AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 2003
--------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
---------------------
FORM 20-F
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 1-14418
SK TELECOM CO., LTD.
(Exact name of Registrant as specified in its charter)
SK TELECOM CO., LTD.
(Translation of Registrant's name into English)
THE REPUBLIC OF KOREA
(Jurisdiction of incorporation or organization)
99, SEORIN-DONG
JONGRO-GU
SEOUL, KOREA
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act.
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
AMERICAN DEPOSITARY SHARES, NEW YORK STOCK EXCHANGE, INC.
EACH REPRESENTING ONE-NINTH
OF ONE SHARE OF COMMON STOCK
NEW YORK STOCK EXCHANGE, INC.*
COMMON STOCK, PAR VALUE
WON 500 PER SHARE
Securities registered or to be registered pursuant to Section 12(g) of the
Act.
NONE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act.
$230,000,000 7 3/4% NOTES DUE 2004
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
84,821,311 SHARES OF COMMON STOCK, PAR VALUE WON 500 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes No [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow.
[ ] Item 17 [X] Item
18
* Not for trading, but only in connection with the registration of the
American Depositary Shares.
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--------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
Certain Defined Terms and Conventions Used in this Report................ 4
Special Note Regarding Forward-Looking Statements........................ 4
Item 1. Identity of Directors, Senior Management and Advisers....... 5
Item 2. Offer Statistics and Expected Timetable..................... 5
Item 3. Key Information............................................. 5
Selected Financial Data................................... 5
Exchange Rates............................................ 10
Risk Factors.............................................. 11
Item 4. Information on the Company.................................. 23
History and Development of the Company.................... 23
Business Overview......................................... 26
Organizational Structure.................................. 48
Property, Plants and Equipment............................ 49
Item 5. Operating and Financial Review and Prospects................ 49
Overview.................................................. 49
Results of Operations..................................... 54
Liquidity and Capital Resources........................... 58
Contractual Obligations and Commitments................... 63
Inflation................................................. 63
U.S. GAAP Reconciliation.................................. 63
Critical Accounting Policies, Estimates and Judgments..... 64
Significant Changes in Korean GAAP........................ 66
Significant Changes in U.S. GAAP.......................... 66
Research and Development.................................. 66
Item 6. Directors, Senior Management and Employees.................. 68
Directors and Senior Management........................... 68
Compensation of Directors and Officers.................... 71
Board Practices........................................... 72
Employees................................................. 73
Share Ownership........................................... 74
Item 7. Major Shareholders and Related Party Transactions........... 76
Major Shareholders........................................ 76
Certain Relationships and Related Party Transactions...... 78
Item 8. Financial Information....................................... 81
Consolidated Statements and Other Financial Information... 81
Legal Proceedings......................................... 81
Dividends................................................. 83
Item 9. The Offer and Listing....................................... 85
Market Price Information.................................. 85
The Korean Securities Market.............................. 87
Item 10. Additional Information...................................... 92
Description of Capital Stock.............................. 92
Description of American Depositary Shares................. 97
Material Contracts........................................ 105
Korean Foreign Exchange Controls and Securities
Regulations............................................... 105
Taxation.................................................. 109
Documents on Display...................................... 112
Item 11. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 113
Exchange Rate and Interest Rate Risks..................... 113
Item 12. Description of Securities Other than Equity Securities...... 114
2
PAGE
----
Item 13. Defaults, Dividend Arrearage and Delinquencies.............. 114
Material Modifications to the Rights of Security Holders and
Item 14. Use of Proceeds............................................. 114
Item 15. Controls and Procedures..................................... 114
Item 16A. Audit Committee Financial Expert............................ 115
Item 16B. Code of Ethics.............................................. 115
Item 16C. Principal Accountant Fees and Services...................... 115
Item 17. Financial Statements........................................ 115
Item 18. Financial Statements........................................ 115
Item 19. Exhibits.................................................... 115
Index to Financial Statements............................................ F-1
3
CERTAIN DEFINED TERMS AND CONVENTIONS USED IN THIS REPORT
All references to "Korea" contained in this report shall mean The Republic
of Korea. All references to the "Government" shall mean the government of The
Republic of Korea. All references to "we", "us", "our" or the "Company" shall
mean SK Telecom Co., Ltd. and its consolidated subsidiaries. References to "SK
Telecom" shall mean SK Telecom Co., Ltd., but shall not include its consolidated
subsidiaries. All references to "U.S." shall mean the United States of America.
Unless otherwise indicated, all references to our number of subscribers shall
include Shinsegi Telecomm, Inc.'s subscribers from April 1, 2000.
All references to "KHz" contained in this report shall mean kilohertz, a
unit of frequency denoting one thousand cycles per second, used to measure band
and bandwidth. All references to "MHz" shall mean megahertz, a unit of frequency
denoting one million cycles per second. All references to "GHz" shall mean
gigahertz, a unit of frequency denoting one billion cycles per second. All
references to "Kbps" shall mean one thousand binary digits, or bits, of
information per second. All references to "Mbps" shall mean one million bits of
information per second. Any discrepancies in any table between totals and the
sums of the amounts listed are due to rounding.
All references to "Won" or "W" in this report 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.
Unless otherwise indicated, translations of Won amounts into Dollars in
this report were made at the noon buying rate in The City of New York for cable
transfers in Won per US$1.00 as certified for customs purposes by the Federal
Reserve Bank of New York. Unless otherwise stated, the translations of Won into
Dollars were made at the noon buying rate in effect on December 31, 2002, which
was Won 1,186.3 to US$1.00. On May 30, 2003, the noon buying rate was Won
1,210.0 to US$1.00.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 business
strategy and expectations concerning our market position, future operations,
margins, profitability, liquidity and capital resources. We caution you that
reliance on any forward-looking statement involves risks and uncertainties, and
that although we believe that the assumptions on which our forward-looking
statements are based are reasonable, any of those assumptions could prove to be
inaccurate, and, as a result, the forward-looking statements based on those
assumptions could be incorrect. The uncertainties in this regard include, but
are not limited to, those identified in the risk factors discussed elsewhere in
this report. See "Key Information -- Risk Factors" beginning on page 11 of this
report. 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.
4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
You should read the selected consolidated financial data below in
conjunction with the consolidated financial statements and the related notes
included elsewhere in this report. The selected consolidated financial data for
the five years ended December 31, 2002 are derived from our audited consolidated
financial statements and related notes. Information as of and for the years
ended December 31, 2000 and 2001 includes information as of and for the nine
months ended December 31, 2000 and the year ended December 31, 2001,
respectively, for Shinsegi unless otherwise specified.
Our consolidated financial statements are prepared in accordance with
Korean generally accepted accounting principles, or Korean GAAP, which differ in
certain respects from U.S. GAAP. For more detailed information you should refer
to notes 30 and 31 of our notes to consolidated financial statements.
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
--------- --------- --------- --------- --------- -----------
(IN BILLIONS OF WON AND MILLIONS OF DOLLARS,
EXCEPT PER SHARE AND PERCENTAGE DATA)
INCOME STATEMENT DATA
KOREAN GAAP:
Total Operating Revenue(1)... W 3,552.3 W 4,441.9 W 7,423.1 W 8,371.9 W 9,324.0 US$ 7,859.7
Cellular Service(1)........ 2,974.1 4,141.5 7,245.1 8,203.0 9,156.8 7,718.8
Paging Service(2).......... 558.6 215.3 57.7 8.8 -- --
Other(3)................... 19.6 85.1 120.3 160.1 167.2 140.9
Operating Expenses........... 3,062.2 4,134.7 5,927.6 6,047.4 6,526.4 5,501.4
Operating Income............. 490.1 307.2 1,495.5 2,324.5 2,797.6 2,358.3
Income before Income Taxes
and Minority Interest...... 287.4 385.0 1,287.8 1,976.7 2,218.8 1,870.3
Income before Minority
Interest................... 154.2 283.8 920.5 1,126.4 1,520.3 1,281.5
Net Income................... 154.3 282.2 972.3 1,146.0 1,487.2 1,253.6
Income per Share of Common
Stock(4)................... 2,410 3,835 11,146 13,242 17,647.0 14.87
Dividends per Share of Common
Stock(5)................... 90 118 185 540 690 0.6
U.S. GAAP:
Net Income................... 280.7 284.1 895.4 1,111.6 1,301.1 1,096.8
Income per Share of Common
Stock(4)................... 4,384 3,862 10,265 12,844 15,440 13.0
Dividends per Share of Common
Stock(5)................... 90 118 185 540 690 0.6
BALANCE SHEET DATA
KOREAN GAAP:
Working Capital
(Deficiency)(6)............ W 218.7 W 253.9 W (374.6) W 668.2 W (259.9) US$ (219.1)
Fixed Assets -- Net.......... 2,103.1 2,441.8 4,543.2 4,174.7 4,569.4 3,851.8
Total Assets................. 4,107.4 6,263.9 11,044.2 13,326.3 14,228.7 11,994.2
Current Portion of Facility
Deposits(7)................ 8.6 7.4 10.0 10.4 18.4 15.5
5
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
--------- --------- --------- --------- --------- -----------
(IN BILLIONS OF WON AND MILLIONS OF DOLLARS,
EXCEPT PER SHARE AND PERCENTAGE DATA)
Long-term Liabilities(8)..... 1,384.4 1,021.5 1,727.2 3,498.4 3,693.4 3,113.4
Facility Deposits(7)....... 151.9 74.5 61.8 56.5 46.9 39.5
Total Shareholders' Equity... 1,503.6 3,752.6 6,142.7 6,149.3 6,231.9 5,253.2
U.S. GAAP:
Total Assets................. 4,246.3 6,143.7 11,182.8 13,841.0 15,720.7 13,251.8
Total Shareholders' Equity... 1,621.4 3,616.6 6,117.9 5,820.1 6,356.2 5,358.0
OTHER FINANCIAL DATA
KOREAN GAAP:
EBITDA(9).................... W 1,355.8 W 1,133.8 W 2,941.7 W 3,932.4 W 3,954.1 US$ 3,333.1
Capital Expenditures(10)..... 859.6 1,123.8 2,241.1 1,382.1 2,024.7 1,706.7
R&D Expenses(11)............. 141.3 96.6 117.1 153.7 253.3 213.5
Internal R&D............... 77.3 66.4 78.8 130.7 194.3 163.8
External R&D............... 64.0 30.2 38.3 23.0 59.0 49.7
Depreciation and
Amortization............... 951.5 709.1 1,456.4 1,759.7 1,543.3 1,300.9
Cash Flow from Operating
Activities................. 654.9 1,123.6 3,043.5 2,423.9 4,267.8 3,597.6
Cash Flow from Investing
Activities................. (927.6) (2,120.8) (4,667.8) (1,972.8) (3,063.4) (2,582.3)
Cash Flow from Financing
Activities................. 324.7 1,075.8 1,629.3 331.2 (1,418.2) (1,195.5)
Margins (% of total sales):
EBITDA Margin(9)........... 38.2% 25.5% 39.6% 47.0% 42.4% 42.4%
Operating Margin........... 13.8 6.9 20.1 27.8 30.0 30.0
Net Margin................. 4.3 6.4 13.1 13.7 15.9 15.9
U.S. GAAP:
EBITDA(9).................... 1,474.7 1,137.0 2,930.5 3,859.1 3,620.7 3,052.1
Capital Expenditures(10)..... 859.6 1,123.8 2,241.1 1,382.1 2,024.7 1,706.7
Cash Flow from Operating
Activities................. 654.9 1,123.6 3,043.5 2,423.8 3,708.9 3,126.4
Cash Flow from Investing
Activities................. (1,104.9) (2,120.8) (4,667.8) (1,972.8) (2,995.2) (2,524.8)
Cash Flow from Financing
Activities................. 324.7 1,075.8 1,629.3 331.2 (927.5) (781.8)
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1999 2000 2001 2002
--------- ---------- ---------- ---------- ----------
SELECTED OPERATING DATA
Population of Korea
(millions)(12).................. 46.4 46.9 47.1 47.4 47.6
Our Wireless Penetration(13)...... 12.9% 21.6% 30.7% 32.0% 36.1%
Number of Employees(14)........... 5,673 6,736 7,279 5,693 6,241
Total Sales per Employee
(millions)...................... 626.2 659.4 1,019.8 1,470.6 1,494.0
Wireless Subscribers(15).......... 5,966,474 10,110,371 14,452,683 15,179,163 17,219,562
Digital(15)..................... 5,400,616 10,110,371 14,452,683 15,179,163 17,219,562
Analog(16)...................... 565,858 -- -- -- --
Average Monthly Outgoing Voice
Minutes per Subscriber(17)...... 134 143 148 172 191
Average Monthly Revenue per
Subscriber(18).................. 36,344 33,473 32,906 36,400 38,383
Average Monthly Churn Rate(19).... 1.9% 2.2% 2.8% 1.4% 1.4%
Digital Cell Sites(20)............ 2,323 3,255 7,008 6,056 7,384
6
---------------
(1) Includes Won 3.0 billion for 1998, Won 116.5 billion for 1999, Won 494.0
billion for 2000, Won 702.4 billion for 2001 and Won 534.0 billion for 2002
from the sale of digital handsets and Won 729.4 billion for 1998 (including
Won 119.5 billion in refunded interconnection charges from 1996 and 1997
which were received in 1998), Won 801.0 billion for 1999, Won 1,312.4
billion for 2000, Won 1,339.9 billion for 2001 and Won 1,043.2 billion for
2002 of interconnection revenue (including interconnection revenue in
respect of calls between mobile users starting in 2000). See "Information
on the Company -- Business Overview -- Interconnection".
(2) In March 2001, we transferred our paging business to Real Telecom Co., Ltd.
(formerly known as INTEC Telecom Co., Ltd.) in exchange for 9.9% of Real
Telecom's newly issued shares and bonds with a principal amount of Won 9.5
billion that can be converted into an additional 7.8% interest in Real
Telecom.
(3) For more information about our other revenue, see "Operating and Financial
Review and Prospects" and "Information on the Company".
(4) Income per share of common stock is calculated by dividing net income by
the weighted average number of shares outstanding during the period, giving
effect to the 10-for-1 stock split of our common shares which became
effective on April 21, 2000 and resulted in the par value of each share
being reduced from Won 5,000 to Won 500.
(5) Dividend per share has been adjusted to give effect to the 10-for-1 stock
split of our common shares which became effective on April 21, 2000. On
January 1, 2002, we early adopted Statement of Korea Accounting Standards
("SKAS") No. 6, "Events Occurring after Balance Sheet Date". This statement
requires that proposed cash dividends be reflected on the balance sheet
when the appropriations are approved by shareholders which is the same as
U.S. GAAP. In order to reflect this accounting change, prior year's
financial statements have been restated. See note 2(v) of our notes to
consolidated financial statements.
(6) Working capital means current assets minus current liabilities.
(7) We require new subscribers (other than some corporate and government
subscribers) to post a non-interest bearing facility deposit of Won 200,000
which we may utilize to offset a defaulting subscriber's outstanding
account balance. See "Information on the Company -- Business
Overview -- Revenues, Rates and Facility Deposits".
(8) Our monetary assets and liabilities denominated in foreign currencies are
valued at the exchange rate of Won 1,208 to US$1.00 as of December 31,
1998, Won 1,145 to US$1.00 as of December 31, 1999, Won 1,260 to US$1.00 as
of December 31, 2000, Won 1,326 to US$1.00 as of December 31, 2001 and Won
1,200 to US$1.00 as of December 31, 2002, the rates of exchange permitted
under Korean GAAP as of those dates. See note 2(r) of our notes to
consolidated financial statements.
(9) EBITDA refers to income before interest income, interest expense, taxes,
depreciation and amortization. EBITDA is commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance, leverage and liquidity. Since the telecommunications business
is a very capital intensive business, capital expenditures and level of
debt and interest expenses may have a significant impact on net income for
companies with similar operating results. Therefore, for a
telecommunications company such as ourselves, we believe that EBITDA
provides a useful reflection of our operating results. However, EBITDA
should not be construed as an alternative to operating income or any other
measure of performance determined in accordance with Korean GAAP or U.S.
GAAP or as an indicator of our operating performance, liquidity or cash
flows generated by operating, investing and financing activities. Other
companies may define EBITDA differently than we do. EBITDA under U.S. GAAP
is computed using income, interest expense, depreciation, amortization and
income taxes under U.S. GAAP which may differ from Korean GAAP for these
items. Part of the funds depicted by EBITDA are used for repayment of
indebtedness and related interest expenses and payment of income tax. In
addition, we have used and will continue to use a substantial portion of
the funds depicted by EBITDA for capital expenditures on our wireless
network construction.
As a measure of our operating performance, we believe that the most
directly comparable U.S. and Korean GAAP measure to EBITDA is net income.
The following table reconciles our net income under U.S. GAAP to our
definition of EBITDA on a consolidated basis for the five years ended
December 31, 1998, 1999, 2000, 2001 and 2002.
RECONCILIATION OF NET INCOME TO EBITDA UNDER US GAAP
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1999 2000 2001 2002 2002
-------- -------- -------- -------- -------- ----------
(IN BILLIONS OF WON AND MILLIONS OF DOLLARS)
NET INCOME............................ W 280.7 W 284.1 W 895.4 W1,111.6 W1,301.1 US$1,096.8
ADD: Interest income.................. (103.9) (84.2) (67.6) (101.8) (90.8) (76.5)
Interest expense.................. 220.6 125.6 215.1 274.4 396.6 334.3
Taxes............................. 127.5 102.1 408.5 791.3 585.0 493.1
Depreciation and Amortization..... 949.7 709.4 1,479.1 1,783.6 1,428.8 1,204.4
-------- -------- -------- -------- -------- ----------
EBITDA................................ W1,474.7 W1,137.0 W2,930.5 W3,859.1 W3,620.7 US$3,052.1
======== ======== ======== ======== ======== ==========
The following table reconciles our net income under Korean GAAP to our
definition of EBITDA on a consolidated basis for the five years ended
December 31, 1998, 1999, 2000, 2001 and 2002.
7
RECONCILIATION OF NET INCOME TO EBITDA UNDER KOREAN GAAP
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1999 2000 2001 2002 2002
-------- -------- -------- -------- -------- ----------
(IN BILLIONS OF WON AND MILLIONS OF DOLLARS)
NET INCOME............................ W 154.3 W 282.2 W 972.3 W1,146.0 W1,487.2 US$1,253.6
ADD: Interest income.................. (103.9) (84.2) (67.6) (97.4) (86.0) (72.5)
Interest expense.................. 220.6 125.6 213.4 273.9 311.1 262.3
Taxes............................. 133.2 101.2 367.3 850.3 698.5 588.8
Depreciation and Amortization..... 951.5 709.1 1,456.4 1,759.6 1,543.3 1,300.9
-------- -------- -------- -------- -------- ----------
EBITDA................................ W1,355.8 W1,133.9 W2,941.9 W3,932.4 W3,954.1 US$3,333.1
======== ======== ======== ======== ======== ==========
As a measure of our liquidity, we believe that the most directly comparable
U.S. and Korean GAAP measure to EBITDA is net cash provided by operating
activities. The following table reconciles our cash provided by operating
activities under U.S. GAAP to our definition of EBITDA on a consolidated
basis for the five years ended December 31, 1998, 1999, 2000, 2001 and
2002.
RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES
TO EBITDA UNDER US GAAP
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1999 2000 2001 2002 2002
-------- -------- -------- -------- -------- ----------
(IN BILLIONS OF KOREAN WON AND MILLIONS OF DOLLARS)
NET CASH PROVIDED BY OPERATING
ACTIVITIES............................... W 654.9 W1,123.6 W3,043.5 W2,423.9 W3,708.9 US$3,126.4
Provision for severance indemnities........ (72.0) (26.1) (34.7) (56.9) (45.5) (38.4)
Loss on disposal and impairment of property
and equipment............................ (13.0) (25.2) (18.1) (41.8) (213.4) (179.9)
Loss on disposal and impairment of
investment assets........................ (129.8) (71.2) -- (24.0) (372.5) (314.0)
Provision for bad debts.................... (55.2) (20.9) (35.3) (56.7) (21.0) (17.7)
Other expenses not involving cash
payments................................. (22.8) (72.1) (92.8) (54.4) (76.1) (64.1)
Income not involving cash receipts......... 149.5 70.0 106.6 35.8 58.4 49.2
Changes in assets and liabilities related
to operating activities.................. 740.1 38.1 (260.2) 984.4 (327.4) (276.0)
Interest income............................ (103.9) (84.2) (67.6) (101.8) (90.8) (76.5)
Interest expense........................... 220.6 125.6 215.1 274.4 396.6 334.3
Income taxes paid.......................... 106.3 79.4 74.0 476.2 603.5 508.7
-------- -------- -------- -------- -------- ----------
EBITDA..................................... W1,474.7 W1,137.0 W2,930.5 W3,859.1 W3,620.7 US$3,052.1
======== ======== ======== ======== ======== ==========
8
The following table reconciles our net cash provided by operating
activities under Korean GAAP to our definition of EBITDA on a consolidated
basis for the five years ended December 31, 1998, 1999, 2000, 2001 and
2002.
RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES
TO EBITDA UNDER KOREAN GAAP
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1999 2000 2001 2002 2002
-------- -------- -------- -------- -------- -----------
(IN BILLIONS OF KOREAN WON AND MILLIONS OF DOLLAR)
NET CASH PROVIDED BY OPERATING
ACTIVITIES.............................. W654.9 W1,123.6 W3,043.5 W2,423.9 W4,267.8 US$ 3,597.6
Reconciliation:
Provision for severance indemnities..... (72.0) (26.1) (34.7) (56.9) (45.5) (38.4)
Loss on disposal and impairment of
property and equipment................ (13.0) (25.2) (18.1) (41.8) (212.1) (178.8)
Loss on disposal and impairment of
Investment assets..................... -- (71.2) -- (24.0) (120.5) (101.6)
Loss on valuation of investments........ (129.8) -- -- -- -- --
Provision for bad debts................. (55.2) (20.9) (35.3) (56.7) (21.0) (17.7)
Other expenses not involving cash
payments.............................. (22.8) (72.1) (92.8) (54.4) (99.7) (84.0)
Income not involving cash receipt....... 149.5 70.0 108.8 35.8 58.4 49.2
Changes in assets and liabilities
related to operating activities....... 621.1 34.9 (247.3) 1,054.0 (701.9) (591.7)
Interest Income......................... (103.9) (84.2) (67.6) (97.4) (86.0) (72.5)
Interest expense........................ 220.6 125.6 213.4 273.9 311.1 262.3
Income taxes............................ 106.3 79.4 74.0 476.2 603.5 508.7
-------- -------- -------- -------- -------- -----------
EBITDA.................................... W1,355.8 W1,133.8 W2,941.9 W3,932.4 W3,954.1 US$ 3,333.1
======== ======== ======== ======== ======== ===========
(10) Consists of investments in property, plant and equipment.
(11) Includes donations to Korean research institutes and educational
organizations. See "Operating and Financial Review and
Prospects -- Research and Development".
(12) Population estimates based on historical data published by the National
Statistical Office of Korea.
(13) Wireless penetration is determined by dividing subscribers by total
estimated population, as of the end of the period.
(14) Includes regular employees and temporary employees. See "Directors, Senior
Management and Employees -- Employees". Includes 1,687 and 1,332 Shinsegi
employees as of December 31, 2000 and 2001, respectively.
(15) Wireless subscribers include those subscribers who are temporarily
deactivated, including (1) subscribers who voluntarily deactivate
temporarily for a period of up to three months no more than twice a year
(454,795 subscribers as of April 30, 2003) and (2) subscribers with
delinquent accounts who may be involuntarily deactivated up to two months
before permanent deactivation, which we determine based on various factors,
including prior payment history (643,282 subscribers as of April 30, 2003).
Wireless subscribers also include 3,517,831 Shinsegi subscribers as of
December 31, 2000 and 3,311,874 as of December 31, 2001. Shinsegi was
merged into SK Telecom on January 13, 2002.
(16) We discontinued our analog service on December 31, 1999.
(17) 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 month, calculated by taking the simple average number
of subscribers at the beginning of the month and at the end of the month,
divided by the number of months in the period. Shinsegi's subscribers and
outgoing voice minutes are included from April 1, 2000.
(18) The 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 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.
Including interconnection revenue, consolidated average monthly revenue per
subscriber was Won 43,958 for 2002. Shinsegi's subscribers and revenue are
included from April 1, 2000. For information about the average monthly
revenue per subscriber of SK Telecom and Shinsegi on a stand-alone basis,
see "Operating and Financial Review and Prospects -- Overview".
(19) The average monthly churn rate for a period is the number calculated by
dividing the sum of voluntary and involuntary deactivations during the
period by the simple average of the number of subscribers at the beginning
and end of the period and dividing the quotient by the number of months in
the period. Churn includes subscribers who upgrade to CDMA 1xRTT or CDMA
1xEV/DO-capable handsets by terminating their service and opening a new
subscriber account.
(20) Includes 2,532 cell sites of Shinsegi as of December 31, 2000 and 1,685
cell sites as of December 31, 2001.
9
EXCHANGE RATES
The following table sets forth, for the periods and dates indicated,
certain information concerning the noon buying rate in The City of New York for
cable transfers in Won per US$1.00 as certified for customs purposes by the
Federal Reserve Bank of New York. We make no representation that the Won or
Dollar amounts we refer to in this report could have been or could be converted
into Dollars or Won, as the case may be, at any particular rate or at all.
AT END AVERAGE
YEAR ENDED DECEMBER 31, OF PERIOD RATE(1) HIGH LOW
----------------------- --------- ------- ----- -----
(WON PER US$1.00)
1998................................................ 1,206 1,367 1,812 1,196
1999................................................ 1,136 1,188 1,243 1,125
2000................................................ 1,267 1,140 1,267 1,106
2001................................................ 1,314 1,293 1,369 1,234
2002................................................ 1,186 1,250 1,332 1,161
December.......................................... 1,186 1,207 1,221 1,186
2003 (through May 2003)............................. 1,210 1,208 1,262 1,165
January........................................... 1,165 1,177 1,197 1,165
February.......................................... 1,194 1,190 1,206 1,173
March............................................. 1,252 1,237 1,260 1,185
April............................................. 1,216 1,231 1,262 1,204
May............................................... 1,210 1,201 1,217 1,192
---------------
(1) The average rates for the annual periods were calculated based on the
average noon buying rate on the last day of each month (or portion thereof)
during the period. The average rate for the monthly periods were calculated
based on the average noon buying rate of each day of the month (or portion
thereof).
10
RISK FACTORS
An investment in our American Depositary Shares, or ADSs, and the debt
securities issued under an indenture dated as of September 5, 1997 between us
and the Bank of New York involves various risks. If you own or are considering
purchasing our ADSs or our debt securities, you should carefully review the
information contained in this report. You should particularly refer to the
following:
COMPETITION MAY REDUCE OUR MARKET SHARE AND HARM OUR RESULTS OF OPERATION AND
FINANCIAL CONDITION.
We face substantial competition in the wireless telecommunications sector
in Korea. We expect competition to intensify as a result of the entry of new
competitors, consolidation of market leaders and the development of new
technologies, products and services. Continued competition from the other
wireless and fixed-line service providers has resulted in, and may continue to
result in, a substantial level of deactivations among our subscribers.
Subscriber deactivations, or churn, may significantly harm our business and
results of operations. In addition, increased competition may cause our
marketing expenses to increase as a percentage of sales, reflecting higher
advertising expenses and other costs of new marketing activities which may be
introduced to attract and retain subscribers.
Prior to April 1996, we were the only wireless telecommunications service
provider in Korea. Since then, several new providers have entered the market,
offering wireless voice and data services that compete directly with our own.
Together, these providers had a market share of approximately 46.3%, in terms of
numbers of wireless service subscribers, as of April 30, 2003. Further, in 2001,
the Government awarded to three companies the licenses to provide high-speed
third generation, or 3G, wireless telecommunications services. One of these
licenses was awarded to our former subsidiary, SK IMT Co., Ltd., which was
merged into SK Telecom on May 1, 2003, and the other two licenses to consortia
led by or associated with KT Corporation (formerly known as Korea Telecom
Corp.), Korea's principal fixed-line operator and the parent of KT Freetel Co.,
Ltd., one of our principal wireless competitors, and to LG Telecom, Ltd. In
addition, our wireless voice businesses compete with Korea's fixed-line
operators, and our wireless data and Internet businesses compete with providers
of fixed-line data and Internet services.
Beginning in 2000, there has been considerable consolidation in the
wireless telecommunications industry resulting in the emergence of stronger
competitors. In 2000, KT Corporation acquired a substantial stake in Hansol
M.Com (formerly known as Hansol PCS Co., Ltd.), which was the fifth largest
wireless operator in terms of numbers of wireless service subscribers at such
time. Hansol M.Com subsequently changed its name to KT M.Com and merged 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. Such consolidations have created large, well-capitalized
competitors with substantial financial, technical, marketing and other resources
to respond to our business offerings.
We expect competition to intensify as a result of the consolidations and
the rapid development of new technologies, products and services. Our ability to
compete successfully will depend on 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. Future business combinations and
alliances in the telecommunications industry may create significant new
competitors and could harm our business and results of operations.
SIGNIFICANT TECHNOLOGICAL ADVANCEMENTS AFFECTING THE WIRELESS INDUSTRY MAY HARM
OUR BUSINESS.
Significant advances in technology are occurring that may affect our
businesses, including the roll-out by us and our competitors of advanced
high-speed wireless telecommunications networks based on CDMA 1xEV/DO technology
and other technologies such as W-CDMA and cdma2000, both of which are commonly
referred to as third generation, or 3G, wireless technology. Such networks are
expected to support data transmission services with more advanced features and
significantly higher data transmission rates than our principal data network,
which uses a technology called CDMA 1xRTT. The successful introduction and
operation of a 3G network by a competitor could materially and adversely affect
our existing wireless
11
businesses as well as the returns on future investments we may make in a 3G
network or our other businesses. We could also be harmed if we fail to timely
adapt to technological or other changes in the telecommunications sector.
W-CDMA TECHNOLOGY MAY REQUIRE SIGNIFICANT CAPITAL AND OTHER EXPENDITURES FOR
IMPLEMENTATION WHICH WE MAY NOT RECOUP AND MAY BE DIFFICULT TO INTEGRATE WITH
OUR OTHER BUSINESSES.
W-CDMA is a high-speed wireless communication technology that we believe
will allow us to offer even more sophisticated wireless data transmission
services at faster speeds than our current CDMA 1xRTT network. Under the terms
of our W-CDMA license received in 2001, we must commence provision of W-CDMA
services by the end of 2003. We currently plan to commence provision of our
IMT-2000 services based on our W-CDMA network 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.
We cannot assure you that we will be able to construct a W-CDMA network or
provide W-CDMA services in a timely and cost efficient manner, or at all.
Several companies in other countries have recently announced delays in the
roll-out of their 3G services as a result of technological problems and
difficulties with software, equipment and handset supply. If we experience
similar problems, our financial condition or results of operations could be
adversely affected. In addition, the MIC is empowered to take various measures
against us ranging from the suspension of our business to the revocation of our
W-CDMA license if we fail to comply with the terms of our W-CDMA license. Also,
we cannot assure you that there will be sufficient demand for our W-CDMA
services, as a result of competition or otherwise, to permit us to recoup or
profit from our investment in the W-CDMA license and network. In addition,
demand for our W-CDMA services will depend in part on the availability of
attractive content and services. We cannot assure you that such content and
services will become available in a timely manner, or at all.
We expect that construction of any future expansion of W-CDMA network may
require external funding, and we cannot assure you that such funding will be
available at a cost acceptable to us, or at all. In addition, we cannot assure
you that we will be able to successfully integrate W-CDMA services into our
existing businesses in a timely or cost-effective manner or that the W-CDMA
business will not adversely affect our current wireless businesses, including
the services currently provided on our networks and new services. The MIC also
awarded the W-CDMA license to provide 3G services based on a technology
different from ours to LG Telecom for a fee lower than the fee we are required
to pay for our W-CDMA license and on terms generally more favorable than the
terms of our license, which may give LG Telecom a competitive advantage. See
"Information on the Company -- Business Overview -- Planned W-CDMA Network" and
"Operating and Financial Review and Prospects -- Liquidity and Capital
Resources".
WE MAY MAKE SIGNIFICANT INVESTMENTS IN NEW BUSINESSES AND REGIONS, INCLUDING
BUSINESSES AND REGIONS IN WHICH WE HAVE LIMITED EXPERIENCE.
We believe that we must continue to make significant investments to build,
develop and broaden our businesses, including developing and providing wireless
data, multimedia, mobile commerce and Internet services as well as possibly
investing in a satellite-based digital multimedia broadcasting (DMB) business.
We will need to respond to market and technological changes and other services
which we may have little or no experience in providing. We may also make
investments in wireless telecommunications and other businesses outside of
Korea. Entering these new businesses and regions may require us to make
substantial investments and no assurance can be given that we will be successful
in our efforts.
12
DUE TO THE EXISTING HIGH PENETRATION RATE OF WIRELESS SERVICES IN KOREA AND THE
KOREAN GOVERNMENT'S PROHIBITION ON HANDSET SUBSIDIES, WE ARE UNLIKELY TO
MAINTAIN OUR SUBSCRIBER GROWTH RATE WHICH COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
According to data published by the Korean Ministry of Information and
Communication, or MIC, and our population estimates based on historical data
published by the National Statistical Office of Korea, the penetration rate for
the Korean wireless telecommunications service industry as of April 30, 2003 was
approximately 69.1%, which is high compared to many industrialized countries. 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 rapid growth in penetration rate in recent years
can, at least in part, be attributed to such subsidies on handsets given to new
subscribers. The MIC prohibited all wireless telecommunications service
providers from providing any such 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 and LG Telecom 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 up new
subscribers for 30 days (from November 21, 2002 through December 20, 2002) for
violating MIC's handset subsidy regulation. KT Freetel and LG Telecom were also
prohibited from signing up new subscribers for 20 days. As a result of the
already high penetration rates in Korea for wireless services, our large market
share, the MIC's handset subsidy regulation and the steps we have taken in
response to such regulation, we expect our subscriber growth rate to decrease,
which could adversely affect our results of operations.
OUR BUSINESS AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED IF WE FAIL TO
ACQUIRE ADEQUATE SPECTRUM OR USE EFFICIENTLY OUR BANDWIDTH TO ACCOMMODATE
SUBSCRIBER GROWTH AND SUBSCRIBER USAGE.
One of the principal limitations on a wireless network's subscriber
capacity is the amount of spectrum available for use by the system. SK Telecom's
networks have been allocated 2 x 25 Mhz of spectrum in the 800 Mhz band.
As a result of bandwidth constraints, SK Telecom's CDMA 1xRTT network is
currently operating near its capacity in the Seoul metropolitan area. The
inability to address such capacity constraints may adversely affect our business
and results of operations.
The growth of our wireless data businesses has increased our utilization of
our bandwidth, since data applications tend to be more bandwidth-intensive than
voice services. This trend has been offset in part by the implementation of our
CDMA 1xRTT network, which uses bandwidth more efficiently for voice and data
traffic than our CDMA networks. If current upward trends in data transmission by
our subscribers continue, our bandwidth capacity requirements could increase
further.
Future growth in our wireless business will depend in part upon our ability
to manage effectively our bandwidth and to implement timely and efficiently new
bandwidth-efficient technologies if they become available. We cannot assure you
that bandwidth constraints will not in the future adversely affect the growth of
our wireless businesses.
WE WILL HAVE SUBSTANTIAL CAPITAL REQUIREMENTS FOR WHICH WE HAVE NOT ARRANGED
FIRM FINANCING.
We estimate that we will spend approximately Won 2.0 trillion for capital
expenditures in 2003 for a range of projects, including expansion and
improvement of our wireless networks, investments in our Internet-related
businesses and 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. We expect to
plan our future capital expenditures after we have reviewed the progress of the
introduction and marketability of our W-CDMA service. For a more detailed
discussion of our capital expenditure plans and a discussion of other factors
which may affect our capital expenditures in the future, see "Operating and
Financial Review and Prospects -- Liquidity and Capital Resources".
13
We have not arranged firm financing for all of our capital expenditure
plans. We have in the past obtained funds for our proposed capital investments
from various sources, including our cash flow from operations as well as debt
and equity financing transactions. If, for any reason, adequate capital is not
available at the time it is needed, our business and prospects could be
adversely affected. If the overall cost of our proposed capital investment
projects increases above expected levels or if spending is required at a
different rate than we now project, we may not be able to finance the projects
in the manner currently intended, and we may be required to seek additional
sources of funding for these projects. We cannot assure you that these
additional funds will be available at a cost acceptable to us, or at all.
TERMINATION OR IMPAIRMENT OF OUR RELATIONSHIP WITH A SMALL NUMBER OF KEY
SUPPLIERS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We purchase wireless network equipment from a small number of suppliers. We
purchase our principal wireless network equipment from Samsung Electronics Co.,
Ltd., LG Electronics Inc. and Hyundai Syscomm Inc. (formerly Hyundai Electronics
Industries Co., Ltd.). To date, we have purchased substantially all of the
equipment for our CDMA 1xRTT network from Samsung Electronics. Samsung
Electronics also currently manufactures more than 50% of the wireless handsets
sold to our subscribers. Although other manufacturers sell the equipment we
require, sourcing such equipment from other manufacturers could result in delays
and additional costs in our roll-out or expansion of the CDMA 1xRTT network.
Carriers globally have had difficulty in obtaining adequate quantities of
various types of 3G equipment, including handsets, from suppliers. In addition,
we rely on KT Corporation to provide a substantial majority of our leased lines.
We cannot assure you that we will be able to continue to obtain the necessary
equipment from one or more of our suppliers. Any discontinuation or interruption
in the availability of equipment from our suppliers for any reason could have an
adverse effect on our results of operations.
OUR BUSINESSES ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND ANY CHANGE IN
GOVERNMENT POLICY RELATING TO THE TELECOMMUNICATIONS INDUSTRY COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Our telecommunications businesses are subject to extensive regulation and
supervision by the Government. Through the MIC, the Government agency primarily
responsible for the regulation and oversight of the telecommunications industry
in Korea, the Government directly or indirectly controls licensing, pricing,
competition, marketing, required customer deposits, foreign investment,
frequency allocation, technology choices, recommended levels of research and
development spending, interconnection arrangements and other aspects of the
Korean telecommunications industry. Government policies and regulations
involving the telecommunications industry (including regulation of us as a
"market dominant service provider") may change, which could have a material
adverse effect on our results of operations and financial condition. See
"Operating and Financial Review and Prospects -- Overview -- Revenue" and
"Financial Information -- Legal Proceedings -- MIC Proceedings".
We operate our telecommunications businesses pursuant to various licenses
granted by the MIC. The MIC may suspend or revoke our licenses or impose fines
on us under certain circumstances, including for violation of telecommunications
laws and regulations. In addition, the MIC may impose different or additional
conditions for the continuation of our licenses.
The MIC has periodically reviewed the tariffs charged by wireless operators
and has from time to time suggested tariff reductions. Although these
suggestions are not binding, we have in the past implemented some level of
tariff reductions in response to these suggestions. After discussions with the
MIC, effective January 1, 2003, we reduced our standard rate plan's monthly
access fee by Won 1,000, increased our free air time from 7 minutes to 10
minutes per month and reduced our peak usage charges from Won 21 to Won 20 per
minute.
The Government plays an active role in the selection of technology to be
used by telecommunications operators in Korea. The MIC has adopted the W-CDMA
and cdma2000 technologies as the only standards available in Korea for
implementing 3G services. The MIC may impose similar restrictions on the choice
of
14
technology used in future telecommunications services and we can give no
assurance that the technologies promoted by the Government will provide the best
commercial returns for us.
Our wireless telecommunication services depend, in part, on our
interconnection arrangements with domestic and international fixed-line and
other wireless networks. Charges for interconnection affect our revenues and
operating results. The MIC determines the basic framework for interconnection
arrangements in Korea and has changed this framework several times in the past.
We cannot assure you that we will not be adversely affected by future changes in
the MIC's interconnection policies. With respect to the interconnection
arrangement for calls from fixed-line networks to wireless networks, for the
years 1999 through 2001, fixed-line operators' payments to wireless network
service providers were calculated based on the actual imputed costs in 1998 of
the leading wireless network service provider, which is us. For 2002 and 2003,
these payments are calculated based on each wireless operator's actual imputed
costs in 2000. This change reduced the interconnection revenue we received from
each call made from a fixed-line network terminating on our network, adversely
affecting our interconnection revenue compared to previous years. The MIC also
implemented interconnection charges for calls between wireless network service
providers beginning in January 2000, affecting both our revenue and our
expenses. These charges were also reduced beginning in January 2002 and in
January 2003. 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. For more information about our interconnection revenue
and expenses, see "Information on the Company -- Business Overview --
Interconnection -- Domestic Calls".
In January 2003, the MIC announced its plan to implement number portability
with respect to wireless telecommunications service in Korea. The number
portability system will allow wireless subscribers to switch wireless service
operators while retaining the same mobile phone number. According to the plan
published by the MIC, the number portability will be adopted for SK Telecom
first, 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 can 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 pose a
greater risk to us compared to the other wireless telecommunications providers
because '011' has a very high brand recognition in Korea as the premium wireless
telecommunications service. The MIC's adoption of number portability system
could also result in a deterioration of our market share as a result of weakened
customer loyalty, increased competition among wireless service providers and
higher costs as a result of maintaining the number portability system, increased
subscriber deactivations, increased churn rate and higher marketing costs. See
"Information on the Company -- Business Overview -- Law and Regulation -- Number
Portability".
In December 2002, the MIC implemented a network co-share system that
permits the wireless application protocol gateway, or WAP gateway, of a
fixed-line operator to connect to a wireless network service provider's IWF
(inter-working function) device. IWF is a device that connects cellular network
with an IP (Internet Protocol) network while WAP Gateway converts hypertext
transfer protocol, or HTTP protocol, into WAP protocol. This co-share system
would allow subscribers of a wireless network service provider to have access to
wireless Internet content provided by a fixed-line operator. As of May 2003,
only KT Corporation has connected to our IWF and commenced service, although it
has yet to begin actively promoting its services to our subscribers. In
addition, the MIC has requested that we provide customer billing service to
third-party content providers who are seeking to provide their content directly
to our subscribers without going through our NATE portal. Third-party content
providers have not been able to provide their content service directly to our
subscribers due to the lack of resources for billing users. We
15
believe that such a co-share system, if widely adopted, will have the effect of
giving our users access to a wide variety of content using their handsets which
may in turn increase revenues attributable to our data services. However, this
system could also place significant competitive pressure on the revenues and
profits attributable to our NATE platform.
WE ARE SUBJECT TO ADDITIONAL REGULATION AS A RESULT OF OUR MARKET POSITION,
WHICH COULD HARM OUR ABILITY TO COMPETE EFFECTIVELY.
The MIC's policy is to promote competition in the Korean telecommunications
markets through measures designed to prevent the dominant service provider in a
telecommunications market from exercising its market power to prevent the
emergence and development of viable competitors. SK Telecom is currently
designated by the MIC as a "market dominant service provider" in respect of our
wireless telecommunications business. As such, we are subject to more stringent
regulation than our competitors. For example, under current government
regulations, we must obtain prior approval from the MIC to change our existing
rates or introduce new rates although our competitors may generally change their
rates or introduce new rates at their discretion. See "Information on the
Company -- Business Overview -- Law and Regulation -- Rate Regulation". As of
April 30, 2003, our standard peak usage charge rate is approximately 11% higher
than those charged by our competitors. We could also be required by the MIC to
charge higher usage rates than our competitors for future services. In addition,
we must introduce number portability earlier than our competitors, KT Freetel
and LG Telecom. The MIC also awarded the W-CDMA license to provide 3G services
based on a technology different from ours to LG Telecom for a fee lower than the
fee we are required to pay for our W-CDMA license and on terms generally more
favorable than the terms of our license. As a result, our wireless businesses
may operate at a competitive disadvantage to that of LG Telecom. The additional
regulation to which we are subject has affected our competitiveness in the past
and may hurt our profitability and impede our ability to compete effectively
against our competitors in the future.
The MIC approved our merger of SK IMT into SK Telecom on April 30, 2003,
subject to certain conditions imposed by the MIC to ensure fair competition and
customer protection. These conditions include, among others, commencing
provision of W-CDMA IMT-2000 services using 2 X 20 MHz of spectrum in the 2GHz
band by the end of 2003, obtaining approval from the MIC on the initial tariff
plan for the W-CDMA services and submission of an implementation plan to open
our wireless Internet network to other telecommunication operators and an
implementation plan for number portability. Although we believe that our efforts
to meet these conditions will not restrict our future business activities, we
may not be able to meet some of the conditions imposed by the MIC due to factors
outside of our control.
In addition, we qualify as a "market-dominating business entity" under the
Korean Monopoly Regulation and Fair Trade Act, or the Fair Trade Act. The Fair
Trade Commission of Korea, or the FTC, approved our acquisition of Shinsegi on
the condition that SK Telecom's and Shinsegi's combined market share of the
wireless telecommunications market, based on numbers of subscribers, be less
than 50.0% as of June 30, 2001. In order to satisfy this condition, we reduced
the level of our subscriber activations and adopted more stringent involuntary
subscriber deactivation policies beginning in 2000 and ceased accepting new
subscribers from April 1, 2001 through June 30, 2001. As of June 30, 2001, our
market share was approximately 49.7%, so we are no longer subject to this
restriction. The FTC, also as a condition to the Shinsegi acquisition, imposed a
maximum limit of 1,200,000 on the number of digital handsets we may purchase
annually from our subsidiary, SK Teletech Co., Ltd., until December 31, 2005.
This restriction does not apply to W-CDMA handsets.
FINANCIAL DIFFICULTIES AND CHARGES OF FINANCIAL STATEMENT IRREGULARITIES AT OUR
AFFILIATE, SK GLOBAL, MAY HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS AND
FINANCIAL CONDITION.
In March 2002, the Seoul Public Prosecutor's Office charged SK Global and
certain of its directors and executives, including Mr. Chey and Mr. Son, with
fraudulently overstating SK Global's results of operations and alleged that SK
Global overstated its revenues and understated its expenses for its 2001 fiscal
year, in violation of the securities laws as they relate to the external audit
of companies. SK Global has restated its earnings for its fiscal year 2002. SK
Global is reported to be insolvent and to be in restructuring negotiations with
various domestic and international creditors. Recent press reports have also
indicated that SK Global's
16
creditors may petition or take action to force SK Global into an involuntary
corporate reorganization procedure in the near future.
SK Global is the exclusive distributor of all of the handsets sold by our
subsidiary, SK Teletech, to our nationwide network of dealers. SK Global also
serves as a distributor of handsets manufactured by third parties to our
nationwide network of dealers. Samsung Electronics Co. Ltd., LG Electronics Inc,
Motorola Korea, Inc. and Pantech & Curitel suspended their supply of handsets to
SK Global from beginning of April for two to three weeks because of the credit
risk of SK Global. In May 2003, all suppliers resumed their supply of handsets
on the condition that payment on their mobile phones be made in cash within one
week of delivery. Although we believe that we will be able to find another
distributor to replace SK Global, in the event SK Global is no longer able to
distribute handsets, we may encounter difficulties in efficiently distributing
the handsets to our subscribers and other customers in the short term. See
"Major Shareholders and Related Party Transactions -- Certain Relationships and
Related Party Transactions -- SK Global".
In addition, in the first quarter of 2003, we leased approximately 30% of
our fixed network lines, which connect our various cell sites and switching
stations, from SK Global. If there is a material disruption of SK Global's
ability to maintain and operate this business due to its financial difficulties,
we may need to seek alternative sources and this may result in a disruption of
our services in the short term.
CONCERNS THAT RADIO FREQUENCY EMISSIONS MAY BE LINKED TO VARIOUS HEALTH CONCERNS
COULD ADVERSELY AFFECT THE MARKET PRICES OF OUR ADSS AND COMMON STOCK AND WE
COULD BE SUBJECT TO LITIGATION RELATING TO THESE HEALTH CONCERNS.
In the past, allegations that serious health risks may result from the use
of wireless telecommunications devices or other transmission equipment have
adversely affected share prices of some wireless telecommunications companies in
the United States. We cannot assure you that these health concerns will not
adversely affect the market prices of our ADSs and common stock. Several class
action and personal injury lawsuits have been filed in the United States against
several wireless phone manufacturers and carriers, asserting product liability,
breach of warranty and other claims relating to radio transmissions to and from
wireless phones. Certain of these lawsuits have been dismissed. We could be
subject to liability or incur significant costs defending lawsuits brought by
our subscribers or other parties who claim to have been harmed by or as a result
of our services. In addition, the actual or perceived risk of wireless
telecommunications devices could have an adverse effect on us by reducing our
number of subscribers or our usage per subscriber.
OUR BUSINESSES MAY BE ADVERSELY AFFECTED BY DEVELOPMENTS AFFECTING THE KOREAN
ECONOMY.
We generate substantially all of our revenue from operations in Korea. Our
future performance will depend in large part on Korea's future economic growth.
Adverse developments in Korea's economy or in political or social conditions in
Korea may have an adverse effect on our number of subscribers, call volumes and
results of operations. In addition, a deterioration of economic, political or
social conditions in Korea could have an adverse effect on the prices of our
common stock and the ADSs.
In 1997 and 1998, Korea experienced a significant increase in the number
and size of companies filing for corporate reorganization and protection from
their creditors. As a result of these corporate failures, high levels of
short-term foreign currency borrowings from foreign financial institutions and
the consideration of non-market oriented factors in making lending decisions,
Korea's financial institutions experienced a sharp increase in non-performing
loans and a deterioration in their capital adequacy ratios. These developments
led to a substantial increase in the number of unemployed workers, reducing the
purchasing power of consumers in Korea. These developments also led
international credit rating agencies to downgrade the credit ratings of
17
Korea and various companies and financial institutions in Korea to below
investment grade, although Standard & Poor's, or S&P, and Moody's raised the
credit rating of Korea back to investment grade levels in early 1999. The
current long-term foreign currency rating of Korea by S&P is A- and the current
foreign currency rating on bond obligations of Korea by Moody's is A3. Prompted
by heightened security concerns stemming from nuclear weapons program of
Democratic People's Republic of Korea, or North Korea, Moody's changed the
outlook on the long-term ratings of Korea from positive to negative in February
2003.
Although the Korean economy began to experience a recovery in 1999, the
pace of the recovery has since slowed and has been volatile. The economic
indicators in 2001 and 2002 have shown mixed signs of recovery and uncertainty,
and future recovery or growth of the economy is subject to many factors beyond
our control. Events such as the terrorist attacks in the United States that took
place on September 11, 2001, the war in Iraq and the outbreak of severe acute
respiratory syndrome (SARS) in Asia and other parts of the world have increased
the uncertainty of world economic prospects in general and continue to have an
adverse effect on the world economy, and may thus adversely affect the Korean
economy. Any future deterioration of the Korean economy could adversely affect
our financial condition and results of operations. Many factors could adversely
affect Korea's prospects for future economic growth, including the following:
- adverse developments in the economies of countries to which Korea
exports, including the United States, Japan, China and Russia or
elsewhere, that would result in a loss of confidence in the Korean
economy;
- the financial problems of Korean business groups, or their suppliers, and
their potential impact on Korea's financial sector;
- failure of restructuring of other Korean companies;
- a slowdown in consumer spending and the overall economy;
- social and labor unrest;
- a decrease in tax revenues and a substantial increase in the Government's
expenditures for unemployment compensation and other social programs
that, together, may lead to an increased government budget deficit;
- adverse changes or volatility in foreign currency reserve levels,
commodity prices, exchange rates, interest rates and the stock markets;
- increased reliance on exports to service foreign currency debts, which
could cause friction with Korea's trading partners;
- political uncertainty or increased strife among and within political
parties in Korea;
- a deterioration in economic or diplomatic relations between Korea and its
trading partners or allies, including such deterioration resulting from
trade disputes or disagreements in foreign policy;
- political uncertainty and risk of further attacks by terrorist groups
around the world;
- hostilities involving oil producing countries in the Middle East and any
material disruption in the supply of oil or increase in the price of oil
resulting from those hostilities; and
- an increase in the level of tensions or an outbreak of hostilities
between Korea and North Korea.
Any developments that could adversely affect Korea's economic recovery will
likely also decrease demand for our services and adversely affect our results of
operations.
18
DEPRECIATION OF THE VALUE OF THE WON AGAINST THE DOLLAR AND OTHER MAJOR FOREIGN
CURRENCIES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND
ON THE PRICES OF OUR COMMON STOCK AND THE ADSS.
Substantially all of our revenues are denominated in Won. Depreciation of
the Won may materially affect our results of operations because, among other
things, it causes:
- an increase in the amount of Won required by us to make interest and
principal payments on our foreign currency-denominated debt, which
accounted for approximately 7.3% of our total long-term debt, including
current portion, as of December 31, 2002; and
- an increase in Won terms in the costs of equipment that we purchase from
overseas sources which we pay for in Dollars or other foreign currencies.
Fluctuations in the exchange rate between the Won and the Dollar will
affect the Dollar equivalent of the Won price of the shares of our common stock
on the Korea Stock Exchange. These fluctuations also will affect the amounts a
registered holder or beneficial owner of ADSs will receive from the ADR
depositary in respect of:
- dividends, which will be paid in Won to the ADR depositary and converted
by the ADR depositary into Dollars;
- the Dollar value of the proceeds that a holder will receive upon sale in
Korea of the shares; and
- the secondary market price of the ADSs.
INCREASED TENSIONS WITH NORTH KOREA COULD HAVE AN ADVERSE EFFECT ON US AND THE
PRICES OF OUR COMMON STOCK AND THE ADSS.
Relations between Korea and North Korea have been tense throughout most of
Korea's modern history. The level of tension between the two Koreas has
fluctuated and may increase or change abruptly as a result of current
developments, including renewed contacts at the highest levels of the
governments of Korea, North Korea, increased hostility between North Korea and
the United States, and future events that cannot be foreseen at this time. In
December 2002, North Korea removed the seals and surveillance equipment from its
Yongbyon nuclear power plant, evicted inspectors from the United Nations
International Atomic Energy Agency and has reportedly resumed processing weapons
grade plutonium at the Yongbyon power plant. In January 2003, North Korea
renounced its obligations under the Nuclear Non-Proliferation Treaty and
demanded that the United States sign a non-aggression pact before North Korea
dismantles its nuclear power and arms program. North Korea has also test-fired
at least two missiles, engaged an unarmed U.S. military aircraft and is most
recently reported to have developed nuclear weapons. As a result of these
events, the level of tension between the two Koreas, as well as between North
Korea and other countries including the United States, has increased. While
discussions between North Korea and other countries, including Korea, the United
States and China, to resolve these issues peacefully have taken place, any
further increase in the tension or occurrence of military hostilities could have
a material adverse effect on our results of operations and the price of our
common stock and the ADSs.
A CHANGE IN THE FOREIGN OWNERSHIP LIMITATIONS ON SK TELECOM'S COMMON STOCK MAY
HAVE AN ADVERSE EFFECT ON THE PRICE OF THE ADSS.
The Telecommunications Business Law limits maximum aggregate foreign
shareholding in SK Telecom to 49.0% of its voting shares. The outstanding ADSs
have at times in the past traded at prices higher than that of the underlying
shares traded in Korea, at least in part due to the limitation on aggregate
foreign ownership of the shares. The limitation may be raised further or lifted
in the future. As of May 13, 2003, foreign shareholders own 34,307,066 shares of
our common stock or approximately 40.5% of our issued common stock. The increase
or elimination of the 49.0% limit could have an adverse effect on the price of
the ADSs, and we can give no assurance that ADSs will trade at a premium to the
underlying shares.
19
IF SK CORPORATION BREACHES THE FOREIGN OWNERSHIP LIMITATIONS ON SK TELECOM, IT
MAY RESULT IN A CHANGE OF CONTROL OF US.
As of May 13, 2003, SK Corporation owns 17,663,127 shares of our common
stock, or approximately 20.8%, of our issued shares. As of April 30, 2003, a
foreign investment fund held a 14.99% stake in SK Corporation, as the largest
shareholder. According to the MIC, upon such foreign investment fund's
acquisition of an additional 0.01% or more stake in SK Corporation, SK
Corporation would be considered a foreign shareholder and its shareholding in SK
Telecom would be included in the calculation of the aggregate foreign
shareholding of SK Telecom. If SK Corporation's shareholding in SK Telecom is
included in the calculation of the aggregate foreign shareholding of SK Telecom,
then the aggregate foreign shareholding in SK Telecom, assuming foreign
ownership level as of May 13, 2003, would reach 61%, exceeding the 49% ceiling.
If the aggregate foreign shareholding in SK Telecom is exceeded, the MIC may
issue a corrective order to SK Telecom and the breaching shareholder, SK
Corporation. Furthermore, SK Corporation may not exercise its voting rights with
respect to the shares held in breach of the 49% ceiling, which may result in a
change in control of us. In addition, the MIC may refuse to grant us licenses or
permits necessary for entering into new telecommunications businesses until the
aggregate foreign shareholding of SK Telecom is reduced to below 49%. See
"Information on the Company -- Business Overview -- Law and
Regulation -- Foreign Ownership and Investment Restrictions and Requirements".
SALES OF SK TELECOM SHARES BY COMPANIES IN THE SK GROUP, POSCO AND/OR OTHER
LARGE SHAREHOLDERS MAY ADVERSELY AFFECT THE PRICES OF SK TELECOM'S COMMON STOCK
AND THE ADSS.
Sales of substantial amounts of shares of our common stock in the public
market, or the perception that such sales may occur, could adversely affect the
prevailing market price of the shares of our common stock or the ADSs or our
ability to raise capital through an offering of our equity securities.
As of May 13, 2003, POSCO owned 6.8% of our issued common stock. POSCO has
not agreed to any restrictions on its ability to dispose of our shares. See
"Major Shareholders and Related Party Transactions -- Major Shareholders".
Companies in the SK Group, which collectively owned 24.1% of our issued common
stock as of May 13, 2003, may sell their shares of our common stock in order to
comply with the Fair Trade Act's limits on the total investments that companies
in a large business group, such as the SK Group, may hold in other domestic
companies. See "Information on the Company -- Business Overview -- Law and
Regulation -- Competition Regulation". Recently, as a result of significant
financial difficulties and prosecutors' discovery of alleged fraudulent
accounting practices at SK Global, it has been reported in the press that SK
Global may sell its 3% stake in SK Telecom to raise capital.
We can make no prediction as to the timing or amount of any such sales. We
cannot assure you that future sales of shares of our common stock, or the
availability of shares of our common stock for future sale, will not adversely
affect the market prices of the shares of our common stock or ADSs prevailing
from time to time.
IF AN INVESTOR SURRENDERS HIS ADSS TO WITHDRAW THE UNDERLYING SHARES, HE MAY NOT
BE ALLOWED TO DEPOSIT THE SHARES AGAIN TO OBTAIN ADSS.
Under the deposit agreement, holders of shares of our common stock may
deposit those shares with the ADR depositary's custodian in Korea and obtain
ADSs, and holders of ADSs may surrender ADSs to the ADR depositary and receive
shares of our common stock. However, under current Korean laws and regulations,
the depositary bank is required to obtain our prior consent for the number of
shares to be deposited in any given proposed deposit which exceeds the
difference between (1) the aggregate number of shares deposited by us for the
issuance of ADSs (including deposits in connection with the initial and all
subsequent offerings of ADSs and stock dividends or other distributions related
to these ADSs) and (2) the number of shares on deposit with the depositary bank
at the time of such proposed deposit. It is possible that we may not give the
consent. Consequently, an investor who has surrendered his ADSs and withdrawn
the underlying shares may not be allowed to deposit the shares again to obtain
ADSs. See "Additional Information -- Korean Foreign Exchange Controls and
Securities Regulations".
20
AN INVESTOR IN OUR ADSS MAY NOT BE ABLE TO EXERCISE PREEMPTIVE RIGHTS FOR
ADDITIONAL SHARES AND MAY SUFFER DILUTION OF HIS EQUITY INTEREST IN US.
The Korean Commercial Code and our articles of incorporation require us,
with some exceptions, to offer shareholders the right to subscribe for new
shares in proportion to their existing ownership percentage whenever new shares
are issued. If we offer any rights to subscribe for additional shares of our
common stock or any rights of any other nature, the ADR depositary, after
consultation with us, may make the rights available to an ADS holder or use
reasonable efforts to dispose of the rights on behalf of the ADS holder and make
the net proceeds available to the ADS holder. The ADR depositary, however, is
not required to make available to an ADS holder any rights to purchase any
additional shares unless it deems that doing so is lawful and feasible and:
- a registration statement filed by us under the U.S. Securities Act is in
effect with respect to those shares; or
- the offering and sale of those shares is exempt from, or is not subject
to, the registration requirements of the U.S. Securities Act.
We are under no obligation to file any registration statement with respect
to any ADSs. If a registration statement is required for an ADS holder to
exercise preemptive rights but is not filed by us, the ADS holder will not be
able to exercise his preemptive rights for additional shares. As a result, ADS
holders may suffer dilution of their equity interest in us.
SHORT SELLING OF OUR ADSS BY PURCHASERS OF SECURITIES CONVERTIBLE OR
EXCHANGEABLE INTO OUR ADSS COULD MATERIALLY ADVERSELY AFFECT THE MARKET PRICE OF
OUR ADSS.
SK Corporation, through one or more special purpose vehicles, has engaged
and may in the future engage in monetization transactions relating to its
ownership interest in us. These transactions have included and may include
offerings of securities that are convertible or exchangeable into our ADSs. Many
investors in convertible or exchangeable securities seek to hedge their exposure
in the underlying equity securities at the time of acquisition of the
convertible or exchangeable securities, often through short selling of the
underlying equity securities or through similar transactions. Since a
monetization transaction could involve debt securities linked to a significant
number of our ADSs, we expect that a sufficient quantity of ADSs may not be
immediately available for borrowing in the market to facilitate settlement of
the likely volume of short selling activity that would accompany the
commencement of a monetization transaction. This short selling and similar
hedging activity could place significant downward pressure on the market price
of our ADSs, thereby having a material adverse effect on the market value of
ADSs owned by you.
SUBSEQUENT HOLDERS OF ADSS MAY NEED TO PAY KOREAN SECURITIES TRANSACTION TAX
UPON WITHDRAWAL OF COMMON SHARES.
Under Korean tax law, a securities transaction tax (including an
agricultural and fisheries special surtax) is imposed on transfers of shares
listed on the Korea Stock Exchange, including the common shares of the Company,
at the rate of 0.3% of the sales price if traded on the Korea Stock Exchange.
According to a tax ruling issued by the Korean tax authorities, foreign
shareholders are not subject to a securities transaction tax upon the deposit of
underlying shares and receipt of depositary shares or upon the surrender of
depositary shares and withdrawal of originally deposited underlying shares.
However, questions have been raised as to whether this ruling also applied to
the surrender of depositary shares and withdrawal of underlying shares by
holders other than the initial holders of depositary shares. It is not clear as
to whether, on whom, when and in what amount the securities transaction tax will
be imposed in the case of withdrawals of underlying shares by holders of
depositary shares other than initial holders. Accordingly, there can be no
assurance that holders of ADSs other than initial holders will not be subject to
the securities transaction tax when they withdraw our shares upon surrendering
the ADSs.
Securities transaction tax, if applicable, generally must be paid by the
transferor of the shares of the rights to subscribe to such shares. When the
transfer is effected through a securities settlement company, such
21
settlement company is generally required to withhold and pay the tax to the tax
authority. When such transfer is made through a securities company, such
securities company is required to withhold and pay the tax. Where the transfer
is effected by a non-resident without a permanent establishment in Korea, other
than through a securities settlement company or a securities company, the
transferee is required to withhold the securities transaction tax. See
"Taxation -- Korean Taxation".
OUR OUTSTANDING NOTES MAY HAVE LIMITED LIQUIDITY.
As of April 30, 2003, we have outstanding $200 million of $230 million in
aggregate principal amount of Notes due 2004, which bear an interest rate of
7 3/4%. The notes are securities with no established trading market. No
assurance can be given as to the liquidity of, or the trading markets for, these
notes.
22
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT
OF THE COMPANY
INTRODUCTION
We are Korea's leading wireless telecommunications services provider and a
pioneer in the commercial development and provision of high-speed wireless data
and Internet services. We serve approximately 17.7 million subscribers
throughout Korea as of April 30, 2003, including 15.8 million subscribers who
own data-capable handsets. As of April 30, 2003, our share of the Korean
wireless market was approximately 53.7%, based on the number of subscribers.
We provide our services principally through networks using CDMA technology.
In October 2000, we became the world's first wireless operator to commercially
launch CDMA 1xRTT, a CDMA-based advanced radio transmission technology for
high-speed wireless data and wireless Internet services. CDMA 1xRTT allows
transmission of data at speeds of up to 144 Kbps, compared to the 64 Kbps
currently possible over our CDMA networks. In addition to higher data transfer
speeds, CDMA 1xRTT technology uses packet-based data transmission, which permits
more efficient use of wireless spectrum and packet-based pricing of data
services. As of April 30, 2003, we had approximately 11.6 million subscribers
with handsets capable of accessing our CDMA 1xRTT network.
In the first half of 2002, we launched an upgrade of our CDMA 1xRTT network
in 26 cities in Korea to an advanced technology called CDMA 1xEV/DO. CDMA
1xEV/DO is a more advanced CDMA-based technology which enables data to be
transmitted at speeds of up to 2.4 Mbps. CDMA 1xEV/DO technology allows us to
provide advanced wireless data services such as streaming color video and
streaming audio services. CDMA 1xEV/DO-capable handsets became available in
Korea in June 2002. We completed our CDMA 1xEV/DO upgrade in 81 cities in Korea
at the end of 2002.
In December 2001, we acquired a license to develop, construct and operate a
wide-band code division multiple access, or W-CDMA, digital cellular network
using 2 X 20 MHz of radio frequency spectrum (i.e., 20 MHz for transmissions
from handsets to cell sites and 20 MHz for transmissions from cell sites to
handsets) in the 2 GHz band. In May 2003, we merged SK IMT, a subsidiary
established for the principal purpose of operating and developing our W-CDMA
services, into SK Telecom because we felt that we could better manage the
technology, marketing and operations of the W-CDMA business as one entity. We
expect to commence construction of the W-CDMA network and provision of W-CDMA
service in Seoul by the end of 2003.
In January 2002, we acquired the remaining 29.6% interest in Shinsegi, the
second wireless operator to introduce wireless voice services in Korea, which we
did not yet own, and merged Shinsegi into SK Telecom. As a result of this
merger, we now have a combined 2 X 25 MHz of spectrum in the 800 MHz range.
On May 30, 2003, we had a market capitalization of approximately Won 16.1
trillion or approximately 6.4% of the total market capitalization on the Korea
Stock Exchange, making us the second largest company listed on the Korea Stock
Exchange based on market capitalization on that date. Our ADSs, each
representing one-ninth of one share of our common stock, have traded on the New
York Stock Exchange since June 27, 1996.
We established our telecommunications business in March 1984 under the name
of Korea Mobile Telecommunications Co., Ltd., under the laws of Korea. We
changed our name to SK Telecom Co., Ltd., effective March 21, 1997.
Our registered office is at 99 Seorin-dong, Jongro-gu, Seoul 110-728, Korea
and our telephone number is 82-2-2121-4599.
23
OUR BUSINESS STRATEGY
We believe that trends in the Korean telecommunications industry during the
next decade will mirror those in the global market and that the industry will be
characterized by rapid technological change, reduced regulatory barriers and
increasing competition. Our business strategy is to enhance shareholder value by
maintaining and solidifying our leading position in the growing Korean market
for wireless services, including voice, data and Internet services. As the
Korean market continues to mature, we will continue to focus on these core
businesses in order to expand and enhance the range and quality of our wireless
telecommunications services. Our principal strategies are to:
- Enhance the technical capabilities of our wireless networks to improve
data transmission rates and service quality and to enable us to offer an
increased range of services. We are expanding the geographic coverage
and subscriber capacity of our existing CDMA 1xRTT network and are
progressively upgrading this network to employ CDMA 1xEV/DO technology,
capable of data transmission at speeds of up to 2.4 Mbps.
- Offer a broad range of new and innovative wireless data and Internet
services. Through our integrated wireless and on-line portal, NATE, we
plan to continue expanding the range of our wireless data and Internet
services with a view to increasing revenue from these services. Our
strategy includes the introduction of sophisticated multimedia services
(such as June, a premium wireless data service that provides streaming
multimedia video content through our CDMA 1xEV/DO technology), mobile
commerce services (such as Moneta, a wireless credit and payment system
which allows subscribers to provide merchants with credit card
information and payment authorization using chips embedded in their
wireless handsets) and mobile finance services (such as NeMo, a mobile
payment solution which allows subscribers to transfer money from their
accounts to the accounts of other NeMo subscribers by typing in the
recipient's wireless handset number) that can be accessed using handsets
and other devices such as personal computers, personal digital assistants
and vehicle mounted terminals.
- Retain the loyalty of, and capitalize on, our large, high-quality
wireless subscriber base. With approximately 17.7 million subscribers as
of April 30, 2003, we have the largest wireless subscriber base in Korea.
We focus on maintaining and expanding our high-quality subscriber base
through the provision of enhanced wireless services, particularly
advanced wireless data and Internet based applications, at higher speeds
than previously available. As part of this strategy, we encourage our
CDMA subscribers to migrate to our CDMA 1xRTT network.
- Position ourselves to be a leader in implementing new and improved
wireless technologies. We pursue a research and development program
designed to allow us to implement new wireless technologies as market
opportunities arise. We operate a network research and development center
which is focused on wireless network design, digital cellular
technologies and wireless telecommunications applications. This center
includes a research team that is helping to develop fourth generation
wireless technology, which is expected to enable wireless data
transmission at speeds of up to 155 Mbps, 70 times faster than 3G
technology. We have acquired a license to develop and operate a W-CDMA
network using 2 X 20 MHz of spectrum in the 2 GHz band.
MERGER WITH SHINSEGI
In a series of transactions between December 1999 and April 2000, we
acquired a 51.2% interest in the common stock of Shinsegi. In subsequent
transactions between March and September 2001, we increased our interest to
70.4%. On January 13, 2002, Shinsegi merged into SK Telecom.
The attractiveness of our merger with Shinsegi derived in large measure
from the synergies, growth opportunities and cost savings we hope to achieve by
integrating Shinsegi's former operations and customer base with those of SK
Telecom and our plans to use the spectrum formerly owned and operated by
Shinsegi in SK Telecom's networks.
24
In 2001, we began integrating Shinsegi's operations with those of SK
Telecom. In 2002, we completed the following steps to realize additional
benefits from our merger with Shinsegi:
- Decommissioned Shinsegi's former network and transfer Shinsegi's former
subscribers to SK Telecom's networks. We have allowed transferred
subscribers to continue receiving services under their existing rate
plans. However, after the merger, no new subscribers have been accepted
under Shinsegi's plans and further marketing efforts have been limited to
the SK Telecom brands. Shinsegi's subscribers did not have to purchase
new handsets, were allowed to use the same telephone numbers assigned to
them and had access to the same services as before the merger.
- Re-allocated the spectrum formerly used by Shinsegi's network to SK
Telecom's CDMA and CDMA 1xRTT networks.
- A portion of Shinsegi's former network equipment was re-deployed in SK
Telecom's CDMA network or sold for use outside Korea. The remainder of
Shinsegi's former network equipment was discarded and written off and an
impairment loss of Won 185.8 billion was recorded in 2002.
We also identified and implemented other cost saving measures, such as the
elimination of redundant distribution centers.
25
BUSINESS OVERVIEW
CELLULAR SERVICES
SK Telecom was the sole provider of cellular services in Korea from 1988,
when we began network operations, to April 1996, when Shinsegi began operating a
digital cellular system in several regions of Korea. In October 1997, three
additional companies commenced providing wireless telecommunications services.
As a result of consolidation in the wireless telecommunications industry in
Korea since 2000, there are currently three providers of wireless
telecommunications services in Korea, SK Telecom, KT Freetel, whose largest
shareholder is KT Corporation, and LG Telecom.
We introduced our digital cellular service using CDMA technology in the
Seoul metropolitan area in January 1996 and substantially completed the
geographic build out of the network in 1998. On December 31, 1999, we terminated
our analog service. Our digital network provides service to an area covering
approximately 99.0% of the Korean population. We continue to increase the
capacity of our wireless networks to keep pace with the growth of our subscriber
base and the resulting increase in usage of voice and wireless data services by
our subscribers.
To complement the services we provide to our subscribers in Korea, we have
entered into roaming service agreements with various foreign wireless
telecommunications service providers, including Verizon Wireless in the United
States, KDDI Corporation in Japan, China United Telecommunications Corporation
and China Mobile Communications Corporation in certain areas in China, Telstra
Corporation Limited in Australia, Hutchison-Whampoa in Hong Kong, Telecom New
Zealand in New Zealand, Telus Mobility in Canada, Guamcell in Guam and CAT in
Thailand.
In order to enhance our ability to provide wireless data services to our
customers, we constructed and are expanding a new wireless network based on CDMA
1xRTT technology. CDMA 1xRTT is an improved code division multiple access add-on
technology which allows wireless data transmission at speeds of up to 144 Kbps
compared to 64 Kbps for CDMA technology. Subscribers to our new CDMA 1xRTT based
services, in addition to having access to our wireless data services at higher
speeds, also have access to other enhanced wireless data applications, such as
the ability to download music videos from the Internet to their handsets. To
enjoy these services, subscribers must purchase CDMA 1xRTT-capable handsets. As
of April 30, 2003, approximately 11.6 million of our subscribers owned handsets
capable of accessing our CDMA 1xRTT network. Over time, we intend to continue
migrating our existing CDMA subscribers to this new network.
In the first half of 2002, we launched an upgrade of our CDMA 1xRTT network
in 26 cities in Korea to an advanced technology called CDMA 1xEV/DO. CDMA
1xEV/DO is a CDMA-based technology, which enables data to be transmitted at
speeds up to 2.4 Mbps, which is 16 times faster than CDMA 1xRTT's maximum
transmission speed. CDMA 1xEV/DO-capable handsets became available in Korea in
June 2002. CDMA 1xEV/DO technology allows us to provide advanced wireless data
services such as streaming color video and streaming audio services. We
completed the expansion of our CDMA 1xEV/DO network in 81 cities in Korea at the
end of 2002. The CDMA 1xEV/DO technology allows us to provide wireless data
services which require faster transmission speeds to our subscribers, as well as
allow us to use our spectrum more efficiently.
WIRELESS INTERNET SERVICES
We are a world leader in developing and commercializing wireless Internet
services. We were the first in the world to commercialize CDMA 1xRTT and CDMA
IxEV/DO technologies and are a pioneer in developing and commercializing various
wireless commerce services. In terms of revenue, we are the leading wireless
Internet service provider in Korea.
26
ON-LINE SERVICES AND INTERNET ACCESS
We offer a wide variety of Internet content and services as well as provide
our wireless subscribers access to the Internet under our common brand name
"NATE".
Under our brand name "NATE Air", we offer our wireless subscribers access
to the Internet, where subscribers can access a wide variety of content
including current news and stock quotes and other information, as well as have
access to a wide variety of services including securities trading as well as
online banking services. Subscribers can purchase goods and services through
their wireless devices as well as send and receive email and have access to
various third party Internet websites configured to work with wireless
technology. Subscribers access NATE Air using wireless application protocol, or
WAP, technology. WAP is a technology that allows wireless data transmission and
has been adopted by over 200 major telecommunications operators worldwide. As of
April 30, 2003, approximately 14.7 million, or 83.2%, of our subscribers owned
WAP-enabled handsets including approximately 11.6 million, or 65.5%, of which
are capable of accessing our CDMA 1xRTT network.
Under our "NATE.com" brand name, we offer a portal service at our website,
www.NATE.com. NATE.com includes information and content formerly offered under
our Netsgo brand as well as those content and services formerly available on
Lycos Korea, which our subsidiary, SK Communications Co., Ltd., acquired in
2002. Nate.com offers a wide variety of content and services, including an
Internet search engine as well as access to free email accounts. In the month of
April 2003, approximately 15 million users have visited this website at least
once.
We offer an instant messaging service to our Nate.com and NATE Air users.
This service, which we call "NATE-ON" allows users to chat online through a
variety of devices, including personal computers, wireless handsets and personal
digital assistants. We continue to seek to introduce new wireless data services
and innovations with a view to increasing revenue from these businesses.
We are also seeking to market our NATE wireless Internet platform to other
CDMA operators worldwide. In April 2002, we entered into an agreement with
Pelephone Communications Ltd., an Israeli CDMA operator, to supply our NATE
wireless Internet platform to Pelephone on a turnkey basis. In May 2002, we
entered into a memorandum of understanding with Openwave of the United States, a
wireless Internet-based communication software and application provider that
currently has more than a 50% share in the wireless Internet gateway and mobile
browser markets, to form a strategic alliance in order to carry out co-
marketing of our NATE wireless Internet platform solutions in overseas markets.
In November 2002, we entered into an agreement with Asia Pacific Broadband
Wireless Communications (APBW), one of five companies licensed to offer 3G
mobile services in Taiwan, to offer wireless Internet solution on a turn-key
basis. Under the agreement, APBW will license software and applications used to
offer mobile Internet access and multimedia services.
FINANCIAL ENABLER
In November 2001, we introduced NeMo, a mobile payment solution which
allows NeMo subscribers to deposit money from their individual bank accounts
into SK Telecom's bank account and transfer money from SK Telecom's bank account
to the individual bank accounts of other NeMo subscribers by typing in the
recipient's wireless handset number. As of April 2002, the number of NeMo
service subscribers exceeded 3.0 million.
In April 2002, we introduced Moneta, a wireless credit and payment system,
which allows holders of mobile credit cards to provide merchants with credit
card information and payment authorization using chips embedded in their
wireless handsets instead of a traditional plastic credit card with a magnetic
stripe. The wireless handset contains an infrared transmitter which transmits
transaction information to the merchant's reader system. Users do not need to
manually enter their credit card number when they make payments using this
system. The system is based on an international technological standard developed
by Europay, Mastercard and Visa. We receive a fee from the card issuer for each
card issued and a transaction fee, based on the transaction value, for each
transaction effected using the mobile commerce card. In May 2002, we entered
27
into a technological cooperation agreement with Visa pursuant to which Visa has
agreed to adopt our wireless credit and payment system as the international
standard for Visa's worldwide operations. We have entered into a business
alliance agreement with Korea Exchange Bank Credit Service Co., Ltd. and plan to
enter into a few more alliances with credit card companies by the end of 2003.
In addition, we have established payment system with major department stores and
discount stores (such as E-Mart) and affiliated merchant stores (such as
Starbucks and TGI). We currently plan to expand the commercial use of Moneta
payment system to 80% of affiliated merchant stores by the end of 2003.
In October 2002, we acquired Paxnet, an on-line financial portal offering
services related to securities trading. We expect to expand our services
provided through Paxnet to include a vast array of financial services relating
to insurance, real estate, personal asset management and investment trust funds.
We are also developing other uses for mobile credit card technology to provide
other services, such as payment for transportation and to serve as a secure
means of identification.
MULTIMEDIA
In November 2002, we introduced June, a wireless data service that provides
multimedia content through streaming method using our CDMA 1xEV/DO technology.
Content provided through the June service includes Video on Demand (VOD), Music
on Demand (MOD), TV broadcastings and multimedia messaging.
We may also invest in a satellite-based digital multimedia broadcasting
(DMB) business, a service which allows broadcasting of multimedia content
through transmission by satellite to various wireless channels, including to
satellite DMB handsets. See "Key Information -- Risk Factors -- We may make
significant investments in new businesses and regions, including businesses and
regions in which we have limited experience."
OTHER PRODUCTS AND SERVICES
HANDSET MANUFACTURING
Through our 61.7%-owned subsidiary, SK Teletech, we design, market and sell
digital handsets under the brand name "Sky". The handsets are principally
manufactured by third parties under contracts with SK Teletech. We established
SK Teletech together with Kyocera Corporation of Japan, which, as of April 30,
2003, held a significant minority interest in SK Teletech. Currently, all of SK
Teletech's domestic sales of digital handsets are to our affiliate, SK Global,
which distributes them principally to our network of dealers for sale to our
subscribers and other consumers. Due to an FTC-imposed condition to our
acquisition of Shinsegi, until the end of 2005, SK Teletech may not sell more
than 1,200,000 handsets (excluding W-CDMA handsets) per year to SK Telecom and
its affiliates.
INTERNATIONAL CALLING SERVICES
Through our 90.8% owned subsidiary, SK Telink, we provide international
telecommunications services, including direct-dial as well as pre- and post-paid
card calling services, bundled services for corporate customers, voice services
using internet protocol, Web-to-phone services, and data services. SK Telink
handled approximately 402 million total call minutes in 2002, which generated
Won 101.6 billion in revenues. For the four months ended April 30, 2003, SK
Telink handled approximately 136 million total call minutes, which generated Won
32.2 billion in revenue. In 2000, we established SK Telink America, Inc., to
extend our international telecommunications service to the United States. We
plan to close down our business operations of SK Telink America, Inc. by the end
of 2003 because the business proved to be unprofitable.
TELEMATICS
In February 2002, we introduced a Telematics service called NATE Drive.
NATE Drive is an interactive communication service designed to guide vehicle
drivers using the satellite-based global positioning system (GPS) and a wireless
network to provide drivers with real-time location and traffic information. In
April 2002,
28
we entered into an agreement with Renault Samsung Motors and Samsung Electronics
to jointly develop a Telematics business with a goal of jointly launching a
commercial product in August 2003. Under the agreement, we will provide the
cellular phone network and NATE Drive service, Samsung Electronics will develop
Telematics terminals for vehicles and Renault Samsung Motors will promote and
install Telematics-enabled terminals in the vehicles it sells.
PLANNED W-CDMA NETWORK
In December 2000, the MIC awarded a consortium we lead the right to acquire
a license to operate a W-CDMA network using 2 X 20 MHz of spectrum in the 2 GHz
band. W-CDMA is a high-speed wireless communication technology that we believe
will allow us to offer even more sophisticated data transmission services at
faster speeds than our current CDMA 1xRTT network. In March 2001, we
incorporated SK IMT to hold the license and develop our W-CDMA business and we,
together with Shinsegi, invested Won 985.2 billion for a 61.6% interest in SK
IMT. In December 2001, we disposed of 144,000 shares of SK IMT worth Won 3.9
billion. After giving effect to the transaction, we own a 61.3% equity interest
in SK IMT. On May 1, 2003, SK IMT merged into SK Telecom.
The W-CDMA license was awarded by the MIC to SK IMT on December 4, 2001.
The total license cost to SK IMT was Won 1.3 trillion. SK IMT paid Won 650
billion of this amount in March 2001, and we are required to pay the remainder
of the license cost in annual installments from 2007 through 2011. For more
information, see note 2(i) of our notes to consolidated financial statements.
According to the terms of the license, we may commence provision of services
after the network has been constructed in accordance with the business plan
submitted with our application for the license and certain other conditions have
been satisfied, and we are required to commence provision of W-CDMA services by
the end of 2003.
On April 30, 2003, the MIC approved the proposed merger of SK IMT into SK
Telecom, subject to certain conditions imposed by the MIC to ensure fair
competition and to protect customer interests. In addition, if such merger is
determined by the MIC to seriously impair fair market competition or harm
subscribers due to factors such as increased market share or discrimination
between cellular subscribers and W-CDMA service subscribers, the MIC may
implement additional measures to remedy such situation.
We are planning to commence provision of IMT-2000 services based on our
W-CDMA network on a limited basis in Seoul by the end of 2003. On May 23, 2003,
we initially selected Samsung Electronics to supply W-CDMA network equipment
which will be used to provide our W-CDMA services in Seoul by the end of 2003
and LG Electronics to supply W-CDMA network equipment which will be used to
provide our W-CDMA services in area to be decided by us at a later date. In
addition, we are currently negotiating with Nortel, our pre-selected potential
supplier, in order to ensure the adequate and timely supply of W-CDMA network
equipment to us. 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. See "Key Information -- Risk
Factors -- W-CDMA technology will require significant capital and other
expenditures for implementation which we may not recoup, may be difficult to
integrate with our other businesses and may not be competitive with other
technologies."
REVENUES, RATES AND FACILITY DEPOSITS
Our wireless revenues are generated principally from initial connection
fees, monthly access fees, usage charges for outgoing calls and wireless data,
interconnection fees and access fees for value-added services. The
29
following table sets forth information regarding our cellular revenues (net of
taxes) and facility deposits for the periods indicated:
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
2000(1)(2) 2001(1)(2) 2002
------------ ------------ ----------
(IN BILLIONS OF WON)
Initial Connection Fees........................... W 231.1 W 146.7 W 230.4
Monthly Access Fees............................... 2,505.2 2,733.8 3,055.4
Usage Charges..................................... 2,592.1 3,071.2 3,415.6
Interconnection Revenue........................... 1,312.4 1,339.9 1,043.2
Revenue from Sales of Digital Handsets(3)......... 494.0 702.4 534.0
Other Revenue(4).................................. 110.3 209.0 878.2
-------- -------- --------
Total........................................ W7,245.1 W8,203.0 W9,156.8
======== ======== ========
Additional Facility Deposits...................... W 105.5 W 74.0 W 11.0
Refunded Facility Deposits........................ 125.8 79.2 20.6
Facility Deposits at Period End................... 61.1 56.5 46.9
---------------
(1) Information as of and for the year ended December 31, 2000 and 2001 includes
information as of and for the year ended December 31, 2000 and 2001,
respectively, for Shinsegi.
(2) The following table sets forth information regarding Shinsegi's cellular
revenues (net of taxes) and facility deposits for the periods indicated:
AS OF AND FOR THE YEAR
ENDED DECEMBER 31,
-----------------------
2000 2001
---------- ----------
(IN BILLIONS OF WON)
Initial Connection Fees..................................... W 43.2 W 33.4
Monthly Access Fees......................................... 470.9 590.0
Usage Charges............................................... 402.1 548.9
Interconnection Revenue..................................... 250.8 269.0
Revenues from Sales of Digital Handsets..................... 245.1 376.1
Other Revenues*............................................. 19.8 78.5
-------- --------
Total.................................................. W1,431.9 W1,895.9
======== ========
Additional Facility Deposits................................ W 10.3 W 15.1
Refunded Facility Deposits.................................. 12.7 14.9
Facility Deposits at Period End............................. 6.6 6.8
---------------
* Other revenue includes revenue from value-added services offered by Shinsegi,
including voice-activated dialing, caller ID, call forwarding, call waiting
and three-way calling.
(3) Our revenue from handset sales consists of sales by our subsidiary, SK
Teletech.
(4) Other revenue includes revenue from value-added services, including
voice-activated dialing, caller ID, call forwarding, call waiting and
three-way calling.
On their initial subscription, we charge our new customers an initial
connection fee for service activation. After their initial connection, we
require our customers to pay a monthly access fee and usage, or airtime, charges
for outgoing calls and access to wireless data services. Prior to April 1, 1999,
all network service providers had mandatory subscription periods. However, since
April 1, 1999, in accordance with MIC guidelines, new wireless service
subscribers cannot be subjected to any mandatory subscription periods. We do not
charge our customers for incoming calls, although we do receive interconnection
charges from KT Corporation and other companies for calls from the fixed-line
network terminating on our networks and, since 2000, interconnection revenues
from other wireless network operators. See "-- Interconnection". Monthly access
fees for some plans include free airtime and/or discounts for designated calling
numbers.
SK Telecom currently offers five basic types of service plans, the Speed011
rate plans, the TTL plans, the Ting plans, the UTO plans and the CARA plans. We
also offer June plans, designed for multimedia wireless
30
data service using CDMA2000 1xEV-DO technology, and Free plans offering free
airtime on weekends or between 12 am and 6 am on weekdays for an additional
monthly fee of Won 10,000 to Won 15,000. As of April 30, 2003, approximately
33.1% of our subscribers subscribed to the Standard rate plan, which is one of
the Speed011 rate plans.
Higher rate plans generally include a fixed monthly amount of usage time
while the lower rate plans are generally usage-based. The monthly access fees
for the Speed011 plans range from Won 12,000 to Won 52,000, and generally target
the adult market segment. The monthly access fees for the TTL plans range from
Won 16,500 to Won 17,500 and target young adults between the ages of 19 and 24.
The monthly access fees for the Ting plans range from Won 13,500 to Won 16,000
and generally target youths between the ages of 13 and 18. The monthly access
fees for the UTO plans range from Won 15,000 to Won 18,000 and generally target
wireless users between the ages of 25 and 35.
Following the successful 2001 launch of the Ting plans and the UTO plans,
we introduced a new service plan, CARA in August 2002. The monthly access fees
for the CARA plans range from Won 13,500 to Won 15,500 and is exclusive to
female subscribers. CARA plans offer benefits designed for women, such as
discounts to hair salons, spas, on-line shopping, restaurants and offers free
gift certificates and discounts for Lotte department store, women's magazines,
personal hygiene products and travel packages.
In November 2002, we introduced the June plans, a new set of rates designed
for subscribers using our CDMA 1xEV/DO service. These plans charge monthly
access fees of between Won 5,000 and Won 50,000. Under a standard rate plan,
subscribers to June are charged based on the amount of data transmitted,
measured in packets of 512 bytes. The rates per packet differ according to the
type of content.
After discussions with the MIC, effective from 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. See "Operating and Financial Review and Prospects -- Overview".
For all calls made from our subscribers' handsets in Korea to any
destination in Korea, we charge usage fees based on the subscriber's cellular
rate plan (as described in the table below). The fees are the same whether the
call is local or long distance. With respect to international calls placed by a
subscriber, we bill the subscriber the international rate charged by the Korean
international telephone service provider through which the call is routed. We
remit to that provider the international charge less our usage charges. See
"-- Interconnection".
31
The following table summarizes some of SK Telecom's popular cellular rate
plans as of April 30, 2003:
PEAK OFF-PEAK NIGHT-TIME
MONTHLY INCLUDED AIRTIME/ USAGE CHARGES USAGE CHARGES USAGE CHARGES
ACCESS FEE DISCOUNT(1)(2) (PER 10 SECONDS)(2) (PER 10 SECONDS)(2) (PER 10 SECONDS)(2)
-------------- ----------------- ------------------- ------------------- -------------------
SPEED011 PLANS
Standard............. W14,000S15,500 10 minutes W 20 W 13 W 10
Premium.............. 52,000S55,000 380 minutes 17 11 9
Family............... 14,000 5 minutes 18 12 9
Silver(3)............ 12,000 20 minutes 38 38 38
View(4).............. 9,100 10 minutes 60 60 60
TTL PLANS
TTL Discount(5)...... 16,000S17,500 7 minutes 9S21 9S20 9S11
TING PLANS
Ting................. 13,500S16,000 50S60 minutes 12S37 12S24 9S18
UTO PLANS
Time Plan & Number
Plan............... 16,000S18,000 Free text 21 17 12
messages
Leisure.............. 15,000S16,500 Free text 40 9 9
messages
CARA PLANS
Standard............. 14,000S15,500 7S10 minutes W 20 W 13 W 10
Daytime discount..... 14,000S15,500 7 minutes and 30% 34 15 --
discount
Discount on
Designated
Numbers............ 13,500S15,000 7 minutes and 40% 36 18 --
discount
JUNE PLANS(6)
June 50.............. 5,000 (7)
June 95.............. 9,500 (8)
June 150............. 15,000 (9)
June 250............. 25,000 (10)
"FREE" PLANS
Free Holiday......... (11)
Free Night........... (12)
Free Eleven.......... (13)
---------------
(1) Discounts may include free text messages, ring tone downloads, colorings and
NATE minutes.
(2) Excludes a 5% discount on domestic calls for customers who have subscribed
to our cellular services for over 2 years; a 7% discount for customers who
have subscribed to our cellular services for 3 to 4 years; and a 10%
discount for customers who have subscribed to our cellular services for over
5 years.
(3) Subscribers must be 65 years old or older and each subscriber is limited to
one silver Plan.
(4) Plan for hearing and speech impaired subscribers. Additional benefits
include free activation and 35% discount for voice service, data service and
text messages.
(5) Includes TTL plan for designated numbers, designated area and TTL plan for
couples.
(6) June plan is only applicable to data services. Subscribers who elect June
plans must also subscribe to one of the basic plans.
(7) Won 13,000 (Won 10,000 for payment by packet), 30% discount for minutes
exceeding given free minutes.
(8) Won 32,500 (Won 25,000 for payment by packet), 50% discount for minutes
exceeding given free minutes.
(9) Won 65,000 (Won 50,000 for payment by packet), 70% discount for minutes
exceeding given free minutes.
(10) Won 156,000 (Won 120,000 for payment by packet), 80% discount for minutes
exceeding given free minutes.
(11) 11 hours of free weekend airtime for an additional Won 10,000 per month.
(12) 11 hours of free airtime between 12 pm and 6 am for an additional Won
10,000 per month.
(13) 11 hours of free airtime exceeding the average number of minutes used in
September and October 2002 for an additional Won 15,000 per month.
32
We offer a variety of value-added services including voice-activated
calling, voice mail, text messaging, caller ID and call waiting. Depending on
the rate plan selected by the subscriber, the monthly fee may or may not include
these value-added services.
We offer wireless data services to our subscribers through NATE.
Subscribers using SK Telecom's CDMA network may elect to pay a monthly fee,
which includes a fixed amount of airtime or data packets, or may elect to pay on
a per-use basis. Standard rates for NATE range from Won 7 to Won 15 for ten
seconds of airtime. Since April 23, 2001, subscribers using our CDMA 1xRTT
network are charged based on the amount of data that is transmitted to the
subscriber's handset. The data transmitted is measured in packets of 512 bytes.
We charge Won 6.5 per text packet and Won 1.3 per multimedia packet. Prior to
April 23, 2001, our CDMA 1xRTT subscribers were charged time-based fees.
We offer wireless multimedia data services through June. Under a standard
rate plan, subscribers to June are charged based on the amount of data
transmitted, measured in packets of 512 bytes. The rates per packet differ
according to the type of content. Text data, voicemail, VOD/MOD and Internet
service are charged at Won 6.5, Won 2.5, Won 1.3 and Won 1.5 per packet,
respectively. For a limited time until the end of June 2003, subscribers may
elect to pay a fixed monthly fee for a certain amount of airtime and be charged
for data usage per content, ranging from Won 200 to Won 1,500. We are currently
offering this special rate plan to promote this new service. After this
promotion period, subscribers to this rate plan will automatically be switched
to the "June 250" plan, at a monthly access fee of Won 25,000.
We require new subscribers (other than some corporate and government
subscribers) to post a non-interest bearing facility deposit of Won 200,000,
which we may utilize to offset a defaulting subscriber's outstanding account
balance. In lieu of posting the facility deposit, subscribers may elect to pay a
Won 10,000 premium for three years of coverage to the Seoul Guarantee Insurance
Company. We pay the Won 10,000 premium to the Seoul Guarantee Insurance Company
for future years on behalf of subscribers who have subscribed with us for at
least three years. Seoul Guarantee Insurance Company reimburses us up to Won
350,000 for each insured subscriber that defaults on any payment obligations. We
refund the facility deposit to all existing subscribers who had initially made a
facility deposit and later elect the facility insurance option. We bill
subscribers on a monthly basis and subscribers may make payment at a bank, post
office, any of our regional headquarters or sales offices, or at any of our
authorized dealers.
Because we have been designated by the MIC as a "market dominant service
provider", our establishment or amendment of fees, charges, and terms and
conditions of service, including promotional rates and facility deposits,
requires prior approval by the MIC.
In December 2000, with effect from September 1, 2001, the National Assembly
abolished the 10.0% telephone tax previously charged to our customers as part of
their monthly service charges. Since September 1, 2001, we have instead charged
our customers a 10.0% value-added tax. We can offset the value-added tax we
collect from our customers against value-added tax refundable to us by the
Korean tax authorities. We remit taxes we collect from our customers to the
Korean tax authorities. We record revenues in our financial statements net of
such taxes.
SUBSCRIBERS
We had 17,721,026 subscribers as of April 30, 2003, representing a market
share of 53.7%, the largest market share among Korean wireless service
providers. We believe that our subscriber growth has been due to many factors,
including:
- our expansion and technical enhancement of our digital network, including
with high-speed data capabilities;
- increasing consumer awareness of the benefits of wireless
telecommunications;
- until June 2000, when the MIC prohibited subsidies on handset sales, the
decline in handset prices in Korea through the payment of subsidies to
subscribers, which effectively lowered the cost of initiating service;
33
- an effective marketing strategy;
- our focus on customer service;
- the introduction of new, value-added services, such as voicemail
services, call-forwarding, caller ID, three-way calling and wireless data
and Internet services provided by NATE; and
- our acquisition of Shinsegi.
The following table sets forth selected historical information about our
subscriber base for the periods indicated:
AS OF OR FOR THE
YEAR ENDED DECEMBER 31,
---------------------------------------
2000(1) 2001 2002
---------- --------- ----------
Subscribers................................... 14,452,683(2) 15,179,063 17,219,562
Subscriber Growth Rate........................ 42.9% 5.0% 13.4%
Activations................................... 4,887,144(3) 3,822,278(3) 4,769,612
Voluntary Deactivations....................... 2,970,384(4) 1,733,155(4) 2,207,345
Involuntary Deactivations..................... 1,183,264(5) 1,362,743(5) 521,768
Average Monthly Churn Rate(6)................. 2.8% 1.7% 1.4%
---------------
(1) As of April 1, 2000, Shinsegi had 3,608,816 subscribers.
(2) Includes 3,517,831 Shinsegi subscribers as of December 31, 2000 and
3,311,774 as of December 31, 2001.
(3) Includes number of activations for Shinsegi, which amounted to 851,926 for
the nine months ended December 31, 2000 and 810,585 for the year ended
December 31, 2001.
(4) Includes number of voluntary deactivations for Shinsegi, which amounted to
772,219 for the nine months ended December 31, 2000 and 651,572 for the year
ended December 31, 2001.
(5) Includes number of involuntary deactivations for Shinsegi, which amounted to
170,692 for the nine months ended December 31, 2000 and 365,070 for the year
ended December 31, 2001.
(6) Average monthly churn rate for a period is the number calculated by dividing
the sum of voluntary and involuntary deactivations during the period by the
simple average of the number of subscribers at the beginning and end of the
period and dividing the quotient by the number of months in the period.
Churn includes subscribers who upgrade to CDMA 1xRTT or CDMA 1xEV/DO-capable
handsets by terminating their service and opening a new subscriber account.
We had 17,721,026 subscribers as of April 30, 2003. For the four months
ended April 30, 2003, we had 1,247,830 activations, 483,152 voluntary
deactivations and 263,214 involuntary deactivations, representing an average
monthly churn rate of 1.1% during the same period. Our subscribers include those
subscribers who are temporarily deactivated, including (1) subscribers who
voluntarily deactivate temporarily for a period of up to three months no more
than twice a year (454,795 subscribers as of April 30, 2003) and (2) subscribers
with delinquent accounts who may be involuntarily deactivated up to two months
before permanent deactivation, which we determine based on various factors,
including prior payment history (643,282 subscribers as of April 30, 2003).
Our subscriber growth rate has been adversely affected by actions we took
to comply with certain requirements of the FTC regarding our acquisition of
Shinsegi. The FTC approved our acquisition of Shinsegi on the condition that SK
Telecom's and Shinsegi's combined market share of the wireless
telecommunications market, based on numbers of subscribers, be less than 50.0%
as of June 30, 2001. In order to satisfy this condition, we reduced the level of
our subscriber activations and adopted more stringent involuntary subscriber
deactivation policies beginning in 2000 and ceased accepting new subscribers
from April 1, 2001 through June 30, 2001. As of June 30, 2001, our market share
was approximately 49.7%, so we are no longer subject to this restriction. We
expect our subscriber growth rate to continue to decline in future periods.
As of April 30, 2003, approximately 11.3 million, or 83.2%, of our
subscribers owned WAP-enabled handsets including approximately 11.6 million, or
65.5%, of which owned handsets capable of accessing our CDMA 1xRTT network.
34
MARKETING AND SERVICE DISTRIBUTION
We market our services and provide after-sales service support to customers
through 29 sales centers, 52 branch offices and a network of 1,533 authorized
exclusive dealers located throughout Korea. Our dealers are connected via
computer to our database and are capable of assisting customers with account
information. In addition, approximately 200,000 independent retailers
(principally handset dealers) assist new subscribers to complete activation
formalities, which includes completing subscription applications and accepting
facility deposits or arranging for insurance with Seoul Guarantee Insurance
Company.
Currently, authorized dealers are entitled to an initial commission for
each new subscriber registered by the dealer as well as an average ongoing
commission calculated as a percentage of that subscriber's monthly access and
usage charges from domestic calls for the first four years. In order to
strengthen our relationships with our exclusive dealers, we offer a dealer
financing plan, which provides interest-free or low-interest loans of up to Won
500 million with a repayment period of up to three years.
We operate a customer information system designed to provide us with an
extensive customer database. Our customer information system includes a billing
system which provides us with comprehensive account information for internal
purposes and enables us to efficiently respond to customer requests. In May
2000, we launched 011e-station.co.kr, a website through which SK Telecom
customers can change their service plans, verify the charges accrued on their
accounts, receive their bills online and send text messages to our other
subscribers.
When we were the only cellular service provider in Korea, we were able to
maintain a low level of marketing and advertising expenses. Over the last
several years, competition in the wireless telecommunications business has
caused us to increase significantly our marketing and advertising expenses and,
with continuing competition, we expect that such expenses will remain high. We
have implemented a range of marketing measures, including more extensive
promotions to attract new customers as well as to discourage migration of our
existing subscribers to other service providers. In 2001, advertising
expenditures as a percentage of revenues amounted to 4.1%, principally for
promotion of our voice and wireless data services. Our marketing expenses were
lowered during the first half of 2001 due to the elimination of handset
subsidies and our efforts to satisfy the FTC-imposed condition that SK Telecom's
and Shinsegi's combined market share of the wireless telecommunications market,
based on numbers of subscribers, be less than 50.0% as of June 30, 2001. In
2002, advertising expenditures amounted to 4.8% of our revenues.
INTERCONNECTION
Our 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 our subscribers to make and receive calls from
telephones outside our 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 Korea
Communications Commission, a government agency under the MIC. We estimate that
approximately 20.6% in 2001 and approximately 19.4% in 2002 of our incoming and
outgoing calls originated from or were routed to the networks of KT Corporation
and Hanaro or the international gateways of KT Corporation, DACOM and Onse. In
April 2002, the MIC announced new interconnection arrangements which reduced the
interconnection fees payable among Korean wireless operators effective January
1, 2002 by between 10.2% and 28.1%, depending upon the operators involved. See
"-- Law and Regulation -- Interconnection" and "Operating and Financial Review
and Prospects -- Overview -- Revenue".
For 2002, our total interconnection revenues were Won 1,043.2 billion and
our total interconnection expenses were Won 752.1 billion.
35
DOMESTIC CALLS
Guidelines issued by the MIC require that all interconnection charges
levied by a regulated carrier be based on the actual costs to that carrier of
carrying a call, or based on imputed costs. The interconnecting parties are
required to calculate the relevant imputed costs on an annual basis. In the
event of a dispute regarding the imputed costs, the Korea Communications
Commission is empowered to act as arbitrator.
Wireless-to-Fixed-line. According to SK Telecom's interconnection
arrangement with KT Corporation, for a call from our wireless network to KT
Corporation's fixed-line network, we collect the usage rate from our wireless
subscriber and in turn pay KT Corporation the interconnection charges based on
KT Corporation's imputed costs.
Fixed-line-to-Wireless. In December 1997, the MIC announced new
interconnection arrangements for calls from a fixed-line network to a wireless
network. Under these arrangements, effective January 1, 1998, for a call
initiated by a fixed-line user to one of our wireless service subscribers, the
fixed-line network operator was to collect our usage fee from the fixed-line
user and pay us an interconnection charge based on our imputed costs.
Interconnection with KT Corporation accounts for substantially all of our
fixed-line-to-wireless interconnection revenue and expenses.
For 2000, KT Corporation's payments to network service providers were
calculated based on a discount of 7.76% to our actual imputed costs in 1998 and
for 2001, a discount of 14.92%. According to this calculation, KT Corporation
was required to pay interconnection charges of Won 68.94 per minute (exclusive
of value-added taxes) for fixed-line to mobile calls to network operators in
2000 and Won 63.59 per minute in 2001.
In April 2002, the MIC announced new interconnection arrangements effective
January 1, 2002 which reduced the interconnection fees payable among Korean
wireless operators effective May 1, 2002 by between 10.2% and 28.1%, depending
upon the operators involved. For 2002, KT Corporation's payments to network
service providers were calculated based on a discount of 28.1% to our actual
imputed costs for 2000. According to this calculation, KT Corporation was
required to pay interconnection charges of Won 45.7 per minute (exclusive of
value-added taxes). This was reduced to Won 41.0 per minute for 2003. The
charges above have been agreed among the parties involved and confirmed by the
MIC.
Wireless-to-Wireless. There were no interconnection charges for calls
between wireless telephone networks in Korea prior to 2000. The MIC implemented
interconnection charges for such calls starting in January 2000. Under these
arrangements, the operator originating the call pays an interconnection charge
to the operator terminating the call. For all operators, the amount of the
charge is based on SK Telecom's imputed cost, which was Won 45.7 per minute for
2002. This was reduced to Won 41.0 per minute for 2003. Our revenues from the
wireless-to-wireless charge were Won 365.6 billion (including Won 86.1 billion
for Shinsegi) in 2000 and Won 435.2 billion (including Won 86.6 billion for
Shinsegi) in 2001 and Won 350.9 billion in 2002. Our expenses from these charges
were Won 429.6 billion (including Won 106.7 billion for Shinsegi) in 2000, Won
496.0 billion (including Won 105.5 billion for Shinsegi) in 2001 and Won 482.7
billion in 2002. The charges above have been agreed among the parties involved
and confirmed by the MIC.
INTERNATIONAL CALLS
With respect to international calls, if a call is initiated by a wireless
subscriber, we bill the wireless subscriber for the international charges of KT
Corporation, DACOM or Onse, and in general we are required to remit to KT
Corporation, DACOM or Onse, as the case may be, interconnection charges equal to
the international charges less our own usage charges. If an international call
is received by our subscriber, KT Corporation pays interconnection charges to us
based on our imputed costs. Notwithstanding the foregoing, our interconnection
agreement with DACOM provides that we are only required to pay to DACOM
international interconnection charges to the extent that we collect the
applicable international charge from our subscriber based on billing information
provided by DACOM. We remit to Onse the interconnection portion of the
international charge that our subscribers are charged by us based on our
calculation for billing. We include only net international call revenues (net of
any interconnection payments) in our sales.
36
INTERNATIONAL ROAMING ARRANGEMENTS
We currently have CDMA automatic roaming agreements with several wireless
telecommunications service providers, including Verizon Wireless in the United
States, KDDI of Japan, Telstra of Australia, China Unicom in China, Hutchison
Telecom of Hong Kong , Telecom New Zealand in New Zealand, Telus Mobility in
Canada, Guamcell in Guam and CAT in Thailand. We plan to enter into similar
arrangements with other wireless telecommunications service providers.
We have also begun to introduce inter-standard roaming which allows our
subscribers to roam on networks employing GSM technology and vice-versa. From
March 2002, we have established a roaming arrangement with Telefonica Moviles
Espana S.A. of Spain. Under this arrangement, GSM subscribers can use their own
SIM cards (Subscriber Information Module Card) with CDMA handsets that are
compatible with such GSM SIM cards by renting such CDMA handsets from us.
Roaming users are able to receive calls made to their normal mobile telephone
numbers. We are seeking to enter into these arrangements with many GSM operators
worldwide. As of April 30, 2003, we had entered into inter-standard roaming
agreements with 48 operators.
DIGITAL CELLULAR NETWORK
We offer wireless voice and data telecommunications services throughout
Korea using digital wireless networks. SK Telecom operates a CDMA network which
currently reaches approximately 99% of the population, and a CDMA 1xRTT network
which currently reaches approximately 80% of the population. Shinsegi operated a
CDMA network prior to its merger into SK Telecom that we completed
decommissioning in July 2002.
CDMA NETWORKS
In January 1996, SK Telecom introduced a digital wireless network based on
CDMA technology. This network has been the core platform for our wireless
telecommunications business. CDMA technology is a continuous digital
transmission technology that accommodates higher throughput than analog
technology by using various coding sequences to allow concurrent transmission of
voice and data signals for wireless communication. CDMA technology provides
customers with a high degree of call quality and security.
CDMA technology is currently in commercial operation in several countries
including Korea, Hong Kong and the United States. A majority of the digital
wireless networks currently in use around the world are based on either the
European Global System for Mobile Communication standard or other time division
multiple access technologies. Unlike the continuous digital transmission method
of CDMA technology, these technologies break voice signals into sequential
pieces of a defined length, place each piece into an information conduit at
specific intervals and then reconstruct the pieces at the end of the conduit.
We completed the decommissioning the CDMA network formerly owned and
operated by Shinsegi in July 2002. In areas where Shinsegi's former network no
longer operates, Shinsegi's former subscribers are able to roam on SK Telecom's
CDMA network.
CDMA 1XRTT NETWORK
In October 2000, we began offering wireless voice and data services on our
CDMA 1xRTT network. CDMA 1xRTT is an advanced CDMA-based technology which allows
transmission of data at speeds of up to 144 Kbps (compared to a maximum of 64
Kbps for our CDMA networks) and constitutes what is sometimes referred to as a
2.5G network. As of April 30, 2003 our CDMA 1xRTT network currently covers 81
cities in Korea, approximately 80% of the population. In areas where the CDMA
1xRTT network is currently unavailable, CDMA 1xRTT-enabled handsets are capable
of accessing the CDMA network.
Unlike our CDMA network, our CDMA 1xRTT network has been designed to be
upgraded in step with advances in wireless technology. In the first half of
2002, we launched an upgrade of our CDMA 1xRTT network in 26 cities in Korea to
an advanced technology called CDMA 1xEV/DO. CDMA 1xEV/DO is a CDMA-based
technology, similar to CDMA 1xRTT, which enables data to be transmitted at
speeds of up to
37
2.4 Mbps. CDMA 1xEV/DO-capable handsets became available in Korea in June 2002.
We are expanding our CDMA 1xEV/DO network and completed the upgrade in 81 cities
in Korea at the end of 2002. This network permits 3G capabilities. A significant
portion of our capital expenditures is expected to be used for the future
expansion and upgrading of our CDMA 1xRTT network as well as our CDMA 1xEV/DO
network. For details of our capital expenditure plans relating to CDMA 1xRTT,
see "Operating and Financial Review and Prospects -- Liquidity and Capital
Resources".
W-CDMA NETWORK
W-CDMA is a 3G level high capacity wireless communication system that is
expected to enable us to offer a wider range of telecommunication services,
including cellular, paging, data communications, video-conferencing, multimedia
services and satellite communications. For more information about our capital
expenditure plans relating to W-CDMA, see "-- Planned W-CDMA Network" and
"Operating and Financial Review and Prospects -- Liquidity and Capital
Resources".
NETWORK INFRASTRUCTURE
The principal components of our wireless networks are:
- cell sites, which are physical locations equipped with transmitters,
receivers and other equipment that communicate by radio signals with
wireless handsets within range of the cell (typically a 3 to 40 kilometer
radius);
- base station transceiver subsystems, which manage the radio transmission
by the equipment located at one or more cell sites, including
radio-channel management, message transport and hand-off of calls between
cell sites;
- switching stations, which switch calls to the proper destinations; and
- leased lines, microwave links or other connections which link the
switching stations, cell sites and the public switched telephone networks
of KT Corporation and Hanaro.
The following table sets forth some basic information about our wireless
networks at April 30, 2003:
CELL SITES SWITCHING STATIONS
---------- ------------------
CDMA Network (excluding CDMA 1xRTT)........................ 4,851 56
CDMA 1xRTT Network......................................... 2,691 43
CDMA 1xEV/DO Network....................................... 2,650 --
We purchase our principal digital wireless equipment for our CDMA networks
from LG Electronics, Hyundai Syscomm and Samsung Electronics. We have purchased
from Samsung Electronics substantially all of the equipment for our CDMA 1xRTT
network. Several manufacturers, including Samsung Electronics, Hyundai Syscomm,
LG Electronics, Motorola Korea, Inc., and Sewon Telecom Ltd., currently produce
handsets for use on our CDMA and CDMA 1xRTT networks. Samsung Electronics, SK
Teletech and Motorola Korea, Inc. currently manufacture most of the handsets for
use on our CDMA 1xEV/DO Network.
Under applicable Korean law, Korean fixed-line operators may not decline to
provide leased line services to us without reasonable cause. We have completed
installation of substantially all optical fiber lines between our switching
stations. In addition, we own several microwave links in areas to serve certain
sections of the network formerly owned and operated by Shinsegi. We have also
installed optical fiber lines linking base stations with switching stations and
other base stations. Where we have not installed optical fiber lines, we
continue to use lines leased by us from KT Corporation. KT Corporation's fixed
charges for the leased lines are based on line capacity, length and type.
We use a cellular network surveillance system. This system oversees the
operation of cell sites and allows us to monitor our main equipment located
throughout the country from one monitoring station. The automatic inspection and
testing provided to the cell sites lets the system immediately rebalance to the
most suitable
38
setting, and the surveillance system provides automatic dispatch of repair teams
and quick recovery in emergency situations.
OTHER INVESTMENTS AND RELATIONSHIPS
We have investments in several other businesses and companies and have
entered into various business arrangements with other companies. Our principal
investments fall into the following categories:
- Wireless Application Developers and Content Providers. As part of our
strategy to develop additional applications and content for our wireless
data services, we invest in companies which develop wireless applications
and provide Internet content, including content accessible by users of
our wireless networks. These investments include:
- Korean Technology and Content Providers. We hold investments in
approximately 36 Korean companies, with an aggregate book value of
approximately Won 33.0 billion as of December 31, 2002, which develop
technology and content for use in our fixed-line and wireless data and
Internet businesses and for continuing development of our multimedia
platforms and networks.
- Joint Ventures. We own a 50% interest in a joint venture with
Hewlett-Packard Company to support development of next generation
wireless multi-media and mobile commerce services and a 50% interest in
a joint venture with Qualcomm Incorporated, formed for the purpose of
funding venture startup companies engaged in development and
commercialization of new applications or services utilizing CDMA
technology. We have committed to invest US$5 million in each of these
ventures. In addition, on March 20, 2003, we entered into an agreement
to establish a joint venture company with China Unicom, China's second
largest mobile phone operator and exclusive CDMA wireless service
provider, to develop wireless Internet platform and content.
- Mobile Broadcasting Corporation. As of December 31, 2002, we have
invested a total of Won 27.2 billion to acquire a 10.5% interest in
Mobile Broadcasting Corporation, or MBCO, a wireless multimedia company
in Japan. MBCO is a developer and provider of content and technology
related to wireless multimedia services and is planning to develop new
services in Satellite DMB. We have invested in this company for
cooperation in this new area of business. See "Information on the
Company -- Business Overview -- Wireless Internet
Services -- Multimedia".
- Foreign Wireless Telecommunications Operators. We have investments in
the following wireless telecommunications operators:
- Skytel. In July 1999, we acquired a 27.8% equity interest in Skytel,
Mongolia's second-largest cellular service provider, by providing
approximately Won 1.5 billion worth of analog infrastructure. As of
March 31, 2003, Skytel had approximately 47,500 subscribers. We,
together with Skytel, have been providing cellular service in Mongolia
since July 1999, and CDMA service since February 2001. In April 2001, we
completed installing the equipment necessary to provide WAP service.
Other investors have invested in Skytel. As a result, as of December 31,
2002, our equity interest in Skytel is 28.6%.
- Daghestan Cellular Network. In October 2000, we acquired a 49.0% equity
interest in Daghestan Cellular Network, Daghestan's exclusive cellular
provider, in return for analog infrastructure. As of December 31, 2002,
our total equity investment in Daghestan Cellular Network amounted to
Won 1.0 billion. We plan to sell our stake in this company before June
30, 2003.
- SLD Telecom. In a series of transactions during 2000, we entered the
Vietnam CDMA market through the acquisition of a 53.8% equity interest
of SLD Telecom Pte. Ltd. in return for an investment of US$1.35 million.
SLD Telecom entered into an agreement with Saigon Post &
Telecommunication Services Corporation to provide CDMA service
throughout Vietnam. We expect to commence CDMA service through Saigon
Post & Telecommunication Service Corporation in July 2003. We are
contractually obligated to make investments of up to US$80.7 million in
39
SLD Telecom through 2016. We have invested US$9.9 million as of December
31, 2002 and plan to invest up to US$33 million in 2003.
- Other Investments. Our other investments include:
- KT Corporation. 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 Won 332.0 billion
principal aggregate amount of bonds issued by KT Corporation that can be
exchanged at our option for 1.8% of KT Corporation's common stock. The
exchangeable bonds bear interest at an annual rate of 3.0% and mature in
2005. KT Corporation is Korea's principal fixed-line operator and the
parent of KT Freetel, one or our principal wireless competitors. 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
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. We
invested in KT Corporation principally for the defensive purpose of
preventing any particular corporation from controlling KT Corporation in
order to preserve the neutrality of the local telephone network and
protect our business activities from our competitors. We also believed
that while we are a major shareholder of KT Corporation, KT Corporation
may be less likely to sell shares in us without prior consultation with
us. Consequently, 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 short-term debt and for general corporate
purposes. In December 2002, KT Corporation and we agreed on a share
exchange transaction at a share price of Won 50,900 for 29,808,333
shares of KT Corporation (total value of Won 1.5 trillion) and Won
224,000 for 8,266,923 of our shares (total value of Won 1.9 trillion).
As Korean regulations do not allow partial cancellation of shares a
company buys back, the purchase of the shares from KT Corporation was
executed in two separate stages. In December 2002, we bought 4,457,635
shares (5% of KT Corporation's holding in SK Telecom) that were
subsequently cancelled in order to maximize our shareholders' value. In
January 2003, we bought the remaining 3,809,288 shares (4.3% of KT
Corporation's holding in SK Telecom). We designated these shares as
treasury stock for use in any future mergers and acquisitions
transactions and strategic alliances or 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. See "Key
Information -- Risk Factors -- Sales of our Shares by KT Corporation,
companies in the SK Group, POSCO and/or other large shareholders may
adversely affect the prices of our common stock and the ADSs."
- Hanaro. As of December 31, 2002, we owned a 5.7% interest in the
outstanding capital stock of Hanaro, a consortium led by DACOM which was
awarded Korea's second local fixed-line service license in 1997. For
more information, see note 4 of our notes to consolidated financial
statements.
- Powercomm. We currently own a 5.0% interest in Powercomm Corporation
with a book value as of December 31, 2002 of Won 29.7 billion. For more
information, see note 4 of our notes to consolidated financial
statements. Powercomm is an operator of fixed-line networks that
provides wholesale fixed-line network services, such as leased lines, to
telecommunications, Internet and cable television service providers in
Korea. We have no current plans to either increase or decrease our
investment in Powercomm.
- SKC&C. We currently own a 30.0% equity interest in SKC&C Co., Ltd. with
a book value as of December 31, 2002 of Won 39.7 billion. SKC&C is an
information technologies services provider. Substantially all of SKC&C's
revenue is generated from services provided to member companies of the
SK business group, including us. We are party to several service
contracts with SKC&C related to development and maintenance of our
information technologies systems. See "Major Shareholders and Related
Party Transactions Certain Relationships and Related Party
Transactions".
40
- SK Group Japan Co., Ltd. In December 2001, we invested Won 5.3 billion
in SK Group Japan Co., Ltd., a trading company. We held a 16.5% equity
interest in SK Group Japan with an acquisition cost of Won 16.4 billion,
which was written off due to an impairment.
- SK Communications. In August 2002, we purchased a 44.5% interest from
Mirae Corporation in Lycos Korea, one of Korea's leading Internet
portals, for Won 12.3 billion. Subsequently, we subscribed for
additional shares in Lycos Korea and increased our interest in Lycos
Korea to 78.3%. Lycos Korea was renamed SK Communications after it
acquired Netsgo Co., Ltd. and business rights to Nate.com service in
November 2002. SK Communications subsequently consolidated services from
Lycos and Nate.com to offer portal service on-line.
In February 2001, we transferred our paging business to Real Telecom and
received a 9.9% interest in Real Telecom, as well as bonds with a principal
amount of Won 9.5 billion, which can be converted into an additional 7.8%
interest in Real Telecom.
We have entered into long-term strategic cooperation agreements with each
of China Mobile and China Unicom to jointly develop CDMA technology-based
services. Since June 2001, we have been providing consulting services in CDMA
network design, equipment procurement, testing and optimization in three
provinces in China as well as training for Chinese engineers. On March 20, 2003,
we entered into an agreement with China Unicom to establish a joint venture
company to engage in providing wireless Internet services in China and to
provide consulting services for the construction and operation of the wireless
Internet platform. We own a 49% equity interest in the joint venture, initially
capitalized at $6 million. We will take the necessary steps to obtain a business
license and build the wireless Internet platform through a Joint Venture Company
Business Arrangement Committee. In accordance with legal procedures in China,
the business license will be in effect after June 2003. We are currently
planning to launch wireless Internet services in China by September 2003.
We have from time to time engaged in discussions with several wireless
telecommunications services providers about strategic relationships of various
types and have certain technology development and sharing agreements with NTT
DoCoMo and Sprint PCS.
We may consider investing in a Korean credit card business, subject to
favorable market conditions. We believe that investing in a credit card business
would better enable us to expand our wireless credit and payment system, improve
our mobile credit card technology, enhance our ability to develop and introduce
mobile commerce services and allow us to diversify our marketing activities in
the area of wireless financial transactions.
COMPETITION
We were Korea's only provider of cellular telecommunications services until
April 1996, when Shinsegi began offering its CDMA service using 10 MHz of
spectrum in the 800 MHz band under a license issued in 1994. In 1996, the
Government issued three additional licenses to KT Freetel, LG Telecom and Hansol
PCS to operate CDMA services, each using 10 MHz of spectrum in the 1700-1800 MHz
band. Each of KT Freetel, LG Telecom and Hansol PCS commenced operation of its
CDMA service in October 1997.
Beginning in 2000, there has been considerable consolidation in the
wireless telecommunications industry resulting in the emergence of stronger
competitors. In 2000, KT Corporation acquired 47.9% of Hansol M.Com's
outstanding shares and renamed the company KT M.Com. KT M.Com merged 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. KT Corporation has a 42.86% interest in KT Freetel as of
March 31, 2003. Such consolidations have created large, well-capitalized
competitors with substantial financial, technical, marketing and other resources
to respond to our business offerings and our competitors have become stronger.
Significant advances in technology are occurring that may affect our
businesses, including the roll-out or the planned roll-out by us and our
competitors of advanced high-speed wireless telecommunications networks based on
CDMA 1xEV/DO technology and other technologies such as W-CDMA and cdma2000. In
41
November 2000, we launched the world's first CDMA 1xRTT network, which enables
us to provide advanced data services. Since then our two principal competitors,
KT Freetel and LG Telecom, have also launched networks using CDMA 1xRTT
technology. We completed the upgrading of our networks to CDMA 1xEV/ DO
technology in 81 cities in Korea at the end of 2002. KT Freetel has expanded its
CDMA 1xEV/DO network to cover 45 cities in Korea as of March 31, 2003. In
addition, we and our competitors also have the rights to acquire licenses to
provide 3G services using W-CDMA technology (in the case of us and KT Freetel)
or cdma2000 technology (in the case of LG Telecom). We believe that the
introduction of these technologies by us and our competitors is likely to have
significant effects on our competitive environment and that our ability to
compete effectively will depend in part upon the relative skill and efficiency
with which we and our competitors are able to implement these new technologies.
We could be harmed if we fail to timely adapt to technological or other changes
in the telecommunications sector. See "Key Information -- Risk
Factors -- Competition may reduce our market share and harm our results of
operation and financial condition".
As of April 30, 2003, according to the MIC, KT Freetel and LG Telecom had
10,426,897 and 4,844,090 subscribers, respectively, representing approximately
31.6% and 14.7%, respectively, of the total number of wireless subscribers in
Korea on such date. As of April 30, 2003, we had 17,721,026 subscribers,
representing a market share of approximately 53.7%.
The entry of new providers of wireless services to the Korean
telecommunications market and subsequent consolidation in the wireless services
market have had and may continue to have a material effect on our existing and
future revenues and profitability. For a description of the risks associated
with the competitive environment in which we operate, see "Key
Information -- Risk Factors -- Competition may reduce our market share and harm
our results of operation and financial condition".
Under current government regulations, as the designated market dominant
service provider for wireless network services, we must obtain prior MIC
approval for a change in our wireless telecommunications service rates, although
our competitors may change their rates at their discretion. The MIC gave new
entrants similar price advantages when DACOM started competing with KT
Corporation in international long distance service in 1991 and domestic long
distance service in 1996. On April 9, 2003, the MIC announced its plan to adopt
a "reserved reporting" system for setting new rates as a measure to relax the
stringent regulation on pricing. Under the "reserved reporting" system, we would
have to report our proposed new rate plan with the MIC in order to change our
rates. Unless the MIC objected to the proposed rate plan within a certain period
of time, such rates would be automatically adopted. We believe that this system
would give us greater flexibility in setting our wireless communications service
rates in response to market conditions in a timely manner, but we can give no
assurance that such a system will be adopted as currently contemplated, or at
all, or that the rates allowed by such a system will allow us to remain
profitable.
For a description of our rates and subscription plans, see "-- Revenues,
Rates and Facility Deposits". In addition, the FTC approved our acquisition of
Shinsegi on two conditions. First, 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 50.0% as of June 30, 2001. In
order to satisfy this condition, we reduced the level of our subscriber
activations, adopted more stringent involuntary deactivation policies beginning
in 2000 and ceased accepting new subscribers from April 1, 2001 to June 30,
2001. As of June 30, 2001, our market share was approximately 49.7%, so we are
no longer subject to this restriction. However, the required reduction in our
market share has had an adverse effect on our results of operations and may have
an on-going negative effect on our competitive position. Second, the FTC imposed
a maximum limit of 1,200,000 on the number of digital handsets we may purchase
annually from our subsidiary, SK Teletech, until December 31, 2005. This
restriction does not apply to W-CDMA handsets.
In February 1997, member governments of the World Trade Organization, or
WTO, reached the WTO Agreement on Basic Telecommunications Services, which
became effective in November 1997. As part of this agreement and to expedite the
opening of the telecommunications market and promote competition, the Government
has amended the Telecommunications Business Law several times to, among other
things,
42
increase the allowed foreign shareholding ownership threshold (up to an
aggregate of 49.0%) and participation in telecommunications service providers,
including us.
While we believe that these measures will enable us to more easily take
advantage of opportunities for investments in overseas telecommunications
projects, they have increased and may in the future increase competition and the
financial and technological resources of our competitors in the domestic market.
LAW AND REGULATION
OVERVIEW
Korea's telecommunications industry is subject to comprehensive regulation
by the MIC, which is responsible for information and telecommunications
policies, radio and broadcasting management, postal services and postal
finances. The MIC regulates and supervises a broad range of communications
issues, including:
- entry into the telecommunications industry;
- scope of services provided by telecommunications service providers;
- allocation of radio spectrum;
- setting of technical standards and promotion of technical
standardization;
- rates, terms and practices of telecommunications service providers;
- customer complaints;
- interconnection and revenue-sharing between telecommunications service
providers;
- disputes between telecommunications service providers;
- research and development budgeting and objectives of telecommunications
service providers; and
- competition among telecommunications service providers.
Telecommunications service providers are currently classified into three
categories: network service providers, value-added service providers, and
specific service providers. We are classified as a network service provider
because we provide telecommunications services with our own telecommunications
networks and related facilities. As a network service provider, we are required
to obtain a license from the MIC for each of the services we provide. Our
licenses permit us to provide cellular services and third generation wireless
services using W-CDMA technology. Our cellular license is valid for an
indefinite term and our W-CDMA license is valid for 15 years starting from 1999.
The MIC may revoke our licenses or suspend any of our businesses if we fail
to comply with its rules and regulations, including the rules restricting
beneficial ownership and control, or the conditions of our licenses. A network
services provider that wants to cease its business or dissolve must obtain MIC
approval.
The MIC has stated that its policy is to promote competition in the Korean
telecommunications market through measures designed to prevent the dominant
service provider in any such market from exercising its market power in such a
way as to prevent the emergence and development of viable competitors. While all
network service providers are subject to MIC regulation, we are subject to
increased regulation because of our position as the dominant wireless
telecommunications services provider in Korea.
RATE REGULATION
Most network service providers must report to the MIC the rates and
contractual terms for each type of service they provide, but generally set rates
at their discretion. However, as the dominant network services provider for
specific services (based on having the largest market share in terms of number
of subscribers and meeting certain revenue thresholds), we must obtain prior
approval of our rates and terms of service from the MIC. In each of the years in
which this requirement has been applicable, the MIC has designated us, for
43
wireless telecommunications service, and KT Corporation, for local telephone
service, as dominant network service providers subject to this approval
requirement. In addition, as a condition to its approval of our acquisition of
Shinsegi, the FTC required that Shinsegi submit its rates and terms to MIC for
approval. As a condition to its approval of SK Telecom's merger with SK IMT, the
MIC required that we submit the rates for our third generation mobile services
using W-CDMA technology to MIC for approval prior to the launch of such
services. The MIC's policy is to approve rates if they are appropriate, fair and
reasonable and if they are calculated in a transparent and appropriate manner.
It may order changes if it deems the rates to be unreasonable or against public
policy. On April 9, 2003, the MIC announced its plan to adopt a "reserved
reporting" system for setting new rates as a measure to relax the stringent
regulation on pricing. Under the "reserved reporting" system, we would have to
report our proposed new rate plan with the MIC in order to change our rates.
Unless the MIC objected to the proposed rate plan within a certain period of
time, such rates would be automatically adopted. Although we believe that this
system would give us greater flexibility in setting our wireless communications
service rates in response to market conditions in a timely manner, we can give
no assurance that such a system will be adopted as currently contemplated, or at
all, or that the rates allowed by such a system will allow us to remain
profitable.
INTERCONNECTION
Dominant network service providers such as ourselves that own essential
infrastructure facilities or that possess a certain market share are required to
provide interconnection of their telecommunications network facilities to other
service providers upon request. The MIC sets and announces the standards for
determining the scope, procedures, compensation and other terms and conditions
of such provision, interconnection or co-use. We have entered into
interconnection agreements with KT Corporation, DACOM, Onse and other network
service providers permitting these entities to interconnect with our network. We
expect that we will be required to enter into additional agreements with new
operators as the MIC grants permits to additional telecommunications service
providers.
NETWORK CO-SHARE
In December 2002, the MIC implemented a network co-share system that
permits the wireless application protocol gateway, or WAP Gateway, of a
fixed-line operator to connect to a wireless network service provider's IWF
(inter-working function) device. IWF is a device that connects cellular network
with an IP (Internet Protocol) network while WAP Gateway converts hypertext
transfer protocol, or HTTP protocol, into WAP protocol. This co-share system
would allow subscribers of a wireless network service provider to have access to
wireless Internet content provided by a fixed-line operator. As of May 2003,
only KT Corporation has connected to our IWF and commenced service, although it
has yet to begin actively promoting its services to our subscribers. In
addition, the MIC has requested that we provide customer billing service to
third-party content providers who are seeking to provide their content directly
to our subscribers without going through our NATE portal. Third-party content
providers have not been able to provide their content service directly to our
subscribers due to the lack of resources for billing users. We believe that such
a co-share system, if widely adopted, will have the effect of giving our users
access to a wide variety of content using their handsets which may in turn
increase revenues attributable to our data services. However, this system could
also place significant competitive pressure on the services available on our
NATE platform.
CONTRIBUTIONS TO FUND FOR DEVELOPMENT OF INFORMATION TELECOMMUNICATIONS
The MIC has the authority to recommend to network service providers that
they provide funds for national research and development of telecommunications
technology and related projects. For 2003, the MIC recommends that we contribute
0.75% of budgeted revenues (calculated pursuant to MIC guidelines that differ
from our accounting practices) to the Fund for Development of Information
Telecommunications operated by the MIC. Although these recommendations are not
mandatory, we have in the past contributed recommended amounts and expect that
we will continue to do so in the future. Our contribution to this fund in 2000
was Won 38.3 billion (including Won 0.6 billion for Shinsegi) based on the MIC
recommendation of 1.5% of MIC-calculated revenues for 2000. Our contribution to
this fund in 2001 was Won 23.0 billion
44
(including nil for Shinsegi) based on the MIC-recommended minimum level of
contribution of 1.0% of MIC-calculated revenues for 2001.
In May 2002, the MIC announced significant changes to the government
contribution system. Starting from 2002, the annual contribution which was set
at 1.0% of total revenues for the previous year was lowered to 0.5% (0.75% for
market dominant service providers like us who are required to provide
interconnection with their telecommunications network) of total revenues for the
previous year, and will be applicable only to those network service providers
who have Won 30 billion in total sales and recorded net profits for the previous
year. Under the policy, the amount of the annual contribution does not need to
exceed the net profit of each company. Our contribution to this fund in 2002 was
Won 58.6 billion based on the new MIC recommendation of 0.75% of MIC-calculated
revenues for 2002.
PARTICIPATION IN UNIVERSAL SERVICE PROVIDER PROGRAM
All telecommunications service providers other than value-added service
providers, specific service providers and regional paging service providers
whose net annual revenue is less than an amount determined by the MIC (currently
set at Won 5 billion) are required to provide "universal" telecommunications
services including local telephone services, local public telephone services,
telecommunications services for remote islands and wireless communication
services for ships and telephone services for the handicapped and the low-
income citizens or contribute toward the supply of such universal services. The
MIC designates universal services and the service provider who is required to
provide each service. Currently, we are required to offer free subscription fee
and 30% discount of our monthly fee for cellular services to the handicapped and
the low-income citizens. The size of a service provider's contribution is based
on its net annual revenue (calculated pursuant to MIC guidelines which differ
from our accounting practices). In 2002, we paid Won 28.9 billion, which was our
estimated contribution amount based on our net annual revenue for our fiscal
year 2001 pursuant to MIC guidelines. We received a refund in the amount of Won
1.8 billion from the MIC after calculating our required contribution amount
based on our net annual revenue for our fiscal year 2001, which effectively
reduced our actual contribution amount to Won 27.1 billion. In 2003, our
estimated contribution amount is Won 90.2 billion for our fiscal year 2002. As a
wireless telecommunications services provider, we are not considered a provider
of universal telecommunications services and do not receive funds for providing
universal service. Other network service providers that do provide universal
services make all or a portion of their "contribution" in the form of expenses
related to the universal services they provide.
FREQUENCY ALLOCATION
The MIC has the discretion to allocate and adjust the frequency band for
each type of service. Upon allocation of new frequency bands or adjustment of
frequency bands, the MIC is required to give a public notice. The MIC also
regulates the frequency to be used by each radio station, including our base
stations, by the terms of its approval for each radio station. All of our
frequency allocations are for an indefinite term. We pay fees to the MIC for our
frequency allocation which are determined based upon our number of subscribers,
frequency usage by our networks and other factors. For 2001, the fee amounted to
Won 78.9 billion. For 2002, the fee amounted to Won 119.2 billion.
In addition, we have paid Won 650 billion of the Won 1.3 trillion cost of
the W-CDMA license in March 2001. We are required to pay the remainder of the
license cost in annual installments for a five-year period from 2007 through
2011. For more information, see note 2(i) of our notes to consolidated financial
statements.
COMPETITION REGULATION
The Korea Communications Commission is charged with ensuring that network
service providers engage in fair competition, and has broad powers to carry out
this goal. If a network service provider is found to be in violation of the fair
competition requirement, the Korea Communications Commission may take corrective
measures it deems necessary, including, but not limited to, the prohibition of
further violation, the amendment to the articles of incorporation or the service
contracts with customers, the execution or performance of, or amendment to, the
interconnection agreements with other network service providers.
45
In addition, we qualify as a market-dominating business entity under the
Fair Trade Act. Accordingly, we are prohibited from engaging in any act of
abuse, such as unreasonably determining, maintaining or altering service rates,
unreasonably controlling the rendering of services, unreasonably interfering
with business activities of other business entities, hindering unfairly the
entry of newcomers or substantially restricting competition to the detriment of
the interests of consumers.
Under the Fair Trade Act, a company that is a member of a large business
group as designated by the FTC, such as ourselves, as a company in the SK Group,
is generally required to limit its total investments in other domestic companies
to 25.0% of its non-consolidated net assets. Investment in companies engaging in
similar business is not included in calculating the 25% limit. The FTC may issue
corrective orders such as disposition of the shares held in excess of the 25.0%
ceiling and the limitation on the voting rights for such shares. SK Telecom's
total investments in other domestic companies (excluding investments in Hanaro
and Powercomm, companies engaging in similar business) amounted to Won 260.2
billion, or 5.3% of our non-consolidated net assets as of March 31, 2003.
NUMBER PORTABILITY
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
subscriber's mobile phone numbers begin with '011' (the former Shinsegi
subscribers use the '017' prefix). Thus, it is not currently possible for our
subscribers to change their wireless phone service to another wireless operator
and keep their same numbers.
In January 2003, the MIC announced its plan to implement number portability
with respect to wireless telecommunications services in Korea. The number
portability system will allow wireless subscribers to switch wireless service
operators while retaining the same mobile phone number. According to the plan
published by the MIC, the number portability will be adopted by SK Telecom
first, 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 can maintain their mobile service identification number
unless and until they switch to a different wireless service provider. See "Key
Information -- Risk Factors -- Our businesses are subject to extensive
government regulation and any change in government policy relating to the
telecommunications industry could have a material adverse effect on our results
of operations and financial condition."
CONTRIBUTION TO 114 DIRECTORY SERVICE
The MIC has been negotiating with network service providers on sharing the
cost of providing 114 directory services through KT Corporation. Prior to 1998,
this cost was shared among service providers through the NTS Participation
Program. The NTS (Non-traffic Sensitive) Participation Program included both the
Universal Service Provider Program and contributions to 114 directory service
before it came to a halt due to disagreements between network service providers
and the MIC. The MIC has determined SK Telecom's share of such cost for the
period between 1998 and 2001 to be Won 40.4 billion, based on the number of
calls made to 114 directory service through its network. KT Freetel and LG
Telecom were charged Won 16.8 billion and Won 6.7 billion, respectively. This
amount is to be paid in monthly installments over a 20-month period.
Contribution to the 114 directory service for 2002 will be determined after
negotiations between service providers and the MIC.
46
FOREIGN OWNERSHIP AND INVESTMENT RESTRICTIONS AND REQUIREMENTS
Because we are a network service provider, foreign governments,
individuals, and entities (including entities where 80% or more of the
outstanding equity is owned by foreigners, or where 15% or more of the
outstanding equity is owned by foreigners and a foreigner is the largest
shareholder) are prohibited from owning more than 49% of our voting stock,
including the ADSs. Recently, in connection with shareholdings of SK Corporation
as described below, the MIC has publicly announced that an entity where its
largest shareholder is a foreigner would be deemed a foreign entity only if such
shareholder owns more than 15.0% of the outstanding equity. If this requirement
is violated, certain of our foreign shareholders, including holders of the ADSs,
will not be permitted to exercise voting rights in excess of the limitation and
the MIC may require other corrective action.
As of May 13, 2003, SK Corporation owns 17,663,127 shares of our common
stock, or approximately 20.8%, of our issued shares. As of April 30, 2003, a
foreign investment fund held a 14.99% stake in SK Corporation, as the largest
shareholder. According to the MIC, upon such foreign investment fund's
acquisition of an additional 0.01% or more stake in SK Corporation, SK
Corporation would be considered a foreign shareholder and its shareholding in SK
Telecom would be included in the calculation of the aggregate foreign
shareholding of SK Telecom. If SK Corporation's shareholding in SK Telecom is
included in the calculation of the aggregate foreign shareholding of SK Telecom,
then the aggregate foreign shareholding in SK Telecom, assuming foreign
ownership level as of May 13, 2003, would reach 61%, exceeding the 49% ceiling.
If the aggregate foreign shareholding in SK Telecom is exceeded, the MIC may
issue a corrective order to SK Telecom and the breaching shareholder, SK
Corporation. Furthermore, SK Corporation may not exercise its voting rights with
respect to the shares held in breach of the 49% ceiling, which may result in a
change in control of us. In addition, the MIC may refuse to grant us licenses or
permits necessary for entering into new telecommunications businesses until the
aggregate foreign shareholding of SK Telecom is reduced to below 49%. See "Key
Information -- Risk Factors -- If SK Corporation breaches the foreign ownership
limitations on SK Telecom, it may result in a change of control of us."
We are required under the Foreign Exchange Transaction Act to file a report
with a designated foreign exchange bank or with the Ministry of Finance and
Economy, or the MOFE, in connection with any issue of foreign currency
denominated securities by us in foreign countries. Issuances of US$30 million or
less require the filing of a report with a designated foreign exchange bank, and
issuances that are over US$30 million require the filing of a report with the
MOFE.
PATENTS AND LICENSED TECHNOLOGY
Access to the latest relevant technology is critical to our ability to
offer the most advanced wireless services and to design and manufacture
competitive products. In addition to active internal and external research and
development efforts as described in "Operating and Financial Review and
Prospects -- Research and Development" below, our success depends in part on our
ability to obtain patents, licenses and other intellectual property rights
covering our products. We own numerous patents and trademarks worldwide, in
addition to applications for patents pending in many countries, including Korea,
Japan, China, the United States, and Europe. Our patents are mainly related to
CDMA technology and wireless Internet applications. Recently, we also acquired a
number of patents related to W-CDMA technology.
We also license a number of patented processes and trademarks under
cross-licensing, technical assistance and other agreements. The most important
agreement is with Qualcomm Inc. and relates mainly to CDMA applications
technology. This agreement generally grants us a non-exclusive license to
manufacture handsets in return for royalty payment or a sub-license to
manufacture and sell certain products both in Korea and overseas during a fixed,
but usually renewable term. We consider our technical assistance and licensing
agreements to be important to our business and believe that we will be able to
renew this agreement on commercially reasonable terms that will not adversely
affect our ability to use the relevant technologies.
We are not currently involved in any material litigation regarding patent
infringement.
47
ORGANIZATIONAL STRUCTURE
We are a member of the SK Group (formerly the Sunkyong Group), whose
members collectively owned in aggregate 26.8% of the shares of our issued and
outstanding common stock as of May 13, 2003. The SK Group is a group of
companies incorporated in Korea with interests in, among other things,
telecommunications, trading, energy, chemicals, engineering and leisure
industries.
SIGNIFICANT SUBSIDIARIES
We currently do not have any significant subsidiaries.
For information regarding our subsidiaries, see note 2(b) of notes to
consolidated statements.
48
PROPERTY, PLANTS AND EQUIPMENT
The following table sets forth certain information concerning our principal
properties:
APPROXIMATE
AREA IN NATURE OF
LOCATION SQUARE FEET PRIMARY USE INTEREST
-------- ----------- ----------------------- ---------
Seoul................................ 396,786 Corporate Headquarters Rental
Seoul................................ 1,095,991 Regional Headquarters Ownership
Seoul................................ 157,348 Customer Service Center Ownership
Taegu................................ 332,060 Regional Headquarters Ownership
Taejon............................... 119,000 Regional Headquarters Ownership
Kwangju.............................. 265,616 Regional Headquarters Ownership
Pusan................................ 373,479 Regional Headquarters Ownership
Sungnam.............................. 482,722 Central research and Ownership
development laboratory
Ichon................................ 277,049 Training Center Ownership
We are also in the process of constructing a new building with an area of
approximately 82,624 square feet for use as our corporate headquarters in which
we expect to have full ownership. We plan to relocate our corporate offices into
the new building upon completion expected in 2004. In addition, we own or lease
various locations for cell sites and switching equipment. We do not anticipate
that we will need a significant number of new cell sites in connection with the
expansion of our networks which is planned for 2003 and we expect to lease or
acquire new sites as needed. We expect that we will need new cell sites in
constructing our W-CDMA network. Our current plan is to share sites with our
existing network and therefore do not at this time expect to have to obtain a
significant number of new cell site locations. We do not anticipate that we will
encounter material difficulties in meeting our future needs for any existing or
prospective leased space for our cell sites. See "-- Business
Overview -- Cellular Services".
We maintain a range of insurance policies to cover our assets and
employees, including our directors and officers. We are insured against business
interruption, fire, lightening, flooding, theft, vandalism, public liability and
certain other risks that may affect our assets and employees. We believe that
the types and amounts of our insurance are in accordance with general business
practices in Korea.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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 Korean GAAP,
which differs in some respects from U.S. GAAP. Note 30 of our notes to
consolidated financial statements provides a description of the significant
differences between Korean GAAP and U.S. GAAP as they relate to us and provides
a reconciliation to U.S. GAAP of our net income and shareholders' equity. In
addition, you should read carefully the section titled "-- Critical Accounting
Policies, Estimates and Judgments" as well as 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 conditions and results of operations.
OVERVIEW
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, 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.
49
The following table sets forth certain revenue information about our
wireless operations during the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------------------
2000(1) 2001(1) 2002
------------ ------------ ------------
(IN BILLIONS OF WON, EXCEPT PERCENTAGES)
CELLULAR REVENUE:
Wireless Services(2).............................. W5,438.7 W6,160.7 W7,579.6
Interconnection................................... 1,312.4 1,339.9 1,043.2
Digital Handset Sales............................. 494.0 702.4 534.0
-------- -------- --------
Total Cellular Revenue............................ 7,245.1 8,203.0 9,156.8
-------- -------- --------
OTHER REVENUE:
Paging Revenue(3)................................. 57.7 8.8 --
International Calling Service(4).................. 58.6 85.9 101.6
Portal Service(5)................................. 15.6 36.1 22.8
Miscellaneous..................................... 46.1 38.1 42.8
-------- -------- --------
Total Other Revenue............................... 178.0 168.9 167.2
-------- -------- --------
TOTAL OPERATING REVENUE............................. W7,423.1 W8,371.9 W9,324.0
======== ======== ========
Cellular Revenue as a percent of Total Revenue.... 97.6% 98.0% 98.2%
Total Operating Revenue Growth.................... 67.1% 12.8% 11.4%
---------------
(1) Includes revenue of Shinsegi from April 1, 2000.
(2) Wireless service revenue includes initial connection fees, monthly access
fees, usage charges, international charges, wireless Internet service fees,
value-added service fees and interest on overdue subscriber accounts (net of
telephone tax).
(3) Prior to March 2001, we also earned revenue from initial connection fees and
monthly access fees, usage charges and value-added service fees paid by our
subscribers for our paging services. In March 2001, we sold our entire
paging business to Real Telecom in exchange for 9.9% of Real Telecom's newly
issued shares and bonds with a principal amount of Won 9.5 billion that can
be converted into an additional 7.8% interest in Real Telecom. Consequently,
the results of the paging business are no longer included in the revenue
from March 2001 and our paging revenue for the year ended December 31, 2001
was negligible.
(4) Provided by our 90.8%-owned subsidiary, SK Telink Co., Ltd.
(5) Portal service revenue attributable to SK Communications.
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
April 30, 2003, we had approximately 17.7 million subscribers, representing a
market share of approximately 53.7%.
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
21, 2002 through December
50
2002) for violating MIC's handset subsidy regulation. KT Freetel and LG Telecom
were also prohibited from signing on new subscribers for 20 days.
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. 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 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 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 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. See "Information on the Company -- Business
Overview -- Law and Regulation -- Rate Regulation" and "Key Information -- Risk
Factors -- We are subject to additional regulation as a result of our market
position, which could harm our ability to compete effectively". Generally, the
rates we charge for our services have been declining. In September 1997 and
April 2000, we implemented revised rate plans which generally offer rates lower
than our previous rates. Effective June 8, 1998, we have been providing a 20%
discount for calls made between our cellular customers. 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 April 30, 2003, our standard
peak usage rate is approximately 11% higher than those charged by our
competitors. We can give no assurance that these rate changes will not
negatively affect our results of operations. For more information about the
rates we charge, see "Information on the Company -- Business
Overview -- Revenues, Rates and Facility Deposits".
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. See "Information on the Company -- Business
Overview -- Interconnection". 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 by between
10.2% and 28.1%, depending on the operators involved. 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
51
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. For more information about our interconnection revenue
and expenses, see "Information on the Company -- Business
Overview -- Interconnection -- Domestic Calls".
The following table sets forth selected information concerning our wireless
telecommunications network during the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------
OTHER DATA 2000 2001 2002(6)
---------- ---------- ---------- ----------
OUTGOING VOICE MINUTES (IN THOUSANDS):(1)
SK Telecom................................................ 20,831,690 24,251,205 37,629,656
Shinsegi.................................................. 3,670,791 5,309,182 --
Combined SK Telecom and Shinsegi.......................... 24,502,480(2) 29,560,387(2) 37,629,656
AVERAGE MONTHLY OUTGOING VOICE MINUTES PER SUBSCRIBER:(3)
SK Telecom................................................ 156 182 191
Shinsegi.................................................. 110 137 --
Combined SK Telecom and Shinsegi.......................... 148(2) 172(2) 191
AVERAGE MONTHLY REVENUE PER SUBSCRIBER:(4)
SK Telecom................................................ W33,628 W37,640 W38,364
Shinsegi.................................................. 28,379 31,898 --
Consolidated SK Telecom and Shinsegi(4)(5)................ 32,906(2) 36,400(2) 38,364
---------------
(1) Does not include minutes of incoming calls or minutes of use relating the
use of text messaging and data services.
(2) Includes Shinsegi from April 1, 2000.
(3) 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 the beginning of the month and at the end of the month,
divided by the number of months in the period.
(4) The 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.
(5) Including interconnection revenue, consolidated average monthly revenue per
subscriber was Won 40,847 for 2000, Won 45,441 for 2001 and Won 43,916 for
2002.
(6) Excludes Shinsegi for 12 days, from January 1, 2002 to January 12, 2002.
Shinsegi merged into SK Telecom on January 13, 2002.
Our average monthly outgoing minutes of voice traffic increased by 3.5% in
2000, 16.2% in 2001 and 29.1% in 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 lower rate
of increase in 2000 is primarily the result of the inclusion of Shinsegi's
subscribers, who averaged less minutes of use than SK Telecom subscribers, from
April 1, 2000.
Our consolidated average monthly revenue per subscriber increased in 2001
by 10.6% to Won 36,400 compared to 2000. Our consolidated average monthly
revenue per subscriber also increased in 2002 to 5.4% to Won 38,364 compared to
2001. These changes reflect 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;
52
- our adoption of more stringent subscriber deactivation policies in 2000,
which we believe positively affected revenue per subscriber since the
policies favored deactivation of low-usage subscribers;
- 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; and
- decreases in the rates we charge subscribers to use our wireless
services.
We cannot assure you that the increases in our average monthly revenue per
subscriber experienced in 2001 and 2002 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. Operating income represented 20.2% in 2000,
27.8% in 2001 and 30.0% in 2002. In 2001, our operating margin increased,
primarily due to an increase in the number of our subscribers and the decrease
in commission payments to authorized dealers as a result of the MIC's decision
to prohibit subsidies on handsets beginning June 1, 2000. In 2002, our operating
margin increased, primarily due to an increase in the number of our subscribers
and decreases in the number of leased lines and depreciation expenses due to the
write-off of Shinsegi's unused network equipment. We cannot assure you that our
operating margin will not decrease in future periods.
Acquisition of Shinsegi. On April 27, 2000, we completed the acquisition
of a 51.2% interest in Shinsegi. In subsequent transactions between March and
September 2001, we increased our interest to 70.4%. The results of operations of
Shinsegi have been consolidated with our results of operations beginning in
April 2000. See note 3 of our notes to consolidated financial statements.
Shinsegi accounted for 12.8% of our consolidated assets and 22.6% of our
consolidated revenue as of and for the year ended December 31, 2001. In January
2002, we acquired the remaining 29.6% interest in Shinsegi which we did not yet
own, and merged Shinsegi into SK Telecom on January 13, 2002.
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.
See "Key Information -- Risk Factors -- Competition may reduce our market share
and harm our results of operation and financial condition".
53
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 YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2000(1) 2001(1) 2002
----------------- ----------------- -----------------
(IN BILLIONS OF WON, EXCEPT PERCENTAGES)
Operating Revenue......... W7,423.1 100.00% W8,371.9 100.00% W9,324.0 100.00%
Operating Expenses........ 5,927.6 79.85 6,047.4 72.23 6,526.4 70.00
-------- ------ -------- ------ -------- ------
Operating Income.......... 1,495.5 20.15 2,324.5 27.77 2,797.6 30.00
Other Income.............. 221.6 2.99 231.2 2.76 259.7 2.79
Other Expenses............ 429.3 5.78 579.0 6.92 838.5 8.99
-------- ------ -------- ------ -------- ------
Income Before Income Taxes
and Minority Interest... 1,287.8 17.35 1,976.7 23.61 2,218.8 23.80
Income Taxes.............. 367.3 4.95 850.3 10.16 698.5 7.49
Minority Interest......... 51.7 0.70 19.6 0.23 (33.1) (0.35)
-------- ------ -------- ------ -------- ------
Net Income................ W 972.3 13.10% W1,146.0 13.69% W1,487.2 15.95%
======== ====== ======== ====== ======== ======
Depreciation and
Amortization............ W1,456.4 19.62% W1,759.7 21.02% W1,543.3 16.55%
---------------
(1) Information for the year ended December 31, 2000 includes information for
the nine months ended December 31, 2000 for Shinsegi; information for the
year ended December 31, 2001 includes information for the year ended
December 31, 2001 for Shinsegi.
2002 COMPARED TO 2001
Operating Revenue. Our operating revenue increased by 11.4% to Won 9,324.0
billion in 2002 from Won 8,371.9 billion in 2001, reflecting a 10.4% increase in
our cellular revenue to Won 9,156.8 billion in 2002 from Won 8,203.0 billion in
2001, which was partially offset by a 22.1% decrease in interconnection revenue.
The increase in our cellular revenue was due primarily to increases in the
number of our wireless subscribers and our consolidated average monthly revenue
per subscriber. The number of our subscribers increased to approximately 17.2
million as of December 31, 2002 from approximately 15.2 million as of December
31, 2001. Wireless Internet Service sales increased by 183.3% to Won 732.8
billion in 2002 from Won 258.7 billion in 2001, representing 4.5% of our
cellular revenue, primarily due to the increased number of wireless
Internet-enabled handset holders.
Our consolidated average monthly revenue per subscriber (excluding
interconnection revenue) increased by 5.4% to Won 38,364 in 2002 (excluding 12
days attributable to Shinsegi) compared to Won 36,400 in 2001. The increase in
consolidated average monthly revenue per subscriber is principally the result of
increases in wireless Internet average monthly revenue per subscriber and
average monthly revenue per subscriber from value-added service, which was
partially offset by the reduction in tariffs by 7.3% (based on the reduction in
our standard rate plan) from January 2002.
Interconnection revenue decreased by 22.1% to Won 1,043.2 billion in 2002
compared to Won 1,339.9 billion in 2001. The decrease was the result of lower
interconnection rates in 2002, which was only partially offset by higher
subscriber numbers and usage.
Operating Income. Our operating income increased by 20.4% to Won 2,797.6
billion in 2002 from Won 2,324.5 billion.
Our operating income increased at a faster rate than our operating revenue
principally because we were able to successfully limit a corresponding increase
in our operating expenses. Operating expenses increased by 7.9% to Won 6,526.4
billion in 2002 from Won 6,047.4 billion in 2001. Increases in labor expenses,
commissions, network interconnection expenses and advertising expenses more than
offset decreases in depreciation, leased line expenses, cost of goods and
materials sold and miscellaneous expenses.
54
Commissions paid to our authorized dealers increased by 39.9% to Won
1,964.8 billion in 2002 compared to Won 1,404.1 billion in 2001, primarily as a
result of an increase in new subscribers by 49.2% and in average subscribers by
17.6% during the period. In addition, commissions paid to our authorized dealers
for the fourth quarter of 2002 were higher as a result of our aggressive
marketing activities to retain our existing customers during the 30-day business
suspension period (from November 21, 2002 to December 20, 2002) imposed on the
Company by MIC for violating its handset subsidy regulation and to maintain our
market leadership in 2G and 2.5G service as well as 3G service going forward.
Cost of goods and materials sold decreased by 20.6% to Won 509.1 billion in
2002 compared to Won 641.1 billion in 2001, primarily as a result of the
exclusion of handset sales, which were included in Shinsegi's operating revenues
and cost of goods and materials sold in 2001, from our cost of goods and
materials sold in 2002 due to the Shinsegi merger.
Advertising expenses increased by 42.0% to Won 448.8 billion in 2002
compared to Won 316.1 billion in 2001. We increased advertising expenses as a
result of our promotion of new services and the marketing activities related to
the World Cup events in Korea. Advertising expenses for the first half of 2001
also were unusually low as a result of our efforts to satisfy the FTC's
condition to our acquisition of Shinsegi that our wireless market share be less
than 50.0% as of June 30, 2001. In addition, advertising expenses for the fourth
quarter of 2002 were higher as a result of our aggressive marketing activities
to retain our existing customers during the 30-day business suspension period
and to maintain our market leadership in 2G and 2.5G service as well as 3G
service going forward.
Depreciation expense decreased by 7.7% to Won 1,435.0 billion in 2002
compared to Won 1,555.1 billion in 2001. The decrease in depreciation expenses
was primarily due to the write-off of Shinsegi's unused network equipment which
was partially offset by the depreciation attributable to expansion of our CDMA
1xRTT network.
Interconnection expense increased by 12.6% to Won 752.1 billion in 2002
compared to Won 667.7 billion in 2001, primarily due to higher subscriber
numbers and an increase in the mandated payment to Universal Service Obligation
fund in the amount of 87.4 billion, which were only partially offset by a
decrease in the level of interconnection fees that we must pay to other
operators for calls using their networks.
Leased line expenses decreased by 8.2% to Won 280.1 billion in 2002
compared to Won 305.2 billion in 2001, primarily due to our efficient use of
leased lines network resulting from the integration of Shinsegi's network into
our network, which was partially offset by an increase in wireless traffic.
Labor expenses increased by 17.7% to Won 318.3 billion in 2002 compared to
Won 270.4 billion in 2001. The increase was primarily due to higher wage levels
and an increase in the number of our employees.
Miscellaneous operating expenses decreased by 7.9% to Won 818.1 billion in
2002 compared to Won 887.8 billion in 2001.
Other Income. Other income, consisting primarily of interest, commission
income from handset manufacturers and Internet content providers, foreign
exchange and translation gains, gains on disposal of property and equipment,
equity in the earnings of affiliates and miscellaneous other income, increased
by 12.3% to Won 259.7 billion in 2002 compared to Won 231.2 billion in 2001.
Other income increased primarily due to significant increases in commission
income and foreign exchange and translation gains which were partially offset by
decreases in interest income and miscellaneous other income.
Other Expenses. Other expenses, consisting primarily of interest and
discounts, donations, foreign exchange and translation losses, loss on disposal
and impairment of property and equipment, loss on disposal of investment assets,
loss on impairment of investment securities and miscellaneous other expenses,
increased by 44.8% to Won 838.5 billion in 2002 compared to Won 579.1 billion in
2001. Other expenses increased primarily due to increases in loss on disposal
and impairment of property and equipment, loss on impairment of investment
securities, interest and discounts and loss on disposal of investment securities
which were partially offset by decreases in donations, foreign exchange and
translation losses and miscellaneous other expenses. As a percentage of
operating revenue, other expenses increased to 9.0% in 2002 from 6.9% in 2001.
55
Loss on disposal of property and equipment increased by more than 42% to
Won 212.1 billion in 2002 compared to Won 41.8 billion in 2001, primarily due to
loss on disposal of Shinsegi's unused network equipment.
Loss on impairment of investment securities increased by 1,987.9% to Won
68.9 billion in 2002 compared to Won 3.3 billion primarily due to our share
exchange transaction with KT Corporation.
Interest and discounts increased by 13.6% to Won 311.1 billion in 2002
compared to Won 273.9 billion in 2001, principally reflecting an increase in
bonds payable.
Loss on disposal of investment assets increased by 191.5% to Won 51.6
billion in 2002 compared to Won 17.7 billion primarily due to our share exchange
transaction with KT Corporation.
Income Tax. Our statutory income tax rate, including resident surtax,
decreased to 29.7% in 2002. Our effective tax rate in 2002 decreased to 31.5%
from an effective rate of 43.0% in 2001. The decrease in our effective tax rate
as compared to 2001 was primarily due to the recording, in 2001, of a valuation
allowance of Won 303.8 billion on deferred tax assets due to the Shinsegi
merger. See note 18 of our notes to consolidated financial statements.
Net Income. Principally as a result of the factors discussed above, our
net income increased by 34.1% to Won 1,487.2 billion in 2002 compared to Won
1,146.0 billion in 2001, increasing as a percentage of operating revenue to
15.9% in 2002 compared to 13.7% in 2001.
2001 COMPARED TO 2000
Operating Revenue. Our operating revenue increased by 12.8% to Won 8,371.9
billion in 2001 (including Won 1,892.7 billion of revenue attributable to
Shinsegi) from Won 7,423.1 billion in 2000 (including Won 1,431.9 billion of
revenue attributable to Shinsegi from April 1, 2000), reflecting a 13.2% growth
in our cellular revenue. The increase in our cellular revenue was due primarily
to the inclusion of Shinsegi's results for the full year in 2001 and an increase
in consolidated average monthly revenue per subscriber which more than offset
the effect of a decrease in the number of our wireless subscribers in the first
half of 2001.
Our consolidated average monthly revenue per subscriber excluding
interconnection revenue increased by 10.6% to Won 36,400 in 2001 compared to Won
32,906 in 2000. On an unconsolidated basis, SK Telecom's average monthly revenue
per subscriber increased by 11.9% to Won 37,640 in 2001 compared to Won 33,628
in 2000. Shinsegi's average monthly revenue per subscriber increased by 12.4% to
Won 31,898 in 2001 compared to Won 28,379 in 2000. The increase in consolidated
monthly revenue per subscriber is principally the result of traffic substitution
from fixed-line telecommunications services, the deactivation of some lower-
usage subscribers following our introduction of more stringent involuntary
subscriber deactivation policies in 2000 and increased use of our wireless data
services, which was partially offset by the inclusion of Shinsegi's revenue and
subscribers from April 1, 2000.
Our subscribers numbered approximately 14.5 million at the end of 2000
(including 3.5 million Shinsegi subscribers). This number decreased to
approximately 14.0 million as of June 30, 2001, primarily as a result of actions
we took to satisfy the FTC's condition to our acquisition of Shinsegi that our
wireless market share be less than 50.0% as of that date. Since we satisfied the
FTC's condition, we have been seeking to increase our subscriber base and, as of
December 31, 2001, the number of our subscribers was approximately 15.2 million.
Operating Income. Our operating income increased by 55.4% to Won 2,324.5
billion in 2001 (including Won 172.8 billion of operating income attributable to
Shinsegi) from Won 1,495.5 billion (taking into account Won 163.9 billion of
operating losses attributable to Shinsegi from April 1, 2000). Shinsegi's
operating expenses include amortization of goodwill relating to SK Telecom's
acquisition of Shinsegi amounting to Won 128.7 billion in 2001 and Won 96.5
billion for the period from April 1, 2000 through December 31, 2000.
Our operating income increased at a faster rate than our operating revenue
principally because we were able to successfully limit the increase in our
operating expenses. Operating expenses increased by 2.0% to Won 6,047.4 billion
in 2001 (including Won 1,719.9 billion of operating expenses attributable to
Shinsegi)
56
from Won 5,927.6 billion in 2000 (including Won 1,595.9 billion of operating
expenses attributable to Shinsegi from April 1, 2000). Compared to the prior
period, increases in labor expenses, depreciation, leased line expenses,
advertising expenses, cost of goods and materials sold and miscellaneous
expenses more than offset decreases in commissions and network interconnection
expenses.
Commissions paid to our authorized dealers decreased by 25.7% to Won
1,404.1 billion in 2001 (including Won 282.3 billion attributable to Shinsegi)
compared to Won 1,889.3 billion in 2000 (including Won 353.5 billion
attributable to Shinsegi from April 1, 2000), primarily as a result of a
decrease in handset sales due to our decision not to accept new subscribers
between April 1 and June 30, 2001 and the elimination of subsidies for digital
handsets beginning June 1, 2000.
Cost of goods sold increased by 39.7% to Won 641.1 billion in 2001
(including Won 347.9 billion attributable to Shinsegi) compared to Won 458.8
billion in 2000 (including Won 244.8 billion attributable to Shinsegi from April
1, 2000), primarily as a result of an increase in wireless handset sales.
Advertising expenses increased by 9.5% to Won 316.1 billion in 2001
(including Won 36.1 billion attributable to Shinsegi) compared to Won 288.6
billion in 2000 (including Won 57.6 billion attributable to Shinsegi from April
1, 2000). We increased advertising expenses as a result of our efforts to
increase our subscriber base after we had satisfied the FTC's condition to our
acquisition of Shinsegi that our wireless market share be less than 50.0% as of
June 30, 2001.
Depreciation expenses increased by 16.3% to Won 1,555.1 billion in 2001
(including Won 446.4 billion attributable to Shinsegi) compared to Won 1,336.6
billion in 2000 (including Won 423.2 billion attributable to Shinsegi from April
1, 2000). The increase in depreciation expenses was primarily due to the
Shinsegi acquisition and expansion of our CDMA 1xRTT network.
Interconnection expenses decreased by 6.0% to Won 667.7 billion in 2001
(including Won 136.4 billion attributable to Shinsegi) compared to Won 710.4
billion in 2000 (including Won 150.7 billion attributable to Shinsegi from April
1, 2000), primarily due to a reduction in wireless-to- fixed-line
interconnection charges.
Leased line expenses increased by 0.2% to Won 305.2 billion in 2001
(including Won 69.1 billion attributable to Shinsegi) compared to Won 305.7
billion in 2000 (including Won 87.3 billion attributable to Shinsegi from April
1, 2000), primarily due to the Shinsegi acquisition and an increase in our
network requirements for leased lines principally as a result of increased use
of our data services.
Labor expenses increased by 36.0% to Won 270.4 billion in 2001 (including
Won 59.1 billion attributable to Shinsegi) compared to Won 198.9 billion in 2000
(including Won 35.2 billion attributable to Shinsegi from April 1, 2000). The
increase was primarily due to higher wage levels and the inclusion of Shinsegi's
labor expense for the full period in 2001, which more than offset a reduction in
the number of our employees.
Miscellaneous operating expenses increased by 20.1% to Won 887.8 billion in
2001 (including Won 214.0 billion attributable to Shinsegi) compared to Won
739.3 billion in 2000 (including Won 147.0 billion attributable to Shinsegi from
April 1, 2000), primarily due to our acquisition of Shinsegi and increased
information technology outsourcing expenses.
Other Income. Other income, consisting primarily of interest, commissions,
foreign exchange and translation gains, gains on disposal of property and
equipment, equity in the earnings of affiliates and miscellaneous income,
increased by 4.3% to Won 231.2 billion in 2001 (including Won 58.9 billion
attributable to Shinsegi) compared to Won 221.6 billion in 2000 (including Won
29.1 billion attributable to Shinsegi from April 1, 2000). Other income
increased primarily due to significant increases in interest income and foreign
exchange and translation gains which were partially offset by decreases in
commissions and miscellaneous other income.
Other Expenses. Other expenses, consisting primarily of interest and
discounts, donations, foreign exchange and translation losses, loss on disposal
of property and equipment, loss on valuation of investment securities, equity in
the losses of affiliates and miscellaneous expenses, increased by 34.9% to Won
579.0 billion in 2001 (including Won 181.9 billion attributable to Shinsegi)
compared to Won 429.3 billion in 2000 (including Won 132.5 billion attributable
to Shinsegi from April 1, 2000). Other
57
expenses increased primarily due to increases in interest and discounts, higher
levels of donations in 2001, loss on disposal of property and equipment and
miscellaneous expense. As a percentage of operating revenue, other expenses
increased to 6.9% in 2001 from 5.8% in 2000.
Interest and discounts increased by 28.4% to Won 273.9 billion in 2001
(including Won 120.6 billion attributable to Shinsegi) compared to Won 213.4
billion in 2000 (including Won 101.5 billion attributable to Shinsegi from April
1, 2000), principally reflecting the Shinsegi acquisition.
Donations in 2001 increased by 77.0% to Won 148.4 billion in 2001
(including Won 13.6 billion attributable to Shinsegi) compared to Won 83.8
billion in 2000 (including Won 1.3 billion attributable to Shinsegi from April
1, 2000), primarily due to increased donations to research institutes, schools,
scholarships funds and employee benefit funds.
Loss on disposal of property and equipment increased by 130.9% to Won 41.8
billion in 2001 (including Won 13.6 billion attributable to Shinsegi) compared
to Won 18.1 billion in 2000 (including Won 0.4 billion attributable to Shinsegi
from April 1, 2000), primarily due to loss on disposal of our paging business
and loss on disposal of certain obsolete network equipment.
Miscellaneous expense increased by 94.8% to Won 86.7 billion in 2001
(including Won 26.7 billion attributable to Shinsegi) compared to Won 44.5
billion in 2000 (including Won 2.2 billion attributable to Shinsegi from April
1, 2000), primarily due to an increase in provision for doubtful accounts
related to accounts receivable -- other and loss on disposal of investment
securities and other assets. The provision for doubtful accounts related to
accounts receivable -- other increased to Won 48.7 billion in 2001 from Won 33.0
billion in 2000. The increase is primarily due to the fact that we provided
provision for the accounts receivable -- other, amounting to Won 19.7 billion,
due from a company that is having financial difficulties. Accounts
receivable -- other relates to the disposal of our analog wireless
telecommunication equipment. The loss on disposal of investment securities and
other assets increased to Won 17.7 billion in 2001 from Won 1.8 billion in 2000.
The increase is principally due to losses in 2001 on the disposal of common
stock of Hanaro Telecom, Inc. amounting to Won 6.7 billion and on the disposal
of a golf club membership amounting to Won 9.3 billion.
Income Tax. Our statutory income tax rate, including resident surtax,
remained at 30.8% in 2001. Our effective tax rate in 2001 increased to 43.0%
from an effective rate of 28.5% in 2000. The difference between the statutory
rate and our effective tax rate in 2001 and the increase in our effective tax
rate as compared to 2000 was primarily due to an increase of Won 311.6 billion
in the valuation allowance for deferred tax assets as a result of our decision
to merge Shinsegi into SK Telecom. See note 18 of our notes to consolidated
financial statements.
Net Income. Principally as a result of the factors discussed above, our
net income increased by 17.9% to Won 1,146.0 billion in 2001 (taking into
account net losses of Won 113.2 billion attributable to Shinsegi) compared to
Won 972.3 billion in 2000 (taking into account net losses of Won 162.7 billion
attributable to Shinsegi from April 1, 2000), increasing as a percentage of
operating revenue to 13.7% in 2001 compared to 13.1% in 2000.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
We had a working capital (current assets minus current liabilities) deficit
of Won 374.6 billion as of December 31, 2000, a working capital surplus of Won
668.2 billion as of December 31, 2001 and a working capital deficit of Won 259.9
billion as of December 31, 2002.
We had cash, cash equivalents, short-term financial instruments and
marketable securities of Won 1,375.6 billion as of December 31, 2000, Won
1,935.7 billion as of December 31, 2001 and Won 1,621.2 billion as of December
31, 2002. We had outstanding short-term borrowings of Won 210.0 billion as of
December 31, 2000, Won 1,167.3 billion as of December 31, 2001 and Won 687.3
billion as of
58
December 31, 2002. Our short-term borrowings increased significantly in 2001,
principally as a result of our funding needs for treasury stock repurchases and
capitalization of SK IMT. As of December 31, 2002, we had availability under
unused credit lines of approximately Won 1,147.4 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.
Since the beginning of 2000, our principal sources of funds have been
operating cash flow and increase in debt. Cash flow provided by operations was
Won 3,043.5 billion in 2000, Won 2,423.9 billion in 2001 and Won 4,267.8 billion
in 2002. Depreciation and amortization were Won 1,456.4 billion in 2000, Won
1,759.7 billion in 2001 and Won 1,543.3 billion in 2002.
We had total long-term debt (excluding current portion and facility
deposits) of Won 1,566.8 billion as of December 31, 2000 and Won 2,695.3 billion
as of December 31, 2001. Our long-term debt increased in 2001 primarily due to
our acquisition of Shinsegi and costs related to obtaining a license for and
investments relating to SK IMT's planned W-CDMA network. W-CDMA is a high-speed
wireless communication technology that we believe will allow us to offer even
more sophisticated wireless data transmission services at faster speeds than our
current networks. As of December 31, 2002, we had total long-term debt
(excluding current portion and facility deposits) outstanding of Won 2,918.9
billion. Our long-term debt included bonds in the amount of Won 2,908.5 billion,
obligation under capital lease of Won 0.1 billion and bank and institutional
loans in the amount of Won 10.3 billion. For a description of our long-term
liabilities, see notes 2(r), 8, 9, 10, 11 and 12 of our notes to consolidated
financial statements.
As of December 31, 2002, substantially all of our foreign
currency-denominated long-term debt, which amounted to approximately 7.3% 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 foreign currency-denominated debt.
In addition, in May 2002, we issued Won 500.0 billion principal amount of
unsecured and unguaranteed Won-denominated bonds. These bonds mature in 2005 and
have an annual interest rate of 6%. We used the net proceeds from the sale of
these bonds to repay maturing long-term indebtedness.
We also have long-term liabilities in respect of facility deposits received
from subscribers, which stood at Won 61.8 billion at December 31, 2000, Won 56.5
billion at December 31, 2001 and Won 46.9 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. See "Information on
the Company -- Business Overview -- Revenues, Rates and Facility Deposits".
We raised Won 1,588.6 billion in 1999 through the issuance of shares in a
rights offering. On April 27, 2000, we issued 5,794,920 shares of our common
stock in connection with our acquisition of a 27.7% equity interest in Shinsegi
from POSCO (formerly known as Pohang Iron & Steel Co., Ltd.).
In June 2002 and December 2002, we sold Won 631.4 billion and Won 650.6
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 580.0 billion and
Won 610.0 billion, respectively, a portion of which we used to repay short-term
debt.
59
CAPITAL REQUIREMENTS AND RESOURCES
The following table sets forth our actual capital expenditures for 2000,
2001 and 2002 as well as our currently planned capital expenditures for 2003:
YEAR ENDED DECEMBER 31,
---------------------------------
2000 2001 2002 2003
------ ------ ------ ------
(IN BILLIONS OF WON)
CDMA Network................................... W1,254 W 185 W 175 W 140
CDMA 1xRTT Network(1).......................... 402 601 1,186 710
Wireless Data(2)............................... 19 64 221 210
W-CDMA(3)...................................... 23 40 15 250
Other(4)....................................... 543 492 428 741
------ ------ ------ ------
Total........................................ W2,241 W1,382 W2,025 W2,021
====== ====== ====== ======
---------------
(1) Includes upgrades to CDMA 1xEV/DO Network technology which were Won 200
billion for 2002 and are estimated at Won 30 billion for 2003.
(2) Consists principally of equipment necessary for the provision of data
services.
(3) 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.
(4) Includes investments in Internet-related businesses, real estate and
information technology systems. Also includes actual capital expenditures of
our consolidated subsidiaries which were Won 406 billion, Won 12 billion and
Won 61 billion for 2000, 2001 and 2002, respectively, and are estimated at
Won 71 billion for 2003.
Our capital expenditures in 2000 and 2001 were Won 2,241 billion and
Won1,382 billion, respectively, primarily for the construction and expansion of
our CDMA 1xRTT network and the expansion of SK Telecom's CDMA network. Our
actual capital expenditures in 2002 were Won 2,025 billion, primarily for the
expansion and upgrading of our CDMA 1xRTT network and for the development and
introduction of new 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 roll-out of our W-CDMA network. We may also
make additional capital expenditure investments if the right opportunities
arise, including investing in a satellite-based digital multimedia broadcasting
(DMB) business. 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. 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. See "Key
Information -- Risk Factors -- Implementation of W-CDMA technology will require
significant capital and other expenditures which we may not recoup."
60
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 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.
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 in order to maximize our shareholders' value and
3,809,288 shares were designated as treasury stock for use in any future mergers
and acquisitions transactions and strategic alliances or 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. See "Key
Information -- Risk Factors -- Sales of our Shares by KT Corporation, companies
in the SK Group, POSCO and/or other large shareholders may adversely affect the
prices of our common stock and the ADSs.
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.
As of December 31, 2002, our principal repayment obligations with respect
to long-term borrowings, bonds and obligations under capital leases outstanding
were as follows for the periods indicated:
YEAR ENDING DECEMBER 31, TOTAL
------------------------ --------------------
(IN BILLIONS OF WON)
2003........................................................ W 925.9
2004........................................................ 1,368.9
2005........................................................ 501.6
After 2005.................................................. 1,100.0
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) equaled 1.6% in 2000, 1.8%
in 2001 and 2.7% in 2002, respectively, of operating revenue. See "-- Research
and Development".
We anticipate that capital expenditures, repayment of outstanding debt and
research and development expenditures will represent our most significant use of
funds in 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
SK IMT's planned construction of the W-CDMA network. We believe that these
sources will be sufficient to fund our planned capital expenditures for 2003.
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.
61
No commercial bank in Korea may extend credits (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 credits 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 13,000 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 from Won 61.1 billion as
of December 31, 2000 to Won 46.9 billion as of December 31, 2002. We do not
expect to have a significant amount of facility deposits available for capital
expenditures in the future.
On April 27, 2001, in accordance with the approval of our board of
directors, we announced a treasury stock purchase program to acquire 4% of our
total outstanding common stock during the period from May 2, 2001 to June 28,
2001 in order to stabilize our stock price. Pursuant to this program, we
acquired an aggregate of 3,566,100 shares of our common stock in 2001 for an
aggregate of purchase price of Won 789.7 billion. We acquired these shares at
market prices on different dates and hold them as treasury stock.
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.
The total accrued and unpaid retirement and severance benefits for all of
our employees of Won 48.5 billion was reflected in our consolidated financial
statements as a liability. As of December 31, 2002, some portion of our
retirement and severance liabilities, totaling Won 120.4 billion, were funded.
See "Directors, Senior Management and Employees -- Employees" and note 2(k) of
our notes to consolidated financial statements.
Dividends approved by shareholders amounted to Won 15.4 billion, Won 48.1
billion and Won 57.3 billion, respectively, in 2000, 2001 and 2002.
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 swap or derivative transactions outstanding. We may
consider in the future entering into such transactions solely for hedging
purposes.
62
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following summarizes our contractual cash obligations at December 31,
2002, 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........................................... 3,875.2 910.0 1,860.2 1,105.0 --
Long-term Borrowings............................ 24.3 14.0 10.3 -- --
Capital lease Obligations....................... 2.1 2.0 0.1 -- --
Operating Leases................................ 2.5 2.2 0.3 -- --
Purchase Obligations(1)......................... 129.9 129.9 -- -- --
Other Long-term Payables(2)..................... 650.0 -- -- 90.0 560.0
------- ------- ------- ------- -----
Total Contractual Cash Obligations.............. 4,684.0 1,058.1 1,870.9 1,195.0 560.0
======= ======= ======= ======= =====
---------------
(1) Related to the construction of our new headquarters. See note 23 of our
notes to consolidated financial statements.
(2) 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
December 31, 2002, 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 5
OTHER COMMERCIAL COMMITMENTS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
---------------------------- ------- --------- --------- --------- -------
(IN BILLIONS OF WON)
Lines of Credit................................. 1,311.5 1,311.5 -- -- --
Standby Letters of Credit....................... -- -- -- -- --
Guarantees...................................... -- -- -- -- --
Standby Repurchase Obligation................... -- -- -- -- --
Other Commercial Commitments.................... -- -- -- -- --
------- ------- -- -- --
Total Commercial Commitments.................... 1,311.5 1,311.5 -- -- --
======= ======= == == ==
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 2.3% in
2000, 4.1% in 2001 and 2.7% in 2002. 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 in 2000 under U.S. GAAP is lower than under Korean GAAP by
Won 76.8 billion, primarily due to differences in the treatment of deferred
income taxes and non-refundable activation fees. Our net income in 2001 under
U.S. GAAP is lower than under Korean GAAP by Won 34.5 billion, primarily due to
differences in the treatment of deferred charges, intangible assets and
nonrefundable activation fees. Our net income in 2002 under U.S. GAAP is lower
than under Korean GAAP by Won 186.0 billion, primarily due to differences in the
treatment of nonrefundable activation fees and loss on impairment of investment
securities which were partially offset by non-amortization of goodwill under
U.S. GAAP. Our losses on impairment of investment securities for the year ended
December 31, 2002 were higher by Won 252.0 billion under U.S. GAAP due to
differences in the treatment of write-down for declines of fair value. Such
write-
63
downs were made in connection with securities held in Powercomm and Hanaro. See
note 4 of our notes to consolidated financial statements.
Our shareholders' equity at December 31, 2000 under U.S. GAAP is lower than
under Korean GAAP by Won 24.7 billion primarily due to the differing treatment
of goodwill relating to the acquisition of Shinsegi. Our shareholders' equity at
December 31, 2001 under U.S. GAAP is lower than under Korean GAAP by Won 329.2
billion primarily due to the differing treatment of minority interest in equity
of consolidated affiliates and non-refundable activation fees, which were
partially offset by differences in intangible assets. Our shareholders' equity
at December 31, 2002 under U.S. GAAP is higher than under Korean GAAP by Won
124.3 billion primarily due to the differing treatment of loss on impairment of
investment securities, minority interest in equity of consolidated affiliates
and cancellation of amortization of good will.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
Our consolidated financial statements are prepared in accordance with
Korean GAAP. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses as well as the disclosure of contingent assets and
liabilities. We continually evaluate our estimates and judgments including those
related to revenue recognition, allowances for doubtful accounts, inventories,
useful lives of property and equipment, investments, employee stock option
compensation plans and income taxes. We base our estimates and judgments on
historical experience and other factors that are believed to be reasonable under
the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. We also provide a summary of significant
differences between accounting principles followed by us and our subsidiaries
and U.S. GAAP. We believe that of our significant accounting policies, the
following may involve a higher degree of judgment or complexity:
REVENUE RECOGNITION
Our revenues are principally derived from telecommunication service revenue
and wireless handset 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 and non-
refundable activation fees are recognized at the time services are rendered.
Our subsidiaries also sell wireless handsets to customers and such sales
are recognized at the time products are delivered.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
An allowance for doubtful account is provided based on a review of the
status of individual receivable accounts at end of the year. We maintain
allowances for doubtful accounts for estimated losses that result from the
inability of our customers to make required payments. We base our allowances on
the likelihood of recoverability of accounts receivable based on past experience
and taking into account current collection trends that are expected to continue.
If economic or specific industry trends worsen beyond our estimates, we increase
our allowances for doubtful accounts by recording additional expenses.
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.
ESTIMATED USEFUL LIVES AND IMPAIRMENT OF LONG-LIVED ASSETS
We estimate the useful lives of long-lived assets in order to determine the
amount of depreciation and amortization expense to be recorded during any
reporting period. The useful lives are estimated at the time the asset is
acquired and are based on historical experience with similar assets as well as
taking into account anticipated technological or other changes. If technological
changes were to occur more rapidly than
64
anticipated or in a different form than anticipated, the useful lives assigned
to these assets may need to be shortened, resulting in the recognition of
increased depreciation and amortization expense in future periods.
Alternatively, these technological changes could result in the recognition of an
impairment charge to reflect the write-down in value of the asset. We review
these types of assets for impairment annually, or when events or circumstances
indicate that the carrying amount may not be recoverable over the remaining
lives of the assets. In assessing impairments, we use cash flows that take into
account management's estimates of future operations.
IMPAIRMENT OF INVESTMENT SECURITIES
When the fair value of a listed equity security or the net equity value of
an unlisted equity security held for Investment (excluding those of affiliates
and subsidiaries) declines compared to acquisition cost and is not expected to
recover (impaired investment security), the value of the equity security is
adjusted to its fair value or net asset value, with the valuation loss charged
to current operations. When the fair value of a held-to-maturity or an
available-for-sale investment debt security declines compared to the acquisition
cost and is not expected to recover (impaired investment security), the carrying
value of the debt security is adjusted to its fair value with the resulting
valuation loss charged to current operations.
As part of this review, the investee's operating results, net asset value
and future performance forecasts as well as general market conditions are taken
into consideration. If we believe, based on this review, that the market value
of an equity security or a debt security may realistically be expected to
recover, the loss will continue to be classified as temporary. If economies or
specific industry trends worsen beyond our estimates, valuation losses
previously determined to be recoverable may need to be charged as an impairment
loss in current operations.
Significant management judgment is involved in the evaluation of declines
in value of individual investments. The estimates and assumptions used by
management to evaluate declines in value can be impacted by many factors, such
as the financial condition, earnings capacity and near-term prospects of the
company in which we have invested and, for publicly-traded securities, the
length of time and the extent to which fair value has been less than cost. The
evaluation of these investments is also subject to the overall condition of the
economy and its impact on the capital markets.
EMPLOYEE STOCK OPTION COMPENSATION PLAN
We adopted the fair value based method of accounting for the employee stock
option compensation plan. The plan was established, effective as of March 17,
2000, to reward the performance of management who have contributed, or have the
ability to contribute, significantly to our company. 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, we exclude the volatility factor in estimating the
value of our 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 life of the option, dividends on the stock, or the risk-free
interest rate.
INCOME TAXES
Current tax expense is determined based on taxable income for the year
computed using prevailing tax rates.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax liabilities are recognized for all taxable temporary
differences and deferred tax assets are recognized for deductible temporary
differences to the extent that it is probable that taxable income will be
available in future periods against which the deductible temporary differences
can be utilized.
65
Deferred tax is calculated at the tax rates that have been enacted or
substantively enacted at the balance sheet date. Deferred tax is charged or
credited in the statement of income, except when it relates to items charged or
credited directly to equity, in which case the deferred tax is also charged or
credited directly to equity.
Deferred tax assets and liabilities are presented on the balance sheet as a
non-current number.
SIGNIFICANT CHANGES IN KOREAN GAAP
On January 1, 2002, the Company and its subsidiaries early adopted
Statement of Korea Accounting Standards ("SKAS") No. 6 "Events Occurring after
Balance Sheet Date". This statement requires that proposed appropriations of
retained earnings, including proposed cash dividends, be reflected on the
balance sheet when the appropriations are approved by shareholders. Through
2001, such proposed appropriation of retained earnings, including proposed cash
dividends, were recorded in the year they were proposed in accordance with
Korean GAAP. In order to reflect this accounting changes, prior year's financial
statements have been restated. This accounting change resulted in an increase in
stockholders' equity as of December 31, 2000, 2001 and 2002 of W48,103 million,
W57,265 million and W151,739 million, respectively, and a decreases in total
liabilities as December 31, 2000, 2001 and 2002 of the same amounts. Operating
income and net income for the years ended December 31, 2000, 2001 and 2002 were
not affected by this change.
SIGNIFICANT CHANGES IN U.S. GAAP
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
annual impairment tests as prescribed by the Statement. The following table
presents the impact of SFAS No. 142 on reported net income and earnings per
share had the standard been in effect for the years ended December 31, 2000,
2001 and 2002 (in millions of Korean won, except per share amount):
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
Reported net income........................... W 895,420 W1,111,596 W1,301,126
Goodwill amortization....................... 112,572 151,911 --
---------- ---------- ----------
Adjusted net income........................... W1,007,592 W1,263,507 W1,301,126
========== ========== ==========
Basic earnings per common share............... W 10,265 W 12,844 W 15,440
Goodwill amortization....................... 1,291 1,755 --
---------- ---------- ----------
Adjusted earnings per common share-basic...... W 11,556 W 14,595 W 15,440
========== ========== ==========
Diluted earnings per common share............. W 10,265 W 12,844 W 15,439
Goodwill amortization....................... 1,291 1,755 --
---------- ---------- ----------
Adjusted earnings per common share-diluted.... W 11,556 W 14,599 W 15,439
========== ========== ==========
RESEARCH AND DEVELOPMENT
OVERVIEW
In conformity with the MIC's guidance, we have maintained a high level of
spending on research and development activity. Prior to 1996, the majority of
our research and development expense consisted of the MIC-directed donations to
several Korean research institutes and educational organizations. More recently,
we have sharply increased our spending for our internal research activity
resulting in such amounts exceeding our spending on external research. We
believe that we must maintain a substantial in-house technology capability to
achieve our strategic goals.
66
The following table sets forth our annual research and development
expenses:
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
------------------------
2000 2001 2002
------ ------ ------
(IN BILLIONS OF WON)
Internal R&D Expenses(1)................................ W 78.8 W130.7 W194.3
External R&D Expenses(2)................................ 38.3 23.0 59.0
------ ------ ------
Total R&D Expenses(3)................................... W117.1 W153.7 W253.3
====== ====== ======
---------------
(1) Includes Won 6.1 billion for Shinsegi for the nine months ended December 31,
2000 and Won 4.8 billion for the year ended December 31, 2001.
(2) Includes Won 0.6 billion for Shinsegi for the nine months ended December 31,
2000 and nil for the year ended December 31, 2001.
(3) Includes Won 6.7 billion for Shinsegi for the nine months ended December 31,
2000 and Won 4.8 billion for the year ended December 31, 2001.
The MIC has the statutory power to recommend levels of spending by
telecommunications service providers on research and development activity and
the allocation of expenditures between internal and external research. In
practice, the MIC has issued guidelines regarding the amount and allocation of
research spending. In its May 1995 guidelines, the MIC recommended that our
minimum level of total research and development spending (set as a percentage of
budgeted revenue and calculated according to MIC guidelines which differ from
our accounting treatment of such expenses) be: 9.0% from 1995 through 1997; 9.5%
for 1998; and 10.0% for 1999 through 2001. With respect to the level of
contribution specifically for external research and development, in July 1998,
the MIC reduced the recommended minimum level of contribution to the MIC-run
Fund for Development of Information and Telecommunications to 1.5% from 2.0%. In
2001, the recommended minimum level of contribution was further reduced to 1.0%.
In 2002, the recommended minimum level of contribution was further reduced to
0.8%. In 2003, the recommended minimum level of contribution is 0.8%, the same
as 2002. We are not obligated to make donations to any other external research
institutes. Although compliance with such guidelines is not mandatory, we have
complied with such guidelines in the past and intend to comply, to the extent
practicable, in the future.
INTERNAL RESEARCH AND DEVELOPMENT
The main focus of our internal research and development activity is the
development of 3G technologies and services and value-added technologies and
services for our CDMA network, such as wireless data communications. We spent
approximately Won 194.3 billion on internal research and development in 2002.
Our internal research and development activity is centered at a research
center with state-of-the-art facilities and equipment established in January
1999 in Bundang-gu, Sungnam-si, Kyunggi-do, Korea. As of April 30, 2003 our
research center housed 595 research engineers (including both full time and
temporary research engineers). Their work focuses on cell planning, network
management, digital wireless technologies, multimedia, information processing
and other wireless telecommunications areas. Our research center includes a team
that is helping to develop a fourth generation wireless technology, which is
expected to enable wireless data transmissions at speeds of up to 155 Mbps, 70
times faster than W-CDMA technology.
Each business unit has its own research team that can concentrate on
specific short-term research needs. Such research teams permit our research
center to concentrate on long-term, technology-intensive research projects. We
aim to establish strategic alliances with selected domestic and foreign
companies with a view to exchanging or jointly developing technologies, products
and services.
EXTERNAL RESEARCH AND DEVELOPMENT
In addition to conducting research in our own facilities, we have been a
major financial supporter of other Korean research institutes, and we have
helped coordinate the Government's effort to commercialize the CDMA digital
technology. We do not have any independently-owned intellectual property rights
in the technologies or products developed by any external research institute.
67
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
Our board of directors has ultimate responsibility for the management of
our affairs. Under our articles of incorporation, our board is to consist of at
least three but no more than twelve directors. We currently have a total of
twelve directors, six of whom are outside directors. We elect our directors at a
general meeting of shareholders with the approval of at least a majority of
those shares present or represented at such meeting. Such majority must
represent at least one-fourth of our total issued and outstanding shares with
voting rights.
As required under relevant Korean laws and our articles of incorporation,
we have a committee for recommendation of outside directors within the board of
directors, or Recommendation Committee. Outside directors are appointed from
among those candidates recommended by the Recommendation Committee. The list of
recommended outside directors submitted by the Recommendation Committee must
include every person who is recommended by shareholders holding 1.0% or more of
our outstanding shares for at least six months as of the date such shareholders
exercise their right to recommend the candidate. The Recommendation Committee
must consist of two or more directors, at least half of whom must be outside
directors.
The term of offices for directors is until the close of the third annual
general shareholders meeting convened after he or she commences his or her term.
Our directors may serve consecutive terms. Our shareholders may remove them from
office by a resolution at a general meeting of shareholders adopted by the
holders of at least two-thirds of the voting shares present or represented at
the meeting, and such affirmative votes also represent at least one-third of our
total voting shares then issued and outstanding.
Representative directors are directors elected by the board of directors
with the statutory power to represent our company.
The following are the names and positions of our standing and non-standing
directors. The business address of all of our directors is the address of our
registered office at 99 Seorin-dong, Jongro-gu, Seoul, Korea.
Standing directors are our full-time employees and executive officers. They
also comprise the senior management, or the key personnel who manage us. Their
names, date of birth and positions at our company and other positions are set
forth below:
OTHER PRINCIPAL
DIRECTOR EXPIRATION DIRECTORSHIPS
NAME DATE OF BIRTH SINCE OF TERM POSITION AND POSITIONS BUSINESS EXPERIENCE
---- ------------- -------- ---------- -------- --------------- -------------------
Kil Seung Son+....... Feb. 6, 1941 1994 2006 Chairman, Chief Representative Vice-Chairman & CEO,
Executive Officer Director, SK SK Telecom;
and Representative Shipping; Director, SK
Director Representative Telecom; President &
Director, SK CEO, Dae Han Telecom
Global; Director,
SK Construction;
Director, SK
Corporation;
Director, SK
Forest, Director,
The Korea Economic
Daily
Jung Nam Cho......... Nov. 20, 1941 1995 2004 Vice-Chairman, President & COO, SK
Chief Operating Telecom
Officer and
Representative
Director
68
OTHER PRINCIPAL
DIRECTOR EXPIRATION DIRECTORSHIPS
NAME DATE OF BIRTH SINCE OF TERM POSITION AND POSITIONS BUSINESS EXPERIENCE
---- ------------- -------- ---------- -------- --------------- -------------------
Moon Soo Pyo*........ Aug. 30, 1953 1994 2006 President, Chief Vice-President, SK
Operating Officer Telecom, Executive
and Representative Director and Head of
Director New Business
Development TFT, SK
Telecom; Chief
Secretary of the
President, SK
Telecom; Managing
Director of Planning
and Coordination
Office, SK Telecom;
Manager of Planning
and Coordination
Office, SK Group;
Director, Daehan
Telecom
Young Jin Kim........ Sept. 19, 1946 2002 2005 Executive Vice- Head of SK Global
President, Head of America, Inc.; Head
Strategic Support of President Office,
Divisional Group & SK Global; Head of
Chief Financial Human Resource
Officer Development Office
And Europe Branch
Office, SK Global
Shin Bae Kim......... Oct. 15, 1954 2002 2005 Senior Vice- Director, Hanaro Head of Strategic
President & Head Telecom; Director, Planning Group,
of Strategic SK Telink; Shinsegi Telecomm;
Planning Director, SK Director of
Divisional Group Teletech; Strategic Business
Representative Division, SK
Director, SK Telecom; Director,
Capital KORMS
Our current non-standing directors are:
OTHER PRINCIPAL
DIRECTOR EXPIRATION DIRECTORSHIPS
NAME DATE OF BIRTH SINCE OF TERM POSITION AND POSITIONS BUSINESS EXPERIENCE
---- ------------- -------- ---------- -------- --------------- -------------------
Tae Won Chey+*....... Dec. 3, 1960 1999 2005 Director Chairman and CEO, Managing Director,
SK Corporation; Sunkyong Ltd.;
Director, SK C&C; Director, Sunkyong
Director, Walker Ltd.; Managing
Hill; Director and Head of
Representative Integrated Network
Director, The Team, Yukong Ltd.;
Contents Company; Managing Director
Representative and Head of Business
Director, Wider Development Team,
Than.com Office of the
Chairman for
Management and
Planning, SK Group
69
OTHER PRINCIPAL
DIRECTOR EXPIRATION DIRECTORSHIPS
NAME DATE OF BIRTH SINCE OF TERM POSITION AND POSITIONS BUSINESS EXPERIENCE
---- ------------- -------- ---------- -------- --------------- -------------------
Dae Sik Kim.......... Jan. 11, 1955 1998 2004 Outside Director Professor, Hanyang University of
University; Pennsylvania, MBA
Committee Member, (1981), Ph.D. (1987)
MOFE Advisory
Committee on
Financial
Development
Sang Koo Nam......... Aug. 20, 1946 1998 2004 Outside Director Professor, Korea University of
University Pennsylvania, MBA
(1975), Ph.D.
(1981); President,
Korean Financial
Association
Sang C. Lee.......... Jan. 24, 1941 1999 2005 Outside Director Consultant Chairman,
Communication
Network Interface,
Inc.; Chairman and
CEO, Spectron Corp.;
President, Scovill
Fasteners, Inc.;
Director of
Organization, ITT
Worldwide Corp.;
Vice President, ITT
Asia Pacific Corp.
Dae Gyu Byun......... Mar. 8, 1960 2001 2004 Outside Director CEO & Representative
Representative Director, Kunin Co.;
Director, Humax Co-promoter, Venture
Co., Ltd.; Head Leaders Club
Vice-President,
Korea Venture
Business
Association
Jae Seung Yoon....... Nov. 9, 1962 2002 2005 Outside Director CEO & Public Prosecutor,
Representative The Seoul/Busan
Director, Daewoong District Public
Pharmaceutical Prosecutors' Office;
Co., Ltd. Auditor and Vice-
President, Daewoong
Pharmaceutical Co.,
Ltd.
Yong Woon Kim........ Oct 4, 1943 2003 2009 Outside Director Standing Advisor, Korea University
POSCO Research
Institute
---------------
+ On March 11, 2003, Mr. Tae Won Chey, our non-standing director, who also
serves as the chairman and CEO of SK Corporation, and Mr. Kil Seung Son, our
Chairman, Chief Executive Officer and Representative Director, who also serves
as the representative director of SK Global and a non-standing director of SK
Corporation, were indicted on charges of misappropriation under the Korean
criminal law by the Seoul District Public Prosecutor's Office. See
"-- Involvement in Certain Legal Proceedings".
* Mr. Tae Won Chey, our non-standing director, and Mr. Moon Soo Pyo, our
President, Chief Operating Officer and Representative Director, are first
cousins.
70
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
On March 11, 2003, Mr. Tae Won Chey, our non-standing director, who also
serves as the chairman and CEO of SK Corporation, and Mr. Kil Seung Son, our
Chairman, Chief Executive Officer and Representative Director, who also serves
as the representative director of SK Global and a non-standing director of SK
Corporation, were indicted on charges of misappropriation under the Korean
criminal law by the Seoul District Public Prosecutor's Office. Both Mr. Chey and
Mr. Son were indicted for causing improper losses to SK Global in violation of
their fiduciary duties, while Mr. Chey's charges also relate to the improper
valuation in certain transactions of shares of certain affiliated companies in
the SK Group. The indictment also charged Mr. Chey and Mr. Son, as well as
certain other executives of companies in the SK Group, with fraudulently
inflating reported profits of SK Global. None of the allegations against Mr.
Chey or Mr. Son relate to actions taken in the capacities in which they directly
serve SK Telecom, and SK Telecom has not been implicated in any of the foregoing
charges.
As of the date hereof, Mr. Chey is in custody and the trials of Mr. Chey
and Mr. Son in connection with the foregoing charges is currently in progress at
the Seoul District Court. The court is expected to render its judgment on June
13, 2003 and, if Mr. Chey or Mr. Son is found guilty, sentencing is also
expected on such date. If found guilty, the penalties can range from monetary
fines to imprisonment. The Seoul Public Prosecutor's Office has reportedly
indicated that it is seeking a prison term of six years for Mr. Chey and five
years for Mr. Son. If Mr. Chey or Mr. Son is found guilty and sentenced to a
prison term with all available appeals exhausted, according to our articles of
incorporation, he will be disqualified from serving as a member of our board of
directors and we will be deprived of his services.
COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate of the remuneration paid and in-kind benefits granted to the
directors (both standing directors, who also serve as our executive officers,
and non-standing directors) during the year ended December 31, 2002 totaled
approximately Won 8.0 billion.
Remuneration for the directors is determined by shareholder resolutions.
Severance allowances for directors are determined by the board of directors in
accordance with our regulation on severance allowances for officers, which was
adopted by shareholder resolutions. The regulation provides for monthly salary,
performance bonus, severance payment and fringe benefits. The amount of
performance bonuses is independently decided by a resolution of the board of
directors.
In March 2001 and 2002, pursuant to the resolutions of the shareholders,
and in accordance with our articles of incorporation, certain of our directors
and officers were granted options to purchase our common shares. 42 and 70
officers, respectively, in 2001 and 2002, were granted options to purchase
43,820 and 65,730 common shares. The exercise price for the shares are Won
211,000 and Won 267,000, respectively, for 2001 and 2002. Each stock option
agreement also provides for adjustments to the amount and exercise price of the
shares in cases where the share price may become diluted as a result of issuance
of new shares, stock dividends or mergers. The officers may exercise their
options during a two-year period starting from March 2004 (for shares granted in
2001) or from March 2005 (for shares granted in 2002). The board of directors
may, by resolution, cancel any director's or officer's stock options under
certain circumstances. In 2003, none of our directors and officers were granted
options to purchase our common shares.
71
The following table shows the share allotment for the directors under our
2001, 2002 and 2003 stock option programs.
NUMBER OF SHARES ALLOTTED NUMBER OF
--------------------------- OPTIONS
NAME POSITION 2001 2002 2003 EXERCISED
---- ------------------ ------- ------- ------- ---------
Kil Seung Son................. Director 0 0 0 0
Jung Nam Cho.................. Director 7,750 6,150 0 0
Moon Soo Pyo.................. Director 0 0 0 0
Young Jin Kim................. Director 0 790 0 0
Shin Bae Kim.................. Director 0 1,650 0 0
Tae Won Chey.................. Director 0 0 0 0
Dae Sik Kim................... Outside Director 1,000 1,000 0 0
Sang Koo Nam.................. Outside Director 1,000 1,000 0 0
Sang C. Lee................... Outside Director 1,000 1,000 0 0
Ki Joong Sung................. Outside Director 1,000 1,000 0 0
Dae Gyu Byun.................. Outside Director 1,000 1,000 0 0
Jae Seung Yoon................ Outside Director 0 1,000 0 0
Yong Woon Kim................. Outside Director -- -- 0 0
Other Officers................ 28,820 51,140 0 0
------ ------ ------ -----
Total....................... 41,570 65,730 0 0
------ ------ ------ -----
BOARD PRACTICES
TERMINATION OF DIRECTORS, SERVICES
Directors are given a retirement and severance payment upon termination of
employment in accordance with our internal regulations on severance payments.
Upon retirement, directors who have made significant contributions to our
company during their term may be appointed to serve either as an advisor to us
or as an officer of an affiliate company.
AUDIT COMMITTEE
Under relevant Korean laws and our articles of incorporation, we are
required to have an audit committee under the board of directors. The committee
is composed of at least three members, two-third of whom must be outside
directors. They are appointed annually by a resolution of the board of
directors. They are required to:
- examine the agenda for the general meeting of shareholders;
- examine financial statements and other reports to be submitted by the
board of directors to the general meeting of shareholders;
- review the administration by the board of directors of our affairs; and
- examine the operations and asset status of us and our subsidiaries.
In addition, the audit committee must appoint independent certified public
accountants to examine our financial statements. An audit and review by
certified public accountants of our financial statements is required for the
purposes of a securities report. Listed companies must provide such report on an
annual, semi-annual and quarterly basis to the Financial Supervisory Commission
of Korea and the Korea Stock Exchange.
Our audit committee is composed of six outside directors: Dae Sik Kim, Sang
Koo Nam, Sang C. Lee, Dae Gyu Byun, Jae Seung Yoon and Yong Woon Kim.
72
REMUNERATION
We do not have an independent internal remuneration committee. Remuneration
for the directors and officers are determined by shareholder resolutions.
Severance allowances for directors are determined by the board of directors in
accordance with our internal regulation on remuneration of officers, which was
also adopted by shareholder resolutions and provides for monthly salary,
performance bonus, severance payment and fringe benefits. The amount of
performance bonuses is independently decided by a resolution of the board of
directors. The regulation on payment of remuneration to company officers also
provides for a special contribution bonus upon retirement, which provide for
additional compensation in addition to the basic severance package to any
officer or director who during his term of service makes special contributions
to the company. We may also reimburse our outside directors for expenses they
incurred in performance of their services. See "-- Compensation of Directors and
Officers". We are currently receiving consulting services on creating a
remuneration committee under the Board of Directors.
EMPLOYEES
The following table sets forth the numbers of our regular employees,
temporary employees and total employees as of the dates indicated:
DATE REGULAR EMPLOYEES TEMPORARY EMPLOYEES TOTAL
---- ----------------- ------------------- -----
December 31, 2000.......................... 4,513(1) 2,766(2) 7,279
December 31, 2001.......................... 4,587(1) 1,106(2) 5,693
December 31, 2002.......................... 4,641 1,600 6,241
April 30, 2003............................. 4,843 1,605 6,448
---------------
(1) Includes 1,687 regular Shinsegi employees as of December 31, 2000 and 1,002
as of December 31, 2001.
(2) Includes 656 temporary Shinsegi employees as of December 31, 2000 and 330 as
of December 31, 2001.
Throughout 2000, we experienced voluntary and involuntary termination of a
large number of temporary employees in non-core business departments such as the
customer hotline center. The number of our regular employees increased in 2001
and 2002 due to periodic hiring of new employees.
The following table sets forth numbers of our regular employees and
temporary employees by categories of activity as of December 31, 2002:
MARKETING PRODUCTION RESEARCH SUPPORT NEW BUSINESS TOTAL
--------- ---------- -------- ------- ------------ -----
Regular Employees......... 1,284 1,463 533 938 423 4,641
Temporary Employees....... 1,044 189 62 227 78 1,600
----- ----- --- ----- --- -----
Total..................... 2,328 1.652 595 1,165 501 6,241
===== ===== === ===== === =====
As of December 31, 2002, we had a company union comprised of 2,859 regular
employees. As of April 30, 2003, we had a company union comprised of 2,865
regular employees. We have never experienced a work stoppage of a serious
nature. Every two years, the union and management negotiate and enter into a new
collective bargaining agreement that has a two-year duration. Our most recent
wage negotiations were completed in June 2002 and resulted in an average wage
rate increase of 5.0% for 2002 from 2001. We have not entered into any wage
negotiation for 2003 as of May, 2003.
In the first half of 1998, we implemented and completed a voluntary early
retirement program pursuant to which employees meeting certain requirements
could receive certain retirement and severance benefits in addition to their
normal retirement and severance benefits if they elected to retire during the
designated period. Designed to enhance labor efficiency, this program resulted
in the early retirement of 689 employees. The aggregate amount of additional
retirement and severance benefits so paid, treated as a current expense in 1998,
amounted to Won 49.3 billion. The aggregate amount of normal retirement and
severance benefits paid to employees electing to retire pursuant to such program
amounted to Won 20.6 billion in 1998.
73
Since April 1999, we have been required to contribute an amount equal to
4.5% of employee wages toward a national pension plan. Employees are eligible to
participate in an employee stock ownership association. We are not required to,
and we do not, make any contributions to this plan, although through the
Employee Welfare Fund we subsidize the employee stock ownership association by
providing low interest rate loans to employees desiring to purchase stock
through the plan in the case of a capitalization by the association. As of May
13, 2003, the employee stock ownership association owned approximately 0.7 % of
our issued common stock.
We are required to pay a severance amount to eligible employees who
voluntarily or involuntarily cease working for us, including through retirement.
This severance amount is based upon the employee's length of service with us and
the employee's salary level at the time of severance. As of December 31, 2002,
the accrued and unpaid retired and severance benefits of Won 175.8 billion for
all of our employees are reflected in our consolidated financial statements as a
liability, and a portion of our retirement and severance liabilities, totaling
Won 120.4 billion was funded. Under Korean laws and regulations, we are
prevented from involuntarily terminating a full-time employee except under
certain limited circumstances. In September 2002, we entered into am employment
stabilization agreement with the union. Among other things, this agreement
provides for a one-year guarantee of the same wage level in the event that we
reorganize a department into a separate entity or we outsource an employee to a
separate entity where the wage is lower. If the new entity is our subsidiary, of
which we own at least a 50% stake, employment is guaranteed for three years.
We are also required by law to contribute up to 5.0% of our annual revenues
for employee welfare. We contributed 3% of our revenues annually for years prior
to 2002. Beginning in 2002, we negotiate an exact amount each year and
contributed Won 99.0 billion in 2002.
We consider our relations with our employees to be good.
SHARE OWNERSHIP
The following table sets forth the share ownership by our standing and
non-standing directors as of April 30, 2003:
PERCENTAGE
NUMBER OF OF TOTAL SPECIAL
SHARES SHARES VOTING
NAME POSITION OWNED OUTSTANDING RIGHTS OPTIONS
---- -------- --------- ----------- ------- -------
STANDING DIRECTORS
Kil Seung Son............. Chairman, Chief Executive 0 -- None 0
Officer and Representative
Director
Jung Nam Cho.............. Vice-Chairman, Chief 0 -- None 16,500
Operating Officer and
Representative Director
Moon Soo Pyo.............. President, Chief Operating 0 -- None 0
Officer and Representative
Director
Young Jin Kim............. Executive Vice-President, 0 -- None 790
Head of Strategic Support
Divisional Group and Chief
Financial Officer
Shin Bae Kim.............. Senior Vice-President and 1,270 -- None 1,650
Head of Strategic Planning
Divisional Group
74
PERCENTAGE
NUMBER OF OF TOTAL SPECIAL
SHARES SHARES VOTING
NAME POSITION OWNED OUTSTANDING RIGHTS OPTIONS
---- -------- --------- ----------- ------- -------
NON-STANDING DIRECTORS
Tae Won Chey.............. Director 100 0* None 0
Dae Sik Kim............... Outside Director 0 -- None 2,500
Sang Koo Nam.............. Outside Director 0 -- None 2,500
Sang C. Lee............... Outside Director 0 -- None 2,500
Dae Gyu Byun.............. Outside Director 0 -- None 2,000
Jae Seung Yoon............ Outside Director 200 0* None 1,000
Yong Woon Kim............. Outside Director 0 -- None 0
---------------
* Less than 1.0%.
In 1989, we established an Employee Welfare Fund to provide employees with
loans with below-market interest rates for housing, purchase of shares under the
employee stock ownership plan and certain emergency purposes. As of April 30,
2003, the Fund's assets, totaling approximately Won 118.5 billion, consist
primarily of Won 66.1 billion in loans to employees and Won 52.4 billion in
cash. The Fund is managed by a committee consisting of five management
representatives and five union representatives.
75
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
As of May 30, 2003, approximately 87.05% of our issued shares were held in
Korea by approximately 30,000 shareholders. The following table sets forth
certain information as of the close of our shareholders' registry on May 13,
2003 with respect to any person known to us to be the beneficial owner of more
than 5.0% of the shares of our common stock and with respect to the total amount
of such shares owned by our employees and our officers and directors, as a
group:
PERCENTAGE OF PERCENTAGE OF
NUMBER OF TOTAL SHARES TOTAL SHARES
SHAREHOLDER/CATEGORY SHARES ISSUED OUTSTANDING
-------------------- ---------- ------------- -------------
Domestic Shareholders
SK Group(1)................................... 20,395,954 24.05% 26.78%
POSCO......................................... 5,794,924 6.83 7.61
Employees(2).................................. 547,295 0.65 --
Treasury shares............................... 3,886,710 4.58 --
Officers and Directors(3)..................... 1,570 0.00 0.00
Other Domestic Shareholders................... 19,887,792 23.45 26.11
Foreign Shareholders (4)........................ 34,307,066 40.44 45.05
---------- ----- -----
Total Issued Shares........................ 84,821,311 100.0% 100.0%
========== ===== =====
---------------
(1) The SK Group's ownership interest consists of the following as of May 13,
2003:
PERCENTAGE OF PERCENTAGE OF
NUMBER OF TOTAL SHARES TOTAL SHARES
SK GROUP MEMBER SHARES ISSUED OUTSTANDING
--------------- ---------- ------------- -------------
SK Corporation.................................. 17,663,127 20.82% 23.19%
SK Securities Co., Ltd. ........................ 11,023 0.01 0.01
SK Global Co., Ltd. ............................ 2,553,664 3.01 3.35
SK Life Insurance Co., Ltd. .................... 62,839 0.07 0.08
SK Investment Trust Management Co., Ltd. ....... 105,301 0.12 0.14
---------- ----- -----
Total........................................... 20,395,954 24.05% 26.78%
========== ===== =====
---------------
(2) Represents shares owned by our employee stock ownership association. See
"Business -- Employees".
(3) Less than 0.01%.
(4) Includes 5,117,500 shares of our common stock, or approximately 6.03% of our
issued common stock, represented by ADSs held by Momenta (Cayman), a special
purpose vehicle incorporated in the Cayman Islands.
76
After giving effect to the 10-for-1 stock split of our common shares which
became effective on April 21, 2000, the following table sets forth significant
changes in the percentage ownership held by our major shareholders during the
past three years:
AS OF DECEMBER 31,
---------------------------
SHAREHOLDER 2000 2001 2002
----------- ------- ------- -------
(AS A PERCENTAGE OF TOTAL
ISSUED SHARES)(1)
SK Group.................................................... 34.17% 34.16% 24.43%
SK Corporation(2)......................................... 26.81 26.81 19.81
SKC Co., Ltd. ............................................ 0.00 0.00 0.00
SK Chemicals Co., Ltd..................................... 0.00 0.00 0.00
SK Evertec Co., Ltd.(3)................................... 0.00 0.00 0.00
SK Life Insurance......................................... 0.01 0.01 0.00
SK Investment Trust Management............................ 0.05 0.04 0.07
SK Global(4).............................................. 7.29 7.29 4.53
SK Energy Sales Co., Ltd.(5).............................. 0.00 0.00 0.00
SK Distribution Co., Ltd.(6).............................. 0.00 0.00 0.00
KT Corporation(7)........................................... 13.39 10.39 9.27
POSCO(8).................................................... 6.50 6.50 6.50
---------------
(1) Includes shares held in treasury of 73,636, 6,159,266 and 4,852,972 as of
December 31, 2000, 2001 and 2002, respectively.
(2) On July 25, 2002, SK Corporation sold our ADSs representing 5,117,500 shares
of our common stock to Momenta (Cayman), which in turn sold bonds
exchangeable initially into such ADSs. On the same day, SK Corporation sold
1,122, 223 shares of our common stock represented by ADRs to foreign
investors.
(3) SK Evertec Co., Ltd. was formerly known as SK Oxychemical Co., Ltd.
(4) On January 4, 2002, SK Global issued bonds exchangeable into an aggregate of
1,730,104 shares of our common stock. On January 31, 2002, bank trust funds
controlled by us purchased from SK Global an aggregate of 1,367,180 shares
of our common stock, or approximately 1.5% of our outstanding common stock.
On July 25, 2002, SK Global sold 1,100,000 shares of our common stock
represented by ADRs to foreign investors.
(5) SK Energy Sales merged into SK Global on July 31, 2000.
(6) SK Distribution merged into SK Global on December 31, 1999.
(7) On April 15, 2002, KT Corporation sold an aggregate of 1,000,000 shares, or
approximately 1.1%, of our outstanding common stock to investors. On
December 30, 2002, KT Corporation sold an aggregate of 4,457,635 shares, on
approximately 5.0%, of our outstanding common stock to us. On January 10,
2002, KT Corporation sold its remaining stake in us, an aggregate of
3,809,288 shares, or approximately 4.3%, of our outstanding common stock to
us.
(8) POSCO acquired these shares in connection with our acquisition of a 27.7%
equity interest in Shinsegi.
Other than companies in the SK Group and POSCO, no other persons or
entities known by us to be acting in concert, directly or indirectly, jointly or
severally, own in excess of 3.0% of our total shares outstanding or exercise
control or could exercise control over our business.
On January 4, 2002, in transactions exempt from registration under the U.S.
Securities Act, SK Global issued bonds exchangeable into an aggregate of
1,730,104 shares of our common stock, subject to anti-dilution adjustments.
These bonds may be exchanged at the option of the bondholders at any time from
April 4, 2002 through December 4, 2004. In connection with the issuance of these
bonds, SK Global has deposited 1,730,104 shares of our common stock with the
Korea Securities Depository. The title to these shares belongs to SK Global but,
under applicable Korean laws and the deposit agreement between SK Global and
Korea Securities Depository dated December 21, 2001, these shares are subject to
restrictions on transfer except upon exercise or repayment of the bonds.
On January 31, 2002, bank trust funds controlled by us purchased from SK
Global an aggregate of 1,367,180 shares of our common stock, or approximately
1.5% of our outstanding common stock.
On July 25, 2002, in transactions exempt from registration under the U.S.
Securities Act, SK Corporation sold our ADSs representing 5,117,500 shares of
our common stock to Momenta (Cayman), a special purpose vehicle incorporated in
the Cayman Islands, which in turn sold bonds exchangeable initially into such
77
ADSs. The 5,117,500 shares of our common stock, or approximately 6.03% of our
issued common stock, held by Momenta (Cayman) are reflected on the foreign
shareholders line in the first table under this "Share Ownership" section.
Pursuant to the terms and conditions of such bonds, if investors do not
otherwise exchange the bonds for our ADSs, all or a portion of such ADSs may
ultimately be returned to SK Corporation. On the same day, SK Corporation and SK
Global each sold 1,122,223 and 1,100,000 shares, respectively, of our common
stock represented by ADRs to foreign investors.
We understand that SK Corporation and SK Global may dispose of additional
shares of our common stock in one or more transactions, which may include sales
pursuant to this registration statement. Recently, as a result of significant
financial difficulties and prosecutors' discovery of alleged fraudulent
accounting practices at SK Global, it has been reported in the press that SK
Global may sell its 3% stake in SK Telecom to raise capital. Although no
decision has been made, we may consider buying back all 3% of our shares from SK
Global. Such transactions are not expected to result in a change of control of
us by the SK Group.
In addition, we currently plan to acquire approximately 3% of our
outstanding common stock through open-market purchases on the Korea Stock
Exchange by September 30, 2003 for the purpose of a reduction in capital. We
expect to announce specific details of our plan to buy back our shares by the
end of June 2003. We may at our sole discretion change our current plan
concerning the acquisition of our shares depending on market conditions or for
other reasons.
As of May 13, 2003, SK Corporation owns 17,663,127 shares of our common
stock, or approximately 20.8%, of our issued shares. As of April 30, 2003, a
foreign investment fund held a 14.99% stake in SK Corporation, as the largest
shareholder. According to the MIC, upon such foreign investment fund's
acquisition of an additional 0.01% or more stake in SK Corporation, SK
Corporation would be considered a foreign shareholder and its shareholding in SK
Telecom would be included in the calculation of the aggregate foreign
shareholding. If SK Corporation's shareholding in SK Telecom is included in the
calculation of the aggregate foreign shareholding of SK Telecom, then the
aggregate foreign shareholding in SK Telecom, assuming foreign ownership level
as of May 13, 2003, would reach 61%, exceeding the 49% ceiling. If the aggregate
foreign shareholding in SK Telecom is exceeded, the MIC may issue a corrective
order to SK Telecom and the breaching shareholder, SK Corporation. Furthermore,
SK Corporation may not exercise its voting rights with respect to the shares
held in breach of the 49% ceiling, which may result in a change in control of
us. In addition, the MIC may refuse to grant us licenses or permits necessary
for entering into new telecommunications businesses until the aggregate foreign
shareholding of SK Telecom is reduced to below 49%. See "Key Information -- Risk
Factors -- If SK Corporation breaches the foreign ownership limitations on SK
Telecom, it may result in a change of control of us." and "Information on the
Company -- Business Overview -- Law and Regulation -- Foreign Ownership and
Investment Restrictions and Requirements".
Other than as disclosed herein, there are no other arrangements, to the
best of our knowledge, which would result in a material change in the control of
us. Our major shareholders do not have different voting rights.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
SK GLOBAL
We are a party to several contracts with SK Global, including:
- A series of real property sale and purchase contracts in November 2000
pursuant to which we purchased from SK Global the building and land where
our new corporate headquarters will be located. The aggregate purchase
price was Won 114.4 billion; and
- A series of sale and purchase agreements pursuant to which SK Teletech
sells handsets to SK Global. The aggregate amounts received from SK
Global pursuant to these contracts were Won 249.3 billion in 2000, Won
272.5 billion in 2001 and Won 393.8 billion in 2002.
78
On August 30, 2002, SK Global acquired from Korea Thrunet Co., Ltd. certain
fiber-optic cable assets. These assets constitute approximately 30% of our
current leased line needs and we currently lease all of such assets from SK
Global. If SK Global is required to sell off its leased line business, this may
result in a disruption of the service provided to us. However, we currently
believe that it is not likely that the creditors will require SK global to sell
this business unit.
SK Global also serves as our distributor of handsets to network of dealers.
Samsung Electronics Co. Ltd., LG Electronics Inc, Motorola Korea, Inc. and
Pantech & Curitel suspended their supply of handsets to SK Global on April 7,
2003. In May 2003, all suppliers have resumed their supply of handsets on the
condition that payment on their mobile phones be made in cash within one week of
delivery. Previously, SK Global issued three-month promissory notes for payment
to handset suppliers.
We currently have Won 3.2 billion of accounts receivables from SK Global
for sale of used handsets purchased from dealers and for usage of SK Global's
employee training facilities. We have Won 14.9 billion of accounts payables to
SK Global, mainly consisting of commissions to dealers owned by SK Global. For
more information on SK Global, see "Key Information -- Risk Factors -- Financial
difficulties and charges of financial statement irregularities at our affiliate,
SK Global, may have a material adverse impact on our business and financial
condition".
OTHER RELATED PARTIES
In December 2000, we entered into an agreement with SK Corporation for the
sale and leaseback of our head office, located at 99 Seorin-dong, Chongro-gu,
Seoul, with a lease period from December 19, 2000 through March 31, 2004. Rent
expense for the period from December 19, 2000 to December 31, 2000 was
approximately Won 417 million. Under the lease agreement, in January 2001, we
deposited Won 80.1 billion in refundable leasehold key money with SK
Corporation. On February 1, 2003, we extended our contract through February 28,
2005 by depositing an additional Won 20.5 billion in refundable leasehold key
money. Although there are no monthly rent payments, we pay a monthly management
fee of Won 353.3 million. SK Corporation is obligated to refund the deposit,
without interest, upon the expiration of the lease. As a result of these
transactions, land and buildings with a net book value of Won 170.5 billion were
removed from our balance sheet in 2000 and we recognized a loss of Won 5.9
billion on the disposal.
We are party to several contracts with SK Engineering and Construction
related to the construction of our new corporate headquarters in Seoul. We
expect that construction of our 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 estimated to be Won 154.0 billion.
We are party to an agreement with SKC&C pursuant to which SKC&C provides us
with information technology services. This agreement will expire on December 31,
2009 but may be terminated by us at any time without cause on six months' prior
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 us. We also
enter into agreements with SKC&C from time to time for specific information
technology-related projects. The aggregate fees we paid to SKC&C for information
technology services amounted to Won 198.0 billion for 2000, Won 221.1 billion
for 2001 and Won 231.5 billion for 2002. The agreed fees under the long-term
contract for 2003 are Won 268.7 billion, subject to adjustment based on services
actually received during the year. We also purchase various information
technology-related equipment from SKC&C from time to time. The total amount of
such purchases was Won 97.4 billion for 2000, Won 108.4 billion for 2001 and Won
197.2 billion for 2002.
79
The following table summarizes the amount of outstanding loans, including
guarantees of any kind, made by us or our subsidiaries to or for the benefit of
related parties from January 1, 2000 through December 31, 2002:
NATURE OF THE LOAN
TOTAL OUTSTANDING LARGEST AMOUNT AND THE TRANSACTION
DATE OF AMOUNT AS OF OUTSTANDING DURING IN WHICH IT WAS
PARTIES/RELATIONSHIP CONTRACT DECEMBER 31, 2002 THE PERIOD INTEREST RATE INCURRED
-------------------- -------- ----------------- ------------------ ------------- -------------------
SK Wyverns Baseball Sept. 8, 2000 Won 24.7 billion Won 24.7 billion 9.0% - Development of a
Club (Subsidiary).. professional
baseball team
DSS Mobile Sept. 2, 1994 US$15,733,922 (Won US$15,733,922 (Won - Guarantee of loan
Communications, 18.9 billion)(1) 18.9 billion)(1) from Sumitomo Bank
Ltd. (Joint Venture in our capacity as
Company)........... shareholder and
promoter of DSS
Mobile.
- SK Telecom paid
DSS Mobile
Communication's
obligation to
Sumitomo Bank in
2001. SK Telecom
has provided 100%
allowance for the
entire
corresponding
amount owed by DSS
Mobile to SK
Telecom.
Total................ Won 38.0 billion Won 43.6 billion
---------------
(1) Based on an exchange rate of US$1.00 to Won 1,200.4 as of December 31, 2002.
All other loans were made in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and
did not involve more than the normal risks of non-collection or present other
unfavorable features.
80
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See "Item 18. Financial Statements" and pages F-1 through F-62.
LEGAL PROCEEDINGS
FTC PROCEEDINGS
In 1998, the FTC conducted two investigations into unfair internal
transactions that may have taken place among companies in Korea's top five
business groups, including the SK Group. These investigations focused not only
on unfair transactions involving goods and services, but also on whether loans,
property or securities were offered at below-market rates, whether real estate
was leased at rental rates below the prevailing rates and whether employees were
dispatched from one group company to another at no cost. On August 10, 1998, the
FTC announced the results of the first investigation and imposed on us a penalty
of approximately Won 57 million for alleged unfair transactions with our
affiliates in the SK Group. On November 23, 1998, the FTC imposed on us another
penalty of approximately Won 1.8 billion after the second investigation, which
we paid in full after an unsuccessful appeal.
On May 6, 1999, the FTC began another investigation into unfair
transactions that may have taken place between January 1998 and April 1999 among
companies in Korea's top five business groups, including the SK Group. The
investigation focused this time on, among other things, whether funds from stock
and other mutual funds managed by securities companies that belong to a
particular business group were used to support affiliated companies within that
business group. On October 28, 1999, following this investigation, the FTC
imposed on us a penalty of approximately Won 435 million. We paid this amount in
2000.
On September 10, 2001, the FTC ordered us to pay a fine of Won 476 million
in connection with certain alliance agreements we entered into with several
restaurants and other service-related companies. Under these agreements,
restaurants operated by these companies provided certain discounts and other
benefits to subscribers under some of our service plans. The agreements
contained provisions which in effect prohibited these companies from entering
into similar arrangements with other companies without obtaining our prior
consent. The FTC took the position that such provisions violated the Fair Trade
Act and ordered us to pay the fine. We paid the fine in full on November 15,
2001 and revised our agreements to comply with the Fair Trade Act.
In addition, also on September 10, 2001, the FTC ordered us to pay a fine
of Won 100 million in connection with the sale arrangements for certain wireless
handsets. SK Global does not charge interest to our authorized dealers who sell
handsets acquired from SK Global to our subscribers under the no-interest
installment plans, while charging interest under installment plans on handsets
supplied by unaffiliated suppliers. The FTC views such practices as an unfair
trade practice. We disagree with the FTC's position and have filed a lawsuit for
an invalidation of the order on October 16, 2001. The case is currently pending
before the Seoul High Court. The Won 100 million fine was paid in full on
November 15, 2001. On October 10, 2002, the Seoul High Court ruled in our favor.
The FTC appealed the decision on November 20, 2002 and the appeal is currently
pending before the Supreme Court.
On July 22, 2002, members of the SK Group (including SK Telecom, SK
Corporation and SK Global) concurrently with several other large Korean
conglomerates, received a notice from the FTC requesting that these companies
submit certain information, including financial statements and information about
related party transactions, to the FTC by August 3, 2002. This deadline was
extended to August 9, 2002, and we provided the requested information to the FTC
on that date. After concluding its investigation, on October 29, 2002, the FTC
ordered us to pay a fine of Won 175 million for violating the disclosure rules
concerning related party transactions, which we paid in full.
81
On November 7, 2002, the FTC ordered us to pay a fine of Won 1.04 billion
in connection with certain misleading advertisements relating to Moneta, our
mobile credit card. We, along with LG Telecom and KT Freetel, advertised that
there would be a Won 100,000 to Won 300,000 discount on the purchase of wireless
handsets when paid with a mobile credit card, such as Moneta. The advertisements
were found to be misleading by the FTC because the FTC concluded that we did not
duly inform the subscribers of an annual interest rate up to 9% to be accrued on
the credit amount. KT Freetel and LG Telecom were also fined Won 672 million and
Won 384 million, respectively, for similar violations. The FTC also ordered us
to make public announcement of such violation.
MIC PROCEEDINGS
In March 2002, the MIC indicated its belief 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. Consequently, beginning in April 2002,
we eliminated such incentives, and believe that other wireless network service
providers eliminated such incentives. 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. See "Operating and Financial Review and
Prospects -- Overview -- Revenue".
We understand that in July 2002 the MIC imposed on us (i) a total fine of
Won 30 million for our and two of our branches' refusal (a fine of Won 10
million for each) to comply with the MIC's request for documents during the
MIC's spot investigations of possible handset subsidies, and (ii) a fine of Won
1 billion for a temporary stoppage of KT Corporation's short messaging service
on our networks for 17 hours without prior notice. We have paid the fine in full
amount in September 2002.
On November 15, 2002, we received an order from the MIC prohibiting us from
signing on new subscribers for 30 days (from November 21, 2002 through December
20, 2002) for violating MIC's handset subsidy regulation. KT Freetel and LG
Telecom were also prohibited from signing on new subscribers for 20 days.
On March 26, 2003, we were ordered by the MIC to pay a fine of Won 300
million and to make public announcements in four major newspapers for violating
certain provisions of the Telecommunications Business Act by not entering into
written contracts with and checking personal identification of such subscribers
for subscription of pre-paid wireless handsets, which is required to prevent
handsets from being used for criminal purposes. KT Freetel and LG Telecom were
also fined Won 200 million and Won 120 million, respectively, for the same
violations.
FORMER SHINSEGI SHAREHOLDERS LITIGATION
Former shareholders of Shinsegi approved the merger of Shinsegi into SK
Telecom on November 16, 2001 at an extraordinary shareholders' meeting. However,
28 former minority shareholders of Shinsegi, including Jin Kap Park, filed a
lawsuit against Shinsegi with the Seoul District Court in December 2001 to void
the shareholders' resolution approving the merger. In the lawsuit, the
plaintiffs argued that the merger did not meet certain requirements of a "small
scale" merger under the Korean Commercial Code and that the merger ratio was
unfair and illegal. The Seoul District Court dismissed the lawsuit on April 25,
2002 on the grounds that the requirements of a "small scale" merger as claimed
by the plaintiffs are not required under the correct interpretation of the
Korean Commercial Code and that there is no evidence supporting the plaintiffs,
claim as to the unfairness of the merger ratio. The plaintiffs appealed the
decision on May 8, 2002 and the appeal is currently pending.
IRIDIUM LITIGATION
On June 9, 2000, The Chase Manhattan Bank filed a lawsuit against SK
Telecom and certain other defendants in the U.S. District Court in Delaware. In
the lawsuit, Chase alleged that we and other members of Iridium LLC are
severally obligated to pay Chase certain amounts allegedly due as a reserve
capital call under the limited liability company agreement of Iridium LLC. The
claim arose out of a US$800 million syndicated
82
loan previously extended to a subsidiary of Iridium by Chase and other banks and
financial institutions. In the lawsuit, our obligation under the reserve capital
call was alleged to be approximately US$10 million. On September 5, 2002, we
paid US$8.15 million to Chase to settle the case.
KT FREETEL LITIGATION
KT Freetel, one of our principal wireless competitors in Korea, has filed
(i) a civil defamation suit against us seeking damages of Won 50 billion with
the Seoul District Court, (ii) a preliminary injunction against us seeking to
prohibit us from continuing to use certain advertisements that they believe are
defamatory with the Seoul District Court, (iii) criminal complaints for
obstruction of business and defamation against us with the Seoul District
Prosecutor's office and (iv) a complaint with the FTC over advertisements used
by us. The preliminary injunction complaint states that our use of certain
advertisements questioning KT Freetel's selection as the number one mobile
telecommunications service provider in the world by Businessweek magazine is
libelous and defamatory. On August 24, 2002, the Seoul District Court ruled in
favor of KT Freetel in the preliminary injunction hearing and issued a
preliminary injunction prohibiting us from continuing to use advertisements that
contain defamatory statements against KT Freetel. The FTC has also notified us
that they have completed their investigation of KT Freetel's complaint and have
found our advertisements were defamatory. As a result, we paid a fine of Won
2.08 billion to the FTC and made public apologies in two major newspapers. We
have also filed complaints against KT Corporation with the Communications
Commission and the FTC for KT Corporation's continued activity of forcing its
employees to promote the sale of KT Freetel mobile subscriptions, which we
believe constitutes illegal marketing activities. The case is currently pending.
Except as described above, neither we nor any of our subsidiaries are
involved in any litigation, arbitration or administrative proceedings relating
to claims which may have, or have had during the twelve months preceding the
date hereof, a significant effect on our financial position or the financial
position of our subsidiaries taken as a whole, and, so far as we are aware, no
such litigation, arbitration or administrative proceedings are pending or
threatened.
DIVIDENDS
Dividends, if any, on our outstanding shares must be approved at the annual
general meeting of shareholders. This meeting is generally held in March of the
following year, and the dividend is generally paid shortly after the meeting.
Since our shareholders have discretion to declare dividends, we cannot give any
assurance as to the amount of dividends per share or that any dividends will be
declared at all. Once declared, dividends must be claimed within five years,
after which the right to receive the dividends is extinguished and reverted to
us.
We pay cash dividends to the ADR depositary in Won. Under the terms of the
deposit agreement, cash dividends received by the ADR depositary generally are
to be converted by the ADR depositary into Dollars and distributed to the
holders of the ADSs, less withholding tax, other governmental charges and the
ADR depositary's fees and expenses. The ADR depositary's designated bank in
Korea must approve this conversion and remittance of cash dividends. See
"Additional Information -- Korean Foreign Exchange Controls and Securities
Regulations" and "Additional Information -- Taxation -- Korean Taxation".
83
The following table sets forth the dividend per share, the aggregate total
amount of dividends, as well as the number of outstanding shares entitled to
dividends to the shareholders of record on December 31 of the years indicated.
The dividends set out for each of the years below were paid in the immediately
following year.
DIVIDEND PER TOTAL AMOUNT OF NUMBER OF SHARES
YEAR ENDED DECEMBER 31, SHARE(1) DIVIDENDS ENTITLED TO DIVIDEND(1)
----------------------- ------------ -------------------- -----------------------
(WON) (IN BILLIONS OF WON)
1998........................................ W 90 W 5.6 62,169,720
1999........................................ 118 7.6 64,258,670
2000........................................ 185 15.4 83,284,110
2001........................................ 540 48.1 89,079,034
2002........................................ 690 57.3 82,993,404
---------------
(1) Dividend per share and number of shares entitled to dividend have been
adjusted to give effect to the 10-for-1 stock split of our common shares
which became effective on April 21, 2000.
84
ITEM 9. THE OFFER AND LISTING
MARKET PRICE INFORMATION
The principal trading market for our common stock is the Korea Stock
Exchange. As of May 30, 2003, 76,159,090 shares of our common stock were
outstanding.
The ADSs are traded on the New York Stock Exchange and the London Stock
Exchange. The ADSs have been issued by the ADR depositary and are traded on the
New York Stock Exchange under the symbol "SKM". Each ADS represents one-ninth of
one share of common stock. As of May 30, 2003, 98,870,022 ADSs representing
10,985,558 shares of our common stock were outstanding.
SHARES OF COMMON STOCK
The following table sets forth the high, low and closing prices and the
average daily trading volume of the shares of common stock on the Korea Stock
Exchange since January 1, 1998:
PRICES(1)
------------------------------ AVERAGE DAILY
CALENDAR YEAR HIGH(2) LOW(2) CLOSE TRADING VOLUME
------------- -------- -------- -------- ------------------
(WON PER SHARE) (NUMBER OF SHARES)
1998............................. W 59,620 W 31,759 W 59,620 81,903
1999............................. 407,000 52,419 407,000 278,185
2000............................. 481,000 216,000 253,000 262,660
First Quarter.................. 481,000 323,000 360,000 238,762
Second Quarter................. 406,000 263,500 365,000 311,828
Third Quarter.................. 379,000 216,000 272,000 239,913
Fourth Quarter................. 288,000 230,000 253,000 261,753
2001............................. 295,000 165,000 268,000 242,254
First Quarter.................. 293,500 182,000 183,000 253,393
Second Quarter................. 235,500 165,000 191,500 312,070
Third Quarter.................. 223,000 184,500 208,000 154,785
Fourth Quarter................. 295,000 220,000 268,000 250,676
2002............................. 299,000 209,500 229,000 261,482
First Quarter.................. 299,000 242,000 290,000 269,185
Second Quarter................. 292,000 239,000 260,500 233,807
Third Quarter.................. 279,500 209,500 237,000 241,154
Fourth Quarter................. 252,500 220,000 229,000 314,019
October..................... 249,000 220,000 225,000 290,247
November.................... 252,000 220,000 248,500 241,856
December.................... 252,500 229,000 229,000 421,305
2003 (through May 2003).......... 235,000 142,000 190,000 392,252
First Quarter.................. 235,000 142,000 153,000 455,169
January..................... 235,000 173,000 179,000 552,736
February.................... 183,500 160,500 165,000 416,757
March....................... 169,500 142,000 153,000 394,185
Second Quarter (through
May 2003)................... 190,000 157,500 190,000 297,110
April....................... 188,000 157,500 169,000 325,105
May......................... 190,000 167,000 190,000 264,696
---------------
Source: Korea Stock Exchange
85
(1) The prices give effect to the 10-for-1 stock split of our common shares
which became effective on April 21, 2000 and resulted in the par value of
each share being reduced from Won 5,000 to Won 500.
(2) Both high and low prices are based on the daily closing prices for the
period.
AMERICAN DEPOSITARY SHARES
The following table sets forth the high, low and closing prices and the
average daily trading volume of the ADSs on the New York Stock Exchange since
January 1, 1998:
PRICES(1)
-------------------------------- AVERAGE DAILY
CALENDAR YEAR HIGH(2) LOW(2) CLOSE TRADING VOLUME
------------- -------- ---------- -------- ----------------
(US$ PER ADS) (NUMBER OF ADSS)
1998.............................. US$10.51 US$ 4.50 US$ 9.06 436,378
1999.............................. 39.94 8.76 38.38 744,266
2000.............................. 50.69 20.56 23.56 832,301
First Quarter................... 50.69 33.50 39.00 964,229
Second Quarter.................. 43.31 28.25 36.31 781,578
Third Quarter................... 43.44 20.56 25.63 810,021
Fourth Quarter.................. 28.19 21.31 23.56 773,376
2001.............................. 28.94 13.50 21.62 710,410
First Quarter................... 28.94 15.18 15.18 743,602
Second Quarter.................. 21.05 13.50 16.90 817,532
Third Quarter................... 20.21 16.15 18.44 655,302
Fourth Quarter.................. 25.29 18.36 21.62 623,611
2002.............................. 26.75 19.25 21.35 684,421
First Quarter................... 24.70 20.30 24.60 488,958
Second Quarter.................. 26.75 20.20 24.40 555,865
Third Quarter................... 26.36 19.25 21.23 963,578
Fourth Quarter.................. 22.81 19.30 21.35 717,859
October...................... 22.50 19.30 20.07 453,100
November..................... 22.81 20.26 22.50 762,435
December..................... 22.74 21.25 21.35 370,795
2003 (through May 2003)........... 21.85 12.83 17.95 875,147
First Quarter................... 21.85 12.83 13.62 971,215
January...................... 21.85 16.70 17.01 1,127,624
February..................... 17.16 15.00 15.39 662,700
March........................ 15.65 12.83 13.62 1,093,938
Second Quarter (through May
2003)........................ 17.95 14.07 17.95 735,619
April........................ 17.32 14.07 15.02 807,971
May.......................... 17.95 15.24 17.95 663,267
---------------
Source: New York Stock Exchange
(1) The prices give effect to the 10-for-1 stock split of our common shares
which became effective on April 21, 2000.
(2) Both high and low prices are based on the daily closing prices for the
period.
86
THE KOREAN SECURITIES MARKET
THE KOREA STOCK EXCHANGE
The Korea Stock Exchange began its operations in 1956. Currently it is the
only stock exchange in Korea. It has a single trading floor located in Seoul.
The Korea Stock Exchange is a membership organization, consisting of most of
Korean securities companies and some Korean branches of foreign securities
companies.
As of July 25, 2002, the aggregate market value of equity securities listed
on the Korea Stock Exchange was approximately Won 290.6 trillion. The average
daily trading volume of equity securities for 2001 was approximately 473 million
shares with an average transaction value of Won 1,997.4 billion and for the
period from January 1, 2002 through July 25, 2002, was approximately 781 million
shares with an average transaction value of Won 3,578.6 billion.
The Korea Stock Exchange has the power in some circumstances to suspend
trading in the shares of a given company or to de-list a security. The Korea
Stock Exchange also restricts share price movements. All listed companies are
required to file accounting reports annually, semi-annually and quarterly and to
release immediately all information that may affect trading in a security.
The Government has in the past exerted, and continues to exert, substantial
influence over many aspects of the private sector business community which can
have the intention or effect of depressing or boosting the market. In the past,
the Government has informally both encouraged and restricted the declaration and
payment of dividends, induced mergers to reduce what it considers excess
capacity in a particular industry and induced private companies to offer
publicly their securities.
The Korea Stock Exchange publishes the Korea Composite Stock Price Index,
or KOSPI, every ten seconds, which is an index of all equity securities listed
on the Korea Stock Exchange. On January 1, 1983, the method of computing KOSPI
was changed from the Dow Jones method to the aggregate value method. In the new
method, the market capitalizations of all listed companies are aggregated,
subject to certain adjustments, and this aggregate is expressed as a percentage
of the aggregate market capitalization of all listed companies as of the base
date, January 4, 1980.
Movements in KOSPI are set out in the following table together with the
associated dividend yields and price to earnings ratios:
PERIOD AVERAGE
----------------------------
DIVIDEND PRICE EARNINGS
YEAR OPENING HIGH LOW CLOSING YIELD(1)(%) RATIO(2)
---- -------- -------- ------ -------- ----------- --------------
1979......................... 131.28 131.28 104.38 118.97 17.8 3.8
1980......................... 100.00 119.36 100.00 106.87 20.9 2.6
1981......................... 97.95 165.95 93.14 131.37 13.2 3.1
1982......................... 123.60 134.49 106.00 127.31 10.5 3.4
1983......................... 122.52 134.46 115.59 121.21 6.9 3.8
1984......................... 116.73 142.46 114.37 142.46 5.1 4.5
1985......................... 139.53 163.37 131.40 163.37 5.3 5.2
1986......................... 161.40 279.67 153.85 272.61 4.3 7.6
1987......................... 264.82 525.11 264.82 525.11 2.6 10.9
1988......................... 532.04 922.56 527.89 907.20 2.4 11.2
1989......................... 919.61 1,007.77 844.75 909.72 2.0 13.9
1990......................... 908.59 928.82 566.27 696.11 2.2 12.8
1991......................... 679.75 763.10 586.51 610.92 2.6 11.2
1992......................... 624.23 691.48 459.07 678.44 2.2 10.9
1993......................... 697.41 874.10 605.93 866.18 1.6 12.7
1994......................... 879.32 1,138.75 860.47 1,027.37 1.2 16.2
87
PERIOD AVERAGE
----------------------------
DIVIDEND PRICE EARNINGS
YEAR OPENING HIGH LOW CLOSING YIELD(1)(%) RATIO(2)
---- -------- -------- ------ -------- ----------- --------------
1995......................... 1,013.57 1,016.77 847.09 882.94 1.2 16.4
1996......................... 888.85 986.84 651.22 651.22 1.3 17.8
1997......................... 653.79 792.29 350.68 376.31 1.5 17.0
1998......................... 385.49 579.86 280.00 562.46 1.9 10.8
1999......................... 587.57 1,028.07 498.42 1,028.07 1.1 13.5
2000......................... 1,059.04 1,059.04 500.60 504.62 1.6(3) 18.6(3)
2001......................... 520.95 704.50 468.76 693.70 2.0(3) 14.2(3)
2002......................... 724.95 937.61 584.04 829.44 1.4(3) 17.9(3)
2003 (through May 2003)...... 635.17 666.71 515.24 633.42 1.8(3) 13.1(3)
---------------
Source: Korea Stock Exchange
(1) Dividend yields are based on daily figures. Before 1983, dividend yields
were calculated at the end of each month. Dividend yields after January 3,
1984 include cash dividends only.
(2) The price to earnings ratio is based on figures for companies that record a
profit in the preceding year.
(3) Starting in April 2000, dividend yield and price earnings ratio of KOSPI
200, an index of 200 equity securities listed on the Korea Stock Exchange.
Starting in April 2000, excludes classified companies, companies which did
not submit annual reports to the Korea Stock Exchange, and companies which
received disqualified opinion from external auditors.
(4) Data not available.
Shares are quoted "ex-dividend" on the first trading day of the relevant
company's accounting period. Since the calendar year is the accounting period
for the majority of listed companies, this may account for the drop in KOSPI
between its closing level at the end of one calendar year and its opening level
at the beginning of the following calendar year.
With certain exceptions, principally to take account of a share being
quoted "ex-dividend" and "ex-rights", permitted upward and downward movements in
share prices of any category of shares on any day are limited under the rules of
the Korea Stock Exchange to 15.0% of the previous day's closing price of the
shares, rounded down as set out below:
ROUNDED DOWN
PREVIOUS DAY'S CLOSING PRICE (WON) TO (WON)
---------------------------------- ------------
Less than 5,000....................................... W 5
5,000 to less than 10,000............................. 10
10,000 to less than 50,000............................ 50
50,000 to less than 100,000........................... 100
100,000 to less than 500,000.......................... 500
500,000 or more....................................... 1,000
As a consequence, if a particular closing price is the same as the price
set by the fluctuation limit, the closing price may not reflect the price at
which persons would have been prepared, or would be prepared to continue, if so
permitted, to buy and sell shares. Orders are executed on an auction system with
priority rules to deal with competing bids and offers.
Due to a recent deregulation of restrictions on brokerage commission rates,
the brokerage commission rate on equity securities transactions may be
determined by the parties, subject to commission schedules being filed with the
Korea Stock Exchange by the securities companies. In addition, a securities
transaction tax will generally be imposed on the transfer of shares or certain
securities representing rights to subscribe for shares. A special agricultural
and fishery tax of 0.15% of the sales prices will also be imposed on transfer of
these shares and securities on the Korea Stock Exchange. See "Additional
Information Taxation -- Korean Taxation".
88
The following table sets forth the number of companies listed on the Korea
Stock Exchange, the corresponding total market capitalization and the average
daily trading volume at the end of the periods indicated:
MARKET CAPITALIZATION ON THE
LAST DAY OF EACH PERIOD
----------------------------------------- AVERAGE DAILY TRADING VOLUME & VALUE
NUMBER OF -------------------------------------
LISTED (MILLIONS (THOUSANDS OF THOUSANDS (MILLIONS (THOUSANDS OF
YEAR COMPANIES OF WON) DOLLARS)(1) OF SHARES OF WON) DOLLARS)(1)
---- --------- ------------ -------------- --------- --------- -------------
1979..................... 355 W 2,609,414 US$ 5,391,351 5,382 W 4,579 US$ 4,641
1980..................... 352 2,526,553 3,828,691 5,654 3,897 5,905
1981..................... 343 2,959,057 4,224,207 10,565 8,708 12,433
1982..................... 334 3,000,494 4,407,711 9,704 6,667 8,904
1983..................... 328 3,489,654 4,386,743 9,325 5,941 7,468
1984..................... 336 5,148,460 6,222,456 14,847 10,642 12,862
1985..................... 342 6,570,404 7,380,818 18,925 12,315 13,834
1986..................... 355 11,994,233 13,924,115 31,755 32,870 38,159
1987..................... 389 26,172,174 33,033,162 20,353 70,185 88,584
1988..................... 502 64,543,685 94,348,318 10,367 198,364 289,963
1989..................... 626 95,476,774 140,489,660 11,757 280,967 414,431
1990..................... 669 79,019,676 110,301,055 10,866 183,692 256,500
1991..................... 686 73,117,833 96,182,364 14,022 214,263 281,850
1992..................... 688 84,711,982 107,502,515 24,028 308,246 391,175
1993..................... 693 112,665,260 139,419,948 35,130 574,048 676,954
1994..................... 699 151,217,231 191,729,721 36,862 776,257 984,223
1995..................... 721 141,151,399 182,201,367 26,130 487,762 629,614
1996..................... 760 117,369,988 139,031,021 26,571 486,834 575,733
1997..................... 776 70,988,897 50,161,742 41,525 555,759 392,707
1998..................... 748 137,798,451 114,090,455 97,716 660,429 471,432
1999..................... 725 349,503,966 305,137,040 278,551 3,481,620 3,039,654
2000..................... 704 188,041,490 150,162,898 306,163 2,602,211 2,078,028
2001..................... 689 225,850,076 194,784,979 473,241 1,997,420 1,520,685
2002..................... 683 258,680,756 218,167,122 851,242 3,041,592 2,414,362
2003 (through
May 2003).............. 679 261,398,853 215,853,718 640,388 1,944,542 1,605,732
---------------
Source: Korea Stock Exchange
(1) Converted at the concentration base rate of The Bank of Korea or the market
average exchange rate as announced by the Seoul Money Brokerage Services
Limited, as the case may be, at the end of the periods indicated.
The Korean securities markets are principally regulated by the Financial
Supervisory Commission of Korea and the Securities and Exchange Act. The
Securities and Exchange Act was amended fundamentally numerous times in recent
years to broaden the scope and improve the effectiveness of official supervision
of the securities markets. As amended, the law imposes restrictions on insider
trading and price manipulation, requires specified information to be made
available by listed companies to investors and establishes rules regarding
margin trading, proxy solicitation, takeover bids, acquisition of treasury
shares and reporting requirements for shareholders holding substantial
interests.
FURTHER OPENING OF THE KOREAN SECURITIES MARKET
A stock index futures market was opened on May 3, 1996 and a stock index
option market was opened on July 7, 1997, in each case at the Korea Stock
Exchange. Remittance and repatriation of funds in connection
89
with investment in stock index futures and options are subject to regulations
similar to those that govern remittance and repatriation in the context of
foreign investment in Korean stocks.
In addition, the Korea Stock Exchange opened new option markets for stocks
of seven companies including our shares of common stock and common stock of six
other companies on January 28, 2002. Foreigners will be permitted to invest in
such options for individual stocks subject to certain procedural requirements.
Starting from May 1, 1996, foreign investors were permitted to invest in
warrants representing the right to subscribe for shares of a company listed on
the Korea Stock Exchange or registered on the KOSDAQ, subject to certain
investment limitations. A foreign investor may not acquire such warrants with
respect to shares of a class of a company for which the ceiling on aggregate
investment by foreigners has been reached or exceeded.
As of December 30, 1997, foreign investors were permitted to invest in all
types of corporate bonds, bonds issued by national or local governments and
bonds issued in accordance with certain special laws without being subject to
any aggregate or individual investment ceiling. The Financial Supervisory
Commission of Korea sets forth procedural requirements for such investments. The
Government announced on February 8, 1998 its plans for the liberalization of the
money market with respect to investment in money market instruments by
foreigners in 1998. According to the plan, foreigners have been permitted to
invest in money market instruments issued by corporations, including commercial
paper, starting February 16, 1998 with no restrictions as to the amount.
Starting May 25, 1998, foreigners have been permitted to invest in certificates
of deposit and repurchase agreements.
Currently, foreigners are permitted to invest in securities including
shares of all Korean companies which are not listed on the Korea Stock Exchange
nor registered on the KOSDAQ and in bonds which are not listed.
PROTECTION OF CUSTOMER'S INTEREST IN CASE OF INSOLVENCY OF SECURITIES COMPANIES
Under Korean law, the relationship between a customer and a securities
company in connection with a securities sell or buy order is deemed to be
consignment and the securities acquired by a consignment agent (i.e., the
securities company) through such sell or buy order are regarded as belonging to
the customer in so far as the customer and the consignment agent's creditors are
concerned. Therefore, in the event of a bankruptcy or reorganization procedure
involving a securities company, the customer of the securities company is
entitled to the proceeds of the securities sold by the securities company.
When a customer places a sell order with a securities company which is not
a member of the Korea Stock Exchange and this securities company places a sell
order with another securities company which is a member of the Korea Stock
Exchange, the customer is still entitled to the proceeds of the securities sold
received by the non-member company from the member company regardless of the
bankruptcy or reorganization of the non-member company.
Under the Securities and Exchange Act, the Korea Stock Exchange is obliged
to indemnify any loss or damage incurred by a counterparty as a result of a
breach by its members. If a securities company which is a member of the Korea
Stock Exchange breaches its obligation in connection with a buy order, the Korea
Stock Exchange is obliged to pay the purchase price on behalf of the breaching
member.
When a customer places a buy order with a non-member company and the
non-member company places a buy order with a member company, the customer has
the legal right to the securities received by the non-member company from the
member company because the purchased securities are regarded as belonging to the
customer in so far as the customer and the non-member company's creditors are
concerned.
As the cash deposited with a securities company is regarded as belonging to
the securities company, which is liable to return the same at the request of its
customer, the customer cannot take back deposited cash from the securities
company if a bankruptcy or reorganization procedure is instituted against the
securities company and, therefore, can suffer from loss or damage as a result.
However, the Depositor Protection Act provides that Korea Deposit Insurance
Corporation will, upon the request of the investors, pay investors up to Won 50
million per investor in case of the securities company's bankruptcy,
liquidation, cancellation of
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securities business license or other insolvency events. Pursuant to the
Securities and Exchange Act, as amended, subject to certain exceptions,
securities companies are required to deposit the cash received from its
customers with the Korea Securities Finance Corporation, a special entity
established pursuant to the Securities and Exchange Act. Set-off or attachment
of cash deposits by securities companies is prohibited. The premiums related to
this insurance under the Depositor Protection Act are paid by securities
companies.
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ITEM 10. ADDITIONAL INFORMATION
DESCRIPTION OF CAPITAL STOCK
This section provides information relating to our capital stock, including
brief summaries of material provisions of our articles of incorporation, the
Korean Securities and Exchange Act of 1962 (the "Korean Securities and Exchange
Act"), the Korean Commercial Code and related laws of Korea, all as currently in
effect. The following summaries are subject to, and are qualified in their
entirety by reference to, our articles of incorporation and the applicable
provisions of the Korean Securities and Exchange Act and the Korean Commercial
Code. We have filed or incorporated by reference copies of our articles of
incorporation and these laws as exhibits to our most recently filed annual
report.
GENERAL
The name of our company is SK Telecom Co., Ltd. We are registered under the
laws of Korea under the commercial registry number of 110111-0371346. As
specified in Article 2 (Objectives) of our articles of incorporation, the
company's objectives are the rational management of the telecommunications
business, development of telecommunications technology, and contribution to
public welfare and convenience. In order to achieve these objectives, we are
engaged in the following:
- information and communication business;
- sale and lease of subscriber handsets;
- new media business;
- advertising business;
- mail order business;
- real estate leases;
- research and technology development relating to the first four items
above;
- overseas and import/export business relating to the first four items
above;
- manufacture and distribution business relating to the first four items
above; and
- any business or undertaking incidental or conducive to the attainment of
the objectives stated above.
Currently, our authorized share capital is 220,000,000 shares, which
consists of shares of common stock, par value Won 500 per share and shares of
non-voting stock, par value Won 500 per share (common shares and non-voting
shares together are referred to as "shares"). Under our articles of
incorporation, we are authorized to issue up to 5,500,000 non-voting shares. As
of May 30, 2003, 84,821,402 common shares were issued, of which 8,662,403 shares
were held by us in treasury. We have never issued any non-voting shares. All of
the issued and outstanding common shares are fully-paid and non-assessable and
are in registered form. We issue share certificates in denominations of 1, 5,
10, 50, 100, 500, 1,000 and 10,000 shares.
BOARD OF DIRECTORS
Meetings of the board of directors are convened by the representative
director as he or she deems necessary or upon the request of more than three
directors. The board of directors determines all important matters relating to
our business. In addition, the prior approval of the majority of the outside
directors is required for certain matters, which includes:
- investment by us or any of our subsidiaries in a foreign company or other
overseas assets in an amount equal to 5.0% or more of our shareholders'
equity under our most recent balance sheet; and
- contribution of capital, loans or guarantees, acquisition of our
subsidiaries' assets or similar transactions with our affiliated
companies in excess of Won 10 billion through one or a series of
transactions.
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Resolutions of the board are adopted in the presence of a majority of the
directors in office and by the affirmative vote of a majority of the directors
present. No director who has an interest in a matter for resolution may exercise
his or her vote upon such matter.
There are no specific shareholding requirements for director's
qualification. Directors are elected at a general meeting of shareholders if the
approval of a majority vote of the shareholders present at such meeting is
obtained, and such majority also represents at least one-fourth of the total
number of shares outstanding. Under the Korean Securities and Exchange Act,
unless stated otherwise in the articles of incorporation, holders of an
aggregate of 1% or more of the outstanding shares with voting rights may request
cumulative voting in any election for two or more directors. Our articles of
incorporation permit cumulative voting starting from the ordinary general
meeting of shareholders in 2003.
The term of office for directors shall be until the close of the third
annual general shareholders' meeting convened after he or she commences his or
her term. Our directors may serve consecutive terms and our shareholders may
remove them from office at any time by a special resolution adopted at a general
meeting of shareholders.
DIVIDENDS
We distribute dividends to our shareholders in proportion to the number of
shares owned by each shareholder. The common shares represented by the ADSs have
the same dividend rights as other outstanding common shares.
Holders of non-voting shares are entitled to receive dividends in priority
to the holders of common shares. The dividend on the non-voting shares is
between 9.0% and 25.0% of the par value as determined by the board of directors
at the time of their issuance. If the dividends for common shares exceed the
dividends for non-voting shares, the holders of non-voting shares will be
entitled to participate in the distribution of such excess amount with the
holders of common shares. If the amount available for dividends is less than the
aggregate amount of the minimum required dividend, holders of non-voting shares
will be entitled to receive such accumulated unpaid dividend from dividends
payable in the next fiscal year before holders of common shares.
We declare dividends annually at the annual general meeting of shareholders
which is generally held within three months after the end of the fiscal year. We
pay the annual dividend shortly after the annual general meeting to the
shareholders of record as of the end of the preceding fiscal year. We may
distribute the annual dividend in cash or in shares. However, a dividend of
shares must be distributed at par value. If the market price of the shares is
less than their par value, dividends in shares may not exceed one-half of the
annual dividend. Our obligation to pay dividend expires if no claim to dividend
is made for five years from the payment date.
Under the Korean Commercial Code, we may pay an annual dividend only out of
the excess of our net assets, on a non-consolidated basis, over the sum of (1)
our stated capital and (2) the total amount of our capital surplus reserve and
legal reserve accumulated up to the end of the relevant dividend period. In
addition, we may not pay an annual dividend unless we have set aside as legal
reserve an amount equal to at least 10.0% of the cash portion of the annual
dividend or unless we have accumulated a legal reserve of not less than one-half
of our stated capital. As a Korea Stock Exchange-listed company, we are also
required under the relevant laws and regulations to set aside in reserve a
certain amount each fiscal year until our own capital ratio is at least 30%. We
may not use legal reserve to pay cash dividends but may transfer amounts from
legal reserve to capital stock or use legal reserve to reduce an accumulated
deficit.
DISTRIBUTION OF FREE SHARES
In addition to paying dividends in shares out of our retained or current
earnings, we may also distribute to our shareholders an amount transferred from
our capital surplus or legal reserve to our stated capital in the form of free
shares. We must distribute such free shares to all our shareholders in
proportion to their existing shareholdings.
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PREEMPTIVE RIGHTS AND ISSUANCE OF ADDITIONAL SHARES
We may at times issue authorized but unissued shares, unless otherwise
provided in the Korean Commercial Code, on terms determined by our board of
directors. All our shareholders are generally entitled to subscribe to any
newly-issued shares in proportion to their existing shareholdings. We must offer
new shares on uniform terms to all shareholders who have preemptive rights and
are listed on our shareholders' registry as of the relevant record date. Under
the Korean Commercial Code, we may amend, without shareholders' approval, the
terms of these preemptive rights for different classes of shares. We must give
public notice of the preemptive rights regarding new shares and their
transferability at least two weeks before the relevant record date. Our board of
directors may determine how to distribute shares for which preemptive rights
have not been exercised or where fractions of shares occur.
Under the Korean Commercial Code and our articles of incorporation, we may
issue new shares pursuant to a board resolution to persons other than existing
shareholders where such issuance is deemed necessary by us to achieve a business
purpose, including, but not limited to, the introduction of new technology or
the improvement of our financial condition. For example, existing shareholders
would not have preemptive rights if the new shares are issued for the purpose of
depositary receipts in accordance with the relevant regulations or through
offering to public investors.
In addition, we may issue convertible bonds or bonds with warrants, each up
to an aggregate principal amount of Won 400 billion, to persons other than
existing shareholders, where such issuance is deemed necessary by us to achieve
a business purpose, including, but not limited to, the introduction of new
technology or the improvement of our financial condition.
Members of our employee stock ownership association, whether or not they
are our shareholders, generally have a preemptive right to subscribe for up to
20.0% of the shares publicly offered pursuant to the Korean Securities and
Exchange Act. This right is exercisable only to the extent that the total number
of shares so acquired and held by members of our employee stock ownership
association does not exceed 20.0% of the sum of the number of shares then
outstanding and the number of newly-issued shares. As of December 31, 2002,
approximately 0.9% of the issued shares were held by members of our employee
stock ownership association.
GENERAL MEETING OF SHAREHOLDERS
We generally hold the annual general meeting of shareholders within three
months after the end of each fiscal year. Subject to a board resolution or court
approval, we may hold an extraordinary general meeting of shareholders:
- as necessary;
- at the request of holders of an aggregate of 3.0% or more of our
outstanding common shares;
- at the request of shareholders holding an aggregate of 3.0% or more of
our outstanding shares for at least six months; or
- at the request of our audit committee.
Holders of non-voting shares may request a general meeting of shareholders
only after the non-voting shares become entitled to vote or "enfranchised," as
described under "-- Voting Rights" below.
We must give shareholders written notice setting out the date, place and
agenda of the meeting at least two weeks before the date of the general meeting
of shareholders. However, for holders of less than 1.0% of the total number of
issued and outstanding voting shares, we may give notice by placing at least two
public notices in at least two daily newspapers at least two weeks in advance of
the meeting. Currently, we use The Korea Economic Daily News and Mail Business
Newspaper, both published in Seoul, for this purpose. Shareholders who are not
on the shareholders' registry as of the record date are not entitled to receive
notice of the general meeting of shareholders or attend or vote at the meeting.
Holders of non-voting shares, unless enfranchised, are not entitled to receive
notice of or vote at general meetings of shareholders, but may attend such
meetings.
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Our general meetings of shareholders have historically been held in or near
Seoul.
VOTING RIGHTS
Holders of our common shares are entitled to one vote for each common
share, except that voting rights of common shares held by us (including treasury
shares and shares held by bank trust funds controlled by us), or by a corporate
shareholder that is more than 10.0% owned by us either directly or indirectly,
may not be exercised. Under the Korean Securities and Exchange Act, unless
stated otherwise in the articles of incorporation, holders of an aggregate of 1%
or more of the outstanding shares with voting rights may request cumulative
voting in any election for two or more directors. Our articles of incorporation
permit cumulative voting starting from the ordinary general meeting of
shareholders in 2003. Under this voting method, each shareholder would have
multiple voting rights corresponding to the number of directors to be appointed
in a particular election and may exercise all voting rights cumulatively to
elect one director.
Our shareholders may adopt resolutions at a general meeting by an
affirmative majority vote of the voting shares present or represented at the
meeting if the proportion of affirmative votes also represent at least one-
fourth of our total voting shares then issued and outstanding. However, under
the Korean Commercial Code and our articles of incorporation, the following
matters, among others, require approval by the holders of at least two-thirds of
the voting shares present or represented at a meeting, and such affirmative
votes also represent at least one-third of our total voting shares then issued
and outstanding:
- amending our articles of incorporation;
- removing a director;
- effecting any dissolution, merger or consolidation of us;
- transferring the whole or any significant part of our business;
- effecting our acquisition of all of the business of any other company or
a part of the business of any other company having a material effect on
our business; or
- issuing any new shares at a price lower than their par value.
In general, holders of non-voting shares are not entitled to vote on any
resolution or receive notice of any general meeting of shareholders. However, in
the case of amendments to our articles of incorporation, or any merger or
consolidation of us, or in some other cases which affect the rights or interests
of the non-voting shares, approval of the holders of non-voting shares is
required. We may obtain the approval by a resolution of holders of at least
two-thirds of the non-voting shares present or represented at a class meeting of
the holders of non-voting shares, where the affirmative votes also represent at
least one-third of our total issued and outstanding non-voting shares. In
addition, if we are unable to pay dividends on non-voting shares as provided in
our articles of incorporation, the holders of non-voting shares will become
enfranchised and will be entitled to exercise voting rights until the dividends
are paid. The holders of enfranchised non-voting shares have the same rights as
holders of common shares to request, receive notice of, attend and vote at a
general meeting of shareholders.
Shareholders may exercise their voting rights by proxy. A shareholder may
give proxies only to another shareholder, except that a corporate shareholder
may give proxies to its officers or employees.
Holders of ADRs exercise their voting rights through the ADR depositary, an
agent of which is the record holder of the underlying common shares. Subject to
the provisions of the deposit agreement, ADR holders are entitled to instruct
the ADR depositary how to vote the common shares underlying their ADSs.
RIGHTS OF DISSENTING SHAREHOLDERS
In some limited circumstances, including the transfer of all or a
significant part of our business or our merger or consolidation with another
company (with certain exceptions), dissenting shareholders have the right to
require us to purchase their shares. To exercise this right, shareholders,
including holders of non-voting shares, must submit to us a written notice of
their intention to dissent before the general meeting of
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shareholders. Then, within 20 days after the relevant resolution is passed at a
meeting, the dissenting shareholders must request us in writing to purchase
their shares. We are obligated to purchase the shares of such dissenting
shareholders within one month after the expiration of the 20-day period. The
purchase price for the shares is required to be determined through negotiation
between the dissenting shareholders and us. If we cannot agree on a price
through negotiation, the purchase price will be the average of (1) the weighted
average of the daily share prices on the Korea Stock Exchange for the two-month
period before the date of the adoption of the relevant board resolution, (2) the
weighted average of the daily share price on the Korea Stock Exchange for the
one month period before the date of the adoption of the relevant resolution and
(3) the weighted average of the daily share price on the Korea Stock Exchange
for the one week period before such date of the adoption of the relevant
resolution. However, the Financial Supervisory Commission of Korea may adjust
this price if we or 30.0% or more of dissenting shareholders do not accept the
purchase price. Holders of ADSs will not be able to exercise dissenter's rights
unless they have withdrawn the underlying common stock and become our direct
shareholders.
REGISTRY OF SHAREHOLDERS AND RECORD DATES
Our transfer agent, Kookmin Bank, maintains the registry of our
shareholders at its office in Seoul, Korea. It records and registers transfers
of shares on the registry of shareholders upon presentation of the share
certificates.
The record date for annual dividends is December 31. For the purpose of
determining the shareholders entitled to annual dividends, the registry of
shareholders is closed for the period from January 1 to January 31 of the
following year. Further, for the purpose of determining the shareholders
entitled to some other rights pertaining to the shares, we may, on at least two
weeks' public notice, set a record date and/or close the register of
shareholders for not more than three months. The trading of shares and the
delivery of share certificates may continue while the register of shareholders
is closed.
ANNUAL REPORT
At least one week before the annual general meeting of shareholders, we
must make our annual report and audited non-consolidated financial statements
available for inspection at our principal office and at all of our branch
offices. In addition, copies of annual reports, the audited non-consolidated
financial statements and any resolutions adopted at the general meeting of
shareholders will be available to our shareholders.
Under the Korean Securities and Exchange Act, we must file with the
Financial Supervisory Commission of Korea and the Korea Stock Exchange (1) an
annual securities report within 90 days after the end of our fiscal year, (2) a
half-year report within 45 days after the end of the first six months of our
fiscal year, and (3) quarterly reports within 45 days after the end of the third
month and the ninth month of our fiscal year. Copies of these reports are or
will be available for public inspection at the Financial Supervisory Commission
of Korea and the Korea Stock Exchange.
TRANSFER OF SHARES
Under the Korean Commercial Code, the transfer of shares is effected by the
delivery of share certificates. However, to assert shareholders' rights against
us, the transferee must have his or her name, seal and address registered on our
registry of shareholders, maintained by our transfer agent. A non-Korean
shareholder may file a sample signature in place of a seal, unless he or she is
a citizen of a country with a sealing system similar to that of Korea. In
addition, a non-resident shareholder must appoint an agent in Korea authorized
to receive notices on his or her behalf and file a mailing address in Korea.
These requirements do not apply to holders of ADSs.
Under current Korean regulations, Korean securities companies and banks,
including licensed branches of non-Korean securities companies and banks,
investment management companies, futures trade companies, internationally
recognized foreign custodians and the Korea Securities Depository may act as
agents and provide related services for foreign shareholders. Certain foreign
exchange controls and securities regulations
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apply to the transfer of shares by non-residents or non-Koreans. See "-- Korean
Foreign Exchange Controls and Securities Regulations".
Our transfer agent is Kookmin Bank, located at 24-3, Yoido-dong,
Yongdungpo-ku, Seoul, Korea.
RESTRICTIONS APPLICABLE TO SHARES
Pursuant to the Telecommunications Business Law, the maximum aggregate
foreign shareholding in us is limited to 49.0%. See "Information on the
Company -- Business Overview -- Law and Regulation -- Foreign Ownership and
Investment Restrictions and Requirements". In addition, certain foreign exchange
controls and securities regulations apply to the acquisition of securities by
non-residents or non-Koreans. See "-- Korean Foreign Exchange Controls and
Securities Regulations".
ACQUISITION OF SHARES BY US
Under the Korean Commercial Code, we may not acquire our own shares except
in limited circumstances, such as a reduction in capital. However, we may
acquire our own shares under the relevant provisions of the Securities and
Exchange Act. In such cases, we may acquire shares through purchases on the
Korea Stock Exchange or through a tender-offer after filing the required report
with the Financial Supervisory Commission of Korea and the Korea Stock Exchange.
We may also acquire interests in our own shares through agreements with trust
companies, securities investment companies and securities investment trust
companies. The aggregate purchase price for the shares may not exceed the total
amount available for distribution of dividends, subject to certain procedural
requirements.
Under the Korean Commercial Code, except in the case of a reduction in
capital, we must resell or transfer any shares we acquire to a third party
within a reasonable time. In general, corporate entities in which we own more
than 50% equity interest may not acquire our shares. Under the Korean Securities
and Exchange Act, we are subject to certain selling restrictions for the shares
we acquire. In the case of a reduction in capital, we must immediately cancel
the shares we acquire. On October 26, 2001, in accordance with the approval of
our board of directors, we announced plans to establish 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. See "Operating
and Financial Review and Prospects".
LIQUIDATION RIGHTS
In the event of our liquidation, assets remaining after payment of all
debts, liquidation expenses and taxes will be distributed among shareholders in
proportion to their shareholdings. Holders of non-voting shares have no
preference in liquidation. Holders of debt securities have no preference over
other creditors in the event of liquidation.
DESCRIPTION OF AMERICAN DEPOSITARY SHARES
The following is a summary of the deposit agreement dated as of May 31,
1996, as amended by amendment no. 1 dated as of March 15, 1999, amendment no. 2
dated as of April 24, 2000 and amendment no. 3 dated as of July 24, 2002, among
us, Citibank, N.A., as ADR depositary, and all holders and beneficial owners of
ADRs and as supplemented by the side letter dated as of August 1, 2002 by and
between us and Citibank, N.A., as ADR depositary. The deposit agreement is
governed by the laws of the State of New York. Because it is a summary, this
description does not contain all the information that may be important to you.
For more complete information, you should read the entire deposit agreement and
the ADR. The deposit agreement has been filed as an exhibit to our registration
statement on Form F-3 (File No. 333-91304) filed with the United States
Securities and Exchange Commission. Copies of the deposit agreement are
available for inspection at the principal New York office of the ADR depositary,
currently located at 111 Wall Street, 20th Floor, New York, New York 10043, and
at the principal London office of the ADR depositary currently located at
Cottons Centre, Hays Lane, London SE1 2QT, England.
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AMERICAN DEPOSITARY RECEIPTS
The ADR depositary will execute and deliver the ADRs evidencing the ADSs.
Each ADR evidences a specified number of ADSs, each ADS representing one-ninth
of one share of our common stock to be deposited with the ADR depositary's
custodian in Seoul, or the Custodian. The Custodian is Korea Securities
Depository, located at 36-5 Yoido-dong, Yongdungpo-ku, Seoul, Korea. Korea
Securities Depository is also the institution authorized under applicable law to
effect book-entry transfers of our common shares, known as the "Custodian". An
ADR may represent any number of ADSs. We and the ADR depositary will treat only
persons in whose names ADRs are registered on the books of the registrar as
holders of ADRs.
DEPOSIT AND WITHDRAWAL OF SHARES OF COMMON STOCK
NOTWITHSTANDING THE PROVISIONS DESCRIBED BELOW, UNDER CURRENT KOREAN LAWS
AND REGULATIONS AND THE TERMS OF THE DEPOSIT AGREEMENT, THE ADR DEPOSITARY IS
REQUIRED TO OBTAIN OUR CONSENT FOR THE DEPOSIT OF OUR COMMON SHARES FOR ISSUANCE
OF ADSS TO THE EXTENT THAT THE NUMBER OF SHARES TO BE DEPOSITED IN ANY GIVEN
PROPOSED DEPOSIT EXCEEDS THE DIFFERENCE BETWEEN (X) THE AGGREGATE NUMBER OF
SHARES DEPOSITED BY US OR WITH OUR CONSENT FOR THE ISSUANCE OF ADSS (INCLUDING
DEPOSITS IN CONNECTION WITH THE INITIAL AND ALL SUBSEQUENT OFFERINGS OF ADSS AND
STOCK DIVIDENDS OR OTHER DISTRIBUTIONS RELATED TO THESE ADSS) AND (Y) THE NUMBER
OF SHARES ON DEPOSIT WITH THE ADR DEPOSITARY AT THE TIME OF SUCH PROPOSED
DEPOSIT.
The shares of common stock underlying the ADSs are delivered to the ADR
depositary's custodian in book-entry form. Accordingly, no share certificates
will be issued for them, and the ADR depositary will hold the shares of common
stock through the book-entry settlement system of the Custodian. The delivery of
the shares of common stock pursuant to the deposit agreement will take place
through the facilities of the Custodian in accordance with its applicable
settlement procedures. The ADR depositary will execute and deliver ADRs if you
or your broker deposit shares or evidence of rights to receive shares of common
stock with the Custodian. Upon payment of its fees and expenses and of any taxes
or charges, such as stamp taxes or stock transfer taxes or fees, the ADR
depositary will register the appropriate number of ADSs in the names you
designate and will deliver an ADR or ADRs for those ADSs to the persons you
designate. The ADR depositary and the ADR depositary's custodian will refuse to
accept shares of common stock for deposit whenever we restrict transfer of
shares of common stock to comply with ownership restrictions under applicable
law or our articles of incorporation or whenever the deposit would cause the
total number of shares of common stock deposited to exceed a level we determine
from time to time. We may instruct the ADR depositary to take certain actions
with respect to a holder of ADSs who holds in excess of the ownership limitation
set forth in the deposit agreement, including the mandatory sale or disposition
of the shares represented by the ADSs in excess of such ownership limitations
if, and to the extent, permitted by applicable law.
You may surrender your ADRs to the ADR depositary to withdraw the
underlying shares of our common stock. Upon payment of the fees and any
governmental charges and taxes provided in the deposit agreement, and subject to
applicable laws and regulations of Korea and our articles of incorporation, you
will be entitled to physical delivery or electronic delivery to an account in
Korea or, if permissible under applicable Korean law, outside Korea, of the
shares of common stock evidenced by the ADRs and any other property at the time
represented by ADRs you surrendered. If you surrender an ADR evidencing a number
of ADSs not evenly divisible by nine, the ADR depositary will deliver the
appropriate whole number of shares of common stock represented by the
surrendered ADSs, and will execute and deliver to you a new ADR evidencing ADSs
representing any remaining fractional shares of common stock.
If you request withdrawal of shares of common stock, you must deliver to
the ADR depositary a written order directing the ADR depositary to cause the
shares of common stock being withdrawn to be delivered outside the United States
to or upon the written order of the person designated in your order, subject to
applicable Korean laws and the provisions of the deposit agreement.
Under the provisions of the deposit agreement, the ADR depositary may not
lend shares of common stock or ADSs. However, subject to the provisions of the
deposit agreement and limitations established by the ADR depositary, the ADR
depositary may execute and deliver ADSs before deposit of the underlying shares
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of common stock. This is called a pre-release of the ADS. The ADR depositary may
also deliver shares of common stock upon cancellation of pre-released ADSs (even
if the cancellation occurs before the termination of the pre-release) or upon
receipt of other ADSs. The ADR depositary may pre-release ADSs only under the
following circumstances:
- before or at the time of the pre-release, the person to whom the
pre-release is being made must represent to the ADR depositary in writing
that it or its customer owns the shares of common stock or ADRs to be
deposited and show evidence of the ownership to the ADR depositary's
satisfaction;
- before or at the time of such pre-release, the person to whom the
pre-release is being made must agree in writing that he will hold the
shares of common stock or ADSs in trust for the ADR depositary until
their delivery to the ADR depositary or custodian, reflect on his records
the ADR depositary as owner of such shares of common stock or ADSs and
deliver such shares of common stock upon the ADR depositary's request;
- the pre-release must be fully collateralized with cash or U.S. government
securities;
- the ADR depositary must be able to terminate the pre-release on not more
than five business day's notice; and
- the pre-release is subject to further indemnities and credit regulations
as the ADR depositary deems appropriate.
The ADR depositary may retain for its own account any compensation received
by it in connection with the pre-release, such as earnings on the collateral.
If you want to withdraw the shares of common stock from the depositary
facility, you must register your identity with the Financial Supervisory Service
of Korea before you acquire the shares of common stock unless you intend to sell
the shares of common stock within three months. See "Korean Foreign Exchange
Controls and Securities Regulations -- Restrictions Applicable to Shares".
DIVIDENDS, OTHER DISTRIBUTIONS AND RIGHTS
If the ADR depositary can, in its judgment and pursuant to applicable law,
convert Won (or any other foreign currency) into Dollars on a reasonable basis
and transfer the resulting Dollars to the United States, the ADR depositary will
as promptly as practicable convert all cash dividends and other cash
distributions received by it on the deposited shares of common stock into
Dollars and to distribute the Dollars to you in proportion to the number of ADSs
representing shares of common stock held by you, after deduction of the fees and
expenses of the ADR depositary. If the ADR depositary determines that in its
judgment any currency other than Dollars it receives from us cannot be converted
and distributed on a reasonable basis, the ADR depositary may distribute the
currency it receives to the extent permitted under applicable law or hold the
currency for your account if you are entitled to receive the distribution. The
ADR depositary will not be liable for any interest. Before making a
distribution, the ADR depositary will deduct any withholding taxes that must be
paid.
In the event that the ADR depositary or the ADR depositary's custodian
receives any distribution upon any deposited shares of common stock in property
or securities (other than shares of common stock, non-voting shares or rights to
receive shares of common stock or non-voting shares), the ADR depositary will
distribute the property or securities to you in proportion to your holdings in
any manner that the ADR depositary deems, after consultation with us, equitable
and practicable. If the ADR depositary determines that any distribution of
property or securities (other than shares of common stock, non-voting shares or
rights to receive shares of common stock or non-voting shares) cannot be made
proportionally, or if for any other reason the ADR depositary deems the
distribution not to be feasible, the ADR depositary may, after consultation with
us, dispose of all or a portion of the property or securities in such amounts
and in such manner, including by public or private sale, as the ADR depositary
deems equitable or practicable. The ADR depositary will distribute to you the
net proceeds of any such sale, or the balance of the property or securities,
after the deduction of the fees and expenses of the ADR depositary.
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If a distribution by us consists of a dividend in, or free distribution of,
our shares of common stock, the ADR depositary may, with our approval, and will,
if we request, deposit the shares of common stock and either (1) distribute to
you, in proportion to your holdings, additional ADSs representing those shares
of common stock, or (2) reflect on the records of the ADR depositary the
increase in the aggregate number of ADSs representing those number of shares of
common stock, in both cases, after the deduction of the fees and expenses of the
ADR depositary. If the ADR depositary deems that such distribution for any
reason is not feasible, the ADR depositary may adopt, after consultation with
us, any method as it may deem equitable and practicable, including by public or
private sale of all or part of the shares of common stock received. The ADR
depositary will distribute to you the net proceeds of any such sale in the same
way as it does with cash. The ADR depositary will only distribute whole ADSs. If
the ADR depositary does not distribute additional ADSs, then each outstanding
ADS will also represent the new shares so distributed.
If a distribution by us consists of a dividend in, or free distribution of,
non-voting shares, the ADR depositary will deposit the non-voting shares under a
non-voting shares deposit agreement to be entered into among us, the ADR
depositary and all holders and beneficial owners of depositary shares. The ADR
depositary will deliver to you, in proportion to your holdings of ADSs,
depositary shares issued under the non-voting shares deposit agreement
representing the number of non-voting shares received as such dividend or
distribution. If the ADR depositary deems such distribution for any reason is
not feasible, the ADR depositary may adopt, after consultation with us, any
method as it may deem equitable and practicable, including by public or private
sale of all or part of the non-voting shares received. The ADR depositary will
distribute to you the net proceeds of any such sale in the same way as it does
with cash. The ADR depositary will only distribute whole depositary shares. We
are not obligated to list depositary shares representing non-voting shares on
any exchange.
If we offer holders of our securities any rights to subscribe for
additional shares of common stock or any other rights, the ADR depositary may
make these rights available to you. The ADR depositary must first determine
whether it is lawful and feasible to do so. If the ADR depositary determines
that it is not lawful or feasible to make these rights available to you, then
upon our request, the ADR depositary will sell the rights and distribute the
proceeds in the same way as it would do with cash. The ADR depositary may allow
these rights that are not distributed or sold to lapse. In that case, you will
receive no value for these rights.
If we issue any rights with respect to non-voting shares, the securities
issuable upon any exercise of such rights by holders or beneficial owners will
be depositary shares representing those non-voting shares issued under the
provisions of a non-voting share deposit agreement.
If a registration statement under the U.S. Securities Act is required with
respect to the securities to which any rights relate in order for us to offer
the rights to you and to sell the securities represented by these rights, the
ADR depositary will not offer such rights to you until such a registration is in
effect, or unless the offering and sale of such securities and such rights to
you are exempt from the registration requirements of the U.S. Securities Act or
any required filing, report, approval or consent has been submitted, obtained or
granted. We or the ADR depositary will not be obligated to register the rights
or securities under the U.S. Securities Act or to submit, obtain or request any
filing, report, approval or consent.
The ADR depositary may not be able to convert any currency or to sell or
dispose of any distributed or offered property or rights in a timely manner or
at a specified price, or at all.
RECORD DATES
The ADR depositary will fix a record date, after consultation with us, in
each of the following situations:
- any cash dividend or other cash distribution becomes payable;
- any distribution other than cash is made;
- rights are issued with respect to deposited shares of common stock;
- the ADR depositary causes a change in the number of shares of common
stock that are represented by each ADS; or
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- the ADR depositary receives notice of any shareholders' meeting.
The record date will, to the extent practicable, be as near as the record
date fixed by us for the shares of common stock. The record date will determine
(1) the ADR holders who are entitled to receive the dividend, distribution or
rights, or the net proceeds of the sale of the rights; or (2) the ADR holders
who are entitled to receive notices or exercise rights.
VOTING OF THE UNDERLYING SHARES OF COMMON STOCK
We will give the ADR depositary a notice of any meeting or solicitation of
shareholder proxies immediately after we finalize the form and substance of such
notice but not less than 14 days before the meeting. As soon as practicable
after it receives our notice, the ADR depositary will fix a record date, and
upon our written request, the ADR depositary will mail to you a notice that will
contain the following:
- the information contained in our notice to the ADR depositary including
an English translation, or, if requested by us, a summary of the
information provided by us;
- a statement that the ADR holders as of the close of business on a
specified record date will be entitled to instruct the ADR depositary as
to how to exercise their voting rights for the number of shares of
deposited shares of common stock, subject to the provisions of applicable
Korean law and our articles of incorporation, which provisions, if any,
will be summarized in the notice to the extent that they are material;
and
- a statement as to the manner in which the ADR holders may give their
instructions.
Upon your written request received on or before the date set by the ADR
depositary for this purpose, the ADR depositary will endeavor, in so far as
practicable, to vote or cause to be voted the deposited shares of common stock
in accordance with the instructions set forth in your written requests. The ADR
depositary may not itself exercise any voting discretion over any deposited
shares of common stock. You may only exercise the voting rights in respect of 9
ADSs or multiples of 9 ADSs. ADR holders may not be entitled to give instruction
to vote the shares represented by the ADSs if, and to the extent, the total
number of shares represented by the ADSs of an ADR holder exceeds the limit set
under applicable law. We can give no assurance to you, however, that we will
notify the ADR depositary sufficiently in advance of the scheduled date of a
meeting or solicitation of consents or proxies to enable the ADR depositary to
make a timely mailing of notices to you, or that you will receive the notices
sufficiently in advance of a meeting or solicitation of consents or proxies to
give instructions to the ADR depositary.
INSPECTION OF TRANSFER BOOKS
The ADR depositary will keep books at its principal New York office which
is currently located at 111 Wall Street, 20th Floor/Zone 7, New York, New York
10043, for the registration and transfer of ADRs. You may inspect the books of
the ADR depositary as long as the inspection is not for the purpose of
communicating with holders in the interest of a business or object other than
our business or a matter related to the deposit agreement or the ADRs.
REPORTS AND NOTICES
On or before the first date on which we give notice, by publication or
otherwise, of any meeting of shareholders, or of any adjourned meeting of
shareholders, or of the taking of any action in respect of any cash or other
distributions or the offering of any rights in respect of the shares of common
stock, we will transmit to the Custodian and the ADR depositary sufficient
copies of the notice in English in the form given or to be given to
shareholders. We will furnish to the ADR depositary English language versions of
any reports notices and other communications that we generally transmit to
holders of our common stock, including our annual reports, with annual audited
consolidated financial statements prepared in conformity with Korean GAAP and,
if prepared pursuant to the Securities Exchange Act of 1934, as amended, a
reconciliation of net earnings for the year and stockholders' equity to U.S.
GAAP, and unaudited non-consolidated semiannual financial statements prepared in
conformity with Korean GAAP. The ADR depositary will arrange for the prompt
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mailing of copies of these documents, or, if we request, a summary of any such
notice provided by us to you or, at our request, make notices, reports (other
than the annual reports and semiannual financial statements) and other
communications available to you on a basis similar to that for the holders of
our common stock or on such other basis as we may advise the ADR depositary
according to any applicable law, regulation or stock exchange requirement.
Notices to you under the deposit agreement will be deemed to have been duly
given if personally delivered or sent by mail or cable, telex or facsimile
transmission, confirmed by letter, addressed to you at your address as it
appears on the transfer books of the ADR depositary or at such other address as
you have notified the ADR depositary.
In addition, the ADR depositary will make available for inspection by
holders at its principal New York office and its principal London office any
notices, reports or communications, including any proxy soliciting materials,
received from us that we generally transmit to the holders of our common stock
or other deposited securities, including the ADR depositary. The ADR depositary
will also send to you copies of reports and communications we will provide as
provided in the deposit agreement.
CHANGES AFFECTING DEPOSITED SHARES OF COMMON STOCK
In case of a change in the par value, or a split-up, consolidation or any
other reclassification of shares of our common stock or upon any
recapitalization, reorganization, merger or consolidation or sale of assets
affecting us, any securities received by the ADR depositary or the Custodian in
exchange for, in conversion of or in respect of deposited shares of our common
stock will be treated as new deposited shares of common stock under the deposit
agreement. In that case, ADSs will, subject to the terms of the deposit
agreement and applicable laws and regulations, including any registration
requirements under the U.S. Securities Act, represent the right to receive the
new deposited shares of common stock, unless additional ADRs are issued, as in
the case of a stock dividend, or unless the ADR depositary calls for the
surrender of outstanding ADRs to be exchanged for new ADRs.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
We may agree with the ADR depositary to amend the deposit agreement and the
ADSs without your consent for any reason. If the amendment adds or increases
fees or charges, except for taxes and other governmental charges or certain
expenses of the ADR depositary, or prejudices any substantial existing right of
ADR holders, it will only become effective 30 days after the ADR depositary
notifies you of the amendment. If you continue to hold your ADSs at the time an
amendment becomes effective, you will be considered to have agreed to the
amendment and to be bound by the deposit agreement as amended. Except as
otherwise required by any mandatory provisions of applicable law, no amendment
may impair your right to surrender your ADSs and to receive the underlying
deposited securities.
The ADR depositary will terminate the deposit agreement if we ask it to do
so with 90 days' prior written notice. The ADR depositary may also terminate the
deposit agreement if the ADR depositary has notified us at least 90 days in
advance that it would like to resign and we have not appointed a new depositary.
In both cases, the ADR depositary must notify you at least 30 days before the
termination date.
If any ADRs remain outstanding after the date of termination, the ADR
depositary will stop performing any further acts under the deposit agreement,
except:
- to collect dividends and other distributions pertaining to the deposited
shares of common stock;
- to sell property and rights and the conversion of deposited shares of
common stock into cash as provided in the deposit agreement; and
- to deliver deposited shares of common stock, together with any dividends
or other distributions received with respect to the deposited shares of
common stock and the net proceeds of the sale of any rights or other
property represented by those ADSs in exchange for surrendered ADRs.
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At any time after the expiration of six months from the date of
termination, the ADR depositary may sell any remaining deposited shares of
common stock and hold uninvested the net proceeds in an unsegregated account,
together with any other cash or property then held, without liability for
interest, for the pro rata benefit of the holders of ADSs that have not been
surrendered by then.
CHARGES OF ADR DEPOSITARY
The fees and expenses of the ADR depositary as agreed between us and the
ADR depositary include:
- taxes and other governmental charges;
- registration fees applicable to transfers of shares of common stock on
our shareholders' register, or that of any entity acting as registrar for
the shares, to the name of the ADR depositary or its nominee, or the
Custodian or its nominee, when making deposits or withdrawals under the
deposit agreement;
- cable, telex and facsimile transmission expenses that are expressly
provided in the deposit agreement;
- expenses incurred by the ADR depositary in the conversion of foreign
currency into Dollars under the deposit agreement;
- a fee of up to US$5.00 per 100 ADSs, or portion thereof, for execution
and delivery of ADSs and the surrender of ADRs under the deposit
agreement; and
- a fee of up to US$0.02 per ADS held for cash distributions, a sale or
exercise of rights or the taking of any other corporate action involving
distributions to shareholders.
GENERAL
Neither we nor the ADR depositary will be liable to you if prevented or
delayed by law, governmental authority, any provision of our articles of
incorporation or any circumstances beyond our or its control in performing our
or its obligations under the deposit agreement. The deposit agreement provides
that the ADR depositary will hold the shares of common stock for your sole
benefit. Our obligations and those of the ADR depositary under the deposit
agreement are expressly limited to performing, in good faith and without
negligence, our and its respective duties specified in the deposit agreement.
The ADSs are transferable on the books of the ADR depositary; provided,
however, that the ADR depositary may, after consultation with us, close the
transfer books at any time or from time to time, when deemed expedient by it in
connection with the performance of its duties. As a condition precedent to the
execution and delivery of any ADSs, registration of transfer, split-up,
combination of any ADR or surrender of any ADS for the purpose of withdrawal of
deposited shares of common stock, the ADR depositary or the Custodian may
require payment from the depositor of the shares of common stock or a holder of
ADSs of a sum sufficient to reimburse the ADR depositary for any tax or other
governmental charge and any stock transfer or registration fee and payment of
any applicable fees payable by the holders of ADSs.
Any person depositing shares of common stock, any holder of an ADS or any
beneficial owner may be required from time to time to file with the ADR
depositary or the Custodian a proof of citizenship, residence, exchange control
approval, payment of applicable Korean or other taxes or governmental charges,
or legal or beneficial ownership and the nature of their interest, to provide
information relating to the registration on our shareholders' register (or our
appointed agent for the transfer and registration of shares of common stock) of
the shares of common stock presented for deposit or other information, to
execute certificates and to make representations and warranties as we or the ADR
depositary may deem necessary or proper or to enable us or the ADR depositary to
perform our and its obligations under the deposit agreement. The ADR depositary
may withhold the execution or delivery or registration of transfer of all or
part of any ADR or the distribution or sale of any dividend or other
distribution of rights or of the proceeds from their sale or the delivery of any
shares deposited under the deposit agreement and any other securities, property
and cash received by the ADR depositary or the Custodian until the proof or
other information is filed or the certificates are executed or the
representations and warranties are made. The ADR depositary shall provide us,
unless otherwise instructed
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by us, in a timely manner, with copies of any these proofs and certificates and
these written representations and warranties.
The delivery and surrender of ADSs and transfer of ADSs generally may be
suspended during any period when our or the ADR depositary's transfer books are
closed, or if that action is deemed necessary or advisable by us or the ADR
depositary at any time or from time to time in accordance with the deposit
agreement. We may restrict, in a manner as we deem appropriate, transfers of
shares of common stock where the transfers may result in ownership of shares of
common stock in excess of limits under applicable law. Except as described in
"Deposit and Withdrawal of Shares of Common Stock" above, notwithstanding any
other provision of the deposit agreement, the surrender of outstanding ADRs and
withdrawal of Deposited Securities (as defined in the deposit agreement)
represented by the ADRs may be suspended, but only as required in connection
with (1) temporary delays caused by closing the transfer books of the ADR
depositary or the issuer of any Deposited Securities (or the appointed agent or
agents for such issuer for the transfer and registration of such Deposited
Securities) in connection with voting at a shareholders' meeting or the payment
of dividends, (2) payment of fees, taxes and similar charges, or (3) compliance
with any United States or foreign laws or governmental regulations relating to
the ADRs or to the withdrawal of the Deposited Securities.
GOVERNING LAW
The deposit agreement and the ADRs will be interpreted under, and all
rights under the deposit agreement or the ADRs are governed by, the laws of the
State of New York.
We have irrevocably submitted to the non-exclusive jurisdiction of New York
State or United States Federal Courts located in New York City and waived any
objection to legal actions or proceedings in these courts whether on the ground
of venue or on the ground that the proceedings have been brought in an
inconvenient forum.
This submission was made for the benefit of the ADR depositary and the
holders and shall not limit the right of any of them to take legal actions or
proceedings in any other court of competent jurisdiction nor shall the taking of
legal actions or proceedings in one or more jurisdictions preclude the taking of
legal actions or proceedings in any other jurisdiction (whether concurrently or
not), to the extent permitted under applicable law.
INFORMATION RELATING TO THE ADR DEPOSITARY
Citibank, N.A. has been appointed as ADR depositary pursuant to the deposit
agreement. Citibank is a wholly-owned subsidiary of Citicorp, a Delaware
corporation whose principal office is located in New York, New York, which in
turn is a wholly-owned subsidiary of Citigroup Inc. Citibank is a global
financial services organization serving individuals, businesses, governments and
financial institutions in approximately 100 countries around the world.
Citibank was originally organized on June 16, 1812, and now is a national
banking association organized under the National Bank Act of 1864 of the United
States of America. Citibank is primarily regulated by the United States Office
of the Comptroller of the Currency. Its principal office is at 399 Park Avenue,
New York, NY 10022.
The consolidated balance sheets of Citibank are set forth in Citicorp's
Annual Reports on Form 10-K, and in Citicorp's quarterly financial reviews and
Forms 10-Q. Citicorp's Annual Reports on Form 10-K and quarterly financial
reviews and Forms 10-Q are filed periodically with the United States Securities
and Exchange Commission, or SEC.
Citibank's Articles of Association and By-laws, each as currently in
effect, together with Citicorp's most recent annual and quarterly reports will
be available for inspection at the Depositary Receipt office of Citibank, N.A.,
111 Wall Street, 20th Floor/Zone 7, New York, New York 10043.
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MATERIAL CONTRACTS
We did not enter into any material contracts during the period from January
1, 2000 through May 31, 2003 other than in the ordinary course of business.
KOREAN FOREIGN EXCHANGE CONTROLS AND SECURITIES REGULATIONS
GENERAL
The Foreign Exchange Transaction Act and the Presidential Decree and
regulations under that Act and Decree, collectively referred to as the Foreign
Exchange Transaction Laws, regulate investment in Korean securities by
non-residents and issuance of securities outside Korea by Korean companies.
Under the Foreign Exchange Transaction Laws, non-residents may invest in Korean
securities only to the extent specifically allowed by these laws or otherwise
permitted by the MOFE. The Financial Supervisory Commission of Korea has also
adopted, pursuant to its authority under the Securities and Exchange Act,
regulations that restrict investment by foreigners in Korean securities and
regulate issuance of securities outside Korea by Korean companies.
Subject to certain limitations, the MOFE has authority to take the
following actions under the Foreign Exchange Transaction Laws:
- if the Government deems it necessary on account of war, armed conflict,
natural disaster or grave and sudden changes in domestic or foreign
economic circumstances or similar events or circumstances, the MOFE may
temporarily suspend performance under any or all foreign exchange
transactions, in whole or in part, to which the Foreign Exchange
Transaction Laws apply (including suspension of payment and receipt of
foreign exchange) or impose an obligation to deposit or sell any means of
payment to the Bank of Korea or certain other governmental agencies or
financial institutions; and
- if the Government concludes that the international balance of payments
and international financial markets are experiencing or are likely to
experience significant disruption or that the movement of capital between
Korea and other countries are likely to adversely affect the Won,
exchange rate or other macroeconomic policies, the MOFE may require any
person who intends to effect a foreign exchange transaction to do so only
with the MOFE's consent or to deposit all or a portion of the means of
payment acquired in such transactions with the Bank of Korea or certain
other governmental agencies or financial institutions.
GOVERNMENT REVIEW OF ISSUANCES OF ADSS
In order for us to issue ADSs outside Korea, we are required to submit a
report to the MOFE or our designated foreign exchange bank (depending on the
aggregate issuance amount) with respect to the issuance of the ADSs. The
transfer of the shares to the ADR depositary must be reported immediately to the
Governor of the Financial Supervisory Service. The ADR depositary must report to
the Financial Supervisory Service (1) the entry into, renewal or termination of
a deposit agreement with a Korean company immediately upon occurrence of such
event and (2) the balance of the issued depositary receipts within 20 days from
the last day of each quarter. Furthermore, at the time of making any payment
under the ADSs or any amount as provided in the deposit agreement, relevant
documents should be submitted to a foreign exchange bank to enable such foreign
exchange bank to verify (1) that the amount being remitted conforms to the
amount required to be paid under the relevant documents, and (2) whether or not
any necessary approval or report requirement, if any, has been met. No further
governmental approval is necessary for the offering and issuance of the ADSs.
Under current Korean laws and regulations, the ADR depositary is required
to obtain our prior consent for the number of shares to be deposited in any
given proposed deposit which exceeds the difference between:
- the aggregate number of shares deposited by us or with our consent for
the issuance of ADSs (including deposits in connection with the initial
and all subsequent offerings of ADSs and stock dividends or other
distributions related to these ADSs); and
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- the number of shares on deposit with the ADR depositary at the time of
such proposed deposit. We can give no assurance that we would grant our
consent, if our consent is required. Therefore, a holder of ADRs who
surrenders ADRs and withdraws shares may not be permitted subsequently to
deposit those shares and obtain ADRs.
REPORTING REQUIREMENTS FOR HOLDERS OF SUBSTANTIAL INTERESTS
Any person whose direct or beneficial ownership of shares with voting
rights, whether in the form of shares or ADSs, certificates representing the
rights to subscribe for shares and equity-related debt securities including
convertible bonds and bonds with warrants, collectively referred to as Equity
Securities, together with the Equity Securities beneficially owned by certain
related persons or by any person acting in concert with the person accounts for
5.0% or more of the total outstanding Equity Securities is required to report
the status of the holdings to the Financial Supervisory Commission of Korea and
the Korea Stock Exchange or the Korean Securities Dealers Association if the
shares are registered on KOSDAQ within five business days after reaching the
5.0% ownership interest. In addition, any change in the ownership interest
subsequent to the report which equals or exceeds 1.0% of the total outstanding
Equity Securities is required to be reported to the Financial Supervisory
Commission of Korea and the Korea Stock Exchange or the Korean Securities
Dealers Association, if the shares are listed on KOSDAQ, within five business
days from the date of the change.
Violation of these reporting requirements may subject a person to criminal
sanctions such as fines or imprisonment and may result in a loss of voting
rights with respect to the ownership of unreported Equity Securities exceeding
5.0%. Furthermore, the Financial Supervisory Commission of Korea may issue an
order to dispose of such non-reported Equity Securities.
RESTRICTIONS APPLICABLE TO ADSS
No Korean governmental approval is necessary for the sale and purchase of
ADSs in the secondary market outside Korea or for the withdrawal of shares
underlying ADSs and the delivery of shares in Korea in connection with the
withdrawal, provided that a foreigner who intends to acquire the shares must
obtain an investment registration card from the Financial Supervisory Service,
as described below. The acquisition of the shares by a foreigner must be
reported by the foreigner or his standing proxy in Korea immediately to the
Governor of the Financial Supervisory Service.
Persons who have acquired shares as a result of the withdrawal of shares
underlying the ADSs may exercise their preemptive rights for new shares,
participate in free distributions and receive dividends on shares without any
further governmental approval.
RESTRICTIONS APPLICABLE TO SHARES
As a result of amendments to the Foreign Exchange Transaction Laws and the
regulations of Financial Supervisory Commission of Korea, together referred to
as the Investment Rules, adopted in connection with the stock market opening
from January 1992 and after that date, foreigners may invest, with limited
exceptions and subject to procedural requirements, in all shares of Korean
companies, whether listed on the Korea Stock Exchange or registered on the
KOSDAQ, unless prohibited by specific laws. Foreign investors may trade shares
listed on the Korea Stock Exchange or registered on the KOSDAQ only through the
Korea Stock Exchange or the KOSDAQ, except in limited circumstances, including,
among others:
- odd-lot trading of shares;
- acquisition of shares by exercise of warrant, conversion right under
convertible bonds, exchange right under exchangeable bonds or withdrawal
right under depositary receipts issued outside of Korea by a Korean
company ("Converted Shares");
- acquisition of shares as a result of inheritance, donation, bequest or
exercise of shareholders' rights, including preemptive rights or rights
to participate in free distributions and receive dividends;
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- over-the-counter transactions between foreigners of a class of shares for
which the ceiling on aggregate acquisition by foreigners, as explained
below, has been reached or exceeded; and.
- acquisition of shares by direct investment under the Foreign Investment
Promotion Law.
For over-the-counter transactions of shares between foreigners outside the
Korea Stock Exchange or the KOSDAQ for shares with respect to which the limit on
aggregate foreign ownership has been reached or exceeded, a securities company
licensed in Korea must act as an intermediary. Odd-lot trading of shares outside
the Korea Stock Exchange or the KOSDAQ must involve a licensed securities
company in Korea as the other party. Foreign investors are prohibited from
engaging in margin transactions through borrowing shares from securities
companies with respect to shares which are subject to a foreign ownership limit.
The Investment Rules require a foreign investor who wishes to invest in
shares on the Korea Stock Exchange or the KOSDAQ (including Converted Shares) to
register its identity with the Financial Supervisory Service prior to making any
such investment; however, the registration requirement does not apply to foreign
investors who acquire Converted Shares with the intention of selling such
Converted Shares within three months from the date of acquisition of the
Converted Shares or who acquire or dispose of shares where such acquisition or
disposal is deemed to be a foreign direct investment pursuant to the Foreign
Investment Promotion Law. Upon registration, the Financial Supervisory Service
will issue to the foreign investor an investment registration card which must be
presented each time the foreign investor opens a brokerage account with a
securities company in Korea. Foreigners eligible to obtain an investment
registration card include foreign nationals who are individuals residing in
Korea for no more than six months, foreign governments, foreign municipal
authorities, foreign public institutions, international financial institutions
or similar international organizations, corporations incorporated under foreign
laws and any person in any additional category designated by decree of the MOFE.
All Korean offices of a foreign corporation as a group are treated as a separate
foreigner from the offices of the corporation outside Korea. However, a foreign
corporation or depositary bank issuing depositary receipts may obtain one or
more investment registration cards in its name in certain circumstances as
described in the relevant regulations.
Upon a foreign investor's purchase of shares through the Korea Stock
Exchange or the KOSDAQ, no separate report by the investor is required because
the investment registration card system is designed to control and oversee
foreign investment through a computer system. However, where a foreign investor
acquires or sells shares outside the Korea Stock Exchange and the KOSDAQ and the
circumstances in connection with such sale or acquisition do not fall within the
exceptions made for certain limited circumstances described above, such
acquisition or sale of shares must be reported by the foreign investor or his
standing proxy to the Governor at the time of each such acquisition or sale;
provided, however, that a foreign investor must ensure that any acquisition or
sale by it of shares outside the Korea Stock Exchange or the KOSDAQ in the case
of trades in connection with a tender offer, odd-lot trading of shares or trades
of a class of shares for which the aggregate foreign ownership limit has been
reached or exceeded, is reported to the Governor by the securities company
engaged to facilitate such transaction. In the event a foreign investor desires
to acquire or sell shares outside the Korea Stock Exchange or the KOSDAQ and the
circumstances in connection with such sale or acquisition do not fall within the
exceptions made for certain limited circumstances described above, then the
foreign investor must obtain the prior approval of the Governor. In addition, in
the event a foreign investor acquires or sells shares outside the Korea Stock
Exchange or the KOSDAQ, a prior report to the Bank of Korea may also be required
in certain circumstances. A foreign investor must appoint one or more standing
proxies from among the Korea Securities Depository, foreign exchange banks,
including domestic branches of foreign banks, securities companies, including
domestic branches of foreign securities companies, investment trust companies,
futures trading companies and internationally recognized custodians which will
act as a standing proxy to exercise shareholders' rights, or perform any matters
related to the foregoing activities if the foreign investor does not perform
these activities himself. However, a foreign investor may be exempted from
complying with these standing proxy rules with the approval of the Governor in
cases deemed inevitable by reason of conflict between laws of Korea and the home
country of the foreign investor.
107
Certificates evidencing shares of Korean companies must be kept in custody
with an eligible custodian in Korea. Only foreign exchange banks, including
domestic branches of foreign banks, securities companies, including domestic
branches of foreign securities companies, the Korea Securities Depository,
investment trust companies, futures trading companies and internationally
recognized custodians are eligible to act as a custodian of shares for a
non-resident or foreign investor. A foreign investor must ensure that his
custodian deposits its shares with the Korea Securities Depository. However, a
foreign investor may be exempted from complying with this deposit requirement
with the approval of the Governor in circumstances where compliance with that
requirement is made impracticable, including cases where compliance would
contravene the laws of the home country of such foreign investor.
Under the Investment Rules, with certain exceptions, foreign investors may
acquire shares of a Korean company without being subject to any foreign
investment ceiling. As one such exception, designated public corporations are
subject to a 40.0% ceiling on the acquisition of shares by foreigners in the
aggregate. Designated public corporations may set a ceiling on the acquisition
of shares by a single person within 3.0% of the total number of shares.
Currently, Korea Electric Power Corporation is the only designated public
corporation which has set such a ceiling. Furthermore, an investment by a
foreign investor of not less than 10.0% of the outstanding shares with voting
rights of a Korean company is defined as a direct foreign investment under the
Foreign Investment Promotion Law, which is, in general, subject to the report
to, and acceptance, by the Ministry of Commerce, Industry and Energy. The
acquisition of our shares by a foreign investor is also subject to the
restrictions prescribed in the Telecommunications Business Law. The
Telecommunications Business Law generally limits the maximum aggregate foreign
shareholdings in us to 49.0% of the outstanding shares. Foreign investors may
hold shares of our common stock in excess of the 49% limitation acquired as a
result of the exercise of certain exchange-traded stock options for individual
corporations; provided, however, that any such foreign investor must dispose of
any of shares of our common stock in excess of the 49% limitation within one day
after settlement of the option. A foreigner who has acquired shares in excess of
such restriction described above may not exercise its voting rights with respect
to the shares exceeding such limitations.
Under the Foreign Exchange Transaction Laws, a foreign investor who intends
to make a portfolio investment in shares of a Korean company listed on the Korea
Stock Exchange or registered on KOSDAQ must designate a foreign exchange bank at
which he must open a foreign currency account and a Won account exclusively for
stock investments. No approval is required for remittance into Korea and deposit
of foreign currency funds in the foreign currency account. Foreign currency
funds may be transferred from the foreign currency account at the time required
to place a deposit for, or settle the purchase price of, a stock purchase
transaction to a Won account opened at a securities company. Funds in the
foreign currency account may be remitted abroad without any governmental
approval.
Dividends on shares are paid in Won. No governmental approval is required
for foreign investors to receive dividends on, or the Won proceeds of the sale
of, any such shares to be paid, received and retained in Korea. Dividends paid
on, and the Won proceeds of the sale of, any such shares held by a non-resident
of Korea must be deposited either in a Won account with the investor's
securities company or his Won account. Funds in the investor's Won account may
be transferred to his foreign currency account or withdrawn for local living
expenses up to certain limitations. Funds in the Won account may also be used
for future investment in shares or for payment of the subscription price of new
shares obtained through the exercise of preemptive rights.
Securities companies and investment trust companies are allowed to open
foreign currency accounts with foreign exchange banks exclusively for
accommodating foreign investors' stock investments in Korea. Through these
accounts, these securities companies and investment trust companies may enter
into foreign exchange transactions on a limited basis, such as conversion of
foreign currency funds and Won funds, either as a counterparty to or on behalf
of foreign investors, without the investors having to open their own accounts
with foreign exchange banks.
108
TAXATION
The following summary is based on the tax laws of the United States and
Korea as in effect on the date of this report, and is subject to any change in
United States or Korean law that may come into effect after such date. We advise
investors in ADSs or shares to consult their own tax advisors as to the United
States, Korean or other tax consequences of the purchase, ownership and
disposition of such securities, including, in particular, the effect of any
national, state or local tax laws.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations for U.S. Holders (as defined below) of ADSs or shares. This
summary is based upon existing United States federal income tax law, which is
subject to change, possibly with retroactive effect. This summary does not
discuss all aspects of United States federal income taxation which may be
important to particular investors in light of their individual investment
circumstances, such as investors subject to special tax rules including
financial institutions, insurance companies, broker-dealers, tax-exempt
organizations, and, except to the extent described below, non-U.S. Holders, or
to persons that will hold the ADSs or shares as part of a straddle, hedge,
conversion, constructive sale, or other integrated transaction for United States
federal income tax purposes or that have a functional currency other than the
Dollar, all of whom may be subject to tax rules that differ significantly from
those summarized below. In addition, this summary does not discuss any state,
local, or foreign tax considerations. This summary assumes that investors will
hold their ADSs or shares as "capital assets" (generally, property held for
investment) under the United States Internal Revenue Code of 1986, as amended
(the "Code"). Each prospective investor is urged to consult his tax advisor
regarding the United States federal, state, local, and foreign income and other
tax considerations of the purchase, ownership, and disposition of the ADSs or
shares.
For purposes of this summary, a "U.S. Holder" is a beneficial owner of ADSs
or shares that is for United States federal income tax purposes (i) an
individual who is a citizen or resident of the United States, (ii) a
corporation, partnership, or other entity created in, or organized under the
laws of, the United States or any State or political subdivision thereof, (iii)
an estate the income of which is includible in gross income for United States
federal income tax purposes regardless of its source, or (iv) a trust (A) the
administration of which is subject to the primary supervision of a United States
court and which has one or more United States persons who have the authority to
control all substantial decisions of the trust, or (B) that was in existence on
August 20, 1996, was treated as a United States person under the Code on the
previous day, and elected to continue to be so treated.
A beneficial owner of ADSs or shares that is not a U.S. Holder is referred
to herein as a "Non-U.S. Holder".
U.S. HOLDERS
For United States federal income tax purposes, an owner of an ADS will be
treated as the owner of his proportionate interest in shares held by the
depositary that is represented by an ADS and evidenced by such ADS. Accordingly,
no gain or loss will be recognized upon the exchange of an ADS for the holder's
proportionate interest in the shares, a holder's tax basis in the withdrawn
shares will be the same as his tax basis in the ADS surrendered therefore, and
the holder's holding period in the withdrawn shares will include the period
during which the holder held the surrendered ADS.
DIVIDENDS
Any cash distributions paid by the Company out of earnings and profits, as
determined under United States federal income tax principles, will be subject to
tax as ordinary dividend income and will be includible in the gross income of a
U.S. Holder upon receipt. Cash distributions paid by the Company in excess of
its earnings and profits will be treated as a tax-free return of capital to the
extent of the U.S. Holder's adjusted tax basis in his ADSs or shares, and
thereafter as gain from the sale or exchange of a capital asset. Dividends paid
in Won will be includible in income in a Dollar amount based on the Dollar --
Won exchange rate prevailing at the time of receipt of such dividends by the
depositary, in the case of ADSs, or by the U.S. Holder, in the
109
case of shares held directly by such U.S. Holder. Dividends received on the ADSs
or shares will not be eligible for the dividends received deduction allowed to
corporations.
Dividends received on the ADSs or shares will be treated, for United States
federal income tax purposes, as foreign source income. A U.S. Holder may be
eligible, subject to a number of complex limitations, to claim a foreign tax
credit in respect of certain foreign taxes imposed on dividends received on the
ADSs or shares. U.S. Holders who do not elect to claim a foreign tax credit for
Korean income tax withheld may instead claim a deduction, for United States
federal income tax purposes, in respect of such withholdings, but only for a
year in which the U.S. Holder elects to do so for all creditable foreign income
taxes. In certain circumstances, a U.S. Holder may not claim a foreign tax
credit (and instead may claim a deduction) for foreign taxes imposed on the
payment of a dividend if the U.S. Holder (i) has not held the ADSs or shares for
at least 16 days in the 30-day period beginning 15 days before the ex-dividend
date, during which it is not protected from risk of loss, (ii) is obligated to
make payments related to the dividends, or (iii) holds the ADSs or shares in an
arrangement in which the expected economic profit of the U.S. Holder is
insubstantial compared to the value of the foreign tax credit expected to be
obtained as a result of the arrangement.
In addition, the United States Treasury has expressed concerns that parties
to whom depositary shares are pre-released may be taking actions that are
inconsistent with the claiming of foreign tax credits by the holders of the
ADSs. Accordingly, the creditability of foreign withholding taxes could be
affected by future actions that may be taken by the United States Treasury.
A distribution of additional shares of the Company to U.S. Holders with
respect to their ADSs or shares that is pro rata to all shareholders of the
Company may not be subject to United States federal income tax. The tax basis of
such additional shares will be determined by allocating the U.S. Holders' tax
basis in the ADSs or shares between the ADSs or shares and the additional
shares, based on their relative fair market values on the date of distribution.
Any Korean withholding tax imposed upon such a tax-free pro rata distribution of
additional shares will be treated as being imposed on "general limitation"
income for United States foreign tax credit purposes.
SALE OR OTHER DISPOSITION OF ADSS OR SHARES
A U.S. Holder will recognize capital gain or loss upon the sale or other
disposition of ADSs or shares in an amount equal to the difference between the
amount realized upon the disposition and the U.S. Holder's adjusted tax basis in
such ADSs or shares, as each is determined in Dollars. Any capital gain or loss
will be long-term if the ADSs or shares have been held for more than one year
and will generally be United States source gain or loss. The claim of a
deduction in respect of a capital loss, for United States federal income tax
purposes, may be subject to limitations.
NON-U.S. HOLDERS
An investment in ADSs or shares by a Non-U.S. Holder will not give rise to
any United States federal income tax consequences unless:
- the dividends received or gain recognized on the sale of ADSs or shares
by such person is treated as effectively connected with the conduct of a
trade or business by such person in the United States as determined under
United States federal income tax law; or
- in the case of gain recognized on a sale of ADSs or shares by an
individual, such individual is present in the United States for 183 days
or more and certain other conditions are met.
In order to avoid back-up withholding on payments in respect of the ADSs or
shares that are made in the United States or through certain U.S.-related
financial intermediaries, a Non-U.S. Holder of the ADSs or shares may be
required to complete, and provide the payor with, an Internal Revenue Service
Form W-8BEN, or other documentary evidence, certifying that such holder is an
exempt foreign person.
110
KOREAN TAXATION
The following summary of Korean tax considerations applies to you so long
as you are not:
- a resident of Korea;
- a corporation organized under Korean law; or
- engaged in a trade or business in Korea through a permanent establishment
or a fixed base to which the relevant income is attributable or with
which the relevant income is effectively connected.
DIVIDENDS ON THE SHARES OR ADSS
We will deduct Korean withholding tax from dividends paid to you at a rate
of 27.5% (including resident surtax). If you are a qualified resident in a
country that has entered into a tax treaty with Korea, you may qualify for a
reduced rate of Korean withholding tax. For example, if you are a qualified
resident of the United States for purposes of the income tax treaty between the
United States and Korea and you are the "beneficial owner" of a dividend,
generally a reduced withholding tax at the rate of 16.5% will apply.
In order to obtain the benefits of a reduced withholding tax rate under a
tax treaty, you must submit to us, prior to the dividend payment date, such
evidence of tax residence as may be required by the Korean tax authorities.
Evidence of tax residence may be submitted to us through the ADR depositary. In
addition, on or after July 1, 2002, to obtain the benefit of a tax exemption
available under applicable tax treaties, you should submit an application for
exemption prior to the time of the first dividend payment, together with a
certificate of your tax residence issued by a competent authority of your
country of tax residence. Excess taxes withheld are generally not recoverable
even if you subsequently produce evidence that you were entitled to have tax
withheld at a lower rate.
If we distribute to you free shares representing a transfer of certain
capital reserves or asset revaluation reserves into paid-in capital, that
distribution may be deemed a dividend which is subject to Korean withholding
tax.
TAXATION OF CAPITAL GAINS
You may be exempt from Korean taxation on capital gains from the shares if
you have owned, together with certain related parties, less than 25.0% of our
total issued and outstanding shares at any time during the year of sale and the
five calendar years before the year of sale and the sale is made through the
Korea Stock Exchange. As for the ADSs, according to a ruling issued by the
Korean taxation authorities, capital gains earned by a non-resident without any
permanent establishment in Korea from the transfer of ADSs to other
non-residents (other than to such transferees' permanent establishment in Korea)
are not subject to Korean taxation. In addition, capital gains earned by a
non-resident holder from the transfer of ADSs outside of Korea are exempt from
Korean taxation by virtue of the Special Tax Treatment Control Law of Korea,
provided that the issuance of the ADSs is deemed to be an overseas issuance
under the Special Tax Treatment Control Law.
If you are subject to tax on capital gains with respect to the sale of
ADSs, or of shares which you acquired as a result of a withdrawal, your gain
will be calculated based on your cost of acquiring the ADSs representing such
shares, although there are no specific Korean tax provisions or rulings on this
issue. In the absence of the application of a tax treaty which exempts or
reduces the rate of tax on capital gains, the amount of Korean tax imposed on
your capital gains will be the lesser of 11.0% of the gross realization proceeds
or, subject to the production of satisfactory evidence of the acquisition cost
of the ADSs, 27.5% of the net capital gains. Under the Korea-United States Tax
Treaty, a U.S. resident is generally exempt from Korean taxation on gains from
the sale, exchange or other disposition of our Shares or ADSs, subject to
certain exceptions.
If you sell your shares or ADSs, the purchaser or, in the case of the sale
of shares on the Korea Stock Exchange or through a licensed securities company
in Korea, the licensed securities company, is required to withhold Korean tax
from the sales price in an amount equal to 11.0% of the gross realization
proceeds and to make payment of such amounts to the Korean tax authority, unless
you establish your entitlement to an exemption or lower rate of taxation under
an applicable tax treaty or produce satisfactory evidence of your acquisition
cost for the ADSs. To obtain the benefit of an exemption or reduced rate of tax
pursuant to a tax
111
treaty, you must submit to the purchaser or the securities company (or through
the ADR depositary), as the case may be, prior to or at the time of payment,
such evidence of your tax residence as the Korean tax authorities may require in
support of your claim for treaty protection. In addition, Korean tax law
requires a non-resident seller to submit to the relevant tax office (through the
payer of the income, subject to certain exceptions) an application for exemption
by the 9th day of the month following the month in which the first payment date
falls, with a certificate of tax residence of the seller issued by a competent
authority of the seller's residence country, to obtain the benefit of a tax
treaty exemption available under applicable tax treaties. However, this
requirement will not apply to exemptions under Korean tax law. Excess taxes
withheld are generally not recoverable even if you subsequently produce evidence
that you were entitled to have taxes withheld at a lower rate.
INHERITANCE TAX AND GIFT TAX
If you die while holding an ADS or transfer an ADS as a gift, it is unclear
whether, for Korean inheritance and gift tax purposes, you will be treated as
the owner of the shares underlying the ADSs. If you are treated as the owner of
the shares, the heir or the donee (or in certain circumstances, you as the
donor) will be subject to Korean inheritance or gift tax presently at the rate
of 10.0% to 50.0%.
If you die while holding a share or donate a share, the heir or donee (or
in certain circumstances, you as the donor) will be subject to Korean
inheritance or gift tax at the same rate as indicated above.
SECURITIES TRANSACTION TAX
You will not pay a securities transaction tax on your transfer of ADSs. If
you transfer shares, you will be subject to a securities transaction tax at the
rate of 0.15% and an agricultural and fishery special tax at the rate of 0.15%
of the sale price of the share when traded on the Korea Stock Exchange. If your
transfer is not made on the Korea Stock Exchange, subject to certain exceptions,
you will be subject to a securities transaction tax at the rate of 0.5% and will
not be subject to an agricultural and fishery special tax.
According to a tax ruling issued by the Korean tax authorities, foreign
shareholders will not be subject to a securities transaction tax upon the
deposit of underlying shares and receipt of depositary shares or upon the
surrender of depositary shares and withdrawal of originally deposited underlying
shares. However, questions have been raised by Korean tax authorities as to
whether this ruling also applies to the surrender of depositary shares and
withdrawal of underlying shares by a subsequent (as opposed to the initial)
holder of depositary shares. Although the tax authorities recently issued
another tax ruling, it is not clear as to whether, on whom, when and in what
amount the securities transaction tax will be imposed in the case of withdrawals
of underlying common shares by holders of depositary shares other than initial
holders. Accordingly, there can be no assurance that holders of ADSs other than
initial holders will not be subject to the securities transaction tax when they
withdraw common shares upon surrendering the ADSs.
Securities transaction tax, if applicable, must be paid in principle by the
transferor of the shares or the rights to subscribe to such shares. When the
transfer is effected through a securities settlement company, such settlement
company is generally required to withhold and pay the tax to the tax authority.
When such transfer is made through a securities company, such securities company
is required to withhold and pay the tax. Where the transfer is effected by a
non-resident without a permanent establishment in Korea, other than through a
securities settlement company or a securities company, the transferee is
required to withhold the securities transaction tax.
DOCUMENTS ON DISPLAY
We file reports, including annual reports on Form 20-F, and other
information with the SEC pursuant to the rules and regulations of the SEC that
apply to foreign private issuers. You may read and copy any materials filed with
the SEC at the Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20459. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. As a foreign private issuer, we are not
required to make filings with the SEC by electronic means, although we may do
so. Any filings we make electronically will be available to the public over the
Internet at the SEC's Website at http://www.sec.gov.
112
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EXCHANGE RATE AND INTEREST RATE RISKS
We are exposed to foreign exchange rate and interest rate risk primarily
associated with underlying liabilities. We have not entered into any other swap
or derivative transactions. We may consider in the future entering into such
transactions solely for hedging purposes.
The following discussion and tables, which constitute "forward looking
statements" that involve risks and uncertainties, summarize our market-sensitive
financial instruments including fair value, maturity and contract terms. These
tables address market risk only and do not present other risks which we face in
the normal course of business, including country risk, credit risk and legal
risk.
EXCHANGE RATE RISK
Korea is our main market and, therefore, substantially all of our cash flow
is denominated in Won. We are exposed to foreign exchange risk related to
foreign currency denominated liabilities. These liabilities relate primarily to
foreign currency denominated debt, all in Dollars and Yen. A 10% change in the
exchange rate between the Won and all foreign currencies would result in a
change in net liabilities of approximately 0.5% or Won 29.1 billion as of
December 31, 2002.
INTEREST RATE RISK
We are also subject to market risk exposure arising from changing interest
rates. The following table summarizes the carrying amounts and fair values,
maturity and contract terms of our exchange rate and interest sensitive
short-term and long-term liabilities of as of December 31, 2002:
MATURITIES
------------------------------------------------------------------------------------------
FAIR
2003 2004 2005 2006 2007 THEREAFTER TOTAL VALUE
--------- -------- -------- ------- -------- ----------- -------- ----------
(IN BILLIONS OF WON, EXCEPT PERCENTAGES)
Local currency:
Fixed rate......... W1,530 W1,120.0 W500.0 W400.0 W700.0 W-- W4,250.0 W4,032.6
Average weighted
rate(1).......... 6.53% 5.86% 6.00% 6.00% 5.37% % 6.08%
Variable rate...... W1.4 W-- W-- W-- W-- W-- W1.4 W1.4
Average weighted
rate(1).......... 6.90% % % % 6.90%
--------- -------- ------- ------ ------- ----- -------- --------
Sub-total........ W1,531.4 W1,120.0 W500.0 W400.0 W700.0 W W4,251.4 W4,034.0
--------- -------- ------- ------ ------- ----- -------- --------
Foreign currency:
Fixed rate......... W65.9 W2,40.2 W-- W-- W-- W-- W306.1 W248.9
Average weighted
rate(1).......... 1.27% 7.75% -- -- 6.35%
Variable rate...... W14.0 W8.6 W1.6 W5.0 W-- W-- W29.2 W29.2
Average weighted
rate(1).......... 4.44% 4.19% 3.14% 5.78% % % 4.52%
--------- -------- ------- ------ ------- ----- -------- --------
Subtotal......... W79.9 W248.8 W1.5 W5.0 W-- W-- W335.3 W344.1
--------- -------- ------- ------ ------- ----- -------- --------
Total.......... W1,368.8 W1,368.8 W501.6 W405.0 W700.0 W-- W4,586.7 W4,378.1
========= ======== ======= ====== ======= ===== ======== ========
---------------
(1) Weighted average rates of the portfolio at the period end.
A 1.0% change in interest rates would result in a change of approximately
2.6% in the fair value of our liabilities resulting in a Won 75.5 billion change
in their value as of December 31, 2002 and an approximate Won 0.3 billion
annualized change in interest expenses.
113
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGE AND DELINQUENCIES.
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this annual report, we carried
out an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(c) and 153-15(c) under the United States
Securities Exchange Act of 1934, as amended (the "Exchange Act")).
In light of the new regulatory framework introduced by the Sarbanes-Oxley
Act of 2002, we are currently in the process of establishing a formal disclosure
committee by reorganizing an existing committee that has acted essentially as
our disclosure committee in the past. We expect to complete the process by the
end of June 2003. The newly organized disclosure committee will consist of the
head of each divisional group, including (among others) the heads of the
investor relations office, legal office and strategic planning office. The
committee, together with our Chief Executive Officer and Chief Financial
Officer, will have the responsibility for the evaluation of the effectiveness of
our new disclosure and control procedures and may generally take all actions
deemed necessary or desirable to ensure compliance with such procedures.
Our disclosure controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving the
objectives of the control system. As such, disclosure controls and procedures or
internal control systems may not prevent all error and all fraud. In addition,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs and our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected.
Based on our evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that the design and operation of our disclosure controls and
procedures were effective as of the date of the evaluation in all material
respects.
There were no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date of the evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
114
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Not applicable.
ITEM 16B. CODE OF ETHICS.
Not applicable.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not applicable.
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 through F-62.
ITEM 19. EXHIBITS
EXHIBIT DESCRIPTION
------- ------------------------------------------------------------
1.1 Articles of Incorporation, as amended (together with English
translation) (Incorporated by reference herein from our Form
20-F filed on June 28, 2002)
10.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
10.2 Consent of Ahn Kwon & Co.*
10.3 Consent of Young Wha Corporation*
10.4 Telecommunications Basic Law of 1983, as amended (English
translation)*
10.5 Enforcement Decree of the Telecommunications Basic Law, as
amended (English translation)*
10.6 Telecommunications Business Law of 1983, as amended (English
translation)*
10.7 Enforcement Decree of the Telecommunications Business Law
(together with English translation) (Incorporated by
reference herein from our Form 20-F filed on July 2, 2001)
10.8 Korean Commercial Code (together with English translation)
(Incorporated by reference herein from our Form 20-F filed
on June 30, 2000)
10.9 Amendment to Korean Commercial Code dated December 29, 2001
(together with English translation) (Incorporated by
reference herein from our Form 20-F filed on June 28, 2002)
10.10 Korean Securities and Exchange Act, as amended (together
with English translation) (Incorporated by reference herein
from our Form 20-F filed on June 28, 2002)
---------------
* Filed herewith.
115
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report of Ahn Kwon & Co. for the years
ended
December 31, 2000, 2001 and 2002.......................... F-2
Independent Auditors' Report of Young Wha Corporation for
the nine-month period ended
December 31, 2000 and the year ended December 31, 2001.... F-3
Consolidated Balance Sheets as of December 31, 2000, 2001
and 2002.................................................. F-4
Consolidated Statements of Income for the Years Ended
December 31, 2000, 2001 and 2002.......................... F-6
Consolidated Statements of Shareholders' Equity for the
Years Ended
December 31, 2000, 2001 and 2002.......................... F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 2001 and 2002.......................... F-9
Notes to Consolidated Financial Statements.................. F-12
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of SK Telecom Co., Ltd.
We have audited the accompanying consolidated balance sheets of SK Telecom
Co., Ltd. (the "Company") and its subsidiaries as of December 31, 2000, 2001 and
2002, and the related consolidated statements of income, shareholders' equity,
and cash flows for the years then ended (all expressed in Korean won). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of Shinsegi Telecomm, Inc. (a consolidated subsidiary) for the nine
months ended December 31, 2000 and the year ended December 31, 2001, which
statements reflect total assets constituting 19.57% and 12.83% of consolidated
total assets as of December 31, 2000 and 2001, respectively and total revenues
constituting 19.29% and 22.61% of consolidated total revenues for the years
ended December 31, 2000 and 2001, respectively. Those statements were audited by
other auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to the amounts included for Shinsegi Telecomm, Inc., is based
solely on the reports of such other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of SK Telecom Co., Ltd. and its subsidiaries at December 31,
2000, 2001 and 2002, and the results of their operations and their cash flows
for the years then ended, in conformity with accounting principles generally
accepted in Korea.
Our audits also comprehended the translation of the Korean won amounts into
U.S. dollar amounts and, in our opinion, such translation has been made 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.
Accounting principles generally accepted in Korea vary in certain respects
from accounting principles generally accepted in the United States of America.
Application of generally accepted accounting principles in the United States of
America would have affected results of operations for the years ended December
31, 2000, 2001 and 2002 and shareholders' equity as of December 31, 2000, 2001
and 2002 to the extent summarized in Note 30 to the consolidated financial
statements.
As described in Note 2(v) to the accompanying consolidated financial
statements, on January 1, 2002, the Company and its subsidiaries early adopted
Statement of Korea Accounting Standards ("SKAS") No. 6, "Events Occurring after
Balance Sheet Date". In order to reflect this accounting change, prior years'
financial statements have been restated.
March 28, 2003
F-2
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
SHINSEGI TELECOMM, INC.
We have audited the balance sheets of Shinsegi Telecomm, Inc. as of
December 31, 2000 and 2001, and the related statements of income, stockholders'
equity and cash flows for the nine-month period ended December 31, 2000 and the
year ended December 31, 2001 (not presented separately herein). These financial
statements are the responsibility of Shinsegi Telecomm, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Shinsegi Telecomm, Inc. as
of December 31, 2000 and 2001, and the results of its operations, stockholders'
equity and its cash flows for the nine-month period ended December 31, 2000 and
the year ended December 31, 2001 in conformity with accounting principles
generally accepted in the Republic of Korea.
Accounting principles generally accepted in the Republic of Korea vary in
certain significant respects from accounting principles generally accepted in
the United States of America. Application of generally accepted accounting
principles in the United States of America would have affected the results of
operations for the nine-month period ended December 31, 2000 and the year ended
December 31, 2001 and stockholders' equity as of December 31, 2000 and 2001, to
the extent summarized in Note 19 to Shinsegi Telecomm, Inc.'s financial
statements.
Seoul, Korea
January 25, 2002
F-3
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000, 2001 AND 2002
2000 2001 2002 2002
----------- ----------- ----------- ----------------
(IN MILLIONS OF KOREAN WON) (IN THOUSANDS
OF U.S. DOLLARS)
(NOTE 2)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 12)........ W 90,490 W 867,280 W 664,117 $ 559,822
Short-term financial instruments (Notes 12
and 21).................................. 647,043 430,919 202,905 171,040
Marketable securities (Note 2)............. 638,082 637,530 754,219 635,774
Accounts receivable -- trade, net of
allowance for doubtful accounts of
W96,532 million, W81,681 million and
W60,542 million at December 31, 2000,
2001 and 2002, respectively (Notes 2, 12
and 23).................................. 1,061,370 1,181,711 1,442,135 1,215,658
Accounts receivable -- other, net of
allowance for doubtful accounts of
W29,171 million, W74,065 million and
W23,355 million at December 31, 2000,
2001 and 2002, respectively (Notes 2, 12
and 23).................................. 273,587 1,096,005 852,873 718,935
Inventories (Notes 2 and 22)............... 34,387 66,559 27,460 23,148
Short-term loans and other (Note 5)........ 54,679 66,742 99,748 84,083
----------- ----------- ----------- -----------
Total Current Assets................ 2,799,638 4,346,746 4,043,457 3,408,460
----------- ----------- ----------- -----------
NON-CURRENT ASSETS:
Property and equipment, net (Notes 2, 6,
11, 21 and 22)........................... 4,543,178 4,174,726 4,569,417 3,851,822
Intangible assets (Note 2)................. 2,565,476 3,816,373 3,721,235 3,136,841
Investment securities (Notes 2 and 4)...... 471,538 602,668 1,546,211 1,303,390
Long-term bank deposits (Note 21).......... 81 77 177 149
Long-term loans, net of allowance for
doubtful accounts of W18,058 million,
W19,699 million and W19,486 million at
December 31, 2000, 2001 and 2002,
respectively (Notes 2, 5 and 12)......... 127,584 83,520 52,688 44,414
Guarantee deposits (Notes 12 and 23)....... 202,267 280,760 249,331 210,175
Deferred income tax assets (Notes 2 and
18)...................................... 300,573 -- -- --
Other...................................... 33,839 21,405 46,194 38,941
----------- ----------- ----------- -----------
Total Non-Current Assets............ 8,244,536 8,979,529 10,185,253 8,585,732
----------- ----------- ----------- -----------
TOTAL ASSETS................................. W11,044,174 W13,326,275 W14,228,710 $11,994,192
=========== =========== =========== ===========
F-4
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
DECEMBER 31, 2000, 2001 AND 2002
2000 2001 2002 2002
----------- ----------- ----------- ----------------
(IN MILLIONS OF KOREAN WON) (IN THOUSANDS
OF U.S. DOLLARS)
(NOTE 2)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable (Notes 12 and 23).......... W 1,070,635 W 1,035,197 W 1,697,502 $ 1,430,921
Short-term borrowings (Notes 12 and 21)..... 209,966 1,167,348 687,296 579,361
Income taxes payable........................ 309,138 371,981 383,900 323,611
Accrued expenses............................ 243,972 357,270 408,521 344,366
Currency forward contracts (Notes 2 and
7)........................................ -- 4,982 -- --
Current portion of long-term debt (Notes 8,
9 and 11)................................. 1,206,998 665,472 922,209 777,383
Current portion of facility deposits........ 10,046 10,400 18,415 15,523
Other....................................... 123,519 65,931 185,543 156,405
----------- ----------- ----------- -----------
Total Current Liabilities............ 3,174,274 3,678,581 4,303,386 3,627,570
----------- ----------- ----------- -----------
LONG-TERM LIABILITIES:
Bonds payable, net (Notes 2 and 8).......... 1,374,629 2,649,119 2,908,496 2,451,737
Long-term borrowings (Note 9)............... 190,774 45,602 10,284 8,669
Facility deposits (Note 10)................. 61,788 56,519 46,850 39,493
Long-term payables -- other (Notes 2 and
12)....................................... 1,260 650,000 551,983 465,298
Obligations under capital leases (Notes 2,
11, 12 and 21)............................ 1,368 633 121 102
Accrued severance indemnities, net (Note
2)........................................ 32,676 61,620 48,519 40,899
Deferred income tax liabilities (Notes 2 and
18)....................................... -- 15,169 104,770 88,317
Guarantee deposits received and other (Notes
2, 12 and 26)............................. 64,754 19,728 22,401 18,883
----------- ----------- ----------- -----------
Total Long-Term Liabilities.......... 1,727,249 3,498,390 3,693,424 3,113,398
----------- ----------- ----------- -----------
Total Liabilities.................... 4,901,523 7,176,971 7,996,810 6,740,968
----------- ----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 21)
SHAREHOLDERS' EQUITY:
Capital stock (Notes 1 and 13).............. 44,576 44,576 44,576 37,576
Capital surplus (Note 13):
Additional paid-in capital................ 3,736,253 3,736,253 3,736,253 3,149,501
Other capital surplus..................... 12,462 (286,555) (851,871) (718,091)
Retained earnings:
Appropriated (Note 14).................... 1,390,923 2,297,749 3,379,922 2,849,129
Unappropriated............................ 954,605 1,145,570 1,493,283 1,258,773
Capital adjustments:
Treasury stock (Note 15).................. (5,042) (1,425,852) (2,192,449) (1,848,140)
Unrealized loss on valuation of investment
securities (Notes 2 and 4).............. (127,921) (68,449) (109,288) (92,125)
Stock options (Notes 2 and 16)............ 383 960 2,452 2,067
Foreign-based operations' translation
credit (Note 2)......................... 4,546 707 3,515 2,963
Minority interest in equity of consolidated
subsidiaries (Note 2)..................... 131,866 704,345 725,507 611,571
----------- ----------- ----------- -----------
Total Shareholders' Equity........... 6,142,651 6,149,304 6,231,900 5,253,224
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... W11,044,174 W13,326,275 W14,228,710 $11,994,192
=========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-5
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
2000 2001 2002 2002
----------- ----------- ----------- ----------------
(IN MILLIONS OF KOREAN WON) (IN THOUSANDS
OF U.S. DOLLARS)
(NOTE 2)
OPERATING REVENUE (Notes 23 and 28)............. W 7,423,072 W 8,371,928 W 9,323,993 $ 7,859,726
OPERATING EXPENSES (Notes 2, 17, 21, 23 and
28)........................................... (5,927,597) (6,047,415) (6,526,350) (5,501,433)
----------- ----------- ----------- -----------
OPERATING INCOME................................ 1,495,475 2,324,513 2,797,643 2,358,293
----------- ----------- ----------- -----------
OTHER INCOME:
Interest...................................... 67,573 97,422 86,013 72,505
Dividends..................................... -- -- 207 174
Commissions................................... 28,395 24,076 73,515 61,970
Foreign exchange and translation gains (Note
2).......................................... 12,895 18,282 41,439 34,931
Gain on disposal of property and equipment.... 27,891 3,467 1,206 1,017
Equity in earnings of affiliates (Notes 2 and
4).......................................... -- 4,294 813 685
Other......................................... 84,877 83,708 56,467 47,599
----------- ----------- ----------- -----------
221,631 231,249 259,660 218,881
----------- ----------- ----------- -----------
OTHER EXPENSES:
Interest...................................... (213,429) (273,871) (311,132) (262,271)
Donations..................................... (83,809) (148,391) (127,517) (107,491)
Foreign exchange and translation losses (Note
2).......................................... (57,960) (23,933) (13,547) (11,420)
Loss on disposal and valuation of marketable
securities (Note 2)......................... -- (1,028) -- --
Loss on disposal and impairment of property
and equipment (Notes 23 and 24)............. (18,063) (41,801) (212,118) (178,806)
Loss on disposal of investment assets......... -- (17,658) (51,618) (43,512)
Loss on impairment of investment securities
(Note 4).................................... -- (3,326) (68,882) (58,065)
Equity in losses of affiliates (Notes 2 and
4).......................................... (11,518) -- -- --
Other......................................... (44,505) (69,046) (53,721) (45,284)
----------- ----------- ----------- -----------
(429,284) (579,054) (838,535) (706,849)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST...................................... 1,287,822 1,976,708 2,218,768 1,870,325
INCOME TAXES (Notes 2 and 18)................... (367,307) (850,307) (698,507) (588,811)
----------- ----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST................. 920,515 1,126,401 1,520,261 1,281,514
MINORITY INTEREST IN NET LOSS (GAIN) OF
CONSOLIDATED SUBSIDIARIES..................... 51,749 19,648 (33,110) (27,910)
----------- ----------- ----------- -----------
NET INCOME...................................... W 972,264 W 1,146,049 W 1,487,151 $ 1,253,604
=========== =========== =========== ===========
NET INCOME PER SHARE (Notes 2 and 19) (In Korean
won and U.S. dollars)......................... W 11,146 W 13,242 W 17,647 $ 14.87
=========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-6
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
TOTAL
COMMON CAPITAL RETAINED CAPITAL MINORITY SHAREHOLDERS'
STOCK SURPLUS EARNINGS ADJUSTMENT INTEREST EQUITY
------- ---------- ---------- ----------- -------- -------------
(IN MILLIONS OF KOREAN WON)
Balance, December 31, 1999............. W41,679 W2,094,099 W1,385,273 W 215,715 W 15,153 W 3,751,919
Net income........................... -- -- 972,264 -- -- 972,264
Issuance of common stock (Note 13)... 2,897 1,654,450 -- -- -- 1,657,347
Stock issuance cost (Note 13)........ -- (4) -- -- -- (4)
Treasury stock transactions.......... -- 1 -- -- -- 1
Cash dividends paid (Note 20)........ -- -- (15,408) -- -- (15,408)
Additional issuance of common stock
by consolidated subsidiaries to
outside entity..................... -- (410) -- -- -- (410)
Loss on disposal of investments in
common stock of subsidiary......... -- (235) -- -- -- (235)
Equity in capital surplus, retained
earnings and capital adjustment
changes of affiliates.............. -- 814 3,399 (1,626) -- 2,587
Stock compensation plans (Notes 2 and
16)................................ -- -- -- 383 -- 383
Unrealized losses on valuation of
investment securities (Note 4)..... -- -- -- (342,791) -- (342,791)
Foreign-based operations' translation
credit............................. -- -- -- 285 -- 285
Increase in minority interest in
equity of consolidated
subsidiaries....................... -- -- -- -- 116,713 116,713
------- ---------- ---------- ----------- -------- -----------
Balance, December 31, 2000............. 44,576 3,748,715 2,345,528 (128,034) 131,866 6,142,651
Net income........................... -- -- 1,146,049 -- -- 1,146,049
Treasury stock transactions.......... -- -- (155) (1,420,809) -- (1,420,964)
Cash dividends paid (Note 20)........ -- -- (48,103) -- -- (48,103)
Excess unallocated purchase price
(Note 13).......................... -- (299,121) -- -- -- (299,121)
Additional issuance of common stock
by consolidated subsidiaries to
outside entity..................... -- 1 -- -- -- 1
Gain on disposal of investments in
common stock of subsidiary......... -- 103 -- -- -- 103
Equity in capital surplus, retained
earnings and capital adjustment
changes of affiliates.............. -- -- -- 8,116 -- 8,116
Unrealized gain on valuation of
investment securities (Note 4)..... -- -- -- 51,355 -- 51,355
Foreign-based operations' translation
credit............................. -- -- -- (3,839) -- (3,839)
Stock compensation plans (Notes 2 and
16)................................ -- -- -- 577 -- 577
Increase in minority interest in
equity of consolidated
subsidiaries....................... -- -- -- -- 572,479 572,479
------- ---------- ---------- ----------- -------- -----------
Balance, December 31, 2001............. W44,576 W3,449,698 W3,443,319 W(1,492,634) W704,345 W 6,149,304
======= ========== ========== =========== ======== ===========
F-7
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
TOTAL
COMMON CAPITAL RETAINED CAPITAL MINORITY SHAREHOLDERS'
STOCK SURPLUS EARNINGS ADJUSTMENT INTEREST EQUITY
------- ---------- ---------- ----------- -------- -------------
(IN MILLIONS OF KOREAN WON)
Balance, December 31, 2001............. W44,576 W3,449,698 W3,443,319 W(1,492,634) W704,345 W 6,149,304
Net income........................... -- -- 1,487,151 -- -- 1,487,151
Treasury stock transactions (Note
15)................................ -- 81,984 -- (766,597) -- (684,613)
Cash dividends paid (Note 20)........ -- -- (57,265) -- -- (57,265)
Excess unallocated purchase price
(Note 13).......................... -- (647,025) -- -- -- (647,025)
Equity in capital surplus, retained
earnings and capital adjustment
changes of affiliates.............. -- (275) -- (12,513) -- (12,788)
Unrealized loss on valuation of
investment securities (Note 4)..... -- -- -- (28,327) -- (28,327)
Foreign-based operations' translation
credit............................. -- -- -- 2,809 -- 2,809
Stock compensation plans (Notes 2 and
16)................................ -- -- -- 1,492 -- 1,492
Increase in minority interest in
equity of consolidated
subsidiaries....................... -- -- -- -- 21,162 21,162
------- ---------- ---------- ----------- -------- -----------
Balance, December 31, 2002............. W44,576 W2,884,382 W4,873,205 W(2,295,770) W725,507 W 6,231,900
======= ========== ========== =========== ======== ===========
(IN THOUSANDS OF U.S. DOLLARS) (NOTE 2)
Balance, December 31, 2001............. $37,576 $2,907,947 $2,902,570 $(1,258,226) $593,733 $ 5,183,600
Net income........................... -- -- 1,253,604 -- -- 1,253,604
Treasury stock transactions.......... -- 69,109 -- (646,209) -- (577,100)
Cash dividends paid.................. -- -- (48,272) -- -- (48,272)
Excess unallocated purchase price.... -- (545,414) -- -- -- (545,414)
Equity in capital surplus, retained
earnings consolidated subsidiaries
to outside entity.................. -- (232) -- (10,548) -- (10,780)
Unrealized loss on valuation of
investment and capital adjustment
changes of affiliates.............. -- -- -- (23,878) -- (23,878)
Foreign-based operations' translation
credit............................. -- -- -- 2,368 -- 2,368
Stock compensation plans............. -- -- -- 1,258 -- 1,258
Increase in minority interest in
equity of consolidated
subsidiaries....................... -- -- -- -- 17,838 17,838
------- ---------- ---------- ----------- -------- -----------
Balance, December 31, 2002............. $37,576 $2,431,410 $4,107,902 $(1,935,235) $611,571 $ 5,253,224
======= ========== ========== =========== ======== ===========
See accompanying Notes to Consolidated Financial Statements.
F-8
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
2000 2001 2002 2002
----------- ----------- ----------- ----------------
(IN MILLIONS OF KOREAN WON) (IN THOUSANDS
OF U.S. DOLLARS)
(NOTE 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. W 972,264 W 1,146,049 W 1,487,151 $ 1,253,604
Expenses not involving cash payments:
Depreciation and amortization............. 1,456,440 1,759,650 1,543,335 1,300,965
Provision for severance indemnities....... 34,684 56,947 45,509 38,362
Loss on disposal and impairment of
property and equipment.................. 18,063 41,801 212,118 178,806
Loss on disposal of investment assets..... -- 17,658 51,618 43,512
Provision for bad debts................... 35,321 56,678 20,981 17,686
Foreign translation loss.................. 54,169 17,336 5,397 4,549
Loss on impairment of investment
securities.............................. -- 6,372 68,882 58,065
Equity in losses of affiliates............ 11,518 -- -- --
Deferred income taxes..................... 25,720 315,755 81,963 69,091
Minority interest in net gain of
consolidated subsidiaries............... -- -- 33,110 27,910
Other..................................... 27,237 36,975 61,193 51,582
----------- ----------- ----------- -----------
Sub-total................................. 1,663,152 2,309,172 2,124,106 1,790,528
----------- ----------- ----------- -----------
Income not involving cash receipts:
Equity in earnings of affiliates.......... -- (4,294) (813) (685)
Foreign translation gain.................. (6,734) (3,354) (30,282) (25,526)
Gain on disposal of property and
equipment............................... (27,891) (3,467) (1,206) (1,017)
Reversal of allowance for doubtful
accounts................................ (5,592) (558) (6,365) (5,365)
Minority interest in net loss of
consolidated subsidiaries............... (51,749) (19,648) -- --
Other..................................... (14,682) (4,460) (19,705) (16,610)
----------- ----------- ----------- -----------
Sub-total................................. (106,648) (35,781) (58,371) (49,203)
----------- ----------- ----------- -----------
Changes in assets and liabilities related to
operating activities:
Accounts receivable -- trade.............. 39,807 (137,811) (277,685) (234,077)
Accounts receivable -- other.............. (5,786) (859,126) 224,640 189,362
Inventories............................... 29,995 (33,049) 39,092 32,953
Other current assets...................... (7,659) (20,091) (30,764) (25,933)
Accounts payable.......................... (38,417) (38,960) 614,005 517,580
Income taxes payable...................... 265,325 61,845 12,946 10,913
Accrued expenses.......................... 81,763 113,306 67,026 56,500
Current portion of facility deposits...... (3,054) 374 3,801 3,204
Other current liabilities................. 178,022 (51,990) 125,767 106,016
Severance indemnity payments.............. (17,860) (14,758) (20,378) (17,178)
F-9
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
2000 2001 2002 2002
----------- ----------- ----------- ----------------
(IN MILLIONS OF KOREAN WON) (IN THOUSANDS
OF U.S. DOLLARS)
(NOTE 2)
Increase in deposits for group severance
indemnities and other deposits.......... W (8,579) W (15,332) W (43,521) $ (36,686)
Other..................................... 1,157 20 -- --
----------- ----------- ----------- -----------
Sub-total................................. 514,714 (995,572) 714,929 602,654
----------- ----------- ----------- -----------
Net Cash Provided by Operating Activities... 3,043,482 2,423,868 4,267,815 3,597,583
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term financial
instruments............................... (248,207) 215,154 231,219 194,908
Decrease (increase) in marketable
securities................................ (395,807) 3,845 (103,256) (87,040)
Decrease in short-term loans and other
current assets............................ 5,285 541 24,474 20,631
Decrease in long-term bank deposits......... 19 22 21 18
Proceeds from sale of investment
securities................................ 105,398 24,804 1,138,175 959,433
Decrease in long-term loans................. 35,521 32,265 19,920 16,792
Decrease in guarantee deposits.............. 199,838 169,074 77,490 65,321
Proceeds from disposal of property and
equipment................................. 230,700 91,489 23,211 19,566
Proceeds from disposal of intangible
assets.................................... 4,759 2,120 1,198 1,010
Increase in long-term bank deposits......... (2) (18) -- --
Acquisition of investment securities........ (370,221) (109,151) (2,271,268) (1,914,581)
Increase in long-term loans................. (61,125) (30,875) (24,376) (20,548)
Increase in guarantee deposits.............. (200,438) (252,246) (55,986) (47,194)
Decrease (increase) in other assets......... 3,602 (18,531) (22,022) (18,564)
Acquisition of property and equipment....... (2,241,063) (1,382,114) (2,024,655) (1,706,697)
Acquisition of intangible assets and
deferred charges.......................... (50,618) (719,204) (77,580) (65,397)
Payment for purchase of new subsidiaries,
net of cash acquired...................... (1,685,419) -- -- --
----------- ----------- ----------- -----------
Net Cash Used in Investing Activities....... (4,667,778) (1,972,825) (3,063,435) (2,582,342)
----------- ----------- ----------- -----------
F-10
SK TELECOM CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
2000 2001 2002 2002
----------- ----------- ----------- ----------------
(IN MILLIONS OF KOREAN WON) (IN THOUSANDS
OF U.S. DOLLARS)
(NOTE 2)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings........... W 1,141,843 W 1,320,111 W 91,942 $ 77,503
Issuance of bonds payable................... 998,846 1,716,560 1,166,451 983,268
Increase in long-term borrowings............ 24,600 72,273 24,682 20,806
Issuance of common stock.................... 1,657,344 -- -- --
Increase in minority interest in equity of
consolidated subsidiaries................. 5,345 643,408 17,405 14,672
Payment of short-term borrowings............ (1,499,204) (355,232) (578,696) (487,816)
Payment of current portion of long-term
debt...................................... (554,414) (1,235,163) (719,779) (606,743)
Payment of dividends........................ (15,408) (48,102) (58,716) (49,495)
Decrease in facility deposits............... (15,993) (20,352) (25,278) (21,308)
Net increase in treasury stock.............. -- (1,420,964) (1,351,243) (1,139,040)
Other....................................... (113,709) (341,313) 15,035 12,673
----------- ----------- ----------- -----------
Net Cash Provided by (Used in) Financing
Activities................................ 1,629,250 331,226 (1,418,197) (1,195,480)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS DUE TO CHANGES IN CONSOLIDATED
SUBSIDIARIES................................ -- (5,479) 10,654 8,981
----------- ----------- ----------- -----------
NET INCREASE(DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 4,954 776,790 (203,163) (171,258)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
YEAR........................................ 85,536 90,490 867,280 731,080
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF THE
YEAR........................................ W 90,490 W 867,280 W 664,117 $ 559,822
=========== =========== =========== ===========
Cash paid for interest (net of amounts
capitalized)................................ W 179,741 W 273,424 W 248,234 $ 209,251
=========== =========== =========== ===========
Cash paid for income taxes.................... W 73,990 W 476,195 W 603,481 $ 508,709
=========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-11
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
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 December 31, 2002, the Company's largest shareholders are
the SK Group (27.28%), KT Corporation (4.77%) and POSCO (formerly known as
Pohang Iron & Steel Co., Ltd., 7.26%).
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, the
accompanying consolidated financial statements have been condensed, restructured
and translated into English. The conversion into U.S. dollars were made at the
rate of W1,186.3 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 year ended December 31, 2002.
Such translations 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. Certain supplementary information included in the statutory
Korean language consolidated financial statements, not required for a fair
presentation of the Company and subsidiaries' financial position or results of
operations, is not presented in the accompanying consolidated financial
statements.
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-12
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's subsidiaries are as follows:
YEAR OF OWNERSHIP
SUBSIDIARY ESTABLISHMENT PRIMARY BUSINESS PERCENTAGE (%)
---------- ------------- ---------------- --------------
SK IMT Co., Ltd....................... 2001 Telecommunication services 61.34
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 90.40
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
services
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
Effective January 1, 2002, SK Telecom International Inc., SLD Telecom PTE
Ltd. and Global Credit and Information Corp. are included in the consolidation
of the accompanying financial statements as their total assets at the beginning
of the fiscal year were more than W7 billion, in accordance with Korean GAAP. As
allowed under Korean GAAP, the financial statements of prior years have not been
restated to include the financial statements of these entities.
In August 2002, the Company purchased a 78.3% interest in SK Communications
Corp. (formerly known as Lycos Korea) and on November 1, 2002, SK Communications
Co., Ltd. merged with NetsGo Co., Ltd., a substantially owned subsidiary of the
Company. In December 2002, the Company purchased a 67.1% interest in Paxnet Inc.
C. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in Korea and the United States require 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. MARKETABLE SECURITIES
Marketable securities, which consist of debt securities and debt unit
trusts, are stated at market value.
E. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is provided based on the estimated
collectibility of individual accounts and historical bad debt experience.
F-13
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the allowance for doubtful accounts receivable -- trade for
2000, 2001 and 2002 is as follows (in millions of Korean won):
2000 2001 2002
-------- -------- --------
Beginning balance................................. W 97,786 W 96,532 W 81,681
Increase in allowance from newly consolidated
subsidiaries.................................... 30,646 -- 2,056
Additions......................................... 2,323 7,446 22,281
Reductions........................................ (34,223) (22,297) (45,476)
-------- -------- --------
Ending balance.................................... W 96,532 W 81,681 W 60,542
======== ======== ========
F. 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.
G. INVESTMENT SECURITIES
(1) 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
those made in preparing consolidated financial statements.
(2) Other Investments
Investments in equity securities with readily determinable fair value and
investments in available-for-sale debt securities are reported at fair value
with unrealized gains or losses reported as a capital adjustment in
shareholders' equity until realized. Declines in the fair value which are
anticipated to be not recoverable are recorded as impairment losses in current
operations after eliminating any previously recorded capital adjustment for
temporary changes. Subsequent recoveries or other future changes in fair value
are recorded as a capital adjustment in shareholders' equity.
Investments in equity securities without readily determinable fair values
are reported at cost, except for declines in the Company's proportionate equity
of the underlying book value of the investees which are anticipated to be not
recoverable, which are recorded as impairment losses in current operations.
Subsequent recoveries are also recorded in current operations up to the original
cost of the investment.
Investments in government, public and corporate bonds are recorded at
acquisition cost plus (or minus) the amortization of any difference between
acquisition cost and par value of the bonds using the effective interest rate
method.
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.
F-14
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, interest expense and other financial charges for borrowings
related to the manufacture or construction of property and equipment are
capitalized. The Company and its subsidiaries capitalized interest amounting to
W70,974 million, W37,326 million and W14,830 million in 2000, 2001 and 2002,
respectively.
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
(3-30 years) of the related assets.
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 W1,300,000 million to the Ministry of Information
Communication ("MIC"). SK IMT, a subsidiary of the Company, which was
incorporated on March 8, 2001 and is in the pre-operating stage at December 31,
2002, paid W650,000 million of this amount in March 2001 and 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% (4.94% as of December 31,
2002). The future payments are W90,000 million in 2007, W110,000 million in
2008, W130,000 million in 2009, W150,000 million in 2010 and W170,000 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 SK IMT 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 the fact that renewal cost is
expected to be substantial.
Interest expense and other financial charges for borrowings related to the
purchase of intangible assets are capitalized until the assets is put in use. SK
IMT, a subsidiary of the Company, capitalized interest amounting to W69,372
million relating to intangible assets during 2002.
Changes in intangible assets for 2000, 2001 and 2002 are as follows (in
millions of Korean won):
2000 2001 2002
---------- ---------- ----------
Beginning balance............................. W 66,701 W2,565,476 W3,816,373
Additions:
Goodwill related to Shinsegi Telecomm,
Inc...................................... 2,560,690 -- --
IMT license................................. -- 1,300,000 (40,393)
Other....................................... 71,097 124,636 144,056
Reductions:
Amortization................................ (128,214) (170,358) (187,094)
Write-off................................... -- -- (6,669)
Disposal.................................... (4,798) (3,380) (5,038)
---------- ---------- ----------
Ending balance................................ W2,565,476 W3,816,374 W3,721,235
========== ========== ==========
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.
F-15
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In
2000, the Company and certain subsidiaries changed the beneficiary of such
deposits from companies themselves to their employees. As a result, such funding
of severance indemnities in outside insurance companies, of which the
beneficiary is their employees, totaling W60,460 million, W76,418 and W120,413
million as of December 31, 2000, 2001, and 2002 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 W8,284 million, W7,522 million and W6,860 million as of December
31, 2000, 2001 and 2002, respectively, are deducted from accrued severance
indemnities.
Changes in accrued severance indemnities for 2000, 2001 and 2002 are as
follows (in millions of Korean won):
2000 2001 2002
-------- -------- --------
Beginning balance................................. W 63,890 W 32,676 W 61,620
Provision......................................... 34,684 59,640 49,599
Payments to employees............................. (17,860) (14,758) (20,378)
Transfer from affiliated and related companies.... 30 20 --
Increase in accrued severance indemnities from
newly consolidated subsidiaries................. 12,392 -- 1,673
Deposits for severance indemnities................ (60,460) (15,958) (43,995)
-------- -------- --------
Ending balance.................................... W 32,676 W 61,620 W 48,519
======== ======== ========
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 W78,806 million, W130,685
million and W194,332 million for the years ended December 31, 2000, 2001 and
F-16
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002, respectively and external research and development costs of W38,319
million, W23,000 million and W58,974 million for the years ended December 31,
2000, 2001 and 2002, respectively.
N. DERIVATIVE INSTRUMENTS
The Company and its subsidiaries record rights and obligations arising from
derivative instruments as assets and liabilities, which are stated at fair
value. The gains and losses that result from the change in the fair value of
derivative instruments are reported in current earnings.
O. 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.
P. 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.
Q. 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.
R. 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 W1,259.70 = US$1, W1,326.10 = US$1 and W1,200.40 = US$1 at
December 31, 2000, 2001 and 2002, respectively. The resulting gains and losses
arising from the translation or settlement of such assets and liabilities are
included in current operations.
S. 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 in present value discount accounts 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.
T. 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
F-17
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note 16). 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 life of the
option, dividends on the stock, or the risk-free interest rate.
U. INVESTEE COMPANY'S CHANGE OF DEPRECIATION METHOD
Effective January 1, 2000, SK C&C Co., Ltd, which is 30% owned by the
Company and accounted for using the equity method, changed its depreciation
method from the declining balance method to the straight-line method in order to
properly allocate period expense. The change had the effect of increasing
beginning retained earnings of the Company and its subsidiaries as of January 1,
2000 by W3,399 million, reducing equity in losses of affiliates for the year
ended December 31, 2000 by W8,705 million and increasing net income for the year
ended December 31, 2000 by W6,024 million.
V. ACCOUNTING CHANGE AND RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
On January 1, 2002, the Company and it subsidiaries early adopted Statement
of Korea Accounting Standards ("SKAS") No. 6, "Events Occurring after Balance
Sheet Date". This statement requires that proposed appropriations of retained
earnings, including proposed cash dividends, be reflected on the balance sheet
when the appropriations are approved by shareholders. Through 2001, such
proposed appropriation of retained earnings, including proposed cash dividends,
were recorded in the year they were proposed in accordance with Korean GAAP. In
order to reflect this accounting change, prior year's financial statements have
been restated. This accounting change resulted in an increase in stockholders'
equity as of December 31, 2000, 2001 and 2002 of W48,103 million, W57,265
million and W151,739 million, respectively, and a decrease in total liabilities
as December 31, 2000, 2001 and 2002 of the same amounts. Operating income and
net income for the years ended December 31, 2000, 2001 and 2002 were not
affected by this change.
3. ACQUISITION OF AND MERGER WITH SHINSEGI TELECOMM, INC.
In order to maximize shareholder value through voluntary restructuring of
the domestic wireless telecom industry, Company management approved the
acquisition of a 51.2% equity interest in Shinsegi Telecomm Inc.'s common stock
on December 20, 1999 and, on December 28, 1999, the Company acquired a 23.5%
equity interest through the purchase of Shinsegi Telecomm, Inc.'s common stock
held by Kolon International Corporation and other minority interests for
W1,088,819 million. The Company acquired the remaining 27.7% equity interest on
April 27, 2000 from POSCO by the issuance of 5,794,924 shares of the Company's
common stock with a market value of W1,657,348 million on the issuance date.
The transaction was accounted for under the purchase method of accounting
and generated W2,560,690 million in goodwill, which is being amortized on a
straight-line basis over a twenty year period.
F-18
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition of a 51.2% equity interest in Shinsegi Telecomm, Inc.'s
common stock completed on April 27, 2000 is summarized as follows:
IN MILLIONS OF
KOREAN WON
--------------
Fair value of assets acquired............................... W 1,183,633
Goodwill.................................................... 2,560,690
Elimination of investment in unconsolidated affiliate....... (1,067,180)
Assumed liabilities......................................... (1,018,710)
-----------
Acquisition cost after adding incidental costs of W1,085
million................................................... W 1,658,433
===========
In 2001, the Company acquired an additional 19.2% equity interest in
Shinsegi Telecomm, Inc. for W327,733 million. And on January 13, 2002, the
Company merged with Shinsegi Telecomm, Inc. in accordance with a resolution of
the Company's board of directors dated September 21, 2001 and the approval of
the shareholders of Shinsegi Telecomm, Inc. dated November 16, 2001. The
exchange ratio of common stock between the Company and Shinsegi Telecomm, Inc.
was 0.05696 to 1. Using such exchange ratio, the Company distributed 2,677,653
shares of treasury stock to minority shareholders of Shinsegi Telecomm, Inc. and
the Company retired all shares of Shinsegi Telecomm, Inc. owned by the Company
upon the merger.
The additional acquisition of equity interests in Shinsegi Telecomm, Inc.
after its acquisition of a majority equity interest on April 27, 2000 was also
accounted for using the purchase method of accounting whereby the purchase price
was allocated to assets acquired and liabilities assumed based on the fair value
at the date when the Company acquired a majority equity interest in Shinsegi
Telecomm, Inc. The excess unallocated purchase prices of W299,121 million for
the additional 19.2% equity interest acquired in 2001 and W647,025 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 recorded
as decreases in capital surplus in accordance with Korean GAAP.
The condensed balance sheets of Shinsegi Telecomm, Inc. as of December 31,
2001 and January 12, 2002 and the condensed statements of operations for the
year ended December 31, 2001 and the period from January 1, 2002 to January 12,
2002, which have been adjusted for the difference in depreciation methods
between the Company and Shinsegi Telecomm, Inc., are as follows (in millions of
Korean won):
DECEMBER 31, 2001 JANUARY 12, 2002
----------------- ----------------
(CONDENSED BALANCE SHEETS)
Current assets........................................ W 578,627 W 574,319
Non-current asset..................................... 1,131,930 1,126,811
---------- ----------
Total Assets.......................................... W1,710,557 W1,701,130
========== ==========
Current liabilities................................... W1,089,375 W1,077,440
Long-term liabilities................................. 513,109 509,934
---------- ----------
Total Liabilities..................................... 1,602,484 1,587,374
---------- ----------
Capital stock......................................... 800,000 800,000
Deficit............................................... (689,599) (680,058)
Capital adjustment.................................... (2,328) (6,186)
---------- ----------
Total Stockholders' Equity............................ 108,073 113,756
---------- ----------
Total Liabilities and Stockholders' Equity............ W1,710,557 W1,701,130
========== ==========
F-19
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED PERIOD FROM JANUARY 1, 2002
DECEMBER 31, 2001 TO JANUARY 12, 2002
----------------- ---------------------------
(CONDENSED STATEMENTS OF OPERATIONS)
Operating revenue............................. W2,007,018 W71,638
Operating expenses............................ 1,793,130 58,562
---------- -------
Operating income.............................. 213,888 13,076
Other income.................................. 71,598 2,570
Other expenses................................ 181,938 3,141
---------- -------
Income before income taxes.................... 103,548 12,505
Provision for income taxes.................... 135,105 2,964
---------- -------
Net income (loss)............................. W (31,557) W 9,541
========== =======
4. INVESTMENT SECURITIES
Investment securities as of December 31, 2000, 2001 and 2002 are as follows
(in millions of Korean won):
OWNERSHIP FAIR VALUE OR
PERCENTAGE (%) NET ASSETS CARRYING AMOUNT
AT DECEMBER 31, ACQUISITION AT DECEMBER 31, --------------------------------
2002 COST 2002 2000 2001 2002
--------------- ----------- --------------- -------- -------- ----------
(INVESTMENTS IN
AFFILIATES)
SK C&C Co., Ltd.......... 30.0 W 19,071 W 33,600 W 36,139 W 43,475 W 39,687
SK Telecom International
Inc.................... 100.0 7,717 -- 6,023 6,023 --
VCASH.................... 27.8 4,170 2,232 4,059 3,417 2,232
STIC IT Venture
Capital................ 28.3 8,000 6,884 8,490 8,038 6,884
SK Telecom International
Inc.................... 28.6 2,159 2,576 1,484 2,352 2,576
SK China Company Ltd..... 20.7 3,195 3,482 3,195 3,869 3,482
Eonex Technologies,
Inc.................... 22.5 3,600 3,022 3,600 3,600 4,615
SLD Telecom PTE Ltd...... 53.8 5,330 -- 1,533 5,330 --
Widerthan.com............ 20.0 1,000 1,750 -- 750 1,750
Global Credit &
Information Corp....... 50.0 2,410 -- -- 2,410 --
SKT-HP Ventures, LLC..... 50.0 6,415 5,990 -- 6,415 5,990
SKT QC Wireless
Development Fund, LLC.. 50.0 6,540 5,993 -- 6,540 5,993
Other investments in
affiliates............. -- -- -- 5,661 13,098 8,038
(INVESTMENTS IN LISTED
COMPANIES)
KT Corporation........... 4.6 775,098 730,602 -- -- 730,602
Digital Chosunilbo Co.,
Ltd.................... 10.1 5,781 2,428 3,498 5,926 2,428
Hanaro Telecom Inc....... 5.7 151,374 49,586 37,024 75,437 49,586
Korea Radio Wave
Basestation Management
(*).................... 4.5 1,171 2,693 616 616 2,693
SK Securities............ 1.1 5,551 5,052 -- -- 5,052
F-20
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OWNERSHIP FAIR VALUE OR
PERCENTAGE (%) NET ASSETS CARRYING AMOUNT
AT DECEMBER 31, ACQUISITION AT DECEMBER 31, --------------------------------
2002 COST 2002 2000 2001 2002
--------------- ----------- --------------- -------- -------- ----------
(INVESTMENTS IN
NON-LISTED COMPANIES)
SK Group Japan Co.,
Ltd.................... 16.5 16,416 -- 11,130 16,417 --
Real Telecom Co., Ltd.
(formerly Intec Telecom
Co., Ltd.)............. 9.9 5,980 1,261 -- 5,981 5,981
Powercomm Co.,Ltd........ 5.0 240,243 40,031 240,243 240,243 240,243
Japan MBCO............... 10.5 27,209 11,163(**) -- 12,288 27,209
Enterprise Networks Co.,
Ltd.
(formerly G&G Networks
Co., Ltd.)........... 4.0 14,437 13,793 14,438 14,438 14,438
SK Life Insurance Co.,
Ltd.................... 9.6 14,890 -- 11,195 14,890 14,890
Korea IT Fund............ -- 190,000 190,000 -- -- 190,000
Korea Economic Daily and
others................. 26,126 40,346 43,971
(OTHER)
Investments in public
bonds.................. 2,871 2,384 586
Convertible bonds of Real
Telecom Co., Ltd.
(formerly Intec Telecom
Co., Ltd.)........... -- 9,514 9,514
Convertible bonds of
Eonex Technologies,
Inc.................... -- -- 2,000
Other convertible
bonds.................. -- -- 400
Subordinated bonds of SK
Life Insurance Co.,
Ltd.................... 50,000 50,000 50,000
Subordinated bonds of
Nate First Special
Purpose Company........ -- -- 40,506
Subordinated bonds of
Nate Second Special
Purpose Company........ -- -- 27,761
Other investments........ 4,213 8,871 7,104
-------- -------- ----------
W471,538 W602,668 W1,546,211
======== ======== ==========
---------------
(*) listed on the Korea Stock Exchanges in 2002.
(**) reflects net asset vale as of March 31, 2002.
The net unrealized losses on investments in common stock of Digital
Chosunilbo Co., Ltd., and Hanaro Telecom Inc., as of December 31, 2000 and 2001,
totaling W127,147 million and W75,792 million, respectively, and the net
unrealized losses 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 December 31, 2002, totaling W104,117 million were
recorded as a capital adjustment.
F-21
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 23, 2002, the Company acquired a 9.6% equity interest (29,808,333
shares of common stock) in KT Corporation for W1,609 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
25). 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 (W50,900 per share) with unrealized losses amounting to
W44,496 million reported as impairment losses in the year ended December 31,
2002, as the declines in the carrying value was not recoverable.
Due to the impairment of the Company's investments in common stock of SK
Group Japan Co., Ltd., an impairment loss of W16,417 million was recorded for
the year ended December 31, 2002.
The net asset value of the Company's investments in the common stock of
Powercomm Co., Ltd. was W40,031 million as of December 31, 2002, which was
W200,212 million less than the carrying amount. However, no valuation allowance
was provided for these investments as Company management expects the carrying
amount of its investment to be recoverable in the future (See note 2 (g)).
The net asset value of SK Life Insurance Co. as of December 31, 2002 was
zero, which was W14,890 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., as Company management expects the carrying
amount of its investment to be recoverable in the future(See note 2 (g)).
As their total assets at the beginning of 2002 were over W7 billion,
effective January 1, 2002, SK Telecom International Inc., Global Credit &
Information Corp. and SLD Telecom PTE Ltd. are included in the consolidation of
the accompanying financial statements in accordance with Korean GAAP.
As allowed under Korean financial accounting standards, investments in
equity securities of SK USA, SK Cyber Pass Inc., Aircross and others were not
accounted for using the equity method of accounting, as their total assets at
the beginning of 2002 were less than W7 billion.
On March 30, 2001, the Company transferred its paging business to Real
Telecom Co., Ltd. (formerly known as Intec Telecom Co., Ltd.) in exchange for
9.9% of Real Telecom Co., Ltd.'s newly issued common stock and bonds with a
principal amount of W9.5 billion that can be converted into an additional 7.8%
interest in Real Telecom Co., Ltd.
The convertible bonds of Eonex Technologies, Inc. with a principal amount
of W2,000 million can be converted into a 26.3% equity interest (177,333 shares
of common stock) of Eonex Technologies, Inc. at W60,000 per share over the
period from December 1, 2002 to May 30, 2003.
On June 20, 2002 and December 3, 2002, the Company sold W631,447 million
and W650,641 million of accounts receivable resulting from its mobile phone
dealer financing plan to Nate First Special Purpose Company and Nate Second
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 and Nate Second
Special Purpose Company for W40,506 million and W27,761 million, respectively,
in order to enhance the credit of bonds issued by Nate First Special Purpose
Company and Nate Second Special Purpose Company (See note 21.(d)).
F-22
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Details of the changes in investments in affiliates accounted for using the
equity method for the years ended December 31, 2000, 2001 and 2002 are as
follows (in millions of Korean won):
FOR THE YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------------------------------------------------------
EQUITY IN
EQUITY IN EQUITY IN CAPITAL SURPLUS
BEGINNING EARNINGS RETAINED AND CAPITAL DIVIDENDS DECREASE ENDING
BALANCE ACQUISITION (LOSSES) EARNINGS ADJUSTMENTS RECEIVED (NOTE 1) BALANCE
--------- ----------- --------- --------- --------------- --------- ---------- -------
Shinsegi Telecomm,
Inc................ 1,088,819 -- (21,639) -- -- -- (1,067,180) --
SK C&C Co., Ltd...... 22,415 -- 10,116 4,911 (703) (600) -- 36,139
VCASH................ -- 4,170 (113) -- 2 -- -- 4,059
STIC IT Venture
Capital............ -- 8,000 601 -- (111) -- -- 8,490
SK Wyverns Baseball
Club............... -- 1,000 (483) -- -- -- -- 517
--------- ------ ------- ----- ---- ---- ---------- ------
1,111,234 13,170 (11,518) 4,911 (812) (600) (1,067,180) 49,205
========= ====== ======= ===== ==== ==== ========== ======
FOR THE YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------------------------------------------
EQUITY IN
EQUITY IN EQUITY IN CAPITAL SURPLUS
BEGINNING EARNINGS RETAINED AND CAPITAL DIVIDENDS DECREASE ENDING
BALANCE ACQUISITION (LOSSES) EARNINGS ADJUSTMENTS RECEIVED (NOTE 2) BALANCE
--------- ----------- --------- --------- --------------- --------- -------- -------
SK C&C Co., Ltd........ 36,139 -- 4,753 -- 3,183 (600) -- 43,475
VCASH.................. 4,059 -- (672) -- 30 -- -- 3,417
STIC IT Venture
Capital.............. 8,490 -- (441) -- (11) -- -- 8,038
Skytel Co., Ltd. (Note
3)................... 1,484 -- 522 -- 346 -- -- 2,352
SK China Co., Ltd.
(Note 3)............. 3,195 -- 132 -- 542 -- -- 3,869
SK Wyverns Baseball
Club................. 517 -- -- -- -- -- (517) --
------ ----------- ----- --------- ----- ---- ---- ------
53,884 -- 4,294 -- 4,090 (600) (517) 61,151
====== =========== ===== ========= ===== ==== ==== ======
F-23
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------------------------
EQUITY IN
EQUITY IN EQUITY IN CAPITAL SURPLUS
BEGINNING EARNINGS RETAINED AND CAPITAL DIVIDENDS ENDING
BALANCE ACQUISITION (LOSSES) EARNINGS ADJUSTMENTS RECEIVED DECREASE BALANCE
--------- ----------- --------- --------- --------------- --------- -------- -------
SK C&C Co., Ltd...... 43,475 -- 3,401 -- (6,589) (600) -- 39,687
VCASH................ 3,417 -- (1,192) -- 7 -- -- 2,232
STIC IT Venture
Capital............ 8,038 -- (1,137) -- (17) -- -- 6,884
Skytel Co., Ltd...... 2,352 675 29 -- (480) -- -- 2,576
SK China Co., Ltd.... 3,869 -- (21) -- (366) -- -- 3,482
Eonex Technologies,
Inc. (note 4)...... 3,600 -- (996) -- 2,011 -- -- 4,615
Widerthan.com (note
4)................. 1,000 -- 750 -- -- -- -- 1,750
SKT-HP Ventures,
LLC................ 6,415 -- (12) -- (413) -- -- 5,990
SKT QC Wireless
Development Fund,
LLC................ 6,540 -- (9) -- (538) -- -- 5,993
------ --- ------ -- ------ ---- -- ------
78,706 675 813 -- (6,385) (600) -- 73,209
====== === ====== == ====== ==== == ======
---------------
(note 1) As the Company acquired an additional 27.7% equity interest of Shinsegi
Telecomm, Inc. on April 27, 2000, such subsidiary is included in the
consolidation of the accompanying financial statements.
(note 2) As its total assets at the beginning of 2001 were over W7 billion, SK
Wyverns Baseball Club is included in the consolidation of the
accompanying financial statements in accordance with Korean GAAP.
(note 3) As their total assets at the beginning of 2001 were over W7 billion,
effective January 1, 2001, investments in equity securities of Skytel
Co., Ltd. and SK China Co., Ltd. are accounted for using the equity
method of accounting.
(note 4) As their total assets at the beginning of 2002 were over W7 billion,
effective January 1, 2002, investments in equity securities of Eonex
Technologies, Inc. and Widerthan.com are accounted for using the equity
method of accounting.
5. LOANS TO EMPLOYEES
Short-term and long-term loans to employees as of December 31, 2000, 2001
and 2002 are as follows (in millions of Korean won):
2000 2001 2002
-------- ------- -------
Loans to employees' stock ownership association..... W 89,105 W70,939 W45,906
Loans to employees for housing and other (3-4%)..... 20,009 6,840 10,556
-------- ------- -------
W109,114 W77,779 W56,462
======== ======= =======
F-24
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2000, 2001 and 2002 are as
follows (in millions of Korean won):
USEFUL
LIVES
(YEARS) 2000 2001 2002
------- ----------- ----------- -----------
Land.............................. W 262,826 W 441,934 W 439,915
Buildings and structures.......... 15-30 893,950 947,949 977,045
Machinery......................... 3-6 5,692,358 6,679,089 6,998,088
Vehicles.......................... 3-4 16,740 12,830 19,368
Construction in progress.......... 922,041 184,971 352,932
Other............................. 3-4 527,019 651,871 878,006
----------- ----------- -----------
Acquisition cost.................. 8,314,934 8,918,644 9,665,354
Less accumulated depreciation..... (3,771,756) (4,743,918) (5,095,937)
----------- ----------- -----------
Property and equipment, net....... W 4,543,178 W 4,174,726 W 4,569,417
=========== =========== ===========
The government's declared standard value of land owned as of December 31,
2000, 2001 and 2002 are W216,014 million, W371,775 million and W356,360 million,
respectively.
7. CURRENCY FORWARD CONTRACTS
Details of the Company and its subsidiary's foreign currency forward
contracts designated as hedging the foreign currency exposure in bank deposits
denominated U.S. dollars as of December 31, 2001 were as of follows (in millions
of Korean won and thousands of U.S. dollars):
U.S. DOLLARS FORWARD FAIR VALUE OF
MATURITY DATE TO BE SOLD EXCHANGE RATE CURRENCY FORWARDS
------------- ------------ ------------- -----------------
January 3, 2002........................ US$ 7,867 W1,276.00/US$ W (394)
January 7, 2002........................ 15,734 W1,276.40/US$ (792)
January 7, 2002........................ 7,867 W1,276.40/US$ (396)
January 21, 2002....................... 15,288 W1,314.60/US$ (220)
January 23, 2002....................... 15,697 W1,284.00/US$ (714)
February 4, 2002....................... 11,837 W1,277.20/US$ (591)
March 14, 2002......................... 39,348 W1,287.00/US$ (1,875)
---------- -------
US$113,638 W(4,982)
========== =======
There was no foreign currency forward contracts outstanding as of December
31, 2002.
F-25
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. BONDS PAYABLE
Bonds payable as of December 31, 2000, 2001 and 2002 are as follows (in
millions of Korean won and thousands of U.S. dollars):
MATURITY ANNUAL INTEREST
YEAR RATE (%) 2000 2001 2002
-------- --------------- ------------ ------------ ------------
Domestic general bonds......... 2001 8.0-16.0 W1,010,000 W -- W --
Domestic general bonds......... 2002 6.0-9.0 475,000 475,000 --
Domestic general bonds......... 2003 5.0-9.9 670,000 910,000 910,000
Domestic general bonds......... 2004 5.0-7.0 -- 1,120,000 1,120,000
2005 6.0 -- -- 500,000
Domestic general bonds......... 2006 6.0 -- 400,000 400,000
2007 5.0-6.0 -- -- 700,000
Dollar denominated bonds....... 2004 7.75 252,038 265,323 240,173
(US$ 200,078) (US$ 200,078) (US$ 200,078)
Bonds with stock purchase
warrants (US $4,000)......... 2006 6M Libor-0.3 -- -- 5,054
------------ ------------ ------------
2,407,038 3,170,323 3,875,227
Less: Discounts on bonds....... (34,038) (49,147) (60,467)
------------ ------------ ------------
Net............................ 2,373,000 3,121,176 3,814,760
Less portion due within one
year......................... (998,371) (472,057) (906,264)
------------ ------------ ------------
Long-term portion.............. W1,374,629 W2,649,119 W2,908,496
============ ============ ============
As of December 31, 2002, the six month London interbank offered rate
(Libor) is 1.43%.
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
Paxnex 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 December 31, 2002, the exercise price per common share of Paxnet Co., Ltd.
is W5,000. 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-26
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LONG-TERM BORROWINGS
Long-term borrowings denominated in Korean won as of December 31, 2000,
2001 and 2002 are as follows (in millions of Korean won):
FINAL
MATURITY
LENDER YEAR ANNUAL INTEREST RATE (%) 2000 2001 2002
------ -------- ------------------------ -------- -------- -------
Korea Development Bank......... 2002 Floating rate W 69,309 W 31,250 W --
Kookmin Bank................... 2002 9.90 44,537 44,537 --
Shinhan Bank................... 2002 6.54 24,600 24,600 --
-------- -------- -------
Total.......................... 138,446 100,387 --
Less portion due within one
year......................... (28,206) (81,637) --
-------- -------- -------
Long-term portion.............. W110,240 W 18,750 W --
======== ======== =======
Long-term borrowings denominated in foreign currency as of December 31,
2000, 2001 and 2002 are as follows (in millions of Korean won and thousands of
U.S. dollars):
FINAL
MATURITY
LENDER YEAR ANNUAL INTEREST RATE (%) 2000 2001 2002
------ -------- ------------------------ ----------- ----------- ----------
Korea Development
Bank................. 2001 3M Libor + 3.2 US$ 1,904 US$ -- US$ --
Korea Development
Bank................. 2001 3M Libor + 2.0 9,532 -- --
Korea Development
Bank................. 2004 3M Libor + 3.45 31,346 22,390 13,434
Korea First Bank....... 2001 3M Libor + 0.6 1,625 -- --
Korea First Bank....... 2001 3M Libor + 2.1 1,835 -- --
Woori Bank............. 2005 Floating rate 12,267 9,541 6,815
KEB (Ireland)
Investment........... 6M Libor
Limited and other.... 2002 +(0.5-0.7) 148,000 32,000 --
BNP Paribas............ 2002 3M Libor + 1.1 -- 40,000 --
----------- ----------- ----------
Total in foreign
currency............. US$ 206,509 US$ 103,931 US$ 20,249
----------- ----------- ----------
Equivalent in Korean
won.................. W 260,139 W 137,823 W 24,307
Less portion due within
one year............. (179,605) (110,971) (14,023)
----------- ----------- ----------
Long-term portion...... W 80,534 W 26,852 W 10,284
=========== =========== ==========
At December 31, 2002, the 3M Libor, 6M Libor and Woori Bank's floating rate
are 1.38%, 1.43% and 2.94%, respectively.
F-27
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future maturities of long-term borrowings at December 31, 2002 are as
follows (in millions of Korean won):
LONG-TERM LONG-TERM
YEAR ENDING BORROWINGS IN BORROWINGS IN
DECEMBER 31, KOREAN WON FOREIGN CURRENCY TOTAL
------------ ------------- ---------------- -------
2003........................................... W -- W14,023 W14,023
2004........................................... -- 8,648 8,648
2005........................................... -- 1,636 1,636
------- ------- -------
W -- W24,307 W24,307
======= ======= =======
10. 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 by service type held as of December
31, 2000, 2001 and 2002 are as follows (in millions of Korean won, except
deposit per subscriber amounts):
DEPOSIT PER
SERVICE TYPE SUBSCRIBER 2000 2001 2002
------------ ----------- ------- ------- -------
Cellular.................................. W200,000 W61,075 W56,518 W46,850
Paging.................................... 22,000 712 -- --
Local phone............................... 100,000 1 1 --
------- ------- -------
Total..................................... W61,788 W56,519 W46,850
======= ======= =======
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. As the Company transferred
its paging business to Real Telecom Co., Ltd. (formerly Intec Telecom Co., Ltd.)
during 2001, the Company has no deposits for paging as of December 31, 2001 and
2002. In addition, as the Company withdrew from the local phone business, the
Company has no deposits for local phone as of December 31, 2002.
11. 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 December 31, 2002 are W12,466 million and W7,512 million,
respectively, and depreciation expense for the years ended December 31, 2000,
2001 and 2002 were W1,153 million, W1,314 million and W1,603 million,
respectively.
F-28
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments under capital leases as of December 31, 2002 are as
follows (in millions of Korean won):
YEAR ENDING
DECEMBER 31, PRINCIPAL INTEREST TOTAL
------------ --------- -------- ------
2003...................................................... W1,922 W72 W1,994
2004...................................................... 121 3 124
------ --- ------
Total..................................................... W2,043 W75 W2,118
====== === ======
As of December 31, 2002, 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):
YEAR ENDING LEASE PAYABLE LEASE PAYABLE IN
DECEMBER 31, IN KOREAN WON FOREIGN CURRENCY TOTAL
------------ ------------- ------------------- ------
2003.......................................... W 958 W1,219 W2,177
2004.......................................... 123 241 364
------ ------ ------
Total......................................... W1,081 W1,460 W2,541
====== ====== ======
Lease expense for the years ended December 31, 2000, 2001 and 2002 were
W6,843 million, W9,389 million and W7,649 million, respectively.
12. 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 8 and 9) as of December 31, 2000, 2001 and
2002 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
Swiss francs, thousands of Chinese Yuan and thousands of Australian dollars):
FOREIGN CURRENCIES KOREAN WON EQUIVALENT
--------------------------------------------- ------------------------------
2000 2001 2002 2000 2001 2002
------------- ------------- ------------- -------- -------- --------
Cash and cash
equivalents............ US$ 1,349 US$ 126,487 US$ 46,025 W 1,700 W167,683 W 55,247
Y 73 Y 53,059 Y 12 1 536 --
-- -- EUR2 -- -- 3
Short-term financial
instruments............ US$ 51,236 US$ 31,086 US$ 35,281 64,543 41,223 42,351
Accounts
receivable -- trade.... US$ 3,447 US$ 3,515 US$ 19,477 4,342 4,661 23,382
Y 22,354 Y 57 Y 240 246 1 2
Accounts
receivable -- other.... US$ 2,346 US$ 2,073 US$ 9,639 2,955 2,749 11,571
Y 44 -- -- -- -- --
Long-term loans.......... US$ 69 -- -- 87 -- --
Guarantee deposits....... -- US$ 35 US$ 187 -- 46 225
-------- -------- --------
Total.................... W 73,874 W216,899 W132,781
======== ======== --------
F-29
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCIES KOREAN WON EQUIVALENT
--------------------------------------------- ------------------------------
2000 2001 2002 2000 2001 2002
------------- ------------- ------------- -------- -------- --------
Accounts
payable -- trade....... US$ 12,345 US$ 12,179 US$ 23,975 15,551 15,845 28,779
Y 1,171,866 Y 500,613 Y 1,198,724 12,908 5,053 12,141
-- -- EUR 180 -- -- 227
Short-term borrowings.... US$ 4,614 US$ 12,903 US$ 32,928 5,812 17,111 39,526
Y 655,549 Y 1,485,813 Y 2,603,467 7,221 14,998 26,370
EUR 81 CHF 302 -- 97 239 --
Accounts
payable -- other....... US$ 51,495 US$ 9,052 US$ 37,228 64,868 12,004 44,689
Y 89,418 Y 1,858 Y 229,641 985 19 2,326
HK$ 1,147 HK$ 218 HK$ 825 185 37 127
-- CNY 128 CNY 61 -- 21 9
-- GBP 25 GBP 1 -- 47 1
-- SG$ 55 SG$ 24 -- 39 17
-- EUR 1 EUR 8 -- 1 11
-- -- AU$ 1 -- -- 1
Long-term
payables -- other...... US$ 1,000 -- -- 1,260 -- --
Obligation under capital
leases including
current portion........ US$ 1,148 US$ 830 US$ 482 1,446 1,101 578
Other long-term
liabilities............ US$ 1,066 -- -- 1,343 -- --
-------- -------- --------
Total.................... W111,676 W 66,515 W154,802
======== ======== ========
13. CAPITAL STOCK AND CAPITAL SURPLUS
The Company's outstanding capital stock consists entirely of common stock
with a par value of W500. The number of authorized, issued and outstanding
common shares as of December 31, 2000, 2001 and 2002 are as follows:
2000 2001 2002
----------- ----------- -----------
Authorized shares......................... 220,000,000 220,000,000 220,000,000
Issued shares............................. 89,152,670 89,152,670 89,152,670
Outstanding shares, net of treasury
stock................................... 89,079,034 82,993,404 79,842,063
The number of authorized shares of preferred stock as of December 31, 2002
is 5,500,000 shares, none of which is outstanding as of December 31, 2002.
Significant changes in common stock and additional paid-in capital in 2000,
2001 and 2002 are as follows (in millions of Korean won, except for share data):
NUMBER OF
SHARES ISSUED ADDITIONAL PAID-IN
(NOTE 1) COMMON STOCK CAPITAL
------------- ------------ ------------------
At January 1, 2000..................... 83,357,750 W41,679 W2,081,807
Issuance of common stock............... 5,794,920 2,897 1,654,450
Stock issuance costs................... -- -- (4)
---------- ------- ----------
At December 31, 2000, 2001 and 2002.... 89,152,670 W44,576 W3,736,253
========== ======= ==========
F-30
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The details of other capital surplus as of December 31, 2000, 2001 and 2002
are as follows (in millions of Korean won):
2000 2001 2002
------- --------- ---------
Consideration for stock warrants (note 1).... W 6,241 W 6,241 W 6,241
DR premium (note 2).......................... 6,051 6,051 6,051
The excess unallocated purchase price (note
3)......................................... -- (299,121) (946,146)
Gain on disposal of treasury stock (note
4)......................................... -- -- 81,984
Other (note 5)............................... 170 274 (1)
------- --------- ---------
W12,462 W(286,555) W(851,871)
======= ========= =========
---------------
(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 W6,051 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 W299,121 million for the
additional 19.2% equity interest acquired in 2001 and W647,025 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.
(note 4) The gain on disposal of treasury stock of W81,984 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.
14. RETAINED EARNINGS
The details of appropriated retained earnings as of December 31, 2000, 2001
and 2002 are as follows (in millions of Korean won):
2000 2001 2002
---------- ---------- ----------
Legal reserve................................. W 6,500 W 11,400 W 17,200
Reserve for improvement of financial
structure................................... 33,000 33,000 33,000
Reserve for business rationalization.......... 110,493 126,493 169,493
Reserve for loss on foreign investment........ 57,892 48,818 29,192
Reserve for loss on disposal of treasury
stock....................................... -- -- 240,000
Reserve for research and manpower
development................................. 129,300 301,300 365,300
Reserve for business expansion................ 1,053,738 1,776,738 2,525,737
---------- ---------- ----------
W1,390,923 W2,297,749 W3,379,922
========== ========== ==========
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.
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
F-31
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. RESERVE FOR BUSINESS RATIONALIZATION
Through 2001, the Tax Exemption and Reduction Control Law required that the
amount of tax benefit associated with certain tax exemptions and tax credits be
appropriated as a reserve for business rationalization. The revised Tax
Exemption and Reduction Control Law no longer requires providing the reserve for
business rationalization. Thus, in 2003, the Company plans to transfer the
reserve for business rationalization to a voluntary reserve that may be utilized
for cash dividends.
D. 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.
E. RESERVE FOR BUSINESS EXPANSION
The reserve for business expansion is voluntary and was approved by the
board of directors and shareholders.
15. 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 W789,667 million
in 2001 in order to stabilize the market price of its stock. The acquired shares
are recorded as a capital adjustment item within stockholders' equity.
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 W1.3 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 W669,982
million on November 6, 2001 and 1,367,180 shares of the Company's common stock
from SK Global Co., Ltd. for W350,698 million on January 31, 2002.
A loss on disposal of treasury stock of W155 million resulted from the
disposal of 155,050 shares of treasury stock for W38,685 million in 2001 that
had been acquired through the trust fund. The loss was reflected as a direct
adjustment to unappropriated retained earnings.
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 W584,646
million. Upon the merger with Shinsegi Telecomm, Inc., the Company acquired
fractional shares totaling 4,179 shares for W1,036 million. On December 30,
2002, the Company acquired 4,457,635 shares of the Company's common stock from
KT Corporation for W999,509 million under the Mutual Agreement on Stock Exchange
between the Company and KT Corporation (see Note 25) and retired such treasury
shares on January 6, 2003.
F-32
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. 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 W424,000 per
share, 43,820 shares at an exercise price of W211,000 per share and 65,730
shares at an exercise price of W267,000 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 years ended December 31, 2000, 2001 and 2002.
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 W500 for 2000, 2001 and 2002. Under these
assumptions, total compensation cost is measured at W1,533 million for options
granted in 2000, W237 million for options granted in 2001 and W3,247 million for
options granted in 2002 and is recognized over the service period (three years).
Such compensation cost of W383 million, W557 million and W1,492 million for the
years ended December 31, 2000, 2001 and 2002, respectively, was charged to
current operations and recorded as a capital adjustment.
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 years ended
December 31, 2000, 2001, and 2002 are as follows:
2000 2001 2002
-------- ---------- ----------
Pro forma net income (in millions of Korean
won)..................................... W971,713 W1,138,432 W1,483,784
Pro forma net income per common shares..... 11,140 13,154 17,607
17. OPERATING EXPENSES
The details of operating expenses in 2000, 2001 and 2002 are as follows (in
millions of Korean won):
2000 2001 2002
---------- ---------- ----------
Labor..................................... W 198,893 W 270,377 W 318,346
Commissions............................... 1,889,316 1,404,091 1,964,797
Depreciation and amortization............. 1,435,454 1,690,728 1,435,041
Network interconnection................... 710,433 667,686 752,144
Leased line............................... 305,730 305,159 280,113
Advertising............................... 288,573 316,056 448,784
Cost of goods and materials sold.......... 458,768 641,062 509,055
Other..................................... 640,430 752,256 818,070
---------- ---------- ----------
W5,927,597 W6,047,415 W6,526,350
========== ========== ==========
F-33
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. INCOME TAXES
The provision for income taxes for the years ended December 31, 2000, 2001
and 2002 consists of the following (in millions of Korean won):
2000 2001 2002
-------- -------- --------
Currently payable............................. W341,587 W518,474 W616,544
Deferred...................................... 25,720 331,833 81,963
-------- -------- --------
Recorded income taxes......................... W367,307 W850,307 W698,507
======== ======== ========
The following is a reconciliation between financial accounting income and
taxable income, together with a computation of income taxes, for the years ended
December 31, 2000, 2001 and 2002 (in millions of Korean won):
2000 2001 2002
---------- ---------- ----------
Income before income taxes................ W1,287,822 W1,976,709 W2,218,768
Additions (deductions):
Allowance for bad debts................. 1,553 47,411 (66,940)
Loss on impairment of investment
securities........................... (129,781) 6,257 68,882
Accrued interest income................. (6,502) 2,463 (2,107)
Foreign exchange loss................... (18,621) (4,497) (8,211)
Depreciation............................ 170,163 135,972 (3,803)
Equity in losses (earnings) of
affiliates........................... 11,634 (4,294) (813)
Amortization of goodwill................ 96,496 128,662 128,662
Loss on impairment of tangible assets
and intangible assets................ (21,980) -- 8,212
Tax-free reserves....................... (169,054) (291,869) (175,096)
Net operating loss carryforwards........ (63,350) (306,366) (7,060)
Other................................... 9,942 138,791 101,950
---------- ---------- ----------
Net taxable income........................ W1,168,322 W1,829,239 W2,262,444
========== ========== ==========
Corporate income taxes at statutory Korean
corporate income tax rates of 27% or
28%..................................... 327,081 512,129 612,890
Tax credit for investments, technology and
human resource development and others... (20,184) (49,959) (62,974)
---------- ---------- ----------
Corporate income taxes payable............ 306,897 462,170 549,916
Resident surtax payable................... 30,690 46,217 54,992
Special surtax for agriculture and fishery
industries and other.................... 4,000 10,087 11,636
---------- ---------- ----------
Total income taxes payable................ W 341,587 W 518,474 W 616,544
========== ========== ==========
F-34
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between income taxes computed using the statutory Korean
corporate income tax rates and the recorded income taxes for the years ended
December 31, 2000, 2001 and 2002 is attributable to the following (in millions
of Korean won):
2000 2001 2002
-------- -------- --------
Income taxes at statutory income tax rate of
27% or 28%.................................. W360,590 W553,478 W599,067
Resident surtax payable....................... 36,059 55,348 59,907
Tax credit for investments, technology and
human resource development and others....... (22,202) (86,917) (37,309)
Special surtax for agriculture and fishery
industries and other........................ 4,000 10,087 11,636
Goodwill amortization not deductible for tax
purpose..................................... 29,721 39,628 38,213
Undistributed earnings (unrecognized deficit)
of subsidiaries............................. (46,117) (54,461) 12,295
Effect of the change in income tax rate....... -- 11,041 --
Other permanent differences................... 3,612 10,468 1,519
Increase in valuation allowance............... 1,644 311,635 13,179
-------- -------- --------
Recorded income taxes......................... W367,307 W850,307 W698,507
======== ======== ========
Effective tax rate............................ 28.52% 43.02% 31.48%
======== ======== ========
The change in valuation allowance for 2000, 2001 and 2002 is as follows (in
millions of Korean won):
2000 2001 2002
------ -------- ---------
Beginning balance.............................. W -- W 1,644 W 313,279
Decrease in deferred tax assets due to
Shinsegi merger........................... -- -- (301,738)
Increase in valuation allowance.............. 1,644 311,635 13,179
------ -------- ---------
Ending balance............................... W1,644 W313,279 W 24,720
====== ======== =========
In the year ended December 31, 2001, the valuation allowance for deferred
tax assets increased by W311,635 million. The increase was primarily due to the
need for a valuation allowance related to the Company's investment in Shinsegi
Telecomm, Inc., a subsidiary of the Company. On January 13, 2002, the Company
merged with Shinsegi Telecomm, Inc. and retired all shares of Shinsegi Telecomm,
Inc. owned by the Company upon the merger. Pursuant to the provisions of the
current Korean Corporate Income Tax Law, the merged company cannot transfer to
the merging company certain temporary differences, such as depreciation, and net
operating loss carryforwards. Further to the provisions of the current Korean
Corporate Income Tax Law, the merging company cannot utilize the unrecognized
deficit of a merged former subsidiary when the merging company retires all
shares of such subsidiary owned by the merging company. Therefore, the Company
has provided a valuation allowance of W303,828 million during the year ended
December 31, 2001.
F-35
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
2000, 2001 and 2002 are as follows (in millions of Korean won):
2000 2001 2002
-------- -------- ---------
Allowance for doubtful accounts.................. W 39,088 W 50,336 W 23,251
Write-off of doubtful accounts................... 11,918 5,878 9,715
Marketable securities............................ -- (635) --
Accrued interest income.......................... (3,134) (2,292) (2,902)
Depreciation..................................... 87,139 122,952 12,609
Loss on impairment of investment securities...... 25,592 26,035 48,588
Foreign currency translation loss................ 6,290 4,701 3,345
Equity in losses of affiliates................... 2,952 950 (5,090)
Unrecognized deficit (undistributed earnings) of
subsidiaries................................... 40,522 92,179 (9,012)
Tax free reserve for loss on foreign
investments.................................... (1,548) -- --
Tax free reserve for research and manpower
development.................................... (78,380) (75,685) (133,920)
Tax free reserve for loss on disposal of treasury
stock.......................................... -- (70,359) (64,775)
Tax credit carryforwards......................... 650 31,963 --
Net operating loss carryforwards................. 183,208 95,597 17,290
Other............................................ (12,080) 16,490 20,851
-------- -------- ---------
Total deferred tax assets (liabilities).......... 302,217 298,110 (80,050)
Valuation allowance for:
Depreciation................................... -- (110,240) (1,081)
Unrecognized deficit of subsidiaries........... -- (109,504) --
Net operating loss carryforwards............... (1,640) (92,519) (17,290)
Other.......................................... (4) (1,016) (6,349)
-------- -------- ---------
Net deferred tax assets (liabilities)............ W300,573 (W15,169) (W104,770)
======== ======== =========
The net operating loss carryforwards will expire as follows (in millions of
Korean won):
NET OPERATING LOSS
YEAR ENDED DECEMBER 31, CARRYFORWARDS
----------------------- ------------------
2003........................................................ W 269
2004........................................................ 4,965
2005........................................................ 5,640
2006........................................................ 6,416
-------
Total....................................................... W17,290
=======
F-36
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. NET INCOME PER SHARE
Net income per share for the years ended December 31, 2000, 2001 and 2002
is computed as follows:
2000 2001 2002
----------- ----------- -----------
Net income (in millions of Korean won)..... W 972,264 W 1,146,049 W 1,487,151
Weighted average number of common shares
outstanding.............................. 87,226,559 86,545,041 84,270,450
----------- ----------- -----------
Net income per share....................... W 11,146 W 13,242 W 17,647
=========== =========== ===========
The weighted average number of common shares outstanding for 2000, 2001 and
2002 is calculated as follows:
WEIGHTED
NUMBER WEIGHTED
ISSUE NUMBER OF OF NUMBER
DATE SHARES DAYS OF SHARES
------- ---------- -------- ----------
For 2000:
At January 1, 2000..................... -- 83,357,750 366/366 83,357,750
Treasury stock, at the beginning....... -- (73,640) 366/366 (73,640)
Treasury stock......................... Apr. 27 4 249/366 3
Issuance of common stock............... Apr. 27 5,794,920 249/366 3,942,446
---------- ----------
Total.................................. 89,079,034 87,226,559
========== ==========
For 2001
At January 1, 2001..................... -- 89,152,670 365/365 89,152,670
Treasury stock, at the beginning....... -- (73,636) 365/365 (73,636)
Treasury stock......................... (note 1) (6,240,680) -- (2,535,267)
Disposal of treasury stock............. Dec. 28 155,050 3/365 1,274
---------- ----------
Total.................................. 82,993,404 86,545,041
========== ==========
For 2002
At January 1, 2002..................... -- 89,152,670 365/365 89,152,670
Treasury stock, at the beginning....... -- (6,159,266) 365/365 (6,159,266)
Distribution of treasury stock for
merger with Shinsegi................ Jan. 13 2,673,474 349/365 2,556,280
Treasury stock......................... (note 1) (5,824,815) -- (1,279,234)
---------- ----------
Total.................................. 79,842,063 84,270,450
========== ==========
---------------
(note 1) The treasury stock was acquired or disposed of on several different
dates in 2001 and 2002 and the weighted number of shares was calculated
according to each acquisition date.
F-37
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Diluted income per share for the years ended December 31, 2000, 2001 and
2002 is computed as follows:
2000 2001 2002
----------- ----------- -----------
Net income (in millions of Korean won)..... W 972,264 W 1,146,049 W 1,487,230
Adjusted weighted average number of common
shares outstanding (note 2).............. 87,226,559 86,545,041 84,277,598
----------- ----------- -----------
Net income per share....................... W 11,146 W 13,242 W 17,646
=========== =========== ===========
---------------
(note 2) In the years ended December 31, 2000 and 2001, the assumed exercise of
stock options was not reflected in diluted earnings per share because
the exercise of stock options would not dilute the earnings per share.
In 2002, for the calculation of diluted income per share, the weighted
average number of common shares outstanding is adjusted assuming the
exercise of stock options on January 1, 2002.
The numerator and denominator of basic and diluted income per share for the
year ended December 31, 2002 is as follows:
AVERAGE WEIGHTED
NET INCOME NUMBER OF SHARES PER-SHARE AMOUNT
--------------- ---------------- ----------------
(IN MILLIONS OF (IN KOREAN WON)
KOREAN WON)
Basic income per share.................. W1,487,151 84,270,450 W17,647
=======
Effect of stock options................. 79 7,148
---------- ----------
Diluted income per share................ W1,487,230 84,277,598 W17,646
========== ========== =======
20. DIVIDEND DISCLOSURE
Details of dividends which were approved by shareholders in 2000, 2001 and
2002 are as follows (in millions of Korean won except for share data):
FISCAL NUMBER OF SHARES
YEAR DIVIDEND TYPE OUTSTANDING FACE VALUE DIVIDEND RATIO DIVIDENDS
------ -------------- ---------------- ---------- -------------- ---------
2000................. Cash dividends 83,284,110 W500 37.0% W15,408
=======
2001................. Cash dividends 89,079,034 W500 108.0% W48,103
=======
2002................. Cash dividends 82,993,404 W500 138.0% W57,265
=======
21. COMMITMENTS AND CONTINGENCIES
a. The Company and its subsidiaries have credit lines with several local
banks that provide for borrowings of up to W1,311,455 million. At December 31,
2002, the borrowings under these credit lines were W164,096 million at an
average interest rate of approximately 3.95%; The net availability under these
credit lines was W1,147,359 million.
b. At December 31, 2002, the Company's property and equipment (land,
buildings and machinery), amounting to W64,730 million in carrying value and its
subsidiaries' short-term financial instruments of W1,621 million are pledged as
collateral for bank borrowings. In addition, the Company and its subsidiaries
have provided one blank check and one blank note to Shinhan Capital Co., Ltd.
and 1st Hanareum Securitization Specialty, LLC, respectively, as collateral for
guarantees of the Company's obligations under lease agreements.
F-38
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
c. At December 31, 2002, the Company and its subsidiaries have guarantee
deposits restricted for their checking accounts totaling W63 million.
d. On June 20, 2002 and December 3, 2002, the Company sold W631,447
million and W650,641 million of accounts receivable resulting from its mobile
phone dealer financing plan to 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
W10,941 million and W12,880 million, respectively. Related to these asset-backed
securitization transactions, the Company has obligations to repurchase
receivables up to 11.50% and 12.65% for Nate First Special Purpose Company and
Nate Second Special Purpose Company, respectively, if receivables become past
due for 3 months or the debtors become insolvent. At December 31, 2002, the
uncollected balances of accounts receivable sold to Nate First Special Purpose
Company and Nate Second Special Purpose Company were W94,860 million and
W497,883 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 the
Company 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, received guarantees for the
repayment of its short-term borrowings from Korea Technology Credit Guarantee
Fund. The outstanding balance of such guarantees as of December 31, 2002
approximated W1,190 million.
g. Paxnet Inc., a subsidiary of the Company, has entered into a bank
overdraft agreement for borrowings up to W1,000 million with Korea Exchange Bank
as of December 31, 2002. Short-term financial instruments of W510 million are
pledged as collateral in connection with the bank overdraft agreement. The
ex-representative director has also provided guarantees in connection with the
bank overdraft agreement.
h. 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 December 31, 2002 approximated W332
million.
i. 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 W50,000 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 W1,000 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.
j. 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 in royalty fees for the five months ended December
31, 2002.
k. On June 9, 2000, the Chase Manhattan Bank ("Chase") filed a lawsuit
against the Company and certain other defendants in the U.S. District Court in
Delaware. In the lawsuit, Chase alleged that the Company and other members of
Iridium LLC were severally obligated to pay Chase certain amounts allegedly due
under the Iridium operating agreement as a reserve capital call. The claim arose
out of a US$800 million syndicated loan to a subsidiary of Iridium by Chase and
other banks and financial institutions. The Company's
F-39
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obligation under the reserve capital call was alleged to be approximately US$10
million. In 2002, the Company paid US$ 8.15 million to Chase and settled the
case.
22. INSURANCE
At December 31, 2002, certain of the Company 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 $3,000
property and equipment.... Fire and comprehensive liability W5,851,619 W10,163,853
========== ===========
23. TRANSACTIONS WITH AFFILIATED COMPANIES
In the normal course of business, the Company and its subsidiaries use
certain telecommunication facilities owned by KT Corporation (a shareholder) and
engage in other transactions with affiliates. Total expenses charged by KT
Corporation related to use of certain telecommunication facilities owned by KT
Corporation amounted to W172.9 billion, W83.5 billion and W150.0 billion for the
years ended December 31, 2000, 2001 and 2002, respectively.
F-40
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant related party transactions and balances with affiliated
companies as of and for the years ended December 31, 2000, 2001 and 2002 were as
follows (in millions of Korean won):
DESCRIPTION 2000 2001 2002
-------------------------------------------------------- ------- ------- -------
TRANSACTIONS
SK Engineering & Construction Co.,Ltd.:
Construction (note 1)................................. 97,627 117,399 289,311
Commissions paid...................................... 2,502 2,827 23,981
Commission income and other income.................... 652 474 678
SK Global:
Purchases of property and equipment................... 193,827 99,715 11,055
Leased line expenses.................................. -- -- 8,796
Commissions paid and other expenses................... 71,172 35,651 74,438
Sales of handsets and other income.................... 252,635 275,690 383,138
SK Corporation:
Disposal of land and building (note 2)................ 164,600 -- --
Purchases of property and equipment................... 9,863 -- 52
Purchases of investment securities.................... 69,927 -- --
Commissions paid and other expenses................... 35,431 20,643 37,249
Commission income and other income.................... 1,930 1,900 3,201
Kyocera Corp.:
Purchases of property and equipment................... 63 -- --
Commissions paid and other expenses................... 1,298 4,838 --
Commission income and other income.................... -- 305 66,088
SK Group Japan:
Purchases of property and equipment................... 587 64 --
Purchase of raw materials for handsets................ 66,692 55,099 9,784
and other expenses
SK Telesys:
Purchases of property and equipment................... 40,771 69,179 187,205
Commissions paid and other expenses................... 1,103 1,269 1,519
Commission income and other income.................... 87 202 290
SKC:
Purchases of inventories.............................. -- 3,443 17,260
Sales of inventories.................................. -- -- 50,341
Innoace:
Purchases of property and equipment................... -- 8,353 40,884
Commissions paid and other expenses................... -- 1,062 9,454
Commission income and other income.................... -- 111 217
SK C&C Co., Ltd.:
Purchases of property and equipment................... 97,403 108,441 197,250
Commissions paid and other expenses (note 3).......... 197,954 221,108 231,472
Commission income and other income.................... 5,115 7,198 6,691
F-41
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DESCRIPTION 2000 2001 2002
-------------------------------------------------------- ------- ------- -------
BALANCES
SK Engineering & Construction Co.,Ltd.:
Accounts receivable................................... 65 57 241
Accounts payable...................................... 32,651 17,016 65,773
Guarantee deposits received........................... 50 90 130
SK Global:
Accounts receivable................................... 54,423 63,810 84,970
Guarantee deposits.................................... 140 113 113
Accounts payable...................................... 18,332 16,194 14,792
Guarantee deposits received........................... 453 513 255
SK Corporation:
Accounts receivable................................... 99 72 985
Guarantee deposits (note 2)........................... 1,000 80,113 79,611
Accounts payable...................................... 25,437 6,508 11,654
Guarantee deposits received........................... 6,290 9,885 9,885
Kyocera Corp.:
Accounts receivable................................... 180 -- 12,094
Accounts payable...................................... 2,705 1,757 63
SK Group Japan:
Accounts payable...................................... 10,851 1,477 1,557
SK Telesys:
Accounts receivable................................... -- 3 5
Accounts payable...................................... 11,893 18,180 60,834
SKC:
Accounts receivable................................... -- 10,276 70,464
Accounts payable...................................... -- 1,753 2,928
Innoace:
Accounts payable...................................... -- 4,524 26,806
Guarantee deposits received........................... -- -- 2,138
SK Life Insurance Co., Ltd.:
Deposits for severance indemnities.................... 29,135 36,892 58,057
Accounts receivable................................... 38 44 117
Guarantee deposits.................................... 33 60 60
Accounts payable...................................... 127 54 --
Guarantee deposits received........................... 786 786 767
SK C&C Co., Ltd.:
Accounts receivable................................... 192 34,358 1,361
Accounts payable...................................... 80,879 59,065 117,202
Guarantee deposits received........................... -- 495 284
---------------
(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
F-42
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 W154 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 W417 million. Under the lease
agreement, in January 2001 the Company deposited refundable leasehold
key money of W80,113 million and, as a result there will be no rent
payment for the remaining lease period. The net book value of the land
and building totaling W170,482 million has been removed from the
accounts and a loss on the disposal approximating W5,882 million was
recognized during the year ended December 31, 2000.
(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.
24. 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 W185,847 million was recorded in
the year ended December 31, 2002.
25. STOCK EXCHANGE BETWEEN THE COMPANY AND KT CORPORTION
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 W50,900 per share of KT Corporation's common stock and W224,000
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 W47,909 million, was recorded as a loss on disposal of investments during the
year ended December 31, 2002, and an impairment loss amounting to W44,496
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 year
ended December 31, 2002.
26. MERGER WITH SK IMT CO., LTD.
On May 1, 2003, the Company plans to merge with SK IMT Co., Ltd., a
subsidiary of the Company, in accordance with a resolution of the Company's
board of directors on December 20, 2002. The exchange ratio of common stock
between the Company and SK IMT Co., Ltd. was announced by the Company to be
0.11276 share of the Company's common stock with a par value of W500 to 1 share
of common stock of SK IMT Co., Ltd. with a par value of W5,000. Using such
exchange ratio, the Company will distribute 126,276 shares of new issued common
stock to minority shareholders of SK IMT Co., Ltd. and the Company will retire
all shares of SK IMT owned by the Company upon the merger.
F-43
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The condensed balance sheet of SK IMT as of December 31, 2002 and the
condensed statement of operations for the year then ended are as follows (in
millions of Korean won):
CONDENSED BALANCE SHEET
-----------------------
Current assets.............................................. W 963,896
Fixed asset................................................. 1,274,630
----------
Total Assets................................................ W2,238,526
==========
Current liabilities......................................... W 26,164
Long-term liabilities....................................... 558,107
----------
Total Liabilities........................................... 584,271
----------
Capital stock............................................... 300,000
Capital surplus............................................. 1,300,020
Retained earnings........................................... 54,235
----------
Total Stockholders' Equity.................................. 1,654,255
----------
Total Liabilities and Stockholders' Equity.................. W2,238,526
==========
CONDENSED STATEMENT OF OPERATIONS
---------------------------------
Operating revenue........................................... W --
Operating expenses.......................................... (7,737)
----------
Operating income (loss)..................................... (7,737)
Non-operating income........................................ 47,794
Non-operating expenses...................................... (1,265)
----------
Income before income taxes.................................. 38,792
Provision for income taxes.................................. (11,554)
----------
Net income.................................................. W 27,238
==========
27. ECONOMIC 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 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.
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
F-44
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 years ended December 31, 2000, 2001 and 2002, such interconnection
revenues amounted to W1,312.4 billion, W1,339.9 billion and W1,043.2 billion,
respectively, while aggregate interconnection expenses amounted to W710.4
billion, W667.7 billion and W752.1 billion, respectively.
29. SUBSEQUENT EVENT -- SIGNIFICANT CONTINGENCY
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 are several legal actions against certain SK Group affiliated
companies. Because of these legal matters, the creditors of SK Global called for
an independent due-diligence review of the assets and liabilities of SK Global.
The final results of the due-diligence review are expected in mid-June 2003.
After conducting a comprehensive review of the due-diligence results and SK
Global's self-rescue plan, the creditors will formulate a plan regarding the
future viability of SK Global. As of and for the years ended December 31, 2000,
2001 and 2002, the Company and its subsidiaries had related party transactions
and account balances, as described in Note 23.
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.
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 W51,427 million, W11,207 million and
W19,688 million as of December 31, 2000, 2001 and 2002, respectively, have been
recognized for Korean GAAP purposes.
F-45
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. DEFERRED CHARGES (SEE NOTE 2)
Korean GAAP requires that bond issuance costs be deducted from proceeds of
bonds, pre-operating costs be charged to expenses as incurred and organization
costs 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 other deferred charges such as
pre-operating costs, organization costs and 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.
D. MARKETABLE SECURITIES AND INVESTMENT SECURITIES (SEE NOTE 2)
Under Korean GAAP, marketable securities and investment equity securities
in listed companies are stated at market value; and investment equity securities
in non-listed companies are stated at cost.
Under U.S. GAAP, Statement of Financial Accounting Standards No. 115 (SFAS
No. 115), "Accounting for Certain Investments in Debt and Equity Securities",
requires that equity securities with readily determinable fair values and all
debt securities be classified into three categories and accounted for as
follows:
- 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.
- 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.
- 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.
Under U.S. GAAP, marketable securities are classified as trading
securities. Investment securities are classified as either available-for-sale or
held-to-maturity securities. Gross proceeds from the sale of such securities
were W102,395 million, W212,250 million and W775,961 million for the years ended
December 31, 2000, 2001 and 2002, respectively. Gross realized gains for the
years ended December 31, 2000, 2001 and 2002 were W1,566 million, W14 million
and W13,540 million, respectively. Gross realized losses for the years ended
December 31, 2000, 2001 and 2002 were W807 million, W7,371 million and W50,958
million, respectively.
F-46
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information with respect to marketable securities affected by SFAS No. 115
at December 31, 2000, 2001 and 2002 is as follows (in millions of Korean won):
GROSS GROSS
COST UNREALIZED UNREALIZED
(AMORTIZED COST) GAINS LOSSES FAIR VALUE
---------------- ---------- ---------- ----------
At December 31, 2000:
Debt securities.................. W638,082 W -- W -- W638,082
======== ======== ======== ========
At December 31, 2001:
Debt securities.................. W637,530 W -- W -- W637,530
======== ======== ======== ========
At December 31, 2002:
Debt securities.................. W754,219 W -- W -- W754,219
======== ======== ======== ========
Information with respect to investment securities affected by SFAS No. 115
at December 31, 2000, 2001 and 2002 is as follows (in millions of Korean won):
GROSS GROSS
COST UNREALIZED UNREALIZED
(AMORTIZED COST) GAINS LOSSES FAIR VALUE
---------------- ---------- ---------- ----------
At December 31, 2000:
Equity securities................ W167,669 W -- W127,147 W 40,522
Debt securities.................. 52,871 -- -- 52,871
-------- -------- -------- --------
W220,540 W -- W127,147 W 93,393
======== ======== ======== ========
At December 31, 2001:
Equity securities................ W157,155 W -- W 75,792 W 81,363
Debt securities.................. 61,898 -- -- 61,898
-------- -------- -------- --------
W219,053 W -- W 75,792 W143,261
======== ======== ======== ========
At December 31, 2002:
Equity securities................ W792,691 W 1,522 W 3,852 W790,361
Debt securities.................. 62,500 -- -- 62,500
-------- -------- -------- --------
W855,191 W 1,522 W 3,852 W852,861
======== ======== ======== ========
In 2002, the Company recorded losses on impairment of investments in equity
securities of KT Corporation and Hanaro Telecom Inc. totaling W146,284 million.
Investment equity securities are carried at fair value for Korean GAAP
purposes as all such investments are in listed companies. All investment debt
securities are classified as held to maturity.
Under Korean GAAP, the subsequent recovery of impaired investment
securities results in an increase of their carrying amount up to the original
acquisition cost. Under U.S. GAAP, the subsequent increase of carrying amount of
the impaired and written down held-to-maturity investment securities is not
allowed.
E. IMPAIRMENT OF LONG-LIVED ASSETS 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
F-47
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
At December 31, 2000 and 2001, the Company determined that there have been
no significant events or changes in circumstances indicating that the carrying
amount of long-lived assets might not be recoverable. 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 W185,847 million was recorded for the year ended December 31, 2002. (see
Note 24).
F. 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.
G. BUSINESS COMBINATIONS AND INTANGIBLE ASSETS
Since regulatory approval of the Shinsegi acquisition was not received
until April 26, 2000 and the transaction was closed on April 27, 2000, the
effective date of the transaction was April 27, 2000 for US GAAP purpose.
However, the results of Shinsegi's operations from April 1, 2000 to April 27,
2000 were not significant. During the period from April 1, 2000 to April 27,
2000, Shinsegi recorded operating revenue of approximately W220,000 million.
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. Intangible assets with finite lives will continue to be
amortized over their estimated useful lives.
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.
H. CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Under Korean GAAP, the cumulative effect of accounting changes was charged
or credited to beginning retained earnings and certain pro forma financial
information was required to be disclosed. If information was not available to
determine the impact on beginning retained earnings, the change could have been
accounted for prospectively. For fiscal years beginning after March 31, 2001,
prior year financial statements are restated and the cumulative effect from
retroactive application is adjusted through the opening balance of retained
F-48
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earnings in the earliest year presented. Under U.S. GAAP, such change is
reflected in net income (after extraordinary items and before net income).
As discussed in Note 2(u) to the consolidated financial statements,
effective January 1, 2000, SK C&C CO., Ltd., which is 30% owned by the Company
and accounted for using the equity method, changed its depreciation method from
the declining balance method to the straight-line method in order to properly
allocate period expense. The change had the effect of increasing beginning
retained earnings of the Company and its subsidiaries as of January 1, 2000 by
W3,399 million, which is reflected in net income based on U.S. GAAP.
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.
Due to such GAAP differences, for U.S. GAAP purposes, intangibles resulting
from the acquisition of Shinsegi Telecomm, Inc. increased by W241,069 million,
which resulted in an increase in amortization of intangibles by W9,040 million
and W25,457 million for the years ended December 31, 2000 and 2001,
respectively.
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
Under Korean GAAP, foreign exchange losses (or foreign exchange gains)
incurred on debt used to finance the construction of property, plant and
equipment are capitalized (or offset against property additions). Under U.S.
GAAP, such foreign exchange losses (or gains) are charged to current operations
as incurred.
Under Korean GAAP, interest expense incurred on debt used to finance the
purchase of intangible assets is capitalized until the asset is put in use.
Under U.S. GAAP, such interest expense is charged to current operations as
incurred.
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.
F-49
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The weighted average fair value of options granted for the years ended
December 31, 2000, 2001 and 2002 was W210,000 per share, W120,070 per share and
W48,724 per share, respectively.
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.
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;
- 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.
- 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.
- 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
F-50
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 and with credit enhancements provided by a
transferor 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. IMPAIRMENT OF INVESTMENT SECURITIES
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 decline in fair value is
anticipated to be permanent, the decline is recorded as impairment losses in
current operations. Due to such differences, for U.S. GAAP purposes, losses on
impairment of investment securities for the year ended December 31, 2002
increased by W252,031 million.
S. PRESENTATION OF MINORITY INTEREST AS A COMPONENT OF SHAREHOLDERS' EQUITY
The revised Korean GAAP, effective January 1, 2000, 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.
The following reconciles net income for the years ended December 31, 2000,
2001 and 2002 and shareholders' equity as of December 31, 2000, 2001 and 2002
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):
F-51
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 2001 2002
----------- ----------- -----------
Net income based on Korean GAAP............ W 972,264 W 1,146,049 W 1,487,151
Adjustments:
Deferred income taxes.................... (40,070) 59,323 113,495
Deferred charges......................... 1,749 (2,002) 1,318
Capital leases........................... 257 433 454
Cumulative effect of accounting change... 3,399 -- --
Intangible assets........................ (9,040) (26,435) (23,507)
Cancellation of amortization of
goodwill.............................. -- -- 138,041
Capitalization of foreign exchange
losses................................ (9,177) 1,190 6,213
Capitalization of interest expense
related to purchase of intangible
assets................................ -- -- (69,372)
Nonrefundable activation fees............ (23,176) (64,773) (104,263)
Loss (gain) on disposal of subsidiary
shares................................ (235) 103 --
Stock option compensation plan........... (551) (1,889) (3,367)
Asset securitization transactions........ -- -- 7,039
Loss on impairment of investment
securities............................ -- -- (252,031)
Discount on leasehold deposits........... -- (322) (45)
Recovery of impaired investment
securities............................ -- (81) --
----------- ----------- -----------
Net income based on U.S. GAAP.............. W 895,420 W 1,111,596 W 1,301,126
=========== =========== ===========
Weighted average number of common shares
outstanding.............................. 87,226,559 86,545,041 84,270,450
=========== =========== ===========
Earnings per share based on U.S. GAAP (in
Korean won):
Basic earnings per share................. W 10,265 W 12,844 W 15,440
=========== =========== ===========
Diluted earnings per share............... W 10,265 W 12,844 W 15,439
=========== =========== ===========
F-52
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
Shareholders' equity based on Korean GAAP..... W6,142,651 W6,149,304 W6,231,900
Adjustments:
Deferred income taxes....................... (1,790) 40,881 132,557
Intangible assets........................... 232,029 504,714 1,033,558
Capitalization of foreign exchange losses... (9,177) (7,987) (1,775)
Capitalization of interest expense related
to purchase of intangible assets......... -- -- (69,372)
Nonrefundable activation fees............... (23,176) (87,949) (192,212)
Deferred charges............................ (1,916) (3,917) (2,600)
Capital leases.............................. 257 691 1,144
Loans receivable for stock issued to
employees' investor association.......... (89,105) (70,938) (45,906)
Minority interest in equity of consolidated
affiliates............................... (131,866) (704,345) (725,507)
Recovery of impaired investment
securities............................... -- (81) (81)
Cancellation of amortization of goodwill.... -- -- 138,041
Asset securitization transactions........... -- -- 7,039
Loss on impairment of investment
securities............................... -- -- (150,243)
Discount on leasehold deposits.............. -- (322) (367)
---------- ---------- ----------
Shareholders' equity based on U.S. GAAP....... W6,117,907 W5,820,051 W6,356,176
========== ========== ==========
Changes in shareholders' equity based on U.S. GAAP for 2000, 2001 and 2002
are as follows (in millions of Korean won):
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 2001 2002
---------- ---------- -----------
Balance, beginning of the year............... W3,616,599 W6,117,907 W 5,820,051
Net income for the year.................... 895,420 1,111,596 1,301,126
Dividends.................................. (15,408) (48,103) (57,265)
Issuance of common stock................... 1,898,416 -- --
Stock issuance cost........................ (4) -- --
Unrealized gains (losses) on valuation of
securities, net of tax.................. (303,630) 34,704 51,644
Equity in capital surplus, retained
earnings and capital adjustments of
affiliates.............................. (812) 8,116 (12,789)
Sales of stock by subsidiaries............. (410) 1 --
Treasury stock transactions................ 1 (1,420,964) (779,290)
Foreign-based operations' translation
adjustments............................. 285 (3,839) 2,809
Stock compensation plan.................... 934 2,466 4,859
Decrease in loans receivable for stock
issued to employees' investor
association............................. 26,516 18,167 25,031
---------- ---------- -----------
Balance, end of the year..................... W6,117,907 W5,820,051 W 6,356,176
========== ========== ===========
F-53
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000, 2001 and 2002 is as follows (in millions of Korean
won):
DECEMBER 31,
---------------------------------------
2000 2001 2002
----------- ----------- -----------
Current assets:
As reported.............................. W 2,799,638 W 4,346,746 W 4,043,457
U.S. GAAP adjustments:
-- deferred income taxes.............. 49,192 79,161 50,692
-- discount on leasehold deposits..... -- 4,843 4,843
-- asset securitization
transactions........................ -- -- 582,742
----------- ----------- -----------
As adjusted................................ 2,848,830 4,430,750 4,681,734
----------- ----------- -----------
Non-current assets:
As reported.............................. W 8,244,536 W 8,979,529 W10,185,253
U.S. GAAP adjustments:
-- deferred income taxes.............. (44,283) -- --
-- loans receivable for stock issued
to employees' investor
association........................ (89,105) (70,938) (45,906)
-- Intangible assets.................. 232,029 507,719 1,044,101
-- cancellation of amortization of
goodwill............................ -- -- 138,041
-- discount on leasehold deposits..... -- (5,165) (5,210)
-- loss on sale of accounts receivable
and other in asset
securitization..................... -- -- (68,267)
-- recovery of impaired investment
securities.......................... -- (115) (81)
-- loss on impairment of investment
securities......................... -- -- (150,243)
-- nonrefundable activation fees...... -- -- 9,129
-- capital lease...................... 17,415 10,553 5,820
-- capitalization of foreign exchange
losses.............................. (28,029) (15,099) (1,775)
-- capitalization of interest expenses
related to purchase of intangible
assets............................. -- -- (69,372)
-- deferred charges................... 1,412 3,788 6,564
----------- ----------- -----------
As adjusted.............................. 8,333,975 9,410,272 11,038,925
----------- ----------- -----------
Total assets based on U.S. GAAP............ W11,182,805 W13,841,022 W15,720,659
=========== =========== ===========
F-54
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
---------------------------------------
2000 2001 2002
----------- ----------- -----------
Current liabilities:
As reported.............................. W 3,174,274 W 3,678,581 W 4,303,386
U.S. GAAP adjustments:
-- deferred charges................... 280 227 222
-- nonrefundable activation fees...... 6,815 20,947 46,723
-- asset securitization
transactions....................... -- -- 507,436
-- acquisition cost of equity interest
in subsidiary...................... -- 1,360 2,449
----------- ----------- -----------
As adjusted................................ 3,181,369 3,701,115 4,860,216
----------- ----------- -----------
Long-term liabilities:
As reported.............................. 1,727,249 3,498,390 3,693,424
U.S. GAAP adjustments:
-- deferred charges................... 3,678 7,907 8,942
-- nonrefundable activation fees...... 18,879 76,131 154,618
-- capital leases..................... 16,911 9,287 4,676
-- acquisition cost of equity interest
in subsidiary...................... -- 1,643 3,748
-- deferred income taxes.............. -- 33,497 (86,648)
----------- ----------- -----------
As adjusted.............................. 1,766,717 3,626,855 3,778,760
----------- ----------- -----------
Total liabilities based on U.S. GAAP....... W 4,948,086 W 7,327,970 8,638,976
=========== =========== ===========
Minority interests:
As reported.............................. W 131,866 W 704,345 W 725,507
U.S. GAAP adjustments:
-- deferred charges................... (631) (428) --
-- capital lease...................... 247 577 --
-- capitalization of foreign exchange
losses (or gains).................. (18,852) (7,112) --
-- deferred income tax................ 6,700 4,782 --
-- reverse of recovery of impaired
investment securities.............. -- (34) --
----------- ----------- -----------
Total minority interests based on U.S.
GAAP..................................... W 116,812 W 693,001 W 725,507
=========== =========== ===========
The following table reconciles cash flows from operating, investing and
financing activities for the years ended December 31, 2000, 2001 and 2002 under
Korean GAAP, as reported in the consolidated financial
F-55
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements to cash flows from operating, investing and financing activities for
the years ended December 31, 2000, 20001 and 2002 under U.S.GAAP (in millions of
Korean won):
2000 2001 2002
----------- ----------- -----------
Cash flows from operating activities based
on Korean GAAP........................... W 3,043,482 W 2,423,868 W 4,267,815
Adjustments:
Asset securitization transactions........ -- -- (558,921)
----------- ----------- -----------
Cash flows from operating activities based
on US GAAP............................... W 3,043,482 W 2,423,868 W 3,708,894
=========== =========== ===========
Cash flows from investing activities based
on Korean GAAP........................... W(4,667,778) W(1,972,825) W(3,063,435)
Adjustment:
Asset securitization transactions........ -- -- 68,267
----------- ----------- -----------
Cash flows from investing activities based
on US GAAP............................... W(4,667,778) W(1,972,825) W(2,995,168)
=========== =========== ===========
Cash flows from financing activities based
on Korean GAAP........................... W 1,629,250 W 331,226 W(1,418,197)
Adjusting:
Asset securitization transactions........ -- -- 490,654
----------- ----------- -----------
Cash flows from financing activities based
on US GAAP............................... W 1,629,250 W 331,226 W (927,543)
=========== =========== ===========
31. ADDITIONAL DISCLOSURES REQUIRED BY U.S. GAAP
A. INCOME TAXES
Income tax expense under U.S. GAAP for 2000, 2001 and 2002 is as follows
(in millions of Korean won):
YEAR ENDED DECEMBER 31,
------------------------------
2000 2001 2002
-------- -------- --------
Currently payable................................. W341,588 W518,474 W616,544
Deferred.......................................... 66,887 272,825 (31,532)
-------- -------- --------
W408,475 W791,299 W585,012
======== ======== ========
F-56
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2000, 2001 and 2002 is attributable to the following (in
millions of Korean won):
YEAR ENDED DECEMBER 31,
------------------------------
2000 2001 2002
-------- -------- --------
Income taxes at statutory income tax rate of 27%
or 28%.......................................... W350,339 W527,296 W518,197
Resident surtax payable........................... 35,034 52,730 51,820
Tax credit for technology, human resource
development and capital investments............. (22,202) (86,917) (37,309)
Special surtax for agriculture and fishery
industries and other............................ 4,000 10,087 11,636
Additional tax paid for cancelled tax credit...... -- 676 --
Goodwill amortization not deductible for tax
purpose......................................... 32,505 47,758 --
Undistributed earnings (unrecognized deficit) of
subsidiaries.................................... (48,902) (54,461) 12,295
Effect of change in income tax rate............... -- 13,147 --
Other permanent differences....................... 1,845 13,028 6,714
Change in valuation allowance..................... 55,856 268,631 21,659
-------- -------- --------
Recorded income taxes............................. W408,475 W791,299 W585,012
======== ======== ========
Effective tax rate................................ 32.6% 42.02% 30.48%
======== ======== ========
The tax effects of temporary differences that resulted in the deferred tax
assets at December 31, 2000, 2001 and 2002 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,
-------------------------------
2000 2001 2002
-------- -------- ---------
Current:
Allowance for doubtful accounts................ W 39,088 W 49,967 W 21,885
Write-off of doubtful accounts................. 11,918 5,878 9,715
Marketable securities.......................... -- (635) --
Accrued income................................. (3,134) (2,292) (2,844)
Accrued expenses and other..................... 1,320 26,243 21,936
-------- -------- ---------
49,192 79,161 50,692
-------- -------- ---------
F-57
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
-------------------------------
2000 2001 2002
-------- -------- ---------
Non-current:
Depreciation................................... 95,615 16,820 11,732
Loss on impairment and valuation of investment
securities (note)........................... 64,753 48,579 119,940
Foreign exchange losses........................ 6,290 4,701 3,345
Equity in losses (earnings) of affiliates...... 2,952 950 (5,090)
Undistributed earnings of subsidiaries......... (10,905) (28,532) (28,700)
Tax free reserve for loss on foreign
investments................................. (1,548) -- --
Tax free reserve for technology development.... (78,380) (75,685) (133,920)
Tax free reserve for loss on disposal of
treasury stock.............................. -- (70,359) (64,775)
Tax credit carryforwards....................... 650 31,963 --
Net operating loss carryforwards............... 181,568 3,078 --
Deferred charges and other..................... (4,705) 19,818 79,346
-------- -------- ---------
256,290 (48,667) (18,122)
-------- -------- ---------
Total deferred tax assets........................ W305,482 W 30,494 W 32,570
======== ======== =========
---------------
(note) As of December 31, 2000, 2001 and 2002, unrealized loss on valuation of
investment securities has been recorded as a separate component of
shareholders' equity, net of tax effect of W39,161 million, W22,510
million and W691 million, respectively.
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, 2000, 2001 and 2002
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.
Marketable Securities and 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 Corportation 45.5% interest in Powercomm at
W12,000 per share. Based on this transaction, an impairment loss of W150,243
million on the Company' investment in the common stock of Powercomm was
recognized in 2002.
Long-Term Bank Deposits
The carrying amount approximates fair value based on a review of interest
rates currently available for similar deposits.
F-58
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The following summarizes the carrying amounts and fair values of financial
instruments as of December 31, 2000, 2001 and 2002 (in millions of Korean won):
2000 2001 2002
----------------------- ----------------------- -----------------------
CARRYING CARRYING CARRYING
AMOUNT FAIR AMOUNT FAIR AMOUNT FAIR
(NOTE A) VALUE (NOTE A) VALUE (NOTE A) VALUE
---------- ---------- ---------- ---------- ---------- ----------
Financial assets:
Cash and cash equivalents
and short-term financial
instruments............. W 737,533 W 737,533 W1,298,199 W1,298,199 W 867,022 W 867,022
Marketable securities..... 638,082 638,082 637,530 637,530 754,219 754,219
Accounts receivable (trade
and other).............. 1,334,957 1,334,957 2,277,716 2,277,716 2,877,750 2,877,750
Investment securities:
Listed equity and
debts................. 93,393 93,393 143,261 143,261 942,861 942,861
Non listed equity....... 307,963 N/A 354,090 N/A 303,593 N/A
Long-term bank deposits... 81 81 77 77 178 178
Long-term loans........... 38,478 33,234 12,581 9,436 6,783 5,087
---------- ---------- ----------
W3,150,487 W4,723,454 W5,752,406
========== ========== ==========
Financial liabilities:
Accounts payable.......... W1,070,635 W1,070,635 W1,035,197 W1,035,197 W1,697,502 W1,697,502
Short-term borrowings..... 209,966 209,966 1,167,348 1,167,348 1,177,950 1,177,950
Bonds payable, long-term
borrowings, long-term
payables -- other and
obligation under capital
leases, including
current portion......... 2,795,898 2,791,736 4,031,251 4,068,192 4,413,130 4,704,752
---------- ---------- ----------
W4,076,499 W6,233,796 W7,288,582
========== ========== ==========
---------------
(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.
F-59
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's subsidiaries also sell telephones to customers and telephone
sales are recognized at the time products are delivered.
D. COMPREHENSIVE INCOME
Comprehensive income for the years ended December 31, 2000, 2001 and 2002
is as follows (in millions of Korean won):
2000 2001 2002
-------- ---------- ----------
Net income..................................... W895,420 W1,111,596 W1,301,126
-------- ---------- ----------
Other comprehensive income:
Unrealized gain (loss) on investment
securities................................ (303,630) 34,704 51,644
Foreign-based operations translation
adjustments............................... 285 (3,839) 2,809
-------- ---------- ----------
Total other comprehensive income............... (303,345) 30,865 54,453
-------- ---------- ----------
Comprehensive income........................... W592,075 W1,142,461 W1,355,579
======== ========== ==========
E. IMPACT OF SFAS NO. 142
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
annual impairment tests as prescribed by the statement. The following tables
present the impact of SFAS No. 142 on reported net income and earnings per share
had the standard been in effect for the years ended December 31, 2000, 2001 and
2002 (in millions of Korean won, except per share amount):
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
Reported net income........................... W 895,420 W1,111,596 W1,301,126
Goodwill amortization....................... 112,572 151,911 --
---------- ---------- ----------
Adjusted net income........................... W1,007,992 W1,263,507 W1,301,126
========== ========== ==========
Basic earnings per common share............... W 10,265 W 12,844 W 15,440
Goodwill amortization....................... 1,291 1,755 --
---------- ---------- ----------
Adjusted earnings per common share -- basic... W 11,556 W 14,599 W 15,440
========== ========== ==========
Diluted earnings per common share............. W 10,265 W 12,844 W 15,439
Goodwill amortization....................... 1,291 1,755 --
---------- ---------- ----------
Adjusted earnings per common
share -- diluted............................ W 11,556 W 14,599 W 15,439
========== ========== ==========
F-60
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill
Changes in the carrying amount of goodwill under U.S. GAAP for the year
ended December 31, 2002 are as follows (in millions of Korean won):
Balance as of December 31, 2001............................. W2,833,752
Goodwill reclassifications................................ --
Goodwill acquired during the period....................... 566,358
Goodwill impairment losses under SFAS No. 142............. --
----------
Balance as of December 31, 2002............................. W3,400,110
==========
Other Intangible Assets
The major components and average useful lives of our other acquired
intangible assets under U.S. GAAP follows (in millions of Korean won):
AS OF DECEMBER 31, 2002 AS OF DECEMBER 31, 2001
----------------------------- -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Amortized intangible assets:
IMT license (14 years)......... W1,189,881 W -- W1,300,000 W --
Customer lists (4 years)....... 99,783 (39,142) 56,013 (14,196)
Other (5 to 20 years).......... 344,708 (158,248) 258,775 (114,898)
---------- --------- ---------- ---------
Total............................ W1,634,372 W(197,390) W1,614,788 W(129,094)
========== ========= ========== =========
Intangible asset amortization expense was W62,037 million for the year
ended December 31, 2002. It is estimated to be W67,378 million in 2003, W138,340
million in 2004, W138,108 million in 2005, W109,834 million in 2006 and W105,669
million in 2007, primarily related to IMT license, customer lists and software.
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. Thus, the
Company does not believe the adoption of SFAS No. 143 will have a significant
impact on its future consolidated financial position or results of operations.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, which rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishments of Debts, SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements, and SFAS No. 44, Accounting for Intangible Assets of
Motor Carries. SFAS No. 145 also amends SFAS No. 13, Accounting for Lease. The
Company does not believe such rescissions and amendments described above will
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
F-61
SK TELECOM CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Company does not believe the adoption of SFAS No. 146 will
have a significant impact on its 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. 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 are effective for
the Company's annual financial statements for the year ending December 31, 2002.
The Company does not believe the adoption of this Interpretation will have a
significant impact on its 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, 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. The Company does not believe the
adoption of this Interpretation will have a significant impact on its
consolidation financial position or results of operations.
F-62
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
SK TELECOM CO., LTD.
By: /s/ KIL SEUNG SON
------------------------------------
Name: Kil Seung Son
Title: Chief Executive Officer
Date: June 3, 2003
CERTIFICATION
I, Kil Seung Son, certify that:
1. I have reviewed this annual report on Form 20-F of SK Telecom Co., Ltd.
("SK Telecom");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of SK
Telecom as of, and for, the periods presented in this annual report;
4. SK Telecom's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the U.S. Securities Exchange Act of 1934, as
amended) for SK Telecom and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to SK Telecom, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of SK Telecom's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. SK Telecom's other certifying officers and I have disclosed, based on
our most recent evaluation, to SK Telecom's auditors and the audit committee of
SK Telecom's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect SK Telecom's ability to
record, process, summarize and report financial data and have identified
for SK Telecom's auditors any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in SK Telecom's internal
controls; and
6. SK Telecom's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 3, 2003
/s/ KIL SEUNG SON
--------------------------------------
Name: Kil Seung Son
Title: Chief Executive Officer
CERTIFICATION
I, Young Jin Kim, certify that:
1. I have reviewed this annual report on Form 20-F of SK Telecom Co., Ltd.
("SK Telecom");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of SK
Telecom as of, and for, the periods presented in this annual report;
4. SK Telecom's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the U.S. Securities Exchange Act of 1934, as
amended) for SK Telecom and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to SK Telecom, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of SK Telecom's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. SK Telecom's other certifying officers and I have disclosed, based on
our most recent evaluation, to SK Telecom's auditors and the audit committee of
SK Telecom's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect SK Telecom's ability to
record, process, summarize and report financial data and have identified
for SK Telecom's auditors any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in SK Telecom's internal
controls; and
6. SK Telecom's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 3, 2003
/s/ YOUNG JIN KIM
--------------------------------------
Name: Young Jin Kim
Title: Chief Financial Officer
EXHIBIT INDEX
EXHIBIT DESCRIPTION
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1.1 Articles of Incorporation, as amended (together with English
translation) (Incorporated by reference herein from our Form
20-F filed on June 28, 2002)
10.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
10.2 Consent of Ahn Kwon & Co.*
10.3 Consent of Young Wha Corporation*
10.4 Telecommunications Basic Law of 1983, as amended (English
translation)*
10.5 Enforcement Decree of the Telecommunications Basic Law, as
amended (English translation)*
10.6 Telecommunications Business Law of 1983, as amended (English
translation)*
10.7 Enforcement Decree of the Telecommunications Business Law
(together with English translation) (Incorporated by
reference herein from our Form 20-F filed on July 2, 2001)
10.8 Korean Commercial Code (together with English translation)
(Incorporated by reference herein from our Form 20-F filed
on June 30, 2000)
10.9 Amendment to Korean Commercial Code dated December 29, 2001
(together with English translation) (Incorporated by
reference herein from our Form 20-F filed on June 28, 2002)
10.10 Korean Securities and Exchange Act, as amended (together
with English translation) (Incorporated by reference herein
from our Form 20-F filed on June 28, 2002)
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* Filed herewith.