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dddddddddddddddddddddddddddddddHwc sRdddddddddddddddddddddddddddddddddddd Rdddddddddddddddddddddddddddddddddd UddddddddddddddddddddddddddddddddHc
ddddddddddddddddddddddddddddHw csRddddddddddddddddddddddddddddddd sRdddddddddddddddddddddddddddddd dddddddddddddddddddddddddddddHwc “KTF-We put the YOU in Ubiquitous Communication”
We’re a young company with our sights set on new challenges, new frontiers, and new value. We’re KTF. Today at KTF, we abide by the new value creation through our “Good Time” management, our firm commitment to transparency, as well as our leading role in the ubiquitous world. In the wonderland called “Blue Ocean”, KTF is set to thrive and to pioneer the world of mobile communications. Corporate Profile 02 CEO’s Message Once again, KTF charts a path to success 06 Interview with CEO 08 Corporate Governance as the blue-ocean service leader.
During the nine years since our founding in January 1997, KTF has grown into a top- U-New tier company and a world-class provider of data and value-added services, including 14 Vision & Strategies personal communications services (PCS), to 12.3 million subscribers. As one of 16 Milestone Korea’s leading mobile communication companies, KTF boasted solid financial status with total assets of KRW 8,200 billion and total shareholders’ equity of KRW4,787 U-Fun billion as well as stellar operational performance with total revenue of KRW6,052 billion and net income of KRW547 billion as of the end of 2005. 22 2005 Operation Review 24 Voice Service In addition, KTF signed a strategic partnership with NTT DoCoMo, the Japanese Contents 26 Data Service 30 Overseas Businesses WCDMA leader and pioneer in the field of wireless Internet, in December 2005. Through this alliance, KTF has strengthened its position in the upcoming WCDMA era as well as invigorating wireless data services, which will be the growth engine for U-Care KTF’s future revenue. 34 Corporate Culture 36 Social Contribution In order to prepare a strong foundation for growth in the coming 10 years, KTF has created a new vision expressed in the mottos “No. 1 KTF” and “Innovative KTF.” U-Trust While pursuing success in WCDMA-based network development, KTF will enhance its 42 Management Discussion & Analysis competitiveness through consolidating its leading position in the contents business 54 Report of Independent Public Accountants and seeking alliances within and outside the industry to pioneer the emerging 56 Financial Statements convergence market. Furthermore, by cultivating a dynamic corporate culture, KTF 98 Glossary aims to create value not only for customers, employees and shareholders, but also for 99 Epilogue society as a whole, thus becoming a creative company and a leader in “first-class Annual Report 2005 3 | 3 service” and “blue ocean service.” CEO’s Message CEO Interview Corporate Governance
KTF bolstered both profitability and future growth momentum in 2005. In 2005, when all of Korea’s mobile communications operators struggled with the mobile number portability (MNP), KTF expanded its customer-friendly and effective marketing activities on the basis of our “Good Time” management. With the addition of 573,425 new subscribers – fully 33% of the net increase for the entire mobile communications market in 2005 – our subscribers now number over 12 million. In addition, taking advantage of continuous growth in sales of wireless data, KTF recorded service revenue (excluding sales of terminals) of KRW5,008 billion, up 9.1% over the previous year, opening an era of KRW5 tril- lion in service sales. Operating income surged 55.9% and net income soared 92.7% over 2004 to KRW547 billion, the highest in our company’s history. Moreover, we again achieved a improved EBITDA margin and made significant “We’re set to cruise for another progress in debt reduction. KTF recorded a net debt-to-equity ratio of 25.1% at successful decade!” the end of 2005. Such strong results have been achieved by the efforts of all KTF employees and the KTF is charting a course for a new era of continuous support from our shareholders and customers. Therefore, following profitability and growth. shareholder returns of 35% of net income in 2003 and 40% in 2004 in the form of We are spreading our wings in 2006 to achieve cash dividends and share buybacks, KTF management will pursue our shareholder- market leadership amid full mobile number focused policy of returning 50% of net income in 2005. portability, bound for blue-ocean success. 2006 signals the start of efforts to guarantee our second decade of prosperity. In spite of KTF’s astonishing growth over the past 10 years, there remains more tasks to establish our company as the market leader, particularly in view of the rapidly evolving market paradigm. Today, KTF must not rest comfortably on the successes of the past 10 years, but rather strive ceaselessly to embrace conceptual changes and new challenges as we steadily prepare for even momentous times in the next 10 years. To pave the way to prosperity in the coming decade, I’ve devised the following three management policies.
Annual Report 2005 2 | 3 CEO’s Message CEO Interview Corporate Governance
FINANCIAL HIGHLIGHTS
“Service revenue over KRW 5 trillion, Total sales over KRW 6 trillion First, KTF must focus its actions on fields where its core competencies and Operating income up 55.9%, Net income growth 92.7%” competitive advantage lie. We will focus all our efforts towards becoming the leader in WCDMA. The partnership we signed with NTT DoCoMo last December has greatly improved our prospects for success in WCDMA. Service revenue (Data revenue) Operating income (Net income) Second, in order to identify new growth engines, we will maximize our part- nership activities. To ensure leadership in convergence services, we will 5,008 825 782 4,589 529 actively seek cooperation with premier companies in other industries and 4,201 reinforce our close alliances and synergies with the KT group. We will also create our own “KTF style” to win the hearts and loyalty of our customers. Competitors are bound to imitate us, but we will hold fast to our lead by 608 547 519 407 284 placing top priority on ensuring superior customer satisfaction and promot- ing KTF’s unique brand image. ‘03 ‘04 ‘05 ‘03 ‘04 ‘05 (in billions of Korean won) (in billions of Korean won) Finally, along with aggressive cost reductions and internal innovation, we remain committed to long-term expansion and will strive to achieve a mini-
EBITDA EBITDA Margin mum of 4% growth in service revenue and a 37-39% EBITDA margin in 2006, thereby achieving both profitability and growth. 38.8 1,945 38.7 35.2 KTF envisions to be a company providing the most desired services to cus- 1,626 1,615 tomers, a company that continuously challenges and innovates, a company that earns the praise of society through transparent management, and an open company that grows together with its partners. In closing, I kindly request your interest and encouragement to ensure that KTF continues to grow as a reputable and valuable member of our community, ‘03 ‘04 ‘05 ‘03 ‘04 ‘05 and that we rise to the challenge of becoming a global leader in our industry. (in billions of Korean won) (%)
Thank you. Debt-To-Equity Net Debt-To-Equity Ratio
98 150 91 142
96
25 Young-Chu Cho President and CEO, KTF
‘03 ‘04 ‘05 ‘03 ‘04 ‘05 (%) (%)
Annual Report 2005 4 | 5 CEO’s Message Interview with CEO Corporate Governance
“The CEO’s comments on KTF, In which directions do you Today and Tomorrow” envision KTF going in the future?
During the past 10 years, KTF has led the development of mobile communications in Korea, enjoying tremendous growth along the How do you judge the way. Today, we have a responsibility to prepare for new challenges. After taking office as the fifth president of KTF in July 2005, the first results of 2005? thing I did was discussing ideas about our future both with our own employees and also with our customers. We experienced a difficult operating environment last year owing to mobile number portability (MNP) and other factors. At the most basic level, I want KTF to have a warm, positive and Still, we achieved 9.1% sales growth and net income of friendly image in the minds of everyone, our customers as well as the KRW547 billion, the highest since our founding, together with general public. As a corporation, I want to see KTF advance to an EBITDA margin of 38.8%. In short, we were able to meet become a world-class company before the end of the next decade. the market’s expectations of improved growth and profitability. To achieve this, we will strive to offer the best of the most popular In 2006 as well, we anticipate uncertainty due to increasing services that customers want, meet the challenge of continuous market maturity, changes in subsidy regulation and pressure change, earn the respect of society for our transparent management, onto tariff cuts, so we’re forecasting an even more competition and create partnerships with other companies that enable us to sur- than in the past. This is why we can’t afford to remain content vive and grow together through an “Open Partnership” system. with last year’s performance, but will strive to attain ever higher levels of customer emotion and shareholder value.
What does KTF’s partnership with NTT DoCoMo mean in the area of WCDMA? What is your forecast for the Our strategic partnership with NTT DoCoMo will put in motion an mobile communication market in 2006? expansive network of business alliances, which will in the future extend to Since the mobile communication market is reaching saturation now, the whole mobile communications industry, consolidating KTF’s future growth will come more from the MNP market than from the new sub- growth momentum and enhance our competitiveness. scriber market. In this situation, following the changes in the subsidies First, through construction and initial stabilization of KTF’s WCDMA system, it is highly probable we’ll see return to price-based competition network, gaining an early foothold in the WCDMA-based roaming mar- for market share. ket between Korea and Japan, and simultaneous development of new ser- However, we will be looking to sidestep this fracas and compete vices and contents, KTF will shore up its technological superiority. instead on the basis of KTF’s first-class service. Through alliances with Second, the bilateral development and sourcing of WCDMA handsets will various partners in neighboring industries, such as digital multimedia create bargaining power against handset manufacturers, and active coop- broadcasting (DMB), automotive and banking industries, KTF will be eration in other sectors including ongoing network standardization will able to develop various convergence services uniting companies from strengthen our market leadership. Also, I expect both companies to pur- many different sectors, to continue our current strong growth trajectory. sue global cooperation in foreign markets in the area of WCDMA. From this year, through WCDMA services, based on HSDPA network, What is your policy on KTF will be able to offer to its customers an experience and value shareholder returns after 2006? above their expectations through telephone via satellite, ultra high- speed wireless internet, convenient international roaming and cus- tomized services. Already, we have returned to our shareholders 35% of 2003 net income and 40% of net income in 2004 through cash dividends and share buybacks. In addition, we have already announced that we will return to shareholders 50% of net income of 2005. In the future, we will consistently maintain this policy of rewarding our shareholders for their role in our success. Therefore, we plan to keep the same level of shareholder return in 2006 as in 2005.
Annual Report 2005 6 | 7 CEO’s Message Interview with CEO Corporate Governance
Ki Kwon Doh, Outside Director & Auditor Jeong Soo Suh, Non-standing Director • MBA, Duke University Graduate School, USA • BA in Economics Science, SungGyunKwan • Director of Marketing/Retail Banking/ University in Seoul Business, Citibank Korea • MBA, Yonsei University • Representative Director and President, • Senior Vice President of Planning & Citicorp Finance & Securities Ltd. (Thailand) Deog Nam Hwang, Coordination Office, KT Outside Director • Representative Director and President, • Head of Privatization Office, KT Ssangyong Investment and Securities • LL. B., Seoul National University, Korea • CFO & Vice President of Financial (Presently Good Morning Shinhan Securities) •MA in Health Sciences, Yonsei University, Korea Management Office, KT • Representative and President , •Judge, Seoul High Court of Justice • Presently Managing Director & Senior Vice President of Corporate Strategy Group, KT Good Morning Shinhan Securities •Legal Secretary, Secretariat, Presidential Office, ROK •Public Member, National Labor Relations Commission Hi Chang Roh, • Presently International Youth Fellowship Non-standing Director •Commissioner of Bureau of Administrative Appeals Chairman Management under the Prime Minister • BA in Business Administration, Jae Chul Lee, Outside Director and Auditor • Presently Unhwa Biotech Corp. •Presently Lawyer, Law Firm Segye Hannam University, Korea Chairman, BOD • Head of Secretariat, KT • BA in Law, Seoul National University, Korea • Head of Los Angeles office, • Presiding Judge, Suwon District Court Hong Ki Kim, KT America, INC. • Representative Director, Outside Director • Managing Director of Investment Shinwon Country Club/Ilshin Leisure • MBA, Sogang University, Korea Management Team of Planning & • Judge, Request Judging Committee, • Chief of Planning Office, Cheil Industries Coordination Office,KT Gyeonggi Province • Director, Samsung Electronics • Vice President of Planning & • Legal Adviser, Gyeonggi Province Coordination Office, KT • Presently Representative Lawyer, • Representative Director and President, • Presently Chief Learning Officer, KT Law Firm Madang Samsung SDS • Management Advisor, Samsung SDS • President, Korea Information Processing Society • Presently President, Korea Software Technology Association • Presently President & CEO, Dongbu Information Technology Co., LTD. Young Jin Kim, Outside Director & Auditor
• MBA, Columbia Business School • DBA, Indiana University • Director, The Institute of Finance and Banking, Seoul Nat’l University Young Chu Cho, • Chairman, The Korean Finance Association Standing Director • Director, The Korea Stock Exchange • Ph.D.& MS in Traffic Engineering, • Presently, Professor of Finance, Seoul National University, Korea Seoul National University • Head of Business Management Office of Marketing Division, KT • Head of Business Planning Group of IMT2000 Business Division, KT • CEO & President, KT ICOM • Head of External Affairs Group, KTF (Senior Executive Vice President) • Presently CEO & President, KTF
Annual Report 2005 8 | 9 CEO’s Message Interview with CEO Corporate Governance
KTF has been cited for excellence in corporate governance in each of the past three years. With our firm policy of 4. Board of Directors maximizing shareholder value and “open style” annual KTF places paramount importance on ensuring an advanced corporate governance structure by general meeting of shareholders, we have created an strengthening the independence and professionalism of the Board of Directors (BOD). While KTF’s Articles of Incorporation stipulate that between three and 15 individuals may be appointed as members image of a transparent company. of the BOD, the company has fixed the number at nine, with a majority of five being professionals from outside the company’s management. For efficient decision-making of the BOD and to best utilize pro- fessional capabilities, four specialized committees (Audit, Finance, Compensation and Outside Board 1. Shareholding structure Member Nomination) have been established. Outside directors chair all four committees to ensure inde- In the fourth quarter of 2005, as a result of our partnership pendence. At the 2005 annual general meeting of shareholders, financial and accounting professionals with NTT DoCoMo, common stock and capital surplus were appointed as outside directors on the Audit Committee, and the number of outside directors on increased by 9.3% and 30.5%, respectively. At the end of Major the Audit Committee are expected to be increased from three to four in 2006. The BOD met nine times Shareholders 2005, the shareholdings of the main shareholders were as in 2005 with a 91% attendance rate (93% for outside directors). The main issues of deliberation includ- following: KT 44.55%, NTT DoCoMo Inc. 10.03%, ed the relocation of KTF’s headquarters and branches, share buyback and cancellation, investment in Qualcomm Inc. 2.19%, Hyosung 1.5%, Microsoft Corp. Sidus FNH, and KTF’s strategic partnership with NTT DoCoMo. 1.01%. 5. Support Organizations 2. Respect for shareholders’ rights The Corporate Governance (CG) Team was established in February 2003 to support outside directors’ KTF is making all efforts to expand the rights of shareholders. Through the change of the Articles of decision-making and to help them understand overall management issues. The CG Team reinforces the Incorporation in 2005, KTF introduced “documented votes” to strengthen shareholders’ rights, and BOD’s independence and transparency and supports effective decision-making. Likewise, the implements innovative programs not yet seen in other Korean companies. For instance, KTF invites ana- Management Auditing Team assists the BOD’s Audit Committee, and the Investors Relations(IR) Team lysts and investors to participate in the annual general meeting of shareholders as panelists through actively carries out investor relations activities and supports communication between management and real-time internet broadcasting, and the CEO provides presentations on current business issues as well shareholders through public disclosures. The Fair Competition Team devises policy measures against as future strategies to shareholders. Through these measures, KTF is creating an unprecedented irregular internal transactions and other unfair practices to establish a code of fair and transparent busi- “open-style” general stockholders’ meeting. ness. The Legal Team supports each of these units in executing their duties. The Ethics Management Team works in conjunction with the BEL Center to diffuse KTF’s ethical principles and practices to 3. Management Transparency & BEL employees and management personnel. In 2005, KTF conducted around 20 IR presentations at home and abroad to provide updates on the progress of the company, and in line with our commitment to management transparency makes public 6. National and International Assessment disclosures of the Board of Directors’ decision through the Financial Supervisory Service(FSS) and the In 2005, KTF was cited for excellent corporate governance for the third time in the last three years by Korea Exchange (KRX). Shareholders can also visit KTF’s homepage anytime to keep track of events the Korea Corporate Governance Service (CGS). In 2003, we were designated by CGS as an “Excellent relating to the company. KTF carries out ethics management in various ways, primarily through the cre- Listed Company” in the Kosdaq category, and in 2004 and 2005 earned honors for our outstanding cor- ation and operation of the Business Ethics Leader (BEL) Center. porate governance, thanks in large part to our outside director-centered BOD composition and our com- BEL reflects KTF’s goal to become a leader in corporate ethics through internal reform. Through BEL, mitment to management transparency. KTF has received praise from national and international agencies KTF sets forth basic principles that we expect staff to follow in dealing with customers, shareholders, for our corporate governance, with high score from Standard & Poor's biannual evaluation in 2002, while fellow employees, local communities and other stakeholders. The BEL Committee represents the pre- Credit Lyonnais Securities Asia ranked KTF 20th out of 100 leading Asian enterprises in its Corporate mier ethics group within KFT, while the BEL Center is practical mechanism. Composed of the presi- Governance Scorecard in 2003. The same year the Reuter’s Institutional Research Group called KTF the dent, key senior executives and employees, the BEL Committee deliberates on ethics management company with “the most improved IR” in their institutional investor report. Also in 2003, KTF was desig- proposals and the BEL Center carries out education, research, dissemination and other activities. The nated an “Excellent Company” in the Kosdaq category in the Hankyung IR Awards. In 2005, KTF won BEL initiative maximizes customer trust and enterprise value, providing the ethical foundation upon the “Cyber IR Award” as well as the “Transparent Management Award” in the Korea Ethics which rests our “Good-Time Management” customer satisfaction concept launched in 2003, and estab- Management Awards held by the New Industry Management Academy. Also, KTF’s annual reports lishes KTF’s image of a transparent and ethical company in the eyes of our customer and shareholders. received gold prize in ARC Awards for two consecutive years in 2004 and 2005.
Annual Report 2005 10 | 11 U-New
14 Vision & Strategies 16 Milestone
The future belongs to those who can visualize it ahead of time. Passion is the energy that will take us to No.1 in this competitive market. With WCDMA, KTF is opening a whole new world of mobile communications. Vision & Strategies Milestone
WCDMA will change the shape of market NTT DoCoMo is a major company with a customer base Being the best doesn’t happen competition exceeding 50 million subscribers, and was the first compa- ny to successfully deploy WCDMA technology in 2001. As The evolution of WCDMA networks presents KTF with a of the end of 2005, they also had the most WCDMA cus- automatically. means to overcome the drawbacks and limitations of late- tomers of any mobile communications provider, as well as comer status in terms of inferior frequencies and lower superior R&D capabilities in this field. Based on these It requires the best service and brand loyalty. WCDMA also represents the best opportuni- facts and figures, KTF anticipates the possibility of dou- ty for KTF to leap from No. 2 to No. 1 in the domestic mar- bling the effect of economies of scale over the current genuine cooperation. ket, while accelerating its advance as a leading company subscriber base of 12.3 million, while securing a key tech- of global prominence. The WCDMA technology that KTF is nological advantage over our competitors, especially in introducing will be based on the 3.5-generation HSDPA global roaming service, and forge a win-win alliance with a KTF’s business environment is characterized by a saturated and rigid domestic network with a wider variety of contents, faster speeds true global leader. Hence, NTT DoCoMo is the ideal choice market, slowing growth in wireless data, and increasing alliances among foreign and more reasonable pricing than ever before, thereby for partner in terms of leveraging KTF’s abilities and plans telecommunication companies. In response to these changes, KTF has declared opening a genuine “wireless era.” to expand its presence and profile in the East Asian mobile 2006 the year to prepare for the success of our second decade of business. We’ve The most remarkable feature of the HSDPA network is its telecommunications market. outlined three basic strategies that will position us at the top and realize our vision capability to transmit 14.4Mbps of data. This is approxi- of “No. 1 KTF”: 1) Prepare WCDMA infrastructures, which will reshape the very mately six times faster than the existing CDMA technolo- gy used in EV-DO networks, and yet is only 1/4 the cost of Pioneering New Frontiers in the New nature of existing market competition; 2) Activate and accelerate contents business this current system. Through quantitative and qualitative Subscriber Market to lead the shifting focus of the new subscriber market; and 3) Pioneer the newly improvement in data service, as well as significant new In the overcrowded market for simple voice-based mobile emerging convergence market through internal and external alliances. revenue generation, this network system opens up new communications, KTF will continue to enhance its role as vistas for delivering video transmission and other multime- the leader in integrated mobile entertainment businesses dia contents requiring higher rates of data transmission through the distribution of new media and contents. KTF is previously unavailable via mobile phones. As such, KTF making strenuous efforts to play a pioneering role in the expects data revenues to increase substantially in step with development of new markets for videophone and mobile Worldwide Launch of WCDMA Network this new technology. multimedia broadcasting services based on digital multi- Furthermore, as of November 2005 there were 94 compa- media broadcasting (DMB), Wibro and HSDPA. nies in 41 countries using WCDMA networks by utilizing GSM network technology as its base. GSM is currently Convergent Market Leadership used by 2/3 of the world's mobile operators. This situation holds enormous potential for the roll-out of KTF's global KTF is concentrating on forming alliances with companies roaming services via WCDMA. in other industries and maximizing synergies with KT group affiliates in order to take an early lead in newly Additionally, the Vodafone Group (Europe, North America, emerging markets for convergence services. Prompting Japan, Australia, etc.), Freemove (Orange, T-mobile, TIM, this approach are expectations of rapid growth in the wire- etc.), Bridge (SingTel, Optus, Bharti, Telkomsel, etc.), and less portal business, converging service and contents busi- DoCoMo (Hutchison, Bougues, KPN, Telstra, etc.) are ness in line with increasing fusion of disparate industries, Global Subscriber by Technology engaged in strategic cooperation to accelerate WCDMA such as financial, automotive, and mobile broadcasting services. industry including DMB. KTF's partnership with NTT DoCoMo formed in December KTF is also preparing various strategies to advance into the 2005 is expected to drive synergy effects and provide e-Book and e-Learning niches and participate in contents opportunities for strategic cooperation in a variety of areas distribution with the goal of expanding the value chain as including WCDMA technology standardization, the pro- leader of the convergence business, and to continuously curement of handsets, and the convergence business. To strive to develop a new global business model in this ensure and oversee progress in this key alliance, KTF has promising area of operations. created the Business & Technology Cooperation Committee (BTCC).
Annual Report 2005 14 | 15 Vision & Strategies Milestone
‘96 ‘97 ‘98
Jun. - Acquired personal Mar. - Acquired the identification number ‘016’ Jan. - First in the industry to publish Braille manual communication system May - Launched Freetel logo and 'PCS 016' brand for the blind (PCS) business rights Jun. - First in Korea to launch PCS pilot services Feb. - First in the PCS industry to reach 500,000 “The history of KFT is Dec. - Held inaugural meeting of (70 villages in five districts in the Gangnam area) subscribers KTF Freetel Co., Ltd. - Succeeded in service quality testing while in Mar. - Launched Korea’s first interactive text mail a history of dedication to high speed movement service Aug. - Opened nationwide network Apr. - Developed wireless network design and Oct. – Launched commercial services nationwide quality analysis system, ‘Net Spider’ customer service.” - First in Korea to develop an intelligent fiber Dec. - First in Korea to develop interactive text mail distribution system service; also launched international roaming - Subscribers reached 1 million in the shortest service time period in the world - Forged strategic partnership with Hansol - Developed PCS equipment maintenance sys- PCS for integrated network establishment tem, ‘FOMS’ and operation Oct. - Jumped into second place in Korean Mobile Communications Industry - Subscribers surpassed 2 million within the shortest time period, and the first in PCS industry - Won both the Best Management Prize and the Customer Value Management Grand Prize in the 1998 Management Innovation Awards hosted by Korea Management Association(KMA) Nov. - Won Grand Prize in the category of special- ‘99 ized corporation in 1998 New Media Awards
Mar. - Declared the second leap forward as subscribers Sep. - Launched KT Freetel-developed Internet PCS device, ‘Neon’ reached 3 million - Subscribers surpassed 4 million. ‘00 Apr. - Exported technologies for CDMA network design, - Established Korea’s first wired/wireless portal, 'Persnet' management and operation to Hutcheson in Oct. – Won Best Prize in Mobile Communications in the Corporate Australia Division of the 1999 KMA Knowledge Management Awards Mar. - Launched exclusive wireless internet PCS phone, ‘KTF-3016’ port and fostering measures) May - Hosted International CDMA Technology Symposium Nov. - Issued KT Freetel Club Membership Card - Second CEO Yong-kyung Lee took office - Subscribers of KT Freetel ‘Na’ surpassed 1 million. - KT and KTF entered into an MOU to be official World Cup Jun. - Declared Customer Service Chapter - Launched home security service, ‘Home Care’ Apr. - Posted the largest number of wireless subscribers within the partners (November 11, 2000) - First in the IT industry to acquire Y2K authentication - Forged strategic alliance with Microsoft, Qualcomm and shortest time (4.27 million subscribers as of the end of 1999) for all divisions CDPQ and attracted foreign capital to register in the Guinness Book of World Records Dec. - KT, KT Freetel and M.Com entered into an MOU to be offi- cial World Cup partners. Jul. - Demonstrated Korea’s first commercial IS-95B system Dec. - Won the 1999 Communications Management Grand Prize Jun. - Developed communications network analysis system, from Korea Institute of Communications Science 'NetProbe' - First in the world to launch unified handset and wireless Aug. - Developed Korea’s smallest home repeater, ‘Smart-H’ - Established ‘Internet World’ together with nine domestic credit card payment device - Announced a new brand ' 016' Internet portals Jul. - Issued Freetel Club Membership card for all customers Sep. - CEO Yong-kyung Lee inaugurated as chairman of GBDe. Nov. - Held 2000/2001 Wireless Internet Forum (announced CP sup-
Annual Report 2005 16 | 17 Vision & Strategies Milestone
‘01 ‘02 ‘03
Jan. - Opened Korea’s largest wired/wireless internet por- Feb. - Inaugurated KTF employees’ social service group “Dream Jan. - Merger between KTF and KTICOM approved. Aug.- ‘Have a Good Time!’ KTF campaign kicked off. tal, ‘magic ’ with 5 million subscribers Friends” - Fourth CEO Joong-soo Nam took office. - Five different new tariff plans were launched as part of - Launched wireless internet download service, ‘Plug In’ - Launched mobile-based on/off line credit payment - Merged with KTICOM(IMT-2000 service provider) 'Good Time' management. - Offered free insurance for lost 018 handsets services, first in the world Apr. - Won a President's Prize for establishing fair trading order - Established Gangnam Members’ Center Feb. - Operated wired/wireless internet ‘magic ’ theme Mar. - Concluded an ‘international roaming contract’ with China May - Introduced Personal Digital Assistant(PDA) rates for Sep. - Formed 'Good time service' task force team train on subway line No. 3 Mobile teenagers - Introduced 'Good time festival' - Launched wireless internet religious portal service Apr. - Selected by the Ministry of Labor out of large enterprises Jun. - Won “Best Management Transparency Award” by Oct. - Invested $10 million in Indonesia's ‘PT Mobile-8 Telecom’ Mar. - Merger between KT Freetel and KT M.Com approved as the ‘2002 Superior Enterprise in New Labor and Kosdaq-listed Company Association (KOSDAQCA) - Participated in ITU Telecom World 2003 - Developed next-generation mobile communications Management Culture’ - Released KTF EVER hot code handsets Nov - Awarded Customer Satisfaction Management Prize for repeater (citation number 2002-2, Effective Date: April 10 - Received ‘Internet Grand Prix’, an Award conferred by the second consecutive year from KMA Consultant and Apr. - Launched CDMA wireless communication module- 2002~April 9 2005) the Ministry of Information and Communications the Korean Customer Satisfaction Associations - Launched exclusive commercial mobile brand ‘K.merce’ equipped pocket PC, ‘Luxian’ Jul. - Chosen as the company with the best corporate - Opened Drama House - First in Korea to initiate international automatic roaming service with China Mobile governance by the Corporate Governance Service(CGS) May - Merged with ‘KT M.Com’ - Announced a fair trade compliance program - Launched commercial cdma2000-1x service - Launched new service brand ‘KTF’ May - CEO Yong-kyung Lee received the Top Management - KTF’s subscribers surpassed 9 million Prize in the 10th Korea Marketing Awards from Korea Management Association Jun. - Forged an alliance with China Unicom - The number of subscribers exceeded 10 million; - Changed company name to "KT Freetel Co., Ltd" Fimm, world’s first IMT-2000 service, launched ‘04 ‘05 with the approval of shareholders - First in Korea to extend a mobile service to Dokdo island Aug. - Launched exclusive 1318-generation (ages between Jun. - Ranked first among mobile communications companies in 13 and 18) brand, ‘Bigi’ Business Week’s top 100 global IT companies. Jan. - "Unlimited flat rating pricing" plan was launched. Jan. - ‘Unlimited Navigation’ plan released - Developed a state-of-the- art wireless streaming - Awarded ‘CDMA Performance Prize’ at the 3G World - Signed a consortium business contract with Korea Advanced VOD solution Conference organized by CDMA Development Group Mar. - ‘Data Free Carryover’ plan released Institute of Science and Technology (KAIST) to build a wireless Sep. - Launched commercial mobile-based payment service, - Launched automobile roaming service between Korea and Apr. - Strategic partnership for Telematics with Hyundai Motor digital library (WDL) ‘nPayMagic’ Japan and Kia Motors Feb. - KTF-Kookmin Bank mobile banking service was launched. Oct. - Launched exclusive 2535-generation (ages between Sep. - CEO Kyung-jun Lee received the Prime Minister’s Prize in - Release of mobile game service ‘GPANG’ - New customers for 2004 reached 1 million. 25 and 35) brand, ‘Main’ Electronic Wave Technology organized by the Ministry of May - Release of ‘dosirak,’ a specialist music portal site - Spun off its handset division as ‘KTF Technology’ Information and Communications Mar. - Opened Unified Data Center - Emergency Disaster Broadcasts service wins - First in the industry to launch PDA portal services - KTF Members’ Center earned an AAA accreditation for its Apr. - Awarded the first place out of mobile telecom operators in commendation from the Minister of Government - Penetrated Chinese CDMA market service quality from Korea Management Association the National Customer Satisfaction Index (NCSI) Administration and Home Affairs Nov. - Launched KTF Members Samsung Card - The ‘ktf.co.kr’ was chosen as a superior website in the May - Received international information security standard Jul. - Fifth CEO, Young-Chu Cho took office. - Established venture firms consultative body field of private information protection by Korean BS7799 Sep. - Awarded two Prizes in Korea Color Design Awards 2005 - Won Best Prize in the 9th Customer Satisfaction Association of Information & Telecommunications - Received certification for information protection (dosirak, KTF Commercial) Management Awards in the category of customer Oct. - Won the ‘Grand Prize in Internet Trading’ in the 2002 management system in networks. - ’dosirak’ Presented with Industry Achievement Award service innovation from Korea Management Korea Internet Awards Jun. - Established 1st Ubiquitous Test Center in Korea. for Most Innovative 3G CDMA Music Service Association Nov.- Won the ’10th Customer Satisfaction Grand Prix’ in - Won best transparent management prize 2-years running. Nov.- Awarded General Grand Prize in CRM Fair 2005 Company-Wide Category from Korea Management Jul. - Gold award for annual report from LACP. - Won the First CMMI Certificate on CRM out of Association Aug.- Release of KTF Call Gift Vouchers Domestic Telecommunication Companies. Dec. - Selected by the Ministry of Labor out of all large - Selected as a benchmark corporation by the Korean CS - Awarded the Grand IR Prize In The 7th Hankyung IR enterprises as the ‘2002 Superior Enterprise (Presidential Committee Awards by the Korea Economic Daily. Prize) in New Labor and Management Culture’ Sep. - Exhibited new ubiquitous technologies at the ITU Telecom Dec. - Partnership with NTT DoCoMo Asia 2004 held in Busan - Main Office Moved to Shincheon-dong, Songpa-Gu Dec. - Set up of joint mobile ad and marketing venture - Adoption of design marketing - first in industry
Annual Report 2005 18 | 19 U-Fun
22 2005 Operation Review 24 Voice Service 26 Data Service 30 Overseas Businesses
KTF is boldly staking out its leadership position in the “convergence era,” offering customers an array of new services through tie-ups with partners in banking, automobile and other sectors including broadcasting . We put the emphasis firmly on “fun,” delivering a whole new world of entertainment that includes internet access, games, music and video – all these and more through a single mobile phone. 2005 Operation Review Voice Service Data Service Overseas Businesses
Market Environment Domestic & International Awards for Even after the full implementation of the mobile number Customer Service Excellence portability regime in 2005, total domestic subscriptions still In 2005, after receiving awards for four consecutive years managed to record a 4.8% increase over 2004 to 38 mil- from the Korean Customer Relationship Management lion accounts, representing a penetration rate of 79% of Association, KTF won the top prize at “CRM Fair 2005,” the entire population. KTF accounted for 33% of this net hosted by the Federation of Korean Information Industries increase in overall subscriptions, adding 573 thousand out and the Korean CRM Association. KTF was the first of the total 1.755 million new subscribers to its rolls and Korean company to earn the CMMI Level-3 award, which raising its subscriber base to 12.3 million as of the end of is determined on the basis of a worldwide qualitative 2005. evaluation of software and IT systems. KTF’s music portal “dosirak” earned the Industry True Convergence Services through Achievement Award for “Most Innovative Use of Music” Strengthened Contents Business in the Customer Service category at the 3G CDMA Americas Congress, an event held by the CDMA With the introduction of new features like the “dosirak” Development Group (CDG). music portal, the “GPANG” game portal, “Mobile Cyworld,” and the premier telematics service “K-ways,” KTF recently became the first company in the mobile We will drive new growth KTF succeeded in growing data ARPU throughout the year. communications industry to receive a citation for the best design management. KTF won the “2005 Korea Color by new services that are In addition, KTF has advanced its positioning in the video Design Award,” the country’s highest recognition in this contents segment and strengthened a variety of alliances field, by the Korean Society of Color Studies, for KTF’s that will also drive growth. Through the “Goodtime “Have a Good Time!” campaign’s orange color scheme uniquely “KTF.” Cinema Party,” whereby mobile communication customers and music portal dosirak’s visual code. are given the opportunity to invest in film projects, KTF has invested KRW 8 billion in the Cinematic Investment Fund operated by Showbox Media, which was instrumental in making possible the sequel to the highly popular Korean film, “Welcome to Dongmak-Gol”.
Penetration rate to the entire population MS by total number of subscriber in 2005 In addition, KTF is preparing a series of services that will help to establish the convergence era by promoting part- nerships, including promotion of a common distribution network with convenience store chain Buy-the-Way, signing of a partnership with NHN for mobile game contents, alliances with Hyundai and Kia Motors in the telematics field, the launch of the “World-Phone” in conjunction with handset maker LG Electronics to provide global roaming 2005 services in 82 countries, and the distribution of PlayStation Portable(PSP) through a joint distribution network between KTF and Sony Entertainment Korea.
Annual Report 2005 22 | 23 2005 Operation Review Voice Service Data Service Overseas Businesses
“Continued growth in voice service provides the basis
for future development of A specialized service targeting the A dream networking service for teenage market with a focus on n-generations new services.” “growth potential” and “lifetime values” The fast-paced world of youth is composed of KTF fully understands the unique communica- its own individual shapes, colors and variety, In 2005, a year marked by the full introduction of mobile number tion culture of teenagers, and created “Bigi” to and charged with unlimited power and the portability (MNP), KTF relied on its “Good-Time Management” give its young friends more voice and SMS potential to lead our society and culture. ”Na” is a total entertainment service designed to pro- platform in launching a series of customer-friendly marketing ini- options than they can access anywhere else in the mobile communication industry. Specially vide satisfaction for the younger generation. It tiatives that attracted 573,425 new subscribers. The total number designed for teenagers, the service features a is a tailor-made service that combines mobile of KTF subscribers now exceeds 12 million. Despite the tariff cuts unique flat rate system, allowing customers to communication with all kinds of cultural activi- in September 2004, the net addition of over 570,000 customers in choose and adjust their own rate plan. It is care- ties. “Na” offers an exciting range of progres- fully packaged to consider the potential power of sive contents and benefits such as franchise a single year and acquiring high-ARPU users through MNP the teenage market and their value as “Life membership services, which can be enjoyed increased voice revenue by 6.1% over the previous year to KRW Time Customers.” anywhere across the country. It also operates a 3,900 billion. total entertainment space called “Nazit” in 12 major commercial areas around Korea.
Change in ARPU
A sophisticated service with specially A competitive brand for women designed benefits for youth “DRAMA” is exactly the right service for ladies Including interconnectionARPUof8,539 Including interconnectionARPUof7,828 “Main” is a service designed specifically for who want to enjoy a life filled with happiness Change in the number of subscribers Change in Voice revenue young men and women aged 25 to 35. This and confidence. important consumer segment forms the main- “DRAMA” provides a wide array of fabulous stream of society, and “Main” has been spe- services and benefits by recognizing and touch- cially tailored to offer economical and practical ing the deep emotions and needs of women. It rate plans according to each customer's is filled with valuable offline contents such as lifestyle and telephone call patterns. It hosts a Book Cafe, Internet PC Zone, Make-up Zone, range of dynamic cultural events, additional and the exclusive women's cultural area of services such as special benefits at theatres, “Drama House.” This service also operates the automotive clinics, leisure centers, travel “Drama Kids” series, which offers practical agents, and much more. help in caring for and entertaining the children (in Korean Won) of our customers. “DRAMA” allows women to be more unique, beautiful, and happy.
(in thousand) (in billions of Korean Won) *Including KT resales subscribers Annual Report 2005 24 | 25 2005 Operation Review Voice Service Data Service Overseas Businesses
“KTF achieved steady data revenue growth through new services that capture the customer’s emotions.”
Growth in Data Revenues Data ARPU by Network In 2005, total revenues from data service increased 17.2% to KRW 608.4 billion. Of particular note during the The average Data ARPU of VOD handset subscribers as of the fourth quarter of 2005 is more than twice year was the development and launch of new services that grabbed the attention and emotion of KTF’s cus- the Data ARPU of normal handset subscribers. In particular, the rapid increase in the number of VOD tomers, including the dosirak music portal, the GPANG portal dedicated to wireless game, and Mobile Cyworld. terminal subscribers, which exceeding 1.5 million at the end of 2005, contributed significantly to the These, combined with improvements in the K-Ways telematics service, have generated continuous growth in increase in overall data revenues. the Data ARPU throughout the year.
Change in Data revenue Change in Data ARPU Data ARPU by Network Change in VOD Subscribers (as of 4Q 2005)
(in millions of Korean Won) (in Korean Won) (in Korean Won) (in thousand)
Expanded Mobile Multimedia Services Swiftly leading you into a world of Through real-time TV broadcasting using “Fimm,” a mobile multimedia service, and excitement the growth of terrestrial and satellite DMB services, KTF is strengthening its offering of video services available to mobile phone users. Also, the launch of flat-rate tariffs Revolutionary high-speed multimedia such as “Fimm Free” rate and “Data Free Carryover” rate has contributed to the mobile communications service ongoing popularization of mobile multimedia services.
The best choice for effective Suggesting a new lifestyle for New Services and convenient financial drivers with Telematics transactions KTF launched various new services in 2005, including the 3D-gaming portal GPANG, the full-scale music portal service dosirak, and Mobile Cyworld. The roll-out of these new functions is serving to create a new business model based on mobile contents, A business solution while continuing to increase the ratio of data sales in total revenues. for leading-edge companies Annual Report 2005 26 | 27 2005 Operation Review Voice Service Data Service Overseas Businesses
Quarterly Voice and Data ARPU Trends GPANG “GPANG” is KTF’s response to serious gamers who crave three-dimensional, on-the-go gaming action. The service allows users to play 3D games on dedicated, game-enabled mobile phones. Contracts with game developers, publishers and game-phone contents providers paved the way for KTF to launch this service, and attractive tariff plans for mobile gamers such as “GPANG Free” rate are offered Mobile Cy world KTF’s “Mobile Cyworld” taps into the explosive growth and widespread popularity of Korea’s Cyworld personal homepage phenomenon. This service enables users to log onto their Cyworld “mini homepage hompy” over their mobile phones and keep in touch with friends and club members anytime, anywhere. Users’ photo images can be altered ARPU to fit the mobile phone screen size, and the service has been customized so users can navigate just as they do on their online Cyworld homepages.
Pop-Up “Pop-Up” is a service that lets users select menus they use most often and place them on the main screen of their phones, allowing them to access information most vital to them easily (in Korean Won) *After sales discount, excluding interconnection and quickly. Pop-Up is also the first commercialized domestic service to provide one-touch stock update information, similar to Home Trading System(HTS). This service is even useful for older users who may not be familiar with wireless Internet features.
dosirak “dosirak” is KTF’s online/offline music portal service that lets users listen to all kinds of music and also dress up their mobile phones with personalized ring-tones and connection melodies. Through contracts with the five leading domestic manu- facturers of MP3 players, the dosirak service can be used not only on KTF’s MP3 phones, but also on general MP3 players with KTF’s Digital Rights Management standard.
K-Ways K-Ways is KTF’s telematics brand that is changing the very nature of driving pattern in Korea. Utilizing mobile communication networks and GPS, the K-Ways service guides drivers to their destination via voice and graphic instructions. Requiring no additional equipment beyond a handset, K-ways lets users choose a separate telematics kit if they prefer, or navigate via a widescreen LCDs. Through its partnerships with Hyundai Motor’s “Mozen” and Ssangyong Motor’s “Everway” navigation systems, KTF is leading the commercialization and development of the entire telematics industry.
Annual Report 2005 28 | 29 2005 Operation Review Voice Service Data Service Overseas Businesses
Strategic Investments and Alliances KTF is currently making direct overseas investments by establishing wireless internet joint ventures in major regions, as well as through strategic alliances with global leaders, aiming to take advantage of communications market liberalization along with technical advances in order to establish a future growth platform. We are also studying opportunities to use “We are expanding our global these global partnerships to advance into foreign markets with our convergence business solutions. Key Investment & Alliance Results - Cooperation agreement with Qualcomm on Brew Global Publisher business into the world market.” - 19.9% equity stake in Indonesian mobile communications - Cooperation agreement with PCCW (Hong Kong) on ring back provider, Freekom tone business - 2.55% equity stake in Indonesian mobile communications - Cooperation agreement with Infospace (U.S.) on value-added KTF seeks to overcome the limitations of the saturated domestic market provider, Mobile-8 services in North American market and build a platform for continued growth by increasing the scope of its - 16.67% joint-venture investment in Chinese handset maker, CECM - Cooperation agreement with China Telecom on 3G service overseas business and deepening its brand presence abroad. Key activi- - Alliances with HP, Microsoft and Intel for wireless internet prod- field-testing ties in this area include participation in the worldwide expansion of WCD- uct development - Alliance with Chinacom on 3G network - Cooperation agreement with China Unicom on CDMA network - Strategic partnership with NTT DoCoMo (Japan) on WCDMA MA networks and identifying new business opportunities in developing optimization and value-added services business countries where it can leverage its core capabilities, accumulated experi- ence and resources. Consulting services, exports of solutions aimed at for- Network Consulting Services eign CDMA network operators, international alliances and joint ventures, and global roaming services – these activities will pave KTF’s road to suc- Based on our nine years of CDMA network operation and marketing experiences in the Korean mobile communications market, and on our experiences as the first company in the world to commercialize mobile multimedia services, KTF pro- cess in the world market. vides diverse consulting services for clients in new overseas mobile communications markets. Key Network Consulting Results Key Marketing Consulting Results - NOC building and operation for Hutchison, Australia - Marketing consulting for Mobile-8 and Komselindo, Indonesia - Network engineering consulting for Mobile-8, Indonesia - CDMA network construction and optimization consulting for Key Wireless Internet Consulting Results Reliance, India - Wireless internet business consulting for Reliance, India - Network consulting for VIBO, Taiwan - Wireless internet business consulting for Mobile-8, Indonesia - Network construction and optimization consulting for China Unicom - 2-ring solution and consulting for China Unicom * Secured regional strongholds for globalization First Stage * Gained experience through foreign market Establishing overseas penetration Solution Exports business base (1999~2004) * Standardized overseas business manuals KTF is pursuing exports of various solutions to overseas mobile communications companies based on our wireless plat- and tools form building experience, in addition to network operation, management technology and communication network building {* Secured manpower and reinforced technology that have been industry-tested and market-proven in Korea. capabilities Key Export Results - Network management system to Hutchison, Australia Reinforced status as Asian business leader Second Stage * - Solution and technology to Fujitsu and Mitsubishi, Japan Solidifying overseas * Expanded operations into new regions - Network management system to Mobile-8, Indonesia business (2004~2005) {* Diversified business in current regions - Contents supply agreements with Mobil Action and Telcel, Mexico (wireless internet, value-added serviced, etc.) Global Roaming Service Third Stage * Make active inroads into global market through strategic alliances KTF provides global roaming service with 160 service providers in 90 countries Global Roaming Service Coverage Expanding overseas (as of Dec. 31, 2005) * Utilize overseas investment earnings to around the world through continuous expansion of global roaming agreements. business (2008~ ) GSM/CDMA roaming: 90 countries, drive M&A The world’s first commercialization of global roaming service between CDMA system 160 service providers {* Build “WCDMA belt” through strong and GSM system was inaugurated in November 2001 between KTF and * U.S.: Cingular Wireless, T-Mobile US leadership in major markets Bouygues Telecom of France. More recently, we have concentrated our pioneering * China: China Mobile, China Unicom efforts on commercializing global roaming service between WCDMA and CDMA WCDMA/WCDMA roaming: systems (including the first ever arrangement with Vodafone K.K., formerly J- 2 countries, 4 service providers phone of Japan), and have formed a strategic alliance with Japan’s NTT DoCoMo, * Japan: NTT DoCoMo, Vodafone KK which will enable expansion of global roaming service in the future WCDMA mar- * Hong Kong: Hong Kong CSL, SmarTone ket. In addition, KTF launched its “world phone” at the end of 2005, which offers roaming capabilities in 82 countries without having to change handsets, greatly enhancing convenience for roaming service users. Annual Report 2005 30 | 31 U-Care
34 Corporate Culture 36 Social Contribution
At KTF, we embrace the corporate spirit of challenge, we are committed to the principle of transparent management, and we listen first and foremost to the needs of our customers in developing innovative new products and services. We are creating a corporate culture that provides an ideal workplace for our employees and promotes a win-win approach to business through open-style partnerships with our affiliates.
Annual Report 2005 6 | 6 Corporate Culture Social Contribution
change activities cess experience. The second generation (2005) helped us cut “T“Takingaking variousvarious stepssteps toto realizerealize valuevalue - Contribution to decision-making by conveying opinions from costs and accelerate core process innovation. In the third fields to staffs generation (2006) we will implement actual innovation, pursu- - Contribution to sound corporate culture by serving as a ing customer value-centered Six Sigma. Through these activ- fromfrom anan openopen corporatecorporate culture”culture” bridge between each level of the company ities, we will concentrate on achieving our business goals and positioning Six Sigma as a regular management system. We are striving to build an open corporate culture that allows us to provide world-class Six Sigma services and to make “innovative KTF.” By cultivating complete trust and confidence Our Six Sigma program was introduced in July 2003. Since
among our staff, KTF seeks to embrace the spirit of challenge, constant change and cus- then it has been the primary motivator of work innovation Concentrate on achieving our tomer-driven innovation. activities, promoting enhancement of management quality business targets Build and raising competitiveness through fundamental process Implement actual infrastructure by Cut costs and innovation, pursuing To do this, KTF is making every effort to foster a sense of ownership and participation accumulating accelerate core innovation. KTF’s Six Sigma efforts have focused on manage- customer value-centered Positioning Six success process innovation experience Six Sigma Sigma as a among our staff through various activities focusing on change and innovation in the areas ment tasks that must be carried out to implement “Good- regular management of “people,” “process” and “product,” while fostering the growth of our human resources time” management. The first generation (2004) enabled us to system into experts who will take up the challenge of their duties with a passion. Furthermore, we eliminate flaws and build infrastructure by accumulating suc- 2004 2005 2006 are seeking to create the best working environment – what we call the “Great Workplace” – to support the aforementioned initiatives. On top of these efforts, we are executing a com- panywide Six Sigma program to enhance management quality and raise competitiveness through fundamental innovation of work processes.
Great Workplace change and innovation are disseminated and implemented throughout the entire company, thereby enabling KTF to Through our “Great Workplace” concept, KTF is working to achieve its key objectives and vision. create a foundation for each individual staff member to demonstrate his or her creativity and passion, as we believe Serving as a “change agent group” with strong support from such creativity and passion are vital to our success in an the CEO, the C&I Committee plays a pivotal role in leading industry characterized by constant change and innovation. and spreading change and innovation to realize our visions of The “Great Workplace” is a workplace where staff and man- “No. 1 Service” and “Innovative KTF.” Its primary duties are agement enjoy mutual respect and trust, and take pride in the as follows: accomplishments of each other as members of the same team. - Communicating company strategy and direction of change - Participating in and supporting change activities at the KTF seeks to create a workplace where: departmental level - Employees, their bosses and top management are united - Leading change tasks and supporting their implementation through deep trust - Employees are proud of their work and their organization - Every staff member works in an enjoyable, rewarding and Heart Board mutually supportive environment Operating under the direct authority of the CEO, the “Heart KTF continually and systematically promotes the goals of the Board” is where the seeds of KTF’s change and innovation “Great Workplace” program, with management and senior are encouraged to germinate, a place where the young and leaders taking the lead and setting examples for its imple- enthusiastic minds of our company grow into tomorrow’s mentation. With the focus on “fun,” KTF links the “Great leaders. The “Heart Board” is responsible for carrying out Workshop” program with our existing personnel systems change activities and serving as a channel of communication and innovation programs. among executives and their staffs. Through this process, members of the Board experience hands-on leadership roles and are nurtured as future key members of KTF. Their core C & I Committee activities are: KTF’s Change & Innovation (C&I) Committee was estab- - Development and discussion of measures to enhance cor- lished to reinforce understanding and commitment to the porate culture core value and strategies of the company by seeing that - Diffusion of change and innovation by carrying out their own
Annual Report 2005 34 | 35 Corporate Culture Social Contribution
“Taking various steps to Helping Underprivileged Children KTF conducted vacation classes for 1,175 underprivileged realize value from an open children in 47 schools nationwide along with Good Neighbors, a Korean NGO. In addition to providing corporate culture” balanced meals to these children, we also provide various educational programs including English, computer science, group activities, field trips, cultural and other special activities. “Good Time” love is also shared through coin donation dri- ves, providing school supplies, winter vacation ski camps and folk activities.
“Think Korea” Campaign Youth Informatization KTF’s “Think Korea” campaign represents our firm KTF’s “Friends with Dreams” has been holding determination to inspire pride and dignity among its “Bigi IT Study Room” program once a young Koreans, the future leaders of our country Staff Volunteers month since August 2003 to bring information and members of the international community, by “Friends with and education to needy youth. The Bigi IT teaching them the true history and values of Korea. Dreams” Study Room gives children from lower-income Accordingly, KTF is conducting various programs, KTF’s “Friends with families an opportunity to use and practice on including “Safeguarding Dokdo Island”, “Think Dreams” is a group of IT equipment and share in the information- Korea History Trip” celebrating the 60th anniversary 2,000 employees who communication revolution. of Independence Day, and correcting falsified history have been volunteering in Japanese textbooks, as well as operating the their time and energy to Juvenile Education “Think Korea” Corner on “Golden Bell”, a TV quiz provide meals and visit welfare facilities every “Good Time Puppet Company” established by KTF program for high school students. year since February 2002. Apart from helping out carries out child-nurturing activities through puppet In addition, we are planning a range of new “Think those in need, some members take part in envi- shows at children’s facilities and educational insti- Korea” programs, such as the “KTF Goodtime ronmental protection campaigns in each region tutes nationwide in conjunction with the Korea Theater,” the “Bigi IT Study Room” to educate and render contributions to the society in various Welfare Foundation. Christmas love and good cheer students from each regions of the country for IT, other ways. were also shared through the “Good Time Santa “Think Korea Camp” for minors who are the Show” at the end of the year. heads of families, “Baekdu Mountain Preservation,” and other activities aimed at fostering national love and devotion.
Annual Report 2005 36 | 37 Corporate Culture Social Contribution
APEC “IT Fair” During the Busan APEC summit, KTF demonstrated its Management of e-Sports advanced ubiquitous services, exhibiting seven new items at a “ubiquitous life experience” space with KT under the slogan KTF’s pro-gaming team, the “Magicns,” were created “Ubiquitous Life Partner.” HSDPA (3.5 generation WCDMA in December 1999 with the aim of building a healthy Disaster Relief for Pakistan high-speed data communication), which will soon be commer- culture for youths and to give impetus to e-sports. It is KTF arranged and delivered KRW20 cialized, was demonstrated for the first time, a world phone now distinguished e-sports team with professional million in relief aid to earthquake-stricken that can roamed 82 countries was shown, and RFID ubiqui- gamers representing Korea. In addition, KTF operates Pakistan through mileage point dona- tous service, K-live (a video remote-relay service), ‘GPANG’ the Bigi Game Training Camp, which greatly contributes tions by KTF customers, with on-the- (next-generation mobile game service), ‘dosirak’ (music portal to the expansion and popularity of e-sports in Korea and spot relief supplies and assistance service), and ‘K-ways’ and ‘Everway’ (telematics services) overseas, with members sent to take part in foreign being provided jointly with the Good were also demonstrated to APEC crowds. competitions. Neighbors Korea.
Official ‘Red Devils’ Sponsor KTF plans to promote official football fan activities with Korea’s famous “Red Devils” organization and support the Korean National Football Team at the 2006 Germany World Cup as the official Red Devils’ sponsor (www.red- devil.co.kr). KTF will also provide free world phones to Benefit Sharing the national team and the Korea Football Association, enabling recipients to use mobile communications con- In 2006, KTF launched a benefit-sharing program veniently without having to lease roaming phones during with its associated small & medium-sized enter- the World Cup final rounds or while training overseas. prises (SMEs) and established the “Cooperation Various team booster-related events in the run-up to the Support Center,” an exclusive one-stop center to 2006 Germany World Cup such as “Reds Go Together!” assist the mutual success of KTF and its associate Gov’t Commendation for are being held. SMEs via benefit sharing. Logistics sharing and Emergency Disaster Pro Golf & Pro Basketball reduced logistics outlay are other goals behind this Broadcasting win-win management initiative. Sponsorship KTF received a special commendation KTF has lined up sponsorship for U.S. LPGA pro- from the Minister of Government golfer Kim Mi-hyun, a five-time LPGA winner, and Administration and Home Affairs for the Kim Ju-hyun, the 2005 U.S. Women’s Open cham- “KTF Emergency Disaster Broadcasting” pion, helping to publicize KTF’s technologies and service. KTF, with the National Emergency services to the international audience. In addition, Management Agency, has been able to KTF has been managing the “Busan KTF Magic prevent disasters promptly during heavy Wings”, a pro-basketball team since January 2004 snow, downpours and forest fires through to help develop professional basketball in Korea emergency disaster broadcasting. and enhance brand image of KTF.
Annual Report 2005 38 | 39 U-Trust
42 MD&A 54 Report of Independent Public Accountants 56 Financial Statements 98 Glossary 99 Epilogue
Our 12.3 million customers are the real owners of KTF, and they have given us our largest net profit ever in 2005. KTF will not find rest on the laurels of this accomplishment, but seek once again to reward all of our customers and stockholders through consistent value creation and a spirit of challenge towards the Blue Ocean and become a true partner in the ubiquitous era.
Annual Report 2005 8 | 8 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Management Discussion & Analysis
1. Overview
In 2005, KTF’s total revenues stood at KRW6,052 billion, up 3.8% on a year-on-year (YoY) basis. This performance was the respectively, to record KRW608 billion and KRW417 billion. result of 9.1% increase in service revenues over the previous year to KRW 5,008 billion although the handset sales dropped A breakdown of voice revenue reveals that monthly fees and airtime charges recorded modest gains of 4.2% and 2.4% YoY by 16% YoY due to the decline in both new subscribers and handset changes. to KRW1,683 billion and KRW1,231 billion. This was due to a 3.3% YoY increase in the number of subscribers (excluding KT Despite a tariff cut that went into effect in September 2004, the company continues to achieve healthy service revenue resale subscribers) and the continued growth in high-ARPU subscribers following the introduction of MNP. In addition, due to growth mainly from bolstered data services revenue and from acquisition of high-ARPU users through Mobile Number the offering of more value-added voice services and the increased volume of mobile-to-mobile traffic, revenues generated by Portability (MNP). Consequently, operating profit soared 55.9% YoY to KRW825 billion of which service operating income value-added services and interconnection grew 8.7% and 19.1% YoY, respectively. Of particular note, other voice service constituted KRW807 billion, up 53.9% YoY. Moreover, recurring profit and net income posted substantial gains of 97.9% and sales turned in a solid 19.1% YoY increase to KRW31 billion on the back of the invigorated global roaming services. 92.7%, respectively, to KRW610.6 billion and KRW547 billion over those in 2004. Data revenue failed to meet our early estimates, but still managed to post a 17.2% YoY advance to KRW608 billion. Aided by The company’s EBITDA, calculated by adding depreciation & amortization expenses to service operating profit, posted a the increased subscriptions of monthly packet plans like “Fimm Free”, monthly fees from data services were up 21.6% YoY 20.4% YoY increase to KRW1,945 billion, while EBITDA margin (EBITDA divided by service revenues) also rose 3.6%p YoY to to KRW157 billion, while the expansion in unlimited text services drove messaging fees ahead 22.2% YoY to KRW155 billion 38.8%, enabling KTF to maintain both quantitative and qualitative revenue growth. This earnings improvement, despite of won. Although data airtime charges were down 16.2% YoY to KRW248 billion, the launch of various monthly packet plans continuous increase in subscriber base, came from our “clean marketing” efforts to stabilize market and control our means that most fees from data services are absorbed by these monthly packet plans. marketing expenses. Utilizing surplus cash flow for debt reduction, KTF slashed its debt-to-equity ratio significantly from The growth in KT resale revenues of 31.9% YoY to KRW417 billion was relatively substantial mainly attributable to the influx 150.1% to 95.9% during the year, while cutting its net debt-to-equity ratio by 72.7%p YoY to 25.1%. of subscribers and incorporation of under-estimated sales figure in 2004. Subscription fees expanded 7.3% YoY to KRW77 billion in line with the growing number of new subscribers. However, handset sales contracted by 16.0% YoY to KRW1,044 Income Statement Summary billion on declining sales to new subscribers and feeble handset replacement demand (In millions of Korean won)
2005 2004 YoY Change %Change
Total Revenues 6,051,789 5,830,818 220,971 3.8% Total Revenue (In millions of Korean won) Service revenues 5,008,217 4,589,209 419,008 9.1% Handset sales 1,043,572 1,241,609 -198,037 -16.0% 2005 2004 YoY Change %Change Total Operating expenses 5,226,993 5,301,831 -74,838 -1.4% Voice revenue 3,898,913 3,673,215 225,698 6.1% Service-related operating expenses 4,201,396 4,064,943 136,453 3.4% Monthly fees 1,683,204 1,614,611 68,593 4.2% Cost of handsets sold 1,025,598 1,236,887 -211,289 -17.1% Airtime charges 1,230,985 1,202,168 28,817 2.4% Total Operating profit 824,796 528,987 295,809 55.9% Value-added services 161,804 148,884 12,920 8.7% Service operating profit 806,822 524,265 282,557 53.9% Interconnection 1,004,406 881,347 123,059 14.0% Service operating profit ratio 16.1% 11.4% 4.7%P 41.0% Others 31,359 26,327 5,032 19.1% Handset net sales 17,974 4,722 13,252 280.6% (Sales discount) -212,845 -200,122 -12,723 6.4% Non-operating income 157,953 109,973 47,980 43.6% Data revenue 608,339 518,927 89,412 17.2% Non-operating expenses 372,096 330,350 41,746 12.6% Monthly fees 156,472 128,671 27,801 21.6% Recurring profit 610,653 308,610 302,043 97.9% Messaging fees 155,131 126,923 28,208 22.2% Income tax expenses 63,650 24,709 38,941 157.6% Airtime charge 247,604 295,295 -47,691 -16.2% Net income 547,003 283,901 263,102 92.7% Contents 37,031 20,921 16,110 77.0% EBITDA 1,944,981 1,614,911 330,070 20.4% Others 14,181 13,258 923 7.0% EBITDA Margin 38.8% 35.2% 3.6%p N/A (Sales discount) -2,081 -66,140 64,059 -96.9% Debt-to-equity ratio 95.9% 150.1% -54.2%p N/A KT Resales 416,818 315,959 100,859 31.9% Other sales 84,147 81,108 3,039 3.7% 2. Revenue Subscription fees 76,793 71,547 5,246 7.3% Others 7,353 9,561 -2,208 -23.1% The service revenue can be classified into voice revenue, data revenue, KT resale and other sales including subscription fees. Service revenue 5,008,217 4,589,209 419,008 9.1% Total service revenues rose by KRW419 billion YoY to KRW5,008 billion with voice revenue, which accounted for the largest portion, maintaining a healthy growth rate of 6.1% YoY, data revenue and KT resale showing 17.2% and 31.9% YoY growth, Handset sales 1,043,572 1,241,609 -198,037 -16.0% Total revenue 6,051,789 5,830,818 220,971 3.8%
Annual Report 2005 42 | 43 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Management Discussion & Analysis
3. Operating Results The strong service revenue performance as discussed above was the result of the increase in subscriber base and enhanced Quarterly ARPU Trends ARPU. Total subscribers as of the end of 2005 exceeded 12.3 million, showing a 4.9% YoY rise. Of the total, KTF-only (In Korean won) subscribers excluding KT resale increased by 313 thousand to 9.8 million, KT resale subscribers rose by 263 thousand to 2.5 4Q/2004 1Q/2005 2Q/2005 3Q/2005 4Q/2005 million. By network, EV-DO subscribers grew the most, rising from 1.34 million to 4.39 million. Among this total, the number of VOD subscribers soared by 82.4% YoY to 1.52 million. The increase in EV-DO subscribers, and particularly the explosive Voice ARPU 25,003 24,409 25,177 24,956 25,381 growth of VOD subscribers, was a major driver behind increased Data ARPU. The market share of KTF, as of the end of 2005, Data ARPU 5,144 5,028 5,154 5,394 5,433 edged up 0.03%p YoY from the end of 2004 to 32.09%, peaking at 32.2% at the end of November 2005 before dropping Total ARPU / ARPU 30,147 29,437 30,331 30,350 30,814 back to near the previous year-end level. This coincides with year-end mandatory deactivation of long-term delinquent Voice ARPU 82.9% 82.9% 83.0% 82.2% 82.4% Data ARPU as % of total / Data ARPU 17.1% 17.1% 17.0% 17.8% 17.6% subscribers, and reflects KTF’s policy of reducing profitless customers and focusing on outstanding customers. -Excluding interconnection, net sales basis, excluding KT resale Subscribers (In thousands)
2005 2004 YoY Change %Change Data ARPU Trends by Network (In Korean won) Total subscribers 12,302 11,729 573 4.9% KTF-only subscribers 9,809 9,499 310 3.3% 4Q/2004 1Q/2005 2Q/2005 3Q/2005 4Q/2005 KT Resale subscribers 2,493 2,230 263 11.8% 1X 4,527 4,510 4,401 4,497 4,501 Subscribers by network 12,302 11,729 573 4.9% EV-DO 9,087 8,093 7,388 7,399 6,737 EV-DO 4,392 3,055 1,337 43.8% VOD 11,732 10,499 9,486 10,417 10,410 (VOD) (1,523) (835) (688) (82.4%) 2G 2,226 1,930 1,669 1,876 2,060 1X 7,336 7,440 -104 -1.4% -Excluding interconnection, gross sales basis, excluding KT resale 2G 575 1,234 -659 -53.4% Market share 32.09% 32.06% 0.03%p N/A
Quarterly ARPU (excluding interconnection fees, net sales basis) in 2005 showed continued improvement over the previous year, with 4Q ARPU up KRW667 to KRW30,814. Voice ARPU in 4Q 2005 rose KRW378 to KRW25,381, while Data ARPU climbed KRW289 to KRW5,433. Expressed as percentages, these results show 0.5% and 5.6% increases respectively. That is, the increase rate of Data ARPU exceeded that of Voice ARPU, with Data ARPU as a portion of total ARPU growing from 17.1% in 4Q 2004 to 17.6% in 4Q 2005. Looking at Data ARPU trends by network, Data ARPU in 4Q 2005 from EV-DO network was KRW6,737. Of that subscriber segment, Data ARPU from VOD network reached KRW10,410, which is 3~5 times higher than that from 2G networks.
Annual Report 2005 44 | 45 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Management Discussion & Analysis
4. Operating Expenses
Service-related operating expenses in 2005 rose 3.4% YoY to KRW4,201 billion. Saturation in the domestic market led to Marketing expenses, a key item in operating expenses, contracted 4.9% YoY or KRW49 billion to KRW956 billion, despite the minus handset sales growth, and thus a 17.1% YoY reduction in cost of handsets sold to KRW1,026 billion. The major items net addition of 310 thousand subscribers (excluding KT resale portion). In addition, the ratio of service revenue to marketing classified as service-related operating expenses are interconnection expenses, repairs & maintenance, and depreciation & expenses declined by 2.8%p YoY to 19.1%. Among marketing expenses, sales commission maintained the previous year’s amortization costs. Interconnection expenses grew on the back of higher land-to-mobile & mobile-to-mobile traffics and rising level at KRW721 billion, while sales promotion expenses fell 20.0% YoY to KRW131 billion. Advertising costs were down interconnection revenues. Repairs and maintenance trended upward amid additional relocation of repeaters & base stations 15.5% YoY to KRW104 billion. These reductions in marketing expenses are the result of our efforts to control marketing and mounting repair and maintenance activities for obsolete equipment. Depreciation and amortization cost edged up expenses through cost-effective marketing activities. 4.4%YoY to KRW1,138 billion in line with growing depreciation cost from continuing investment in new networks. Bad-debt expenses galloped 113.3% YoY to KRW54 billion, and this was a result of KTF’s conservative presumption of its allowance Marketing Expenses rate and disposal of bad debts. The company’s universal service obligation(USO) fell 56.0% YoY to KRW13.5 billion. This (In millions of Korean won) reflects the effect of settlement for advanced USO payment in 2004, which was higher than the actual level of USO 2005 2004 YoY Change %Change determined in 2005. Sales commission 721,154 718,090 3,064 0.4% Promotion expenses 130,911 163,653 -32,742 -20.0% Operating Expenses Advertising expenses 104,100 123,261 -19,161 -15.5% (In millions of Korean won) Total marketing expenses 956,165 1,005,004 -48,839 -4.9% 2005 2004 YoY Change %Change Marketing expenses/ Service revenues 19.1% 21.9% -2.8%P -12.8% Salary and wages 228,063 222,064 5,999 2.7% Commission expenses 400,203 405,294 -5,091 -1.3% Interconnection expenses 603,160 506,982 96,178 19.0% International interconnection expenses 10,023 5,953 4,070 68.4% Marketing expenses Contents cost CP3,335 2874 461 16.0% Rentn 114,028 113,441 587 0.5% 10.9% Depreciation & amortization cost 1,138,159 1,090,645 47,514 4.4% 12.3% Lease line fees 360,655 357,257 3,398 1.0% Electricity/water/light & heat 54,533 49,362 5,171 10.5% 13.7% Repairs & maintenance 74,337 58,302 16,035 27.5% 16.3% Lease 61,307 61,307 0 0.0% 2004 2005 Marketing expenses 956,165 1,005,004 -48,839 -4.9% 75.4% Bad-debt expenses 54,282 25,448 28,834 113.3% Tax and dues 44,199 45,170 -971 -2.1% 71.4% Universal service obligations 13,455 30,557 -17,102 -56.0% Other 85,490 85,285 205 0.2% Service related operating expenses 4,201,396 4,064,943 136,453 3.4% Cost of handsets sold 1,025,598 1,236,887 -211,289 -17.1% Sales commission Total 5,226,993 5,301,831 -74,838 -1.4% Promotion expenses Advertising expenses
Annual Report 2005 46 | 47 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Management Discussion & Analysis
Marketing Expenses Breakdown (In millions of Korean won) 5. EBITDA & Capex 2005 2004 YoY Change %Change In 2005, operating profit and net income both registered significant growth, with EBITDA also posting a solid 20.4% YoY Subscriber acquisition expenses 374,862 330,533 44,329 13.4% increase to KRW1,945 billion. The company’s EBITDA margin – EBITDA divided by service revenue – climbed 3.6%p YoY to Sales commission 363,514 286,951 76,563 26.7% 38.8%. This reflected KTF’s improved profitability in 2005, contributed by the solid growth in service revenue but lower Promotion expenses 11,348 43,582 -32,234 -74.0% marketing expenses. Capital expenditure (CAPEX) in 2005 was down by 24.5% YoY to KRW714 billion, though this reflects Subscriber acquisition cost per subscriber (won) 107,353 105,119 2,234 2.1% some facility investments initially slated for 2005 being carried over to 2006. Subscriber retention expenses 477,203 551,210 -74,007 -13.4% Sales commission 357,639 431,139 -73,500 -17.0% EBITDA & Capex Promotion expenses 119,564 120,071 -507 -0.4% (In millions of Korean won) Advertising Expenses 104,100 123,261 -19,161 -15.5% Total marketing expenses 956,165 1,005,004 -48,839 -4.9% 2005 2004 YoY Change %Change
Service operating profit 806,822 524,265 282,557 53.9% Marketing Expenses Breakdown Depreciation & amortization 1,138,159 1,090,646 47,513 4.4% EBITDA 1,944,981 1,614,911 330,070 20.4% 10.9% Subscriber acquisition expenses EBITDA Margin 38.8% 35.2% 3.6%p N/A 12.3% 32.9% Subscriber retention expenses Advertising Expenses CAPEX 713,789 945,500 -231,711 -24.5% 49.9% -Excluding handsets 2004 2005 39.2%
54.8% 6. Non-operating Gains and Losses
Interconnection profits in 2005 posted a moderate 7.2% YoY growth to KRW401 billion, while interconnection revenues and KTF recorded a total non-operating loss of KRW214 billion in 2005, representing a slight improvement from the non-operating interconnection expenses both increased by a substantial 14.0% and 19.0% YoY, respectively, to KRW1,004 billion and loss of KRW220 billion in 2004. This result reflects KRW48 billion improvement in non-operating gains over the previous year, KRW603 billion. Behind this growth were traffic increases in both inbound and outbound call. whereas non-operating expenses were increased only KRW42 billion YoY. As for interconnection revenues, the increased volume of mobile-to-mobile(MM) traffic and the revision of previously presumed revenue, the level of which was lower than real revenue, were the main cause of the revenue growth. Net interest losses amounted to KRW175 billion, slipping 16.0% from a year earlier, contributed by redemption of interest- bearing debts as well as a lower interest rate condition In the case of interconnection expenses, due to the increases in both interconnection rate for land-to-mobile(LM) traffic as well as traffic volume itself, overall interconnection expenses rose from KRW507 billion to KRW603. Net foreign exchange gains in 2005 contracted 39.8% YoY, falling KRW9 billion to KRW14 billion, owing to less volatility in F/X rates in 2005 than in 2004. KTF sought to minimize F/X-related risk from its foreign currency-denominated liabilities and Interconnection-related Revenues/Expenses (In millions of Korean won) expenditures through derivative products, thereby hedging the potential risks.
2005 2004 YoY Change %Change Other non-operating gains and losses both registered huge jumps of 84.7% and 73.3% YoY, respectively, the primary factor Interconnection revenues 1,004,437 881,353 123,084 14.0% being KRW58.5 billion in losses on the disposition of tangible assets including outdated network-machinery and other Land to Mobile (LM) 356,919 353,863 3,056 0.9% equipment. Mobile to Mobile (MM) 647,518 527,490 120,028 22.8% Interconnection expenses 603,160 506,982 96,178 19.0% Land to Mobile (LM) 112,149 103,161 8,988 8.7% Mobile to Mobile (MM) 491,011 403,821 87,190 21.6% Interconnection profits 401,277 374,371 26,906 7.2% Land to Mobile (LM) LM 244,770 250,702 -5,932 -2.4% Mobile to Mobile (MM) 156,507 123,669 32,838 26.6%
Annual Report 2005 48 | 49 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Management Discussion & Analysis
Non-operating Performance 8. Balance Sheet Summary (In millions of Korean won) Total assets rose 3.0% YoY, up KRW240 billion to KRW8,200 billion at 2005-end. The primary contributor was an increase in 2005 2004 YoY Change %Change current assets consisting of short-term financial instruments and short-term investment capital, the main item being Interest income 10,058 12,691 -2,633 -20.7% investment from NTT DoCoMo in conjunction with KTF’s partnership with the Japanese firm signed in the final quarter of Interest expenses 184,695 220,606 -35,911 -16.3% 2005. Fixed assets retreated 8.9% YoY, down KRW560 billion. There was a decrease in tangible assets, as CAPEX spending Net interest gains -174,637 -207,915 33,278 -16.0% was insufficient to cover depreciation, while some superannuated equipment was disposed of. Total liabilities receded F/X-related gains 14,501 25,069 -10,568 -42.2% KRW746 billion YoY to KRW4,013 billion through redemption of borrowings and debentures. F/X-related losses 593 1,971 -1,378 -66.9% Total shareholders’ equity grew by KRW1,004 billion YoY to KRW4,187 billion, with the capital increase from KTF’s alliance Net F/X gains 13,908 23,098 -9,190 -39.8% with NTT DoCoMo contributing to gains recorded in capital stock and capital surplus, and boosted retained earnings by strong Other non-operating gains 133,394 72,213 61,181 84.7% net income. Other non-operating losses 186,807 107,775 79,032 73.3% Net other non-operating gains -53,414 -35,561 17,853 50.2% Balance Sheet Summary Total non-operating gains 157,953 109,973 47,980 43.6% (In millions of Korean won) Total non-operating losses 372,096 330,350 41,746 12.6% Net total non-operating income -214,143 -220,377 6,234 -2.8% 2005 2004 YoY Change %Change Current assets 2,487,129 1,687,502 799,627 47.4% Quick assets 2,274,312 1,451,733 822,578 56.7% Inventories 212,818 235,769 -22,951 -9.7% Fixed assets 5,713,042 6,272,928 -559,886 -8.9% Investment assets 579,541 532,939 46,602 8.7% 7. Income Tax Expenses Tangible assets 4,091,233 4,600,893 -509,660 -11.1% Intangible assets 1,042,268 1,139,096 -96,828 -8.5% Income tax expenses for 2005 surged 157.6% YoY to KRW63.6 billion. This was the result of the aforementioned rise of 56% Total assets 8,200,171 7,960,430 239,741 3.0% YoY in operating profit leading to a huge increase in recurring profit over the previous year. Although the statutory income tax Current liabilities 1,726,732 2,366,726 -639,994 -27.0% rate was 27.5%, the effective tax rate for KTF in 2005 was reduced to 10.4% thanks to the utilization of accumulated tax Fixed liabilities 2,286,577 2,410,947 -124,370 -5.2% credit carried forward as well as temporary differences in deferred income tax. While this rate represents a 2.4%p YoY Total liabilities 4,013,309 4,777,673 -764,364 -16.0% increase over the figure for 2004, it is still quite low. However, as the favorable tax treatment KTF has enjoyed since 2001 Capital stock 1,044,181 955,703 88,478 9.3% following its merger with KTM.com is soon to expire, higher effective tax rates are expected henceforth. Capital surplus 1,731,321 1,325,488 405,833 30.6% Income Tax Expenses Retained earnings 1,419,196 985,275 433,921 44.0% (In millions of Korean won) Capital adjustment -7,836 -83,709 75,873 -90.6% Total shareholders’ equity 4,186,863 3,182,757 1,004,105 31.5% 2005 2004 YoY Change %Change Total liabilities and total shareholders’ equity 8,200,171 7,960,430 239,741 3.0% Before-tax net income 610,653 308,610 302,043 97.9% Debt-to-equity ratio 95.9% 150.1% -54.2%p N/A Income tax expenses 63,650 24,709 38,941 157.6% Net debt-to-equity ratio 25.1% 97.8% -72.7%p N/A Effective income tax rate 10.4% 8.0% 2.4%p N/A Net debt-to-equity ratio (including accounts payable for W-CDMA spectrum license) 38.5% 114.8% -76.3%p N/A
Annual Report 2005 50 | 51 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Management Discussion & Analysis
9. Borrowings Cash Flows (In millions of Korean won) Total borrowings as of year-end 2005 sharply declined to KRW2,017 billion, down 36.0% YoY or KRW1,133 billion. 2005 2004 YoY Change %Change Contributing to this achievement, short-term borrowings of KRW300 billion were completely redeemed, while debentures (including current portion) were slashed by 29.2% YoY or KRW833 billion to KRW2,017 billion. With this reduction in Cash flows from operating activities 2,220,256 907,626 1,312,630 144.6% borrowings, the company’s debt-to-equity ratio fell to 95.9%, and excluding accounts payable for WCDMA, spectrum license, Net income 547,003 283,901 263,102 92.7% KTF’s net debt-to-equity ratio stood at 25.1% at 2005-end. Addition of expenses not involving cash outflows 1,405,027 1,250,783 154,244 12.3% Deduction of revenues not involving cash inflows -81,798 -24,280 -57,518 236.9% Borrowings Change in working capital 350,024 -602,778 952,802 -158.1% (In millions of Korean won) Cash flows from investing activities -1,280,100 -919,138 -360,962 39.3% 2005 2004 YoY Change %Change Cash inflows from investing activities 686,682 203,704 482,978 237.1% Cash outflows from investing activities -1,966,782 -1,122,842 -843,940 75.2% Short-term borrowings 0 300,000 -300,000 -100.0% Sub total 940,156 -11,512 951,668 -8,266.7% Debentures 2,016,557 2,849,470 -832,913 -29.2% Cash flows from financing activities -681,220 29,663 -710,883 -2,396.5% Current portion 339,862 1,030,288 -690,426 -67.0% Cash inflows from financing activities 962,716 7,045,396 -6,082,680 -86.3% Balance 1,676,695 1,819,182 -142,487 -7.8% Cash outflows from financing activities -1,643,936 -7,015,733 5,371,797 -76.6% Total 2,016,557 3,149,470 -1,132,913 -36.0% Net increase in cash 258,936 18,151 240,785 1,326.6% Beginning of the year 28,887 10,736 18,151 169.1% End of the year 287,823 28,887 258,936 896.4%
10. Cash Flows
Cash flows from operating activities in 2005 expanded a staggering 144.6% YoY, up KRW1,313 billion to KRW2,220 billion. Expenses not involving cash outflows such as depreciation, bad-debt expenses, loss on disposition of tangible assets, and 11. Shareholder Return Policy loss on trading of derivatives, increased by KRW154 billion to KRW1,405 billion. Additionally, change in working capital While maintaining its potential for growth, KTF makes various efforts to share a portion of the profits of its operations with reversed from a cash outflow of KRW603 billion in 2004 to a cash inflow of KRW350 billion in 2005. Such increase in cash stockholders. As part of this policy, the company conducted a large-scale stock buyback and cancellation initiative in 2004, inflows from change in working capital resulted from the fact that the sizeable amount of account receivables and prepaid and continued to reward shareholders in 2005. KTF’s total payout ratio in the form of cash dividends and stock payments recorded in 2004 dwindled in 2005, and that inventories which had surged in 2004 fell down in 2005, while buyback/cancellation has steadily grown from 35% of net income in 2003 to 40% in 2004, 50% in 2005, and also 50% accounts payables in 2005 rather augmented. planned for 2006. Henceforth, other than the portion returned to shareholders, KTF will use its retained earnings to invest in Cash flows from investment activities registered a KRW1,280 billion outflow in 2005, increased from KRW919 billion outflow the future growth business of WCDMA, and will continue to share its success with shareholders. in 2004. Investment in tangible assets posted a year-on-year decline, with CAPEX slipping by KRW232 billion to KRW714 Shareholder Return billion in 2005, but acquisitions of short-term financial instruments and short-term investment capital showed a significant (In millions of Korean won) increase over 2004, accounting for an expansion in overall cash outflows from investment activities. However, the aforementioned short-term financial instruments and short-term investment capital were actually temporary capital inflows 2005 2004 YoY Change %Change resulting from KTF’s alliance with NTT DoCoMo formalized in 4Q 2005. Retained earnings paid out as dividends 120,688 99,715 20,973 21.0%
Cash flows from financing activities recorded an inflow of KRW30 billion in 2004, though an outflow of KRW681 was Retained earnings reserved for business expansion 350,000 30,000 320,000 1,066.7% registered in 2005. This turnaround was largely due to repayment of borrowings and restraint in new borrowing. As a result, Stock buyback 13,368 146,064 -132,696 -90.8% cash held by the company increased by KRW259 billion to KRW288 billion at the end of 2005. Disposition of treasury stock 69,108 0 69,108 N/A Cancellation of treasury stock 13,366 149,853 -136,487 -91.1%
Annual Report 2005 52 | 53 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Independent Auditors’ Report
To the Shareholders and Board of Directors of KT Freetel Co., Ltd.:
We have audited the accompanying non-consolidated balance sheets of KT Freetel Co., Ltd. (the “Company”) as of Our audits also comprehended the translation of Korean Won amounts into U.S. dollar amounts and, in our opinion, such December 31, 2005 and 2004, and the related non-consolidated statements of income, appropriations of retained earnings translation has been made in conformity with the basis in Note 2. Such U.S. dollar amounts are presented solely for the and cash flows for the years then ended, all expressed in Korean won. These financial statements are the responsibility of the convenience of readers outside of Korea. Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. Accounting principles and auditing standards and their application in practice vary among countries. The accompanying We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards financial statements are not intended to present the financial position, results of operations and cash flows in accordance require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally financial statements. An audit also includes assessing the accounting principles used and significant estimates made by accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a those knowledgeable about Korean accounting procedures and auditing standards and their application in practice. reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004, and the results of its operations, changes in its retained earnings and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea.
Anjin Deloitte LLC Seoul, Korea January 20, 2006
This report is effective as of January 20, 2006, the auditors’ report date. Certain subsequent events or circumstances may have occurred between the auditors’ report date and the time the auditors’ report is read. Such events or circumstances could significantly affect the accompanying financial statements and may result in modification to the auditors’ report.
Annual Report 2005 54 | 55 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Non-Consolidated Balance Sheets
(In millions of Korean won, In thousands of U.S dollars) (In millions of Korean won, In thousands of U.S dollars)
2005 2004 2005 2004 2005 2004 2005 2004
ASSETS Intangibles (Note 10) 1,042,268 1,139,096 1,031,949 1,127,818 CURRENT ASSETS: Other non-current assets 12,991 9,532 12,861 9,438 Cash and cash equivalents (Note 19) 287,823 28,887 $ 284,973 $ 28,601 5,713,042 6,272,929 5,656,477 6,210,820 Short-term financial instruments 430,000 - 425,743 - Total Assets 8,200,171 7,960,430 $ 8,118,982 $ 7,881,613
Short-term investment securities (Note 6) 248,028 6,518 245,572 6,454 LIABILITIES AND SHAREHOLDERS’ EQUITY Trade accounts and notes receivable, net of CURRENT LIABILITIES: allowance for doubtful accounts of 148,416 million in Short-term borrowings (Note 12) - 300,000 $ - $ 297,030 2005 and 140,315 million in 2004, and net of discount on Trade accounts and notes payable (Note 21) 293,889 222,099 290,979 219,900 present value of 4,088 million in 2005 and 5,145 Current portion of debentures, net of discount on million in 2004(Notes 4 and 21) 1,064,561 1,181,886 1,054,021 1,170,184 debentures of 418 million in 2005 and 565 Accounts receivable-other, net of allowance for million in 2004, and addition of accrued interest of doubtful accounts of 9,576 million in 2005 15,731 million in 2004 (Note 13) 339,862 1,030,288 336,497 1,020,087 and 2,577 million in 2004 (Notes 19 and 21) 106,259 97,688 105,207 96,721 Accounts payable-other (Notes 19 and 21) 715,332 499,383 708,250 494,438 Prepaid expenses 12,472 11,178 12,349 11,067 Accrued expenses 136,719 142,709 135,365 141,296 Inventories, net of allowance of 10,459 million in 2005 and Withholdings 101,268 124,352 100,265 123,121 1,681 million in 2004 212,818 235,769 210,711 233,434 Income tax payable 93,658 21,908 92,730 21,691 Short-term loans (Note 5) 7,777 19,606 7,700 19,412 Current portion of reserve for liabilities (Note 16) 9,096 - 9,006 - Current portion of deferred income tax assets (Note 18) 91,899 74,953 90,989 74,211 Other current liabilities 36,908 25,987 36,543 25,730 Other current assets 25,492 31,016 25,240 30,709 1,726,732 2,366,726 1,709,635 2,343,293 2,487,129 1,687,501 2,462,505 1,670,793 LONG-TERM LIABILITIES: NON-CURRENT ASSETS: Long-term accounts payable-other, net (Note 15) 559,540 538,207 554,000 532,878 Long-term financial instruments (Note 3) 16 19 15 18 Debentures, net (Note 13) 1,676,695 1,819,182 1,660,094 1,801,170 Long-term investment securities (Note 7) 119,104 144,373 117,925 142,943 Accrued severance indemnities, net (Note 2) 40,436 36,674 40,035 36,310 Long-term loans (Notes 5 and 19) 36,591 37,746 36,229 37,372 Reserve for liabilities (Note 16) 9,800 15,429 9,703 15,277 Investment securities using the equity method (Note 8) 77,284 18,905 76,519 18,718 Other long-term liabilities 105 1,455 106 1,441 Long-term trade accounts and notes receivable, net of 2,286,576 2,410,947 2,263,938 2,387,076 discount on present value of Total Liabilities 4,013,308 4,777,673 3,973,573 4,730,369 4,565 million in 2005 and 6,336 million in 2004 (Note 2) 55,958 83,046 55,404 82,224 Guarantee deposits, net of allowance for doubtful accounts of 2,012 million in 2004 219,473 205,101 217,300 203,070 Deferred income tax assets (Note 18) 58,124 34,218 57,549 33,879 Property and equipment, net (Notes 9 and 11) 4,091,233 4,600,893 4,050,726 4,555,340
(continued)
Annual Report 2005 56 | 57 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Non-Consolidated Balance Sheets Non-Consolidated Statements of Income (continued)
(In millions of Korean won, In thousands of U.S dollars) (In millions of Korean won, In thousands of U.S dollars)
2005 2004 2005 2004 2005 2004 2005 2004
SHAREHOLDERS’ EQUITY: OPERATING REVENUE (Notes 20, 21 and 23) 6,051,789 5,830,818 $ 5,991,870 $ 5,773,087 Common stock (Note 17) 1,044,181 955,703 1,033,843 946,240 OPERATING EXPENSES (Notes 20 and 21) 5,226,993 5,301,831 5,175,241 5,249,337 Paid-in capital in excess of par value (Note 17) 1,731,321 1,325,489 1,714,179 1,312,365 OPERATING INCOME 824,796 528,987 816,629 523,750 Retained earnings 1,419,196 985,275 1,405,145 975,520 OTHER INCOME (EXPENSES), NET: Capital adjustments: Interest income 10,058 12,691 9,958 12,566 Treasury stock (Note 17) (2,076) (93,799) (2,056) (92,870) Rental income 9,224 10,452 9,132 10,348 Gain on valuation of available-for-sale securities (Notes 6 and 7) 6,179 5,025 6,117 4,975 Gain on foreign currency transactions, net 6,858 5,269 6,790 5,216 Gain on valuation of investment securities using the Gain on foreign currency translation, net 7,050 17,830 6,980 17,653 equity method, net (Note 8) 557 - 552 - Interest expense (184,695) (220,606) (182,866) (218,421) Loss on disposal of treasury stock (Note 17) (17,457) - (17,284) - Loss on disposal of trade accounts and notes receivable (Note 4) (11,862) (11,816) (11,744) (11,699) Stock compensation (Note 17) 4,962 5,064 4,913 5,014 Gain on disposal of short-term investment securities, net 8,713 437 8,626 433 Total Shareholders’ Equity 4,186,863 3,182,757 4,145,409 3,151,244 Gain on valuation of short-term investment securities (Note 6) 97 - 96 - Total Liabilities and Shareholders’ Equity Gain on valuation using the equity method, net (Note 8) 2,072 1,590 2,052 1,574 8,200,171 7,960,430 $ 8,118,982 $ 7,881,613 Gain (loss) on disposal of long-term investment securities, net 394 (3,447) 390 (3,413) See accompanying notes to non-consolidated financial statements. Loss on disposal of property and equipment, net (58,520) (13,840) (57,940) (13,703) Impairment loss on investment securities (Note 7) (25,131) (45,856) (24,882) (45,402) Loss on valuation of currency options (Note 14) (2,340) (1,349) (2,317) (1,336) Loss on transaction of currency option (7,948) - (7,870) - Other, net 31,887 28,268 31,572 27,989 (214,143) (220,377) (212,023) (218,195) ORDINARY INCOME 610,653 308,610 604,606 305,555 EXTRAORDINARY ITEM - - - - INCOME BEFORE INCOME TAX 610,653 308,610 604,606 305,554 INCOME TAX EXPENSE (Note 18) (63,650) (24,709) (63,019) (24,464) NET INCOME
547,003 283,901 $ 541,587 $ 281,091 EARNINGS PER SHARE (Note 2) 3,012 1,545 $ 2.982 $ 1.530 DILUTED EARNINGS PER SHARE (Note 2) 3,012 1,514 $ 2.982 $ 1.530
See accompanying notes to non-consolidated financial statements.
Annual Report 2005 58 | 59 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Non-Consolidated Statements of Non-Consolidated Statements of Appropriations of Retained Earnings Cash Flows
(In millions of Korean won, In thousands of U.S dollars) (In millions of Korean won, In thousands of U.S dollars)
2005 2004 2005 2004 2005 2004 2005 2004
RETAINED EARNINGS BEFORE APPROPRIATIONS: CASH FLOWS FROM OPERATING ACTIVITIES: Unappropriated retained earnings carried over from prior years 16,174 21,813 $ 16,014 $ 21,597 Net income 547,003 283,901 $ 541,587 $ 281,091 Retirement of treasury stock (Note 17) (13,366) (149,853) (13,234) (148,370) Addition of expenses not involving cash outflows: Net income 547,003 283,901 541,587 281,091 Loss on disposal of property and equipment, net 58,520 13,840 57,940 13,703 549,811 155,861 544,367 154,318 Depreciation 1,037,761 992,900 1,027,487 983,069 APPROPRIATIONS: Amortization of intangibles 100,398 97,745 99,404 96,778 Legal reserve 12,069 9,972 11,950 9,873 Long-term accrued interest - 7,643 - 7,567 Loss on disposal of treasury stock 17,457 - 17,284 - Amortization of discounts on debentures 5,385 12,789 5,332 12,662 Reserve for business expansion 350,000 30,000 346,535 29,703 Amortization of discounts on long-term accounts payable-other 21,334 19,445 21,123 19,253 Dividends (Note 17) 120,688 99,715 119,493 98,728 Provision for severance indemnities 14,453 12,130 14,309 12,010 500,214 139,687 495,262 138,304 Loss on disposal of trade accounts and notes receivable 11,862 11,816 11,744 11,699 UNAPPROPRIATED RETAINED EARNINGS TO Loss on disposal of long-term investment securities, net - 3,447 - 3,413 BE CARRIED FORWARD TO SUBSEQUENT YEAR 49,597 16,174 $ 49,105 $ 16,014 Stock compensation 5,160 2,409 5,108 2,386 Impairment loss on investment securities 25,131 45,856 24,882 45,402 See accompanying notes to non-consolidated financial statements. Bad debt expense 54,282 25,448 53,745 25,196 Loss on valuation of currency options 2,340 1,349 2,317 1,336 Loss on transaction of currency options 7,948 - 7,870 - Other 349 1,788 344 1,770 1,344,923 1,248,605 1,331,605 1,236,244 Deduction of revenues not involving cash inflows: Gain on foreign currency translation, net 7,050 17,830 6,980 17,653 Interest income 2,828 - 2,800 - Gain on disposal of short-term investment securities, net 8,713 437 8,626 433 Gain on valuation of short-term investment securities, net 97 - 96 - Gain on valuation using the equity method, net 2,072 1,590 2,052 1,574 Gain on disposal of long-term investment securities 394 - 390 - Other 539 2,247 533 2,225 21,693 22,104 21,477 21,885 Changes in assets and liabilities resulting from operations: Decrease (Increase) in trade accounts and notes receivable 21,224 (424,632) 21,014 (420,427) Increase in accounts receivable-other (14,725) (19,805) (14,579) (19,609) Decrease (Increase) in prepaid expenses (1,295) 9,094 (1,282) 9,004
(continued)
Annual Report 2005 60 | 61 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Non-Consolidated Statements of Cash Flows (continued)
(In millions of Korean won, In thousands of U.S dollars) (In millions of Korean won, In thousands of U.S dollars)
2005 2004 2005 2004 2005 2004 2005 2004
Decrease (Increase) in inventories 22,951 (72,123) 22,724 (71,409) Payment of guarantee deposits (55,187) (27,599) (54,641) (27,326) Decrease (Increase) in other current assets 5,243 (19,745) 5,191 (19,550) Acquisition of property and equipment (714,644) (945,623) (707,568) (936,260) Decrease (Increase) in long-term trade accounts and notes Increase in intangibles (3,482) (6,445) (3,448) (6,382) receivables 28,858 (83,046) 28,572 (82,224) Payment of long-term loans (13,427) (22,023) (13,294) (21,805) Increase in deferred income tax assets (43,196) (14,914) (42,768) (14,767) Other (11,621) (782) (11,505) (774) Payment of severance indemnities (10,928) (7,996) (10,820) (7,917) (1,966,782) (1,122,842) (1,947,309) (1,111,725 Increase in trade accounts and notes payable 71,790 26,151 71,080 25,893 Net cash used in investing activities (1,280,100) (919,136) (1,267,425) (910,038) Increase (Decrease) in accounts payable-other 216,490 (82,550) 214,346 (81,732) CASH FLOWS FROM FINANCING ACTIVITIES: Increase (Decrease) in accrued expenses (5,990) 31,713 (5,931) 31,399 Cash inflows from financing activities Increase (Decrease ) in withholdings (23,085) 49,568 (22,856) 49,078 Proceeds from short-term borrowings 200,000 5,770,000 198,020 5,712,871 Increase (Decrease) in income tax payable 71,750 (13,190) 71,039 (13,059) Proceeds from issuance of debentures 199,297 1,275,396 197,324 1,262,768 Increase in other current liabilities 7,232 11,765 7,161 11,648 Paid-in capital increase 494,311 - 489,416 - Decrease in National Pension 135 144 134 143 Disposal of treasury stock 69,108 - 68,424 - Increase in other long-term liabilities 3,569 6,787 3,533 6,719 962,716 7,045,396 953,184 6,975,639 350,023 (602,779) 346,558 (596,810) Cash outflows from financing activities Net cash provided by operating activities 2,220,256 907,623 2,198,273 898,640 Repayment of short-term borrowings (500,000) (5,720,000) (495,050) (5,663,366) CASH FLOWS FROM INVESTING ACTIVITIES: Repayment of accounts payable-other - - - - Cash inflows from investing activities Repayment of current portion of debentures (1,030,853) (1,055,529) (1,020,647) (1,045,078) Collection of short-term loans Acquisition of treasury stock (13,368) (146,064) (13,236) (144,618) 24,242 22,724 $ 24,002 $ 22,499 Dividends (99,715) (94,137) (98,728) (93,205) Proceeds from sale of long-term investment securities 1,151 18,688 1,139 18,503 Other - (3) - (3) Disposal of short-term investment securities 119,098 100,437 117,919 99,443 (1,643,936) (7,015,733) (1,627,661) (6,946,270) Withdrawal of guarantee deposits 40,168 58,670 39,771 58,089 Net cash provided by (used in) financing activities (681,220) 29,663 (674,476) 29,369 Withdrawal of short term financial instruments 371,300 - 367,624 - NET INCREASE IN CASH AND CASH EQUIVALENTS 258,936 18,150 256,372 17,971 Proceeds from disposal of property and equipment 127,561 2,923 126,298 2,894 CASH AND CASH EQUIVALENTS, BEGINNIG OF YEAR 28,887 10,737 28,601 10,630 Proceeds from disposal of intangible assets 464 236 459 233 CASH AND CASH EQUIVALENTS, END OF YEAR Other 2,698 28 2,672 28 287,823 28,887 $ 284,973 $ 28,601 686,682 203,706 679,884 201,687 TRANSACTIONS NOT INVOLVING CASH: Cash outflow from financing activities Transfer of trade accounts and notes receivable to Purchase of short-term financial instruments (801,300) - (793,366) - long-term investments securities 25,224 30,681 $ 24,974 $ 30,526 Purchase of short-term investment securities (350,000) (100,000) (346,535) (99,010) Transfer of debentures to current portion 339,862 1,014,556 336,497 1,004,511 Purchase of long-term investment securities (531) (7,370) (526) (7,297) Transfer of long-term loans to short-term loans 34,534 26,752 33,363 25,845 Purchase of investment securities using the equity method (16,590) (13,000) (16,426) (12,871) Transfer of long-term investments securities using
(continued) See accompanying notes to non-consolidated financial statements.
Annual Report 2005 62 | 63 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Non-Consolidated Statements of Notes to Non-Consolidated Cash Flows (continued) Financial Statements
(In millions of Korean won, In thousands of U.S dollars) 1. GENERAL: 2005 2004 2005 2004 KT Freetel Co., Ltd. (the “Company”) was incorporated on January 3, 1997, under the Commercial Code of the Republic of investments securities 38,659 - 38,276 - Korea, and listed on the Korean Securities Dealers Association Automated Quotation System (the KOSDAQ) in December Transfer of construction in progress 717,941 711,701 624,200 704,654 1999. On April 19, 2004, the Company transferred from the KOSDAQ to the Korea Stock Exchange. The Company is currently Transfer of gain on valuation of available-for-sale engaged in providing personal communications service (“PCS”), value added services, and sale and lease of personal securities to deferred assets 2,344 - 2,131 - communication devices.
Transfer of other long-term liabilities to other current liabilities 10,445 - 9,495 - As of December 31, 2005, the shareholders of the Company are as follows: Retirement of treasury stock 13,366 - 12,151 -
Number of shares Percentage of ownership(%) See accompanying notes to non-consolidated financial statements. KT Corporation 89,640,088 44.55 NTT DoCoMo Inc 20,176,309 10.03 Qualcomm Incorporated 4,416,350 2.19 HyoSung Corp. 3,017,276 1.50 Microsoft Corp. 2,030,000 1.01 Others 81,928,068 40.72 201,208,091 100.00
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Financial Statement Presentation The Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements.
The accompanying financial statements are stated in Korean Won, the currency of the country in which the Company is incorporated and operates. The translation of Korean Won amounts into U.S. dollar amounts is included solely for the convenience of readers outside of the republic of Korea and has been made at the noon buying rate of 1,010.00 to US$1.00 at December 31, 2005 in the City of New York for cable transfers in won as certified for customs purposes by the Federal Reserve Bank of New York. Such translations should not be construed as representations that the Korean Won amounts could be converted at that or any other rate.
Annual Report 2005 64 | 65 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
Adoption of Newly Effective Statements of Korea Accounting Standards (1) Classification of Securities The Company prepared its financial statements in accordance with the revised Statements of Korea Accounting Standards At acquisition, the Company classifies securities into one of the three categories: trading, held-to-maturity or available-for-sale. (”KAS”), which are effective from January 1, 2005. The revised accounting standards include SKAS No.14 – “Exception to Trading securities are those that were acquired principally to generate profits from short-term fluctuations in prices. Held-to- Accounting for Small and Medium-sized Entities”, No.15 – ”Investments in Associates”, No.16 – “Income Taxes”, No.17 – maturity securities are those with fixed and determinable payments and fixed maturity that an enterprise has the positive “Provisions, Contingent Liabilities and Contingent Assets” and No.18 – ”Interests in Joint Ventures”. However, adoption of intent and ability to hold to maturity. Available-for-sale securities are those not classified as either held-to-maturity or trading the revised accounting standards did not have a material effect on the Company’s net loss or net assets. securities. Trading securities are classified as short-term investment securities, whereas available-for-sale securities and held- to-maturity securities are classified as long-term investment securities, except for those maturity dates or whose likelihood of The significant accounting policies followed by the Company in the preparation of the accompanying financial statements are being disposed of are within one year from balance sheet date, which are classified as short-term investment securities. summarized as follows:
Use of Estimates (2) Valuation of Securities The preparation of financial statements in accordance with Korean GAAP requires management to make estimates and Securities are recognized initially at cost, which includes the market value of the consideration given and incidental expenses. assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant If the market price of the consideration given is not available, the market prices of the securities purchased are used as the estimates and assumptions relate to the allowance for doubtful accounts and depreciation. Actual results could differ from basis of measurement. If neither the market price of the consideration given nor those of the acquired securities are available, those estimates and may affect amounts reported in future periods. Management believes that the estimates are reasonable. the acquisition cost is measured at the best estimates of its fair value.
After initial recognition, held-to-maturity securities are valued at amortized cost. The difference between their acquisition Cash and Cash Equivalents costs and face values is amortized over the remaining term of the securities by applying the effective interest method and Cash and cash equivalents are bank deposits and short-term money market instruments that can be easily converted into added to or subtracted from the acquisition costs and interest income of the remaining period. Trading securities are valued at cash and whose risk of value fluctuation arising from changes of interest rates is not material. Only investments with fair value, with unrealized gains or losses included in current operations. Available-for-sale securities are also valued at fair maturities of three months or less at the acquisition date are included in cash equivalents. value, with unrealized gains or losses included in capital adjustments, until the securities are sold or if the securities are determined to be impaired and the lump-sum cumulative amount of capital adjustments are reflected in current operations. Revenue Recognition However, available-for-sale securities that are not traded in an active market and whose fair values cannot be reliably The Company’s revenues are principally derived from sales of PCS handsets and PCS service revenues, which consist of non- estimated are accounted for at acquisition costs. For those securities that are traded in an active market (marketable refundable initial subscription fees, fixed monthly access fees and usage charges. The Company recognizes sales on PCS securities), fair values refer to the quoted market prices, which are measured as the closing price at the balance sheet date. handsets when these are delivered to the dealers, fixed monthly access fees in the period earned, and usage charges and The fair values of non-marketable securities are measured at the discounted future cash flows by using the discount rate that non-refundable initial subscription fees at the time services are rendered. appropriately reflects the credit rating of the issuing entity assessed by a publicly reliable independent credit rating agency. If application of such measurement method is not feasible, estimates of the fair values may be made using a reasonable Allowance for Doubtful Accounts valuation model or quoted market prices of similar debt securities issued by entities conducting similar business in similar The allowance for doubtful accounts is provided based on the estimated collectibility of individual accounts and historical bad industries. debt experience. Securities are evaluated at each balance sheet date to determine whether there is any objective evidence of impairment loss. When any such evidence exists, unless there is a clear counter-evidence that recognition of impairment is unnecessary, the Inventories Company estimates the recoverable amount of the impaired security and recognizes any impairment loss in current Inventories are stated at the lower of cost or net realized value, cost being determined using the average cost method. If the operations. The amount of impairment loss of held-to-maturity security or non-marketable equity security is measured as the net realizable value of inventories is lower than cost, inventories are adjusted to net realizable value and the difference difference between the recoverable amount and the carrying amount. The recoverable amount of held-to maturity security is between cost and revalued amount is charged to current operations. the present value of expected future cash flows discounted at the securities’ original effective interest rate. For available-for- Investment Securities Other than those Accounted for Using the Equity Method sale debt or equity security, the amount of impairment loss to be recognized in the current period is determined by subtracting the amount of impairment loss of debt or equity security already recognized in prior period from the amount of amortized cost in excess of the recoverable amount for debt security or from the amount of acquisition cost in excess of fair value for equity security.
Annual Report 2005 66 | 67 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
If the realizable value subsequently recovers, in case of a security stated at fair value, the increase in value in recorded in Long-Lived Assets current operations, up to the amount of the previously recognized impairment loss, while security stated at amortized cost or Long-lived assets are subject to review for impairment whenever events or changes in circumstances indicate that the acquisition cost, the increase in value is recorded in current operations, so that its recovered value does not exceed what its carrying amount of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future amortized cost would be as of the recovery date if there had been no impairment loss. net cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the (3) Reclassification of Securities carrying amount of the assets exceeds the fair value of the assets. When transfers of securities between categories are needed because of changes in an entity’s intention and ability to hold Leases those securities, such transfer is accounted for as follows: trading securities cannot be reclassified into available-for-sale and held-to-maturity securities, and vice versa, except when certain trading securities lose their marketability. Available-for-sale Lease agreements that include a bargain purchase option, result in the transfer of ownership by the end of the lease term, securities and held-to-maturity securities can be reclassified into each other after fair value recognition. When held-to-maturity have a term equal to at least 75% of the estimated economic life of the leased property or where the present value of the security is classified into available-for-sale security, the difference between fair value and book value is recorded as capital minimum lease payments at the beginning of the lease term equals or exceeds 90% of the fair value of the leased property adjustments. Whereas, in case available-for-sale security is reclassified into held-to-maturity security, the difference is are accounted for as capital leases. All other leases are accounted for as operating leases. Assets and liabilities related to recorded as capital adjustments and amortized using effective interest rate method for the remaining periods. capital leases are recorded as property and equipment and long-term debt, respectively, and the related interest is calculated
Investment Securities Using the Equity Method using the effective interest rate method. In respect to operating leases, the future minimum lease payments are expensed Equity securities held for investments in companies in which the Company is able to exercise significant influence over the ratably over the lease term while contingent rentals are expensed as incurred. investees are accounted for using the equity method. The Company’s share in net income or net loss of investees is reflected Intangibles in current operations. Changes in the retained earnings, capital surplus or other capital accounts of investees are accounted Intangible assets are stated at cost, net of accumulated amortization computed using the straight-line method over the useful for as an adjustment to retained earnings or to capital adjustment. lives of the assets as described below.
Property and Equipment Property and equipment are stated at cost. Routine maintenance and repairs are expensed at the time incurred. Expenditures Estimated useful lives that result in enhancement of the value or extension of the useful lives of the facilities involved are capitalized as additions to Frequency use rights 13 years property and equipment. Goodwill 5 years Depreciation is computed using the straight-line method based on the estimated useful lives of the assets as follows: Intellectual property rights 5~10 years Facility use rights 10~15 years Development costs 2 years Estimated useful lives Other intangibles 5 years Buildings and structures 15~30 years Machinery and equipment 8 years Vehicles 4~8 years Other 4~8 years
Annual Report 2005 68 | 69 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
Long-term Accounts and Notes Receivable Changes in accrued severance indemnities for the years ended December 31, 2005 and 2004(In are millions as follows: of Korean won) Long-term accounts and notes receivable arising from long-term contracts are recorded at the net present value of future 2005 2004 cash flows, calculated using the effective interest rate at the time of the contract execution. The difference between the nominal value and the present value of these accounts and notes receivable is amortized over the contract period using the Beginning of year 37,124 32,938 effective interest rate method. The amortization is recognized as interest income. Long-term accounts and notes receivable Severance payments (10,928) (7,996) (handset installment receivable) as of December 31, 2005 and 2004 is recorded at net present value using the weighted 26,196 24,942
average borrowing interest rate as follows: (In millions of Korean won) Provision 14,453 12,130 Increase due to taking over 102 52 2005 2004 End of year 40,751 37,124 Long-term accounts and notes receivable 60,523 89,382 Discount (4,565) (6,336)
55,958 83,046 Accounting for Foreign Currency Transactions and Translation The Company maintains its accounts in Korean won. Transactions in foreign currencies are recorded in Korean won based on the prevailing rates of exchange on the transaction date. Monetary accounts with balances denominated in foreign currencies are recorded and reported in the accompanying financial statements at the exchange rates prevailing at the balance sheet Discounts on Debentures date and the translation gains or losses are reflected in current operations. The balances have been translated using the rate Discounts on debentures are amortized over the redemption period of the debentures using the effective interest rate of method. Amortization of discounts is recognized as interest expense. 1,013.00 and 1,043.80 to US$1.00 at December 31, 2005 and 2004, respectively.
Accrued Severance Indemnities Accounting for Derivative Instruments All employees with more than one year of service are entitled to receive a lump-sum payment upon termination of their All derivative instruments are accounted for at fair value with the valuation gain or loss recorded as an asset or liability. If the employment with the Company, based on their length of service and rate of pay at the time of termination. The severance derivative instruments in not part of a transaction qualifying as a hedge, the adjustment to fair value is reflected in current indemnities that would be payable assuming all eligible employees were to resign amount to operations. The accounting for derivative transactions that are part of a qualified hedge based both on the purpose of the 40,751 million and 37,124 transaction and on meeting the specified criteria for hedge accounting differs depending on whether the transaction is a fair million as of December 31, 2005 and 2004, respectively. value hedge or a cash flow hedge. Fair value hedge accounting is applied to a derivative instrument designated as hedging Before April 1999, the Company and its employees paid 3 percent and 6 percent, respectively, of monthly pay (as defined) to the exposure to changes in the fair value of an asset or a liability or a firm commitment (hedged item) that is attributable to a the National Pension Fund in accordance with the National Pension Law of Korea. The Company paid half of the employees’ 6 particular risk. percent portion and is paid back at the termination of service by offsetting the receivable against the severance payments. The gain or loss both on the hedging derivative instruments and on the hedged item attributable to the hedged risk is Such receivables, with a balance of 315 million and 450 million as of December 31, 2005 and 2004, respectively, are reflected in current operations. Cash flow hedge accounting is applied to a derivative instrument designated as hedging the presented as deduction from accrued severance indemnities. Starting April 1999, the Company and its employees each pay exposure to variability in expected future cash flows of an asset or liability or a forecasted transaction that is attributable to a 4.5 percent of monthly pay to the National Pension Fund under the revised National Pension Law of Korea. particular risk. The effective portion of gain or loss on a derivative instrument designated as a cash flow hedge is recorded as capital adjustment and the ineffective portion is recorded in current operations. The effective portion of gain or loss recorded as a capital adjustment is reclassified to current earnings in the same period during which the hedged forecasted transaction affects earnings. If the hedged transaction results in the acquisition of an asset or the incurrence of a liability, the gain or loss in capital adjustment is added to or deducted from the asset or the liability. Income Tax
Annual Report 2005 70 | 71 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
The provision for income tax consists of the corporate income tax and resident surtax currently payable and changes in 3. RESTRICTED DEPOSITS: deferred income taxes for the period. The Company recognizes deferred taxes arising from temporary differences between amounts reported for financial accounting and income tax purposes. Deferred income taxes will be offset against those 16 million and 19 incurred in the future, if any. Deferred income taxes are recalculated based on the actual rate, effective at each balance million, respectively,As of December are subject 31, to 2005 withdrawal and 2004, restriction the deposits as collateral under forlong-term borrowings financial and instrumentsguarantee of amountingchecking accounts. to sheet date.
Stock Compensation Expense The Company records the difference between the present value of the exercise price and the stock price at the grant date as 4. DISPOSAL OF TRADE ACCOUNTS AND NOTES RECEIVABLE: compensation expense with a corresponding credit to the capital adjustment account (“the fair value method”). The 253,247 million as of October 31, 2003, and computed deferred compensation expenses are allocated over the contracted vesting period. When the stock options are futureOn trade December receivables, 19, 2003, which the were Company expected transferred to be incurred PCS service until receivablesFebruary 28, of 2007 to Shinhan Bank Trust. As a result of exercised with the issuance of new shares, the difference between the exercise price plus the stock option cost recorded in this disposal, the Company received cash of 200,000 million and beneficiary certificate of 53,247 million, and the the capital adjustment account and the par value of the new shares issued, is recorded as additional paid-in capital. Company recognized a loss on disposal of trade accounts and notes receivable of 11,862 million and 11,816 million for the years ended December 31, 2005 and 2004, respectively. Basic and Diluted Ordinary Income per Share and Earnings per Share Ordinary income per share and earnings per share are computed by dividing ordinary income (after deducting the income tax effect) and net income by the weighted average number of common shares outstanding during the period. The number of shares used in computing earnings and ordinary income per share was 181,629 thousand shares and 183,802 thousand 5. LOANS TO EMPLOYEES: shares for the years ended December 31, 2005 and 2004, respectively. As of December 31, 2005 and 2004, the Company has provided loans to its employees for housing, tuition and purchase of Diluted ordinary income per share and earnings per share are computed by dividing ordinary income (after deducting the the Company’s stock with the balance of 2,684 million ( 1,144 million in short-term loans and 1,540 million in long-term income tax effect) and net income by the weighted average number of common shares outstanding, including the additional loans) and 4,483 million ( 1,375 million in short-term loans and 3,108 million in long-term loans), respectively. common share that would have been outstanding if the dilutive potential common shares had been issued during the period. The number of shares used in computing diluted earnings and ordinary income per share was 181,629 thousand shares and 193,748 thousand shares for the years ended December 31, 2005 and 2004, respectively. Diluted ordinary income and earnings were 6. SHORT-TERM INVESTMENT SECURITIES: 547,003 million and 293,373 million for the years ended December 31, 2005 and 2004, respectively. Short-term investment securities as of December 31, 2005 and 2004 are as follows: The dilutive potential shares as of December 31, 2005 and 2004 are as follows: (In millions of Korean won) 2005 2004 Number of Exercise period Acquisition cost Fair value Gain on valuation Fair value common shares to be issued Trading: Convertible bonds March 29, 2004_March 28, 2009 18,000 Beneficiary certificates 240,000 240,097 97 - Stock options March 25, 2005_March 24, 2010 44,800 Available-for-sales: Stock options Sep. 9. 2005 ~ Sep. 8. 2010 320,913 Empas.Com 2,500 7,931 5,431 6,518 Stock options March 5, 2007 ~ March 4, 2012 128,800 242,500 248,028 5,528 6,518 The gain on valuation of the above trading securities is recorded in currents operations and gain on valuation (before tax effect) of the above available-for-sales security is recorded in capital adjustments.
Annual Report 2005 72 | 73 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
7. LONG-TERM INVESTMENT SECURITIES: (3) Non-listed equity securities as of December 31, 2005 and 2004 are as follows: (In millions of Korean won) (1) Long-term investment securities as of December 31, 2005 and 2004 are as follows: 2005 2004 (In millions of Korean won) Ownership Acquisition Net asset Book Book 2005 2004 (%) cost value value value
Available-for-sale securities: Mondex Korea Co., Ltd. 6.02 920 - - - Listed equity securities 5,877 4,159 Internet Metix Inc. 2.00 200 25 23 23 Non-listed equity securities 3,851 10,973 Geotel Co., Ltd. 10.55 263 407 263 263 Investments in funds 3,361 38,383 Inews24. Co., Ltd. 3.58 350 - - - Debt securities 1,710 2,191 ENtoB Corp. - - - - 500 Held-to maturity securities: The Radio News Co., Ltd. 10.73 624 - - - Beneficiary certificates 104,305 88,667 Prime Venture Capital Co., Ltd. 10.00 1,000 - - 93 Onse Telecom Corp. 0.17 2,148 163 105 105 119,104 144,373 NAZCA Entertainment Co., Ltd. 11.74 500 87 46 46 Toysoft Co., Ltd 8.78 500 28 28 80 (2) Listed equity securities as of December 31, 2005 and 2004 are as follows: Ohmylove Co., Ltd. 12.06 1,200 106 131 131 (In millions of Korean won) IMM Investment Corp. 1.09 500 260 210 210 2005 2004 Vacom Wireless, Inc. 16.77 1,880 914 719 719 Acquisition cost Fair value Gain(loss) on Mobizon Co., Ltd. 2.25 48 24 48 48 valuation Fair value Citylover Co., Ltd. 3.45 38 - - - Wide Telecom Co. 300 24 (276) 11 MDS Planning Co., Ltd. 4.00 120 - 1 1 Gaeasoft Co., Ltd. 532 1,438 906 514 WIZcommunications Co., Ltd. 10.90 290 357 290 290 KRTnet Corp. 1,954 4,415 2,461 3,634 Intromobile Co., Ltd. 8.33 200 200 200 200 2,786 5,877 3,091 4,159 Korea Smart Card Co., Ltd. 1.06 326 303 326 501 Directmedia Co., Ltd. 16.09 435 248 248 435 The gain (loss) on valuation (before tax effect) of the above listed equity securities is included in capital adjustments. Ncerti Co., Ltd. 19.90 328 317 328 328 KTFMhows Co., Ltd. - - - - 2,550 Harex Info Tech Ltd. - - - - 3,375 Others - 1,242 1,205 885 1,075
13,112 4,644 3,851 10,973
In 2005, the Company recognized an impairment loss of332 million on non-listed equity securities of which the net equity value had declined compared to the acquisition cost and it is not expected to recover and reclassified KTFMhows Co., Ltd. , Harex Info Tech Ltd. and EntoB Corp. from long-term investment securities into investment securities using the equity method in accordance with the SKAS No.15 – “Investment in Associates”.
Annual Report 2005 74 | 75 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
(4) Investments in funds as of December 31, 2005 and 2004 are as follows: (7) Held-to-maturity securities as of December 31, 2005 and 2004 are as follows:
(In millions of Korean won) (In millions of Korean won) 2005 2004 2005 2004 Ownership Acquisition Net asset Ownership Acquisition Net asset Acquisition cost Book value Acquisition cost Book value (%) cost value (%) cost value Beneficiary certificates 126,154 104,305 130,745 88,667 CEC Mobile Ltd. 16.67 4,457 1,507 16.67 4,456 4,456 PT. KTF Indonesia - - - 99.00 234 234 The Company acquired the above beneficiary certificates issued by Shinhan Bank Trust in relation to the disposal of trade Korea IT Fund - - - 10.00 30,000 30,000 accounts and notes receivable (Note 4). The Company recognized the difference between fair value and acquisition cost as Korea Telecom Strategy Fund 10.00 - - 10.00 2,000 2,000 impairment loss of 21,849 million, which may arise from the uncollectibility of the trade accounts and notes receivable. Cinema party Fund 5.00 500 500 - - - Others - 1,354 1,354 - 1,693 1,693
6,311 3,361 38,383 38,383 8. INVESTMENT SECURITIES USING THE EQUITY METHOD:
In 2005, the Company recognized an additional impairment loss of2,950 million on investments in funds of CEC Mobile (1) Investment securities using the equity method as of December 31, 2005 and 2004 are as follows: Ltd. for which the net equity value had declined compared to the acquisition cost and it is not expected to recover. (In millions of Korean won) The Company has reclassified PT. KTF Indonesia, Korea IT Fund and Korea Telecom Strategy Fund from long-term investment securities into investment securities using the equity method in accordance with SKAS No.15. 2005 2004 Ownership Acquisition Book Acquisition Book (%) cost value cost value (5) Debt securities as of December 31, 2005 and 2004 are as follows: Korea Digital Satellite (In millions of Korean won) Broadcasting Co., Ltd. 2.12 9,954 - 9,954 - 2005 2004 KTF Technologies Co., Ltd 73.05 15,563 22,198 15,372 18,905 Acquisition cost Book value Acquisition cost Book value KTFMhows Co., Ltd. 51.00 2,550 2,507 - -
Government bonds 1,710 1,710 1,691 1,691 Harex Info Tech Ltd. 21.17 3,375 2,698 - - Convertible bonds - - 500 500 Korea IT Fund 10.00 30,000 30,857 - - Korea Telecom Strategy Fund 10.00 2,000 2,015 - - 1,710 1,710 2,191 2,191 ENtoB Corp. 3.13 500 630 - - (6) Maturities of debt securities as of December 31, 2005 are as follows: PT. KTF Indonesia 99.00 234 - - - Boston Enterprise Partners 39.02 8,000 7,979 - - (In millions of Korean won) Sidus FNH Corp. 15.30 8,400 8,400 - - 1-5 years 6-10 years 80,576 77,284 25,326 18,905 Government bonds 1,694 16 The Company is able to exercise significant influence over KDB, Korea IT Fund, Korea Telecom Strategy Fund, ENtoB Corp and Sidus FNH including KT Corporation’s ownership.
The Company discontinued applying the equity method on Korea Digital Satellite Broadcasting Co., Ltd. with book value below zero. The unrecognized equity losses not reported in the accompanying financial statements are440 million and 45 million for the years ended December 31, 2005 and 2004, respectively.
Annual Report 2005 76 | 77 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
(2) Details of valuation using the equity method for the year ended December 31, 2005 are as follows: (4) The key financials of investees accounted for using the equity method as of and for the year ended December 31, 2005 are as follows: (In millions of Korean won)
(In millions of Korean won) Beginning of Acquisition and Gain(loss) on Other End of year year reclassification valuation changes(*) Total assets Total liabilities Sales Net income(loss) KTF Technologies Co., Ltd. 18,905 190 2,485 618 22,198 Korea Digital Satellite Broadcasting Co., Ltd. 659,448 600,974 347,274 (79,169) KTFMhows Co., Ltd. - 2,550 (43) - 2,507 KTF Technologies Co., Ltd. 149,217 107,687 303,135 10,496 Harex Info Tech Ltd. - 3,375 (839) 162 2,698 KTFMhows Co., Ltd. 8,948 4,032 7,893 148 Korea IT Fund - 30,000 780 77 30,857 Harex Info Tech Ltd. 5,971 461 1,071 (2,156) Korea Telecom Strategy Fund - 2,000 117 (102) 2,015 Korea IT Fund 308,574 - - 7,505 ENtoB Corp. - 500 130 - 630 Korea Telecom Strategy Fund 20,436 285 584 291 PT. KTF Indonesia - 234 (168) (66) - ENtoB Corp. 61,059 40,896 362,373 4,197 Boston Enterprise Partners - 8,000 (21) - 7,979 PT. KTF Indonesia 9,918 10,291 2,537 (612) Sidus FNH Corp. - 8,400 - - 8,400 Boston Enterprise Partners 20,575 129 75 (54) 18,905 55,249 2,441 689 77,284 Sidus FNH Corp. 27,266 10,350 24,335 (8,839)
(*) Other changes are composed of acquisition (disposal) amounts of investment securities, dividends and the changes in investment securities in capital adjustments.
The Company recognized gain on valuation using equity method of637 million and loss on valuation using equity method of 80 million, which were recorded in capital adjustments as of December 31, 2005.
(3) Changes in the difference between acquisition cost and net asset value at the acquisition date as of December 31, 2005 are as follows:
(In millions of Korean won) Beginning of year Increase Amortization End of year
KTF Technologies Co., Ltd. (695) (580) (907) (368) Harex Info Tech Ltd. - 1,914 383 1,531 Sidus FNH Corp. - 5,812 - 5,812 (695) 7,146 (524) 6,975
Annual Report 2005 78 | 79 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
9. PROPERTY AND EQUIPMENT: (In millions of Korean won) <2004> Increase Decrease Changes in property and equipment for the years ended December 31, 2005 and 2004 are as follows: Beginning Acquisition Other Other Disposal Other End of year (In millions of Korean won) of year
<2005> Increase Decrease Land 122,712 88 - 960 - 121,840 122,712 Buildings and structures 302,843 3,182 5,773 3,408 76 308,314 308,314 Beginning Acquisition Other Disposal Other End of year of year Machinery and equipment 6,255,439 355,997 671,977 32,473 70,607 7,180,333 7,180,333 Land 121,840 104 108 2,507 - 119,545 Vehicles 11,723 341 - 242 - 11,822 11,822 Buildings and structures 308,314 28,319 93,091 6,849 1,908 420,967 Other 572,865 45,589 104,724 6,007 65 717,106 717,105 Machinery and equipment 7,180,333 86,080 550,640 353,822 2,477 7,460,754 Construction in progress 354,668 540,426 51 - 711,867 183,278 183,279 Vehicles 11,822 531 131 721 - 11,763 7,620,250 945,623 782,525 43,090 782,615 8,522,693 8,522,693 Other 717,105 23,978 75,973 21,703 - 795,353 Increase Decrease Construction in progress 183,279 573,691 2,352 392 718,354 40,576 Beginning Depreciation Other Disposal Other End of year 8,522,693 721,703 722,295 385,994 722,739 8,848,958 of year
Increase Decrease Accumulated depreciation Less: Beginning Buildings and structures 47,658 10,816 1 779 - 57,696 of year Depreciation Other Disposal Other End of year Machinery and equipment 2,565,671 844,930 - 8,858 30,799 3,370,944 Less: Accumulated depreciation Vehicles 5,988 1,854 - 116 - 7,726 Buildings and structures 57,696 13,320 - 704 2 70,310 Other 323,898 135,300 30,798 4,562 - 485,434 Machinery and equipment 3,370,944 900,600 2 182,786 22 4,088,738 2,943,215 992,900 30,799 14,315 30,799 3,921,800 Vehicles 7,726 1,860 - 461 - 9,125 Net book value 4,677,035 4,600,893 Other 485,434 121,981 2 17,865 - 589,552 The market value of the Company’s land based on the official price of land (published by the Ministry of Construction and 3,921,800 1,037,761 4 201,816 24 4,757,725 Traffic) is 119,393 million as of December 31, 2005. Net book value 4,600,893 4,091,233 Depreciable assets are insured against fire and other casualty losses up to704,298 million as of December 31, 2005.
Annual Report 2005 80 | 81 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
10. INTANGIBLES: 11. LEASED ASSETS:
(1) Changes in intangibles for the years ended December 31, 2005 and 2004 are as follows: The Company maintains operating lease agreements for certain machinery and equipment. The following are the future minimum rental payments under operating leases as of December 31, 2005: (In millions of Korean won)
<2005> Increase Decrease (In millions of Korean won) Beginning Year Operating lease payment of year Acquisition Other Amortization Other End of year 2006 38,430 Goodwill 12,961 1,272 - 3,759 226 10,248 Intellectual property rights 1,715 1,111 - 463 - 2,363 Facility use rights 8,361 770 19 1,313 51 7,786 Frequency use rights 1,115,996 - - 94,622 - 1,021,374 12. BORROWINGS: Development cost - 329 425 194 79 481 (1) Short-term borrowings as of December 31, 2005 and 2004 are as follows: Other 63 - - 47 - 16 (In millions of Korean won) 1,139,096 3,482 444 100,398 356 1,042,268 Interest rate per annum (%) (In millions of Korean won) 2005 2005 2004 Increase Decrease <2004> General loans - - 100,000 Beginning Discounted promissory notes - - 200,000 of year Depreciation Other Amortizationl Other End of year - 300,000 Goodwill 13,140 3,566 90 3,626 209 12,961 Intellectual property rights 1,334 768 - 387 - 1,715 Facility use rights 7,532 2,112 - 1,252 31 8,361 Frequency use rights 1,208,429 - - 92,433 - 1,115,996 13. DEBENTURES: Other110 - - 47 - 63 (1) Debentures as of December 31, 2005 and 2004 are as follows:
1,230,545 6,446 90 97,745 240 1,139,096 (In millions of Korean won) (2) Interest rate per annum (%) 9,103 million and 10,513 million of ordinary development costs were charged to expense for the years ended December 31, 2005 and 2004, respectively. 2005 2005 2004 General debentures 3.13-6.00 2,020,280 2,472,147 Convertible bonds - - 370,000 2,020,280 2,842,147 Less: Current portion (340,280) (1,015,122) Discount on debentures (3,305) (7,843) Add: Long-term accrued interest - -
1,676,695 1,819,182
Annual Report 2005 82 | 83 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
(2) General debentures as of December 31, 2005 and 2004 are as follows: (3) Payment schedules for the Company’s debentures as of December 31, 2005 are as follows:
(In millions of Korean won, In millions of JPY) (In millions of Korean won) Interest rate Year Amount per annum (%) Due date 2005 2005 2004 2007 500,000 2008 320,000 20th Feb. 9, 2006 6.00 300,000 300,000 2009 590,000 23rd Apr. 20, 2006 3.13 40,280 47,025 2010 200,000 (JPY 4,695) (JPY 4,695) 2011 70,000 37th May 24, 2005 - - 95,122
-(JPY 9,497) 2,020,280
40th Feb. 18, 2005 - - 350,000 41st Aug. 26, 2005 - - 200,000
42nd Nov. 14, 2007 5.94 200,000 200,000 14. DERIVATIVES:
44th Feb. 19, 2009 5.66 360,000 360,000 The Company has entered into currency option contracts with Shinhan Bank to hedge the exposure to the change in value of debentures that are linked with Japanese yen. Currency option contracts as of December 31, 2005 are as follows: 45th Mar. 15, 2008 5.24 320,000 320,000
46th May 10, 2007 4.61 300,000 300,000 Exercisable exchange Term Contract Type 47-1st July 13, 2009 4.95 230,000 230,000 amount rate (JPY/) 47-2nd July 12, 2011 5.32 70,000 70,000 Shinhan Bank 2004.05.10-2006.4.20 JPY 2,000,000,000 JPY Call/JPY Put 10.65-13.4 48 th Feb. 15, 2010 5.31 200,000 - In relation to the currency option contracts, the Company recognized loss on valuation of currency options of 2,340 million. 2,020,280 2,472,147
(JPY 4,695) (JPY 14,192)
Discounts on debentures are amortized over the period from the issue date to due date, using effective interest rate, and the amortized amounts are charged as interest expense.
Annual Report 2005 84 | 85 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
15. LONG-TERM ACCOUNTS PAYABLE-OTHER: 16. RESEVE FOR LIABILITIES
Long-term account payable-other is related to frequency use rights and required to be paid including applicable interest from (1) The Company has accounted for the call bonus mileage amounts, which the Company is obliged 2007 to 2011. to pay to its customers, as reserve for liabilities. Changes in reserve for liabilities for the year
Long-term accounts payable-other as of December 31, 2005 is stated at the net present value of future cash flows, calculated ended December 31, 2005 are summarized as follows: using the effective interest rate (9.93%) at the time of receipt of frequency use license as follows: (In millions of Korean won)
(In millions of Korean won) Year Amount Amount Beginning of year 15,429 Long-term account payable-other Payment (6,382) 650,000 Provision 9,849 Discount (90,460) 18,896 559,540 Less : current portion 9,096
9,800 The maturities of the Company's long-term account payable-other as of December 31, 2005 are as follows:
(In millions of Korean won) (2) The call bonus mileages provided by the Company are effective for five years and the unused Year Amount call bonus mileages for this period will expire. The Company expects its call bonus mileages to 2007 90,000 be used as follows:
2008 110,000 (In millions of Korean won) 2009 130,000 Year Nominal amount Present value 2010 150,000 2011 170,000 2006 9,328 9,096 2007 4,941 4,557 650,000 2008 3,124 2,735 2009 1,975 1,642 2010 1,092 866
20,460 18,896
Annual Report 2005 86 | 87 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
17. SHAREHOLDERS’ EQUITY: The principal assumptions in relation to estimation of the stock compensation expense are as follows:
(1) Capital stock 1st 2nd 3rd 4th The Company has authorized 400,000,000 shares of 5,000 par value common stock and issued 201million shares as of Risk-free interest rate (%) 6.12 6.44 4.31 4.18 December 31, 2005. Expected lives (years) 3 3 3 3
The changes in capital stock for the year ended December 31, 2005 are as follows: Expected forfeitures per year (%) - - - - Volatility (%) 122.33 97.05 63.14 37.33 (In millions of Korean won) Paid in capital in Date Cause of Par value Number of Capital stock (4) Dividends in 2005 and 2004 are as follows: changes (won) shares excess of par value (In millions of Korean won, except for dividends) Beginning of year - 5,000 184,067,319 955,703 1,325,489 2005 2004 December 26, 2005 Retirement of treasury stock - 555,000 - - Outstanding common stock (shares) 201,146,844 181,300,368
December 26, 2005 Paid-in capital Dividends per share (won) 600 550 increase -17,695,772 88,478 405,832 Cash dividends 120,688 99,715 End of year 201,208,091 1,044,181 1,731,321 Net income 547,003 283,901 Pay out ratio (Dividend / Net income) 22.1% 35.1% (2) Treasury stock Dividend yield ratio (Dividend per share / Stock price) 2.4% 2.2% As of December 31, 2005, the Company holds 61,247 treasury shares and intends to dispose of the treasury stock in near future. The loss on disposal of treasury stock of 17,457 million is included in capital adjustments.
(3) Stock Option Plan The Company entered into stock option agreements with the Chief Executive Officer and senior managers. The details of the stock options granted as of December 31, 2005 are as follows:
(In millions of Korean won) Number of Exercise Grant Date Employee shares price/share Methods Exercise period
2001. 3.29 Former CEO 18,000 41,273 New stock issue 2004.3.29~2009. 3.28 2002. 3.25 Senior managers 44,800 45,178 New stock issue 2005.3.25~2010. 3.24 2003. 9. 8 CEO, Senior managers 320,913 30,000 New stock issue 2005.9.9~2010. 9.8 2005.3.4 Senior managers 128,800 30,700 New stock issue 2007.5.5 ~ 2012.3.4
The Company values stock options granted based on the fair value method (See Note 2). Total compensation expense of
5,316 million was allocated over the vesting period and the compensation expense charged to operations for the year ended December 31, 2005 is 354 million.
Annual Report 2005 88 | 89 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
18. INCOME TAX AND DEFERRED INCOME TAXES: 19. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCY:
(1) The statutory corporate income tax rate (including resident surtax) applicable to the Company As of December 31, 2005 and 2004, assets and liabilities denominated in foreign currencies, other than the lease obligations was approximately 27.5 percent in 2005 and 2004. Income tax expense for the years ended under capital lease and debentures in foreign currencies, described in Note 13, are as follows: December 31, 2005 and 2004 is as follows: (Foreign currencies other than U.S. dollars are translated into U.S. dollars; Korean won in millions) (In millions of Korean won) 2005 2004 2005 2004 Account U.S. dollars Won equivalent U.S.dollars Won equivalent
Income before income tax 610,653 308,610 Cash and cash equivalents $ 75 76 $ 326 340 Adjustments: Account receivable - other 86,626 88 - - Non-temporary differences, net (2,714) 16,882 Long-term loans 9,285 9,406 7,185 7,500 Temporary differences, net 74,622 19,658 Accounts payable- other 19,483 19,611 18,740 19,561 71,908 36,540 Taxable income before tax loss carryforward 682,561 345,150 Tax loss carryforward from KTM.Com (94,983) (109,860) 20. OPERATING REVENUE AND EXPENSES: Taxable income 587,578 235,290 (1) Operating revenue for the years ended December 31, 2005 and 2004 consist of the following : Tax rate (%) 27.5 27.5 Tax calculated on taxable income 161,584 64,705 (In millions of Korean won) Tax credit (54,739) (34,447) 2005 2004 Income tax currently payable 106,845 39,623 PCS 4,545,588 4,231,059 Decrease (Increase) in deferred income taxes: Merchandise sales 1,043,572 1,241,609 Temporary differences (18,239) (1,029) Other 462,629 358,150 Utilization of accumulated tax losses carried forward 13,750 (13,750) 6,051,789 5,830,818 Utilization of accumulated tax credit carried forward (36,363) (135) Income tax expense directly reflected to capital (2,343) - Income tax expense 63,650 24,709 (2) The changes in deferred income taxes for the years ended December 31, 2005 and 2004 are as follows:
(In millions of Korean won, except for dividends) 2005 2004
Beginning of year 109,171 94,257 Increase 63,104 14,914 Decrease 22,252 - 150,023 109,171 Less: current portion 91,899 74,953
End of year 58,124 34,218
Annual Report 2005 90 | 91 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
(2) Operating expenses for the years ended December 31, 2005 and 2004 is summarized below: 21. RELATED PARTY TRANSACTIONS: (In millions of Korean won) 2005 2004 (1) Transactions with related parties for the years ended December 31, 2005 and 2004 are as follows: Salaries and wages 172,600 171,634
Provision for severance indemnities 14,453 12,130 (In millions of Korean won) Employee welfare 28,906 27,904 Revenues: Transaction 2005 2004
Rent 114,028 113,441 KT Corporation Interconnection charges & others 779,524 631,544
Lease 61,307 61,307 KT Networks Co., Ltd. Interconnection charges & others 2,348 8,772 Commissions 403,539 438,725 KT Hitel Co., Ltd. Interconnection charges & others 50 43
Depreciation 1,037,761 992,900 Others Interconnection charges & others 2,853 1,680 Amortization 100,398 97,745 784,775 642,039 Tax and dues 44,199 45,170 Expenses: Transaction 2005 2004 Interconnection charges 603,160 506,982
Leased line charges 360,065 357,257 KT Corporation Leased line charges & others 512,426 482,900
Ordinary development costs (Note 10) 9,103 10,513 KT Networks Co., Ltd. Sales commissions & others 7,671 8,258
Sales promotion 130,711 163,653 KTF Technologies Co., Ltd. PCS revenues & others 237,024 248,293 Sales commissions 712,154 718,089 KT Hitel Co., Ltd. 26,833 24,425 Advertisements 104,100 123,261 Others 1,059 2,190 Bad debt 54,282 25,448 785,013 766,066 Water and electricity 54,533 49,362
Communications 30,264 28,827
Repairs and maintenance 74,337 58,302
Cost of PCS handset sales 1,025,598 1,236,887
Other 91,495 62,294
5,226,993 5,301,831
Annual Report 2005 92 | 93 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Notes to Non-Consolidated Financial Statements
(2) Receivables and payables with related parties as of December 31, 2005 and 2004 are as follows: 23. BUSINESS SEGMENTS: (In millions of Korean won) The Company’s operations consist of 016 division and 018 division classified by recognition code providing the same services Receivables Payables and devices. Details of the Company’s business segment information for the years ended and as of December 31, 2005 and 2005 2004 2005 2004 2004 are as follows (Won in billions):
KT Corporation 239,432 155,301 41,878 389,725 (In millions of Korean won) KT Solutions 43 300 304 377 2005 016 division 018 division Total KT Hitel 20 2 3,561 2,584 Operating revenue 5,486 566 6,052 KTF Technologies Co., Ltd. 2 - 82,177 50,058 Operating income 706 119 825 PT KTF Indonesia 10,688 8,385 - - Ordinary income 513 98 611
Others 519 4 239 292 Depreciation 941 97 1,038 Property and equipment, net (*) 3,672 379 4,051 205,704 163,992 128,159 443,036 2004 016 division 018 division Total
Operating revenue 5,139 692 5,831 22. COMMITMENT AND CONTINGENT LIABILITIES: Operating income 396 133 529 Ordinary income 202 107 309 (1) The Company has entered into an agreement covering the resale of PCS with KT Corporation. Depreciation 875 118 993 As compensation for providing telecommunications network, the Company receives certain Property and equipment, net (*) 3,902 515 4,417 amount by multiplying outgoing call generated from KT Corporation’s subscribers by rate per minute. (*) Construction in progresses is not included.
(2) As of December 31, 2005, the Company is faced with 19 lawsuits as the defendant for total claims of 4,428 million and has filed 7 lawsuits as the plaintiff for the total claims of4,120 24. APPROVAL OF FINANCIAL STATEMENTS: million. The management of the Company believes the outcome of these lawsuits will not have a material impact on the financial statements. The Company’s financial statements, which are to be presented before the Company’s shareholders’ meeting, will be approved by the board of directors on February 8, 2006.
Annual Report 2005 94 | 95 Management Discussion & Analysis Report of Independent Public Accountants Financial Statements
Internal Accounting Control System Review Report
To the Chief Executive Officer of KT Freetel Co., Ltd.:
We have reviewed the report of management’s assessment of internal accounting control system (“IACS”) of KT Freetel Co., Based on our review, no material weakness in the design or operations of the Company’s IACS under Article 2-2 of the Ltd. (the “Company”) as of December 31, 2005. In accordance with Article 2-2 of the Act on External Audit for Stock External Audit Law as of December 31, 2005 has come to our attention. Companies (the “External Audit Law”) of the Republic of Korea, the Company’s management is responsible for assessing the This report applies to the Company’s IACS in existence as of December 31, 2005. We did not review the Company’s IACS design and operations of its IACS. Our responsibility is to review management’s assessment and issue a report based on our subsequent to December 31, 2005. This report has been prepared for Korean regulatory purposes, pursuant to the External review. Audit Law, and may not be appropriate for other purposes or for other users. We conducted our review in accordance with Article 2-3 of the External Audit Law. Our review included inquiries of management and employees, inspection of related documents and checking of the operations of the Company’s IACS. We did not perform an audit of the Company’s IACS and accordingly, we do not express an audit opinion.
As this report is based on Interim Guidelines on Auditors’ Review and Report on Management’s Assessment of IACS, issued by the Korean Audit Standards Committee on March 29, 2005, it applies only from that date until the date the Final Standard for Management’s Assessment of IACS and Final Standard for Auditors’ Review and Report on Management Assessment of IACS becomes effective. A review performed based on the final standards may have different results and accordingly, the Anjin Deloitte LLC content of our report may be different. Seoul, Korea January 20, 2006
This report is annexed in relation to the audit of the financial statements as of December, 31, 2005 and the review of internal accounting control system pursuant to Article 2-3 of the Act on External Audit for Stock Companies of the Republic of Korea.
Annual Report 2005 96 | 97 Glossaries
CDMA Code Division Multiple Access, a digital wireless downlink shared channel for packet connection. communication transmission technology for HSDPA represents one level above W-CDMA encoding signals by using either a special and supports high-speed data transmission at a message sequence or code for defining maximum rate of 14.4 Mbps. It also stably telecommunication channels. supports videophone and various other mobile multimedia services. cdma2000The standard for the 3rd-gneration synchronous mobile telecommunication technology, an i-mode The wireless internet service launched by NTT improvement over the 2nd-generation DoCoMo of Japan in 1999. technology, CDMA. There are two main International Mobile Telecommunications-2000, standards of CDMA2000 currently in use: IMT-2000 the global standard for 3rd-generation wireless CDMA2000 1x and CDMA 1xEV-DO (1x communications as defined by the International Evolution-Data Optimized), the latter capable of Telecommunication Union. transmitting larger volumes of data at faster speeds. “Ready for U” PCS Personal Communications Service, the digital wireless service operating in the 1,800 MHz Customer Relationship Management, an CRM band. integrated customer management system Ubiquitous defines the very essence of KTF today. aimed at increasing customer satisfaction, PDC Personal Digital Cellular, which is the TDMA- Our services, our technologies and maximizing both corporate profits and customer based (Time Division Multiple Access) 2nd- value by providing products & services generation mobile phone standard developed our brand are everywhere. customers want based on precise and detailed and used exclusively in Japan. customer data. RFID Radio Frequency Identification, the method But for KTF, the future begins now, EDGE Enhanced Data rates for GSM Evolution, the used in remote sensor systems for processing 2.5-generation mobile telecommunications information stored in small tags attached to and our successes of the past 10 years are only a prelude technology created to provide data transmission various objects. speeds of 2Mbps based on GSM technical to a brighter second decade that stands before us. standards. TelematicsThe integrated use of telecommunication and informatics, used to provide essential GPRS General Packet Radio Service, a technology information through wireless networks in real Come share that future with us. capable of supporting packet switching in GSM time. networks, supporting Internet services such as With KTF – The mobile communication leader. the web-browsing and data service with a USIM Universal Subscriber Identity Module, the IC transmission speed of 115kbps under the GSM card (called a “smartcard”) inserted in a 3G environment. mobile phone or wireless terminal, an upgraded module of previous SIM for a 2G GSM mobile GPS Global Positioning System, a satellite-based phone or terminal. location-tracking and wireless navigation system. VOD Voice On Demand systems allowing users to select and watch stored video content over a GSM Global System for Mobile Communications, the network. 2nd-generation mobile phone communication standard used throughout Europe. Most GSM VoIP Voice over Internet Protocol, the technology for networks in Europe, Asia and Australia operate transmitting ordinary telephone voice signals in the 900 MHz and 1,800 MHz bands, while through the Internet. the 1,900 MHz band is most common in North America and Central & South America. WCDMA Wideband Code Division Multiple Access, an IMT-2000 asynchronous-type 3rd-generation HSDPA High-Speed Downlink Packet Access, the 3.5- mobile phone technology standard that generation mobile telecommunications represents an evolution of the GSM standard. technology which defines a new high-speed
Annual Report 2005 98 | 99 KTF, 7-18 Shincheon-Dong Songpa-Gu, Seoul 138-240, Korea www.ktf.com