Services and Capital Markets Act;
issued to members of our employee stock ownership association;
represented by depositary receipts;
issued upon exercise of stock options granted to our officers and employees;
issued through an offering to public investors, the amount of which is no more than 10% of the issued Shares;
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issued in order to satisfy specific needs such as strategic alliance, inducement of foreign funds or new technology, improvement of financial structure or other capital raising requirement; or
issued to domestic or foreign financial institutions when necessary for raising funds in emergency cases.
In addition, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of (Won)2,000 billion, to persons other than existing shareholders in the situations described above.
Members of our employee stock ownership association, whether or not they are our shareholders, generally have a preemptive right to subscribe for up to 20.0% of the Shares publicly offered pursuant to the Financial Investment Services and Capital Markets Act. This right is exercisable only to the extent that the total number of Shares so acquired and held by members of our employee stock ownership association does not then exceed 20.0% of the total number of Shares then issued (including in such total both: (i) all issued and outstanding Shares at the time the preemptive rights are exercised; and (ii) all Shares to be newly issued in the applicable share issuance transaction in connection with which such preemptive rights are exercised). As of December 31, 2011, 1.36% of the issued Shares were held by members of our employee stock ownership association.
Limitation on Shareholdings
The Telecommunications Business Act permits maximum aggregate foreign shareholding in us to be 49.0% of our total issued and outstanding Shares with voting rights (including equivalent securities with voting rights, e.g., depositary certificates and certain other equity interests). For the purposes of the foregoing, a shareholder is a “foreign shareholder” if such shareholder is: (1) a foreign person; (2) a foreign government; or (3) a company whose largest shareholder is a foreign person (including any “specially related persons” as determined under the Financial Investment Services and Capital Markets Act) or a foreign government, in circumstances where (i) such foreign person or foreign government holds, in aggregate, 15.0% or more of such company’s total voting shares, and (ii) such company holds at least 1.0% of our total issued and outstanding Shares with voting rights. For the avoidance of doubt, 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. The Foreign Investment Promotion Act also prohibits any foreign shareholder from being our largest shareholder, if such shareholder owns 5.0% or more of our Shares with voting rights. For the purposes of this restriction under the Foreign Investment Promotion Act, a “foreign shareholder” is defined in the same manner as described above with respect to the foreign shareholding restriction under the Telecommunications Business Act, provided, however, that no exception is made under the Foreign Investment Promotion Act regulations for companies that own less than 1.0% of our Shares (see item (3)(ii) above in this paragraph). A foreigner who has acquired the Shares in excess of such ceiling described above may not exercise its voting rights for shares in excess of such limitation, and the Korea Communications Commission may require corrective measures to comply with the ownership restrictions.
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General Meeting of Shareholders
We hold the annual general meeting of shareholders within three months after the end of each fiscal year. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:
as necessary;
at the request of shareholders of an aggregate of 3.0% or more of our issued Common Shares;
at the request of shareholders holding an aggregate of 1.5% or more of our issued Shares for at least six months; or
at the request of our audit committee.
Holders of Non-Voting Shares may request a general meeting of shareholders only after the Non-Voting Shares become entitled to vote or are enfranchised, as described under “—Voting Rights” below.
We must give shareholders written notice setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders. However, for holders of less than 1.0% of the total number of issued and outstanding Common Shares, we may give notice by placing at least two public notices in at least two daily newspapers at least two weeks in advance of the meeting. Currently, we use Seoul Shinmun, Maeil Business Newspaper and The Korea Economic Daily published in Seoul for this purpose. Shareholders not on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting. Holders of Non-Voting Shares, unless enfranchised, are not entitled to receive notice of general meetings of shareholders, but may attend such meetings.
Our general meetings of shareholders are held at our head office, in Sungnam, or if necessary, may be held anywhere near our head office or in Seoul.
Voting Rights
Holders of our Common Shares are entitled to one vote for each Common Share, except that voting rights of Common Shares held by us, or by a corporate shareholder that is more than 10.0% owned by us either directly or indirectly, may not be exercised. The Commercial Code permits cumulative voting, under which voting method each shareholder has multiple voting rights corresponding to the number of directors to be appointed in the voting and may exercise all voting rights cumulatively to elect one director. Our articles of incorporation permit cumulative voting at our shareholders’ meeting. Under the Commercial Code of Korea, any shareholder holding shares equivalent to not less than 1/100 of the total number of shares issued may apply to us for selecting and appointing such directors by cumulative voting.
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;
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reduction of our capital stock;
effecting any dissolution, merger or consolidation of us;
transferring the whole or any significant part of our business;
effecting our acquisition of all of the business of any other company or our acquisition of a part of the business of any other company which will significantly affect our business; or
issuing any new Shares at a price lower than their par value.
In general, holders of Non-Voting Shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders. However, in the case of amendments to our articles of incorporation, any merger or consolidation of us, or in some other cases that affect the rights or interests of the Non-Voting Shares, approval of the holders of Non-Voting Shares is required. We may obtain such approval by a resolution of holders of at least two-thirds of the Non-Voting Shares present or represented at a class meeting of the holders of Non-Voting Shares, where the affirmative votes also represent at least one-third of our total outstanding Non-Voting Shares. In addition, if we are unable to pay dividends on Non-Voting Shares as provided in our articles of incorporation, the holders of Non-Voting Shares will become enfranchised and will be entitled to exercise voting rights until those dividends are paid. The holders of enfranchised Non-Voting Shares have the same rights as holders of Common Shares to request, receive notice of, attend and vote at a general meeting of shareholders.
Shareholders may exercise their voting rights by proxy. The proxy must present a document evidencing an appropriate power of attorney prior to the start of the general meeting of shareholders. Additionally, shareholders may exercise their voting rights in absentia by submission of signed write-in voting forms. To make it possible for our shareholders to proceed with voting on a write-in basis, we are required to attach the appropriate write-in voting form and related informational material to the notices distributed to shareholders for convening the relevant general meeting of shareholders. Any of our shareholders who desires to vote on such write-in basis must submit their completed and signed write-in voting forms to us no later than one day prior to the date that the relevant general meeting of shareholders is convened.
Holders of ADRs exercise their voting rights through the ADR depositary, an agent of which is the record holder of the underlying Common Shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote the Common Shares underlying their ADSs. See “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares—Voting Rights.”
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
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the KRX KOSPI Market for the one month period before the date of the adoption of the relevant board resolution and (3) the weighted average of the daily Share price on the KRX KOSPI Market for the one week period before the date of the adoption of the relevant board resolution. However, if we or any of the dissenting shareholders do not accept the purchase price calculated using the above method, the rejecting party may request the court to determine the purchase price. Holders of ADSs will not be able to exercise dissenter’s rights unless they have withdrawn the underlying common stock and become our direct shareholders.
Register of Shareholders and Record Dates
Our transfer agent, Kookmin Bank, maintains the register of our shareholders at its office in Seoul, Korea. It registers transfers of Shares on the register of shareholders on presentation of the Share certificates.
The record date for annual dividends is December 31. For the purpose of determining the shareholders entitled to annual dividends, the register of shareholders may be closed for the period from the day after the record date to January 31 of the following year. Further, for the purpose of determining the shareholders entitled to some other rights pertaining to the Shares, we may, on at least two weeks’ public notice, set a record date and/or close the register of shareholders for not more than three months. The trading of Shares and the delivery of share certificates may continue while the register of shareholders is closed.
Annual Reports
At least one week before the annual general meeting of shareholders, we must make our annual report and audited non-consolidated financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of annual reports, the audited non-consolidated financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.
Under the Financial Investment Services and Capital Markets Act, we must file with the Financial Services Commission and the KRX KOSPI Market (1) an annual report within 90 days after the end of our fiscal year and (2) interim reports with respect to the three month period, six month period and nine month period from the beginning of each fiscal year within 45 calendar days following the end of each period. Copies of these reports are or will be available for public inspection at the Financial Services Commission and the KRX KOSPI Market.
Transfer of Shares
Under the Commercial Code, the transfer of Shares is effected by delivery of share certificates. However, to assert shareholders’ rights against us, the transferee must have his name and address registered on our register of shareholders. For this purpose, a shareholder is required to file his name, address and seal with our transfer agent. A non-Korean shareholder may file a specimen signature in place of a seal, unless he is a citizen of a country with a sealing system similar to that of Korea. In addition, a non-resident shareholder must appoint an agent authorized to receive notices on his behalf in Korea and file a mailing address in Korea. The above requirements do not apply to the holders of ADSs.
Under current Korean regulations, Korean securities companies and banks, including licensed branches of non-Korean securities companies and banks, investment management companies, futures trading companies, internationally recognized foreign custodians and the Korea Securities Depository
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may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of Shares by non-residents or non-Koreans. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”
Our transfer agent is Kookmin Bank, located at 24-3, Yoido-dong, Youngdungpo-ku, Seoul, Korea.
Acquisition of Shares by Us
We may not acquire our own Shares except in limited circumstances, such as a reduction in capital. In addition, pursuant to the Financial Investment Services and Capital Markets Act, we may acquire Shares only by (i) purchasing on the KRX KOSPI Market, (ii) a tender offer, or (iii) receiving Shares returned to us upon the cancellation or termination of a trust agreement with a trustee who acquired the Shares by either of the methods indicated above. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year, subject to certain procedural requirements, provided that, in case of acquisition of our own Shares by us for the purpose of cancellation, the aggregate purchase price may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year minus certain reserves.
In general, corporate entities in which we own a 50.0% or more equity interest may not acquire our Shares.
As of December 31, 2011, there were 17,897,147 treasury shares including shares held by our treasury stock fund.
Liquidation Rights
In the event of our liquidation, after payment of all debts, liquidation expenses and taxes, our remaining assets will be distributed among shareholders in proportion to their shareholdings. Holders of Non-Voting Shares have no preference in liquidation.
Item 10.C. Material Contracts
We have not entered into any material contracts since January 1, 2010, other than in the ordinary course of our business. For information regarding our agreements and transactions with certain related parties, see “Item 7.B. Related Party Transactions” and Note 35 to the Consolidated Financial Statements. For a description of certain agreements entered into during the past two years related to our capital commitments and obligations, see “Item 5.B. Liquidity and Capital Resources.”
Item 10.D. Exchange Controls
General
The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree (collectively the “Foreign Exchange Transaction Laws”) regulate investment in Korean securities by non-residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws, non-residents may invest in Korean securities only in compliance with the provisions of, and to the extent specifically allowed by, these laws or otherwise permitted by the Ministry of Strategy and Finance. The Financial Services Commission has also adopted, pursuant to its authority under the Korean Financial Investment Services and Capital Markets Act, regulations that control investment by foreigners in Korean securities and regulate the issuance of securities outside Korea by Korean companies.
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Under the Foreign Exchange Transaction Laws, if the Government deems that certain emergency circumstances, including, but not limited to, the outbreak of natural calamities, wars or grave and sudden changes in domestic or foreign economies, are likely to occur, the Ministry of Strategy and Finance may temporarily suspend the transactions where Foreign Exchange Transaction Laws are applicable, or impose an obligation to deposit or sell capital to certain Korean governmental agencies or financial institutions. In addition, if the Government deems that it is confronted or is likely to be confronted with serious difficulty in movement of capital between Korea and abroad which will bring serious obstacles in carrying out its currency policies, exchange rate policies and other macroeconomic policies, the Ministry of Strategy and Finance may take measures to require any person who performs transactions to deposit such capital to certain Korean governmental agencies or financial institutions.
Government Review of Issuance of ADSs
In order for us to issue shares represented by ADSs, we are required to file a prior report of the issuance with the Ministry of Strategy and Finance if our securities and borrowings denominated in foreign currencies issued during the one-year period preceding such filing date exceed US$30 million in aggregate. No further Korean governmental approval is necessary for the initial offering and issuance of the ADSs.
Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with the consent of us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We can give no assurance that we would grant our consent, if our consent is required. Therefore, a holder of ADRs who surrenders ADRs and withdraws shares may not be permitted subsequently to deposit those shares and obtain ADRs.
Reporting Requirements for Holders of Substantial Interests
Any person whose direct or beneficial ownership of shares, whether in the form of shares or ADSs, certificates representing the rights to subscribe for Shares and equity-related debt securities including convertible bonds and bonds with warrants (collectively, the “Equity Securities”) together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person accounts for 5.0% or more of the total issued Equity Securities is required to report the status of the holdings to the Financial Services Commission and the KRX KOSPI Market within five 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.
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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;
over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded;
shares acquired by direct investment as defined in the Foreign Investment Promotion Law;
disposal of shares pursuant to the exercise of appraisal rights of dissenting shareholders;
disposal of shares in connection with a tender offer;
acquisition of shares by a foreign depositary in connection with the issuance of depositary receipts;
acquisition and disposal of shares through overseas stock exchange market if such shares are simultaneously listed on the KRX KOSPI Market or the KRX KOSDAQ Market and such overseas stock exchange; and
arm’s length transactions between foreigners, if all of such foreigners belong to an investment group managed by the same person.
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For over-the-counter transactions of shares between foreigners outside the KRX KOSPI Market or the KRX KOSDAQ Market for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, an investment broker licensed in Korea must act as an intermediary. Odd-lot trading of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market must involve a licensed investment trader in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions through borrowing shares from a securities company with respect to shares which are subject to a foreign ownership limit.
The Investment Rules require a foreign investor who wishes to invest in shares on the KRX KOSPI Market or the KRX KOSDAQ Market (including Converted Shares) to register its identity with the Financial Supervisory Service prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition of the Converted Shares or who acquire the shares in an over-the-counter transaction or dispose of shares where such acquisition or disposal is deemed to be a foreign direct investment pursuant to the Financial Investment Services and Capital Markets Act. Upon registration, the Financial Supervisory Service will issue to the foreign investor an investment registration certificate that must be presented each time the foreign investor opens a brokerage account with a financial investment business entity. Foreigners eligible to obtain an investment registration certificate include foreign nationals who are individuals residing abroad for more than six months, foreign governments, foreign municipal authorities, foreign public institutions, corporations incorporated under foreign laws, international organizations, funds and associations as defined under the Financial Investment Services and Capital Markets Act. All Korean offices of a foreign corporation as a group are treated as a separate entity from the offices of the corporation outside Korea. However, a foreign corporation or depositary bank issuing depositary receipts may obtain one or more investment registration certificates in its name in certain circumstances as described in the relevant regulations.
Upon a foreign investor’s purchase of shares through the KRX KOSPI Market or the KRX KOSDAQ Market, no separate report by the investor is required because the investment registration certificate system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market (as discussed above) must be reported by the foreign investor or his standing proxy to the Governor of the Financial Supervisory Service at the time of each such acquisition or sale; provided, however, that in cases where a foreigner acquires shares through the exercise of rights as a holder of ADSs (or other depositary certificates), the foreigner must cause such report to the Governor of the Financial Supervisory Service to be filed by the Korea Securities Depository; and further provided that a foreign investor must ensure that any acquisition or sale by it of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market in the case of trades in connection with a tender offer, odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the Governor of the Financial Supervisory Service by the investment trader, the investment broker, the Korea Securities Depository or the financial securities company engaged to facilitate such transaction. A foreign investor must appoint one or more standing proxies from among the Korea Securities Depository, foreign exchange banks, including domestic branches of foreign banks, investment traders, investment brokers, the Korea Securities Depository, financial securities companies and internationally recognized custodians that satisfies all relevant requirements under the Financial Investment Services and Capital Markets Act and will act as a standing proxy to exercise shareholders’ rights or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the Governor of the Financial Supervisory Service in cases deemed inevitable by reason of conflict between laws of Korea and the home country of the foreign investor.
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Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only the Korea Securities Depository, foreign exchange banks including domestic branches of foreign banks, investment traders, investment brokers, collective investment business entities and internationally recognized custodians satisfying the relevant requirements under the Financial Investment Services and Capital Markets Act are eligible to act as a custodian of shares for a non-resident or foreign investor. A foreign investor must ensure that his custodian deposits its shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor of the Financial Supervisory Service in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.
Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40.0% ceiling on the acquisition of shares by foreigners in the aggregate and a ceiling on the acquisition of shares by a single foreign investor pursuant to the articles of incorporation of such corporation. Currently, Korea Electric Power Corporation is the only designated public corporation which has set such a ceiling. Furthermore, an investment by a foreign investor of not less than 10.0% of the issued shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Act, which is, in general, subject to the report to, and acceptance, by the Ministry of Knowledge Economy. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign shareholding restrictions in the event that the restrictions are prescribed in each specific law which regulates the business of the Korean company. A foreigner who has acquired shares of our common stock in excess of this ceiling may not exercise his voting rights with respect to the shares of our common stock exceeding the limit.
Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at an investment broker or an investment trader. Funds in the foreign currency account may be remitted abroad without any governmental approval.
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.
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Item 10.E. Taxation
The following summary is based upon tax laws of the United States and the Republic of Korea as in effect on the date of this annual report on Form 20-F, and is subject to any change in United States or Korean law that may come into effect after such date. Investors in the shares of common stock or ADSs are advised to consult their own tax advisers as to the United States, Korean or other tax consequences of the purchase, ownership and disposition of such securities, including the effect of any national, state or local tax laws.
Korean Taxation
The following summary of Korean tax considerations applies to you as long as you are not:
a resident of Korea;
a corporation organized under Korean law; or
engaged in a trade or business in Korea through a permanent establishment or a fixed base.
Shares or ADSs
Dividends on Shares of Common Stock or ADSs
Unless an applicable tax treaty provides otherwise, we will deduct Korean withholding tax from dividends paid to you either in cash or shares at a rate of 22.0% (including local income tax). If you are a resident of a country that has entered into a tax treaty with Korea, you may qualify for a reduced rate of Korean withholding tax under such a treaty. For example, if you are a qualified resident of the United States for purposes of the US-Korea Tax Treaty (the “Treaty”) and you are the beneficial owner of a dividend, a reduced withholding tax rate of 16.5% (including local income tax) generally will apply. You will not be entitled to claim treaty benefits if you are not the beneficial owner of a dividend.
In order to obtain the benefits of a reduced withholding tax rate under a tax treaty, you must submit to us, prior to the dividend payment date, such evidence of tax residence as may be required by the Korean tax authorities. In the case of ADSs, evidence of tax residence may be submitted to us through the depositary. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have tax withheld at a lower rate.
If we distribute to you free shares representing a transfer of certain capital reserves or asset revaluation reserves into paid-in capital, that distribution may be a deemed dividend subject to Korean tax.
Capital Gains
Capital gain from a sale of shares of common stock will generally be exempt from Korean taxation if you have owned, together with certain related parties, less than 25.0% of our total issued shares during the year of sale and the five calendar years before the year of sale, and the sale is made through the KRX KOSPI Market, and you have no permanent establishment in Korea. Capital gain earned by a non-Korean holder from a sale of ADSs outside of Korea are exempt from Korean taxation by virtue of the Special Tax Treatment Control Law of Korea (the “STTCL”), provided that the issuance of the ADSs is deemed to be an overseas issuance under the STTCL.
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If you are subject to tax on capital gain from a sale of ADSs, or shares of common stock that you acquired as a result of a withdrawal, your gain will be calculated based on your cost of acquiring the ADSs representing the shares of common stock, although there are no specific Korean tax provisions or rulings on this issue. In the absence of the application of a tax treaty that exempts tax on capital gain, the amount of Korean tax imposed on such capital gains will be the lesser of 11.0% (including local income tax) of the gross realization proceeds or, subject to the production of satisfactory evidence of the acquisition cost and the transaction costs of the ADSs, 22.0% (including local income tax) of the net capital gain.
If you sell your shares of common stock or ADSs, the purchaser or, in the case of a sale of shares of common stock on the KRX KOSPI Market or through a licensed securities company in Korea, the licensed securities company, is required to withhold Korean tax from the sales price in an amount equal to 11% (including local income tax) of the gross realization proceeds and to make payment thereof to the Korean tax authorities, unless you establish your entitlement to an exemption of taxation under an applicable tax treaty or produce satisfactory evidence of your acquisition cost and the transaction costs for the shares of common stock or ADSs. In order to obtain the benefit of an exemption of tax pursuant to a tax treaty, you must submit to the purchaser or the securities company (or through the depositary), as the case may be, prior to the first payment, an exemption application, together with a certificate of your tax residence issued by a competent authority of your residence country. This requirement will not apply to exemptions under Korean tax law. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have taxes withheld at a lower rate.
Most tax treaties that Korea has entered into provide exemptions for capital gains tax for capital gains from sale and purchase of shares of common stock. However, Korea’s tax treaties with Japan, Austria, Spain and a few other countries do not provide an exemption from such capital gains tax. For example, Article 13 of Korea’s tax treaty with Japan provides that if a taxpayer holding 25% or more (including those shares held by any related party of the taxpayer) of total issued shares of a company in a taxable year sells 5% or more (including those sold by any related party of the taxpayer) of total issued shares of the same company in the same taxable year, the country where the company is a resident may impose tax on such taxpayer.
Inheritance Tax and Gift Tax
Korean inheritance tax is imposed upon (a) all assets (wherever located) of the deceased if at the time of his death he was domiciled in Korea and (b) all property located in Korea which passes on death (irrespective of the domicile of the deceased). Gift tax is imposed in similar circumstances to the above. Taxes are currently imposed at the rate of 10% to 50% if the value of the relevant property is above a certain limit and vary according to the identity of the parties involved.
Under Korean Inheritance and Gift Tax Law, shares issued by a Korean corporation are deemed located in Korea irrespective of where they are physically located or by whom they are owned. It remains unclear whether, for Korean inheritance and gift tax purposes, a non-resident holder of ADSs will be treated as the owner of the shares underlying the ADSs. If such non-resident is treated as the owner of the shares, the heir or donee of such non-resident (or in certain circumstances, the non-resident as the donor) will be subject to Korean inheritance or gift tax at the same rate as described above.
Securities Transaction Tax
If you transfer shares of common stock on the KRX KOSPI Market, you will be subject to the securities transaction tax at a rate of 0.15% and an agriculture and fishery special tax at a rate of
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0.15%, calculated based on the sales price of the shares. If you transfer shares of common stock and your transfer is not made on the KRX KOSPI Market you will generally be subject to the securities transaction tax at a rate of 0.5% and will generally not be subject to the agriculture and fishery special tax.
With respect to transfers of ADSs, a tax ruling recently issued in 2004 by the Korean tax authority appears to hold that depositary receipts (such as the ADSs) constitute share certificates subject to the securities transaction tax. In May 2007, the Seoul Administrative Court held that depositary receipts do not constitute share certificates subject to the securities transaction tax. In 2008, the case was upheld by the Seoul High Court and was further upheld by the Supreme Court. However, as the Supreme Court dismissed the tax authorities’ appeal without ruling on the substantive law issue, it is not clear if the Supreme Court’s decision for this case will serve as the Supreme Court’s precedent on this issue. Even if depositary receipts (such as the ADSs) constitute share certificates subject to the securities transaction tax under the Securities Transaction Tax Law, sale price of ADSs from a transfer of depositary receipts listed on the New York Stock Exchange, the Nasdaq National Market or other qualified foreign exchanges are exempt from the securities transaction tax.
United States Federal Income Taxation
This summary describes the material U.S. federal income tax consequences to you, if you are a U.S. holder (as defined below), of owning our shares of common stock or ADSs. This summary applies to you only if you hold shares of common stock or ADSs as capital assets for tax purposes. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as:
a dealer in securities or currencies;
a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;
a bank;
an insurance company;
a tax-exempt organization;
a person that holds shares of common stock or ADSs that are a hedge or that are hedged against interest rate or currency risks;
a person that holds shares of common stock or ADSs as part of a straddle or conversion transaction for tax purposes;
a person whose functional currency for tax purposes is not the U.S. dollar; or
a person that owns or is deemed to own 10% or more of any class of our stock.
This summary is based on laws, treaties and regulatory interpretations in effect on the date hereof, all of which are subject to change, possibly on a retroactive basis.
Please consult your own tax advisers concerning the U.S. federal, state, local and other national tax consequences of purchasing, owning and disposing of shares of common stock or ADSs in your particular circumstances.
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For purposes of this summary, you are a “U.S. holder” if you are a beneficial owner of shares of common stock or ADSs and are:
a citizen or resident of the United States;
a U.S. domestic corporation; or
subject to U.S. federal income tax on a net income basis with respect to income from the shares of common stock or ADSs.
Shares of Common Stock and ADSs
In general, if you hold ADSs, you will be treated as the holder of the shares of common stock represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if you exchange an ADS for the shares of common stock represented by that ADS.
The gross amount of cash dividends that you receive (prior to deduction of Korean taxes) generally will be subject to U.S. federal income taxation as foreign source dividend income. Dividends paid in Won will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your (or, in the case of ADSs, the depositary’s) receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. If such a dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. holders should consult their own tax advisers regarding the treatment of any foreign currency gain or loss on any Won received by U.S. holders that are converted into U.S. dollars on a date subsequent to receipt.
Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2013 with respect to the ADSs and common stock will be subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends.” Dividends paid on the ADSs and common stock will be treated as qualified dividends if (i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service has approved for the purposes of the qualified dividend rules and (ii) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”). The income tax treaty between Korea and the United States (the “Treaty”) has been approved for the purposes of the qualified dividend rules, and we believe we are eligible for benefits under the Treaty. Based on our audited financial statements and relevant market and shareholder data, we do not anticipate being classified as a PFIC. You should consult your own tax advisers regarding the availability of the reduced dividend tax rate in light of your own particular circumstances.
Distributions of additional shares in respect of shares of common stock or ADSs that are made as part of a pro-rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.
Sales and Other Dispositions
For U.S. federal income tax purposes, gain or loss that you realize on the sale or other disposition of shares of common stock or ADSs will be capital gain or loss, and will be long-term capital gain or loss if the shares of common stock or ADSs were held for more than one year.
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Foreign Tax Credit Considerations
You should consult your own tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits, including the possible adverse impact of failing to take advantage of benefits under the income tax treaty between the United States and Korea. If no such rules apply, you generally may claim a credit, up to any applicable reduced rates provided under the Treaty, against your U.S. federal income tax liability for Korean taxes withheld from dividends on shares of common stock or ADSs, so long as you have owned the shares of common stock or ADSs (and not entered into certain kinds of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Instead of claiming a credit, you may generally elect to deduct such Korean taxes in computing your taxable income provided that you do not elect to claim a foreign tax credit for any foreign income taxes paid or accrued for the relevant tax year. Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain hedged positions in securities and may not be allowed in respect of arrangements in which your expected economic profit is insubstantial. You may not be able to use the foreign tax credit associated with any Korean withholding tax imposed on a distribution of additional shares that is not subject to U.S. tax unless you can use the credit against United States tax due on other foreign-source income.
Any Korean securities transaction tax or agriculture and fishery special tax that you pay will not be creditable for foreign tax credit purposes.
The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions involve the application of complex rules that depend on a U.S. holder’s particular circumstances. You should consult your own tax advisers regarding the creditability or deductibility of such taxes.
U.S. Information Reporting and Backup Withholding Rules
Payments in respect of the shares of common stock or ADSs that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of its non-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.
Item 10.F. Dividends and Paying Agents
See “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends” for information concerning our dividend policies and our payment of dividends. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association—Dividends” for a discussion of the process by which dividends are paid on our common shares. See “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares—Dividends and Distributions” for a discussion of the process by which dividends are paid on our ADSs. The paying agent for payment of our dividends on ADSs in the United States is Citibank, N.A.
Item 10.G. Statements by Experts
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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 Value Management Office conducts financial risk management and assessment. Upon identification and evaluation of our risk exposures, we selectively enter into derivative financial instruments to manage the risks. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. The activities of our finance division are subject to policies approved by our foreign exchange and interest rate risk management committee. These policies address the use of derivative financial instruments, including the approval of counterparties, setting of limits and investment of excess liquidity. Our general policy is to hold or issue derivative financial instruments largely for hedging purposes.
For our trading derivative contracts, we recognized a valuation gain of (Won)21 billion and a valuation loss of (Won)0 billion in 2010 and a valuation gain of (Won)13 billion and a valuation loss of (Won)0 billion in 2011. For our hedging derivative contracts, we recognized a valuation gain of (Won)35 billion, a valuation loss of (Won)47 billion and accumulated other comprehensive expense of (Won)49 billion in 2010 and a valuation gain of (Won)54 billion, a valuation loss of (Won)9 billion and accumulated other comprehensive income of (Won)22 billion in 2011. For further details regarding the assets, liabilities, gains and losses recorded relating to our derivative contracts outstanding as of December 31, 2010 and 2011, see Note 9 to the Consolidated Financial Statements.
Exchange Rate Risk
Substantially all of our cash flow is denominated in Won. We are exposed to foreign exchange risk related to foreign currency denominated liabilities and anticipated foreign exchange payments. Anticipated foreign exchange payments, mostly in Dollars, relate primarily to payments of foreign currency denominated debt, net settlements paid to foreign telecommunication carriers and payments for equipment purchased from foreign suppliers. We have entered into several currency swap contracts, combined interest currency swap contracts and currency forward contracts to hedge our foreign currency risks.
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The following table shows our assets and liabilities denominated in foreign currency as of December 31, 2010 and 2011.
(in thousands of foreign currencies)
U.S. Dollar
Special Drawing Right
Japanese Yen
British Pound
Euro
Algerian Dinar
Chinese Yuan
Russian Ruble
Uzbekistani Sum
Indonesian Rupiah
As of December 31, 2010 and 2011, a 10% increase in the exchange rate between the Won and all foreign currencies, with all other variables held constant, would have decreased our profit before income tax by (Won)61 billion and (Won)57 billion, respectively, and shareholders’ equity by (Won)46 billion and (Won)50 billion, respectively, with a 10% decrease in the exchange rate having the opposite effect. The foregoing sensitivity analysis assumes that all variables other than foreign exchange rates are held constant, and as such, does not reflect any correlation between foreign exchange rates and other variables, nor our decision to decrease the risk. See Note 36 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.
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The following table summarizes the principal amounts, fair values, principal cash flows by maturity date and weighted average interest rates of our short-term and long-term liabilities as of December 31, 2011 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, 2010 and 2011, a 100 basis point increase in the market interest rates, with all other variables held constant, would have decreased our profit before income tax by (Won)1 billion and (Won)1 billion, respectively, and shareholders’ equity by (Won)4 billion and (Won)345 million, respectively, and 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 (Won)17 billion and (Won)13 billion, respectively, and shareholders’ equity by (Won)15 billion and 14 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, 2010 and 2011, a 10% increase in the equity indices where our marketable equity securities are listed, with all other variables held constant, would have increased our shareholders’ equity by (Won)2 billion and (Won)4 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.
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Item 12. Description of Securities Other than Equity Securities
Item 12.A. Debt Securities
Item 12.B. Warrants and Rights
Item 12.C. Other Securities
Item 12.D. American Depositary Shares
Fees and Charges
Under the terms of the deposit agreement, holders of our ADSs are required to pay the following service fees to the depositary:
Services
Fees
Issuance of ADSs upon deposit of shares
Delivery of deposited shares against surrender of ADSs
Distribution delivery of ADSs pursuant to sale or exercise of rights
Distributions of dividends
Distribution of securities other than ADSs
Other corporate action involving distributions to shareholders
Holders of our ADSs are also responsible for paying certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:
fees for the transfer and registration of shares charged by the registrar and transfer agent for the shares in Korea (i.e., upon deposit and withdrawal of shares);
expenses incurred for converting foreign currency into U.S. dollars;
expenses for cable, telex and fax transmissions and for delivery of securities;
taxes and duties upon the transfer of securities (i.e., when shares are deposited or withdrawn from deposit); and
fees and expenses incurred in connection with the delivery or servicing of shares on deposit.
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.
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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 2011, 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 2012 in respect of 2011):
Contributions toward our investor relations efforts (including non-deal roadshows, investor conferences and investor relations agency fees):
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Disclosure Controls and Procedures
Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2011. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including
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the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed by, and under the supervision of, our principal executive, principal operating and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management has completed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on criteria in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2011.
Samil PricewaterhouseCoopers, an independent registered public accounting firm, which also audited our consolidated financial statements as of, and for the year ended December 31, 2011, 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.
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Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the year covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
At our annual shareholders’ meetings in March 2012, our shareholders reelected E. Han Kim as a member of the Audit Committee. Our Audit Committee is comprised of Hyun-Nak Lee, E. Han Kim and Byong Won Bahk. The board of directors has determined that E. Han Kim and Byong Won Bahk are the audit committee financial experts.
Item 16B. Code of Ethics
We have adopted a code of ethics, as defined in Item 16B. of Form 20-F under the Securities Exchange Act of 1934, as amended. Our code of ethics applies to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, as well as to our directors, other officers and employees. Our code of ethics is available on our web site at www.kt.com. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our web site.
Item 16C. Principal Accountant Fees and Services
Audit and Non-Audit Fees
The following table sets forth the fees billed to us by Samil PricewaterhouseCoopers, our independent auditors, during the fiscal year ended December 31, 2010 and 2011:
Audit fees
Audit-related fees
Tax fees
Other fees
Total fees
Audit fees in the above table are the aggregate fees billed by our auditors in connection with the audit of our annual financial statements and the review of our interim financial statements.
Audit Committee Pre-Approval Policies and Procedures
Our audit committee has established pre-approval policies and procedures to pre-approve all audit services to be provided by Samil PricewaterhouseCoopers, our independent registered public accounting firm. Our audit committee’s policy regarding the pre-approval of non-audit services to be provided to us by our independent auditors is that all such services shall be pre-approved by our audit committee. Non-audit services that are prohibited to be provided to us by our independent auditors under the rules of the SEC and applicable law may not be pre-approved. In addition, prior to the
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granting of any pre-approval, our audit committee must be satisfied that the performance of the services in question will not compromise the independence of our independent registered public accounting firm and does not include delegation of the audit committee’s responsibilities to the management under the Securities Exchange Act of 1934, as amended.
Our audit committee did not pre-approve any non-audit services under the de minimis exception of Rule 2-01 (c)(7)(i)(C) of Regulation S-X as promulgated by the SEC.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth the repurchases of common shares by us or any affiliated purchasers during the fiscal year ended December 31, 2011:
January 1 to January 31
February 1 to February 29
March 1 to March 31
April 1 to April 30
May 1 to May 31
June 1 to June 30
July 1 to July 31
August 1 to August 31
September 1 to September 30
October 1 to October 31
November 1 to November 30
December 1 to December 31
Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.
Item 16F. Change in Registrant’s Certifying Accountant
Not Applicable
Item 16G. Corporate Governance
The following is a summary of the significant differences between the New York Stock Exchange’s corporate governance standards and those that we follow under Korean law.
NYSE Corporate Governance Standards
KT Corporation’s Corporate Governance Practice
Director Independence
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.
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Nomination/Corporate Governance Committee
Compensation Committee
Executive Session
Shareholder Approval of Equity Compensation Plan
We currently have two equity compensation plans: one providing for the grant of stock options to officers and non-independent directors; and an employee stock ownership association program.
All material matters related to the granting stock options are provided in our articles of incorporation, and any amendments to the articles of incorporation are subject to shareholders’ approval. Matters related to the employee stock ownership association program are not subject to shareholders’ approval under Korean law.
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, 2010, 2011 and January 1, 2010
Consolidated Statements of Income for the Years Ended December 31, 2010 and 2011
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2010 and 2011
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2010 and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2011
Notes to Consolidated Financial Statements
Item 19. Exhibits
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* Filed previously.
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To the Board of Directors and Stockholders of
In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of income, of comprehensive income, of changes in shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of KT Corporation and its subsidiaries at December 31, 2011 and 2010 and January 1, 2010 and the results of their operations and their cash flows for the years ended December 31, 2011 and 2010 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, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Annual Report on Internal Control over Financial Reporting in Item 15 of Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated 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 opinion.
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 26, 2012
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KT Corporation and Subsidiaries
Consolidated Statements of Financial Position
January 1, 2010 and December 31, 2010 and 2011
(in millions of Korean won)
Assets
Current assets
Non-current assets
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Consolidated Statements of Financial Position (Continued)
Liabilities and Equity
Current liabilities
Deferred revenue
Non-current liabilities
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Accumulated other comprehensive income
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Consolidated Statements of Income
Years ended December 31, 2010 and 2011
(in millions of Korean won, exceptper share amounts)
Finance costs
Discontinued Operations:
Equity holders of the Parent Company
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Consolidated Statements of Comprehensive Income
Other comprehensive income
Changes in value of available-for-sale financial assets
Net reclassification adjustment for realized losses of available-for-sale financial assets
Actuarial loss on retirement benefit liabilities
Net gains(losses) on cashflow hedges
Net reclassification adjustment for cashflow hedges
Shares of other comprehensive income (expense) from jointly controlled entities and associates
Net reclassification to income for jointly controlled entities and associates
Shares of actuarial gain (loss) of jointly controlled entities and associates
Currency translation differences
Net reclassification adjustment for currency translation differences
Total comprehensive income for the period
Comprehensive income for the period attributable to:
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Consolidated Statements of Changes in Shareholders’ Equity
Balance at January 1, 2010
Comprehensive income
Net losses on cashflow hedge
Shares of other comprehensive income of jointly controlled entities and associates
Shares of actuarial gain of jointly controlled entities and associates
Transactions with equity holders
Appropriations of loss on disposal of treasury stock
Change in ownership interest in subsidiaries
Balance at December 31, 2010
Balance at January 1, 2011
Net gains on cashflow hedge
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Consolidated Statements of Changes in Shareholders’ Equity (Continued)
Changes in consolidation scope
Balance at December 31, 2011
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Years ended December 31, 2011
(in thousands of U.S dollars)(Note2)
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Consolidated Statements of Cash Flows
Cash flows from operating activities
Cash generated from operations
Interest paid
Interest received
Dividends received
Income tax paid
Income tax refund received
Cash flows from investing activities
Collection of loans
Origination of loans
Disposal of available-for-sale financial assets
Acquisition of available-for-sale financial assets
Disposal of investments in jointly controlled entities and associates
Acquisition of investments in jointly controlled entities and associates
Disposal of current and non-current financial instruments
Acquisition of current and non-current financial instruments
Disposal of property and equipment
Acquisition of property and equipment
Disposal of intangible assets
Acquisition of intangible assets
Acquisition of subsidiaries, net of cash acquired
Cash inflow(outflow) from changes in scope of consolidation
Cash flows from financing activities
Proceeds from borrowings and bonds
Repayments of borrowings and bonds
Settlement of derivative assets and liabilities, net
Cash inflow from consolidated capital transaction
Cash outflow from consolidated capital transaction
Dividends paid to shareholders
Dividends paid to non-controlling interest
Decrease in finance leases liabilities
Effect of exchange rate change on cash and cash equivalents
Net increase(decrease) in cash and cash equivalents
Beginning of the period
End of the period
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1. General Information
The consolidated financial statements include the accounts of KT Corporation, which is the controlling company as defined under IAS 27, Consolidated and Separate Financial Statements, and its 51 controlled subsidiaries as described in Note 1.2 (collectively referred to as the “Company”).
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-si, Gyeonggi-do, Republic of Korea, and the address of its registered head office is 206, Jungja-dong, Bundang-gu, Seongnam-si, Gyeonggi-do.
On October 1, 1997, upon the announcement of the Government-Investment Enterprises Management Basic Act and the Privatization Law, the Controlling Company became a government-funded institution under the Commercial Code of Korea.
On December 23, 1998, the Controlling Company’s shares were listed on the Korea Exchange.
On May 29, 1999, the Controlling Company issued 24,282,195 additional shares and issued American Depository Shares (ADS), representing new shares and government-owned shares, at the New York Stock Exchange and the London Stock Exchange. On July 2, 2001, the additional ADS representing 55,502,161 government-owned shares were issued at the New York Stock Exchange and London Stock Exchange.
In 2002, the Controlling Company acquired 60,294,575 government-owned shares in accordance with the Korean government’s privatization plan. As of December 31, 2011, the Korean government does not own any share in the Controlling Company.
On June 1, 2009, the Controlling Company, which is an existing company, was merged with KT Freetel Co., Ltd., which was a subsidiary, to enhance the efficiency of business management.
Consolidated Subsidiaries
The consolidated subsidiaries as of December 31, 2011, are as follows:
Type of Business
Location
KT Powertel Co.,Ltd. 2
KT Networks Corporation
KT Linkus Co.,Ltd.
KT Telecop Co.,Ltd.
KT Hitel Co.,Ltd.
KT Commerce Inc.
KT Tech, Inc.
KT Capital Co.,Ltd.
KT New Business Fund No.1
Gyeonggi-KT Green Growth Fund
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KTC Media Contents Fund 1 3
KTC Media Contents Fund 2
KT Strategic Investment Fund No.1
BC card co., Ltd. 4
VP Inc.
H&C Network 1
BC card China Co.,Ltd.
U Payment Co., Ltd
INITECH Co., Ltd.
InitechSmartro Holdings Co., Ltd.
Smartro Co.Ltd.
Pay N Mobile Co., Ltd.
Sidus FNH Corporation
Nasmedia, Inc.
Sofnics, Inc.
KT Edui Co.,Ltd.
KTDS Co., Ltd.
KT M Hows Co.,Ltd.
KT M&S Co.,Ltd.
KT Music Corporation 2
Online music production and distribution
KT Innotz Inc.,
Software and solution related cloud computing
KT Skylife Co., Ltd.
Satellite broadcasting business
Korea HD Broadcasting Corp.
TV contents provider
KT Estate Inc.
Residential Building Development and Supply
KT AMC Co., Ltd.
Asset management and consulting services
NEXR Co., Ltd.
Cloud system implementation
KTSB Data service
Data centre development and related service
KT Cloudware Corporation
Development of cloud computing operation
KC smart service Co., Ltd.
U-City solution business
Enswers Inc.
Video-clip searching service
Revlix Inc.
Development of mobile SNS application
Soompi Meidia, LLC
Domestic marketing for a website “soompi.com”
Soompi USA, LLC
Operation service for “soompi.com”
OIC Korea Co., Ltd.
Development and distribution of education contents and software
Korea Telecom Japan Co., Ltd.
Foreign telecommunication business
Korea Telecom China Co., Ltd.
KTSC Investment Management B.V
Management of Investment in Super
iMax and East Telecom
Super iMax
Wireless high speed internet business
East Telecom
Fixed line telecommunication business
Korea Telecom America, Inc.
PT. KT Indonesia
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Changes in scope of consolidation in 2011 are as follows:
Changes
Subsidiaries
Reason
Inclusion
Exclusion
A summary of financial data of the major consolidated subsidiaries as of and for the years ended December 31, 2010 and 2011, are as follows:
KT Powertel Co.,Ltd.
KT Hitel Co.,Ltd. 1
KT Capital Co.,Ltd. 1
KT Music Corporation
KT Innotz Inc.
KT Internal venture Fund No 2
New Telephone Company, Inc.
KTSC Investment Management B.V 1
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KT Skylife Co.,Ltd. 1
KT Estate Inc. 1
NEXR Co.,Ltd.
KTSB Dataservice
KC smart service Co.,Ltd.
Enswers Inc. 1
OIC Korea Co.,Ltd.
Korea Telecom China Co.,Ltd.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Company in the preparation of its financial statements. These policies have been consistently applied to all the periods presented, unless otherwise stated.
2.1 Basis of Preparation
The Company determined to adopt International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) for the annual periods beginning on or after January 1, 2011.
The Company’s IFRS transition date from accounting principles generally accepted in the Republic of Korea (“Korean GAAP”) to IFRS according to IFRS 1, First-time Adoption of IFRS, is January 1, 2010, and reconciliations and descriptions of the effect of the transition from Korean GAAP to IFRS on the Company’s assets, liabilities, equity, and comprehensive income are provided in Note 4.
The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment and complexity, or the areas where assumptions and estimates are significant to these financial statements are disclosed in Note 3.
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New standards, amendments and interpretations issued but not effective for the financial year beginning January 1, 2011, and not early adopted are as follows.
—Amendments to IFRS 1, Hyperinflation and Removal of Fixed Dates for first-time adopters
As an exception to retrospective application requirements, this amendment to IFRS 1 allows a prospective application of derecognition of financial assets for transactions occurring on or after the date of transition to IFRS, instead of fixed date (January 1, 2004). Accordingly, the Company is not required to restate and recognize those assets or liabilities that were derecognized as a result of a transaction that occurred before the dated of transition to IFRS. This amendment will be effective for the Company from annual periods beginning on or after July 1, 2011. The Controlling Company expects that the application of this amendment would not have material impact on its consolidated financial statements
—Amendments to IAS 12, Income Taxes
According to the amendments to IAS 12,Income Taxes, for the investment property that is measured using the fair value model, the measurement of deferred tax liability and deferred tax asset should reflect the tax consequences of recovering the carrying amount of the investment property entirely through sale, unless evidences support otherwise. This amendment will be effective for the Company as of January 1, 2012. The Controlling Company expects that the application of this amendment would not have material impact on its consolidated financial statements.
—Amendments to IAS 19, Employee Benefits
According to the amendments to IAS 19, Employee Benefits, use of a ‘corridor’ approach is no longer permitted, and therefore all actuarial gains and losses incurred are immediately recognized in other comprehensive income. All past service costs incurred from changes in pension plan are immediately recognized, and expected returns on interest costs and plan assets that used to be separately calculated are now changed to calculating net interest expense (income) by applying discount rate used in measuring defined benefit obligation in net defined benefit liabilities (assets). This amendment will be effective for the Company as of January 1, 2013, and The Controlling Company is assessing the impact of application of the amended IAS 19 on its consolidated financial statements as of the report date.
—Amendments to IFRS 7, Financial Instruments: Disclosures
According to the amendment, an entity should provide the required disclosures of nature, carrying amount, risk and rewards associated with all transferred financial instruments that are not derecognized from an entity’s financial statements. In addition, an entity is required to disclose additional information related to transferred and derecognized financial instruments for any continuing involvement in transferred assets. This amendment will be effective for the Company from annual periods beginning on or after July 1, 2011. The Company expects additional disclosures in relation to transfer of financial instruments upon application of the above amended IFRS requirement.
—Additions to IFRS 9, Financial instruments
IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair
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value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Controlling Company is yet to assess IFRS 9’s full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after January 1, 2013.
—IFRS 10, Consolidated Financial Statements
IFRS 10, Consolidated financial statements’ builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The Controlling Company is yet to assess IFRS 10’s full impact and intends to adopt IFRS 10 no later than the accounting period beginning on or after January 1, 2013
—IFRS 11, Joint arrangements
IFRS 11 is a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement rather than its legal form. There are two types of joint arrangement: joint operations and joint ventures. Joint operations arise where a joint operator has rights to the assets and obligations relating to the arrangement and hence accounts for its interest in assets, liabilities, revenue and expenses. Joint ventures arise where the joint operator has rights to the net assets of the arrangement and hence equity accounts for its interest. Proportional consolidation of joint ventures is no longer allowed. The Controlling Company expects that it would not have a material impact on the consolidated financial statements.
—IFRS 12, Disclosures of interests in other entities
IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The company is yet to assess IFRS 12’s full impact and intends to adopt IFRS 12 no later than the accounting period beginning on or after January 1, 2013.
—Enactment of IFRS 13, Fair value measurement
IFRS 13, Fair value measurement, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. IFRS 1 does not extend the use of fair value accounting but provides guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs. This amendment will be effective for the Company as of January 1, 2013, and the Controlling Company expects that it would not have a material impact on the consolidated financial statements.
2.2 Consolidation
The Company’s consolidated financial statements are prepared in accordance with IAS 27, Consolidated and Separate Financial Statements.
(1) Subsidiaries
Subsidiaries are all entities over which the Company has the power to govern the financial and operating policies, generally which have more than half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing
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whether the Company controls another entity. The company also assesses existence of control where it does not have more than 50% of the voting power but is able to govern the financial and operating policies by virtue of de-facto control. De-facto control may arise in circumstances where the size of the Company’s voting rights relative to the size and dispersion of holdings of other shareholders give the company the power to govern the financial and operating policies and others.
Subsidiaries are fully consolidated from the date on which control is transferred to the Company. Subsidiaries are de-consolidated from the date that control ceases.
The Company uses the acquisition method to account for business combinations. The consideration transferred for the acquisition of subsidiary is the fair value of the assets transferred, equity interests issued and liabilities incurred or assumed at the date of acquisition. The consideration transferred includes the fair value of any assets or liability resulting from a contingent consideration arrangement. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Company measures any non-controlling interests in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interests’ proportionate share in the recognized amounts of the acquiree’s identifiable net assets in the event of liquidation. Other non-controlling interests are measured at the fair value unless otherwise required by other standards.
Acquisition-related costs are expense as incurred. If a business combination is achieved in stages, the acquirer’s previously held ownership of the acquire is re-measured at the fair value at the acquisition date and the resulting gain or loss is recognized as the profit and loss.
Any contingent consideration to be transferred by the Company is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognized in accordance with IAS 39, either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity.
The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Company’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in case of a bargain purchase, the difference is recognized directly in the statement of income.
Intercompany transactions, balances and unrealized gains and losses on transactions between consolidated companies are eliminated after considering impairment of the asset transferred. Unrealized gains and losses are eliminated after recognizing impairment of transferred assets, accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.
(2) Changes in ownership interests in subsidiaries without change of control
Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions; that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.
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(3) Disposal of subsidiaries
When the Company ceases to have control any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Company had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss.
(4) Associates
Associates are all entities over which the Company has significant influence but not control, generally holding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method and are initially recognized at cost. The Company’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss.
If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income is reclassified to profit or loss where appropriate.
The Company’s share of its associates’ post-acquisition profits or losses is recognized in the statement of income, and its share of post-acquisition movements in other reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Company’s share of losses of an associate equals or exceeds its interest in the associate, including any unsecured receivables, the Company does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate.
The Company should assess at the end of each reporting period whether there is any objective evidence that an investment in associates is impaired. If any such evidence exists, the Company should recognize difference between recoverable amount and carrying amount of the associates as impairment loss.
Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed, where necessary, to ensure consistency with the policies adopted by the Company. Dilution gains and losses arising from investments in associates are recognized in the statement of income.
(5) Jointly controlled entities
A joint venture is a contractual arrangement whereby two or more parties (venturers) undertake an economic activity that is subject to joint control. As with associates, investments in jointly controlled entities are accounted for using the equity method and are initially recognized at cost. The Company’s investment in jointly controlled entities includes goodwill identified on acquisition, net of any accumulated impairment loss. The Company does not recognize its share of profits or losses from the joint venture that result from the Company’s purchase of assets from the joint venture until it re-sells the assets to an independent party. However, a loss on the transaction is recognized immediately if the loss provides evidence of a reduction in the net realizable value of current assets, or an impairment loss.
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2.3 Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (Note 34). The chief operating decision-maker is responsible for making strategic decisions on resource allocation and performance assessment of the operating segments.
2.4 Foreign Currency Translation
(1) Functional and presentation currency
Items included in the financial statements of each of the consolidated companies are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in ‘Korean won’, which is the Controlling Company’s functional and presentation currency.
(2) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of income, except when deferred in other comprehensive income as qualifying cash flow hedges.
Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in amortized cost are recognized in profit or loss, and other changes in carrying amount are recognized in other comprehensive income.
Foreign currency translation differences on non-monetary financial assets and liabilities are recognized as a part of the fair value gain or loss. Translation differences on equity instruments classified as available-for-sale are included in other comprehensive income, while translation differences on equity instruments classified as financial assets and liabilities at fair value through profit or loss are included in the statement of income.
(3) Overseas subsidiaries
The functional currency of all overseas subsidiaries is the local currency of the countries where the subsidiaries are located. The results and financial position of all consolidated companies whose functional currency is different from the presentation currency are translated into the presentation currency as follows:
Assets and liabilities are translated at the closing rate at the end of the reporting period;
Income and expenses are translated at an average rate for the period. However, if exchange rates fluctuate significantly, the actual rate at the date of the transaction is used; and
All resulting exchange differences are recognized in other comprehensive income.
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When the Controlling Company ceases to have control, exchange differences that were recorded in equity are recognized in profit and loss on disposal of the investment.
Goodwill and fair value adjustments arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity. These are presented in functional currency of the foreign entity, and translated at the closing rate.
2.5 Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of less than three months.
2.6 Trade Receivables
Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. Where, otherwise, they are presented as non-current assets.
Trade receivables are recognized initially at fair value, less allowance for doubtful accounts. Non-current trade receivables are measured at amortized cost using the effective interest method.
2.7 Financial Assets
(1) Classification
The Company classifies its financial instruments in the following categories: financial assets and liabilities at fair value through profit or loss, loans and receivables, available-for-sale financial assets, held-to-maturity investments and financial liabilities measured at amortized cost. Management determines the classification of financial instruments at initial recognition.
1) Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are financial instruments held for trading. Financial assets are classified in this category if acquired or incurred principally for the purpose of selling or repurchase in the short term. Derivatives that are not subject to hedge accounting are also categorized in this category.
2) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period, which are classified as non-current assets. The Company’s loans and receivables are classified as ‘cash and cash equivalents’, ‘trade and other receivables’, ‘loans receivable’, ‘finance lease receivables’ and ‘other financial assets’ in the financial statements.
3) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months from the end of the reporting period. The available-for-sale financial assets of the Company are classified to the ‘other financial assets’ in the financial statements.
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4) Held-to-maturity investments
Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Company’s management has the positive intention and ability to hold to maturity and are categorized in ‘other financial assets’ in the financial statements. If the Company were to sell other than an insignificant amount of held-to-maturity financial assets, the whole category would be tainted and reclassified as available-for-sale financial assets. Held-to-maturity financial assets are included in non-current assets, except for those with maturities of less than 12 months from the end of the reporting period which are classified as current assets.
(2) Recognition and Measurement
Regular purchases and sales of financial assets are recognized on the trade date (the date on which the Company commits to purchase or sell the assets). Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the statement of income. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest rate method.
Gains or losses arising from changes in the fair value of the financial assets and liabilities at fair value through profit or loss are presented in the statement of income within ‘financial income and expenses’ in the period in which they arise. The Company recognizes a dividend income from financial assets at fair value through profit or loss in the statement of income when the Company’s right to receive payments is established.
Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are recognized at cost. Other than these investments, all available-for-sale financial assets are measured at fair value.
Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognized in other comprehensive income. Generally, when securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in equity are reported in the statement of income as ‘gains (losses) from investment securities’.
Interest on available-for-sale financial assets calculated using the effective interest method is recognized in the statement of income as part of ‘financial income’. Dividends on available-for-sale equity instruments are recognized in the statement of income as part of ‘financial income’ when the Company’s right to receive payments is established. However, in case a subsidiary is engaged in the financial industry, the realized accumulated fair value adjustment, interest and dividends on available-for-sale are recognized as ‘operating income and expense’ in the statement of income.
(3) Offsetting Financial Instruments
Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when 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 asset and settle the liability simultaneously.
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(4) Derecognition of Financial Assets
Financial assets are derecognized when the contractual rights to receive cash flows from the investments have expired or have been transferred and the Company has substantially transferred all risks and rewards of ownership. If the risk and rewards of ownership of transferred assets have not been substantially transferred, the Company reviews the level of control retained over that asset and the extent of its continuing involvement to determine if transfers do not qualify for derecognition.
Collaterals (trade receivables and other) provided in transactions of discount and factoring of trade receivables do not meet the requirements for asset derecognition if risks and rewards do not substantially transfer in the event the debtor defaults. Financial liabilities recognized in relation to these transactions are included as borrowings in the Company’s statement of financial position.
2.8 Impairment of Financial Assets
(1) Assets carried at amortized cost
The Company 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.
The criteria that the Company uses to determine that there is objective evidence of an impairment loss include:
Significant financial difficulty of the issuer or obligor;
A breach of contract, such as a default or delinquency in interest or principal payments;
The Company, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;
It becomes probable that the borrower will enter bankruptcy or other financial reorganization;
The disappearance of an active market for that financial asset because of financial difficulties; or
Observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:
Adverse changes in the payment status of borrowers in the portfolio;
National or local economic conditions that correlate with defaults on the assets in the portfolio.
The amount of the loss 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 financial asset’s original effective interest rate. The carrying amount of the
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asset is reduced and the amount of the loss is recognized in the statement of income. The Company may measure impairment of the financial instruments on the basis of an instrument’s fair value using an observable market price.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the reversal of the previously recognized impairment loss is recognized in the statement of income.
(2) Assets classified as available-for-sale
The Company 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. For debt securities, the Company uses the criteria referred to (1) above. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the asset is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss—measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss—is removed from equity and recognized in the statement of income. Impairment losses recognized in the statement of income on equity instruments are not reversed through the statement of income. The fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the statement of income.
2.9 Derivative Financial Instruments
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as either:
Hedges of the fair value of a recognized asset or liability or a firm commitment (fair value hedge); or
Hedges of a particular risk associated with a recognized asset or liability on a highly probable forecast transaction (cash flow hedge)
The Company documents at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes on fair values or cash flows of hedged items.
The fair values of various derivative instruments used for hedging purposes and movements on the hedging reserve in shareholders’ equity are shown in Note 9. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability.
(1) Fair value hedge.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
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If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to profit or loss over the period to maturity.
(2) Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is hedges is recognized in other comprehensive income. The gain of loss relating to the ineffective portion is recognized immediately as financial income (costs) in the statement of income.
Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss (for example, when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion of interest rate swaps hedging variable rate foreign borrowings is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized as financial income in the statement of income.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to profits or losses in the statement of income.
2.10 Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted-average method, except for inventories in-transit which is determined using the specific identification method. Net realizable value is the estimated selling price in the ordinary course of business, less applicable selling expenses.
2.11 Property and Equipment
All property and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributed to the acquisition of the items. However, in accordance with IFRS 1, First-time Adoption of IFRS, the Company measured certain buildings and telecommunications equipment at fair value at the date of transition to IFRS and the fair value is used as their deemed cost at that date.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the statement of income during the financial period in which they are incurred.
Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost over their estimated useful lives, as follows:
Estimated Useful Lives
Buildings
Structures
Machinery and equipment
Vehicles
Tools
Office equipment
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The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized as operating revenue or expenses in the statement of income.
2.12 Investment Property
Investment property is held to earn rentals or for capital appreciation or both. Investment property is measured initially at its cost including transaction costs incurred in acquiring the asset. After recognition as an asset, investment property is carried at its cost less any accumulated depreciation and impairment losses.
Land held for investment is not depreciated. Investment property, except for land, is depreciated using the straight-line method over their estimated useful lives.
The depreciation method, the residual value and the useful life of an asset are reviewed at least at the end of each reporting period and, if management judges that previous estimates should be adjusted, the change is accounted for as a change in an accounting estimate.
Gains or losses arising from the disposal of investment property shall be determined as the difference between the net disposal proceeds and the carrying amount of the asset and shall be recognized in the operating revenue and expenses in the income statement.
2.13 Intangible Assets
(1) Goodwill
Goodwill is measured as explained in Note 2.2 (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. Impairment losses on goodwill are not reversed. The calculation of the gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the acquirer’s cash-generating units, or groups of cash-generating units (“CGU”), that is expected to benefit from the synergies of the combination. Goodwill is monitored at the operating segment level.
Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed.
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(2) Intangible assets except goodwill
Intangible assets except for goodwill are measured at historical cost. These assets have definite useful lives and carried at historical cost less amortization. Amortization is calculated using the straight-line method to allocate the cost of assets over their estimated useful lives. However, facility usage rights (condominium membership and golf membership) and broadcast license are regarded as intangible assets with indefinite useful life and not amortized, because there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Company.
The useful life of an asset with indefinite useful life is reviewed each period to determine whether events and circumstances continue to support the indefinite useful life assessment for that asset. If management judges that previous estimates should be adjusted, the change is accounted for as a change in an accounting estimate. The depreciation method and useful life of an asset with definite useful life are reviewed at the end of each reporting period.
The estimated useful life used for amortizing intangible assets is as follows:
Goodwill
Industrial property rights
Development costs
Software
Frequency usage rights
Others 1
(3) Research and development costs
Expenditure on research is recognized as an expense as incurred. If the expense as incurred that is identifiable and when the probable future economic benefits are expected, the cost for the new merchandises and technology is recognized as intangible assets when all the following criteria are met:
It is technically feasible to complete the intangible asset so that it will be available for use;
Management intends to complete the intangible asset and use or sell it;
There is the ability to use or sell the intangible asset;
It can be demonstrated how the intangible asset will generate probable future economic benefits;
Adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available; and
The expenditure attributable to the intangible asset during its development can be reliably measured
Other development expenditures that do not meet these criteria are recognized as expenses as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Capitalized development costs, which are stated as intangible assets, are amortized using the straight-line method when the assets are available for use and are tested for impairment.
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2.14 Borrowing Costs
General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their 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. All other borrowing costs are recognized in profit or loss in the period in which they are incurred.
2.15 Government Grants
Grants from a government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Company will comply with all attached conditions.
Government grants relating to costs are deferred and recognized in the statement of income over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to property and equipment are deferred and are credited to the statement of income on a straight-line basis over the expected lives of the related assets.
2.16 Impairment of Non-Financial Assets
Assets that have an indefinite useful life such as goodwill are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.
2.17 Financial liabilities
(1) Financial assets at fair value through profit or loss
Financial liabilities at fair value through profit or loss are financial instruments held for trading. Financial liabilities are classified in this category if acquired or incurred principally for the purpose of selling or repurchase in the short term. Derivatives that are not subject to hedge accounting are also categorized in this category.
(2) Financial liabilities measured at amortized cost
The Company classifies non-derivative financial liabilities as financial liabilities measured at amortized cost, except for financial liabilities at fair value through profit or loss or for financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition. For cases not qualifying for derecognition, the transferred asset continues to be recognized and a financial liability is measured as the consideration received. Financial liabilities measured at amortized cost are included in non-current liabilities, except for liabilities with maturities of less than 12 months as of the end of the reporting period, which are classified as current liabilities.
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2.18 Trade Payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year. If not, they are presented as non-current liabilities. Trade payables are initially recognized at fair value.
2.19 Financial guarantee contracts
A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Financial guarantee is initially measured at fair value on the date the guarantee was given. Subsequent to initial recognition, the Company’s liabilities under such guarantees are measured at the higher of the amounts below. Any increase in the liability relating to guarantees is reported as other financial liabilities:
The amounts determined in accordance with IAS 37 Provisions Contingent Liabilities and Contingent Assets, or
The amounts initially recognized less the accumulated amortization accordance with IAS 18 Revenue
2.20 Borrowings
Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the statement of income over the period of the borrowings using the effective interest method. However, in case a subsidiary is engaged in the financial industry, the interest expenses are recognized as operating expenses since it is considered as a main business activity of the subsidiary.
The Company classifies the liability as current when it does not have an unconditional right to defer its settlement for at least 12 months after the reporting date.
2.21 Employee Benefits
(1) Retirement benefit liabilities
The liability recognized in the statement of financial position in respect of the defined benefit pension plan 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 to maturity approximating the terms of the related pension liability.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to other comprehensive income in the period in which they arise. To the extent that the benefits are already vested following the introduction of or changes to, a defined benefit plan, past-service costs are recognized immediately in income, while costs are amortized over the vesting period for the unvested benefits.
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(2) Termination benefits
Termination benefits are payable when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.
2.22 Share-based payments
The Controlling Company operates share-based compensation plans, under which the Controlling Company receives services from employees as consideration for equity instruments (options) of the Controlling Company. The fair value of the employee services received in exchange for the grant of the options is recognized as a compensation expense in the statement of income over the vesting period.
2.23 Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events and an outflow of resources required to settle the obligation is probable and can be reliably estimated. Provisions are not recognized for future operating losses.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation. The increase in the provisions due to passage of time is recognized as an interest expense.
2.24 Leases
(1) The Company as the Lessee
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the statement of income on a straight-line basis over the period of the lease.
Lease of property and equipment where the lessee has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the outstanding balance. The corresponding rental obligations, net of finance charges, are included in the finance lease liabilities.
The interest element of the finance cost is charged to the statement of income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset and the lease term.
(2) The Company as the Lessor
For finance leases, lease receivables are recognized at the amount equivalent to the net investment in the lease asset. The Company recognizes interest income, which is calculated for net finance lease receivable based on effective interest rate. Lease income from operating leases shall be
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recognized on a straight-line basis over the lease term. Initial direct costs incurred by lessors in negotiating and arranging operating leases shall be added to the carrying amount of the lease asset and recognized as the expenses over the lease term corresponding to the lease income.
2.25 Dividend Distribution
Dividend distribution to the Company’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the Company’s shareholders.
2.26 Capital Stock
Common stocks are classified as equity. Incremental costs directly attributable to the issue of new common stocks or options are shown in equity as a deduction, net of tax, from the proceeds.
Where the Controlling Company purchases its own equity share capital, the consideration paid, including any directly attributable incremental costs, is deducted from equity attributable to the Controlling Company’s equity holders until the stocks are cancelled or reissued. Where such shares are subsequently reissued, any consideration received is included in equity attributable to the Controlling Company’s equity holders.
2.27 Revenue Recognition
Revenue comprises the fair value of the consideration received or receivable for the sales of goods and services in the ordinary course of the Company’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Company. The Company recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Company’s activities as described below. The Company bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.
(1) Sales of Services
When providing interconnection or telecommunications service to a customer based on service plans, the related revenue is recognized at the time service is provided. If the customer uses the telecommunications equipment according to the service plans, the related revenue is recognized on straight-line basis over the contract period. Revenue related to the other telecommunications services is recognized when the service is provided to the customer.
For other services, when the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with such a transaction is recognized by reference to the stage of performance of the services. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue is recognized only to the extent of the expenses recognized that are recoverable.
Total consideration for combined services is allocated to each service in proportion to its fair value and the allocated amount is recognized as revenue according to revenue recognition policy for the service.
(2) Sales of goods
Sales of goods such as selling handsets are recognized when the Company has delivered products to the customer. Delivery does not occur until the products have been shipped to the
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specified location, the risks of obsolescence and loss have been transferred to the customer, and either the customer has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Company has objective evidence that all criteria for acceptance have been satisfied.
(3) Interest income
Interest income is recognized using the effective interest method. When a loan and receivable is impaired, the Company reduces the carrying amount to its recoverable amount and continues unwinding the discount as interest income. Interest income on impaired receivables is recognized using the original effective interest rate.
(4) Commission fees.
Commission fees related to credit card business 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.
2.28 Current and Deferred Income Tax
The tax expense for the period consists of current and deferred tax. Tax is recognized in the statement of income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this exception, the tax is also recognized in other comprehensive income or directly in equity, respectively.
The current income tax charge is calculated on the basis of the tax laws enacted or substantially enacted at the reporting date in the countries where the Company operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises 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 nor loss. Deferred income tax is determined using tax rates and laws that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.
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Deferred income tax liabilities are provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax is recognized only to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.
Deferred income 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 either to settle the balances on a net basis or to realize the asset and settle the liability simultaneously.
2.29 Deferred Loan Fees and Costs
Loan origination fees in relation to loan origination process such as upfront fee, are deferred and amortized over the life of the loan as an adjustment to the yield of the loan using the effective interest rate method. Loan origination costs, which relates to loan origination activities such as commissions to brokers, are deferred and amortized over the life of the loan as an adjustment to the yield of the loan, using the effective interest rate method, if the future economic benefit related costs incurred can be matched with each loan.
In addition, the amortization of the deferred loan origination fees on costs is offset and the net amounts are presented in the consolidated statement of financial position.
2.30 Non-current Assets Held for Sale and Discontinued Operations
Non-current assets (or disposal groups) are classified as ‘assets and liabilities classified as held for sale’ (or ‘groups classified as held for sale’) when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount or fair value less costs to sell.
When a component of the Company representing a separate major line of business or geographical area of operation has been disposed of, or is subject to a sale plan involving loss of control of a subsidiary, the Company discloses in the statement of income the post-tax profit or loss of discontinued operations and the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or group to be sold constituting the discontinued operation. The net cash flows attributable to the operating, investing and financing activities of discontinued operations are presented in the notes to the financial statements.
2.31 US Dollar Convenience Translation
The December 31, 2011 consolidated financial statements are expressed in Korean Won and have been translated into U.S. dollars at the rate of (Won)1,153.3 to US$1, the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. and in effect on December 31, 2011, solely for the convenience of the reader. These translations should not be construed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any other rate.
3. Critical Accounting Estimates and Assumptions
The Company makes estimates and assumptions concerning the future. Estimates and assumptions are continually evaluated and are based on historical experience and other factors,
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including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.
3.1 Estimated Impairment of Goodwill
The Company tests annually whether goodwill has suffered any impairment in accordance with the accounting policy stated in Note 2.16. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. (Note 14)
3.2 Income Taxes
Current and deferred income tax are determined using tax rates and laws that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.
3.3 Fair Value of Financial Instruments
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Company 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.
3.4 Allowance for Doubtful Accounts
The Company uses 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 amortization amount will be increased more than the estimated.
3.5 Defined Benefit Obligation
The present value of the defined benefit obligation depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the defined benefit obligation include the discount rate. Any changes in these assumptions will impact the carrying amount of the defined benefit obligation.
The Company determines the appropriate discount rate at the end of each reporting period. This is the interest rate that is used to determine the present value of estimated future cash outflows expected to be required to settle the defined benefit obligation. In determining the appropriate discount rate, the Company considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related liability. Other key assumptions for defined benefit obligation are based in part on current market conditions. Additional information is disclosed in Note 19.
3.6 Deferred Revenue
Service installation fees and initial subscription fees related to activation of service are deferred and recognized as revenue over the expected terms of customer relationships. The estimate
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of expected terms of customer relationship is based on the historical rate. If management’s estimation is amended, it may cause significant differences in the timing of revenue recognition and amount recognized.
3.7 Provisions
As described in Note 18, the Company 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.
3.8 Useful lives of Property and equipment
Depreciation on the property and equipment is calculated using 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 Company will increase depreciation if the useful lives are considered shorter than the previously estimated useful lives.
4. Transition to IFRS
The Company’s transition date to IFRS is January 1, 2010, and adoption date is January 1, 2011. The Company prepared the opening statement of financial position as of January 1, 2010.
In preparing these consolidated financial statements in accordance with IFRS 1, First-time Adoption of international Financial Reporting Standards, the Company has applied the mandatory exceptions and certain optional exemptions allowed by IFRS.
4.1 Exemptions options under IFRS 1
The Company has elected to apply the following optional exemptions from full retrospective application of the IFRS.
(1) Business combination
The Company has not retrospectively applied IFRS 3 to the business combinations that took place prior to the transition date of January 1, 2010 (the date of transition to IFRS).
(2) Deemed cost for property and equipment
The Company has elected to measure certain property and equipment at fair value as of January 1, 2010, (the date of transition to IFRS) and uses that fair value as its deemed cost at that date. The certain buildings and telecommunications equipment were measured using fair value as its deemed cost at transition date. The adjusted amount resulting from fair value revaluation is (Won)256,781 million (before the income tax effects), with the total fair value of (Won)6,492,658 million.
(3) Decommissioning liabilities included in the cost of property and equipment
According to IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar liabilities, changes in a decommissioning, restoration or similar liability are added to or deducted from the cost of the asset to which it relates. The Company elects not to comply with these requirements for changes in such liabilities that occurred before the date of transition to IFRS. The amounts to be included as costs of decommissioning assets are measured by discounting the liability over the intervening period and the accumulated depreciation on that amount is calculated at the date of transition to IFRS.
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(4) Borrowing costs
In respect of capitalizing borrowing costs incurred in the construction of a qualifying asset, the Company capitalizes interest on all qualifying assets for which the commencement date for capitalization is after the transition date subject to IAS 23.
(5) Contribution for construction
Subject to IFRIC 18, the Company applies this interpretation prospectively to contribution for construction received on or after January 1, 2010 (the date of transition to IFRS).
4.2 Mandatory exceptions to retrospective application of IFRS 1
The Company has applied the following mandatory exceptions.
(1) Derecognition of financial assets
The Company has prospectively applied IAS 39, Financial Instruments: Recognition and Measurement, to the transactions of financial assets after January 1, 2004. The Company has not applied IFRS to transactions of financial assets before January 1, 2004, even if they met the requirements of derecognition .
(2) Exception for estimates
The Company’s estimates in accordance with IFRS, at the date of transition (January 1, 2010) are consistent with estimates made for the same date in accordance with previous accounting standards(after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those estimates were in error.
4.3 Significant Differences in Accounting Policies
Significant differences between the accounting policies chosen by the Company under IFRS and under Korean GAAP are as follows:
(1) Revenue recognition
Under Korean GAAP, non-refundable service installation fees for telephone and initial subscription fees for Personal Communications Services(PCS) and leased-line services are recognized as revenue when installation and initiation services are rendered. Under IFRS, service installation fees, and an initial subscription fees related to activation of service, are deferred and recognized as revenue over the expected terms of customer relationship.
In addition, under Korean GAAP, as the certain real estate revenue is considered as a construction type contract, the real estate revenue is recognized on a percentage of completion basis. Under IFRS, as the related real estate revenue is considered as a sale of goods, real estate revenue is recognized at the time of the transfer to customer.
(2) Employee benefits
Under Korean GAAP, provisions for severance benefits were estimated assuming all eligible employees were to terminate their employment at the end of reporting period. Under IFRS, the defined benefit obligations are measured by using actuarial method.
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(3) Government grants
Under Korean GAAP, government grants were presented by deducting the grant in arriving at the carrying amount of the asset. Under IFRS, government grants are presented as liabilities for deferred revenue and recognized as revenue over the useful life of the asset.
(4) Goodwill or bargain purchase arising from business combinations
Under Korean GAAP, goodwill recognized at the business combination was amortized using the straight-line basis over 4~10 years from the year of acquisition and negative goodwill was recognized as income using the straight-line basis over the weighted average useful life of the acquired depreciable assets. Under IFRS, goodwill is not amortized or reversed but tested for impairment at least annually. Gain on bargain purchase is recognized immediately in the statement of income.
(5) Capitalization of borrowing costs
Under Korean GAAP, borrowing costs were expensed as incurred from the initial date of manufacture, acquisition, construction and development until getting ready for its intended use or sale. Under IFRS, the Company capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, acquired after the date of transition, as part of the cost of that asset.
(6) Customer loyalty programs
Under Korean GAAP, the amount of future obligation was recognized as expense and liability provision when sales occur. Under IFRS, awarded credits are separately accounted for as an identifiable component of the sales transaction in which they are granted and the related revenue is deferred.
(7) Transfer of financial assets
Under Korean GAAP, if the Company transferred a financial asset to financial institutions and it was determined that control over the asset has been transferred to financial institutions, the Company derecognized the financial asset. Under IFRS, if the Company retains substantially all the risks and rewards of ownership of the asset, the asset is not derecognized but instead the related cash proceeds are recognized as financial liabilities.
(8) Deferred income tax
Under Korean GAAP, deferred tax assets and liabilities were either classified as current or non-current based on the classification of their underlying assets and liabilities. If there are no corresponding assets or liabilities the deferred tax assets and liabilities are classified based on their expected recoverable periods.
Under IFRS, deferred tax and liabilities, are classified as non-current on the statement of financial position.
Under Korean GAAP, temporary differences related to investments in subsidiaries, associates and joint ventures were treated as a single difference in determining whether to recognize deferred tax assets or liabilities. Under IFRS, deferred tax assets and liabilities are recognized reflecting the manner of recovery or settlement of temporary difference of each component.
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4.4 Changes in Scope of Consolidation
At January 1, 2010, the date of transition, changes in the scope of consolidation as a result of adoption of IFRS are as follows:
Description
Excluded
Sidus FNH Benex,Cinema InvestmentFund No. 1
Newly added
As a result of adoption of IFRS, three subsidiaries are excluded from scope of consolidation at the date of transition.
4.5 Reconciliation between IFRS and Korean GAAP
(1) Effects on the consolidated total assets, liabilities and equity as of January 1, 2010, the transition date of IFRS
Reported amount under Korean GAAP
Adjustments :
Change in revenue recognition of certain real estate sales
Deferred revenue such as initial subscription fees
Deemed cost of property and equipment
Valuation of financial instruments (present value and others)
Actuarial estimation of post employment benefit
Readjustments of asset retirement obligation
Reclassifications of government grants
Effect of changes in the scope of consolidation
Tax-effect on adjustments
Adjusted amount under IFRS
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(2) Effects on the consolidated total assets, liabilities and equity as of December 31, 2010
Effect of depreciation cost to apply deemed cost and others
Capitalization of borrowing cost
(3) Adjustments to the statement of cash flows
According to IFRS, cash flows of the related income (expenses) and assets (liabilities) are adjusted to separately disclose the cash flows from interest received, interest paid and cash payments of income taxes that were not presented separately under Korean GAAP. Also, other IFRS transition effects are reflected on cash flows if they have an effect on cash flow.
5. Financial Instruments by category
Financial instruments by category as of January 1, 2010 and December 31, 2010 and 2011 are as follows:
(In millions of Korean won)
Financial assets
Trade and other receivables
Loans receivable
Finance lease receivables
In millions of Korean won)
Financial liabilities
Finance lease liabilities
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Other financial Assets
Income or expense (gain or loss) by financial instruments category for the years ended December 31, 2010 and 2011, are as follows:
(In millions of Korean won
Loans and receivables
Interest income 1
Gain or loss on valuation
Foreign currency transaction gain or loss
Foreign currency translation gain or loss
Gain or loss on disposal
Assets at fair value through the profit and loss
Dividend income
Reclassified to profit or loss from other comprehensive income 2, 3
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Derivatives used for hedging
Transaction gain or loss
Other comprehensive income 2
Reclassified to profit or loss from other comprehensive income 2, 4
Available -for-sale
Impairment loss
Reclassified to profit or loss from other comprehensive income2
Liabilities at fair value through the profit and loss
Interest expense 1
Financial liabilities at amortized cost
Interest expense 1, 5
Financial guarantee gain or loss
6. Cash and Cash Equivalents
Cash and cash equivalents as of January 1, 2010 and December 31, 2010 and 2011 are as follows:
Cash on hand
Cash in banks
Money market trust
Other financial instruments
Cash and cash equivalents in the statement of financial position equal cash and cash equivalents in the statements of cash flows.
Restricted cash and cash equivalents as of January 1, 2010 and December 31, 2010 and 2011 are as follows:
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7. Trade and Other Receivables
Trade and other receivables as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Trade receivables
Other receivables
The fair values of trade and other receivables with original maturities less than one year equal their carrying values because the discounting effect is immaterial. The fair value of trade and other receivables with original maturities longer than one year, which are mainly from sales of goods, is determined discounting the expected future cash flow at the weighted average borrowing rate.
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Details of changes in allowance for doubtful accounts for the year ended December 31, 2010 and 2011, are as follows:
Beginning balance
Ending balance
Provisions for doubtful trade and other receivables are recognized as operating expenses.
Details of aging analysis of trade receivables as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Neither past due nor impaired
Past due and impaired
Up to six months
Six months to twelve months
Over twelve months
Allowance for doubtful accounts
The detail of other receivables as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Loans
Receivables 1
Accrued income
Refundable deposits
Allowance
Current
Non-current
Details of aging analysis of other receivables as of January 1, 2010 and December 31, 2010 and 2011, are as follows
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The maximum exposure of trade and other receivables to credit risk is carrying value of each class of receivables mentioned above as of December 31, 2011.
8. Loans Receivable
Loans receivable as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Factoring receivables
Accounts receivable-loans
Loans for installment credit
Deferred loan origination costs
Accounts receivable-loans for installment credit
Non-Current
Deferred loan origination fees
New technology financial investment assets
New technology financial loans
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The fair values of trade and other receivables with maturities less than one year equal their carrying values because the discounting effect is immaterial. The fair value of loans receivables is determined discounting the future cash flow at the weighted average borrowing rate.
Details of changes in allowance for doubtful accounts for the years ended December 31, 2010 and 2011, are as follows:
Beginning
Ending
Provisions for doubtful loans receivable are recognized as operating expenses.
Details of aging analysis of loans receivables as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
The maximum exposure of loans receivables to credit risk is carrying value as of December 31, 2011.
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9. Other Financial Assets and Liabilities
Other financial assets and liabilities as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Derivatives
Financial instruments 1
Available-for-sale financial assets
Held-to-maturity investments
Less: Non-current
Derivatives as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Interest rate swap
Currency swap
Currency forward
Other derivatives 1
Less:
The full value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and, as a current asset or liability, if the maturity of the hedged item is less than 12 months.
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The valuation gains and losses on the derivatives contracts for the years ended December 31, 2010 and 2011, are as follows:
Type of Transaction
Interest rate swap 2, 5
Currency swap 3, 4
Currency forward 5
Other derivatives
Interest rate swap 2
Other derivatives 5
There is no gain or loss on valuation due to fair value valuation of bond to hedge fair value in 2011 (2010: gain on valuation of (Won)1,190 million).
The ineffective portion of recognized in profit or loss on the cash flow hedge is gain on valuation of (Won)2,714 million in 2011. (2010: gain on (Won)10,341 million)
The Company discontinued prospectively hedge accounting for certain currency swaps that were previously designated as hedging instruments for cash flows because the hedge effectiveness could not be demonstrated. The derivatives were reclassified to the financial instruments at fair value through profit or loss.
Details of available-for-sale financial assets as of January 1, 2010 and December 31, 2010 and 2011, 2010, are as follows:
Marketable equity securities
Non-marketable equity securities
Marketable debt securities
Non-marketable debt securities
Less: non-current
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Changes of available-for-sale financial assets for the years ended December 31, 2010 and 2011, are as follows;
Acquisition
Disposal
Valuation 1
Gain (loss) reclassified from equity 1
Impairment
Changes in scope of consolidation
The maximum exposure of debt securities of available-for-sale financial assets to credit risk is carrying value as of December 31, 2011.
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.
10. Inventories
Inventories as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
(in millions of
Korean won)
Merchandise
Supplies
Goods in transit
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11. Other Assets and Liabilities
Other assets and liabilities as of January 1, 2010 and December 31, 2010 and 2011, 2010, are as follows:
Other assets
Advance payments
Prepaid expenses
Other liabilities
Advances received
Withholdings
Unearned revenue
12. Property and Equipment
The changes in property and equipment for the years ended December 31, 2010 and 2011, are as follows:
Acquisition cost
Accumulated depreciation (including accumulated impairment loss and others)
Balance at 1.1.2010
Transfer in (out)
Exclusion in the scope of consolidation
Balance at 12.31.2010
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Balance at 1.1.2011
— Disposal 1
Inclusion in scope of consolidation
Exclusion in scope of consolidation
Balance at 12.31.2011
Certain land and buildings are pledged as collaterals for borrowings of up to (Won)1,940 million as of December 31, 2011 (2010.12.31: (Won)3,498 million, 1.1.2010: (Won)8,300 million).
The borrowing costs capitalized for qualifying assets amount to (Won)14,675 million (2010:(Won)17,024 million) in 2011. The interest rate applied to calculate the capitalized borrowing costs in 2011 is 5.23% to 6.83%. (2010: 5.08% to 6.76%)
13. Investment Property
The changes in investment property for years ended December 31, 2010 and 2011, are as follows:
Disposal 1
Transfer in
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The buildings mentioned above are depreciated over 10 to 40 years using the straight-line method.
The fair value of investment property is (Won)2,524,039 million as of December 31, 2011. (12.31.2010: (Won)2,207,754 million, 1.1.2010: (Won)2,026,023 million). The fair value of investment property is estimated based on the expected cash flow.
Rental income from investment property is(Won)150,752 million in 2011(2010:(Won)114,779 million) and direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period are recognized as operating expenses.
Certain lands and buildings are pledged as collateral related to the rental contracts up to (Won)70,317million as of December 31, 2011 (12.31.2010:(Won)67,206 million, 1.1.2010: 65,092 million).
14. Intangible Assets
The changes in intangible assets for the years ended December 31, 2010 and 2011, are as follows:
(in millions of Koreanwon)
Accumulated amortization (including accumulated impairment loss and others)
Amortization
Changes in scope of Consolidation
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The carrying value of facility usage rights with indefinite useful life not subject to amortization is (Won)153,797 million (12.31.2010:(Won)149,847 million, 1.1.2010:(Won)162,556 million) as of December 31, 2011.
Goodwill is allocated to the Company’s cash-generating unit which is identified by operating segments. As of December 31, 2011, goodwill allocated to each cash-generation unit is as follows:
Personal 1
BC card co., Ltd
H&C Network
Nasmedia
KT Skylife Co.,Ltd.
OIC Korea Co.,Ltd
Goodwill impairment reviews are undertaken annually. The recoverable amounts for some goodwill of(Won)328,759 million allocated to others are determined based on the related CGUs’ fair value less costs to sell and the recoverable amounts of all other CGUs, to which goodwill of (Won)120,636 is allocated, have been determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets approved by management. Cash flows beyond the Company’s financial plan are extrapolated using the estimated growth rates and the growth rate does not exceed the long-term average growth rate for the business in which the CGU operates.
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The Company determined the gross margin rate based on past performance and its expectations of market development. The average growth rates used are estimated based on the historical growth rate. In addition, the Company estimated the pre-tax cash flow based on past performance and its expectation of market growth and the discount rates used are pre-tax and reflect specific risks relating to the relevant CGUs.
As a result of the impairment test, the Company recognized the impairment losses of (Won)1,227 million on goodwill allocated to KT Edui Co., Ltd. as operating expenses in the statement of the consolidated income. The Company considers that the carrying value of cash generating units does not exceed the recoverable amount of the CGUs other than KT Edui Co., Ltd.
15. Investments in Jointly Controlled Entities and Associates
The changes in investments in jointly controlled entities and associates for the years ended December 31, 2010 and 2011, are as follows:
KT Submarine Co., Ltd.
KT Rental
KTCS corporation
KTIS Corporation
Korea Information & Technology Fund
KT-Global New Media Fund
Company K Movie Asset Fund No.1
Boston Global Film & Contents Fund L.P.
Mongolian Telecommunications
Metropol Property LLC
KT wibro infra Co., Ltd.
KTF-CJ Music Contents Investment Fund
KT-DoCoMo Mobile Investment Fund
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KT-Global New MediaFund
Boston Global Film & Contents Fund L.P
SMART CHANNEL Co., Ltd. 2
Kan Communications Co., Ltd.
The summary of financial information of joint ventures and associates as of and for the years ended January 1, 2010 and December 31, 2010 and 2011, are as follows:
KT Skylife Co.,Ltd
Company K movie asset fund No.1 3
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KT Rental 1
KTCS corporation 2
KTIS Corporation 2
Monogolian Telecommunications
KT wibro infra Co., Ltd
KTIS corporation 2
Company K Movie Asset Fund No.1 3
SMART CHANNEL Co., Ltd 1
Kan Communications Co.,Ltd.
As a result of acquisition of additional interest, the Company has 65% of ownership in Smart Channel Co.,Ltd.; however, the entity was classified as an associate and equity-method accounting has been applied as the Company has the significant influence but no control under the arrangement of shareholders. In addition, the Company has 58% of ownership in KT Rental Co.,Ltd.; however, the entity was classified as a joint venture due to exercise of joint control under the arrangement of shareholders.
At the end of the reporting period, even though the Company has ownership less than 20%, the equity method accounting has been applied as it is considered that the Company has the significant influence over the operating and financial policies of those entities.
At the end of the reporting period, even though the Company has ownership more than 50%, the equity method accounting has been applied as it the Company, which is a limited partner of investment fund, cannot participate in determining the operating and financial policies.
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Marketable investments in joint ventures and associates as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
KTCS Corporation
The accumulated comprehensive loss of joint ventures and associates as of December 31, 2011 which was not recognized by the Company is (Won)22,004 million (2010.12.31 (Won) 9,857million, 2010.1.1 2010.12.31 (Won) 23,915 million).
The following equity securities owned by the Company are pledged as collaterals for Investees’ borrowings.
Investee company
Investments in associates
16. Trade and other payables
The Company’s trade and other payables as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Trade payables
Other payables
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Details of other payables as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Non-trade payables 1
Accrued expenses
Operating deposits
(non-current)
17. Bonds Payable and Borrowings
Details of bonds payable and borrowings as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Bonds Payable
(in millions of Korean won andthousands of foreign currencies)
Type
MTNP notes 1
MTNP notes
The 170th Public bond
The 172-1st Public bond
The 172-2nd Public bond 2
1.60%
FR notes 2
1.50%
0.47%
The 178-1st Public bond 2
1.00%
The 178-2nd Public bond2
1.05%
The 49th Public bond
The 50th Public bond
The 51-1st Public bond
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(in millions of Korean won and thousands of foreigncurrencies)
The 132nd Public bond
The 159th Public bond
The 160th Public bond
The 161st Public bond
The 162nd Public bond
The 163rd Public bond
The 164th Public bond
The 165-1st Public bond
The 165-2nd Public bond
The 166-1st Public bond
The 166-2nd Public bond
The 167-1st Public bond
The 167-2nd Public bond
The 168-1st Public bond
The 168-2nd Public bond
The 169th Public bond
The 171st Public bond
The 173-1st Public bond
The 173-2nd Public bond
The 174-1st Public bond
The 174-2nd Public bond
The 175-1st Public bond
The 175-2nd Public bond
The 176-1st Public bond
The 176-2nd Public bond
The 176-3rd Public bond
The 177-1st Public bond
The 177-2nd Public bond
The 177-3rd Public bond
The 179th Public bond
The 180-1st Public bond
The 180-2nd Public bond
The 47-2nd Public bond
The 48th Public bond
The 51-2nd Public bond
The 52-1st Private bond
The 52-2nd Public bond
The 53-1st Public bond
The 53-2nd Public bond
The 181-1st Public bond
The 181-2nd Public bond
The 181-3rd Public bond
The 182-1st Public bond
The182-2nd Public bond
The 183-1st Public bond
The 183-2nd Public bond
The 183-3rd Public bond
The 24th Public bond
The 25th Public bond
The 26th Public bond
The 27th Public bond
The 19-2nd Public bond
The 10th Public bond
The 11st Private bond
The 12nd Public bond
The 13-2nd Public bond
The 14th Public bond
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The 15th Public bond
The 16th Public bond
The 1st Private bond
The 2nd Private bond
The 4th Public bond
The 5th Private bond
The 6-2nd Public bond
The 7-2nd Public bond
The 8th Private bond
The 9-2nd Public bond
The 11st Public bond
The 13-1st Public bond
The 14-1st Public bond
The 14-2nd Public bond
The 15th Private bond
The 16-1st Public bond
The 16-2nd Public bond
The 17-3rd Public bond
The 18-2nd Public bond
The 18-3rd Public bond
The 18-4th Public bond
The 19-3rd Public bond
The 19-4st Public bond
The 22-1st Public bond
The 22-2nd Public bond
The 22-3rd Public bond
The 23th Public bond
The 25-1st Public bond
The 25-2nd Public bond
The 27th Private bond
The 28-1st Public bond
The 28-2nd Public bond
The 29-1st Public bond
The 29-2nd Public bond
The 30-1st Public bond
The 30-2nd Public bond
The 30-3rd Public bond
The 31st Public bond
The 32-1st Public bond
The 32-2nd Public bond
The 32-3rd Public bond
The 33rd Public bond
The 34-1st Public bond
The 34-2nd Public bond
The 35-1st Public bond
The 35-2nd Public bond
The 36-1st Public bond2
The 36-2nd Public bond
The 36-3rd Public bond
The 37-1st Public bond
The 37-2nd Public bond
The 37-3rd Public bond
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(in millions of Korean won and thousands offoreign currencies)
The 37-4th Public bond
The 38-1st Public bond
The 38-2nd Public bond
The 38-3rd Public bond
The 39th Public bond
The 40-1st Public bond
The 40-2nd Public bond
The 40-3rd Public bond
The 41-1st Public bond
The 41-2nd Public bond
The 41-3rd Public bond
The 42-1st Public bond
The 42-2nd Public bond
The 42-3rd Public bond
The 43-1st Public bond
The 43-2nd Public bond
The 43-3rd Private bond
The 44-1st Public bond
The 44-2nd Public bond
The 44-3rd Public bond
The 45th Public bond
The 46-1st Public bond
The 46-2nd Public bond
The 46-3rd Public bond
The 46-4th Public bond
The 47th Public bond
The 49th Public bond 2
The 50-1st Public bond
The 50-2nd Public bond
The 52-1st Public bond
The 52-2nd Public bond 2
The 53rd Public bond
The 54th Public bond
The 55-1st Public bond
The 55-2nd Public bond
The 55-3rd Public bond
The 56th Public bond
Unsecured private convertible bond
The 14-2nd unsecured bond
The 15th unsecured bond
Redeemable convertible preferred stock
The 1st unsecured redeemable convertible preferred stock
The 1st private bond
The A Redeemable convertible preferred stock
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The B Redeemable convertible preferred stock
The C Redeemable convertible preferred stock
Less:Current portion
Discount on bonds
Conversion right adjustment
Premium on bonds redemption
Net
As of December 31, 2011, the outstanding notes issued by the Company amount to USD 1,300 million with fixed interest rates under Medium Term Note Program (“MTNP”) listed in the Singapore Stock Exchange, which allowed issuance of notes of up to USD 2,000 million. However, this MTN Program has not been valid since 2007.
Libor (3M) and CD (91D) are approximately 0.58 % and 3.52 %, respectively, as of December 31, 2011.
Short-term borrowings
Financial institution
Shinhan Bank
+1.44
%
Samsung Securities
Meritz Securities
Woori Bank
Korea Exchange Bank
Kookmin Bank
Shinhan Investment Corp.
Woori Investment & Securities
Dongbu Securities
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Financialinstitution
KTB Investment & Securities
Hanyang Securities
HI Investment & Securities
Standard Chartered Securities
Eugene Investment & Securities
Kumho Investment Bank
Tong Yang Securities
SK Securities
Shinyoung Securities
Korea Development Bank
General loans
Hana Bank
Usance(JPY)
IBK Bank
Usance
Korea Investment & Securities
Shinhan Investment Corp
Daewoo Securities
Daegu Bank
Factoring Receivables
Libor (3M) and CD (91D) are approximately 0.58% and 3.52%, respectively, as of December 31, 2011.
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Long-term borrowings
Export-Import
Bank of Korea
Inter-KoreanCooperationFund 1
Bank of Communications
Kwangju Bank
National Federation of Fisheries Cooperatives
NH Bank
Commercialpapers
CapitalFactoring
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Hanyang securities
RCPS(Redeemable Convertible Preferred Stock)
Loans foroperation
Korea Credit Guarantee Fund
Less: Current portion
Repayment schedule of the Company’s bonds payable and borrowings including the portion of current liabilities as of December 31, 2011, is as follows:
2012.01.01~ 2012.12.31
2013.01.01~ 2013.12.31
2014.01.01~ 2014.12.31
2015.01.01~ 2015.12.31
Thereafter
Book value and fair value of the Company’s bonds payable and borrowings as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Bonds payable
Long-term borrowings (Including current borrowings)
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The fair value of short-term borrowings equals its book value because the discounting effect is immaterial.
The fair values of bonds payable and long-term borrowings are calculated by discounting the expected future cash flows at weighted average borrowing rate. The weighted average borrowing rate is approximately 4.64% as of December 31, 2011 (2010.12.31: 4.83%, 2010.1.1: 5.12%).
18. Provisions
The changes in provisions during the years ended December 31, 2010 and 2011, are as follows:
Increase
Usage
Reversal
Current portion
Non-current portion
19. Retirement Benefit Obligation
The amounts recognized in the statements of financial position are determined as follows:
Present value of defined benefit obligations
Fair value of plan assets
Liabilities
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The changes in the defined benefit obligations for the years ended December 31, 2010 and 2011, are as follows:
Current service cost
Past service cost
Benefit paid
Costs on settlements
Changes due to settlements of plan
Actuarial losses
Changes in the fair value of plan assets for the years ended December 31, 2010 and 2011, are as follows:
Expected return on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Actuarial gains (losses)
Amounts recognized in the statement of income for the years ended December 31, 2010 and 2011, are as follows:
Interest cost
Transfer out
Total expenses
Principal actuarial assumptions used are as follows:
1.1.2010
12.31.2010
12.31.2011
Discount rate
Expected rate of return
Future salary increase
Details of plan assets as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Pension deposit
Severance insurance deposits
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Actual return on plan assets for the years ended December 31, 2010 and 2011, are as follows:
Actual return on plan assets
Details of adjustments for the differences between initial assumptions and actual figures as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Present value of the defined benefit obligations
Deficit in the plan
Experience adjustments on defined benefit liabilities
Experience adjustments on plan assets
20. Commitments and Contingencies
As of December 31, 2011, major commitments with local financial institutions are as follows:
(in millions of Korean won
and thousands of foreign currencies)
Bank overdraft
Commercial papers factoring
Loan on information and communications fund
Collateralized loan on accounts receivable-trade
Collection for foreign currency denominated checks
Plus electronic bill
Comprehensive credit line
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As of December 31, 2011, guarantees received from financial institutions are as follows:
Performance guarantee for construction
Performance guarantee
Bid guarantee
Advances received guarantee
Prepayment guarantee
Warranties guarantee
Currency guarantee
Foreign currency guarantee
Guarantee deposit
Guarantee for import letters of credit
Saudi Riyal.
Algerian Dinar.
Details of collaterals that KT Capital Co.,Ltd., a subsidiary of KT Corporation, is provided with by third parties as of December 31, 2011, are as follows:
Details
Amounts
Credits
As of December 31, 2011, guarantees provided by the Company for a third party, are as follows:
Creditor
Eun-haeng 1-area urban environment Improving project union
Yeongdeungpo apartment-type factory People who have the right of ownership
Samsung Engineering Co.and others
Other Project Financing 1
As of December 31, 2011, guarantee liabilities of(Won) 2,839million (2010.12.31: (Won)2,919 million) in relation to guarantees for PF loan are recorded as ‘other financial liabilities’ in the statement of financial position.
As of December 31, 2011, the Company is a defendant in 142 lawsuits, with an aggregate amount of (Won)37,065million. As of December 31, 2011, litigation provisions of (Won) 28,915 million for various pending lawsuits and unasserted claims are recorded as liabilities for potential loss in the ordinary course of business. The final outcome of these cases cannot yet be predicted.
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According to the financial and other covenants included in certain bonds and borrowings, the Company is required to maintain certain financial ratios such as debt/equity ratio, use the funds for the designated purpose and report to the creditors periodically. The covenant also contains restriction on provision of additional collaterals and disposal of certain assets. As of December 31, 2011, the Company is compliance with the related covenants.
21. Lease
The Company’s non-cancellable lease arrangements are as follows:
The Company as the Lessee
Finance Lease
Details of finance lease assets as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Acquisition costs
Accumulated depreciation
Net balance
The related depreciation amounted to (Won) 26,024 million (2010: (Won) 28,319 million) for the year ended December 31, 2011.
Details of future minimum lease payments as of January 1, 2010 and December 31, 2010 and 2011, under finance lease contracts are summarized below:
Within one year
From one year to five years
Operating Lease
Details of future minimum lease payments as of January 1, 2010 and December 31, 2010 and 2011, under operating lease contracts are summarized below:
Operating lease expenses incurred for the years ended December 31, 2010 and 2011, amounted to (Won) 23,680 million and (Won)41,499 million, respectively.
The Company as the Lessor
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Details of finance lease assets as of January 1, 2010, is as follows:
Details of finance lease assets as of December 31, 2010, are as follows:
Details of finance lease assets as of December 31, 2011, are as follows:
Details of bad debts allowance for finance lease receivables as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Over five years
Details of operating lease assets as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
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22. Capital Stock
As of January 1, 2010 and December 31, 2010 and 2011, the Company’s number of authorized shares is one billion.
Common stock 1
The Company retired 51,787,959 treasury shares against retained earnings. Therefore, the common stock amount differs from the amount resulting from multiplying the number of shares issued by (Won)5,000 par value per share of common stock.
23. Retained Earnings
Details of retained earnings as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Legal reserve 1
Voluntary reserves
Unappropriated retained earnings
The Commercial Code of the Republic of Korea requires the Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid until such reserve equals 50% of its issued capital stock. The reserve is not available for the payment of cash dividends, but may be transferred to capital stock with the approval of the Company’s Board of Directors or used to reduce accumulated deficit, if any, with the ratification of the Company’s majority shareholders.
24. Other Components of Equity
As of January 1, 2010 and December 31, 2010 and 2011, the Company’s other components of equity are as follows:
Treasury stock
Loss on disposal of treasury stock
Share-based payments
Gain (loss) from transactions with non-controlling shareholders and changes in interest in subsidiaries are included.
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As of January 1, 2010 and December 31, 2010 and 2011, 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 Company’s directors and employees and other purposes.
25. Share-Based Payments
The controlling Company’s share-based compensation programs include the employee stock options and stock grants. The Company measures and recognizes compensation cost for all share-based payment awards made to employees and directors, including grants of employee stock options and employee stock grants.
The fair value of awards granted that are expected to ultimately vest is recognized as expense over the requisite service periods. The number of options expected to vest equals the total options granted less an estimation of the number of forfeitures expected to occur prior to vesting. The forfeiture rate is calculated based on historical data and is adjusted if actual forfeitures differ significantly from the original estimates. The effect of any change in estimated forfeitures would be recognized through a cumulative adjustment that would be included in compensation cost in the period of the change in estimate.
The Company has granted stock options to its executive officers and directors as of December 31, 2011, in accordance with the stock option plan approved by its board of directors, details of which are as follows:
Grant date
Grantee
Number of basic allocated shares upon grant
Number of additional shares related to business performance upon grant
Number of shares expected to be exercised upon grant
Number of settled or forfeited shares
Number of expired shares as of December 31, 2011
Number of basic allocated shares as of December 31, 2011
Number of additional shares related to business performance as of December 31, 2011
Number of shares expected to be exercised
Fair value per share (in Korean won)
Total compensation cost (in millions of Korean won)
Exercise price per share (in Korean won)
Exercise period
Valuation method
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Upon exercise, the controlling Company can elect one of the following settlement methods: issuance of new shares, issuance of treasury stock or cash settlement, subject to certain circumstances. The changes of the number of stock options and a weighted-average exercise prices, as of December 31, 2010 and 2011 are as follows:
(in Korean won)
2nd grant
4th grant
KTF-2nd
KTF-3rd
KTF-4th
Weighted-average exercise prices
The controlling Company adopted the fair value method to measure compensation costs based on the various valuation assumptions and methods, which are as follows:
Risk-free interest rate
Expected duration(year)
Expected volatility
Expected dividend yield ratio
Other share-based compensation
The Company provided stock grants subject to both the service period and business performance goals.
The fair value of each stock grant awarded was estimated on the date of grant for performance based grants assuming that performance goals will be achieved. The expected term for grants is generally one year. The stock grants are settled with the new shares issued or treasury stock owned by the Company upon vesting. The fair value is based on the market price of the Company’s stock on the grant date. Compensation cost is recognized over the requisite vesting period and adjusted for actual forfeitures before vesting.
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The details of stocks grants as of December 31, 2011 are as follows:
5th grant
Estimated number of shares granted at grant date
Estimated number of shares granted as of December 31, 2011
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)
Changes of the number of other share-based payments, as of December 31, 2010 and 2011 are as follows:
3rd grant
26. Operating Revenues
Operating revenues for the years ended December 31, 2010 and 2011, are as follows:
Sales of services
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27. Operating Expenses
Operating expenses for the years ended December 31, 2010 and 2011, are as follows:
Amortization of intangible assets
Changes of inventories
Utilities
Taxes and Dues
Rent
Advertising expenses
Details of salaries and wages for the years ended December 31, 2010 and 2011 are as follows:
Short-term employee benefits
Post-employment benefits
Share-based payment (Note 25)
Termination benefits
28. Classification of Operating Income
The Company’s operating income is calculated by deducting operating expenses such as salaries and amortization cost and others, from operating revenue which includes sales of services and others. Major items and related amounts included in operating revenue and expenses are described in Notes 26 and 27.
29. Financial Income and Expenses
Details of financial income for the years ended December 31, 2010 and 2011, are as follows:
Foreign currency transaction gain
Foreign currency translation gain
Gain on settlement of derivatives
Gain on valuation of derivatives
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Details of financial expenses for the years ended December 31, 2010 and 2011, are as follows:
Interest expenses
Foreign currency transaction loss
Foreign currency translation loss
Loss on settlement of derivatives
Loss on valuation of derivatives
30. Deferred Income Tax and Income Tax Expense
The analysis of deferred tax assets and deferred tax liabilities as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Deferred tax assets
Deferred tax assets to be recovered after more than 12 months
Deferred tax assets to be recovered within 12 months
Deferred tax liabilities
Deferred tax liability to be recovered after more than 12 months
Deferred tax liability to be recovered within 12 months
Deferred tax assets (liabilities), net
The gross movements on the deferred income tax account for the years ended December 31, 2010 and 2011, are calculated as follows:
Charged/(credited) to the income statement
Charged/(credited) to other comprehensive income
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The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:
Derivative financial assets
Investment in joint venture and associates
Deposits for severance benefits
Inventory valuation
Contribution to construction
Defined benefit liabilities
Withholdings for facilities expenses
Accrued payroll expenses
Deduction of installment receivables
Present value discount
Assets retirement obligation
Gain or loss foreign currency translation
Real-estate sales
Tax credit carryforwards
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Reserve for technology and human resource development
Allowance for Doubtful Accounts
Contribution for construction
Withholding of facilities expenses
The tax impacts directly to equity as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Available-for-sale valuation gain (loss)
Hedge instruments valuation gain (loss)
Actuarial gain (loss)
Shares of other comprehensive gain (loss) of joint ventures and associates
Shares of actuarial gain (loss) of Joint ventures and associates
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Details of income tax expenses for the years ended December 31, 2010 and 2011 are calculated as follows:
Current income tax expenses
Impact of change in temporary difference
Impact of change in tax rate 1
Total income tax expense
Income tax expense from continued operations
Income tax expense for discontinued operations
During the year, as a result of the change in the Korean corporation tax rate from 22% to 24.2% that was enacted on December 31, 2011, the relevant deferred tax balances have been re-measured. Deferred tax expected to be realized in the year to December 31, 2011, has been measured using the effective rate 24.2% applicable for the period.
The tax on the Company’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows:
Profit before continuing operations before income tax expenses
Expected tax expense at statutory tax rate
Tax effects of
Income not subject to tax
Expenses not deductible for tax purposes
Tax credit carry forwards and deductions
Changes in unrealizable deferred tax assets
Deferred tax effects due to changes in tax rates and others
Income tax expenses for continuing operations
Average effective tax rate
31. Earnings Per Share
Calculation of earnings per share for the years ended December 31, 2010 and 2011, are as follows:
1) Basic earnings per share from continuing operations
Basic earnings per share from continuing operations is calculated by dividing the profit from continuing operations attributable to equity holders of the Company by the weighted average number of common stocks outstanding during the period, excluding common stocks purchased by the Company and held as treasury stock (Note 24).
Basic earnings per share from continuing operations for the years ended December 31, 2010 and 2011, are calculated as follows:
Profit from continuing operations attributable to common stock(in millions of Korean won)
Weighted average number of common stock outstanding
Basic earnings per share from continuing operations(in Korean won)
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2) Basic earnings per share from discontinued operations
Basic earnings per share from discontinued operations is calculated by dividing the profit from discontinued operations attributable to equity holders of the Company by the weighted average number of common stocks outstanding during the period, excluding common stocks purchased by the Company and held as treasury stock (Note 24).
Basic earnings per share from discontinued operations for the years ended December 31, 2010 and 2011, are calculated as follows:
Profit from discontinued operations attributable to common stock(in millions of Korean won)
Basic earnings per share from discontinued operations(in Korean won)
3) Basic earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of common stocks outstanding during the year, excluding common stocks purchased by the Company and held as treasury stock (Note 24).
Basic earnings per share for the years ended December 31, 2010 and 2011, are calculated as follows:
Net income attributable to common stock(in millions of Korean won)
Basic earnings per share(in Korean won)
4) Diluted earnings per share from continuing operations
Diluted earnings per share from continuing operations is calculated by adjusting the weighted average number of common stocks outstanding to assume conversion of all dilutive potential common stocks. The Company has dilutive potential common stocks from stock options.
Diluted earnings per share from continuing operations for the years ended December 31, 2010 and 2011, are calculated as follows:
Adjusted Profit from continuing operations attributable to common stock(in millions of Korean won)
Number of dilutive potential common shares outstanding
Weighted-average number of common shares outstanding and dilutive common shares
Diluted earnings per share from continuing operations(in Korean won)
Diluted earnings per share from continuing operations is calculated by dividing adjusted profit from continuing operations attributable to equity holders of the Company by the sum of the number of common stocks and dilutive potential common stocks. Certain stock options and other share-based payments have no dilutive effect and are excluded from the calculation of diluted earnings per share from continuing operations.
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5) Diluted earnings per share from discontinued operations
Diluted earnings per share from discontinued operations is calculated by adjusting the weighted average number of common stocks outstanding to assume conversion of all dilutive potential common stocks. The Company has dilutive potential common stocks from stock options.
Diluted earnings per share from discontinued operations for the years ended December 31, 2010 and 2011, are calculated as follows:
Profit from discontinued operations attributable to common stock (in millions of Korean won)
Adjusted profit from discontinued operations attributable to common stock (in millions of Korean won)
Diluted earnings per share from discontinued operations (in Korean won)
Diluted earnings per share from discontinued operations is calculated by dividing adjusted profit from discontinued operations attributable to equity holders of the Company by the sum of the number of common stocks and dilutive potential common stocks. Certain stock options and other share-based payments have no dilutive effect and are excluded from the calculation of diluted earnings per share from discontinued operations.
6) Diluted earnings per share
Diluted earnings per share is calculated by adjusting the weighted average number of common stocks outstanding to assume conversion of all dilutive potential common stocks. The Company has dilutive potential common stocks from stock options.
Diluted earnings per share for the years ended December 31, 2010 and 2011, are calculated as follows:
Net income attributable to common stock (in millions of Korean won)
Adjusted net income attributable to common stock (in millions of Korean won)
Diluted earnings per share (in Korean won)
Diluted earnings per share is calculated by dividing adjusted net income attributable to equity holders of the Company by the sum of the number of common stocks and dilutive potential common stocks. Certain stock options and other share-based payments have no dilutive effect and are excluded from the calculation of diluted earnings per share.
32. Dividends
The dividends paid by the Controlling Company in 2011 and 2010 were (Won)586,150 million ((Won)2,410 per share) and(Won)486,393 million ((Won)2,000 per share), respectively. A dividend in respect of the year ended December 31, 2011, of (Won)2,000 per share, amounting to a total dividend of (Won)486,602 million, was approved at the shareholders’ meeting on March 16, 2012. These consolidated financial statements do not reflect this dividend payable.
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33. Cash Generated from Operations
Cash flows from operating activities for the years ended December 31, 2010 and 2011 are as follows:
1. Profit for the period
2. Adjustments to reconcile net income
Income tax expenses
Provision for severance benefits
Bad debt expenses
Income or losses from jointly controlled entities and associates2
Gain or loss on disposal of jointly controlled entities and associates
Impairment on jointly controlled entities and associates
Impairment on property and equipment
Gain or loss on disposal of property and equipment
Contribution of provisions
Reversal of provisions
Foreign currency translation gain (loss)
Gain or loss on valuation of derivatives
3. Changes in operating assets and liabilities
Increase in trade receivables
Decrease in other receivables
Increase in loans receivable
Increase in finance lease receivables
Increase in other assets
Decrease in inventories
Increase in trade payables
Decrease in other payables
Increase in other liabilities
Decrease in provisions
Increase in deferred revenue
Increase in contribution on plan assets
Payment of severance benefits
4. Net cash provided by operating activities (1+2+3)
Significant transactions not affecting cash flows for the years ended December 31, 2010 and 2011, are as follows:
Reclassification of the current portion of bonds payable
Reclassification of construction-in-progress to property and equipment
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34. Segment Information
The Company’s operating segments are as follows:
Business service
Personal Customer Group ("Personal")
Home / Enterprise Customer Group (“Home” / “Enterprise”)
Details of each segment for the years ended December 31, 2010 and 2011, are as follows:
Personal
Home/Enterprise
Elimination
Consolidated amount
The geographic data information provided to the management for the geographic data for the years ended December 31, 2010 and 2011, are as follows:
Domestic
Overseas
Non-current assets include fixed assets, intangible assets (excluding goodwill) and investment property.
35. Related Party Transactions
The list of subsidiaries of the Company as of December 31, 2011, is described in Note 1.2.
The related receivables and payables as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Associates
Joint Ventures
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Significant transactions with related parties for the years ended December 31, 2010 and 2011, are as follows:
Key management compensation for the years ended December 31, 2010 and 2011, consists of:
Salaries and other short-term benefits
Stock-based compensation
36. Financial risk management
(1) Financial risk factors
The Company’s activities expose itself to a variety of financial risks such as changes in foreign exchange rates, interest rates and market prices arising from future commercial transactions and recognized assets and liabilities. The Company’s financial risk management is focused on controlling these risks in its operating and financing activities. The Company uses derivatives to hedge certain financial risk exposures such as fair value risk and cash flow risk.
The Company’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 market conditions to estimate the effect from the market changes.
1) Market risk
The Company’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 Company’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 Company is exposed. Reasonably possible changes in the relevant risk variable such as prevailing market interest rates, currency rates, equity prices or commodity prices are estimated and if the rate of change in the underlying risk variable is stable, the Company 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 Company 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 Company’s cash flows. Foreign exchange risk unaffecting the Company’s cash flows is not hedged but can be hedged at a particular situation.
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As of December 31, 2010 and 2011, if the foreign exchange rate had strengthened/weakened by 10% with all other variables held constant, the effects on profit before income tax and shareholders’ equity would have been as follows:
The above analysis is a simple sensitivity analysis which assumes that all the variables other than foreign exchange rates are held constant. Therefore, the analysis does not reflect any correlation between foreign exchange rates and other variables, nor the management’s decision to decrease the risk.
Details of foreign assets and liabilities of the Company as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
USD
SDR
JPY
GBP
EUR
DZD
AUD
CNY
RUR
UZS
IDR
KWD
(iii) Price risk
As of December 31, 2010 and 2011, the Company is exposed to equity securities price risk because the securities held by the Company 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 analysis is based on the assumption that the equity index had increased/decreased by 10% with all other variables held constant and all the Company’s marketable equity instruments had moved according to the historical correlation with the index.
(iv) Cash flow and fair value interest rate risk
The Company’s interest rate risk arises from liabilities in foreign currency such as foreign currency bonds payable. Bonds payable in foreign currency issued at variable rates expose the
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Company to cash flow interest rate risk which is partially offset by swap transactions. Bonds payable and borrowings issued at fixed rates expose the Company to fair value interest rate risk. The Company sets the policy and operates to minimize the uncertainty of the changes in interest rates and financial costs.
As of December 31, 2010 and 2011, 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 ofinterest rate
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 Company 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 Company 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 January 1, 2010 and December 31, 2010 and 2011, maximum exposure to credit risk that are not considered of value of collateral held regarding financial instrument are as follows.
Cash equivalents (except cash on hand)
Derivate financial assets
Financial instrument
Held-to-maturity financial assets
Financial guarantee contracts 1
Performance guarantee contracts 1
3) Liquidity risk
The Company manages its liquidity risk by liquidity strategy and plans. The Company considers the maturity of financial assets and financial liabilities and the estimated cash flows from operations.
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The table below analyses the Company’s liabilities into relevant maturity groups based on the remaining period at the date of the end of each reporting period to the contractual maturity date. These amounts are contractual undiscounted cash flows.
Finance lease payables
Other non-derivative financial liabilities1
Obligation guarantee contracts 1
Other non-derivative financial liabilities 1
Total amount guaranteed by the Company according to guarantee contracts. Cash flow from financial guarantee contracts is classified as the maturity group in the earliest period when the financial guarantee contracts can be executed
Cash outflow and inflow of derivatives settled gross or net are undiscounted contractual cash flow and can differ from the amount in the financial statements.
Outflow
Inflow
(2) Disclosure of capital management
The Company’s objectives when managing capital are to safeguard the Company’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 Company’s capital structure consists of liabilities including borrowings, cash and cash equivalents, and shareholders’ equity. The treasury department monitors the Company’s capital structure and considers cost of capital and risks related each capital component.
The debt ratios as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
Gearing ratio
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The Company 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.
The gearing ratio as of January 1, 2010 and December 31, 2010 and 2011, are as follows:
(in millions of Korean won, %)
Total borrowings
Less: cash and cash equivalents
Net debt
Total capital
(3) Fair value estimation
The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1)
Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2)
Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3)
The following table presents the Company’s assets and liabilities that are measured at fair value as of January 1, 2010 and December 31, 2010 and 2011:
Available-for-sale
Derivative financial liabilities
Hedged bonds
Financial guarantee liabilities
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The fair value of financial instruments traded in active markets is based on quoted market prices at the date of the end of reporting period. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the Company is the bid price. These instruments are included in level 1. Instruments included in level 1 comprise listed equity investments classified as available-for-sale.
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value of an instrument are observable, the instrument is included in level 2.
If one or more of the significant inputs are not based on observable market data, the instrument is included in level 3.
The changes of the financial instrument included in Level 3 for the year ended December 31, 2011 are as follows:
Total profit
Income for the year
Transfer into Level 3 from the cost method
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The details of equity securities measured at historical cost as of January 1, 2010 and December 31, 2010 and 2011, are as follows.
SBSKTSPC 1
MBCKTSPC 1
KBSKTSPC 1
IBK-AUCTUS Green Growth Private Equity Fund 1
ELAND RETAIL.Ltd. 1
Vogo II-2 Investment Holdings Co., Ltd. 1
Revolution Private Equity Fund 1
KoFC-IMM Pioneer Champ 2010-17 venture investment 1
Enterprise DB Corp. 1
The Company does not have any plans to dispose the above-mentioned equities instruments in the near future. These instruments will be measured at fair value when the Company can develop a reliable estimate of the fair value.
37. Business Combination
(1) KT Skylife Co., Ltd.
Due to the trend of convergence in the telecommunications and broadcasting market, the Controlling Company needed to obtain control over a broadcasting company to enhance the synergy effects of the resources within the consolidated subsidiaries. On January 27, 2011, the Controlling Company acquired from Dutch Savings Holdings B.V 5,600,000 of redeemable convertible preferred stock with voting rights and the bonds convertible into 5,600,000 of common stock of KT Skylife Co., Ltd. (formerly “Korea Digital Satellite Broadcasting Co., Ltd.”) for (Won)246,400 million, which is engaged in the satellite broadcasting business. Including the potential voting rights, the Controlling Company’s ownership in KT Skylife Co., Ltd. has increased to 53.05% and accordingly, the Controlling Company has control over KT Skylife Co., Ltd. On March 10, 2011, the Controlling Company exercised the conversion right of both redeemable convertible preferred stocks and convertible bonds.
As a result of applying the acquisition method, the Company recognized goodwill of (Won)306,303 million, which is the excess of total consideration transferred over the fair value of the net assets at the acquisition date. The fair value of the net assets at the acquisition date includes the identifiable intangible assets such as customer relationship, which was not previously recognized in the subsidiary’s financial statements.
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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 (cash and cash equivalents)
The acquisition-date fair value of the acquirer’s previously held equity interest
The recognized amounts of assets acquired and liabilities assumed 1
Trade and other accounts receivable
Inventories
Fixed assets including broadcast equipment and satellite communication facilities
Intangible assets including broadcast license and customer relationship
Trade and other accounts payable
Provisions for severance benefits
Accrued provisions
The net of total amounts of identifiable assets and liabilities measured at fair value
Non-controlling interests 2
Goodwill 3
As described in Note 15, the previously held interest in KT Skylife Co., Ltd. was measured at fair value, and the Company recognized other operating income of(Won)187,458 million arising from the fair value measurement on acquisition.
After the acquisition date, the revenue and net income for consolidation of KT Skylife Co., Ltd. before the elimination of intercompany transactions with its subsidiaries are (Won)116,748 and (Won)7,321 million, respectively. The difference between its revenue and net income from the acquisition date and the revenue and net income if KT Skylife Co., Ltd. had been consolidated from January 1, 2011, included in consolidation is insignificant.
The fair value of trade accounts receivable and other receivables acquired from KT Skylife Co., Ltd. is (Won)140,180 million, while the full contract value is (Won)168,693 million. The uncollectible amounts from these receivables are expected to be (Won)28,513 million.
(2) BC Card Co.,Ltd.
KT Capital Co.,Ltd., which is a subsidiary of the Controlling Company, acquired common shares with voting right at (Won)252,302 million from Woori Bank on October 6, 2011 in order to secure stable management control of BC card co., Ltd. and strengthen synergies between two firms based on determination of board meetings at February 11 and February 23, 2011. By this acquisition, the company’s ownership interests of BC Card Co.,Ltd. increased to 38.86% including ownership which were previously acquired from Citi Bank. Also, the Company entered into shareholders’ agreement to
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exercise voting right of 1,349,920 registered common shares of BC Card Co.,Ltd. (30.68% of total BC Card Co.,Ltd. shares) owned by Vogo-BCC Investment Holdings Co.,Ltd. and KGF-BCC LIMITED on March 25, 2011. Based on the shareholders’ agreement and the acquisition of common shares described above, the Company has control of BC card co., Ltd. from October 6, 2011(acquisition date).
As a result of applying the acquisition method, the Company recognized goodwill of (Won)41,234 million, which is the excess of total consideration transferred over the fair value of the net assets at the acquisition date. The fair value of the net assets at the acquisition date includes the identifiable intangible assets such as customer relationship, which was not previously recognized in the subsidiary’s financial statements.
Details of the consideration transferred, fair value of the acquired identifiable assets and liabilities, and goodwill at the acquisition date are as follows.
Commitment for dividends payable 1
Total consideration transferred (a)
The recognized amounts of assets acquired and liabilities assumed2
Fixed assets
Investment properties
Intangible assets including customer relationship
Current tax liabilities
The net of total amounts of identifiable assets and liabilities measured at fair value (b)
Non-controlling interests 3 (c)
Goodwill (a-b+c) 4
After the acquisition date, the revenue and net income for consolidation of BC Card Co,. Ltd. before the elimination of inter-company transactions with its subsidiaries are (Won)782,853million and (Won)945 million, respectively. If BC Card Co.,Ltd had been consolidated from January 1, 2011, the revenue and net income included in consolidation should have been (Won)3,376,113million and (Won)102,459million, respectively.
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(3) Enswers Inc.
As approved by Board of Directors on November 11, 2011, the Company acquired on December 7, 2011, from existing shareholders 14,185 common shares and 3,676 of redeemable convertible preferred stock with voting rights of Enwers Inc, which is specialized in the video-related technology, in order to develop a new business and strengthen the existing business. The Company’s ownership in Enwers Inc. has increased to 56.3% including the potential voting rights and accordingly, the Company acquired control over Enswers Inc.
The recognized amounts of assets acquired and liabilities assumed1
Current tax assets
Intangible assets including Patents-Industrial and customer relationship
Non-controlling interests 2 (c)
Goodwill (a – b + c) 3
The previously held interest in Enswers Inc. was measured at fair value, and the Company recognized other operating income of (Won)1,942 million arising from the fair value measurement on acquisition.
After the acquisition date, the revenue and net loss for consolidation of Enswers Inc. before the elimination of inter-company transactions with its subsidiaries are (Won)797 and(Won)331 million, respectively. If Enswers Inc. had been consolidated from January 1, 2011, the revenue and net loss included in consolidation should have been (Won)3,467million and (Won)1,512million, respectively.
The fair value of trade accounts receivable and other receivables acquired from Enswers Inc. is (Won)387 million, while the full contract value is(Won)414 million. The uncollectible amounts from these receivables are expected to be(Won)27 million.
38. Assets Held for Sale and Discontinued Operations
As approved by the Controlling Company’s Board of Directors on May 4, 2011, the Controlling Company decided to sell 5,309,189 shares (79.96%) of New Telephone Company, Inc. to Vimpel-Communication and the Controlling Company lost its control of New Telephone Company. The prior
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period financial statements presented for comparative purposes have been restated in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. Profit or loss arising from net fair value measurement and related income tax effect is reflected in profit or loss from discontinued operations.
The liquidation of KT Internal venture Fund NO.2, a former subsidiary, was completed on December 28, 2011. Therefore, the Company accounted for the operating result until the liquidation as discontinued operation and restated the prior year statement of income presented for the comparative purpose in accordance with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”. The Company also included the related gains or losses and income tax effects in the profit from the discontinued operation.
On June 1, 2010, the rent-a-car business segment of Kumho Rent-A-Car Global Co., Ltd., a joint venture investment, was split off and was merged with Kumho Rental Co., Ltd., resulting in the decrease of the Company’s ownership in Kumho Rental Co., Ltd. from 100% to 58%. And as the Company has joint control of KT Rental Co., Ltd. under the shareholders’ agreement, this subsidiary is accounted for under the equity method in accordance with IAS 31, Interest in Joint Ventures. The operating results of KT Rental Co., Ltd. until the date the Company lost control are accounted for under discontinued operations.
The Company sold all shares of DOREMI MEDIA CO.,LTD and D&G Star to the third parties. The operating results of DOREMI MEDIA CO.,LTD and D&G Star prior to the loss of the control were accounted for as discontinued operation in 2010 and the related gains or losses and income tax effects are included in the profit from the discontinued operation.
Income and loss from discontinued operations for the year ended December 31, 2010 and 2011, are as follows:
Revenue
Expense
Income (loss) from discontinued operations before income taxes
Income (loss) from discontinued operations
Gain on disposal and fair valuation before income taxes
Gain on disposal and fair valuation after tax
Cash flows from discontinued operations for the year ended December 31, 2010 and 2011, are as follows:
Changes in foreign exchange rates
Total cash flows
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39. Subsequent Events
Subsequent to December 31, 2011, the Company has issued the unsecured public bonds, as follows:
(in millions of Korean won and
thousands of foreign currencies)
Repayment method
The 57-1st non-registered unsecured bond
The 57-2nd non-registered unsecured bond
The 57-3rd non-registered unsecured bond
Regulation S.Bond
Subsequent to December 31, 2011, the additional contributions was made by the Controlling Company as follows.
Purpose
KT Capital Co.,Ltd
common shares
To strengthen the financial
stability
The Company entered into the shareholders’ agreement with Vogo-BCC Investment Holdings Co.,Ltd. and KGF-BCC LIMITED on March 25, 2011 for the sustainable control over BC card co., Ltd, which is a subsidiary of the Company. Based on this agreement, the Company has exercised the call option for 1,349,920 common shares of BC Card Co., Ltd, owned by Vogo-BCC Investment Holdings Co.,Ltd. and KGF-BCC LIMITED(30.68% of total shares) for (Won)28,713,408 million on January 27, 2012.
On April 18, 2012, the Company entered into a contract with Olleh KT First Securitization Specialty Co., Ltd. which is a special purpose entity formed for the securitization of KT’s accounts receivable. Based on this contract, the Company sold its accounts receivables with book value of (Won)529,776 million for a total sales price of (Won)525,400 million.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
/s/ Suk-Chae Lee
Date: April 27, 2012