Company Quick10K Filing
Kt
20-F 2020-12-31 Filed 2021-04-30
20-F 2019-12-31 Filed 2020-04-29
20-F 2018-12-31 Filed 2019-04-30
20-F 2017-12-31 Filed 2018-04-30
20-F 2016-12-31 Filed 2017-04-28
20-F 2015-12-31 Filed 2016-04-29
20-F 2013-12-31 Filed 2014-04-28
20-F 2012-12-31 Filed 2013-04-29
20-F 2011-12-31 Filed 2012-04-27
20-F 2010-12-31 Filed 2011-06-29
20-F 2009-12-31 Filed 2010-06-29

KT 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Managers and Advisers
Item 1.A. Directors and Senior Management
Item 1.B. Advisers
Item 1.C. Auditors
Item 2. Offer Statistics and Expected Timetable
Item 2.A. Offer Statistics
Item 2.B. Method and Expected Timetable
Item 3. Key Information
Item 3.A. Selected Financial Data
Item 3.B. Capitalization and Indebtedness
Item 3.C. Reasons for The Offer and Use of Proceeds
Item 3.D. Risk Factors
Item 4. Information on The Company
Item 4.A. History and Development of The Company
Item 4.B. Business Overview
Item 4.C. Organizational Structure
Item 4.D. Property, Plants and Equipment
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 5.A. Operating Results
Item 5.B. Liquidity and Capital Resources
Item 5.C. Research and Development, Patents and Licenses, Etc.
Item 5.D. Trend Information
Item 5.E. Off-Balance Sheet Arrangements
Item 5.F. Tabular Disclosure of Contractual Obligations
Item 5.G. Safe Harbor
Item 6. Directors, Senior Management and Employees
Item 6.A. Directors and Senior Management
Item 6.B. Compensation
Item 6.C. Board Practices
Item 6.D. Employees
Item 6.E. Share Ownership
Item 7. Major Shareholders and Related Party Transactions
Item 7.A. Major Shareholders
Item 7.B. Related Party Transactions
Item 7.C. Interests of Experts and Counsel
Item 8. Financial Information
Item 8.A. Consolidated Statements and Other Financial Information
Item 8.B. Significant Changes
Item 9. The Offer and Listing
Item 9.A. Offer and Listing Details
Item 9.B. Plan of Distribution
Item 9.C. Markets
Item 9.D. Selling Shareholders
Item 9.E. Dilution
Item 9.F. Expenses of The Issuer
Item 10. Additional Information
Item 10.A. Share Capital
Item 10.B. Memorandum and Articles of Association
Item 10.C. Material Contracts
Item 10.D. Exchange Controls
Item 10.E. Taxation
Item 10.F. Dividends and Paying Agents
Item 10.G. Statements By Experts
Item 10.H. Documents on Display
Item 10.I. Subsidiary Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Item 12.A. Debt Securities
Item 12.B. Warrants and Rights
Item 12.C. Other Securities
Item 12.D. American Depositary Shares
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-1 dex1.htm
EX-8.1 dex81.htm
EX-12.1 dex121.htm
EX-12.2 dex122.htm
EX-13.1 dex131.htm
EX-15.1 dex151.htm
EX-15.2 dex152.htm
EX-15.3 dex153.htm
EX-15.4 dex154.htm
EX-15.5 dex155.htm

Kt Earnings 2009-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on June 29, 2010

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

        For the fiscal year ended December 31, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

        Date of event requiring this shell company report                                         

        For the transition period from                      to                     

Commission file number 1-14926

KT Corporation

(Exact name of Registrant as specified in its charter)

 

KT Corporation   The Republic of Korea
(Translation of Registrant’s name into English)   (Jurisdiction of incorporation or organization)

206 Jungja-dong

Bundang-ku, Sungnam, Gyunggi-do

463-711 Korea

(Address of principal executive offices)

Thomas Bum Joon Kim

206 Jungja-dong

Bundang-ku, Sungnam, Gyunggi-do

463-711 Korea

Telephone: +82-31-727-0150; E-mail: thomaskim@kt.com

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

  

Name of each exchange on which registered

American Depositary Shares, each representing   

New York Stock Exchange, Inc.

one-half of one share of common stock   
Common Stock, par value (Won)5,000 per share*   

New York Stock Exchange, Inc.*

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

As of December 31, 2009, there were 243,196,468 shares of common stock, par value (Won) 5,000 per share, outstanding

(not including 17,915,340 shares of common stock held by the company as treasury shares)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No   ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

U.S. GAAP  ¨    IFRS   ¨    Other   x

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨     Item 18  x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

 

* Not for trading, but only in connection with the registration of the American Depositary Shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

              Page

PART I

   1

ITEM 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGERS AND ADVISERS

   1
 

Item 1.A.

  

Directors and Senior Management

   1
 

Item 1.B.

  

Advisers

   1
 

Item 1.C.

  

Auditors

   1

ITEM 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

   1
 

Item 2.A.

  

Offer Statistics

   1
 

Item 2.B.

  

Method and Expected Timetable

   1

ITEM 3.

 

KEY INFORMATION

   2
 

Item 3.A.

  

Selected Financial Data

   2
 

Item 3.B.

  

Capitalization and Indebtedness

   5
 

Item 3.C.

  

Reasons for the Offer and Use of Proceeds

   5
 

Item 3.D.

  

Risk Factors

   5

ITEM 4.

 

INFORMATION ON THE COMPANY

   15
 

Item 4.A.

  

History and Development of the Company

   15
 

Item 4.B.

  

Business Overview

   15
 

Item 4.C.

  

Organizational Structure

   40
 

Item 4.D.

  

Property, Plants and Equipment

   40

ITEM 4A.

 

UNRESOLVED STAFF COMMENTS

   43

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

   43
 

Item 5.A.

  

Operating Results

   43
 

Item 5.B.

  

Liquidity and Capital Resources

   60
 

Item 5.C.

  

Research and Development, Patents and Licenses, Etc.

   67
 

Item 5.D.

  

Trend Information

   67
 

Item 5.E.

  

Off-balance Sheet Arrangements

   67
 

Item 5.F.

  

Tabular Disclosure of Contractual Obligations

   68
 

Item 5.G.

  

Safe Harbor

   68

ITEM 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

   68
 

Item 6.A.

  

Directors and Senior Management

   68
 

Item 6.B.

  

Compensation

   74
 

Item 6.C.

  

Board Practices

   75
 

Item 6.D.

  

Employees

   76
 

Item 6.E.

  

Share Ownership

   78

 

i


Table of Contents

TABLE OF CONTENTS

(continued)

 

              Page

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

   78
 

Item 7.A.

  

Major Shareholders

   78
 

Item 7.B.

  

Related Party Transactions

   78
 

Item 7.C.

  

Interests of Experts and Counsel

   78

ITEM 8.

 

FINANCIAL INFORMATION

   79
 

Item 8.A.

  

Consolidated Statements and Other Financial Information

   79
 

Item 8.B.

  

Significant Changes

   80

ITEM 9.

 

THE OFFER AND LISTING

   80
 

Item 9.A.

  

Offer and Listing Details

   80
 

Item 9.B.

  

Plan of Distribution

   81
 

Item 9.C.

  

Markets

   81
 

Item 9.D.

  

Selling Shareholders

   85
 

Item 9.E.

  

Dilution

   85
 

Item 9.F.

  

Expenses of the Issuer

   86

ITEM 10.

 

ADDITIONAL INFORMATION

   86
 

Item 10.A.

  

Share Capital

   86
 

Item 10.B.

  

Memorandum and Articles of Association

   86
 

Item 10.C.

  

Material Contracts

   92
 

Item 10.D.

  

Exchange Controls

   93
 

Item 10.E.

  

Taxation

   97
 

Item 10.F.

  

Dividends and Paying Agents

   102
 

Item 10.G.

  

Statements by Experts

   102
 

Item 10.H.

  

Documents on Display

   102
 

Item 10.I.

  

Subsidiary Information

   102

ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   102

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

   103
 

Item 12.A.

  

Debt Securities

   103
 

Item 12.B.

  

Warrants and Rights

   104
 

Item 12.C.

  

Other Securities

   104
 

Item 12.D.

  

American Depositary Shares

   104

PART II

   105

ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

   105

 

ii


Table of Contents

TABLE OF CONTENTS

(continued)

 

              Page

ITEM 14.

  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS    105

ITEM 15.

 

CONTROLS AND PROCEDURES

   105

ITEM 16.

 

[Reserved]

   107

ITEM 16A.

 

AUDIT COMMITTEE FINANCIAL EXPERT

   107

ITEM 16B.

 

CODE OF ETHICS

   107

ITEM 16C.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

   107

ITEM 16D.

 

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

   107

ITEM 16E.

  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS    108

ITEM 16F.

 

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

   108

ITEM 16G.

 

CORPORATE GOVERNANCE

   109

PART III

   111

ITEM 17.

 

FINANCIAL STATEMENTS

   111

ITEM 18.

 

FINANCIAL STATEMENTS

   111

ITEM 19.

 

EXHIBITS

   111

 

iii


Table of Contents

PRESENTATION

All references to “Korea” or the “Republic” contained in this annual report mean the Republic of Korea. All references to the “Government” are to the government of the Republic of Korea. All references to “we,” “us” or the “Company” are to KT Corporation and, as the context may require, its subsidiaries.

All references to “Won” or “(Won) ” in this annual report are to the currency of the Republic and all references to “Dollars,” “$,” “US$” or “U.S. dollars” are to the currency of the United States of America. Our monetary assets and liabilities denominated in foreign currency are translated into Won at the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. on the balance sheet dates, which were, for U.S. dollars, (Won)938.2 to US$1.00, (Won)1,257.5 to US$1.00 and (Won)1,167.6 to US$1.00 at December 31, 2007, 2008 and 2009, respectively. Our consolidated financial statements are expressed in Won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 2009 have been translated into United States dollars at the rate of (Won)1,163.7 to US$1.00, the noon buying rate in the City of New York for cable transfers in Won as certified for customs purposes by the Federal Reserve Bank of New York at December 31, 2009.

Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

All market share data contained in this annual report, unless otherwise specified, are based on the number of subscribers announced by the Korea Communications Commission or the Korea Telecommunications Operators Association.

PART I

Item 1.   Identity of Directors, Senior Managers and Advisers

Item 1.A.  Directors and Senior Management

Not applicable.

Item 1.B.  Advisers

Not applicable.

Item 1.C.  Auditors

Not applicable.

Item 2.  Offer Statistics and Expected Timetable

Item 2.A.  Offer Statistics

Not applicable.

Item 2.B.  Method and Expected Timetable

Not applicable.

 

1


Table of Contents

Item 3.  Key Information

Item 3.A.  Selected Financial Data

You should read the selected consolidated financial data below in conjunction with the Consolidated Financial Statements as of December 31, 2008 and 2009 and for each of the years in the three-year period ended December 31, 2009, and the reports of the independent registered public accounting firms on these statements included herein. The selected consolidated financial data for the five years ended December 31, 2009 are derived from our audited consolidated financial statements.

Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in Korea (“Korean GAAP”), which differ in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). See Note 40 to the Consolidated Financial Statements for a description of the nature and the effect of such differences.

Income Statement Data

 

     Year Ended December 31,  
     2005     2006    2007    2008     2009     2009  
     (In billions of Won and millions of Dollars, except per share data)  

Korean GAAP (1):

              

Operating revenues

   (Won) 17,192      (Won) 17,825    (Won) 18,614    (Won) 19,593      (Won) 19,649      US$ 16,886   

Operating expenses

     14,781        15,442      16,859      18,153        18,683        16,055   

Operating income

     2,411        2,383      1,755      1,440        966        831   

Non-operating revenues

     490        565      486      1,052        808        694   

Non-operating expenses

     1,137        962      783      1,785        1,059        910   

Income tax expense on continuing operations (2)

     399        476      357      168        108        93   

Income from continuing operations

     1,365        1,510      1,106      539        607        522   

Income (loss) from discontinuing operations

     (5          65      (26     3        2   

Net Income

     1,360        1,510      1,171      513        610        524   

Attributable to equity holders of the parent

     1,085        1,292      1,056      450        495        425   

Attributable to noncontrolling interests

     275        218      115      63        115        99   

Basic income per share from continuing operations

     5,154        6,153      4,783      2,312        2,216        1.90   

Basic net income per share (3)

     5,131        6,155      5,112      2,217        2,254        1.94   

Diluted income per share from continuing operations

     5,148        6,146      4,783      2,312        2,190        1.88   

Diluted net income per share (4)

     5,124        6,148      5,112      2,217        2,227        1.91   

Dividends per share (5)

     3,000        2,000      2,000      1,120        2,000        1.72   

U.S. GAAP (6):

              

Operating revenues

   (Won) 12,328      (Won) 14,088    (Won) 17,953    (Won) 18,599      (Won) 18,891      US$ 16,235   

Operating income

     1,539        1,868      1,499      1,197        992        853   

Income taxes

     356        357      270      178        118        101   

Income from continuing operations

     1,160        1,423      1,087      577        841        723   

Income (loss) from discontinuing operations

     (5          73      (4     (1     (1

Net Income (7)

     1,155        1,423      1,160      573        840        722   

Attributable to stockholders

     1,149        1,329      1,069      518        742        638   

Attributable to noncontrolling interests

     6        94      91      55        98        84   

Basic income per share from continuing operations

     5,452        6,331      4,821      2,571        3,382        2.91   

Basic income per share (3)

     5,428        6,333      5,172      2,554        3,380        2.90   

Diluted income per share from continuing operations

     5,447        6,325      4,821      2,571        3,332        2.86   

Diluted income per share (4)

     5,423        6,327      5,172      2,554        3,330        2.86   

 

2


Table of Contents

Balance Sheet Data

 

     Year Ended December 31,
     2005    2006    2007    2008    2009    2009
     (In billions of Won and millions of Dollars)

Korean GAAP (1):

                 

Working capital (8)

   (Won) 1,309    (Won) 558    (Won) 564    (Won) 1,833    (Won) 1,031    US$ 886

Net property and equipment

     15,087      15,167      15,288      15,189      14,775      12,697

Total assets

     24,678      24,243      24,127      26,139      26,620      22,877

Long term debt, excluding current portion

     7,360      6,097      5,973      7,947      7,536      6,476

Refundable deposits for telephone installation

     958      907      841      782      696      598

Total equity

     10,390      10,697      11,138      11,088      10,667      9,167

U.S. GAAP (6):

                 

Working capital (8)

   (Won) 334    (Won) 333    (Won) 332    (Won) 1,640    (Won) 845    US$ 726

Net property and equipment

     10,677      14,729      14,671      14,460      14,041      12,066

Total assets

     18,383      24,098      24,023      25,974      26,526      22,796

Total equity

     7,436      10,221      10,589      10,609      10,456      8,986

Stockholders’ equity

     7,345      8,038      8,438      8,490      10,287      8,841

Noncontrolling interests

     91      2,183      2,151      2,119      169      145

Other Financial Data

 

     Year Ended December 31,  
     2005     2006     2007     2008     2009     2009  
     (In billions of Won and millions of Dollars)  

Korean GAAP:

            

Net cash provided by operating activities

   (Won) 5,865      (Won) 5,714      (Won) 4,265      (Won) 2,919      (Won) 3,398      US$ 2,920   

Net cash used in investing activities

     (2,526     (3,061     (3,449     (3,531     (2,870     (2,467

Net cash provided by (used in) financing activities

     (3,601     (2,367     (1,368     1,051        (930     (800

U.S. GAAP (6):

            

Net cash provided by operating activities

   (Won) 3,588      (Won) 4,667      (Won) 4,260      (Won) 2,889      (Won) 3,338      US$ 2,869   

Net cash used in investing activities

     (735     (2,432     (3,410     (3,502     (2,818     (2,422

Net cash provided by (used in) financing activities

     (3,362     (1,671     (1,271     1,147        (901     (774

Operating Data

 

     As of December 31,
     2005    2006    2007    2008    2009
     (Unaudited)

Lines installed (thousands) (9)

   26,190    26,838    26,671    26,008    25,907

Lines in service (thousands) (9)

   20,837    20,331    19,980    18,883    17,069

Lines in service per 100 inhabitants (9)

   43.1    42.0    41.2    38.8    35.0

Mobile subscribers (thousands)

   12,302    12,914    13,721    14,365    15,016

Broadband Internet subscribers (thousands)

   6,242    6,353    6,516    6,712    6,953

 

 

(1) Through December 31, 2008, the Korea Accounting Standards Board has issued Statements of Korea Accounting Standards (“SKAS”) No. 1 through No. 25. Among these statements, SKAS No. 1 through No. 10 and SKAS No. 12 through No. 20 are required to be applied in the prior periods. Although SKAS No. 11 and SKAS No. 21 through No. 25 are required to be applied starting in 2007, the balances of 2005 and 2006 have been reclassified in accordance with Statements of Korea Accounting Standards No. 16 and No. 21 for comparison purposes.

 

(2) With the early adoption in 2006 of the Application of Korea Accounting Standard 06-2 “Deferred Tax Accounting for Investments in Subsidiaries, Affiliated Companies Accounted for Using the Equity Method, and Interest in Joint Ventures,” the amounts for 2005 were restated in 2006 as required by this standard.

 

(3) Basic earnings per share under Korean GAAP and U.S. GAAP is calculated by dividing net earnings by the weighted average number of shares outstanding during the period. The weighted average number of shares of common stock outstanding during the period was 211,565 thousand for 2005, 209,895 thousand for 2006, 206,599 thousand for 2007, 202,891 thousand for 2008 and 219,513 thousand for 2009.

 

3


Table of Contents
(4) Diluted earnings per share are calculated based on the effect of dilutive securities that were outstanding during the period. The denominator of the diluted earnings per share computation is adjusted to include the number of additional common shares that would have been outstanding if the 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. The weighted average number of common and common equivalent shares outstanding was 211,822 thousand for 2005, 210,150 thousand for 2006, 206,599 thousand for 2007, 202,891 thousand for 2008 and 224,168 thousand for 2009.

 

(5) The calculation of dividends per share represents the weighted average dividends paid per share.

 

(6) See Note 40 to the Consolidated Financial Statements for reconciliation to U.S. GAAP.

 

(7) In December 2007, the Financial Accounting Standard Board issued and amended an accounting standard that requires that a noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity in consolidated financial statements. With the adoption of the amended standard, net income attributable to noncontrolling interests is included in net income. We retrospectively adopted the presentation and disclosure requirements of the standard for all of the financial statements and information included herein on January 1, 2009.

 

(8) “Working capital” means current assets minus current liabilities.

 

(9) Including public telephones.

Exchange Rate Information

The following table sets out information concerning the market average exchange rate for the periods and dates indicated.

 

Period

   At End of
Period
   Average
Rate (1)
   High    Low
     (Won per US$1.00)

2005

   1,013.0    1,024.2    1,060.3    998.2

2006

   929.6    956.1    1,013.0    918.0

2007

   938.2    929.2    950.0    902.2

2008

   1,257.5    1,102.6    1,509.0    934.5

2009

   1,167.6    1,276.4    1,573.6    1,152.8

December

   1,167.6    1,166.5    1,183.6    1,152.9

2010 (through June 28)

   1,204.7    1,154.5    1,261.5    1,104.0

January

   1,156.5    1,138.8    1,167.6    1,119.8

February

   1,158.4    1,157.1    1,172.6    1,142.7

March

   1,130.8    1,137.6    1,160.2    1,129.5

April

   1,115.5    1,117.1    1,132.5    1,104.0

May

   1,200.2    1,163.1    1,255.1    1,108.5

June (through June 28)

   1,204.7    1,213.1    1,261.5    1,176.7

 

Source: Seoul Money Brokerage Services, Ltd.

 

(1) The average rate for each full year is calculated as the average of the market average exchange rates on the last business day of each month during the relevant year. The average rate for a full month is calculated as the average of the market average exchange rates on each business day during the relevant month (or portion thereof).

Our monetary assets and liabilities denominated in foreign currency are translated into Won at the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. on the balance sheet dates, which were, for U.S. dollars, (Won)938.2 to US$1.00, (Won)1,257.5 to US$1.00 and (Won)1,167.6 to US$1.00 at December 31, 2007, 2008 and 2009, respectively.

Our consolidated financial statements are expressed in Won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 2009 have been translated into United States dollars at the rate of (Won)1,163.7 to US$1.00, the noon buying rate in the City of New York for cable transfers in Won as certified for customs purposes by the Federal Reserve Bank of New York at December 31, 2009.

We make no representation that the Won or Dollar amounts contained in this annual report could have been or could be converted into Dollar or Won, as the case may be, at any particular rate or at all.

 

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Item 3.B.  Capitalization and Indebtedness

Not applicable

Item 3.C.  Reasons for the Offer and Use of Proceeds

Not applicable.

Item 3.D.  Risk Factors

You should carefully consider the following factors.

Risks Relating to Our Business

Competition in the Korean telecommunications industry is intense.

Competition in the telecommunications sector in Korea is intense. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. In particular, SK Telecom Co., Ltd. (or SK Telecom) acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband Co., Ltd. (or SK Broadband). The acquisition enables SK Telecom to provide fixed-line telecommunications, broadband Internet access and Internet television (or IP-TV) services together with its mobile telecommunications services. On January 1, 2010, LG Dacom Corporation (or LG Dacom) and LG Powercom Co., Ltd. (or LG Powercom) merged into LG Telecom Co., Ltd. (or LG Telecom). The merger enables LG Telecom to provide a similar range of services as SK Telecom and us. Our inability to adapt to such changes in the competitive landscape could have a material adverse effect on our business, financial condition and results of operations.

Mobile Service. We provide mobile services based on Code Division Multiple Access (or CDMA) technology and Wideband Code Division Multiple Access (or W-CDMA) technology. Competitors in the mobile telecommunications service industry are SK Telecom and LG Telecom. We had a market share of 31.3% as of December 31, 2009, making us the second largest mobile telecommunications service provider. SK Telecom had a market share of 50.6% as of December 31, 2009.

Mobile subscribers are allowed to switch their service provider while retaining the same mobile phone number. Mobile service providers also grant subsidies to subscribers who purchase new handsets and agree to a minimum subscription period. Mobile number portability and handset subsidies have intensified competition among the mobile service providers and increased their marketing expenses. If the mobile service providers adopt a strategy of expanding market share through price competition, it could lead to a decrease in our net profit margins.

In recent years, SK Telecom and we also launched third-generation mobile telecommunications services, which we believe have further intensified competition between the two companies and resulted in an increase in marketing expenses. We expanded our coverage area of High Speed Downlink Packet Access (or HSDPA)-based IMT-2000 services nationwide in March 2007. IMT-2000 is a third-generation, high-capacity wireless communications technology, which allows operators to provide to their customers significantly more bandwidth capacity. Although we expect that SK Telecom will face similar challenges to those that we expect to face in implementing this third-generation technology, we cannot assure you that we will continue to be able to successfully compete in third-generation mobile telecommunications services.

 

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Fixed-line Telephone Services. Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. Since then, various competitors have entered the local, domestic long-distance and international long-distance telephone service markets in Korea, which have eroded our market shares. LG Telecom and SK Broadband currently provide local, domestic long-distance and international long-distance telephone services. In addition, Onse Telecom Corporation and SK Telink, Inc. currently provide domestic long-distance and international long-distance telephone services. Starting in 1998, specific service providers, such as Internet phone service providers, voice resellers and call-back service providers, also began offering international long-distance service in Korea. While we offer our own Internet phone service, the entry of these and other potential competitors into the local, domestic long-distance and international long-distance telephone service markets has had and may continue to have a material adverse effect on our revenues and profitability from these businesses. As of December 31, 2009, we had a market share in local telephone service of 89.9% and a market share in domestic long-distance service of 86.3%. Further increase in competition may decrease our market shares in such businesses.

Internet Services. The Korean broadband Internet access service market has experienced significant growth in the past decade. SK Broadband (formerly Hanarotelecom) entered the broadband market in 1999 offering both Hybrid Fiber Coaxial (or HFC) and Asymmetric Digital Subscriber Line (or ADSL) services. We also began offering broadband Internet access service in 1999, followed by Dreamline, Onse and LG Telecom. In recent years, numerous cable television operators have also begun to offer HFC-based services at rates lower than ours. We had a market share of 42.5% as of December 31, 2009. As a result of having to compete with a number of competitors and the maturing of the Internet access service market, we currently encounter, and we expect to encounter, pressure to increase marketing expenses in the future.

The market for other Internet-related services in Korea, including IP-TV and Internet phone services, is also very competitive. We anticipate that competition will continue to intensify as the usage and popularity of the Internet grows and as new domestic and international competitors enter the Internet industry in Korea. The substantial growth of the Internet industry in Korea has attracted many competitors and as a result may lead to increasing price competition to provide Internet-related services. Increased competition in the Internet industry could have a material adverse effect on the number of subscribers of our Internet-related service and on our results of operations.

We may fail to realize the anticipated benefits of the merger of KTF into KT Corporation.

On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger. The success of the merger of KTF with KT Corporation will depend, in part, on our ability to realize the anticipated synergies, growth opportunities and, to a lesser extent, cost savings from combining these two companies. The realization of these anticipated benefits may be impeded, delayed or reduced as a result of numerous factors, some of which are outside our control. These factors include:

 

   

difficulties in integrating the operations of KTF with those of KT Corporation, including information systems, personnel, policies and procedures, and in reorganizing or reducing overlapping personnel, operations, marketing networks and administrative functions;

 

   

unforeseen contingent risks or latent liabilities relating to the merger that may become apparent in the future;

 

   

difficulties in managing a larger business; and

 

   

loss of key management personnel or customers.

 

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Accordingly, we cannot assure you that we will realize the anticipated benefits of the merger or that the merger will not adversely affect our combined business, financial condition and results of operations.

The integration of the operations of KTF into KT Corporation may require significant amounts of time, financial resources and management attention. KT Corporation’s management intends to implement a business plan to effectively combine the operations of KTF with the operations of KT Corporation. If this business plan is not effective in integrating these operations, however, we may not realize the anticipated benefits of the merger. The integration process could also result in the disruption of our ongoing business and information technology systems, or inconsistencies in standards, controls, procedures and policies and a reduction in employee morale, each of which may adversely affect our ability to maintain relationships with customers and to retain key personnel.

In addition, as conditions to the approval of the merger of KTF into KT Corporation, the Korea Communications Commission is requiring us to (i) allow competing service providers to have greater access to our cable tunnels and telephone poles, (ii) improve Public Switched Telephone Network (or PSTN) number portability and voice over Internet protocol (or VoIP) number portability, and (iii) allow competing service providers to access our wireless Internet network. Such conditions may intensify competition in the telecommunications industry, which could have a material adverse effect on the number of our subscribers and results of operations.

Our WiBro service poses challenges and risks to us.

In March 2005, we acquired a license to provide wireless broadband Internet access service for (Won)126 billion. The license is valid for seven years from the grant date and the license amount is amortized over the remaining contractual life commencing from June 2006. Wireless broadband Internet access (or WiBro) service enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 1 Mbps per user. A subscriber is able to access the WiBro service network during transit at speeds of up to 120 kilometers per hour. We positioned WiBro service to provide Internet Protocol (IP)-based triple-play services, which are voice, data and video, to our subscribers who have mobile phone as well as WiBro-enabled laptop computers. We commercially launched our service in June 2006, and we had approximately 287 thousand subscribers as of December 31, 2009. We believe that substantial additional amounts of capital expenditures and research and development will be required to complete the buildout of our WiBro service network, and we plan to spend approximately (Won)265 billion in capital expenditures in 2010 to expand our WiBro service network, which we may adjust subject to market demand. No assurance can be given that the network will gain broad market acceptance such that we will be able to derive revenues from WiBro service to justify the license fee, capital expenditures and other investments required to provide such service.

Disputes with our labor union may disrupt our business operations.

In the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing of non-core businesses and reducing our employee base. Although we have not experienced any significant labor disputes or unrests in recent years, there can be no assurance that we will not experience labor disputes or unrests in the future, including expanded protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operation.

We also negotiate collective bargaining agreements every two years with our labor union and annually negotiate a wage agreement. Our current collective bargaining agreement expires on May 25, 2011. Although we have been able to reach collective bargaining agreements and wage agreements with our labor union in recent years, there can be no assurance that we will not experience labor disputes and unrests resulting from disagreements with the labor union in the future.

 

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The Korean telecommunications and Internet protocol broadcasting industries are subject to extensive Government regulations, and changes in Government policy relating to these industries could have a material adverse effect on our operations and financial condition.

The Government, primarily through the Korea Communications Commission, has authority to regulate the telecommunications industry. The Korea Communications Commission’s policy is to promote competition in the Korean telecommunications markets through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors.

Under current Government regulations, if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the Korea Communications Commission, it must obtain prior approval from the Korea Communications Commission for the rates and the general terms for that service. Each year the Korea Communications Commission designates service providers the rates and the general terms of which must be approved by the Korea Communications Commission. In recent years, the Korea Communications Commission has so designated us for local telephone service and SK Telecom for mobile service, and the Korea Communications Commission, in consultation with the Ministry of Strategy and Finance, currently approves rates charged by us and SK Telecom for such services. The Korea Communications Commission currently does not regulate our domestic long-distance, international long-distance, broadband internet access and mobile service rates, but the inability to freely set our local telephone service rates may hurt profits from such business and impede our ability to compete effectively against our competitors. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation—Rates.” The form of our standard agreement for providing local network service and each agreement for interconnection with other service providers are also subject to approval by the Korea Communications Commission.

The Government also sets the policies regarding the use of radio frequencies and allocates the spectrum of radio frequencies used for wireless telecommunications. On April 29, 2010, the Korea Communications Commission announced its decision to allocate 20 MHz of spectrum in the 900 MHz band to us, 20 MHz of spectrum in the 800 MHz band to LG Telecom and 40 MHz of spectrum in the 2.1GHz band to SK Telecom. Such new allocations of spectrum will become effective on July 1, 2011. The new allocation of spectrum could increase competition among wireless service providers, which may have an adverse effect on our business.

We also plan to put more focus on the Internet protocol (or IP) media market, and we began offering IP-TV service on November 17, 2008. IP-TV is a service which combines video-on-demand services with real-time high definition broadcasting via broadband networks. The Korea Communications Commission has the authority to regulate the IP media market, including IP-TV services. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IP media broadcasting business must obtain a license from the Korea Communications Commission, and anyone intending to engage in the broadcasting of certain contents must obtain additional approval of the Korea Communications Commission. Although we currently believe that we may freely compete in this market, there can be no assurance that Government regulations and policies will permit us to continue to do so.

Government policies and regulations relating to the above as well as other regulations involving the Korean telecommunications and IP broadcasting industries (including as a result of the implementation of free trade agreements between Korea and other countries, including the United States and the European Union) may change, which could have a material adverse effect on our operations and financial condition. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation.”

 

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We are subject to various regulations under the Monopoly Regulation and Fair Trade Act.

The Monopoly Regulation and Fair Trade Act provides for various regulations and restrictions on large business groups enforced by the Korea Fair Trade Commission. The Korea Fair Trade Commission initially designated us as a large business group under the Monopoly Regulation and Fair Trade Act on April 1, 2002. Our business relationships and transactions with our subsidiaries, affiliates and other companies within the KT Group are subject to ongoing scrutiny by the Fair Trade Commission as to, among other things, whether such relationships and transactions constitute undue financial support among companies of the same business group. We are also subject to the fair trade regulations limiting cross-guarantee of debt and cross-shareholdings among member companies of the same group. Any future determination by the Korea Fair Trade Commission that we have engaged in transactions that violate the fair trade laws and regulations may result in fines or other punitive measures and may have a material adverse effect on our reputation and our business.

Concerns that radio frequency emissions may be linked to various health concerns could adversely affect our business and we could be subject to litigation relating to these health concerns.

In the past, allegations that serious health risks may result from the use of wireless telecommunications devices or other transmission equipment have adversely affected share prices of some wireless telecommunications companies in the United States. We cannot assure you that these health concerns will not adversely affect our business. Several class action and personal injury lawsuits have been filed in the United States against several wireless phone manufacturers and carriers, asserting product liability, breach of warranty and other claims relating to radio transmissions to and from wireless phones. Certain of these lawsuits have been dismissed. We could be subject to liability or incur significant costs defending lawsuits brought by our subscribers or other parties who claim to have been harmed by or as a result of our services. In addition, the actual or perceived risk of wireless telecommunications devices could have an adverse effect on us by reducing our number of subscribers or our usage per subscriber.

Disruptions in global credit and financial markets and the resulting governmental actions around the world could have a material adverse impact on our business and the ability to meet our funding needs, and could cause the market value of our securities to decline.

In recent years, disruptions and volatility in the global financial markets have resulted in increases in credit spreads and limitations on the availability of credit. Starting in mid-2007, credit markets in the United States began experiencing difficult conditions and increased volatility, which in turn adversely affected worldwide financial markets. Adverse conditions in the global credit and financial markets were further exacerbated in 2008 by the bankruptcy or acquisition of, and government assistance to, several major U.S. and European financial institutions. These developments resulted in reduced liquidity, greater volatility, widening of credit spreads and a reduction in price transparency in the U.S. and global financial markets.

In response to such developments, legislators and financial regulators in the United States and other jurisdictions, including Korea, implemented a number of policy measures designed to add stability to the financial markets and stimulate the economy, including the provision of direct and indirect assistance to distressed financial institutions. However, while the rate of deterioration of the global economy slowed in the second half of 2009 and into 2010, with some signs of stabilization and improvement, the overall prospects for the Korean and global economy in 2010 and beyond remain uncertain. For example, in November 2009, the Dubai government announced a moratorium on the outstanding debt of Dubai World, a government-affiliated investment company. In addition, many governments worldwide, in particular in Greece and other countries in southern Europe, are showing increasing signs of fiscal stress and may experience difficulties in meeting their debt service

 

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requirements. Any of these or other developments could potentially trigger another financial and economic crisis. In addition, while many governments worldwide are considering or are in the process of implementing “exit strategies,” in the form of reduced government spending, higher interest rates or otherwise, with respect to the economic stimulus measures adopted in response to the global financial crisis, such strategies may, for reasons related to timing, magnitude or other factors, have the unintended consequence of prolonging or worsening global economic and financial difficulties. Adverse conditions and uncertainty surrounding the Korean and global economies and financial markets may have a material adverse effect on our business and the ability to meet our funding needs, as well as negatively affect the market prices of the ADSs.

Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on the results of our operations and on the prices of our securities.

Substantially all of our revenues are denominated in Won. Depreciation of the Won may materially affect the results of our operations because, among other things, it causes an increase in the amount of Won required by us to make interest and principal payments on our foreign-currency-denominated debt, the costs of telecommunications equipment that we purchase from overseas sources, net settlement payments to foreign carriers and administrations and certain payments related to our derivative instruments entered into for foreign exchange risk hedging purposes. Of the (Won)7,536 billion total long-term debt (excluding current portion) outstanding as of December 31, 2009, (Won)2,788 billion was denominated in foreign currencies with interest rates ranging from 1.06% to 6.50%. See “Item 3. Key Information—Item 3.A. Select Financial Data—Exchange Rate Information” and “Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources.”

Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of the shares of our common stock on the KRX KOSPI Market and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the Dollar conversion by the depositary for the ADRs of cash dividends, if any, paid in Won on shares of common stock represented by the ADSs.

Risks Relating to Korea

Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.

We are incorporated in Korea and a significant portion of our operations occurs in Korea. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea. Economic indicators in Korea in recent years have shown mixed signs, and future growth of the Korean economy is subject to many factors beyond our control.

Recent difficulties affecting the U.S. and global financial sectors, adverse conditions and volatility in the worldwide credit and financial markets, fluctuations in oil and commodity prices and the general weakness of the U.S. and global economy have increased the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. Due to recent liquidity and credit concerns and volatility in the global financial markets, the value of the Won relative to the Dollar has also fluctuated significantly in recent years. Furthermore, as a result of adverse global and Korean economic conditions, there has been continuing volatility in the stock prices of Korean companies. The Korea Composite Stock Price Index declined from 1,674.92 on June 30, 2008 to 938.75 on October 24, 2008. On June 28, 2010, the Korea Composite Stock Price Index recovered to 1,732.03. Future declines in the Korea Composite Stock Price Index and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds

 

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of such sales may adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea, and the ability of Korean companies to raise capital. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.

Developments that could have an adverse impact on Korea’s economy in the future include:

 

   

continuing difficulties in the housing and financial sectors in the United States and elsewhere and increased sovereign default risks in select countries and the resulting adverse effects on the global financial markets;

 

   

declines in consumer confidence and a slowdown in consumer spending;

 

   

adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the Dollar or Japanese Yen exchange rates or revaluation of the Chinese renminbi), interest rates and stock markets;

 

   

continuing adverse conditions in the economies of countries that are important export markets for Korea, such as the United States, Japan and China, or in emerging market economies in Asia or elsewhere;

 

   

increasing delinquencies and credit defaults by retail and small- and medium-sized enterprise borrowers;

 

   

the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China);

 

   

the economic impact of any pending or future free trade agreements;

 

   

social and labor unrest;

 

   

substantial decreases in the market prices of Korean real estate;

 

   

a decrease in tax revenues and a substantial increase in the Government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased Government budget deficit;

 

   

financial problems or lack of progress in the restructuring of Korean conglomerates, other large troubled companies, their suppliers or the financial sector;

 

   

loss of investor confidence arising from corporate accounting irregularities and corporate governance issues at certain Korean conglomerates;

 

   

geo-political uncertainty and risk of further attacks by terrorist groups around the world;

 

   

the occurrence of severe health epidemics in Korea and other parts of the world;

 

   

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from trade disputes or disagreements in foreign policy;

 

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political uncertainty or increasing strife among or within political parties in Korea;

 

   

hostilities involving oil producing countries in the Middle East and any material disruption in the supply of oil or increase in the price of oil; and

 

   

an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States.

Escalations in tensions with North Korea could have an adverse effect on us.

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. In recent years, there have been heightened security concerns stemming from North Korea’s nuclear weapons and long-range missile programs and increased uncertainty regarding North Korea’s actions and possible responses from the international community.

In addition to conducting test flights of long-range missiles, North Korea announced in October 2006 that it had successfully conducted a nuclear test, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council passed a resolution that prohibits any United Nations member state from conducting transactions with North Korea in connection with any large-scale arms and material or technology related to missile development or weapons of mass destruction and from providing luxury goods to North Korea, imposes an asset freeze and travel ban on persons associated with North Korea’s weapons program, and calls upon all United Nations member states to take cooperative action, including through inspection of cargo to or from North Korea. In response, North Korea agreed in February 2007 at the six-party multi-lateral talks with Korea, the United States, China, Japan and Russia to shut down and seal the Yongbyon nuclear facility, including the reprocessing facility, and readmit international inspectors to conduct all necessary monitoring and verifications.

In April 2009, North Korea launched a long-range rocket over the Pacific Ocean. Korea, Japan and the United States responded that the launch poses a threat to neighboring nations and that it was in violation of the United Nations Security Council resolution adopted in 2006 against nuclear tests by North Korea, and the United Nations Security Council unanimously passed a resolution that condemned North Korea for the launch and decided to tighten sanctions against North Korea. Subsequently, North Korea announced that it would permanently pull out of the six party talks and restart its nuclear program, and the International Atomic Energy Agency reported that its inspectors had been ordered to remove surveillance devices and other equipment at the Yongbyon nuclear power plant and to leave North Korea. On May 25, 2009, North Korea announced that it had successfully conducted a second nuclear test and test-fired three short-range surface-to-air missiles. In response, the United Nations Security Council unanimously passed a resolution that condemned North Korea for the nuclear test and decided to expand and tighten sanctions against North Korea. In March 2010, a Korean warship was destroyed by an underwater explosion, killing many of the crewmen on board. In May 2010, the Government formally accused North Korea of causing the sinking and is seeking United Nations Security Council sanctions for the act. North Korea has threatened retaliation for any attempt to punish it for the act.

In addition, there recently has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for economic and political stability in the region. In June 2009, U.S. and Korean officials announced that Kim Jong-il, the North Korean ruler who reportedly suffered a stroke in August 2008, designated his third son, who is reportedly in his twenties, to become his successor. The succession plan, however, remains uncertain. In addition, North Korea’s economy faces severe challenges. For example, in November 2009, the North Korean

 

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government redenominated its currency at a ratio of 100 to 1 as part of a currency reform undertaken in an attempt to control inflation and reduce income gaps. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which led to severe inflation and food shortages. Such developments may further aggravate social and political tensions within North Korea.

There can be no assurance that the level of tension on the Korean peninsula will not escalate in the future. Any further increase in tension, which may occur, for example, if North Korea experiences a leadership or economic crisis, high-level contacts break down, or military hostilities occur, could have a material adverse effect on our operations and the market value of the ADSs.

Risks Relating to the Securities

If an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs.

Korean law currently limits foreign ownership of the ADSs and our shares. In addition, under our deposit agreement, the depositary bank cannot accept deposits of shares and deliver ADSs representing those shares unless (1) we have consented to such deposit or (2) Korean counsel has advised the depositary bank that the consent required under (1) is no longer required under Korean laws and regulations. Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with our consent for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. The depositary bank has informed us that, at a time it considers to be appropriate, the depositary bank plans to start accepting deposits of shares without our consent and to deliver ADSs representing those shares up to the amount allowed under current Korean laws and regulations. Until such time, however, the depositary bank will continue to obtain our consent for such deposits of shares and delivery of ADSs, which we may not provide. Consequently, if an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”

A foreign investor may not be able to exercise voting rights with respect to common shares exceeding the number of common shares held by our largest domestic shareholder.

Under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 5.0% or more of our total shares and was our largest shareholder on or prior to May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. Under the Telecommunications Business Act, the Korea Communications Commission may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. In addition, the Foreign Investment Promotion Act prohibits any foreign shareholder from being our largest shareholder if such shareholder owns 5.0% or more of our shares with voting rights. In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, such foreign shareholder may not be able to exercise voting rights with respect to common shares exceeding such threshold. The Korea Communications Commission may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less.

 

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Holders of ADSs will not be able to exercise dissenter’s rights unless they have withdrawn the underlying common stock and become our direct shareholders.

In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their shares under Korean law. A holder of ADSs will not be able to exercise dissenter’s rights unless he has withdrawn the underlying common stock and become our direct shareholder. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.”

An investor may not be able to exercise preemptive rights for additional shares and may suffer dilution of his equity interest in us.

The Commercial Code of Korea and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the depositary bank, after consultation with us, may make the rights available to an ADS holder or use reasonable efforts to dispose of the rights on behalf of the ADS holder and make the net proceeds available to the ADS holder. The depositary bank, however, is not required to make available to an ADS holder any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:

 

   

a registration statement filed by us under the Securities Act of 1933, as amended, is in effect with respect to those shares; or

 

   

the offering and sale of those shares is exempt from or is not subject to the registration requirements of the Securities Act.

We are under no obligation to file any registration statement. If a registration statement is required for an ADS holder to exercise preemptive rights but is not filed by us, the ADS holder will not be able to exercise his preemptive rights for additional shares. As a result, the ADS holder may suffer dilution of his equity interest in us.

Forward-looking statements may prove to be inaccurate.

This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

 

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Item 4.  Information on the Company

Item 4.A.  History and Development of the Company

In 1981, the Government established us under the Korea Telecom Act to operate the telecommunications services business that it previously directly operated. Under the Korea Telecom Act and the Government-Invested Enterprises Management Basic Act, the Government exercised substantial control over our business and affairs. Effective October 1, 1997, the Korea Telecom Act was repealed and the Government-Invested Enterprises Management Basic Act became inapplicable to us. As a result, we became a corporation under the Commercial Code, and our corporate organization and shareholders’ rights were governed by the Privatization Law and the Commercial Code. Among other things, we began to exercise greater autonomy in setting our annual budget and making investments in the telecommunications industry, and our shareholders began electing our directors, who used to be appointed by the Government under the Korea Telecom Act.

Prior to 1993, the Government owned all of the issued shares of our common stock. From 1993 through May 2002, the Government disposed of all of its equity interest in us, and the Privatization Law ceased to apply to us in August 2002. We amended our legal name from Korea Telecom Corp. to KT Corporation in March 2002.

Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. The Government began to introduce competition in the telecommunications services market in the early 1990’s. As a result, including ourselves, there are currently three local telephone service providers, five domestic long-distance carriers and numerous international long-distance carriers (including voice resellers) in Korea. In addition, the Government awarded licenses to several service providers to promote competition in other telecommunications business areas such as mobile telephone services and data network services. On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. See “Item 4.B. Business Overview—Competition.”

Our legal and commercial name is KT Corporation. Our principal executive offices are located at 206 Jungja-dong, Bundang-ku, Sungnam, Gyunggi-do, Korea, and our telephone number is (8231) 727-0114.

Item 4.B.  Business Overview

We are the leading telecommunications service provider in Korea and one of the largest and most advanced in Asia. As an integrated telecommunications service provider, our principal services include:

 

   

Personal Communications Service (or PCS) mobile telecommunications service and third-generation HSDPA-based IMT-2000 wireless Internet and video multimedia communications services;

 

   

telephone services, including local, domestic long-distance and international long-distance fixed-line telephone services and interconnection services to other telecommunications companies;

 

   

broadband Internet access service and other Internet-related services, including IP-TV services; and

 

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various other services, including leased line service and other data communication service, satellite service and information technology and network services.

Leveraging on our dominant position in the fixed-line telephone services market and our established customer base in Korea, we have successfully pursued new growth opportunities during the past decade and obtained strong market positions in each of our principal lines of business. In particular:

 

   

in the mobile services market in Korea, we achieved a market share of 31.3% with approximately 15.0 million subscribers as of December 31, 2009;

 

   

in the fixed-line telephone services market in Korea, we continue to be the dominant provider with approximately 25.9 million installed lines, of which 17.0 million lines were in service as of December 31, 2009. As of such date, our market share of the local market was 89.9% and our market share of the domestic long-distance market was 86.3%;

 

   

we are Korea’s largest broadband Internet access provider with 7.0 million subscribers as of December 31, 2009, representing a market share of 42.5%; and

 

   

we are also the leading provider of data communication services in Korea.

For the year ended December 31, 2009, under Korean GAAP, our operating revenues were (Won) 19,649 billion, our net income was (Won)610 billion and our basic net income per share was (Won)2,254. As of December 31, 2009, our total equity was (Won)10,667 billion.

Business Strategy

We believe the telecommunications market in Korea will continue to expand due to Korea’s growing economy, consumers’ willingness to adopt new technologies, relatively high income and a relatively large middle class. In order to enhance the management efficiencies of our mobile and fixed-line telecommunications operations as well as more effectively respond to the convergence trends in the telecommunications industry, KTF merged into KT Corporation on June 1, 2009, with KT Corporation surviving the merger. We also restructured our organization into three sub-groups, the Home Customer Group, the Personal Customer Group and the Enterprise Customer Group, so that we may more effectively address differing needs of our customer segments. Consistent with our strategic objectives, we aim to pursue growth through the following four core areas:

 

   

Home Customer Group. We aim to offer a one-stop-shop that satisfies various information technology and telecommunications needs of a household. In March 2009, we launched a new brand “QOOK” to promote our bundled products, which include broadband Internet access service, IP-TV service, Internet phone service and fixed-line telephone service. We aim to differentiate ourselves from our competitors by providing broadband Internet access service using high-speed fiber-to-the-home (or FTTH) connection and offering Internet phone service with value-added features such as video communication, short message service and phone banking. We also began offering real-time broadcasting service on our IP-TV service starting in November 2008.

 

   

Personal Customer Group. Our Personal Customer Group focuses on expanding our wireless data communication business to meet the rising demand for broadband Internet access using advanced wireless data communications devices such as smart phones. We are working closely with handset manufacturers to expand our offerings of smart phones and handsets designed to promote convergence of fixed-line and mobile

 

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telecommunications services, as well as promote development of various applications for such devices. In line with this strategy, we began offering Apple’s iPhone on November 28, 2009 and have sold more than 700 thousand units within six months of its launch. We believe that our WiBro network, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices, as well as our extensive wireless LAN networks installed nationwide, enable our subscribers to maximize effective usage of their smart phones. We plan to take advantage of our industry-leading network infrastructure to attract more customers as this market further develops. In addition, we aim to further enhance our position in the mobile telecommunications market by leveraging on our strong brand, nationwide marketing network and ability to bundle various mobile and fixed-line services.

 

   

Enterprise Customer Group. We aim to provide our corporate customers, small- and medium-sized enterprises and government agencies with one-stop solution services including designing data communications and information technology infrastructure to overseeing their day-to-day operations with the objective of achieving operational efficiencies and cost savings. We provide solutions specifically tailored for individual clients, as well as Internet-based computing services, whereby shared resources, software and information are delivered from our data centers and servers. For example, we designed an urban transit infrastructure maintenance system for the Seoul Metropolitan Rapid Transit Corporation, in which workers are able to utilize their smart phones to report back their maintenance results to the headquarters remotely from the maintenance site. Leveraging our extensive customer base, we plan to further expand the range of innovative solutions for our enterprise customers.

 

   

Convergence. We believe that convergence of fixed-line and mobile communications technologies provides a competitive advantage to us because we have the technological know-how and experience to design and construct a unified delivery platform for a new generation of value-added services. We plan to make such platform more readily available to others so that they may create additional contents and convenience solutions such as electronic commerce and digital transaction applications that can be utilized anywhere using various media and communications devices.

The Telecommunications Industry in Korea

The Korean telecommunications industry is one of the most developed in Asia. According to the Korea Communications Commission, the number of mobile subscribers in Korea was 47.9 million and the number of broadband Internet access subscribers in Korea was 16.3 million as of December 31, 2009. As of December 31, 2009, the mobile penetration rate, which is calculated by dividing the number of mobile subscribers (including multiple counting of those who subscribe to more than one mobile service) by the population of Korea, was 98.4%, and the broadband Internet penetration rate, which is calculated by dividing the number of broadband Internet access service subscribers (including multiple counting of those who subscribe to more than one broadband Internet access service) by the number of households in Korea, was 96.6%.

Mobile Telecommunications Service Market

The Korean cellular market was formally established in 1984 when SK Telecom, formerly Korea Mobile Telecom, became the first mobile telephone operator in Korea. SK Telecom remained the only cellular operator in Korea until Shinsegi Telecom began service in 1994. In order to encourage further market growth and competition, the Ministry of Information and Communication awarded three PCS licenses in June 1996. KTF was awarded a license alongside LG Telecom and Hansol M.com, and commercial PCS service was launched in October 1997.

 

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Since the introduction of three new operators in 1997, the Korean mobile market has undergone consolidation and significant growth. Following SK Telecom’s purchase of a controlling stake in Shinsegi, we acquired a 47.9% interest in Hansol M.com in 2000 and renamed the company KT M.com. KT M.com merged into KTF in May 2001 and Shinsegi merged into SK Telecom in January 2002. On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger. KT Corporation, SK Telecom and LG Telecom have invested in networks compatible with Evolution-Data Optimized (or EV-DO) handsets that allow subscribers to enjoy 2.5 generation high speed wireless data services. KT Corporation and SK Telecom also offer third-generation, high-capacity HSDPA-based IMT-2000 wireless Internet and video multimedia communications services that use significantly greater bandwidth capacity.

The table below gives the subscription and penetration information of the mobile telecommunications industry for the periods indicated:

 

     As of December 31,  
     2005     2006     2007     2008     2009  

Total Korean Population (1)

   48,294      48,378      48,457      48,607      48,747   

Mobile Subscribers (2)

   38,342      40,197      43,498      45,607      47,944   

Mobile Subscriber Growth Rate

   4.8   4.8   8.2   4.9   5.1

Mobile Penetration (3)

   79.4   83.1   89.8   93.8   98.4

 

 

(1) In thousands, based on population trend estimates by the National Statistical Office of Korea.

 

(2) In thousands, based on information announced by the Korea Communications Commission.

 

(3) Penetration is determined by dividing mobile subscribers by total Korean population.

Broadband Internet Access Market

With the advancement of broadband technology, the Korean broadband Internet access market has experienced significant growth. The principal technologies used in providing high speed Internet access services are xDSL, HFC and fiber optic LAN. xDSL refers to various types of digital subscriber lines, including ADSL and VDSL. xDSL offers an access solution over existing telephone lines using a specialized modem while HFC service involves the use of two-way cable networks. Fiber optic LAN is a technology that combines fiber optic cables and Unshielded Twisted Pair (or UTP) cables. Fiber optic cables are connected to residential and commercial buildings with UTP cable-based LAN capabilities. While xDSL and HFC are more widely used technologies because of their relative reliability, ease of provisioning and cost effectiveness, fiber optic LAN usage in Korea has been steadily increasing in recent years.

Since the subscribers of two-way cable networks share a limited bandwidth, the downstream speed tends to slow down as the number of subscribers increases, thereby decreasing the quality of HFC-based service. While xDSL technology was commercially introduced after HFC technology, it has surpassed HFC to become the prevalent broadband access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in 2002. Some of the service providers have upgraded their broadband network to provide fiber optic LAN-based service to their subscribers, which further enhances data transmission speed up to 100 Mbps as well as improves connection quality, and enables such service providers to offer video-on-demand services with real-time high definition broadcasting.

In recent years, broadband Internet access service providers and mobile telecommunications service providers have focused their attention to provide wireless Internet connection capabilities. They have introduced wireless LAN service with speeds of up to 155 Mbps, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops, PDAs and

 

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smart phones in hot-spot zones and at home. Some service providers have also developed wireless Internet networks to provide WiBro service, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 1 Mbps.

Our Services

Mobile Service

We provide mobile services based on CDMA technology and W-CDMA technology. Prior to the merger of KTF into KT Corporation, we provided such services through KTF, which was formerly a consolidated subsidiary. On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. KTF obtained one of the three licenses to provide nationwide PCS service in June 1996 and began offering PCS service in October 1997. PCS service is a digital wireless telephone and data transmission system that uses portable handsets with long battery life to communicate via low-power antennae. Our PCS service is based on CDMA technology and utilizes 40 MHz of bandwidth in the 1800 MHz frequency. KTF also began offering HSDPA-based IMT-2000 services, which is a third-generation, high-capacity wireless Internet and video multimedia communications technology that allows an operator to provide to its subscribers significantly more bandwidth capacity. We currently offer such services under the brand name “SHOW.”

Revenues related to mobile service accounted for 33.8% of our operating revenues in 2009. In addition, our goods sold, which are primarily from mobile handset sales, accounted for 17.3% of our operating revenues in 2009. The following table shows selected information concerning the usage of our network during the periods indicated and the number of our subscribers as of the end of such periods:

 

     As of or for the Year Ended December 31,
     2007    2008    2009

Outgoing Minutes (in thousands) (1)

     27,002,928      28,959,840      30,714,420

Average Monthly Outgoing Minutes per Subscriber (1) (2)

     164      168      173

Average Monthly Revenue per Subscriber (1) (3)

   (Won) 38,627    (Won) 39,487    (Won) 36,241

Number of Subscribers (in thousands)

     13,721      14,365      15,016

 

 

(1) Prior to the merger of KTF into KT Corporation on June 1, 2009, we maintained an air-time reselling arrangement with KTF where we billed directly to our resale subscribers for their usage of KTF’s mobile networks and collected all fees and charges relating to such usage. Such amounts related to resale subscribers are not included in our calculation of outgoing minutes and average monthly outgoing minutes and revenue per subscriber in 2007 and 2008. In 2009, we have included such amounts related to resale subscribers.

 

(2) The average monthly outgoing minutes per subscriber is computed by dividing the total minutes of usage for the period by the weighted average number of subscribers for the period and dividing the quotient by the number of months in the period. The weighted average number of subscribers is the sum of the total number of subscribers at the end of each month divided by the number of months in the period.

 

(3) The average monthly revenue per subscriber is computed by dividing total monthly fees, usage charges, interconnection fees and value-added service fees for the period by the weighted average number of subscribers and dividing the quotient by the number of months in the period.

We compete with SK Telecom, a mobile service provider that has a longer operating history than us, and LG Telecom that began its service at around the same time as KTF. As of December 31, 2009, we had approximately 15.0 million subscribers, which was second largest among the three mobile service providers. As of December 31, 2009, we had a market share of 31.3% of the mobile service market.

 

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We market our mobile services primarily through independent exclusive dealers located throughout Korea. As of December 31, 2009, there were approximately 2,200 shops managed by our independent exclusive dealers. In addition to assisting new subscribers to activate mobile service and purchase handsets, authorized dealers are connected to our database and are able to assist customers with account information. Although most of these dealers sell exclusively our products and services, sub-dealers hired by exclusive dealers may sell products and services offered by other mobile telecommunications service providers. Authorized dealers are entitled to a commission for each new subscriber registered, as well as ongoing commissions for the first five years based primarily on the subscriber’s monthly fee, usage charges and length of subscription. The handsets sold by us to the dealers cannot be returned to us unless they are defective. If a handset is defective, it may be exchanged for a new one within 14 days from the date of purchase.

In response to the diversification of our customers’ demands and their increasing sophistication, we have also selectively engaged in opportunities to expand our internal sales channels in recent years. In 2007, we established a wholly-owned subsidiary, KT M&S Co., Ltd., that operates approximately 140 customer plazas that engage in mobile service sales activities as well as provide a one-stop shop for a wide range of other services and products that we offer. We also operate a website to promote and advertise our products and services to the general public and in particular to younger customers who are more familiar with the Internet.

We conduct the screening process for new subscribers with great caution. A potential subscriber must meet all minimum credit criteria before receiving mobile service. The procedure includes checking the history of non-payment and credit information from banks and credit agencies such as the National Information and Credit Evaluation Corporation. Applicants who do not meet the minimum criteria can only subscribe to the mobile service by using a pre-paid card.

Telephone Services

Fixed-line Telephone Services. We utilize our extensive nationwide telephone network to provide fixed-line telephone services, which consist of local, domestic long-distance and international long-distance services. These fixed-line telephone services accounted for 18.0% of our operating revenues in 2009. Our telephone network includes exchanges, long-distance transmission equipment and fiber optic and copper cables. The following table gives some basic measures of the development of our telephone system:

 

     As of or for the Year Ended December 31,
     2005    2006    2007    2008    2009

Total Korean population (thousands) (1)

   48,294    48,378    48,457    48,607    48,747

Lines installed (thousands) (2)

   26,190    26,838    26,671    26,008    25,907

Lines in service (thousands) (2)

   20,837    20,331    19,980    18,883    17,069

Lines in service per 100 inhabitants (3)

   43.1    42.0    41.2    38.8    35.0

Fiber optic cable (kilometers)

   167,857    212,715    267,421    312,232    405,528

Number of public telephones installed (thousands)

   267    218    185    161    144

Domestic long-distance call minutes (millions) (4) (5)

   13,417    14,769    13,375    11,591    9,526

Local call pulses (millions) (4)

   18,566    16,182    14,676    12,449    8,406

 

 

(1) Based on population trend estimates by the National Statistical Office of Korea.

 

(2) Including lines used for public telephones but excluding lines dedicated to centralized extension system services for corporate subscribers.

 

(3) Determined based on lines in service and total Korean population.

 

(4) Excluding calls placed from public telephones.

 

(5) Estimated by KT Corporation.

 

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Our domestic long-distance cable network is entirely made up of fiber optic cable and can carry both voice and data transmissions. Compared to conventional materials such as coaxial cable, fiber optic cable provides significantly greater transmission capacity with less signal fading, thus requiring less frequent amplification. In recent years, we have also increased the proportion of our lines that are connected to exchanges capable of handling digital signal technology. A principal limitation of the older analog technology is that applications other than voice communications, such as the transmission of text and computer data, require either separate networks or conversion equipment. Digital systems permit a range of voice, text and data applications to be transmitted simultaneously on the same network. We completed connection of all installed lines to digital exchanges in June 2003.

The following table shows the number of minutes of international long-distance calls recorded by us and specific service providers utilizing our international long-distance network in each specified category for each year in the five-year period ended December 31, 2009:

 

     Year Ended December 31,
     2005    2006    2007    2008    2009
     (In millions of billed minutes)

Incoming international long-distance calls

   558.9    519.4    627.4    603.7    442.2

Outgoing international long-distance calls

   467.8    400.9    431.4    398.1    325.9
                        

Total

   1,026.7    920.3    1,058.8    1,001.8    768.1
                        

United States (20.9%), Japan (15.4%) and China (18.7%) accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2009. In recent years, the volume of our incoming calls exceeded the volume of our outgoing calls. The agreed settlement rate is applied to the call minutes to determine the applicable net settlement payment.

Interconnection. Under the Telecommunications Business Act, we are required to permit other service providers to interconnect to our fixed-line network. Currently, the principal users of this interconnection capacity include SK Broadband and LG Telecom (offering local, domestic long-distance and international long-distance services), Onse and SK Telink (offering international and domestic long-distance services), and SK Telecom and LG Telecom (transmitting calls to and from their mobile networks). We expect that interconnection revenues and payments will remain important for our results of operations. In recent years, revenues from a landline user for a call initiated by a landline user to a mobile service subscriber (land-to-mobile interconnection) have become a significant portion of our results of operations, accounting for 5.8% of our operating revenues in 2009. We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as an expense the amount of interconnection charge paid to the mobile service provider.

Internet phone services. The volume of calls made through Internet phone services has significantly increased since Internet phone service was first introduced in Korea in 1998. We provide Internet phone services that enable VoIP phone devices with broadband connection to make domestic and international calls. In order to differentiate our Internet phone services from our competitors’ services, we provide value-added services such as video communication, short message service, phone banking and a variety of traffic and local news information. In March 2009, we changed our brand name to “QOOK Internet Phone.” As of December 31, 2009, we had approximately 1.7 million subscribers.

Internet Services

Broadband Internet Access Service. Leveraging on our nationwide network of 405,528 kilometers of fiber optic cable network, we have achieved a leading market position in the broadband Internet access market in Korea. We believe we have a competitive advantage over other broadband

 

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Internet access service providers because, unlike our competitors, we can utilize our existing networks nationwide to provide broadband Internet access service. Our broadband Internet access service accounted for 9.8% of our operating revenues in 2009. Our principal Internet access services include:

 

   

ADSL, VDSL, Ethernet and FTTH services under the “QOOK Internet” brand name;

 

   

wireless LAN service under the “Nespot” brand name, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops, PDAs and smart phones in hot-spot zones and QOOK Internet service in fixed-line environments. Nespot enables subscribers to access the Internet at up to 155 Mbps. We sponsored approximately 13,000 hot-spot zones nationwide for wireless connection as of December 31, 2009; and

 

   

WiBro Internet access service, which enables two-way wireless broadband Internet access to portable computers, mobile phones and other portable devices at a speed averaging 1 Mbps per user.

We had 7.0 million fixed-line QOOK Internet subscribers and approximately 296 thousand Nespot service subscribers as of December 31, 2009. We commercially launched our WiBro service in June 2006, and we had approximately 287 thousand subscribers as of December 31, 2009. We also bundle our WiBro service with QOOK Internet and Nespot services at a discount in order to attract additional subscribers.

Our QOOK Internet service utilizes ADSL technology, which is a technology that converts existing copper twisted-pair telephone lines into access paths for multimedia and high-speed data communications. ADSL transforms the existing public telephone network from one limited to voice, text and low-resolution graphics to a system capable of bringing multimedia to subscriber premises without new cabling. The asymmetric design optimizes the bandwidth by maximizing the downstream speed for downloading information from the Internet. While ADSL technology was commercially introduced after HFC-based technology, it has surpassed HFC to become the prevalent access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in July 2002. We are currently upgrading our broadband network to enable FTTH connection, which further enhances downstream speed up to 100 Mbps and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such as IP-TV service and delivery of other digital media content.

The high-speed downstream rates can reach up to 8 Mbps for ADSL and 100 Mbps for VDSL and FTTH. Downstream rates depend on a number of factors. For a constant wire gauge, the data rate decreases as the length of the copper wire increases. Generally, if the separation between the telephone office and the subscriber is greater than four kilometers, line attenuation is so severe that broadband speeds can no longer be achieved. Approximately 95% of the households subscribing to our basic local telephone service are located within a four kilometer radius of our telephone offices, making our QOOK Internet service available to most of the Korean population. Fiber-optic cable used by FTTH, on the other hand, uses laser light to carry signals that travel long distances inside fiber optic cable without degradation.

Other Internet-related Services. Our other Internet-related services focus primarily on providing infrastructure and solutions for business enterprises, as well as IP-TV and network portal services. Our other Internet-related services accounted for 2.6% of our operating revenues in 2009.

 

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We operate seven Internet data centers located throughout Korea and provide a wide range of computing services to companies which need servers, storages and leased lines. Internet data centers are facilities used to house, protect and maintain network server computers that store and deliver Internet and other network content, such as web pages, applications and data. Our Internet data centers are designed to meet international standards, and are equipped with temperature control systems, regulated and reliable power supplies, fire detection and suppression equipment, security monitoring and wide-bandwidth connections to the Internet. Internet data centers allow corporations or Internet service providers to outsource their application and server hardware management.

Our Internet data centers offer network outsourcing services, server operation services and system support services. Our network outsourcing services include co-location, which is the installation of our customers’ network equipment at our Internet data centers. Co-location is designed to increase customers’ Internet connection speed and reduce connection time and costs by directly connecting the customers’ server to the Internet backbone switch at our Internet data centers. Our server operation services include optimal server management service and technical support service we provide with respect to the leased servers that are linked directly to our Internet backbone switch. We also lease servers and network equipment for a fixed monthly fee. Our system support services include providing system resources for a wide range of Internet computing services, such as application transfer, network storage, video streaming and application download, as well as sending short text messages and messages containing multimedia objects, such as images, audio and video.

We also offer a service called Bizmeka to develop and commercialize business-to-business solutions targeting small- and medium-sized business enterprises in Korea. Bizmeka is an applied application service provider which provides industry-specific business solutions, including customer database management and electronic data interchange.

We also offer high definition video-on-demand and real-time broadcasting IP-TV services under the brand name “QOOK TV.” Our IP-TV service offers access to an array of digital media contents, including movies, sports, news, educational programs and TV replay, for a fixed monthly fee. Through a digital set-top box that we rent to our customers, our customers are able to browse the catalogue of digital media contents and view selected media streams on their television. A set-top box provides two-way communications on an IP network and decodes video streaming data. We expanded our IP-TV service to include real-time broadcasting on November 17, 2008. We had 1.2 million QOOK TV subscribers as of December 31, 2009.

Data Communication Service

Our data communication service involves offering exclusive lines that allow point-to-point connection for voice and data traffic between two or more geographically separate points. As of December 31, 2007, 2008 and 2009, we leased 391,383 lines, 386,917 lines and 327,778 lines to domestic and international businesses. The data communication service accounted for 6.7% of our operating revenues in 2009.

We provide dedicated and secure broadband Internet connection service to institutional customers under the “Kornet” brand name. We provide high-speed connection up to 4.2 Tbps, as well as rent to our customers and install necessary routers to ensure reliable Internet connection and enhanced security. We provide discount rates to qualified customers, including small- and medium-sized enterprises, businesses engaging in Internet access services and government agencies.

We currently have two satellites in operation, Koreasat 3 and Koreasat 5. We launched Koreasat 3 in September 1999. Koreasat 3 carries transponders that are used for direct-to-home satellite broadcasting, telecommunications, video distribution and high-speed data communications services. Most of the direct-to-home satellite broadcasting transponders are utilized by Korea Digital Satellite Broadcasting Inc.

 

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We launched Koreasat 5 in August 2006, which replaced Koreasat 2. Koreasat 5, a combined civil and military communications satellite, is the first Korean satellite to provide commercial satellite services to neighboring countries, and the service zone of the twelve beam repeaters include Japan, China, Taiwan, the Philippines, the eastern part of China and the southern part of Russia. The design life of Koreasat 5 is fifteen years. The design life of Koreasat 3 is twelve years, and we plan to launch Koreasat 6 in November 2010 to replace Koreasat 3. We also lease satellite capacity to offer commercial satellite services to both domestic and international customers.

Miscellaneous Services

We also engage in various business activities that extend beyond telephone services and data communications services, including information technology and network services, real estate development and car rental business. Our miscellaneous services accounted for 5.8% of our operating revenues for 2009.

We offer a broad array of integrated information technology and network services to our business customers. Our range of services include consulting, designing, building and maintaining systems and communication networks that satisfy the individual needs of our customers in the public and private sectors.

We own land and real estate in various locations nationwide. Technological developments have enhanced the coverage area of individual telecommunications facilities, which enable us to better utilize our existing land and other real estate holdings. In recent years, we have engaged in the planning and development of commercial and office buildings and condominiums on our unused sites, as well as in the leasing of buildings we own.

We also operate KT Rental, a subsidiary that provides rental cars and equipment. On March 31, 2010, MBK Partners, a private equity firm, and we jointly acquired Kumho Rent-A-Car Co., Ltd. from Korea Express Inc. for (Won)289 billion, with each taking a 50% stake. Kumho Rent-A-Car was subsequently merged with the car rental business unit of KT Rental on June 1, 2010. As a result of the merger, Kumho Rent-A-Car owns approximately 55,000 cars and has a market share of 24% of the domestic car rental market.

 

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Revenues and Rates

The table below shows the percentage of our revenues derived from each category of services for each of the years from 2007 through 2009:

 

     Year Ended December 31,  
         2007             2008             2009      

Mobile service

   32.1   32.8   33.8

Fixed-line telephone services:

      

Local service

   15.4      14.0      13.6   

Non-refundable service initiation fees

   0.2      0.1      0.1   

Domestic long-distance service

   3.6      3.0      2.4   

International long-distance service

   2.3      2.3      2.0   

Land-to-mobile interconnection

   8.5      7.1      5.8   
                  

Sub-total

   30.0      26.5      23.9   
                  

Internet services:

      

Broadband Internet access service

   11.1      10.4      9.9   

Other Internet-related services (1)

   1.7      2.3      2.5   
                  

Sub-total

   12.8      12.7      12.4   
                  

Goods sold (2)

   13.2      15.6      17.3   

Data communications service (3)

   6.8      6.8      6.7   

Miscellaneous services (4)

   5.1      5.6      5.9   
                  

Operating revenues

   100.0   100.0   100.0
                  

 

 

(1) Includes revenues from services provided by our Internet data centers, Bizmeka and QOOK TV.

 

(2) Includes mobile handset sales.

 

(3) Includes revenues from Kornet Internet connection service and satellite services.

 

(4) Includes revenues from information technology and network services, real estate development and car rental business.

Mobile Services

We derive revenues from mobile services principally from:

 

   

initial subscription fees;

 

   

monthly fees;

 

   

usage charges for outgoing calls;

 

   

usage charges for wireless data transmission;

 

   

contents download fees; and

 

   

value-added monthly service fees.

 

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We offer various rate plans, including those that offer a specified number of free airtime minutes per month in return for a higher monthly fee and those that are geared toward business customers. In September 2009, we reduced our initial subscription fee for new subscribers by 20% from (Won)30,000 to (Won)24,000. For our HSDPA-based SHOW service, we also charge monthly fees, voice calling usage charges and video calling usage charges. Under our standard rate plan for HSDPA-based SHOW service, we charge a monthly fee of (Won)12,000, voice calling usage charges of (Won)18 per ten seconds and video calling usage charges of (Won)30 per ten seconds. The following table summarizes charges for our representative HSDPA-based SHOW service plans:

 

     Free Voice Call
Airtime Minutes
   Free Video Call
Airtime Minutes
   Monthly Fee

SHOW KING Sponsor Standard

   0    0    (Won) 12,000

SHOW KING Sponsor Gold—Free 150 (1)

   150    15      28,500

SHOW KING Sponsor Gold—Free 250 (1)

   250    0      35,000

SHOW KING Sponsor Gold—Free 350 (1)

   350    0      45,000

SHOW KING Sponsor Gold—Free 450 (1)

   450    0      55,000

SHOW KING Sponsor Gold—Free 650 (1)

   650    0      67,000

SHOW KING Sponsor Gold—Free 850 (1)

   850    0      75,000

SHOW KING Sponsor Gold—Free 2000 (1)

   2,000    0      97,000

 

 

(1) Requires mandatory subscription period of 24 months.

A subscriber may also subscribe to an individually designed calling rate plan by mixing free voice calling airtime minutes and free text messages at a set monthly fee.

For our PCS service, we charge monthly fees and usage charges. Under our standard rate plan for PCS service, we charge a monthly fee of (Won)12,500 and usage charges of (Won)18 per ten seconds, and the subscriber is provided with five free minutes. The following table summarizes charges for our representative PCS service plans:

 

     Free Airtime
Minutes
   Free Text
Messages
   Monthly Fee

Standard

   5    0    (Won) 12,500

New Double Designated Numbers (1)

   0    50      15,500

Roll Over (Free 200 Minutes) (2)

   200    0      31,500

Roll Over (Free 550 Minutes) (2)

   550    0      61,000

Roll Over (Free 800 Minutes) (2)

   800    0      71,000

 

 

(1) Discounts of 40% when a subscriber makes calls to up to six pre-designated numbers.

 

(2) Unused free airtime may be transferred to the following month.

We also provide plans specially designed for elderly and pre-teen subscribers as well as special discounts to our subscribers with physical disabilities.

 

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In September 2009, we also introduced new rate plans specifically for smart phone users. The following table summarizes charges for our representative smart phone service plans:

 

     Free Airtime
Minutes
   Free Data
Transmission (1)
   Monthly Fee

SHOW Smart Sponsor Free 150 (2)

   150    0 megabytes    (Won) 28,500

SHOW Smart Sponsor Free 250 (2)

   250    0      35,000

SHOW Smart Sponsor Free 350 (2)

   350    0      45,000

SHOW Smart Sponsor Free 450 (2)

   450    0      55,000

SHOW Smart Sponsor Free 650 (2)

   650    0      67,000

SHOW Smart Sponsor Free 850 (2)

   850    0      75,000

SHOW KING Sponsor i—Slim (3)

   150    100      35,000

SHOW KING Sponsor i—Lite (3)

   200    500      45,000

SHOW KING Sponsor i—Talk (3)

   250    100      45,000

SHOW KING Sponsor i—Medium (3)

   400    1,000      65,000

SHOW KING Sponsor i—Special (3)

   600    1,500      79,000

SHOW KING Sponsor i—Premium (3)

   800    3,000      95,000

 

 

(1) We do not charge for any data transmission in wireless LAN zones. We charge (Won)0.025 per 0.5 kilobyte for any additional data transmission exceeding the free monthly quota.

 

(2) Available only to smart phone users who do not use Apple iPhones. We provide discounts of up to 36.7% for mandatory subscription periods ranging from one to three years.

 

(3) We provide discounts of up to 38.2% for mandatory subscription periods ranging from one to three years.

We have entered into arrangements with various partners including a leading discount store, a leading online shopping mall, a cosmetics company, oil refinery companies, an operator of cinema complexes, a leading motor company and Korea Railroad Corporation, and the subscribers of our mobile service may elect to receive monthly discount coupons, membership points or movie tickets in lieu of our monthly rate discounts.

In September 2009, we also launched QOOK&SHOW, a bundled package for individuals with specially designed mobile phones that can be used as an Internet phone and a wireless broadband Internet access device at home and at any wireless LAN zone and as a mobile phone and a wireless broadband Internet access device outside of such locations. Subscribers pay a monthly fee according to the package selected and pay a discounted rate of (Won)13 per 10 seconds instead of the standard W-CDMA rate of (Won)18 per 10 seconds to call a mobile phone and (Won)39 per 3 minutes instead of (Won)18 per 10 seconds to call another landline phone when they are at home or at any wireless LAN zone. In addition, the basic monthly fee of (Won)2,000 for the Internet phone service is waived. QOOK&SHOW subscribers may use wireless broadband Internet access service without any usage charges at home or at any wireless LAN zone. In order to promote our QOOK&SHOW package, we are offering additional incentives to all new subscribers of the package who sign up prior to July 15, 2010. We provide to such subscribers an additional monthly discount of (Won)2,500 as well as provide them with unlimited free calls to our Internet phone subscribers. Such additional discounts and benefits apply during the mandatory subscription period.

Fixed-line Telephone Services

Local Telephone Service. Our revenues from local telephone service consist primarily of:

 

   

Service initiation fees for new lines;

 

   

Monthly basic charges; and

 

   

Monthly usage charges based on the number of call pulses.

 

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All calls are currently measured by call pulses. Each pulse is determined by the duration of the call and the time of the day at which the call is made. For instance, during regular service hours, a call pulse is triggered at the beginning of each local telephone call and every three minutes thereafter.

The rates we charge for local calls are currently subject to approval by the Korea Communications Commission after consultation with the Ministry of Strategy and Finance. The rates are identical for residential and commercial customers. The following table summarizes our local usage rates as of each date on which rates were revised:

 

     Dec 1, 1996    Sept 1, 1997    April 15, 2001    May 1, 2002

Local Usage Charges (per pulse) (1)

           

Regular service

   (Won) 41.6    (Won) 45    (Won) 39    (Won) 39

Public telephone

     40      50      50      70

 

 

(1) Since January 1, 1990, usage charges for local service in those metropolitan areas subject to measured service have been based on the number of pulses, which are a function of the duration and number of calls, and per pulse rates. Before January 1, 1993, in areas not subject to measured service, a pulse was triggered once for each local telephone call, regardless of the length of the call. Commencing January 1, 1993, measured service applies to all lines in service. A pulse is triggered at the beginning of each local call and every three minutes thereafter from 8:00 a.m. to 9:00 p.m. on weekdays and every 258 seconds thereafter on holidays and from 9:00 p.m. to 8:00 a.m. on weekdays.

We also charge a monthly basic charge ranging from (Won)3,000 to (Won)5,200, depending on location, and a non-refundable service initiation fee of (Won)60,000 to new subscribers. The non-refundable service initiation fee is waived for the new subscribers who subscribe to our local service through our online application process. Until April 2001, we charged refundable service initiation deposits, which were refunded upon termination of service. As of December 31, 2009, we had (Won)697 billion of refundable service initiation deposits outstanding and 3,087 thousand subscribers who are enrolled under the mandatory deposit plan and are eligible to switch to the no deposit plan and receive their service initiation deposit back (less the non-refundable service initial fees).

Domestic Long-distance Telephone Service. Our revenues from domestic long-distance service consist of charges for calls placed, charged for the duration, time of day and day of the week a call is placed, and the distance covered by the call. We are able to set our own rates for domestic long-distance service without approval from the Korea Communications Commission.

The following table summarizes our domestic long-distance rates as of each date on which rates were revised. These charges do not reflect discounts applicable to calls made during off-peak hours or holidays.

 

     Date of Rate Change (1)
     Dec. 1, 1996    Sept. 1, 1997    Dec. 1, 2000    April 15, 2001    Nov. 1, 2001

Domestic Long-Distance Charges (per three minutes) (1) (2)

              

Up to 30 km

   (Won) 41.6    (Won) 45    (Won) 45    (Won) 39    (Won) 39

Up to 100 km

     182      172      192      192      261

100 km or longer

     277      245      252      252      261

 

 

(1) Domestic long-distance calls of up to 30 kilometers are billed on the same basis as local calls. Before April 15, 2001, for domestic long-distance calls in excess of 30 kilometers, a pulse was triggered at the beginning of each call and every 47 seconds for calls up to 100 kilometers or every 33 seconds for calls in excess of 100 kilometers. Commencing April 15, 2001, a pulse was triggered at the beginning of each call and every 30 seconds thereafter. Commencing November 1, 2001, a pulse is triggered at the beginning of each call and every 10 seconds thereafter.

 

(2) Rates for domestic long-distance calls in excess of 30 kilometers are currently discounted (by an adjustment in the period between pulses) by 10% on holidays and from 6:00 a.m. to 8:00 a.m. on weekdays, and by 30% from midnight to 6:00 a.m. every day.

 

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In recent years, we have begun to offer optional flat rate plans, discount plans and bundled product plans in order to mitigate the impact from lower usage of local and domestic long-distance calls and stabilize our revenues from fixed-line telephone services. For a discussion of our bundled products, see “—Bundled Products.” Some of our new flat rate and discount plans introduced in recent years include the following:

 

   

starting in November 2007, a subscriber who elects to pay an additional monthly flat rate of (Won)3,000 is able to make local and domestic long-distance calls at a flat rate of (Won) 39 per call without regard to length of the call;

 

   

starting in November 2007, a subscriber who elects to pay an additional monthly flat rate of (Won)2,000 is able to make domestic long-distance calls at a rate of (Won)39 per three minutes;

 

   

starting in June 2008, a subscriber who elects to pay a monthly flat rate of (Won)12,500 is able to make free local and domestic long-distance calls after 9 p.m. on weekdays or at any time on weekends. Each month, the subscriber also receives a free movie ticket and free 60 minutes of land-to-mobile calls. The subscriber is also eligible to receive a discount of up to 20%, subject to the length of the mandatory subscription period;

 

   

starting in October 2009, a subscriber who elects to subscribe to our fixed-line phone service for a three year mandatory subscription period is able to make local and domestic long-distance calls at a flat rate of (Won)39 per three minutes; and

 

   

starting in October 2009, a subscriber who elects to subscribe to our broadband Internet access service or SHOW mobile service for a three year mandatory subscription period is able to make local, domestic long-distance and land-to-mobile calls of up to (Won)150,000 with a flat rate payment of (Won)50,000 or such calls up to (Won)50,000 with a flat rate payment of (Won)10,000. Standard rates apply to calls that exceed the capped amounts.

International Long-distance Service. Our revenues from international long-distance service consist of:

 

   

amounts we bill to customers for outgoing calls made to foreign countries (including customers who make calls to Korea from foreign countries under our home country direct-dial service);

 

   

amounts we bill to foreign telecommunications carriers and administrations for connection to the Korean telephone network in respect of incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service); and

 

   

other revenues, including revenues from international calls placed from public telephones.

We bill outgoing calls made by customers in Korea (and calls made to Korea from foreign countries under our home country direct-dial service) in accordance with our international long-distance rate schedule for the country called. These rates vary depending on the time of day at which a call is placed. We bill outgoing international calls on the basis of one-second increments. We are able to set our own rates for international long-distance service without approval from the Korea Communications Commission.

For incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service), we receive settlement payments from the relevant foreign carrier or administration at the applicable settlement rate specified under the agreement with the foreign entity. We have entered into numerous bilateral agreements with foreign carriers and administrations. We

 

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negotiate the settlement rates under these agreements with each foreign carrier, subject to Korea Communications Commission approval. It is the practice among international carriers for the carrier in the country in which the call is billed to collect payments due in respect of the use of overseas networks. Although we record the gross amounts due to and from us in our financial statements, we make settlements with most carriers quarterly on a net basis.

Interconnection. We provide other telecommunications service providers, including mobile operators and other fixed-line operators, interconnection to our fixed-line network.

Land-to-mobile Interconnection. For a call initiated by a landline user to a mobile service subscriber, we collect from the landline user the land-to-mobile usage charge and remit to the mobile service provider a land-to-mobile interconnection charge. The Korea Communications Commission periodically issues orders setting the interconnection charge calculation method applicable to interconnections with mobile service providers. The Korea Communications Commission determines the land to mobile interconnection charge by calculating the long run incremental cost of mobile service providers, taking into consideration technology development and future expected costs.

The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes) to mobile operators for landline to mobile calls.

 

     Effective Starting
     January 1, 2007    January 1, 2008    January 1, 2009

SK Telecom

   (Won) 32.8    (Won) 33.4    (Won) 32.9

KTF

     39.6      38.7      38.0

LG Telecom

     45.1      39.1      38.5

The following table shows the usage charge per minute collected from a landline user for a call initiated by a landline user to a mobile service subscriber.

 

     Effective Starting September 1, 2004

Weekday

   (Won) 87.0

Weekend

     82.0

Evening (1)

     77.2

 

 

(1) Evening rates are applicable from 12:00 a.m. to 6:00 a.m. everyday.

We recognize as land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as expense the amount of interconnection charge paid to the mobile service provider.

Land-to-land and Mobile-to-land Interconnection. For a call initiated by a landline subscriber of our competitor to our fixed-line user, the landline service provider collects from its subscriber its normal rate and remits to us a land-to-land interconnection charge. In addition, for a call initiated by a mobile service subscriber to our landline user, the mobile service provider collects from its subscriber its normal rate and remits to us a mobile-to-land interconnection charge.

 

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The following table shows such interconnection charge per minute collected for a call depending on the type of call, as determined by the Korea Communications Commission.

 

     Effective Starting
     January 1, 2007    January 1, 2008    January 1, 2009

Local access (1)

   (Won) 17.3    (Won) 18.3    (Won) 18.1

Single toll access (2)

     19.0      19.5      19.3

Double toll access (3)

     20.7      20.6      20.4

 

Source: The Korea Communications Commission.

 

(1) Interconnection between local switching center and local access line.

 

(2) Interconnection involving access to single long-distance switching center.

 

(3) Interconnection involving access to two long-distance switching centers.

Internet Services

Broadband Internet Access Service. We offer broadband Internet access service that primarily uses existing telephone lines to provide both voice and data transmission. We charge monthly fixed fees to customers of broadband Internet service. In addition, we charge customers a one time installation fee per site of (Won)30,000 and modem rental fee ranging from (Won)3,000 to (Won)8,000 on a monthly basis. The rates we charge for broadband Internet access service are subject to approval by the Korea Communications Commission.

The following table summarizes our charges for our representative broadband Internet service plans:

 

     Maximum Speed    Monthly Fee

QOOK Internet Special (1)

   100 Mbps    (Won) 28,800

QOOK Internet Lite (1)

   50                 25,500

WiBro 1G (2) (6)

   3                 10,000

WiBro 5G (3) (6)

   3                 20,000

WiBro 10G (4) (6)

   3                 30,000

WiBro 30G (5) (6)

   3                 40,000

 

 

(1) We waive the installation fee of (Won)30,000 for mandatory subscription periods of three to four years.

 

(2) We charge a monthly fee of (Won)10,000 for up to 1,000 megabytes of data transmission and (Won)50 per megabyte for any additional data transmission in excess of 1,000 megabytes per month.

 

(3) We charge a monthly fee of (Won)20,000 for up to 5,000 megabytes of data transmission and (Won)25 per megabyte for any additional data transmission in excess of 5,000 megabytes per month.

 

(4) We charge a monthly fee of (Won)30,000 for up to 10,000 megabytes of data transmission and (Won)10 per megabyte for any additional data transmission in excess of 10,000 megabytes per month.

 

(5) We charge a monthly fee of (Won)40,000 for up to 30,000 megabytes of data transmission and (Won)7 per megabyte for any additional data transmission in excess of 30,000 megabytes per month.

 

(6) In order to promote our WiBro service, we are currently offering promotional rates to all new customers subscribing before June 30, 2011. New subscribers may elect either flat rate plans in which the subscriber pays either a monthly fee of (Won)19,800 for up to 30,000 megabytes of data transmission or a monthly fee of (Won)27,000 for up to 50,000 megabytes of data transmission, or a discount plan in which the subscriber pays a monthly fee of (Won)10,000 for up to 1,000 megabytes of monthly data transmission and (Won)25 per megabyte for data transmission in excess of such amount, with the maximum monthly fee capped at (Won)150,000. Both promotional plans are subject to mandatory subscription periods.

QOOK TV Services. We charge our subscribers an installation fee per site of (Won) 24,000, a set-top box rental fee ranging from (Won)2,000 to (Won)7,000 on a monthly basis and a monthly subscription fee. The rates we charge for QOOK TV services are subject to approval by the Korea Communications Commission.

 

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The following table summarizes charges for our representative QOOK TV service plans:

 

     Real-time
Broadcasting Channels
   Monthly Fee  (1)

QOOK TV Video-on-Demand

   0    (Won) 10,000

QOOK TV Choice (2)

   25      12,000

QOOK TV Education (3)

   35      12,000

QOOK TV Thrift (4)

   56      12,000

QOOK TV Standard (4)

   78      16,000

QOOK TV Deluxe (4)

   87      23,000

QOOK TV Skylife Economy (5)

   92      20,000

QOOK TV Skylife Standard (5)

   117      25,000

QOOK TV Skylife Premium (5)

   151      30,000

 

 

(1) We provide discounts of 5% to 20% for mandatory subscription periods ranging from one to three years. For QOOK TV Skylife subscribers, we provide discounts of 20% for mandatory subscription period of three years.

 

(2) Assuming selection of one package. Subscribers must choose at least one channel package, each of which charges a monthly fee of (Won)2,000. The packages include entertainment, media, leisure, education and multi-room.

 

(3) Assuming selection of one package. Subscribers must choose at least one channel package, each of which charges a monthly fee of (Won)2,000. The packages include elementary school, middle/high school and English education.

 

(4) We charge additional monthly fees for value-added services such as short messaging service and high-definition channels from Skylife, our subsidiary satellite broadcasting operator.

 

(5) For subscription to QOOK TV Skylife service, subscribers are charged an additional (Won)11,000 installation fee.

Data Communication Service

We charge customers of domestic leased-lines on a monthly fixed-cost basis based on the distance of the leased line, the capacity of the line measured in bits per second (“bps”), the type of line provided and whether the service site is local or long-distance. In addition, we charge customers a one-time installation fee per line ranging from (Won)56,000 to (Won)1,940,000 depending on the capacity of the line.

Bundled Products

We utilize our extensive customer relationships and market knowledge to expand our revenue base by cross-selling our telecommunications products and services. We launched a new brand “QOOK” in March 2009 to promote our bundled products, and we plan to gradually unify brand names for our various service offerings as QOOK and SHOW. In order to attract additional subscribers to our new services, we bundle our services, such as our broadband Internet access service with WiBro, IP-TV, Internet phone, fixed-line telephone service and mobile services, at a discount.

The following table summarizes our various bundled packages that we currently offer. The packages require subscribers to agree to a subscription period of three years.

 

     Monthly Rates    Mobile usage
Charge Discounts
     Flat Rate (1)    Mobile
Monthly Fee
   Between
Family
Members (2)
  Calls to
Designated
Numbers (3)

Internet / Internet Phone / Mobile

   (Won) 24,000    Discounts of between

10% to 50%, subject
to the number of
subscribers who
participate (up to 5
mobile numbers)

  

50%

  20%

Internet / Fixed-Line Phone / Mobile

     27,000       50%   20%

Internet / IP-TV / Mobile (4)

     31,000       50%   20%

Internet / Internet Phone / IP-TV / Mobile (4)

     32,000       50%   50%

Internet / Fixed-Line Phone / IP-TV / Mobile (4)

     34,000       50%   50%

Internet / Fixed-Line or Internet Phone / IP-TV (5)

     40,000    Not applicable    Not applicable   Not applicable

 

 

(1) Assuming selection of QOOK Internet Lite service. If QOOK Internet Special is selected, additional monthly charge of (Won)3,000.

 

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(2) Applies to both voice call and video call airtime minutes.

 

(3) Applies to voice call airtime minutes only. Limited to one designated mobile number and one designated fixed-line number.

 

(4) Assuming selection of QOOK TV Thrift Plan. If QOOK TV Video-on-Demand is selected, deduction of (Won)2,000 from the monthly flat rate. If QOOK TV Standard Plan is selected, additional monthly charge of (Won)3,000.

 

(5) Assuming selection of QOOK TV Video-on-Demand, QOOK TV Choice or QOOK TV Education for IP-TV service and QOOK Internet Special for broadband Internet access service. Additional monthly charges of (Won)2,000 to (Won)10,000 apply if other IP-TV packages are selected. We provide to such subscribers of bundled packages unlimited free voice calling from their fixed-line or Internet phones to other subscribers of our fixed-line, Internet phone or mobile services. In addition, we provide up to 100 free voice call airtime minutes for calls made to subscribers of our competing mobile service providers.

In order to promote our bundled packages, we are offering additional incentives to all subscribers who sign up prior to October 15, 2010 to packages that include mobile service with fixed-line phone or Internet phone service. We provide to such subscribers unlimited free voice calling to their immediate family members. Such additional discounts apply during the mandatory subscription period.

We have also entered into partnerships with a leading online shopping mall, an operator of cinema complexes, a satellite broadcasting service operator, a life insurance company and a manufacturer of health drinks, and our subscribers may elect to receive monthly gift certificates, music downloads, online game money or movie tickets with value of up to (Won)50,000 per month in lieu of monthly rate discounts.

We believe that subscribers who sign up for bundled products are less likely to cancel our services than subscribers who subscribe to individual services. Subscription fees paid for our bundled products are allocated to each service in proportion to their fair value and the allocated amount is recognized as revenue according to the revenue recognition policy for each service.

Competition

Competition in the telecommunications sector in Korea is intense. In recent years, business combinations in the telecommunications industry have significantly changed the competitive landscape of the Korean telecommunications industry. In particular, SK Telecom acquired a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband. The acquisition enables SK Telecom to provide fixed-line telecommunications, broadband Internet access and IP-TV services together with its mobile telecommunications services. On January 1, 2010, LG Dacom and LG Powercom merged into LG Telecom Co., Ltd. The merger enables LG Telecom to provide a similar range of services as SK Telecom and us.

Under the Telecommunications Basic Law and the Telecommunications Business Law, telecommunications service providers in Korea are currently classified into network service providers, value-added service providers and specific service providers. See “—Regulation.”

Network Service Providers

All network service providers in Korea are permitted to set the rates for international or domestic long-distance services on their own without Korea Communications Commission approval. Many of our competitors have set their rates lower than ours. Currently, we can compete freely with other providers on the basis of rates in all services except for rates we charge for local calls and broadband Internet access service, which require advance approval from the Korea Communications Commission. In all service areas, we compete by endeavoring to provide superior customer service and superior technical quality, taking advantage of our broad customer base and our ability to provide various telecommunication services.

 

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We and SK Telecom have been designated as market-dominating business entities in the respective markets under the Telecommunications Business Act. Under this Act, a market-dominating business entity may not engage in any act of abuse, such as unreasonably interfering with business activities of other business entities, hindering unfairly the entry of newcomers or substantially restricting competition to the detriment of the interests of consumers. The Korea Communications Commission has also issued guidelines on fair competition of the telecommunications companies. If any telecommunications service provider breaches the guidelines, the Korea Communications Commission may take necessary corrective measures against it after a hearing at which the service provider may defend its action.

Mobile Service. Competition in the mobile telecommunications industry in Korea is intense among SK Telecom, LG Telecom and us. Such competition has intensified in recent years due to the implementation of mobile number portability, which enabled mobile subscribers to switch their service provider while retaining the same mobile phone number, as well as payments of handset subsidies to purchasers of new handsets who agree to minimum subscription periods.

The following table shows the market share in the mobile telecommunications market as of the dates indicated:

 

     Market Share (%)
     KT
Corporation
   SK Telecom    LG Telecom

December 31, 2007

   31.5    50.5    18.0

December 31, 2008

   31.5    50.5    18.0

December 31, 2009

   31.3    50.6    18.1

 

 

Source: Korea Communications Commission.

We offer various rate plans, including those that offer a specified number of free airtime minutes per month in return for a higher monthly fee and those that are geared toward business customers. Our competitors also offer similar plans at competitive rates.

Local Telephone Service. We compete with SK Broadband and LG Telecom in the local telephone service business. SK Broadband began providing local telephone service in 1999, followed by LG Telecom in 2004. In addition, the services provided by mobile service providers have had a material adverse effect on KT Corporation in terms of our revenues from fixed-line telephone services. We expect this trend to continue.

The following table shows the market share in the local telephone service market as of the dates indicated:

 

     Market Share (%)
     KT Corporation    SK Broadband    LG Telecom

December 31, 2007

   90.4    8.8    0.8

December 31, 2008

   89.8    8.7    1.5

December 31, 2009

   89.9    8.4    1.7

 

 

Source: Korea Communications Commission.

Although the local usage charge of our competitors and us is the same at (Won)39 per pulse (generally three minutes), our competitors’ non-refundable telephone service initiation charge and basic monthly charge are lower than ours. Our customers pay a non-refundable telephone service initiation charge of (Won)60,000 and a basic monthly charge of up to (Won)5,200 depending on location. On the other hand, customers of our competitors pay a non-refundable telephone service initiation charge of (Won)30,000 and a basic monthly charge of up to (Won)5,200 depending on location.

 

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Domestic Long-distance Telephone Service. We compete with SK Broadband, LG Telecom, Onse and SK Telink in the domestic long-distance market. LG Telecom began offering domestic long-distance service in 1996, followed by Onse in 1999 and SK Broadband and SK Telink in 2004. The following table shows the market shares in the domestic long-distance market as of the dates indicated:

 

     Market Share (%)
     KT Corporation    LG Telecom    SK
Broadband
   Onse    SK Telink

December 31, 2007

   85.4    7.4    3.9    1.8    1.5

December 31, 2008

   85.2    7.8    3.7    1.7    1.6

December 31, 2009

   86.3    3.4    6.8    1.6    1.9

 

 

Source: Korea Telecommunications Operators Association.

Our competitors and we charge (Won)39 per three minutes for domestic long-distance calls up to 30 kilometers. For domestic long-distance calls greater than 30 kilometers, our competitors typically charge between 3% to 5% less than us. The following table is a comparison of our standard long-distance usage charges per 10 seconds with the standard rates of our competitors as of December 31, 2009:

 

     KT
Corporation
   SK
Broadband
   LG Telecom    Onse    SK Telink

30 kilometers or longer

   (Won) 14.5    (Won) 13.9    (Won) 14.1    (Won) 13.8    (Won) 13.8

 

 

Source: Korea Communications Commission.

International Long-Distance Telephone Service. Four companies, SK Broadband, LG Telecom, Onse and SK Telink, directly compete with us in the international long-distance market. LG Telecom began offering international long-distance service in 1991, followed by Onse in 1997 and SK Broadband in 2004. SK Telink, which only provides Internet phone service, entered the international long-distance market in 2003 and offers its services at rates lower than those of network-based international long-distance telephone services. The entry of Internet phone service providers and other telecommunications service providers, such as voice resellers, that can offer telecommunications services at rates lower than ours has increased competition in the international long-distance market and adversely affected our revenues and profitability from international long-distance services. See “—Specific Service Providers.”

Our competitors generally charge less than us for international long-distance calls. The following table is a comparison of our standard long-distance usage charges per one minute with the standard rates of our competitors as of December 31, 2009:

 

     KT
Corporation
   SK
Broadband
   LG Telecom    Onse    SK Telink

United States

   (Won) 282    (Won) 276    (Won) 288    (Won) 276    (Won) 156

Japan

     696      672      678      672      384

China

     990      984      996      984      780

Australia

     1,086      1,044      1,086      1,044      528

Great Britain

     1,008      966      996      966      498

Germany

     948      912      942      912      402

 

 

Source: KT Corporation.

Broadband Internet Access Service. The Korean broadband Internet access market has experienced significant growth in the past decade. SK Broadband entered the broadband market in 1999 offering both HFC and ADSL services, and we entered the market with our ADSL services in

 

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1999, followed by Dreamline, Onse and LG Telecom. In addition, the entry of cable television providers that offer HFC-based broadband Internet access services at rates lower than ours has increased competition in the broadband Internet access market. We expect industry consolidation among our competitors in the near future, and smaller competitors in the broadband market today may become larger competitors.

The following table shows the market share in the broadband Internet access market as of the dates indicated:

 

     Market Share (%)
     KT
Corporation
   SK
Broadband
   LG
Powercom
   Others

December 31, 2007

   44.3    24.9    11.7    19.1

December 31, 2008

   43.4    22.9    14.1    19.6

December 31, 2009

   42.5    23.5    15.4    18.6

 

 

Source: Korea Communications Commission.

Our competitors generally charge less than us for broadband Internet access service. The following table is a comparison of fees for our QOOK Internet Lite service with three year mandatory subscription period with fees of our competitors for comparable services as of December 31, 2009:

 

     KT
Corporation
   SK
Broadband
   LG
Telecom
   Cable Providers  (1)

Monthly subscription fee

   (Won) 25,500    (Won) 25,200    (Won) 25,000    (Won) 20,000

Monthly modem rental fee

     3,000      3,000      None      1,000

Additional installation fee upon moving

     10,000      10,000      20,000      20,000

 

 

Source: KT Corporation.

 

(1) These are typical fees charged by cable providers.

Data Communication Service. We had a monopoly in domestic data communication service until 1994, when LG Telecom was authorized to provide the leased-line service. The data communications service market has become more competitive with limited growth during the past decade, and we primarily compete with SK Broadband and LG Telecom.

Value-Added Service Providers

Value-added service providers may commence operations following filing of a report to the Korea Communications Commission. The scope of business of a value-added service provider includes specific value-added telecommunications activities (other than services reserved for network service providers), such as data communications utilizing telecommunications facilities leased from network service providers.

Specific Service Providers

Specific service providers, such as Internet phone service providers and voice resellers, started operations in Korea in 1998. We began providing Internet phone service for international long-distance calls in May 1998. Our Internet phone service also competes with international long-distance services provided by voice resellers who have also seen sharp increases in demand for their services.

 

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Regulation

Under the Telecommunications Basic Law and the Telecommunications Business Law, telecommunications service providers are currently classified into three categories:

 

   

network service providers, such as us, which typically provide telecommunications services with their own telecommunications networks and related facilities. Their services may include local, domestic long-distance and international long-distance telephone services, mobile communications service, paging service and trunked radio system service;

 

   

value-added service providers, which provide telecommunications services other than those services specified for network service providers, such as data communications using telecommunications facilities leased from network service providers; and

 

   

specific service providers, which may occupy a middle ground between network service providers and value-added service providers and are broadly defined by law as telecommunications service providers that provide network services using the telecommunications network facilities or services of network service providers.

Under the Telecommunications Basic Law and the Telecommunications Business Law, the Korea Communications Commission has comprehensive regulatory authority over the telecommunications industry and all network service providers. The Korea Communications Commission is established under the direct jurisdiction of the President and is comprised of five standing commissioners. Commissioners of the Korea Communications Commission are appointed by the President, and the appointment of the Chairperson must be approved at a confirmation hearing at the National Assembly. The Korea Communications Commission’s policy is to promote competition in the Korean telecommunications markets through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors. A network service provider must be licensed by the Korea Communications Commission. Our license as a network service provider permits us to engage in a wide range of telecommunications services.

Under the Use and Protection of Credit Information Act, telecommunications service providers are also required to disclose personal credit information of their customers only for the purpose of validating and maintaining telecommunications service agreements. Korean telecommunications service providers may use their customers’ credit information only to the extent allowed by the Use and Protection of Credit Information Act, which has gained greater importance in recent years due to the occurrence of personal information leakage incidents.

The Korea Communications Commission also has the authority to regulate the IP media market, including IP-TV services. We began offering IP-TV services with real-time high definition broadcasting on November 17, 2008. Under the Internet Multimedia Broadcasting Business Act, anyone intending to engage in the IP media broadcasting business must obtain a license from the Korea Communications Commission. The ownership of the shares of an IP media broadcasting company by a newspaper, a news agency or a foreigner is limited, and broadcasting of certain contents must obtain additional approval of the Korea Communications Commission.

Rates

Under current regulations implementing the Telecommunications Business Act, a network service provider may set its rates at its discretion, although it must report to the Korea Communications Commission the rates and the general terms and conditions for each type of network service provided

 

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by it. There is, however, one exception to this general rule: if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the Korea Communications Commission, it must obtain prior approval from the Korea Communications Commission for the rates and the general terms for that service. Each year the Korea Communications Commission designates the service providers and the types of services for which the rates and the general terms must be approved by the Korea Communications Commission. In 2009, the Korea Communications Commission designated us for local telephone service and SK Telecom for cellular service. The Korea Communications Commission, in consultation with the Ministry of Strategy and Finance, is required to approve the rates proposed by a network service provider if (1) the proposed rates are appropriate, fair and reasonable and (2) the calculation method for the rates are appropriate and transparent.

Other Activities

A network service provider, such as us, must obtain the permission of the Korea Communications Commission in order to:

 

   

engage in certain businesses specified in the Presidential Decree under the Telecommunications Business Act, such as the telecommunications equipment manufacturing business and the telecommunications network construction business;

 

   

change the conditions for its licenses;

 

   

transfer, terminate, suspend or spin off all or a part of the business for which it is licensed;

 

   

acquire all or a part of the business of another network service provider; or

 

   

enter into a merger with another network service provider.

A telephone service provider may provide some network services using the equipment it currently has by submitting a report to the Korea Communications Commission. The Korea Communications Commission can revoke our licenses or order the suspension of any of our businesses if we do not comply with the regulations of the Korea Communications Commission under the Telecommunications Business Law.

The responsibilities of the Korea Communications Commission also include:

 

   

formulating the basic plan for the telecommunications industry; and

 

   

preparing periodic reports to the National Assembly of Korea regarding developments in the telecommunications industry.

In May 2010, the Korea Communications Commission issued a guideline that limits the marketing expenditure amounts of telecommunication service providers in Korea to 22% of their revenues, with the restrictions applicable to fixed-line and mobile segments to be calculated separately. However, up to (Won)100 billion of the marketing expenditures may be applied to either segment at the discretion of the service provider. The calculation of marketing expenditure amounts under the guideline excludes advertising expenses and the calculation of revenue amounts excludes revenues from handset sales. To encourage compliance with the non-binding guideline, the Korea Communications Commission plans to release the marketing expenditure amounts of each service provider on a quarterly basis. The Korea Communications Commission may periodically adjust the guideline to accommodate changes in market conditions.

The responsibilities of the Ministry of Knowledge Economy include:

 

   

drafting and implementing plans for developing telecommunications technology;

 

   

fostering and providing guidance to institutions and entities that conduct research relating to telecommunications; and

 

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recommending to network service providers that they invest in research and development or that they contribute to telecommunications research institutes in Korea.

In addition, since January 2000, all network service providers (other than regional paging service providers) are obligated to contribute toward the supply of “universal” telecommunications services in Korea. Telecommunications service providers designated as “universal service providers” by the Korea Communications Commission are required to provide universal telecommunications services such as local services, local public telephone services, discount services for persons with disabilities and for certain low-income persons, telecommunications services for remote islands and wireless communication services for ships. We have been designated as a universal service provider. The costs and losses recognized by universal service providers in connection with providing these universal telecommunications services will be shared on an annual basis by all network service providers (other than regional paging service providers), including us, on a pro rata basis based on their respective net annual revenue calculated pursuant to a formula set by the Korea Communications Commission.

Due to the amendment of the Telecommunications Business Law, effective April 9, 2001, a network service provider must permit other network service providers to co-use wirelines connecting the switching equipment to end-users, upon the request of such other network service providers. In addition, a network service provider may permit other network service providers to co-use its wireless communication systems upon the request of any of such other network service providers. The compensation method for the co-use must be determined by the Korea Communications Commission and be settled, by fair and proper methods.

In addition, starting April 2002, we are required to lease to other companies our fixed-lines that connect subscribers to our network. This system, which is called local loop unbundling, is intended to prevent excessive investment in local loops. This system requires us to lease the portion of our copper lines that represent our excess capacity to other companies upon their request at rates that are determined by the Korea Communications Commission based on our cost, and taking into consideration an appropriate rate of return, to enable them to provide voice and broadband services. Revenues from local loop unbundling are recognized as revenues from miscellaneous services.

Foreign Investment

The Telecommunications Business Act restricts the ownership and control of network service providers by foreign shareholders. Foreigners, foreign governments and “foreign invested companies” may not own more than 49.0% of the issued shares with voting rights of a network service provider, including us, and a foreign shareholder may not become our largest shareholder if such shareholder holds 5.0% or more of our shares. For purposes of the Telecommunications Business Act, the term “foreign invested company” means a company in which foreigners and foreign governments hold 15.0% or more shares with voting rights in the aggregate and a foreigner or a foreign government is the largest shareholder, provided, however, that such company will not be counted as a foreign shareholder for the purposes of the above-referenced 49.0% limit if it holds less than 1.0% of our total issued and outstanding shares with voting rights. As of December 31, 2009, 46.2% of our common shares were owned by foreign investors. In the event that a network service provider violates the shareholding restrictions, its foreign shareholders cannot exercise voting rights for their shares in excess of such limitation, and the Korea Communications Commission may require corrective measures be taken to comply with the ownership restrictions. There is no restriction on foreign ownership for specific service providers and value-added service providers.

Individual Shareholding Limit

Under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 5.0% or more of our total shares and was our largest shareholder on or prior to

 

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May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. In addition, under the Telecommunications Business Act, the Korea Communications Commission may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. In addition, the Foreign Investment Promotion Act prohibits any foreign shareholder from being our largest shareholder, if such shareholder owns 5.0% or more of our shares with voting rights. In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, the Telecommunications Business Act restricts such foreign shareholder from exercising his or her voting rights with respect to common shares exceeding such threshold. The Korea Communications Commission may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less.

Customers and Customer Billing

We typically charge residential subscribers and business subscribers similar rates for services provided. On a case-by-case basis, we also provide discount rates for some of our high-volume business subscribers. We bill all of our customers on a monthly basis. Our customers may make payment at either payment points such as local post offices, banks or our service offices, through a direct-debit service that automatically deducts the monthly payment from a subscriber’s designated bank account, or through a direct-charge service that automatically charges the monthly payment to a subscriber’s designated credit card account. More than 70% of our subscribers as of December 31, 2009 pay through the direct-debit service. Accounts of subscribers who fail to pay our invoice are transferred to a collection agency, which sends out a notice of payment. If such charges are not paid after notice, we cease to provide outgoing service to such subscribers after a period of time determined by the type of subscribed service. If charges are still not paid two to three months after outgoing service is cut off, we cease all services to such subscribers. After service is ceased, the overdue charges that are not collected by the collection agency are written off.

Insurance

We carry insurance against loss or damage to all significant buildings and automobiles. Except for our insurance coverage of our satellites and Internet data centers, we do not carry insurance covering losses to outside plants or to equipment because we believe the cost of such insurance is excessive and the risk of material loss or damage is insignificant. We do not have any provisions or reserves against such loss or damage. We do not carry any business interruption insurance.

We provide co-location and a variety of value-added services including server-hosting services to a number of corporations whose business largely depends on critical data operated on our servers or on their servers located at our data centers. Any disruptions, interruptions, physical or electronic data loss, delays or slow down in communication connections could expose us to potential liabilities for losses relating to the disrupted businesses of our customers relying on our services.

Item 4.C.  Organizational Structure

These matters are discussed under Item 4.B. where relevant.

Item 4.D.  Property, Plants and Equipment

Our principal fixed asset is our integrated telecommunications networks. In addition, we own buildings and real estate throughout Korea.

Our fixed-line equipment vendors and mobile equipment suppliers include well-known international and local suppliers such as Samsung Electronics, LG Electronics, Cisco Systems and Apple Inc.

 

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Mobile Networks

Our mobile network architecture includes the following components:

 

   

cell sites, which are physical locations equipped with base transceiver stations consisting of transmitters, receivers and other equipment used to communicate through radio channels with subscribers’ mobile telephone handsets within the range of a cell;

 

   

base station controllers, which connect to and control, the base transceiver stations;

 

   

mobile switching centers, which in turn control the base station controllers and the routing of telephone calls; and

 

   

transmission lines, which connect the mobile switching centers, base station controllers, base transceiver stations and the public switched telephone network.

The following table lists selected information regarding our mobile networks as of December 31, 2009:

 

     CDMA    W-CDMA

Mobile switching centers

   55    27

Base station controllers

   274    301

Base transceiver stations

   10,705    12,663

Indoor and outdoor repeaters

   45,949    221,080

We have 40 MHz of bandwidth in the 1,800 MHz spectrum to provide PCS services based on CDMA wireless network standards and another 40 MHz of bandwidth in the 2,000 MHz spectrum to provide IMT-2000 services based on W-CDMA wireless network standards. We have also installed an intelligent network on our mobile network infrastructure to provide a wide range of advanced call features and value-added services.

Exchanges

Exchanges include local exchanges and “toll” exchanges that connect local exchanges to long-distance transmission facilities. We had 26.0 million lines connected to local exchanges and 1.7 million lines connected to toll exchanges as of December 31, 2009.

All of our exchanges are fully automatic. We completed replacement of all electromechanical analog exchanges with digital exchanges in June 2003 in order to provide higher speed and larger volume services. Starting in 2006, we also began conversion of our exchanges to be compatible to Internet protocol platform in preparation for building our next generation broadband convergence network by 2021. As of December 31, 2009, approximately 80% of our lines connected to toll exchanges are compatible to Internet protocol platform.

Internet Backbone

Our Internet backbone network, called KORNET, has the capacity to handle an aggregate traffic of our broadband Internet access subscribers, Internet data centers and Internet exchange system at any given moment of up to 4.2 Tbps as of December 31, 2009. We have set up contingent plans to prepare against various incidents that could affect reliable Internet access service. Starting in 2005, we have also begun deploying our Internet protocol premium network that enables us to more reliably support QOOK TV, WiBro, QOOK Internet Phone, upgraded VoIP services and other Internet protocol services. As of December 31, 2009, our Internet protocol premium network had 1,227,000 lines installed to provide voice over Internet protocol services and a total capacity to handle up to 415 Gbps of video-on-demand services. We plan to continue to expand our Kornet and Internet protocol premium network in 2010.

 

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Access Lines

As of December 31, 2009, we had 12.2 million access lines installed, which allow us to reach virtually all homes and businesses in Korea. As part of our broadband deployment strategy, we have upgraded many of our access lines by equipping them with broadband capability using xDSL and FTTH technology. As of December 31, 2009, we had approximately 10.2 million broadband lines with speeds of at least 50 Mbps that enable us to deliver broadband Internet access and multimedia content to our customers.

Transmission Network

Our domestic fiber optic cable network consisted of 405,528 kilometers of fiber optic cables as of December 31, 2009 of which 86,814 kilometers of fiber optic cables are used to connect our backbone network and 318,714 kilometers are used to connect the backbone network to our subscribers. Our backbone network utilizes dense wavelength division multiplexing technology for connecting major cities as well as optical add-drop multiplexer technology for connecting neighboring cities. Dense wavelength division multiplexing technology improves bandwidth efficiency by enabling transmission of data from multiple signals across one fiber strand in a cable by carrying each signal on a separate wavelength. We enhanced our backbone network connecting six major cities in Korea by implementing an optical cross-connector (OXC) architecture in 2008 and are in the process of building our next generation broadband convergence network through installation of network equipment utilizing optical reconfigurable add-drop multiplexer technology and multi-service provisioning platform.

Our extensive domestic long-distance network is supplemented by our fully digital domestic microwave network, which consists of 55 relay sites.

International Network

Our international network infrastructure consists of both submarine cables and satellite transmission systems, including two submarine cable-landing stations in Busan and Keoje and two satellite teleports in Kumsan and Boeun. Data services such as international private lease circuits, Internet protocol and very small aperture terminals are provided through submarine cables and satellite transmission. In order to guarantee high quality services to our end customers, our submarine cables and satellite transmission systems are linked to various points-of-presence in the United States, Asia and Europe. In addition, our international telecommunications networks are directly linked to approximately 278 telecommunications service providers in various international destinations and are routed through our three international switching centers in Seoul, Daejeon and Busan.

Our international Internet backbone with capacity of 130 Gbps is connected to approximately 190 Internet service providers through our two Internet gateways in Heawha and Guro. In addition, we operate a video backbone with capacity of 665 Mbps to transmit video signals from Korea to the United States, Japan and Singapore.

Satellites

In order to provide broadcasting, video distribution and broadband data services in select areas, we operate two satellites, Koreasat 3 and 5, launched in 1999 and 2006, respectively. These two satellites are expected to reach the end of their normal operational lives in 2011 and 2021, respectively. See “Item 4.B. Business Overview—Our Services—Satellite Services.”

 

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International Submarine Cable Networks

International traffic is handled by telecommunications satellites and submarine cables. Because of the high cost of laying a submarine cable, the usual practice is for multiple carriers to jointly commission a new cable and share the costs and the capacity. We own interests in several international fiber optic submarine cable networks, including:

 

   

a 2.3% interest in the 12,083-kilometer Asia Pacific Cable Network connecting Korea, Japan and Hong Kong with six Southeast Asian countries and Australia, activated since January 1997;

 

   

a 1.4% interest in the 29,000-kilometer FLAG Europe-Asia network connecting Korea, Southeast Asia, the Middle East and Europe, activated since April 1997;

 

   

a 1.9% interest in the 39,000-kilometer Southeast Asia-Middle East-Western Europe 3 Cable Network linking 34 countries, activated since December 1999;

 

   

a 6.7% interest in the 30,444-kilometer China-U.S. Cable Network linking Korea, China, Japan, Taiwan and the United States, activated since January 2000;

 

   

a 2.5% interest in the 19,000-kilometer Asia Pacific Cable Network 2 connecting Korea, China, Japan, Taiwan, Hong Kong, Philippines, Singapore and Malaysia, activated since December 2001;

 

   

a 20.0% interest in the 500-kilometer Korea-Japan Cable Network linking Korea and Japan, activated since March 2002.; and

 

   

a 13.1% interest in the 16,500-kilometer Trans Pacific Express Cable Network linking Korea, China, Taiwan and the United States, activated since September 2008.

We have also invested in 15 other international fiber optic submarine cables around the world.

Item 4A.  Unresolved Staff Comments

We do not have any unresolved comments from the Securities and Exchange Commission staff regarding our periodic reports under the Exchange Act of 1934.

Item 5.  Operating and Financial Review and Prospects

Item 5.A.  Operating Results

The following discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with Korean GAAP. Korean GAAP varies in certain significant respects from accounting principles generally accepted in the United States of America. We have summarized these differences and their effect on our total equity as of December 31, 2008 and 2009 and the results of our operations for each of the years in the three-year period ended December 31, 2009, in Note 40 to the Consolidated Financial Statements.

Overview

We are an integrated provider of telecommunications services. Our principal services include mobile service, fixed-line telephone services, Internet services including broadband Internet access service and data communication service. The principal factors affecting our revenues from these

 

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services have been our rates for, and the usage volume of, these services, as well as the number of subscribers. For information on rates we charge for our services, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates.” We determined our operating segments after the merger with KTF on June 1, 2009 as (i) the Personal Customer Group, which engages in mobile and wireless data communications services, (ii) the Home Customer Group and Enterprise Customer Group, which engage in fixed-line telephone services, Internet services including broadband Internet access service and data communication service, and (iii) others, which include information technology and network services, real estate development and car rental businesses.

One of the major factors contributing to our historical performance was the growth of the Korean economy, and our future performance will depend at least in part on Korea’s general economic growth and prospects. For a description of recent developments that have had and may continue to have an adverse effect on our results of operations and financial condition, see “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.” A number of other developments have had or are expected to have a material impact on our results of operations, financial condition and capital expenditures. These developments include:

 

   

merger of KTF into KT Corporation on June 1, 2009;

 

   

employee reductions and changes in severance and retirement benefits;

 

   

IMT-2000 service license payments;

 

   

changes in the rate structure for our services;

 

   

developing and launching WiBro service;

 

   

deployment of FTTH; and

 

   

implementation of IFRS.

As a result of these factors, our financial results in the past may not be indicative of future results or trends in those results.

Merger of KTF into KT Corporation

On June 1, 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. The merger was consummated pursuant to a “comprehensive stock transfer” under Article 360-15 of the Korean Commercial Code, whereby KTF common stockholders received 0.7192335 share of KT Corporation common stock for every one share of KTF common stock they owned.

The success of the merger of KTF with KT Corporation will depend, in part, on our ability to realize the anticipated synergies, growth opportunities and, to a lesser extent, cost savings from combining these two companies. The realization of these anticipated benefits may be impeded, delayed or reduced as a result of numerous factors, some of which are outside our control. Some of our challenges include difficulties in integrating the operations of KTF with those of KT Corporation, including information systems, personnel, policies and procedures, and in reorganizing or reducing overlapping personnel, operations, marketing networks and administrative functions.

 

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Employee Reductions and Changes in Severance and Retirement Benefits

We sponsor a voluntary early retirement plan where we provide additional financial incentives for our employees who have been employed by us for more than 20 years to retire early, as part of our efforts to improve operational efficiencies. In 2007 and 2008, 510 employees and 1,141 employees, respectively, retired under our voluntary early retirement plan. In 2009, in addition to our usual voluntary early retirement plan, we held a special voluntary early retirement program in December 2009 where we received applications for voluntary early retirement from employees who had been employed by us for more than 15 years and provided them with additional financial incentives to retire early. The special voluntary early retirement program resulted in the early retirement of 5,992 employees out of 25,340 eligible employees. In aggregate, 6,515 employees retired in 2009 under the voluntary early retirement plan and the special voluntary early retirement program. We recorded severance indemnities relating to such voluntary early retirement plan and special voluntary early retirement program of (Won)41 billion in 2007, (Won)97 billion in 2008 and (Won)878 billion in 2009. We believe that we will be able to achieve additional operational efficiencies starting in 2010 as a result of our optimized employee headcount level.

IMT-2000 Service License Payments

We acquired the right to purchase one of three licenses to provide IMT-2000 services on December 15, 2000, as a member of a consortium of companies including KT Corporation and KTF. In March 2001, KT ICOM, a company created by the consortium, paid half of the (Won)1.3 trillion license fee payable to the Korea Communications Commission. KTF, which subsequently merged with KT ICOM, paid (Won)90 billion in 2007, (Won)110 billion in 2008 and (Won)130 billion in 2009, and we are obligated to pay the remaining (Won)320 billion as follows: (Won)150 billion in 2010 and (Won)170 billion in 2011. This payable accrues interest at the applicable three-year Government bond interest rate minus 0.75%. The accrued interest is paid on an annual basis to the Korea Communications Commission. We began offering our HSDPA-based IMT-2000 services nationwide in March 2007 under the brand name “SHOW.”

Changes in the Rate Structure for Our Services

Periodically, we change our rate structure for our services. In order to mitigate the impact from lower usage charges of local and domestic long-distance calls, we have increased our basic monthly charges and began offering optional flat rate plans for our fixed-line subscribers. Such adjustments in the rate structure have increased the portion of fixed income and stabilized our cash flow. In addition, because the growing use of mobile telecommunications services has decreased the usage of our fixed-line telephone services, we believe we are able to maximize our revenues from fixed-line telephone services by adjusting the rate structure so as to increase our basic monthly charges. We also provide bundled packages of our various services at a discount in order to attract additional subscribers to our new services. We launched a new brand “QOOK” in March 2009 to promote our bundled products, and we currently bundle our broadband Internet access service with WiBro, IP-TV, Internet phone, fixed-line telephone service and mobile services at a discount. For a discussion of adjustments in our rate structure, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues and Rates.”

Developing and Launching WiBro Service

In March 2005, we acquired a license to provide wireless broadband Internet access service for (Won)126 billion. The license is valid for seven years from the grant date and the license amount is amortized over the remaining contractual life commencing from June 2006. We commercially launched our Wibro service in June 2006 and had approximately 287 thousand subscribers as of December 31, 2009. We believe that additional amounts of capital expenditures and research and development will

 

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be required to complete the buildout of our WiBro service network. We plan to spend approximately (Won)265 billion in capital expenditures in 2010 to expand our WiBro service network, which we may adjust subject to market demand.

Upgrading of Broadband Network to FTTH

FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such as IP-TV service and delivery of other digital media content. We are currently upgrading our broadband network to enable FTTH connection, which enhances downstream speed up to 100 Mbps and connection quality. We are planning to spend approximately (Won)301 billion in capital expenditures in 2010 to upgrade our broadband network to FTTH, which we may adjust after periodic assessments.

Transition to IFRS Starting in 2011

In March 2007, the Financial Services Commission and the Korea Accounting Institute announced a road map for the adoption of the Korean equivalent of International Financial Reporting Standards (“Korean IFRS”), pursuant to which all listed companies in Korea will be required to prepare their annual financial statements under Korean IFRS beginning in 2011. All standards and interpretations issued by the International Accounting Standards Board (“IASB”), and the International Financial Reporting Interpretations Committee have been adopted by the Korean IFRS. In preparation of such adoption, we began preparing our internal financial statements under both Korean GAAP and Korean IFRS starting in January 2010.

Critical Accounting Policies

The preparation of 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 financial statements and revenues and expenses during the years reported. We based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ from those estimates under different assumptions and conditions.

The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. To aid in that understanding, our management has identified “critical accounting estimates.” These estimates have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.

These critical accounting estimates include:

 

   

allowances for doubtful accounts;

 

   

useful lives of property and equipment;

 

   

impairment of long-lived assets, including goodwill assets;

 

   

impairment of investment securities;

 

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income taxes; and

 

   

valuation of derivatives.

Allowances for Doubtful Accounts

Allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing notes and accounts receivable. We determine 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 when all means of collection have been exhausted and the potential for recovery is considered remote. Our past experience shows that the possibility of collection is remote after three years of collection effort.

Changes in the allowances for doubtful accounts for each of the years in the three-year period ended December 31, 2009 are summarized as follows:

 

     Year Ended December 31,  
     2007     2008     2009  
     (In millions of Won)  

Balance at beginning of year

   (Won) 563,164      (Won) 487,729      (Won) 488,739   

Provision

     71,390        148,972        104,977   

Write-offs

     (146,825     (147,962     (116,592
                        

Balance at end of year

   (Won) 487,729      (Won) 488,739      (Won) 477,124   
                        

If economic or specific industry trends change, we would adjust our allowances for doubtful accounts by recording additional expense or benefit. Our study shows that a 5.0% decrease or increase in the historical write-off experience would increase or decrease the provision for doubtful accounts by approximately (Won)2.7 billion as of December 31, 2009.

Useful Lives of Property and Equipment

Property and equipment are depreciated based on the useful lives disclosed in Note 2(h) to the Consolidated Financial Statements. Generally, the useful lives are estimated at the time the asset is acquired and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes. In certain cases and as permitted under Korean GAAP, those useful lives used for accounting purposes are different from the estimated economic lives of the related asset. In addition, the estimated lives of certain other assets, including underground access to cable tunnels, and concrete and steel telephone poles are based on rates established by a ruling by the Korean National Tax Service (which is also applicable under Korean GAAP). If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation expense in future periods. A decrease of remaining estimated useful life by one year of our property and equipment would result in an increase of depreciation expense of approximately (Won)373 billion in 2009.

Impairment of Long-lived Assets

Long-lived assets generally consist of property and equipment and intangible assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, we evaluate our long-lived assets for impairment each year as part of our annual forecasting process. An impairment loss would be considered when estimated undiscounted future net cash flow 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 as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

 

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Our intangible assets include the IMT-2000 frequency usage right, which has a contractual life of 13 years and is amortized from the date commercial service is initiated through the end of its contractual life, which is November 2016. We started to amortize this frequency usage right in December 2003, and we review the IMT-2000 frequency usage right for impairment on an annual basis. In connection with our review, we utilize the estimated long-term revenue and cash flow forecasts developed as part of our planning process. The results of our review using the testing method described above did not indicate any need to impair the IMT-2000 frequency usage right in 2009. The use of different assumptions within our cash flow model could result in different amounts for the IMT-2000 frequency usage right.

Impairment of Goodwill Assets

Goodwill represents the excess of purchase price paid over the fair value assigned to the net assets of acquired businesses. The determination of the fair values of goodwill assets is based on management’s judgment on the expected cash flows of the goodwill assets, taking market demand, competition and other economic factors into consideration.

The determination of impairments of goodwill assets involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment. Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the telecommunications industry, a decline in our expected future cash flows, changes in the future availability of financing, technological obsolescence, discontinuance of services, current replacement costs and prices paid in comparable transactions. The determination of impairment of goodwill assets requires a significant amount of management’s judgment.

We evaluate the carrying value of goodwill annually or more frequently if events or changes in circumstances indicate that the carrying amount may exceed estimated fair value. Goodwill impairment testing is a two-step process. The first step involves determining the fair value of the reporting unit and comparing that to the book value. If the fair value exceeds the book value, then no further testing is required. If the fair value is less than the book value, then a second step is performed. In the second step, the fair values of all of the assets and liabilities of the reporting unit, including those that may not be currently recorded, are determined. The difference between the sum of all of those fair values and the overall reporting unit’s fair value is a new implied goodwill amount that is compared to the recorded goodwill. If implied goodwill is less than the recorded goodwill, then impairment to the recorded goodwill is recorded.

Impairment of Investment Securities

For investments in companies, whether or not publicly held, that are not controlled, but under our significant influence, we utilize the equity method of accounting. Under the equity method of accounting, our initial investment is recorded at cost and is subsequently increased to reflect our share of the investee income and reduced to reflect our share of the investee losses or dividends received. Any excess in our acquisition cost over our share of the investee’s identifiable net assets is generally recorded as investor-level goodwill or other intangibles and amortized by the straight-line method over the estimated useful life. The amortization of investor-level goodwill or other intangibles is recorded against the equity income (losses) of affiliates.

Significant management judgment is involved in the evaluation of declines in value of individual investments. The estimates and assumptions used by management to evaluate declines in value can be impacted by many factors, such as the financial condition, earnings capacity and near-term prospects of the company in which we have invested and, for publicly-traded securities, the length of time and the extent to which fair value has been less than cost. The evaluation of these investments is also subject to the overall condition of the economy and its impact on the capital markets.

 

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Income Taxes

We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for the future tax consequences of events that have been reflected in our financial statements or tax returns. This process requires management to make assessments regarding the timing and probability of the tax impact. Actual income taxes could vary from these estimates due to future changes in income tax law or unpredicted results from the final determination of each year’s liability by taxing authorities.

We believe that the accounting estimate related to establishing tax valuation allowances is a “critical accounting estimate” because: (1) it requires management to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities, and (2) the impact that changes in actual performance versus these estimates could have on the realization of tax benefits as reported in our results of operations could be material. Management’s assumptions require significant judgment because actual performance has fluctuated in the past and may continue to do so.

Valuation of Derivatives

We record rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. Gains and losses that result from the change in the fair value of derivative instruments are recognized in current earnings. However, for derivative instruments that qualify for cash flow hedge accounts, the effective portion of the gain or loss on the derivative instruments are recorded as gain (loss) on valuation of derivatives for cash flow hedge included in accumulated other comprehensive income (loss).

Significant management judgment is involved in determining the fair value of derivative instruments. The estimates and assumptions used by our management to determine fair value can be impacted by many factors, such as the credit quality of each derivative counterparty, interest rate, market volatility or the overall condition of the economy and its impact on the capital markets. Any changes in these assumptions could significantly affect the valuation and timing of recognition of valuation losses classified as other than temporary.

Operating Revenues and Operating Expenses

Operating Revenues

Our operating revenues primarily consist of:

 

   

fees related to our mobile services, including initial subscription fees, monthly fees, usage charges for outgoing calls, usage charges for wireless data transmission, contents download fees and value-added monthly service fees;

 

   

fees from our fixed-line telephone services, including:

 

  Ø  

local service revenues, primarily consisting of (i) basic monthly charges and monthly usage charges (or fixed monthly charges for discount plans), (ii) revenues from value-added services, including local telephone directory assistance, call waiting and caller identification services, (iii) interconnection fees we charge to fixed-line and mobile service providers for their use of our local network in providing their services and (iv) revenues from local calls placed from public telephones;

 

  Ø  

non-refundable installation fees;

 

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  Ø  

domestic long-distance service revenues, primarily consisting of (i) monthly usage charges (or fixed monthly charges for discount plans), (ii) interconnection fees we charge to fixed-line and mobile service providers and voice resellers for their use of our domestic long-distance network in providing their services and (iii) revenues from domestic long-distance calls placed from public telephones;

 

  Ø  

international long-distance service revenues, primarily consisting of (i) amounts we bill to our customers for outgoing calls made to foreign countries, (ii) amounts we bill to foreign telecommunications carriers for connection to the domestic telephone network in respect of incoming calls at the applicable settlement rate, (iii) amounts we charge to fixed-line and mobile service providers and voice resellers as interconnection fees for using our international network in providing their services and (iv) other revenues, including revenues from international calls placed from public telephones and international leased lines; and

 

  Ø  

land-to-mobile interconnection revenues;

 

   

Internet service revenues which consist of:

 

  Ø  

broadband Internet access service revenues, primarily consisting of installation fees and basic monthly charges; and

 

  Ø  

other Internet-related service revenues related to our infrastructure and solution services for business enterprises, IP-TV and network portal services.

 

   

revenues from goods sold that are generated primarily through sale of mobile handsets and specially designed phones for fixed-line and mobile convergence services;

 

   

data communications service revenues, primarily consisting of installation fees and basic monthly charges for our leased line services and Kornet Internet connection service and revenues from our satellite services; and

 

   

miscellaneous revenues that are primarily derived from information technology and network services, real estate development and car rental businesses.

Operating Expenses

Our operating expenses primarily include:

 

   

cost of goods sold, primarily consisting of our sale of mobile handsets and specially designed phones for fixed-line mobile convergence services;

 

   

depreciation and amortization expenses incurred primarily in connection with our telecommunications network facilities;

 

   

salaries and related costs, including severance indemnities that are a lump-sum amount paid to employees upon departure who have been employed by us for more than one year, share-based payments and employee welfare expenses;

 

   

sales commissions, primarily consisting of commissions to independent dealers related to procurement of mobile subscribers and mobile handset sales;

 

   

commissions, primarily consisting of payments for third-party outsourcing services, including commissions to the call center staff;

 

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interconnection charges, which are interconnection payments to mobile service providers for calls from landline users and our mobile subscribers to our competitors’ mobile service subscribers; and

 

   

promotion expenses that consist primarily of handset subsidies that we offer to purchasers of new handsets who agree to minimum subscription periods.

Operating Results—2008 Compared to 2009

The following table presents selected income statement data and changes therein for 2008 and 2009.

 

     For the Year Ended
December 31,
    Changes  
     2008 vs. 2009  
     2008     2009     Amount     %  
     (In billions of Won)  

Operating revenues

   (Won) 19,593      (Won) 19,649      (Won) 56      0.3

Operating expenses

     18,153        18,683        530      2.9   
                          

Operating income

     1,440        966        (474   (32.9

Net non-operating income (expense)

     (733     (251     482      (65.8
                          

Income from continuing operations before income tax expense

     707        715        8      1.1   

Income tax expense on continuing operations

     168        108        (60   (35.7
                          

Net income

   (Won) 513      (Won) 610      (Won) 97      18.9
                          

Operating Revenues

The following table presents a breakdown of our operating revenues and changes therein for 2008 and 2009.

 

     For the Year Ended
December 31,
   Changes  
      2008 vs. 2009  
     2008    2009    Amount     %  
     (In billions of Won)  

Mobile services