6-K 1 u99763e6vk.htm KT CORPORATION KT Corporation
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13a-16 OR 15d-16 UNDER THE SECURITIES
EXCHANGE ACT OF 1934

For the month of May 2005

KT Corporation

206 Jungja-dong
Bundang-gu, Sungnam
Kyunggi-do
463-711
Korea

(Address of principal executive offices)

(indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

     
Form 20-F þ   Form 40-F o

(Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

     
Yes o   No þ



 


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This Current Report on Form 6-K is being filed to incorporate by reference into Registration Statement No. 333-100251 on Form F-3, effective December 27, 2002, relating to $1,210,050,000 0.25% Convertible Notes Due 2007, $500,000,000 4.30% Bonds Due 2005 and Warrants to Purchase 9,270,200 Common Shares.

 



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Independent Auditors’ Report

Based on a report originally issued in Korean

The Board of Directors and Stockholders
KT Corporation:

We have audited the accompanying consolidated balance sheets of KT Corporation and subsidiaries (the “Company”) as of December 31, 2003 and 2004, and the related consolidated statements of earnings and changes in stockholders’ equity and cash flows for the years then ended, all expressed in Korean Won. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of KT Freetel Co., Ltd. (“KTF”), a 46.9% and 48.7% owned subsidiary at December 31, 2003 and 2004, respectively, as of and for the years then ended December 31, 2003 and 2004. The financial statements of KTF, which are included in the consolidated financial statements of the Company, reflect total combined assets constituting 29.1% and 29.5% as of December 31, 2003 and 2004, respectively, and total revenues constituting 28.1% and 30.5% for the years ended December 31, 2003 and 2004, respectively, of the related consolidated totals. Those financial statements were audited by other auditors whose report has been furnished to us and our report, insofar as it relates to the amounts included for KTF, is based solely on the report of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles and significant estimates used by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2004, and the results of its operations, the changes in its stockholders’ equity, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea.

The accompanying consolidated financial statements as of and for the year ended December 31, 2004 have been translated into United States dollars solely for the convenience of the reader and have been translated on the basis set forth in note 3 to the consolidated financial statements.

 


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Without qualifying our opinion, we draw attention to the following:

As discussed in note 2(a) to the consolidated financial statements, accounting principles and auditing standards and their application in practice vary among countries. The accompanying consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying consolidated financial statements are for use by those knowledgeable about Korean accounting procedures and auditing standards and their application in practice.



Seoul, Korea
February 25, 2005








This report is effective as of February 25, 2005, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

 


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KT CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

                         
                    2004  
Assets   2003     2004     (note 3)  
Current assets:
                       
Cash and cash equivalents (notes 4 and 5)
  W 760,868       1,755,929     $ 1,696.4  
Short-term financial instruments (note 5)
    60,899       984,122       950.8  
Current portion of investment securities (note 8):
                       
Trading securities
    52,397       6,186       6.0  
Available-for-sale securities
    286,757       257,803       249.1  
Held-to-maturity securities
    5,712       1,660       1.6  
Notes and accounts receivable – trade, less allowance for doubtful accounts of W646,273 in 2003 and W702,635 in 2004 (note 2)
    2,647,379       2,793,143       2,698.4  
Accounts receivable – other
    323,042       365,162       352.8  
Inventories (note 6)
    364,833       374,319       361.6  
Other current assets (note 7)
    230,044       270,653       261.5  
 
                 
 
                       
Total current assets
    4,731,931       6,808,977       6,578.2  
 
                 
Investment securities:
                       
Available-for-sale securities (note 8)
    260,642       218,757       211.3  
Held-to-maturity securities (note 8)
    111,409       94,404       91.2  
Equity securities of affiliates (note 9)
    140,790       54,061       52.2  
 
                 
 
                       
Total investment securities
    512,841       367,222       354.7  
 
                 
 
                       
Property, plant and equipment (note 10):
                       
Land
    1,154,955       1,167,683       1,128.1  
Buildings and structures
    4,282,494       4,555,427       4,401.0  
Machinery and equipment
    34,731,446       35,624,899       34,416.9  
Vehicles
    82,911       89,316       86.3  
Tools, furniture and fixtures
    2,005,812       2,114,653       2,042.9  
Construction in progress
    750,267       487,461       470.9  
 
                 
 
                       
 
    43,007,885       44,039,439       42,546.1  
 
                       
Less accumulated depreciation
    (26,633,942 )     (28,317,984 )     (27,357.8 )
 
                 
 
                       
Net property, plant and equipment
    16,373,943       15,721,455       15,188.3  
 
                 
 
                       
Other assets (notes 5, 11 and 26)
    3,937,960       3,575,578       3,454.3  
 
                 
 
                       
 
  W 25,556,675       26,473,232     $ 25,575.5  
 
                 

See accompanying notes to consolidated financial statements.

 


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KT CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets, Continued

December 31, 2003 and 2004

(In millions of Won and U.S. dollars, except share data)

                         
                    2004  
Liabilities and Stockholders' Equity   2003     2004     (note 3)  
Current liabilities:
                       
Notes and accounts payable – trade
  W 1,022,805       853,381     $ 824.4  
Short-term borrowings (note 13)
    631,689       438,592       423.8  
Current portion of long-term debt (note 15)
    2,172,510       4,756,067       4,594.8  
Accounts payable – other
    1,233,422       1,123,323       1,085.2  
Advance receipts from customers
    103,139       125,989       121.7  
Accrued expenses
    252,841       288,488       278.7  
Withholdings
    147,233       187,579       181.2  
Income taxes payable
    219,348       284,102       274.5  
Other current liabilities (notes 14 and 23)
    132,614       276,969       267.5  
 
                 
 
                       
Total current liabilities
    5,915,601       8,334,490       8,051.8  
 
                       
Long-term debt, excluding current portion (note 15)
    9,049,748       6,985,071       6,748.2  
Refundable deposits for telephone installation (note 16)
    1,227,355       1,086,635       1,049.8  
Accrual for retirement and severance benefits, net (note 17)
    245,878       314,789       304.1  
Long-term accounts payable – other (note 12)
    572,606       554,024       535.2  
Other long-term liabilities (note 18)
    148,867       171,843       166.0  
 
                 
 
                       
Total liabilities
    17,160,055       17,446,852       16,855.1  
 
                 
Stockholders’ equity:
                       
Common stock of W5,000 par value (note 19):
                       
Authorized – 1,000,000,000 shares
                       
Issued – 284,849,400 shares in 2003 and 2004
    1,560,998       1,560,998       1,508.1  
Capital surplus (note 20)
    1,308,612       1,291,617       1,247.8  
Retained earnings:
                       
Appropriated (note 21)
    8,025,854       5,431,862       5,247.7  
Unappropriated (deficit)
    (342,554 )     2,901,378       2,803.0  
 
                 
 
                       
 
    7,683,300       8,333,240       8,050.7  
 
                 
 
                       
Capital adjustments:
                       
Treasury stock (note 22)
    (3,962,598 )     (3,962,568 )     (3,828.2 )
Loss on retirement of treasury stock (note 22)
    (16,391 )     (16,388 )     (15.8 )
Foreign-based operations translation adjustment
    (5,859 )     (2,847 )     (2.7 )
Unrealized gains (losses) on available-for-sale securities (note 8)
    (24,799 )     7,797       7.5  
Unrealized losses on equity securities of affiliates (note 9)
    (2,691 )     (6,732 )     (6.5 )
Stock options (note 29)
    6,745       11,686       11.3  
 
                 
 
                       
 
    (4,005,593 )     (3,969,052 )     (3,834.4 )
 
                 
 
                       
Minority interest in consolidated subsidiaries
    1,849,303       1,809,577       1,748.2  
 
                 
 
                       
Total stockholders’ equity
    8,396,620       9,026,380       8,720.4  
 
                       
Commitments and contingencies (note 23)
                 
 
                 
 
                       
 
  W 25,556,675       26,473,232     $ 25,575.5  
 
                 

See accompanying notes to consolidated financial statements.

 


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KT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Earnings

Years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars, except earnings per share)

                         
                    2004  
    2003     2004     (note 3)  
Operating revenues (note 24)
  W 16,067,779       17,068,371     $ 16,489.6  
Operating expenses (note 25)
    14,245,343       14,587,839       14,093.2  
 
                 
 
                       
Operating income
    1,822,436       2,480,532       2,396.4  
 
                 
 
                       
Other income (expense):
                       
Interest income
    115,454       116,725       112.8  
Interest expense
    (705,540 )     (678,514 )     (655.5 )
Equity in losses of affiliates, net (note 9)
    (30,270 )     (79,350 )     (76.7 )
Foreign currency transaction and translation gain (loss), net (note 15)
    (27,074 )     542,566       524.2  
Loss on disposition of property, plant and equipment, net
    (122,966 )     (103,513 )     (100.0 )
Gain (loss) on disposition of available-for-sale securities, net (note 8)
    772,901       (15,115 )     (14.6 )
Impairment loss on available-for-sale securities (note 8)
    (43,993 )     (5,831 )     (5.6 )
Impairment loss on held-to-maturity securities (note 8)
          (42,078 )     (40.7 )
Contributions received for losses on universal telecommunications services (note 32)
    28,539       80,310       77.6  
Prior year’s additional income tax payment (note 26)
    (53,992 )     (943 )     (0.9 )
Contribution payments for research and development and donations (note 32)
    (182,983 )     (146,779 )     (141.8 )
Derivatives transaction and valuation loss, net (note 23)
    (151 )     (146,937 )     (142.0 )
Other, net
    8,699       7,963       7.7  
 
                 
 
                       
 
    (241,376 )     (471,496 )     (455.5 )
 
                 
 
                       
Earnings before income taxes and minority interest
    1,581,060       2,009,036       1,940.9  
 
                       
Income taxes (note 26)
    523,631       577,889       558.3  
 
                 
 
                       
Earnings before minority interest
    1,057,429       1,431,147       1,382.6  
 
                       
Minority interest in earnings of consolidated subsidiaries, net
    (235,695 )     (148,931 )     (143.9 )
 
                 
 
                       
Net earnings
  W 821,734       1,282,216     $ 1,238.7  
 
                 
 
                       
Basic earnings per share of common stock in Won and U.S. dollars (note 28)
  W 3,802       6,084     $ 5.88  
 
                 
 
                       
Diluted earnings per share of common stock in Won and U.S. dollars (note 28)
  W 3,313       5,697     $ 5.50  
 
                 

See accompanying notes to consolidated financial statements.

 


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KT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

                                                         
    Common     Capital     Retained     Capital     Minority             2004  
    Stock     surplus     earnings     adjustments     interest     Total     (note 3)  
Balance at January 1, 2003
  W 1,560,998       1,447,951       8,274,482       (3,386,959 )     1,936,094       9,832,566          
Net earnings
                821,734                   821,734          
Retirement of treasury stock
                (1,198,499 )                 (1,198,499 )        
Dividends
                (212,887 )                 (212,887 )        
Cumulative effect of an accounting change
                (1,530 )           (2,198 )     (3,728 )        
Increase (decrease) in unrealized gains (losses) on available-for-sale securities
                      (768,362 )     2,541       (765,821 )        
Unrealized losses on equity securities of affiliates
                      1,575       1,937       3,512          
Decrease of treasury stock, net (note 22)
                      149,627             149,627          
Loss on retirement of treasury stock
                      (9,753 )           (9,753 )        
Stock options
                      6,192       774       6,966          
Changes in translation adjustments of foreign subsidiaries
                      2,087       160       2,247          
Changes in subsidiaries included in consolidation
                            27,379       27,379          
Acquisition of additional equity in consolidated subsidiaries
            (165,642 )                 (260,410 )     (426,052 )        
Equity change of subsidiary from merger transaction
          26,181                   (92,958 )     (66,777 )        
Minority interest in earnings of consolidated subsidiaries
                            235,695       235,695          
Other
          122                   289       411          
 
                                           
 
                                                       
Balance at December 31, 2003
  W 1,560,998       1,308,612       7,683,300       (4,005,593 )     1,849,303       8,396,620     $ 8,111.9  
 
                                         
 
                                                       
Net earnings
                1,282,216                   1,282,216       1,238.7  
Retirement of treasury stock in consolidated subsidiaries
          (14,784 )                 (135,069 )     (149,853 )     (144.8 )
Dividends (note 27)
                (632,276 )                 (632,276 )     (610.8 )
Dividends in consolidated subsidiaries
                            (50,037 )     (50,037 )     (48.3 )
Increase (decrease) in unrealized gains (losses) on available-for- sale securities
                      32,596       (1,418 )     31,178       30.1  
Unrealized losses on equity securities of affiliates
                      (4,041 )     (1,281 )     (5,322 )     (5.1 )
Stock options
                      4,941       1,188       6,129       5.9  
Changes in translation adjustments of foreign subsidiaries
                      3,012       (2,814 )     198       0.2  
Minority interest in earnings of consolidated subsidiaries
                            148,931       148,931       143.9  
Other
          (2,211 )           33       774       (1,404 )     (1.3 )
 
                                         
 
                                                       
Balance at December 31, 2004
  W 1,560,998       1,291,617       8,333,240       (3,969,052 )     1,809,577       9,026,380     $ 8,720.4  
 
                                         

See accompanying notes to consolidated financial statements.

 


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KT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

                         
                    2004  
    2003     2004     (note 3)  
Cash flows from operating activities:
                       
Net earnings
  W 821,734       1,282,216     $ 1,238.7  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Depreciation
    3,393,175       3,403,639       3,288.2  
Amortization
    364,051       393,849       380.5  
Provision for doubtful accounts
    363,774       287,073       277.3  
Provision for retirement and severance benefits
    1,067,076       281,453       271.9  
Equity in losses of affiliates
    30,270       79,350       76.7  
Loss on disposition of property, plant and equipment
    122,966       103,513       100.0  
Loss (gain) on foreign currency translations, net
    27,555       (546,335 )     (527.8 )
Loss (gain) on disposition of available-for-sale securities, net
    (772,901 )     15,115       14.6  
Impairment loss on available-for-sale securities
    43,993       5,831       5.6  
Impairment loss on held-to-maturity securities
          42,078       40.7  
Deferred income tax expense
    46,294       106,964       103.3  
Minority interest in earnings of consolidated subsidiaries
    235,695       148,931       143.9  
Changes in operating assets and liabilities:
                       
Notes and accounts receivable – trade
    (742,487 )     (361,316 )     (349.1 )
Accounts receivable – other
    (387,518 )     (93,936 )     (90.7 )
Inventories
    (197,478 )     (15,564 )     (15.0 )
Other asset (long-term accounts receivable – trade)
    126,900       (266,813 )     (257.8 )
Notes and accounts payable – trade
    (143,425 )     (150,771 )     (145.7 )
Accounts payable – other
    60,928       (107,901 )     (104.2 )
Advance receipts from customers
    (25,359 )     22,850       22.1  
Accrued expenses
    (5,792 )     35,647       34.4  
Withholdings
    (23,451 )     40,346       39.0  
Income taxes payable
    (240,025 )     (540 )     (0.5 )
Payment of retirement and severance benefits
    (1,020,940 )     (93,178 )     (90.0 )
Severance benefits insurance deposit
    (180,801 )     (119,568 )     (115.5 )
Other, net
    226,166       226,434       218.8  
 
                 
 
                       
Net cash provided by operating activities
  W 3,190,400       4,719,367     $ 4,559.4  
 
                 

See accompanying notes to consolidated financial statements.

 


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KT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, Continued

Years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

                         
                    2004  
    2003     2004     (note 3)  
Cash flows from investing activities:
                       
Purchases of property, plant and equipment
  W (3,209,376 )     (2,971,376 )   $ (2,870.6 )
Proceeds from sale of property, plant and equipment
    253,137       109,469       105.7  
Decrease in accounts receivable – other
    215,021              
Decrease (increase) in short-term financial instruments
    758,916       (923,223 )     (891.9 )
Purchases of available-for-sale securities
    (315,553 )     (499,370 )     (482.4 )
Purchases of held-to-maturity securities
    (11,412 )     (3,182 )     (3.1 )
Purchases of equity securities of affiliates
    (83,890 )            
Proceeds from sale of available-for-sale securities
    210,121       589,977       570.0  
Proceeds from maturity of held-to-maturity securities
    218       12,992       12.5  
Proceeds from sale of equity securities of affiliates
    18,480       2,057       2.0  
Decrease in other current assets
    560,208       184,753       178.5  
Decrease (increase) in other assets
    123,258       (119,908 )     (115.8 )
 
                 
 
                       
Net cash used in investing activities
    (1,480,872 )     (3,617,811 )     (3,495.1 )
 
                 
 
                       
Cash flows from financing activities:
                       
Payment of dividends
    (213,308 )     (683,208 )     (660.0 )
Proceeds from sale of accounts receivable
    512,000              
Proceeds from short-term borrowings, net
    (484,696 )     (193,097 )     (186.6 )
Repayment of long-term debt
    (1,989,381 )     (2,178,028 )     (2,104.2 )
Proceeds from issuance of long-term debt
    1,285,653       3,235,976       3,126.2  
Decrease in refundable deposits for telephone installation
    (306,211 )     (140,720 )     (135.9 )
Increase (decrease) in other long-term liabilities
    (2,781 )     3,905       3.8  
Reacquisition of treasury stock
    (412,247 )            
Proceeds from sale of treasury stock
    39,312              
Reacquisition of treasury stock in consolidated subsidiaries
    (69,747 )     (151,308 )     (146.2 )
Acquisition of additional equity interest in consolidated subsidiaries
    (426,052 )     (609 )     (0.6 )
Other, net
    2,247       594       0.6  
 
                 
 
                       
Net cash used in financing activities
    (2,065,211 )     (106,495 )     (102.9 )
 
                 
 
                       
Net increase in cash and cash equivalents from change of subsidiaries in consolidated financial statements
    29,862              
 
                 
 
                       
Net increase (decrease) in cash and cash equivalents
    (325,821 )     995,061       961.4  
 
                       
Cash and cash equivalents at beginning of year
    1,086,689       760,868       735.0  
 
                 
 
                       
Cash and cash equivalents at end of year
  W 760,868       1,755,929     $ 1,696.4  
 
                 

See accompanying notes to consolidated financial statements.

 


Table of Contents

1

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003 and 2004

(1)   Organization and Description of Business
 
    KT Corporation (“KT” or the “Company”) commenced operations on January 1, 1982 through the segregation of specified operations from the Korean Ministry of Information and Communication (the “MIC”) for the purpose of contributing to the convenience in national life and improvement of public welfare through rational management of the public telecommunications business and improvement of telecommunications technology under the Korea Telecom Act.
 
    Upon the repeal of the Korea Telecom Act as of October 1, 1997, KT became a government invested institution regulated by the Korean Commercial Code and changed its name from Korea Telecom to Korea Telecom Corp. pursuant to an amendment to its Articles of Incorporation. Shares of KT were listed on the Korea Stock Exchange on December 23, 1998. KT issued 24,282,195 additional shares on May 29, 1999 and issued American Depository Shares (“ADS”) representing these new shares and government owned shares. On July 2, 2001, additional ADS representing 55,502,161 government-owned shares were issued.
 
    The Korean government has gradually reduced its ownership interest in the Company since 1993 and completed the disposition of its ownership interest in the Company on May 24, 2002. On March 22, 2002, the Company changed its name from Korea Telecom Corp. to KT Corporation.
 
    Under Korean law, the MIC and other government entities have extensive authority to regulate KT. The MIC has responsibility for approving rates for local service and interconnection services provided by KT. Beginning in January 1998, KT is allowed to set its own rates for domestic long-distance service, international long-distance service and other services without approval from the MIC.
 
    In recent years, KT has been subject to increasing competition as a result of the government’s issuance of additional licenses to create competition in the telecommunications market and to foster new telecommunications business areas. Additionally, in June 1997, the MIC awarded a license to a second carrier to provide local telephone service. This new carrier commenced operations in 1999. A third carrier commenced international long-distance service in 1997 and domestic long-distance service in 1999. The entry of these new carriers into the local and long-distance telephone service markets has had, and is expected to continue to have, a negative impact on KT’s telephone service revenues and profitability.

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements

  (a)   Basis of Presenting Consolidated Financial Statements
 
      The accompanying consolidated financial statements have been extracted from KT’s Korean language consolidated financial statements that were prepared using accounting principles, procedures and reporting practices generally accepted in the Republic of Korea (“Korean GAAP”). The consolidated financial statements have been translated from those issued in the Korean language into the English language, and have been modified to allow for the formatting of the consolidated financial statements in a manner which is different from the presentation under Korean financial statements practices. In addition, certain modifications have been made in the accompanying consolidated financial statements to bring the formal presentation into conformity with practices outside of Korea, and certain information included in the Korean language statutory consolidated financial statements, which management believes is not required for a fair presentation of KT’s financial position or results of operations, is not presented in the accompanying consolidated financial statements.
 
      Accordingly, the accompanying consolidated financial statements and their utilization are not designed for those who are not informed about Korean accounting principles, procedures and practices and furthermore are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of Korea.

 


Table of Contents

2

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

  (a)   Basis of Presenting Consolidated Financial Statements, Continued
 
      The consolidated financial statements include the accounts of KT and the following controlled subsidiaries (collectively referred to as the “Company”) as of December 31, 2003 and 2004. Controlled subsidiaries include majority-owned entities by either the Company or a controlled subsidiary and other entities where the Company or its controlled subsidiary owns more than 30% of total outstanding common stock and is the largest shareholder. All significant intercompany balances and transactions have been eliminated in consolidation.

                                     
            Year of   Percentage    
    Year of   obtaining   ownership (%)    
Subsidiary   establishment   control   2003   2004   Primary business
KT Freetel Co., Ltd. (“KTF”)
    1997       1997       46.9       48.7     PCS business
KT Hitel Co., Ltd. (“KTH”)
    1991       1992       65.9       65.9     Data communication
KT Submarine Co., Ltd. (“KTSC”)
    1995       1995       36.9       36.9     Submarine cable construction and maintenance
KT Powertel Co., Ltd. (“KTP”)
    1985       1985       44.8       44.8     Trunk radio system business
KT Networks Corporation (“KTN”)
    1986       1986       100.0       100.0     Group telephone management
KT Linkus Co., Ltd.
    1988       1988       93.8       93.8     Public telephone maintenance
Korea Telecom America, Inc.
    1993       1993       100.0       100.0     Foreign telecommunication
business
Korea Telecom Philippines, Inc.
    1994       1994       100.0       100.0     Foreign telecommunication
business
New Telephone Company, Inc. (“NTC”)
    1993       1998       72.5       72.5     Foreign telecommunication
business
Korea Telecom Japan Co., Ltd.
    1999       1999       100.0       100.0     Foreign telecommunication
business
KTF Technologies Inc. (“KTFT”)*
    2001       2002       57.4       70.8     PCS handset development
KT Commerce Inc. (“KTC”)**
    2002       2002       100.0       100.0     B2C, B2B service
KT Rental Corp. (“KTR”)***
    1999       2003       98.8           Rental service
KT China Co., Ltd. (“KTCC”)
    2003       2003       100.0       100.0     Foreign telecommunication
business


*   The 70.8% ownership percentage in KTFT represents the ownership of this entity by KTF.
 
**   The 100.0% ownership percentage in KTC represents the ownership of this entity by KT (19.0%) and KTH (81.0%).
 
***   The 98.8% ownership percentage in KTR represents the ownership of this entity by KTN.

      On March 6, 2003, KTICOM Co., Ltd. (“KTICOM”) was merged into KTF. This transaction was done by KTF issuing an additional 7,082,476 shares of its common stock to the minority shareholders of KTICOM, which resulted in a decrease in the Company’s equity ownership interest. In addition, during 2003, the Company acquired an additional 15,532,846 shares of KTF for W399,996 million, increasing its equity ownership interest to 46.9%. The amount paid by KT exceeded the proportionate net assets of KTF by W165,642 million. This difference was recorded as a reduction to capital surplus. In 2004, KTF reacquired 7,073,200 shares of its common stock and retired these treasury shares amounting to W149,800 million by a charge to its retained earnings. Accordingly, the Company’s equity ownership interest in KTF increased from 46.9% to 48.7%.
 
      KTP acquired Anam Telecom Ltd. on February 5, 2003. As a result, the Company’s equity ownership interest decreased to 44.8%.

 


Table of Contents

3

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

  (a)   Basis of Presenting Consolidated Financial Statements, Continued
 
      In March 2003, the Company invested W1,245 million in KTCC, which is a wholly-owned subsidiary located in China.
 
      In June 2004, KTF purchased an additional 555,555 shares of KTFT for W13,000 million. As a result, KTF’s equity ownership interest in KTFT increased to 70.8% as of December 31, 2004.
 
      In January 2004, KTN, a subsidiary of KT, purchased an additional 1.2% of KTR shares. As a result, KTN’s equity ownership interest in KTR increased to 100.0%. In addition, KTR was merged into KTN on April 27, 2004.
 
      As of December 31, 2004, KT has issued guarantees of consolidated subsidiaries’ indebtedness and contract performance as follows:

         
Subsidiary   Millions  
KTSC
  W 60,540  
NTC
    12,526  
 
     
 
       
 
  W 73,066  
 
     

      Significant account balances which occurred in the normal course of business with and between subsidiaries as of December 31, 2003 and 2004 are summarized as follows (these amounts have been eliminated in consolidation):

                 
    Millions  
Balance Sheet Items   2003     2004  
Notes and accounts receivable — trade
  W 113,890       208,815  
Accounts receivable — other
    19,179       16,713  
Convertible notes
    332,375       347,814  
Accounts payable — other
    188,054       193,794  
Key money deposits
    48,895       41,599  

      Significant account balances which occurred in the normal course of business with equity method investees as of December 31, 2003 and 2004 are summarized as follows:

                         
            Millions  
Transaction Parties   Balance Sheet Items   2003     2004  
KT
  KDB   Trade notes and accounts receivable   W 4,079       54,664  
KT
  Other   Trade notes and accounts receivable     1,526       1,120  
KT
  Infotech   Accounts payable     19,348       23,374  
KT
  eNtoB   Accounts payable     16,462       16,669  
KT
  KOID   Accounts payable     13,169       14,757  
KT
  KTRD   Accounts payable     12,664       6,633  
KT
  KOIS   Accounts payable     8,852       9,538  
KT
  Other   Accounts payable     1,178       1,963  

 


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4

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

  (a)   Basis of Presenting Consolidated Financial Statements, Continued
 
      Significant transactions which occurred in the normal course of business with and between subsidiaries are eliminated in the course of consolidation for the years ended December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Operating revenues
  W 695,685       891,233  
Operating expenses
    835,728       1,124,463  
Contributions received for losses on universal telecommunications services
    44,250       25,557  
Other income     10,103       10,307  

      Significant transactions which occurred in the normal course of business with equity method investees for the years ended December 31, 2003 and 2004 are summarized as follows:

                         
            Millions  
Transaction Parties   Income Statement Items   2003     2004  
KT
  KDB   Sales   W 47,337       131,685  
KT
  KOID   Sales     8,942       10,676  
KT
  KOIS   Sales     6,480       7,934  
KT
  Other   Sales     1,367       1,872  
KT
  KOID   Purchases     96,944       102,624  
KT
  KTRD   Purchases     66,361       74,058  
KT
  KOIS   Purchases     66,148       71,778  
KT
  Infotech   Purchases     59,097       43,499  
KT
  NtoB   Purchases     33,101       86,406  
KT
  Other   Purchases     7,069       7,321  

  (b)   Cash Equivalents
 
      The Company considers short-term financial instruments with maturities of three months or less at the acquisition date to be cash equivalents.
 
  (c)   Financial Instruments
 
      Short-term financial instruments are instruments handled by financial institutions which are held for short-term cash management purposes or will mature within one year, including time deposits, installment savings deposits and restricted bank deposits.
 
  (d)   Allowance for Doubtful Accounts
 
      Notes and trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing notes and accounts receivable. The Company determines the allowance for doubtful notes and accounts receivable based on an analysis of portfolio quality and historical write-off experience. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 


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5

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

  (d)   Allowance for Doubtful Accounts, Continued
 
      Changes in the allowances for doubtful accounts for the years ended December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Balance at beginning of year
  W 430,066       646,273  
Increase due to the changes of consolidated subsidiaries
    65        
Provision
    363,774       287,073  
Write-offs
    (147,632 )     (230,711 )
 
           
 
               
Balance at end of year
  W 646,273       702,635  
 
           

  (e)   Inventories
 
      Inventories are stated at the lower of cost or net realizable value. Cost is determined by the moving-average cost method, except for materials in transit for which cost is determined by the specific identification method. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated selling cost. Effective January 1, 2004, the Company adopted Statement of Korea Accounting Standards (“SKAS”) No. 10 “Inventories”. Through 2003, a valuation loss incurred when the market value of inventory falls below its carrying amount was reported as a non-operating expense. In 2004, in accordance with SKAS No. 10, the Company included inventory valuation losses in its cost of goods sold (“a component of operating expenses”). The Company recognized inventory valuation losses of W21,471 million included in cost of goods sold for the year ended December 31, 2004. As allowed by this standard, the Company did not reclassify prior year balances because the amount was not material.
 
  (f)   Investments in Securities
 
      Upon acquisition, the Company classifies certain debt and equity securities into one of the three categories: held-to-maturity, available-for-sale, or trading securities. Investments in debt securities that the Company has the positive intention and ability to hold to maturity are classified as held-to-maturity. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) are classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used to generate profit on short-term differences in price. Investments not classified as either held-to-maturity or trading securities are classified as available-for-sale securities. Such determination should be reassessed at each balance sheet date.
 
      Trading securities are carried at fair value, with unrealized holding gains and losses included in earnings. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported as a capital adjustment. Investments in equity securities and limited partnerships that do not have readily determinable fair values are stated at cost. Declines in value judged to be other-than-temporary on available-for-sale securities are charged to current results of operations. Realized gains and losses are determined using the specific identification method based on the trade date of a transaction. Investments in debt securities that are classified into held-to-maturity are reported at amortized cost at the balance sheet date and such amortization is included in interest income.

 


Table of Contents

6

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

  (f)   Investments in Securities, Continued
 
      Marketable securities are at the quoted market prices as of the period end. Non-marketable debt securities are recorded at the fair values derived from the discounted cash flows by using an interest rate deemed to approximate the market interest rate. The market interest rate is determined by the issuers’ credit rate announced by the accredited credit rating agencies in Korea. Beneficiary certificates which are securities indicating beneficiary right on certain investment securities held by the investment management companies are recorded at fair value as determined by the investment management companies. Investments in funds which are not classified as trading securities shall be classified as available-for-sale securities and be stated at cost.
 
      Trading securities shall be classified as current assets, whereas available-for-sale securities and held-to-maturity securities shall be classified as long-term investments. However, available-for-sale securities, whose maturity dates are due within one year from the balance sheet date or whose likelihood of being disposed of within one year from the balance sheet date is probable, shall be classified as current assets. Likewise, held-to-maturity securities whose maturity dates are due within one year from the balance sheet date shall be classified as current assets.
 
  (g)   Investment Securities under the Equity Method of Accounting
 
      For investments in companies except funds, whether or not publicly held, that are not controlled, but under the Company’s significant influence, the Company utilizes the equity method of accounting. Significant influence is generally deemed to exist if the Company can exercise influence over the operating and financial policies of an investee. The ability to exercise that influences may be indicated in several ways, such as the Company’s representation on its board of directors, the Company’s participation in its policy making processes, material transactions with the investee, interchange of managerial personnel, or technological dependency. Also, if the Company owns directly or indirectly 20% or more of the voting stock of an investee and the investee is not required to be consolidated (see note 2(a)), the Company generally presumes that the investee is under significant influence. In addition, certain funds which meet the above criteria are nevertheless excluded from equity method accounting and instead accounted for as available-for-sale securities and recorded at cost.
 
      Under the equity method of accounting, the Company’s initial investment is recorded at cost and is subsequently increased to reflect the Company’s share of the investee income and reduced to reflect the Company’s share of the investee losses or dividends received. Any excess in the Company’s acquisition cost over the Company’s share of the investee’s identifiable net assets is generally recorded as goodwill or other intangibles and amortized by the straight-line method over the estimated useful life. The amortization of goodwill or other intangibles is recorded against the equity income (losses) of affiliates. When events or circumstances indicate that carrying amount may not be recoverable, the Company reviews goodwill or other intangibles for impairment.
 
      Some investee companies depreciate their machinery and equipment by the straight-line method in accordance with Korean GAAP considering the attributes and nature of the underlying assets. Accordingly, the Company does not conform the depreciation method of those investees to the declining-balance method used by the Company.
 
      Assets and liabilities of foreign-based companies accounted for using the equity method are translated at the current rate of exchange at the balance sheet date while profit and loss items in the statement of earnings are translated at the average rate during the year and capital account at the historical rate. The translation gains and losses arising from collective translation of the foreign currency financial statements of foreign-based companies are offset and the balance is accumulated as capital adjustment.

 


Table of Contents

7

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

  (g)   Investment Securities under the Equity Method of Accounting, Continued
 
      Under the equity method of accounting, the Company does not record its share of losses of an affiliate when such losses would make the Company’s investment in such entity less than zero unless the Company has guaranteed obligations of the investee or is otherwise committed to provide additional financial support.
 
  (h)   Property, Plant and Equipment
 
      Property, plant and equipment are stated at cost. Improvements that significantly extend the life of an asset or add to its productive capacity are capitalized. Expenditures for maintenance and repairs are charged to income as incurred. Property, plant and equipment contributed by the government on January 1, 1982 are stated at net revalued amounts.
 
      Depreciation is computed using the declining-balance method (except for buildings, structures, underground access to cable tunnels, and concrete and steel telephone poles, and the assets of some subsidiaries which are depreciated using the straight-line method) based on the following estimated useful lives of the related assets:

         
    Estimated useful lives (years)  
Buildings and structures
    5-60  
Machinery and equipment:
       
Underground access to cable tunnels, and concrete and steel telephone poles
    20-40  
Other
    3-15  
Vehicles
    3-10  
Tools, furniture and fixtures:
       
Steel safe boxes
    20  
Tools, computer equipment, furniture and fixtures
    2-8  

      Prior to January 1, 2003, the Company capitalized interest costs on all borrowings incurred prior to completion of the acquisitions, as part of the cost of qualifying assts. However, effective January 1, 2003, the Company adopted Statement of Korea Accounting Standards No. 7, “Capitalization of Financing Costs”. In accordance with this standard, the Company elected to no longer capitalize interest costs. Accordingly, the Company recognizes interest costs and other financial charges on borrowings associated with the manufacture, purchase, or construction of property, plant and equipment as an expense in the period in which they are incurred.
 
      The Company reviews for impairment of property, plant and equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future 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 carrying amount of the assets exceeds the fair value of the assets.

 


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8

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

  (i)   Contributions Received for Capital Expenditures
 
      Contributions received for capital expenditures are reflected as a reduction of the acquisition cost of the acquired assets and, accordingly, reduce depreciation expense related to the acquired assets over their useful lives. Contributions received, which have yet to be disbursed for capital expenditures, are presented as a deduction of received assets.
 
  (j)   Intangible Assets

  (i)   Goodwill
 
      Goodwill, which represents the excess of the acquisition cost over the fair value of net identifiable assets acquired related to entities that are being consolidated, is amortized on a straight-line basis over its estimated economic useful life.
 
      Accounting for the difference between the acquisition cost and the amount of underlying equity of a purchased entity differs depending on whether (1) the acquisition of the controlling interest of an investee is the original acquisition or (2) the purchase represents an additional equity purchase of a controlled entity. When the Company first acquires a controlling financial interest of an entity, the difference between the acquisition cost and the corresponding proportionate share of the entity’s equity as of the most recently audited or reviewed balance sheet date is recorded as goodwill. However, for additional equity purchases of existing consolidated subsidiaries, such difference is recorded as a reduction of stockholders’ equity (capital surplus). Goodwill is amortized over its estimated useful life of 4 to 10 years.
 
      Amortization of goodwill of W294,306 million and W212,210 million for the years ended December 31, 2003 and 2004, respectively, and amortization of negative goodwill of W518 million for the years ended December, 31 2003 and 2004, are included in operating expenses and other income, respectively, in the consolidated statements of earnings.
 
  (ii)   Other Intangible Assets
 
      Other intangible assets, consisting of exclusive rights usage and software, are stated at cost less accumulated amortization. Amortization is computed using the straight-line method over periods which range from 3 to 50 years. The Company has monopolistic and exclusive rights to control buildings and facilities utilization and copyrights by contract or related laws. Accordingly, the Company amortizes those intangible assets over the period of 30 or 50 years based on contract or related laws.
 
  (iii)   Research and Development Costs
 
      The Company charges research and development costs to expense as incurred. However, the costs which are recoverable from future earnings are deferred and amortized over their estimated useful lives. In addition, internal use software development costs, after technological feasibility test, such as those associated with Broadband Integrated Services Digital Network (B-ISDN), Integrated Customer Information System (ICIS) and Enterprise Resource Planning (ERP), are accounted for as intangible assets and amortized by the straight-line method over their estimated economic useful lives from 3 to 6 years.
 
      The Company expensed research and development costs of W244,625 million and W265,207 million for the years ended December 31, 2003 and 2004, respectively. In addition, the Company capitalized development costs, which consist of software, of W61,736 million and W103,374 million for the years ended December 31, 2003 and 2004, respectively.

 


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9

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

  (j)   Intangible Assets, Continued
 
      The Company reviews for impairment of intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
 
  (k)   Valuation of Receivables at Present Value
 
      Receivables arising from extended payment terms which generally involve sales of personal communication service (“PCS”) handsets, are stated at present value and the difference between the nominal value and present value is deducted directly from the nominal value of related receivables and is amortized using the effective interest method over the payment period. The amount amortized is included in interest income.
 
  (l)   Convertible Notes and Bonds with Warrants
 
      Effective January 1, 2003, the Company adopted Statement of Korea Accounting Standards No. 9, “Convertible Securities” related to convertible bonds, bonds with warrants and convertible preferred stock, which requires the separate recognition of the convertible features and warrant rights. However, as allowed by the transition clause of the Statement, the Company recognizes interest expense on convertible notes and bonds with warrants as determined using the effective interest method, and amortization of a redemption premium is recorded as long-term accrued interest expense.
 
  (m)   Retirement and Severance Benefits
 
      Employees who have been with the Company for more than one year are entitled to lump sum payments based on current rates of pay and length of service when they leave the Company. The Company’s estimated liability under the plan which would be payable if all employees left on the balance sheet date is accrued in the accompanying consolidated balance sheets. A portion of the liability is covered by an employees’ severance pay insurance where the employees have a vested interest in the deposit with the insurance company. Therefore, such deposit for severance benefit insurance amounting to W519,377 million and W638,945 million as of December 31, 2003 and 2004, respectively, are reflected in the accompanying consolidated balance sheets as a deduction from the liability for retirement and severance benefits.
 
      Through March 1999, under the National Pension Scheme of Korea, the Company transferred a certain portion of retirement allowances of employees to the National Pension Fund. The amount transferred will reduce the retirement and severance benefit amount to be payable to the employees when they leave the Company and is accordingly reflected in the accompanying consolidated balance sheets as a reduction from retirement and severance benefit liability. The cumulative balances of such transfers to the National Pension Fund were W729 million and W525 million as of December 31, 2003 and 2004, respectively. Beginning in April 1999, however, a new regulation applies and such transfers to the National Pension Fund are no longer required.

 


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10

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

  (n)   Customer Call Bonus Program
 
      The Company records an estimated liability for the marketing costs associated with providing gifts under the customer call bonus program when call bonus points are earned. The liability is recorded in other long-term liabilities in the accompanying consolidated balance sheets. The liability is adjusted periodically based on points earned, points redeemed and changes in estimated costs.
 
  (o)   Contingent Liabilities
 
      Contingent losses are generally recognized as a liability when probable and reasonably estimable.
 
  (p)   Revenue Recognition
 
      Operating revenues are recognized on a service-rendered basis. Revenues from public telephone cards are recognized when a cardholder places a call. Sales and cost of sales of Personal Communication Service (“PCS”) handsets are recognized when delivered to customers. The non-refundable service initiation fees for telephone, broadband Internet access, PCS services and leased-line service are recognized as revenue upon receipt.
 
      Prior to April 15, 2001, customers could choose between alternative plans for initiating basic telephone services. Under these alternatives, customers could elect to place a fully refundable deposit (which is reflected as a liability) or pay a reduced non-refundable service initiation fee (which is included in operating revenues). Prior to this change, all customers were required to place fully refundable deposits.
 
      Effective April 15, 2001, the Company revised the telephone installation deposit system. Under the revised system, new customers are required to pay a non-refundable service initiation fee. The non-refundable service initiation fee is included in operating revenues upon commencement of service.
 
  (q)   Foreign Currency Translation
 
      Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at the balance sheet date. Unrealized foreign currency translation gains and losses on monetary assets and liabilities are included in current results of operations. As of December 31, 2003 and 2004, monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at W1,197.8 to US$1 and W 1,043.8 to US$1, respectively, that are permitted by the Financial Accounting Standards. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated into Korean Won at the foreign exchange rate at the date of the transaction.
 
      Prior to January 1, 2003, the Company accounted for foreign exchange translation gains and losses on all borrowings, capitalizing financing costs, as part of the cost of qualifying assets. However, effective January 1, 2003, the Company adopted Statement of Korea Accounting Standards No. 7, “Capitalization of Financing Costs”. In accordance with this standard, all foreign exchange translation gains and losses are included in the results of operations.
 
  (r)   Derivatives
 
      Derivative instruments, regardless of whether they are entered into for trading or hedging purposes, are valued at fair value. Derivative contracts not meeting the requirements for hedge accounting treatment are classified as trading contracts with the changes in fair value included in current operations.

 


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11

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

  (r)   Derivatives, Continued
 
      Derivative financial instruments used for hedging purposes are accounted for in a manner consistent with the accounting treatment appropriate for the transactions being hedged or associated with such contracts. The instruments are valued at fair value when underlying transactions are valued at fair value, and resulting unrealized valuation gains or losses are recorded in current results of operations.
 
  (s)   Leases
 
      The Company accounts for and classifies its lease transactions as either an operating or capital lease, depending on the terms of the lease under Korean Lease Accounting Standards. If a lease is substantially noncancellable and meets one or more of the criteria listed below, the present value of future minimum lease payments is reflected as an obligation under capital lease.

    Ownership of the leased property shall be transferred to the lessee at the end of the lease term without additional payment or for a contract price.
 
    The lease has a bargain purchase option.
 
    The lease term is equal to 75% or more of the estimated economic useful life of the leased property.
 
    The present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90% of the fair value of the leased property.

      If the above criteria are not met, the lease is classified as an operating lease and lease payments are expensed on a straight-line basis over the lease term.
 
  (t)   Income Taxes
 
      Income tax expense or benefit on earnings includes both current and deferred taxes. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted at the balance sheet date. Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. However, deferred taxes are not recognized for temporary differences related to unrealized gains and losses on marketable investments in equity securities that are reported in a separate component of stockholders’ equity. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of the expected enactment date.
 
      A deferred tax asset is recognized only to the extent that it is probable that such deferred tax asset is recoverable in a future period. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
 
  (u)   Dividends Payable
 
      Dividends are recorded when approved by the board of directors and stockholders.

 


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Notes to Consolidated Financial Statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

  (v)   Stock Options
 
      The stock option program allows the Company’s officers to acquire shares of the Company. The option exercise price is generally fixed above the market price of underlying shares at the date of the grant. The Company values stock options based upon an option-pricing model (Black-Scholes model) under the fair value method and recognizes this value as an expense over the period in which the options vest.
 
      When the options are exercised, equity is increased by the amount of the proceeds received, and the values of options exercised and credited to the capital adjustment account. When stock options are forfeited because the specified vesting requirements are not satisfied, previously recognized compensation costs and corresponding capital adjustment account are reversed to earnings. When stock options expire unexercised, previously recognized compensation costs and corresponding capital adjustment account are reversed to capital surplus.
 
  (w)   Earnings Per Share
 
      Basic earnings per common share are calculated by dividing net earnings available to common stock by the weighted-average number of shares of common stock holders outstanding during each period. Diluted earnings per share are calculated by dividing net earnings plus interest expenses, net of tax, of the convertible notes available to common stock holders by the weighted-average number of shares of common stock outstanding adjusted to include the potentially dilutive effect of the convertible notes.
 
      Stock options were not considered when calculating diluted earnings per share because the exercise price of the stock options was greater than the average market price of the common share and, therefore the effect would have been antidilutive.
 
  (x)   Use of Estimates
 
      The preparation of consolidated financial statements in conformity with Korean GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
  (y)   Minority Interest in Consolidated Subsidiaries
 
      Minority interest in consolidated subsidiaries are presented as a separate component of stockholders’ equity in the consolidated balance sheets.
 
  (z)   Foreign Currency Translation of Foreign Subsidiaries
 
      Assets and liabilities of the Company’s foreign subsidiaries and operations are translated into Korean Won at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the fiscal year. Gains and losses resulting from such translation of financial statements are recognized as a foreign-based operations translation adjustment in stockholders’ equity.

 


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13

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Consolidated Financial Statements, Continued

  (aa)   Accounting for the Disposition of an Equity Interest in a Consolidated Subsidiary
 
      Gains or losses on the Company’s sale of a subsidiary’s stock is recognized in income if, after the sale of the equity interest, the investment is no longer required to be consolidated. If the entity is still required to be consolidated, the Company records the difference between net proceeds and the carrying amount of the stock as an adjustment to stockholders’ equity.
 
  (ab)   Application of the Statements of Korea Financial Accounting Standards
 
      The Korean Accounting Standards Board (“KASB”) has published a series of Statements of Korea Accounting Standards (“SKAS”), which will gradually replace the existing financial accounting standards, established by the Korea Financial Supervisory Board. SKAS No. 10, No. 12 and No. 13 were adopted by the Company as of January 1, 2004. SKAS No. 15 “Equity Method Accounting”, No. 16 “Income Taxes”, and No. 17 “Provisions, Contingent Liabilities and Contingent Assets” become effective for the Company on January 1, 2005 according to the effective date set forth by each SKAS. The Company does not expect the adoption of these standards to have a material impact on the financial statements.

(3)   Basis of Translating Consolidated Financial Statements
 
    The consolidated financial statements are expressed in Korean Won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 2004, have been translated into United States dollars at the rate of W1,035.1 to US$1, the noon buying rate in the City of New York for cable transfers in Won as certified for customs purposes by the Federal Reserve Bank of New York as of December 31, 2004. The translation should not be construed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any other rate.
 
(4)   Cash and Cash Equivalents
 
    Cash and cash equivalents as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Cash on hand
  W 380       65  
Checking accounts
    3,919       5,751  
Passbook accounts
    17,859       22,290  
Cash in transit
    541,918       424,884  
Time deposits
    196,792       1,302,939  
 
           
 
               
 
  W 760,868       1,755,929  
 
           

 


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Notes to Consolidated Financial Statements, Continued

(5)   Restricted Deposits
 
    There are certain amounts included in cash and cash equivalents and short-term and long-term financial instruments, which are restricted in use for expenditures for certain business purposes as of December 31, 2003 and 2004 as follows:

                 
    Millions  
    2003     2004  
Cash and cash equivalents
  W 1,038        
Short-term financial instruments
    3,127       5,800  
Long-term financial instruments
    61       92  
 
           
 
               
 
  W 4,226       5,892  
 
           

(6)   Inventories
 
    Inventories as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
PCS handsets
  W 225,809       282,652  
Valuation allowance
          (21,471 )
Construction and repair materials
    72,924       29,331  
Other
    66,100       83,807  
 
           
 
               
 
  W 364,833       374,319  
 
           

(7)   Other Current Assets
 
    Other current assets as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Current portion of long-term loans to employees
  W 118,629       136,047  
Prepaid expenses
    28,412       28,203  
Prepayments
    49,371       74,030  
Accrued interest income
    8,359       25,098  
Refundable deposits
    8,721       4,154  
Short-term loans
    6,526       271  
Receivables from derivative contracts (note 23)
    9,070       2,661  
Other
    956       189  
 
           
 
               
 
  W 230,044       270,653  
 
           

 


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15

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(8)   Investments in Securities
 
    Investments in securities as of December 31, 2003 and 2004 are summarized as follows:

  (a)   Trading securities (fair value)

                 
    Millions  
    2003     2004  
Mutual funds
  W 52,397       6,186  

  (b)   Available-for-sale securities

  (i)   Equity securities

                                 
    Percentage        
    of ownership (%)     Millions  
    2003     2004     2003     2004  
Current assets:
                               
Knowledge Plant, Inc.*
    4.4       4.4       7,272       1,625  
Mobilians Co., Ltd.*
          12.2             4,893  
 
                           
 
                               
 
                  W 7,272       6,518  
 
                           
Investment assets:
                               
New Skies Satellites N.V.
    1.4           W 15,917        
Intelsat, Ltd.
    0.7       0.7       6,222       6,222  
Inmarsat Ventures plc
    2.3             15,015        
Inmarsat Group holdings., Ltd.
          2.3             653  
Real Telecom Corporation
    6.5       6.5       721       721  
Korea Software Financial Cooperative
    1.4       1.4       1,000       1,000  
Korea Information Certificate Authority, Inc.
    9.4       9.4       2,000       2,000  
KT Internal Venture Fund No. 1
    89.3       89.3       3,303       3,303  
KT Internal Venture Fund No. 2
    90.0       94.3       3,000       5,000  
Mirae Asset Securities Co., Ltd.
    9.6       4.4       11,960       5,000  
Korea Telecom Venture Fund No. 1
    90.0       90.0       18,000       18,000  
Sky Life Contents fund
    22.5       22.5       4,500       4,500  
Korea Information Technology Fund
    33.3       33.3       100,000       100,000  
Kookmin Credit Information Inc.
    13.0       13.0       1,202       1,202  
On Game Network Inc.
    19.5       19.5       1,061       1,061  
GaeaSoft Corp.*
    2.1       2.1       913       514  
KRTnet Corporation*
    7.5       7.5       4,454       3,634  
Sports Toto
    6.7       6.7       13,500       13,500  
VACOM Wireless, Inc.
    16.8       16.8       1,880       719  
ESTsoft Corp.
    15.0       15.0       1,650       1,650  
CEC Mobile
    16.7       16.7       4,456       4,456  
Onse Telecom
    6.4       8.6       4,605       6,181  
Wide Telecom, Inc*
    0.5       0.5       24       11  
Dalsvyaz*
    2.6       2.6       234       204  
Other
                13,684       22,078  
 
                           
 
                               
 
                  W 229,301       201,609  
 
                           


*   Investments in these equity securities are recorded at fair value. All other equity securities that do not have readily determinable fair values are stated at cost.

 


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16

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Notes to Consolidated Financial Statements, Continued

(8)   Investments in Securities, Continued

  (b)   Available-for-sale securities, Continued

  (i)   Equity securities, Continued
 
      The Company recognized an impairment loss on available-for-sale securities of W43,993 million and W5,831 million for the years ended December 31, 2003 and 2004, respectively. These charges were related to other-than-temporary declines in the value of the investee companies.
 
      The Company and SK Telecom agreed to an equity swap on December 20, 2002 under which each company sold all of the other’s equity shares it held in the other. According to the agreement, the Company exchanged 4,457,635 shares of SK Telecom for 15,454,659 shares of treasury stock plus cash of W211,868 million on December 30, 2002. In addition, the Company exchanged 3,809,288 shares of SK Telecom for 14,353,674 shares of treasury stock plus cash of W122,679 million on January 10, 2003 and the Company recognized a gain on disposition of available-for-sale securities in the amount of W775,241 million for the year ended December 31, 2003. Subsequent to January 10, 2003, the Company no longer has any shares of SK Telecom.
 
  (ii)   Debt securities

                         
            Millions  
    Maturity     2003     2004  
Current assets:
                       
Beneficiary certificates
    2005     W 216,105       251,285  
Equity-linked securities
          63,380        
 
                   
 
                       
 
          W 279,485       251,285  
 
                   
 
                       
Investment assets:
                       
KTF Second Securitization Specialty Co., Ltd.
          19,254        
Other
          12,087       17,148  
 
                   
 
                       
 
          W 31,341       17,148  
 
                   

      On April 11, 2002, the Company purchased equity-linked securities from an investment bank. The value of the equity-linked securities were linked to the weighted-average quoted price of SK Telecom stock. The Company’s investments in the equity-linked securities were recorded at fair value and unrealized holding gains and losses were recorded as a separate component of stockholder’s equity. The equity-linked securities were tested for impairment during 2003 because of the decrease of the quoted market value of the SK Telecom shares. As a result of this impairment test, the Company recognized an impairment loss amounting to W35,137 million on the equity-linked securities for the year ended December 31, 2003. As of December 31, 2003, the equity-inked securities also had unrealized losses recorded within stockholders’ equity of W34,078 million. During 2004, the Company disposed of its equity-linked securities and recognized a realized loss on disposition of available-for-sale securities amounting to W54,806 million.
 
  (iii)   Changes in unrealized gains (losses)
 
      Changes in unrealized gains (losses) on available-for-sale securities for the year ended December 31, 2004 are summarized as follows:

         
    Millions  
Beginning balance
  W (24,799 )
Realized losses on disposition of securities
    27,844  
Changes in unrealized gains and losses, net
    4,752  
 
     
 
       
Net balance at end of year
  W 7,797  
 
     

 


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KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(8)   Investments in Securities, Continued

  (c)   Held-to-maturity securities

                 
    Millions  
    2003     2004  
Current assets:
               
Government and municipal bonds
  W 5,712       1,660  
 
               
Investment assets:
               
Government and municipal bonds
    11,495       2,501  
Beneficiary certificates (note 23(j))
    99,914       88,667  
Other
          3,236  
 
           
 
               
 
  W 111,409       94,404  
 
           

      During 2003, KTF acquired beneficiary certificates issued by Shinhan Bank Trust in relation to the disposal of trade accounts and notes receivable (see note 23(j)). During 2004, KTF recognized the difference between fair value and acquisition cost as impairment loss of W42,078 million, which may arise from the uncollectability of the trade accounts and notes receivable.

(9)   Investments in Equity Securities of Affiliated Companies
 
    Investments in affiliated companies accounted for using the equity method as of December 31, 2003 and 2004 are summarized as follows:

                                                 
    Percentage     Millions  
    Ownership (%)     2003     2004  
    2003     2004     Net asset     Book value     Net asset     Book value  
Listed*:
                                               
Hallim Venture Capital Corporation (“HVCC”)
    25.3       25.3     W 7,700       3,512       2,466        
 
                                               
Unlisted:
                                               
Mongolian Telecommunications Co.
    40.0       40.0       4,982       4,982       8,183       8,183  
Korea IT Venture Partners Inc.
    28.0       28.0       9,227       9,227       9,228       9,228  
KBSi Co., Ltd.
    32.4       32.4       1,386       1,386       1,667       1,667  
Korea Telephone Directory Co., Ltd.
    34.0       34.0       8,601       8,601       8,777       8,777  
eNtoB Corp.
    23.8       23.8       3,420       3,420       3,803       3,803  
KT Infotech Corporation
    15.6       15.6       4,350       3,955       3,334       3,059  
Korea Telecom Realty Development and Management Co., Ltd.
    19.0       19.0       1,964       1,921       2,172       2,172  
Korea Digital Satellite Broadcasting Co. (“KDB”)
    29.9       29.9       40,411       89,885       (2,191 )      
Korea Information Data Corp.
    19.0       19.0       6,864       6,864       9,138       9,138  
Korea Information Service Corp.
    19.0       19.0       4,552       4,552       6,007       6,007  
KT Instrument & Communication Corp.
    19.0       19.0       309       309       354       354  
Bank Town Co., Ltd.
    19.0       19.0       444       433       569       569  
Korea Telecom Hitel Global Co., Ltd.
    49.0       49.0       293       293              
Sports TOTO On-Line
    30.0       30.0       1,450       1,450       1,104       1,104  
 
                                       
 
                                               
 
                  W 95,953       140,790       54,611       54,061  
 
                                       


*   The quoted market value (based on the closing KOSDAQ price) of HVCC as of December 31, 2004 is W2,990 million.

 


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18

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Notes to Consolidated Financial Statements, Continued

(9)   Investments in Equity Securities of Affiliated Companies, Continued
 
    In December 2003, the Company purchased an additional 11,770,000 shares of KDB for W82,390 million including W49,119 million of investor-level goodwill. After making this cash purchase, the Company’s equity ownership interest increased to 29.9%. In 2004, the Company impaired investor-level goodwill of W37,030 million related with KDB due to continuous operating losses. This impairment loss was recorded as a component of equity in losses of affiliates. In addition, in 2004, KDB issued 11,875,000 shares of callable preferred stock, which has no voting rights, amounting to W94,028 million to a third party. In the calculation of the Company’s equity ownership interest in KDB’s net assets, the Company excluded the proceeds from the preferred stock issuance.
 
    The Company has recorded unrealized losses of W2,691 million and W6,732 million relating to the above affiliates as of December 31, 2003 and 2004, respectively, which have been accounted for as capital adjustments. These capital adjustments have been recorded as unrealized losses on equity securities of affiliates within stockholders’ equity.
 
    The Company received dividends of W554 million and W333 million in the aggregate from affiliates for the years ended December 31, 2003 and 2004.
 
(10)   Insurance
 
    Property, plant and equipment are insured against fire damage up to an amount of W1,237,621 million and W1,619,139 million as of December 31, 2003 and 2004, respectively. Additionally, the Company maintains insurance policies covering loss and liability arising from automobile accidents.
 
(11)   Other Assets
 
    Other assets as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Frequency usage right, net (note 12)
  W 1,208,429       1,115,996  
Long-term loans to employees
    565,556       475,319  
Leasehold rights and deposits
    330,747       313,302  
Goodwill
    944,326       731,694  
Negative goodwill
    (2,071 )     (1,553 )
Other intangible assets, net
    276,714       338,552  
Long-term accounts receivable — trade
    48,438       139,740  
Long-term accounts receivable — other
    17,361       17,368  
Deferred income tax assets (note 26)
    415,396       373,726  
Other
    133,064       71,434  
 
           
 
               
 
  W 3,937,960       3,575,578  
 
           

(12)   Frequency Usage Right
 
    During 2001, KTICOM acquired an IMT-2000 frequency usage right and a license to operate the IMT-2000 business from the MIC for W1,300 billion. KTICOM was merged into KTF on March 6, 2003. The Company paid 50%, or W650 billion, of this amount in 2001 and the net present value of the remaining W650 billion unpaid balance is recorded as long-term accounts payable — other in the accompanying consolidated balance sheet as of December 31, 2004. This right have a contractual life of 15 years and are amortized based on the date commercial service is initiated through the end of their contractual life. The Company began amortizing the frequency usage right on December 1, 2003.

 


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Notes to Consolidated Financial Statements, Continued

(12)   Frequency Usage Right, Continued
 
    The net amount of the frequency usage right as of December 31, 2003 and 2004 is as follows:

                 
    Millions  
    2003     2004  
Frequency usage right
  W 1,216,223       1,216,223  
Less: Accumulated amortization
    (7,794 )     (100,227 )
 
           
 
               
 
  W 1,208,429       1,115,996  
 
           

    Long-term accounts payable — other related to frequency usage right is stated at the net present value of future cash flows, calculated using the effective interest rate (9.93%) at the time of receipt of the frequency use license. The balances as of December 31, 2003 and 2004 are as follows:

                 
    Millions  
    2003     2004  
Long-term accounts payable — other
  W 650,000       650,000  
Less: Present value discount
    (131,239 )     (111,793 )
 
           
 
               
 
  W 518,761       538,207  
 
           

    The maturities of the Company’s long-term accounts payable — other related to frequency usage right outstanding as of December 31, 2004 are as follows:

         
Year   Millions  
2005
  W  
2006
     
2007
    90,000  
2008
    110,000  
2009
    130,000  
2010
    150,000  
2011
    170,000  
 
     
 
       
 
  W 650,000  
 
     

(13)   Short-term Borrowings
 
    Short-term borrowings (all of which mature within one year) as of December 31, 2003 and 2004 are summarized as follows:

                         
    Interest rate     Millions  
    per annum (%)     2003     2004  
Commercial paper
    3.96~4.80%     W 478,000       215,000  
Borrowings from banks
    4.18~6.00%       119,817       195,883  
Short-term borrowings in foreign currency
    0.60~4.71%       33,872       27,709  
 
                   
 
                       
 
          W 631,689       438,592  
 
                   

 


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Notes to Consolidated Financial Statements, Continued

(14)   Other Current Liabilities
 
    Other current liabilities as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Key money deposits
  W 100,739       104,197  
Unearned income
    4,932       4,002  
Payables from interest rate swap (note 23)
    16,077       7,278  
Payables from interest currency swap (note 23)
          99,615  
Payables from currency swap (note 23)
    3,554       40,799  
Payables from currency forward (note 23)
          10,025  
Payables from currency option (note 23)
          1,349  
Other
    7,312       9,704  
 
           
 
               
 
  W 132,614       276,969  
 
           

(15)   Long-term Debt
 
    Long-term debt as of December 31, 2003 and 2004 is summarized as follows:

                                 
    Interest rate               Millions  
    per annum (%)   Maturity date           2003     2004  
Local currency (Won) debt:
                               
Bonds
  4.14~9.20   2005~2014           W 6,425,001       6,850,000  
Convertible notes of KTF and KTFT
  1.00   2005             38,880       38,600  
Convertible notes issued in May 2002
  3.00   2005             1,322,563       1,322,530  
Borrowings from banks
  4.90~7.25   2005~2007             90,680       72,223  
Information and Telecommunication Improvement Fund
  3.53~6.85   2005~2009             173,070       132,764  
 
                           
 
                               
 
                    8,050,194       8,416,117  
 
                           
Foreign currency debt:
                               
Convertible notes issued in January 2002 (USD)
  0.25   2007             1,483,628       1,178,759  
Bonds with warrants (Microsoft) (USD)
  4.30   2005             598,900       521,900  
Yankee bonds (USD)
  7.50~7.63   2006~2007             419,230       365,330  
Bonds (USD)
  Libor+0.80   2006             179,670       156,570  
MTNP notes (USD)
  5.88~6.50   2014~2034                   730,660  
Bonds (JPY)
  2.64~3.13   2005~2006             263,666       142,146  
Loans (USD)
  Libor+0.45~                            
 
  Libor+3.50   2005~2009             248,451       219,198  
 
                           
 
                               
 
                    3,193,545       3,314,563  
 
                           
 
                               
 
                    11,243,739       11,730,680  
 
                               
Add: Premium on bonds
                    30,997       52,828  
 
                               
Less:
                               
Current portion, net of discount
                    2,172,510       4,756,067  
Discount on bonds
                    52,478       42,370  
 
                           
 
                               
 
                  W 9,049,748       6,985,071  
 
                           

 


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21

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(15)   Long-term Debt, Continued
 
    In June 2004, the Company established a US$1 billion Medium Term Note Program (MTNP). As of December 31, 2004, the Company has issued notes in the amount of US$700 million with a fixed interest rate under the MTNP. The notes are listed on the Singapore Stock Exchange. As of December 31, 2004, the unused portion of the MTNP amounts to US$300 million.
 
    On January 4, 2002, the Company issued convertible notes with face amount of US$1,317.8 million. Holders of convertible notes are entitled to convert notes into shares of the Company’s common stock from January 4, 2003 to January 1, 2007. In November 2004, holders of the convertible notes elected their option to redeem these convertible notes. As a result, as described in note 34, on January 4, 2005, the principal amount of US$1,115.1 million was repaid. Prior to January 1, 2004, convertible notes are not subject to foreign currency translation because convertible notes are regarded as non-monetary foreign currency liabilities in accordance with Korean GAAP. However, in November 2004, certain holders of the convertible notes elected their option to redeem these convertible notes. As a result of the election by the note holders, the convertible notes are subject to foreign currency translation as of December 31, 2004. Accordingly, the Company has recognized a foreign currency translation gain of W304,870 million for the year ended December 31, 2004. During 2002 and 2003, the Company purchased and retired convertible notes with a face value of US$191.5 million.
 
    During 2002, bonds with warrants were issued in connection with a strategic alliance with Microsoft Corp. Holders of bonds with warrants were entitled to exercise the warrants from January 4, 2003 to December 31, 2003. The warrants expired on December 31, 2003 without being exercised. The bonds of W521,900 million issued to Microsoft Corp. were repaid on January 4, 2005.
 
    On May 25, 2002, the Company issued convertible notes with a face amount of W1,397,349 million. Holders of the convertible notes are entitled to convert notes into shares of the Company’s common stock from September 25, 2002 to April 25, 2005. The exchange price was W59,400 per share of common stock, which allowed the bondholders to obtain up to 23,524,392 shares. During 2002, 2003 and 2004, due to early retirement of the convertible notes and 13,705 shares of common stock converted, the number of shares allowed to the holders was reduced to 22,264,813 shares. The convertible notes, if not converted, will be redeemed at 104.438% of their principal amount at maturity date. The Company recognizes interest expense on the convertible notes using the effective interest method, and amortization of the redemption premium is recorded as accrued interest expense. Since the issuance of the notes through December 31, 2004, the Company has purchased and retired convertible notes with a face value of W74,000 million and exchanged convertible notes with a face value of W819 million with the Company’s shares.
 
    On December 18, 2003, the Company purchased and retired convertible notes issued on January 4, 2002 with a face value of US$83.7 million for US$85.8 million with a gain on retirement of convertible notes of W7,441 million.
 
    Aggregate principal maturities for the Company’s long-term debt as of December 31, 2004 are as follows:

         
Fiscal year ending December 31,   Millions  
2005
  W 4,713,505  
2006
    1,232,601  
2007
    1,310,355  
2008
    857,686  
2009
    994,796  
Thereafter
    2,621,737  
 
     
 
  W 11,730,680  
 
     

 


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Notes to Consolidated Financial Statements, Continued

(16)   Refundable Deposits for Telephone Installation
 
    Through September 15, 1998, KT collected deposits for telephone installation in accordance with the Korea Public Telecommunication Business Law. Such deposits (which are reflected as a liability) are to be refunded without interest to the telephone subscribers upon termination of service. For changes in site classifications of telephones that were installed prior to January 1, 1990, KT is obligated to refund the original deposit received plus the increased deposit due to changes in site classifications.
 
    Beginning on September 15, 1998, KT allowed customers to choose between alternative plans for basic telephone service. Under such plan, customers were permitted the option to either place fully refundable deposits or pay a reduced non-refundable service initiation fee. The non-refundable service installation fees were recorded as operating revenues. Refundable deposits continue to be subject to the same provisions as described above. Effective April 15, 2001, all new customers are required to pay a non-refundable service initiation fee.
 
(17)   Accrual for Retirement and Severance Benefits
 
    Changes in retirement and severance benefits for the years ended December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Estimated severance benefits liability at beginning of year
  W 379,606       245,878  
Provision for the year
    1,067,076       281,453  
Increase due to change of consolidated subsidiaries
    600        
Payments
    (1,020,940 )     (93,178 )
Withdrawal from the National Pension Fund, net
    337       204  
Payment for deposit of severance benefits insurance
    (180,801 )     (119,568 )
 
           
 
               
Net balance at end of year
  W 245,878       314,789  
 
           

    In September 2003, the Company offered a voluntary early retirement plan (the “Plan”) to its employees. Under the terms of the Plan, employees participating in the Plan would receive additional amounts of retirement and severance benefits. For the year ended December 31, 2003, the Company recorded costs of W831,535 million related to this Plan covering approximately 5,500 employees.
 
(18)   Other Long-term Liabilities
 
    Other long-term liabilities as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Accrual for customer call bonus points
  W 105,391       128,397  
Advance receipt
    17,099       16,390  
Key money deposits from customers
    20,963       24,868  
Other
    5,414       2,188  
 
           
 
               
 
  W 148,867       171,843  
 
           

 


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Notes to Consolidated Financial Statements, Continued

(19)   Stockholders’ Equity
 
    The composition of holders of common stock as of December 31, 2003 and 2004 are summarized as follows:

                                 
                    Ownership  
    No. of shares owned     percentage  
    2003     2004     2003     2004  
Employee Stock Ownership Associations
    16,394,226       16,174,934       5.76 %     5.68 %
National Pension Corporation
    9,461,792       10,654,638       3.32 %     3.74 %
Treasury stock
    74,090,974       74,090,418       26.01 %     26.01 %
Others, including private companies
    184,902,408       183,929,410       64.91 %     64.57 %
 
                       
 
                               
 
    284,849,400       284,849,400       100.00 %     100.00 %
 
                       

    Changes in common stock for the years ended December 31, 2003 and 2004 are as follows:

                 
    Number of        
    shares issued     Millions  
Balance at January 1, 2003
    309,077,659     W 1,560,998  
 
               
Retirement of treasury stock on January 6, 2003
    15,454,659        
Retirement of treasury stock on June 20, 2003
    2,937,000        
Retirement of treasury stock on December 9, 2003
    5,836,600        
 
           
Balance at December 31, 2003
    284,849,400     W 1,560,998  
 
           
Retirement of treasury stock during 2004
           
 
           
 
               
Balance at December 31, 2004
    284,849,400     W 1,560,998  
 
           

    As allowed by the Securities Exchange Law of the Republic of Korea, the Company retired its treasury shares by a charge to retained earnings rather than its common stock.
 
(20)   Capital Surplus
 
    Capital surplus as of December 31, 2003 and 2004 is summarized as follows:

                 
    Millions  
    2003     2004  
Paid-in capital in excess of par value
  W 1,440,258       1,440,258  
Goodwill of additional equity in consolidated subsidiaries
    (181,649 )     (181,649 )
Other, net
    50,003       33,008  
 
           
 
               
 
  W 1,308,612       1,291,617  
 
           

    The line item, “Other, net”, mainly consists of the effects of common stock issuance of subsidiaries, retirement of treasury stock in consolidated subsidiaries and merger between subsidiaries.

 


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Notes to Consolidated Financial Statements, Continued

(21)   Appropriated Retained Earnings
 
    Retained earnings appropriated to various restricted reserves as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Involuntary reserve:
               
Legal reserve
  W 780,499       780,499  
Voluntary reserve:
               
Reserve for business rationalization
    443,416       443,416  
Reserve for technology and human resource development
    3,334        
Reserve for social overhead capital
    3,333        
Reserve for business expansion
    6,587,325       4,000,000  
Reserve for redemption of telephone bonds
    207,947       207,947  
 
           
 
               
 
  W 8,025,854       5,431,862  
 
           

    Retained earnings appropriated to the legal reserve are restricted in use as cash dividends under the applicable laws and regulations of the Republic of Korea. The Korean Commercial Code requires KT to appropriate to a legal reserve an amount equal to at least 10% of the cash dividend amount at the end of each accounting period until the reserve equals 50% of stated capital. The legal reserve may be used to reduce a deficit or may be transferred to stated capital.
 
    The Company is allowed to appropriate from retained earnings amounts necessary to establish reserves for business expansion and research and development at its own discretion. These reserves may be used for research, development and facilities expansion of the Company.
 
    Under the Special Tax Treatment Control Law, the Company is allowed to make certain deductions from taxable income. The Company is, however, required to transfer from retained earnings the amount of tax benefits obtained and transfer such amount into reserves for social overhead capital and technology and human resource development.
 
    Through 2001, under the Special Tax Treatment Control Law, investment tax credits were allowed for certain investments. However, the Company was required to transfer from retained earnings the amount of tax benefits obtained into a reserve for business rationalization. Effective December 11, 2002, the Company is no longer required to establish a reserve for business rationalization despite tax benefits received for certain investments, and consequently the existing balance is now regarded as a voluntary reserve.
 
(22)   Treasury Stock

  (a)   Trust fund
 
      During 2000, in order to stabilize the price of the Company’s common stock in the market, the Company established a treasury stock fund of W100 billion. This trust fund is managed by a bank, which is used primarily as a vehicle for trading the common stock of the Company. The trust fund (which is recorded at cost) held treasury stock of 1,259,170 shares as of December 31, 2003 and 2004, respectively.
 
  (b)   Issuance to the notes holders
 
      During 2004, certain holders of convertible notes (as described in note 15), which were issued on May 25, 2002, converted their notes into shares of the Company’s common stock. As part of this transaction, 556 shares of treasury stock were issued to the note holders.

 


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Notes to Consolidated Financial Statements, Continued

(22)   Treasury Stock, Continued

  (c)   Purchase and retirement of treasury stock
 
      The Company and SK Telecom agreed to an equity swap on December 20, 2002, under which each company sold all of the other’s equity shares it held in the other. According to the agreement, the Company exchanged 4,457,635 shares of SK Telecom for 15,454,659 shares of the Company’s common stock and cash of W211,868 million on December 30, 2002 and retired these treasury stock for W786,666 million by a charge to retained earnings on January 6, 2003. In addition, on January 10, 2003, the Company exchanged 3,809,288 shares of SK Telecom for 14,353,674 shares of the Company’s common stock amounting W730,704 million and cash of W122,679 million.
 
      During 2003, the Company initiated a stock buyback and retirement program approved by the Board of Directors. The Company reacquired 8,773,600 shares of treasury stock during 2003 and retired these treasury shares amounting to W411,833 million by a charge to retained earnings. As of December 31, 2004, no amounts under the stock buyback and retirement programs are outstanding.
 
  (d)   Sale and contribution to Employee Stock Ownership Association
 
      On August 28, 2003, the Company sold 1,803,296 shares of treasury stock to the KT Employee Stock Ownership Association (“ESOA”). The difference between carrying value and the fair value of W13,886 million was recorded as a loss on retirement of treasury stock and the difference between the fair value and the sales proceeds of W40,754 million was expensed in 2003.

    Changes in treasury stock for the years ended December 31, 2003 and 2004 are as follows:

                                 
    2003     2004  
    Number             Number        
    of shares     Millions     of shares     Millions  
Balance at beginning of year
    76,988,771     W 4,112,225       74,090,974     W 3,962,598  
Purchase of the Company’s common stock
    23,127,274       1,142,537              
Issuance to convertible note holders
    (2,356 )     (127 )     (556 )     (30 )
Purchase by trust fund, net
    8,840       414              
Retirement of treasury stock
    (24,228,259 )     (1,198,499 )            
Sale and contribution to ESOA
    (1,803,296 )     (93,952 )            
 
                       
 
                               
Balance at end of year
    74,090,974     W 3,962,598       74,090,418     W 3,962,568  
 
                       

(23)   Commitments and Contingencies

  (a)   Legal matters
 
      On February 20, 2001, the Fair Trade Commission alleged that the Company had unfairly assisted its affiliates by paying them unreasonably high service fees through the violation of the Fair Trade Laws. The Fair Trade Commission imposed a fine of approximately W30,700 million, and the Company expensed W30,700 million for this claim during 2001. In November 2004, the Seoul High Court partially reversed the Fair Trade Commission’s decision and decreased the fine from W30,700 million to W2,400 million. As of December 31, 2004, the ruling of the Seoul High Court’s decision is not reflected in the accompanying consolidated financial statements. The Company believes that the Fair Trade Commission will appeal to the Supreme Court of Korea.

 


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26

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(23)   Commitments and Contingencies, Continued

  (a)   Legal matters, Continued
 
      The Company is also in litigation as a defendant in other cases for damages allegedly resulting from various claims, disputes and legal actions in the normal course of operations. These claims amounted to W111,230 million as of December 31, 2004. Management believes that the ultimate settlement of these matters, and the matter described in the previous paragraph, will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
 
  (b)   Interest rate swaption
 
      During 2002, the Company entered into interest rate swaption contract with Citibank for variable rates of interest in place of fixed rates of interest. Details of the interest rate swaption contract outstanding as of December 31, 2004 are as follows:

                                                 
    Swaption             Fixed     Variable              
    premium     Notional     interest rate     interest              
Bank   (millions)     amount     (1 year)     rate (3 months)     Exercise date     Type  
Citibank
  W 1,913     W 100,000       7.9 %   91-Day CD rate   April 25, 2005   Selling

      Under the interest rate swaption contract, the Company recognized a valuation gain of W2,448 million and a valuation loss of W(636) million for the years ended December 31, 2003 and 2004, respectively.
 
  (c)   Interest rate swap
 
      During 2002, 2003 and 2004, the Company entered into various interest rate swap contracts with financial institutions for variable rates of interest in place of fixed rates of interest. Details of these interest rate swap contracts as of December 31, 2004 are as follows:

                             
    Nominal   Notional     Fixed          
    premium   amount     interest     Variable interest   Terminal
Bank   (millions)   (millions)     rate     rate   date
J.P. Morgan
  $1.6   US$ 150       7.50 %   6-month LIBOR +4.32%   June 1, 2006
J.P. Morgan
  $0.5   US$ 200       7.63 %   6-month LIBOR +4.61%   April 15, 2007
Citibank
    W 110,000       5.29 %   3-month LIBOR +1.47%   April 30, 2008
Shinhan Bank
    W 180,000       6.35 %   3-month LIBOR +2.47%    
 
                      +Contingent spread   September 30, 2007
Shinhan Bank
    W 57,810       4.70 %   6-month LIBOR + 0.69%   June 24, 2009
UBS
    W 57,810       4.70 %   6-month LIBOR + 0.69%   June 24, 2009
UBS
    W 57,810       4.64 %   6-month LIBOR + 0.69%   June 24, 2009
BNP Paribas
    W 110,000       5.29 %   3-month LIBOR +1.54%   April 30, 2008
CSFB
    W 57,810       4.64 %   6-month LIBOR +0.69%   June 24, 2009

      Under the interest rate swap contracts, the Company recognized a valuation loss of W (13,645) million and gain of W222 million for the year ended December 31, 2003, and a valuation loss of W(2,943) million and gain of W12,427 million for the year ended December 31, 2004.
 
      In addition, the Company settled two contracts and three contracts in 2003 and 2004, respectively, and recognized a transaction gain of W8,170 million and a transaction loss of W(1,252) million for the years ended December 31, 2003 and 2004, respectively.

 


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27

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Notes to Consolidated Financial Statements, Continued

(23)   Commitments and Contingencies, Continued

  (d)   Currency swap
 
      During June 2003, the Company entered into two currency swap contracts for principal and interest denominated in Korean Won in place of principal and interest of long-term debt denominated in U.S. dollars. Details of these currency swap contracts as of December 31, 2004 are as follows:

                                         
    Receiving     Paying                    
    amount     amount     Receiving     Paying     Terminal  
Bank   (millions)     (millions)     Interest rate     Interest rate     date  
J.P. Morgan
  US$ 50     W 59,750     4.30% (US$) per year   6.17% (Won) per year   January 3, 2005
J.P. Morgan
  US$ 150     W 179,760     3-month LIBOR   3-month LIBOR   June 24, 2006
 
                  + 0.80% (US$)   +2.64% (Won)        

      Under the currency swap contracts, the Company recognized valuation losses of W(2,429) million and W(37,244) million for the years ended December 31, 2003 and 2004, respectively.
 
  (e)   Interest currency swap
 
      In October 2003, the Company entered into five interest currency swap contracts with financial institutions for principal and the fixed rate of interest denominated in Korean Won in place of principal and the variable rate of interest of long-term debt denominated in U.S. dollars. The principal amounts in Korean Won will be adjusted according to the foreign exchange rate of the terminal date within certain ranges. In addition, during 2004, the Company entered into five interest currency swap contracts with financial institutions for principal and interest denominated in Korean Won in place of principal and interest of long-term debt denominated in U.S. dollars. Details of these interest currency swap contracts as of December 31, 2004 are as follows:

                     
    Receiving   Paying   Fixed   Variable    
    amount   Amount   interest   interest   Terminal
Bank   (millions)   (millions)   rate (1 year)   rate (6 months)   date
J.P. Morgan
  US$50   W55,000~60,000   4.3% (US$)   6-month LIBOR +4.55% (Won)   January 3, 2005
J.P. Morgan(*)
  US$100   W115,620   5.9% (US$)   6-month LIBOR +1.87% (Won)    
 
          5.5% (Won)       June 24, 2014
J.P. Morgan(**)
  US$200   W231,240   5.5% (Won)   6-month LIBOR +0.69% (Won)    
 
              5.9%-Contingent Spread (US$)   June 24, 2014
Merrill Lynch
  US$100   W116,400   5.0% (Won)   5.9%-Contingent Spread (US$)   June 24, 2014
Merrill Lynch
  US$50   W53,325   4.7% (Won)   5.9%-Contingent Spread (US$)   June 24, 2014
Citibank
  US$25   W27,500~30,000   4.3% (US$)   6-month LIBOR +4.45% (Won)   January 3, 2005
UBS
  US$25   W27,500~30,000   4.3% (US$)   6-month LIBOR +4.45% (Won)   January 3, 2005
Deutsche Bank
  US$50   W55,000~60,000   4.3% (US$)   6-month LIBOR +4.57% (Won)   January 3, 2005
Deutsche Bank
  US$50   W53,325   4.7% (Won)   5.9%-Contingent Spread (US$)   June 24, 2014
Shinhan Bank
  US$50   W55,000~60,000   4.3% (US$)   6-month LIBOR +4.45% (Won)   January 3, 2005


(*)    The interest will be received at 5.9% (US$) and paid at 6-month LIBOR +1.87% (Won) every six months over the first five years. Then, the interest will be received at 5.9% (US$) every six months and paid at 5.5% (Won) per year over the following five years.
 
(**)    The interest will be received at 5.9%-contingent spread (US$) and paid at 6-month LIBOR+0.69% (Won) every six months over the first five years. Then, the interest will be received at 5.9%-contingent spread (US$) every six months and paid at 5.5% (Won) per year over the following five years.

 


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28

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(23)   Commitments and Contingencies, Continued

  (e)   Interest currency swap, Continued
 
      Under the interest currency swap contracts, the Company recognized valuation gain of W5,083 million and valuation loss of W(105,899) million for the years ended December 31, 2003 and 2004, respectively.
 
  (f)   Currency Forward
 
      During 2004, the Company entered into eight currency forward contracts related to the convertible notes which are due on January 4, 2005 (note 15) with financial institutions. As of December 31, 2004, these fixed amount US dollar forward contracts amounting to $870 million are outstanding with a terminal date of January 3, 2005. Under the currency forward contracts, the Company recognized a valuation loss of W(10,025) million and a valuation gain of W164 million, respectively, for the year ended December 31, 2004.
 
      In 2004, KTFT and KTSC, subsidiaries of KT, entered into eight currency forward buying contracts with financial institutions. As of December 31, 2004, one currency forward contract amounting to $3.4 million in KTSC is outstanding with a terminal date of March 7, 2005. Under the currency forward contract, KTSC recognized a valuation gain of W42 million for the year ended December 31, 2004.
 
      During 2004, KTFT settled seven contracts at the terminal date and recognized a transaction loss of W(730) million and gain of W508 million for the year ended December 31, 2004.
 
  (g)   Currency option
 
      In 2004, KTF has entered into two currency option contracts with Shinhan Bank. Each currency option contract consists of a call and put option. The details of the currency option contracts as of December 31, 2004 are as follows:

                 
    Contract       Fixed    
    amount       Exchange   Terminal
Bank   (millions)   Position   rate   date
Shinhan Bank
  JPY 2,000   JPY Call / JPY Put   10.30~10.85   May 24 2005
Shinhan Bank
  JPY 2,000   JPY Call / JPY Put   10.65~13.40   April 20, 2006

      Under these currency option contracts, KTF recognized a valuation loss of W(1,349) million for the year ended December 31, 2004.

 


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29

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(23)   Commitments and Contingencies, Continued

  (h)   Loans and Borrowings
 
      As of December 31, 2004, the Company has entered into bank overdraft agreements with two banks for borrowings up to W750,000 million and a collection agreement for foreign currency denominated checks up to US$1 million with Korea Exchange Bank. In addition, the Company has received letter of credits up to US$35 million with four banks.
 
      In October 2004, the Company has entered into revolving stand-by credit line agreements with 12 banks for borrowing up to US$200 million. However, as of December 31, 2004, there is no outstanding amount under these agreements.
 
      As of December 31, 2004, KTP has received letter of credits up to US$4,235 thousand and W1,000 million with three banks.
 
      As of December 31, 2004, KTF has entered into bank overdraft agreements with Shinhan Bank for borrowings up to W50,000 million. The Company also has received letter of credits up to US$20,000 thousand with Shinhan Bank.
 
      In addition, as of December 31, 2004, KTH also has entered into bank overdraft agreements with Korea First bank for borrowings up to W1,000 million.
 
  (i)   Guarantee Provided by a Third Party
 
      As of December 31, 2004, three financial institutions are providing guarantees for the Company covering contract biddings up to US$7,403 thousand, SAR8 million and W57,701 million.
 
  (j)   Disposal of KTF accounts receivable
 
      On November 4, 2003, KTF transferred handset installment receivables of W339,677 million and guarantee insurance and other incident rights to KTF Second Securitization Specialty Co., Ltd. As a result of this disposal, KTF received cash of W312,000 million and subordinate debt securities of W19,254 million, and KTF recognized a loss on disposal of trade accounts and notes receivable of W8,423 million for the year ended December 31, 2003.
 
      In addition, on December 19, 2003, KTF transferred PCS service receivables of W253,247 million as of October 31, 2003, and future trade receivables, which were expected to be incurred until February 28, 2007 to Shinhan Bank Trust. As a result of this disposal, on December 19, 2003, KTF received cash of W200,000 million and beneficiary certificate of W53,247 million. Under this program, KTF sells receivables on a monthly basis. As a result, the beneficiary certificate will change depending on the amount of disposals. KTF recognized a loss on disposal of trade accounts and notes receivable of W1,680 million and W11,816 million for the years ended 2003 and 2004, respectively. As of December 31, 2003 and 2004, the uncollected trade receivables under this program were W301,802 million and W 342,672 million, respectively.

 


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30

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(23)   Commitments and Contingencies, Continued

  (k)   Leases

  (i)   Operating leases
 
      The Company maintains operating lease agreements for certain machinery and equipment from Macquarie IT KOREA Lease Company and others. Annual future lease payments under operating leases as of December 31, 2004 are as follows:

         
Year ending December 31,   Millions  
2005
  W 67,600  
2006
    66,819  
2007
    6,268  
2008
    5,915  
2009
    5,915  
Thereafter
    31,621  
 
     
 
       
 
  W 184,138  
 
     

  (ii)   Capital leases
 
      The Company has capital lease agreements with GE Capital Korea Ltd. for certain machinery and equipment, of which acquisition cost amounts to W22,860 million. Depreciation on the machinery and equipment for the years ended December 31, 2003 and 2004 amounted to W312 million and W4,505 million, respectively. Annual future minimum payments under the lease agreements as of December 31, 2004 are as follows:

         
Year ending December 31,   Millions  
2005
  W 4,955  
2006
    4,955  
2007
    4,955  
2008
    4,782  
2009
    2,123  
 
     
 
       
 
    21,770  
 
       
Less: amount representing interest
    (1,683 )
 
     
 
       
 
  W 20,087  
 
     

(24)   Operating Revenues
 
    Operating revenues for the years ended December 31, 2003 and 2004 are as follows:

                 
    Millions  
    2003     2004  
Internet services
  W 2,369,593       2,606,852  
Data communication services
    1,083,093       962,627  
Telephone services
    6,610,982       6,189,290  
PCS services
    4,164,286       4,799,586  
Sales of PCS handsets
    1,153,505       1,754,968  
Satellite services
    119,639       119,412  
Other
    566,681       635,636  
 
           
 
               
 
  W 16,067,779       17,068,371  
 
           

 


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31

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(25)   Operating Expenses
 
    Operating expenses for the years ended December 31, 2003 and 2004 are as follows:

                 
    Millions  
    2003     2004  
Salaries and wages
  W 2,038,466       1,945,714  
Compensation expense (note 29)
    6,966       6,129  
Provision for retirement and severance benefits, including early retirement payments
    1,067,076       281,453  
Employee benefits
    597,859       503,857  
Communications
    64,231       56,613  
Utilities
    181,359       194,350  
Taxes and dues
    140,291       141,623  
Rent
    194,330       269,667  
Depreciation
    3,393,175       3,403,639  
Amortization
    364,051       393,849  
Repairs and maintenance
    450,550       488,407  
Automobile maintenance
    25,682       26,348  
Commissions
    834,846       1,061,726  
Commissions to sales agent
    565,082       940,039  
Entertainment
    4,545       7,903  
Advertising
    283,969       294,262  
Education and training
    59,254       50,372  
Research and development
    244,625       265,207  
Travel
    37,969       37,342  
Supplies
    47,096       38,809  
Interconnection charges
    1,077,082       973,429  
Cost of goods sold
    1,131,475       1,782,140  
Cost of services (commissions for system integration service and other miscellaneous service)
    532,424       420,149  
International line usage
    184,326       194,143  
Promotion
    376,834       537,927  
Provision for doubtful accounts
    363,774       287,073  
Other
    97,992       111,269  
 
           
 
               
 
    14,365,329       14,713,439  
Less: amounts included in construction in progress
    (119,986 )     (125,600 )
 
           
 
               
 
  W 14,245,343       14,587,839  
 
           

    In September 2003, the Company offered a voluntary early retirement plan (the “Plan”) to its employees. Under the terms of the Plan, employees participating in the Plan would receive additional amounts of retirement and severance benefits. For the year ended December 31, 2003, the Company recorded costs of W831,535 million related to this Plan covering approximately 5,500 employees.

 


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32

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(26)   Income Taxes

  (a)   The Company is subject to a number of income taxes based upon taxable income which results in the following normal tax rates (including resident tax):

                 
Taxable earnings   2004     2005 and thereafter  
Up to W100 million
    16.5 %     14.3 %
Over W100 million
    29.7 %     27.5 %

      The components of income tax expense for the years ended December 31, 2003 and 2004 are as follows:

                 
    Millions  
    2003     2004  
Current income tax expense
  W 477,337       470,925  
Deferred income tax expense
    46,294       106,964  
 
           
 
               
 
  W 523,631       577,889  
 
           

  (b)   The provision for income taxes calculated using tax rates differs from the actual provision for the years ended December 31, 2003 and 2004 for the following reasons:

                 
    Millions  
    2003     2004  
Provision for income taxes at normal tax rates
  W 469,575       596,684  
Tax effect of prior year’s additional income tax payment
    16,036       280  
Tax effect of permanent differences, net
    85,689       39,024  
Utilization of loss carryforwards
    (40,273 )     (32,628 )
Investment tax credits
    (174,952 )     (206,344 )
Effect of tax rate change
    33,974       6,535  
Impairment of deferred tax asset
    133,582       174,338  
 
           
 
               
Actual provision for income taxes
  W 523,631       577,889  
 
           

      The effective tax rates, after adjustments for certain differences between amounts reported for financial accounting and income tax purposes, were approximately 33.1% and 28.8% for the years ended December 31, 2003 and 2004, respectively.
 
  (c)   The tax effects of temporary differences that result in significant portions of deferred income tax assets and liabilities as of December 31, 2003 and September 30, 2004 are presented below:

                 
    Millions  
    2003     2004  
Deferred income tax assets:
               
Retirement and severance benefits
  W 9,309       8,357  
Allowance for doubtful accounts
    161,473       149,093  
Refundable deposits for telephone installation
    20,022       18,157  
Equity in losses of affiliates
    221,957       352,926  
Investment securities
    50,469       36,669  
Tax credit carryforwards
    25,816       61,526  
Loss carryforwards
    80,230       22,283  
Other, net
    90,355       107,347  
 
           
 
               
Total deferred income tax assets
    659,631       756,358  
 
           

 


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33

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(26)   Income Taxes, Continued

                 
    Millions  
    2003     2004  
Deferred income tax liabilities:
               
Accumulated depreciation
  W 28,166       64,708  
Accrued interest income
    2,257       10,004  
 
           
 
               
Total deferred income tax liabilities
    30,423       74,712  
 
           
 
               
Write-off
    213,812       307,920  
 
           
 
               
Deferred income tax asset, net
  W 415,396       373,726  
 
           

    Following the Company’s acquisition of a controlling financial interest in KTM in July 2000, KTM reassessed its business plan with the Company in KTM’s future business. As part of the revised strategy, KTM’s intent was to seek a merger partner and undertake other operational changes. During December 2000, KTM concluded that it was not likely that it would be able to realize the tax benefit of its loss carryforward and, therefore, wrote off the related deferred tax assets in the amount of W233,496 million as of December 31, 2000 by a charge to deferred income tax expense in 2000.
 
    In 2001, KTM was merged into KTF with the combined entity operating under the name of KTF. Upon the merger in 2001, the Company recognized a deferred tax asset for the net operating loss of KTM. However, subsequent to the initial realization, the Company provided a valuation allowance as a component of income tax expense for this deferred tax asset due to the uncertainty of realization. As a result of KTM’s operating performance in 2001 as well as a change in tax regulations, KTF was able to utilize KTM’s loss carryforward as a benefit to income tax expense in the amount of W150,653 million in 2002, W135,600 million in 2003 and W109,860 million in 2004. As of December 31, 2004, KTF’s remaining loss carryforwards are W181,885 million which will expire during 2005. During 2004, the Company concluded that a portion of this tax loss carryforward was probable of realization in 2005. As a result, the Company recorded an income tax benefit of W13,750 for the portion of the tax loss carryforward that is realizable in 2005. However, KTF concluded that it is not probable that the total tax benefit of the loss carryforward generated by KTM can be realized in 2005 and therefore, did not recognize a deferred income tax asset related to KTM’s remaining loss carryforwards of W131,885 million which are not expected to be realized in 2005 and will expire at the end of 2005.
 
    The Company concluded that it was not probable that it would be able to realize the tax benefit of its equity in losses of affiliates within the near future, which is construed usually to mean 5 years and, therefore, wrote off the related deferred income tax assets in the amount of W133,582 million and W169,963 million by a charge to deferred income tax expense for the years ended December 31, 2003 and 2004, respectively.
 
    In addition, in April 2004, KTR was merged into KTN, a subsidiary of KT, and KTN wrote off the deferred tax assets in the amount of W4,375 million.
 
    During 2003, the Korea National Tax Service initiated a tax audit of the Company for the periods from 1998 to 2002. In September 2003, the Company received a final notice from the Korea National Tax Service asserting income tax deficiencies. As a result of the tax audit, the Company paid W67,410 million which consisted of W1,639 million of deferred income tax asset and W65,771 million of prior year’s income tax expense for the year ended December 31, 2003.
 
    During 2004, the Korea National Tax Service initiated a tax audit with the Company for a stock transaction which took place in 2000. For the year ended December 31, 2004, the Company recognized a deferred income tax asset of W65,294 million and a prior year’s income tax expense of W943 million, respectively, from the cash payment related to this tax audit.

 


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34

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(27)   Dividends

  (a)   Interim dividends
 
      On July 29, 2004, an interim dividend was declared by the Board of Directors and the Company paid this dividend to common shareholders on August 13, 2004. Dividends relating to each of the year’s earnings based upon the par value of common stock are as follows:

                                 
    Rate     Millions  
    2003     2004     2003     2004  
Dividends paid
          20.0 %   W       210,759  
 
                           

  (b)   Dividends are generally proposed based on each year’s earnings and are declared, recorded and paid in the subsequent year. Dividends relating to each of the year’s earnings based upon the par value of common stock are as follows:

                                 
    Rate     Millions  
    2003     2004     2003     2004  
Dividends proposed
    40.0 %     40.0 %   W 421,517       421,518  
 
                           

    Proposed dividends of W421,518 million were not recorded in the 2004 financial statements. They will be recorded upon the approval by the shareholders in 2005.
 
(28)   Earnings Per Share
 
    Earnings per share of common stock for the years ended December 31, 2003 and 2004 are calculated as follows:

                 
    Millions  
    (except number of shares  
    and earnings per share)  
    2003     2004  
(a)  Basic earnings per share
               
 
               
Net earnings
  W 821,734       1,282,216  
Weighted-average number of shares of common stock (in thousands)
    216,106       210,759  
 
           
 
               
Basic earnings per share (in Won)
  W 3,802       6,084  
 
           

 


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35

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(28)   Earnings Per Share, Continued

                 
    Millions  
    (except number of shares  
    and earnings per share)  
    2003     2004  
(b)  Diluted earnings per share
               
 
               
Net earnings
  W 821,734       1,282,216  
Adjustments:
               
Interest expense on convertible notes
    51,373       46,662  
 
           
Net earnings available for common and common equivalent shares
    873,107       1,328,878  
Weighted-average number of common and common equivalent shares (in thousands)
    263,556       233,270  
 
           
Diluted earnings per share (in Won)
  W 3,313       5,697  
 
           

    Diluted earnings per share are calculated based on the effect of potentially dilutive securities that were outstanding during the year. The denominator for the diluted earnings per share computation is adjusted to include the number of additional common shares that would have been outstanding if the potentially dilutive securities had been converted into common stock. In addition, the numerator is adjusted to include the after-tax amount of interest recognized associated with convertible notes.
 
    Potentially dilutive securities as of December 31, 2003 and 2004 are as follows:

                 
    No. of potentially dilutive shares  
    (thousands)  
    2003     2004  
Convertible notes (note 15)
    45,770       22,511  
Stock options (note 29)
    616       512  

    Stock options were not considered in the determination of diluted earnings per share in 2003 and 2004 because of the anti-dilutive effect on the exercise of stock options.
 
(29)   Stock Options
 
    The Company granted stock options to its executive officers and directors in accordance with the stock option plan approved by the Board of Directors. The details of the stock options granted are as follows:

                         
    1st Grant     2nd Grant     3rd Grant  
Grant date
    2002.12.26       2003. 9.16       2003.12.12  
Exercise price (in Won)
    70,000       57,000       65,000  
Number of shares
    371,632       34,200       106,141  
Exercise period
    2004.12.27~2009.12.26       2005.9.17~2010.9.16       2005.12.13~2010.12.12  
Valuation method
  Fair value   Fair value   Fair value
 
  (Black-Scholes model)   (Black-Scholes model)   (Black-Scholes model)

    The first grant of stock options consisted of 680,000 shares of common stock, including 220,000 shares under performance condition at the option price of W70,000 per share. However, the number of stock options decreased to 371,632 shares and the total cost of compensation decreased from W10,602 million to W8,311 million because of the resignation of two officers and not achieving performance criteria.

 


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36

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(29)   Stock Options, Continued
 
    The second grant of stock options consisted of 36,400 shares of common stock at the option price of W57,000 per share. However, the number of stock options decreased to 34,200 shares and the total cost of compensation decreased from W453 million to W426 million because of the resignation of an outside director.
 
    The third grant of stock options consisted of 120,000 shares of common stock, including 40,000 shares under performance condition at the option price of W65,000 per share. As of December 31, 2004, the total shares that are expected to be exercised are 106,141 and the total cost of compensation is W1,160 million.
 
    The options are fully vested upon completion of two years mandatory service periods starting from the grant dates. The first and third granted option holders can exercise one third of total options annually from 2004 and 2005, respectively. The second granted options holders can exercise total options when the options are vested.
 
    The Company adopted the fair value method (Black-Scholes model) for the calculation of compensation costs which are amortized to expense over the option vesting periods.
 
    The valuation assumptions of stock options based on the fair value method under the Black-Scholes model are as follows:

                         
    1st Grant   2nd Grant   3rd Grant
Risk free interest rate
  5.46%   4.45%   5.09%
Expected option life
  4.5 years to 5.5 years   4.5 years   4.5 years to 5.5 years
Expected volatility
  49.07% ~ 49.90%   34.49%   31.26% ~ 33.90%
Expected dividend yield ratio
  1.10%   1.57%   1.57%
Fair value per option (in Won)
  W22,364   W12,443   W10,926
Total compensation cost (in millions)
  W 8,311   W   426   W 1,160

    For the year ended December 31, 2004, the Company recognized a compensation benefit of W1,167 million because certain directors left the Company prior to completion of mandatory service periods.
 
    Changes in the total cost of compensation for the year ended December 31, 2004 are summarized as follows:

         
    Millions  
Adjusted total cost of compensation
       
 
       
Total cost of compensation before adjustment
  W 12,215  
Cost of compensation — forfeited
    (2,318 )
 
     
 
       
 
    9,897  
 
     
Accumulated cost recognized in prior periods
    (5,479 )
 
       
Cost recognized for the year
       
Cost of compensation — forfeited
    1,167  
Cost of compensation for the year
    (4,887 )
 
     
 
    (3,720 )
 
       
Cost to be recognized in future years
  W 698  
 
     

 


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37

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(29)   Stock Options, Continued
 
    In addition, KTF and KTP, subsidiaries of KT, granted stock options to its officers and adopted the fair value based method for the calculation of compensation expense which is amortized to expense over the option vesting period. KTF and KTP recognized W2,487 million (accumulated) as capital adjustments as of December 31, 2004 and recognized stock option expense of W1,590 million and W2,409 million for the years ended December 31, 2003 and 2004, respectively.
 
(30)   Segment Information
 
    The Company has two reportable operating segments — wireline communications and PCS services (including IMT-2000 services). Wireline communications include all services provided to fixed line customers, including internet services, data communication services, wire and other facilities, leased line services and telephone services. PCS services (including IMT-2000 services) provides both PCS service and IMT-2000 service through the merger between two separate legal entities, KTF and KTICOM during 2003. PCS service is a digital wireless telephone system that uses light handsets with a long battery life to communicate via low-power antennas. PCS telephones have the capacity to receive and send data as well as voice transmission. IMT-2000 service is a third-generation, high-capacity wireless communication system that enables subscribers to utilize a full range of mobile multi-media services including video phone and wireless data transmission. The operations of all other entities which fall below the reporting thresholds are included in the “Miscellaneous” segment below, and include entities providing, among others, submarine cable construction and group telephone management.
 
    The Company’s reportable segments consist of separate legal entities that offer different products and services and/or serve different customers. No single customer accounted for revenues in excess of 10% of total revenues. The entities are managed differently since they utilize different technology and marketing strategies and have different capital requirements. Management primarily evaluates the performance of the segments based on operating income (loss).
 
    The Company accounts for intersegment revenues and costs as if the related transactions were with third parties. The adjustments included in “Reconciling Adjustments,” line item “Other income (expense), net” include minority interest in earnings of consolidated subsidiaries of W235,695 million and W148,931 million for the years ended December 31, 2003 and 2004, respectively, and elimination of the parent company’s equity in net earnings of KTF and other subsidiaries of W160,161 million and W91,880 million for the years ended December 31, 2003 and 2004, respectively. Reconciling adjustments also include reclassification of amortization of goodwill between the line items “Other income (expense), net” and “Operating expenses — depreciation and amortization” in the amount of W294,306 million and W212,210 million for the years ended December 31, 2003 and 2004, respectively. Additionally, reconciling adjustments include intersegment eliminations in all line items.

 


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38

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(30)   Segment Information, Continued
 
    The following table provides information for each operating segment as of and for the year ended December 31, 2003:

                                         
    2003 (millions)  
    Wireline     PCS             Reconciling        
    Communications     Services     Miscellaneous     Adjustments     Consolidated  
Operating revenues:
                                       
External customers
  W 11,090,939       4,520,348       456,492             16,067,779  
Intersegment
    483,610       566,999       462,716       (1,513,325 )      
 
                             
 
    11,574,549       5,087,347       919,208       (1,513,325 )     16,067,779  
Operating expenses:
                                       
Depreciation and amortization
    2,514,299       849,500       101,874       291,553       3,757,226  
Other
    7,817,106       3,459,638       775,515       (1,564,142 )     10,488,117  
 
                             
 
    10,331,405       4,309,138       877,389       (1,272,589 )     14,245,343  
Operating income (loss)
    1,243,144       778,209       41,819       (240,736 )     1,822,436  
Interest income
    78,670       34,842       12,046       (10,104 )     115,454  
Interest expense
    (432,200 )     (272,992 )     (10,452 )     10,104       (705,540 )
Other income (expenses), net
    400,055       (76,937 )     (55,685 )     (154,418 )     113,015  
 
                             
Earnings (loss) before income taxes
    1,289,669       463,122       (12,272 )     (395,154 )     1,345,365  
Income taxes
    459,603       51,657       11,671       700       523,631  
 
                             
Net earnings (loss)
  W 830,066       411,465       (23,943 )     (395,854 )     821,734  
 
                             
Total assets
  W 19,573,181       7,591,888       1,229,309       (2,837,703 )     25,556,675  
 
                             
Capital expenditures
  W 2,083,370       953,377       186,830       (14,201 )     3,209,376  
 
                             

 


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39

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(30)   Segment Information, Continued
 
    The following table provides information for each operating segment as of and for the year ended December 31, 2004:

                                         
    2004 (millions)  
    Wireline     PCS             Reconciling        
    Communications     Service     Miscellaneous     Adjustments     Consolidated  
Operating revenues:
                                       
External customers
  W 11,315,054       5,206,380       546,937             17,068,371  
Intersegment
    535,765       634,890       724,857       (1,895,512 )      
 
                             
 
    11,850,819       5,841,270       1,271,794       (1,895,512 )     17,068,371  
Operating expenses:
                                       
Depreciation and amortization
    2,361,257       1,090,645       135,583       210,003       3,797,488  
Other
    7,362,443       4,211,186       1,136,658       (1,919,936 )     10,790,351  
 
                             
 
    9,723,700       5,301,831       1,272,241       (1,709,933 )     14,587,839  
Operating income (loss)
    2,127,119       539,439       (447 )     (185,579 )     2,480,532  
Interest income
    102,398       12,691       21,056       (19,420 )     116,725  
Interest expense
    (450,740 )     (220,606 )     (26,588 )     19,420       (678,514 )
Other income (expenses), net
    20,748       (22,914 )     (27,902 )     (28,570 )     (58,638 )
 
                             
Earnings (loss) before income taxes
    1,799,525       308,610       (33,881 )     (214,149 )     1,860,105  
Income taxes
    544,003       24,709       9,209       (32 )     577,889  
 
                             
Net earnings (loss)
  W 1,255,522       283,901       (43,090 )     (214,117 )     1,282,216  
 
                             
Total assets
  W 20,114,036       7,960,430       1,285,758       (2,886,992 )     26,473,232  
 
                             
Capital expenditures
  W 1,818,507       945,623       210,482       (3,236 )     2,971,376  
 
                             

(31)   Non-cash Financing and Investing Activities
 
    Significant non-cash investing activities for the years ended December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Change in unrealized gains (losses) on available-for-sale securities
  W (13,045 )     4,752  
Change in unrealized gains (losses) due to the sales of available-for-sale securities
    (781,406 )     27,844  
Available-for-sale securities transferred to treasury stock
    730,704        
Exchange on available-for-sale securities
          18,798  
Construction in progress transferred to property, plant and equipment
    2,473,599       2,585,478  

 


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40

KT CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(32)   Contribution Payments for Research and Development and Donations
 
    For the years ended December 31, 2003 and 2004, the Company made contributions of W63,407 million and W74,413 million, respectively, to the Korean government (Information and Telecommunication Improvement Fund), the Korea Electronic Telecommunication Research Institute (ETRI), and other institutes. In addition, the Company established a labor welfare fund as a separate entity and contributed W100,000 million and W50,000 million for the years ended December 31, 2003 and 2004, respectively.
 
(33)   Contributions Received for Losses on Universal Telecommunications Services
 
    Starting on January 1, 2000, all telecommunications service providers must contribute towards the supply of universal telecommunications services in Korea. Telecommunications service providers designated as universal service providers by the MIC are required to provide universal telecommunications services, including local services, local public telephone services, telecommunications services for remote islands and wireless communication services for ships. The Company has been designated a universal service provider. The losses incurred by universal service providers in connection with providing these universal telecommunications services are to be apportioned among the service providers based on their respective annual revenues. For the years ended December 31, 2003 and 2004, amounts reimbursed to the Company were W28,539 million and W80,310 million, respectively. As the only universal telecommunication service provider in Korea, the Company incurred estimated contribution costs of W86,704 million and W120,915 million in 2003 and 2004 respectively. These costs are subject to review by MIC before being finalized.
 
(34)   Fourth Quarter Information (Unaudited)
 
    Operating revenues, operating income, net earnings and basic earnings per share are for the three-month periods ended December 31, 2003 and 2004 are as follows:

                 
    Millions  
    (except per share data)  
    2003     2004  
Operating revenues
  W 3,977,336       4,187,416  
Operating income
    491,410       430,921  
Net earnings
    82,516       383,998  
Basic earnings per share
    382       1,822  

(35)   Subsequent Event
 
    As described in note 15, on January 4, 2005, the principal amount of US$1,115,105 thousand of convertible notes and US$500,000 thousand of bonds with warrants was repaid.

 


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KT CORPORATION
 
Financial Statements
 
December 31, 2003 and 2004
 
(With Independent Auditors’ Report Thereon)

 


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Independent Auditors’ Report

Based on a report originally issued in Korean

The Board of Directors and Stockholders
KT Corporation:

We have audited the accompanying balance sheets of KT Corporation (the “Company”) as of December 31, 2003 and 2004, and the related statements of earnings, appropriation of retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of KT Freetel Co., Ltd. (“KTF”), a 46.9% and 48.7% owned subsidiary at December 31, 2003 and 2004, respectively, as of and for the years ended December 31, 2003 and 2004. Those financial statements were audited by other auditors whose report has been furnished to us, and our report, insofar as it relates to the amounts included for KTF is based solely on the report of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles and significant estimates used by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2004, and the results of its operations, the 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.

The accompanying financial statements as of and for the year ended December 31, 2004 have been translated into United States dollars solely for the convenience of the reader and have been translated on the basis set forth in note 3 to the financial statements.

Without qualifying our opinion, we draw attention to the following:

As discussed in note 2(a) to the financial statements, accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable about Korean accounting procedures and auditing standards and their application in practice.

 


Table of Contents

As discussed in note 10 to the financial statements, the Company’s revenues and expenses as a result of transactions with its affiliates for the year ended December 31, 2004 amounted to W728,022 million and W1,510,149 million, respectively. Accounts receivable and accounts payable with affiliates and convertible notes of KTF as of December 31, 2004, aggregated W151,191 million, W308,327 million and W347,814 million, respectively. In addition, as of December 31, 2004, the Company provided payment guarantees aggregating W73,066 million for certain affiliates’ indebtedness and contract performance.

 

 

Seoul, Korea
February 4, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
This report is effective as of February 4, 2005, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.
 

 


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KT CORPORATION

Balance Sheets

December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

                         
                    2004  
Assets   2003     2004     (note 3)  
Current assets:
                       
Cash and cash equivalents (notes 4 and 19)
  W 653,744       1,604,267     $ 1,549.9  
Short-term financial instruments (note 5)
    2,877       926,872       895.4  
Current portion of investment securities (notes 8 and 10):
                       
Available-for-sale securities
    276,444       593,528       573.4  
Held-to-maturity securities
    332       1,522       1.5  
Notes and accounts receivable — trade, less allowance for doubtful accounts of W463,910 in 2003 and W530,110 in 2004 (notes 10 and 19)
    1,842,559       1,575,906       1,522.5  
Accounts receivable — other, less allowance for doubtful accounts of W51,848 in 2003 and W66,967 in 2004 (notes 10 and 19)
    267,866       294,869       284.9  
Inventories (note 6)
    156,918       100,680       97.3  
Other current assets (notes 7 and 19)
    159,751       198,019       191.2  
 
                 
 
                       
Total current assets
    3,360,491       5,295,663       5,116.1  
 
                 
 
                       
Investment securities:
                       
Available-for-sale securities (notes 8 and 10)
    480,880       124,944       120.7  
Held-to-maturity securities (note 8)
    3,313       1,839       1.8  
Equity securities of affiliates (note 9)
    3,168,077       2,845,405       2,748.9  
 
                 
 
                       
Total investment securities
    3,652,270       2,972,188       2,871.4  
 
                 
 
                       
Property, plant and equipment, at cost (note 11)
    34,571,075       34,639,070       33,464.5  
Less accumulated depreciation
    (23,325,504 )     (24,002,011 )     (23,188.1 )
 
                 
 
                       
Net property, plant and equipment
    11,245,571       10,637,059       10,276.4  
 
                 
 
                       
Other assets (notes 12, 19 and 27)
    1,314,849       1,209,126       1,168.1  
 
                 
 
                       
 
  W 19,573,181       20,114,036     $ 19,432.0  
 
                 

See accompanying notes to financial statements.

 


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KT CORPORATION

Balance Sheets, Continued

December 31, 2003 and 2004

(In millions of Won and U.S. dollars, except share data)

                         
                    2004  
Liabilities and Stockholders' Equity   2003     2004     (note 3)  
Current liabilities:
                       
Notes and accounts payable — trade (notes 10 and 19)
  W 893,309       683,539     $ 660.4  
Short-term borrowings (note 13)
    250,000              
Current portion of long-term debt (notes 15 and 19)
    1,054,287       3,986,227       3,851.1  
Accounts payable — other (note 10)
    648,133       616,042       595.2  
Advance receipts from customers
    86,215       98,006       94.7  
Accrued expenses (note 10)
    141,824       132,741       128.2  
Withholdings
    68,365       63,262       61.1  
Income taxes payable
    181,456       258,627       249.9  
Other current liabilities (notes 10 and 14)
    168,418       305,603       295.1  
 
                 
 
                       
Total current liabilities
    3,492,007       6,144,047       5,935.7  
 
                       
Long-term debt, excluding current portion (notes 15 and 19)
    7,711,004       5,014,800       4,844.7  
Refundable deposits for telephone installation (note 16)
    1,229,712       1,087,276       1,050.4  
Accrual for retirement and severance benefits, net (note 17)
    197,918       263,531       254.6  
Other long-term liabilities (notes 10 and 18)
    129,932       157,869       152.6  
 
                 
 
                       
Total liabilities
    12,760,573       12,667,523       12,238.0  
 
                 
 
                       
Stockholders’ equity:
                       
Common stock of W5,000 par value (note 20)
                       
Authorized — 1,000,000,000 shares
                       
Issued — 284,849,400 shares in 2003 and 2004
    1,560,998       1,560,998       1,508.1  
Capital surplus (note 21)
    1,440,258       1,440,258       1,391.4  
Retained earnings:
                       
Appropriated (note 22)
    8,025,854       5,431,862       5,247.7  
Unappropriated (deficit)
    (249,963 )     2,967,275       2,866.7  
Capital adjustments:
                       
Treasury stock (note 23)
    (3,962,598 )     (3,962,568 )     (3,828.2 )
Unrealized gains (losses) on available-for-sale securities (note 8)
    (44,134 )     3,053       2.9  
Unrealized gains on equity securities of affiliates (note 9)
    53,105       12,824       12.4  
Stock options (note 30)
    5,479       9,199       8.9  
Loss on retirement of treasury stock (note 23)
    (16,391 )     (16,388 )     (15.9 )
 
                 
 
                       
Total stockholders’ equity
    6,812,608       7,446,513       7,194.0  
 
                       
Commitments and contingencies (note 24)
                 
 
                 
 
                       
 
  W 19,573,181       20,114,036     $ 19,432.0  
 
                 

See accompanying notes to financial statements.

 


Table of Contents

KT CORPORATION

Statements of Earnings

For the years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars, except earnings per share)

                         
                    2004  
    2003     2004     (note 3)  
Operating revenues (notes 10 and 25)
  W 11,574,549       11,850,819     $ 11,449.0  
Operating expenses (notes 10 and 26)
    10,331,405       9,723,700       9,394.0  
 
                 
 
                       
Operating income
    1,243,144       2,127,119       2,055.0  
Other income (expense) (note 10):
                       
Interest income
    78,670       102,398       98.9  
Interest expense
    (432,200 )     (450,740 )     (435.5 )
Equity in losses of affiliates (note 9)
    (155,320 )     (235,514 )     (227.5 )
Dividend income
    15,198       4,486       4.3  
Foreign currency transaction and translation gain (loss), net (note 19)
    (20 )     510,075       492.8  
Loss on disposition of property, plant and equipment, net
    (53,594 )     (86,938 )     (84.0 )
Gain (loss) on disposition of available-for-sale securities, net (note 8)
    775,266       (14,131 )     (13.7 )
Impairment loss on available-for-sale securities (note 8)
    (39,607 )     (307 )     (0.3 )
Contributions received for losses on universal telecommunications services (note 33)
    66,065       105,867       102.3  
Contribution payments for research and development and donations (note 32)
    (168,685 )     (127,320 )     (123.0 )
Prior year’s additional income tax payment (note 27)
    (61,835 )     (273 )     (0.2 )
Derivatives transaction and valuation loss, net (note 24)
    (151 )     (145,408 )     (140.5 )
Other, net
    22,738       10,211       9.9  
 
                 
 
                       
 
    46,525       (327,594 )     (316.5 )
 
                 
 
                       
Earnings before income taxes
    1,289,669       1,799,525       1,738.5  
 
                       
Income taxes (note 27)
    459,603       544,003       525.6  
 
                 
 
                       
Net earnings
  W 830,066       1,255,522     $ 1,212.9  
 
                 
 
                       
Basic earnings per share of common stock in won and U.S. dollars (note 28)
  W 3,841       5,957     $ 5.75  
 
                 
 
                       
Diluted earnings per share of common stock in won and U.S. dollars (note 28)
  W 3,344       5,582     $ 5.39  
 
                 

See accompanying notes to financial statements.

 


Table of Contents

KT CORPORATION

Statements of Appropriation of Retained Earnings

For the years ended December 31, 2003 and 2004

Date of Appropriation for 2003 : March 12, 2004
Date of Appropriation for 2004 : March 11, 2005

(In millions of Won and U.S. dollars)

                         
                    2004  
    2003     2004     (note 3)  
Unappropriated retained earnings (accumulated deficit):
                       
Balance at beginning of year
  W 120,000       1,922,512     $ 1,857.3  
Interim dividend (note 29)
          (210,759 )     (203.5 )
Cumulative effect of an accounting change (note 9)
    (1,530 )            
Net earnings
    830,066       1,255,522       1,212.9  
Retirement of treasury stock (notes 20 and 23)
    (1,198,499 )            
 
                 
Balance at end of year before appropriation
    (249,963 )     2,967,275       2,866.7  
 
                       
Transfers from reserves (note 22):
                       
Reserve for technology and human resources development
    3,334              
Reserve for social overhead capital
    3,333              
Reserve for business expansion
    2,587,325              
 
                 
 
                       
Unappropriated retained earnings available for appropriation
    2,344,029       2,967,275       2,866.7  
 
                 
 
                       
Appropriation of retained earnings (note 22):
                       
Reserve for technology and human resources development
          350,000       338.1  
Reserve for social overhead capital
          30,000       29.0  
Cash dividends (note 29)
    421,517       421,518       407.2  
 
                 
 
                       
 
    421,517       801,518       774.3  
 
                 
 
                       
Unappropriated retained earnings to be carried over to subsequent year
  W 1,922,512       2,165,757     $ 2,092.4  
 
                 

See accompanying notes to financial statements.

 


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KT CORPORATION




Statements of Cash Flows

For the years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

                         
                    2004  
    2003     2004     (note 3)  
Cash flows from operating activities:
                       
Net earnings
  W 830,066       1,255,522     $ 1,212.9  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Depreciation
    2,457,584       2,291,428       2,213.7  
Amortization
    56,715       69,829       67.5  
Provision for doubtful notes and accounts receivable — trade
    301,107       238,953       230.9  
Provision for doubtful notes and accounts receivable — other
    18,885       58,603       56.6  
Provision for retirement and severance benefits
    1,038,868       208,665       201.6  
Loss on disposition of property, plant and equipment, net
    53,594       86,938       84.0  
Gain on foreign currency translation, net
    (223 )     (555,241 )     (536.4 )
Loss (gain) on disposition of available-for-sale securities, net
    (775,266 )     14,131       13.7  
Impairment loss on available-for-sale securities
    39,607       307       0.3  
Equity in losses of affiliates
    155,320       235,514       227.5  
Deferred income tax expense
    74,681       128,546       124.2  
Changes in operating assets and liabilities:
                       
Increase in notes and accounts receivable — trade
    (61,732 )     (28,904 )     (27.9 )
Increase in accounts receivable — other
    (48,279 )     (65,435 )     (63.2 )
Decrease (increase) in inventories
    (163,815 )     56,238       54.3  
Increase in other current assets
    (1,748 )     (44,352 )     (42.8 )
Decrease in notes and accounts payable — trade
    (46,812 )     (191,116 )     (184.6 )
Decrease in accounts payable — other
    (151,762 )     (35,771 )     (34.6 )
Increase (decrease) in withholdings
    7,100       (5,103 )     (4.9 )
Increase (decrease) in advance receipts from customers
    (23,753 )     11,791       11.4  
Decrease in accrued expenses
    (30,918 )     (9,082 )     (8.8 )
Increase (decrease) in income taxes payable
    (242,729 )     77,171       74.6  
Payment of retirement and severance benefits
    (1,001,154 )     (23,205 )     (22.4 )
Increase in deposit for severance benefits insurance
    (174,588 )     (119,847 )     (115.8 )
Other, net
    80,619       112,769       108.8  
 
                 
 
                       
Net cash provided by operating activities
    2,391,367       3,768,349       3,640.6  
 
                 

See accompanying notes to financial statements.

 


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KT CORPORATION

Statement of Cash Flows, Continued

For the years ended December 31, 2003 and 2004

(In millions of Won and U.S. dollars)

                         
                    2004  
    2003     2004     (note 3)  
Cash flows from investing activities:
                       
Purchases of property, plant and equipment
  W (2,083,370 )     (1,818,507 )   $ (1,756.8 )
Proceeds from sale of property, plant and equipment
    95,154       28,828       27.9  
Decrease in accounts receivable — other
    527,954              
Decrease in other assets
    325,166       28,927       27.9  
Decrease (increase) of short-term financial instruments
    152,822       (923,995 )     (892.7 )
Purchases of available-for-sale securities
    (293,293 )     (492,000 )     (475.3 )
Purchases of held-to-maturity securities
    (587 )     (49 )      
Purchases of equity securities of affiliates
    (483,632 )            
Proceeds from sale of available-for-sale securities
    186,710       572,338       552.9  
Proceeds from maturity on held-to-maturity securities
    400       333       0.3  
Proceeds from dividends of equity securities of affiliates
    959       46,877       45.3  
 
                 
 
                       
Net cash used in investing activities
    (1,571,717 )     (2,557,248 )     (2,470.5 )
 
                 
Cash flows from financing activities:
                       
Repayment of long-term debt
    (1,147,622 )     (1,065,098 )     (1,029.0 )
Decrease in short-term borrowings
    (250,000 )     (250,000 )     (241.5 )
Proceeds from issuance of long-term debt
    1,277,171       1,836,434       1,774.2  
Decrease in refundable deposits for telephone installation
    (307,026 )     (142,436 )     (137.6 )
Reacquisition of treasury stock
    (412,248 )            
Proceeds from sale of treasury stock
    39,312              
Payment of dividends
    (213,308 )     (633,171 )     (611.7 )
Other, net
    (5,523 )     (6,307 )     (6.2 )
 
                 
 
                       
Net cash used in financing activities
    (1,019,244 )     (260,578 )     (251.8 )
 
                 
 
                       
Net increase (decrease) in cash and cash equivalents
    (199,594 )     950,523       918.3  
 
                       
Cash and cash equivalents at beginning of year
    853,338       653,744       631.6  
 
                 
 
                       
Cash and cash equivalents at end of year
  W 653,744       1,604,267     $ 1,549.9  
 
                 

See accompanying notes to financial statements.

 


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1

KT CORPORATION

Notes to Financial statements

December 31, 2003 and 2004

(1)   Organization and Description of the Business
 
    KT Corporation (“KT” or the “Company”) commenced operation on January 1, 1982 through the segregation of specified operations from the Korean Ministry of Information and Communication (the “MIC”) for the purpose of contributing to the convenience in national life and improvement of public welfare through rational management of the public telecommunications business and improvement of telecommunications technology under the Korea Telecom Act.
 
    Upon the repeal of the Korea Telecom Act as of October 1, 1997, KT became a government invested institution regulated by the Korean Commercial Code and changed its name from Korea Telecom to Korea Telecom Corp. pursuant to an amendment to its Articles of Incorporation. Shares of KT were listed on the Korea Stock Exchange on December 23, 1998. KT issued 24,282,195 additional shares on May 29, 1999 and issued American Depository Shares (“ADS”) representing these new shares and government owned shares. On July 2, 2001, additional ADS representing 55,502,161 government-owned shares were issued.
 
    The Korean government has gradually reduced its ownership interest in the Company since 1993 and completed the disposition of all of its equity interest in the Company on May 24, 2002. On March 22, 2002, the Company changed its name from Korea Telecom Corp. to KT Corporation.
 
    Under Korean law, the MIC and other government entities have extensive authority to regulate KT. The MIC has responsibility for approving rates for local service and interconnection provided by KT. Beginning in January 1998, KT is allowed to set its own rates for domestic long-distance service, international long-distance service and other services without approval from the MIC.
 
    In recent years, KT has been subjected to increasing competition as a result of the government’s issuance of additional licenses to create competition in the telecommunications market and to foster new telecommunications business areas. Additionally, in June 1997, the MIC awarded a license to a second carrier to provide local telephone service. This new carrier commenced operations in 1999. A third carrier commenced international long-distance service in 1997 and domestic long-distance service in 1999. The entry of these new carriers into the local and long-distance telephone service markets has had, and is expected to continue to have, a negative impact on KT’s telephone service revenues and profitability.

(2)   Summary of Significant Accounting Policies and Basis of Presenting Financial Statements

  (a)   Basis of Presenting Financial Statements
 
      The accompanying financial statements have been extracted from KT’s Korean language financial statements that were prepared using accounting principles, procedures and reporting practices generally accepted in the Republic of Korea (“Korean GAAP”). The financial statements have been translated from those issued in the Korean language into the English language, and have been modified to allow for the formatting of the financial statements in a manner which is different from the presentation under Korean financial statements practices. In addition, certain modifications have been made in the accompanying financial statements to bring the formal presentation into conformity with practices outside of Korea, and certain information included in the Korean language statutory financial statements, which management believes is not required for a fair presentation of KT’s financial position or results of operations, is not presented in the accompanying financial statements.
 
      Accordingly, the accompanying financial statements and their utilization are not designed for those who are not informed about Korean accounting principles, procedures and practices and furthermore are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of Korea.

 


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2

KT CORPORATION

Notes to Financial statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

  (a)   Basis of Presenting Financial Statements, Continued
 
      The accompanying financial statements include only the accounts of KT, and do not consolidate the accounts of any of KT’s subsidiaries (see note 9). Instead, these entities are accounted for under the equity method of accounting.
 
      Effective January 1, 2004, the Company adopted Statements of Korea Accounting Standards No. 10 “Inventories”, No. 12 “Construction — Type Contracts” and No. 13 “Troubled Debt Restructuring”. The adoption of these standards did not have a significant impact on the accompanying financial statements.
 
  (b)   Cash Equivalents
 
      The Company considers short-term financial instruments with maturities of three months or less at the acquisition date to be cash equivalents.
 
  (c)   Financial Instruments
 
      Short-term financial instruments are instruments handled by financial institutions which are held for short-term cash management purposes or will mature within one year, including time deposits, installment savings deposits and restricted bank deposits.
 
  (d)   Allowance for Doubtful Accounts
 
      Notes and trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing notes and accounts receivable. The Company determines the allowance for doubtful notes and accounts receivable based on an analysis of portfolio quality and historical write-off experience. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
 
  (e)   Inventories
 
      Inventories are stated at the lower of cost or net realizable value. Cost is determined by the moving-average cost method, except for materials in transit for which cost is determined by the specific identification method. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated selling cost. Effective January 1, 2004, the Company adopted Statement of Korea Accounting Standards (“SKAS”) No. 10, “Inventories”. Through 2003, a valuation loss incurred when the market value of inventory falls below its carrying amount was reported as non-operating expense. In 2004, in accordance with SKAS No. 10, the Company included inventory valuation losses in its cost of PCS handsets sold (“a component of operating expenses”). The Company recognized inventory valuation costs of W19,184 million included in cost of goods sold for the year ended December 31, 2004. As allowed by this standard, the Company did not reclassify prior year balances because the amount was immaterial.
 
  (f)   Investments in Securities
 
      Upon acquisition, the Company classifies certain debt and equity securities into one of the three categories: held-to-maturity, available-for-sale, or trading securities. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) are classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used to generate profit on short-term differences in price. Investments not classified as either held-to-maturity or trading securities are classified as available-for-sale securities. Such determination should be reassessed at each balance sheet date.

 


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3

KT CORPORATION

Notes to Financial statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

  (f)   Investments in Securities, Continued
 
      Trading securities are carried at fair value, with unrealized holding gains and losses included in earnings. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported as a capital adjustment. Investments in equity securities that do not have readily determinable fair values are stated at cost. Declines in value judged to be other-than-temporary on available-for-sale securities are charged to current results of operations. Realized gains and losses are determined using the specific identification method based on the trade date of a transaction. Investments in debt securities that are classified into held-to-maturity are reported at amortized cost at the balance sheet date and such amortization is included in interest income.
 
      Marketable securities are at the quoted market prices as of the period end. Non-marketable debt securities are recorded at the fair values derived from the discounted cash flows by using an interest rate deemed to approximate the market interest rate. The market interest rate is determined by the issuers’ credit rate announced by the accredited credit rating agencies in Korea. Beneficiary certificates which are securities indicating beneficiary rights on certain investment securities held by the investment management companies are recorded at fair value as determined by the investment management companies.
 
      Trading securities are classified as current assets, whereas available-for-sale securities and held-to-maturity securities are classified as long-term investments. However, available-for-sale securities whose maturity dates are due within one year from the balance sheet date or whose likelihood of being disposed of within one year from the balance sheet date is probable are classified as current assets. Likewise, held-to-maturity securities whose maturity dates are due within one year from the balance sheet date are classified as current assets.
 
  (g)   Investment Securities under the Equity Method of Accounting
 
      For investments in companies, whether or not publicly held, under the Company’s significant influence, the Company utilizes the equity method of accounting. Significant influence is generally deemed to exist if the Company can exercise influence over the operating and financial policies of an investee. The ability to exercise that influence may be indicated in several ways, such as the Company’s representation on its board of directors, the Company’s participation in its policy making processes, material transactions with the investee, interchange of managerial personnel, or technological dependency. Also, if the Company owns directly or indirectly 20% or more of the voting stock of an investee, the Company generally presumes that the investee is under significant influence.
 
      Under the equity method of accounting, the Company’s initial investment is recorded at cost and is subsequently increased to reflect the Company’s share of the investee income and reduced to reflect the Company’s share of the investee losses or dividends received. Any excess in the Company’s acquisition cost over the Company’s share of the investee’s identifiable net assets is considered as goodwill or other intangibles and amortized by the straight-line method over the estimated useful life. The amortization of goodwill or other intangibles is recorded against the equity income (losses) of affiliates. When events or circumstances indicate that carrying amount may not be recoverable, the Company reviews goodwill or other intangibles for impairment.
 
      Some investee companies depreciate their machinery and equipment by the straight-line method in accordance with Korean GAAP considering the attributes and nature of the underlying assets. Accordingly, the Company does not conform the depreciation method of investee to the declining-balance method used by the Company.
 
      Assets and liabilities of foreign-based companies accounted for using the equity method are translated at the current rate of exchange at the balance sheet date while profit and loss items in the statement of operations are translated at the average rate and capital account at the historical rate. The translation gains and losses arising from collective translation of the foreign currency financial statements of foreign-based companies are offset and the balance is accumulated as a capital adjustment.

 


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4

KT CORPORATION

Notes to Financial statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

  (g)   Investment Securities under the Equity Method of Accounting, Continued
 
      Under the equity method of accounting, the Company does not record its share of losses of an affiliate or subsidiary not consolidated when such losses would make the Company’s investment in such entity less than zero unless the Company has guaranteed obligations of the investee or is otherwise committed to provide additional financial support.
 
  (h)   Property, Plant and Equipment
 
      Property, plant and equipment are stated at cost. Improvements that significantly extend the life of an asset or add to its productive capacity are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Property, plant and equipment contributed by the government on January 1, 1982 are stated at net revalued amounts.
 
      Depreciation is computed by the declining-balance method (except for buildings, structures, underground access to cable tunnels, and concrete and steel telephone poles that are depreciated using the straight-line method) based on the following estimated useful lives of the related units of property:

         
    Estimated useful lives (years)  
Buildings and structures
    5-60  
Machinery and equipment:
       
Underground access to cable tunnels, and concrete and steel telephone poles
    20-40  
Other
    3-15  
Vehicles
    3-10  
Tools, furniture and fixtures:
       
Steel safe boxes
    20  
Tools, computer equipments, furniture and fixtures
    2-8  

      Prior to January 1, 2003, the Company capitalized interest costs on all borrowings incurred prior to completion of the acquisitions, as part of the cost of qualifying assets. However, effective January 1, 2003, the Company adopted Statement of Korea Accounting Standards No. 7, “Capitalization of Financing Costs.” In accordance with this standard, the Company elected to no longer capitalize interest costs. Accordingly, the Company recognizes interest costs and other financial charges on borrowings associated with the manufacture, purchase, or construction of property, plant and equipment as an expense in the period in which they are incurred.
 
      The Company reviews for the impairment of property, plant and equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future 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 carrying amount of the assets exceeds the fair value of the assets.
 
  (i)   Contributions Received for Capital Expenditures
 
      Contributions received for capital expenditures are reflected as a reduction from the acquisition cost of the acquired assets and, accordingly, reduce depreciation expense related to the acquired assets over their useful lives. Contributions received, which have yet to be disbursed for capital expenditures, are presented as a deduction of received assets.

 


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5

KT CORPORATION

Notes to Financial statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

  (j)   Intangible Assets
 
      Intangible assets, consisting of exclusive rights and deferred development costs including internal use software, are stated at cost less accumulated amortization. Amortization is computed by the straight-line method over periods which range from 3 to 50 years. The Company has monopolistic and exclusive rights to control buildings and facilities utilization and copyrights by contract or related laws. Accordingly, the Company amortizes those intangible assets over the period of 30 or 50 years based on contract or related laws.
 
      The Company charges research and development costs to expense as incurred. However, the costs which are recoverable from future earnings are deferred and amortized over their estimated useful lives. In addition, the internal software development costs, after technological feasibility test, such as those associated with Broadband Integrated Services Digital Network (B-ISDN), Integrated Customer Information System (ICIS) and Enterprise Resource Planning (ERP), are accounted for as intangible assets and amortized by the straight-line method over their estimated economic useful lives from 3 to 6 years.
 
      The Company expensed research and development costs of W232,180 million and W254,360 million for the years ended December 31, 2003 and 2004, respectively. In addition, the Company capitalized development costs, which consist of software, of W53,824 million and W87,509 million for the years ended December 31, 2003 and 2004, respectively.
 
      The Company reviews for the impairment of intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
 
  (k)   Valuation of Receivables at Present Value
 
      Receivables arising from extended payment terms which generally involve sales of personal communication service (“PCS”) handsets, are stated at present value and the difference between the nominal value and present value is deducted directly from the nominal value of related receivables and is amortized using the effective interest method over the payment period. The amount amortized is included in interest income.
 
  (l)   Convertible Notes and Bonds with Warrants
 
      Effective January 1, 2003, the Company adopted Statement of Korea Accounting Standards No. 9, “Convertible Securities” related to convertible bonds, bonds with warrants and convertible preferred stock, which requires the separate recognition of the convertible features and warrant rights. However, as allowed by the transition clause of the Statement, the Company recognizes interest expense on convertible notes and bonds with warrants as determined using the effective interest method, and amortization of a redemption premium is recorded as long-term accrued interest expense.
 
  (m)   Retirement and Severance Benefits
 
      Employees who have been with the Company for more than one year are entitled to lump sum payments based on current rates of pay and length of service when they leave the Company. The Company’s estimated liability under the plan which would be payable if all employees left on the balance sheet date is accrued in the accompanying balance sheets. A portion of the liability is covered by an employees’ severance pay insurance where the employees have a vested interest in the deposit with the insurance company. The deposit for severance benefit insurance is, therefore, reflected in the accompanying balance sheets as a deduction from the liability for retirement and severance benefits.

 


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6

KT CORPORATION

Notes to Financial statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

  (n)   Customer Call Bonus Program
 
      The Company records an estimated liability for the marketing costs associated with providing gifts under the customer call bonus program when call bonus points are earned. The liability is recorded in other long-term liabilities on the accompanying balance sheets. The liability is adjusted periodically based on points earned, points redeemed and changes in estimated costs
 
  (o)   Contingent Liabilities
 
      Contingent losses are generally recognized as a liability when probable and reasonably estimable.
 
  (p)   Revenue Recognition
 
      Operating revenues are recognized on a service-rendered basis. Revenues from public telephone cards are recognized when a cardholder places a call. Sales and cost of sales of Personal Communication Service (“PCS”) handsets are recognized when delivered to customers. The non-refundable service initiation fees for telephone, broadband internet access, PCS services and leased-line service are recognized as revenue upon receipt.
 
      Prior to April 15, 2001, customers could choose between alternative plans for initiating basic telephone services. Under these alternatives, customers could elect to place a fully refundable deposit (which is reflected as a liability) or pay a reduced non-refundable service initiation fee (which is included in operating revenues). Prior to this change, all customers were required to place fully refundable deposits.
 
      Effective April 15, 2001, the Company revised the telephone installation deposit system. Under the revised system, new customers are required to pay a non-refundable service initiation fee. The non-refundable service initiation fee is included in operating revenues upon commencement of service.
 
  (q)   Foreign Currency Translation
 
      Monetary assets and liabilities denominated in foreign currencies are translated into Korean won at the balance sheet date. Unrealized foreign currency translation gains and losses on monetary assets and liabilities are included in current results of operations. As of December 31, 2003 and 2004, monetary assets and liabilities denominated in foreign currencies are translated into Korean won at W1,197.8 to US$1 and W1,043.8 to US$1, respectively, that are permitted by the Financial Accounting Standards. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated into Korean won at the foreign exchange rate at the date of the transaction.
 
      Prior to January 1, 2003, the Company accounted for foreign exchange translation gains and losses on all borrowings, capitalizing financing costs, as part of the cost of assets. However, the Company adopted Statement of Korea Accounting Standards No. 7, “Capitalization of Financing Costs,” effective January 1, 2003. In accordance with this standard, all foreign exchange translation gains and losses are included in the results of operations.
 
  (r)   Derivatives
 
      Derivative instruments, regardless of whether they are entered into for trading or hedging purposes, are valued at fair value. Derivative contracts not meeting the requirements for hedge accounting treatment are classified as trading contracts with the changes in fair value included in current operations.
 
      Derivative financial instruments used for hedging purposes are accounted for in a manner consistent with the accounting treatment appropriate for the transactions being hedged or associated with such contracts. The instruments are valued at fair value when underlying transactions are valued at fair value, and resulting unrealized valuation gains or losses are recorded in current results of operations. For instruments that are not valued at fair value, unrealized valuation gains or losses are recognized at the time of settlement.

 


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7

KT CORPORATION

Notes to Financial statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

  (s)   Leases
 
      The Company accounts for and classifies its lease transactions as either an operating or capital lease, depending on the terms of the lease under Korean Lease Accounting Standards If a lease is substantially noncancellable and meets one or more of the criteria listed below, the present value of future minimum lease payments is reflected as an obligation under capital lease.

    Ownership of the leased property shall be transferred to the lessee at the end of the lease term without additional payment or for a contract price.
 
    The lease has a bargain purchase option.
 
    The lease term is equal to 75% or more of the estimated economic useful life of the leased property.
 
    The present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90% of the fair value of the leased property.

      If the above criteria are not met, the lease is classified as an operating lease and lease payments are expensed on a straight-line basis over the lease term.
 
  (t)   Income Taxes
 
      Income tax expense or benefit on earnings includes both current and deferred taxes. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted at the balance sheet date. Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. However, deferred taxes are not recognized for temporary differences related to unrealized gains and losses on available-for-sale securities that are reported in a separate component of stockholders’ equity. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of the expected enactment date.
 
      A deferred tax asset is recognized only to the extent that it is probable that such deferred tax asset is recoverable in a future period. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
 
  (u)   Dividends Payable
 
      Dividends are recorded when approved by the board of directors and stockholders.
 
  (v)   Stock Options
 
      The stock option program allows the Company’s officers to acquire shares of the Company. The option exercise price is generally fixed above the market price of underlying shares at the date of the grant. The Company values stock options based upon an option-pricing model (Black-Scholes model) under the fair value method and recognizes this value as an expense over the period in which the options vest.
 
      When the options are exercised, equity is increased by the amount of the proceeds received and the values of the options exercised, and by crediting capital surplus. When stock options are forfeited because the specified vesting requirements are not satisfied, previously recognized compensation costs and corresponding capital adjustment accounts are reversed to earnings. When stock options expire unexercised, previously recognized compensation costs and corresponding capital adjustment accounts are reversed to other capital surplus.

 


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8

KT CORPORATION

Notes to Financial statements, Continued

(2)   Summary of Significant Accounting Policies and Basis of Presenting Financial Statements, Continued

  (w)   Earnings Per Share
 
      Basic earnings per common share are calculated by dividing net earnings available to common stock by the weighted-average number of shares of common stock holders outstanding during each period. Diluted earnings per share are calculated by dividing net earnings plus interest expenses, net of tax, of the convertible notes available to common stock holders by the weighted-average number of shares of common stock outstanding adjusted to include the potentially dilutive effect of the convertible notes.
 
      Stock options were not considered when calculating diluted earnings per share because the exercise price of the stock options was greater than the average market price of the common share and, therefore the effect would have been antidilutive.
 
  (x)   Use of Estimates
 
      The preparation of financial statements in accordance with accounting principles generally accepted in the Republic of Korea requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes to financial statements. Actual results could differ from those estimates.
 
  (y)   Application of the Statements of Korea Financial Accounting Standards
 
      The Korean Accounting Standards Board (“KASB”) has published a series of Statements of Korea Accounting Standards (“SKAS”), which will gradually replace the existing financial accounting standards, established by the Korea Financial Supervisory Board. SKAS No. 10, No. 12 and No. 13 were adopted by the Company as of January 1, 2004. SKAS No. 15 “Equity Method Accounting,” No. 16 “Income Taxes,” and No. 17 “Provisions, Contingent Liabilities and Contingent Assets” become effective for the Company on January 1, 2005 according to the effective date set forth by each SKAS. The Company does not expect the adoption of these standards to have a material impact on the financial statements.

(3)   Basis of Translating Financial Statements
 
    The financial statements are expressed in Korean Won and, solely for the convenience of the reader, the financial statements as of and for the year ended December 31, 2004, have been translated into United States dollars at the rate of W1,035.1 to US$1, the noon buying rate in the City of New York for cable transfers in Won as certified for customs purposes by the Federal Reserve Bank of New York as of December 31, 2004. The translation should not be construed as a representation that any or all of the amounts shown could be converted into U.S. dollars at this or any other rate.
 
(4)   Cash and Cash Equivalents
 
    Cash and cash equivalents as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Passbook accounts
  W 48       46  
Cash in transit
    541,918       424,884  
Time deposits
    111,778       1,179,337  
 
           
 
  W 653,744       1,604,267  
 
           


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9

KT CORPORATION

Notes to Financial statements, Continued

(5)   Restricted Deposits
 
    There are certain amounts included in short-term financial instruments which are restricted in use for expenditures for certain business purposes as of December 31, 2003 and 2004 as follows:

                 
    Millions  
    2003     2004  
Short-term financial instruments
  W 2,877       5,570  
 
           

(6)   Inventories
 
    Inventories as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Construction and repair materials
  W 42,558       17,717  
Merchandise
    114,360       102,147  
Valuation allowance
          (19,184 )
 
           
 
  W 156,918       100,680  
 
           

(7)   Other Current Assets
 
    Other current assets as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Current portion of long-term loans to employees
  W 115,367       115,713  
Prepaid expenses
    6,157       13,220  
Prepayments
    20,751       38,902  
Accrued interest income
    4,237       23,375  
Refundable deposits
    3,833       3,927  
Receivables from interest rate swap (note 24)
    2,998       2,102  
Receivables from interest rate swaption (note 24)
    989       353  
Receivables from interest currency swap (note 24)
    5,083        
Short-term loans
    240       261  
Other
    96       166  
 
           
 
  W 159,751       198,019  
 
           


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10

KT CORPORATION

Notes to Financial statements, Continued

(8)   Investments in Securities
 
    Investments in securities as of December 31, 2003 and 2004 are summarized as follows:

  (a)   Available-for-sale securities

  (i)   Equity securities

                                 
    Percentage        
    of ownership (%)     Millions  
    2003     2004     2003     2004  
Investment assets:
                               
New Skies Satellites N.V.
    1.4           W 15,917        
Intelsat Ltd.
    0.7       0.7       6,222       6,222  
Inmarsat Ventures plc
    2.3             15,015        
Inmarsat Group holdings., Ltd.
          2.3             652  
Danish Russian Japan Korean Telecommunication Group
    10.0       10.0       307        
Real Telecom Corporation
    6.5       6.5       721       721  
Polytech Adventure Town, Inc.
    6.7       6.7       200       200  
Korea Software Financial Cooperative
    1.4       1.4       1,000       1,000  
Korea Information Certificate Authority, Inc.
    9.4       9.4       2,000       2,000  
K-3-I Co., Ltd.
    13.0       13.0       300       300  
KT Internal Venture Fund No. 1
    89.3       89.3       3,303       3,303  
KT Internal Venture Fund No. 2
    90.0       94.3       3,000       5,000  
Mirae Asset Securities Co., Ltd.
    4.4       4.4       5,000       5,000  
Korea Telecom Venture Fund No. 1
    70.0       70.0       14,000       14,000  
Sky Life Contents Fund
    22.5       22.5       4,500       4,500  
ICO Global Communications Ltd.
    0.1       0.1       617       617  
Information and Communication Financial Cooperative
    0.1       0.1       16       16  
Korea Information Technology Fund
    23.3       23.3       70,000       70,000  
Daegu Football Club
    1.8       1.8       300       300  
Kookmin Credit Information Inc.
    13.0       13.0       1,202       1,202  
Onse Telecom
          2.2             1,576  
Korea Electric Engineers Association
    0.2       0.2       20       20  
 
                           
 
                  W 143,640       116,629  
 
                           

    Investments in equity securities above except for New Skies Satellites N.V., that do not have readily determinable fair values are stated at cost.
 
    The Company recognized a W4,470 million impairment loss on the investment in Real Telecom Corporation and a W307 million impairment loss on the investment in Danish Russian Japan Korean Telecommunication Group for the years ended December 31, 2003 and 2004, respectively. These charges were related to other-than-temporary declines in the value of the investee companies.
 
    The Company and SK Telecom agreed to an equity swap on December 20, 2002 under which each company sold all of the other’s equity shares it held in the other. According to the agreement, the Company exchanged 4,457,635 shares of SK Telecom for 15,454,659 shares of treasury stock plus cash of W211,868 million on December 30, 2002. In addition, the Company exchanged 3,809,288 shares of SK Telecom for 14,353,674 shares of treasury stock plus cash of W122,679 million on January 10, 2003 and the Company recognized a gain on disposition of available-for-sale securities in the amount of W775,241 million for the year ended December 31, 2003. Subsequent to January 10, 2003, the Company no longer has any shares of SK Telecom.


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11

KT CORPORATION

Notes to Financial statements, Continued

(8)   Investments in Securities, Continued

  (a)   Available-for-sale securities, Continued

  (ii)   Debt securities

                     
        Millions  
    Maturity   2003     2004  
Current assets:
                   
Beneficiary certificates
  2005   W 213,064       245,714  
Convertible notes of KTF
  2005           347,814  
Equity-linked securities
      63,380        
 
               
 
      W 276,444       593,528  
 
               
Investment assets:
                   
Convertible notes of KTF
    W 327,240        
Other
      10,000       8,315  
 
               
 
      W 337,240       8,315  
 
               

    The Company invested in convertible notes issued by KT Freetel Co., Ltd. (“KTF”) in 2002. The details are as follows:

     
Issuance date:
  November 29, 2002
Issuance amount (millions):
  W336,200
Nominal interest rate:
  1% per annum
Redemption premium:
  3% per annum
Maturity date:
  November 28, 2005
Conversion price:
  W37,200 per share
Market price of KTF as of December 31, 2004:
  W24,700 per share
Conversion period:
  On or after November 30, 2003 through November 28, 2005
Total number of shares convertible into:
  9,037,634 shares of KTF

    On April 11, 2002, the Company purchased equity-linked securities from some investment banks. The value of the equity-linked securities were linked to the weighted-average quoted price of SK Telecom stock. The Company’s investments in the equity-linked securities were recorded at fair value and unrealized holding gains and losses were recorded as a separate component of stockholders’ equity. The equity-linked securities were tested for impairment during 2003 because of the significant decrease of the quoted market value of the SK Telecom shares. As a result of this impairment test, the Company recognized an impairment loss amounting to W35,137 million on the equity-linked securities for the year ended December 31, 2003. As of December 31, 2003, the equity-linked securities also had unrealized losses recorded within stockholders’ equity of W34,078 million. During 2004, the Company disposed of its equity-linked securities and recognized a realized loss on disposition of available-for-sale securities amounting to W54,806 million.

  (iii)   Changes in unrealized gains (losses)
 
      Changes in unrealized gains (losses) on available-for-sale securities for the year ended December 31, 2004 are summarized as follows:

         
    Millions  
Beginning balance
  W (44,134 )
Realized losses on disposition of securities
    27,844  
Changes in unrealized gains and losses, net
    19,343  
 
     
Net balance at end of year
  W 3,053  
 
     


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12

KT CORPORATION

Notes to Financial statements, Continued

(8)   Investments in Securities, Continued

  (b)   Held-to-maturity securities

                 
    Millions  
    2003     2004  
Current assets:
               
Government and municipal bonds
  W 332       1,522  
 
           
Investment assets:
               
Government and municipal bonds
  W 3,313       1,839  
 
           

(9)   Investment in Equity Securities of Affiliated Companies
 
    Investments in affiliated companies accounted for using the equity method as of December 31, 2003 and 2004, are summarized as follows:

                                                 
    Percentage of     Millions  
    ownership (%)     2003     2004  
    2003     2004     Net asset     Book value     Net asset     Book value  
Listed:
                                               
KT Freetel Co., Ltd. (“KTF”)
    46.9       48.7     W 1,474,420       2,643,593       1,549,990       2,428,061  
KT Hitel Co., Ltd. (“KTH”)
    65.9       65.9       130,181       131,787       109,569       110,853  
KT Submarine Co., Ltd. (“KTSC”)
    36.9       36.9       23,311       23,023       22,710       22,542  
 
                                               
Unlisted:
                                               
KT Infotech Corporation
    15.6       15.6       4,350       3,955       3,334       3,059  
Korea Telephone Directory Co., Ltd.
    34.0       34.0       8,601       8,601       8,777       8,777  
KT Powertel Co. (“KTP”)
    44.9       44.9       39,148       39,148       43,313       43,313  
KT Networks Corporation
    100.0       100.0       76,442       76,401       72,508       72,157  
KT Linkus Co.
    93.8       93.8       81,047       79,026       60,138       58,943  
KT China Co., Ltd. (“KTCC”)
    100.0       100.0       1,341       1,341       1,044       1,044  
KT Realty Development and Management Co., Ltd.
    19.0       19.0       1,964       1,921       2,172       2,172  
Korea Telecom America, Inc. (“KTAI”)
    100.0       100.0       3,088       3,088       2,864       2,864  
Korea Telecom Philippines, Inc. (“KTPI”)
    100.0       100.0       (59,544 )           (76,208 )      
KT Commerce, Inc. (“KTC”)
    19.0       19.0       468       257       30        
Mongolian Telecommunications Co.
    40.0       40.0       4,982       4,982       8,183       8,183  
New Telephone Company (“NTC”)
    72.5       72.5       41,623       39,311       55,464       53,979  
Korea Telecom Japan Co., Ltd. (“KTJ”)
    100.0       100.0       (1,416 )           (1,138 )      
Korea Digital Satellite Broadcasting Co. (“KDB”)
    27.4       27.4       37,156       86,630       (2,008 )      
Korea Information Data Corp.
    19.0       19.0       6,864       6,864       9,138       9,138  
Korea Information Service Corp.
    19.0       19.0       4,552       4,552       6,007       6,007  
KT Instrument & Communication Corp.
    19.0       19.0       309       309       354       354  
Korea IT Venture Partners Inc.
    28.0       28.0       9,227       9,227       9,228       9,228  
KBSi Co., Ltd. (formerly, Crezio.com)
    32.4       32.4       1,386       1,386       1,667       1,667  
Bank Town Co., Ltd.
    19.0       19.0       443       432       569       569  
eNtoB Corp.
    15.6       15.6       2,243       2,243       2,495       2,495  
 
                                       
 
                                               
 
                  W 1,892,186       3,168,077       1,890,200       2,845,405  
 
                                       

    On March 6, 2003, KTICOM was merged into KTF. This transaction was done by KTF issuing an additional 7,082,476 shares of its common stock to the minority shareholders of KTICOM, which resulted in a decrease in the Company’s equity ownership interest. In addition, during 2003, the Company acquired an additional 15,532,846 shares of KTF for W399,996 million, increasing its equity ownership interest to 46.9%.


Table of Contents

13

KT CORPORATION

Notes to Financial statements, Continued

(9)   Investment in Equity Securities of Affiliated Companies, Continued
 
    In 2004, KTF reacquired 7,073,200 shares of its common stock and retired these treasury shares amounting to W149,800 million by a charge to retained earnings. Accordingly, the Company’s equity ownership interest in KTF increased from 46.9% to 48.7%.
 
    KTP acquired Anam Telecom Ltd. on February 5, 2003. As a result, the Company’s equity ownership interest decreased to 44.9%.
 
    In March 2003, the Company invested W1,245 million in KTCC, which is a wholly-owned subsidiary located in China.
 
    In December 2003, the Company purchased an additional 11,770,000 shares of KDB for W82,390 million including W49,119 million of investor level goodwill. After making this cash purchase, the Company’s equity ownership interest increased to 27.4%. In 2004, the Company impaired investor level goodwill of W37,030 million related to KDB due to continuous operating losses. This impairment loss was recorded as a component of equity losses of affiliates. In addition, in 2004, KDB issued 11,875,000 shares of callable preferred stock, which has no voting rights, amounting to W94,028 million to a third party. In the calculation of the Company’s equity ownership interest in KDB’s net assets, the Company excluded the proceeds from the preferred stock issuance.
 
    Investments in affiliated companies under the equity method of accounting as of December 31, 2003 are as follows:

                                                 
    Millions  
            Equity in     Equity             Dividends        
            retained     income (loss)     Unrealized     received     Book  
    Cost     earnings (deficit)     in 2003     gains (losses)     in 2003     value  
Listed*:
                                               
KT Freetel Co., Ltd.
  W 3,463,803       (720,298 )     (163,286 )     63,374             2,643,593  
KT Hitel Co., Ltd.
    67,780       57,768       10,336       (4,097 )           131,787  
KT Submarine Co., Ltd.
    8,085       12,807       1,741       794       (404 )     23,023  
 
                                               
Unlisted:
                                               
KT Infotech Corporation
    3,011       1,155       (170 )     19       (60 )     3,955  
Korea Telephone Directory Co., Ltd.
    6,800       1,583       218                   8,601  
KT Powertel Co.
    55,135       (21,773 )     3,356       2,430             39,148  
KT Networks Corporation
    49,800       30,168       (3,597 )     30             76,401  
KT Linkus Co., Ltd.
    50,861       20,509       2,102       5,554             79,026  
KT Commerce, Inc.
    1,330       (576 )     (496 )     (1 )           257  
KT China Co., Ltd.
    1,245             144       (48 )           1,341  
KT Realty Development and Management Co., Ltd.
    760       743       424       (6 )           1,921  
Korea Telecom America, Inc.
    4,783       (4,775 )     97       2,983             3,088  
Korea Telecom Philippines, Inc.
    2,481       (2,481 )                        
Mongolian Telecommunications Co.
    3,450       5,935       440       (4,348 )     (495 )     4,982  
Korea Digital Satellite Broadcasting Co.
    131,890       (19,580 )     (25,420 )     (260 )             86,630  
Korea Information Data Corp.
    3,800       1,420       1,644                   6,864  
Korea Information Service Corp.
    2,850       764       904       34             4,552  
KBSi Co., Ltd.
    4,760       (2,607 )     (767 )                 1,386  
Bank Town Co., Ltd.
    190       218       24                   432  
eNtoB Corp.
    2,500       (815 )     558                   2,243  
New Telephone Company
    33,064       3,578       15,470       (12,801 )           39,311  
Korea Telecom Japan Co., Ltd.
    6,586       (6,586 )                        
KT Instrument & Communication Corp.
    95       115       99                   309  
Korea IT Venture Partners, Inc.
    9,000       (80 )     859       (552 )           9,227  
 
                                   
 
                                               
 
  W 3,914,059       (642,808 )     (155,320 )     53,105       (959 )     3,168,077  
 
                                   


Table of Contents

14

KT CORPORATION

Notes to Financial statements, Continued

(9)   Investment in Equity Securities of Affiliated Companies, Continued
 
  * The quoted market values (based on closing KOSDAQ prices) of KTF, KTH and KTSC as of December 31, 2003 are W1,712,126 million, W180,863 million and W10,511 million, respectively.
 
    Effective January 1, 2003, KT’s subsidiaries adopted Statement of Korea Accounting Standards No. 3, “Intangible Assets.” In accordance with this standard, the cumulative effect on prior years of this change in the accounting has been credited to retained earnings. Therefore, under the equity method of accounting, the Company has charged W1,530 million in the retained earnings of investee companies to retained earnings.
 
    Investments in affiliated companies under the equity method of accounting as of December 31, 2004 are as follows:

                                                 
    Millions  
            Equity in     Equity             Dividends        
            retained     income (loss)     Unrealized     received     Book  
    Cost     earnings (deficit)     in 2004     gains (losses)     in 2004     value  
Listed*:
                                               
KT Freetel Co., Ltd.
  W 3,463,803       (883,584 )     (143,369 )     36,031       (44,820 )     2,428,061  
KT Hitel Co., Ltd.
    67,780       68,104       (19,415 )     (5,616 )           110,853  
KT Submarine Co., Ltd.
    8,085       14,144       (392 )     705             22,542  
 
                                               
Unlisted:
                                               
KT Infotech Corporation
    3,011       925       1,082       (235 )     (1,724 )     3,059  
Korea Telephone Directory Co., Ltd.
    6,800       1,801       176                   8,777  
KT Powertel Co.
    55,135       (18,417 )     4,165       2,430             43,313  
KT Networks Corporation
    49,800       26,571       (4,185 )     (29 )           72,157  
KT Linkus Co., Ltd.
    50,861       22,611       (20,083 )     5,554             58,943  
KT Commerce, Inc.
    1,330       (1,072 )     (258 )                  
KT China Co., Ltd.
    1,245       144       (137 )     (208 )           1,044  
KT Realty Development and Management Co., Ltd.
    760       1,167       367       (8 )     (114 )     2,172  
Korea Telecom America, Inc.
    4,783       (4,678 )     190       2,569             2,864  
Korea Telecom Philippines, Inc.
    2,481       (2,481 )                        
Mongolian Telecommunications Co.
    3,450       5,880       4,662       (5,590 )     (219 )     8,183  
Korea Digital Satellite Broadcasting Co.
    131,890       (45,000 )     (86,890 )                  
Korea Information Data Corp.
    3,800       3,064       2,274                   9,138  
Korea Information Service Corp.
    2,850       1,668       1,489                   6,007  
KBSi Co., Ltd.
    4,760       (3,374 )     279       2             1,667  
Bank Town Co., Ltd.
    190       242       137                   569  
eNtoB Corp.
    2,500       (257 )     252                   2,495  
New Telephone Company
    33,064       19,048       23,680       (21,813 )           53,979  
Korea Telecom Japan Co., Ltd.
    6,586       (6,586 )                        
KT Instrument & Communication Corp.
    95       214       45                   354  
Korea IT Venture Partners, Inc.
    9,000       779       417       (968 )           9,228  
 
                                   
 
                                               
 
  W 3,914,059       (799,087 )     (235,514 )     12,824       (46,877 )     2,845,405  
 
                                   

  * The quoted market values (based on closing Korea Stock Exchange and KOSDAQ prices) of KTF, KTH and KTSC as of December 31, 2004 are W2,214,110 million, W100,669 million and W9,524 million, respectively.
 
    In prior years, the investments in KTPI and KTJ were reduced to nil due to continuous operating losses. As a result, the Company discontinued the use of the equity method of accounting for these investments as the Company does not provide any guarantees or have any commitments to provide additional financial support for these entities.


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15

KT CORPORATION

Notes to Financial statements, Continued

(10)   Transactions and Balances with Affiliated Companies

  (a)   Significant transactions which occurred in the normal course of business with affiliated companies for the years ended December 31, 2003 and 2004 are summarized as follows:

                     
        Millions  
Affiliated company   Income Statement Items   2003     2004  
KT Freetel Co., Ltd.
  Operating revenue   W 411,098       443,354  
 
  Operating expense     563,262       628,428  
 
  Interest income from KTF     10,103       10,307  
 
  Contributions received for losses on                
 
  universal telecommunications services     44,250       25,557  
KT Hitel Co., Ltd.
  Operating revenue     3,260       2,163  
 
  Operating expense     18,585       27,897  
KT Networks Corporation
  Operating revenue     28,412       51,667  
 
  Operating expense     56,828       131,420  
KT Linkus Co., Ltd.
  Operating revenue     16,634       17,350  
 
  Operating expense     123,631       112,435  
KTF Technologies Inc.
  Operating revenue     23       248  
 
  Operating expense     35,914       101,385  
KT Commerce, Inc.
  Operating revenue     1,331       1,683  
 
  Operating expense     21,509       113,052  
Korea Digital Satellite Broadcasting Co.
  Operating revenue     47,337       131,685  
 
  Operating expense     246       1,299  
Korea Information Data Corp.
  Operating revenue     8,942       10,676  
 
  Operating expense     96,944       102,624  
KT Realty Development and Management Co., Ltd.
  Operating revenue     287       820  
 
  Operating expense     66,361       74,058  
Korea Information Service Corp.
  Operating revenue     6,480       7,934  
 
  Operating expense     66,148       71,778  
KT Infotech Corporation
  Operating revenue     121       51  
 
  Operating expense     59,097       43,499  
eNtoB Corp.
  Operating expense     33,101       86,406  
Other
  Operating revenue     17,677       24,527  
 
  Operating expense     22,822       15,868  
 
               
 
                   
Total
  Revenue   W 595,955       728,022  
 
               
 
                   
 
  Expense   W 1,164,448       1,510,149  
 
               


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16

KT CORPORATION

Notes to Financial statements, Continued

(10)   Transactions and Balances with Affiliated Companies, Continued

  (b)   Significant account balances which occurred in the normal course of business with affiliated companies as of December 31, 2003 and 2004 are summarized as follows:

                     
Affiliated company   Balanced sheet Items   2003     2004  
KT Freetel Co., Ltd.
  Notes and accounts receivable – trade   W 18,693       41,911  
 
  Convertible notes     327,240       347,814  
 
  Notes and accounts payable – trade     106,202       113,702  
 
  Key money deposits     48,895       41,599  
KT Hitel Co., Ltd.
  Notes and accounts receivable – trade     5,005       1,134  
 
  Accrued expenses     2,090       3,920  
KT Networks Corporation
  Notes and accounts receivable – trade     5,126       5,338  
 
  Accounts payable – other     33,528       35,170  
KT Linkus Co., Ltd.
  Notes and accounts receivable – trade     2,233       112  
 
  Notes and accounts payable – trade     19,024       22,389  
Korea Telecom Philippines, Inc.
  Accounts receivable– other     19,179       16,713  
KTF Technologies Inc.
  Notes and accounts receivable – trade           368  
 
  Notes and accounts payable – trade     14,709       2,584  
KT Commerce, Inc.
  Notes and accounts receivable – trade     4,623       3,509  
 
  Notes and accounts payable – trade     8,672       11,141  
Korea Digital Satellite Broadcasting Co.
  Notes and accounts receivable – trade     4,079       54,664  
 
  Accounts payable - other     19       20  
Korea Information Data Corp.
  Notes and accounts receivable – trade     840       884  
 
  Accounts payable – other     13,169       14,757  
KT Realty Development and Management Co., Ltd.
  Accounts payable – other     12,664       6,633  
Korea Information Service Corp.
  Notes and accounts receivable – trade     676       236  
 
  Accounts payable – other     8,852       9,538  
KT Infotech Corporation
  Notes and accounts receivable – trade     10        
 
  Accounts payable – other     19,348       23,374  
eNtoB Corp.
  Accounts payable – other     16,462       16,669  
Other
  Accounts receivable     22,013       26,322  
 
  Accounts payable     4,988       6,831  
 
               
 
                   
Total
  Accounts receivable   W 82,477       151,191  
 
               
 
  Convertible notes   W 327,240       347,814  
 
               
 
  Accounts payable   W 308,622       308,327  
 
               

  (c)   As of December 31, 2004, the Company has provided guarantees of the following affiliates’ indebtedness and contract performance as follows:

         
Affiliated company   Millions  
KTSC
    W60,540  
NTC
    12,526  
 
     
 
    W73,066  
 
     


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17

KT CORPORATION

Notes to Financial statements, Continued

(11)   Property, Plant and Equipment

  (a)   Property, plant and equipment as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Land
  W 1,002,186       1,015,119  
Buildings and structures
    3,908,118       4,170,154  
Machinery and equipment
    28,056,035       27,993,970  
Vehicles
    63,809       62,162  
Tools, furniture and fixtures
    1,153,082       1,129,429  
Construction in progress
    387,845       268,236  
 
           
 
               
 
    34,571,075       34,639,070  
Less accumulated depreciation
    (23,325,504 )     (24,002,011 )
 
           
 
               
Net property, plant and equipment
  W 11,245,571       10,637,059  
 
           

      Property, plant and equipment are insured against fire damage up to an amount of W651,275 million and W709,060 million as of December 31, 2003 and 2004, respectively. Additionally, the Company maintains insurance policies covering loss and liability arising from automobile accidents.
 
  (b)   Officially Declared Value of Land
 
      The officially declared value of land at December 31, 2004, as announced by the Ministry of Construction and Transportation, is as follows:

                 
    Millions  
    Book value     Declared value  
Head office
  W 130,469       393,695  
Metropolitan District
    395,860       2,140,817  
Busan District
    98,425       391,993  
Jeonnam District
    90,550       212,339  
Daegu District
    116,754       266,344  
Chungnam District
    47,598       140,581  
Jeonbuk District
    47,587       114,511  
Kangwon District
    43,679       81,867  
Chungbuk District
    29,426       77,105  
Cheju District
    14,771       30,463  
 
           
 
               
 
  W 1,015,119       3,849,715  
 
           

    The officially declared value, which is used for government purposes, is not intended to represent fair value.


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18

KT CORPORATION

Notes to Financial statements, Continued

(12)   Other Assets
 
    Other assets as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Deferred income tax asset, net (note 27)
  W 313,913       250,661  
Long-term loans to employees
    556,740       434,816  
Intangible assets, net
    247,826       299,106  
Leasehold rights and deposits
    99,549       106,453  
Other long-term loans
    36,137       8,386  
Long-term accounts receivable — trade
    14,538       59,457  
Long-term accounts receivable — other
    3,869       3,647  
Other
    42,277       46,600  
 
           
 
               
 
  W 1,314,849       1,209,126  
 
           

(13)   Short-term Borrowings
 
    Short-term borrowings (all of which mature within one year) as of December 31, 2003 and 2004 are summarized as follows:

                                 
            Interest rate per     Millions  
Debt instrument/Lender   Maturity     annum     2003     2004  
Commercial paper
    2004       4.12~4.17 %   W 250,000        
 
                           

(14)   Other Current Liabilities
 
    Other current liabilities as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Key money deposits
  W 147,395       147,006  
Payables from interest currency swap (note 24)
          99,615  
Payables from interest swap (note 24)
    16,077       7,278  
Payables from currency swap (note 24)
    3,554       40,799  
Payable from currency forward (note 24)
          10,025  
Other
    1,392       880  
 
           
 
               
 
  W 168,418       305,603  
 
           

(15)   Long-term Debt
 
    Long-term debt as of December 31, 2003 and 2004 is summarized as follows:

                         
    Interest rate       Millions  
    per annum   Maturity date   2003     2004  
Local currency (Won) debt :
                       
Bonds
  4.15%~9.20%   2005-2014   W 4,420,000       4,420,000  
Convertible notes
  3.00%   2005     1,322,563       1,322,530  
Information and Telecommunication Improvement Fund
  3.63%~4.28%   2006-2009     107,275       79,818  
 
                   
 
                       
 
            5,849,838       5,822,348  
 
                   


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19

KT CORPORATION

Notes to Financial statements, Continued

(15)   Long-term Debt, Continued

                         
    Interest rate       Millions  
    per annum   Maturity date   2003     2004  
Foreign currency (U.S. dollars) debt:
                       
Convertible notes
  0.25%   2007   W 1,483,628       1,178,759  
Bonds with warrants
  4.30%   2005     598,900       521,900  
Yankee bonds
  7.50%~7.63%   2006-2007     419,230       365,330  
Loans
  Libor+0.45%   2005     239,560       208,760  
Bonds
  Libor+0.80%   2006     179,670       156,570  
MTNP notes
  5.88%~6.50%   2014-2034           730,660  
 
                   
 
                       
 
            2,920,988       3,161,979  
 
                   
 
                       
Total
            8,770,826       8,984,327  
 
                       
Add: Premium on bonds
            30,239       50,387  
 
                       
Less: Current portion
            1,054,287       3,995,904  
Discount on bonds
            35,774       24,010  
 
                   
 
          W 7,711,004       5,014,800  
 
                   

    In June 2004, the Company established a US$1 billion Medium Term Note Program (MTNP). As of December 31, 2004, the Company has issued notes in the amount of US$700 million with a fixed interest rate under the MTNP. The notes are listed on the Singapore Stock Exchange. As of December 31, 2004, the unused portion of the MTNP amounts to US$300 million.
 
    On January 4, 2002, the Company issued convertible notes with a face amount of US$1,317,800 thousand. Holders of convertible notes are entitled to convert notes into shares of the Company’s common stock from January 4, 2003 to January 1, 2007. In November 2004, certain holders of the convertible notes elected their option to redeem these convertible notes. As a result, as described in note 35, on January 4, 2005, the principal amount of US$1,115,105 thousand was repaid. During 2002 and 2003, the Company purchased and retired convertible notes with a face value of US$191,450 thousand.
 
    During 2002, bonds with warrants were issued in connection with a strategic alliance with Microsoft Corp. Holders of bonds with warrants were entitled to exercise the warrants from January 4, 2003 to December 31, 2003. The warrants expired on December 31, 2003 without being exercised. The bonds of W521,900 million issued to Microsoft Corp. were repaid on January 4, 2005.
 
    On May 25, 2002, the Company issued convertible notes with a face amount of W1,397,349 million. Holders of the convertible notes are entitled to convert notes into shares of the Company’s common stock from September 25, 2002 to April 25, 2005. The exchange price was W59,400 per share of common stock, which allowed the bondholders to obtain up to 23,524,392 shares. During 2002, 2003 and 2004, due to early retirement of the convertible notes and 13,705 shares of common stock converted, the number of shares allowed to the holders was reduced to 22,264,813 shares. The convertible notes, if not converted, will be redeemed at 104.438% of their principal amount at maturity date. The Company recognizes interest expense on the convertible notes using the effective interest method, and amortization of the redemption premium is recorded as accrued interest expense. Since the issuance of the notes through December 31, 2004, the Company has purchased and retired convertible notes with a face value of W74,000 million and exchanged convertible notes with a face value of W819 million with the Company’s shares.
 
    On December 18, 2003, the Company purchased and retired convertible notes issued on January 4, 2002 with a face value of US$83,700 thousand for US$85,839 thousand with a gain on retirement of convertible notes of W7,441 million.


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20

KT CORPORATION

Notes to Financial statements, Continued

(15)   Long-term Debt, Continued
 
    Aggregate principal maturities for the Company’s long-term debt as of December 31, 2004 are as follows:

         
Fiscal year ending December 31,   Millions  
2005
  W 3,945,517  
2006
    809,720  
2007
    743,830  
2008
    532,667  
2009
    401,900  
Thereafter
    2,550,693  
 
     
 
  W 8,984,327  
 
     

(16)   Refundable Deposits for Telephone Installation
 
    Through September 15, 1998, KT collected deposits for telephone installation in accordance with the Korea Public Telecommunication Business Law. Such deposits (which are reflected as a liability) are to be refunded without interest to the telephone subscribers upon termination of service. For changes in site classifications of telephones that were installed prior to January 1, 1990, KT is obligated to refund the original deposit received plus the increased deposit due to changes in site classifications.
 
    Beginning on September 15, 1998, KT allowed customers to choose between alternative plans for basic telephone service. Under such plan, customers were permitted the option to either place fully refundable deposits or pay a reduced non-refundable service initiation fee. The non-refundable service installation fees were recorded as operating revenues. Refundable deposits continue to be subject to the same provisions as described above. Effective April 15, 2001, all new customers are required to pay a non-refundable service initiation fee.
 
(17)   Retirement and Severance Benefits
 
    Changes in retirement and severance benefits for the years ended December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Estimated severance benefits liability at beginning of year
  W 654,792       692,506  
Provision for the year
    1,038,868       208,665  
Payments
    (1,001,154 )     (23,205 )
 
           
 
               
Estimated severance benefits liability at end of year
    692,506       877,966  
 
               
Deposit for severance benefits insurance
    (494,588 )     (614,435 )
 
           
 
               
Net balance at end of year
  W 197,918       263,531  
 
           

    In September 2003, the Company offered a voluntary early retirement plan (the “Plan”) to its employees. Under the terms of the Plan, employees participating in the Plan would receive additional amounts of retirement and severance benefits. For the year ended December 31, 2003, the Company recorded costs of W831,535 million related to this Plan covering approximately 5,500 employees.


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21

KT CORPORATION

Notes to Financial statements, Continued

(18)   Other Long-term Liabilities
 
    Other long-term liabilities as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Accrual for customer call bonus points
  W 93,790       112,968  
Key money deposits from customers
    16,466       12,694  
Advance receipts
    17,099       16,390  
Other
    2,577       15,817  
 
           
 
               
 
  W 129,932       157,869  
 
           

(19)   Assets and Liabilities Denominated in Foreign Currencies
 
    Assets and liabilities denominated in foreign currency as of December 31, 2003 and 2004 are summarized as follows:

                                 
    2003     2004  
    Foreign             Foreign        
    currency     Won     Currency     Won  
    (USD in     equivalent     (USD in     equivalent  
    thousand)     (in million)     thousand)     (in million)  
Assets:
                               
Cash and cash equivalents
  $ 26,395     W 31,616     $ 54,932     W 57,339  
Short-term financial instruments
                298,239       311,302  
Accounts receivable — trade
    184,580       221,090       211,596       220,864  
Accounts and notes receivable — other
    16,012       19,179       16,012       16,713  
Short-term loans
    200       240       250       261  
Long-term loans
    30,169       36,137       23,310       24,331  
 
                       
 
                               
 
  $ 257,356     W 308,262     $ 604,339     W 630,810  
 
                       
 
                               
Liabilities:
                               
Accounts and notes payable — trade
  $ 185,410     W 222,085     $ 195,551     W 204,116  
Long-term debt, including current portion
    1,200,000       1,437,360       1,900,000       1,983,220  
Convertible notes
    1,126,350       1,483,628       1,126,350       1,178,759  
 
                       
 
                               
 
  $ 2,511,760     W 3,143,073     $ 3,221,901     W 3,366,095  
 
                       

    Prior to January 1, 2004, convertible notes are not subject to foreign currency translation because convertible notes are regarded as non-monetary foreign currency liabilities in accordance with Korean GAAP. However, in November 2004, certain holders of the convertible notes elected their option to redeem these convertible notes. As a result of the election by the note holders, the convertible notes are subject to foreign currency translation as of December 31, 2004. Accordingly, the Company has recognized a foreign currency translation gain of W304,870 million for the year ended December 31, 2004.


Table of Contents

22

KT CORPORATION

Notes to Financial statements, Continued

(20)   Common Stock
 
    The composition of holders of common stock as of December 31, 2003 and 2004 are summarized as follows:

                                 
    No. of shares owned     Ownership percentage  
    2003     2004     2003     2004  
Employee Stock Ownership Associations
    16,394,226       16,174,934       5.76 %     5.68 %
National Pension Corporation
    9,461,792       10,654,638       3.32 %     3.74 %
Treasury stock
    74,090,974       74,090,418       26.01 %     26.01 %
Others, including private companies
    184,902,408       183,929,410       64.91 %     64.57 %
 
                       
 
                               
 
    284,849,400       284,849,400       100.00 %     100.00 %
 
                       

    Changes in common stock for the years ended December 31, 2003 and 2004 are as follows:

                 
    Number of        
    shares issued     Millions  
Balance at January 1, 2003
    309,077,659     W 1,560,998  
Retirement of treasure stock on January 6, 2003
    15,454,659        
Retirement of treasure stock on June 20, 2003
    2,937,000        
Retirement of treasure stock on December 9, 2003
    5,836,600        
 
           
Balance at December 31, 2003
    284,849,400     W 1,560,998  
 
               
 
       
 
           
Balance at December 31, 2004
    284,849,400     W 1,560,998  
 
           

    As allowed by the Securities Exchange Law of the Republic of Korea, the Company retired its treasury shares by a charge to retained earnings rather than its common stock.
 
(21)   Capital Surplus
 
    Capital surplus as of December 31, 2003 and 2004 is summarized as follows:

                 
    Millions  
    2003     2004  
Paid-in capital in excess of par value
  W 1,440,258       1,440,258  
 
           


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23

KT CORPORATION

Notes to Financial statements, Continued

(22)   Appropriated Retained Earnings
 
    Retained earnings appropriated to various restricted reserves as of December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Involuntary reserve:
               
Legal reserve
  W 780,499       780,499  
Voluntary reserve:
               
Reserve for business rationalization
    443,416       443,416  
Reserve for technology and human resource development
    3,334        
Reserve for social overhead capital
    3,333        
Reserve for business expansion
    6,587,325       4,000,000  
Reserve for redemption of telephone bonds
    207,947       207,947  
 
           
 
  W 8,025,854       5,431,862  
 
           

    Retained earnings appropriated to the legal reserve are restricted in use as cash dividends under the applicable laws and regulations of the Republic of Korea. The Korean Commercial Code requires the Company to appropriate to a legal reserve an amount equal to at least 10% of the cash dividend amount at the end of the year for each accounting period until the reserve equals 50% of stated capital. The legal reserve may be used to reduce a deficit or may be transferred to stated capital.
 
    The Company is allowed to appropriate from retained earnings amounts necessary to establish reserves for business expansion and research and development at its own discretion. These reserves may be used for research, development and facilities expansion of the Company.
 
    Under the Special Tax Treatment Control Law, the Company is allowed to make certain deductions from taxable income. However, the Company is required to appropriate retained earnings in the amount of tax benefits obtained and transfer such amount into reserves for social overhead capital and technology and human resources development.
 
    Through 2001, under the Special Tax Treatment Control Law, investment tax credits were allowed for certain investments. However, the Company was required to transfer from retained earnings the amount of tax benefits obtained into a reserve for business rationalization. Effective December 11, 2002, the Company is no longer required to establish a reserve for business rationalization despite tax benefits received for certain investments, and consequently the existing balance is now regarded as a voluntary reserve.
 
(23)   Treasury Stock

  (a)   Trust fund
 
      During 2000, in order to stabilize the price of the Company’s common stock in the market, the Company established a treasury stock fund of W100 billion. This trust fund is managed by a bank, which is used primarily as a vehicle for trading the common stock of the Company. The trust fund (which is recorded at cost) held treasury stock of 1,259,170 shares as of December 31, 2003 and 2004, respectively.
 
  (b)   Issuance to the notes holders
 
      During 2004, certain holders of convertible notes (as described in note 15), which were issued on May 25, 2002, converted their notes into shares of the Company’s common stock. As part of this transaction, 556 shares of treasury stock were issued to the note holders.


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24

KT CORPORATION

Notes to Financial statements, Continued

(23)   Treasury Stock, Continued

  (c)   Purchase and retirement of treasury stock
 
      The Company and SK Telecom agreed to an equity swap on December 20, 2002, under which each company sold all of the other’s equity shares it held in the other. According to the agreement, the Company exchanged 4,457,635 shares of SK Telecom for 15,454,659 shares of the Company’s common stock and cash of W211,868 million on December 30, 2002 and retired these treasury stock for W786,666 million by a charge to retained earnings on January 6, 2003. In addition, on January 10, 2003, the Company exchanged 3,809,288 shares of SK Telecom for 14,353,674 shares of the Company’s common stock amounting W730,704 million and cash of W122,679 million.
 
      During 2003, the Company initiated a stock buyback and retirement program approved by the Board of Directors. The Company reacquired 8,773,600 shares of treasury stock during 2003 and retired these treasury shares amounting to W411,833 million by a charge to retained earnings. As of December 31, 2004, no amounts under the stock buyback and retirement programs are outstanding.
 
  (d)   Sale and contribution to Employee Stock Ownership Association
 
      On August 28, 2003, the Company sold 1,803,296 shares of treasury stock to the KT employee stock ownership association (“ESOA”). The difference between carrying value and the fair value of W13,886 million was recorded as a loss on retirement of treasury stock and the difference between the fair value and the sales proceeds of W40,754 million was expensed.

    Changes in treasury stock for the years ended December 31, 2003 and 2004 were as follows:

                                 
    2003     2004  
    Number             Number        
    of shares     Millions     of shares     Millions  
Balance at beginning of year
    76,988,771     W 4,112,225       74,090,974     W 3,962,598  
Purchase of the Company’s common stock
    23,127,274       1,142,537              
Issuance to convertible note holders
    (2,356 )     (127 )     (556 )     (30 )
Purchase by trust fund, net
    8,840       414              
Retirement of treasury stock
    (24,228,259 )     (1,198,499 )            
Sale and contribution to ESOA
    (1,803,296 )     (93,952 )            
 
                       
Balance at end of year
    74,090,974     W 3,962,598       74,090,418     W 3,962,568  
 
                       

(24)   Commitments and Contingencies

(a)   Legal matters
 
    On February 20, 2001, the Fair Trade Commission alleged that the Company had unfairly assisted its affiliates by paying them unreasonably high service fees through the violation of the Fair Trade Laws. The Fair Trade Commission imposed a fine of approximately W30,700 million, and the Company made a provision of W30,700 million for this claim during 2001. In October 2004, the Seoul High Court partially reversed the Fair Trade Commission’s decision and decreased the fine from W30,700 million to W2,400 million. As of December 31, 2004, the ruling of the Seoul High Court’s decision is not reflected in the accompanying financial statements. The Company believes that the Fair Trade Commission will appeal to the Supreme Court of Korea.


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25

KT CORPORATION

Notes to Financial statements, Continued

(24)   Commitments and Contingencies, Continued

  (a)   Legal matters, Continued
 
      The Company is also in litigation as a defendant in other cases for damages allegedly resulting from various claims, disputes and legal actions in the normal course of operations. These claims amounted to W100,629 million as of December 31, 2004. Management believes that the ultimate settlement of these matters, and the matters described in the previous paragraph, will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
 
  (b)   As of December 31, 2004, the Company guarantees lease payables of Hanwha S&C to KT Networks Corporation amounting W4,577 million.
 
  (c)   Interest rate swaption
 
      During 2002, the Company entered into interest rate swaption contract with Citibank for variable rates of interest in place of fixed rates of interest. Details of the interest rate swaption contract outstanding as of December 31, 2004 are as follows:

                                         
    Swaption premium     Fixed interest     Variable interest              
Bank   (millions)     rate (3 months)     rate (3 months)     Exercise date     Type  
Citibank
  W 1,913       1.975 %   91-Day CD rate   April 25, 2005   Selling

      Under the interest rate swaption contract, the Company recognized a valuation gain of W2,448 million and a valuation loss of W(636) million for the years ended December 31, 2003 and 2004, respectively.
 
  (d)   Interest rate swap
 
      During 2002, 2003 and 2004, the Company entered into various interest rate swap contracts with financial institutions for variable rates of interest in place of fixed rates of interest. Details of these interest rate swap contracts as of December 31, 2004 are as follows:

                             
    Nominal   Fixed     Fixed          
    premium   amount     interest     Variable interest   Terminal
Bank   (millions)   (millions)     rate     rate   date
J.P. Morgan
  $1.6   US$ 150       7.50 %   6-month LIBOR +4.32%   June 1, 2006
J.P. Morgan
  $0.5   US$ 200       7.63 %   6-month LIBOR +4.61%   April 15, 2007
Citibank
    W 110,000       5.29 %   3-month LIBOR +1.47%   April 30, 2008
Shinhan Bank
    W 180,000       6.35 %   3-month LIBOR +2.47%    
 
                      +Contingent spread   September 30, 2007
Shinhan Bank
    W 57,810       4.70 %   6-month LIBOR + 0.69%   June 24, 2009
UBS Bank
    W 57,810       4.70 %   6-month LIBOR + 0.69%   June 24, 2009
UBS Bank
    W 57,810       4.64 %   6-month LIBOR + 0.69%   June 24, 2009
BNP Paribas Bank
    W 110,000       5.29 %   3-month LIBOR +1.54%   April 30, 2008
CSFB
    W 57,810       4.64 %   6-month LIBOR +0.69%   June 24, 2009

      Under the interest rate swap contracts, the Company recognized a valuation loss and gain of W(13,645) million and W222 million, respectively, for the year ended December 31, 2003, and a valuation loss and gain of W(2,943) million and W12,427 million, respectively, for the year ended December 31, 2004.
 
      In addition, the Company settled two contracts and three contracts in 2003 and 2004, respectively, and recognized a transaction gain of W8,170 million and a transaction loss of W(1,252) million for the years ended December 31, 2003 and 2004, respectively.


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26

KT CORPORATION

Notes to Financial statements, Continued

(24)   Commitments and Contingencies, Continued

  (e)   Currency swap
 
      During June 2003, the Company entered into two currency swap contracts for principal and interest denominated in Korean Won in place of principal and interest of long-term debt denominated in U.S. dollars. Details of these currency swap contracts as of December 31, 2004 are as follows:

                             
    Contract   Fixed                
    amount   amount     Receiving   Paying   Terminal
Bank   (millions)   (millions)   Interest rate   Interest rate   date
J.P. Morgan
  US$50   W 59,750     4.30% (US$) per year   6.17% (Won) per year   January 3, 2005
J.P. Morgan
  US$150   W 179,760     3-month LIBOR
+ 0.80%(US$)
  3-month LIBOR +2.64% (Won)   June 24, 2006

      Under the currency swap contracts, the Company recognized a valuation loss of W(2,429) million and a valuation loss of W(37,244) million for the years ended December 31, 2003 and 2004, respectively.
 
  (f)   Interest currency swap
 
      The Company entered into five interest currency swap contracts with financial institutions for principal and the fixed rate of interest denominated in Korean Won in place of principal and the variable rate of interest of long-term debt denominated in U.S. dollars in October 2003. The principal amounts in Korean Won will be adjusted according to the foreign exchange rate of the terminal date within certain ranges. In addition, the Company entered into five interest currency swap contracts with financial institutions for principal and interest denominated in Korean Won in place of principal and interest of long-term debt denominated in U.S. dollars in 2004. Details of these interest currency swap contracts as of December 31, 2004 are as follows:

                             
    Contract           Fixed     Variable    
    amount   Amount     interest     interest   Terminal
Bank   (millions)   (millions)     rate (1 year)     rate (6 months)   date
J.P. Morgan
  US$50   W 55,000~60,000     4.3%(US$)   6-month LIBOR +4.55% (Won)   January 3, 2005
J.P. Morgan(*)
  US$100   W 115,620     5.9%(US$)   6-month LIBOR +1.87% (Won)    
 
              5.5%(Won)       June 24, 2014
J.P. Morgan(**)
  US$200   W 231,240     5.5%(Won)   6-month LIBOR +0.69% (Won)    
 
                      5.9%-Contingent Spread (US$)   June 24, 2014
Merrill Lynch
  US$100   W 116,400     5.0%(Won)   5.9%-Contingent Spread (US$)   June 24, 2014
Merrill Lynch
  US$50   W 53,325     4.7%(Won)   5.9%-Contingent Spread (US$)   June 24, 2014
Citibank
  US$25   W 27,500~30,000     4.3%(US$)   6-month LIBOR +4.45% (Won)   January 3, 2005
UBS Bank
  US$25   W 27,500~30,000     4.3%(US$)   6-month LIBOR +4.45% (Won)   January 3, 2005
Deutsche Bank
  US$50   W 55,000~60,000     4.3%(US$)   6-month LIBOR +4.57% (Won)   January 3, 2005
Deutsche Bank
  US$50   W 53,325     4.7%(Won)   5.9%-Contingent Spread (US$)   June 24, 2014
Shinhan Bank
  US$50   W 55,000~60,000     4.3%(US$)   6-month LIBOR +4.45% (Won)   January 3, 2005

      (*) The interest will be received at 5.9% (US$) every six months and paid at 6-month LIBOR + 1.87% (Won) over the first five years. Then, the interest will be received at 5.9% (US$) every six months and paid at 5.5% (Won) per year over the following five years.
 
      (**) The interest will be received at 5.9%-Contingent spread (US$) every six months and paid at 6-month Libor +0.69% (Won) over the first five years. Then, the interest will be received at 5.9%-Contingent spread (US$) every six months and paid at 5.5% (Won) per year over the following five years.

      Under the interest currency swap contracts, the Company recognized a valuation loss of W(5,083) million and W(105,899) million for the years ended December 31, 2003 and 2004, respectively.


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27

KT CORPORATION

Notes to Financial statements, Continued

(24)   Commitments and Contingencies, Continued

  (g)   Currency Forward
 
      The Company entered into eight currency forward contracts with financial institutions in order to pay back convertible notes and bonds with warrants, which were issued on January 4, 2002. Details of these currency forward contracts outstanding as of December 31, 2004 are as follows:

                 
    Fixed        
    amount        
Bank   (millions)     Terminal date
Shinhan Bank
  US$ 118     January 3, 2005
Shinhan Bank
  US$ 82     January 3, 2005
Kookmin Bank
  US$ 100     January 3, 2005
Kookmin Bank
  US$ 100     January 3, 2005
Citibank
  US$ 100     January 3, 2005
Citibank
  US$ 100     January 3, 2005
UBS
  US$ 100     January 3, 2005
J.P. Morgan
  US$ 170     January 3, 2005

      Under the currency forward contracts, the Company recognized a valuation loss of W(10,025) million and a valuation gain of W164 million, respectively, for the year ended December 31, 2004.
 
  (h)   Loans and Borrowings
 
      As of December 31, 2004, the Company has entered into bank overdraft agreements with two banks for borrowings up to W750,000 million and a collection agreement for foreign currency denominated checks up to US$1 million with Korea Exchange Bank. In addition, the Company has received letter of credits up to US$35 million with four banks.
 
      In October 2004, the Company has entered into revolving stand-by credit line agreements with 12 banks for borrowing up to US$200 million. However, as of December 31, 2004, no amounts are outstanding.
 
  (i)   Guarantee Provided by a Third Party
 
      As of December 31, 2004, three financial institutions are providing guarantees for the Company covering contract biddings up to US$7,403 thousand, SAR8,093 thousand and W57,701 million.
 
  (j)   Lease
 
      The Company has capital lease agreements with GE Capital Korea Ltd. for certain machinery and equipment, which acquisition cost amounts to W22,860 million. Depreciation on the machinery and equipment for the years ended December 31, 2003 and 2004 amounted to W312 million and W 4,505 million, respectively. Annual future minimum payments under the lease agreements as of December 31, 2004 are as follows:

         
Fiscal year ending December 31,   Millions  
2005
  W 4,955  
2006
    4,955  
2007
    4,955  
2008
    4,782  
Thereafter
    2,123  
 
     
 
       
Less : amount representing interest
    (1,683 )
 
     
 
       
 
  W 20,087  
 
     


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28

KT CORPORATION

Notes to Financial statements, Continued

(25)   Operating Revenues
 
    Operating revenues for the years ended December 31, 2003 and 2004 are as follows:

                 
    Millions  
    2003     2004  
Internet services
  W 2,349,185       2,638,581  
Data communication services
    1,420,569       1,348,084  
Telephone services
    6,791,717       6,326,579  
Wireless services
    681,346       1,118,476  
Satellite services
    120,269       119,759  
System integration services
    115,480       191,122  
Real estate rental services
    48,356       69,753  
Other
    47,627       38,465  
 
           
 
               
 
  W 11,574,549       11,850,819  
 
           

(26)   Operating Expenses
 
    Operating expenses for the years ended December 31, 2003 and 2004 are as follows:

                 
    Millions  
    2003     2004  
Salaries and wages
  W 1,793,867       1,661,418  
Compensation expense (note 30)
    5,376       3,720  
Provision for retirement and severance benefits, including early retirement payments
    1,038,868       208,665  
Employee benefits
    546,394       450,748  
Communications
    41,895       44,617  
Utilities
    138,682       143,476  
Taxes and dues
    88,668       92,364  
Rent
    47,428       85,319  
Depreciation
    2,457,584       2,291,428  
Amortization
    56,715       69,829  
Repairs and maintenance
    373,541       418,881  
Automobile maintenance
    18,365       17,495  
Commissions
    613,200       658,998  
Advertising
    152,782       142,930  
Education and training
    50,867       41,576  
Research and development
    232,180       254,360  
Travel
    30,655       29,830  
Supplies
    32,305       23,556  
Interconnection charges
    1,025,216       869,606  
Cost of PCS handsets sold
    275,902       554,847  
Cost of services
    437,706       493,790  
International settlement payment
    185,448       189,938  
Commissions for system integration service
    113,607       192,671  
Promotion
    235,621       372,417  
Sales commission
    108,792       235,116  
Provision for doubtful accounts
    301,107       238,953  
Other
    48,620       62,752  
 
           
 
    10,451,391       9,849,300  
 
               
Less: amounts included in construction in progress
    119,986       125,600  
 
           
 
               
 
  W 10,331,405       9,723,700  
 
           


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29

KT CORPORATION

Notes to Financial statements, Continued

(26)   Operating Expenses, Continued
 
    In September 2003, the Company offered a voluntary early retirement plan (the “Plan”) to its employees. Under the terms of the Plan, employees participating in the Plan would receive additional amounts of retirement and severance benefits. For the year ended December 31, 2003, the Company recorded costs of W831,535 million related to this Plan covering approximately 5,500 employees.
 
(27)   Income Taxes

  (a)   The Company is subject to a number of income taxes based upon taxable income which results in the following normal tax rates (including resident tax):

                 
Taxable earnings   2004     2005 and thereafter  
Up to W100 million
    16.5 %     14.3 %
Over W100 million
    29.7 %     27.5 %

      The components of income tax expense for the years ended December 31, 2003 and 2004 are as follows:

                 
    Millions  
    2003     2004  
Current income tax expense
  W 384,922       415,457  
Deferred income tax expense
    74,681       128,546  
 
           
 
               
 
  W 459,603       544,003  
 
           

  (b)   The provision for income taxes calculated using the normal tax rates differs from the actual provision for the years ended December 31, 2003 and 2004 for the following reasons:

                 
    Millions  
    2003     2004  
Provision for income taxes at normal tax rates
  W 383,032       534,459  
Tax effect of prior year’s additional income tax payment
    18,365       81  
Tax effect of permanent differences, net
    43,680       13,698  
Effect of tax rate change
    32,985       770  
Investment tax credit
    (152,041 )     (174,968 )
Write off of deferred tax asset
    133,582       169,963  
 
           
 
               
Actual provision for income taxes
  W 459,603       544,003  
 
           

      The effective tax rates, after adjustments for certain differences between amounts reported for financial accounting and income tax purposes, were approximately 35.6% and 30.2% for the years ended December 31, 2003 and 2004, respectively.


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30

KT CORPORATION

Notes to Financial statements, Continued

(27)   Income Taxes, Continued

  (c)   The tax effects of temporary differences that result in significant portions of deferred income tax assets and liabilities as of December 31, 2003 and 2004 are presented below:

                 
    Millions  
    2003     2004  
Deferred income tax assets:
               
Allowance for doubtful accounts
  W 124,705       128,403  
Refundable deposits for telephone installation
    20,022       18,157  
Equity in losses of affiliates
    219,749       351,155  
Investment securities
    46,477       19,119  
Accrual for customer call bonus points
    25,792       31,398  
Accrued expense
    18,585       6,606  
Tax credit carryforwards
          34,393  
Other, net
    25,117       36,280  
 
           
 
               
Total deferred income tax assets
    480,447       625,511  
 
           
 
               
Deferred income tax liabilities:
               
Accumulated depreciation
    30,784       61,738  
Accrued interest income
    2,168       9,567  
 
           
 
               
Total deferred income tax liabilities
    32,952       71,305  
 
           
 
               
Write-off
    (133,582 )     (303,545 )
 
           
 
               
Deferred income tax asset, net
  W 313,913       250,661  
 
           

    The Company concluded that it was not probable that it would be able to realize the tax benefit of its equity in losses of affiliates within the near future which is construed usually to mean 5 years and, therefore, wrote off the related deferred income tax assets in the amount of W133,582 million and W169,963 million by a charge to deferred income tax expense for the years ended December 31, 2003 and 2004, respectively.
 
    During 2003, the Korea National Tax Service initiated a tax audit of the Company for the periods from 1998 to 2002. In September 2003, the Company received a final notice from the Korea National Tax Service asserting income tax deficiencies. As a result of the tax audit, the Company paid W67,410 million which consisted of W1,639 million of deferred income tax asset and W65,771 million of prior year’s income tax expense for the year ended December 31, 2003. For the year ended December 31, 2004, the Company recognized a deferred income tax asset of W65,294 million and a prior year’s income tax expense of W273 million, respectively, from cash payment related to the tax audit of stock transaction incurred in 2000.
 
(28)   Earnings Per Share
 
    Earnings per share of common stock for the years ended December 31, 2003 and 2004 are calculated as follows:

  (a)   Basic earnings per share

                 
    Millions  
    (except number of shares  
    and earnings per share)  
    2003     2004  
Net earnings
  W 830,066       1,255,522  
Weighted-average number of shares common stock (in thousands)
    216,106       210,759  
 
           
 
               
Basic earnings per share (in Won)
  W 3,841       5,957  
 
           


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31

KT CORPORATION

Notes to Financial statements, Continued

(28)   Earnings Per Share, Continued

  (b)   Diluted earnings per share

                 
    Millions  
    (except number of shares  
    and earnings per share)  
    2003     2004  
Net earnings
  W 830,066       1,255,522  
Adjustments:
               
Interest expense on convertible notes
    51,373       46,662  
 
           
 
               
Net earnings available for common and common equivalent shares
    881,439       1,302,184  
Weighted-average number of common and common equivalent shares (in thousands)
    263,556       233,270  
 
           
 
               
Diluted earnings per share (in Won)
  W 3,344       5,582  
 
           

    Diluted earnings per share are calculated based on the effect of potentially dilutive securities that were outstanding during the year. The denominator for the diluted earnings per share computation is adjusted to include the number of additional common shares that would have been outstanding if the potentially dilutive securities had been converted into common stock. In addition, the numerator is adjusted to include the after-tax amount of interest recognized associated with convertible notes.
 
    Potentially dilutive securities as of December 31, 2003 and 2004 are as follows:

                 
    No. of potentially dilutive shares  
    (thousands)  
    2003     2004  
Convertible notes (note 15)
    45,770       22,511  
Stock options (note 30)
    616       512  

    Stock options were not considered in the determination of diluted earnings per share in 2003 and 2004 because of the anti-dilutive effect on the exercise of stock options.
 
(29)   Dividends

  (a)   Interim dividends
 
      On July 29, 2004, an interim dividend was declared by the Board of Directors and the Company paid this dividend to common shareholders on August 13, 2004. Dividends relating to each of the following year’s earnings based upon the par value of common stock are as follows:

                                 
    Rate     Millions  
    2003     2004     2003     2004  
Dividends paid
          20.0 %     W-       210,759  


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32

KT CORPORATION

Notes to Financial statements, Continued

(29)   Dividends, Continued

  (b)   Dividends are generally proposed based on each year’s earnings and are declared, recorded and paid in the subsequent year. Dividends relating to each of the following year’s earnings based upon the par value of common stock are as follows:

                                 
    Rate     Millions  
    2003     2004     2003     2004  
Dividends proposed
    40.0 %     40.0 %   W 421,517       421,518  

    Proposed dividends of W421,518 million were not recorded in the 2004 financial statements. They will be recorded upon the approval by the shareholders in 2005.
 
(30)   Stock Options
 
    The Company granted stock options to its executive officers and directors in accordance with the stock option plan approved by the Board of Directors. The details of the stock options granted are as follows:

             
    1st Grant   2nd Grant   3rd Grant
Grant date
  2002.12.26   2003. 9.16   2003.12.12
Exercise price (in Won)
  70,000   57,000   65,000
Number of shares
  371,632   34,200   106,141
Exercise period
  2004.12.27~2009.12.26   2005.9.17~2010.9.16   2005.12.13~2010.12.12
Valuation method
  Fair value (Black-Scholes model)   Fair value (Black-Scholes model)   Fair value (Black-Scholes model)

    The first grant of stock options consisted of 680,000 shares of common stock, including 220,000 shares under performance condition at the option price of W70,000 per share. However, the number of stock options decreased to 371,632 shares and the total cost of compensation decreased from W10,602 million to W8,311 million because of the resignation of two officers and not achieving performance criteria.
 
    The second grant of stock options consisted of 36,400 shares of common stock at the option price of W57,000 per share. However, the number of stock options decreased to 34,200 shares and the total cost of compensation decreased from W453 million to W426 million because of the resignation of an outside director.
 
    The third grant of stock options consisted of 120,000 shares of common stock, including 40,000 shares under performance condition at the option price of W65,000 per share. As of December 31, 2004, the total shares that are expected to be exercised are 106,141 and the total cost of compensation is W1,160 million.
 
    The options are fully vested upon completion of two years mandatory service periods starting from the grant dates. The first and third granted option holders can exercise one third of total options annually from 2004 and 2005, respectively. The second granted options holders can exercise total options when the options are vested.
 
    The Company adopted the fair value method (Black-Scholes model) for the calculation of compensation costs which are amortized to expense over the option vesting periods.


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33

KT CORPORATION

Notes to Financial statements, Continued

(30)   Stock Options, Continued
 
    The valuation assumptions of stock options based on the fair value method under the Black-Scholes model are as follows:

             
    1st Grant   2nd Grant   3rd Grant
Risk free interest rate
  5.46%   4.45%   5.09%
Expected option life
  4.5 years to 5.5 years   4.5 years   4.5 years to 5.5 years
Expected volatility
  49.07% ~ 49.90%   34.49%   31.26% ~ 33.90%
Expected dividend yield ratio
  1.10%   1.57%   1.57%
Fair value per option (in Won)
  W22,364   W12,443   W10,926
Total compensation cost (in millions)
  W8,311   W426   W1,160

    For the year ended December 31, 2004, the Company recognized a compensation benefit of W1,167 million because certain directors left the Company prior to completion of mandatory service periods.
 
    Changes in the total cost of compensation for the year ended December 31, 2004 are summarized as follows:

         
    Millions  
Adjusted total cost of compensation
       
Total cost of compensation before adjustment
  W 12,215  
Cost of compensation — forfeited
    (2,318 )
 
     
 
    9,897  
 
     
 
       
Accumulated cost recognized up to prior periods
    (5,479 )
 
       
Cost recognized for the year
       
Cost of compensation — forfeited
    1,167  
Cost of compensation for the year
    (4,887 )
 
     
 
       
 
    (3,720 )
 
     
 
       
Cost recognized in future years
  W 698  
 
     

(31)   Non-cash Investing Activities
 
    Significant non-cash investing activities for the years ended December 31, 2003 and 2004 are summarized as follows:

                 
    Millions  
    2003     2004  
Changes in unrealized gains (losses) on available-for-sale securities
  W 5,534       19,343  
Realized gains (losses) on disposition of available-for-sale securities
    (781,406 )     27,844  
Available-for-sale securities transferred to treasury stock
    730,704        
Changes in unrealized gains (losses) on equity securities of affiliates
    46,573       (40,281 )
Exchange on available-for-sale securities
          18,798  
Construction-in-progress transferred to property, plant and equipment
    2,022,603       1,842,446  


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34

KT CORPORATION

Notes to Financial statements, Continued

(32)   Contribution Payments for Research and Development and Donations
 
    For the years ended December 31, 2003 and 2004, the Company made donations of W63,407 million and W74,413 million, respectively, to the Korean government (Information and Telecommunication Improvement Fund), the Korea Electronic Telecommunication Research Institute (ETRI) and other institutes. In addition, the Company established a labor welfare fund as a separate entity and contributed W100,000 million and W50,000 million for the years ended December 31, 2003 and 2004, respectively.
 
(33)   Contributions Received for Losses on Universal Telecommunications Services
 
    Starting on January 1, 2000, all telecommunications service providers must contribute towards the supply of universal telecommunications services in Korea. Telecommunications service providers designated as universal service providers by the MIC are required to provide universal telecommunications services, including local services, local public telephone services, telecommunications services for remote islands and wireless communication services for ships. The Company has been designated a universal service provider. The losses incurred by universal service providers in connection with providing these universal telecommunications services are to be apportioned among the service providers based on their respective annual revenues. For the years ended December 31, 2003 and 2004, amounts reimbursed to the Company were W66,065 million and W105,867 million, respectively. In addition, estimated incurred contribution costs were W86,704 million and W120,915 million in 2003 and 2004, respectively. These costs are subject to review by the MIC before being finalized.
 
(34)   Fourth Quarter Information (Unaudited)
 
    Operating revenues, operating income, net earnings and basic earnings per share for the three-month periods ended December 31, 2003 and 2004 are as follows:

                 
    Millions  
    (except per share data)  
    2003     2004  
Operating revenues
  W 2,862,822       2,871,159  
Operating income
    389,171       287,250  
Net earnings
    81,581       396,186  
Basic earnings per share
    382       1,880  

(35)   Subsequent Event
 
    As described in note 15, on January 4, 2005, the principal amount of US$1,115,105 thousand of convertible notes and US$500,000 thousand of bonds with warrants was repaid.


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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: May 11, 2005
         
  KT Corporation
 
 
 
  By:   /s/ Wha Joon Cho    
  Name: Wha Joon Cho   
  Title:   Managing Director