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KT KT

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As filed with the Securities and Exchange Commission on April 29, 2020

 

 

 

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

 

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

 

    

    For the fiscal year ended December 31, 2019

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)

KT Gwanghwamun Building East

33, Jong-ro 3-Gil, Jongno-gu

03155 Seoul, Korea

(Address of principal executive offices)

Kyung-Keun Yoon

KT Gwanghwamun Building East

33, Jong-ro 3-Gil, Jongno-gu

03155 Seoul, Korea

Telephone: +82-31-727-0114; E-mail: ktir@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

 

Trading symbol

 

Name of each exchange on which registered

American Depositary Shares, each representing one-half of one share of ordinary share KT New York Stock Exchange, Inc.
Ordinary share, par value5,000 per share* KT 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, 2019, there were 245,241,550 ordinary shares, par value5,000 per share, outstanding

(not including 15,870,258 ordinary shares held by the registrant 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      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  

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer      Accelerated filer      Non-accelerated filer      Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    Yes      No  

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  

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  

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  

 

*

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

 

 

 


Table of Contents

TABLE OF CONTENTS

 

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   1 
 Item 3.A. Selected Financial Data   1 
 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   24 
 Item 4.A. History and Development of the Company   24 
 Item 4.B. Business Overview   24 
 Item 4.C. Organizational Structure   46 
 Item 4.D. Property, Plant and Equipment   46 
Item 4A. Unresolved Staff Comments   48 

Item 5.

 Operating and Financial Review and Prospects   48 
 Item 5.A. Operating Results   48 
 Item 5.B. Liquidity and Capital Resources   72 
 Item 5.C. Research and Development, Patents and Licenses, Etc.   75 
 Item 5.D. Trend Information   76 
 Item 5.E. Off-balance Sheet Arrangements   76 
 Item 5.F. Tabular Disclosure of Contractual Obligations   76 
 Item 5.G. Safe Harbor   76 

Item 6.

 Directors, Senior Management and Employees   76 
 Item 6.A. Directors and Senior Management   76 
 Item 6.B. Compensation   81 
 Item 6.C. Board Practices   82 
 Item 6.D. Employees   84 
 Item 6.E. Share Ownership   85 

 

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Item 7.

 Major Shareholders and Related Party Transactions   87 
 Item 7.A. Major Shareholders   87 
 Item 7.B. Related Party Transactions   87 
 Item 7.C. Interests of Experts and Counsel   87 
Item 8. Financial Information   88 
 Item 8.A. Consolidated Statements and Other Financial Information   88 
 Item 8.B. Significant Changes   89 

Item 9.

 The Offer and Listing   90 
 Item 9.A. Offer and Listing Details   90 
 Item 9.B. Plan of Distribution   90 
 Item 9.C. Markets   90 
 Item 9.D. Selling Shareholders   90 
 Item 9.E. Dilution   90 
 Item 9.F. Expenses of the Issuer   90 
Item 10. Additional Information   90 
 Item 10.A. Share Capital   90 
 Item 10.B. Memorandum and Articles of Association   90 
 Item 10.C. Material Contracts   97 
 Item 10.D. Exchange Controls   97 
 Item 10.E. Taxation   101 
 Item 10.F. Dividends and Paying Agents   109 
 Item 10.G. Statements by Experts   109 
 Item 10.H. Documents on Display   109 
 Item 10.I. Subsidiary Information   109 
Item 11. Quantitative and Qualitative Disclosures About Market Risk   109 
Item 12. Description of Securities Other than Equity Securities   112 
 Item 12.A. Debt Securities   112 
 Item 12.B. Warrants and Rights   112 
 Item 12.C. Other Securities   112 
 Item 12.D. American Depositary Shares   112 

Part II

   114 
Item 13. Defaults, Dividend Arrearages and Delinquencies   114 
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds   114 
Item 15. Controls and Procedures   114 

 

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Item 16. [Reserved]   115 
Item 16A. Audit Committee Financial Expert   115 
Item 16B. Code of Ethics   115 
Item 16C. Principal Accountant Fees and Services   116 
Item 16D. Exemptions from the Listing Standards for Audit Committees   116 
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers   117 
Item 16F. Change in Registrant’s Certifying Accountant   117 
Item 16G. Corporate Governance   117 
Item 16H. Mine Safety Disclosure   118 
Part III   119 
Item 17. Financial Statements   119 
Item 18. Financial Statements   119 
Item 19. Exhibits   120 

 

 

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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 “” 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. (the “Market Average Exchange Rate”) on the balance sheet dates, which were, for U.S. dollars,1,071.4 to US$1.00,1,118.1 to US$1.00 and1,157.8 to US$1.00 on December 31, 2017, 2018 and 2019, respectively.

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 Ministry of Science and ICT (the “MSIT”), the Korea Communications Commission (the “KCC”) 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.

Item 3.  Key Information

Item 3.A.  Selected Financial Data

The selected financial data presented below should be read in conjunction with our consolidated financial statements as of December 31, 2018 and 2019 and for each of the years in the

 

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three-year period ended December 31, 2019 and related notes thereto (“Consolidated Financial Statements”) and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. The selected financial data as of December 31, 2018 and 2019 and for each of the years in the three year period ended December 31, 2019 were derived from our audited Consolidated Financial Statements included elsewhere in this annual report. Our Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we prepare financial statements in accordance with IFRS as adopted by the Republic of Korea(“K-IFRS”), which we are required to file with the Financial Services Commission and the Korea Exchange under the Financial Investment Services and Capital Markets Act of Korea (“FSCMA”). English translations of such financial statements are furnished to the Securities and Exchange Commission under Form6-K. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results—Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS.”

The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our Consolidated Financial Statements and related notes included in this annual report.

 

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Selected consolidated statement of operations data

 

   Year Ended December 31, 
       2015           2016           2017          2018          2019     
   (In billions of Won, except per share data) 

Continuing Operations:

        

Operating revenue

  22,715   23,164   23,547  23,436  24,899 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Revenue

   22,227    22,798    23,260   23,220   24,640 

Others

   488    366    287   216   259 

Operating expenses

   21,623    21,781    22,478   22,335   23,879 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Operating profit

   1,092    1,383    1,069   1,101   1,020 

Finance income

   273    296    406   374   424 

Finance costs

   645    515    645   436   422 

Share of net profits (loss) of associates and joint ventures

   6    3    (14  (5  (3
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Profit from continuing operations before income tax

   726    1,167    817   1,034   1,019 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Income tax expense

   231    335    271   315   320 

Profit for the year from the continuing operations

   495    832    546   719   699 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Discontinued operations:

        

Profit from discontinued operations

   141               
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Profit for the year

  636   832   546  719  699 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Profit for the year attributable to:

        

Equity holders of the parent company

  557   745   462  645  649 

Profit from continuing operations

   415    745    462   645   649 

Profit from discontinued operations

   142               

Non-controlling interest

  79   87   85  74  50 

Profit from continuing operations

   80    87    85   74   50 

Loss from discontinued operations

   1               

Earnings per share attributable to the equity holders of the Parent Company during the period:

        

Basic earnings per share

  2,275   3,043   1,884  2,634  2,648 

From continuing operations

   1,694    3,043    1,884   2,634   2,648 

From discontinued operations

   581               

Diluted earnings per share

  2,275   3,041   1,883  2,634  2,646 

From continuing operations

   1,694    3,041    1,883   2,634   2,646 

From discontinued operations

   581               

 

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Selected consolidated statement of financial position data

 

   As of December 31, 
Selected Statement of Financial Position Data  2015  2016  2017  2018  2019 
   (In billions of Won) 

Assets:

      

Current assets:

      

Cash and cash equivalents

  2,559  2,900  1,928  2,703  2,306 

Trade and other receivables, net

   4,960   5,478   5,965   5,680   5,859 

Other financial assets

   293   721   973   995   868 

Current income tax assets

   4   2   9   4   68 

Inventories, net

   617   455   642   1,075   792 

Assets held for sale

         7   13   84 

Other current assets

   318   311   305   1,688   2,000 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total current assets

   8,751   9,866   9,829   12,158   11,977 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-current assets:

      

Trade and other receivables, net

   704   709   829   843   1,182 

Other financial assets

   658   665   755   623   822 

Property and equipment, net

   14,479   14,312   13,562   13,068   13,785 

Right-of-use assets

               788 

Investment property, net

   1,102   1,148   1,190   1,091   1,387 

Intangible assets, net

   2,600   3,023   2,633   3,407   2,834 

Investments in jointly controlled entities and associates

   270   284   279   272   268 

Deferred income tax assets

   840   701   712   465   425 

Othernon-current assets

   103   106   107   546   685 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-current assets

   20,756   20,948   20,067   20,316   22,177 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

  29,507  30,815  29,896  32,474  34,153 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities and Equity:

      

Current liabilities:

      

Trade and other payables

  6,337  7,142  7,426  6,948  7,597 

Borrowings

   1,726   1,820   1,573   1,368   1,186 

Other financial liabilities

   44   0   37   1   1 

Current income tax liabilities

   83   103   83   250   66 

Provisions

   104   96   78   118   176 

Deferred income

   98   36   18   53   53 

Other current liabilities

   311   342   259   656   1,032 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total current liabilities

   8,703   9,539   9,474   9,394   10,111 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-current liabilities:

      

Trade and other payables

   669   1,188   1,001   1,409   1,082 

Borrowings

   6,909   6,301   5,110   5,280   6,113 

Other financial liabilities

   104   108   149   163   149 

Retirement benefit liabilities

   524   378   395   561   366 

Provisions

   91   101   125   164   79 

Deferred income

   96   85   92   111   99 

Deferred income tax liabilities

   130   138   128   205   425 

Othernon-current liabilities

   27   59   237   528   585 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-current liabilities

   8,550   8,358   7,238   8,422   8,898 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

  17,253  17,898  16,712  17,816  19,009 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity attributable to owners of the Parent Company:

      

Paid-in capital

      

Share capital

  1,564  1,564  1,564  1,564  1,564 

Share premium

   1,440   1,440   1,440   1,440   1,440 

Retained earnings

   9,147   9,779   9,961   11,256   11,594 

Accumulated other comprehensive income (expense)

   14   (1  31   50   195 

Other components of equity

   (1,233  (1,218  (1,205  (1,181  (1,170

Total equity attributable to owners of the parent company

   10,934   11,564   11,792   13,130   13,624 

Non-controlling interest

   1,320   1,353   1,392   1,529   1,520 

Total equity

   12,254   12,917   13,183   14,658   15,144 

Total liabilities and equity

  29,507  30,815  29,896  32,474  34,153 

 

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Selected consolidated statement of cash flow data

 

   Year Ended December 31, 
   2015  2016  2017  2018  2019 
   (In billions of Won) 

Net cash generated from operating activities

  4,230  4,771  3,878  4,010  3,745 

Net cash used in investing activities

   (2,402  (3,485  (3,483  (2,704  (3,887

Net cash used in financing activities

   (1,164  (943  (1,363  (532  (250

Operating Data

 

   As of December 31, 
   2015   2016   2017   2018   2019 

Lines installed (thousands)(1)

   23,607    24,858    24,343    23,660    23,315 

Lines in service (thousands)(1)

   12,440    11,871    11,220    10,655    10,068 

Lines in service per 100 inhabitants(1)

   24.6    23.0    21.7    20.6    19.6 

Mobile subscribers (thousands)

   18,038    18,892    20,015    21,120    21,922 

Broadband Internet subscribers (thousands)

   8,328    8,516    8,758    8,729    8,962 

 

 

(1)

Including public telephones.

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 each of our principal business areas is intense.

We face significant competition in each of our principal business areas. In the markets for mobile services, fixed-line services and media and content services, we compete primarily with SK Telecom Co., Ltd. (“SK Telecom”) and LG Uplus Corp. (“LG U+”) (including their affiliates). In the past two decades, considerable consolidation in the telecommunications industry has occurred, resulting in the current competitive landscape comprising three network service providers that offer a wide range of telecommunications and data communications services. Each of our primary competitors has recently acquired or announced plans to acquire a leading cable TV operator in Korea to significantly increase their market shares in the pay TV market, which we expect will further intensify competition. In December 2019, LG U+ completed its acquisition of a controlling interest in CJ Hello Co., Ltd., which subsequently became LG HelloVision Co., Ltd. In February 2019, SK Telecom announced its plan to merge witht-broad Co., Ltd.(“t-broad”), which is expected to be completed in the second quarter of 2020.

To a lesser extent, we also compete with various value-added service providers and network service providers as classified under the Framework Act on Telecommunications and the Telecommunications Business Act, including mobile virtual network operators (“MVNOs”) that lease mobile networks and offer mobile services, VoIP service providers that offer Internet telephone

 

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services, cable TV operators, text messaging service providers (particularly Kakao Corp. (“Kakao”)) and voice resellers, many of which offer competing services at lower prices. We also face changes in the evolving landscape of the market for media and content services arising from the increasing popularity of globalover-the-top media services such as Netflix. The entrance of new service providers in the markets for mobile services, fixed-line services and media and content services may further increase competition, as well as cause downward price pressure on the fees we charge for our services. For a discussion of our market shares in key markets, please see “Item 4. Information on the Company—Item 4.B. Business Overview—Competition.”

We compete primarily based on our service performance, quality and reliability, ability to accurately identify and respond to evolving consumer demand, and pricing. With the launch of the next generation 5G mobile services in April 2019, competition has further intensified among the three network service providers, which has resulted in an increase in marketing expenses as well as additional capital expenditures related to implementing 5G mobile services. Mobile service providers also grant subsidies or subscription discount rates to subscribers who purchase new handsets and agree to a minimum subscription period, and we compete also based on such amounts. We and SK Telecom have been designated as market-dominating business entities in the local telephone and mobile markets, respectively, 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. In addition, changes in our local telephone rates and mobile rates of SK Telecom require prior approval from the MSIT. The KCC has also issued guidelines on fair competition of the telecommunications companies.

In the financial services market, our credit and check cards issued under the “BC Card” brand pursuant toco-brand agreements with member companies compete principally with cards issued by other leading credit card companies in Korea with their own merchant payment networks, such as Shinhan Card, Hyundai Card and Samsung Card. Our member companies that issueco-branded credit or check cards include Woori Card, NH Card, Industrial Bank of Korea and KB Kookmin Card. We also compete with service providers that provide outsourcing services related to business operations of credit card companies. Competition in the credit card and check card businesses has increased substantially as existing credit card companies, consumer finance companies and other financial institutions in Korea have made significant investments and engaged in aggressive marketing campaigns and promotions for their credit and check cards, as well as investing in operational infrastructure that may reduce the need for our outsourcing services.

Our inability to adapt to changes in the competitive landscape and compete against our competitors in our principal business areas could have a material adverse effect on our business, financial condition and results of operations.

Failure to renew existing bandwidth licenses, acquire adequate additional bandwidth licenses or use our bandwidth efficiently may adversely affect our mobile telecommunications business and results of operations.

One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth allocated to a service provider. We have acquired a number of licenses to secure bandwidth capacity to provide our broad range of services, for which we typically make an initial payment as well as pay usage fees during the license period. We made bandwidth license payments of271 billion in 2017,573 billion in 2018 and389 billion in 2019. For our outstanding payment obligations relating to our bandwidth licenses as of December 31, 2019, see “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results—Overview—Acquisition of New Bandwidth Licenses and Usage Fees.” For more information on our bandwidth licenses, see “ Item 4. Information on the Company—Item 4.D. Property, Plant and Equipment—Mobile Networks.”

 

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The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have significantly increased the utilization of our bandwidth, because wireless data applications are generally more bandwidth-intensive than voice services. The current trend of increasing data transmission use and the increasing sophistication of multimedia contents are likely to put additional strain on the bandwidth capacity of mobile service providers. In the event we are unable to maintain sufficient bandwidth capacity by renewing existing bandwidth licenses, receiving additional bandwidth allocation or cost-effectively implementing technologies that enhance the efficiency of our bandwidth usage, our subscribers may perceive a general decrease in the quality of mobile telecommunications services. No assurance can be given that bandwidth constraints will not adversely affect the growth of our mobile telecommunications business. Furthermore, we may be required to make substantial payments to acquire additional bandwidth capacity in order to meet increasing bandwidth demand, which may adversely affect our business, financial condition and results of operations.

The ongoing global pandemic of a new strain of coronavirus(“COVID-19”) and any possible recurrence of other types of widespread infectious diseases, may adversely affect our business, financial condition or results of operations.

TheCOVID-19, an infectious disease caused by severe acute respiratory syndrome coronavirus 2 that was first reported to have been transmitted to humans in late 2019 and has since spread globally, has materially and adversely affected the global economy and financial markets in recent months as well as disrupted our business operations. The World Health Organization declared theCOVID-19 as a pandemic in March 2020. In light of the Government’s recommendation for social distancing, we implemented in late February 2020 remote work arrangements for a portion of our workforce, including for substantially all of our employees in areas severely impacted by the pandemic. While we do not believe that such temporary arrangements have had a material adverse impact on our business, a prolonged outbreak ofCOVID-19 may result in further disruption in the normal operations of our business, including implementation of further work arrangements requiring employees to work remotely and/or temporary closures of our facilities, which may lead to a reduction in labor productivity.

Other risks associated with a prolonged outbreak ofCOVID-19 or other types of widespread infectious diseases may potentially include:

 

  

increase in unemployment among our customers who may not be able to meet payment obligations, which in turn may decrease demand for our products and services;

 

  

service disruptions, outages and performance problems due to capacity constraints caused by an overwhelming number of people accessing our services simultaneously;

 

  

disruptions in supply of mobile handsets or telecommunications equipment from our vendors;

 

  

depreciation of the Won against major foreign currencies, which in turn may increase the cost of imported equipment necessary for expansion and enhancement of our telecommunications infrastructure; and

 

  

impairments in the fair value of our investments in companies that may be adversely affected by the pandemic.

We are currently not able to estimate the duration or full magnitude of harm fromCOVID-19. In the event thatCOVID-19 or other types of widespread infectious diseases cannot be effectively and timely contained, our business, financial condition and results of operations may be adversely affected.

 

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Introduction of new services, including our 5G mobile services launched in April 2019, poses challenges and risks to us.

The telecommunications industry is characterized by continual advances and improvements in telecommunications technology, and we have been continually researching and implementing technology upgrades and additional telecommunications services to maintain our competitiveness. For example, we have been building more advanced mobile telecommunications networks based on 5G technology and commenced providing commercial 5G mobile services with transmission speed of up to 1.5 Gbps in April 2019, initially focusing on the Seoul metropolitan area, six additional metropolitan cities, high-traffic commercial areas and university campuses as well as major transportation infrastructure such as highways, railways and airports. We plan to further expand the coverage nationwide and increase the transmission speed of our 5G services. As we continue to compete with SK Telecom and LG U+ to improve network quality, introduce new services and accommodate increased data usage of subscribers, we may incur significant expenses to acquire additional bandwidth licenses and incur significant capital expenditures to build out and improve our network. We have made extensive efforts to develop advanced technologies as well as provide a variety of services with enhanced speed, latency and connectivity. Furthermore, we are also continually upgrading our broadband network to enable betterfiber-to-the-home (“FTTH”) connection, which enhances data transmission speed and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cable extending from the telecommunications operator’s switching equipment to homes or offices. 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 services that require high bandwidth with stability, such as IPTV and other digital media and content services.

No assurance can be given that our new services will gain broad market acceptance such that we will be able to derive revenue from such services to justify the license fees, capital expenditures and other investments required to provide such services. For example, we discontinued our wireless broadband Internet access (“WiBro”) services in the fourth quarter of 2018, following a steady decrease in its subscriber base in recent years reflecting an increase in popularity of 4G LTE services. If our new services do not gain broad market acceptance, our business, financial condition and results of operations may be adversely affected.

We may not be able to successfully pursue our strategy to acquire businesses and enter into joint ventures that complement or diversify our current business, and we may need to incur additional debt to finance such expansion activities.

One key aspect of our overall business strategy calls for acquisitions of businesses and entering into joint ventures that complement or diversify our current businesses. For example, we have pursued investment opportunities in the financial sector in the past decade that we believe provide attractive growth opportunities. In October 2011, we acquired a controlling interest in BC Card Co., Ltd. (“BC Card”), a leading credit card solutions provider in Korea in which we hold a 69.54% interest. We also acquired 10.00% of the common shares of K Bank Inc. (“K Bank”), an Internet-only bank that began its commercial operations in April 2017, which interest is accounted for using the equity method of accounting.In April 2020, we agreed to transfer such interest to BC Card for36.3 billion, which transfer would take place only upon satisfaction of certain conditions.

While we plan to continue our search for other suitable acquisition and joint venture opportunities, we cannot provide assurance that we will be able to identify additional attractive opportunities or that we will successfully complete the transactions without encountering administrative, technical, political, financial or other difficulties, or at all. Even if we were to successfully complete the transactions, the success of an acquisition or a joint venture depends largely on our ability to achieve the anticipated synergies, cost savings and growth opportunities from integrating the

 

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business of the acquired company or the joint venture with our current businesses. There can be no assurance that we will achieve the anticipated benefits of the transaction, which may adversely affect our business, financial condition and results of operations. Pursuing acquisitions or joint venture transactions also requires significant capital, and as we pursue further growth opportunities for the future, we may need to raise additional capital through incurring loans or through issuances of bonds or other securities in the international capital markets.

The Korean telecommunications and Internet-related 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 MSIT and the KCC, has the authority to regulate the telecommunications industry in Korea. The MSIT and the KCC also have the authority to regulate the pay TV industry under the Korea Broadcasting Act and the Internet Multimedia Broadcasting Services Act, which cover our IPTV services as well as our satellite TV services provided through KT Skylife Co., Ltd. (“KT Skylife”), in which we own a 49.99% interest. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation.” The MSIT’s policy is to promote competition through measures designed to prevent the dominant service provider in any such market from exercising its market power in a way that would prevent the emergence and development of viable competitors. Under such regulations, if a network service provider has the largest market share for a specified type of telecommunications service and its revenue from that service for the previous year exceeds a specific revenue amount set by the MSIT, such entity may be designated as a market-dominating business entity that 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. Furthermore, under the Internet Multimedia Broadcasting Services Act, an IPTV service provider, together with its affiliates providing IPTV services, is restricted from having more thanone-third of the market share of all paid broadcasting subscribers in Korea (consisting of IPTV, cable TV and satellite TV subscribers). As of December 31, 2019, KT Skylife and we together had an aggregate market share of 31.6% of all paid broadcasting subscribers in Korea. The KCC has also issued guidelines on fair competition of telecommunications and Internet-related companies. In addition, the Government sets the policies regarding the use of radio frequency bandwidths and allocates the bandwidths used for wireless telecommunications by an auction process or by a planned allocation.

We and SK Telecom have been designated as market-dominating business entities in the local telephone and mobile markets, respectively, and the MSIT, in consultation with the Ministry of Economy and Finance (“MOEF”), currently approves rates charged by us and SK Telecom for such services. The form of our standard agreement for providing local network services and each agreement for interconnection with other service providers must also be reported to the MSIT. Although we compete freely with other network service providers in terms of rate plans for our principal telecommunications and Internet-related services except for rates we charge for local calls, our inability to freely set our local telephone service rates may hurt profits from such businesses and impede our ability to compete effectively against our competitors. In addition, the MSIT may periodically announce policy guidelines that we may be recommended to take into consideration in our telecommunications and Internet-related businesses.In recent years, the MSIT has announced policy guidelines with the objectives of reducing mobile service rates and promoting transparency in the decision making of telecommunications service providers. Specific policy guidelines include monthly rate reductions applicable to certainlow-income subscribers as well as subscription rate discounts in lieu of handset subsidies. Starting in December 2017, we began providing rate discounts of up to11,000 per month to ourlow-income mobile subscribers on government welfare programs. We also increased the maximum discount rate applicable to mobile subscribers who elect not to receive handset subsidies

 

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from 20.0% to 25.0% starting in September 2017. Such discounts have contributed to a decrease in the average monthly revenue per subscriber of our mobile services from34,444 in 2017 to32,021 in 2018 and31,625 in 2019.

The Government may pursue additional measures to regulate the markets in which we compete. There can be no assurance that we will not adopt additional measures that reduce rates charged to our subscribers as well as adjustments to our handset subsidies and other measures in the future to comply with regulatory requirements or the Government’s policy guidelines.

The MSIT may revoke our licenses or suspend any of our businesses if we fail to comply with its rules, regulations and corrective orders, including the rules restricting beneficial ownership and control or any violation of the conditions of our licenses. Alternatively, in lieu of suspension of our business, the MSIT may levy a monetary penalty of up to 3.0% of the average of our annual revenue for the preceding three fiscal years. From time to time, we have been imposed fines for violation of regulations imposed by MSIT and KCC, including imposition of fines of12.5 billion in January 2018 and0.9 billion in April 2019 by the KCC for violation of regulations relating to handset sales. There is no guarantee that the laws and regulations to which we are or become subject will not have a material adverse effect on our business, financial condition or results of operations.

Legal cases involving our charitable or political donations and other incidents and allegations, including matters connected to a scandal involving Ms. Soon-sil Choi, a confidante of former President Geun-hye Park, could have a material adverse effect on our business, reputation and stock price.

In April 2014, the Seoul Central District Prosecutor’s Office charged Mr. Suk-chae Lee, a former chief executive officer of KT Corporation, with embezzlement and breach of fiduciary duty. Mr. Il Yung Kim, a former president of KT Corporation, was charged as a co-conspirator in the breach of fiduciary duty by Mr. Lee, and Mr. Yu-yeol Seo, a former president of KT Corporation, was charged as a co-conspirator in Mr. Lee’s embezzlement. On May 30, 2017, the Supreme Court of Korea confirmed the acquittal of Mr. Lee and Mr. Kim on the charge of breach of fiduciary duty, and reversed the appellate court judgment against Mr. Lee and Mr. Seo (which had sentenced both to a suspended prison term of 18 months, on probation for two years, for allegedly creating and embezzling off-the-book funds of1.1 billion for personal use between 2009 and 2013) and remanded the case back to the Seoul High Court. On April 26, 2018, the Seoul High Court acquitted Mr. Lee and Mr. Seo of such charge. No indictment or charges of wrongdoing were brought against us or any of our current executives or employees in connection with such indictment of Mr. Lee, Mr. Seo, and Mr. Kim.

In March 2017, the Constitutional Court of Korea found that many Korean corporations, including us, made donations to two non-profit foundations, Mir Foundation and K-Sports Foundation, at former President Park’s request. Our contributions comprised1.1 billion of the total48.6 billion given to Mir Foundation and700 million of the total28.8 billion given to K-Sports Foundation. The Constitutional Court also found that an aide of former President Park, at the direction of the former President, on several occasions asked our previous chief executive officer to hire (and later to change the employment positions of) two individuals, Mr. Dong-Soo Lee and Ms. Hye-Sung Shin. Mr. Lee was hired and later appointed as the head of a business unit in charge of our marketing and advertisement campaigns and Ms. Shin was hired to another position in the same business unit. Subsequently, the same presidential aide also requested that Mr. Lee and our other officers award advertising contracts to Playground Communications Co., Ltd. (“Playground”), an advertising agency in which Ms. Soon-sil Choi, a confidante of former President Park, effectively owns a 70% equity interest, according to the Constitutional Court. The Constitutional Court further held that the companies receiving the purported “requests” from former President Park’s aide appeared to have felt immense pressure to comply with the requests and could not easily have rejected them. Playground was awarded seven advertising

 

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contracts for a total of approximately6.8 billion in 2016, amounting to approximately 3.7% of our annual advertising spending in 2016. In 2016, Playground recognized approximately517 million of income from such activities. We have not awarded additional advertising contracts to Playground since September 2016, and Mr. Lee and Ms. Shin resigned in November 2016 and May 2016, respectively.

In November 2016, the Korean Prosecutor’s Office commenced investigations on former President Park and in April 2017 indicted the former President on charges of bribery, coercion and abuse of power, among others. On August 24, 2018, the Seoul High Court sentenced the former President to a prison term of 25 years and a monetary fine of20 billion, having found the former President guilty on many of the charges, including the coercion charges relating to the same events underlying the Constitutional Court decisions described above: (i) the employment and changes to the employment positions of Mr. Lee and Ms. Shin at KT Corporation, (ii) the entry into advertising contracts with Playground and (iii) the donations to Mir Foundation and K-Sports Foundation by us and other Korean corporations. The prosecution appealed the appellate court’s decision to the Supreme Court of Korea, which, on August 29, 2019, vacated the appellate court judgment against the former President on the bribery-related charges due to errors made in its sentencing process and remanded the case back to the Seoul High Court for retrial. No indictment or charges of wrongdoing were brought against us or any of our executives or employees in connection with such indictment of the former President.

On January 18, 2018, the Korean Prosecutor’s Office indicted Mr. Byung-Hun Jun, a former member of the National Assembly, for charges of bribery, corruption and coercion, among others. One of the allegations was that Mr. Jun, during his term as a member of the former Science, ICT, Future Planning, Broadcasting and Communications Committee (currently the Science, ICT, Broadcasting and Communications Committee) of the National Assembly, solicited donations or financial sponsorships from various corporations, including us, to an organization where he used to serve as the president. In February 2019, the Seoul Central District Court found Mr. Jun guilty of the bribery charges and sentenced him to a prison term of five years and an aggregate monetary fine of375 million, guilty of abuse of authority and sentenced him to a suspended prison term of one year on probation for two years, and not guilty of the charge in connection with soliciting financial sponsorship of100 million from us. Both Mr. Jun and the Korean prosecution appealed the court’s decision. No indictment or charges of wrongdoing were brought against us or any of our executives or employees in connection with Mr. Jun’s indictment.

In January 2018, the Korean police commenced an investigation in connection with the allegations that our current and former executives and employees violated the Political Funds Act of Korea, by making certain donations or gifts to various lawmakers using corporate funds. This matter is currently being investigated by the Prosecutors’ Office.

In March 2019, the KT New Labor Union filed criminal complaints with the Seoul Central District Prosecutor’s Office against our previous chief executive officer, Mr. Chang-Gyu Hwang, alleging charges that include a criminal breach of fiduciary duty, in connection with management consulting (research and survey) contracts entered into between us and others, including certain former public officials, since November 2014. The investigation by the Prosecutor’s Office is ongoing.

In April 2019, the Seoul Southern District Prosecutor’s Office indicted four former executive officers, including Mr. Suk-chae Lee and Mr. Yu-yeol Seo, for charges of obstruction of business arising from allegedly engaging in a number of improper hirings during the public recruiting process of college graduates in the second half of 2012. In October 2019, the Seoul Southern District Court found the former executive officers guilty of the charges and sentenced Mr. Lee to a prison term of one year and Mr. Seo to a suspended prison term of eight months, on probation for two years. Both the Prosecutor’s Office and the former executive officers appealed the court’s decision and the case is

 

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currently pending at the Seoul High Court. No indictment or charges of wrongdoing were brought against us or any of our current executives or employees in connection with such indictment of our former executive officers.

We are also cooperating with an investigation by the U.S. Securities and Exchange Commission (the “SEC”) related to the above-described matters and other related allegations regarding compliance with the U.S. Foreign Corrupt Practices Act. It is not possible to determine the outcome of any such investigations at this time, including the timing or terms of any potential resolution and what final costs, remediation, payments or other criminal or civil liability may occur. There can be no assurance that the SEC or another regulatory body will not make further regulatory inquiries or pursue further action. Furthermore, there can be no assurance that any outcome or any further developments relating to the above-mentioned matters, including adverse publicity, will not adversely affect our business, financial results, reputation or stock price.

Cybersecurity breaches may expose us to significant legal and financial exposure, damage to our reputation and a loss of confidence of our customers.

Our business involves the storage and transmission of large amounts of confidential information of our subscribers and cardholders, and cybersecurity breaches expose us to a risk of loss of this information, which may lead to improper use or disclosure of such information, ensuing potential liability and litigation, any of which could harm our reputation and adversely affect our business. Even though we strive to take all steps we believe are necessary to protect personal information, hardware, software or applications we develop or procure from third parties may contain defects or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to circumvent our security measures to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff. In addition, because the techniques used to obtain unauthorized access or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures.

In the past, we have experienced cyber-attacks of varying degrees from time to time, including theft of personal information of our subscribers by third parties that have led to lawsuits and administrative actions against us alleging that the leak was related to our management of subscribers’ personal information. For example, in July 2012, the police arrested two third-party individuals in connection with the alleged theft of personal information relating to approximately 8.7 million of our mobile phone subscribers. The individuals in question stole personal information through a series of hackings into our mobile customer information system starting from February 2012. Furthermore, in March 2014, the police arrested three third-party individuals in connection with their alleged theft of personal information relating to approximately 9.8 million of our subscribers. The individuals in question stole the personal information of our subscribers through a series of hackings into our main homepage starting from February 2014. If we experience additional significant cybersecurity breaches or fail to detect and appropriately respond to significant cybersecurity breaches, we could be subject to additional government enforcement actions, regulatory sanctions and litigation in the future. In addition, our subscribers and cardholders could lose confidence in our ability to protect their personal information, which could cause them to discontinue using our services altogether. Furthermore, adverse final determinations, decisions or resolutions regarding such matters could encourage other parties to bring related claims and actions against us. Accordingly, our failure to prevent cybersecurity breaches may materially and adversely impact our business, financial condition and results of operations.

 

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Our business and performance may be harmed by a disruption in our services due to failures in or changes to our systems, or by our failure to timely and effectively expand and upgrade our technology and infrastructure.

Our reputation and ability to attract, retain, and serve our subscribers, cardholders and other business partners are dependent in large part upon the reliable performance of our services and the underlying technical infrastructure. Our telecommunications network systems and information technology systems may not be adequately designed with the necessary reliability and redundancy to avoid performance delays or outages that could be harmful to our business. We have experienced, and may in the future experience, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, hardware failures, capacity constraints due to an overwhelming number of people accessing our services simultaneously, computer viruses, power losses, fraud and security attacks. Our technical infrastructure is also vulnerable to the risk of damage from natural and other disasters, such as fires, earthquakes, floods, and typhoons, as well as from acts of terrorism and other criminal acts. For example, in November 2018, a fire broke out at one of our facilities located in the Ahyeon district of western Seoul, which temporarily disrupted our wireless, fixed-line and IPTV services in seven districts covered by the facility. We restored most of our services within four days and our fixed-line public switched telephone network (“PSTN”) services within 11 days, and we refunded subscription fees ranging from one to six months as compensation to our affected subscribers. In addition, we accepted applications from small business owners for financial assistance, which we provided as appropriate to assist in their recovery from the incident.

As the number of our subscribers and cardholders increases and as our customers access, download and transmit increasing volumes of media contents as well as engage in increasing volumes of financial transactions, we may be required to expand and upgrade our technology and infrastructure to continue to reliably deliver our services. We cannot provide assurance that we will be able to expand and upgrade our technology and infrastructure to meet user demand in a timely manner, or on favorable economic terms. We purchase telecommunications network and other equipment from a limited number of key suppliers, and any discontinuation or interruption in the availability of equipment from our key suppliers for any reason could have an adverse effect on our operations. If our users are unable to readily access our services or access is disrupted, users may seek other service providers instead, and may not return to our services or use our services as often in the future. This would negatively impact our ability to attract subscribers, cardholders and other business partners as well as increase engagement of our customers. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed or continually develop our technology and infrastructure to accommodate actual and anticipated changes in our customers’ needs, our business, financial condition and results of operations may be harmed.

Our intellectual property rights are valuable, and our inability to protect them could reduce the value of our products, services and brands.

Our trade secrets, trademarks, copyrights, patents and other intellectual property rights are important assets for us. We rely on, and expect to continue to rely on, a combination of confidentiality and license agreements with our employees, consultants and third parties with whom we have relationships, as well as trademark, trade dress, domain name, copyright, trade secret and patent laws, to protect our brands and other intellectual property rights. However, various events outside of our control may pose a threat to our intellectual property rights, as well as to our products, services and technologies. For example, we may fail to obtain effective intellectual property protection, or effective intellectual property protection may not be available, in every country in which our services are available. Also, the efforts we have taken to protect our intellectual property rights may not be sufficient or effective, and any of our intellectual property rights may be challenged, which could result in them

 

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being narrowed in scope or declared invalid or unenforceable. There can be no assurance that our intellectual property rights will be sufficient to protect against others offering services that are substantially similar to ours and compete with our business.

We also rely onnon-patented proprietary information and technology, such as trade secrets, confidential information,know-how and technical information. While in certain cases we have agreements in place with employees and third parties that place restrictions on the use and disclosure of such intellectual property, these agreements may be breached, or such intellectual property may otherwise be disclosed or become known to our competitors, which could cause us to lose competitive advantages resulting from such intellectual property.

We are also pursuing registration of trademarks and domain names in Korea and in select jurisdictions outside of Korea. Effective protection of trademarks, domain names and other intellectual property is expensive and difficult to maintain, both in terms of application and registration costs as well as the costs of defending and enforcing those rights.

We also seek to obtain patent protection for some of our technology, and we have filed various applications in Korea and elsewhere for protection of certain aspects of our intellectual property and currently hold a number of issued patents in multiple jurisdictions. We may be unable to obtain patent or trademark protection for our technologies and brands, and our existing patents and trademarks, and any patents or trademarks that may be issued in the future, may not provide us with competitive advantages or distinguish our products and services from those of our competitors. In addition, any patents and trademarks may be contested, circumvented, or found unenforceable or invalid, and we may not be able to prevent third parties from infringing, diluting or otherwise violating them. Significant infringements of our intellectual property rights, and limitations on our ability to assert our intellectual property rights against others, could harm our ability to compete and our business, financial condition and results of operations could be adversely affected.

We may become party to intellectual property rights claims in the future that may be expensive and time consuming to defend, and such claims, if resolved adversely, could have a significant impact on our business.

Telecommunications and information technology companies own large numbers of patents, copyrights, trademarks, licenses and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property or other rights. In addition, various“non-practicing entities” that own intellectual property rights often attempt to aggressively assert claims in order to extract payments from companies like us. From time to time, we have received, and may receive in the future, claims from third parties which allege that we have infringed upon their intellectual property rights. Furthermore, from time to time, we may introduce or acquire new services or content, including in areas where we currently do not compete, which could increase our exposure to intellectual property claims from competitors andnon-practicing entities.

As we face increasing competition, the number and scope of intellectual property claims against us may grow. Any claim or litigation alleging that we have infringed or otherwise violated intellectual property or other rights of third parties, with or without merit, and whether or not settled out of court or determined in our favor, could be time consuming and costly to address and resolve, and could divert the time and attention of our management and technical personnel. The outcome of any litigation is inherently uncertain, and there can be no assurance that favorable final outcomes will be obtained. In addition, plaintiffs may seek, and we may become subject to, preliminary or provisional rulings in the course of any such litigation, including potential preliminary injunctions requiring us to cease some or all of our operations.

 

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If any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed upon appeal. The terms of any such judgment or any settlement may require us to cease some or all of our operations, pay substantial amounts to the other party or seek licensing arrangements. If we are required or choose to enter into royalty or licensing arrangements, such arrangements may not be available on commercially reasonable terms, or at all. In addition, the development or procurement of alternative technology could require significant effort and expense or may not be feasible. Accordingly, an unfavorable resolution of any intellectual property rights claims could adversely affect our business, financial condition and results of operations.

We rely on key researchers and engineers and senior management, and the loss of the services of any such key personnel or the inability to attract and retain replacements may negatively affect our business.

Our success depends to a significant extent upon the continued service of our research and development and engineering personnel, and on our ability to continue to attract, retain and motivate qualified researchers and engineers. In particular, our focus on leading the market in introducing new telecommunications and Internet-related services has meant that we must aggressively recruit engineers with expertise in cutting-edge technologies. In addition, our ability to execute our strategy effectively is dependent upon contributions from our key senior management. Our future success will depend on the continued service of our key executive officers and managers who possess significant expertise and knowledge of our industry. A limited number of individuals have primary responsibility for the management of our business, including our relationships with key business partners. From time to time, there may be changes in our senior management team that may be disruptive to our business, and we may not be able to find replacement key personnel in a timely manner. Any loss or interruption of the services of these individuals, whether from retirement, loss to competitors or other causes, or failure to attract and retain other qualified new personnel, could prevent us from effectively executing our business strategy, cause us to lose key business relationships, or otherwise materially affect our operations.

Government regulation of the credit card industry may adversely affect the operations of BC Card in which we hold a 69.54% interest.

Due to the rapid growth of the credit card market and rising consumer debt levels in Korea, the Government has heightened its regulatory oversight of the credit card industry in recent decades. In particular, the FSC and the Financial Supervisory Service (“FSS”) have adopted a variety of regulations governing the credit card industry. Among other things, these regulations impose minimum capital adequacy ratios, minimum required provisioning levels applicable to credit card receivables and stringent lending ratios. The FSC and FSS also impose rules governing the evaluation and reporting of credit card balances, procedures governing which persons may receive credit cards as well as processing fees paid by merchants. For example, the FSC and FSS announce periodic guidelines every three years for processing fees paid by merchants for credit card and check card transactions. In November 2018, the FSC and FSS announced guidelines reducing credit card processing fees paid by merchants with annual revenue between500 million to50 billion from a range of 2.05% to 2.17% to a revised range of 1.4% to 1.95%. In addition, the guidelines reduced check card processing fees paid by merchants with annual revenue exceeding500 million from a range of 1.56% to 1.60% to a revised range of 1.10% to 1.45%. BC Card implemented such reductions in February 2019.

Pursuant to the FSS’s capital adequacy guidelines, which are derived from standards established by the Bank for International Settlements, credit card companies in Korea are required to maintain a total capital adequacy ratio of at least 8.0% on a consolidated basis. To the extent a credit card company fails to maintain such ratio, Korean regulatory authorities may impose penalties on such company ranging from a warning to a suspension or revocation of its license. BC Card’s capital

 

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adequacy ratios were 29.3% as of December 31, 2018 and 33.7% as of December 31, 2019. Such capital adequacy ratio will decrease if the growth in BC Card’s asset base is not matched by corresponding growth in its regulatory capital. In addition, BC Card’s capital base and its capital adequacy ratio may decrease if its results of operations or financial condition deteriorates. Accordingly, there can be no assurance that BC Card will not be required to obtain additional capital in the future in order to maintain its capital adequacy ratio above the minimum required levels. There can be no assurance that, if BC Card requires additional capital in the future, it will be able to obtain such capital on favorable terms or at all, which could have a material adverse effect on the business, financial condition and results of operations of BC Card.

The Government may adopt further regulatory changes in the future that affect the credit card industry. Depending on their nature, such changes may adversely affect the operations of BC Card, by restricting its growth or scope, subjecting it to stricter requirements and potential sanctions or greater competition, constraining its profitability or otherwise.

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 ofnon-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 extended protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operations.

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 June 16, 2021. 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 unrest resulting from disagreements with the labor union in the future.

We are subject to various laws and regulations in Korea and other jurisdictions, including the Monopoly Regulation and Fair Trade Act of Korea.

Our business operations and acts of our management, employees and other relevant parties are subject to various laws and regulations in and outside Korea. These laws are complicated and sometimes conflicting and our efforts to comply with these laws could increase our cost of doing business, restrict our business activities and expose us or our employees to legal sanctions and liabilities.

The Monopoly Regulation and Fair Trade Act provides for various regulations and restrictions on large business groups enforced by the Korea Fair Trade Commission to prohibit or restrict actions that impede competition and fair trade. The Korea Fair Trade Commission 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 debt guarantees for other domestic member companies of the same group and cross-shareholdings among domestic member companies of the same group, as well as requiring disclosure of the status of such cross-shareholdings. Additionally, we are subject to a prohibition, in effect since July 2014, against circular shareholding among any three or more entities within our business group.Any future determination by

 

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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 the share prices of some wireless telecommunications companies in the United States. In May 2011, the International Agency for Research on Cancer (“IARC”) announced that it has classified radiofrequency electromagnetic fields associated with wireless phone use as possibly carcinogenic to humans, based on an increased risk for glioma, a malignant type of brain cancer. The IARC is part of the World Health Organization that conducts research on the causes of human cancer and the mechanisms of carcinogenesis, and aims to develop scientific strategies for cancer control. We cannot assure you that such 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. 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.

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 certain payments related to our derivative instruments entered into for foreign exchange risk hedging purposes. Of the7,299 billion total book value of debentures and borrowings outstanding as of December 31, 2019,2,781 billion was denominated in foreign currencies. Upon identification and evaluation of our currency risk exposures, we, having considered various circumstances, enter into derivative financial instruments to try to mitigate such risks. Although the impact of exchange rate fluctuations has in the past been partially mitigated by such strategies, our results of operations have historically been affected by exchange rate fluctuations, and there can be no assurance that such strategies will be sufficient to reduce or eliminate the adverse impact of such fluctuations in the future. See “—Item 3.A. Selected Financial Data—Exchange Rate Information”, “Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Exchange Rate Risk.”

Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of our ordinary shares on the KRX Korea Composite Stock Price Index (“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 American Depositary Receipts (“ADRs”) of cash dividends, if any, paid in Won on our ordinary shares represented by the ADSs.

 

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We may be exposed to potential claims for unpaid wages and become subject to additional labor costs arising from the Supreme Court of Korea’s interpretation of ordinary wages.

Under the Labor Standards Act, an employee’s “ordinary wage” is a key legal construct used to calculate many statutory benefits and entitlements in Korea. Increasing or decreasing the amount of compensation included in employees’ ordinary wages has the effect of increasing or decreasing the amounts of various statutory entitlements that are calculated based on “ordinary wage,” such as overtime premium pay. Under guidelines previously issued by the Ministry of Employment and Labor, prior to the Supreme Court decision described below, an employee’s ordinary wage included base salary and certain fixed monthly allowances for work performed overtime during night shifts and holidays. Prior to the Supreme Court of Korea’s decision described below, companies in Korea had typically interpreted these guidelines as excluding from the scope of ordinary wages fixed bonuses that are paid other than on a monthly basis, namely on abi-monthly, quarterly or biannual basis.

In December 2013, the Supreme Court of Korea ruled that regular bonuses (including those that are paid other than on a monthly basis) shall be deemed ordinary wages if these bonuses are paid “regularly” and “uniformly” on a “fixed basis” notwithstanding differential amounts based on seniority. Under this decision, any collective bargaining agreement or labor-management agreement which attempts to exclude such regular bonuses from employees’ ordinary wages will be deemed void for violation of the mandatory provisions of Korean law. However, the Supreme Court of Korea further ruled that, in certain limited situations, an employee’s claim of underpayment under the expanded scope of ordinary wages for the past three years may be denied based on the principles of good faith, even if the claim is raised within the statute of limitations period. Following this Supreme Court decision, the Ministry of Employment and Labor issued a Guideline for Labor and Management on Ordinary Wages in January 2014. A bill for amendment to the Labor Standard Act, which includes a definition of “ordinary wages” as “entire money and valuables determined in advance to be provided to the employee by the employer as wages, regardless of its name, in exchange of the prescribed or total work of the employee,” is currently pending at thesub-committee level of the National Assembly.

While we currently are not subject to any claims of underpayment from our current or former employees,the Supreme Court decision may result in additional labor costs for us in the form of additional payments required under the expanded scope of ordinary wages, both those incurred during the past three years and those to be incurred in the future. Any such additional payments may have an adverse effect on our financial condition and results of operation.

Risks Relating to Korea

If economic conditions in Korea deteriorate, our current business and future growth could be materially and adversely affected.

We are incorporated in Korea, and we generate most of our operating revenue in Korea. As a result, we are subject to economic, political, legal and regulatory risks specific to Korea. The economic indicators in Korea in recent years have shown mixed signs of growth and uncertainty, and future growth of the Korean economy is subject to many factors beyond our control, including developments in the global economy. Any future deterioration of the Korean economy, as a result of unfavorable global economic conditions or otherwise, could adversely affect our business, financial condition and results of operations and the market price of our ADSs.

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

 

  

declines in consumer confidence and a slowdown in consumer spending;

 

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deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy (such as the ongoing trade disputes with Japan);

 

  

adverse conditions or developments in the economies of countries and regions that are important export markets for Korea, such as China, the United States, Europe and Japan, or in emerging market economies in Asia or elsewhere, including as a result of any deterioration in economic and trade relations between the United States and China as well as increased uncertainties resulting from the United Kingdom’s exit from the European Union on January 31, 2020;

 

  

the occurrence of severe health epidemics in Korea or other parts of the world (such as the ongoing global outbreak ofCOVID-19);

 

  

decreases in the market prices of Korean real estate;

 

  

adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. dollar, the Euro or the Japanese Yen exchange rates or revaluation of the Chinese Renminbi), interest rates, inflation rates or stock markets;

 

  

increased sovereign default risk in select countries and the resulting adverse effects on the global financial markets;

 

  

investigations of large Korean business groups and their senior management for possible misconduct;

 

  

a continuing rise in the level of household debt and increasing delinquencies and credit defaults by retail andsmall- andmedium-sized enterprise borrowers in Korea;

 

  

social and labor unrest;

 

  

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

 

  

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

 

  

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

 

  

loss of investor confidence arising from corporate accounting irregularities or corporate governance issues at certain Korean companies;

 

  

increases in social expenditures to support an aging population in Korea or decreases in economic productivity due to the declining population size in Korea;

 

  

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

 

  

natural orman-made disasters that have a significant adverse economic or other impact on Korea or its major trading partners;

 

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

 

  

increase in the statutory minimum wage in Korea, to the extent its benefits (such as an increase in consumer confidence or spending level of employees earning the minimum wage) are outweighed by its costs (such as an increase in unemployment rate);

 

  

hostilities or political or social tensions involving oil producing countries in the Middle East (including a potential escalation of hostilities between the U.S. and Iran) and Northern Africa and any material disruption in the global supply of oil or sudden increase in the price of oil;

 

  

increased reliance on exports to service foreign currency debts, which could cause friction with Korea’s trading partners;

 

  

the continued growth 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);

 

  

political or social tensions involving Russia and any resulting adverse effects on the global supply of oil or the global financial markets; 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 and the market value of our ADSs.

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 particular, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and ballistic missile programs as well as its hostile military actions against Korea. Some of the significant incidents in recent years include the following:

 

  

North Korea renounced its obligations under the NuclearNon-Proliferation Treaty in January 2003 and has conducted six rounds of nuclear tests since October 2006, including claimed detonations of hydrogen bombs, which are more powerful than plutonium bombs, and warheads that can be mounted on ballistic missiles. Over the years, North Korea has also conducted a series of ballistic missile tests, including missiles launched from submarines and intercontinental ballistic missiles that it claims can reach the United States mainland. In response, the Government has repeatedly condemned the provocations and flagrant violations of relevant United Nations Security Council resolutions. In February 2016, the Government also closed the inter-Korea Gaesong Industrial Complex (in which we provided certain telecommunications services prior to its closure) in response to North Korea’s fourth nuclear test in January 2016. Internationally, the United Nations Security Council has passed a series of resolutions condemning North Korea’s actions and significantly expanding the scope of sanctions applicable to North Korea, most recently in December 2017 in response to North Korea’s intercontinental ballistic missile test in November 2017. Over the years, the United States and the European Union have also expanded their sanctions applicable to North Korea.

 

  

In March 2010, a Korean naval vessel was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korea of causing

 

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the sinking, while North Korea denied responsibility. Moreover, in November 2010, North Korea fired more than one hundred artillery shells that hit Korea’s Yeonpyeong Island near the Northern Limit Line, which acts as the de facto maritime boundary between Korea and North Korea on the west coast of the Korean peninsula, causing casualties and significant property damage. The Government condemned North Korea for the attack and vowed stern retaliation should there be further provocation.

North Korea’s economy also faces severe challenges, which may further aggravate social and political pressures within North Korea.

Although bilateral summit meetings were held between Korea and North Korea in April, May and September 2018 and between the United States and North Korea in June 2018, February 2019 and June 2019, there can be no assurance that the level of tensions affecting the Korean peninsula will not escalate in the future. Any increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis,high-level contacts between Korea or the United States and North Korea break down or further military hostilities occur, could have a material adverse effect on the Korean economy and on our business, financial condition and results of operations.

Korea’s legislation allowing class action suits related to securities transactions may expose us to additional litigation risk.

The Securities-related Class Action Act of Korea enacted in January 2004 allows class action suits to be brought by shareholders of companies (including us) listed on the KRX KOSPI Market for losses incurred in connection with purchases and sales of securities and other securities transactions arising from (1) false or inaccurate statements provided in the registration statements, prospectuses, business reports, audit reports, semi-annual or quarterly reports and material fact reports and omission of material information in such documents, (2) insider trading, (3) market manipulation and (4) unfair trading. This law permits 50 or more shareholders who collectively hold 0.01% of the shares of a company to bring a class action suit against, among others, the issuer and its directors and officers. Because of the relatively recent enactment of the act, there is not enough judicial precedent to predict how the courts will apply the law. Litigation can be time-consuming and expensive to resolve, and can divert management time and attention from business operation. We are not aware of any basis upon which such suit may be brought against us, nor are any such suits pending or threatened. Any such litigation brought against us could have a material adverse effect on our business, financial condition and results of operations.

We are generally subject to Korean corporate governance and disclosure standards, which differ in significant respects from those in other countries.

Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies which differ in some respects from standards applicable in other countries, including the United States. As a reporting company registered with the Securities and Exchange Commission and listed on the New York Stock Exchange, we are, and will continue to be, subject to certain corporate governance standards. However, foreign private issuers, including us, are exempt from certain corporate governance standards required under the New York Stock Exchange. For a description of significant differences in corporate governance practice compared to corporate governance standards of the New York Stock Exchange applicable to U.S. issuers, see “Item 16G. Corporate Governance.” There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public ornon-public companies in other countries.

 

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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 certain restrictions.

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. In addition, under the Telecommunications Business Act, the MSIT may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. 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 MSIT 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.

In addition, 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. As of December 31, 2019, 46.6% of our common shares were owned by foreign investors. 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 MSIT 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. See “Item 4. Information of the Company—Item 4.B. Business Overview—Regulation—Foreign Investment” and “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association—Limitations on Shareholding.”

 

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Holders of ADSs will not be able to exercise appraisal rights unless they have withdrawn the underlying ordinary shares 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 appraisal rights unless he has withdrawn the underlying ordinary shares 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 ordinary shares 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 us and the industries in which we operate. The forward-looking statements are subject to various risks and uncertainties. Theseforward-looking statements include, but are not limited to, those statements using words such as “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project,” “aim,” “plan,” “likely to,” “target,” “contemplate,” “predict,” “potential” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions generally intended to identify forward-looking statements. 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 Government’s privatization laws 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 had previously been 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 laws 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. In June 2009, KT Freetel Co., Ltd. (“KTF”), a subsidiary providing mobile telephone services, 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.”

We are a corporation with limited liability organized under the laws of Korea, and our legal and commercial name is KT Corporation. Our principal executive offices are located at KT Gwanghwamun Building East, 33,Jong-ro3-gil,Jongno-gu, 03155, Seoul, Korea, our telephone number is+82-31-727-0114 and the address of our English website is https://corp.kt.com/eng/.

The SEC maintains a website (http://www.sec.gov), which contains reports, information statements and other information regarding issuers that file electronically with the SEC.

Item 4.B.  Business Overview

We are the leading integrated telecommunications service provider in Korea and one of the most advanced in Asia. Our principal services include:

 

  

mobile voice and data telecommunications services based on 5G, 4G LTE and3G W-CDMA technology;

 

  

fixed-line services, which include:

 

 Ø 

(i) fixed-line telephone services, including local, domestic long-distance and internationallong-distance services, (ii) Voice over Internet Protocol (“VoIP”) telephone

 

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services (i.e., provision of communication services over the Internet, and not over the fixed-line PSTN) and (iii) interconnection services to other telecommunications companies;

 

 Ø 

broadband Internet access services; and

 

 Ø 

data communication services, including fixed-line and satellite leased line services and dedicated broadband Internet connection service to institutional customers;

 

  

media and content services, including IPTV, satellite TV, TV home shopping, digital contents distribution, information and communication technology (“ICT”) platform consulting, digital music streaming and downloading and online advertising;

 

  

credit card processing and other financial services offered primarily through BC Card;

 

  

various business activities that extend beyond telecommunications and financial services, including information technology and network services and satellite services as well as rental of real estate by KT Estate Inc. (“KT Estate”); and

 

  

sale of goods, primarily sale of handsets related to our mobile services and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate developed by KT Estate.

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

 

  

in mobile services, we achieved a market share of 31.8% with approximately 21.9 million subscribers as of December 31, 2019;

 

  

in fixed-line and VoIP telephone services, we had approximately 14.1 million subscribers, consisting of 11.0 million PSTN subscribers and 3.1 million VoIP subscribers as of December 31, 2019. As of such date, our market share of the fixed-line local telephone and VoIP services was 57.2%; and

 

  

we are Korea’s largest broadband Internet access provider with approximately 9.0 million subscribersas of December 31, 2019, representing a market share of 40.9%.

For the year ended December 31, 2019, our operating revenue was24,889 billion, our profit for the year was699 billion and our basic earnings per share was2,648. As of December 31, 2019, our total assets were34,153 billion, total liabilities were19,009 billion and total equity was15,144 billion.

 

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Our Services

The following table sets out our operating revenue by principal product categories and the respective percentage of total operating revenue in 2017, 2018 and 2019.

 

   For the Year Ended December 31, 
   2017  2018  2019 

Products and services

  Billions of
Won
   %  Billions of
Won
   %  Billions of
Won
   % 

Mobile services

  7,122    30.2 6,828    29.1 6,795    27.3

Fixed-line services:

          

Fixed-line and VoIP telephone services

   1,834    7.8   1,708    7.3   1,579    6.3 

Broadband Internet access services

   2,082    8.8   2,113    9.0   2,177    8.7 

Data communication services

   1,066    4.5   1,048    4.5   1,111    4.5 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Sub-total

   4,982    21.2   4,869    20.8   4,867    19.5 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Media and content

   2,207    9.4   2,262    9.7   2,516    10.1 

Financial services

   3,443    14.6   3,445    14.7   3,642    14.6 

Others

   2,432    10.3   2,743    11.7   2,885    11.6 

Sale of goods(1)

   3,361    14.3   3,289    14.0   4,194    16.8 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total operating revenue

  23,547    100.0 23,436    100.0 24,899    100.0
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

 

(1)

Primarily related to sale of handsets for our mobile service and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate developed by KT Estate.

Mobile Services

We provide mobile services based on 5G, 4G LTE, and 3GW-CDMA technology. We have made extensive efforts to continually develop advanced technologies as well as to provide a variety of new mobile services with enhanced speed, latency and connectivity. We commercially launched our next generation 5G mobile services with transmission speed of up to 1.5 Gbps in April 2019, initially focusing on the Seoul metropolitan area, six additional metropolitan cities, high-traffic commercial areas and university campuses as well as major transportation infrastructure such as highways, railways and airports. We plan to further expand the coverage nationwide and increase the transmission speed of our 5G services. We believe that the faster data transmission speed and lower latency of the 5G network enables us to offer significantly enhanced wireless data transmission with faster access to multimedia contents. We began offering 4G LTE services in the Seoul metropolitan area in January 2012, and we completed the expansion of our coverage nationwide in October 2012. 4G LTE technology enables data to be transmitted faster than 3GW-CDMA technology, generally providing a downloading speed of approximately 50 Mbps per 10 MHz. Since our launch of 4G LTE services, we have acquired additional bandwidth licenses that have enabled us to further enhance the quality of our LTE services.

 

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Revenue related to mobile service accounted for 27.3% of our operating revenue in 2019.The following table shows selected information concerning the usage of our network during the periods indicated and the number of our mobile subscribers as of the end of such periods:

 

   As of or for the Year Ended December 31, 
           2017                   2018                   2019         

Average monthly revenue per subscriber(1)

  34,444   32,021   31,625 

Number of mobile subscribers (in thousands)

   20,015    21,120    21,922 

LTE subscribers

   15,462    16,971    17,153 

W-CDMA subscribers

   4,554    4,149    3,350 

5G subscribers

           1,419 

 

 

(1)

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 (other than MVNO 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 U+ which began its service at around the same time as KTF. As of December 31, 2019, we had approximately 21.9 million subscribers, or a market share of 31.8%, which was the second largest among the three mobile service providers.

We market our mobile services primarily through independent exclusive dealers located throughout Korea. As of December 31, 2019, there were 2,537 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 their account. 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. As of December 31, 2019, we operated 188 customer plazas that engage in mobile service sales activities as well as provide aone-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 ofnon-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 apre-paid card.

Fixed-line Services

We provide a variety of fixed-line services, including various telephone services, broadband Internet access and data communication services.

Fixed-line and VoIP Telephone Services

We utilize our extensive nationwide telephone network to provide fixed-line telephone services, which consist of local, domestic long-distance, international long-distance services andland-to-mobile

 

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interconnection services. Ourfixed-line telephone network includes exchanges, long-distance transmission equipment and fiber optic and copper cables. We also provide VoIP telephone services that enable VoIP phone devices with broadband connection to make domestic and international calls. These fixed-line and VoIP telephone services accounted for 6.3% of our operating revenue in 2019. In recent years, the proliferation of mobile phones, as well as the availability of increasingly lower wireless pricing plans, some of which include unlimited voice minutes, has led to significant decreases in our domestic long-distance call minutes and local call pulses. The following table shows selected information concerning our fixed-line telephone network and the number of PSTN and VoIP subscribers as of the end of the periods indicated as well as their engagement levels during such periods.

 

   As of or for the Year Ended December 31, 
   2015   2016   2017   2018   2019 

Total Korean population (thousands)(1)

   51,529    51,696    51,799    51,826    51,850 

PSTN and VoIP lines in service (thousands)

   16,682    16,266    15,610    14,992    14,185 

PSTN lines in service

   13,268    12,791    12,201    11,637    11,052 

Local lines in service

   12,409    11,869    11,222    10,654    10,076 

Group lines in service

   859    921    979    983    976 

VoIP lines in service

   3,413    3,436    3,409    3,355    3,133 

Fiber optic cable (kilometers)

   695,546    732,873    764,802    784,088    847,497 

Domestic long-distance call minutes (millions)(2)

   2,113    1,507    1,126    892    744 

Local call pulses (millions)(2)

   3,034    2,161    1,285    974    804 

 

 

(1)

Based on the number of registered residents as published by the Ministry of the Interior and Safety of Korea.

 

(2)

Excluding calls placed from public telephones.

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. All of our lines 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.

Japan, China and the United States accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2019. In recent years, the volume of our incoming calls has exceeded the volume of our outgoing calls. The agreed settlement rate is applied to the call minutes to determine the applicable net settlement payment. The following table shows the number of minutes of international long-distance calls recorded by us and network service providers utilizing our international long-distance network in each specified category for each year in the five-year period ended December 31, 2019:

 

   Year Ended December 31, 
   2015   2016   2017   2018   2019 
   (In millions of billed minutes) 

Incoming international long-distance calls

   390.5    352.3    286.4    221.1    189.6 

Outgoing international long-distance calls

   179.0    155.1    125.9    101.1    78.8 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   569.5    507.4    412.3    322.2    268.4 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 affiliates of SK Telecom and LG U+ (offering local, domestic long-distance and international long-distance services, and transmitting calls to and from their mobile networks). We recognize as

 

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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.

Broadband Internet Access Services

Leveraging on our nationwide network of 847,497 kilometers of fiber optic cables, 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 Internet access service providers because, unlike our competitors, we can utilize our existing networks nationwide to provide broadband Internet access service. Our principal Internet access services are offered under the “KT Internet” and “KT GiGA Internet” brand names. We also offer WiFi services under the “KT WiFi” brand name, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops and smartphones inhot-spot zones and KT Internet service in fixed-line environments. Our broadband Internet access services accounted for 8.7% of our operating revenue in 2019.

As of December 31, 2019, we had approximately 9.0 million broadband Internet subscribers, including approximately 5.5 million KT GiGA Internet service subscribers with enhanced data transmission speeds of up to 10.0 Gbps. In addition, we had approximately 4.7 million KT WiFi subscribers as of such date. We also sponsored approximately 130 thousandhot-spot zones nationwide for wireless connection as of December 31, 2019.

Our KT Internet services primarily utilize 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 andlow-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. We are continually upgrading our broadband network to enable better FTTH connection, which further enhances data transmission speed 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 services that require high bandwidth, such as IPTV, and other digital media contents with higher stability.

Data Communication Services

Our data communication services involve offering exclusive lines that allowpoint-to-point connection for voice and data traffic between two or more geographically separate points. As of December 31, 2019, we leased 268,373 lines to domestic and international businesses. We provide dedicated and secure broadband Internet connection service to institutional customers under the “Kornet” brand name. We provide high-speed connection to our Internet backbone network, 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- andmedium-sized enterprises, businesses engaging in Internet access services and government agencies.Data communication services accounted for 4.5% of our operating revenue in 2019.

Through our wholly owned subsidiary KT Sat Co., Ltd., we also provide transponder leasing, broadcasting, video distribution and data communication services through satellites periodically launched by us. We also lease satellite capacity from other satellite operators to offer satellite services to both domestic and international customers.

 

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Media and Content Services

We offer a variety of media and content services, including IPTV, satellite TV, TV home shopping, digital content distribution, ICT platform consulting, digital music streaming and downloading and online advertising. Media and content services accounted for 10.1% of our operating revenue in 2019.

IPTV

We offer high definitionvideo-on-demand and real-time broadcasting IPTV services under the brand name “olleh TV” as well as ultra-high-definition (“UHD”) IPTV services under the brand name “olleh GiGA UHD TV.” Our IPTV service offers access to an array of digital media contents, including movies, sports, news, educational programs and TV replay, for a fixed monthly fee or on apay-per-view basis. Through a digitalset-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. Aset-top box providestwo-way communications on an IP network and decodes video streaming data. We had approximately 8.4 million IPTV subscribers as of December 31, 2019.

Satellite TV

We offer satellite TV services with features similar to our IPTV services through KT Skylife, in which we own a 49.99% interest. As of December 31, 2019, we had approximately 4.2 million subscribers for our satellite TV services, including olleh TV Skylife combination services.

KTH

We offer TV home shopping, digital content distribution and information and communication technology platform consulting services through KTH Co., Ltd., in which we hold a 67.10% interest on a consolidated basis. We offer a variety of consumer products and food items on our IPTV and satellite TV platforms. We also secure rights to digital entertainment contents such as movies, animations and TV series and distribute such contents to other media platforms. In addition, we provide a wide range of consulting services related tobuild-out of information and communication technology platforms.

Digital Music Services

We operate Genie, our platform for music contents as well as subscription-based access to online music streaming and downloading services, through our subsidiary Genie Music Corporation, in which we hold a 35.97% interest. As of December 31, 2019, Genie was the second-largest music streaming and downloading service provider in Korea in terms of number of subscribers. Genie offers a broad selection of Korean and international music, both in streaming and download formats, as well as a variety of features designed to enhance the experience of users. We offer Genie services in various formats that are specifically designed for mobile and other connected devices, PCs and TVs.

Online Advertising Consulting

We provide strategic advertising consulting services for the online advertising industry through our subsidiary Nasmedia, Co., Ltd. (“Nasmedia”), in which we hold a 42.75% interest. We provide a variety of services for advertising agencies, online media companies and their clients, ranging from market studies to advertising campaign planning as well as analysis of such campaign’s effectiveness. Our proprietary data analysis tools enable us to define specific advertising targets for the clients as well as to evaluate the effectiveness of various marketing channels to provide an optimal advertising campaign strategy.

 

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Financial Services

As part of our overall strategy, we selectively pursue new business opportunities in the financial sector that complement our telecommunications business. In October 2011, we acquired a controlling interest in BC Card, a leading credit card solutions provider in Korea in which we hold a 69.54% interest. We also acquired 10.00% of the common shares of K Bank, an Internet-only bank that began its commercial operations in April 2017, which interest is accounted for using the equity method of accounting. In April 2020, we agreed to transfer such interest to BC Card for36.3 billion, which transfer would take place only upon satisfaction of certain conditions. Revenue from our financial services, which consist primarily of revenue from BC Card, accounted for 14.6% of our operating revenue in 2019.

BC Card

Through BC Card, we offer various credit card processing and related financial services. We operate the largest merchant payment network in Korea as measured by transaction volume. We also provide outsourcing services to a wide range of financial institutions for their credit card and check card business operations, including production and delivery of new credit cards, the preparation of monthly statements, management of merchants and other ancillary services. In recent years, we have made efforts to expand our services in select countries in Asia, including China, Indonesia and Vietnam.

A minority interest in BC Card is owned by various financial institutions in Korea, many of which are member companies that enter intoco-branding agreements with us and issue credit cards and check cards under the “BC Card” brand. Our member companies that issueco-branded credit or check cards include Woori Card, NH Card, Industrial Bank of Korea and KB Kookmin Card. We engage in joint marketing efforts to promote cards issued pursuant to ourco-branding agreements. However, we typically do not assume credit risks related to the inability of cardholders to make payments on their card usage, which are typically assumed by the member companies. As of December 31, 2019, we had approximately 20.6 million credit cards and approximately 34.3 million check cards issued by our member companies under the “BC Card” brand. We also provide ancillary outsourcing services to various other banks, securities companies and financial institutions that do not issueco-branded cards with us.

We charge commissions for merchant fees paid by merchants to credit card companies for processing transactions. Merchant fees vary depending on the type of merchant and the total transaction amounts generated by the merchant. In addition to merchant fees, we receive commissions related to nominal interchange fees for international card transactions, as well as service fees from financial institutions that outsource their credit card business operations.

K Bank

We own 10.00% of the common shares of K Bank, which is one of two Internet-only banks in Korea. In April 2020, we agreed to transfer such interest to BC Card for36.3 billion, which transfer would take place only upon satisfaction of certain conditions. Internet-only banks generally operate without branches and conduct their operations primarily through electronic means, which enable them to minimize costs and offer customers higher interest rates on deposits as well as lower lending rates. As of December 31, 2019, K Bank had approximately 1.2 million holders of deposit accounts, with total deposits of2,285 billion and outstanding loans of1,415 billion. Other shareholders of K bank include Woori Bank, NH Investment & Securities, Co., Ltd., GS Retail Co., Ltd. and Hanwha Life Insurance Co., Ltd.

 

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Pursuant to the Act on Special Cases Concerning Internet-Only Banks, starting from January 2019, a company with its ICT assets comprising more than 50% of its total assets (such as us) may obtain up to a 34.0% interest in an Internet-only bank, and is required to obtain approval from the FSC in order to become its largest shareholder.

Other Businesses

We also engage in various business activities that extend beyond telecommunications and financial services, including information technology and network services, real estate development and satellite services. Our other businesses accounted for 11.6% of our operating revenue in 2019.

Information Technology and Network Services

We offer a broad array of integrated information technology and network services to our business customers. Our range of systems integration services includes consulting, designing, building and maintaining systems and communication networks that satisfy the individual needs of our customers in the public and private sectors. We also operate Internet data centers located throughout Korea and provide a wide range of computing services to companies that need servers, storage and leased lines. Data centers are facilities used to house, protect and maintain network server computers that store and deliver Internet and other network contents. Our data centers are designed to meet international standards, and are equipped with temperature and humidity control systems, regulated and reliable power supplies, mechanical equipment, fire detection and suppression equipment, security monitoring and wide-bandwidth connections to the Internet. Our data centers offer network outsourcing services, server operation services and system support services to our corporate customers.

Real Estate Development

We own land and real estate in various locations throughout Korea. Technological developments have enhanced the coverage area of telecommunications facilities, which enable us to better utilize our existing land and other real estate holdings. Through our wholly-owned subsidiary KT Estate, we engage in the planning and development of residential complexes and commercial buildings on our unused sites, as well as in the leasing of buildings we own. Under the “Remark VILL” brand, we also lease units in residential complexes developed by us in urban areas such as Seoul and Busan.    

Sale of Goods

We recognize revenue related to sale of goods, primarily handsets sold to subscribers of our mobile services as well as miscellaneous telecommunications equipment sold to vendors and other telecommunications companies and sale of residential units and commercial real estate developed by KT Estate. We purchase handsets primarily from Samsung Electronics, Apple and LG Electronics. Sale of goods accounted for 16.8% of our operating revenue in 2019.

Our Rates

We offer various service plans for our mobile, fixed-line and media and content services. For our individual customers, we offer rate plans targeting specific customer segments that aim to address their individual needs. We also offer bundled rate plans that provide discounts for subscribing to a combination of our services, as well as family plans that provide discounts for multiple line subscriptions under one household. For many of our services, we provide additional discounts for customers who commit to extended subscription periods. We provide an online tool designed to help our customers select a plan that is customized to their needs. Our service rates are typically charged on a monthly basis and are due at the end of the month. Our customers are also assessed a 10.0% VAT, which is included in the monthly subscription rates that we charge to our customers.

Our rates for business customers are tailored to the specific needs of the business customers.

 

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Mobile Services

We offer a wide range of mobile service plans that vary depending, among others, on mobile technology (5G, LTE orW-CDMA), mobile device (mobile phone, tablet or other WiFi device) and age category, under which we offer plans based on usage volume for voice calling, data transmission and text messaging as well as addition of value-added services. Our premium packages offer unlimited voice calling, data transmission and text messaging as well as additional media content. We also provide plans specially designed for elderly and young subscribers as well as special discounts to subscribers with physical disabilities or on welfare programs. We do not charge an activation fee for our mobile services.

For mobile service plans that offer unlimited data transmission, we typically decelerate data transmission speeds after a subscriber reaches a set data usage threshold. For usage-based data transmission plans, our subscribers are typically charged additional data transmission fees if usage exceeds the applicable quota. However, for many of our plans, we provide our subscribers the ability to bank unused data transmission quota of the current month to the following month, or borrow quota allocated to the following month if the current monthly quota have been exhausted.

We also subsidize the purchase of new handsets by our qualifying subscribers who agree to use our service for a predetermined service period and purchase handsets on an installment basis. Under the Handset Distribution Reform Act, everyone, regardless of their status, is entitled to receive either a handset subsidy related to the purchase of a recently released mobile phone, or a discount on the mobile service subscription rate. The ceiling on handset subsidies previously imposed was phased out in October 2017, but the MSIT announced policy guidelines to promote additional discounts on mobile service subscription rates. Following such policy guidelines, we increased the maximum discount rate applicable to mobile subscribers who elect not to receive handset subsidies from 20.0% to 25.0% starting in September 2017.

 

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The following table summarizes the terms of our representative 5G and LTE mobile service plans that we currently offer:

 


Plan

  Monthly
Rate
  Voice
Calls
  Video
Calls
  


Data Transmission

  


Additional Features

5G Super Plan Premium

  130,000  Unlimited  300 min.  Unlimited  

•    Unlimited data roaming at 3 Mbps

•    Handset insurance using reward points

•    No service fee for additional smart device

5G Super Plan Special

  100,000  Unlimited  300 min.  Unlimited  

•    Unlimited data roaming, but decelerate to 100 kbps

•    Handset insurance using reward points

•    No service fee for additional smart device

5G Super Plan Basic

  80,000  Unlimited  300 min.  Unlimited  

•    Unlimited data roaming, but decelerate to 100 kbps

5G Slim

  55,000  Unlimited  300 min.  Unlimited, but decelerate to 1 Mbps after 8 GB  

Data On Premium

  89,000  Unlimited  300 min.  Unlimited  

•    Handset insurance using reward points

•    No service fee for additional smart device

•    Media package offering music, video, webtoon and movie content.

Data On Video

  69,000  Unlimited  300 min.  Unlimited, but decelerate to 5 Mbps after 100 GB  

•    Mobile TV package offering live broadcast and VOD contents of up to 2 GB per day

Data On Talk

  49,000  Unlimited  300 min.  Unlimited, but decelerate to 1 Mbps after 3 GB  

•    Mobile TV package offering live broadcast and VOD contents of up to 2 GB per day

LTE Basic

  33,000  Unlimited  50 min.  1.4 GB with an option to transfer data from and into the next month’s usage  

In addition to our mobile service plans, we offer value-added services for additional monthly fees that can be added to the subscription such as media packages, mobile TV packages, additional data transmission packages, caller ID, music service packages and ring tone services and usage reporting services. We also offer fixed-rate international roaming plans that provide data roaming services in various countries around the world, which may be scheduled or automatically activated upon access from an overseas location.

Our mobile services also generate interconnection charges and expenses. For a call initiated by a mobile subscriber of one of our competitors to our mobile subscriber, the competitor collects from its subscriber its normal rate and remits to us amobile-to-mobile interconnection charge. In addition, for a call initiated by our mobile subscriber to a mobile subscriber of one of our competitors, we collect from our subscriber our normal rate and remit to the competitor amobile-to-mobile interconnection charge.

 

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The following table shows the interconnection charges we paid per minute (exclusive of VAT) to our competitors, and the charges received per minute (exclusive of VAT) from mobile operators for mobile to mobile calls:

 

   Effective Starting 
   January 1, 2017   January 1, 2018   January 1, 2019 

KT

  14.6   13.1   11.6 

SK Telecom

   14.6    13.1    11.6 

LG U+

   14.6    13.1    11.6 

Fixed-line Services

Fixed-line Telephone Services

Local and Domestic Long-distance. Our standard usage-based fixed-line telephone service plan consists of a base monthly rate of5,720 and usage fees for local and domestic long-distance calls, as well as calls to VoIP phones and mobile phones. We charge42.9 per three-minute increment for local calls,15.95 per ten second increment for domestic long-distance calls,53.9 per three-minute increment for calls to VoIP phones and15.95 per ten second increment for calls to mobile phones.All usage-based fees are subject to discounts during certainlow-usage periods of the day and on national holidays. The rates we charge for local calls are subject to approval by the MSIT after consultation with the MOEF. For our subscribers who are initiating fixed-line telephone services, we charge aone-time nonrefundable activation fee of60,000, which is waived with a three-year subscription commitment.

We also offer a flat rate fixed-line telephone service plan with a base monthly rate of12,100 (or8,470 for a three year subscription commitment) that includes 50 hours of local and domestic long-distance calls and calls to VoIP phones. Calls to mobile phones are not included in the free 50 hours, and we charge14.50 per ten second increment for such calls. For a premium plan with a base monthly fee of16,500 (or11,550 for a three year subscription commitment), calls to KT mobile subscribers are included as part of the free 50 hours.

Until April 2001, we collected refundable service activation deposits for our fixed-line telephone services, which were refunded upon termination of service. As of December 31, 2019, we had292 billion in refundable service activation deposits outstanding and 1.3 million subscribers enrolled under the deposit plan, each of whom are eligible to switch to ano-deposit plan and receive a refund of their service activation deposit, less thenon-refundable service activation fee.

International Long-distance. For our international long-distance services, fees forout-going calls vary based on the destination country and whether the user has subscribed to an international long-distance services plan, which can be customized based on the type of telecommunication device (mobile or fixed-line), destination countries and other customer preferences. Usage is typically measured inone-second increments. We pay a settlement fee to the relevant foreign carrier for such calls under a bilateral agreement with the foreign carrier. For incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial services), we receive settlement payments from the relevant foreign carrier at the applicable settlement rate specified under the relevant bilateral agreement.

Land-to-mobile Interconnection. We provide other telecommunications service providers, including mobile operators and other fixed-line operators, interconnection to our fixed-line network. For a call initiated by a landline user to a mobile service subscriber, we collect from the landline user theland-to-mobile usage charge and remit to the mobile service provider aland-to-mobile interconnection charge. We recognize asland-to-mobile interconnection revenue the entire amount of the usage

 

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charge collected from the landline user and recognize as expense the amount of interconnection charge paid to the mobile service provider. The MSIT periodically issues orders setting the interconnection charge calculation method applicable to interconnections with mobile service providers. The MSIT 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 VAT) to mobile operators for landline to mobile calls:

 

   Effective Starting 
   January 1, 2017   January 1, 2018   January 1, 2019 

SK Telecom

  14.6   13.1   11.6 

LG U+

   14.6    13.1    11.6 

Land-to-land andMobile-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 aland-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 amobile-to-land interconnection charge.

The following table shows such interconnection charge per minute collected for a call depending on the type of call, as determined by the MSIT:

 

   Effective Starting 
   January 1, 2017   January 1, 2018   January 1, 2019 

Local access(1)

  9.7   8.7   7.8 

Single toll access(2)

   10.9    10.0    9.2 

Double toll access(3)

   14.8    12.7    12.2 

 

Source: The MSIT.

 

(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.

VoIP Telephone Services

Our VoIP telephone services offer rate plans that charge generally lower base monthly rates and usage-based fees compared to our fixed-line telephone services. For our subscribers who are initiating VoIP telephone services, we charge aone-time nonrefundable activation fee of11,000, which is waived with aone-year subscription commitment.

Broadband Internet Access Services

We offer various broadband Internet access service plans based on data transmission speed and data usage thresholds and offer discounts based on length of commitment that are applied for periods of up to four years. Most of our plans also include WiFi routers that enable our subscribers to create a WiFi environment in their residences. We charge our customers aone-time installation fee per site of27,500. We also charge a modem rental fee ranging from4,400 to22,000 per year that varies depending on the type of model required for the service plan, which is also subject to discounts and waivers based on length of subscription commitment period.

 

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The following table summarizes the terms of our representative broadband Internet access service plans that we currently offer:

 


Plan

  Monthly Rate   Rate with
3 Year Term
   Maximum
Speed
  Max Speed
Daily Limit (1)
  

Additional Features

10 GiGA Max 10G

  110,000   88,000   10 Gbps  1000 GB  2 WiFi routers included.

10 GiGA Max 5G

  82,500   60,500   5 Gbps  500 GB  2 WiFi routers included.

10 GiGA Max 2.5G

  60,500   44,000   2.5 Gbps  250 GB  Discount on 1 WiFi router rental.

GiGA Internet Max 1G

  55,000   38,500   1.0 Gbps  150 GB  

Internet Max 100M

  39,600   22,000   100 Mbps  None  

 

 

(1)

Data transmission speed is reduced to 100 Mbps if data usage exceeds the specified maximum speed daily limit.

Media and Content Services

Our IPTV and satellite TV service plans vary based on the package of media channels provided, availability of UHD channels and the inclusion of other value-added services. In addition to monthly rates for subscription, we charge aone-time installation fee of27,500 perset-top box and a digitalset-top box rental fee ranging from7,700 to9,900 per year that varies depending on the type ofset-top box required for the service plan, which is also subject to discounts and waivers based on length of subscription commitment period. We also offer variousvideo-on-demand contents for streaming and downloading for a fee. In addition to offering service plans that enable TV viewing at home as well as access on mobile devices, we provide separate mobile TV plans at lower rates that are specifically designed for mobile devices.

The following table summarizes the terms of our representative IPTV and satellite TV service plans that we currently offer:

 


Plan

  

Monthly
Rate

  

Rate with
3 Year Term

  Channels
(UHD)
   

Additional Features

Olleh TV Live

        

TV Movie Plus

  55,000  44,000   270 (6)   

•    Prime movie package that provides access to more than 28,000video-on-demand contents.

•    Catch-on & Plus channel dedicated to latest popular movies and dramas.

•    Discounts on online TV home shopping purchases.

•    Monthly coupon of10,000 forvideo-on-demand plus 25% discount on all such contents.

TV Slim

  16,500  13,200   238 (3)   

Olleh TV Skylife

        

TV Entertainment

  31,020  24,816   225 (5)   

•    Monthly coupon of10,000 forvideo-on-demand.

TV Slim

  16,500  13,200   206 (5)   

Bundled Rate Plans

In order to provide our customers with additional value and further promote our marketing efforts to cross sell our various services, we provide our customers with various bundled rate plans that provide discounts for subscribing to a combination of our services, as well as family plans that provide discounts for multiple line subscriptions under one household. As of December 31, 2019, the majority of our subscribers participated in our bundled rate plans.

 

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Fixed-line Packages

We offer substantial discounts to customers who subscribe to two or more of our fixed-line and TV services consisting of fixed-line telephone, VoIP telephone, broadband Internet access, IPTV and satellite TV services. Subscription payments collected pursuant to our bundled rate plans are allocated to each service.

Mobile Packages

For our mobile services, we offer family plans that provide monthly discounts of up to11,000 per mobile phone subscription. Up to five members of a household may participate in our family plans.

Fixed-line and Mobile Combination Packages

We also offer various bundled rate plans that combine our fixed-line and TV services with mobile services, for both households and single subscribers. For households that subscribe to broadband Internet access as well as mobile services, our premium family plan provides discounts of approximately 50% for broadband Internet access subscription as well as for mobile services of each additional family member (up to four additional members).

Competition

We face significant competition in each of our principal business areas. In the markets for mobile services, fixed-line services and media and content services, we compete primarily with SK Telecom and LG U+ (including their affiliates). In the past two decades, considerable consolidation in the telecommunications industry has occurred, resulting in the current competitive landscape comprising three network service providers that offer a wide range of telecommunications and data communications services. Each of our primary competitors has recently acquired or announced plans to acquire a leading cable TV operator in Korea to significantly increase their market shares in the pay TV market, which we expect will further intensify competition. In December 2019, LG U+ completed its acquisition of a controlling interest in CJ Hello Co., Ltd, which subsequently became LG HelloVision Co., Ltd. In February 2019, SK Telecom announced its plan to merge witht-broad, which is expected to be completed in the second quarter of 2020.

To a lesser extent, we also compete with various value-added service providers and network service providers as classified under the Framework Act on Telecommunications and the Telecommunications Business Act, including MVNOs that lease mobile networks and offer mobile services, VoIP service providers that offer Internet telephone services, cable TV operators, text messaging service providers (particularly Kakao) and voice resellers, many of which offer competing services at lower prices. We also face changes in the evolving landscape of the market for media and content services arising from the increasing popularity of globalover-the-top media services such as Netflix.

We compete primarily based on our service performance, quality and reliability, ability to accurately identify and respond to evolving consumer demand, and pricing. With the launch of the next generation 5G mobile services in April 2019, competition has further intensified among the three network service providers, which has resulted in an increase in marketing expenses, as well as additional capital expenditures related to implementing 5G mobile services. Mobile service providers also grant subsidies or subscription discount rates to subscribers who purchase new handsets and agree to a minimum subscription period, and we compete also based on such amounts. We and SK Telecom have been designated as market-dominating business entities in the local telephone and mobile markets, respectively, under the Telecommunications Business Act. Under this Act, a market-

 

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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. In addition, changes in our local telephone rates and mobile rates of SK Telecom require prior approval from the MSIT. The KCC has also issued guidelines on fair competition of the telecommunications companies.

In the financial services market, our credit and check cards issued under the “BC Card” brand pursuant toco-brand agreements with member companies compete principally with cards issued by other leading credit card companies in Korea with their own merchant payment networks, such as Shinhan Card, Hyundai Card and Samsung Card. Our member companies that issueco-branded credit or check cards include Woori Card, NH Card, Industrial Bank of Korea and KB Kookmin Card. We also compete with service providers that provide outsourcing services related to business operations of credit card companies. Competition in the credit card and check card businesses has increased substantially as existing credit card companies, consumer finance companies and other financial institutions in Korea have made significant investments and engaged in aggressive marketing campaigns and promotions for their credit and check cards, as well as investing in operational infrastructure that may reduce the need for our outsourcing services.

The following tables show the market shares in our principal markets in terms of subscribers as of the dates indicated:

Mobile Services

 

   Market Share (%)(1) 
   KT Corporation   SK Telecom   LG U+ 

December 31, 2017

   31.4    47.9    20.7 

December 31, 2018

   31.8    46.9    21.3 

December 31, 2019

   31.8    46.0    22.1 

 

Source: The MSIT.

 

(1)

Includes subscribers of MVNOs that lease mobile networks of the respective mobile service provider.

Fixed-line Local Telephone and VoIP Services

 

   Market Share (%) 
   KT Corporation   SK Broadband   LG U+ 

December 31, 2017

   65.2    15.1    12.5 

December 31, 2018

   65.1    14.8    12.6 

December 31, 2019

   64.9    14.6    12.7 

 

Source: Korea Telecommunications Operators Association.

Broadband Internet Access Services

 

   Market Share (%) 
   KT Corporation   SK Broadband   LG U+   Others 

December 31, 2017

   41.4    25.7    18.0    14.9 

December 31, 2018

   41.0    25.4    18.9    14.7 

December 31, 2019

   40.9    25.6    19.6    13.9 

 

Source: The MSIT.

 

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Pay TV Services

 

   Market Share (%) 
   KT Corporation (1)   SK Broadband   LG U+ 

December 31, 2017

   30.8    13.5    10.9 

December 31, 2018

   31.2    14.1    12.0 

December 31, 2019

   31.6    15.0    12.9 

 

Source: Korea Telecommunications Operators Association.

 

(1)

Including market share of KT Skylife.

Regulation

With the establishment of the MSIP in March 2013, many of the regulatory responsibilities formerly handled by the KCC have been transferred to the MSIP. On July 26, 2017, the MSIP was renamed as the Ministry of Science and ICT. Under the Framework Act on Telecommunications and the Telecommunications Business Act, the MSIT continues to have comprehensive regulatory authority over the telecommunications industry and all network service providers.

Since the establishment of its predecessor, the MSIP, the MSIT has assumed primary policy and regulatory responsibility for matters such as: (i) registration of network service providers and licensing of select services (the MSIT authorizes the licensing of IPTV service providers and, with the consent of the KCC, authorizes the licensing of satellite broadcasting companies); (ii) regulation of mergers and acquisitions, as well as license suspension and termination of network service providers; (iii) providing oversight on foreign ownership ratios in network service providers; and (iv) reviewing telecommunication matters as they relate to the public interest and approving ancillary telecommunication business activities. Additionally, the MSIT is responsible for a broad range of other policy and regulatory matters, including the administration and supervision of regulatory reporting by telecommunications companies, examination and analysis of accounting and business management practices in the industry, establishment and administration of policies governing telecommunications service fees, value-added service providers and network service providers, as well as supervision of reporting requirements of standard telecommunications service/user contracts.

The KCC’s overall policy role is to play a key role in regulatory activities aimed at protecting service users in the broadcast and telecommunications market and it continues to be responsible for investigations and sanctions regarding violations by telecommunications companies, as well as for mediating disputes between service providers and users. The KCC is established under the direct jurisdiction of the President of Korea and is comprised of five standing commissioners. Commissioners of the KCC are appointed by the President, and the appointment of the Chairperson must be approved at a confirmation hearing at the National Assembly.

Under the Act on Promotion of Information and Communications Network Utilization and Information Protection, etc., telecommunications service providers are also required to protect personal information of their customers. Generally, when a telecommunications service provider intends to collect or use its customer’s personal information, such telecommunications service provider, with certain exceptions, must notify and receive the customers’ consent in relation to the purpose of collection, the use of the collected personal information, types of personal information collected and period during which the personal information will be possessed and used. Korean telecommunications providers may not use their customers’ personal information for any purpose other than the purpose their customers have consented to. In addition, there are various internal processes that the telecommunications providers are mandated to install in order to collect and handle personal information of their customers. Pursuant to the amendments to the Act on Promotion on Information and Communications Network Utilization and Information Protection, etc. and the Personal Information

 

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Protection Act, such regulations relating to personal information will be enforced under the Personal Information Protection Act starting on August 5, 2020.

The MSIT also has the authority to regulate the pay TV market, including IPTV services. Under the Internet Multimedia Broadcasting Services Act, anyone intending to engage in the Internet multimedia broadcasting business must obtain a license from the MSIT. The ownership of the shares of an Internet multimedia broadcasting company by a newspaper, a news agency or a foreigner is limited. Furthermore, under the Internet Multimedia Broadcasting Services Act, an IPTV service provider, together with its affiliates providing IPTV services, is restricted from having more thanone-third of the market share of all paid broadcasting subscribers in Korea (consisting of IPTV, cable TV and satellite TV subscribers).

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 MSIT the rates and the general terms and conditions for each type of network service provided by it. However, 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 MSIT, it must obtain prior approval from the MSIT for the rates and the general terms for that service. Each year the MSIT designates the service providers and the types of services for which the rates and the general terms must be approved by the MSIT. In 1997, the MSIP designated us for local telephone service and SK Telecom for mobile service, which currently remains in effect. The MSIT, in consultation with the MOEF, 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. The form of our standard agreement for providing local network service and each agreement for interconnection with other service providers must also be reported to the MSIT.

The Government has also imposed regulations to restrict the amount of handset subsidies, which may cause mobile subscribers to subscribe to more expensive monthly plans in return for greater handset subsidies or may cause handset vendors to provide discriminatory subsidies based on consumers’ age, residence and subscription plan. In October 2014, the Handset Distribution Reform Act was implemented, with the primary objectives of reducing overall mobile service expenses to consumers, encouraging handset manufacturers to reduce retail prices and restricting discriminatory subsidy practices. Under the Handset Distribution Reform Act, everyone, regardless of their status, is entitled to receive either a handset subsidy related to the purchase of a recently released mobile phone, or a discount on the mobile service subscription rate. The ceiling on handset subsidies previously imposed was phased out in October 2017, but the MSIT announced policy guidelines to promote additional discounts on mobile service subscription rates. Following such policy guidelines, mobile service providers increased the maximum discount rate applicable to subscribers who elect not to receive handset subsidies from 20.0% to 25.0% starting in September 2017. The MSIT may periodically announce additional policy guidelines that telecommunications companies are recommended to take into consideration.In recent years, the MSIT has announced policy guidelines with objectives of reducing telecommunications service rates and promoting transparency in the decision making of telecommunications service providers. Specific policy guidelines include monthly rate reductions applicable to certainlow-income subscribers, which was implemented by mobile service providers in December 2017.

Other Activities

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

 

  

modify its licenses;

 

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

 

  

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

 

  

enter into a merger with another network service provider.

By submitting a report to the MSIT, a network service provider may enter into arrangements for services to be furnished to its customers by a different telecommunications service provider and, in connection therewith, may provide its telecommunications services to, or authorize the use of all or a portion of its telecommunications facilities by, such other telecommunications service provider. The MSIT can revoke our licenses or order the suspension of any of our businesses if we do not comply with the regulations of the MSIT under the Telecommunications Business Act.

The responsibilities of the MSIT include:

 

  

drafting and implementing plans for developing telecommunications technology;

 

  

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

 

  

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

In addition, 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 MSIT are required to provide universal telecommunications services such as local services, local public telephone services, broadband services, discount services for persons with disabilities and for certainlow-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, except for discount services for persons with disabilities and for certainlow-income persons, 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 MSIT. As for the costs and losses recognized by a universal service provider in connection with providing discount services for persons with disabilities and for certainlow-income persons, such costs and losses will be borne by such universal service provider.

Prior to April 2018, in accordance with the MSIT’s determination that we possessed essential infrastructure, we were required to permit other fixed-line communications service providers toco-use our fixed-line telecommunication infrastructure, upon the request of such other fixed-line telecommunications service providers. In April 2018, to facilitate expedient establishment of 5G mobile services infrastructure, the Government announced its initiatives to amend theco-use system, as follows: (i) we should permit not only fixed-line telecommunications service providers, but also mobile service providers such as SK Telecom and LG U+ toco-use our telecommunications infrastructure necessary for provision of 5G mobile services, (ii) the Government determined that we, SK Telecom, SK Broadband and LG U+ possessed essential infrastructure with respect to the interval between the cable entry at a building and the initial occurrence of connection within the building and required that the three companies share such infrastructure throughout buildings in Korea with each other, and (iii) fixed-line telecommunications service providers and mobile service providers are required to participate in joint efforts to construct additional fixed-line and mobile network architecture. For more information on our mobile network architecture, see “Item 4.D. Property, Plant and Equipment—Mobile Networks.”

 

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In addition, 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 MSIT based on our cost, and taking into consideration an appropriate rate of return, to enable them to provide voice and broadband services. Revenue from local loop unbundling, if any, are recognized as revenue from other businesses.

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 in the aggregate own more than 49.0% of the issued shares with voting rights of a network service provider, including us. For purposes of the Telecommunications Business Act, the term “foreign invested company” means a company in which a foreigner or a foreign government is the largest shareholder and holds 15.0% or more of the company’s shares with voting rights, provided, however, that such company will not be counted as a foreign shareholder for the purposes of the 49.0% limit if (1) it holds less than 1.0% of our total issued and outstanding shares with voting rights or (2) if the largest shareholder of such company is a government or foreign entity of a country that is a counterparty to a free trade agreement with Korea, as publicly announced by the MSIT, and the MSIT determines that the fact that such foreign government or entity holds a 15.0% or greater shareholding in such company does not present a risk of harm to the public interest. However, the calculation of the above-referenced 49% ceiling will apply to: (x) any foreign entities that have entered into a major management-related agreement with a network service provider or the shareholder(s) thereof; and (y) foreign entities that have entered into an agreement pertaining to the settlement of fees relating to the handling of international electronic telecommunications services. As of December 31, 2019, 46.6% 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 MSIT may require corrective measures be taken to comply with the ownership restrictions.

In addition to the 49.0% limit referenced above, 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. In addition, under the Telecommunications Business Act, the MSIT may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. 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 MSIT may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a period of up to six months.

Customers and Customer Billing

We typically charge residential subscribers and business subscribers similar rates for services provided. On acase-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

 

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subscriber’s designated credit card account. Approximately 86.6% of our subscribers as of December 31, 2019 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.

Credit Card Business

Through BC Card in which we hold a 69.54% interest, we offer various credit card processing and related financial services.BC Card is regulated and supervised as a Specialized Credit Financial Business (“SCFB”), as defined under the Specialized Credit Financial Businesses Act of Korea (“SCFBA”). The SCFBA subjects SCFB companies to licensing (for credit card businesses) and registration (for leasing, installment finance or new technology finance businesses) requirements and provides guidance and restrictions regarding capital adequacy, liquidity ratios, loans to major shareholders, reporting and other matters relating to the supervision of SCFB companies. The SCFBA delegates regulatory authority over SCFB companies to the FSC and FSS. The FSC has the authority to suspend the operations of an SCFB company for up to six months fornon-compliance with certain regulations under the SCFBA and issue certain administrative orders. The FSC is also entitled to cancel a license or registration if an SCFB company fails to comply with certain SCFBA regulations or FSC administrative orders, including a suspension order.

The SCFBA and the regulations thereunder require an SCFB company to satisfy a minimumpaid-in capital amount of (i) Won 20 billion, where the SCFB company engages in no more than two kinds of core businesses and (ii) Won 40 billion, where the SCFB company, such as BC Card, engages in three or more kinds of core businesses. An SCFB engaging in a credit card business must maintain a total Tier I and Tier II capital adequacy ratio (adjusted equity capital divided by adjusted total assets) of 8% or more. In addition, an SCFB company must maintain aone-month-or-longer delinquent claim ratio (delinquent claims divided by total claims) of less than 10%.

Under the SCFBA and the regulations thereunder, an SCFB company is required to maintain a Won liquidity ratio(Won-denominated current assets divided byWon-denominated current liabilities) of 100% or more. In addition, if an SCFB company is registered as a foreign exchange business institution with the MOEF, such SCFB company is required to maintain (1) a foreign-currency liquidity ratio (foreign currency liquid assets due within three months divided by foreign-currency liabilities due within three months) of not less than 80%, (2) a ratio of foreign currency liquid assets due within seven days less foreign currency liabilities due within seven days, divided by total foreign-currency assets, of not less than 0%, and (3) a ratio of foreign currency liquid assets due within a month less foreign currency liabilities due within a month, divided by total foreign-currency assets, of not less than negative 10%.

Under the SCFBA and the regulations thereunder, an SCFB company may not provide loans in the aggregate exceeding 50% of its equity capital to its major shareholders (including their specially related persons).

Pursuant to the SCFBA and the regulations thereunder, an SCFB company is required to submit business reports to the FSC regarding, among others, financial statements, actual results of management and soundness of assets. An SCFB company is also required to provide information regarding specific matters, including: (i) the amount of loans provided to major shareholders as of the end of each quarter; (ii) changes in the aggregate amount of such loans and the terms and conditions of the credit extension transactions for each quarter; (iii) the amount of stocks acquired by major

 

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shareholders as of the end of each quarter; and (iv) changes in the aggregate amount of stocks held and the acquisition price of such stocks for each quarter, in each case within one month of the end of each quarter. In addition, an SCFB company is required to file a report to the FSC upon the occurrence of certain events, including (i) changes to its name; (ii) changes to the largest shareholder; or (iii) changes of 1% or more in the ownership of stocks with voting rights held by a major shareholder and such major shareholder’s specially related persons, in each case within seven days from the date of its occurrence.

Insurance

We carry insurance against loss or damage to all significant buildings and automobiles. Except for our insurance coverage of our satellites and 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 provideco-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 slowdowns in communication connections could expose us to potential liabilities for losses relating to the disrupted businesses of our customers relying on our services.

Information Technology and Operational Systems

Enhancement of our information technology and operational systems and efficient utilization of such systems are important in effectively promoting our core strategies. We are committed to continually investing in and enhancing our information technology systems, which provide support to many aspects of our businesses. In order to respond more effectively to a changing business environment, an enterprise resource planning system (the “ERP System”) was implemented in July 2012. We are committed to continually investing in and enhancing our information technology systems, which provide support to many aspects of our businesses. In June 2017, a business support system, called KT One System (“KOS”), was implemented. KOS is our wired/wireless system integration program that unified wired/wireless workflows, structures and systems that had been separated previously. KOS has contributed to enhancing various aspects of our business processes and control systems.

Patents and Licensed Technology

The ability to obtain and protect intellectual property rights to the latest telecommunications technology is important for our business. We own or have licenses to various patents and trademarks in Korea and overseas, and have applications for patents pending in Korea and other select countries such as the United States, Europe, China and Japan. A majority of our patents registered in Korea and overseas relate to our wireless and fixed-line telecommunications, media and IoT technologies. In addition, we operate several research and development (“R&D”) laboratories to develop latest technology and additional platforms, as described in “Item 5.C. Research and Development, Patents and Licenses, Etc.” We license our intellectual property rights to third parties in return for periodic royal payments. We currently do not license any material technologies or patents from third parties.

Seasonality of the Business

Our main business generally does not experience significant seasonality.

 

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Item 4.C.  Organizational Structure

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

Item 4.D.  Property, Plant and Equipment

Our principal fixed asset is our integrated telecommunications networks. In addition, we own buildings and real estate throughout Korea. As of December 31, 2019, the net book value of our property, plant and equipment was13,785 billion, of which3,424 billion is accounted for by the net book value of our land, buildings and structures. As of December 31, 2019, the net book value of our investment properties, which is accounted for separately from our property and equipment was1,387 billion. Other than as may be described in this annual report, no significant amount of our properties is leased. There are no material encumbrances on our properties including the fixed assets below.

Our fixed-line equipment vendors and mobile equipment suppliers include well-known international and local suppliers such as Samsung Electronics, Ericsson, Nokia, Juniper and Cisco Systems.

Mobile Networks

Our mobile network architecture includes the following components:

 

  

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

 

  

centralized centers, which are physical locations with baseband units of base transceiver stations;

 

  

core networks, which connect to and control the base transceiver stations and provide the gateway to other networks and services; and

 

  

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

One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth allocated to a service provider. We have acquired a number of bandwidth licenses to secure additional bandwidth capacity to provide our broad range of services, for which we typically make an initial payment as well as pay usage fees during the license period. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results—Overview—Acquisition of New Bandwidth Licenses and Usage Fees.”

Exchanges

Exchanges include local exchanges and “toll” exchanges that connect local exchanges to long-distance transmission facilities. We had approximately 23.3 million lines connected to local exchanges and 2.2 million lines connected to toll exchanges as of December 31, 2019.

All of our exchanges are fully digital and automatic in order to provide higher speed and larger volume services. In addition, all of our lines connected to toll exchanges are compatible to IP platform.

 

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Internet Backbone

Our Internet backbone network, called KORNET, has the capacity to handle aggregate traffic of our broadband Internet access subscribers, data centers and Internet exchange system at any given moment of up to 17.4 Tbps as of December 31, 2019.We have set up contingent plans to prepare against various incidents that could affect reliable Internet access service. Our IP premium network enables us to more reliably support IPTV, VoIP and otherIP-related services. As of December 31, 2019, our IP premium network had 3,122 lines installed to provide mobile data services, 1,546 lines installed to provide IPTV services and a total capacity to handle up to 3.3 Tbps of IPTV, voice, mobile data and virtual private network (“VPN”) service traffic.

Access Lines

As of December 31, 2019, we had 22.4 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 most of our access lines by equipping them with broadband capability using FTTH technology. As of December 31, 2019, we had approximately 22.2 million broadband lines with speed of at least 50 Mbps that enable us to deliver broadband Internet access and multimedia contents to our customers.

Transmission Networks

Our domestic fiber optic cable network consisted of 847,497 kilometers of fiber optic cables as of December 31, 2019 of which 129,546 kilometers of fiber optic cables are used to connect our backbone network and 717,951 kilometers are used to connect the backbone network to our subscribers. Our backbone network utilizes 64 Tbp Long-haul Reconfigurable Optical Add Drop Multiplexer (“ROADM”) technology for connecting cities. ROADM technology improves bandwidth efficiency by enabling data to be transmitted from multiple signals across one fiber strand in a cable and carrying each signal on a separate wavelength.Our transmission backbone network connecting major cities in Korea utilize Packet Optical Transport Network (“POTN”), and we access such network through multi-service provisioning platform (“MSPP”) architecture.

Our extensive domestic long-distance network is supplemented by our fully digital domestic microwave network, which consisted of 53 relay sites as of December 31, 2019.

International Networks

Our international network infrastructure consists of both submarine cables and satellite transmission systems, including two submarine cable-landing stations in Busan and Keoje and one satellite teleport in Kumsan. International traffic is handled by submarine cables and telecommunications satellites. 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. We also operate satellites periodically launched by us, as well as lease satellite capacity from other satellite operators. Data services such as international private lease circuits, IP 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 variouspoints-of-presence in the United States, Asia and Europe. In addition, as of December 31, 2019, our international telecommunications networks were directly linked to 252 telecommunications service providers in various international destinations and are routed through our three international switching centers in Seoul, Daejeon and Busan.

 

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As of December 31, 2019, our international Internet backbone with capacity of approximately 2,220 Gbps is connected to approximately 300 Internet service providers through our three Internet gateways in Hyehwa, Guro and Busan.In addition, we operate a broadcasting backbone with capacity of 1.1 Gbps to transmit broadcasting signals from Korea to the rest of 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 IFRS as issued by the IASB.

Overview

We are an integrated provider of telecommunications services. Our principal telecommunications and Internet-related services include mobile voice and data telecommunications services, fixed-line services (consisting of fixed-line telephone, VoIP telephone, broadband Internet access and data communication services) and media and content services (including IPTV and satellite TV). The principal factors affecting our revenue from these 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—Our Rates.” In addition, we derive revenue from credit card processing and other financial services, sale of goods (primarily handsets related to our mobile services and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate developed KT Estate), and miscellaneous business activities including information technology and network services, real estate development and satellite services.

Our four operating segments for financial reporting purposes are organized as the following:

 

  

the ICT segment, which consists of KT Corporation on a standalone basis that is primarily engaged in providing various telecommunications services to individual and household customers as well as corporate customers;

 

  

the finance segment, which engages in providing various financial services such as credit card services;

 

  

the satellite TV segment, which engages in satellite TV services; and

 

  

the others segment, which includes (i) security services, (ii) satellite service, (iii) information technology and network services, (iv) global business services that provide global network services to multinational or domestic corporate customers and telecommunications companies, (v) sale of handsets and (vi) real property development and leasing services and other services provided by our subsidiaries.

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—

 

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Item 3.D. Risk Factors—If economic conditions in Korea deteriorate, our current business and future growth could be materially and adversely affected” and “—The ongoing global pandemic of a new strain of coronavirus(“COVID-19”) and any possible recurrence of other types of widespread infectious diseases, may adversely affect our business, financial condition or results of operations.” 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:

 

  

acquisition of new bandwidth licenses and usage fees;

 

  

researching and implementing technology upgrades and additional telecommunications services such as 5G technologies;

 

  

changes in the rate structure for our telecommunications services;

 

  

acquisitions and disposals of interests in subsidiaries and joint ventures; and

 

  

marketing activities.

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

Acquisition of New Bandwidth Licenses and Usage Fees

One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth allocated to a service provider. The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have been significant factors in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than voice services. The current trend of increasing data transmission use and the increasing sophistication of multimedia contents are likely to put additional strain on the bandwidth capacity of mobile service providers. We have acquired a number of licenses in recent years to secure additional bandwidth capacity to provide our broad range of services, for which we typically make an initial payment as well as pay usage fees during the license period.

We made bandwidth license payments of271 billion in 2017,573 billion in 2018 and389 billion in 2019. The following table sets forth our outstanding payment obligations relating to our bandwidth licenses as of December 31, 2019.

 

Spectrum

  

Bandwidth

  

License Acquisition
Date

  Total
Payable
Amount

(in billions
of Won)
   Initial
Payment
Amount

(in billions
of Won)
   Initial
Payment
Year
   Annual
Usage
Fee

(in billions
of Won)
   

Annual
Usage

Fee Payment
Term

800 MHz

  10 MHz  July 1, 2012  261   65    2012   33   2012 to 2020

900 MHz

  20 MHz  July 1, 2011  251   126    2011   16   2011 to 2021

1.8 GHz

  20 MHz  July 1, 2011  194   97    2011   16   2011 to 2021

1.8 GHz

  15 MHz  September 10, 2013  878   219    2013   82   2013 to 2021

1.8 GHz

  20 MHz  August 4, 2016  470   117    2016   35   2016 to 2026

2.1 GHz

  40 MHz  December 4, 2016  569   142    2016   85   2016 to 2021

3.5 GHz

  100 MHz  December 1, 2018  968   242    2018   73   2018 to 2028

28 GHz

  800 MHz  December 1, 2018  208   52    2018   31   2018 to 2023

Researching and Implementing Technology Upgrades and Additional Telecommunications Services such as 5G Technologies

The telecommunications industry is characterized by continued advances and improvements in telecommunications technology, and we have been continually researching and implementing network

 

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upgrades and launching additional telecommunications services to maintain our competitiveness. In recent years, we have made extensive efforts to continue to develop mobile services with enhanced speed, latency and connectivity that enable us to offer significantly improved wireless data transmission with faster access to multimedia content. We commercially launched our next generation 5G mobile services with transmission speed of up to 1.5 Gbps in April 2019, initially focusing on the Seoul metropolitan area, six additional metropolitan cities, high-traffic commercial areas and university campuses as well as major transportation infrastructure such as highways, railways and airports. We plan to further expand the coverage nationwide and increase the transmission speed of our 5G services.

We also make investments to continually upgrade our broadband network to enable better FTTH connection, which further enhances data transmission speed 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 services that require high bandwidth with stability, such as IPTV and other digital media content. The MSIT has the authority to recommend to network service providers that they provide funds for national research and development of telecommunications technology and related projects. Including such contributions, total expenditures (which include capitalized expenses) on research and development were435 billion in 2017,273 billion in 2018 and254 billion in 2019.We plan to continue to invest in researching and implementing network upgrades, which will entail additional operating expenses as well as capital expenditures.

Fee Discounts and Adjustments to the Rates for Our Telecommunications Services

We provide bundled packages of our various services at a discount in order to attract additional subscribers to our new services. We offer discounts to customers who subscribe to two or more of our fixed-line and TV services consisting of fixed-line telephone, VoIP telephone, broadband Internet access, IPTV and satellite TV services. For our mobile services, we offer family plans that provide monthly discounts of up to11,000 per mobile phone subscription. We also offer various bundled rate plans that combine our fixed-line and TV services with mobile services, for both households and single subscribers. See “Item 4. Information on the Company—Item 4.B. Business Overview—Our Rates.”

The MSIT, in consultation with the MOEF, currently approves rates charged by us for local telephone service. The form of our standard agreement for providing local network service and each agreement for interconnection with other service providers must also be reported to the MSIT. Although we compete freely with other network service providers in terms of rate plans for our principal telecommunications and Internet-related services except for rates we charge for local calls, the MSIT may periodically announce policy guidelines that we may be recommended to take into consideration.In recent years, the MSIT has announced policy guidelines with the objectives of reducing mobile service rates and promoting transparency in the decision making of telecommunications service providers. Specific policy guidelines include monthly rate reductions applicable to certainlow-income subscribers as well as subscription rate discounts in lieu of handset subsidies. Starting in December 2017, we began providing rate discounts of up to11,000 per month to ourlow-income mobile subscribers on government welfare programs. We also increased the maximum discount rate applicable to mobile subscribers who elect not to receive handset subsidies from 20.0% to 25.0% starting in September 2017. Such discounts have contributed to a decrease in the average monthly revenue per subscriber of our mobile services from34,444 in 2017 to32,021 in 2018 and31,625 in 2019.

 

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The Government may pursue additional measures to regulate the markets in which we compete. There can be no assurance that we will not adopt additional measures that reduce rates charged to our subscribers as well as adjustments to our handset subsidies and other measures in the future to comply with regulatory requirements or the Government’s policy guidelines. For a discussion of adjustments in our rate structure, see “Item 4. Information on the Company—Item 4.B. Business Overview—Our Rates.”

Acquisitions and Disposals of Interests in Subsidiaries and Joint Ventures

One key aspect of our overall business strategy calls for acquisitions of businesses and entering into joint ventures that complement or diversify our current business, as well as disposal or termination of such businesses from time to time. For example, we have pursued investment opportunities in the financial sector in the past decade that we believe provide attractive growth opportunities. In October 2011, we acquired a controlling interest in BC Card, a leading credit card solutions provider in Korea in which we hold a 69.54% interest. We also acquired 10.00% of the common shares of K Bank, an Internet-only bank that began its commercial operations in April 2017, which interest is accounted for using the equity method of accounting. In April 2020, we agreed to transfer such interest to BC Card for36.3 billion, which transfer would take place only upon satisfaction of certain conditions. Our financial condition and results of operations may be affected as a result of such acquisitions, disposals or consolidation. Furthermore, pursuing acquisitions, joint venture and certain investment transactions also requires significant capital, and as we pursue further growth opportunities for the future, we may need to raise additional capital by incurring loans or through the issuances of bonds or other securities in the international capital markets, which may lead to increased levels of debt and debt servicing costs in the future.

Marketing Activities

We engage in marketing activities to promote our new, as well as existing, products and services and to further strengthen our marketing efforts through our network of independent exclusive dealers and other third-party dealers. Our marketing expenses, consisting of sales commissions and advertising expenses, amounted to2,399 billion in 2017,2,101 billion in 2018 and2,466 billion in 2019. Sales commissions primarily consist of sales commissions to third-party dealers related to procurement of mobile subscribers and mobile handset sales, and our advertising expenses relate primarily to our utilization of television commercials and Internet and mobile advertising as well as promotional events.

While we believe that our large subscriber base as well as the brand power of our products and services will remain key drivers of our growth, we expect to continue to invest significantly in marketing activities, particularly in connection with launching of new products and services such as the launch of our 5G mobile services in April 2019. Our marketing expenses may not directly correspond to our revenue in the same period, and our quarterly marketing expenses have fluctuated in the past and are expected to continue to fluctuate in the future.

Critical Accounting Policies

We have prepared our consolidated financial statements in accordance with IFRS as issued by the IASB. These accounting principles require our management to make certain 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 revenue 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

 

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sources. On anon-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, equipment, intangible assets and investment property;

 

  

impairment of long-lived assets, including goodwill;

 

  

valuation and impairment of financial assets;

 

  

amortization of contract assets, contract liabilities and contract cost assets;

 

  

income taxes;

 

  

post-employment benefit liabilities; and

 

  

provisions.

Allowances for Doubtful Accounts

Allowance for doubtful accounts is our best estimate of the amount of impairment losses incurred on our existing notes and accounts receivable. We apply the simplified approach, which requires expected lifetime credit losses to be recognized from the initial recognition of the receivable. 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 our trade and other receivables in the three-year period ended December 31, 2019 are summarized as follows:

 

   Year Ended December 31, 
   2017  2018  2019 
   (In millions of Won) 

Balance at beginning of year

  612,487  523,799  453,746 

Provision

   44,697   113,065   60,193 

Reversal orwritten-off

   (131,341  (185,117  (135,096

Changes in the scope of consolidation

   (142      

Others

   (1,902  1,999   156 
  

 

 

  

 

 

  

 

 

 

Balance at end of year

  523,799  453,746  378,999 
  

 

 

  

 

 

  

 

 

 

If economic or specific industry trends change, we would adjust our allowances for doubtful accounts by recording additional expense or benefit. See Note 6 of the Consolidated Financial Statements.

 

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Useful Lives of Property, Equipment, Intangible Assets and Investment Property

Property and equipment, intangible assets and investment properties (excluding land, condominium memberships, golf club memberships and broadcasting concession) are depreciated using the straight-line method over their useful lives as disclosed in Note 3.8 to the Consolidated Financial Statements. An asset’s residual value and useful lives are reviewed and adjusted at the end of each financial reporting period, and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than 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.

Impairment of Long-Lived Assets, including Goodwill

Long-lived assets generally consist of property and equipment and intangible assets, including goodwill. 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 recognized when the asset’s recoverable amount is less than its carrying amount. The recoverable amount of a long-lived asset is the greater of an asset’s fair value less costs to sell and its value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The recoverable amounts of cash-generating units are based on their value in use calculated by applying the annual discount rate ranging from 4.64% to 21.90% (depending on the segment) to the estimated future cash flows based on financial budgets for the next five years. An annual growth rate of 0.0% to 1.0% was applied for the cash flows expected to be incurred after five years. 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 estimated recovery value. For example, in 2019, we recognized impairment loss of39 billion in relation to KT Skylife, as the carrying amount of cash-generating units exceeded the recoverable amount, and we recognized such impairment loss as operating expense in the consolidated statement of profit or loss. See Note 13 of the Consolidated Financial Statements.

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

Valuation and Impairment of Financial Assets

The fair value of financial instruments, including derivative instruments, which are not traded in an active market, is determined by using valuation techniques. Our management uses its judgment to select a variety of methods and makes assumptions that are mainly based on market conditions existing at the end of each reporting period.

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 a change in the fair value of derivative

 

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instruments are recognized in current earnings. However, for derivative instruments that qualify for cash flow hedge accounting, the effective portion of the gain or loss on the derivative instruments is recognized in the cash flow hedge reserve within equity, and recognized as finance income (costs) for the periods when the corresponding transactions affect profit or loss.

For financial assets, we make an annual assessment at the end of each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. For equity investments, we make all subsequent measurements at fair value. For debt instruments carried at amortized cost and at fair value through other comprehensive income, we assess on a forward-looking basis the expected credit losses, using methods that depend on whether there has been a significant increase in credit risk. For trade receivables and lease receivables, we apply the simplified approach, which requires the expected lifetime credit losses to be recognized from the initial recognition of the receivable.

The provision for impairment for financial assets are based on assumptions about risk of default and expected loss rates. Significant management judgment is involved in making these assumptions and selecting the inputs to the impairment calculation based on our past history, existing market conditions as well as forward looking estimates at the end of each reporting period. Such assumptions and estimates 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, breach of contract such as default or delinquency in payments, disappearance of an active market for the financial asset and other adverse changes in the payment status of borrowers in the portfolio. The evaluation of these investments is also subject to the overall condition of the economy and its impact on the capital markets.

Amortization of Contract Assets, Contract Liabilities and Contract Cost Assets

We recognize revenue when we satisfy the performance obligations specified in a customer contract by transferring the goods or services to the customer. With the application of IFRS 15, we allocate a transaction price for such revenue recognition to each performance obligation based on relative standalone selling prices of the goods or services provided to the customer.

We have identified two main performance obligations: (i) provision of telecommunications services and (ii) sale of handsets. In order to allocate a transaction price to each performance obligation on a relative standalone selling price basis, we are required to determine such standalone selling price at the inception of the contract based on the price for such good or service that we have charged in the past to similar customers under similar circumstances. We recognize such allocated amounts as contract assets or contract liabilities. Under IFRS 15, we are also required to capitalize as assets the incremental costs of obtaining a new contract, which include commission fees that we pay to authorized dealers when new customers subscribe for our telecommunications services. Such contract cost assets, as well as other contract assets and contract liabilities, are amortized over the remaining expected period of benefit of a customer contract.

We believe that the estimates and assumptions made that are related to amortization of contract assets, contract liabilities and contract cost assets are critical accounting estimates because they require our management to make assessments about the expected period of benefit of customer contracts as well as the standalone selling prices of our goods and services. After taking into account historical data, we apply estimates and assumptions that we believe to be reasonable, but which are unpredictable and inherently uncertain. The use of alternative estimates and assumptions would result in different impacts on our results of operations.

 

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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 assessing the realizability of deferred tax assets 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.

Post-employment Benefit Liabilities

Our accounting of post-employment benefits, which mainly consist of a defined benefit plan (we began offering a defined contribution plan in December 2012), involves judgments about uncertain events including discount rates, life expectancy and future pay inflation. Any changes in these assumptions will impact the carrying amount of the defined benefit liability. The discount rates used to determine the present value of estimated future cash outflows expected to be required to settle the defined benefit liability, are determined at the end of each reporting period by reference to the yield at the reporting date on high-quality corporate bonds that have maturity dates approximating the terms of our benefits obligations and that are denominated in the same currency in which the benefits are expected to be paid. Other key assumptions for defined benefit liability are based in part on current market conditions. For defined contribution plans, we pay contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis, and we have no further payment obligations once the contributions have been paid.

Provisions

We recognize provisions at the end of the reporting period when we have a present legal or constructive obligation, such as litigation or assets retirement obligations, as a result of past events and an outflow of resources required to settle the obligation is probable and can be reliably estimated. We measure provisions at the present value of the expenditures expected to be required to settle the obligation, which are estimated based on factors such as historical experience. We do not recognize provisions for future operating losses and recognize as interest expense any increase in the provisions due to passage of time. See Notes 2.22, 3.7 and 17 to the Consolidated Financial Statements.

Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS

In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we prepare financial statements in accordance withK-IFRS, which we are required to file with the Financial Services Commission and the Korea Exchange under the FSCMA.

K-IFRS differs in certain respects from IFRS as issued by the IASB in the presentation of operating profit. Additionally, underK-IFRS, revenue from the development and sale of real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB,

 

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revenue from the development and sale of real estate is recognized when an individual unit of residential real estate is delivered to the buyer. Primarily due to such differences, our consolidated statements of comprehensive income and our consolidated statements of financial position prepared in accordance with IFRS as issued by the IASB included in this annual report differ from our consolidated statements of comprehensive income and consolidated statements of financial position prepared in accordance withK-IFRS.

The table below sets forth a reconciliation of our operating profit and net income or loss as presented in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB for each of the years ended December 31, 2017, 2018 and 2019 to our operating profit and net income or loss in our consolidated statements of operations prepared in accordance withK-IFRS, for each of the corresponding years, taking into account such differences:

 

   For the Year Ended December 31, 
   2017   2018   2019 
   (In millions of Won) 

Operating profit under IFRS as issued by the IASB

  1,069,092   1,100,860   1,020,174 

Effect of changes in operating income presentation

   286,161    103,897    170,549 

Revenue recognition of development, sale of real estate, etc.

   20,033    56,765    (39,658
  

 

 

   

 

 

   

 

 

 

Operating profit underK-IFRS

  1,375,286   1,261,522   1,151,065 
  

 

 

   

 

 

   

 

 

 

 

   For the Year Ended December 31, 
   2017  2018  2019 
   (In millions of Won) 

Net income under IFRS as issued by the IASB

  546,341  719,412  699,274 

Profit before income tax

    

Revenue recognition of development, sale of real estate, etc.

   20,033   56,765   (39,658

Income tax

   (4,848  (13,872  9,731 
  

 

 

  

 

 

  

 

 

 

Profit for the year underK-IFRS

  561,526  762,305  669,347 
  

 

 

  

 

 

  

 

 

 

Adoption of IFRS 15

The IASB issued IFRS 15Revenue from Contracts with Customers (“IFRS 15”) for recognizing revenue. IFRS 15 establishes a five step model that applies to operating revenue earned from a contract with a customer, regardless of the type of revenue transaction or the industry with limited exceptions. We mainly provide telecommunications services and sell handsets, and revenue from such services provided is recognized over time and revenue from such sale of goods is recognized at a point in time. We have adopted IFRS 15 from January 1, 2018 and applied the modified retrospective approach, and recognized the cumulative impact of initially applying the revenue standard as an adjustment to retained earnings as of January 1, 2018, the period of initial application. Accordingly, the financial information related to periods prior to January 1, 2018 have not been restated for the adoption of IFRS 15 and continue to be presented under IAS 18 Revenue and other standards (collectively, “IAS 18 and Other Standards”).

 

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The adjustments made to line items presented in the consolidated statements of comprehensive income for the year ended December 31, 2018 due to the change from IAS 18 and Other Standards applied previously to IFRS 15 are as follows:

 

   For the Year Ended December 31, 
   2018
(under IFRS 15)
  Adjustments  2018 (under IAS 18
and Other Standards)
 
   (In billions of Won) 

Operating revenue

  23,436  268  23,704 

Operating expenses

   22,335   316   22,651 

Operating profit

   1,101   (48  1,053 

Financial income

   374   (4  370 

Financial costs

   436   17   453 

Share of net losses of associates and joint venture

   (5     (5

Profit before income tax

   1,034   (69  965 

Income tax expense

   315   (18  297 
  

 

 

  

 

 

  

 

 

 

Profit for the year

  719  (51 668 
  

 

 

  

 

 

  

 

 

 

Adoption of IFRS 16

The IASB issued IFRS 16Leases (“IFRS 16”) for recognizing as assets and liabilities all leases which lease terms are over 12 months and the underlying assets are not low value assets. Upon adoption of IFRS 16, we began to recognizeright-of-use assets and lease liabilities representing our obligation to make lease payments, which had previously been classified as “operating leases” under the principles of IAS 17. We have adopted IFRS 16 from January 1, 2019 and applied the modified retrospective approach, and recognized the cumulative impact of initially applying the standard as an adjustment to retained earnings as of January 1, 2019, the period of initial application. Accordingly, the financial information related to periods prior to January 1, 2019 have not been restated for the adoption of IFRS 16 and continue to be presented under IAS 17.

The adjustments made to line items presented in the consolidated statement of financial position on January 1, 2019 due to the change from IAS 17 applied previously to IFRS 16 are as follows:

 

  

property and equipment decreased by210 billion;

 

  

intangible assets decreased by26 billion;

 

  

right-of-use assets increased by900 billion;

 

  

investment properties increased by47 billion;

 

  

lease receivables increased by15 billion;

 

  

prepayments decreased by0.008 billion;

 

  

prepaid expenses decreased by84 billion;

 

  

other liabilities increased by0.6 billion;

 

  

lease liabilities increased by643 billion; and

 

  

revenue increased by0.8 billion.

 

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The net impact on retained earnings on January 1, 2019 was a decrease of4 billion.

For a discussion of the adoption of IFRS 16, see Notes 2.2 and 40 of the notes to the Consolidated Financial Statements.

Recent Accounting Pronouncements under IFRS

For a summary of new standards, amendments and interpretations issued under IFRS as issued by the IASB but not effective for 2019, and which have not been adopted early by us, see Note 2.2 to the Consolidated Financial Statements.

Operating Revenue and Operating Expenses

Operating Revenue

Our operating revenue primarily consists of:

 

  

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

 

  

fees from our fixed-line services, including:

 

 Ø 

fees from our fixed-line and VoIP telephone services, which include:

 

 Ø 

monthly basic charges, which areone-time or monthly fixed charges primarily consisting of(i) non-refundable activation fees; and (ii) monthly fixed charges from local telephone services (or monthly fixed charges for discount plans);

 

 Ø 

monthly usage charges, which are usage fees based on the amount of services used, primarily consisting of (i) monthly usage charges for local telephone and domestic long distance services; (ii) international long-distance service revenue, (primarily (a) amounts we bill to our customers for outgoing calls made to foreign countries, (b) amounts we bill to foreign telecommunications carriers for connection to the domestic telephone network in respect of incoming calls at the applicable settlement rate, and (c) other revenue, including revenue from international leased lines);(iii) land-to-mobile andland-to-land interconnection revenue; and (iv) interconnection fees we charge to fixed-line and mobile service providers and voice resellers for their use of our local, domestic long-distance and international networks in providing their services; and

 

 Ø 

other revenue from (i) value-added services, local telephone directory assistance, call waiting and caller identification services; and (ii) local, domestic long-distance and international calls placed from public telephones.

 

 Ø 

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

 

 Ø 

data communication service revenue, primarily consisting of installation fees and basic monthly charges for our fixed-line and satellite leased line services and Kornet Internet connection service;

 

  

revenue from media and content services, primarily consisting of installation fees and basic monthly charges of IPTV and satellite TV services, as well as revenue from TV home

 

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shopping, digital content distribution, ICT platform consulting, digital music streaming and downloading and online advertising;

 

  

financial service revenue, primarily consisting of fees from credit card services provided by BC Card, our consolidated subsidiary in which we hold a 69.54% interest;

 

  

revenue from our miscellaneous business activities categorized as “others” that extend beyond telecommunications and financial services, including information technology and network services and rental of real estate; and

 

  

revenue from sale of goods, primarily handsets related to our mobile services and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate developed by KT Estate.

Operating Expenses

Our operating expenses primarily include:

 

  

purchase of inventories, primarily consisting of (i) inventories purchased for our sale of mobile handsets and (ii) development expenses of KT Estate for real estate units to be sold, and changes of inventories, which reflects increases or decreases of inventories of handsets, phones andfor-sale real estate units during the applicable period;

 

  

salaries and wages, including post-employment benefits, termination benefits (including severance benefits for voluntary and special early retirements) and share-based payments;

 

  

card service costs, primarily consisting of costs in connection with credit and cash card services provided by BC Card, including fees paid to member credit card companies in our network for marketing expenses;

 

  

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

 

  

sales commissions, primarily consisting of sales commissions to third-party dealers related to procurement of mobile subscribers and mobile handset sales;

 

  

service cost, primarily consisting of payments to IPTV and satellite TV content providers;

 

  

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

 

  

amortization expenses incurred primarily in connection with our intangible assets; and

 

  

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

 

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Operating Results—2018 Compared to 2019

The following table presents selected income statement data and changes therein for 2018 and 2019:

 

   For the Year Ended
December 31,
  Changes 
 2018 vs. 2019 
   2018  2019  Amount  % 
   (In billions of Won) 

Operating revenue

  23,436  24,899  1,463   6.2

Operating expenses

   22,335   23,879   1,544   6.9 
  

 

 

  

 

 

  

 

 

  

Operating profit

   1,101   1,020   (81  (7.3

Finance income

   374   424   50   13.4 

Finance costs

   436   422   (14  (3.2

Share of net profits (losses) of associates and joint venture

   (5  (3  2   (39.6
  

 

 

  

 

 

  

 

 

  

Profit before income tax

   1,034   1,019   (15  (1.4

Income tax expense

   315   320   5   1.7 
  

 

 

  

 

 

  

 

 

  

Profit for the year

  719  699  (20  (2.8)% 
  

 

 

  

 

 

  

 

 

  

Operating Revenue

The following table presents a breakdown of our operating revenue and changes therein for 2018 and 2019:

 

   For the Year Ended
December 31,
   Changes 
  2018 vs. 2019 

Products and services

  2018   2019   Amount  % 
   (In billions of Won) 

Mobile services

  6,828   6,795   (33  (0.5)% 

Fixed-line services:

       

Fixed-line and VoIP telephone services

   1,708    1,579    (130  (7.6

Broadband Internet access services

   2,113    2,177    65   3.1 

Data communication services

   1,048    1,111    63   6.0 
  

 

 

   

 

 

   

 

 

  

Sub-total

   4,869    4,867    (3  (0.1
  

 

 

   

 

 

   

 

 

  

Media and content

   2,262    2,516    254   11.2 

Financial services

   3,445    3,642    197   5.7 

Others

   2,743    2,885    142   5.2 

Sale of goods(1)

   3,289    4,194    905   27.5 
  

 

 

   

 

 

   

 

 

  

Total operating revenue

  23,436   24,899   1,463   6.2
  

 

 

   

 

 

   

 

 

  

 

 

(1)

Primarily related to sale of handsets for our mobile service and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate developed by KT Estate.

Total operating revenue increased by 6.2%, or1,463 billion, from23,436 billion in 2018 to24,899 billion in 2019, primarily due to increases in revenue from sale of goods and media and content, the collective impact of which was partially offset by decreases in revenue from fixed-line and VoIP telephone services.

Mobile Services

Our mobile services revenue decreased by 0.5%, or33 billion, from6,828 billion in 2018 to6,795 billion in 2019, primarily due to a decrease in our average revenue per user, which impact was offset by an increase in our mobile subscribers.

 

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Our average revenue per user decreased from32,021 in 2018 to31,625 in 2019 mainly due to (i) the election by a substantial portion of our renewal as well as new subscribers to receive subscription rate discounts in lieu of handset subsidies, which discounts increased from 20.0% to 25.0% in September 2017, (ii) election of less costly plans for their second devices and (iii) an amendment to our revenue recognition method pursuant to which we no longer recognize operating expenses related to redemption of rewards points and instead deduct such amount from our operating revenue starting in the fourth quarter of 2019, the aggregate impact of which was partially offset by an increase in the subscribers of our 5G services, which entail higher subscription rates compared to our other mobile services.

We recorded a 3.8% increase in our mobile subscribers from approximately 21.1 million as of December 31, 2018 to approximately 21.9 million (including 1.4 million subscribers of 5G services) as of December 31, 2019.

Fixed-line Services

Our fixed-line services revenue decreased by 0.1%, or3 billion, from4,869 billion in 2018 to4,867 billion in 2019, reflecting a decrease in our revenue from fixed-line and VoIP telephone services, which impact was mostly offset by increases in revenue from broadband Internet access services and data communication services.

Fixed-line and VoIP Telephone Services. Our fixed-line and VoIP telephone services revenue decreased by 7.6%, or130 billion, from1,708 billion in 2018 to1,579 billion in 2019, primarily due to decreases in subscribers reflecting continued decrease in demand for such services. Our number of PSTN and VoIP lines in service decreased from 14.9 million as of December 31, 2018 to 14.1 million as of December 31, 2019.

Broadband Internet Access Services. Our broadband Internet access services revenue increased by 3.1%, or65 billion, from2,113 billion in 2018 to2,177 billion in 2019, primarily as a result of an increase in the number of subscribers to our premium services. The number of our KT GiGA Internet service subscribers increased from approximately 4.9 million as of December 31, 2018 to approximately 5.5 million as of December 31, 2019.

Data Communication Services. Our data communication services revenue increased by 6.0%, or63 billion, from1,048 billion in 2018 to1,111 billion in 2019 primarily due to an increase in revenue from ourco-location and server leasing services offered to corporate customers.

Media and Content

Our media and content revenue increased by 11.2%, or254 billion, from2,262 billion in 2018 to2,516 billion in 2019, primarily due to an increase in the number of IPTV subscribers from approximately 7.9 million as of December 31, 2018 to approximately 8.4 million as of December 31, 2019, as well as increases in revenues generated from Genie Music Corporation and KTH.

Financial Services

Financial services revenue increased by 5.7%, or197 billion, from3,445 billion in 2018 to3,642 billion in 2019, primarily due to an increase in commission revenue from BC Card reflecting an expansion of its merchant payment network.

Others

Other operating revenue increased by 5.2%, or142 billion, from2,743 billion in 2018 to2,885 billion in 2019, primarily due to increases in revenue from our information technology and network services, particularly from systems integration services and operation of Internet data centers.

 

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Sale of Goods

Revenue from sale of goods increased by 27.5%, or905 billion, from3,289 billion in 2018 to4,194 billion in 2019, primarily due to an increase in revenue from sales of mobile handsets in 2019 compared to 2018. The sale of mobile handsets in 2019 increased largely due to increases in the number of handset units sold and, to a lesser extent, theper-unit price of premium handsets.

Operating Expenses

The following table presents a breakdown of our operating expenses and changes therein for 2018 and 2019:

 

   For the Year Ended
December 31,
   Changes 
   2018 vs. 2019 
   2018  2019   Amount  % 
   (In billions of Won) 

Salaries and wages

  3,846  3,974   128   3.3

Depreciation

   2,674   2,530    (144  (5.4

Depreciation ofright-of-use assets

      452    452   N.A. 

Amortization of intangible assets

   608   657    49   8.1 

Commissions

   1,080   1,115    35   3.3 

Interconnection charges

   580   534    (46  (7.9

International interconnection fee

   227   240    14   6.0 

Purchase of inventories

   4,414   4,454    40   0.9 

Changes of inventories

   (433  283    716   N.A. 

Sales commission

   1,943   2,316    373   19.2 

Service cost

   1,541   1,610    69   4.5 

Utilities

   323   333    9   2.9 

Taxes and dues

   285   277    (8  (2.9

Rental expenses

   460   193    (267  (58.0

Insurance premium

   74   82    9   11.9 

Installation fee

   144   155    12   8.0 

Advertising expenses

   158   150    (8  (4.8

Research and development expenses

   177   165    (12  (6.6

Card service costs

   3,113   3,067    (46  (1.5

Others

   1,123   1,291    168   15.0 
  

 

 

  

 

 

   

 

 

  

Total operating expenses

  22,335  23,879   1,544   6.9
  

 

 

  

 

 

   

 

 

  

 

N.A. means not applicable.

Total operating expenses increased by 6.9%, or1,544 billion, from22,335 billion in 2018 to23,879 billion in 2019 primarily due to impact from changes of inventories, recognition of depreciation ofright-of-use assets starting in 2019, and increases in sales commissions and salaries and wages, the collective impact of which was partially offset by decreases in rental expenses and depreciation. Specifically:

 

  

Changes of inventories, which reflect inventory changes during a period by calculating inventories at the beginning of the period minus those at the end of the period, amounted to(433) billion in 2018 and283 billion in 2019, which indicates that inventories increased by433 billion in 2018 while they decreased by283 billion in 2019.

 

  

We recorded depreciation ofright-of-use assets of452 billion in 2019 compared to no such expenses in 2018 due to our adoption of IFRS 16 starting on January 1, 2019 and related recognition ofright-of-use assets of900 billion on such date.Right-of-use assets are depreciated over the shorter of the assets’ useful life and the lease term on a straight-line basis. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results—Adoption of IFRS 16.”

 

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Sales commission increased by 19.2%, or373 billion, from1,943 billion in 2018 to2,316 billion in 2019 primarily due to an increase in sales commissions that we paid to third party dealers for procurement of 5G mobile subscribers launched in April 2019.

 

  

Salaries and wages increased by 3.3%, or128 billion, from3,846 billion in 2018 to3,974 billion in 2019 primarily due to an increase in wages as well as the consolidation of salary expenses of certain subsidiaries in which we acquired a controlling interest in the fourth quarter of 2018.

These factors were partially offset by the following:

 

  

Our rental expenses decreased by 58.0%, or267 billion, from460 billion in 2018 to193 billion in 2019 primarily due to our adoption of IFRS 16 starting on January 1, 2019. Pursuant to our adoption of IFRS 16, we began to recognize lease liabilities in relation to leases that had previously been classified as “operating leases,” which in turn reduced our rental expenses in 2019.

 

  

Depreciation decreased by 5.4%, or144 billion, from2,674 billion in 2018 to2,530 billion in 2019 primarily due to completion of depreciation of certain assets related to our LTE services as well as a decrease in property and equipment of210 billion upon our adoption of IFRS 16 starting on January 1, 2019.

Operating Profit

Due to the factors described above, our operating profit decreased by 7.3%, or81 billion, from1,101 billion in 2018 to1,020 billion in 2019. Our operating margin, which is operating profit as a percentage of operating revenue, was 4.7% in 2018 and 4.1% in 2019.

Finance Income (Costs)

The following table presents a breakdown of our finance income and costs and changes therein for 2018 and 2019:

 

   For the Year Ended
December 31,
   Changes 
   2018 vs. 2019 
   2018   2019   Amount  % 
   (In billions of Won) 

Interest income

  245   283   38   15.5

Gain on foreign currency transactions

   17    25    7   43.2 

Gain on foreign currency translation

   4    18    14   387.1 

Gain on settlement of derivatives

   28    9    (19  (67.7

Gain on valuation of derivatives

   66    77    11   16.7 

Others

   14    13    (2  (11.0
  

 

 

   

 

 

   

 

 

  

Total finance income

  374   424   50   13.4 
  

 

 

   

 

 

   

 

 

  

Interest expenses

  297   268   (29  (9.6)% 

Loss on foreign currency transactions

   49    30    (19  (38.4

Loss on foreign currency translation

   73    94    21   29.4 

Loss on settlement of derivatives

       0    0   N.A. 

Loss on valuation of derivatives

   2    16    14   675.9 

Loss on disposal of trade receivables

   14    11    (3  (18.2

Others

   1    2    1   102.4 
  

 

 

   

 

 

   

 

 

  

Total finance costs

  436   422   (14  (3.2
  

 

 

   

 

 

   

 

 

  

 

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N.A. means not applicable.

Our interest income increased by 15.5%, or38 billion, from245 billion in 2018 to283 billion in 2019 primarily due to an increase in interest income related to our device installment plans.

Our interest expenses decreased by 9.6%, or29 billion, from297 billion in 2018 to268 billion in 2019 primarily due to a general decrease in weighted-average interest rates of our borrowings in 2019 compared to 2018.

Our net loss on foreign currency transactions decreased by 82.3%, or26 billion, from32 billion in 2018 to6 billion in 2019, and our net loss on foreign currency translation increased by 10.2%, or7 billion, from69 billion in 2018 to76 billion in 2019, as the Won depreciated against the Dollar in 2018 as well as in 2019. In terms of the market average exchange rates announced by Seoul Money Brokerage Services, Ltd., the Won depreciated from1,071.4 to US$1.00 as of December 31, 2017 to1,118.1 to US$1.00 as of December 31, 2018 and decreased further to1,157.8 to US$1.00 as of December 31, 2019. Against such depreciations, our net gain on transactions of derivatives decreased by 67.8%, or19 billion, from28 billion in 2018 to9 billion in 2019 and our net gain on valuation of derivatives decreased by 4.3%, or3 billion, from64 billion in 2018 to61 billion in 2019 .

Share of Net Profits (Losses) of Associates and Joint Venture

Our share of net losses of associates and joint ventures decreased by 39.6%, or2 billion, from5 billion in 2018 to3 billion in 2019. In 2018, our share of net losses of associates and joint ventures consisted primarily of our share of loss from K Bank of20 billion, which was partially offset by our share of profit from Korea Information & Technology Fund of15 billion. In 2019, our share of net losses of associates and joint ventures consisted primarily of our share of loss from K Bank of29 billion, which was partially offset by our share of profit from Korea Information & Technology Fund of18 billion.

Income Tax Expense

Income tax expense increased by 1.7%, or5 billion, from315 billion in 2018 to320 billion in 2019, while our profit before income tax decreased by 1.4%, or15 billion, from1,034 billion in 2018 to1,019 billion in 2019. Our effective tax rate was 30.4% in 2018 and 31.4% in 2019. See Note 29 to the Consolidated Financial Statements.

Profit for the Year

Due to the factors described above, our profit for the year decreased by 2.8%, or20 billion, from719 billion in 2018 to699 billion in 2019. Our net profit margin, which is net profit for the year as a percentage of operating revenue, was 3.1% in 2018 and 2.8% in 2019.

Segment Results—ICT

Our operating revenue for the ICT segment, prior to adjusting for inter-segment transactions, increased by 4.5%, or803 billion, from17,724 billion in 2018 to18,528 billion in 2019, primarily due to increases in revenue from our information technology and network services and media and content services, the collective impact of which was partially offset by a decrease in revenue from our fixed-line services to individual and household customers, as described above.

 

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Our operating income for the ICT segment, prior to adjusting for inter-segment transactions, decreased by 32.8%, or306 billion, from933 billion in 2018 to627 billion in 2019, as the1,109 billion increase in the segment’s operating expenses outpaced the803 billion increase in operating revenue.For this segment, operating margin, which is operating income as a percentage of total operating revenue prior to adjusting for inter-segment transactions, decreased from 5.3% in 2018 to 3.4% in 2019.

Our depreciation and amortization for the ICT segment, prior to adjusting for inter-segment transactions, increased by 11.0%, or321 billion, from2,917 billion in 2018 to3,239 billion in 2019.

Segment Results—Finance

Our operating revenue for the finance segment, prior to adjusting for inter-segment transactions, slightly decreased by 0.1%, or4 billion, from3,560 billion in 2018 to3,557 billion in 2019.

Our operating income for the finance segment, prior to adjusting for inter-segment transactions, increased by 8.5%, or12 billion, from145 billion in 2018 to158 billion in 2019, as the16 billion decrease in the segment’s operating expenses outpaced the4 billion decrease in operating revenue. For this segment, operating margin increased from 4.1% in 2018 to 4.4% in 2019.

Depreciation and amortization for the finance segment, prior to adjusting for inter-segment transactions, increased by 18.8%, or4 billion, from23 billion in 2018 to27 billion in 2019.

Segment Results—Satellite TV

Our operating revenue for the satellite TV segment, prior to adjusting for inter-segment transactions, increased by 0.6%, or4 billion, from691 billion in 2018 to695 billion in 2019.

Our operating income for the satellite TV segment, prior to adjusting for inter-segment transactions, increased by 3.9%, or3 billion, from67 billion in 2018 to69 billion in 2019, as the4 billion increase in the segment’s operating revenue outpaced the1 billion increase in operating expenses. Operating margin for this segment increased from 9.7% in 2018 to 10.0% in 2019.

Depreciation and amortization for the satellite TV segment, prior to adjusting for inter-segment transactions, decreased by 3.4%, or3 billion, from98 billion in 2018 to95 billion in 2019.

Segment Results—Others

Our operating revenue for the others segment, prior to adjusting for inter-segment transactions, increased by 13.3%, or714 billion, from5,371 billion in 2018 to6,084 billion in 2019, primarily due to increases in revenue from our sale of handsets as well as our information and technology and network services.

Our operating income for the others segment, prior to adjusting for inter-segment transactions, increased by 288.7%, or163 billion, from56 billion in 2018 to219 billion in 2019, as the714 billion increase in the segment’s operating revenue outpaced the551 billion increase in operating expenses. Operating margin for this segment increased from 1.0% in 2018 to 3.6% in 2019.

Depreciation and amortization for this segment, prior to adjusting for inter-segment transactions, increased by 51.4%, or122 billion, from237 billion in 2018 to358 billion in 2019.

 

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Operating Results—2017 Compared to 2018

The following table presents selected income statement data and changes therein for 2017 and 2018:

 

   For the Year Ended
December 31,
  Changes 
 2017 vs. 2018 
   2017  2018  Amount  % 
   (In billions of Won) 

Operating revenue

  23,547  23,436  (111  (0.5)% 

Operating expenses

   22,478   22,335   (143  (0.6
  

 

 

  

 

 

  

 

 

  

Operating profit

   1,069   1,101   32   3.0 

Finance income

   406   374   (32  (7.9

Finance costs

   645   436   (209  (32.4

Share of net profits of associates and joint venture

   (14  (5  8   (60.6
  

 

 

  

 

 

  

 

 

  

Profit before income tax

   817   1,034   217   26.6 

Income tax expense

   271   315   44   16.2 
  

 

 

  

 

 

  

 

 

  

Profit for the year

  546  719  173   31.7
  

 

 

  

 

 

  

 

 

  

Operating Revenue

The following table presents a breakdown of our operating revenue and changes therein for 2017 and 2018:

 

   For the Year Ended
December 31,
   Changes 
  2017 vs. 2018 

Products and services

  2017   2018   Amount  % 
   (In billions of Won) 

Mobile services

  7,122   6,828   (294  (4.1)% 

Fixed-line services:

       

Fixed-line and VoIP telephone services

   1,834    1,708    (126  (6.9

Broadband Internet access services

   2,082    2,113    31   1.5 

Data communication services

   1,066    1,048    (18  (1.7
  

 

 

   

 

 

   

 

 

  

Sub-total

   4,982    4,869    (113  (2.3
  

 

 

   

 

 

   

 

 

  

Media and content

   2,207    2,262    55   2.5 

Financial services

   3,443    3,445    2   0.1 

Others

   2,432    2,743    312   12.8 

Sale of goods(1)

   3,361    3,289    (72  (2.1
  

 

 

   

 

 

   

 

 

  

Total operating revenue

  23,547   23,436   (111  (0.5)% 
  

 

 

   

 

 

   

 

 

  

 

 

(1)

Primarily related to sale of handsets for our mobile service and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate developed by KT Estate.

Total operating revenue decreased by 0.5%, or111 billion, from23,547 billion in 2017 to23,436 billion in 2018, primarily due to decreases in revenue from mobile services, fixed-line services and sale of goods, which impacts were partially offset by increases in revenue from our other businesses, particularly from information technology and network services, and media and content services. Our operating revenue was also negatively impacted by our adoption of IFRS 15 starting on January 1, 2018 using the modified retrospective method. See “—Adoption of IFRS 15.” In 2018, our operating revenue was23,436 billion under IFRS 15, compared to23,704 billion under IAS 18 and Other Standards. Had we continued to apply the previous method of IAS 18 and Other Standards in 2018, our operating revenue would have increased by 0.7%, or157 billion, from23,547 billion in 2017 to23,704 billion in 2018.

 

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Mobile Services

Our mobile services revenue decreased by 4.1%, or294 billion, from7,122 billion in 2017 to6,828 billion in 2018, primarily due to a decrease in our average revenue per user, which impact was partially offset by an increase in our mobile subscribers.

Our average revenue per user decreased from34,444 in 2017 to32,021 in 2018 mainly due to the increase in the maximum discount rate we provide to mobile subscribers who elect to receive subscription rate discounts in lieu of handset subsidies from 20.0% to 25.0%, a substantial portion of our new mobile subscribers having elected to receive such subscription rate discounts in lieu of handset subsidies, as well as less costly plans for their second devices and the impact of our adoption of IFRS 15 starting on January 1, 2018.

We recorded a 5.5% increase in our mobile subscribers from approximately 20.0 million as of December 31, 2017 to approximately 21.1 million as of December 31, 2018.

Fixed-line Services

Our fixed-line services revenue decreased by 2.3%, or113 billion, from4,982 billion in 2017 to4,869 billion in 2018, primarily due to decreases in our revenue from fixed-line and VoIP telephone services and data communication services, which impacts were partially offset by an increase in revenue from broadband Internet access services.

Fixed-line and VoIP Telephone Services. Our fixed-line and VoIP telephone services revenue decreased by 6.9%, or126 billion, from1,834 billion in 2017 to1,708 billion in 2018, primarily due to decreases in monthly usage charges and subscribers as well as a continued decrease in demand for such services, which were partially offset by an increase in monthly basic charges. Our domestic long-distance call minutes decreased from 1.1 billion in 2017 to 0.9 billion in 2018 and local call pulses from 1.3 billion in 2017 to 1.0 billion in 2018, while the number of PSTN and VoIP lines in service decreased from 15.6 million as of December 31, 2017 to 14.9 million as of December 31, 2018. Partially offsetting such trends, our monthly basic charges increased primarily due to an increase in subscribers of our unlimited fixed-line telephone service plan in 2018 which offers unlimited call minutes for fixed monthly basic charges.

Broadband Internet Access Services. Our broadband Internet access services revenue increased by 1.5%, or31 billion, from2,082 billion in 2017 to2,113 billion in 2018, primarily as a result of an increase in the number of subscribers to our premium services, which was partially offset by our adoption of IFRS 15 starting on January 1, 2018. The number of our KT GiGA Internet service subscribers increased from approximately 3.9 million as of December 31, 2017 to approximately 4.9 million as of December 31, 2018.

Data Communication Services. Our data communication services revenue decreased by 1.7%, or18 billion, from1,066 billion in 2017 to1,048 billion in 2018 primarily due to increases in market competition based on pricing as well as discounts provided to our long-term customers.

Media and Content

Our media and content revenue increased by 2.5%, or55 billion, from2,207 billion in 2017 to2,262 billion in 2018, primarily due to an increase in the number of IPTV subscribers from approximately 7.5 million as of December 31, 2017 to approximately 7.9 million as of December 31, 2018 as well as increases in revenues generated from Genie Music Corporation and KTH, which impacts were partially offset by a decrease in revenue from our joint ventures as well as the negative impact on media and content revenue from our adoption of IFRS 15 starting on January 1, 2018.

 

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Financial Services

Financial services revenue remained stable and increased slightly by 0.1%, or2 billion, from3,443 billion in 2017 to3,445 billion in 2018.

Others

Other operating revenue increased by 12.8%, or312 billion, from2,432 billion in 2017 to2,743 billion in 2018, primarily due to increases in revenue from our information technology and network services, particularly from systems integration services and operation of Internet data centers.

Sale of Goods

Revenue from sale of goods decreased by 2.1%, or72 billion, from3,361 billion in 2017 to3,289 billion in 2018, primarily due to the negative impact on sale of goods revenue from our adoption of IFRS 15 starting on January 1, 2018 as well as a decrease in revenue from sales of miscellaneous telecommunications equipment, which impacts were partially offset by an increase in revenue from sales of mobile handsets in 2018 compared to 2017. The sale of mobile handsets in 2018 increased largely due to increases in the number of handset units sold and, to a lesser extent, theper-unit price of premium handsets.

Operating Expenses

The following table presents a breakdown of our operating expenses and changes therein for 2017 and 2018:

 

   For the Year Ended
December 31,
  Changes 
  2017 vs. 2018 
   2017  2018  Amount  % 
   (In billions of Won) 

Salaries and wages

  3,568  3,846  277   7.8

Depreciation

   2,746   2,674   (72  (2.6

Amortization of intangible assets

   619   608   (11  (1.8

Commissions

   1,086   1,080   (6  (0.5

Interconnection charges

   641   580   (61  (9.5

International interconnection fee

   214   227   13   5.9 

Purchase of inventories

   4,054   4,414   360   8.9 

Changes of inventories

   (187  (433  (246  131.6 

Sales commission

   2,202   1,943   (259  (11.8

Service cost

   1,428   1,541   112   7.9 

Utilities

   323   323   0   0.0 

Taxes and dues

   280   285   6   2.0 

Rental expenses

   449   460   12   2.6 

Insurance premium

   69   74   4   6.2 

Installation fee

   147   144   (3  (2.1

Advertising expenses

   197   158   (39  (20.0

Research and development expenses

   169   177   8   4.8 

Card service costs

   3,095   3,113   18   0.6 

Others

   1,379   1,123   (257  (18.6
  

 

 

  

 

 

  

 

 

  

Total operating expenses

  22,478  22,335  (143  (0.6)% 
  

 

 

  

 

 

  

 

 

  

Total operating expenses decreased by 0.6%, or143 billion, from22,478 billion in 2017 to22,335 billion in 2018 primarily due to decreases in sales commissions, other expenses and changes of inventories, the impacts of which were partially offset by increases in purchase of inventories, salaries and wages and service cost. Our operating expenses were also negatively impacted by our

 

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adoption of IFRS 15 starting on January 1, 2018 using the modified retrospective method. See “—Adoption of IFRS 15”. In 2018, our operating expenses were22,335 billion under IFRS 15, compared to22,651 billion under IAS 18 and Other Standards. Had we continued to apply the previous method of IAS 18 and Other Standards in 2018, our operating expenses would have increased by 0.8%, or174 billion, from22,478 billion in 2017 to22,651 billion in 2018. Specifically:

 

  

Sales commission decreased by 11.8%, or259 billion, from2,202 billion in 2017 to1,943 billion in 2018 primarily due to the impact of our adoption of IFRS 15 starting in 2018, which was partially offset by an increase in sales commissions that we paid to third-party dealers for procurement of mobile subscribers and handsets in 2018 compared to 2017.

 

  

Other expenses decreased by 18.6%, or257 billion, from1,379 billion in 2017 to1,123 billion in 2018 primarily due to a loss on disposal of certain telecommunications assets in 2017, which did not occur in 2018.

 

  

Changes of inventories, which reflect inventory changes during a period by calculating inventories at the beginning of the period minus those at the end of the period, increased by 131.6%, or246 billion, from(187) billion in 2017 to(433) billion in 2018, which indicates increases in inventories by187 billion in 2017 and an additional433 billion in 2018. This was primarily due to an increase in our purchase of mobile handsets in 2018 compared to 2017 as described below, which was partially offset by an increase in the sale of mobile handsets in 2018 compared to 2017.

These factors were partially offset by the following:

 

  

Our purchase of inventories increased by 8.9%, or360 billion, from4,054 billion in 2017 to4,414 billion in 2018 primarily due to an increase in purchase of mobile handsets (consisting of an increase in the total number of mobile handsets (mostly smartphones) purchased and an increase in theper-unit price of handsets).

 

  

Salaries and wages increased by 7.8%, or277 billion, from3,568 billion in 2017 to3,846 billion in 2018 primarily due to an increase in wages as well as payments of special incentive bonuses to our employees.

 

  

Service cost increased by 7.9%, or112 billion, from1,428 billion in 2017 to1,541 billion in 2018, primarily due to increases in content costs relating to our IPTV and satellite TV services.

Operating Profit

Due to the factors described above, our operating profit increased by 3.0%, or32 billion, from1,069 billion in 2017 to1,101 billion in 2018. Our operating margin, which is operating profit as a percentage of operating revenue, was 4.5% in 2017 and 4.7% in 2018.

 

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Finance Income (Costs)

The following table presents a breakdown of our finance income and costs and changes therein for 2017 and 2018:

 

   For the Year Ended
December 31,
   Changes 
   2017 vs. 2018 
   2017   2018   Amount  % 
   (In billions of Won) 

Interest income

  93   245   152   163.0

Gain on foreign currency transactions

   80    17    (62  (78.4

Gain on foreign currency translation

   226    4    (222  (98.4

Gain on settlement of derivatives

       28    28   N.A. 

Gain on valuation of derivatives

   0    66    66   N.M. 

Others

   8    14    6   80.0 
  

 

 

   

 

 

   

 

 

  

Total finance income

  406   374   (32  (7.9
  

 

 

   

 

 

   

 

 

  

Interest expenses

  302   297   (6  (1.8)% 

Loss on foreign currency transactions

   40    49    9   22.0 

Loss on foreign currency translation

   12    73    60   493.5 

Loss on settlement of derivatives

   59        (59  (100.0

Loss on valuation of derivatives

   210    2    (208  (99.0

Loss on disposal of trade receivables

   20    14    (7  (32.1

Impairment loss onavailable-for-sale financial assets

   0        (0  (100.0

Others

   1    1    0   11.4 
  

 

 

   

 

 

   

 

 

  

Total finance costs

  645   436   (209  (32.4
  

 

 

   

 

 

   

 

 

  

 

N.A. means not applicable.

N.M. means not meaningful.

Our interest income increased by 163.0%, or152 billion, from93 billion in 2017 to245 billion in 2018. In 2018, we recognized interest income related to a delay in VAT refund, compared to no such income recognized in 2017. In addition, a general increase in interest rates in Korea in 2018 contributed to the increase in interest income in 2018 compared to 2017.

We recognized a net gain on foreign currency translation of214 billion in 2017 compared to a net loss of69 billion in 2018, and we recognized a net gain on foreign currency transactions of40 billion in 2017 compared to a net loss of32 billion in 2018, as the Won appreciated against the Dollar in 2017 but depreciated in 2018. In terms of the market average exchange rates announced by Seoul Money Brokerage Services, Ltd., the Won appreciated from1,208.5 to US$1.00 as of December 31, 2016 to1,071.4 to US$1.00 as of December 31, 2017 but depreciated to1,118.1 to US$1.00 as of December 31, 2018. Against such fluctuations, we recognized a net loss on valuation of derivatives of210 billion in 2017 compared to a net gain of64 billion in 2018 and recorded a net loss on transactions of derivatives of59 billion in 2017 compared to a net gain of28 billion in 2018.

Share of Net Profits (Losses) of Associates and Joint Venture

Our share of net losses of associates and joint ventures decreased by 60.6%, or8 billion, from14 billion in 2017 to5 billion in 2018. In 2017, our share of net losses of associates and joint ventures consisted primarily of our share of loss from K Bank of Won 17 billion. In 2018, our share of loss from K Bank increased to Won 20 billion, which was partially offset by our share of profit from Korea Information & Technology Fund of Won 15 billion.

 

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Income Tax Expense

Income tax expense increased by 16.2%, or44 billion, from271 billion in 2017 to315 billion in 2018, primarily due to an increase in profit before income tax, which increased by 26.6%, or217 billion, from817 billion in 2017 to1,034 billion in 2018. Our effective tax rate was 33.1% in 2017 and 30.4% in 2018. See Note 29 to the Consolidated Financial Statements.

Profit for the Year

Due to the factors described above, our profit for the year increased by 31.7%, or173 billion, from546 billion in 2017 to719 billion in 2018. Our net profit margin, which is net profit for the year as a percentage of operating revenue, was 2.3% in 2017 and 3.1% in 2018.

Segment Results—ICT

Our operating revenue for the ICT segment, prior to adjusting for inter-segment transactions, decreased by7 billion from17,732 billion in 2017 to17,724 billion in 2018. A decrease in revenue from our fixed-line services to individual and household customers was substantially offset by increases in revenue from our information technology and network services, as described above.

Our operating income for the ICT segment, prior to adjusting for inter-segment transactions, decreased by 28.4%, or369 billion, from1,303 billion in 2017 to933 billion in 2018, primarily due to the362 billion increase in the segment’s operating expenses and to a small extent, the7 billion decrease in operating revenue. For this segment, operating margin, which is operating income as a percentage of total operating revenue prior to adjusting for inter-segment transactions, decreased from 7.3% in 2017 to 5.3% in 2018.

Our depreciation and amortization for the ICT segment, prior to adjusting for inter-segment transactions, decreased by 3.3%, or99 billion, from3,017 billion in 2017 to2,917 billion in 2018.

Segment Results—Finance

Our operating revenue for the finance segment, prior to adjusting for inter-segment transactions, decreased by 2.1%, or78 billion, from3,638 billion in 2017 to3,560 billion in 2018 primarily due to the reasons described above.

Our operating income for the finance segment, prior to adjusting for inter-segment transactions, decreased by 29.3%, or60 billion, from206 billion in 2017 to145 billion in 2018, as the78 billion decrease in the segment’s operating revenue outpaced the17 billion decrease in operating expenses. For this segment, operating margin decreased from 5.7% in 2017 to 4.1% in 2018.

Depreciation and amortization for the finance segment, prior to adjusting for inter-segment transactions, decreased by 21.9%, or6 billion, from29 billion in 2017 to23 billion in 2018.

Segment Results—Satellite TV

Our operating revenue for the satellite TV segment, prior to adjusting for inter-segment transactions, remained relatively unchanged, increasing by 0.7%, or5 billion, from686 billion in 2017 to691 billion in 2018.

 

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Our operating income for the satellite TV segment, prior to adjusting for inter-segment transactions, decreased by 11.5%, or9 billion, from75 billion in 2017 to67 billion in 2018, as the14 billion increase in the segment’s operating expenses outpaced the5 billion increase in operating revenue. Operating margin for this segment decreased from 11.0% in 2017 to 9.7% in 2018.

Depreciation and amortization for the satellite TV segment, prior to adjusting for inter-segment transactions, decreased by 0.9%, or1 billion, from99 billion in 2017 to98 billion in 2018.

Segment Results—Others

Our operating revenue for the others segment, prior to adjusting for inter-segment transactions, increased by 1.6%, or82 billion, from5,288 billion in 2017 to5,371 billion in 2018, primarily due to an increase in revenue from our information and technology and network services, which was partially offset by decreases in revenue from sale of handsets and real estate developed by KT Estate.

Our operating income for the others segment, prior to adjusting for inter-segment transactions, decreased by 68.2%, or121 billion, from177 billion in 2017 to56 billion in 2018, as the203 billion increase in the segment’s operating expenses outpaced the82 billion increase in operating revenue. Operating margin for this segment decreased from 3.4% in 2017 to 1.0% in 2018.

Depreciation and amortization for this segment, prior to adjusting for inter-segment transactions, increased by 11.9%, or25 billion, from212 billion in 2017 to237 billion in 2018.

Item 5.B.  Liquidity and Capital Resources

The following table sets forth the summary of our cash flows for the years indicated:

 

   For the Years Ended December 31, 
           2017                  2018                  2019         
   (In billions of Won) 

Net cash inflow from operating activities

  3,878  4,010  3,745 

Net cash outflow from investing activities

   (3,483  (2,704  (3,887

Net cash outflow from financing activities

   (1,363  (532  (250

Cash and cash equivalents at beginning of the year

   2,900   1,928   2,703 

Cash and cash equivalents at end of the year

   1,928   2,703   2,306 

Net increase (decrease) in cash and cash equivalents

   (972  775   (398

Capital Requirements

Historically, our capital requirements consisted principally of purchases of property and equipment and other assets and repayments of borrowings. In our investing activities, we used cash of2,442 billion in 2017,2,261 billion in 2018 and3,263 billion in 2019 for the acquisition of property and equipment and investment properties. In our financing activities, we used cash of1,780 billion in 2017,1,613 billion in 2018 and1,377 billion in 2019 for repayments of borrowings and debentures. From time to time, we may also require capital for investments involving acquisitions, including shares of our affiliates, and strategic relationships.

Our cash dividends paid to shareholders andnon-controlling interests amounted to243 billion in 2017,299 billion in 2018 and305 billion in 2019.

We anticipate that capital expenditures and repayment of outstanding contractual obligations and commitments will represent the most significant use of funds for the next several years. We may

 

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also require capital for purchase of shares of our affiliates as well as investments involving acquisitions and strategic relationships. We compete primarily in the telecommunications andInternet-related markets in Korea, which are rapidly evolving. In recent years, competition among us, SK Telecom and LG U+ to commercialize 5G mobile services has intensified and we have made and will continue to make capital expenditure to expand our 5G mobile service capabilities and technologies. We may need to incur additional capital expenditures to keep up with unexpected developments in rapidly evolving telecommunications technology. There can be no assurance that we will be able to secure funds on satisfactory terms from financial institutions or other sources that are sufficient for our unanticipated needs.

Payments of contractual obligations and commitments will also require considerable resources. In our ordinary course of business, we routinely enter into commercial commitments for various aspects of our operations, including repair and maintenance. We have also provided guarantees to our affiliates. See Note 20 to the Consolidated Financial Statements for a disclosure of the guarantees provided.

The following table sets forth selected information regarding our contractual obligations to make future payments as of December 31, 2019:

 

   Payments Due by Period 

Contractual Obligations(1)

  Total   Less than
1 Year
   1-3
Years
   4-5
Years
   After 5
Years
 
   (In billions of Won) 

Long-term debt obligations (including current portion of long-term debt)

  7,236   1,103   2,707   1,326   2,100 

Lease obligations (including any interests)

   781    353    313    65    50 

Severance payment obligations(2)

   5,198    241    542    565    3,850 

Asset retirement obligations

   14    2    4    4    4 

Long-term accounts payable—others

   1,395    339    448    247    361 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   14,624    2,038    4,014    2,207    6,365 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimate of interest payment based on contractual interest rates effective as of December 31, 2019

  932   126   224   182   400 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1)

Contractual obligations represent contractual liabilities as of the consolidated balance sheet date excluding refundable deposits for telephone installation and accruals for customer call bonus points, which do not have definitive payment schedules.

 

(2)

The amount represents undiscounted pension benefit as of December 31, 2019.

Capital Resources

We have traditionally met our working capital and other capital requirements principally from cash provided by operations, while raising the remainder of our requirements primarily through debt financing.

Our major sources of cash have been net cash provided by operating activities, including profits for the year, expenses not involving cash payments such as depreciation and amortization, and proceeds from issuance of bonds and borrowings. We expect that these sources will continue to be our principal sources of cash in the future. We recorded profits for the year of546 billion in 2017,719 billion in 2018 and699 billion in 2019 as discussed in “Item 5.A. Operating Results.”Non-cash expense adjustments in our statement of cash flows from depreciation, amortization of intangible assets and depreciation ofright-of-use assets amounted to3,438 billion in 2017,3,365 billion in 2018 and3,681 billion in 2019, primarily reflecting our capital investment activities during the recent years, including our purchase of bandwidth licenses for our operations, investments in network

 

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infrastructures and acquisition of real estate.Cash proceeds from borrowings and debentures were616 billion in 2017,1,473 billion in 2018 and1,952 billion in 2019. As of December 31, 2019, we held 15,870,258 treasury shares.

Since 2012, we have disposed of a portion of our trade receivables relating to handset sales to several special purpose companies, as part of our efforts to improve our cash and asset management. We also entered into asset management agreements with each of these special purpose companies, and will be receiving management fees from such companies. See Note 20 to the Consolidated Financial Statements.

We believe that we have sufficient working capital available to us for our current requirements and that we have a variety of alternatives available to us to satisfy our financial requirements to the extent that they are not met by funds generated by operations, including the issuance of debt securities and bank borrowings denominated in Won and various foreign currencies. For example, we issued (i) US$400 million of 2.625% notes due 2022 in August 2017, (ii) US$200 million of LIBOR(3M)+0.450% notes due 2020 in August 2018, (iii) US$100 million of LIBOR(3M)+0.900% notes due 2023 in August 2018, (iv) Japanese Yen 30 billion of 0.300% notes due 2020 in November 2018, (v) US$350 million of LIBOR(3M)+0.980% notes due 2024 in November 2019, (vi) Japanese Yen 29.6 billion of 0.220% notes due 2022 in July 2019 and (vii) Japanese Yen 0.4 billion of 0.330% notes due 2024 in July 2019. See Note 16 to the Consolidated Financial Statements. However, our ability to rely on some of these alternatives could be affected by factors such as the liquidity of the Korean and the global financial markets, prevailing interest rates, our credit rating and the Government’s policies regarding Won currency and foreign currency borrowings. Other factors which could materially affect our liquidity in the future include unanticipated increase in capital expenditures and decrease in cash provided by operations resulting from a significant decrease in demand for our services. We may also need to raise additional capital sooner than we expect in order to fund unanticipated investments and acquisitions.

Our total equity was13,183 billion as of December 31, 2017,14,658 billion as of December 31, 2018 and15,144 billion as of December 31, 2019.

Liquidity

We had a working capital (current assets minus current liabilities) surplus of354 billion as of December 31, 2017,2,764 billion as of December 31, 2018 and1,865 billion as of December 31, 2019. The following table sets forth the summary of our significant current assets for the years indicated:

 

   As of December 31, 
       2017           2018           2019     
   (In billions of Won) 

Cash and cash equivalents

  1,928   2,703   2,306 

Trade and other receivables, net

   5,965    5,680    5,859 

Inventories, net

   642    1,075    792 

Other financial assets

   973    995    868 

Our cash and cash equivalents (substantially all of which are in Won) totaled1,928 billion as of December 31, 2017,2,703 billion as of December 31, 2018 and2,306 billion as of December 31, 2019. Under IFRS as issued by IASB, bank deposits held at call and all other highly liquid temporary cash instruments within maturities of three months are considered as cash equivalents. Other current financial assets primarily consist of financial instruments,available-for-sale financial assets and derivative assets used for hedging.

 

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The following table sets forth the summary of our significant current liabilities for the years indicated:

 

   As of December 31, 
   2017   2018   2019 
   (In billions of Won) 

Trade and other payables

  7,426   7,008   7,597 

Borrowings

   1,573    1,368    1,186 

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 certain payments related to our derivative instruments entered into for foreign exchange risk hedging purposes. As of December 31, 2019, we entered into various commitments with financial institutions totaling2,649 billion and US$215 million, of which209 billion and US$91 million was used.See Note 20 to the Consolidated Financial Statements. Of the7,299 billion total book value of debentures and borrowings outstanding as of December 31, 2019,2,781 billion was denominated in foreign currencies. See Note 16 to the Consolidated Financial Statements. Upon the identification and evaluation of our currency risk exposures, we, having considered various circumstances, enter into derivative financial instruments to manage such risks. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Exchange Rate Risk and Interest Rate Risk.” We have not had, and do not anticipate that we will have, difficulty gaining access to short-term financing sufficient to meet our current requirements.

Capital Expenditures

We used cash of2,442 billion in 2017,2,261 billion in 2018 and3,263 billion in 2019 on a consolidated basis for the acquisition of property, plant and equipment and investment property. We currently expect our capital expenditure for the acquisition of property, plant and equipment and investment property in 2020 to decrease to3.1 trillion on a standalone basis compared to the3.3 trillion incurred in 2019. However, the actual amount remains subject to adjustment depending on market conditions, our results of operations and changes in ourbuild-out plan for our 5G mobile telecommunications network.

Inflation

We do not consider that inflation in Korea has had a material impact on our results of operations in recent years. According to data published by the Bank of Korea, annual inflation in Korea was 1.9% in 2017, 1.5% in 2018 and 0.4% in 2019. 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 or political conditions in Korea deteriorate.”

Item 5.C.  Research and Development, Patents and Licenses, Etc.

In order to maintain our leadership in the converging telecommunications business environment and develop additional platforms, services and applications, we engage in research and development (“R&D”) activities in our various business units and also operate the following R&D laboratories:

 

  

an infrastructure R&D laboratory;

 

  

an artificial intelligence R&D laboratory; and

 

  

a platform R&D laboratory.

 

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As of December 31, 2019, KT Corporation had 4,386 domestic and 1,331 international registered patents.

The MSIT has the authority to recommend to network service providers that they provide funds for national research and development of telecommunications technology and related projects. Including such contributions, total expenditures (which include capitalized expenses) on research and development were435 billion in 2017,273 billion in 2018 and254 billion in 2019.

Item 5.D.  Trend Information

These matters are discussed under Item 5.A. above where relevant.

Item 5.E.  Off-balance Sheet Arrangements

These matters are discussed under Item 5.B. above where relevant.

Item 5.F.  Tabular Disclosure of Contractual Obligations

These matters are discussed under Item 5.B. above where relevant.

Item 5.G.  Safe Harbor

See “Item 3.D. Risk Factors—Forward-looking statements may prove to be inaccurate.”

Item 6.  Directors, Senior Management and Employees

Item 6.A.  Directors and Senior Management

Directors

Our board of directors has the ultimate responsibility for the administration of our affairs. Our articles of incorporation provide for a board of directors consisting of:

 

  

up to three inside directors, including the Representative Director; and

 

  

up to eight outside directors.

All of our directors are elected at the general shareholders’ meeting. If the total assets of a company listed on the KRX KOSPI Market exceed2,000 billion as of the end of the preceding year, which is the case with us, the Commercial Code of Korea requires such company to have more than three outside directors, with outside directors being the majority of the board of directors. Under our articles of incorporation, the term of office for an inside director is up to three years. Pursuant to an amendment to our articles of incorporation in March 2020, the term of office for an outside director changed from up to ten years to up to six years, which change was made to reflect an amendment to the enforcement decree of the Commercial Code of Korea. The terms for both an inside director and an outside director are, however, extended to the close of the annual shareholders’ meeting convened with respect to the last full fiscal year of a director’s term of office. If the term of office for a director is not completed and ends before the close of the annual general shareholders’ meeting and a new director is appointed in his or her place, the term of office for such replacement director will coincide with the uncompleted remaining term of office of his or her predecessor.

Under the Commercial Code of Korea, we must establish a committee to nominate candidates for outside directors within the board of directors, and outside directors must make up more than half of

 

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the total members of the outside director candidate nominating committee. According to our articles of incorporation, such committee must consist of one inside director and all of our outside directors, other than for election of an outside director resulting from the expiration of the term of the office, in which case such outside director whose term is expiring may not be a member of the committee. Our Outside Director Candidate Nominating Committee nominates outside director candidates for appointment at the general shareholders’ meeting.

Upon the request of any director (to the extent that the board of directors does not separately authorize only a particular director to make such request), a meeting of the board of directors will be assembled. The chairperson of the board of directors is elected from among the outside directors by a resolution of the board of directors. The term of office of the chairperson is one year.

Our current directors are as follows:

 

Name

 

Position

 Director
Since
   

Date of Birth

 Expiration of
Term of
Office
 

Inside Directors(1)

     

Hyeon-Mo Ku

 Representative Director and Chief Executive Officer  March 2020   January 13, 1964  2023 

Yoon-Young Park

 President, Head of Enterprise Business Group  March 2020   April 15, 1962  2021 

Jong-Ook Park

 Senior Executive Vice President, Head of Corporate Planning Group  March 2020   January 24, 1962  2021 

Outside Directors(1)

     

Dae-You Kim

 Outside Director, DB Life Insurance Co., Ltd.  March 2018   July 21, 1951  2021 

Gang-Cheol Lee

 Former Auditing Director, Ultra V Co., Ltd.  March 2018   May 6, 1947  2021 

Hee-Yol Yu

 

Board Chairperson, Korea Carbon Capture and Sequestration

R&D Center

  March 2019   January 12, 1947  2022 

Tae-Yoon Sung

 Professor, School of Economics, Yonsei University  March 2019   February 13, 1970  2022 

Hyun-Myung Pyo

 Former President and CEO, LOTTE Rental Co., Ltd.  March 2020   October 21, 1958  2023 

Chung-Gu Kang

 Professor, School of Electrical Engineering, Korea University  March 2020   December 12, 1962  2023 

Chan-Hi Park

 Professor, School of Business,Chung-Ang University  March 2020   December 2, 1964  2022 

Eun-Jung Yeo

 Professor, School of Business,Chung-Ang University  March 2020   February 15, 1973  2023 

 

 

(1)

All of our inside and outside directors beneficially own less than one percent of the issued shares of KT Corporation in the aggregate.

Hyeon-Mo Ku has served as our inside director since March 2020 and has served as our Representative Director since March 2020. Previously, he served as the president of our Customer & Media Business Group and our Corporate Planning Group. Mr. Ku holds a bachelor’s degree in industrial engineering from Seoul National University and a Ph.D. in managerial science from the Korea Advanced Institute of Science and Technology.

Yoon-Young Park has served as our inside director since March 2020 and is also serving as our president and the head of our Enterprise Business Group. Previously, he served as the Executive Vice President of our Enterprise Business Consulting Unit. Mr. Park holds a bachelor’s degree and a Ph.D. in civil engineering from Seoul National University.

 

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Jong-Ook Park has served as our inside director since March 2020 and is also serving as our Senior Executive Vice President and the head of our Corporate Planning Group. Previously, he served as the Executive Vice President of our Strategy & Planning Office. Mr. Park holds a bachelor’s degree and completed a master’s degree in law from Jeonnam National University.

Dae-You Kim has served as our outside director since March 2018. He is currently an outside director of DB Life Insurance Co., Ltd. Previously, he served as the vice chairman of Wonik Investment Partners and a professor of Hanyang University. He also previously served as a presidential secretary for economic policies to the President of Korea. Mr. Kim holds a bachelor’s degree in export studies at Seoul National University and a masters’ degree in public policy from the University of Wisconsin.

Gang-Cheol Lee has served as our outside director since March 2018. He served as an auditing director of Ultra V Co., Ltd. Previously, he served as a presidential secretary of civil society policies to the President of Korea. Mr. Lee holds a bachelor’s degree in political science and diplomacy from Kyungpook National University.

Hee-Yol Yu has served as our outside director since March 2019. He is currently a board chairperson of the Korea Carbon Capture and Sequestration R&D Center. Previously, he served as vice minister of the Ministry of Science & Technology and a chief-professor at Pusan National University. Mr. Yu holds a bachelor’s degree in liberal arts and sciences from Seoul National University and a master’s degree in public administration from Seoul National University. He also holds a master of philosophy degree in technology innovation of the science policy research unit from Sussex University in the United Kingdom and a Ph.D in politics and science and technology policy making from Korea University.

Tae-Yoon Sung has served as our outside director since March 2019. He is currently a professor of economics at Yonsei University, a dean of the Yonsei Underwood International College and an editorial board member of the Korean Economic Review at Korean Economic Association. Mr. Sung holds a bachelor’s degree and a master’s degree in economics from Yonsei University and a Ph.D. in economics from Harvard University.

Hyun-Myung Pyo has served as our outside director since March 2020 and served as our president from 2010 to 2014. Previously, he also served as the president and chief executive officer of LOTTE Rental Co., Ltd and as an outside director of JB Financial. Mr. Pyo holds a bachelor’s degree in electrical engineering from Korea University and a master’s degree and a Ph.D. in communication engineering from Korea University.

Chung-Gu Kang has served as our outside director since March 2020. He is currently a professor of electrical engineering at Korea University and a member of the National Academy of Engineering of Korea. He was previously the chairperson of the Consultative Committee for Radio Policy at the Ministry of Science and ICT. Mr. Kang holds a bachelor’s degree in electrical engineering from University of California at San Diego and a master’s degree and a Ph.D. in electrical and computer engineering from University of California at Irvine.

Chan-Hi Park has served as our outside director since March 2020. He is currently a professor at the School of Business atChung-Ang University and a member of the National Development Committee at the National Economic Advisory Council. He was previously a member of the National Development Committee at the Presidential Commission on Policy Planning. Mr. Park holds a bachelor’s degree and a master’s degree in business administration from Seoul National University and a Ph.D. in business administration from Harvard University.

 

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Eun-Jung Yeo has served as our outside director since March 2020. She is currently a professor at the School of Business atChung-Ang University and the vice president of the Korea Money and Finance Association and the Financial Information Society of Korea. Ms. Yeo holds a bachelor’s degree and a master’s degree in chemical engineering from Seoul National University and a Ph.D. in economics from University of Michigan.

In March 2020, our articles of incorporation were amended to modify the title of “Representative Director President (Hwejang)” to “Representative Director.” Our “Representative Director” is authorized to perform all judicial and extra-judicial acts relating to our business. Our shareholders elect the Representative Director in accordance with the provisions of the Commercial Code and our articles of incorporation. In March 2018, we amended our articles of incorporation in efforts to add more rigor and transparency to the process of selecting our Representative Director. Our Corporate Governance Committee conducts investigation and composition of a pool of candidates and selects the representative director candidates whose candidacy will be further examined. Subsequently, the Representative Director Candidate Examination Committee examines and selects Representative Director candidates and submits an examination report of such candidates to our board of directors. A Representative Director candidate recommended by our board of directors is nominated at the shareholders’ meeting.

Under our articles of incorporation, the board of directors must submit a draft management contract between KT Corporation and the candidate covering our management objectives to the shareholders’ meeting at the time of candidate nomination to the meeting. When the draft management contract has been approved at the shareholders’ meeting, we enter into such management contract with the Representative Director. In such case, the chairperson of the board of directors, on our behalf, signs the management contract. In March 2020, our articles of incorporation were amended to have management goals be set based on objectives that can be accomplished during a Representative Director’s term in office.

The board of directors may conduct performance review discussions to determine if the new Representative Director performed his or her duties under the management contract, or hire a professional evaluation agency for such purpose. If the board of directors determines, based on the results of the performance review, that the new Representative Director has failed to achieve the management goals, it may propose to dismiss Representative Director at a shareholders’ meeting.

Senior Management

In addition to our inside directors who are also our executive officers, we have the following executive officers as of April 29, 2020:

 

Name

  

Title and Responsibilities

  Year of
birth
 

Kook-Hyun Kang

  Senior Executive Vice President, Customer Business Group   1963 

Byung-Sam Park

  Senior Executive Vice President, Ethics Office   1966 

Sang-Don Ahn

  Senior Executive Vice President, Legal Affairs Office   1962 

Soo-Jung Shin

  Senior Executive Vice President, IT Planning Office   1965 

Hong-Beom Jeon

  Senior Executive Vice President, AI/DX Convergence Business Group   1962 

Hyun-Yok Sheen

  Senior Executive Vice President, Corporate Management Group   1968 

Cheol-Gyu Lee

  Senior Executive Vice President, Network Group   1960 

June-Keun Kim

  Executive Vice President, Incubation Unit   1966 

Hyoung-Wook Kim

  Executive Vice President, Future Value TF   1963 

Hee-Su Kim

  Executive Vice President, KT Institute of Economics & Business Research   1962 

Young-Ho Kim

  Executive Vice President, Northern Seoul/Gangwon Regional Headquarters   1966 

Kyeong-Weon Park

  Executive Vice President, Daegu/Gyeongbuk Regional Headquarters   1963 

Jong-Ryeol Park

  Executive Vice President, SCM Strategy Office   1963 

Chang-Seok Seo

  Executive Vice President, Jeonnam/Jeonbuk Regional Headquarters   1967 

 

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Name

  

Title and Responsibilities

  Year of
birth
 

Jae-Ho Song

  Executive Vice President, Media Business Unit   1966 

Kyung-Keun Yoon

  Executive Vice President, Financial Management Office   1963 

Dong-Sik Yun

  Executive Vice President, Cloud/DX Business Unit   1963 

Seung-Yong Lee

  Executive Vice President, Corporate Relations Office 1   1964 

Hyeon-Seuk Lee

  Executive Vice President, Device Business Unit   1966 

Sang-Kwi Chang

  Executive Vice President, Legal Affairs Department 1   1968 

Bong-Gyun Kim

  Executive Vice President, Biz Customer Business Unit   1972 

Hoon-Bae Kim

  Executive Vice President, Future Business Development Unit   1963 

Gyung-Pyo Hong

  Executive Vice President, Institute of Convergence Technology   1962 

Kyoung-Woo Ko

  Senior Vice President, Northern Seoul/Gangwon Network O&M Headquarters   1963 

Choong-Rim Ko

  Senior Vice President, Strategic Channel Business Unit   1967 

Ki-Yeon Kwak

  Senior Vice President, AI/DX Business Strategy Department   1971 

Gang-Bon Koo

  Senior Vice President, Metropolitan Wholesale Unit   1972 

Moo-Seong Kim

  Senior Vice President, Labor Relations Department 2   1972 

Byung-Kyun Kim

  Senior Vice President, Device Development Department   1968 

Bong-Ki Kim

  Senior Vice President, Platform Laboratory   1968 

Sang-Kyoon Kim

  Senior Vice President, KT Group Human Resources Office   1970 

Young-Woo Kim

  Senior Vice President, Global Business Development Unit   1967 

Young-In Kim

  Senior Vice President, Network Strategy Department   1968 

Young-Jin Kim

  Senior Vice President, Strategy & Planning Office   1967 

Yi-Han Kim

  Senior Vice President, Enterprise Business Consulting/Execution Unit 1   1966 

Jae-Kyung Kim

  Senior Vice President, Corporate Strategy Research Department   1971 

Jae-Kwon Kim

  Senior Vice President, Busan/Gyeongnam Enterprise Customer Sales Headquarters   1968 

Jun-Su Kim

  Senior Vice President, Busan/Gyeongnam Network O&M Headquarters   1970 

Jin-Koog Kim

  Senior Vice President, Group Management Office   1965 

Jin-Han Kim

  Senior Vice President, AI Laboratory   1963 

Chae-Hee Kim

  Senior Vice President, AI/Big Data Business Unit   1974 

Cheol-Kee Kim

  Senior Vice President, Corporate Relations Office 2   1970 

Hye-Joo Kim

  Senior Vice President, AI/Big Data Convergence Business Department   1970 

Pyeong Ryu

  Senior Vice President, Small & Medium Business Customer Department   1966 

Sung-Uk Moon

  Senior Vice President, Enterprise New Business Development Unit   1972 

Young-Il Moon

  Senior Vice President, Data & Information Security Unit   1966 

Yong-Man Park

  Senior Vice President, Jeonnam/Jeonbuk Customer Sales Headquarters   1965 

Jeong-Jun Park

  Senior Vice President, Enterprise Customer Business Unit   1967 

Jong-Ho Park

  Senior Vice President, Intelligent Network Service Unit   1964 

Joon-Hyun Park

  Senior Vice President, Business Portfolio Department   1971 

Hyun-Jin Park

  Senior Vice President, Customer Value Management Unit   1968 

Hyo-Il Park

  Senior Vice President, Customer Strategy Department   1970 

Young-Soo Seo

  Senior Vice President, Network Research Technology Support Unit   1968 

Eun-Kwon Suk

  Senior Vice President, Daegu/Gyeongbuk Enterprise Customer Sales Headquarters   1968 

So-Hee Shin

  Senior Vice President, Global Sales Department 1   1968 

Chang-Yong Ahn

  Senior Vice President, Southern Seoul/Western Seoul Network O&M Headquarters   1966 

Chi-Yong Ahn

  Senior Vice President, Sales Operating Business Unit   1966 

Yul-Mo Yang

  Senior Vice President, Public Relations Office   1967 

Jin-Ho Yang

  Senior Vice President, Legal Affairs Department 2   1973 

Jae-Min Eom

  Senior Vice President, Busan/Gyeongnam Customer Sales Headquarters, Sales Planning Department   1965 

Byung-Ki Oh

  Senior Vice President, Global Investment & Management Department   1964 

Hun-Yong Oh

  Senior Vice President, Platform IT Service Unit   1966 

Kyung-Hwa Ok

  Senior Vice President, S/W Development Unit   1968 

Heung-Jae Won

  Senior Vice President, Southern Seoul/Western Seoul Customer Sales Headquarters   1967 

Yong-Kyu Yoo

  Senior Vice President, Jeonnam/Jeonbuk Enterprise Customer Sales Headquarters   1971 

Chang-Kyu Yoo

  Senior Vice President, Northern Seoul/Gangwon Enterprise Customer Sales Headquarters   1966 

Mi-Hee Lee

  Senior Vice President, Infra Service Unit   1970 

Sun-Joo Lee

  Senior Vice President, Sustainability Management Unit   1969 

Seong-Hwan Yi

  Senior Vice President, 5G/GIGA Business Unit   1968 

Su-Kil Lee

  Senior Vice President, Network Strategy Unit   1968 

Yong-Gyoo Lee

  Senior Vice President, 5G Platform Development Unit   1965 

 

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Name

  

Title and Responsibilities

  Year of
birth
 

Won-Joon Lee

  Senior Vice President, Human Resources Office   1967 

Jong-Sik Lee

  Senior Vice President, Infra Laboratory   1972 

Jin-Woo Lee

  Senior Vice President, Enterprise Service Unit   1966 

Chang-Jae Lee

  Senior Vice President, Energy Efficiency Business Department   1969 

Chang-Ho Yi

  Senior Vice President, CEO Office   1972 

Han-Sup Lee

  Senior Vice President, Enterprise Business Consulting/Execution Unit 2   1966 

Jong-Taek Lim

  Senior Vice President, Management Support Office   1964 

Chae-Hwan Im

  Senior Vice President, AI B2B Business Department   1969 

Dae-Jin Jang

  Senior Vice President, Group Contents Strategy Department   1971 

Jung-Soo Jung

  Senior Vice President, Busan/Gyeongnam Regional Headquarters   1966 

Seong-Eun Cho

  Senior Vice President, 5G Smart Platform DevelopmentP-TF   1971 

Il Cho

  Senior Vice President, Financial Management Planning Department   1966 

Chang-Hwan Cho

  Senior Vice President, Tax Department   1962 

Jung-Yong Ji

  Senior Vice President, Network O&M Unit   1968 

Keun-Ha Chin

  Senior Vice President, Ethics Department 1   1968 

Jung-Ho Chae

  Senior Vice President, MVNO Department   1966 

Kang-Rim Choi

  Senior Vice President, Connected Car Biz Center   1974 

Si-Hwan Choi

  Senior Vice President, CEO Office Team 1   1967 

Chan-Ki Choi

  Senior Vice President, Chungnam/Chungbuk Regional Headquarters   1966 

Ho-Chang Choi

  Senior Vice President, KT Group HR Development Academy   1971 

Ja-Kyung Hahn

  Senior Vice President, Platform Laboratory Industry AI Platform TF   1971 

Yong-Sun Hae

  Senior Vice President, Southern Seoul/Western Seoul Regional Headquarters   1963 

Kye-Sung Hong

  Senior Vice President, Chungnam/Chungbuk Enterprise Customer Sales Headquarters   1968 

Sung-Pil Hong

  Senior Vice President, KT Group Real Estate Department   1965 

Item 6.B.  Compensation

Compensation of Directors and Executive Officers

In 2019, the aggregate compensation paid and accrued to all directors and executive officers was approximately Won 46 billion and the aggregate amount set aside or accrued by us to provide pension and retirement benefits to such persons was Won 5 billion.

The compensation of our five most compensated directors and executive officers who received total annual compensation exceeding500 million in 2019 was as follows:

 

Name

  

Position

  Total Compensation
in 2019
  

Composition of Total
Compensation

      (In millions of Won)

Chang-Gyu Hwang

  Chief Executive Officer  1,442  573 (salary);859 (bonus);10 (benefits)

Hyeon-Mo Ku

  President  892  370 (salary);503 (bonus);19 (benefits)

Seong-Mok Oh

  President  888  376 (salary);490 (bonus);22 (benefits)

Dong-Myun Lee

  President  775  377 (salary);384 (bonus);14 (benefits)

In-Hoe Kim

  President  732  369 (salary);353 (bonus);10 (benefits)

The chairperson of our board of directors enters into an employment agreement on our behalf with our Representative Director. The employment agreement sets certain management targets to be achieved by the Representative Director as determined by the Evaluation and Compensation Committee each year, including a target for the amount of “EBITDA” to be achieved in each year. EBITDA is defined as earnings before interest, tax, depreciation and amortization. Other management targets include (i) short-term operational and strategic goals centered around key performance indices

 

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and (ii) increase on a long-term basis in shareholder value measured against performance of companies listed on KOSPI and the shares of our competitors. Failure to achieve certain thresholds below the targets will allow the board of directors to take actions with respect to the Representative Director’s employment, including proposing at the shareholders’ meeting an early termination of his employment. In addition, the head of each of our functional departments, the president of each of our subsidiaries and the heads of each regional head office have entered into employment agreements with the Representative Director that provide for similar management targets to be achieved by each of our departments, subsidiaries and regional head offices.

Item 6.C.  Board Practices

As of April 1, 2020, none of our inside or outside directors maintained directors’ service contracts with us or with any of our subsidiaries providing for benefits upon termination of employment.

Corporate Governance Committee

The Corporate Governance Committee is comprised of four outside directors and one inside director, Gang-Cheol Lee,Dae-You Kim,Hee-Yol Yu, Hyun-Myung Pyo andJong-Ook Park. The chairperson is Gang-Cheol Lee. The committee is responsible for the review of matters with respect to our Corporate Governance Guidelines and our performance under such guidelines to monitor effectiveness of our corporate governance. The committee is also responsible for authorization of investigation and composition of a pool of internal and external Representative Director candidates and selection of the Representative Director candidates, who shall be further examined by the Representative Director Candidate Examination Committee, pursuant to the examination criteria determined by our board of directors. The committee members are elected by the board after the annual meeting, and the term of the committee members is one year.

Representative Director Candidate Examination Committee

The Representative Director Candidate Examination Committee is comprised of one inside director and all of our outside directors. No member of this committee shall become a candidate for the position of the Representative Director during his or her term as a member of the committee. The committee’s duties include examining the Representative Director candidates selected under the examination criteria determined by our board of directors, selecting the Representative Director candidates pursuant to such criteria and reporting to the board of directors the outcome of the examination.

Outside Director Candidate Nominating Committee

The Outside Director Candidate Nominating Committee consists of one inside director and all of our outside directors, other than for election of an outside director resulting from the expiration of the term of the office, in which case such outside director whose term is expiring cannot be a member of the committee. The committee’s duties include reviewing the qualifications of potential candidates and proposing nominees to serve as outside directors on our board of directors to the shareholders at the general shareholders’ meeting. The committee members’ terms expire immediately after the adjournment of the shareholders’ meeting where the outside directors are elected.

Evaluation and Compensation Committee

The Evaluation and Compensation Committee is currently comprised of four outside directors,Hee-Yol Yu, Gang-Cheol Lee, Hyun-Myung Pyo andChan-Hi Park.The chairperson isHee-Yol Yu.The committee’s duties include prior review of the Representative Director’s management goals, terms

 

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and conditions proposed for inclusion in the management contract of the Representative Director, including, but not limited to, determining whether the Representative Director has achieved the management goals, and the determination of compensation for the Representative Director and the inside directors. The committee members are elected by the board after the closing of the annual meeting, and the term of the committee members is one year.

Management Committee

The Management Committee is currently comprised ofHyeon-Mo Ku, Yoon-Young Park andJong-Ook Park.The chairperson isHyeon-Mo Ku.The committee’s duties include the authorization of establishment and management of branch offices, the disposal and sale of stocks of our subsidiaries, which have a market value between15 billion and30 billion, not including any sale for stocks with market value of10 billion or more that involves a change of control, making investments and providing guarantees between15 billion to30 billion, the acquisition and disposal of real estate having market value between15 billion to30 billion, and the issuance of certain debt securities.

Related-Party Transactions Committee

The Related-Party Transactions Committee is currently comprised of four outside directors,Hee-Yol Yu,Chung-Gu Kang,Chan-Hi Park andEun-Jung Yeo.The chairperson isHee-Yol Yu. This committee’s duties include reviews of transactions between KT Corporation and its subsidiaries and ensures compliance with applicable antitrust laws. The committee members are elected by the board after the annual meeting, and the term of the committee members is one year.

Sustainability Management Committee

The Sustainability Management Committee is currently comprised of four outside directors and one inside director, Hyun-Myung Pyo, Gang-Cheol Lee,Tae-Yoon Sung,Chan-Hi Park and Yoon-Young Park. The chairperson is Hyun-Myung Pyo.The committee’s duties include reviews of sustainable management plans, the authorization of establishment of medium- and long-term sustainable management strategies, sustainable management results, regular reporting and risk management of sustainable management activities and charitable contributions between100 million to1 billion. The committee members are elected by the board after the annual meeting, and the term of the committee members is one year.

Audit Committee

Under the Commercial Code of Korea and our articles of incorporation, we are required to establish an audit committee comprised of three or more outside directors and at leasttwo-thirds of the Audit Committee members are required to be outside directors. Audit Committee members must also meet the applicable independence criteria set forth under the rules and regulations of the Sarbanes-Oxley Act of 2002. The committee is currently comprised ofTae-Yoon Sung,Dae-You Kim,Eun-Jung Yeo andChung-Gu Kang.The chairperson isTae-Yoon Sung and the financial expert isEun-Jung Yeo. Members of the committee are elected by our shareholders at the shareholders’ meeting. Our internal and external auditors report directly to the committee.

The duties of the committee include:

 

  

appointing independent auditors;

 

  

approving the appointment and recommending the dismissal of the internal auditor;

 

  

evaluating performance of independent auditors;

 

  

approving services to be provided by the independent auditors;

 

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reviewing annual financial statements;

 

  

reviewing audit results and reports;

 

  

reviewing and evaluating our system of internal controls and policies

 

  

examining improprieties or suspected improprieties; and

 

  

on a quarterly basis, reviewing reports on internal controls for legal compliance, including with respect to cybersecurity laws.

In addition, regarding the shareholders’ meeting, the committee may examine the agenda, financial statement and other reports to be submitted by the board of directors at each shareholders’ meeting.

Item 6.D.  Employees

On anon-consolidated basis, we had 23,372 employees as of December 31, 2019, compared to 23,835 employees as of December 31, 2018 and 23,925 employees as of December 31, 2017.

Labor Relations

We consider our current relations with our work force to be good. However, in the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing ofnon-core businesses and reducing our employee base.

As of December 31, 2019, about 77.7% of the employees of KT Corporation were members of the KT Trade Union. On behalf of its members, the union negotiates a collective bargaining agreement with us every two years, and our current collective bargaining agreement expires on June 16, 2021. The current collective bargaining agreement provides that even in the event of a strike, the minimum number of employees necessary to operate the telecommunications business must continue to work.

The union also negotiates its members’ wages with us every year. Under the Act of the Promotion of Worker’s Participation and Cooperation, our Employee-Employer Cooperation Committees, which are composed of representatives of management and labor for each business unit and regional office, meet quarterly to discuss employee grievances, working conditions and potential employee-initiated improvements in service or management.

The Trade Union and Labor Relations Adjustment Act (“Labor Act”) allow multiple labor unions to be formed within one company. Therefore, additional labor unions may be formed by our employees. Pursuant to such amendments, our employees formed a new labor union called “KT New Union” in July 2011. The Labor Act also requires such multiple unions to consolidate themselves into a single channel when negotiating with the company on behalf of their members and to enter into a single collective bargaining agreement with the company. As a result of the recent consolidation of labor unions, KT Trade Union was selected as the bargaining representative of the labor unions. Its term as the bargaining representative expires in December 31, 2021.

Employee Stock Ownership and Benefits

We have an employee stock ownership association, which may purchase on behalf of its members up to 20.0% of any of our shares offered publicly in Korea. The employee stock ownership association owned 0.4% of our issued shares as of December 31, 2019.

In accordance with the National Pension Act of Korea, we contribute an amount equal to 4.5% of an employee’s standard monthly wages, and each employee contributes 4.5% of his or her standard monthly wages, into his or her personal pension account. Our employees, including executive officers

 

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as well asnon-executive employees, are subject to a pension insurance system, under which we make monthly contributions to the pension accounts of the employees, and upon retirement, such employees are paid the pension amount due from their pension accounts. Prior to April 2011, our executive andnon-executive employees were subject to alump-sum severance payment system, under which they were entitled to receive alump-sum severance payment upon termination of their employment, based on their length of service and salary level at the time of termination. Starting in April 2011, in accordance with the Korean Employee Retirement Income Security Act, we replaced suchlump-sum severance payment system with our current pension insurance system in the form of a defined benefit plan, and also introduced a defined contribution plan in December 2012, with a total combined unfunded portion of approximately2,127 billion as of December 31, 2019.Lump-sum severance amounts previously accrued prior to our adoption of the current pension insurance system continue to remain payable. We also provide a wide range of fringe benefits to our employees, including housing, housing loans, company-provided hospitals and schools, a company-sponsored pension program, an employee welfare fund, industrial disaster insurance, cultural and athletic facilities, physical education grants, meal allowances, medical examinations and training and resort centers. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results.”

Employee Training

The objective of our training program is to develop information technology specialists who are able to create value for our customers. In order to develop skills of our employees, we require 85 hours of training per year from most of our employees, using individually-tailored curriculums based on individual assessments. We also operate a Cyber Academy to provide online classes to our employees, as well as offer various foreign language classes to our employees. In addition, we provide tuition and living expense reimbursements to our high potential employees who pursue graduate programs in Korea and abroad, as well as provide financial assistance to those who pursue work-related professional licenses or participate in after-work study programs.

Item 6.E.  Share Ownership

Ordinary Shares

The persons who currently serve as our directors or executive officers held, as a group, 273,868 ordinary shares as of April 29, 2020. The table below shows the ownership of our ordinary shares by our directors and executive officers:

 

Shareholders

  Number of Ordinary
Shares Owned
 

Hyeon-Mo Ku

   18,239 

Hyun-Myung Pyo

   10,684 

Hong-Beom Jeon

   7,993 

Kook-Hyun Kang

   7,776 

Jong-Ook Park

   7,695 

Su-Kil Lee

   7,586 

Chang-Seok Seo

   7,455 

Yoon-Young Park

   6,947 

Kyeong-Weon Park

   6,692 

Kyung-Keun Yoon

   6,465 

Hyoung-Wook Kim

   6,423 

Pyeong Ryu

   6,136 

Cheol-Gyu Lee

   5,979 

Jae-Ho Song

   5,865 

Byung-Sam Park

   5,365 

Hyun-Yok Sheen

   5,354 

Sang-Kwi Chang

   5,070 

Young-Ho Kim

   4,861 

Seung-Yong Lee

   4,440 

 

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Shareholders

  Number of Ordinary
Shares Owned
 

Hee-Su Kim

   4,387 

Soo-Jung Shin

   4,384 

Chan-Ki Choi

   4,252 

Hyeon-Seuk Lee

   4,237 

June-Keun Kim

   4,112 

Gyung-Pyo Hong

   4,110 

Jung-Yong Ji

   3,985 

Chi-Yong Ahn

   3,755 

Jun-Su Kim

   3,210 

Kyoung-Woo Ko

   3,161 

Bong-Gyun Kim

   2,800 

Jong-Ryeol Park

   2,542 

Young-In Kim

   2,527 

Young-Soo Seo

   2,481 

Heung-Jae Won

   2,428 

Hun-Yong Oh

   2,359 

Chang-Hwan Cho

   2,332 

Dong-Sik Yun

   2,322 

Han-Sup Lee

   2,111 

Chang-Yong Ahn

   2,108 

Yi-Han Kim

   2,070 

Chang-Kyu Yoo

   2,036 

Il Cho

   2,036 

Hyun-Jin Park

   2,014 

Yul-Mo Yang

   2,013 

Cheol-Kee Kim

   2,013 

Yong-Sun Hae

   1,969 

Young-Gyoo Lee

   1,917 

Jae-Kyung Kim

   1,855 

Sun-Joo Lee

   1,810 

Won-Joon Lee

   1,780 

Kyung-Hwa Ok

   1,755 

Hye-Byung Min

   1,755 

Ki-Yeon Kwak

   1,755 

Hyo-Il Park

   1,634 

So-Hee Shin

   1,562 

Young-Il Moon

   1,405 

Dae-Jin Jang

   1,376 

Joon-Hyun Park

   1,369 

Byung-Ki Oh

   1,259 

Choong-Rim Ko

   1,232 

Ho-Chang Choi

   1,230 

Jong-Ho Park

   1,207 

Jin-Han Kim

   1,170 

Min-Hee Lee

   1,166 

Gang-Bon Koo

   1,116 

Jung-Soo Jung

   1,106 

Moo-Seong Kim

   1,096 

Hoon-Bae Kim

   1,088 

Young-In Kim

   1,049 

Young-Woo Kim

   1,046 

Jin-Ho Yang

   1,042 

Byung-Kyun Kim

   1,037 

Seong-Hwan Yi

   1,036 

Yong-Kyu Yoo

   1,036 

Sung-Pil Hong

   1,036 

Keun-Ha Chin

   1,036 

Sung-Uk Moon

   1,036 

Chan-Hee Kim

   1,036 

Yong-Man Park

   1,036 

 

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Shareholders

  Number of Ordinary
Shares Owned
 

Jae-Won Kim

   1,036 

Kye-Sung Hong

   1,000 

Jong-Taek Lim

   1,000 

Sang-Kyoon Kim

   1,000 

Chang-Jae Lee

   966 

Jeong-Jun Park

   936 

Chang-Ho Lee

   851 

Bong-Ki Kim

   836 

Jin-Woo Lee

   755 

Jong-Sik Lee

   676 

Eun-Kwon Suk

   659 

Jung-Ho Chae

   657 

Jin-Koong Kim

   636 

Chae-Hwan Im

   636 

Ja-Kyung Hahn

   616 

Si-Hwan Choi

   602 

Hye-Joo Kim

   570 

Seong-Eun Cho

   566 

Jae-Min Eom

   544 

Kang-Rim Choi

   536 

Gang-Cheol Lee

   471 

Dae-You Kim

   471 
  

 

 

 

Total

   273,868 
  

 

 

 

Stock Options

We have not granted any stock options to our current directors and executive officers.

Item 7.  Major Shareholders and Related Party Transactions

Item 7.A.  Major Shareholders

The following table sets forth certain information relating to the shareholders of our ordinary shares as of December 31, 2019:

 

Shareholders

  Number of
Shares
   Percent of
Total
Shares Issued
 

National Pension Corporation

   32,836,553    12.58

NTTDoCoMo, Inc.

   14,257,813    5.46

Silchester International Investors LLP

   13,588,760    5.20

Employee stock ownership association

   1,111,616    0.43

Directors as a group

   64,278    0.02

Public

   183,382,530    70.23

KT Corporation (held in the form of treasury stock)

   15,870,258    6.08
  

 

 

   

 

 

 

Total issued shares

   261,111,808    100.00
  

 

 

   

 

 

 

Item 7.B.  Related Party Transactions

We have engaged in various transactions with our subsidiaries and affiliated companies. See Note 35 to the Consolidated Financial Statements. We have not issued any guarantees in favor of our consolidated subsidiaries.

Item 7.C.  Interests of Experts and Counsel

Not applicable.

 

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Item 8.  Financial Information

Item 8.A.  Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” and pagesF-1 throughF-109.

Legal Proceedings

In July 2012, the Fair Trade Commission issued to us a penalty surcharge of approximately5 billion as well as certain corrective orders, after investigating certain pricing and subsidy practices of mobile service carriers and handset manufacturers. Samsung Electronics Co., Ltd., LG Electronics Co., Ltd., Pantech Curitel Co., Ltd., SK Telecom and LG U+ were also issued penalty surcharges as a result of the investigation. We filed for a stay of execution of the Fair Trade Commission’s decision, and in September 2012, the Seoul High Court granted a stay of execution with respect to the corrective order, and denied the stay of execution with respect to the penalty surcharge. We paid the entire penalty surcharge in September 2012. In September 2012, we filed a lawsuit with the Seoul High Court against the Fair Trade Commission to appeal the penalty surcharge and the corrective order, and on February 6, 2014, the Seoul High Court ruled against us on our appeal. In February 2014, we filed another appeal with respect to the penalty surcharge and the corrective order with the Supreme Court of Korea, and on September 26, 2019, the Supreme Court of Korea ruled against us on our appeal. The outcome of this case did not result in any fine or penalty in addition to the penalty surcharge we already paid in September 2012.

In March 2015, the KCC imposed a combined fine of approximately34 billion on SK Telecom, LG U+ and us (our fine being approximately9 billion) for violation of regulations relating to handset sales, in connection with a used handset buyback program that we and the other telecommunications operators were promoting. In February 2018 and April 2019, the KCC imposed a combined fine of approximately50.6 billion and 2.9 billion, respectively, on SK Telecom, LG U+ and us (our fine being approximately12.5 billion and0.9 billion, respectively) for violation of regulations relating to handset sales in case of wholesale, online sale, etc.

In 2009, we entered into a contract with Enspert, Co., Ltd.(“Enspert”), a consumer electronics manufacturer, to purchase approximately 200,000 tablet PCs. Due to defects with the tablet PCs, we cancelled our contract and the outstanding order for approximately 170,000 tablet PCs, for which we would have paid approximately51 billion. In June 2014, the Korea Fair Trade Commission imposed a penalty surcharge of approximately2 billion on us, finding that we cancelled our contract with Enspert without cause. We appealed such decision but the decision was confirmed by the Seoul High Court and the Supreme Court in May 2016 and September 2016, respectively. In April 2017, Enspert filed a lawsuit against us at the Seoul Central Court, alleging damages of approximately94 billion caused by our cancellation of the contract between Enspert and us for the tablet PCs and specifying a claim amount of47 billion, which amount was subsequently increased by Enspert to141 billion in July 2019. In February 2020, the Seoul Central Court ruled in favor of Enspert, entitling it to recovery of damages of approximately6.7 billion. Both parties filed an appeal with the Seoul High Court, where the case is currently pending, and we intend to vigorously defend against such lawsuit.

In April 2019, the Korea Fair Trade Commission determined that we, LG U+, SK Broadband and Sejong Telecom colluded in numerous biddings held by public institutions, including the Public Procurement Service and the Korea Racing Authority, between April 2015 to June 2017 for the engagement of telecommunications companies to provide dedicated fixed-line services, in violation of the Monopoly Regulation and Fair Trade Act, and issued an order to cease and desist, imposed a penalty surcharge of5.7 billion on us and filed a criminal complaint against us, which is currently under investigation by the Seoul Central District Prosecutor’s Office. In addition, we are restricted for a six month period from January 2020 until July 2020 from bidding on projects by public institutions, including The Public Procurement Service and the Korea Racing Authority.

 

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For a description of our additional legal proceedings, see “Item 3. Key Information—Item 3.D. Risk Factors—Legal cases involving our charitable or political donations and other incidents and allegations, including matters connected to a scandal involving Ms. Soon-sil Choi, a confidante of former President Geun-hye Park, could have a material adverse effect on our business, reputation and stock price.”

As of December 31, 2019, we have established provisions relating to litigation proceedings of64 billion.See Note 17 to the Consolidated Financial Statements.

Dividends

The table below sets out the annual dividends declared on the outstanding ordinary shares to shareholders of record on December 31 of the years indicated and the interim dividends declared on the outstanding ordinary shares to shareholders of record on June 30 of the years indicated:

 

Year

  Annual Dividend per
Ordinary Share
   Interim Dividend per
Ordinary Share
   Average Total
Dividend per Ordinary
Share
 
   (In Won)   (In Won)   (In Won) 

2015

  500       500 

2016

   800        800 

2017

   1,000        1,000 

2018

   1,100        1,100 

2019

   1,100        1,100 

If sufficient profits are available, the board of directors may propose annual dividends on the outstanding ordinary shares, which our shareholders must approve by a resolution at the ordinary general meeting of shareholders. This meeting is generally held in March of the following year and if our shareholders at such ordinary general meeting of shareholders approve the annual dividend, we must pay such dividend within one month following the date of such resolution. Typically, we pay such dividends shortly after the meeting. The declaration of annual dividends is subject to the vote of our shareholders, and consequently, there can be no assurance as to the amount of dividends per ordinary share or that any such dividends will be declared. Interim dividends paid in cash can be declared by a resolution of the board of directors. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association—Dividends” and “Item 12. Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares.”

The Commercial Code provides that shares of a company of the same class must receive equal treatment. However, major shareholders may consent to receive dividend distributions at a lesser rate than minor shareholders.

Any cash dividends relating to the shares held in the form of ADSs will be paid to the depositary bank in Won. The deposit agreement provides that, except in certain circumstances, cash dividends received by the depositary bank will be converted by the depositary bank into Dollars and distributed to the holders of the ADRs, less withholding tax, other governmental charges and the depositary bank’s fees and expenses. See “Item 12. Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares.”

Item 8.B.  Significant Changes

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

 

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Item 9.  The Offer and Listing

Item 9.A.  Offer and Listing Details

Market Price Information

Ordinary Shares

Our shares were listed on the KRX KOSPI Market on December 23, 1998 under the securities identification code “030200.”

ADSs

The outstanding ADSs, each of which representsone-half of one share of our ordinary share, have been traded on the New York Stock Exchange under the ticker symbol “KT” since May 25, 1999.

Item 9.B.  Plan of Distribution

Not applicable.

Item 9.C.  Markets

Please refer to “Item 9.A. Offering and Listing Details.”

Item 9.D.  Selling Shareholders

Not applicable.

Item 9.E.  Dilution

Not applicable.

Item 9.F.  Expenses of the Issuer

Not applicable.

Item 10.  Additional Information

Item 10.A.  Share Capital

Currently, our authorized share capital is 1,000,000,000 shares, which consists of ordinary shares, par value5,000 per share (“Ordinary Shares”) and shares ofnon-voting preferred stock, par value5,000 per share(“Non-Voting Shares”). Ordinary Shares andNon-Voting Shares together are referred to as “Shares.” Under our articles of incorporation, we are authorized to issueNon-Voting Shares up toone-fourth of our total issued share capital. As of December 31, 2019, 261,111,808 Ordinary Shares were issued, of which 15,870,258 shares were held by the treasury stock fund or us as treasury shares.We have never issued anyNon-Voting Shares. All of the issued Ordinary Shares are fully-paid andnon-assessable and are in registered form.

Item 10.B.  Memorandum and Articles of Association

Under Article 2 of our articles of incorporation, the primary purpose of KT Corporation is to engage in, including but not limited to, the integrated telecommunications business, the new media and

 

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internet multimedia broadcasting business, the development and sale of media contents and software, the sale of telecommunications devices, the testing and inspection of telecommunications equipment and the telemarketing business. This section provides information relating to our share capital, including brief summaries of material provisions of our articles of incorporation, the FSCMA, the Commercial Code and related laws of Korea, all as currently in effect. The following summaries are subject to, and are qualified in their entirety by reference to, our articles of incorporation and the applicable provisions of the FSCMA and the Commercial Code. We have filed a copy of our articles of incorporation as an exhibit to registration statements under the Securities Act or annual reports under the Securities Exchange Act previously filed by us.

Directors

A director is prohibited from voting on a proposal, arrangement or contract in which the director has an interest. Director compensation is determined based on the standards and methods of compensation as determined by the board of directors and reviewed by the Compensation Committee, which consists of four independent directors, and approved by the board of directors in accordance with our articles of incorporation. See “Item 6.B. Compensation—Compensation of Directors.” Directors appointed at the general shareholders meeting may not be beneficiaries nor participants of the employee welfare fund, which includes borrowings. There is no explicit age limit relating to a director’s retirement ornon-retirement, and there is no number of shares required for purposes of determining a director’s qualifications.

Dividends

We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. No dividends are distributed with respect to shares held by us or our treasury stock fund. The Ordinary Shares represented by the ADSs have the same dividend rights as other outstanding Ordinary Shares.

Holders ofNon-Voting Shares are entitled to receive dividends in priority to the holders of Ordinary Shares in an amount of not less than 9% of the par value of theNon-Voting Shares as determined by the board of directors at the time of their issuance, provided that if the dividends on the Ordinary Shares exceed those on theNon-Voting Shares, theNon-Voting Shares will also participate in the distribution of such excess dividend amount in the same proportion as the Ordinary Shares. If the amount available for dividends is less than the aggregate amount of such minimum dividend, the holders ofNon-Voting Shares will be entitled to receive such accumulated unpaid dividend in priority to the holders of Ordinary Shares from the dividends payable in respect of the next fiscal year.

We declare dividends annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record as of the end of the preceding fiscal year. We may distribute the annual dividend in cash or in Shares. However, a dividend of Shares must be distributed at par value. If the market price of the Shares is less than their par value, dividends in Shares may not exceedone-half of the annual dividend. We may pay interim dividends in cash once a year to shareholders or registered pledgees who are registered in the registry of shareholders as of June 30 of each fiscal year by a resolution of the board of directors. We have no obligation to pay any annual dividend unclaimed for five years from the payment date.

Under the Commercial Code, we may pay our dividend only out of the excess of our net assets, on anon-consolidated basis, over the sum of (1) our stated capital and (2) the total amount of our capital surplus reserve and earned surplus reserve (the “Legal Reserve”) accumulated up to the end of the relevant dividend period. In addition, we may not pay any dividend unless we have set aside

 

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as earned surplus reserve an amount equal to at least 10% of the cash portion of the dividend or unless we have accumulated an earned surplus reserve of not less thanone-half of our stated capital. We may not use the Legal Reserve to pay cash dividends but may transfer amounts from the Legal Reserve to share capital or use the Legal Reserve to reduce an accumulated deficit.

Distribution of Free Shares

In addition to paying dividends in Shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from the Legal Reserve to our stated capital in the form of free shares. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings.

Preemptive Rights and Issuance of Additional Shares

We may issue authorized but unissued shares at times and, unless otherwise provided in the Commercial Code, on terms our board of directors may determine. Subject to the limitation described in “Limitation on Shareholdings” below, all our shareholders are generally entitled to subscribe for any newly issued Shares in proportion to their existing shareholdings. We must offer new Shares on uniform terms to all shareholders who have preemptive rights and are listed on our shareholders’ register as of the relevant record date. Under the Commercial Code, we may vary, without shareholders’ approval, the terms of these preemptive rights for different classes of shares. We must give notice to all persons who are entitled to exercise preemptive rights regarding new Shares and their transferability at least two weeks before the relevant record date. Our board of directors may determine how to distribute Shares for which preemptive rights have not been exercised or where fractions of Shares occur.

Under the Commercial Code, it is required that the new Shares, convertible bonds or bonds with warrants be issued to persons other than the existing shareholders solely for the purpose of achieving managerial objectives. Under our articles of incorporation, we may issue new Shares pursuant to a board resolution to persons other than existing shareholders, who in these circumstances will not have preemptive rights, if the new Shares are:

 

  

publicly offered pursuant to Articles 4 and 119 of the FSCMA;

 

  

issued to members of our employee stock ownership association;

 

  

represented by depositary receipts;

 

  

issued upon exercise of stock options granted to our officers and employees;

 

  

issued through an offering to public investors pursuant to Article165-6 of the FSCMA, the amount of which is no more than 10% of the issued Shares;

 

  

issued in order to satisfy specific needs such as strategic alliance, inducement of foreign funds or new technology, improvement of financial structure or other capital raising requirement; or

 

  

issued to domestic or foreign financial institutions when necessary for raising funds in emergency cases.

In addition, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of2,000 billion, to persons other than existing shareholders in the situations described above.

 

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Members of our employee stock ownership association, whether or not they are our shareholders, generally have a preemptive right to subscribe for up to 20.0% of the Shares publicly offered pursuant to the FSCMA. This right is exercisable only to the extent that the total number of Shares so acquired and held by members of our employee stock ownership association does not then exceed 20.0% of the total number of Shares then issued (including in such total both: (i) all issued and outstanding Shares at the time the preemptive rights are exercised; and (ii) all Shares to be newly issued in the applicable share issuance transaction in connection with which such preemptive rights are exercised). As of December 31, 2019, 0.4% of the issued Shares were held by members of our employee stock ownership association.

Limitations on Shareholding

The Telecommunications Business Act permits maximum aggregate foreign shareholding in us to be 49.0% of our total issued and outstanding Shares with voting rights (including equivalent securities with voting rights, e.g., depositary certificates and certain other equity interests). For the purposes of the foregoing, a shareholder is a “foreign shareholder” if such shareholder is: (1) a foreign person; (2) a foreign government; or (3) a company whose largest shareholder is a foreign person (including any “specially related persons” as determined under the FSCMA) or a foreign government, in circumstances where (i) such foreign person or foreign government holds, in aggregate, 15.0% or more of such company’s total voting shares, and (ii) such company holds at least 1.0% of our total issued and outstanding Shares with voting rights. For the avoidance of doubt, both of conditions (i) and (ii) in the foregoing item (3) must exist for such a company to be counted as a “foreign shareholder” for the purposes of calculating whether the 49.0% foreign shareholding threshold is reached under the Telecommunications Business Act. In addition, the Telecommunications Business Act prohibits a foreign shareholder from being our largest shareholder if such shareholder owns 5.0% or more of our Shares with voting rights. For the purposes of this restriction, any two or more foreign persons or foreign governments who enter into an agreement to act in concert in the exercise of their voting rights will be counted together and prohibited from becoming our largest shareholder in the event that they collectively hold 5.0% or more of our Shares. For the purposes of this restriction under the Foreign Investment Promotion Act, a “foreign shareholder” is defined in the same manner as described above with respect to the foreign shareholding restriction under the Telecommunications Business Act, provided, however, that no exception is made under the Foreign Investment Promotion Act regulations for companies that own less than 1.0% of our Shares (see item (3)(ii) above in this paragraph). A foreigner who has acquired the Shares in excess of such ceiling described above may not exercise its voting rights for shares in excess of such limitation, and the MSIT may require corrective measures to comply with the ownership restrictions.

General Meeting of Shareholders

We hold the annual general meeting of shareholders within three months after the end of each fiscal year. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:

 

  

as necessary;

 

  

at the request of shareholders of an aggregate of 3.0% or more of our issued Ordinary Shares;

 

  

at the request of shareholders holding an aggregate of 1.5% or more of our issued Shares for at least six months; or

 

  

at the request of our Audit Committee.

 

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We must give shareholders written notice setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders. However, for holders of less than 1.0% of the total number of issued and outstanding Ordinary Shares, we may give notice by placing at least two public notices in at least two daily newspapers at least two weeks in advance of the meeting. Currently, we use Seoul Shinmun, Maeil Business Newspaper and The Korea Economic Daily published in Seoul for this purpose. Shareholders not on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting. Holders ofNon-Voting Shares are not entitled to receive notice of general meetings of shareholders, but may attend such meetings.

Our general meetings of shareholders are held at our office in Seoul, or if necessary, may be held elsewhere.

Voting Rights

Holders of our Ordinary Shares are entitled to one vote for each Ordinary Share, except that voting rights of Ordinary Shares held by us, or by a corporate shareholder that is more than 10.0% owned by us either directly or indirectly, may not be exercised. The Commercial Code permits cumulative voting, under which voting method each shareholder has multiple voting rights corresponding to the number of directors to be appointed in the voting and may exercise all voting rights cumulatively to elect one director. Our articles of incorporation permit cumulative voting at our shareholders’ meeting. Under the Commercial Code of Korea, any shareholder holding shares equivalent to not less than 1/100 of the total number of shares issued may apply to us for selecting and appointing such directors by cumulative voting.

Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting shares present or represented at the meeting, where the affirmative votes also represent at leastone-fourth of our total voting shares then outstanding. However, under the Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at leasttwo-thirds of the voting shares present or represented at a meeting, where the affirmative votes also represent at leastone-third of our total voting shares then outstanding:

 

  

amending our articles of incorporation;

 

  

removing a director;

 

  

reduction of our share capital;

 

  

effecting any dissolution, merger or consolidation of us;

 

  

transferring the whole or any significant part of our business;

 

  

effecting our acquisition of all of the business of any other company or our acquisition of a part of the business of any other company which will significantly affect our business; or

 

  

issuing any new Shares at a price lower than their par value.

In general, holders ofNon-Voting Shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders. However, in the case of amendments to our articles of incorporation, any merger or consolidation of us, or in some other cases that affect the rights or interests of theNon-Voting Shares, approval of the holders ofNon-Voting Shares is required. We may obtain such approval by a resolution of holders of at leasttwo-thirds of theNon-Voting Shares present or represented at a class meeting of the holders ofNon-Voting Shares, where the affirmative votes also represent at leastone-third of our total outstandingNon-Voting Shares.

 

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Shareholders may exercise their voting rights by proxy. The proxy must present a document evidencing an appropriate power of attorney prior to the start of the general meeting of shareholders. Additionally, shareholders may exercise their voting rights in absentia by submission of signedwrite-in voting forms. To make it possible for our shareholders to proceed with voting on awrite-in basis, we are required to attach the appropriatewrite-in voting form and related informational material to the notices distributed to shareholders for convening the relevant general meeting of shareholders. Any of our shareholders who desire to vote on suchwrite-in basis must submit their completed and signedwrite-in voting forms to us no later than one day prior to the date that the relevant general meeting of shareholders is convened.

Holders of ADRs exercise their voting rights through the ADR depositary, an agent of which is the record holder of the underlying Ordinary Shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote the Ordinary Shares underlying their ADSs.

Appraisal Rights of Dissenting 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. To exercise this right, shareholders must submit to us a written notice of their intention to dissent before the general meeting of shareholders. Within 20 days after the relevant resolution is passed at a meeting, the dissenting shareholders must request us in writing to purchase their Shares. We are obligated to purchase the Shares of dissenting shareholders within one month after the expiration of the20-day period. The purchase price for the Shares is required to be determined through negotiation between the dissenting shareholders and us. If we cannot agree on a price through negotiation, the purchase price will be the average of (1) the weighted average of the daily Share prices on the KRX KOSPI Market for thetwo-month period before the date of the adoption of the relevant board resolution, (2) the weighted average of the daily Share price on the KRX KOSPI Market for the one month period before the date of the adoption of the relevant board resolution and (3) the weighted average of the daily Share price on the KRX KOSPI Market for the one week period before the date of the adoption of the relevant board resolution. However, if we or any of the dissenting shareholders do not accept the purchase price calculated using the above method, the rejecting party may request the court to determine the purchase price. Holders of ADSs will not be able to exercise appraisal rights unless they have withdrawn the underlying ordinary shares and become our direct shareholders.

Register of Shareholders and Record Dates

Our account management institution, Kookmin Bank, maintains the electronic register of our shareholders at its office in Seoul, Korea. Our account management institution effects transfers of Shares on the electronic register of shareholders only upon the electronic registration of such transfers pursuant to the Act on Electronic Registration of Stocks, Bonds, Etc. of Korea (the “Electronic Registration Act”).

The record date for annual dividends is December 31. For the purpose of determining the shareholders entitled to annual dividends, the register of shareholders may be closed for the period from the day after the record date to January 31 of the following year. Further, for the purpose of determining the shareholders entitled to some other rights pertaining to the Shares, we may, on at least two weeks’ public notice, set a record date and/or close the register of shareholders for not more than three months. The trading of Shares and the delivery of share certificates may continue while the register of shareholders is closed.

 

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Annual Reports

At least one week before the annual general meeting of shareholders, we must make our annual report and audited consolidated financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of annual reports, the audited consolidated financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.

Under the FSCMA, we must file with the Financial Services Commission and the KRX KOSPI Market (1) an annual report within 90 days after the end of our fiscal year and (2) interim reports with respect to the three month period, six month period and nine month period from the beginning of each fiscal year within 45 calendar days following the end of each period. Copies of these reports are or will be available for public inspection at the Financial Services Commission and the KRX KOSPI Market.

Transfer of Shares

Under the Electronic Registration Act, the transfer of Shares is effected by the electronic registration of such transfers on an electronic registry pursuant to the Electronic Registration Act, under which the electronic registration of stocks, bonds and transfers thereof will be required. To assert shareholders’ rights against us, the transferee must have his name and address registered on our electronic register of shareholders. For this purpose, a shareholder is required to apply for electronic registration of transfer between accounts. The above requirements do not apply to the holders of ADSs.

Under current Korean regulations, Korean securities companies and banks, including licensed branches ofnon-Korean securities companies and banks, investment management companies, futures trading companies, internationally recognized foreign custodians and the Korea Securities Depository may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of Shares bynon-residents ornon-Koreans. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”

Our account management institution is Kookmin Bank, located at 26,Gukjegeumyung-ro8-gil,Yeongdeungpo-gu, Seoul, Korea.

Acquisition of Shares by Us

Under the Commercial Code, we may acquire our own Shares by (i) purchasing on the KRX KOSPI Market, or (ii) purchasing from shareholders on a pro rata basis in accordance with the number of shares held by each shareholder. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year. Moreover, we must acquire our own Shares from dissenting shareholders who exercise their appraisal rights.

Under the FSCMA, we may acquire Shares only by (i) purchasing on the KRX KOSPI Market, (ii) purchasing from shareholders on a pro rata basis in accordance with the number of shares held by each shareholder, or (iii) receiving Shares returned to us upon the cancellation or termination of a trust agreement with a trustee who acquired the Shares by either of the methods indicated above. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year.

In general, corporate entities in which we own a 50.0% or more equity interest may not acquire our Shares.

 

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As of December 31, 2019, there were 15,870,258 treasury shares including shares held by our treasury stock fund.

Liquidation Rights

In the event of our liquidation, after payment of all debts, liquidation expenses and taxes, our remaining assets will be distributed among shareholders in proportion to their shareholdings. Holders ofNon-Voting Shares have no preference in liquidation.

Item 10.C.  Material Contracts

None.

Item 10.D.  Exchange Controls

General

The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree (collectively the “Foreign Exchange Transaction Laws”) regulate investment in Korean securities bynon-residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws,non-residents may invest in Korean securities only in compliance with the provisions of, and to the extent specifically allowed by, these laws or otherwise permitted by the MOEF. The Financial Services Commission has also adopted, pursuant to its authority under the FSCMA, regulations that control investment by foreigners in Korean securities and regulate the issuance of securities outside Korea by Korean companies.

Under the Foreign Exchange Transaction Laws, if the Government deems that certain emergency circumstances, including, but not limited to, the outbreak of natural calamities, wars or grave and sudden changes in domestic or foreign economies, are likely to occur, the MOEF may temporarily suspend the transactions where Foreign Exchange Transaction Laws are applicable, or impose an obligation to deposit or sell capital to certain Korean governmental agencies or financial institutions. In addition, if the Government deems that it is confronted or is likely to be confronted with serious difficulty in movement of capital between Korea and abroad which will bring serious obstacles in carrying out its currency policies, exchange rate policies and other macroeconomic policies, the MOEF may take measures to require any person who performs transactions to deposit such capital to certain Korean governmental agencies or financial institutions.

Government Review of Issuance of ADSs

In order for us to issue shares represented by ADSs, we are required to file a prior report of the issuance with the MOEF if our securities and borrowings denominated in foreign currencies issued during theone-year period preceding such filing date exceed US$30 million in aggregate. No further Korean governmental approval is necessary for the initial offering and issuance of the ADSs.

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 the consent of us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We can give no assurance that we would grant our consent, if our consent is required. Therefore, a holder of ADRs who surrenders ADRs and withdraws shares may not be permitted subsequently to deposit those shares and obtain ADRs.

 

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Reporting Requirements for Holders of Substantial Interests

Any person whose direct or beneficial ownership of shares, whether in the form of shares or ADSs, certificates representing the rights to subscribe for Shares and equity-related debt securities including convertible bonds and bonds with warrants (collectively, the “Equity Securities”) together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person accounts for 5.0% or more of the total issued Equity Securities is required to report the status of the holdings to the Financial Services Commission and the KRX KOSPI Market within five business days after reaching the 5.0% ownership interest. In addition, any change in the ownership interest subsequent to the report which equals or exceeds 1.0% of the total issued Equity Securities is required to be reported to the Financial Services Commission and the KRX KOSPI Market within five business days from the date of the change. The required information to be included in the 5.0% report may be different if the acquisition of such shareholding interest is for the purpose of exercising influence over the management, as opposed to an acquisition for investment purposes. Any person reporting the holding of 5.0% or more of the total issued Equity Securities and any person reporting the change in the ownership interest which equals or exceeds 1.0% of the total issued Equity Securities pursuant to the requirements described above must also deliver a copy of such reports to us.

Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment and may result in a loss of voting rights with respect to the unreported ownership of Equity Securities exceeding 5.0%. Furthermore, the Financial Services Commission may issue an order to dispose ofnon-reported Equity Securities.

Restrictions Applicable to ADSs

No Korean governmental approval is necessary for the sale and purchase of ADSs in the secondary market outside Korea or for the withdrawal of shares underlying ADSs and the delivery inside Korea of shares in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration certificate from the Financial Supervisory Service as described below. In general, the acquisition of the shares by a foreigner must be reported by the foreigner or his standing proxy in Korea immediately to the Governor of the Financial Supervisory Service; provided, however, that in cases where a foreigner acquires shares through the exercise of rights as a holder of ADSs (or other depositary certificates), the foreigner must cause such report to the Governor of the Financial Supervisory Service to be filed by the Korea Securities Depository.

Persons who have acquired shares as a result of the withdrawal of shares underlying the ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further governmental approval.

Restrictions Applicable to Shares

As a result of amendments to the Foreign Exchange Transaction Laws and Financial Services Commission regulations adopted in connection with the stock market opening from January 1992, which we refer to collectively as the Investment Rules, foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the KRX KOSPI Market or the KRX KOSDAQ Market, unless prohibited by specific laws. Foreign investors may trade shares listed on the KRX KOSPI Market or the KRX KOSDAQ Market only through the KRX KOSPI Market or the KRX KOSDAQ Market, except in limited circumstances, including:

 

  

odd-lot trading of shares;

 

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acquisition of shares (“Converted Shares”) by exercise of warrant, conversion right under convertible bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company;

 

  

acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends;

 

  

over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded;

 

  

shares acquired by foreign direct investment as defined in the Foreign Investment Promotion Act;

 

  

disposal of shares pursuant to the exercise of appraisal rights of dissenting shareholders;

 

  

disposal of shares in connection with a tender offer;

 

  

acquisition of shares by a foreign depositary in connection with the issuance of depositary receipts;

 

  

acquisition and disposal of shares through overseas stock exchange market if such shares are simultaneously listed on the KRX KOSPI Market or the KRX KOSDAQ Market and such overseas stock exchange;

 

  

acquisition and disposal of shares through alternative trading systems (ATS);

 

  

arm’s length transactions between foreigners, if all of such foreigners belong to an investment group managed by the same person.

Forover-the-counter transactions of shares between foreigners outside the KRX KOSPI Market or the KRX KOSDAQ Market for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, an investment broker licensed in Korea must act as an intermediary.Odd-lot trading of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market must involve a licensed investment trader in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions through borrowing shares from a securities company with respect to shares which are subject to a foreign ownership limit.

The Investment Rules require a foreign investor who wishes to invest in shares on the KRX KOSPI Market or the KRX KOSDAQ Market (including Converted Shares) to register its identity with the Financial Supervisory Service prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition of the Converted Shares or who acquire the shares in anover-the-counter transaction or dispose of shares where such acquisition or disposal is a foreign direct investment as defined in the Foreign Investment Promotion Act. Upon registration, the Financial Supervisory Service will issue to the foreign investor an investment registration certificate that must be presented each time the foreign investor opens a brokerage account with a financial investment business entity. Foreigners eligible to obtain an investment registration certificate include foreign nationals who are individuals residing abroad for more than six months, foreign governments, foreign municipal authorities, foreign public institutions, corporations incorporated under foreign laws, international organizations, funds and associations as

 

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defined under the FSCMA. All Korean offices of a foreign corporation as a group are treated as a separate entity from the offices of the corporation outside Korea. However, a foreign corporation or depositary bank issuing depositary receipts may obtain one or more investment registration certificates in its name in certain circumstances as described in the relevant regulations.

Upon a foreign investor’s purchase of shares through the KRX KOSPI Market or the KRX KOSDAQ Market, no separate report by the investor is required because the investment registration certificate system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market (as discussed above) must be reported by the foreign investor or his standing proxy to the Governor of the Financial Supervisory Service at the time of each such acquisition or sale; provided, however, that in cases where a foreigner acquires shares through the exercise of rights as a holder of ADSs (or other depositary certificates), the foreigner must cause such report to the Governor of the Financial Supervisory Service to be filed by the Korea Securities Depository; and further provided that a foreign investor must ensure that any acquisition or sale by it of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market in the case of trades in connection with a tender offer,odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the Governor of the Financial Supervisory Service by the investment trader, the investment broker, the Korea Securities Depository or the financial securities company engaged to facilitate such transaction. A foreign investor may appoint one or more standing proxies from among the Korea Securities Depository, foreign exchange banks, including domestic branches of foreign banks, investment traders, investment brokers, the Korea Securities Depository, financial securities companies and internationally recognized custodians that satisfy all relevant requirements under the FSCMA.

Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only the Korea Securities Depository, foreign exchange banks including domestic branches of foreign banks, investment traders, investment brokers, collective investment business entities and internationally recognized custodians satisfying the relevant requirements under the FSCMA are eligible to act as a custodian of shares for anon-resident or foreign investor. A foreign investor must ensure that his custodian deposits its shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor of the Financial Supervisory Service in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.

Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40.0% ceiling on the acquisition of shares by foreigners in the aggregate and a ceiling on the acquisition of shares by a single foreign investor pursuant to the articles of incorporation of such corporation. Currently, Korea Electric Power Corporation is the only designated public corporation which has set such a ceiling. Furthermore, an investment by a foreign investor of not less than 10.0% of the issued shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Act, which is, in general, subject to the report to, and acceptance, by the Ministry of Trade Industry & Energy. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign shareholding restrictions in the event that the restrictions are prescribed in each specific law which regulates the business of the Korean company. A foreigner who has acquired our ordinary shares in excess of this ceiling may not exercise his voting rights with respect to our ordinary shares exceeding the limit.

Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and

 

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a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at an investment broker or an investment trader. Funds in the foreign currency account may be remitted abroad without any governmental approval.

Dividends on Shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any shares held by anon-resident of Korea must be deposited either in a Won account with the investor’s investment broker or investment trader or his Won Account. Funds in the investor’s Won Account may be transferred to his foreign currency account or withdrawn for local living expenses up to certain limitations. Funds in the Won Account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.

Investment brokers and investment traders are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these investment brokers and investment traders may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors, without the investors having to open their own accounts with foreign exchange banks.

Item 10.E.  Taxation

The following summary is based upon tax laws of the United States and the Republic of Korea as in effect on the date of this annual report on Form20-F, and is subject to any change in United States or Korean law that may come into effect after such date. Investors in the ordinary shares or ADSs are advised to consult their own tax advisers as to the United States, Korean or other tax consequences of the purchase, ownership and disposition of such securities, including the effect of any national, state or local tax laws.

Korean Taxation

The following summary of Korean tax considerations applies to you as long as you are not:

 

  

a resident of Korea;

 

  

a corporation organized under Korean law; or

 

  

engaged in a trade or business in Korea through a permanent establishment or a fixed base.

Shares or ADSs

Dividends on Ordinary Shares or ADSs

Unless an applicable tax treaty provides otherwise, we will deduct Korean withholding tax from dividends paid to you either in cash or shares at a rate of 22.0% (including local income tax). If you are a resident of a country that has entered into a tax treaty with Korea, you may qualify for a reduced rate of Korean withholding tax under such a treaty. For example, if you are a qualified resident of the United States for purposes of theUS-Korea Tax Treaty (the “Treaty”) and you are the beneficial owner of a dividend, a reduced withholding tax rate of 16.5% (including local income tax) generally will apply. You will not be entitled to claim treaty benefits if you are not the beneficial owner of a dividend.

 

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In order to obtain the benefits of a reduced withholding tax rate under a tax treaty, you must submit to us, prior to the dividend payment date, an application for entitlement to a reduced tax rate. If you hold ADSs and receive the dividends through a depositary, you are not required to submit the application for entitlement to a reduced tax rate. If you are an overseas investment vehicle (an “OIV”), which is defined as an organization established in anon-Korean jurisdiction that manages funds collected through investment solicitation by way of acquiring, disposing, or otherwise investing in any such assets and distributes the yield therefrom to investors), you must submit to us a report of the OIV and a schedule of beneficial owners together with their applications for entitlement to a reduced tax rate, which you should collect from each beneficial owner. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have tax withheld at a lower rate.

If we distribute to you free shares representing a transfer of certain capital reserves or asset revaluation reserves intopaid-in capital, that distribution may be a deemed dividend subject to Korean tax.

Capital Gains

Capital gains from a sale of ordinary shares will generally be exempt from Korean taxation if you have owned, together with certain related parties, less than 25.0% of our total issued shares during the year of sale and the five calendar years before the year of sale, and the sale is made through the KRX KOSPI Market, and you have no permanent establishment in Korea. Capital gains earned by anon-Korean holder from a sale of ADSs outside of Korea are exempt from Korean taxation by virtue of the Special Tax Treatment Control Law of Korea (the “STTCL”), provided that the issuance of the ADSs is deemed to be an overseas issuance under the STTCL.

If you are subject to Korean taxation on capital gains from a sale of ADSs, or ordinary shares that you acquired as a result of a withdrawal, your gain will be calculated based on your cost of acquiring the ADSs representing the ordinary shares, although there are no specific Korean tax provisions or rulings on this issue. In the absence of the application of a tax treaty that exempts tax on capital gains, the amount of Korean tax imposed on such capital gains will be the lesser of 11.0% (including local income tax) of the gross realization proceeds or, subject to the production of satisfactory evidence of the acquisition cost and the transaction costs of the ADSs, 22.0% (including local income tax) of the net capital gain.

If you are subject to Korean taxation on capital gains from a sale of ADSs, or ordinary shares that you acquire as a result of a withdrawal, and you sell your ordinary shares or ADSs, the purchaser or, in the case of a sale of ordinary shares on the KRX KOSPI Market or through a licensed securities company in Korea, the licensed securities company, is required to withhold Korean tax from the sales price in an amount equal to 11% (including local income tax) of the gross realization proceeds and to make payment thereof to the Korean tax authorities, unless you establish your entitlement to an exemption from taxation under an applicable tax treaty or produce satisfactory evidence of your acquisition cost and the transaction costs for the ordinary shares or ADSs. In order to obtain the benefit of an exemption from tax pursuant to a tax treaty, you must submit to the purchaser or the securities company (or through the depositary), as the case may be, prior to the first payment, an exemption application, together with a certificate of your tax residence issued by a competent authority of your residence country. If you are an OIV, you must submit a report of the OIV and a schedule of beneficial owners together with their applications for exception, which you should collect from each beneficial owner. The withholding obligor must submit the application and the report to the relevant tax office by the ninth day of the month following the date of the first payment of such income. This requirement will not apply to exemptions under Korean tax law. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have taxes withheld at a lower rate.

 

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Most tax treaties that Korea has entered into provide exemptions for capital gains tax for capital gains from sale of ordinary shares. However, Korea’s tax treaties with Japan, Austria, Spain and a few other countries do not provide an exemption from such capital gains tax. For example, Article 13 of Korea’s tax treaty with Japan provides that if a taxpayer holding 25% or more (including those shares held by any related party of the taxpayer) of total issued shares of a company in a taxable year sells 5% or more (including those sold by any related party of the taxpayer) of total issued shares of the same company in the same taxable year, the country where the company is a resident may impose tax on such taxpayer.

Inheritance Tax and Gift Tax

Korean inheritance tax is imposed upon (a) all assets (wherever located) of the deceased if at the time of his death he was domiciled in Korea or had resided in Korea for at least 183 days immediately prior to his death and (b) all property located in Korea which passes on death (irrespective of the domicile of the deceased). Gift tax is imposed in similar circumstances to the above. Taxes are currently imposed at the rate of 10% to 50% if the value of the relevant property is above a certain limit and vary according to the identity of the parties involved.

Under Korean Inheritance and Gift Tax Law, shares issued by a Korean corporation are deemed located in Korea irrespective of where they are physically located or by whom they are owned. It remains unclear whether, for Korean inheritance and gift tax purposes, anon-resident holder of ADSs will be treated as the owner of the shares underlying the ADSs. If suchnon-resident is treated as the owner of the shares, the heir or donee of suchnon-resident (or in certain circumstances, thenon-resident as the donor) will be subject to Korean inheritance or gift tax at the same rate as described above.

Securities Transaction Tax

If you transfer ordinary shares on the KRX KOSPI Market, you will be subject to the securities transaction tax at a rate of 0.10% and an agriculture and fishery special tax at a rate of 0.15%, calculated based on the sales price of the shares. If you transfer ordinary shares and your transfer is not made on the KRX KOSPI Market you will generally be subject to the securities transaction tax at a rate of 0.50% for transfers before April 1, 2020 and 0.45% for transfers on and after April 1, 2020 and will generally not be subject to the agriculture and fishery special tax.

With respect to transfers of ADSs, a tax ruling issued in 2004 by the Korean tax authority appears to hold that depositary receipts (such as the ADSs) constitute share certificates subject to the securities transaction tax. In May 2007, the Seoul Administrative Court held that depositary receipts do not constitute share certificates subject to the securities transaction tax. In 2008, the Seoul Administrative Court’s holding was upheld by the Seoul High Court and was further upheld by the Supreme Court. Subsequent to this series of rulings, however, the Securities Transaction Tax Law was amended to expressly provide that depositary receipts constituted a form of share certificates subject to the securities transaction tax. However, the sale price of ADSs from a transfer of depositary receipts listed on the New York Stock Exchange, the Nasdaq National Market or other qualified foreign exchanges are exempt from the securities transaction tax.

United States Federal Income Taxation

The following discussion describes the materialUnited States federal income tax consequences of the ownership of our ADSs and ordinary shares as of the date hereof. This discussion deals only with ADSs and ordinary shares that are held as capital assets by a U.S. Holder (as defined below). In addition, the discussion set forth below is applicable only to U.S. Holders (i) who

 

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are residents of the United States for purposes of the current Treaty, (ii) whose ADSs or ordinary shares are not, for purposes of the Treaty, effectively connected with a permanent establishment in Korea and (iii) who otherwise qualify for the full benefits of the Treaty.

For purposes of this summary, a “U.S. Holder” is a beneficial owner of our ADSs or ordinary shares that is:

 

  

a citizen or resident of the United States;

 

  

a United States domestic corporation; or

 

  

otherwise is subject to United States federal income taxation on a net income basis in respect of such ADSs or ordinary shares.

This discussion is based upon provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof, as well as the Treaty (as defined above).Those authorities may be changed, perhaps retroactively, so as to result in United States federal income tax consequences different from those summarized below. In addition, this discussion is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.

This discussion does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:

 

  

a dealer in securities or currencies;

 

  

a financial institution;

 

  

a regulated investment company;

 

  

a real estate investment trust;

 

  

an insurance company;

 

  

atax-exempt organization;

 

  

a person holding our ADSs or ordinary shares as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle;

 

  

a trader in securities that has elected themark-to-market method of accounting for securities;

 

  

a person liable for alternative minimum tax;

 

  

a person who owns or is deemed to own 10% or more of our stock (by vote or value);

 

  

a partnership or other pass-through entity for United States federal income tax purposes; or

 

  

a person whose “functional currency” is not the United States dollar.

 

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If a partnership (or other entity treated as a partnership for United States federal income tax purposes) holds our ADSs or ordinary shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our ADSs or ordinary shares, you should consult your tax advisors.

This discussion does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances and does not address the Medicare contribution tax on net investment income or the effects of any state, local ornon-United States tax laws.If you are considering the purchase of our ADSs or ordinary shares, you should consult your own taxadvisors concerning the particular United States federal income tax consequences to you of the purchase, ownership and disposition of our ADSs or ordinary shares, as well as the consequences to you arising under other United States federal tax laws and the laws of any other taxing jurisdiction.

ADSs

If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying ordinary shares that are represented by such ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax. For the remainder of this discussion, references to “ordinary shares” should be interpreted to include ADSs, unless otherwise specified.

Taxation of Dividends

The gross amount of distributions of cash or property with respect to the ordinary shares (including any amounts withheld to reflect Koreanwithholding taxes) will be taxable as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Because we do not expect to determine earnings and profits in accordance with United States federal income tax principles, you should expect that a distribution will generally be treated as a dividend for United States federal income tax purposes.

Any dividends that you receive (including any withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of ordinary shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code. With respect tonon-corporate United States investors, certain dividends received from a qualified foreign corporation may be subject to preferential rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States which the United States Treasury Department determines to be satisfactory for these purposes and which includes an exchange of information provision. The United States Treasury Department has determined that the Treaty meets these requirements, and we believe we are eligible for the benefits of the Treaty.

Non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a passive foreign investment company in the taxable year in which such dividends are paid or in the preceding taxable year (see “—Passive Foreign Investment Company” below).

The amount of any dividend paid in Won will equal the United States dollar value of the Won received calculated by reference to the exchange rate in effect on the date the dividend is received by you, in the case of ordinary shares, or by the depositary, in the case of ADSs, regardless of whether the Wonare converted into United States dollars. If the Won received as a dividend are converted into United States dollars on the date they are received, you generally will not be required to recognize

 

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foreign currency gain or loss in respect of the dividend income. If the Wonreceived as a dividend are not converted into United States dollars on the date of receipt, you will have a basis in the Wonequal to their United States dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Wonwill be treated as United States source ordinary income or loss.

Subject to certain conditions and limitations (including a minimum holding period requirement), Koreanwithholding taxes on dividends may be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ordinary shares will be treated as income from sources outside the United States and will generally constitute passive category income. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.

Passive Foreign Investment Company

Based on the past and projected composition of our income and assets, and the valuation of our assets we do not believe we were a passive foreign investment company, or PFIC, for our most recent taxable year or in the preceding taxable year and do not expect to become a PFIC in the current taxable year or the foreseeable future, although there can be no assurance in this regard.

In general, we will be a PFIC for any taxable year in which:

 

  

at least 75% of our gross income is passive income, or

 

  

at least 50% of the value (determined based on a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income.

For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). If we own at least 25% (by value) of the stock of another corporation, for purposes of determining whether we are a PFIC, we will be treated as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income.

The determination of whether we are a PFIC is made annually based on the facts and circumstances at the time, some of which may be beyond our control, such as the amount and composition of our income and the valuation and composition of our assets, including goodwill and other intangible assets, as implied by the market price of our ordinary shares. Recent stock market volatility could exacerbate these considerations. See “Item 3. Key Information—Item 3.D. Risk Factors—Risks Relating to Our Business—The ongoing global pandemic of a new strain of coronavirus(“COVID-19”) and any possible recurrence of other types of widespread infectious diseases, may adversely affect our business, financial condition or results of operations.” Accordingly, we cannot be certain that we will not be a PFIC in the current or any future taxable year. If we are a PFIC for any taxable year during which you hold our ordinary shares, you will be subject to special tax rules discussed below.

If we are a PFIC for any taxable year during which you hold our ordinary shares and you do not make a timelymark-to-market election, as described below, you will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a pledge, of ordinary shares. Distributions received in a taxable year will be treated as excess distributions to the extent that they are greater than 125% of the average annual distributions received

 

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during the shorter of the three preceding taxable years or your holding period for the ordinary shares. Under these special tax rules:

 

  

the excess distribution or gain will be allocated ratably over your holding period for the ordinary shares,

 

  

the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and

 

  

the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

Although the determination of whether we are a PFIC is made annually, if we are a PFIC for any taxable year in which you hold our ordinary shares, you will generally be subject to the special tax rules described above for that year and for each subsequent year in which you hold the ordinary shares (even if we do not qualify as a PFIC in such subsequent years). However, if we cease to be a PFIC, you can avoid the continuing impact of the PFIC rules by making a special election to recognize gain as if your ordinary shares had been sold on the last day of the last taxable year during which we were a PFIC. You are urged to consult your own tax advisor about this election.

In lieu of being subject to the special tax rules discussed above, you may make amark-to-market election with respect to your ordinary shares provided such ordinary shares are treated as “marketable stock.” The ordinary shares generally will be treated as marketable stock if they are regularly traded on a “qualified exchange or other market” (within the meaning of the applicable Treasury regulations).

If you make an effectivemark-to-market election, for each taxable year that we are a PFIC you will include as ordinary income the excess of the fair market value of your ordinary shares at the end of the year over your adjusted tax basis in the ordinary shares. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the ordinary shares over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of themark-to-market election. Your adjusted tax basis in the ordinary shares will be increased by the amount of any income inclusion and decreased by the amount of any deductions under themark-to-market rules. In addition, upon the sale or other disposition of your ordinary shares in a year that we are a PFIC, any gain will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount of income previously included as a result of themark-to-market election.

If you make amark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ordinary shares are no longer regularly traded on a qualified exchange or other market, or the Internal Revenue Service (the “IRS”) consents to the revocation of the election. You are urged to consult your tax advisor about the availability of themark-to-market election, and whether making the election would be advisable in your particular circumstances.

Alternatively, you can sometimes avoid the special tax rules described above by electing to treat a PFIC as a “qualified electing fund” under Section 1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election.

If we are a PFIC for any taxable year during which you hold our ordinary shares and any of ournon-United States subsidiaries is also a PFIC, you will be treated as owning a proportionate amount

 

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(by value) of the shares of the lower-tier PFIC for purposes of the application of the PFIC rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.

You will generally be required to file IRS Form 8621 if you hold our ordinary shares in any year in which we are classified as a PFIC. You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding ordinary shares if we are considered a PFIC in any taxable year.

Taxation of Capital Gains

For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of the ordinary shares in an amount equal to the difference between the amount realized for the ordinary shares and your tax basis in the ordinary shares.Such gain or loss will generally be capital gain or loss and will generally be long-term capital gain or loss if you have held the ordinary shares for more than one year. Long-term capital gains ofnon-corporate U.S. Holders (including individuals) are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as United States source gain or loss.

You should note that any Koreansecurities transaction tax or agriculture and fishery special tax will not be treated as a creditable foreign tax for United States federal income tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under the Code. You should consult your own tax advisors regarding the application of the foreign tax credit rules to your investment in, and disposition of, the ordinary shares.

Foreign Financial Asset Reporting

Certain U.S. Holders that own “specified foreign financial assets” with an aggregate value in excess of U.S.$50,000 on the last day of the taxable year or U.S.$75,000 at any time during the taxable year are generally required to file an information statement along with their tax returns, currently on IRS Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at anon-United States financial institution, as well as securities issued by anon-United States issuer that are not held in accounts maintained by financial institutions. The understatement of income attributable to “specified foreign financial assets” in excess of U.S.$5,000 extends the statute of limitations with respect to the tax return to six years after the return was filed. U.S. Holders who fail to report the required information could be subject to substantial penalties. You are encouraged to consult with your own tax advisors regarding the possible application of these rules, including the application of the rules to your particular circumstances.

Information Reporting and Backup Withholding

In general, information reporting will apply to dividends in respect of our ordinary shares and the proceeds from the sale, exchange or other disposition of our ordinary shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of exempt status or fail to report in full dividend and interest income.

Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is timely furnished to the IRS.

 

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Item 10.F.  Dividends and Paying Agents

See “Item 8. Financial Information—Item 8.A. Consolidated Statements and Other Financial Information—Dividends” for information concerning our dividend policies and our payment of dividends. See “—Item 10.B. Memorandum and Articles of Association—Dividends” for a discussion of the process by which dividends are paid on our ordinary shares. See “Item 12.Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares” for a discussion of the process by which dividends are paid on our ADSs. The paying agent for payment of our dividends on ADSs in the United States is Citibank, N.A.

Item 10.G.  Statements by Experts

Not applicable.

Item 10.H.  Documents on Display

We are subject to the information requirements of the U.S. Securities Exchange Act of 1934, as amended, and, in accordance therewith, are required to file reports, including annual reports on Form20-F, and other information with the U.S. Securities and Exchange Commission. These materials, including this annual report and the exhibits thereto, may be inspected and copied at the Commission’s public reference rooms in Washington, D.C. Please call the Commission at1-800-SEC-0330 for further information on the public reference rooms. We are required to make filings with the Commission by electronic means, which will be available to the public over the Internet at the Commission’s website at http://www.sec.gov.

Item 10.I.  Subsidiary Information

Not applicable.

Item 11.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to foreign exchange rate and interest rate risks primarily associated with underlying liabilities, and to equity price risk as a result of our investment in equity securities. Our long-term financial policies are annually reported to our Board of Directors, and our finance division conducts financial risk management and assessment. Upon identification and evaluation of our risk exposures, we, having considered various circumstances, enter into derivative financial instruments to try to manage some of such risks. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. The activities of our finance division are subject to policies approved by our foreign exchange and interest rate risk management committee. These policies address the use of derivative financial instruments, including the approval of counterparties, setting of limits and investment of excess liquidity. Our general policy is to hold or issue derivative financial instruments largely for hedging purposes.

For our hedging derivative contracts, we recognized a valuation gain of0.1 billion, a valuation loss of210 billion and accumulated other comprehensive loss of147 billion in 2017, a valuation gain of66 billion, a valuation loss of2 billion and accumulated other comprehensive income of22 billion in 2018 and a valuation gain of77 billion, a valuation loss of16 billion and accumulated other comprehensive income of92 billion in 2019. For further details regarding the assets, liabilities, gains and losses recorded relating to our derivative contracts outstanding as of December 31 2017, 2018 and 2019, see Note 7 to the Consolidated Financial Statements.

 

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Exchange Rate Risk

Most of our cash flow is denominated in Won. We are exposed to foreign exchange risk related to foreign currency denominated liabilities and anticipated foreign exchange payments. Anticipated foreign exchange payments, mostly in U.S. Dollars, relate primarily to payments of foreign currency denominated debt, net settlements paid to foreign telecommunication carriers and payments for equipment purchased from foreign suppliers. We have entered into several currency swap contracts, combined interest currency swap contracts and currency forward contracts to hedge our foreign currency risks.

The following table shows our assets and liabilities denominated in foreign currency as of December 31, 2017, 2018 and 2019:

 

   As of December 31, 
   2017   2018   2019 

(in thousands of foreign currencies)

  Financial
assets
   Financial
liabilities
   Financial
assets
   Financial
liabilities
   Financial
assets
   Financial
liabilities
 

U.S. Dollar

   236,476    1,908,831    279,327    1,893,782    209,163    2,551,289 

Special Drawing Right

   306    738    267    730    255    729 

Japanese Yen

   28,267    21,801,443    66,078    50,000,000    24,930    80,000,000 

British Pound

       74        256        56 

Euro

   186    3,625    2    6    1    6 

Algerian Dinar

   47        618             

Chinese Yuan

   46,555    10    16,315    271    2,438,626    14,137 

Uzbekistani Sum

   136,787        121,053             

Rwandan Franc

   3,346        857        706     

Thai Bhat

           1,685    1,685    6,143    3,079 

Indonesian Rupiah

   14,886,393    710,162    64,240,286    41,510,330    10,657,194    2,034,151 

Myanmar Kyat

   84        84        84     

Tanzanian Shilling

   317,348            2,876    6,919     

Botswana Pula

   42        897        911   

Hong Kong Dollar

                       268 

Bangladeshi Taka

   38,074        39,494        18,897     

Polish Zloty

   338        26             

Vietnamese Dong

   311,649        467,272        271,563     

Central African Franc

           666        97,411     

Swiss Franc

       12                 

As of December 31, 2017, a 10% increase in the exchange rate between the Won and all foreign currencies, with all other variables held constant, would have decreased our income before income tax by10 billion, and total equity by7 billion, with a 10% decrease in the exchange rate having the opposite effect. As of December 31, 2018, a 10% increase in the exchange rate between the Won and all foreign currencies, with all other variables held constant, would have decreased our income before income tax by2 billion and increased total equity by0.6 billion, and a 10% decrease would have decreased our income before income tax by3 billion and total equity by0.06 billion. As of December 31, 2019, a 10% increase in the exchange rate between the Won and all foreign currencies, with all other variables held constant, would have decreased our income before income tax by52 billion, and total equity by44 billion, with a 10% decrease in the exchange rate having the opposite effect.The foregoing sensitivity analysis assumes that all variables other than foreign exchange rates are held constant, and as such, does not reflect any correlation between foreign exchange rates and other variables, nor our decision to decrease the risk. See Note 36 to the Consolidated Financial Statements.

Interest Rate Risk

We are also subject to market risk exposure arising from changing interest rates. A reduction of interest rates increases the fair value of our debt portfolio, which is primarily of a fixed interest

 

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nature. We use, to a limited extent, interest rate swap contracts and combined interest rate and currency swap contracts to reduce interest rate volatility on some of our debt and manage our interest expense by achieving a balanced mixture of floating and fixed rate debt. We entered into several interest rate swap contracts in which we exchange fixed interest rate payments with variable interest rate payments for a specified period, as well as entered into the combined interest rate and currency swap contracts to hedge our interest rate risk.

The following table summarizes the principal amounts, fair values, principal cash flows by maturity date and weighted average interest rates of our short-term and long-term liabilities as of December 31, 2019 which are sensitive to exchange rates and/or interest rates. The information is presented in Won, which is our reporting currency:

 

                  December 31, 2019 
   2020  2021  2022  2023  Thereafter  Total  Fair Value 
   (in millions of Won, except rates) 

Local currency:

        

Fixed rate

   543,993   1,065,493   566,493   340,000   1,981,976   4,497,955   5,736,443 

Average weighted rate(1)

   3.23  3.90  1.76  2.86  2.69  2.94   

Variable rate

                      

Average weighted rate(1)

                      
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sub-total

   543,993   1,065,493   566,493   340,000   1,981,976   4,497,955   5,736,443 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Foreign currency:

        

Fixed rate

   361,580   200,163   777,907      583,154   1,922,804   1,911,271 

Average weighted rate(1)

   0.30  0.78  1.65     3.28  1.80   

Variable rate

   235,033         115,780   405,230   756,043   758,349 

Average weighted rate(1)

   2.31        2.81  2.89  2.70   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

   596,613   200,163   777,907   115,780   988,384   2,678,847   2,669,620 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

   1,140,606   1,265,656   1,344,400   455,780   2,970,360   7,176,802   8,406,063 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

(1)

Weighted average rates of the portfolio at the period end.

As of December 31, 2017, 2018 and 2019, a 100 basis point increase in the market interest rate, with all other variables held constant, would have increased our profit before income tax by2 billion, increased our profit before income tax by1 billion and increased our profit before income tax by0.4 billion, respectively. As of December 31, 2017, 2018 and 2019, such increase, with all other variables held constant, would have increased our shareholders’ equity by5 billion, increased our shareholders’ equity by10 billion and increased our shareholders’ equity by15 billion, respectively.

As of December 31, 2017, 2018 and 2019, a 100 basis point decrease in the market interest rates, with all other variables held constant, would have decreased our profit before income tax by2 billion, decreased our profit before income tax by2 billion and decreased our profit before income tax by0.5 billion, respectively. As of December 31, 2017, 2018 and 2019, a 100 basis point decrease in the market interest rates, with all other variables held constant, would have decreased our shareholders’ equity by5 billion,10 billion and19 billion, respectively. The foregoing sensitivity analysis assumes that all variables other than market interest rates are held constant, and as such, does not reflect any correlation between market interest rates and other variables, nor our decision to decrease the risk, but reflects the effects of derivative contracts in place at the time of conducting the analysis.

 

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Equity Price Risk

We are also subject to market risk exposure arising from changes in the equity securities market, which affect the fair value of our equity portfolio. As of December 31, 2017, 2018 and 2019, a 10% increase in the equity indices where our marketable equity securities are listed, with all other variables held constant, would have increased our total equity by0.7 billion,0.9 billion and by0.7 billion, respectively, with a 10% decrease in the equity index having the opposite effect. The foregoing sensitivity analysis assumes that all variables other than changes in the equity index are held constant, and that our marketable equity instruments had moved according to the historical correlation to the index, and as such, does not reflect any correlation between the equity index and other variables.

Item 12.  Description of Securities Other than Equity Securities

Item 12.A.  Debt Securities

Not applicable.

Item 12.B.  Warrants and Rights

Not applicable.

Item 12.C.  Other Securities

Not applicable.

Item 12.D.  American Depositary Shares

Fees and Charges

Under the terms of the deposit agreement, holders of our ADSs are required to pay the following service fees to the depositary:

 

Services

  

Fees

Issuance of ADSs upon deposit of shares

  Up to $0.05 per ADS issued

Delivery of deposited shares against surrender of ADSs

  Up to $0.05 per ADS surrendered

Distribution delivery of ADSs pursuant to sale or exercise of rights

  Up to $0.02 per ADS held

Distributions of dividends

  None

Distribution of securities other than ADSs

  Up to $0.02 per ADS held

Other corporate action involving distributions to shareholders

  Up to $0.02 per ADS held

Holders of our ADSs are also responsible for paying certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:

 

  

fees for the transfer and registration of shares charged by the registrar and transfer agent for the shares in Korea (i.e., upon deposit and withdrawal of shares);

 

  

expenses incurred for converting foreign currency into U.S. dollars;

 

  

expenses for cable, telex and fax transmissions and for delivery of securities;

 

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taxes and duties upon the transfer of securities (i.e., when shares are deposited or withdrawn from deposit); and

 

  

fees and expenses incurred in connection with the delivery or servicing of shares on deposit.

Depositary fees payable upon the issuance and surrender of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for surrender. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.

The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend rights), the depositary charges the applicable fee to the ADS record-date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary sends invoices to the applicable record-date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via the Depository Trust Company, or DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.

In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse to provide the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to such holder of ADSs.

The fees and charges that holders of our ADSs may be required to pay may vary over time and may be changed by us and by the depositary. Holders of our ADSs will receive prior notice of such changes.

Fees and Payments from the Depositary to Us

In 2019, we received the following payments, after deduction of applicable U.S. taxes, from the depositary:

 

Reimbursement of NYSE listing fees

  $287,748.78 

Reimbursement of SEC filing fees

  $143,690.48 

Reimbursement of settlement infrastructure fees (including maintenance fees)

  $171,818.77 

Reimbursement of proxy process expenses (printing, postage and distribution)

  $32,576.80 

Reimbursement of legal fees (reimbursement received in 2020 in respect of 2019)

  $72,054.88 

Contributions toward our investor relations efforts (includingnon-deal roadshows, investor conferences and investor relations agency fees)

  $257,537.27 

 

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PART II

Item 13.  Defaults, Dividend Arrearages and Delinquencies

Not applicable.

Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds

Not applicable.

Item 15.  Controls and Procedures

Disclosure Controls and Procedures

Our management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rules13a-15(e) and15d-15(e) under the Exchange Act, as of December 31, 2019. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2019. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed by, and under the supervision of, our principal executive, principal operating and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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Our management has performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019, utilizing the criteria discussed in the Internal Control—Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, we concluded that our internal control over financial reporting was effective as of December 31, 2019.

Samil PricewaterhouseCoopers, an independent registered public accounting firm, which also audited our consolidated financial statements as of, and for the year ended December 31, 2019, as stated in their report which is included herein, has issued an attestation report on the effectiveness of our internal control over financial reporting.

Attestation Report of the Registered Public Accounting Firm

The attestation report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting is furnished in Item 18 of this Form20-F.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16.  [Reserved]

Item 16A.  Audit Committee Financial Expert

Our Audit Committee is comprised ofTae-Yoon Sung,Dae-You Kim,Eun-Jung Yeo andChung-Gu Kang. The board of directors has determined thatEun-Jung Yeo is the financial expert of the Audit Committee.Eun-Jung Yeo is independent as such term is defined in Section 303A.02 of the NYSE Listed Company Manual, Rule10A-3 under the Exchange Act and the Korea Stock Exchange listing standards.

Item 16B.  Code of Ethics

We have adopted a code of ethics, as defined in Item 16B. of Form20-F under the Securities Exchange Act of 1934, as amended. Our code of ethics applies to our chief executive officer, chief financial officer and persons performing similar functions, as well as to our directors, other officers and employees. Our code of ethics is available on our web site at www.kt.com. If we amend the provisions of our code of ethics that apply to our chief executive officer, chief financial officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website.

 

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Item 16C.  Principal Accountant Fees and Services

Audit andNon-Audit Fees

The following table sets forth the fees billed to us by Samil PricewaterhouseCoopers, our independent registered public accounting firm, during the fiscal years ended December 31, 2018 and 2019. Such fees exclude the fees billed for work associated with our foreign subsidiaries which Samil PricewaterhouseCoopers did not provide services and with our former subsidiaries.

 

   Year Ended
December 31,
 
   2018   2019 
   (In millions) 

Audit fees(1)

  3,225   3,768 

Audit-related fees

        

Tax fees(2)

   104    302 

All other fees

        
  

 

 

   

 

 

 

Total fees

   3,329    4,070 
  

 

 

   

 

 

 

 

 

(1)

Audit fees consist of fees for the annual audit and quarterly review services engagement and the comfort letters.

 

(2)

Tax fees consist of fee for tax services which are mainly the preparation ornon-recurring tax compliance review of original or amended tax returns.

Audit CommitteePre-Approval Policies and Procedures

Our Audit Committee has establishedpre-approval policies and procedures topre-approve all audit services to be provided by Samil PricewaterhouseCoopers, our independent registered public accounting firm. Our Audit Committee’s policy regarding thepre-approval ofnon-audit services to be provided to us by our independent registered public accounting firm is that all such services shall bepre-approved by our Audit Committee.Non-audit services that are prohibited to be provided to us by our independent registered public accounting firm under the rules of the SEC and applicable law may not bepre-approved. In addition, prior to the granting of anypre-approval, our Audit Committee must be satisfied that the performance of the services in question will not compromise the independence of our independent registered public accounting firm and does not include delegation of the Audit Committee’s responsibilities to the management under the Securities Exchange Act of 1934, as amended.

Our Audit Committee did notpre-approve anynon-audit services under the de minimis exception of Rule2-01 (c)(7)(i)(C) of RegulationS-X as promulgated by the SEC.

Item 16D.  Exemptions from the Listing Standards for Audit Committees

Not applicable.

 

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Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth the repurchases of ordinary shares by us or any affiliated purchasers during the fiscal year ended December 31, 2019:

 

Period

  Total Number
of Shares
Purchased
   Average Price
Paid per Share
(In Won)
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
   Maximum Number of
Shares that May Yet
be Purchased Under
the Plans
 

January 1 to January 31

           —            —            —            — 

February 1 to February 29

                

March 1 to March 31

                

April 1 to April 30

                

May 1 to May 31

                

June 1 to June 30

                

July 1 to July 31

                

August 1 to August 31

                

September 1 to September 30

                

October 1 to October 31

                

November 1 to November 30

                

December 1 to December 31

                
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

                
  

 

 

   

 

 

   

 

 

   

 

 

 

Neither we nor any “affiliated purchaser,” as defined in Rule10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.

Item 16F.  Change in Registrant’s Certifying Accountant

Not applicable.

Item 16G.  Corporate Governance

The following is a summary of the significant differences between the New York Stock Exchange’s corporate governance standards and those that we follow under Korean law:

 

NYSE Corporate Governance Standards

  

KT Corporation’s Corporate Governance Practice

Director Independence

  
Independent directors must comprise a majority of the board.  

The Commercial Code of Korea requires that our board of directors must comprise no less than a majority of outside directors. Our outside directors must meet the criteria for outside directorship set forth under the Commercial Code of Korea.

 

The majority of our board of directors is independent (as defined in accordance with the New York Stock Exchange’s standards), and 8 out of 11 directors are outside directors.

Nominating/Corporate Governance Committee

  
Listed companies must have a nominating/corporate governance committee composed entirely of independent directors.  We have not established a nominating/corporate governance committee composed entirely of independent directors. However, we maintain an Outside Director Candidate Nominating Committee composed of all of our outside directors and one inside director. We also maintain a Corporate Governance Committee comprised of four outside directors and one inside director. The committee is responsible for the review of matters with respect to our Corporate Governance Guidelines and our performance under such guidelines to monitor effectiveness of our corporate governance.

 

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Compensation Committee

  
Listed companies must have a compensation committee composed entirely of independent directors.  We maintain an Evaluation and Compensation Committee composed of four outside directors.

Executive Session

  
Non-management directors must meet in regularly scheduled executive sessions without management.  Our outside directors hold meetings solely attended by outside directors in accordance with the charter of our board of directors.

Audit Committee

  
Listed companies must have an audit committee which has a minimum of three directors and satisfy the requirements of Rule10A-3 under the Exchange Act.  We maintain an Audit Committee comprised of four outside directors who meet the applicable independence criteria set forth under Rule10A-3 under the Exchange Act.

Shareholder Approval of Equity Compensation Plan

  
Listed companies must allow their shareholders to exercise their voting rights with respect to any material revision to the company’s equity compensation plan.  

We currently have two equity compensation plans: one providing for stock grants to officers and inside directors; and an employee stock ownership association program.

 

All material matters related to the granting stock options are provided in our articles of incorporation, and any amendments to the articles of incorporation are subject to shareholders’ approval. Matters related to the employee stock ownership association program are not subject to shareholders’ approval under Korean law.

Shareholder Approval of Equity Offerings

  
Listed companies must allow its shareholders to exercise their voting rights with respect to equity offerings that do not qualify as public offerings for cash, and offerings of equity of related parties.  Voting rights are not separately provided for equity offerings that do not qualify as public offerings for cash, or offerings of equity of related parties.

Corporate Governance Guidelines

  
Listed companies must adopt and disclose corporate governance guidelines.  We have adopted Corporate Governance Guidelines in March 2007 setting forth our practices with respect to corporate governance matters. Our Corporate Governance Guidelines are in compliance with Korean law but do not meet all requirements established by the New York Stock Exchange for U.S. companies listed on the exchange. A copy of our Corporate Governance Guidelines in Korean is available on our website at www.kt.com.

Code of Business Conduct and Ethics

  
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for executive officers.  We have adopted a Code of Ethics for all directors, officers and employees. A copy of our Code of Ethics in Korean is available on our website at www.kt.com

Item 16H.  Mine Safety Disclosure

Not applicable.

 

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Item 19. Exhibits

 

    1  Articles of Incorporation of KT Corporation (English translation)
    2.1*  Deposit Agreement dated as of May  25, 1999 entered into among KT Corporation, Citibank, N.A., as depositary, and all Holders and Beneficial Owners of American Depositary Shares evidenced by the American Depositary Receipts issued thereunder, including the form of American depositary receipt (incorporated herein by reference to Exhibit (a)(i) of the Registrant’s Registration Statement (RegistrationNo. 333-13578) on FormF-6)
    2.2*  Form of Amendment No. 1 to Deposit Agreement dated as of May  25, 1999 entered into among KT Corporation, Citibank, N.A., as depositary, and all Holders and Beneficial Owners of American Depositary Shares evidenced by the American Depositary Receipts issued thereunder, including the form of American depositary receipt (incorporated herein by reference to Exhibit (a)(ii) of the Registrant’s Registration Statement (RegistrationNo. 333-13578) on FormF-6)
    2.3*  Letter from Citibank, N.A., as depositary, to the Registrant relating to thepre-release of the American depositary receipts (incorporated herein by reference to the Registrant’s Registration Statement (RegistrationNo. 333-10330) on FormF-6)(P)
    2.4*  Letter from Citibank, N.A., as depositary, to the Registrant relating to the establishment of a direct registration system for ADSs and the issuance of uncertified ADSs as part of the direct registration system. (incorporated herein by reference to Exhibit 2.4 of the Registrant’s Annual Report on Form20-F filed on June 30, 2008)
    2.5  Description of common stock (see Item 10.B. Memorandum and Articles of Association)
    2.6  Description of American Depositary Shares
    8.1  List of subsidiaries of KT Corporation
    12.1  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    12.2  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    13.1  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    101  Interactive Data Files (XBRL-Related Documents)

 

 

*

Filed previously.

 

(P)

Paper filing.

 

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

KT CORPORATION
(Registrant)

/s/HYEON-MO KU

Name:Hyeon-Mo Ku

Title:

 

Representative Director and

Chief Executive Officer

Date: April 29, 2020

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of KT Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of financial position of KT Corporation and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as at December 31, 2019, based on criteria established inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as at December 31, 2019, based on criteria established inInternal Control—Integrated Framework (2013) issued by the COSO.

Changes in Accounting Principles

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenue from contracts with customers and the manner in which it accounts for financial instruments in 2018.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and

 

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evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Cash-Generating Units Impairment Assessment—Information and Communication Technology (“ICT”) Segment

As described in Notes 11, 13 and 34 to the consolidated financial statements, the Company’s property and equipment and intangible assets balance was KRW 16,619,336 million as of December 31, 2019. This amount includes KRW 13,687,834 million of property and equipment and intangible assets associated with the Cash-Generating Units in the ICT segment (the “CGUs”). The long-lived assets of the CGUs are primarily comprised of property and equipment and intangible assets. The Company performs its impairment assessment for assets attributed to the CGUs when impairment indicators exist or in the case of goodwill and indefinite lived intangible assets at least annually. The Company identified three CGUs in the ICT segment. Those CGUs are Mobile, Fixed Line and Corporate Services. The Company compared the carrying value of each CGU to the estimated recoverable amount. The recoverable amount of the CGUs was determined based on a discounted cash flow model which requires management to estimate significant assumptions, including revenue growth rate, terminal growth rate and discount rate. No impairment loss was recognized as the recoverable amount of each of the CGUs exceeds their respective carrying amounts.

The principal considerations for our determination that performing procedures relating to the CGUs impairment assessment is a critical audit matter are that there was significant judgement by management when developing these estimates which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate audit evidence related to management’s

 

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discounted cash flow model and significant assumptions, including revenue growth rate, terminal growth rate and discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge in performing these procedures and evaluating the audit evidence obtained.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s CGUs impairment assessment, including controls over management’s determination of the estimated recoverable amount of each CGU and development of assumptions, including revenue growth rate, terminal growth rate and discount rate. These procedures also included, among others, testing management’s process for identifying CGUs and determining the estimated recoverable amount of CGUs, including evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management, including the revenue growth rate, terminal growth rate and discount rate. Evaluating management’s assumptions related to the revenue growth rate, terminal growth rate and discount rate involved evaluating whether the assumptions used by management were reasonable considering current and past performance of the CGUs, management’s future plans, external market and industry data and whether these assumptions were consistent with evidence obtained in other areas of the audit. In addition, the discount rate was evaluated considering cost of capital of comparable businesses and other industry factors. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow model and significant assumptions, including revenue growth rate, terminal growth rate and discount rate.

 

/s/ Samil PricewaterhouseCoopers

Seoul, Korea

April 29, 2020

We have served as the Company’s auditor since 2010.

 

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KT Corporation and Subsidiaries

Consolidated Statements of Financial Position

December 31, 2018 and December 31, 2019

 

 

(In millions of Korean won)  Notes   December 31,
2018
   December 31,
2019
 

Assets

      

Current assets

      

Cash and cash equivalents

   4,5    2,703,422   2,305,894 

Trade and other receivables, net

   4,6    5,680,349    5,858,696 

Other financial assets

   4,7    994,780    868,388 

Current income tax assets

     4,046    68,120 

Inventories, net

   8    1,074,634    791,677 

Assets held for sale

   10    13,035    83,602 

Other current assets

   9    1,687,548    2,000,308 
    

 

 

   

 

 

 

Total current assets

     12,157,814    11,976,685 
    

 

 

   

 

 

 

Non-current assets

      

Trade and other receivables, net

   4,6    842,995    1,181,798 

Other financial assets

   4,7    623,176    821,658 

Property and equipment, net

   11, 21    13,068,257    13,785,299 

Right-of-use assets

   21    —      788,497 

Investment properties, net

   12    1,091,084    1,387,430 

Intangible assets, net

   13    3,407,123    2,834,037 

Investments in associates and joint ventures

   14    272,407    267,660 

Deferred income tax assets

   29    465,369    424,856 

Other non-current assets

   9    545,895    685,488 
    

 

 

   

 

 

 

Total non-current assets

     20,316,306    22,176,723 
    

 

 

   

 

 

 

Total assets

    32,474,120   34,153,408 
    

 

 

   

 

 

 

 

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KT Corporation and Subsidiaries

Consolidated Statements of Financial Position (Continued)

December 31, 2018 and December 31, 2019

 

 

(In millions of Korean won)  Notes   December 31,
2018
  December 31,
2019
 

Liabilities

     

Current liabilities

     

Trade and other payables

   4,15   6,948,190  7,597,478 

Borrowings

   4,16    1,368,481   1,185,725 

Other financial liabilities

   4,7    942   943 

Current income tax liabilities

     249,837   66,266 

Provisions

   17    117,881   175,612 

Deferred revenue

     52,878   53,473 

Other current liabilities

   9    655,914   1,031,958 
    

 

 

  

 

 

 

Total current liabilities

     9,394,123   10,111,455 
    

 

 

  

 

 

 

Non-current liabilities

     

Trade and other payables

   4,15    1,409,330   1,082,220 

Borrowings

   4,16    5,279,812   6,113,142 

Other financial liabilities

   4,7    163,454   149,136 

Defined benefit liabilities, net

   18    561,269   365,663 

Provisions

   17    163,995   78,550 

Deferred revenue

     110,702   99,180 

Deferred income tax liabilities

   29    204,785   425,468 

Other non-current liabilities

   9    528,160   584,504 
    

 

 

  

 

 

 

Total non-current liabilities

     8,421,507   8,897,863 
    

 

 

  

 

 

 

Total liabilities

     17,815,630   19,009,318 
    

 

 

  

 

 

 

Equity

     

Share capital

   22    1,564,499   1,564,499 

Share premium

     1,440,258   1,440,258 

Retained earnings

   23    11,256,069   11,594,322 

Accumulated other comprehensive income

   24    50,158   194,934 

Other components of equity

   24    (1,181,083  (1,170,083
    

 

 

  

 

 

 

Equity attributable to ownersof the Controlling Company

     13,129,901   13,623,930 
    

 

 

  

 

 

 

Non-controlling interest

     1,528,589   1,520,160 
    

 

 

  

 

 

 

Total equity

     14,658,490   15,144,090 
    

 

 

  

 

 

 

Total liabilities and equity

    32,474,120  34,153,408 
    

 

 

  

 

 

 

The above consolidated statements of financial position should be read in conjunction with the accompanying notes.

 

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KT Corporation and Subsidiaries

Consolidated Statements of Operations

Years ended December 31, 2017, 2018 and 2019

 

 

(In millions of Korean won)  Notes  2017  2018  2019 

Operating revenue

  26  23,546,929  23,436,050  24,899,189 

Revenue

     23,259,541   23,220,052   24,639,758 

Others

     287,388   215,998   259,431 

Operating expenses

  27   22,477,837   22,335,190   23,879,015 
    

 

 

  

 

 

  

 

 

 

Operating profit

     1,069,092   1,100,860   1,020,174 

Finance income

  28   406,328   374,243   424,395 

Finance costs

  28   (644,531  (435,659  (421,931

Share of net profits of associates and joint venture

  14   (13,892  (5,467  (3,304
    

 

 

  

 

 

  

 

 

 

Profit before income tax

     816,997   1,033,977   1,019,334 

Income tax expense

  29   270,656   314,565   320,060 
    

 

 

  

 

 

  

 

 

 

Profit for the year

    546,341  719,412  699,274 
    

 

 

  

 

 

  

 

 

 

Profit for the year attributable to:

      

Owners of the Controlling Company

    461,559  645,571  649,109 

Non-controlling interest

    84,782  73,841  50,165 

Earnings per share attributable to the equity holders of the Controlling Company during the year (in Korean won):

      

Basic earnings per share

  30  1,884  2,634  2,648 

Diluted earnings per share

  30  1,883  2,634  2,646 

 

 

The above consolidated statements of operations should be read in conjunction with the accompanying notes.

 

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KT Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

Years ended December 31, 2017, 2018 and 2019

 

 

(In millions of Korean won)            
  Notes  2017  2018  2019 
             

Profit for the year

  546,341  719,412  699,274 

Other comprehensive income

    

Items that will not be reclassified to profit or loss:

    

Remeasurements of the net defined benefit liability

  18   (83,962  (73,511  (25,777

Shares of remeasurement gain (loss) of associates and joint ventures

   (115  (816  649 

Gain on valuation of equity instruments at fair value through other comprehensive income

   —     43,077   155,319 

Items that may be subsequently reclassified to profit or loss:

    

Gain on valuation of debt instruments at fair value through other comprehensive income

   —     734   11,833 

Changes in value of available-for-sale financial assets

   51,235   —     —   

Other comprehensive income from available-for sale financial assets reclassified to loss

   (55,450  —     —   

Valuation gain (loss) on cash flow hedge

   (111,083  17,268   67,548 

Other comprehensive income (loss) from cash flow hedges reclassified to profit (loss)

   141,929   (44,279  (44,684

Share of other comprehensive income (loss) from associates and joint ventures

   10,280   (41  2,517 

Exchange differences on translation of foreign operations

   (21,122  2,940   4,933 
  

 

 

  

 

 

  

 

 

 

Total other comprehensive income (loss)

   (68,288  (54,628  172,338 
  

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

  478,053  664,784  871,612 
  

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year attributable to:

    

Owners of the Controlling Company

   413,149   589,179   771,747 

Non-controlling interest

   64,904   75,605   99,865 

The above consolidated statements of comprehensive income should be read in conjunction with the accompanying notes.

 

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KT Corporation and Subsidiaries

Consolidated Statements of Changes in Equity

Years ended December 31, 2017, 2018 and 2019

 

 

      Attributable to owners of the Controlling Company       
(In millions of Korean won)  Notes  Share
capital
  Share
premium
  Retained
earnings
  Accumulated
other
comprehensive
income
  Other
components
of equity
  Total  Non-controlling
interest
  Total equity 

Balance as of January 1, 2017

   1,564,499  1,440,258  9,778,707  (1,432 (1,217,934 11,564,098  1,352,844  12,916,942 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income

          

Profit for the year

    —     —     461,559   —     —     461,559   84,782   546,341 

Changes in value of available-for-sale financial assets

   4,7   —     —     —     (1,433   (1,433  (2,782  (4,215

Remeasurements of the net defined benefit liability

   18   —     —     (80,711  —     —     (80,711  (3,251  (83,962

Valuation gains on cashflow hedge

   4,7   —     —     —     30,846   —     30,846   —     30,846 

Shares of other comprehensive income of associates and joint ventures

    —     —     —     10,148   —     10,148   132   10,280 

Shares of loss on remeasurements of associates and joint ventures

    —     —     (116  —     —     (116  1   (115

Exchange differences on translation of foreign operations

    —     —     —     (7,144  —     (7,144  (13,978  (21,122
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

    —     —     380,732   32,417   —     413,149   64,904   478,053 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Transactions with equity holders

          

Dividends paid by the Controlling Company

    —     —     (195,977  —     —     (195,977  —     (195,977

Dividends paid to non-controlling interest of subsidiaries

    —     —     —     —     —     —     (47,162  (47,162

Changes in consolidation scope

    —     —     —     —     —     —     250   250 

Change in ownership interest in subsidiaries

    —     —     —     —     5,441   5,441   21,242   26,683 

Appropriations of loss on disposal of treasury stock

    —     —     (2,312  —     2,312   —     —     —   

Others

    —     —     —     —     4,879   4,879   (314  4,565 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal

    —     —     (198,289  —     12,632   (185,657  (25,984  (211,641
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at December 31, 2017

   1,564,499  1,440,258  9,961,150  30,985  (1,205,302 11,791,590  1,391,764  13,183,354 
   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The above consolidated statements of changes of equity should be read in conjunction with the accompanying notes.

 

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KT Corporation and Subsidiaries

Consolidated Statements of Changes in Equity (Continued)

Years ended December 31, 2017, 2018 and 2019

 

 

     Attributable to owners of the Controlling Company       
(In millions of Korean won) Notes  Share
capital
  Share
premium
  Retained
earnings
  Accumulated
other
comprehensive
income
  Other
components
of equity
  Total  Non-controlling
interest
  Total equity 

Balance as of January 1, 2018

  1,564,499  1,440,258  9,961,150  30,985  (1,205,302 11,791,590  1,391,764  13,183,354 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Changes in accounting policy

   —     —     954,053   17,741   —     971,794   77,128   1,048,922 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted total equity at the beginning of the financial year

   1,564,499   1,440,258   10,915,203   48,726   (1,205,302  12,763,384   1,468,892   14,232,276 

Comprehensive income

         

Profit for the year

   —     —     645,571   —     —     645,571   73,841   719,412 

Remeasurements of net defined benefit liability

  18   —     —     (61,449  —      (61,449  (12,062  (73,511

Share of loss on remeasurements of joint ventures and associates

   —     —     (816  —     —     (816  —     (816

Share of other comprehensive income of associates and joint ventures

   —     —     —     (136  —     (136  95   (41

Valuation losses on cash flow hedge

  4,7   —     —     —     (27,011  —     (27,011  —     (27,011

Gain(loss) on disposal of equity instruments at fair value through other comprehensive income

  4,7     4,441   (4,441  —     —     —     —   

Gain on valuation of financial instruments at fair value through other comprehensive income

  4,7   —     —     —     30,731   —     30,731   13,080   43,811 

Exchange differences on translation of foreign operations

   —     —     —     2,289   —     2,289   651   2,940 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year

   —     —     587,747   1,432   —     589,179   75,605   664,784 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Transactions with owners

         

Dividends paid by the Controlling Company

   —     —     (245,097  —     —     (245,097  —     (245,097

Dividends paid to non-controlling interest of subsidiaries

   —     —     —     —     —     —     (53,535  (53,535

Changes in consolidation scope

   —     —     —     —     (1,803  (1,803  102   (1,701

Change in ownership interest in subsidiaries

   —     —     —     —     11,118   11,118   37,471   48,589 

Appropriations of loss on disposal of treasury stock

   —     —     (2,046  —     2,046   —     —     —   

Disposal of treasury stock