1934 Act Registration No. 1-14418
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE MONTH OF SEPTEMBER 2003
-------------------
SK TELECOM CO., LTD.
(Translation of registrant's name into English)
99, Seorin-dong
Jongro-gu
Seoul, Korea
(Address of principal executive offices)
-------------------
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.)
Form 20-F [ ] Form 40-F [X]
(Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes [X] No [ ]
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):82- .)
================================================================================
This report on Form 6-K shall be deemed to be incorporated by reference in
the prospectuses included in Registration Statements on Form F-3 (File Nos.
333-91034 and 333-99073) filed with the Securities and Exchange Commission and
to be a part thereof from the date on which this report is filed, to the extent
not superseded by documents or reports subsequently filed or furnished.
TABLE OF CONTENTS
PAGE
----
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 1
Overview........................................................................................ 2
Results of Operations........................................................................... 5
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002....................... 5
Liquidity and Capital Resources................................................................. 9
Contractual Obligations and Commitments......................................................... 13
Inflation....................................................................................... 14
U.S. GAAP Reconciliation........................................................................ 14
CONSOLIDATED FINANCIAL STATEMENTS
Independent Accountants' Review Report of Deloitte & Touche LLC for the six months ended
June 30, 2002 and 2003.......................................................................... F-1
Consolidated Balance Sheets as of December 31, 2002 and June 30, 2003........................... F-3
Consolidated Statements of Income for the Six Months Ended June 30,
2002 and 2003................................................................................. F-5
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2002 and 2003................................................................................. F-6
Notes to Consolidated Financial Statements...................................................... F-9
EXHIBITS
Exhibit 1
Letter by Deloitte & Touche LLC regarding unaudited interim financial information
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
In this report on Form 6-K, unless the context indicates or otherwise
requires, references to "we", "us", "our" or the "Company" shall mean SK Telecom
Co., Ltd. and its consolidated subsidiaries, and references to "SK Telecom"
shall mean SK Telecom Co., Ltd., but shall not include its consolidated
subsidiaries. Unless otherwise indicated, references to our number of
subscribers shall include Shinsegi Telecomm, Inc.'s subscribers from April 1,
2000. All references to "Korea" contained in this report shall mean The Republic
of Korea and all references to the "Government" shall mean the government of The
Republic of Korea.
All references to "Kbps" shall mean one thousand binary digits, or bits, of
information per second. Any discrepancies in any table between totals and the
sums of the amounts listed are due to rounding.
The financial information appearing in this report and in our accompanying
consolidated financial statements is stated in Korean won. All references to
"Won" or "W" in this prospectus supplement and the prospectus are to the
currency of Korea, all references to "Dollars", "$" or "US$" are to the currency
of the United States of America and all references to "Yen" or "Y" are to the
currency of Japan. Any discrepancies in any table between totals and the sums of
the amounts listed are due to rounding.
Unless otherwise indicated, the translations of Won amounts in to Dollars
were made at the rate of W1,196.0 to US$1.00, the noon buying rate in the City
of New York for cable transfers in Won as certified for customs purposes by the
Federal Reserve Bank of New York on the last business day of the six months
ended June 30, 2003. Such conversion into U.S. dollars should not be construed
as representations that the Won amounts could be converted into Dollars at the
above or any other rate.
This report contains "forward-looking statements", as defined in Section 27A
of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S.
Securities Exchange Act of 1934, as amended, 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 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. 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.
You should read the following discussion together with our consolidated
financial statements and the related notes which appear elsewhere in this
report. We prepare our financial statements in accordance with generally
accepted accounting principles in Korea
1
("Korean GAAP"), which differs in some respects from generally accepted
accounting principles in the United States ("U.S. GAAP"). This section titled
"--U.S. GAAP Reconciliation" below and notes 30 and 31 of our notes to
consolidated financial statements describe the significant differences between
Korean GAAP and U.S. GAAP as they relate to us and provide a reconciliation to
U.S. GAAP of our net income and shareholders' equity. In addition, you should
read carefully note 2 of our notes to consolidated financial statements which
provide summaries of certain critical accounting policies that require our
management to make difficult, complex or subjective judgments relating to
matters which are highly uncertain and that may have a material impact on our
financial condition and results of operations.
OVERVIEW
Revenue. We earn revenue principally from connection fees and monthly and
usage fees paid by subscribers to our wireless services, interconnection fees
paid to us by other telecommunications operators and sales of wireless handsets
by our subsidiary, SK Teletech. The amount of our revenue depends principally
upon the number of our wireless subscribers, the rates we charge for our
services, subscriber usage of our services and the terms of our interconnection
with other telecommunications operators.
Our wireless subscriber base has been increasing rapidly in recent years,
growing from approximately 6.0 million subscribers at the end of 1998 to
approximately 10.1 million subscribers, 14.5 million subscribers (including
approximately 3.5 million Shinsegi subscribers), 15.2 million subscribers
(including approximately 3.3 million Shinsegi subscribers) and 17.2 million
subscribers at the end of 1999, 2000, 2001 and 2002, respectively. As a
condition to its approval of our acquisition of Shinsegi, the FTC required that
SK Telecom's and Shinsegi's combined market share of the wireless
telecommunications market, based on numbers of subscribers, be less than 50% as
of June 30, 2001. As a result, we reduced the level of our subscriber
activations and adopted more stringent involuntary subscriber deactivation
policies beginning in 2000 and ceased accepting new subscribers for two months,
from April 1, 2001 through June 30, 2001. As of June 30, 2001, we reduced our
market share to approximately 49.7%. We are no longer subject to this
restriction and resumed activation of new subscribers since that time. As of
June 30, 2003, we had approximately 17.9 million subscribers, representing a
market share of approximately 53.8%.
In the past, wireless telecommunications service providers provided handsets
at below retail prices to attract new subscribers, offsetting a significant
portion of the cost of handsets. The MIC prohibited all wireless
telecommunications service providers from providing handset subsidies beginning
June 1, 2000. In March 2002, the MIC concluded that certain incentive payments
made to wireless handset dealers by us and other wireless network service
providers were being passed on to purchasers of wireless handsets and therefore
constituted improper handset subsidies. In May 2002, we, KT Freetel, LG Telecom
and KT Corporation were fined an aggregate of Won 20.0 billion by the MIC in
respect of these incentive payments. We were assessed and have paid in full a
fine of Won 10.0 billion. On November 15, 2002, we received an order from the
MIC prohibiting us from signing on new subscribers for 30 days (from November
2002 through December 2002) for violating MIC's handset subsidy regulation. KT
Freetel and LG Telecom were also prohibited from signing on new subscribers for
20 days.
2
As a result of the MIC's handset subsidy regulation and steps we have taken
as a result, we experienced a significant reduction in our gross and net
additions of new subscribers in April and May 2002. The MIC's November 2002
order also resulted in a reduction in our gross and net additions of new
subscribers in November and December 2002. We believe that our competitors have
also experienced similar reductions and our market share has not been adversely
affected. We cannot assure you that the elimination of dealer incentives will
not continue to adversely affect the rate at which we attract new subscribers or
the rate at which existing subscribers upgrade their wireless handsets to take
advantage of the higher data transmission capabilities of our CDMA 1xRTT and
CDMA 1xEV/DO network technologies. We also believe that beginning in March 2002,
there was an expectation among dealers that dealer incentives would soon be
eliminated or reduced as a result of the MIC's actions. This expectation
contributed to the abnormally high number of gross and net subscriber additions
and the higher churn rate that we experienced in March 2002 which was 2.1%,
compared to 1.2% in January 2002 and 1.1% in February 2002. Churn rate increased
in part because many existing subscribers chose to upgrade their handsets by
terminating their service and opening a new subscriber account. For the first
six months of 2003, our churn rate has ranged from 0.9% (in February 2003) to
1.6% (in May 2003), with churn rate for June 2003 at 1.1%. We cannot assure you
that our churn rates will not increase in the future.
At present, Korea's wireless telecommunications system uses a
network-specific prefix system in which a unique prefix is assigned to all the
phone numbers of a network operator. We have been assigned the "011" prefix, and
all our current subscriber's mobile phone numbers begin with "011" (the former
Shinsegi subscribers use the "017" prefix) and our subscribers cannot change
their wireless phone service to another wireless operator and keep their current
numbers. In January 2003, the MIC announced its plan to implement number
portability with respect to wireless telecommunications services in Korea,
allowing wireless subscribers to switch wireless service operators while
retaining the same mobile phone number. According to the MIC's plan, number
portability will first be adopted by SK Telecom, starting from January 1, 2004.
KT Freetel and LG Telecom will be required to introduce number portability
starting from June 1, 2004 and January 1, 2005, respectively. In addition, in
order to manage the availability of phone numbers efficiently and to secure
phone number resources for the new services, the MIC plans to integrate mobile
telephone identification numbers into a common prefix identification number
"010" and to gradually retract the current mobile service identification numbers
which had been unique to each wireless telecommunications service provider,
including "011" for our cellular services, starting from 2004. All new
subscribers will be given the "010" prefix starting in January 2004, while
existing users will be able to maintain their mobile service identification
number unless and until they switch to a different wireless service provider. We
believe that the use of the common prefix identification system may have a
greater effect on us as compared to our competitors because "011" has a very
high brand recognition in Korea as the premium wireless telecommunications
service. We can give no assurance that the implementation of the number
portability system will not negatively affect our results of operations due to,
among others factors, increased competition among wireless service providers
(and a corresponding increase in our marketing costs), an adverse effect on our
ability to attract new subscribers and a possible increase in our churn rate. We
may also incur additional costs related to maintaining the number portability
system and increased subscriber deactivations.
For cellular services, we charge initial connection fees, monthly access
fees, usage charges, wireless Internet service fees and monthly charges for
value-added services. Under current regulations, we must obtain prior MIC
approval of the terms on which we may offer our
3
services, including all rates and fees charged for these services. Each of our
competitors, however, is permitted to offer its services at rates set at its
discretion without having to obtain the MIC approval. Generally, the rates we
charge for our services have been declining. In September 1997, April 2000 and
January 2001, we implemented revised rate plans which generally offer rates
lower than our previous rates. Effective May 1, 2001, we implemented a new
charge system based on the amount of data that is transmitted to the
subscribers' handsets, with respect to subscribers using our CDMA 1xRTT network.
CDMA 1xRTT is an advanced CDMA-based technology which allows transmissions of
data at speeds of up to 144 Kbps (compared to a maximum of 64 Kbps for our CDMA
networks). After discussions with the MIC, effective January 1, 2003, we reduced
our Standard rate plan's monthly access fee by Won 1,000, included 10 minutes of
free air time per month and reduced our peak usage charges from Won 21 to Won 20
per minute. As of June 30, 2003, our standard peak usage rate is approximately
11.1% higher than those charged by our competitors. We can give no assurance
that these rate changes will not negatively affect our results of operations.
Under our interconnection agreements, we are required to make payments in
respect of calls from our subscribers which are routed through networks of other
Korean telecommunication operators, and the other operators are required to make
payments to us in respect of calls which originate in their networks and
terminate in our network. The MIC revised the method for calculating
interconnection charges between us and KT Corporation for 2000 and 2001, which
we believe has adversely affected our per-minute interconnection charges, and
consequently, our interconnection revenue. The MIC implemented interconnection
charges for calls between wireless networks starting in January 2000. In April
2002, the MIC revised the manner in which interconnection charges for calls made
from fixed-line operators to wireless networks and calls made between wireless
networks are calculated. These charges, which were previously calculated on the
basis of our actual imputed costs for 1998, are now calculated based on each
wireless operator's actual imputed costs for 2000. The effect of this change was
to reduce the interconnection fees payable by fixed-line operators for 2002 by
between 10.2% and 28.1%, depending on the operators involved. For 2003, an
operator's interconnection charges are based on that operator's actual
interconnection charges for 2002, and decreased by 10.3% for each operator in
accordance with new MIC policy. We expect these changes to adversely affect our
net revenue, because the changes reduce the interconnection charges payable to
us in respect of calls made from fixed-line networks to our wireless networks.
The reduction in fixed-to-wireless charges was also larger, in percentage terms,
than the reduction in wireless-to-wireless interconnection charges, which affect
both our revenue and our expenses. However, we do not expect that the impact of
this change will fully offset the adverse effect of the changes described above.
The MIC is expected to introduce a new method of calculating interconnection
payments, based on the originator's long-run incremental cost, in 2004. We
believe that our interconnection revenue may be reduced even further under the
new framework.
Our average monthly outgoing minutes of voice traffic increased by 2.7% to
193 minutes for the six months ended June 30, 2003 from 188 minutes for the six
months ended June 30, 2002. We believe that this trend principally reflects
lower overall tariff levels and increased use of wireless telecommunications as
a substitute for fixed-line communications. The average monthly outgoing voice
minutes per subscriber is computed by dividing the total minutes of outgoing
voice usage for the period by the monthly weighted average number of subscribers
for the period and dividing the quotient by the number of months in the period.
The monthly weighted average number of subscribers is the sum of the average
number of subscribers for the months calculated by taking the simple average
number of subscribers at
4
the beginning of the month and at the end of the month, divided by the number of
months in the period.
Our consolidated average monthly revenue per subscriber increased by 13.3%
to Won 38,942 for the six months ended June 30, 2003 compared to Won 34,352 for
the six months ended June 30, 2002. Average monthly revenue per subscriber
excludes interconnection revenue and is computed by dividing total initial
connection fees, monthly access fees, usage charges for voice and data,
international charges, value-added service fees and interest on overdue
subscriber accounts (net of telephone tax) for the period by the monthly
weighted average number of subscribers for the period and dividing the quotient
by the number of months in the period. The increase in consolidated average
monthly revenue per subscriber reflects the net effect of several offsetting
trends, including:
- increased usage of our data services by our subscribers, which we
attribute principally to the lower overall tariff levels and our introduction of
an increased range of wireless data and wireless Internet services as well as
other value-added services such as caller ID services and the increase in the
number of our subscribers using our CDMA 1xRTT network;
- increased usage of our voice services by our subscribers, which we
attribute principally to lower overall tariff levels and increased use of
wireless telecommunications as a substitute for fixed-line communications; and
- the inclusion of Shinsegi's subscribers from April 1, 2000 since
Shinsegi's subscriber base has produced less revenue per subscriber than SK
Telecom's.
We cannot assure you that the increases in our average monthly revenue per
subscriber experienced during the six months ended June 30, 2003 will continue
or that revenue per subscriber will not decrease in future periods.
Operating Expenses and Operating Margins. Our operating expenses consist
principally of depreciation, commissions paid to authorized dealers, network
interconnection and leased line expenses, the cost of manufacturing handsets,
advertising costs and labor costs. Our operating margin (operating income
divided by operating revenue) declined slightly from 32.0% for the first six
months of 2002 to 31.8% for the first six months of 2003, primarily due to an
increase in operating expenses which was only partially offset by an increase in
operating revenues.
Industry Consolidation. Beginning in 2000, there has been considerable
consolidation in the wireless telecommunications industry resulting in the
emergence of stronger competitors. In July 2000, KT Corporation acquired a 47.9%
interest in KT M.Com and merged KT M.Com into KT Freetel in May 2001. In May
2002, the Government sold its remaining 28.4% stake in KT Corporation. It is
widely believed that KT Corporation is likely to operate more efficiently and be
managed more effectively and profitably as a privatized business. We believe
that these transactions have increased KT Freetel's ability to compete with us.
On May 23, 2002, we acquired a 9.6% equity interest (29,808,333 shares of
common stock) in KT Corporation for Won 1,609 billion. Pursuant to the terms of
an agreement between us and KT Corporation dated November 14, 2002, we sold all
of our shares of KT Corporation. Under the terms of the agreement, we exchanged
29,808,333 shares of KT Corporation's common stock for 8,266,923 shares of our
common stock and settled the difference in the price in cash on December 30,
2002 and January 10, 2003. The exchange was made at Won
5
50,900 per share of KT Corporation's common stock and Won 224,000 per share of
the Company's common stock.
On August 29, 2003, we purchased Won 120.0 billion of Hanaro Telecom
commercial paper in order to provide Hanaro Telecom with short-term liquidity
while it attempts to secure a foreign investor that will inject new capital into
the company and enhance its corporate value. The commercial paper will be repaid
as soon as a foreign investor infuses capital into Hanaro Telecom.
RESULTS OF OPERATIONS
The following table sets forth selected income statement data, including
data expressed as a percentage of operating revenue, for the periods indicated:
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------
2002 (UNAUDITED) 2003 (UNAUDITED)
-------------------------- -------------------------
(IN BILLIONS OF WON, EXCEPT PERCENTAGES)
Operating Revenue..................................... W 4,439.9 100.0% W 5,026.6 100.0%
Operating Expenses.................................... (3,018.9) (68.0) (3,428.7) (68.2)
----------- ------------ ------------ -----------
Operating Income...................................... 1,421.0 32.0 1,597.9 31.8
Other Income.......................................... 150.0 3.4 154.4 3.0
Other Expenses........................................ (223.7) (5.0) (272.8) (5.4)
----------- ------------ ------------ -----------
Income Before Income Taxes and Minority Interest...... 1,347.3 30.4 1,479.5 29.4
Income Taxes.......................................... (420.8) (9.5) (449.6) (8.9)
Minority Interest..................................... (18.5) (0.4) (7.2) (0.1)
----------- ------------ ------------ -----------
Net Income............................................ W 908.0 20.5% W 1,022.7 20.3%
=========== ============ ============ ===========
Depreciation and Amortization......................... W 676.0 15.2% W 737.3 14.7%
=========== ============ ============ ===========
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Operating Income. Operating income increased by 12.4% to Won 1,597.9 billion
for the six months ended June 30, 2003 from Won 1,421.0 billion for the six
months ended June 30, 2002. The increase in operating income for the six months
ended June 30, 2003 compared to the six months ended June 30, 2002 is lower than
the increase in operating revenue for the same period (13.2% for the six months
ended June 30, 2003 compared to the six months ended June 30, 2002) because
operating expenses increased at a greater rate (13.6% for the six months ended
June 30, 2003 compared to the six months ended June 30, 2002) than operating
income for the same period.
Operating Revenue. Our operating revenue increased by 13.2% to Won 5,026.6
billion for the six months ended June 30, 2003 from Won 4,439.9 billion for the
six months ended June 30, 2002 principally reflecting a 13.8% increase in our
cellular revenue to Won 4,993.4 billion for the six months ended June 30, 2003
from Won 4,334.2 billion for the six months ended June 30, 2002, which was
partially offset by a 3.7% decrease in interconnection revenue and an 11.8%
decline in other non-cellular operating revenue, such as international calling
services.
The increase in our cellular revenue was principally due to an increase in
the number of our wireless subscribers, as well as an increase in the average
monthly revenue per subscriber. The number of our wireless subscribers increased
to approximately 17.9 million as of June 30, 2003 from approximately 16.5
million as of June 30, 2002 reflecting a market share of approximately 53.8%.
6
Our consolidated average monthly revenue per subscriber (including
interconnection revenue) increased by 2.2% to Won 43,849 for the six months
ended June 30, 2003 from Won 42,888 for the six months ended June 30, 2002. The
increase is principally due to increases in average monthly revenue per
subscriber from wireless Internet sales and average monthly revenue per
subscriber from value-added services and other sales, which was partially offset
by the reduction in tariffs by 7.3% (based on a reduction in the standard tariff
plan) from January 2003 and the decrease in interconnection rates.
Our consolidated average monthly revenue per subscriber from wireless
internet sales increased by 76.0% to Won 5,408 for the six months ended June 30,
2003 from Won 3,073 for the six months ended June 30, 2002. Wireless Internet
sales increased by 98.8% to Won 570.7 billion for the six months ended June 30,
2003 from Won 287.1 billion for the six months ended June 30, 2002, representing
11.6% of our cellular revenue, primarily due to the increased number of wireless
Internet-enabled handset holders.
Our consolidated average monthly revenue per subscriber from value-added
services and other sales increased by 28.5% to Won 2,091 for the six months
ended June 30, 2003 from Won 1,627 for the six months ended June 30, 2002.
Value-added services and other sales increased by 45.0% to Won 220.6 billion for
the six months ended June 30, 2003 from Won 152.1 billion for the six months
ended June 30, 2002 primarily due to the increased number of wireless
Internet-enabled handset holders.
On an aggregate basis, interconnection revenue decreased by 3.7% to Won
515.7 billion for the six months ended June 30, 2003 from Won 535.7 billion for
the six months ended June 30, 2002. The decrease was primarily due to lower
interconnection rates during the six months ended June 30, 2003 compared to the
six months ended June 30, 2002.
The following table sets forth certain revenue information about our
wireless operations during the periods indicated:
SIX MONTHS ENDED JUNE 30,
-----------------------------------------
2002 (UNAUDITED) 2003 (UNAUDITED)
------------------- -----------------
(IN BILLIONS OF WON, EXCEPT PERCENTAGES)
CELLULAR REVENUE:
Wireless Services(1)....................................... W 3,538.0 W 4,099.9
Interconnection............................................ 535.7 515.7
Digital Handset Sales...................................... 260.5 317.8
------------------ ----------------
Total Cellular Revenue..................................... 4,334.2 4,933.4
------------------ ----------------
OTHER REVENUE:
International Calling Service(2)........................... 48.2 47.1
Netsgo..................................................... 15.1 7.9
Miscellaneous.............................................. 42.4 38.2
------------------ ----------------
Total Other Revenue........................................ 105.7 93.2
TOTAL OPERATING REVENUE...................................... W 4,439.9 W 5,026.6
================== ================
Cellular Revenue as a percent of Total Revenue............. 97.6% 98.1%
Total Operating Revenue Growth............................. 14.8% 13.2%
-----------
(1) Wireless service revenue includes initial connection fees, monthly access
fees, usage charges, international charges, value-added service fees and
interest on overdue subscriber accounts (net of telephone tax).
(2) Provided by our 90.8%-owned subsidiary, SK Telink Co., Ltd. as of June 30,
2003.
7
Operating Expenses. Our operating expenses for the six months ended June 30,
2003 increased by 13.6% to Won 3,428.7 billion compared to Won 3,018.9 billion
for the six months ended June 30, 2002 primarily due to increases in commissions
paid, network interconnection expenses, depreciation and amortization expenses,
cost of goods and materials sold, labor costs, advertising expenses and
miscellaneous operating expenses.
Commissions paid to our authorized dealers increased by 22.1% to Won 1,084.3
billion for the six months ended June 30, 2003 compared to Won 888.1 billion for
the six months ended June 30, 2002, primarily due to the increase in average
subscribers by 11.2% during the period, increase in commissions paid to retail
agents and wireless Internet content providers as wireless Internet sales
increase, increase in the number of handsets sold and our aggressive marketing
activities to maintain our market leadership in 2G & 2.5G services as well as 3G
services going forward.
Network interconnection expenses increased by 10.0% to Won 412.1 billion for
the six months ended June 30, 2003 compared to Won 374.5 billion for the six
months ended June 30, 2002, primarily due to the higher subscriber numbers and
an increase of the mandated payment in Universal Service Obligation fund for the
first quarter of 2003 of Won 22.5 billion compared to Won 7.2 billion in the
first quarter of 2002, which were only partially offset by a decrease in
interconnection rates and a decrease in the level of interconnection fees that
we must pay to other operators for calls using their networks. Additionally, we
reflected as an expense in the second quarter of 2003 all of the amounts due to
be paid to KT Corporation for the years 1998, 1999, 2000 and 2001 pursuant to a
cost sharing arrangement regarding the provision of directory assistance
services by KT Corporation to our subscribers. We will discuss with KT
Corporation the amounts to be paid by us for directory assistance services
provided to our subscribers during 2002 and the six months ended June 30, 2003.
Depreciation and amortization expenses increased by 9.1% to Won 737.3
billion for the six months ended June 30, 2003 compared to Won 676.0 billion for
the six months ended June 30, 2002. The increase in depreciation and
amortization expenses was primarily due to the expansion of our CDMA 1xRTT
network.
Cost of goods and materials sold increased by 16.2% to Won 277.6 billion for
the six months ended June 30, 2003 compared to Won 238.8 billion for the six
months ended June 30, 2002, primarily due to an increase in wireless
Internet-enabled handset sales .
Labor cost increased by 13.7% to Won 198.8 billion for the six months ended
June 30, 2003 compared to Won 174.8 billion for the six months ended June 30,
2002. The increase was primarily due to payment of performance bonuses to
employees in 2003.
Advertising expenses increased by 8.5% to Won 195.6 billion for the six
months ended June 30, 2003 compared to Won 180.2 billion for the six months
ended June 30, 2002, primarily due to our marketing activities related to the
promotion of our wireless Internet services.
Miscellaneous operating expenses increased by 13.9% to Won 437.2 billion for
the six months ended June 30, 2003 compared to Won 384.0 billion for the six
months ended June 30, 2002 primarily due to increases in research and
development expenses and maintenance expenses.
8
Other Income. Other income, consisting primarily of dividend income,
commission income and interest income, increased by 3.0% to Won 154.4 billion
for the six months ended June 30, 2003 compared to Won 150.0 billion for the six
months ended June 30, 2002, primarily due to increases dividend income,
commission income and interest income, which were offset by a declines in
foreign exchange and translation gains and declines in equity in earnings of
affiliates.
Other Expenses. Other expenses includes interest expenses, foreign exchange
and translation losses, loss on disposal and impairment of property and
equipment, donations and miscellaneous expenses. Other expenses increased by
21.9% to Won 272.8 billion for the six months ended June 30, 2003 compared to
Won 223.7 billion for the six months ended June 30, 2002. The increase was
primarily due to increases in interest expense, donations and losses on the
impairment of long-term investment securities which were only partially offset
by decreases in foreign exchange translation losses, losses on disposal of
property and equipment and other miscellaneous expenses. As a percentage of
operating revenue, other expenses increased by 5.4% for the six months ended
June 30, 2003 from 5.0% for the six months ended June 30, 2002.
Income Tax. Provision for income taxes increased by 6.8% to Won 449.6
billion for the six months ended June 30, 2003 from Won 420.8 billion for the
six months ended June 30, 2002. Our effective tax rate in the six months ended
June 30, 2003 decreased to 30.4% from an effective tax rate of 31.2% for the six
months ended June 30, 2002. See note 19 of the notes to our consolidated
financial statements.
Net Income. Principally as a result of the factors discussed above, our net
income increased by 12.6% to Won 1,022.7 billion for the six months ended June
30, 2003 from Won 908.0 billion for the six months ended June 30, 2002, with net
income as a percentage of operating revenues at 20.4% for the six months ended
June 30, 2003 as compared to 20.5% for the six months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital (current assets minus current liabilities) surplus
of Won 21.9 billion as of June 30, 2003 as compared to a working capital deficit
of Won 189.7 billion as of December 31, 2002.
We had cash, cash equivalents, short-term financial instruments and
marketable securities of Won 1,380.1 billion as of June 30, 2003 and Won 1,621.2
as of December 31, 2002. We had outstanding short-term borrowings including the
current portion of long-term debt of Won 2,243.8 billion as of June 30, 2003 and
Won 1,609.5 billion as of December 31, 2002. As of June 30, 2003, we had
availability under unused credit lines of approximately Won 198.5 billion. We
funded our investment in shares and exchangeable bonds of KT Corporation in May
2002 with Won 901.7 billion of cash and by incurring Won 1,040.0 billion of
short-term debt.
In 2002 and the first half of 2003, our principal sources of funds were
operating cash flow and increases in debt. Cash flow provided by operations in
the six months ended June 30, 2003 was Won 730.9 billion, compared to Won
2,098.6 billion for the six months ended June 30, 2002. Depreciation and
amortization for the six months ended June 30, 2003 were Won 737.3 billion,
compared to Won 676.0 billion for the six months ended June 30, 2002.
9
As of June 30, 2003, we had total long-term debt (excluding current portion
and facility deposits) outstanding of Won 3,573.3 billion. Our long-term debt
included bonds in the amount of Won 2,756.2 billion, bank and institutional
loans in the amount of Won 3.3 billion and obligation under capital lease of Won
0.48 billion. We had total long-term debt (excluding current portion and
facility deposits) of Won 3,693.4 billion as of December 31, 2002. Our long-term
debt decreased as of June 30, 2003 primarily due to a decrease in bonds payable
of Won 152.5 million. For a description of our long-term liabilities, see notes
2, 9, 10, 11, 12, 13, 19, 22 and 24 of the notes to our consolidated financial
statements.
As of June 30, 2003, substantially all of our foreign currency-denominated
long-term debt, which amounted to approximately 6.3% of our total outstanding
long-term debt, including current portion, as of such date, was denominated in
Dollars. Depreciation of the Won against the Dollar will result in net foreign
exchange and translation losses. Changes in foreign currency exchange rates will
also affect our liquidity because of the effect of such changes on the amount of
funds required for us to make interest and principal payments on our foreign
currency-denominated debt.
We issued an unsecured and un-guaranteed Won-denominated bond with a
principal amount of Won 300 billion on March 10, 2003 and an unsecured and
un-guaranteed Won-denominated bond with a principal amount of Won 150 billion on
August 4, 2003. These bonds mature in March 2008 and August 2006, respectively,
and have an annual interest rate of 5.0%. We used the net proceeds from the sale
of these bonds to pay for our operating expenses. See note 29 of the notes to
our consolidated financial statements.
We also have long-term liabilities in respect of facility deposits received
from subscribers, which stood at Won 43.7 billion at June 30, 2003 and Won 46.8
billion at December 31, 2002. These non-interest bearing deposits are collected
from some subscribers when they initiate service and returned (less unpaid
amounts due from the subscriber for our services) when the subscriber's service
is deactivated.
In December 2002, May 2003 and September 2003, we sold Won 650.6 billion,
Won 577.3 billion and Won 549.3 billion, respectively, of accounts receivable
under our handset dealer financing plan to a third party in an asset-backed
securitization transaction. The proceeds from this transaction amounted to
approximately Won 600.0 billion, Won 499.0 billion and Won 451.0 billion,
respectively, a portion of which we used to repay short-term debt.
The following table sets forth our actual capital expenditures for 2002 and
our currently planned capital expenditures for 2003:
YEAR ENDED/ENDING DECEMBER 31,
------------------------------
2002 2003(1)
---- -------
(IN BILLIONS OF WON)
CDMA Network............................................ W 175 W 140
CDMA 1xRTT Network(2)................................... 1,186 710
Wireless Data(3)........................................ 221 210
W-CDMA(4)............................................... 15 250
Other (including land and buildings)(5)................. 428 741
------ ------
Total................................................. W2,025 W2,021
====== ======
----------
(1) Estimated.
(2) Includes upgrades to CDMA 1xEV/DO Network technology which are estimated at
Won 200 billion for 2002 and are estimated at Won 30 billion for 2003.
10
(3) Consists principally of equipment necessary for the provision of data
services.
(4) W-CDMA estimated capital expenditures for 2003 assume that the commencement
of construction of our W-CDMA network and provision of W-CDMA services on a
limited basis in Seoul by the end of 2003. Please see the discussion below.
(5) Includes investments in internet-related businesses, real estate,
satellite-based digital multimedia broadcasting business and information
technology systems.
Our actual capital expenditures for the six months ended June 30, 2003 were
Won 495.5 billion compared with Won 633.9 billion for the six months ended June
30, 2002. Our capital expenditures in 2002 were primarily for the construction
and expansion of our CDMA 1xRTT network and, to a lesser extent, for the
expansion of SK Telecom's CDMA network. Our capital expenditures for the first
half of 2003 were primarily for the expansion and upgrading of our CDMA 1xRTT
network, for our initial investment in the satellite-based digital multimedia
broadcasting (DMB) business and for the development and introduction of wireless
data services.
We estimate that we will spend approximately Won 2.0 trillion for capital
expenditures in 2003 for a range of projects, including primarily for the
expansion and improvement of our wireless networks, investments in our
Internet-related businesses and the satellite-based DMB business and the
roll-out of our W-CDMA network. We may also make additional capital expenditure
investments if the right opportunities arise. In addition, we may increase,
reduce or suspend our planned capital expenditures for 2003 or change the timing
and area of our capital expenditure spending from the estimates reflected in the
table above in response to market conditions or for other reasons.
We currently plan to spend Won 250 billion in 2003 on capital expenditures
related to commencement of construction of our W-CDMA network and provision of
W-CDMA services on a limited basis in Seoul by the end of 2003. However, the
actual scope and timing of the roll-out of our W-CDMA network will depend on
several factors, including the availability of network equipment, progress of
dual band/dual mode handset developments, adoption of CDMA 1xEV/DO service,
regulatory decisions, our assessment of the market opportunities for W-CDMA
technology-based services and the competitive landscape in the Korean wireless
market. At the time we applied for the W-CDMA license, we estimated that the
construction of a nationwide W-CDMA network would require capital expenditures
amounting to approximately Won 3.1 trillion over a six-year period. We have not
subsequently revised or updated this estimate. Our actual construction costs are
likely to differ significantly from this original estimate. Our actual capital
expenditures for the construction of the W-CDMA network will depend upon many
factors, including the scope and timing of the network roll-out, whether W-CDMA
technology is widely implemented worldwide (which could lower the cost of
network equipment) and other factors.
In September 2003, we entered into an agreement with Mobile Broadcasting
Corporation for the purposes of co-owing and launching a satellite for the
satellite DMB business. Under the terms of the agreement, SK Telecom is
committed to fund 34.66% of the costs of launching and maintaining the
operations of the satellite, which is expected to be approximately Won 92.0
billion. Although actual implementation of the satellite DMB business will
depend on many factors, including government approvals, our current expectations
are to launch the satellite in January 2004 and begin commercial service by
March 2004.
In May 2002, the Government sold its remaining 28.4% stake in KT
Corporation. By participating in this privatization, we acquired 9.6% of KT
Corporation's common stock and
11
Won 332.0 billion aggregate principal amount of exchangeable bonds issued by KT
Corporation exchangeable at our option for 1.8% of KT Corporation's common
stock. We purchased 29,808,333 shares of common stock of KT Corporation for Won
1.6 trillion and bonds exchangeable into 5,589,666 shares of such common stock
for Won 332.0 billion. We funded our investment in shares and bonds of KT
Corporation in May 2002 with Won 901.7 billion of cash and by incurring Won
1,040.0 billion of short-term debt. On July 16, 2002, we sold all of the
exchangeable bonds of KT Corporation which we owned to several Korean
institutional investors for an aggregate sale price of Won 340.3 billion. We
used the proceeds of the sale to repay our short-term debt and for general
corporate purposes. We exchanged 29,808,333 shares of KT Corporation's common
stock at Won 50,900 per share for 8,266,923 shares of our common stock at Won
224,000 per share and settled the difference of Won 334.5 billion between the
aggregate sale and purchase prices in cash on December 30, 2002 and January 10,
2003, under a mutual agreement on stock exchange between us and KT Corporation
dated November 14, 2002. Related to these stock exchanges, a loss on exchange of
investments in 15,454,659 shares of KT Corporation for 4,457,635 shares of our
common stock on December 31, 2002, amounting to Won 47,909 million, was recorded
as a loss on disposal of investments during the year ended December 31, 2002. An
impairment loss amounting to Won 44,496 million, which was related to the
investments in 14,353,674 shares of KT Corporation's common stock as of December
31, 2002, was also recorded during the year ended December 31, 2002. 4,457,635
shares were subsequently cancelled and 3,809,288 shares were designated as
treasury stock for use in future mergers and acquisitions transactions and
strategic alliances or for other corporate purposes to be determined by us. As a
result of the share swap, all cross-holdings between KT Corporation and us have
been completely eliminated.
On July 22, 2003, we acquired 2,481,310 shares of POSCO common stock held by
SK Corporation at a price of Won 134,000 per share in accordance with a
resolution of our board of directors dated July 22, 2003. For a description of
this transaction, please see note 29 in the notes to our consolidated financial
statements.
From time to time, we may make other investments in telecommunications or
other businesses, in Korea or abroad, where we perceive attractive opportunities
for investment. From time to time, we may also dispose of existing investments
when we believe that doing so would be in our best interests.
Our research and development expenses have been influenced by the MIC, which
makes annual recommendations concerning the level of our research and
development spending. Our research and development expenses (including donations
to research institutes and educational organizations) were 2.8% of operating
revenue for the six months ended June 30, 2003 and 1.5% of operating revenue for
the six months ended June 30, 2002.
We anticipate that capital expenditures, repayment of outstanding debt and
research and development expenditures will represent our most significant use of
funds in the second half of 2003 and thereafter. To fund our scheduled debt
repayment and planned capital expenditures over the next several years, we
intend to rely primarily on funds provided by operations, as well as bank and
institutional borrowings, and offerings of debt or equity in the domestic or
international markets. In particular, we expect that we will require external
sources of financing to fund our planned construction of the W-CDMA network. We
believe that these sources will be sufficient to fund our planned capital
expenditures for the second half of 2003 and for 2004. Our ability to rely on
these alternatives could be affected by the
12
liquidity of the Korean financial markets or by government policies regarding
Won and foreign currency borrowings and the issuance of equity and debt. Our
failure to make needed expenditures would adversely affect our ability to
sustain subscriber growth and provide quality services and, consequently, our
results of operations.
No commercial bank in Korea may extend credit (including loans, guarantees
and purchase of bonds) in excess of 20% of its shareholders' equity to any one
borrower. In addition, no commercial bank in Korea may extend credit exceeding
25% of the bank's shareholders' equity to any one borrower and to any person
with whom the borrower shares a credit risk. We believe that we have never
operated near our limit with any Korean commercial bank.
We generally collect refundable, non-interest bearing deposits from our
customers as a condition to activating their service. Subject to the approval of
the MIC, we set the amounts to be collected for deposits for cellular services.
Effective February 1, 1996, we generally require cellular subscribers to pay a
facility deposit of Won 200,000. These deposits were an important source of
interest-free capital for us and historically funded a substantial portion of
our capital expenditures. Since 1997, we have been offering existing and new
cellular subscribers the option of obtaining facility insurance from the Seoul
Guarantee Insurance Company, instead of posting the facility deposit. In order
to obtain this facility insurance, subscribers must meet Seoul Guarantee
Insurance Company's credit requirements and pay a Won 10,000 premium for three
years of coverage. After three years, we pay the cost of such insurance on the
subscriber's behalf. For each defaulting insured subscriber, Seoul Guarantee
Insurance Company reimburses us up to Won 350,000. We refund the facility
deposit to any existing subscriber who elects to have facility insurance. As a
result of the facility insurance program, we have refunded a substantial amount
of facility deposits, and facility deposits decreased to Won 43.7 billion as of
June 30, 2003 from Won 47.3 billion as of June 30, 2002. We do not expect to
have a significant amount of facility deposits available for capital
expenditures in the future.
On August 11, 2003 SK Telecom concluded the stock buyback program it had
commenced on June 30, 2003. SK Telecom acquired a total of 2,544,600 shares of
its outstanding common stock, all of which were cancelled on August 20, 2003.
The total purchase price for the stock buyback was Won 524.4 billion (or an
average of approximately Won 206,078.55 per share), with the price per share
ranging from Won 192,000 (on July 24, 2003) to Won 216,000 (on July 15-16,
2003). As a result of the stock buyback and subsequent cancellation of shares,
the total number of SK Telecom's outstanding common stock declined from
84,821,311 to 82,276,711.
In October 2001, in accordance with the approval of our board of directors,
we established trust funds with four Korean banks with a total funding of Won
1.3 trillion for the purpose of acquiring our shares at market prices plus or
minus five percent. Each of the trust funds has an initial term of three years
but is terminable at our option six months after the establishment of the trust
fund and at the end of each succeeding six-month period thereafter. While held
by the trust funds, our shares are not entitled to voting rights and do not bear
dividends. Upon termination of the trust funds, we are required to resell the
shares acquired by the trust funds. On November 6, 2001, these funds purchased
an aggregate of 2,674,580 of our shares of common stock, or approximately 3.0%
of our issued shares, from KT Corporation. On January 31, 2002, these funds
purchased from SK Global an aggregate of 1,367,180 shares of our common stock,
or approximately 1.5% of our issued shares.
13
The total accrued and unpaid retirement and severance benefits for all of
our employees as of June 30, 2003 of Won 71.6 billion is reflected in our
consolidated financial statements as a liability, which is net of deposits with
insurance companies totaling Won 115.4 billion to fund a portion of the
employees' severance indemnities. See note 2(k) of the notes to our consolidated
financial statements.
Dividends declared on our common stock amounted to Won 48.1 billion, Won
57.3 billion and Won 151.7 billion, respectively, in 2001, 2002 and 2003.
Substantially all of our revenue and operating expenses are denominated in
Won. We generally pay for imported capital equipment in Dollars.
We do not have any material swap or derivative transactions outstanding. We
may consider in the future entering into such transactions solely for hedging
purposes.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following summarizes our contractual cash obligations at June 30, 2003,
and the effect such obligations are expected to have on liquidity and cash flow
in future periods:
PAYMENTS DUE BY PERIOD
---------------------------------------------------
LESS THAN AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
------------------------------- ------------ ---------- --------- --------- --------
(IN BILLIONS OF WON)
Bonds................................... W 4,041.6 W 1,285.4 W2,456.2 W 300.0 --
Long-term Borrowings.................... 17.2 13.9 3.3 -- --
Capital lease Obligations............... 0.5 0.5 -- -- --
Operating Leases........................ 1.0 1.0 -- -- --
Other Long-term Payables(1)............. 557.9 -- -- 133.4 424.5
------------ ---------- --------- --------- --------
Total Contractual Cash Obligations...... W 4,618.2 W 1,300.8 W2,459.5 W 433.4 W424.5
============ ========== ========= ========== ========
----------
(1) Related to acquisition of IMT license. See note 2(i) of our notes to
consolidated financial statements.
The following summarizes our contractual cash commercial commitments at June
30, 2003, and the effect such obligations are expected to have on liquidity and
cash flow in future periods:
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
LESS THAN OVER
OTHER COMMERCIAL COMMITMENTS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
-------------------------------- ----------- ----------- ------------- ------------ ----------
(IN BILLIONS OF WON)
Lines of Credit......................... W -- W -- -- -- --
Standby Letters of Credit............... -- -- -- -- --
Guarantees.............................. 0.3 -- -- -- 0.3
Standby Repurchase Obligation........... -- -- -- -- --
Other Commercial Commitments............ -- -- -- -- --
----------- ---------- ------- ----- --------
Total Commercial Commitments............ W 0.3 W -- -- -- W 0.3
=========== ========== ======= ===== ========
INFLATION
We do not consider that inflation in Korea has had a material impact on our
results of operations in recent years. Annual inflation in Korea was 4.1% in
2001 and 3.1% for 2002. For the first half of 2003, the average inflation rate
in Korea was 3.0%, compared to an
14
average of 2.6% for the first half of 2002, on an annualized basis. We can give
no assurance that inflation will not have an adverse effect on our operations.
U.S. GAAP RECONCILIATION
Our consolidated financial statements are prepared in accordance with Korean
GAAP, which differs in certain significant respects from U.S. GAAP. For a
discussion of significant differences between Korean GAAP and U.S. GAAP, see
notes 30 and 31 of our notes to consolidated financial statements.
Our net income for the six months ended June 30, 2003 under U.S. GAAP is
higher than under Korean GAAP by Won 36.0 billion, principally as a result of
differences in the treatment of cancellation of amortization of goodwill and
capitalization of interest expenses, which increased net income under U.S. GAAP,
the effect of which was only partially offset by deferred income taxes,
intangible assets and nonrefundable activation fees. Our net income for the six
months ended June 30, 2002 under U.S. GAAP was lower than under Korean GAAP by
Won 2.8 billion, principally as a result of differences in the treatment of
capitalization of foreign exchange losses and interest expenses, intangible
assets and nonrefundable activation fees.
Our shareholders' equity at June 30, 2003 under U.S. GAAP is higher than
under Korean GAAP by Won 785.6 billion, principally as a result of differences
in the treatment of intangible assets, deferred income taxes and cancellation of
amortization of goodwill, which increased shareholders' equity under U.S. GAAP,
the effect of which was only partially offset by differences in the treatment of
minority interest in equity of consolidated affiliates and nonrefundable
activation fees. Our shareholders' equity at December 31, 2002 under U.S. GAAP
is higher than under Korean GAAP by Won 124.3 billion, principally as a result
of the differing treatment of intangible assets, which increased shareholders'
equity under U.S. GAAP, the effect of which was only partially offset by
differences in the treatment of minority interests in equity of consolidated
affiliates and nonrefundable activation fees.
On January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses accounting for the cost of
legal obligations associated with the retirement of ling-lived assets. SFAS No.
143 requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred and
that such amount be capitalized as part of the book value of the long-lived
asset. We have determined that we do not have a material legal obligation to
remove long-lived assets as described by this statement. Thus, the adoption of
SFAS No. 143 did not have a significant impact on our future consolidated
financial position or results of operations.
On January 1, 2003, we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than the date of an entity's commitment to
an exit plan. The adoption of SFAS No. 146 did not have a significant impact on
our consolidated financial position or results of operations.
In December of 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which is an amendment of
FASB statement No.
15
123, "Accounting for Stock-Based Compensation." In response to a growing number
of companies announcing plans to record expenses for the fair value of stock
options, SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. We have already
adopted the fair value method to evaluate stock options.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees issued. It also clarifies that a guarantor is required to recognize,
at the inception of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of FIN 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosures were effective for
our annual financial statements for the year ended December 31, 2002. The
adoption of FIN 45 did not have a significant impact on our consolidated
financial position or results of operations.
On January 17, 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses consolidation by
business enterprises where equity investors do not bear the residual economic
risks and rewards. These entities have been commonly referred to as "special
purpose entities." The underlying principle behind FIN 46 is that if a business
enterprise is the primary beneficiary of an entity, which is defined in the
guidance as a variable interest entity (VIE), the assets, liabilities and
results of the activities of the variable interest entity should be included in
the consolidated financial statements with those of the business enterprise. FIN
46 also explains how to identify variable interest entities and how an
enterprise should assess its interest in an entity when deciding whether or not
it will consolidate that entity. VIEs created after January 31, 2003 must be
consolidated immediately, while VIEs that existed prior to February 1, 2003 must
be consolidated as of July 1, 2003. Management is currently reviewing existing
VIEs that may require consolidation.
In April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." The statements amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. The new guidance amends Statement 133 regarding implementation
issues raised in relation to the application of the definition of a derivative,
particularly regarding the meaning of an underlying and the characteristics of a
derivative that contains financing components. The amendments set forth in SFAS
No. 149 improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this statement
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in Statement 133. In
addition, it clarifies when a derivative contains a financing component that
warrants special reporting in the statement of the statement of cash flows. We
do not believe the adoption of SFAS No. 149 will have a significant impact on
our consolidated financial position or results of operations.
In May 15, 2003, the FASB has issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." The
statement changes the
16
accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. The new statement requires that certain
instruments be classified as liabilities in statements of financial position.
One type of instrument is a mandatory redeemable stock, which the issuing
company is obligated to buy back in exchange for cash or other assets. A second
type of instrument, which includes put options and forward purchase contracts,
involves instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets. The third type of instruments that
are considered liabilities under this statement are obligations that can be
settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as a market index, or varies inversely with the
value of the issuers' shares. SFAS No. 150 does not apply to features embedded
in a financial instrument that is not a derivative in its entirety. In addition
to its requirements for the classification and measurement of financial
instruments in its scope, SFAS No. 150 also requires disclosures about
alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatory redeemable. Most of the guidance in
this statement is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. We do not believe the
adoption of SFAS No. 150 will have a significant impact on our consolidated
financial position or results of operations.
17
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders of
SK Telecom Co., Ltd.
We have reviewed the accompanying consolidated balance sheet of SK Telecom Co.,
Ltd. (the "Company") and its subsidiaries as of June 30, 2003 and the related
consolidated statements of income and cash flows for the six months ended June
30, 2002 and 2003 (all expressed in Korean won). These consolidated financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in Korea.
The consolidated balance sheet of SK Telecom Co., Ltd. and its subsidiaries as
of December 31, 2002 and the related consolidated statement of income,
shareholders' equity and cash flows for the year then ended (not presented
herein) were audited by other auditors whose report dated March 28, 2003,
expressed an unqualified opinion on those consolidated financial statements. The
information set forth in the accompanying consolidated balance sheet as of
December 31, 2002 has been derived from those consolidated financial statements
referred to above.
Our reviews also comprehended the translation of the Korean won amounts into
U.S. dollar amounts and, based on our reviews, we are not aware of any material
modifications that should be made thereto in order for such translation to be in
conformity with the basis stated in Note 2(a) to the accompanying consolidated
financial statements. Such U.S. dollar amounts are presented solely for the
convenience of readers outside of Korea.
F-1
Accounting principles generally accepted in Korea vary in certain respects from
accounting principles generally accepted in the United States of America. Based
on our reviews, we are not aware of any modifications that should be made to the
disclosures in Notes 30 and 31 to the accompanying consolidated financial
statements regarding application of accounting principles generally accepted in
the United States of America as of June 30, 2003 and for the six months ended
June 30, 2002 and 2003.
August 28, 2003
F-2
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND JUNE 30, 2003
In thousands of
In millions of Korean won U.S. dollars (Note 2)
---------------------------- ---------------------------
December 31, June 30, December 31, June 30,
A S S E T S 2002 2003 2002 2003
------------- --------- ----------- ---------
(Unaudited) (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents (Note 13) .......................... (Won) 664,117 (Won) 295,724 $ 555,282 $ 247,261
Short-term financial instruments (Notes 13 and 22) ........... 202,905 292,077 169,653 244,212
Trading securities (Notes 2 and 4) ........................... 754,219 792,293 630,618 662,452
Current portion of long-term investment securities
(Notes 2 and 4) ............................................ 70,267 66,239 58,752 55,384
Accounts receivable -- trade, net of
allowance for doubtful accounts of
(Won)60,542 million and (Won)66,480 million
at December 31, 2002 and June 30, 2003,
respectively (Notes 2, 13 and 24) .......................... 1,442,135 1,510,214 1,205,798 1,262,721
Accounts receivable -- other, net of allowance for
doubtful accounts of (Won)23,355 million
and (Won)24,037 million at December 31,
2002 and June 30, 2003, respectively
(Notes 2, 13 and 24) ....................................... 852,873 1,072,085 713,105 896,392
Inventories (Note 4) ......................................... 27,460 44,068 22,960 36,846
Short-term loans and other (Note 6) .......................... 99,748 151,957 83,401 127,053
-------------- --------------- ----------- -----------
Total Current Assets ...................................... 4,113,724 4,224,657 3,439,569 3,532,321
-------------- --------------- ----------- -----------
NON-CURRENT ASSETS:
Property and equipment, net
(Notes 2, 7, 12, 22, 23 and 25) ............................ 4,569,417 4,402,123 3,820,583 3,680,705
Intangible assets (Notes 2 and 8) ............................ 3,721,235 3,658,994 3,111,401 3,059,360
Long-term investment securities (Notes 2, 4 and 21) .......... 1,394,697 677,127 1,166,135 566,160
Equity securities accounted for using the equity method
(Notes 2 and 5) ............................................ 81,247 76,550 67,932 64,005
Long-term bank deposits (Note 22) ............................ 177 503 148 421
Long-term loans, net of allowance for
doubtful accounts of (Won)19,486 million
and (Won)19,414 million at December 31,
2002 and June 30, 2003, respectively
(Notes 2 and 6) ............................................ 52,688 45,048 44,054 37,666
Guarantee deposits (Notes 13 and 24) ......................... 249,331 257,959 208,471 215,685
Other ........................................................ 46,194 55,098 38,623 46,067
--------------- --------------- ----------- -----------
Total Non-Current Assets ................................... 10,114,986 9,173,402 8,457,347 7,670,069
--------------- --------------- ----------- -----------
TOTAL ASSETS ....................................................... (Won)14,228,710 (Won)13,398,059 $11,896,916 $11,202,390
=============== =============== =========== ===========
(Continued)
F-3
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2002 AND JUNE 30, 2003
In thousands of
In millions of Korean won U.S. dollars (Note 2)
------------------------------ ---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY December 31, June 30, December 31, June 30,
2002 2003 2002 2003
-------------- -------- ------------ --------
(Unaudited) (Unaudited)
CURRENT LIABILITIES:
Accounts payable (Notes 13 and 24) ........................... (Won) 1,697,502 (Won) 812,162 $ 1,419,316 $ 679,065
Short-term borrowings (Note 13) .............................. 687,296 944,009 574,662 789,305
Income taxes payable ......................................... 383,900 417,267 320,987 348,885
Accrued expenses ............................................. 408,521 452,137 341,573 378,041
Current portion of long-term debt (Notes 9,10,12 and 13) ..... 922,209 1,299,797 771,078 1,086,787
Current portion of facility deposits ......................... 18,415 14,204 15,397 11,876
Other ........................................................ 185,543 263,178 155,137 220,049
--------------- --------------- ----------- -----------
Total Current Liabilities .................................. 4,303,386 4,202,754 3,598,150 3,514,008
--------------- --------------- ----------- -----------
LONG-TERM LIABILITIES:
Bonds payable, net (Notes 2 and 9) ........................... 2,908,496 2,756,180 2,431,853 2,304,498
Long-term borrowings (Notes 10 and 22) ....................... 10,284 3,252 8,599 2,719
Facility deposits (Note 11) .................................. 46,850 43,676 39,172 36,518
Long-term payables -- other (Note 2) ......................... 551,983 557,880 461,525 466,456
Obligations under capital leases (Notes 2, 12, 13 and 22) .... 121 -- 101 --
Accrued severance indemnities, net (Note 2) .................. 48,519 71,620 40,568 59,883
Deferred income tax liabilities (Notes 2 and 19) ............. 104,770 122,281 87,600 102,242
Guarantee deposits received and other
(Notes 2, 11 and 24) ....................................... 22,401 18,453 18,730 15,429
--------------- --------------- ------------ ------------
Total Long-Term Liabilities ................................ 3,693,424 3,573,342 3,088,148 2,987,745
--------------- --------------- ------------ ------------
Total Liabilities .......................................... 7,996,810 7,776,096 6,686,298 6,501,753
--------------- --------------- ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 22)
SHAREHOLDERS' EQUITY:
Capital stock (Notes 1 and 14) ............................... 44,576 44,639 37,271 37,324
Capital surplus (Note 14):
Additional paid-in capital ................................. 3,736,253 3,758,099 3,123,957 3,142,223
Other capital surplus ...................................... (851,871) (846,301) (712,267) (707,610)
Retained earnings (Note 15) .................................. 4,873,205 4,732,862 4,074,586 3,957,242
Capital adjustments:
Treasury stock (Note 16) ................................... (2,192,449) (2,067,784) (1,833,151) (1,728,916)
Unrealized loss on valuation of long-term investment
securities (Notes 2 and 4) ............................... (104,117) (108,450) (87,054) (90,677)
Equity in capital adjustments of affiliates
(Notes 2 and 5) .......................................... (5,171) (9,070) (4,324) (7,584)
Stock options (Notes 2 and 17) ............................. 2,452 3,160 2,050 2,642
Foreign-based operations' translation credit (Note 2)....... 3,515 2,963 2,939 2,477
Minority interest in equity of consolidated subsidiaries
(Note 2) ................................................... 725,507 111,845 606,611 93,516
--------------- --------------- ------------ ------------
Total Shareholders' Equity ................................. 6,231,900 5,621,963 5,210,618 4,700,637
--------------- --------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... (Won)14,228,710 (Won)13,398,059 $ 11,896,916 $ 11,202,390
=============== =============== ============ ============
See accompanying Notes to
Consolidated Financial Statements and Independent Accountants' Review Report.
F-4
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2002 AND 2003
(UNAUDITED)
In millions of Korean won, In thousands of U.S. dollars,
except for income except for income
per share data per share data (Note 2)
------------------------------- -----------------------------
2002 2003 2002 2003
------------- ------------- ----------- -----------
OPERATING REVENUE (Note 4) ................................. (Won)4,439,933 (Won)5,026,591 $ 3,712,319 $ 4,202,835
OPERATING EXPENSES (Notes 2, 18, 22, 24 and 28) ............ 3,018,936 3,428,691 2,524,194 2,866,798
------------ ------------- ----------- -----------
OPERATING INCOME ........................................... 1,420,997 1,597,900 1,188,125 1,336,037
------------ ------------- ----------- -----------
OTHER INCOME:
Interest ................................................ 39,477 47,292 33,008 39,542
Dividends ............................................... 207 25,980 173 21,722
Commissions ............................................. 36,493 45,601 30,513 38,128
Foreign exchange and translation gains (Note 2) ......... 38,266 5,110 31,995 4,273
Gain on disposal of property and equipment .............. 2,634 772 2,202 645
Equity in earnings of affiliates (Notes 2 and 5) ........ 7,796 1,716 6,518 1,435
Other ................................................... 25,077 27,961 20,967 23,378
------------ ------------- ----------- -----------
149,950 154,432 125,376 129,123
------------ ------------- ----------- -----------
OTHER EXPENSES:
Interest ................................................ (152,936) (202,475) (127,873) (169,293)
Donations ............................................... (3,105) (41,284) (2,596) (34,518)
Foreign exchange and translation losses (Note 2) ........ (8,759) (5,381) (7,324) (4,499)
Loss on disposal and valuation of trading securities
(Note 2) ............................................ -- (1,724) -- (1,441)
Loss on disposal and impairment of property and equipment (9,553) (3,480) (7,987) (2,910)
Loss on disposal of investment assets ................... -- (299) -- (250)
Loss on impairment of long-term investment securities
(Note 2) ............................................ (419) (3,555) (351) (2,972)
Loss on impairment of intangible assets ................. (2,977) -- (2,489) --
Other ................................................... (45,960) (14,594) (38,428) (12,204)
------------ ------------- ----------- -----------
(223,709) (272,792) (187,048) (228,087)
------------ ------------- ----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST ................................................ 1,347,238 1,479,540 1,126,453 1,237,073
INCOME TAXES (Notes 2 and 19) .............................. (420,759) (449,641) (351,805) (375,954)
------------ ------------- ----------- -----------
INCOME BEFORE MINORITY INTEREST ............................ 926,479 1,029,899 774,648 861,119
MINORITY INTEREST IN NET INCOME
OF CONSOLIDATED SUBSIDIARIES ............................ (18,505) (7,222) (15,472) (6,038)
------------ ------------- ----------- -----------
NET INCOME ................................................. (Won)907,974 (Won)1,022,677 $ 759,176 $ 855,081
============ ============= =========== ===========
NET INCOME PER SHARE (Notes 2 and 20)
(In Korean won and U.S. dollars) ........................ (Won) 10,772 (Won) 13,411 $ 9.01 $ 11.21
============ ============= =========== ===========
See accompanying Notes to
Consolidated Financial Statements and Independent Accountants' Review Report.
F-5
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2003
(UNAUDITED)
In thousands of
In millions of Korean won U.S. dollars (Note 2)
-------------------------- --------------------------
2002 2003 2002 2003
----------- ------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... (Won)907,974 (Won)1,022,677 $ 759,176 $ 855,081
----------- ------------- ----------- -----------
Expenses not involving cash payments:
Depreciation and amortization .................................. 675,990 737,340 565,209 616,505
Provision for severance indemnities ............................ 37,148 27,091 31,060 22,651
Provision for bad debts ........................................ 9,734 10,359 8,139 8,661
Foreign translation loss ....................................... 6,039 364 5,049 304
Loss on disposal and impairment of property and equipment ...... 9,553 3,480 7,987 2,910
Loss on disposal of investment assets .......................... -- 299 -- 250
Loss on disposal and valuation of trading securities............. -- 1,724 -- 1,441
Loss on impairment of long-term investment securities........... 419 3,555 351 2,972
Loss on impairment of intangible assets ........................ 2,977 -- 2,489 --
Deferred income taxes .......................................... 6,487 28,278 5,424 23,644
Minority interest in net income of consolidated
subsidiaries .............................................. 18,505 7,222 15,472 6,038
Other .......................................................... 14,942 29,950 12,492 25,042
----------- ------------- ----------- -----------
Sub-total ...................................................... 781,794 849,662 653,672 710,418
----------- ------------- ----------- -----------
Income not involving cash receipts:
Reversal of allowance for doubtful accounts .................... (1,629) (5) (1,362) (4)
Foreign translation gain ....................................... (34,380) (2,338) (28,746) (1,955)
Gain on disposal of property and equipment ..................... (2,634) (772) (2,202) (645)
Equity in earnings of affiliates ............................... (7,796) (1,716) (6,518) (1,435)
Other .......................................................... (8,935) (1,661) (7,470) (1,388)
----------- ------------- ----------- -----------
Sub-total ...................................................... (55,374) (6,492) (46,298) (5,427)
----------- ------------- ----------- -----------
Changes in assets and liabilities related to operating activities:
Accounts receivable -- trade ................................... (101,740) (78,320) (85,067) (65,485)
Accounts receivable -- other ................................... 301,665 (231,663) 252,228 (193,698)
Inventories .................................................... 6,629 (16,608) 5,543 (13,886)
Other current assets ........................................... (26,700) (61,787) (22,324) (51,661)
Accounts payable ............................................... (6,339) (884,973) (5,300) (739,944)
Income taxes payable ........................................... 40,853 13,170 34,158 11,012
Accrued expenses ............................................... 127,434 43,583 106,550 36,441
Current portion of facility deposits ........................... 3,868 3,396 3,234 2,839
Other current liabilities ...................................... 125,804 83,030 105,187 69,423
Severance indemnity payments ................................... (10,706) (9,872) (8,952) (8,254)
Deposits for group severance indemnities and other deposits .... 3,480 5,123 2,911 4,283
----------- ------------- ----------- -----------
Sub-total ...................................................... 464,248 (1,134,921) 388,168 (948,930)
----------- ------------- ----------- -----------
Net Cash Provided by Operating Activities .......................... 2,098,642 730,926 1,754,718 611,142
----------- ------------- ----------- -----------
(Continued)
F-6
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2003
(UNAUDITED)
In thousands of
In millions of Korean won U.S. dollars (Note 2)
--------------------------- ---------------------------
2002 2003 2002 2003
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term financial instruments ....... (Won)313,014 (Won)(117,692) $ 261,717 $ (98,405)
Increase in trading securities ................................ (125,663) (41,547) (105,069) (34,738)
Proceeds from sales of long-term investment securities ........ 2,801 776,814 2,342 649,510
Proceeds from sales of equity securities accounted for
using the equity method .................................. -- 3,441 -- 2,877
Decrease (increase) in short-term loans ....................... (1,840) 31,859 (1,538) 26,639
Increase in long-term bank deposits ........................... (15) (324) (13) (271)
Decrease in long-term loans ................................... 8,803 27,803 7,360 23,247
Decrease in guarantee deposits ................................ 28,312 44,491 23,672 37,200
Proceeds from disposal of property and equipment .............. 14,216 4,342 11,886 3,630
Proceeds from disposal of intangible assets ................... 10 236 8 197
Acquisition of property and equipment ......................... (633,856) (495,497) (529,980) (414,295)
Acquisition of intangible assets .............................. (9,859) (12,949) (8,243) (10,827)
Acquisition of long-term investment securities ................ (1,943,873) (52,890) (1,625,312) (44,222)
Acquisition of equity securities accounted for
using the equity method .................................. -- (15,095) -- (12,621)
Increase in long-term loans ................................... (8,633) (22,280) (7,218) (18,629)
Increase in guarantee deposits ................................ (10,109) (52,886) (8,452) (44,219)
Increase in other non-current assets .......................... -- (8,484) -- (7,094)
----------- ----------- ----------- -----------
Net Cash Provided by (Used in) Investing Activities ........... (2,366,692) 69,342 (1,978,840) 57,979
----------- ----------- ----------- -----------
(Continued)
F-7
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2003
(UNAUDITED)
In thousands of
In millions of Korean won U.S. dollars (Note 2)
-------------------------- --------------------------
2002 2003 2002 2003
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings ............................. (Won)381,938 (Won)259,584 $ 319,346 $ 217,043
Issuance of bonds payable ..................................... 487,259 315,829 407,407 264,071
Increase in long-term borrowings .............................. 2,872 13,532 2,401 11,314
Payment of short-term borrowings .............................. -- (2,300) -- (1,923)
Payment of current portion of long-term debt .................. (345,596) (127,398) (288,960) (106,520)
Payment of dividends .......................................... (57,265) (151,739) (47,880) (126,872)
Decrease in facility deposits ................................. (9,241) (3,174) (7,727) (2,654)
Net increase in treasury stock ................................ (351,734) (874,844) (294,092) (731,475)
Increase (decrease) in minority interest in equity of
consolidated subsidiaries ............................. 7,443 (588,619) 6,223 (492,156)
Other ......................................................... (2,046) (9,532) (1,708) (7,970)
------------ ------------ ---------- ----------
Net Cash Provided by (Used in) Financing Activities ........... 113,630 (1,168,661) 95,010 (977,142)
------------ ------------ ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS
DUE TO CHANGES IN CONSOLIDATED SUBSIDIARIES ................... 68 -- 57 --
------------ ------------ ---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS .......................... (154,352) (368,393) (129,055) (308,021)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ............... 867,280 664,117 725,151 555,282
------------ ------------ ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD ..................... (Won)712,928 (Won)295,724 $ 596,096 $ 247,261
============ ============ ========== ==========
Cash paid for interest (net of amounts capitalized) ................ (Won) 96,693 (Won)100,211 $ 80,847 $ 83,788
============ ============ ========== ==========
Cash paid for income taxes ......................................... (Won)376,761 (Won)393,720 $ 315,018 $ 329,197
============ ============ ========== ==========
See accompanying Notes to
Consolidated Financial Statements and Independent Accountants' Review Report
F-8
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 AND 2003
(Unaudited)
1. GENERAL
SK Telecom Co., Ltd. (the "Company") was incorporated in March 1984 under
the laws of Korea as a wholly-owned subsidiary of KT Corporation (formerly
known as Korean Telecom Corp.), the Korean government-owned fixed-line
telephone company, and is currently engaged in providing cellular telephone
communication services. The Company's common shares and depositary receipts
(DRs) are listed on the Korea Stock Exchange and the New York and London
Stock Exchanges, respectively. As of June 30, 2003, the Company's largest
shareholders are the SK Group (26.78%) and POSCO (formerly known as Pohang
Iron & Steel Co., Ltd.) (7.62%).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in preparing the accompanying
consolidated financial statements are summarized as follows:
a. Basis of Presentation
The official accounting records of the Company are expressed in Korean
won and are maintained in accordance with the relevant laws and
regulations of Korea. The accounting principles and reporting practices
followed by the Company and generally accepted in Korea ("Korean GAAP")
may differ in certain respects from accounting principles and reporting
practices generally accepted in other countries and jurisdictions. To
conform more closely to presentations customary in filings with the
Securities and Exchange Commission of the United States of America, the
accompanying consolidated financial statements have been condensed,
restructured and translated into English. The conversion into U.S.
dollars was made at the rate of (Won)1,196.0 to US$1, the Noon Buying
Rate in the City of New York for cable transfers in Korean won as
certified for customs purposes by the Federal Reserve Bank of New York on
the last business day of the six months ended June 30, 2003. Such
conversion into U.S. dollars should not be construed as representations
that the Korean won amounts could be converted into U.S. dollars at the
above or any other rate.
b. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation. 20% to 50% owned
affiliates are accounted for by the equity method.
F-9
The Company's subsidiaries are as follows:
Year of Ownership
Subsidiary Establishment Primary business Percentage (%)
-------------------------------------- ---------------- --------------------------------------- -----------------
SK Teletech Co., Ltd.................. 1995 Engineering and maintenance.......... 61.66
SK Capital Co., Ltd................... 1995 Finance.............................. 100.00
SK Telink Co., Ltd.................... 1998 Telecommunication services........... 90.77
SK Communications Corp................ 1999 Internet website services............ 94.17
SK Wyverns Baseball Club.............. 2000 Business related sports.............. 99.99
Centurion IT Investment Association... 2001 Investments.......................... 37.50
Global Credit and Information Corp.... 1998 Credit and collection................ 50.00
Paxnet Inc............................ 1999 Internet website services............ 67.10
SK Telecom International Inc.......... 1995 Investments.......................... 100.00
SLD Telecom PTE Ltd................... 2000 Telecommunication services........... 53.80
c. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in Korea and the United States of America
requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
d. Allowance for Doubtful Accounts
The allowance for doubtful accounts is provided based on the estimated
collectibility of individual accounts and historical bad debt experience.
Activity in the allowance for doubtful accounts receivable -- trade for
the six months ended June 30, 2002 and 2003 is as follows (in millions of
Korean won):
Six months ended June 30,
-------------------------------
2002 2003
----------- -----------
Beginning balance.................... (Won)81,681 (Won)60,542
Increase in allowance from newly
consolidated subsidiaries.......... -- --
Additions............................ 11,093 9,775
Reductions........................... (13) (3,837)
----------- -----------
Ending balance....................... (Won)92,761 (Won)66,480
=========== ===========
F-10
e. Inventories
Inventories are stated at the lower of cost, determined using the moving
average method, or net realizable value. Inventories consist of supplies
for wireless telecommunication facilities, handsets and raw materials for
handsets.
f. Investment Securities
Effective January 1, 2003, the Company and its subsidiaries adopted
Statement of Korea Accounting Standards ("SKAS") No. 8, "Securities", and
applied it retroactively, by reclassifying the accounts relating to
securities in the consolidated financial statements for the year ended
December 31, 2002, presented for comparative purposes in the accompanying
consolidated financial statements. Such reclassification did not have an
effect on the reported financial position of the Company and its
subsidiaries as of December 31, 2002 or the results of their operations
for the year ended December 31, 2002 and the six months ended June 30,
2002. This statement requires that certain investment securities be
classified into three separate categories such as "trading securities",
"available-for-sales securities", and "held-to-maturity securities", each
with different accounting treatment.
Trading securities are stated at fair value with gains or losses on
valuation charged to current operations.
Securities classified as available-for-sale are reported at fair value.
Unrealized gains or losses on valuation of available-for-sale securities
are included in capital adjustments and the unrealized gains or losses
are reflected in net income when the securities are soldor if an
impairment is other than temporary as discussed below. Equity securities
without readily determinable fair value are stated at acquisition cost
The declines in the fair value (or recoverable value) of individual
available-for-sale securities below their acquisition or amortized cost
that are other than temporary and where there is objective evidence of
impairment, result in write-downs of the individual securities to their
fair value. The related write-downs are recorded in current operations as
loss on impairment of long-term investment securities.
Held-to-maturity securities are presented at acquisition cost after
premiums or discounts for debt securities are amortized or accreted,
respectively. The Company and its subsidiaries recognize write-downs
resulting from the other-than-temporary declines in the fair value below
their book value on the balance sheet date where there is objective
evidence of impairment. The related write-downs are recorded in current
operations as loss on impairment of long-term investment securities.
Trading securities are presented in the current asset section of the
balance sheet, and available-for-sales and held-to-maturity securities
are presented in the current and/or non-current asset section of the
balance sheet as current portion of long-term investment securities
and/or long-term investment securities.
F-11
g. Investments with 20% or More Ownership Interest
Investment securities of non-consolidated affiliated companies, in which
the Company has a 20% or more ownership interest, are carried using the
equity method of accounting, whereby the Company's initial investment is
recorded at cost and the carrying value is subsequently increased or
decreased to reflect the Company's portion of shareholders' equity of the
investee. Differences between the purchase cost and net asset value of
the investee are amortized over 20 years using the straight-line method.
When applying the equity method of accounting, unrealized intercompany
gains and losses are eliminated similar to the method used in preparing
consolidated financial statements.
h. Property and Equipment
Property and equipment are stated at cost. Routine maintenance and
repairs are expensed as incurred. Expenditures which result in an
enhancement of the value or extension of the useful life of the
facilities involved are capitalized.
Depreciation is computed using the declining balance method (except for
buildings and structures acquired on or after January 1, 1995 which are
depreciated using the straight-line method) over the estimated useful
lives (3i-30 years) of the related assets.
Through 2002, interest expense and other financing charges for borrowings
related to the manufacture or construction of property and equipment were
capitalized until such manufacture or construction activities were
complete. Effective January 1, 2003, in accordance with the application
of SKAS No. 7, "Capitalization of Financing Costs", the Company changed
the accounting policy for capitalization of interest costs to charge such
interest expense and other financial charges to current operations as
incurred. In accordance with this statement, this accounting change has
been applied prospectively. If financing costs had been capitalized,
total assets of the Company and its subsidiaries as of June 30, 2003 and
net income for the six months then ended would have increased by
(Won)9,132 million and (Won)6,420 million (net of income tax effect
of (Won)2,712 million), respectively. For the six months ended June 30,
2002, the Company and its subsidiaries capitalized financing costs
amounting to (Won)5,086 million.
i. Intangible Assets
Intangible assets are stated at cost less amortization computed using the
straight-line method over 4 to 20 years.
With its application for a license to provide IMT 2000 service, the
Company has a commitment to pay (Won)1,300,000 million to the Ministry of
Information Communication ("MIC"). SK IMT Co., Ltd., which was merged to
the Company on May 1, 2003, paid (Won)650,000 million of this amount in
March 2001 and the Company is required to pay the remainder over 10 years
with an annual interest rate equal to the 3-year-maturity government bond
rate minus 0.75% (3.41% as of June 30, 2003). The future payments are
(Won)90,000 million in 2007, (Won)110,000 million in 2008, (Won)130,000
million in 2009, (Won)150,000 million in 2010 and (Won)170,000 million in
2011. On December 4, 2001, SK IMT received the IMT 2000 license from the
MIC, and recorded the total license cost as an intangible asset.
Amortization of the IMT license is to commence when the Company commences
providing IMT 2000 service, and will be computed using the straight-line
method over the estimated useful life of the IMT license which expires in
December 2016. The Company determined the IMT license has a finite life,
considering that renewal cost is expected to be substantial.
F-12
Through 2002, interest expense and other financing charges for borrowings
related to the purchase of intangible assets were capitalized until the
assets were put in use. Effective January 1, 2003, in accordance with the
application of SKAS No. 7, "Capitalization of Financing Costs", the
Company changed the accounting policy for capitalization of interest
costs to charge such interest expense and other financing charges to
current operations as incurred. In accordance with this statement, this
accounting change has been applied prospectively. If financing costs had
been capitalized, total assets of the Company and its subsidiaries as of
June 30, 2003 and net income for the six months then ended would have
increased by (Won)20,965 million and (Won)14,738 million (net of
income tax effect of (Won)6,227 million), respectively. For the six
months ended June 30, 2002, the Company and its subsidiaries capitalized
interest amounting to (Won)47,505 million relating to intangible
assets.
j. Discounts on Bonds
Discounts on bonds are amortized to interest expense using the effective
interest rate method over the redemption period of the bonds.
k. Accrued Severance Indemnities
In accordance with the policies of the Company and its subsidiaries, all
employees with more than one year of service are entitled to receive
severance indemnities, based on length of service and rate of pay, upon
termination of their employment. Accruals for severance indemnities are
recorded to approximate the amount required to be paid if all employees
were to terminate at the balance sheet date.
The Company and certain subsidiaries have deposits with insurance
companies to fund the portion of the employees' severance indemnities
which is in excess of the tax deductible amount allowed under the
Corporate Income Tax Law, in order to take advantage of the additional
tax deductibility for such funding. Such funding of severance indemnities
in outside insurance companies, where the beneficiaries are their
employees, totaling (Won)120,413 million and (Won)115,416 million as of
December 31, 2002 and June 30, 2003, respectively, were deducted from
accrued severance indemnities in accordance with Korean GAAP.
In accordance with the Korean National Pension Fund Law, the Company and
its domestic subsidiaries transferred a portion of its accrued severance
indemnities to the National Pension Fund through March 1999. Such
transfers, amounting to (Won)6,860 million and (Won)6,565 million
as of December 31, 2002 and June 30, 2003, respectively, are deducted
from accrued severance indemnities.
Changes in accrued severance indemnities for the six months ended June
30, 2002 and 2003 are as follows (in millions of Korean won):
Six months ended June 30,
-------------------------------
2002 2003
----------- -----------
Beginning balance.................... (Won)61,620 (Won)48,519
Provision............................ 37,148 27,091
Payments to employees................ (10,706) (9,872)
Capitalized as construction-
in-progress........................ -- 885
Increase in accrued severance
indemnities from newly
consolidated subsidiaries.......... 177 --
Decrease (increase) in deposits for
severance indemnities.............. 3,480 4,997
----------- -----------
Ending balance....................... (Won)91,719 (Won)71,620
=========== ===========
F-13
l. Accounting for Leases
Lease agreements that include a bargain purchase option, result in the
transfer of ownership at the end of the lease term, have a lease term
equal to 75% or more of the estimated economic life of the leased
property or where the present value of minimum lease payments equals or
exceeds 90% of the fair value of the leased property, are accounted for
as capital leases. All other leases are accounted for as operating
leases.
Assets and liabilities related to capital leases are recorded as property
and equipment and obligations under capital leases, respectively, and the
related interest is calculated using the effective interest rate method
and charged to expense. For operating leases, the future minimum lease
payments are expensed ratably over the lease term while contingent
rentals are expensed as incurred.
m. Research and Development Costs
The Company and its subsidiaries charge substantially all research and
development costs to expense as incurred. The Company and its
subsidiaries incurred internal research and development costs of
(Won)68,130 million and (Won)110,594 million for the six months ended
June 30, 2002 and 2003, respectively, and external research and
development costs of (Won)50,310 million and (Won)32,210 million for the
six months ended June 30, 2002 and 2003, respectively.
n. Income Taxes
Deferred tax assets and liabilities are recorded for future tax
consequences of operating loss carryforwards, tax credits and temporary
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax
assets are recognized to the extent that they are expected to be
realizable. Deferred tax assets and liabilities are presented on the
balance sheet as a single non-current net number.
o. Net Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period.
p. Foreign-Based Operations' Translation Credit
In translating the foreign currency financial statements of the Company's
overseas subsidiaries into Korean won, the Company presents the
translation gain as a foreign-based operations' translation credit in the
capital adjustment section of the balance sheet. The translation gain
arises from the application of different exchange rates; the year-end
rate for balance sheet items except shareholders' equity, the historical
rate for shareholders' equity and the daily average rate for statement of
income items.
F-14
q. Accounting for Foreign Currency Transactions
The Company and its domestic subsidiaries maintain their accounts in
Korean won. Transactions in foreign currencies are recorded in Korean won
based on the prevailing rate of exchange at the dates of transactions. As
allowed under Korean GAAP, monetary assets and liabilities denominated in
foreign currencies are translated in the accompanying consolidated
financial statements at the Base Rates announced by the Korean government
on the balance sheet dates, which, for U.S. dollars, were (Won)1,200.4 to
US$1 and (Won)1,193.1 to US$1 at December 31, 2002 and June 30, 2003,
respectively. The resulting gains and losses arising from the translation
or settlement of such assets and liabilities are included in current
operations.
r. Valuation of Long-Term Payables
Long-term payables resulting from long-term installment transactions are
stated at the present value of the expected future cash flows. Imputed
interest amounts are recorded as a present value discount which are
deducted directly from the related nominal payable balances. Such imputed
interest is included in operations using the effective interest rate
method over the redemption period.
s. Accounting for Employee Stock Option Compensation Plan
The Company adopted the fair value based method of accounting for its
employee stock option compensation plan. The plan was established,
effective as of March 17, 2000, to reward the performance of its
management who have contributed, or have the ability to contribute,
significantly to the Company (see Note 17). Under the fair value based
method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period. For stock
options, fair value is determined using an option-pricing model that
takes into account the stock price at the grant date, the exercise price,
the expected life of the option, the volatility of the underlying stock,
expected dividends and the current risk-free interest rate for the
expected life of the option. However, as permitted under Korean GAAP, the
Company excludes the volatility factor in estimating the value of its
stock options, which results in measurement at minimum value. The total
compensation cost of an option estimated at the grant date is not
subsequently adjusted for changes in the price of the underlying stock or
its volatility, the actual life of the option, dividends on the stock, or
the risk-free interest rate.
t. Unaudited Interim Financial Statements
The accompanying unaudited interim financial statements reflect all
adjustments which are, in the opinion of Company management, necessary
for a fair statement of the results during the interim period presented.
F-15
3. MERGER WITH SK IMT CO., LTD.
On May 1, 2003, the Company merged with SK IMT Co., Ltd. ("SK IMT"), in
accordance with a resolution of the Company's Board of Directors dated
December 20, 2002 and the approval of shareholders of SK IMT dated February
21, 2003. The shareholders of SK IMT were entitled to exercise dissenter's
right under Korean law. Shareholders holding 22,078,770 shares (or 36.8% of
SK IMT's issued and outstanding shares) exercised such rights, and SK IMT
repurchased the shares of these dissenting shareholders at a purchase price
of (Won)27,400 per share, totaling (Won)604,958 million, before the
completion of the merger with the Company. The exchange ratio of common
stock between the Company and SK IMT was 0.11276 share of the Company's
common stock with a par value of (Won)500 to 1 share of common stock of SK
IMT with a par value of (Won)5,000. Using such exchange ratio, the Company
distributed 126,276 shares of newly issued common stock to minority
shareholders of SK IMT and the Company retired all shares of SK IMT owned by
the Company and SK IMT upon the merger. The excess of acquired net assets
over costs of (Won)9,919 million for the distribution of 126,276 shares of
newly issued common stock to minority shareholders of SK IMT upon on the
merger dated May 1, 2003, was recorded as an increase in capital surplus in
accordance with Korean GAAP.
4. INVESTMENT SECURITIES
a. Trading securities
Trading securities as of December 31, 2002 and June 30, 2003 are as
follows (in millions of Korean won):
December 31, 2002 June 30, 2003
----------------- ---------------------------------------------------
Fair value and
carrying amount Acquisition cost Fair value Carrying amount
---------------- ---------------- ------------ --------------
Debt unit trusts.............. (Won)754,182 (Won)766,299 (Won)764,745 (Won)764,745
Bank debentures............... -- 27,512 27,512 27,512
Government or public bonds.... 37 36 36 36
------------ ------------ ------------ ------------
Total.............. (Won)754,219 (Won)793,847 (Won)792,293 (Won)792,293
============ ============ ============ ============
F-16
B. AVAILABLE-FOR-SALE EQUITY SECURITIES
Available-for-sale equity securities as of December 31, 2002 and June 30,
2003 are as follows (in millions of Korean won, except for share data):
December 31, 2002 June 30, 2003
----------------- ---------------------------------------------------
Ownership Acquisition Fair Carrying
Carrying amount percentage (%) cost value amount
---------------- -------------- ----------- ----- --------
(INVESTMENTS IN LISTED COMPANIES)
KT Corporation........................ (Won) 730,602 -- (Won)-- (Won)-- (Won) --
Digital Chosunilbo Co., Ltd........... 2,428 10.1 5,781 4,191 4,191
Hanaro Telecom Inc.................... 49,586 5.4 151,374 46,109 46,109
Korea Radio Wave Basestation
Management.......................... 2,693 4.5 1,171 2,131 2,131
SK Securities Co., Ltd................ 5,052 1.1 5,550 2,995 2,995
-------------- ------------
sub-total........................... 790,361 55,426
-------------- ------------
(INVESTMENTS IN NON-LISTED COMPANIES)
Real Telecom Co., Ltd................. 5,981 9.9 5,981 (note a) 5,981
Powercomm Co., Ltd.................... 240,243 5.0 240,243 (note a) 240,243
Japan MBCO............................ 27,209 13.6 42,517 (note a) 42,517
Enterprise Networks Co., Ltd.......... 14,438 4.0 14,438 (note a) 14,438
SK Life Insurance Co., Ltd............ 14,890 9.5 14,890 (note a) 14,890
Others................................ 43,971 66,166 (note a) 51,906
-------------- ------------
sub-total........................... 346,732 369,975
-------------- ------------
(INVESTMENTS IN FUNDS)
Korea IT Fund......................... 190,000 190,000 (note a) 190,000
Others................................ 7,104 7,176 (note a) 7,176
-------------- ------------
sub-total........................... 197,104 197,176
-------------- ------------
Total................................. (Won)1,334,197 (Won)622,577
============== ============
(note a) As a reasonable estimate of fair value could not be made without
incurring excessive costs, it states at acquisition cost.
The net unrealized loss on investments in common stock of KT Corporation,
Digital Chosunilbo Co., Ltd., Hanaro Telecom, Inc., Korea Radio Wave
Basestation Management and SK Securities Co., Ltd. as of December 31, 2002
totaling(Won)104,117 million and the net unrealized loss on investments in
common stock of Digital Chousnilbo Co., Ltd., Hanaro Telecom Inc, Korea
Radio Wave Basestation Management and SK Securities Co., Ltd. as of June
30, 2003, totaling(Won)108,450 million were recorded as a capital
adjustment.
On May 23, 2002, the Company acquired a 9.6% equity interest (29,808,333
shares of common stock) in KT Corporation for (Won)1,609 billion as a
result of participation in the privatization of KT Corporation. The
Company sold all of these shares on December 30, 2002 and January 10,
2003, under the Mutual Agreement on Stock Exchange between the Company and
KT Corporation (See Note 26). The investments in 14,353,674 shares of KT
Corporation's common stock as of December 31, 2002, which were not sold
until January 10, 2003, were reported at the agreed sales price
((Won)50,900 per share) with unrealized losses amounting to
(Won)44,496 million reported as impairment losses in the year ended
December 31, 2002, as the declines in the carrying value was not
recoverable.
F-17
The net asset value of the Company's investments in the common stock of
Powercomm Co., Ltd. was (Won)41,501 million as of June 30, 2003, which
was (Won)198,742 million less than the carrying amount. However, no
valuation allowance was provided for these investments as there is no
objective evidence of impairment and the Company management expects the
carrying amount of its investment to be recoverable in the future (See
note 2(f)).
The net asset value of SK Life Insurance Co. Ltd. as of June 30, 2003 was
zero, which was(Won)14,890 million less than the carrying amount.
However, no valuation allowance was provided for the equity investment or
the subordinated bonds of SK Life Insurance Co., Ltd. as there is no
objective evidence of impairment and the Company management expects the
carrying amount of its investment to be recoverable in the future (See
note 2 (f)).
C. AVAILABLE-FOR-SALE DEBT SECURITIES
Available-for-sale debt securities as of December 31, 2002 and June 30,
2003 are as follows (in millions of Korean won):
December 31, 2002 June 30, 2003
----------------- ------------------------
Acquisition Carrying
Maturity Carrying amount cost amount
-------------- ----------------- ------------ ---------
Public bonds........................................... (note a) (Won) 586 (Won) 750 (Won) 750
Convertible bonds of Real Telecom Co., Ltd............. March, 2004 9,514 9,514 9,514
Convertible bonds of Eonex Technologies, Inc.(1st)..... May, 2003 2,000 -- --
Convertible bonds of Eonex Technologies, Inc.(2nd)..... December, 2003 -- 1,500 1,500
Convertible bonds of Eonex Technologies, Inc.(3rd)..... January, 2005 - 3,600 3,600
Other convertible bonds................................ 400 200 200
----------------- ----------
Total.................................................. 12,500 15,564
Less current portion of available-for-sale
debt securities...................................... (2,000) (11,014)
----------------- ----------
Long-term available-for-sale debt securities........... (Won)10,500 (Won)4,550
================= ==========
(note a) The maturities of public bonds as of December 31, 2002 and June
30, 2003 are as follows (in millions of Korean won):
Maturity December 31, 2002 June 30, 2003
------------------------------------- ------------------------- ------------------------
Within five years.................... (Won)583 (Won)690
Within ten years..................... 3 60
------------------------- ------------------------
(Won)586 (Won)750
========================= ========================
F-18
The convertible bonds of Eonex Technologies, Inc. (2nd) with a principal
amount of (Won)1,500 million can be converted into 25,000 shares of
common stock of Eonex Technologies, Inc. at (Won)60,000 per share over
the period from June 16, 2003 to December 30, 2003.
The convertible bonds of Eonex Technologies, Inc. (3rd) with a principal
amount of (Won)3,600 million can be converted into 48,000 shares of
common stock of Eonex Technologies, Inc. at (Won)75,000 per share over
the period from July 30, 2003 to January 29, 2005.
d. Held-to-maturity securities
Held-to-maturity securities as of December 31, 2002 and June 30, 2003 are
as follows (in millions of Korean won):
December 31, 2002 June 30, 2003
----------------- ---------------------
Acquisition Carrying
Maturity Carrying amount cost amount
--------------- --------------- ----------- ---------
Subordinated bonds of
SK Life Insurance Co., Ltd........... April, 2006 (Won)50,000 (Won)50,000 (Won)50,000
Subordinated bonds of
Nate First Special Purpose Company... June, 2003 40,506 -- --
Subordinated bonds of
Nate Second Special Purpose Company.. December, 2003 27,761 27,761 27,761
Subordinated bonds of
Nate Third Special Purpose Company... May, 2004 -- 27,464 27,464
----------- -----------
Total.................................. 118,267 105,225
Less current portion of
held-to-maturity securities.......... (68,267) (55,225)
----------- -----------
Long-term held-to-maturity securities.. (Won)50,000 (Won)50,000
=========== ===========
On June 20, 2002, December 3, 2002 and May 2, 2003, the Company sold
(Won)631,447 million, (Won)650,641 million and 577,253 million,
respectively, of accounts receivable resulting from its mobile phone
dealer financing plan to Nate First Special Purpose Company, Nate Second
Special Purpose Company and Nate Third Special Purpose Company,
respectively, in asset-backed securitization transactions. In the course
of these transactions, the Company acquired subordinate bonds issued by
Nate First Special Purpose Company, Nate Second Special Purpose Company
and Nate Third Special Purpose Company, for (Won)40,506 million,
(Won)27,761 million and 27,464 million, respectively, in order to
enhance the credit of bonds issued by Nate First Special Purpose Company,
Nate Second Special Purpose Company and Nate Third Special Purpose Company
(See note 22(d)).
F-19
5. EQUITY SECURITIES ACCOUNTED FOR USING THE EQUITY METHOD
Equity securities accounted for using the equity method as of December 31,
2002 and June 30, 2003 are as follows (in millions of Korean won):
December 31, 2002 June 30, 2003
------------------ -----------------------------------------------------
Carrying Ownership Acquisition Net Carrying
amount percentage (%) cost assets amount
------------------ -------------- ------------ ------ --------
SK C&C Co., Ltd....................... (Won)39,687 30.0 (Won)19,071 (Won)29,147 (Won)35,032
VCASH................................. 2,232 27.8 4,170 1,627 1,627
STIC IT Venture Capital............... 6,884 28.3 8,000 6,683 6,683
Skytel Co., Ltd....................... 2,576 25.3 2,159 2,688 2,688
SK China Company, Ltd................. 3,482 20.7 3,195 3,461 3,461
Eonex Technologies, Inc............... 4,615 16.8 3,600 -- --
Widerthan.com......................... 1,750 20.0 1,000 2,501 2,501
SKT-HP Ventures, LLC.................. 5,990 50.0 6,415 5,940 5,940
SKT QC Wireless Development Fund, LLC. 5,993 50.0 6,540 5,910 5,910
Other investments in affiliates....... 8,038 12,577 12,708
----------- -----------
(Won)81,247 (Won)76,550
=========== ===========
As allowed under Korean GAAP, investments in equity securities of AirCross
Co., Ltd., Daegu Electronics Co., Ltd. and others were not accounted for
using the equity method of accounting, as their total assets at the
beginning of the fiscal year were less than(Won)7 billion.
Details of the changes in investments in affiliates accounted for using the
equity method for the six months ended June 30, 2002 and 2003 are as
follows (in millions of Korean won):
For the six months ended June 30, 2002
-----------------------------------------------------------------------------------------
Equity in
capital
Equity in surplus and
Beginning earnings capital Dividends Ending
balance Acquisition (losses) adjustments received Decrease Balance
--------- ----------- --------- ----------- --------- -------- -------
SK C&C Co., Ltd............. (Won)43,475 (Won)-- (Won)9,510 (Won)6,048 (Won)(600) -- (Won)58,433
VCASH....................... 3,417 -- (631) (4) -- -- 2,782
STIC IT Venture Capital..... 8,038 -- (183) -- -- -- 7,855
Skytel Co., Ltd............. 2,352 675 -- (204) -- -- 2,823
SK China Co., Ltd........... 3,869 -- -- (362) -- -- 3,507
Eonex Technologies, Inc..... 3,600 -- (1,006) 1,625 -- -- 4,219
Widerthan.com............... 1,000 -- 130 (3) -- -- 1,127
SKT-HP Ventures, LLC........ 6,415 -- -- -- -- -- 6,415
SKT QC Wireless
Development Fund, LLC..... 6,540 -- (24) (530) -- -- 5,986
----------- -------- ---------- ---------- --------- -------- -----------
(Won)78,706 (Won)675 (Won)7,796 (Won)6,570 (Won)(600) -- (Won)93,147
=========== ======== ========== ========== ========= ======== ===========
F-20
For the six months ended June 30, 2003
-----------------------------------------------------------------------------------------------
Equity in Equity in
Equity in beginning capital surplus
Beginning earnings retained and capital Dividends Decrease Ending
balance (losses) earnings adjustments received (note a) balance
--------- ---------- --------- ---------------- --------- -------- -------
SK C&C Co., Ltd. .......... (Won)39,687 (Won)1,700 (Won) -- ((Won)5,755) (Won)600) (Won) -- (Won)35,032
VCASH...................... 2,232 (621) -- 16 -- -- 1,627
STIC IT Venture Capital.... 6,884 (179) (2) (20) -- -- 6,683
Skytel Co., Ltd. .......... 2,576 162 -- (50) -- -- 2,688
SK China Company, Ltd. .... 3,482 -- -- (21) -- -- 3,461
Eonex Technologies, Inc.... 4,615 (22) -- 1,989 -- (6,582) --
Widerthan.com.............. 1,750 751 -- -- -- -- 2,501
SKT-HP Ventures, LLC....... 5,990 (27) -- (23) -- -- 5,940
SKT QC Wireless
Development Fund, LLC.... 5,993 (48) -- (35) -- -- 5,910
----------- ---------- ------- ----------- --------- ----------- -----------
(Won)73,209 (Won)1,716 ((Won)2) ((Won)3,899) ((Won)600) ((Won)6,582) (Won)63,842
=========== ========== ======= =========== ========= =========== ===========
(note a) As the Company's ownership in Eonex Technologies decreased from
22.5% to 16.8%, during the first quarter of 2003, investments in
common stock of Eonex Technologies, Inc. were reclassified to
available-for-sale securities at the end of the first quarter of
2003.
6. LOANS TO EMPLOYEES
Short-term and long-term loans to employees as of December 31, 2002 and June
30, 2003 are as follows (in millions of Korean won):
December 31, 2002 June 30, 2003
----------------- -------------
Loans to employees' stock ownership association..................... (Won)45,906 (Won)40,401
Loans to employees for housing and other (3-4%)..................... 10,556 9,608
----------- -----------
(Won)56,462 (Won)50,009
=========== ===========
F-21
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 and June 30, 2003 consists of
the following (in millions of Korean won):
Useful lives
(years) December 31, 2002 June 30, 2003
----------- ----------------- -------------
Land....................................... (Won) 439,915 (Won) 442,990
Buildings and structures................... 15-30 977,045 1,020,214
Machinery.................................. 3-6 6,998,088 7,617,983
Vehicles................................... 3-4 19,368 19,692
Other...................................... 3-4 878,006 758,859
Construction in progress................... 352,932 267,130
-------------- --------------
Acquisition cost........................... 9,665,354 10,126,868
Less accumulated depreciation.............. (5,095,937) (5,724,745)
-------------- --------------
Property and equipment, net................ (Won)4,569,417 (Won)4,402,123
============== ==============
The government's declared standard value of land owned as of December 31,
2002 and June 30, 2003 are (Won)356,360 million and (Won)358,649
million, respectively.
Details of change in property and equipment for the six months ended June
30, 2003 are as follows (in millions of Korean won):
Beginning Ending
balance Acquisition Disposal Transfer Depreciation balance
--------- ----------- -------- -------- ------------ -------
Land...................... (Won) 439,915 (Won) 3,391 ((Won)1,747) (Won) 1,431 (Won) -- (Won) 442,990
Buildings and structures.. 778,832 5,389 (1,675) 39,880 (19,439) 802,987
Machinery................. 2,475,663 47,738 (1,375) 577,127 (571,274) 2,527,879
Vehicles.................. 6,353 795 (95) 40 (1,534) 5,559
Other..................... 515,722 240,213 (2,137) (351,604) (46,616) 355,578
Construction in progress.. 352,932 197,971 -- (283,773) -- 267,130
-------------- ----------- ----------- ------------ ------------- --------------
Total................. (Won)4,569,417 (Won)495,497 ((Won)7,029) ((Won)16,899) ((Won)638,863) (Won)4,402,123
============== =========== =========== ============ ============= ==============
F-22
8. INTANGIBLE ASSETS
Intangible assets as of December 31, 2002 and June 30, 2003 consist of the
following (in millions of Korean won).
December 31, 2002 June 30, 2003
----------------- ---------------------------------------------------------
Acquisition Accumulated Carrying
Carrying amounts cost amortization amounts
---------------- ----------- ------------ --------
Goodwill...................... (Won)2,255,868 (Won)2,394,532 ((Won)205,959) (Won)2,188,573
Software development costs.... 91,337 167,080 (58,699) 108,381
IMT license................... 1,259,253 1,259,253 -- 1,259,253
Other......................... 114,777 267,656 (164,869) 102,787
-------------- -------------- ------------- --------------
(Won)3,721,235 (Won)4,088,521 ((Won)429,527) (Won)3,658,994
============== ============== ============= ==============
Details of changes in intangible assets for the six months ended June 30,
2003 are as follows (in millions of Korean won):
Beginning Ending
balance Acquisition Disposal Transfer Amortization balance
-------- ----------- -------- -------- ------------ -------
Goodwill.................... (Won)2,255,868 (Won) -- (Won) -- ((Won) 110) ((Won)67,185) (Won)2,188,573
Software development costs.. 91,337 6,351 -- 26,014 (15,321) 108,381
IMT license................. 1,259,253 -- -- -- -- 1,259,253
Other....................... 114,777 6,598 (257) (2,360) (15,971) 102,787
-------------- ----------- --------- ----------- ------------ --------------
(Won)3,721,235 (Won)12,949 ((Won)257) (Won)23,544 ((Won)98,477) (Won)3,658,994
============== =========== ========= =========== ============ ==============
F-23
9. BONDS PAYABLE
Bonds payable as of December 31, 2002 and June 30, 2003 are as follows (in
millions of Korean won and thousands of U.S. dollars):
Maturity Annual interest
year rate (%) December 31, 2002 June 30, 2003
-------- --------------- ----------------- -------------
Domestic general bonds............................ 2003 5.0-9.9 910,000 830,000
"....................................... 2004 5.0-7.0 1,120,000 1,120,000
"....................................... 2005 6.0 500,000 500,000
"....................................... 2006 6.0 400,000 400,000
"....................................... 2007 5.0-6.0 700,000 700,000
"....................................... 2008 5.0 - 300,000
Dollar denominated bonds.......................... 2004 7.75 240,173 238,713
(US$200,078) (US$200,078)
Bonds with stock purchase warrants (US$4,000)..... 2006 6M Libor - 0.3 5,054 5,137
-------------- --------------
3,875,227 4,093,850
Less: Discounts on bonds.......................... (60,467) (52,272)
-------------- --------------
Net............................................... 3,814,760 4,041,578
Less portion due within one year.................. (906,264) (1,285,398)
-------------- --------------
Long-term portion ................................ (Won)2,908,496 (Won)2,756,180
============== ==============
As of June 30, 2003, the six month London interbank offered rate (Libor) is
1.12%.
All of the above bonds will be paid in full at maturity.
The bonds with stock purchase warrants were issued on December 11, 2001 by
Paxnet Co., Ltd., in which the Company purchased a 67.1% interest in
December 2002. The stock purchase warrants are detachable and the bonds are
unsecured overseas public bonds. These bonds are redeemable for cash at the
option of the bondholders for 3 years after the issuance date, at 114.79% of
the principal amount. The stock purchase warrants may be exercised at any
time after 3 months from the issuance date and up to 1 month before the
maturity date of the bonds. As of June 30, 2003, the exercise price per
common share of Paxnet Co., Ltd. is (Won)5,000. Unless either previously
redeemed or exercised, the bonds will be redeemed on December 11, 2006, with
a guaranteed annual interest rate of 6M Libor + 4.35%.
F-24
10. LONG-TERM BORROWINGS
Long-term borrowings as of December 31, 2002 and June 30, 2003 are as
follows (in millions of Korean won and thousands of U.S. dollars):
Final Annual interest
Lender maturity year rate (%) December 31, 2002 June 30, 2003
----------------------------------- --------------- --------------- ----------------- -------------
Korea Development Bank............. 2004 3M Libor + 3.45 US$13,434 US$8,956
Woori Bank......................... 2005 Floating rate 6,815 5,452
----------- ----------
Total in foreign currency.......... US$20,249 US$14,408
----------- ----------
Equivalent in Korean won........... (Won)24,307 (Won)17,190
Less portion due within one year... (14,023) (13,938)
----------- ----------
Long-term portion.................. (Won)10,284 (Won)3,252
=========== ==========
At June 30, 2003, the 3M Libor and Woori Bank's floating rate are 1.11% and
2.72%, respectively.
The future maturities of long-term borrowings in foreign currency at June
30, 2003 are as follows (in millions of Korean won and thousands of U.S.
dollars):
Long-term borrowings in foreign currency
Twelve months ---------------------------------------------------
Ending June 30, Foreign currency Korean Won equivalent
--------------- ---------------- ---------------------
2004............... US$11,682 (Won)13,938
2005............... 2,726 3,252
--------- -----------
US$14,408 (Won)17,190
========= ===========
F-25
11. FACILITY DEPOSITS
The Company receives facility guarantee deposits from customers of cellular
services at the subscription date. The Company has no obligation to pay
interest on these deposits and returns all amounts to subscribers upon
termination of the subscription contract.
Long-term facility guarantee deposits as of December 31, 2002 and June 30,
2003 are as follows (in millions of Korean won, except deposit per
subscriber amounts):
Service type Deposit per subscriber December 31, 2002 June 30, 2003
------------ ---------------------- ----------------- -------------
Cellular.............. (Won)200,000 (Won)46,850 (Won)43,676
The Company offers existing and new cellular subscribers the option of
obtaining facility insurance from Seoul Guarantee Insurance Company ("SGIC")
in lieu of the facility deposit. Existing subscribers who elect this option
are refunded their facility deposits. As a result of this arrangement, the
balance of facility guarantee deposits has been decreasing.
12. LEASES
The Company and its subsidiaries lease certain machinery and equipment under
capital leases. The Company and its subsidiaries have an option to acquire
the leased machinery and equipment, free of charge, upon termination of the
lease period. The capitalized cost and accumulated depreciation related to
these leased assets as of June 30, 2003 are (Won)11,094 million and
(Won)6,788 million, respectively, and depreciation expense for the six
months ended June 30, 2002 and 2003 were (Won)494 million and (Won)921
million, respectively.
Future minimum payments under capital leases as of June 30, 2003 are as
follows (in millions of Korean won):
Twelve months
Ending June 30, Principal Interest Total
--------------- --------- -------- -----
2004..................... (Won)461 (Won)17 (Won)478
As of June 30, 2003, the Company and its subsidiaries leased certain
machinery and equipment under operating leases. The minimum annual lease
payables under operating leases are as follows (in millions of Korean won):
Twelve months Lease payable Lease payable
Ending June 30, in Korean won in foreign currency Total
--------------- ------------- ------------------- -----
2004...................... (Won)368 (Won)600 (Won)968
Lease expense for the six months ended June 30, 2002 and 2003 were
(Won)3,901 million and 1,179 million, respectively.
F-26
13. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES
The details of monetary assets and liabilities denominated in foreign
currencies (except for bonds payable and long-term borrowings denominated in
foreign currencies described in Notes 9 and 10) as of December 31, 2002 and
June 30, 2003 are as follows (in millions of Korean won, thousands of U.S.
dollars, thousands of HK dollars, thousands of Japanese yen, thousands of
Singaporean dollars, thousands of Euros, thousands of Great Britain pounds,
thousands of Chinese Yuan and thousands of Australian dollars):
Foreign currencies Korean won equivalent
----------------------------------- ----------------------------------
December 31, 2002 June 30, 2003 December 31, 2002 June 30, 2003
----------------- ------------- ----------------- -------------
Cash and cash equivalents............. US$46,025 US$8,812 (Won) 55,247 (Won)10,513
(Yen)12 (Yen)9 -- --
EUR2 EUR2 3 3
Short-term financial instruments...... US$35,281 US$31,286 42,351 37,327
Accounts receivable -- trade.......... US$19,477 US$7,921 23,382 9,451
(Yen)240 -- 2 --
Accounts receivable -- other.......... US$9,639 US$5,700 11,571 6,801
Guarantee deposits.................... US$187 US$192 225 230
------------ -----------
Total................................. (Won)132,781 (Won)64,325
============ ===========
Accounts payable -- trade............. US$23,975 US$13,024 (Won) 28,779 (Won)15,539
(Yen)1,198,724 (Yen)654,683 12,141 6,523
EUR180 -- 227 --
Short-term borrowings................. US$32,928 US$18,983 39,526 22,649
(Yen)2,603,467 (Yen)1,267,736 26,370 12,632
Accounts payable -- other............. US$37,228 US$ 1,921 44,689 2,292
(Yen)229,641 (Yen)15,027 2,326 150
HK$825 HK$336 127 51
CNY61 CNY69 9 10
GBP1 GBP33 1 65
SG$24 SG$13 17 9
EUR8 EUR3 11 4
AU$1 AU$1 1 1
Obligation under capital leases
including current portion.......... US$482 US$296 578 353
------------ -----------
Total................................ (Won)154,802 (Won)60,278
============ ===========
F-27
14. CAPITAL STOCK AND CAPITAL SURPLUS
The Company's outstanding capital stock consists entirely of common stock
with a par value of (Won)500. The number of authorized, issued and
outstanding common shares as of December 31, 2002 and June 30, 2003 are as
follows:
December 31, 2002 June 30, 2003
----------------- -------------
Authorized shares................................. 220,000,000 220,000,000
Issued shares..................................... 89,152,670 84,821,311
Outstanding shares, net of treasury stock......... 79,842,063 76,058,908
The number of authorized shares of preferred stock as of June 30, 2003 is
5,500,000 shares, none of which is outstanding as of June 30, 2003.
Significant changes in common stock and additional paid-in capital for the
six months ended June 30, 2003 are as follows (in millions of Korean won,
except for share data):
Number of
shares issued Additional
(note 1) Common stock paid-in capital
------------- ------------ ---------------
At December 31, 2001............................. 89,152,670 (Won)44,576 (Won)3,736,253
========== =========== ==============
At December 31, 2002............................. 89,152,670 (Won)44,576 (Won)3,736,253
Retirement of treasury stock................... (4,457,635) -- --
Issuance of common stock for the merger with
SK IMT (see Note 3).......................... 126,276 63 21,846
---------- ----------- --------------
At June 30, 2003................................. 84,821,311 (Won)44,639 (Won)3,758,099
========== =========== ==============
The details of other capital surplus as of December 31, 2002 and June 30,
2003 are as follows (in millions of Korean won):
December 31, 2002 June 30, 2003
----------------- -------------
Consideration for stock warrants (note 1)....... (Won) 6,241 (Won) 6,241
DR premium (note 2)............................. 6,051 6,051
Excess unallocated purchase price (note 3)...... (946,146) (936,227)
Gain on disposal of treasury stock (note 4)..... 81,984 81,984
Other (note 5).................................. (1) (4,350)
------------- -------------
((Won)851,871) ((Won)846,301)
============= =============
F-28
(note 1) Consideration for stock warrants was reclassified to other capital
surplus as of the date the stock warrants were exercised.
(note 2) In 1996, the Company received a premium of (Won)6,051 million upon
issuance of depositary receipts (DRs) in exchange for 129,476
shares of common stock beneficially owned by a foreign shareholder,
Tiger Management LLC.
(note 3) The excess unallocated purchase price of (Won)299,121 million for
the additional 19.2% equity interest of Shinsegi Telecomm, Inc.
acquired in 2001 and (Won)647,069 million for the distribution of
2,677,653 shares of treasury stock to minority shareholders of
Shinsegi Telecomm, Inc. upon the merger dated January 13, 2002,
were deducted from other capital surplus, in accordance with Korean
GAAP. The excess of acquired net assets over costs of (Won)9,963
million for the distribution of 126,276 shares of new issued common
stock to minority shareholders of SK IMT Co., Ltd. upon the merger
dated May 1, 2003 was added to other capital surplus in accordance
with Korean GAAP.
(note 4) The gain on disposal of treasury stock of (Won)81,984 million
resulting from the distribution of treasury stock to minority
shareholders of Shinsegi Telecomm, Inc. upon the merger dated
January 13, 2002 was recorded as an increase in other capital
surplus.
(note 5) The Company's other capital surplus was increased or decreased to
reflect the Company's share of an increase or decrease in capital
surplus of affiliated companies which are accounted for by the
equity method in the Company's consolidated financial statements.
15. RETAINED EARNINGS
The details of retained earnings as of December 31, 2002 and June 30, 2003
are as follows (in millions of Korean won):
December 31, 2002 June 30, 2003
----------------- -------------
Legal reserve................................... (Won) 17,200 (Won) 22,288
Reserve for improvement of financial structure.. 33,000 33,000
Reserve for loss on foreign investment.......... 29,192 --
Reserve for loss on disposal of treasury stock.. 240,000 221,198
Reserve for research and manpower development... 365,300 559,198
Reserve for business rationalization............ 169,493 --
Reserve for business expansion.................. 2,525,737 3,908,138
Other........................................... 1,493,283 (10,960)
-------------- --------------
(Won)4,873,205 (Won)4,732,862
============== ==============
a. Legal Reserve
The Korean Commercial Code requires the Company to appropriate as a legal
reserve at least 10% of cash dividends for each accounting period until
the reserve equals 50% of outstanding capital stock. The legal reserve
may not be utilized for cash dividends, but may only be used to offset a
future deficit, if any, or may be transferred to capital stock.
F-29
b. Reserve for Improvement of Financial Structure
The Financial Control Regulation for listed companies in Korea requires
that at least 10% of net income (net of accumulated deficit), and an
amount equal to net gains (net of related income taxes, if any) on the
disposal of property and equipment be appropriated as a reserve for
improvement of financial structure until the ratio of stockholders'
equity to total assets reaches 30%. The reserve for improvement of
financial structure may not be utilized for cash dividends, but may only
be used to offset a future deficit, if any, or may be transferred to
capital stock.
c. Reserves for Loss on Foreign Investment, Loss on Disposal of Treasury
Stock and Research and Manpower Development
Reserves for loss on foreign investment, loss on disposal of treasury
stock and research and manpower development were appropriated in order to
recognize certain tax deductible benefits through the early recognition
of future expenditures. These reserves will be unappropriated from
appropriated retained earnings in accordance with the relevant tax laws.
Such unappropriation will be included in taxable income in the year of
unappropriation.
d. Reserves for Business Rationalization and Business Expansion
The reserves for business rationalization and business expansion are
voluntary and were approved by the board of directors and shareholders.
16. TREASURY STOCK
Upon issuance of stock dividends and new common stock, the Company acquired
fractional shares totaling 73,636 shares through 2000. In addition, the
Company acquired 3,566,100 shares of treasury stock in the market for
(Won)789,667 million in 2001 in order to stabilize the market price of its
stock.
On October 26, 2001 in accordance with the approval of its board of
directors, the Company established trust funds with four Korean banks with a
total funding of (Won)1.3 trillion for the purpose of acquiring its shares
at market prices. These funds purchased 2,674,580 shares of the Company's
common stock, or approximately 3.0% of its outstanding shares, from KT
Corporation for (Won)669,982 million on November 6, 2001 and 1,367,180
shares of the Company's common stock from SK Global Co., Ltd. for
(Won)350,698 million on January 31, 2002.
A loss on disposal of treasury stock of (Won)155 million resulted from the
disposal of 155,050 shares of treasury stock for (Won)38,685 million in 2001
that had been acquired through the trust fund. The loss was reflected as a
direct adjustment to unappropriated retained earnings.
F-30
On January 13, 2002, the Company merged with Shinsegi Telecomm, Inc. and
distributed 2,677,653 shares of treasury stock to minority shareholders of
Shinsegi Telecomm, Inc. The cost of the treasury stock distributed was
(Won)584,646 million. Upon the merger with Shinsegi Telecomm, Inc., the
Company acquired fractional shares totaling 4,179 shares for (Won)1,036
million. On December 30, 2002, the Company acquired 4,457,635 shares of the
Company's common stock from KT Corporation for (Won)999,509 million under
the Mutual Agreement on Stock Exchange between the Company and KT
Corporation (see Note 26). The Company retired such treasury shares on
January 6, 2003 in accordance with a resolution of the board of directors
dated December 26, 2002 and reduced unappropriated retained earnings by
(Won)1,009,632 million net of a tax effect of (Won)10,123 million in
accordance with Korean Commercial Laws.
On January 10, 2003, the Company acquired 3,809,288 shares of the Company's
common stock from KT Corporation for (Won)854,134 million under the Mutual
Agreement on Stock Exchange between the Company and KT Corporation. On
February 3, 2003, the Company acquired fractional shares totaling 52 shares
for (Won)13 million which resulted from the merger with Shinsegi Telecomm,
Inc., and on May 13, 2003, the Company acquired fractional shares totaling
91 shares for (Won)16 million which resulted from the merger with SK IMT
Co., Ltd.
On June 30, 2003, in accordance with the resolution of board of directors
dated June 24, 2003, we announced a stock repurchase program to acquire
2,544,600 shares of our common stock in the market in order to enhance our
stockholders' interest and to stabilize our stock price. Pursuant to the
program, from June 30, 2003 to August 11, 2003 we acquired a total of
2,544,600 shares of our outstanding common stock for a total purchase price
of Won 524.4 billion. The shares were acquired at market prices on different
dates and all of the shares so acquired were cancelled on August 20, 2003.
17. STOCK OPTIONS
On March 17, 2000, March 16, 2001 and March 8, 2002, in accordance with the
approval of its stockholders, the Company granted stock options to its
management, representing 17,800 shares at an exercise price of (Won)424,000
per share, 43,820 shares at an exercise price of (Won)211,000 per share and
65,730 shares at an exercise price of (Won)267,000 per share. The stock
options will become exercisable after three years from the date of grant and
shall be exercised within two years from the first exercisable date. If the
employees leave the Company within three years after the grant of stock
options, the Company may cancel the stock options awarded. Upon exercise of
stock options, the Company will issue its common stock. There were no
forfeited or expired stock options for the six months ended June 30, 2002
and 2003.
The value of stock options granted is determined using the Black-Scholes
option-pricing model, without considering a volatility factor in estimating
the value of its stock options, as permitted under Korean financial
accounting standards. The following assumptions are used to estimate the
fair value of options granted in 2000, 2001 and 2002; risk-free interest
rate of 9.1% for 2000, 5.9% for 2001 and 6.2% for 2002; expected life of
three years for 2000, 2001 and 2002; expected dividend of (Won)500 for 2000,
2001 and 2002. Under these assumptions, total compensation cost is measured
at (Won)1,533 million for options granted in 2000, (Won)237 million for
options granted in 2001 and (Won)3,247 million for options granted in 2002
and is recognized over the service period (three years). Such compensation
cost of (Won)656 million and (Won)708 million for the six months ended June
30, 2002 and 2003, respectively, was charged to current operations and
recorded as a capital adjustment.
F-31
The pro forma net income and net income per common share, if the Company
had not excluded the volatility factor (expected volatility of 66.8% for
options granted in 2000, 67.5% for options granted in 2001 and 63.0% for
options granted in 2002) in estimating the value of its stock options, for
the six months ended June 30, 2002 and 2003 are as follows:
2002 2003
------------ --------------
Pro forma net income
(in millions of Korean won)................... (Won)906,439 (Won)1,021,028
Pro forma net income per common share........... 10,754 13,390
The fair value of options granted in 2000, 2001 and 2002 is
(Won)209,993, (Won)83,511 and (Won)32,257 per share, respectively.
18. OPERATING EXPENSES
The details of operating expenses for the six months ended June 30, 2002 and
2003 are as follows (in millions of Korean won):
2002 2003
------------ ------------
Labor........................................... (Won) 174,825 (Won) 198,808
Commissions..................................... 888,140 1,084,312
Depreciation and amortization................... 675,990 737,340
Network interconnection......................... 374,488 412,074
Leased line..................................... 144,340 151,404
Advertising..................................... 180,179 195,565
Cost of goods and materials sold................ 238,846 277,612
Other........................................... 342,128 371,576
-------------- --------------
(Won)3,018,936 (Won)3,428,691
============== ==============
19. INCOME TAXES
The provision for income taxes for the six months ended June 30, 2002 and
2003 consists of the following (in millions of Korean won):
2002 2003
------------ ------------
Currently payable............................... (Won)414,272 (Won)421,363
Deferred........................................ 6,487 28,278
-------------- ---------------
Recorded income taxes........................... (Won)420,759 (Won)449,641
============== ===============
F-32
The following is a reconciliation between financial accounting income and
taxable income, together with a computation of income taxes, for the six
months ended June 30, 2002 and 2003 (in millions of Korean won):
2002 2003
-------------- --------------
Income before income taxes ............................... (Won)1,347,238 (Won)1,479,540
Additions (deductions):
Allowance for bad debts................................. 456 4,690
Loss on impairment of investment securities............. 419 (52,744)
Accrued interest income................................. (3,299) (3,363)
Foreign exchange loss................................... (3,991) (4,225)
Depreciation............................................ -- (4,454)
Equity in earnings of affiliates........................ (7,796) (1,716)
Amortization of goodwill................................ 64,394 64,331
Loss on impairment of tangible assets and intangible.... 7,733 7,031
Tax-free reserves....................................... -- (62,098)
Net operating loss carryforwards........................ (7,060) (815)
Other................................................... 34,086 41,955
-------------- --------------
Net taxable income........................................ (Won)1,432,180 (Won)1,468,132
============== ==============
Corporate income taxes at statutory Korean corporate
income tax rates of 27%................................. 386,653 396,324
Tax credit for investments, technology
and human resource development and others............... (12,047) (15,914)
-------------- --------------
Corporate income taxes payable............................ 374,606 380,410
Resident surtax payable................................... 37,460 38,041
Special surtax for agriculture and fishery industries
and other............................................... 2,206 2,912
-------------- --------------
Total income taxes payable ............................... (Won) 414,272 (Won) 421,363
============== ==============
F-33
The difference between income taxes computed using the statutory Korean
corporate income tax rates and the recorded income taxes for the six months
ended June 30, 2002 and 2003 is attributable to the following (in millions
of Korean won):
2002 2003
------------- ------------
Income taxes at statutory income tax rate of 27%................. (Won) 363,755 (Won)399,476
Resident surtax payable.......................................... 36,375 39,948
Tax credit for investments, technology and
human resource development and others.......................... (14,448) (17,505)
Special surtax for agriculture and fishery industries and other.. 2,206 2,912
Goodwill amortization not deductible for tax purpose............. 19,833 19,106
Undistributed earnings (unrecognized deficit) of subsidiaries.... 4,421 677
Other permanent differences...................................... 1,968 (1,041)
Change in valuation allowance.................................... 6,649 6,068
------------ ------------
Recorded income taxes............................................ (Won)420,759 (Won)449,641
============ ============
Effective tax rate............................................... 31.23% 30.39%
============ ============
The increase in the valuation allowance was primarily due to the need for a
valuation allowance related to subsidiaries' net operating loss
carryforwards.
The tax effects of each type of temporary difference that gave rise to a
significant portion of the deferred tax assets and liabilities at December
31, 2002 and June 30, 2003 are as follows (in millions of Korean won):
December 31, 2002 June 30, 2003
----------------- -------------
Allowance for doubtful accounts................................. (Won) 23,251 (Won) 24,397
Write-off of doubtful accounts.................................. 9,715 9,587
Accrued interest income......................................... (2,902) (3,453)
Depreciation.................................................... 12,609 13,163
Loss on disposal of property and equipment...................... -- 15,100
Loss on impairment of investment securities..................... 48,588 30,990
Foreign currency translation loss............................... 3,345 2,091
Equity in earnings of affiliates................................ (5,090) (5,591)
Unrecognized deficit (undistributed earnings) of subsidiaries... (9,012) (9,242)
Reserve for research and manpower development................... (133,920) (151,724)
Reserve for loss on disposal of treasury stock.................. (64,775) (64,775)
Net operating loss carryforwards................................ 18,552 24,708
Other........................................................... 20,851 24,518
------------- -------------
Total deferred tax (liabilities)................................ (78,788) (90,231)
Valuation allowance for:
Depreciation.................................................. (1,081) (1,484)
Net operating loss carryforwards.............................. (18,552) (24,708)
Other......................................................... (6,349) (5,858)
------------- -------------
Net deferred tax liabilities.................................... ((Won)104,770) ((Won)122,281)
============= =============
F-34
The net operating loss carryforwards (tax affected) will expire as follows
(in millions of Korean won):
Year ended December 31, Amount
----------------------- -----------
2003........................ (Won) 269
2004........................ 4,903
2005........................ 6,101
2006........................ 7,039
2007........................ 6,396
-----------
Total....................... (Won)24,708
===========
20. NET INCOME PER SHARE
Net income per share for the six months ended June 30, 2002 and 2003 is
computed as follows:
2002 2003
------------ --------------
Net income (in millions of Korean won)...... (Won)907,974 (Won)1,022,677
Weighted average number of common shares
outstanding............................... 84,289,973 76,255,752
------------ --------------
Net income per share........................ (Won) 10,772 (Won) 13,411
============ ==============
The weighted average number of common shares outstanding for the six months
ended June 30, 2002 and 2003 is calculated as follows:
Number of Weighted Weighted
shares number of days number of shares
------------------- ----------------- -------------------
For the six months ended June 30, 2002:
At January 1, 2002......................... 89,152,670 181/181 89,152,670
Treasury stock, at the beginning........... (6,159,266) 181/181 (6,159,266)
Distribution of treasury stock for merger
with Shinsegi............................ 2,673,474 165/181 2,437,145
Purchase of treasury stock................. (1,367,180) 151/181 (1,140,576)
---------- ----------
Total.................................. 84,299,698 84,289,973
========== ==========
For the six months ended June 30, 2003:
At January 1, 2003......................... 89,152,670 181/181 89,152,670
Treasury stock, at the beginning issue of (9,310,607) 181/181 (9,310,607)
common stock............................. 126,276 49/181 34,185
Treasury stock transactions................ (3,909,431) (Note a) (3,620,496)
---------- ----------
Total................................... 76,058,908 76,255,752
========== ==========
(note a) The treasury stock was acquired or disposed of on several
different dates in the six months ended June 30, 2003 and the
weighted number of shares was calculated according to each
acquisition date.
F-35
Diluted income per share for the six months ended June 30, 2002 and 2003
is computed as follows:
2002 2003
------------ --------------
Net income (in millions of Korean won) ................. (Won)908,013 (Won)1,022,677
Adjusted weighted average number of common shares
outstanding (note 2).................................. 84,299,124 76,255,752
------------ --------------
Net income per share.................................... (Won) 10,771 (Won) 13,411
============ ==============
(note 2) In the six months ended June 30, 2003, the assumed exercise of
stock options was not reflected in diluted earnings per share
because the exercise price as of June 30, 2003 exceeded the
average market price of common stock for the period. In the
six months ended June 30, 2002, for the calculation of diluted
income per share, net income and weighted average number of
common shares outstanding are adjusted assuming the exercise of
stock options on January 1, 2002.
The numerator and denominator of basic and diluted income per share for
the six months ended June 30, 2002 is as follows:
Net income Average weighted Per-share amount
(in millions of Korean won) number of shares (in Korean won)
--------------------------- --------------------- ----------------
Basic income per share .......... (Won)907,974 84,289,973 (Won)10,772
===========
Effect of stock options.......... 39 9,151
------------ ----------
Diluted income per share......... (Won)908,013 84,299,124 (Won)10,771
============ ========== ===========
21. DIVIDEND DISCLOSURE
Details of dividends which were approved by shareholders in 2002 and 2003
are as follows (in millions of Korean won except for share data):
Number of shares
Fiscal year Dividend type outstanding Face value Dividend ratio Dividends
------------ ------------- ---------------- ---------- -------------- ---------
2002 Cash dividends 82,993,404 (Won)500 138.0% (Won) 57,265
============
2003 Cash dividends 84,299,698 (Won)500 360.0% (Won)151,739
============
F-36
22. COMMITMENTS AND CONTINGENCIES
a. The Company and its subsidiaries have credit lines with several local
banks that provide for borrowings of up to (Won)1,158,800 million. At
June 30, 2003, the borrowings under these credit lines were (Won)960,304
million at an average interest rate of approximately 6.24% the net
availability under these credit lines was (Won)198,496 million.
b. At June 30, 2003, the Company's property and equipment (land, buildings
and machinery), amounting to (Won)61,542 million in carrying value,
short-term financial instruments amounting to (Won)29,921 million and its
subsidiary's notes receivable worth of (Won)30,000 million are pledged as
collateral for bank borrowings. In addition, the Company and its
subsidiaries have provided one blank check to Shinhan Capital Co., Ltd.
as collateral for the Company's obligations under lease agreements.
c. At June 30, 2003, the Company and its subsidiaries have guarantee
deposits restricted for their checking accounts totaling (Won)58 million.
d. On December 3, 2002 and May 2, 2003, the Company sold(Won)650,641 million
and (Won)577,253 million of accounts receivable resulting from its mobile
phone dealer financing plan to Nate Second Special Purpose Company and
Nate Third Special Purpose Company, respectively, in asset-backed
securitization transactions and recorded a loss on disposal of other
receivables of (Won)12,880 million and (Won)10,789 million, respectively.
Related to these asset-backed securitization transactions, the Company
has obligations to repurchase receivables up to 12.65% and 13.15% for
Nate Second Special Purpose Company and Nate Third Special Purpose
Company, respectively, if receivables become past due for 3 months or the
debtors become insolvent. Related to these obligations to repurchase
receivables, as of June 30, 2003, the maximum potential amount of future
payments the Company could be required to make to repurchase such
receivables totaled (Won)70,163 million, however no losses have been
accrued as all receivables sold under asset-backed securitization
transactions are insured by Seoul Guarantee Insurance Company. At June
30, 2003, the uncollected balances of accounts receivable sold to Nate
Second Special Purpose Company and Nate Third Special Purpose Company
were (Won)82,584 million and (Won)347,229 million, respectively.
e. On October 18, 2002 and November 15, 2002, GNI Enterprise Inc. filed
lawsuits against SK Communications Corp., a subsidiary of the Company. In
the lawsuit filed on October 18, 2002, GNI Enterprise Inc. asserted that
the expired contract for usage of the Lycos brand between GNI Enterprise
Inc. and SK Communications Corp. was still effective. In addition, in the
lawsuit filed on November 15, 2002, GNI Enterprise Inc. asserted that the
merger of SK Communications Corp. with Netsgo Co., Ltd. was not
legitimate. The ultimate outcome of these lawsuits cannot presently be
determined. SK Communications Corp. believes that any liability it may be
subject to thereunder will not be material.
f. Paxnet Inc., a subsidiary of the Company, has guaranteed the repayment of
borrowings for Finger Co., Ltd., which is an affiliated company. The
outstanding balance of such guarantees as of June 30, 2003
approximated (Won)332 million.
g. On July 8, 2002, KT Freetel Corporation filed a lawsuit against the
Company. In the lawsuit, KT Freetel Corporation claims remuneration for
its loss of (Won)50,000 million resulting from the Company's alleged
false advertising against KT Freetel Corporation. On September 6, 2002,
the Company brought a counterclaim against KT Freetel Corporation,
claiming remuneration for the Company's loss of (Won)1,000 million. The
ultimate outcome of these lawsuits cannot presently be determined. The
Company believes that any liability the Company may be subject to
thereunder will not be material. The Company has not set aside any
reserve or made any other provision in respect of KT Freetel
Corporation's claims.
F-37
h. SK Communications Corp., which is the Company's subsidiary, has entered
into a license agreement with Lycos Inc. to pay royalties totaling US$
9,253,390 for two years from August 14, 2002. In accordance with this
agreement, the Company paid US$ 4,626,195 on August 14, 2002 and should
pay the rest of royalties amounting to US$ 4,627,195 on a quarterly
installment basis from August 14, 2003.
i. The Company's implementation of mobile network system development service
to be provided to Asia Pacific Broadband Wireless Communications Inc., a
Taipei company, has been guaranteed by Citi Corp, within the limit of US$
2,100,000.
23. INSURANCE
At June 30, 2003, certain of the Company's and its subsidiaries' assets are
insured with local insurance companies as follows (in millions of Korean won
and thousands of U.S. dollars):
Asset Risk Book value Coverage
------------------- ----------------------- ------------ ----------
Inventories and
property and equipment Fire and comprehensive liability (Won)5,865,910 (Won)9,964,135
============== ==============
24. TRANSACTIONS WITH AFFILIATED COMPANIES
Significant related party transactions for the six months ended June 30,
2002 and 2003 and balances with affiliated companies as of December 31, 2002
and June 30, 2003 were as follows (in millions of Korean won):
Six months ended June 30,
---------------------------------
Description 2002 2003
------------------------------------------------ ----------- ------------
TRANSACTIONS
SK Engineering & Construction Co., Ltd.:
Construction (note 1)......................... (Won)76,141 (Won)115,172
Commissions paid.............................. 1,199 2,167
Commission income and other income............ 442 445
SK Global:
Purchases of property and equipment........... 9,855 7,909
Commissions paid and other expenses........... 34,691 96,625
Sales of handsets and other income............ 203,913 247,074
SK Corporation:
Purchases of property and equipment........... -- 4,101
Commissions paid and other expenses........... 26,334 28,959
Commission income and other income............ 2,172 2,641
(Continued)
F-38
Six months ended June 30,
-----------------------------------
Description 2002 2003
---------------------------------------------------------- ------------- -------------
TRANSACTIONS
Kyocera Corp.:
Purchase of inventory and other expenses................ (Won) 2,108 (Won) 5,948
Sales of goods and other income......................... 21,217 13,170
SK Group Japan:
Purchases of raw materials for handsets
and other expenses.................................... 5,462 --
SK Telesys:
Purchases of property and equipment..................... 47,390 54,925
Commissions paid and other expenses..................... 19 627
Commission income and other income...................... 224 20
Innoace:
Purchases of property and equipment..................... 4,573 4,355
Commissions paid and other expenses..................... 2,416 5,757
Commission income and other income...................... 151 131
SK Life Insurance Co., Ltd.:
Commission income and other income...................... -- 74
Widerthan.com:
Purchase of inventory................................... -- 1,601
Purchases of property and equipment..................... -- 8,554
Commissions paid and other expenses..................... 12,305 20,471
Commission income and other income...................... -- 145
SK C&C:
Purchase of property and equipment...................... 30,357 31,932
Commissions paid and other expenses (note 3)............ 101,085 132,102
Commission income and other income...................... 3,387 3,501
SKC:
Purchase of inventory and outsourcing commission fees... 6,903 194,300
(Continued)
F-39
Description 2002.12.31 2003.6.30
--------------------------------------------------- ---------- ----------
BALANCES
SK Engineering & Construction Co.,Ltd.:
Accounts receivable.............................. (Won) 241 (Won) 66
Accounts payable................................. 65,773 14,097
Guarantee deposits received...................... -- 90
Other payables................................... 130 --
SK Global:
Accounts receivable.............................. 84,970 128,072
Guarantee deposits paid.......................... 113 113
Accounts payable................................. 14,792 40,066
Guarantee deposits received...................... 255 553
SK Corporation:
Accounts receivable.............................. 985 124
Guarantee deposits paid (note 2)................. 80,113 100,140
Accounts payable................................. 11,654 7,120
Guarantee deposits received...................... 9,885 8,917
Kyocera Corp.:
Accounts receivable.............................. 12,094 --
Accounts payable................................. 63 4,478
SK Group Japan:
Accounts payable................................. 1,557 --
SK Life Insurance Co., Ltd.:
Deposits for severance indemnities............... 58,057 55,242
Accounts receivable.............................. 117 49
Guarantee deposits paid.......................... 60 60
Guarantee deposits received...................... 767 821
SK Telesys:
Accounts receivable.............................. 5 45
Accounts payable................................. 60,834 25,456
SKC:
Accounts receivable.............................. 70,464 68,538
Accounts payable................................. 2,928 51,897
Innoace:
Accounts payable................................. 26,806 11,415
Guarantee deposits received...................... 2,138 1,069
Widerthan.com:
Accounts receivable.............................. -- 61
Accounts payable................................. 8,296 11,852
Guarantee deposits received...................... 4,736 4,736
SK C&C:
Accounts receivable.............................. 1,361 11
Accounts payable................................. 117,202 16,111
Guarantee deposits received...................... 284 346
(Continued)
F-40
(note 1) The Company is a party to several contracts with SK Engineering
and Construction related to the construction of its new corporate
headquarters in Ulchiro 2-ga, Chongro-gu, Seoul. The Company
expects that construction of its new headquarters will be
completed by the end of 2003. The total contract price for the
demolition of existing buildings on the site and construction of
the new building is (Won)154 billion.
(note 2) On December 19, 2000, the Company entered into an agreement with
SK Corporation for the sale and leaseback of the Company's head
office with the lease period from December 19, 2000 to March 31,
2004. Rent expense for the period from December 19, 2000 to
December 31, 2000 under the lease agreement approximated (Won)417
million. Under the lease agreement, the Company deposited
refundable leasehold key money of (Won)80,113 million in January
2001 and, as a result there will be no rent payment for the
remaining lease period. On January 30, 2003, the Company
prolonged the lease term to February 28, 2005 and deposited
additional refundable leasehold key money of (Won)20,027 million.
(note 3) The Company and certain subsidiaries are party to an agreement
with SK C&C, pursuant to which SK C&C provides them with
information technology services, dated as of December 28, 1998
and amended as of November 1, 1999. This agreement will expire on
December 31, 2009, but may be terminated by the Company and
certain subsidiaries without cause on six months notice. The
agreement provides that the parties will agree annually on the
specific services to be provided and the monthly fees to be paid
by the Company and certain subsidiaries. The Company and certain
subsidiaries also enter into agreements with SK C&C from time to
time for specific information technology-related projects.
25. LOSS ON IMPAIRMENT OF IDLE NETWORK EQUIPMENT OF SHINSEGI TELECOMM, INC.
In 2002, the Company integrated Shinsegi Telecomm, Inc.'s former operations
with those of the Company and some portion of Shinsegi Telecomm, Inc.'s
former network equipment was re-deployed in the Company's network or sold
for use outside Korea. The Company wrote off the remainder of the network
equipment, excluding additional network equipment which will be re-deployed
in the Company's network, and an impairment loss of (Won)185,847 million
was recorded in the second half of 2002.
26. STOCK EXCHANGE BETWEEN THE COMPANY AND KT CORPORATION
The Company exchanged 29,808,333 shares of KT Corporation's common stock
for 8,266,923 shares of the Company's common stock and settled the
difference in the price in cash on December 30, 2002 and January 10, 2003,
under a mutual agreement on stock exchange between the Company and KT
Corporation. The exchange had been made at (Won)50,900 per share of KT
Corporation's common stock and (Won)224,000 per share of the Company's
common stock. Related to these stock exchanges, a loss on exchange of
investments in 15,454,659 shares of KT Corporation for 4,457,635 shares of
the Company's common stock on December 31, 2002, amounting to
(Won)47,909 million, was recorded as a loss on disposal of investments
during the second half of 2002, and an impairment loss amounting to
(Won)44,496 million, which was related to the investments in 14,353,674
shares of KT Corporation's common stock as of December 31, 2002, was
recorded during the second half of 2002.
F-41
27. UNCERTAINTIES
In response to general unstable economic conditions, the Korean government
and the private sector have been implementing structural reforms to
historical business practices. Implementation of these reforms is
progressing slowly, particularly in the areas of restructuring private
enterprises and reforming the banking industry. The Korean government
continues to apply pressure to Korean companies to restructure into more
efficient and profitable firms. The Company and its subsidiaries may be
either directly or indirectly affected by these general unstable economic
conditions and the reform program described above. The accompanying
consolidated financial statements reflect management's assessment of the
impact to date of the economic situation on the financial position of the
Company and its subsidiaries. Actual results may differ materially from
management's current assessment.
As described in Note 1, the Company is one of the SK Group affiliated
companies. In February 2003, the Korean government began an investigation
of various past transactions entered into by certain SK Group affiliated
companies. On March 11, 2003, the Prosecutors' office in the Republic of
Korea filed charges against several SK Group executives for alleged
accounting irregularities at SK Global Co., Ltd. ("SK Global"), and other
alleged illegal transactions among certain SK Group affiliated companies.
As a result of these charges, there is a legal action against certain SK
Group affiliated company. Currently, negotiations are underway among the
creditors of SK Global and certain of its affiliates. As of and for the six
months ended June 30, 2003, the Company and its subsidiaries had related
party transactions and account balances as described in Note 24.
The ultimate outcome of these legal matters relating to the SK Group
affiliated companies, and the impact in the Company's future operations and
continued access to capital and financial markets are not presently known.
Although there can be no definitive assurance, management of the Company
believes that these legal matters will not have a material adverse effect
on the Company's financial position, operating results, or liquidity.
28. NETWORK INTERCONNECTION CHARGES
The Company's networks interconnect with the public switched telephone
networks operated by KT Corporation and Hanaro and, through their networks,
with the international gateways of KT Corporation, DACOM and Onse, as well
as the networks of the other wireless telecommunications service providers
in Korea. These connections enable the Company's subscribers to make and
receive calls from telephones outside the Company's networks. Under Korean
law, service providers are required to permit other service providers to
interconnect to their networks for purposes of offering other services. If
the new service provider desires interconnection and the incumbent service
provider is unable to reach an agreement within 90 days, the new service
provider can appeal to the Korean Communications Commission, a government
agency under the MIC.
For the six months ended June 30, 2002 and 2003, such interconnection
revenues amounted to (Won)535.7 billion and (Won)515.7 billion,
respectively, while aggregate interconnection expenses amounted to
(Won)374.5 billion and (Won)412.1 billion, respectively.
F-42
29. SUBSEQUENT EVENT
On July 22, 2003, the Company acquired 2,481,310 shares of POSCO's common
stock held by SK Corporation in accordance with a resolution of the
Company's board of directors dated July 22, 2003. The acquisition cost was
(Won)134,000 per share which was the closing market price of the date when
the resolution of its board of directors was made and the total acquisition
amounted to (Won)332,495 million.
In accordance with the approval of its board of directors dated June 24,
2003, the Company issued unguaranteed domestic bonds with face amounts
totaling (Won)150,000 million at an annual interest rate of 5%, for
(Won)147,200 million on August 4, 2003. The final maturity date of the
bonds is August 4, 2006.
30. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Korea ("Korean GAAP"), which
differ in certain respects from accounting principles generally accepted in
the United States of America ("U.S. GAAP"). The significant differences are
described below. Other differences do not have a significant effect on
either consolidated net income or shareholders' equity.
a. Deferred Income Taxes (see Note 2)
Under U.S. GAAP, deferred tax assets and liabilities are separated into
their current and non-current portions based on the classification of
related assets or liability for financial reporting purposes. Under
Korean GAAP, deferred tax assets and liabilities are presented on the
balance sheet as a single non-current net number.
In addition, U.S. GAAP does not allow recognition of deferred tax assets
on the difference between the tax bases and financial statement bases of
investments in subsidiaries unless it is apparent that the difference
will reverse in the foreseeable future which has generally been
interpreted to be one year. Such deferred tax assets totaling
(Won)19,688 million and (Won)26,143 million as of December 31, 2002
and June 30, 2003, respectively, have been recognized for Korean GAAP
purposes.
b. Deferred Charges (see Note 2)
Korean GAAP requires that bond issuance costs be deducted from proceeds
of bonds be charged to expenses as incurred and certain development costs
be reclassified as intangible assets. Under U.S. GAAP, bond issuance
costs are capitalized and amortized over the redemption period of the
related obligation whereas research and development costs are charged to
expense as incurred.
c. Leases
Through 1998, leases whose present value of minimum lease payments exceed
90% of the fair value of the leased equipment were not capitalized under
Korean GAAP, but are capitalized under U.S. GAAP. Therefore, with respect
to lease contracts entered into prior to January 1, 1999, certain
adjustments for equipment, obligations under capital leases, interest on
capital leases and depreciation are required.
F-43
d. Investment Securities (see Note 2)
Through 2002, under Korean GAAP, debt and equity securities were
classified into marketable securities and investment securities.
Effective January 1, 2003, Korean GAAP was revised to classify investment
in securities into three separate categories; trading securities,
available-for-sales securities and held-to-maturity securities in a
similar manner of Statement of Financial Accounting Standards No. 115
(SFAS No. 115), "Accounting for Certain Investments in Debt and Equity
Securities", described below, except that certain available-for-sale
securities without readily determinable fair value are carried at costs
under Korean GAAP as described in Note 2.f. The valuation method for each
category is similar to SFAS No. 115;however, the accounting treatment for
impairment of investment securities and recoveries under Korean GAAP
differ from those under U.S. GAAP as described in Note 30-e.
Under U.S. GAAP, SFAS No. 115 requires that equity securities with
readily determinable fair values and all debt securities be classified
into three categories and accounted for as follows:
o Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost with cost determined using the weighted
average method.
o Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains
and losses included in income.
o Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and
losses excluded from income and reported in other comprehensive
income.
Gross proceeds from the sale of such securities were (Won)274,744
million and (Won)780,255 million for the six months ended June 30,
2002 and 2003, respectively. Gross realized gains were (Won)6,603
million and (Won)94 million for the six months ended June 30, 2002 and
2003, respectively. Gross realized losses were (Won)2 million and
(Won)164 million for the six months ended June 30, 2002 and 2003,
respectively.
Information with respect to trading securities at December 31, 2002 and
June 30, 2003 is as follows (in millions of Korean won):
Gross Gross
Cost unrealized unrealized Fair
(amortized cost) gains losses Value
---------------- ---------- ---------- ------------
At December 31, 2002:
Debt securities............. (Won)754,219 (Won)-- (Won) -- (Won)754,219
============ ======= ========== ============
At June 30, 2003:
Debt securities............. (Won)793,847 (Won)-- (Won)1,554 (Won)792,293
============ ======= ========== ============
F-44
Information with respect to long-term investment securities including the
current portion affected by SFAS No. 115 at December 31, 2002 and
June 30, 2003 is as follows (in millions of Korean won) :
Gross Gross
Cost unrealized unrealized Fair
(amortized cost) gains losses Value
---------------- ---------- ---------- ------------
At December 31, 2002:
Equity securities...... (Won)792,691 (Won)1,522 (Won)3,852 (Won)790,361
Debt securities........ 62,500 -- -- 62,500
------------ ---------- ---------- ------------
(Won)855,191 (Won)1,522 (Won)3,852 (Won)852,861
============ ========== ========== ============
At June 30, 2003:
Equity securities...... (Won) 58,612 (Won) 960 (Won)4,146 (Won) 55,426
Debt securities........ 66,564 -- -- 65,564
------------ ---------- ---------- ------------
(Won)125,176 (Won) 960 (Won)4,146 (Won)120,990
============ ========== ========== ============
During the six months ended June 30, 2003, the Company recorded losses on
impairment of investments in equity securities of Hanaro Telecom Inc.
totaling (Won)3,477 million.
e. Impairment of Investment Securities and Recoveries
Under U.S. GAAP, if the decline in fair value is judged to be other than
temporary, the cost basis of the individual securities is written down to
fair value as a new cost basis and the amount of the write-down is
included in current operations. Under Korean GAAP, if the collectible
value from the securities is less than acquisition costs with objective
evidence of impairment such as bankruptcy of investees, an impairment
loss is recognized. Due to such differences, for U.S. GAAP purposes,
losses on impairment of investment securities for the year ended December
31, 2002 and the six months ended June 30, 2003 increased by
(Won)252,031 million and (Won)3,477 million, respectively.
Under Korean GAAP, the subsequent recoveries of impaired
available-for-sale securities, held-to-maturity debt securities and
equity securities without readily determinable fair value, result in an
increase of their carrying amount up to the original acquisition cost,
and the recovery gains are reported in current operations up to the
previously recognized impairment loss as reversal of loss on impairment
of investment securities. Under U.S. GAAP, the subsequent increase of
carrying amount of the impaired and written down held-to-maturity debt
securities and equity securities without readily determinable fair value
is not allowed. The subsequent increase in fair value of
available-for-sale securities is reported in other comprehensive income.
F-45
f. Impairment of Long-Lived Assets to be Held and Used and Long-Lived Assets
to be Disposed of
U.S. GAAP (SFAS No. 144) requires entities to perform separate
calculations for long-lived assets to be held and used in order to
determine whether recognition of an impairment loss is required and, if
so, to measure the impairment. For assets held for use, if the sum of
expected future cash flows (undiscounted and without interest charges) is
less than the asset's carrying value, an impairment loss is recognized,
but if the sum of the expected future cash flows is greater than an
asset's carrying value, an impairment loss is not recognized. Measurement
of an impairment loss is based on the fair value of the asset. An
impairment loss creates a new book basis and subsequent recoveries of the
fair value are not recognized. U.S. GAAP also requires long-lived assets
to be disposed of by sale be reported at the lower of the carrying value
or fair value less selling expense.
Through 1998, Korean GAAP had no specific provisions for accounting for
impairment of long-lived assets to be held and used and long-lived assets
to be disposed of. Effective January 1, 1999, Korean GAAP was revised to
require that impairment loss should be recorded in a manner similar to
U.S. GAAP.
In 2002, the Company integrated Shinsegi Telecomm, Inc.'s former
operations with those of the Company and some portion of Shinsegi
Telecomm, Inc.'s former network equipment was re-deployed in the
Company's network or sold for use outside Korea. The Company wrote off
the remainder of the network equipment, excluding additional network
equipment which will be re-deployed in the Company's network, and an
impairment loss of (Won)185,847 million was recorded in the second
half of 2002. (see Note 25).
g. Comprehensive Income
Under Korean GAAP, there is no requirement to present comprehensive
income. Under US GAAP, comprehensive income and its components must be
presented in the financial statements. Comprehensive income includes all
changes in shareholders' equity during a period except those resulting
from investments by, or distributions to, owners, including certain items
not included in the current results of operations.
h. Business Combinations and Intangible Assets
Effective July 1, 2001, U.S. GAAP requires the use of the purchase method
of accounting for all business combinations. Starting from 2002,
resulting goodwill and intangible assets with indefinite lives are no
longer amortized; however, they will be subject to annual impairment
tests as prescribed by the Statement. The Company believes there is no
impairment of such assets at December 31, 2002 and June 30, 2003.
Intangible assets with finite lives will continue to be amortized over
their estimated useful lives.
F-46
Under Korean GAAP, business combinations involving other than commonly
controlled entities are accounted for as either a purchase or a pooling
of interests, depending on the specific circumstances. In a purchase
combination, the difference between the purchase consideration and the
fair value of the net assets acquired is accounted for as goodwill or as
negative goodwill. Goodwill and all other intangible assets are amortized
over their estimated economic lives, not to exceed 20 years.
i. Determination of Acquisition Cost of Equity Interest in Subsidiary
Under U.S. GAAP, when a parent company acquires an equity interest in a
subsidiary in exchange for newly issued common stock of the parent
company, the acquisition cost of the equity interest in a subsidiary is
determined at the market price of the parent company's common stock for a
reasonable period before and after the date the terms of the acquisition
are agreed to and announced. Under Korean GAAP, the acquisition cost is
determined at the closing market price of the parent company's common
stock when the common stock is actually issued. In addition, there are
certain other differences in the methods of allocating cost to assets
acquired.
j. Additional Equity Investment in Subsidiaries
Under Korean GAAP, when additional interest is acquired after acquiring a
majority interest in a subsidiary, the differences between the Company's
acquisition cost of the additional interest and the corresponding
carrying amount of the acquired additional interest in a subsidiary is
presented as an adjustment to capital surplus. Under U.S. GAAP, the cost
of an additional interest would be allocated based on the fair value of
net assets acquired, with the excess allocated to goodwill.
k. Capitalization of Foreign Exchange Losses (or Gains) and Interest Expense
Through 2002, under Korean GAAP, interest expenses and foreign exchange
losses (or foreign exchange gains) incurred on debt used to finance the
construction of property, plant and equipment were capitalized (or offset
against property additions). Effective January 1, 2003, Korean GAAP was
revised to allow a company to charge such interest expense and foreign
exchange losses to current operations. For Korean GAAP purposes, the
Company adopted the accounting policy not to capitalize such financing
costs prospectively. Under U.S. GAAP, interest expenses incurred on debt
used to finance the construction of property, plant and equipment are
capitalized, while related foreign exchange losses (or gains) are charged
to current operations as incurred.
Through 2002, under Korean GAAP, interest expense incurred on debt used
to finance the purchase of intangible assets was capitalized until the
asset was put in use. Under U.S. GAAP such interest is charged to current
operations as incurred. Effective January 1, 2003, Korean GAAP was
revised to allow a company to charge such interest expense to current
operations as incurred. For Korean GAAP purposes, the Company adopted the
accounting policy not to capitalize such interest expense. And this
accounting change has been applied prospectively.
F-47
l. Nonrefundable Activation Fees
For U.S. GAAP purposes, effective January 1, 2000, the Company and its
subsidiaries adopted the provisions of the Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition
in Financial Statements". As a result of the adoption of SAB No. 101, the
Company and its subsidiaries now defer nonrefundable activation revenues
and costs and amortize them over the expected term of the customer
relationship, which ranges from 41 months to 89 months. Previously, these
revenues and costs were recognized when the activation service was
performed.
Under Korean GAAP, there is no specific provision for the recognition of
such activation fees and the Company and its subsidiaries recognize these
revenues and costs when the activation service is performed.
m. Gain or Loss on Disposal of Subsidiary's Stock
Under Korean GAAP, gains or losses on disposal of investments in common
stock of subsidiaries are not recognized in the consolidated income
statement but included in capital surplus, until such subsidiary has been
excluded as a majority-owned subsidiary. Under U.S. GAAP, such gains or
losses on disposal of the investments in common stock of subsidiary are
recognized in the income statement at the time of disposal of such
investments.
n. Employee Stock Option Compensation Plan
For Korean and U.S. GAAP purposes, the Company charges to expense the
value of stock options granted. Korean GAAP permits all entities to
exclude the volatility factor in estimating the value of their stock
options, which results in measurement at minimum value. Under U.S. GAAP,
public entities are not permitted to exclude the volatility factor in
estimating the value of their stock options.
o. Loans Receivable for Stock Issued to Employee's Investor Association
U.S. GAAP requires that notes received for capital stock be reported as a
reduction of stockholder's equity, while Korean GAAP allows for recording
such receivables as an asset.
p. Discount on Leasehold Deposits
Under U.S. GAAP, when cash and other rights are exchanged for notes,
notes (receivables or payables that represent contractual rights to
receive money or contractual obligations to pay money on fixed or
determinable dates, whether or not there is a stated provision for
interest) should be stated at their present value and the difference
between the face amount and the present value should be deducted from or
added to the face amount of the note as a discount or premium and
amortized over the term by using effective interest method. Thus,
leasehold key money deposits are stated at their present value. Under
Korean GAAP, the leasehold key money deposits are stated at their face
amounts.
F-48
q. Asset Securitization Transactions
Under U.S. GAAP, a transfer of financial assets in an asset
securitization is accounted for as a sale only if all three of the
following conditions are met;
o The transferred asset has been isolated from the transferor and put
beyond the reach of the transferor, or any consolidated affiliated of
the transferor and their creditors even in the event of bankruptcy or
receivership of the transferor or any consolidated affiliate.
o The transferee is a qualifying special-purpose entity ("QSPE") and each
holder of its beneficial interests (including both debt and equity
securities) has the right to pledge, or the right to exchange its
interests. If the issuing vehicle is not a QSPE, then sale accounting
is only permitted if the issuing vehicle itself has the right to pledge
or the right to exchange the transferred assets.
o The transferor does not effectively maintain control over the
transferred assets either through;
(a) an agreement that calls for the transferor to repurchase the
transferred assets (or to buy back securities of a QSPE held by
third-party investors) before their maturity or
(b) the ability to unilaterally cause the SPE or QSPE to return
specific assets; other than through a cleanup call.
In addition, under U.S. GAAP, unless a transferee is a QSPE, a transferee
with nominal capital investment is generally consolidated into the
transferor.
However, under Korean GAAP, when a transfer of financial assets in an
asset securitization is conducted in accordance with the Korean Asset
Securitization Act, such transfer is generally accounted for as a sale of
financial assets and the securitization vehicle is generally not
consolidated into the transferor.
r. Presentation of Minority Interest as a Component of Shareholders' Equity
Korean GAAP requires the classification of minority interest in equity of
consolidated subsidiaries as a component of shareholders' equity. Under
U.S. GAAP, minority interest in equity of consolidated subsidiaries is
presented separately from shareholders' equity.
F-49
The following reconciles net income for the six months ended June 30, 2002
and 2003 and shareholders' equity as of December 31, 2002 and June 30,
2003 under Korean GAAP as reported in the consolidated financial
statements to the net income and shareholders' equity amounts determined
under U.S. GAAP, giving effect to adjustments for the differences listed
above (in millions of Korean won, except per share amounts):
Six months ended June 30,
------------------------------------
2002 2003
----------------- -----------------
Net income based on Korean GAAP....................... (Won)907,974 (Won)1,022,677
Adjustments:
Deferred income taxes............................... 25,962 (3,433)
Deferred charges.................................... 336 8
Capital leases...................................... 1,000 1,423
Intangible assets................................... (8,816) (9,623)
Cancellation of amortization of goodwill............ 69,050 66,851
Capitalization of foreign exchange losses........... (44,943) 9,754
Nonrefundable activation fees....................... (54,018) (27,484)
Gain on disposal of subsidiary shares............... -- 58
Recovery of impaired investment securities.......... -- 81
Stock option compensation plan...................... (1,534) (1,649)
Asset securitization transaction.................... 10,194 3,808
Loss on impairment of investment securities......... -- (3,477)
Discount on leasehold deposit....................... (22) (306)
------------ --------------
Net income based on U.S. GAAP......................... (Won)905,183 (Won)1,058,688
============ ==============
Weighted average number of common shares outstanding.. 84,289,973 76,255,752
============ ==============
Earnings per share based on U.S. GAAP:
Basic earnings per share............................ (Won) 10,739 (Won) 13,883
============ ==============
Diluted earnings per share.......................... (Won) 10,738 (Won) 13,883
============ ==============
F-50
December 31, 2002 June 30, 2003
----------------- -------------
Shareholders' equity based on Korean GAAP............... (Won)6,231,900 (Won)5,621,963
Adjustments:
Deferred income taxes............................... 132,557 129,377
Intangible assets................................... 1,033,558 1,022,600
Capitalization of foreign exchange losses........... (1,775) (433)
Capitalization of interest expense related to
construction of property and equipment............ -- 8,411
Capitalization of interest expense related to
purchase of intangible assets..................... (69,372) (69,372)
Nonrefundable activation fees....................... (192,212) (219,696)
Deferred charges.................................... (2,600) (427)
Capital leases...................................... 1,144 2,568
Loans receivable for stock issued to
employees' investor association................... (45,906) (40,401)
Minority interest in equity of consolidated
affiliates........................................ (725,507) (111,845)
Recovery of impaired investment securities.......... (81) --
Cancellation of amortization of goodwill............ 138,041 204,892
Asset securitization transactions................... 7,039 10,847
Loss on impairment of investment securities......... (150,243) (150,243)
Discount on leasehold deposits...................... (367) (673)
-------------- --------------
Shareholders' equity based on U.S. GAAP................. (Won)6,356,176 (Won)6,407,568
============== ==============
Changes in shareholders' equity based on U.S. GAAP for the six months ended
June 30, 2002 and 2003 are as follows (in millions of Korean won):
Six months ended June 30,
-------------------------
2002 2003
---- ----
Balance, beginning of the period........................ (Won)5,820,051 (Won)6,356,176
Net income............................................ 905,183 1,058,688
Dividends............................................. (57,265) (151,739)
Issuance of common stock.............................. -- 21,909
Unrealized gains (losses) on valuation of
securities, net of tax.............................. (121,262) (601)
Equity in capital surplus, retained earnings and
capital adjustments of affiliates................... 3,254 792
Retirement of treasury stock.......................... -- (10,123)
Treasury stock transactions........................... 220,222 (874,844)
Foreign-based operations' translation adjustments..... 3,594 (552)
Stock compensation plan............................... 2,190 2,357
Decrease in loans receivable for stock
issued to employees' investor association........... 9,727 5,505
-------------- --------------
Balance, ending of the period (Won)6,785,694 (Won)6,407,568
============== ==============
F-51
A reconciliation of the significant balance sheet accounts except for the
above listed shareholders' equity items to the amounts determined under U.S.
GAAP as of December 31, 2002 and June 30, 2003 is as follows (in millions of
Korean won):
December 31, 2002 June 30, 2003
----------------- -----------------
Current assets:
As reported...................................... (Won) 4,113,724 (Won) 4,224,657
U.S. GAAP adjustments:
-- deferred income taxes........................ 50,692 58,006
-- discount on leasehold deposits............... 4,843 5,870
-- asset securitization transactions............ 582,742 429,813
--------------- ---------------
As adjusted....................................... 4,752,001 4,718,346
--------------- ---------------
Non-current assets:
As reported....................................... (Won)10,114,986 (Won) 9,173,402
U.S. GAAP adjustments:
-- loans receivable for stock issued to
employees' investor association........... (45,906) (40,401)
-- intangible assets........................... 1,044,101 1,030,295
-- cancellation of amortization of goodwill.... 138,041 204,892
-- discount on leasehold deposits.............. (5,210) (6,543)
-- loss on sale of accounts receivable and
other in asset securitization............. (68,267) (55,225)
-- recovery of impaired investment securities.. (81) 34
-- loss on impairment of investment securities. (150,243) (150,243)
-- capital lease............................... 5,820 4,560
-- capitalization of foreign exchange losses... (1,775) (433)
-- capitalization of interest expense
related to construct property and
equipment................................. -- 8,412
-- capitalization of interest expenses related
to purchase of intangible assets.......... (69,372) (69,372)
-- deferred charges............................ 6,564 7,179
--------------- ---------------
As adjusted....................................... 10,968,658 10,106,557
--------------- ---------------
Total assets based on U.S. GAAP...................... (Won)15,720,659 (Won)14,824,903
=============== ===============
F-52
December 31, 2002 June 30, 2003
----------------- -------------
Current liabilities:
As reported.................................................. (Won)4,303,386 (Won)4,202,754
U.S. GAAP adjustments:
-- deferred charges........................................ 222 243
-- nonrefundable activation fees........................... 46,723 55,810
-- asset securitization transactions....................... 507,436 363,742
-- acquisition cost of equity interest in subsidiary....... 2,449 3,383
-------------- --------------
As adjusted.................................................. 4,860,216 4,625,932
-------------- --------------
Long-term liabilities:
As reported ................................................. 3,693,424 3,573,342
U.S. GAAP adjustments:
-- deferred charges........................................ 8,942 7,363
-- nonrefundable activation fees........................... 154,618 173,015
-- capital leases.......................................... 4,676 1,992
-- acquisition cost of equity interest in subsidiary....... 3,748 --
-- deferred income taxes................................... (86,648) (76,154)
-------------- --------------
As adjusted.................................................. 3,778,760 3,679,558
-------------- --------------
Total liabilities based on U.S. GAAP............................ (Won)8,638,976 (Won)8,305,490
============== ==============
Minority interests:
As reported.................................................. (Won) 725,507 (Won) 111,845
U.S. GAAP adjustments........................................ -- --
-------------- --------------
Total minority interests based on U.S. GAAP..................... (Won) 725,507 (Won) 111,845
============== ==============
F-53
The following table reconciles cash flows from operating, investing and
financing activities for the six months ended June 30, 2002 and 2003 under
Korean GAAP, as reported in the consolidated financial statements to cash
flows from operating, investing and financing activities for the six months
ended June 30, 2002 and 2003 under U.S.GAAP (in millions of Korean won):
2002 2003
-------------- --------------
Cash flows from operating activities based on Korean GAAP........................ (Won) 2,098,642 (Won) 730,926
Adjustment:
Asset securitization transactions.............................................. (620,506) 126,693
--------------- ----------------
Cash flows from operating activities based on U.S. GAAP.......................... (Won) 1,478,136 (Won) 857,619
=============== ================
Cash flows from investing activities based on Korean GAAP........................ ((Won)2,366,692) (Won) 69,342
Adjustment:
Asset securitization transactions.............................................. 40,506 13,042
--------------- ---------------
Cash flows from investing activities based on U.S. GAAP.......................... ((Won)2,326,186) (Won) 82,384
=============== ================
Cash flows from financing activities based on Korean GAAP........................ (Won) 113,630 ((Won)1,168,661)
Adjustment:
Asset securitization transactions.............................................. 580,000 (139,735)
--------------- ---------------
Cash flows from financing activities based on U.S. GAAP.......................... (Won) 693,630 ((Won)1,308,396)
=============== ===============
F-54
31. ADDITIONAL DISCLOSURES REQUIRED BY U.S. GAAP
a. Income Taxes
Income tax expense under U.S. GAAP for the six months ended June 30, 2002
and 2003 is as follows (in millions of Korean won):
2002 2003
------------ ------------
Currently payable............................. (Won)414,272 (Won)421,363
Deferred...................................... (19,474) 31,711
------------ ------------
(Won)394,798 (Won)453,074
============ ============
The difference between the actual income tax expense and the tax expense
computed by applying the statutory Korean corporate income tax rates to
income before taxes for the six months ended June 30, 2002 and 2003 is
attributable to the following (in millions of Korean won):
Six months ended June 30,
----------------------------------
2002 2003
---------------- ----------------
Income taxes at statutory income tax rate of 27% in 2002
and 2003................................................ (Won)355,991 (Won)408,176
Resident surtax payable.................................... 35,599 40,818
Tax credit for investments, technology and human resource
development and others................................... (14,448) (17,505)
Special surtax for agriculture and fishery industries...... 2,206 2,912
Undistributed earnings (losses) of subsidiaries............ 4,421 (1,931)
Other permanent differences................................ 4,380 8,081
Change in valuation allowance.............................. 6,649 12,523
------------ ------------
Recorded income taxes...................................... (Won)394,798 (Won)453,074
============ ============
Effective tax rate......................................... 29.94% 29.97%
============ ============
F-55
The tax effects of temporary differences that resulted in the deferred
tax assets at December 31, 2002 and June 30, 2003 computed under U.S.
GAAP, and a description of the financial statement items that created
these differences are as follows (in millions of Korean won):
December 31, 2002 June 30, 2003
----------------- -------------
Current:
Allowance for doubtful accounts........................... (Won) 21,885 (Won) 24,397
Write-off of doubtful accounts............................ 9,715 9,587
Accrued income............................................ (2,844) (3,453)
Accrued expenses and other................................ 21,936 27,475
------------ ------------
50,692 58,006
------------ ------------
Non-current:
Depreciation............................................. 11,732 12,351
Loss on impairment and valuation of
investment securities (note 1)......................... 119,940 107,821
Foreign currency translation losses...................... 3,345 2,091
Equity in earnings of affiliates......................... (5,090) (5,591)
Undistributed earnings of subsidiaries................... (28,700) (9,242)
Tax free reserve for research and manpower development... (133,920) (151,724)
Tax free reserve for loss on disposal of treasury stock.. (64,775) (64,775)
Net operating loss carryforwards......................... -- 24,708
Deferred charges and other............................... 79,346 38,236
------------ ------------
(18,122) (46,125)
------------ ------------
Total deferred tax assets.................................. (Won) 32,570 (Won) 11,881
============ ============
(note 1) As of December 31, 2002 and June 30, 2003, unrealized loss on
valuation of investment securities has been recorded as a
separate component of shareholders' equity, net of tax effect of
(Won)691 million and (Won)945 million, respectively.
F-56
b. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments as of December 31, 2002 and
June 30, 2003 for which it is practicable to estimate that value:
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE (TRADE AND OTHER),
ACCOUNTS PAYABLE AND SHORT-TERM BORROWINGS
The carrying amount approximates fair value because of the short maturity
of those instruments.
TRADING SECURITIES AND LONG-TERM INVESTMENT SECURITIES
For investments in non-listed companies' stock, a reasonable estimate of
fair value could not be made without incurring excessive costs.
Additional information pertinent to these investments is provided in Note
4. The fair value of investments in listed companies' stock, public
bonds, and other marketable securities are estimated based on quoted
market prices for those or similar investments.
Korea Electric Power Corp. ("KEPCO"), the parent company of Powercomm
Co., Ltd. ("Powercomm"), sold to Dacom Corporation a 45.5% interest in
Powercomm at (Won)12,000 per share. Based on this transaction, an
impairment loss of (Won)150,243 million on the Company's investment in
the common stock of Powercomm was recognized in the second half of 2002.
LONG-TERM BANK DEPOSITS
The carrying amount approximates fair value based on a review of interest
rates currently available for similar deposits.
LONG-TERM LOANS
The fair value of long-term loans is estimated by discounting the future
cash flows using the current interest rate of time deposits with similar
maturities.
BONDS PAYABLE, BONDS WITH STOCK WARRANT, LONG-TERM BORROWINGS, LONG-TERM
PAYABLE -- OTHER AND OBLIGATION UNDER CAPITAL LEASES
The fair value of these liabilities is estimated based on the quoted
market prices for the same or similar issues or on the current rates
offered for debt of the same remaining maturities.
F-57
The following summarizes the carrying amounts and fair values of
financial instruments as of December 31, 2002 and June 30, 2003 (in
millions of Korean won):
December 31, 2002 June 30, 2003
------------------------------- -------------------------------
Carrying Carrying
amount (note a) Fair value amount (note a) Fair value
--------------- ---------- --------------- ----------
Financial assets:
Cash and cash equivalents and
short-term financial instruments...... (Won) 867,022 (Won) 867,022 (Won) 587,801 (Won) 587,801
Trading securities...................... 754,219 754,219 792,293 792,293
Accounts receivable (trade and other)... 2,877,750 2,877,750 3,012,112 3,012,112
Long-term investment securities
including current portion:
Listed equity and debts............... 942,861 942,861 210,990 210,990
Non listed equity..................... 303,593 N/A 326,908 N/A
Long-term bank deposits................. 177 177 503 503
Long-term loans......................... 6,783 5,087 7,148 5,361
-------------- --------------
(Won)5,752,406 (Won)4,937,755
============== ==============
Financial liabilities:
Accounts payable........................ (Won)1,697,502 (Won)1,697,502 (Won) 812,162 (Won) 812,162
Short-term borrowings................... 1,177,950 1,177,950 1,294,928 1,294,928
Bonds payable, long-term borrowings,
long-term payables -- other and
obligation under capital leases,
including current portion............. 4,413,130 4,704,752 4,630,090 4,730,060
-------------- --------------
(Won)7,288,582 (Won)6,737,180
============== ==============
(note a) These carrying amounts represent the amounts determined under
U.S. GAAP.
c. Revenue Recognition Policy
The revenues of the Company and its subsidiaries are principally derived
from telecommunication service revenue and telephone sales.
Telecommunication service consists of fixed monthly charges,
usage-related charges and non-refundable activation fees. Fixed monthly
charges are recognized in the period earned. Usage-related charges are
recognized at the time services are rendered. Non-refundable activation
fees and costs are deferred and amortized over the expected term of the
customer relationship.
The Company's subsidiaries also sell telephones to customers and
telephone sales are recognized at the time products are delivered.
F-58
d. Comprehensive Income
Comprehensive income for the six months ended June 30, 2002 and 2003 is
as follows (in millions of Korean won):
2002 2003
------------ --------------
Net income.......................................... (Won)905,183 (Won)1,058,688
------------ --------------
Other comprehensive income (loss):
Unrealized loss on investment securities.......... (121,262) (601)
Foreign-based operations translation credit....... 3,595 (552)
------------ --------------
Total other comprehensive loss...................... (117,667) (1,153)
------------ --------------
Comprehensive income................................ (Won)787,516 (Won)1,057,535
============ ==============
e. Goodwill and other intangible assets
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill and intangible assets
with indefinite lives are no longer amortized, however, they will be
subject to periodic impairment tests as prescribed by the statement and
intangible assets that do not have indefinite lives are amortized over
their useful lives. The following tables present the additional
disclosures required by this statement.
GOODWILL
Changes in the carrying amount of goodwill under U.S. GAAP for the six
months ended June 30, 2002 and 2003 are as follows (in millions of Korean
won):
Six months ended June 30,
--------------------------------------
2002 2003
-------------- --------------
Beginning of period................................ (Won)2,833,752 (Won)3,400,110
Goodwill reclassifications to other intangibles.. -- (16,437)
Goodwill acquired during the period.............. 453,509 --
Goodwill impairment losses under SFAS No. 142.... -- --
-------------- --------------
Ending of period................................... (Won)3,287,261 (Won)3,383,673
============== ==============
F-59
OTHER INTANGIBLE ASSETS
The major components and average useful lives of our other acquired
intangible assets under U.S. GAAP are as follows (in millions of Korean
won):
December 31, 2002 June 30, 2003
-------------------------------- --------------------------------
Gross carrying Accumulated Gross carrying Accumulated
amount amortization amount amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
IMT license (14 years)....... (Won)1,189,881 (Won) -- (Won)1,189,881 (Won) --
Customer lists (4 years)..... 99,783 (39,142) 99,783 (51,615)
Other (5 to 20 years)........ 344,708 (158,248) 434,736 (223,568)
-------------- ------------- -------------- -------------
Total.......................... (Won)1,634,372 (Won)(197,390) (Won)1,724,400 (Won)(275,183)
============== ============= ============== =============
Intangible asset amortization expense for the six months ended June 30,
2002 and 2003 was (Won)31,019 million and (Won)44,290 million,
respectively. It is estimated to be (Won)75,260 million for the six
months ending December 31, 2003 ; and (Won)146,222 million, (Won)137,990
million, (Won)117,716 million, (Won)113,552 million and (Won)110,750
million for the years ending December 31, 2004, 2005, 2006, 2007 and
2008, respectively, primarily related to the IMT license, customer lists
and other.
f. New Accounting Pronouncements
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations." This statement addresses accounting for
the cost of legal obligations associated with the retirement of
ling-lived assets. SFAS No. 143 requires that companies recognize the
fair value of a liability for asset retirement obligations in the period
in which the obligations are incurred and that such amount be capitalized
as part of the book value of the long-lived asset. The Company has
determined that it does not have a material legal obligation to remove
long-lived assets as described by this statement. The adoption of SFAS
No. 143 did not have a significant impact on its future consolidated
financial position or results of operations.
On January 1, 2003, the Company adopted SFAS No. 146 "Accounting for
Costs Associated with Exit or Disposal Activities". This statement
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
This statement requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred
rather than the date of an entity's commitment to an exit plan. The
adoption of SFAS No. 146 did not have a significant impact on its
consolidated financial position or results of operations.
F-60
In December of 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure", which is an
amendment of FASB statement No. 123 "Accounting for Stock-Based
Compensation". In response to a growing number of companies announcing
plans to record expenses for the fair value of stock options, SFAS 148
provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of
SFAS 123 to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. The
Company has already adopted the fair value method to evaluate stock
options.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45") --
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45
elaborates on the disclosures to be made by a guarantor about its
obligations under certain guarantees issued. It also clarifies that a
guarantor is required to recognize, at the inception of certain
guarantees, a liability for the fair value of the obligation undertaken
in issuing the guarantee. The initial recognition and measurement
provisions of FIN 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosures were effective for the
Company's annual financial statements for the year ended December 31,
2002. The adoption of this Interpretation did not have a significant
impact on the Company's consolidation financial position or results of
operations.
On January 17, 2003, the FASB issued Interpretation No. 46 ("FIN 46") --
"Consolidation of Variable Interest Entities", which addresses
consolidation by business enterprises where equity investors do not bear
the residual economic risks and rewards. These entities have been
commonly referred to as "special purpose entities". The underlying
principle behind the new Interpretation is that if a business enterprise
is the primary beneficiary of an entity, which is defined in the guidance
as a variable interest entity (VIE), the assets, liabilities and results
of the activities of the variable interest entity should be included in
the consolidated financial statements with those of the business
enterprise. The Interpretation also explains how to identify variable
interest entities and how an enterprise should assess its interest in an
entity when deciding whether or not it will consolidate that entity. VIEs
created after January 31, 2003 must be consolidated immediately, while
VIEs that existed prior to February 1, 2003 must be consolidated as of
July 1, 2003. Management is currently reviewing existing VIEs that may
require consolidation.
In April 30, 2003, the FASB issued Statement No. 149 -- "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". The
statements amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities under Statement 133. The new guidance amends
Statement 133 regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an underlying and the characteristics of a derivative that
contains financing components. The amendments set forth in SFAS No. 149
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this statement
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in SFAS
No. 133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of the
statement of cash flows. The Company does not believe the adoption of
SFAS No. 149 will have a significant impact on its consolidation
financial position or results of operations.
F-61
In May 15, 2003, the FASB has issued Statement No. 150 -- "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity". The Statement changes the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity. The new statement requires that the certain instruments be
classified as liabilities in statements of financial position. One type
of instrument is mandatory redeemable stock, which the issuing company is
obligated to buy back in exchange for cash or other assets. A second type
of instrument, which includes put options and forward purchase contracts,
involves instruments that do or may require the issuer to buy back some
of its shares in exchange for cash or other assets. The third type of
instrument that are considered liabilities under this statement are
obligations that can be settled with shares, the monetary value of which
is fixed, tied solely or predominantly to a variable such as a market
index, or varies inversely with the value of the issuers' shares. The
statement does not apply to features embedded in a financial instrument
that is not a derivative in its entirety. In addition to its requirements
for the classification and measurement of financial instruments in its
scope, SFAS No. 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities, all of
whose shares are mandatory redeemable. Most of the guidance in this
statement is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The Company
does not believe the adoption of SFAS No. 150 will have a significant
impact on its consolidation financial position or results of operations.
F-62
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SK TELECOM CO., LTD.
By: /s/ Chi Woo Han
-------------------------
Name: Chi Woo Han
Title: Vice President
Finance Management Office
Date: September 30, 2003
F-63