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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 AUGUST 2004
COMMISSION FILE NUMBER: 1-14418
SK TELECOM CO., LTD.
(Translation of registrant's name into English)
99, Seorin-dong
Jongro-gu
Seoul, Korea
(Address of principal executive offices)
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(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 [x] Form 40-F - [ ]
(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 -- [ ] No [x]
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):82- .)
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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not superseded by documents or reports subsequently filed or furnished.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 6-K 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",
"consider", "depends", "estimate", "expect", "intend", "plan", "project" and
similar expressions, or that certain events, actions or results "will", "may",
"might", "should" or "could" occur, be taken or be achieved.
Forward-looking statements in this report on Form 6-K include, but are not
limited to, statements related to the following:
- our ability to anticipate and respond to various competitive factors
affecting the industry, including new services that may be introduced,
changes in consumer preferences, economic conditions and discount
pricing strategies by competitors;
- our implementation of CDMA 1xEV/DO technology and other technologies
such as W-CDMA, which is commonly referred to as third generation, or
3G, wireless technology;
- our plans to spend approximately Won 1.7 trillion for capital
expenditures in 2004 for a range of projects, including expansion and
improvement of our wireless networks, investments in our
Internet-related businesses and expansion of our W-CDMA network and
our expected future capital expenditures on various initiatives;
- our ability to comply with governmental rules and regulations,
including Korean Ministry of Information Communication (MIC)
regulations related to telecommunications providers and rules related
to our status as a "market-dominating business entity" under the Fair
Trade Commission of Korea's Korean Monopoly Regulation and Fair Trade
Act;
- our expectations and estimates related to: interconnection fees;
tariffs charged by wireless operators; regulatory fees; operating
costs and expenditures; working capital requirements; principal
repayment obligations with respect to long-term borrowings, bonds and
obligations under capital leases; research and development
expenditures; and other financial estimates;
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- the effect of the number portability system that allows wireless
subscribers to switch wireless service operators while retaining the
same mobile phone number and the use of the common prefix
identification system;
- the telecommunications industry in Korea and other markets in which we
do business and the effect economic, political or social conditions
have on our number of subscribers, call volumes and results of
operations; and
- our plans to pay dividends in 2004, and statements related to
estimates of contractual obligations and commitments, financing
activities and plans and other information more specifically detailed
in "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
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. Risks and
uncertainties associated with our business include, but are not limited to,
risks related to changes in the regulatory environment; technology changes;
potential litigation and governmental actions; changes in the competitive
environment; political changes; currency risks; foreign ownership limitations;
credit risks and other risks and uncertainties that are more fully described
under the heading "Key Information -- Risk Factors" beginning on page 11 of our
annual report on Form 20-F filed with the United States Securities and Exchange
Commission on June 1, 2004. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We must file semi-annual reports with the Financial Supervisory Commission
of Korea and the Korean Stock Exchange. These semi-annual reports contain our
unaudited, reviewed and non-consolidated financial statements as of and for the
six months ended June 30, 2003 and 2004, that are prepared in accordance with
Korean GAAP, which differs in some respects from U.S. GAAP. You should read the
following discussion together with our unaudited non-consolidated financial
statements included in this report.
The financial information described below and in our unaudited
non-consolidated financial statements as of December 31, 2003 and June 30, 2004
and for the six months ended June 30, 2003 and 2004 is non-consolidated, and
therefore does not reflect the results of operations of our subsidiaries other
than those reflected under the equity method of accounting. While
non-consolidated net income reflects the results of our consolidated
subsidiaries, our other non-consolidated financial data, including operating
revenue and operating income, do not. Accordingly, we believe that while there
should not be any material differences between our net income on a
non-consolidated basis and our net income on a consolidated basis, our other
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financial data, including those items noted above, may be materially different
on a consolidated basis. As a result, the financial information below is not
comparable with the consolidated financial information presented in our annual
report on Form 20-F for the year ended December 31, 2003, filed with the United
States Securities and Exchange Commission on June 1, 2004.
Under Korean GAAP, our non-consolidated revenues accounted for
approximately 92.6% and 92.7% of our consolidated revenues in the years ended
December 31, 2002 and 2003, respectively, and at December 31, 2002 and 2003, our
non-consolidated assets were approximately 89.4% and 96.8% of our consolidated
assets and our non-consolidated current assets were approximately 66.8% and
85.0% of our consolidated current assets. We can give no assurance as to what
the ratios will be for the year ending December 31, 2004. In addition, results
of operations for the first six months of 2004 may not be indicative of results
of operations for the full year 2004.
Accounting principles and their application in practice vary among
countries. The following discussion and our interim non-consolidated financial
statements are not intended to present the financial position, results of
operations and cash flows in accordance with accounting principles and practices
generally accepted in countries other than the Republic of Korea. Accordingly,
this report and the accompanying interim non-consolidated financial statements
are for use by those knowledgeable about Korean accounting principles and review
standards and their application in practice.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data derived from our
interim non-consolidated financial statements as of and for the six months ended
June 30, 2004. You should read the selected non-consolidated financial data
below in conjunction with our interim non-consolidated financial statements
included in this report.
FOR THE SIX MONTHS ENDED JUNE 30,
2003 2004
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NON-CONSOLIDATED INCOME STATEMENT DATA (IN BILLIONS OF WON)
Operating Revenue W4,629.6 W4,784.6
Wireless Service 4,098.6 4,354.7
Interconnection 520.7 429.9
Total Cellular Revenue 4,619.3 4,773.8
Operating Expenses 3,061.8 3,630.7
Operating Income 1567.8 1153.9
Other Income 142.5 150.5
Other Expenses 280.8 223.5
Income Taxes 430.3 329.7
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Net Income W 999.2 W 751.2
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AS OF DECEMBER 31, 2003 AS OF JUNE 30, 2004
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NON-CONSOLIDATED BALANCE SHEET DATA (IN BILLIONS OF WON)
Total Current Assets W 3,460.7 W 3,684.4
Total Non-Current Assets 9,915.3 9,841.2
Total Assets 13,376.0 13,489.7
Total Current Liabilities 4,232.0 3,384.4
Total Long-Term Liabilities 3,202.1 3,762.7
Total Stockholders' Equity 5,941.8 6,342.6
RESULTS OF OPERATIONS
Non-Consolidated Revenue. We earn revenue principally from initial
connection fees and monthly access fees, usage charges and value-added service
fees paid by subscribers to our wireless services and interconnection fees paid
to us by other telecommunications operators. The amount of our revenue depends
principally upon the number of wireless subscribers, the rates we charge for our
services, subscriber usage of our services and the terms of our interconnection
with other telecommunications operators. Government regulation also affects our
revenues.
Non-Consolidated Operating Revenue. Our operating revenue increased by 3.3%
to Won 4,784.6 billion in the six months ended June 30, 2004 from Won 4,629.6
billion in the corresponding period in 2003. This increase was principally a
result of a 3.3% increase in our cellular revenue to Won 4,773.8 billion in the
six months ended June 30, 2004 up from Won 4,619.3 billion in the corresponding
period in 2003, as a result of an increase in the number of our wireless
subscribers and the average monthly revenue per subscriber, which was offset by
a 17.4 % decrease in interconnection revenue. Our wireless services revenue
increased by 6.3% to Won 4,354.7 billion in the six months ended June 30, 2004
up from Won 4,098.6 billion in the corresponding period in 2003.
In January 2003, the MIC announced its plan to implement number portability
with respect to wireless telecommunications service in Korea. The number
portability system allows wireless subscribers to switch wireless service
operators while retaining the same mobile phone number. Subscribers who switch
operators to or from SK Telecom must purchase a new handset, as we use a
different frequency than our competitors, KT Freetel and LG Telecom. In
accordance with the plan published by the MIC, we were required to permit number
portability first, beginning on January 1, 2004. The following number of
subscribers have transferred to the service of our competitors during each month
following our implementation of the number portability system:
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MONTH NUMBER OF SUBSCRIBERS TRANSFERRED
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January 305,267
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February 183,876
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March 214,232
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April 261,654
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May 259,642
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June 211,270
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July 374,301
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Subscribers who choose to transfer to a different wireless operator have
the right to return to us without paying any penalties within 14 days of the
initial transfer. KT Freetel introduced number portability beginning on July 1,
2004 and LG Telecom will be required to introduce number portability beginning
on January 1, 2005. Notwithstanding our implementation of number portability on
January 1, 2004, our total number of wireless subscribers increased to
approximately 18.6 million as of June 30, 2004 up from approximately 18.3
million as of December 31, 2003 and 17.8 million as of June 30, 2003. The
increase in the number of wireless subscribers resulted in part from our service
quality and marketing efforts.
On June 15, 2004, the Minister of Information and Communication (MIC)
issued a suspension that prohibits us from acquiring new subscribers for a
period of 40 days beginning on August 20, 2004. The MIC also issued suspensions
to our three largest competitors that prohibited them from acquiring new
subscribers for periods ranging from 20 days to 30 days. KT Freetel Co. Ltd. was
issued a 30 day suspension beginning on July 21, 2004; LG Telecom Ltd. was
issued a 30 day suspension beginning on June 21, 2004; and Korea Telecom was
issued a 20 day suspension beginning on July 21, 2004. These suspensions
resulted from MIC's determination that we violated the ban on providing
subsidies to handset purchasers. During the suspensions, each company was or
will be able to continue regular business activities, including replacement of
handsets, changes in user names, changes in mobile phone numbers and changes in
tariff plans applicable to the existing subscribers. Because of the length and
timing of our suspension relative to our competitors, we believe the suspension
may have negative impact on our operating revenues and results of operations.
On an aggregate basis, interconnection revenue decreased by 17.4% to Won
429.9 billion in the six months ended June 30, 2004 down from Won 520.7 billion
in the corresponding period in 2003. This decrease was due in part to the new
adjusted interconnect rates announced by the MIC on July 9, 2004, which were
applied retroactively. The new interconnect rates are as follows:
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YEAR SK TELECOM KT FREETEL LG TELECOM
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2003 41.02 47.99 52.89
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2004 31.81 47.66 58.55
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2005 31.19 46.70 54.98
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The interconnection rates were adjusted based on the original cost of
individual operators under Long Run Incremental Cost (LRIC) method and the
competitive market situation in the telecommunication service industry of Korea.
The LRIC method is designed to calculate costs of interconnection of individual
telecommunication service providers within a network using certain models called
"bottom-up" and "top-down." The LRIC method was adopted by other countries such
as the United States, the United Kingdom and Japan. Assuming that the factors
affecting the interconnection revenues and expenses such as call volumes and
call patterns are the same as those of 2003, we estimate that the new rates will
have negative impact on our operations in this year in the amount of
approximately Won 244 billion, resulting from an
6
estimated Won 206 billion reduction in revenue and Won 38 billion increase in
interconnection expenses. The Won 38 billion increase in the interconnection
expenses includes the expected increase in the land to mobile (LM)
interconnection expenses that we will have to pay to fixed-line service
providers.
Our non-consolidated average monthly revenue per subscriber (excluding
interconnection revenue) increased by 0.74% to Won 39,281 in the six months
ended June 30, 2004 up from Won 38,992 in the corresponding period in 2003. The
increase is principally due to increases in average monthly revenue per
subscriber from wireless Internet services.
Our non-consolidated average monthly revenue per subscriber from wireless
Internet services sales increased by 34.7% to Won 7,296 in the six months ended
June 30, 2004 up from Won 5,415 in the corresponding period in 2003. Wireless
Internet services sales increased by 41.7% to Won 808.8 billion in the six
months ended June 30, 2004 (representing 16.9% of our cellular revenue) up from
Won 570.6 billion in the corresponding period in 2003, primarily due to the
increased number of subscribers who use wireless Internet-enabled handsets.
Our non-consolidated average monthly revenue per subscriber from
value-added services and other sales decreased by 25.4% to Won 1,562 in the six
months ended June 30, 2004 down from Won 2,094 in the corresponding period in
2003. Value-added services and other sales decreased by 21.5% to Won 173.2
billion in the six months ended June 30, 2004 down from Won 220.6 billion in the
corresponding period in 2003 primarily due to a decrease in caller ID rates from
Won 2,000 to Won 1,000 that took effect in October 2003.
Non-Consolidated Operating Expenses. Our operating expenses in the six
months ended June 30, 2004 increased by 18.6% to Won 3,630.7 billion compared to
Won 3,061.8 billion in the corresponding period in 2003, primarily due to
increases in commissions paid, labor costs, depreciation and amortization
expenses, leased line expenses and miscellaneous operating expenses, which more
than offset decreases in network interconnection expenses, cost of goods sold
and advertising expenses.
Commissions paid to our authorized dealers increased by 35.9% to Won
1,471.7 billion in the six months ended June 30, 2004 compared to Won 1,082.7
billion in the corresponding period in 2003, primarily due to the 5.3% increase
in the average number of subscribers during the period, increases in commissions
paid to wireless Internet content providers and retail agents and an increase in
the number of handsets sold. We also increased our marketing activities to
maintain our market leadership in 2G and 2.5G services, to promote our 3G
services and to counter the effects of number portability.
Labor costs increased by 38.4% to Won 236.6 billion in the six months ended
June 30, 2004 compared to Won 170.9 billion in the corresponding period in 2003.
The increase was primarily due to an increase in performance bonuses and an
increase in salaries.
Depreciation and amortization expense increased by 8.5% to Won 661.9
billion in the six months ended June 30, 2004 compared to Won 718.0 billion in
the corresponding period in 2003.
7
The increase in depreciation and amortization expenses was primarily due to the
continued expansion of our CDMA 1xRTT network.
Leased line expenses increased by 15.3% to Won 172.2 billion in the six
months ended June 30, 2004 up from Won 149.3 billion in the corresponding period
in 2003 primarily due to higher call volumes.
Miscellaneous operating expenses increased by 17.2% to Won 452.9 billion in
the six months ended June 30, 2004 compared to Won 386.5 billion in the
corresponding period in 2003 primarily due to increases in taxes and other dues
and rent expenses.
Network interconnection expenses decreased by 4.2% to Won 399.5 billion in
the six months ended June 30, 2004 compared to Won 417.1 billion in the
corresponding period in 2003, primarily due to 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, which was partially offset by
the higher subscriber numbers. Mobile-to-mobile interconnection expenses
increased by 18.1% to Won 302.5 billion in the six months ended June 30, 2004
compared to Won 256.2 billion in the corresponding period in 2003.
Mobile-to-land interconnection expenses decreased by 30.0% to Won 81.1 billion
in the six months ended June 30, 2004 compared to Won 115.8 billion in the
corresponding period in 2003.
Cost of goods sold decreased by 89.0% to Won 1.0 billion in the six months
ended June 30, 2004 compared to Won 5.1 billion in the corresponding period in
2003. The decrease was primarily due to a decrease in sales of wireless Internet
solutions (including software, hardware and service) following the completion of
our obligation to provide wireless Internet solutions to Asia Pacific Broadband
Wireless Communications (APBW) at the end of 2003.
Advertising expenses decreased by 2.8% to Won 178.9 billion in the six
months ended June 30, 2004 compared to Won 184.0 billion in the corresponding
period in 2003. We reduced advertising and focused our efforts on managing our
distribution network to mitigate the effect of number portability.
Non-Consolidated Operating Income. Our operating income decreased by 26.4%
to Won 1567.8 billion in the six months ended June 30, 2004 down from Won 1153.9
billion in the corresponding period in 2003. Our operating income decreased
principally because our operating expenses increased at a faster rate than our
operating revenue, as explained above.
Non-Consolidated Other Income. Other income, consisting primarily of equity
in earnings of affiliates, interest income, dividend income, foreign exchange
and translation gains and commission income, increased by 5.6% to Won 150.5
billion in the six months ended June 30, 2004 compared to Won 142.5 billion in
the corresponding period in 2003, primarily due to increases in equity in
earnings of affiliates, interest income and foreign exchange translation gains,
which were partially offset by a decrease in commissions and dividend income.
Non-Consolidated Other Expenses. Other expenses include interest and
discount expenses, loss on disposal of property, equipment and intangible
assets, loss on valuation of
8
derivative instruments, foreign exchange and translation losses and donations.
Other expenses decreased by 20.4% to Won 223.5 billion in the six months ended
June 30, 2004 compared to Won 280.8 billion in the corresponding period in 2003.
The decrease was primarily due to decreases in loss on impairment of long-term
investment securities, equity in losses of affiliates, interest and discounts
and foreign exchange translation losses, which more than offset increases in
loss on valuation of derivative instruments and loss on disposal of property,
equipment and intangible assets. As a percentage of operating revenue, other
expenses decreased to 4.7% in the six months ended June 30, 2004 from 6.7% in
the corresponding period in 2003.
Non-Consolidated Income Tax. Provision for income taxes decreased by 23.4%
to Won 329.7 billion in the six months ended June 30, 2004 from Won 430.4
billion in the corresponding period in 2003. Our effective tax rate increased to
32.5% in the six months ended June 30, 2004 from an effective tax rate of 30.1%
in the corresponding period in 2003.
Non-Consolidated Net Income. Principally as a result of the factors
discussed above, our net income decreased by 24.8% to Won 751.2 billion in six
months ended June 30, 2004 down from Won 999.4 billion in the corresponding
period in 2003, with net income as a percentage of operating revenues at 15.7%
in the six months ended June 30, 2004 as compared to 21.6% in the corresponding
period in 2003.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
We had a working capital (current assets minus current liabilities) deficit
of Won 264.0 billion as of June 30, 2004 and Won 771.3 billion as of December
31, 2003. We had cash, cash equivalents, short-term financial instruments and
trading securities of Won 736.0 billion as of June 30, 2004 and Won 987.6
billion as of December 31, 2003. We had outstanding short-term borrowings of Won
180.0 billion as of June 30, 2004 and Won 728.7 billion as of December 31, 2003.
Operating cash flow is our principal source of liquidity. Cash and cash
equivalents increased by Won 25.9 billion to Won 54.3 billion at June 30, 2004
up from Won 23.4 billion at December 31, 2003.
Net Cash Flow from Operating Activities. Our principal source of liquidity
is cash flow from operations. Cash flow provided by operations was Won 783.6
billion in the six month period ended June 30, 2004, compared to Won 782.8
billion during the same period in 2003.
Net Cash from Investing Activities. Net cash flow from investing activities
was Won 357.1 billion in the six month period ended June 30, 2004, compared to
Won 64.2 billion during the same period in 2003. Cash inflows from investing
activities were Won 400.3 billion in the six month period ended June 30, 2004,
compared to Won 904.6 billion during the same period in 2003, and the primary
contributor to such inflows related to a decrease in trading securities of Won
285.6 billion in the six month period ended June 30, 2004, compared to Won nil
during the
9
same period in 2003. Cash outflows for investing activities were Won 757.4
billion in the six month period ended June 30, 2004, compared to Won 969.0
billion during the same period in 2003. The primary contributors to the overall
cash outflows for investing activities were expenditures related to the
acquisition of property and equipment, which were Won 471.6 billion in the six
month period ended June 30, 2004, compared to Won 463.0 billion during the same
period in 2003; increase in short-term financial instruments, which were Won 6.9
billion in the six month period ended June 30, 2004, compared to Won 186.5
billion during the same period in 2003; and increase of trading securities,
which were nil in the six month period ended June 30, 2004, compared to Won 97.7
billion during the same period in 2003.
Net Cash from Financing Activities. Financing activities used cash of Won
400.6 billion in the six month period ended June 30, 2004, compared to using
cash of Won 619.7 billion during the same period in 2003. Cash inflows from
financing activities included net increase in issuance of bonds, which provided
cash of Won 1018.0 billion in the six month period ended June 30, 2004, compared
to Won 315.8 billion during the same period in 2003. Cash outflows for financing
activities included, among other items, net repayment of short-term borrowing of
Won 548.7 billion in the six month period ended June 30, 2004, compared to nil
during the same period in 2003; repayment of the current portion of long-term
debt, which used cash of Won 466.8 billion in the six month period ended June
30, 2004, compared to Won 87.1 billion during the same period in 2003;
acquisition of treasury stock, which used cash of Won 2 million in the six month
period ended June 30, 2004, compared to Won 885.0 billion during the same period
in 2003; and payment of dividends which used cash of Won 404.7 billion in the
six month period ended June 30, 2004, compared to Won 151.7 billion during the
same period in 2003.
The net increase in cash and cash equivalents was Won 25.9 billion in the
six month period ended June 30, 2004, compared to Won 98.8 billion during the
same period in 2003.
LONG TERM DEBT
We had total non-consolidated long-term debt (excluding current portion and
facility deposits) of Won 3,762.7 billion as of June 30, 2004 and Won 3,202.1
billion as of December 31, 2003. Our non-consolidated long-term debt as of June
30, 2004 included, among other items, bonds payable in the net amount of Won
2,721.5 billion, facility deposits of Won 37.4 billion, long-term payables of
Won 570.6 billion and deferred income tax liabilities of Won 275.0 billion. Our
non-consolidated long-term debt as of December 31, 2003 included, among other
items, bonds payable in the net amount of Won 2,256.6 billion, facility deposits
of Won 44.2 billion, long-term payables of Won 564.1 billion, deferred income
tax liabilities of Won 242.1 billion and bank and institutional loans of Won 1.6
billion. As of June 30, 2004, substantially all of our foreign
currency-denominated long-term debt 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.
In June 2002 and December 2002, we sold Won 631.4 billion and Won 650.6
billion, respectively, of accounts receivable resulting from our mobile phone
dealer financing plan to
10
Nate First Special Purpose Company and Nate Second Special Purpose Company,
respectively, in asset-backed securitization transactions and recorded a loss on
disposal of accounts receivable-other of Won 10.9 billion and Won 12.9 billion,
respectively. Nate First Special Purpose Company and Nate Second Special Purpose
Company were liquidated in August 2003 and April 2004, respectively.
On September 4, 2003 and December 15, 2003, we sold Won 549.3 billion and
Won 498.4 billion of accounts receivable resulting from our mobile phone dealer
financing plan Nate Fourth Special Purpose Company and Nate Fifth Special
Purpose Company, respectively, in asset-backed securitization transactions and
recorded a loss on disposal of accounts receivable-other of Won 12.9 billion and
Won 9.9 billion, respectively. In connection with these asset-backed
securitization transactions, we have obligations to repurchase up to 13.3% and
13.2% of the receivables for Nate Fourth Special Purpose Company and Nate Fifth
Special Purpose Company, respectively, if receivables become past due for three
months or the debtors become insolvent. At June 30, 2004, the uncollected
balances of accounts receivable sold to Nate Fourth Special Purpose Company and
Nate Fifth Special Purpose Company were Won 14.4 billion and Won 101.3 billion,
respectively.
In May, July, August and November 2002, we issued Won 500.0 billion, Won
200.0 billion, Won 200.0 billion and Won 300.0 billion principal amount of
unsecured and unguaranteed Won-denominated bonds, respectively. These bonds
mature in May 2005, July 2007, August 2007 and November 2007, and have an annual
interest rate of 6.0%, 6.0%, 6.0% and 5.0%, respectively. We issued
Won-denominated bonds with a principal amount of Won 300.0 billion, Won 150.0
billion and Won 250.0 billion in March, August and November 2003, respectively.
These bonds mature in March 2008, August 2006 and November 2006, respectively,
and have an annual interest rate of 5.0%.
In March 2004, we issued Won-denominated bonds with a principal amount of
Won 150.0 billion. These bonds will mature in 2009 and have an annual interest
rate of 5.0%. We used the net proceeds from the sale of these bonds to repay
commercial paper which matured at the end of March 2004.
During the quarter ended June 30, 2004, we completed the following debt
offerings:
In April 2004, we issued notes in the principal amount of US$300,000,000
with a maturity of seven years and an interest rate of 4.25%. The proceeds
from the offering in April 2004 were used to pay maturing debt.
In May 2004, we issued Won-denominated notes in the principal amount of Won
150.0 billion with a maturity of five years and an interest rate of 5.0%.
The proceeds of the Won-denominated note offering in May 2004 were used for
our operations.
On May 27, 2004, we issued our US$329,450,000 Zero Coupon Convertible Notes
due 2009, pursuant to an indenture dated as of May 27, 2004 between us and
Citibank, N.A. Holders of Zero Coupon Convertible Notes will have the right
to convert their notes (or any portion thereof being US$100,000 in
principal amount or an integral multiple of
11
US$10,000 in excess thereof) into shares of our common stock at the initial
conversion price of Won 235,625 per share, subject to adjustments for stock
splits, dividends, sub-divisions and similar distributions, at any time on
or after July 7, 2004 up to the close of business on May 13, 2009, subject
to our right of redemption. In connection with the issuance of the zero
coupon convertible notes, we deposited 1,645,000 shares of our common stock
with Korea Securities Depository to be reserved and used to satisfy the
note holders' conversion rights. This will be deemed as the repurchase of
treasury stock and cancellation thereof for the purposes of Korean law. If
(1) the exercise by the holder of the conversion right would be prohibited
by Korean law or we reasonably conclude that the delivery of common stock
upon conversion of these notes would result in a violation of applicable
Korean law or (2) we do not have a sufficient number of shares of our
common stock to ratify the conversion right, then we will pay a converting
holder a cash settlement payment. In such situations, we intend to sell
such number of treasury shares held in trust for us that corresponds to the
number of shares of common stock that would have been deliverable in the
absence of the 49% foreign shareholding restrictions imposed by the
Telecommunications Law or other legal restrictions. We entered into a swap
agreement to reduce our exposure with respect to cash settlement payments
exceeding the proceeds from sales of treasury shares held in trust.
CAPITAL REQUIREMENTS AND RESOURCES
We estimate that we will spend a total of approximately Won 1.7 trillion
for capital expenditures in 2004 primarily for the expansion and upgrading of
our CDMA 1xRTT network, for our initial investment in the satellite-based
digital multimedia broadcasting (DMB) business, the roll-out of our W-CDMA
network and for the development and introduction of wireless data services. We
have spent approximately Won 463.9 billion on capital expenditures in the six
month period ended June 30, 2004. Of the Won 1.7 trillion for capital
expenditures in 2004, we plan to spend up to Won 800 billion of which we have
spent approximately Won 279 billion as of June 30, 2004 on capital expenditures
related to expansion and improvement of our 95A/B and CDMA 1xRTT Network; Won
250 billion of which we have spent approximately Won 5 billion as of June 30,
2004 on capital expenditures related to construction of our W-CDMA network and
provision of W-CDMA services, which began service on a limited basis in Seoul at
the end of 2003; and Won 600 billion of which we have spent approximately Won
180 billion as of June 30, 2004 on other capital expenditures and projects. We
may also make additional capital expenditure investments as opportunities arise.
In addition, we may increase, reduce or suspend our planned capital expenditures
for 2004 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.
In addition, we expect that construction of our new headquarters will be
completed by the end of 2004.
The actual scope and timing of our planned full nationwide roll-out of our
W-CDMA network and expenditures related to the rollout will depend on several
factors, including the availability of network equipment, progress on the
development of dual band/dual mode handsets, ability to overcome technical
problems currently affecting W-CDMA performance,
12
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.
Accordingly, 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. Our future capital expenditures will be fixed after we have
reviewed the progress of the introduction and marketability of our W-CDMA
service.
In September 2003, we entered into an agreement with Mobile Broadcasting
Corporation for the purposes of co-owning and launching a satellite for the
satellite DMB business. Under the terms of the agreement, SK Telecom is
committed to fund 34.7% of the cost of launching and maintaining the operations
of the satellite, which is expected to be approximately Won 92.0 billion. We
launched the satellite in March 2004. Although actual implementation of the
satellite DMB business will depend on many factors, including government
approvals that have yet to be obtained, our current expectations are to begin
commercial service by October 2004.
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 interest.
As of December 31, 2003, our principal repayment obligations (on a
consolidated basis) with respect to long-term borrowings, bonds and obligations
under capital leases outstanding were as follows for the periods indicated:
TWELVE MONTHS ENDING DECEMBER 31, TOTAL
(In Billions of Won)
2004 ...................................................... W1,368.4
2005....................................................... 501.6
2006....................................................... 805.3
Thereafter................................................. 1,000.0
We also intend to incur research and development expenses, which are
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)
equaled 2.8% of operating revenue in 2003 and 2.7% of operating revenue for the
six month period ended June 30, 2004.
We anticipate that capital expenditures, repayment of outstanding debt and
research and development expenditures will represent our most significant use of
funds during the remainder of 2004 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
13
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 construction of the W-CDMA network. We
believe that these sources will be sufficient to fund our planned capital
expenditures for the remainder of 2004. Our ability to rely on these
alternatives could be affected by the 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 paying 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. Since August 1, 2002, SK Telecom has been paying initial premium for
the first three years as well as renewal premium on behalf of the subscriber who
elects to have facility insurance. 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 from
Won 44.2 billion as of December 31, 2003 to Won 37.4 billion as of June 30,
2004. We do not expect to have a significant amount of facility deposits
available for capital expenditures in the future.
DIVIDEND POLICY
In 2004, we amended our articles of incorporation to permit payment of
interim dividends in accordance with relevant laws. On July 23, 2004, SKT's
board of directors approved the interim dividend rate of 1,000 Korean Won per
common stock for the first half of fiscal year 2004. The shareholders who are
registered in the SKT's shareholders registry as of June 30, 2004 were entitled
to receive the interim dividends. The interim dividend was paid on August ,
2004. The total amount of the interim dividend paid was 73,614,296,000 Korean
Won. The overall dividend payout ratio with respect to dividends for 2004 is
currently expected to be up to 25% of net income from 2004.
14
DERIVATIVE INSTRUMENTS
In connection with the issuance of our US$300 million notes in April 2004,
we entered into currency swap agreements and currency forward contracts with
three banks to reduce our foreign currency exposure.
In May 2004, we sold US$329.5 million in zero coupon convertible notes due
2009. These convertible notes are convertible by the holders into shares of our
common stock at the rate of Won 235,625 per share. In connection with the
issuance of the zero coupon convertible notes, we deposited 1,645,000 shares of
our common stock with Korea Securities Depository to be reserved and used to
satisfy the note holders' conversion rights. If (1) the exercise by the holder
of the conversion right would be prohibited by Korean law or we reasonably
conclude that the delivery of common stock upon conversion of these notes would
result in a violation of applicable Korean law or (2) we do not have a
sufficient number of shares of our common stock to ratify the conversion right,
then we will pay a converting holder a cash settlement payment. In such
situations, we intend to sell such number of treasury shares held in trust for
us that corresponds to the number of shares of common stock that would have been
deliverable in the absence of the 49% foreign shareholding restrictions imposed
by the Telecommunications Law or other legal restrictions. We entered into a
swap agreement to reduce our exposure with respect to cash settlement payments
exceeding the proceeds from sales of treasury shares held in trust.
We may consider in the future entering into additional currency swap
agreements, currency forward contracts transactions and other arrangements
solely for hedging purposes.
OTHER INFORMATION
As a condition to the approval of the merger of Shinsegi into SK Telecom in
January 2002, the MIC imposed certain conditions on us. The MIC periodically
reviews our compliance with the conditions to our merger with Shinsegi. On May
25, 2004, a policy advisory committee to the MIC announced the results of its
review and stated that the committee believed that our market dominance may
significantly restrict competition in the telecommunications market and that we
have violated a merger condition related to our acquisition of Shinsegi by
providing subsidies to handset buyers. The advisory committee subsequently
recommended that the MIC extend the post-merger monitoring period by two years
until January 2007 and take appropriate corrective measures against us for
providing subsidies to handset buyers. On June 7, 2004, MIC imposed a Won 11.9
billion fine on us and extended the post-merger monitoring period until January
2007.
On May 25, 2004, we voluntarily undertook to limit our market share to
52.3% of the wireless telecommunications market through the end of 2005, the
level of our market share at the time of the approval of our merger with
Shinsegi in January 2002. As of June 30, 2004, we had approximately 18.6 million
subscribers, representing a market share of approximately 51.3%. If we are
subject to additional market share limitations in the future, our ability to
compete effectively will be impeded.
15
On June 15, 2004, the MIC issued a suspension that prohibits us from
acquiring new subscribers for a period of 40 days beginning on August 20, 2004.
The MIC also issued suspensions to our three largest competitors that prohibited
them from acquiring new subscribers for periods ranging from 20 days to 30 days.
KT Freetel Co. Ltd. was issued a 30 day suspension beginning on July 21, 2004;
LG Telecom Ltd. was issued a 30 day suspension beginning on June 21, 2004; and
Korea Telecom was issued a 20 day suspension beginning on July 21, 2004. These
suspensions resulted from MIC's determination that we violated the ban on
providing subsidies to handset purchasers. During the suspensions, each company
will be able to continue regular business activities, including replacement of
handsets, changes in user names, changes in mobile phone numbers and changes in
tariff plans applicable to the existing subscribers.
16
SK TELECOM CO., LTD.
NON-CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
In millions of Korean won
A S S E T S As of Dec. 31, 2003 As of June 30, 2004
------------------- -------------------
CURRENT ASSETS:
Cash and cash equivalents W 28,393 W 54,322
Short-term financial instruments 100,513 105,980
Trading securities 858,739 575,702
Current portion of long-term investment securities 85,861 51,983
Accounts receivable - trade (net of allowance for doubtful accounts
of W44,064 million in 2004 1H and W56,805 million in 2003) 1,438,836 1,392,475
Short-term loans (net of allowance for doubtful accounts of W585
million in 2004 1H and W516 million in 2003) 51,102 57,896
Accounts receivable - others (net of allowance for doubtful accounts
of W16,142 million in 2004 1H and W15,979 million in 2003) 811,496 1,306,186
Inventories 8,024 9,444
Accrued income and others 77,742 94,451
Total Current Assets 3,460,706 3,648,439
NON-CURRENT ASSETS:
Property and equipment, net 4,551,626 4,351,219
Intangible assets, net 3,600,268 3,492,833
Long-term investment securities 855,195 850,533
Equity securities accounted for using the equity method 563,539 722,680
Long-term loans (net of allowance for doubtful accounts of W19,222
million in 2003 and W19,502 million in 2003) 41,591 33,099
Guarantee deposits 246,004 249,131
Long-term deposits and others 57,030 141,746
Total Non-Current Assets 9,915,253 9,841,242
TOTAL ASSETS W13,375,959 W13,489,680
17
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable W 1,117,835 W 823,824
Short-term borrowings 728,669 180,000
Income taxes payable 399,852 293,608
Accrued expenses 401,245 424,927
Current portion of long-term debt, net 1,364,264 1,397,807
Current portion of facility deposits 10,824 12,819
Others 209,285 251,414
Total Current Liabilities 4,231,974 3,384,399
LONG-TERM LIABILITIES:
Bonds payable, net 2,256,644 2,721,504
Long-term borrowings 1,633
Facility deposits 44,197 37,391
Long-term payables-others, net of present value discount of
W79,422 million in 2004 1H W85,881 million in 2003) 564,119 570,578
Accrued severance indemnities, net 63,663 89,046
Deferred income tax liabilities 242,057 274,993
Others 29,834 69,190
Total Long-Term Liabilities 3,202,147 3,762,703
Total Liabilities 7,434,121 7,147,101
STOCKHOLDERS' EQUITY:
Capital stock 44,639 44,639
Capital surplus 2,915,964 2,983,166
Retained earnings:
Appropriated 4,743,822 4,733,936
Unappropriated 396,527 752,778
Capital adjustments:
Treasury stock (2,047,103) (2,047,105)
Unrealized loss on valuation of long-term investment securities (156,948) (201,027)
Equity in capital adjustments of affiliates 41,196 104,235
Stock options 3,742 4,295
Unrealized loss on valuation of currency swap (32,339)
Total Stockholders' Equity 5,941,838 6,342,579
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY W13,375,959 W13,489,680
18
SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2003 AND 2004
In millions of Korean won
2003 1H 2004 1H
---------- ----------
OPERATING REVENUE W4,629,598 W4,784,563
OPERATING EXPENSES
Labor cost 170,908 236,595
Commissions paid 1,082,661 1,471,660
Depreciation and amortization 661,903 717,975
Network interconnection 417,058 399,472
Leased line 149,278 172,191
Advertising 183,976 178,894
Cost of goods sold 9,529 1,048
Others 386,507 452,867
Sub-total 3,061,821 3,630,700
OPERATING INCOME 1,567,776 1,153,862
OTHER INCOME:
Interest income 31,855 37,683
Dividends 25,806 18,792
Commissions 50,269 16,240
Foreign exchange and translation gains 2,299 10,014
Reversal of allowance for doubtful accounts - 4,157
Gain on disposal of property and equipment 720 384
Equity in earnings of affiliates - 43,854
Others 31,551 19,419
Sub-total 142,500 150,542
OTHER EXPENSES:
Interest and discounts 187,382 156,735
Donations 8,455 5,185
Foreign exchange and translation losses 2,459 775
Loss on disposal and impairment of property,
equipment and intangible assets 2,933 8,068
Loss on impairment of long-term investment securities 18,717 11,782
Loss on disposal of investment assets 179 809
Equity in losses of affiliates 16,183 -
Others 44,443 40,096
Sub-total 280,751 223,451
INCOME BEFORE INCOME TAXES 1,429,526 1,080,954
PROVISION FOR INCOME TAXES 430,278 329,709
NET INCOME W 999,247 W 751,244
19
SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003
2003 1H 2004 1H
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income W 999,247 W 751,244
----------- ---------
Expenses not involving cash payments:
Depreciation and amortization 720,162 777,053
Provision for severance indemnities 24,682 33,197
Allowance for doubtful accounts 6,263 79
Loss on impairment of long-term investment securities 1,449 -
Foreign translation loss 286 1,748
Equity in losses of affiliates 16,183
Loss on impairment of long-term investment securities 18,717 11,782
Loss on disposal and impairment of property,
equipment and intangible assets 2,933 8,068
others 26,103 22,236
----------- ---------
Sub-total 816,778 854,162
----------- ---------
Income not involving cash receipts:
Foreign translation gain 1,575 241
Reversal of allowance for doubtful accounts - 4,157
Gain on impairment of long-term investment securities - 2,039
Equity in earnings of affiliates - 43,854
Gain on disposal of property and equipment 720 384
others 1,079 3,432
----------- ---------
Sub-total 3,374 54,107
----------- ---------
Changes in assets and liabilities related to
operating activities:
Accounts receivable - trade (67,095) 50,127
Accounts receivable - others (208,411) (494,872)
Accrued income and others (32,922) (12,652)
Inventories 4,050 (1,478)
Accounts payable (927,256) (293,903)
(Continued)
20
Accrued expenses 73,488 23,682
Income taxes payable 52,636 (106,002)
Current portion of facility deposits 2 1,994
Other current liabilities 81,800 47,623
Deferred income taxes 2,966 32,694
Severance indemnity payments (9,157) (14,932)
----------- ---------
Sub-total (1,029,898) (767,719)
----------- ---------
Net Cash Provided by Operating Activities 782,754 783,580
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash inflows from investing activities:
Decrease in short-term financial instruments - -
Decrease in trading securities - 285,568
Decrease in current portion of long-term investment
securities 41,006 37,478
Decrease in short-term loans 24,772 39,316
Decrease in long-term financial instruments 3 -
Proceeds from sales of long-term investment securities 730,615 734
Proceeds from sales of equity securities accounted
for using the equity method 3,440 2,179
Decrease in long-term loans 13,577 -
Decrease in guarantee deposits 24,166 7,275
Decrease in other non-current assets 62,838 22,870
Proceeds from disposal of property and equipment 3,900 4,879
Proceeds from disposal of intangible assets 236 1
----------- ---------
Sub-total 904,554 400,300
----------- ---------
Cash outflows for investing activities:
Increase in short-term financial instruments 186,535 6,896
Increase of trading securities 97,705 -
increase in current portion of long-term debt 27,464 -
Increase in short-term loans 19,453 32,954
increase in long-term financial instruments 3 60,000
Increase in long-term loans 7,659 4,461
Acquisition of long-term investment securities 19,708 52,336
(Continued)
21
Acquisition of equity securities accounted for using
the equity method 30,648 58,410
Increase in guarantee deposits and other non-current
assets 107,446 61,963
Acquisition of property and equipment 463,000 471,639
Increase in intangible assets 9,173 8,715
----------- ---------
Sub-total 968,794 757,374
----------- ---------
Net Cash Provided by Investing Activities (64,239) (357,073)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash inflows from financing activities:
Increase in short-term borrowings 218,669 -
Issuance of bonds 315,829 1,018,020
Others 1,594 11,970
----------- ---------
Sub-total 536,092 1,029,990
----------- ---------
Cash outflows for financing activities:
Repayment of short-term borrowings - 548,669
Repayment of current portion of long-term debt 87,094 466,770
Repayment of bonds 19,840 -
Decrease in facility deposits 3,174 6,805
Payment of dividends 151,739 404,710
Acquisition of treasury stock 884,966 2
others 8,980 3,612
----------- ---------
Sub-total 1,155,794 1,430,569
----------- ---------
Net Cash Used in Financing Activities (619,702) (400,579)
----------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 98,812 25,928
----------- ---------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF THE YEAR 6,228 28,393
----------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS FROM THE MERGED ENTITY 43,224 -
----------- ---------
CASH AND CASH EQUIVALENTS W 148,264 W 54,322
=========== =========
22
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/ Dong Hyun Jang
--------------------------------
Name: Dong Hyun Jang
Title: Vice President
Date: August 27, 2004
23