20-F 1 h04310e20vf.htm FORM 20-F e20vf
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As filed with the Securities and Exchange Commission on June 30, 2010
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 20-F
 
 
 
 
     
(Mark One)    
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2009
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o
  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 1-14418
SK Telecom Co., Ltd.
(Exact name of Registrant as specified in its charter)
 
 
SK Telecom Co., Ltd.
(Translation of Registrant’s name into English)
 
The Republic of Korea
(Jurisdiction of incorporation or organization)
SK T-Tower
11, Euljiro 2-Ga, Jung-gu, Seoul, Korea
(Address of principal executive offices)
Mr. Sang yun Lee
11, Euljiro 2-Ga, Jung-gu, Seoul, Korea
Telephone No.: 82-2-6100-2114
Facsimile No.: 82-2-6100-7830
(Name, telephone, email and/or facsimile number and address of company contact person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
American Depositary Shares, each representing
one-ninth of one share of Common Stock
  New York Stock Exchange
Common Stock, par value W500 per share   New York Stock Exchange*
 
 
* Not for trading, but only in connection with the registration of the American Depositary Shares.
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
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
 
72,344,999 shares of common stock, par value W500 per share (not including 8,400,712 shares of common stock held by the company as treasury shares)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
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 o     No þ
 
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 þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP o     IFRS o     Other þ
 
Indicate by check mark which financial statement item the registrant has elected to follow.  Item 17 o     Item 18 þ
 
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 o     No þ
 


Table of Contents

 
TABLE OF CONTENTS
 
             
        Page
 
    1  
    1  
       
PART I     3  
  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS     3  
  Directors and Senior Management     3  
  Advisers     3  
  Auditor     3  
  OFFER STATISTICS AND EXPECTED TIMETABLE     3  
  KEY INFORMATION     3  
  Selected Financial Data     3  
  Capitalization and Indebtedness     8  
  Reasons for the Offer and Use of Proceeds     8  
  Risk Factors     8  
  INFORMATION ON THE COMPANY     22  
  History and Development of the Company     22  
  Business Overview     24  
  Organizational Structure     48  
  Property, Plants And Equipment     49  
  UNRESOLVED STAFF COMMENTS     49  
  OPERATING AND FINANCIAL REVIEW AND PROSPECTS     49  
  Operating Results     50  
  Liquidity and Capital Resources     58  
  Research and Development     69  
  Trend Information     70  
  Off-Balance Sheet Arrangements     70  
  Tabular Disclosure of Contractual Obligations     70  
  Safe Harbor     70  
  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES     70  
  Directors and Senior Management     70  
  Compensation     72  
  Board Practices     72  
  Employees     74  
  Share Ownership     75  
  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     75  
  Major Shareholders     75  
  Related Party Transactions     77  
  Interests of Experts and Counsel     78  
  FINANCIAL INFORMATION     78  
  Consolidated Statements and Other Financial Information     78  
  Significant Changes     81  


Table of Contents

             
        Page
 
  THE OFFER AND LISTING     81  
  Offering and Listing Details     81  
  Plan of Distribution     81  
  Markets     81  
  Selling Shareholders     88  
  Dilution     88  
  Expenses of the Issue     88  
  ADDITIONAL INFORMATION     88  
  Share Capital     88  
  Memorandum and Articles of Incorporation     88  
  Material Contracts     101  
  Exchange Controls     101  
  Taxation     105  
  Dividends and Paying Agents     109  
  Statements by Experts     109  
  Documents on Display     109  
  Subsidiary Information     110  
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     110  
  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     111  
  Debt Securities     111  
  Warrants and Rights     111  
  Other Securities     111  
  American Depositary Shares     111  
       
PART II     112  
  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES     112  
  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS     112  
  CONTROLS AND PROCEDURES     112  
  [RESERVED]     113  
  Audit Committee Financial Expert     113  
  Code of Ethics     114  
  Principal Accountant Fees and Services     114  
  Exemptions from the Listing Standards for Audit Committees     114  
  Purchases of Equity Securities by the Issuer and Affiliated Purchasers     115  
  Change in Registrant’s Certifying Accountant     115  
  Corporate Governance     116  
       
PART III     117  
  FINANCIAL STATEMENTS     117  
  FINANCIAL STATEMENTS     117  
  EXHIBITS     117  
 Exhibit 1.1
 Exhibit 12.1
 Exhibit 12.2
 Exhibit 13.1
 Exhibit 13.2


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CERTAIN DEFINED TERMS AND CONVENTIONS USED IN THIS REPORT
 
All references to “Korea” contained in this report shall mean The Republic of Korea. All references to the “Government” shall mean the government of The Republic of Korea. All references to “we”, “us”, “our” or the “Company” shall mean SK Telecom Co., Ltd. and, unless the context otherwise requires, its consolidated subsidiaries. References to “SK Telecom” shall mean SK Telecom Co., Ltd., but shall not include its consolidated subsidiaries. All references to “U.S.” shall mean the United States of America.
 
All references to “KHz” contained in this report shall mean kilohertz, a unit of frequency denoting one thousand cycles per second, used to measure band and bandwidth. All references to “MHz” shall mean megahertz, a unit of frequency denoting one million cycles per second. All references to “GHz” shall mean gigahertz, a unit of frequency denoting one billion cycles per second. All references to “Kbps” shall mean one thousand binary digits, or bits, of information per second. All references to “Mbps” shall mean one million bits of information per second. Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.
 
In this report, we refer to third generation, or “3G”, technology and “3.5G” technology. Second generation, or 2G, technology was designed primarily with voice communications in mind. On the other hand, 3G and 3.5G technologies are designed to transfer both voice data and non-voice, or multimedia, data, generally at faster transmission speeds than was previously possible.
 
All references to “Won”, “(Won)” or “W” in this report are to the currency of Korea, all references to “Dollars”, “$” or “US$” are to the currency of the United States of America and all references to “Yen” or “¥” are to the currency of Japan.
 
Pursuant to an amendment to the Government Organization Act, effective as of February 29, 2008, the Ministry of Information and Communication, or “MIC”, has become the Ministry of Knowledge Economy and functions formerly performed by the MIC are now performed separately by the Ministry of Knowledge Economy, the Ministry of Culture, Sports and Tourism, the Ministry of Public Administration and Security, and, particularly, the Korea Communications Commission, or the “KCC”. In this report, we refer to the MIC as the relevant governmental authority in connection with any approval granted or action taken by the MIC prior to such amendment to the Government Organization Act and to such other relevant governmental authority in connection with any approval granted or action taken by such other relevant governmental authority subsequent to such amendment.
 
Unless otherwise indicated, all financial information in this report is presented in accordance with Korean generally accepted accounting principles (“Korean GAAP”).
 
Unless otherwise indicated, translations of Won amounts into Dollars in this report were made at the noon buying rate in The City of New York for cable transfers in Won per US$1.00 as certified for customs purposes by the Federal Reserve Bank of New York (the “noon buying rate”). Unless otherwise stated, the translations of Won into Dollars were made at the noon buying rate in effect on December 31, 2009, which was Won 1,163.65 to US$1.00. On June 25, 2010, the noon buying rate was Won 1,215.1 to US$1.00. See “Item 3.A. Selected Financial Data — Exchange Rates”.
 
FORWARD-LOOKING STATEMENTS
 
This report contains “forward-looking statements”, as defined in Section 27A of the U.S. Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate”, “believe”, “considering”, “depends”, “estimate”, “expect”, “intend”, “plan”, “planning”, “planned”, “project” and similar expressions, or that certain events, actions or results “may”, “might”, “should” or “could” occur, be taken or be achieved.


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Forward-looking statements in this annual report include, but are not limited to, statements about the following:
 
  •  our ability to anticipate and respond to various competitive factors affecting the wireless telecommunications industry, including new services that may be introduced, changes in consumer preferences, economic conditions and discount pricing strategies by competitors;
 
  •  our implementation of high-speed downlink packet access, or HSDPA, technology, high-speed uplink packet access, or HSUPA, technology, evolved high-speed uplink packet access, or HSPA+, service and wireless broadband Internet, or WiBro, technology;
 
  •  our plans for capital expenditures in 2010 for a range of projects, including investments in our backbone networks, investments to improve our WCDMA network-based products and services, investments in our wireless Internet-related and convergence businesses and funding for mid- to long-term research and development projects, as well as other initiatives, primarily related to our ongoing businesses and in the ordinary course;
 
  •  our efforts to make significant investments to build, develop and broaden our businesses, including developing and providing wireless data, multimedia, mobile commerce and Internet services;
 
  •  our ability to comply with governmental rules and regulations, including the regulations of the KCC related to telecommunications providers, rules related to our status as a “market-dominating business entity” under the Korean Monopoly Regulation and Fair Trade Act, or the Fair Trade Act, and the effectiveness of steps we have taken to comply with such regulations;
 
  •  our ability to manage effectively our bandwidth and to implement timely and efficiently new bandwidth-efficient technologies;
 
  •  our expectations and estimates related to interconnection fees, tariffs charged by our competitors, regulatory fees, operating costs and expenditures, working capital requirements, principal repayment obligations with respect to long-term borrowings, bonds and obligations under capital leases, and research and development expenditures and other financial estimates;
 
  •  the success of our various joint ventures and investments in other telecommunications service providers;
 
  •  our ability to successfully manage our acquisition in 2009 of the leased-transmission line business of SK Networks Co., Ltd., a fixed-line operator that provides a substantial portion of the transmission lines we use;
 
  •  our ability to successfully manage our planned investment in Packet One Networks (Malaysia) Sdn. Bhd., a Malyasian wireless broadband company;
 
  •  our ability to successfully attract and retain subscribers under the KCC’s new guideline on the marketing expenses of the telecommunication service providers; and
 
  •  the growth of the telecommunications industry in Korea and other markets in which we do business and the effect that economic, political or social conditions have on our number of subscribers, call volumes and results of operations.
 
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. Risks and uncertainties associated with our business include, but are not limited to, risks related to changes in the regulatory environment, technology changes, potential litigation and governmental actions, changes in the competitive environment, political changes, foreign exchange currency risks, foreign ownership limitations, credit risks and other risks and uncertainties that are more fully described under the heading “Item 3. Key Information — Risk Factors” and elsewhere in this report. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.


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PART I
 
Item 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Item 1.A.   Directors and Senior Management
 
Not applicable.
 
Item 1.B.   Advisers
 
Not applicable.
 
Item 1.C.   Auditor
 
Not applicable.
 
Item 2.   OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
Item 3.   KEY INFORMATION
 
Item 3.A.   Selected Financial Data
 
You should read the selected consolidated financial and operating data below in conjunction with the consolidated financial statements and the related notes included elsewhere in this report. The selected consolidated financial data for the five years ended December 31, 2009 is derived from our audited consolidated financial statements and related notes thereto.
 
Our consolidated financial statements are prepared in accordance with Korean GAAP, which differs in certain respects from U.S. GAAP. For more detailed information you should refer to notes 34 and 35 of the notes to our audited consolidated financial statements included in this annual report.
 
                                                 
    As of or for the Year Ended December 31,
    2005   2006   2007   2008   2009   2009*
    (In billions of Won and millions of dollars, except per share and percentage data)
 
INCOME STATEMENT DATA
                                               
Korean GAAP:
                                               
Total Operating Revenue(1)
  W 10,721.8     W 11,016.2 (19)   W 11,843.4(19 )   W 13,995.9 (19)   W 14,555.4     $ 12,508.4  
Cellular Service(1)
    10,361.9       10,515.6       11,016.1       11,389.8       12,034.1       10,341.7  
Broadband Internet and Fixed-line Telephone Service
                      1,821.8       1,714.9       1,473.7  
Other(2)
    359.9       500.6 (19)     827.3 (19)     784.3 (19)     806.4       693.0  
Operating Expenses
    8,051.2       8,392.8 (19)     9,741.7 (19)     12,244.7 (19)     12,676.9       10,894.1  
Operating Income
    2,670.6       2,623.4 (19)     2,101.7 (19)     1,751.2 (19)     1,878.5       1,614.3  
Income from Continuing Operation before Income Tax
    2,561.6       2,023.8 (19)     2,284.9 (19)     1,260.4 (19)     1,400.5       1,203.5  
Net Income(3)
    1,868.3       1,449.6       1,562.3       972.3       1,055.6       907.1  
Net Income per Share
    25,443       19,801       22,696       16,707       17,239       14.81  
Diluted Net Income per Share
    25,036       19,523       22,375       16,559       17,046       14.65  
Dividends Declared per Share
    9,000       8,000       9,400       9,400       9,400       8.08  
Weighted Average Number of Shares
    73,614,296       73,305,026       72,650,909       72,765,557       72,346,763       72,346,763  
U.S. GAAP:
                                               
Total Operating Revenue
  W 10,701.4     W 10,530.0     W 11,192.5     W 11,132.5     W 12,620.1     $ 10,845.3  
Operating Expenses
    7,847.7       7,706.0       9,124.6       9,380.2       10,745.7       9,234.5  
Operating Income
    2,853.7       2,824.1       2,067.8       1,752.4       1,874.5       1,610.9  
Net Income(4)
    2,014.9       1,876.4       1,451.1       951.7       1,356.7       1,165.9  
Net Income per Share(4)(5)
    27,435       25,624       20,720       14,744       20,453       17.58  
Diluted Net Income per Share(4)(5)
    26,983       25,207       20,379       14,606       20,145       17.31  
 


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    As of or for the Year Ended December 31,
    2005   2006   2007   2008   2009   2009*
    (In billions of Won and millions of dollars, except per share and percentage data)
 
BALANCE SHEET DATA
                                               
Korean GAAP:
                                               
Working Capital(6)
  W 1,735.2     W 1,455.5     W 1,796.2     W 793.6     W 1,475.7     $ 1,268.3  
Property and Equipment, Net
    4,663.4       4,507.3       4,969.4       7,437.7       8,165.9       7,017.5  
Total Assets
    14,704.8       16,240.0       19,048.9       22,473.7       23,206.3       19,942.7  
Non-current Liabilities(7)
    3,513.9       3,548.5       4,344.4       6,020.4       5,966.7       5,127.6  
Capital Stock
    44.6       44.6       44.6       44.6       44.6       38.3  
Total Shareholders’ Equity
    8,327.5       9,483.1       11,687.6       11,824.4       12,344.6       10,608.5  
U.S. GAAP:
                                               
Working Capital
  W 1,587.2     W 1,286.2     W 1,751.1     W 738.0     W 1,815.6     $ 1,560.3  
Total Assets(4)
    16,356.5       17,909.4       20,173.6       21,239.2       25,788.3       22,161.6  
Total Shareholders’ Equity(4)
    9,477.7       10,718.4       12,897.6       12,562.0       14,260.8       12,255.2  
 
                                                 
    As of or for the Year Ended December 31,
    2005   2006   2007   2008   2009   2009*
    (In billions of Won and millions of dollars, except per share and percentage data)
 
OTHER FINANCIAL DATA
                                               
Korean GAAP:
                                               
EBITDA(3)(8)
  W 4,429.5     W 3,880.7     W 4,360.6     W 4,008.7     W 4,262.0     $ 3,662.6  
Capital Expenditures(9)
    1,416.6       1,498.1       1,804.1       2,236.9       2,162.4       1,858.3  
R&D Expenses(10)
    321.1       279.0       293.1       299.7       293.2       252.1  
Internal R&D
    252.0       212.0       218.7       226.7       236.3       203.1  
External R&D
    69.1       67.0       74.4       73.0       56.9       49.0  
Depreciation and Amortization
    1,675.5       1,698.2       1,968.6       2,759.0       2,732.8       2,348.5  
Cash Flow from Operating Activities
    3,407.1       3,590.5 (20)     3,721.0 (20)     3,295.4 (20)     2,933.3 (20)     2,520.8  
Cash Flow from Investing Activities
    (1,938.2 )     (2,535.0 )(20)     (2,415.4 )(20)     (3,875.3 )(20)     (1,828.2 )(20)     (1,571.1 )
Cash Flow from Financing Activities
    (1,429.0 )     (952.4 )(20)     (1,041.3 )(20)     869.4 (20)     (1,205.1 )(20)     (1,035.6 )
Margins (% of total sales):
                                               
EBITDA Margin(8)(11)
    41.3 %     35.2 %     36.9 %     28.6 %     29.3 %     29.3 %
Operating Margin(11)
    24.9       23.8       17.7       12.5       12.9       12.9  
Net Margin(11)
    17.4       13.2       13.2       6.9       7.3       7.3  
U.S. GAAP:
                                               
EBITDA(4)(8)
  W 4,399.5     W 4,525.5     W 3,906.5     W 3,156.7     W 4,155.1     $ 3,570.7  
Capital Expenditures(9)
    1,429.3       1,538.0       1,854.0       1,861.0       2,160.5       1,856.7  
Cash Flow from Operating Activities
    3,296.8       3,615.5       3,284.1       2,697.2       3,064.3       2,633.4  
Cash Flow from Investing Activities
    (1,816.5 )     (2,560.4 )     (2,436.2 )     (3,926.8 )     (2,126.8 )     (1,827.7 )
Cash Flow from Financing Activities
    (1,439.3 )     (940.6 )     (631.3 )     1,118.7       (840.0 )     (721.9 )
 

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    As of or for the Year Ended December 31,
    2005   2006   2007   2008   2009   2009*
 
SELECTED OPERATING DATA
                                               
Population of Korea (millions)(12)
    48.3       48.3       48.5       48.6       48.7       48.7  
Our Wireless Penetration(13)
    40.4 %     42.0 %     45.3 %     47.4 %     50.6 %     50.6 %
Number of Employees(14)
    6,646       7,676       9,485       10,626       10,714       10,714  
Total Sales per Employee (in millions of Won and thousands of Dollars)
  W 1,613.3     W 1,436.7     W 1,267.1     W 1,319.5     W 1,358.5     $ 1,167.4  
Wireless Subscribers(15)
    19,530,117       20,271,133       21,968,169       23,032,045       24,269,553       24,269,553  
Average Monthly Outgoing Voice Minutes per Subscriber(16)
    197       201       201       200       197       197  
Average Monthly Revenue per Subscriber(17)
  W 40,205     W 40,220     W 40,154     W 38,526     W 38,171     $ 32.80  
Average Monthly Churn Rate(18)
    1.8 %     2.0 %     2.6 %     2.7 %     2.7 %     2.7 %
Digital Cell Sites
    10,142       12,515       16,099       17,213       15,979       15,979  
 
 
The translation into Dollars was made at the rate of Won 1,163.65 to US$1.00. See note 2(a) of the notes to our consolidated financial statements.
 
(1) Includes revenues from SK Teletech Co., Ltd. of Won 294.6 billion for 2005 from the sale of digital handsets and Won 898.6 billion for 2005, Won 1,033.4 billion for 2006, Won 1,062.2 billion for 2007, Won 1,149.2 billion for 2008 and 1,245.4 billion for 2009 of interconnection revenue. Following our sale of a 60% equity interest in SK Teletech to Pantech & Curitel Communication, Inc. in July 2005, our equity interest in the company was reduced to 29.1% (which subsequently became a 22.7% interest in Pantech following the merger of SK Teletech into Pantech in December 2005) and SK Teletech ceased to be our consolidated subsidiary. Our equity interest in Pantech has been reduced from 22.7% to 0.5% in 2007. Digital handset sales revenue of PS&Marketing which is our consolidated subsidiary in 2009 was Won 185.3 billion
 
(2) For more information about our other revenue, see “Item 5. Operating and Financial Review and Prospects” and “Item 4.B. Business Overview”.
 
(3) As of January 1, 2007, we adopted Statements of Korean Accounting Standards, or SKAS No. 25. Pursuant to adoption of SKAS No. 25, net income is allocated to equity holders of the parent and minority interest. In addition, when a subsidiary is purchased during the fiscal year, the subsidiary’s statement of income is included in consolidation as though it had been acquired at the beginning of the fiscal year, and pre-acquisition earnings are presented as a separate deduction within the consolidated statements of income. The consolidated statements of income for the years ended December 31, 2005 and 2006 appearing in our consolidated financial statements included elsewhere in this report have been reclassified in accordance with SKAS No. 25.
 
(4) Adjusted to retroactively reflect our acquisition of an additional 38.7% equity stake in SK Broadband in March 2008, increasing our total equity interest in SK Broadband to 43.4%. According to revised Accounting Standard Codification Topic 810 “Consolidation,” net income (loss) attributable to the non-controlling interest is included in net income. The net loss attributable to the non-controlling interest for the years ended December 31, 2005, 2006, 2007, 2008 and 2009 was Won (12.7 billion), Won (4.1 billion), (Won 54.3 billion), Won (121.1 billion) and Won (123.0 billion), respectively.
 
(5) Net income per share is calculated by dividing net income attributable to majority interest by the weighted average number of shares outstanding during the period. Diluted net income per share is calculated by dividing adjusted net income by adjusted weighted average number of shares outstanding during the period, taking into account the issuance of convertible bonds in 2005, 2006, 2007, 2008 and 2009.
 
(6) Working capital means current assets minus current liabilities.
 
(7) Our monetary assets and liabilities denominated in foreign currencies are valued at the exchange rate of Won 1,013.0 to US$1.00 as of December 31, 2005, Won 929.6 to US$1.00 as of December 31, 2006, Won 938.2 to US$1.00 as of December 31, 2007, Won 1,257.5 to US$1.00 as of December 31, 2008, Won 1,167.6 to US$1.00 as of December 31, 2009, the rates of exchange permitted under Korean GAAP as of those dates. See note 2(w) of the notes to our consolidated financial statements.

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(8) EBITDA refers to income before interest income, interest expense, taxes, depreciation and amortization. EBITDA as used here is a non-GAAP measure and is commonly used in the telecommunications industry to analyze companies on the basis of operating performance. Since the telecommunications business is a very capital intensive business, capital expenditures and level of debt and interest expenses may have a significant impact on net income for companies with similar operating results. Therefore, for a telecommunications company such as ourselves, we believe that EBITDA provides a useful reflection of our operating results. We use EBITDA as a measurement of operating performance because it assists us in comparing our performance on a consistent basis as it removes from our operating results the impact of our capital structure, which includes interest expense from our outstanding debt, and our asset base, which includes depreciation and amortization of our property and equipment. However, EBITDA should not be construed as an alternative to operating income or any other measure of performance determined in accordance with Korean GAAP or U.S. GAAP or as an indicator of our operating performance, liquidity or cash flows generated by operating, investing and financing activities. Other companies may define EBITDA differently than we do. EBITDA under U.S. GAAP is computed using interest income, interest expense, depreciation, amortization and income taxes under U.S. GAAP, which may differ from Korean GAAP for these items.
 
(9) Consists of investments in property, plant and equipment. Under U.S. GAAP, interest costs incurred during the period required to complete an asset or ready an asset for its intended use are capitalized based on the interest rates a company pays on its outstanding borrowings. Under Korean GAAP, such interest costs are expensed as incurred.
 
(10) Includes donations to Korean research institutes and educational organizations. See “Item 5.C. Research and Development”.
 
(11) Operating revenue and operating income used in the calculation of these ratios for 2005, 2006, 2007, 2008 and 2009 exclude the operating revenue and operating income from the discontinued operation, but include the operating revenue and operating income of newly-consolidated subsidiaries prior to the date of consolidation.
 
(12) Population estimates based on historical data published by the National Statistical Office of Korea.
 
(13) Wireless penetration is determined by dividing our subscribers by total estimated population, as of the end of the period.
 
(14) Includes regular employees and temporary employees. See “Item 6.D. Employees”.
 
(15) Wireless subscribers include those subscribers who are temporarily deactivated, including (1) subscribers who voluntarily deactivate temporarily for a period of up to three months no more than twice a year and (2) subscribers with delinquent accounts who may be involuntarily deactivated up to two months before permanent deactivation, which we determine based on various factors, including prior payment history.
 
(16) The average monthly outgoing voice minutes per subscriber is derived by dividing the total minutes of outgoing voice usage for the period by the monthly average number of subscribers for the period, then dividing that number by the number of months in the period. The monthly average number of subscribers is derived by dividing (i) the sum of the average number of subscribers for each month in the period, calculated as the average of the number of subscribers on the first and last days of the relevant month, by (ii) the number of months in the period.
 
(17) The average monthly revenue per subscriber excludes interconnection revenue and is derived by dividing the sum of total initial subscription fees, monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services, value-added service fees and other miscellaneous revenues for the period by the monthly average number of subscribers for the period, then dividing that number by the number of months in the period. Including interconnection revenue, average monthly revenue per subscriber was Won 44,167 for 2005, Won 44,599 for 2006, Won 44,416 for 2007, Won 43,016 for 2008 and Won 42,469 for 2009.
 
(18) The average monthly churn rate for a period is the number calculated by dividing the sum of voluntary and involuntary deactivations during the period by the simple average of the number of subscribers at the beginning and end of the period, then dividing that number by the number of months in the period. Churn includes subscribers who upgrade to CDMA lxRTT or CDMA 1xEV/ DO-capable handsets by terminating their service and opening a new subscriber account.


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(19) As a result of our sale of HELIO, LLC to Virgin Mobile USA, Inc. in August 2008, HELIO’s results of operations have been classified as discontinued operations. SK Communications Co., Ltd., a subsidiary of the Company, sold the Spicus division, the Company’s telephone English education division, to Spicus Inc., a subsidiary of Altos Ventures, in August 2009 and sold Etoos Co., Ltd. to Cheong Sol in October 2009. Operating revenue, operating expenses, operating income and income before income taxes and minority interest for the years ended December 31, 2006, 2007 and 2008 have been revised to exclude HELIO’s, the Spicus division’s and Etoos’ results of operations.
 
(20) Cash flow activities from discontinued operation for the years ended December 31, 2006, 2007, 2008 and 2009 have been excluded.
 
As a measure of our operating performance, we believe that the most directly comparable U.S. and Korean GAAP measure to EBITDA is net income. The following table reconciles our net income under Korean GAAP to our definition of EBITDA on a consolidated basis for each of the five years ended December 31, 2009.
 
                                                 
    As of or for the Year Ended December 31,
    2005   2006   2007   2008   2009   2009*
    (In billions of Won and millions of dollars)
 
Korean GAAP:
                                               
Net Income
  W 1,868.3     W 1,449.6     W 1,562.3     W 972.3     W 1,055.6     $ 907.1  
LESS: Interest income
    (61.1 )     (80.0 )(1)     (93.9 )(1)     (136.3 )(1)     (187.1 )(1)     (160.8 )(1)
ADD: Interest expense
    253.5       239.1 (1)     235.3 (1)     344.6 (1)     440.3 (1)     378.4 (1)
Taxes
    693.3       571.4 (1)     694.7 (1)     188.3 (1)     359.3 (1)     308.8 (1)
Depreciation and
    1,675.5       1,700.6 (1)     1,970.5 (1)     2,639.2 (1)     2,593.9 (1)     2,229.1 (1)
Amortization
                                               
EBITDA
  W 4,429.5     W 3,880.7     W 4,360.6     W 4,008.7     W 4,262.0     $ 3,662.6  
 
 
The translation into Dollars was made at the rate of Won 1,163.65 to US$1.00. See note 2(a) of the notes to our consolidated financial statements.
 
(1) In accordance with SKAS No. 25, which we adopted in 2007, when a subsidiary is purchased during the fiscal year, the subsidiary’s statement of income is included in consolidation as though it had been acquired at the beginning of the fiscal year, and pre-acquisition earnings are presented as a separate deduction within the consolidated statements of income. For purposes of reconciling net income under Korean GAAP with EBITDA, the interest income, interest expense, taxes and depreciation and amortization amounts for 2007, 2008 and 2009 shown in the table above exclude, with respect to subsidiaries newly consolidated in 2007, 2008 or 2009 the income earned and expense incurred by such subsidiaries prior to the date of consolidation. In addition, interest income, interest expense, taxes and depreciation and amortization amounts for 2006, 2007, 2008 and 2009 shown in the table above include income earned and expense incurred from discontinued operations. As a result, the interest income, interest expense, taxes and depreciation and amortization amounts for 2007, 2008 and 2009 that appear in the table above differ from those set forth in our consolidated statements of income and consolidated statements of cash flows for the years ended December 31, 2007, 2008 and 2009, respectively.
 
The following table reconciles our net income under U.S. GAAP to our definition of EBITDA on a consolidated basis for each of the five years ended December 31, 2009.
 
                                                 
    As of or for the Year Ended December 31,
    2005   2006   2007   2008   2009   2009*
    (In billions of Won and millions of dollars)
 
U.S. GAAP:
                                               
Net Income(1)
  W 2,014.9     W 1,876.4     W 1,451.1     W 951.7     W 1,356.7     $ 1,165.9  
LESS: Interest income
    (62.6 )     (86.7 )     (99.0 )     (121.8 )     (208.1 )     (178.8 )
ADD: Interest expense
    226.8       241.7       204.0       240.2       374.7       322.0  
Taxes
    667.1       686.8       576.7       161.9       486.7       418.3  
Depreciation and Amortization
    1,553.3       1,807.4       1,773.7       1,924.7       2,145.1       1,843.5  
EBITDA(1)
  W 4,399.5     W 4,525.5     W 3,906.5     W 3,156.7     W 4,155.1     $ 3,570.7  


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The translation into Dollars was made at the rate of Won 1,163.65 to US$1.00. See note 2(a) of the notes to our consolidated financial statements.
 
(1) Adjusted to retroactively reflect our acquisition of an additional 38.7% equity stake in SK Broadband in March 2008, increasing our total equity interest in SK Broadband to 43.4%.
 
Exchange Rates
 
The following table sets forth, for the periods and dates indicated, certain information concerning the noon buying rate for translations of Won amounts into Dollars. We make no representation that the Won or Dollar amounts we refer to in this report could have been or could be converted into Dollars or Won, as the case may be, at any particular rate or at all.
 
                                 
    At End of
  Average
       
Year Ended December 31,
  Period   Rate(1)   High   Low
    (Won per US$1.00)
 
2005
    1,010.0       1,023.8       1,059.8       997.0  
2006
    930.0       954.3       1,002.9       913.7  
2007
    935.8       929.0       950.2       903.2  
2008
    1,262.0       1,098.7       1,507.9       935.2  
2009
    1,163.7       1,274.6       1,570.1       1,149.0  
 
                 
    Past Six Months
    High   Low
    (Won per US$1.00)
 
December 2009
    1,185.4       1,149.0  
January 2010
    1,168.0       1,120.0  
February 2010
    1,170.0       1,144.0  
March 2010
    1,153.0       1,128.0  
April 2010
    1,126.3       1,104.0  
May 2010
    1,253.2       1,115.0  
June 2010 (through June 25, 2009)
    1,250.4       1,173.6  
 
 
Source: Federal Reserve Bank of New York.
 
(1) The average rates for the annual periods were calculated based on daily noon buying rates for cable transfers in New York City certified for customs purposes by the Federal Reserve Bank of New York.
 
On June 25, 2010, the noon buying rate was Won 1,215.1 to US$1.00.
 
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
 
Risks Relating to Our Business
 
Competition may reduce our market share and harm our results of operations and financial condition.
 
We face substantial competition across all our businesses, including our wireless telecommunications business, in Korea. We expect competition to intensify as a result of continuing consolidation of market leaders


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and the development of new technologies, products and services. We expect that such trends will continue to put downward pressure on the prevailing tariffs we can charge our subscribers.
 
Prior to April 1996, we were the only wireless telecommunications service provider in Korea. Since then, several new providers have entered the market, offering wireless voice and data services that compete directly with our business. The collective market share of these providers amounts to approximately 49.4%, in terms of numbers of wireless service subscribers, as of December 31, 2009. Since 2000, there has also been considerable consolidation in the wireless telecommunications industry, resulting in the emergence of stronger competitors, including the merger of KT Freetel Co., Ltd., or KTF, one of our principal wireless competitors before the merger, into KT Corporation, or KT, Korea’s principal fixed-line operator, in June 2009 and the merger of LG DACOM Corporation and LG Powercomm Co., Ltd. into LG Telecom Co., Ltd., or LGT, in January 2010. Such consolidation has created large, well-capitalized competitors with substantial financial, technical, marketing and other resources to respond to our business offerings. In addition, our broadband Internet access service provided through SK Broadband competes with other providers of Internet access services, including KT, LGT, and cable companies, and our fixed-line telephone service provided through SK Broadband competes with KT, as well as providers of voice over Internet protocol, or VoIP, services. Future business combinations and alliances in the telecommunications industry may also create significant new competitors or enhance the abilities of our current competitors to offer more competitive services and could harm our business and results of operations.
 
Continued competition from the other wireless and fixed-line service providers has also resulted in, and may continue to result in, a substantial level of deactivations among our subscribers. Subscriber deactivations, or churn, may significantly harm our business and results of operations. In 2009, the churn rate in our wireless business ranged from 2.1% to 3.2%, with an average churn rate of 2.7%, compared to an average churn rate of 2.7% in 2008. Intensification of competition in the future may cause our churn rates to increase. The increased competition may cause us to increase our marketing expenses as a percentage of sales to attract and retain subscribers.
 
However, on May 13, 2010, the KCC announced a guideline recommending that telecommunication service providers limit their marketing expenses to 22% of their annual sales. The guideline is not binding and such marketing expenses do not include advertising expenses. In order to meet the new guideline, we, as well as our competitors, would have to decrease such marketing expenses. Such decrease in our marketing expenses may have a material adverse effect on our businesses and results of operations.
 
In addition, in March 2008, the KCC fully lifted its prohibition on the practice of telecommunications services providers to offer handsets at below retail prices to attract new subscribers. As a result of the Government’s decision to allow handset subsidies, we have faced increased competition from other mobile service providers and increased our marketing expenses. However, in order to comply with the KCC’s guideline on marketing expenditures, we may not be able to spend sufficient funds on marketing to effectively compete with our competitors, and any material decrease in our marketing expenditures may have a material adverse effect on our results of operations.
 
In 2007, the KCC introduced certain regulations to allow telecommunication service providers to bundle their services as well as allow our competitors to employ services provided by us so that they can offer similar discounted package services. Competition intensified as licensed transmission service providers were permitted to offer local, domestic long-distance and international telephone services, as well as broadband Internet access and Internet phone services, without additional business licenses. Moreover, beginning in September 2010, we may be required to lease our networks to a mobile virtual network operator, or MVNO, at such MVNO’s request, at a rate mutually agreed upon that complies with the standards set by the KCC. We expect a few MVNOs will commence providing wireless telecommunications services using the networks leased from us by early 2011. For more detailed discussion of the Government’s rate regulations, see “Item 4.B. Business Overview — Law and Regulation — Competition Regulation — Rate Regulation”. In addition, Korea Mobile Internet, or KMI, announced this year a plan to enter the wireless telecommunications market as a fourth telecommunication service provider in Korea and provide wireless Internet and mobile VoIP services based on the wireless broadband Internet, or WiBro, technologies. We believe the introduction of bundled services and the entrance of MVNOs and KMI into the wireless telecommunications market may further increase competition in the telecommunications sector, as well as cause downward price pressure on the fees we charge for our services, which, in turn, may have a material adverse effect on our results of operations, financial position and cash flows.


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We expect competition to intensify as a result of continued consolidation of our competitors, regulatory changes and the rapid development of new technologies, products and services. Our ability to compete successfully will depend on our ability to anticipate and respond to various competitive factors affecting the industry, including new services that may be introduced, changes in consumer preferences, economic conditions and discount pricing strategies by competitors.
 
Inability to successfully implement or adapt our network and technology to meet the continuing technological advancements affecting the wireless industry will likely have a material adverse effect on our financial condition, results of operation, cash flows and business.
 
The telecommunications industry has been characterized by continual improvement and advances in technology, and this trend is expected to continue. We and our competitors have continually implemented technology upgrades from basic code division multiple access, or CDMA, networks to wide-band code division multiple access, or WCDMA, which is the 3G technology implemented by us. We are currently further upgrading our WCDMA network to support even more advanced high-speed uplink packet access, or HSUPA, technology, and plan to introduce evolved high speed packet access, or HSPA+, service by the end of 2010. The more successful operation of a 3G network by a competitor, including better market acceptance of a competitor’s 3G-based services, could materially and adversely affect our existing wireless businesses as well as the returns on future investments we may make in our 3G network or our other businesses.
 
In March 2005, we obtained a license from the MIC to provide WiBro services. WiBro enables us to offer high-speed and large-packet data services, including wireless broadband Internet access to portable computers and other portable devices. We commercially launched WiBro service in June 2006, initially to 24 “hot zone” areas, which are neighborhoods and districts that we have determined to be high-data traffic areas, in seven cities in Korea. By the end of 2009, we have extended WiBro service to hot zone areas in 84 cities throughout Korea. In 2010, we plan to further expand WiBro service to more extensive hot zone areas in the 84 cities. Beyond 2010, our WiBro expansion plans will depend, in part, on subscriber demand for WiBro services. As the implementation of WiBro service in Korea is relatively new, we cannot assure you that there will continue to be sufficient demand for our WiBro services. Our WiBro services may not be commercially successful if market conditions are unfavorable or service demand is weak.
 
For a more detailed description of our backbone networks, see “Item 4.B. Business Overview — Digital Cellular Network”.
 
Our business could also be harmed if we fail to implement, or adapt to, future technological advancements in the telecommunications sector in a timely manner.
 
Implementation of WiBro technology has required, and may continue to require, significant capital and other expenditures, which we may not recoup.
 
We have made, and intend to continue to make, capital investments to develop and launch our WiBro services. In 2009, we spent Won 146.8 billion in capital expenditures to build and expand our WiBro network. We submitted an implementation plan to the KCC in February 2010 to spend an additional amount of Won 145.3 billion by May 2011 to expand our WiBro network, and may make further capital investments related to our WiBro service in the future. Our WiBro-related investment plans are subject to change, and will depend, in part, on market demand for WiBro services, the competitive landscape for provision of such services and the development of competing technologies. There may not be sufficient demand for our WiBro services, as a result of competition or otherwise, to permit us to recoup or profit from our WiBro-related capital investments. KT Corporation commercially launched its WiBro service in 2006. The more successful operation of a WiBro network by KT Corporation, or another competitor, including better market acceptance of a competitor’s WiBro services, could also materially and adversely affect our business.


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Our growth strategy calls for significant investments in new businesses and regions, including businesses and regions in which we have limited experience.
 
As a part of our growth strategy, we plan to selectively seek business opportunities abroad. In February 2005, we established a joint venture company, UNISK Information Technology Co., Ltd., with China Unicom Ltd., China’s second largest mobile operator, to market and offer wireless data services in China. In October 2008, China Unicom merged with China Netcom Group Corporation (Hong Kong) Limited, a leading broadband communications and fixed-line telecommunications operator in China. On November 5, 2009, we sold all common shares (representing a 6.6% equity interest) of China Unicom held by us to China Unicom. In connection with our investment in China Unicom, we realized a cumulative gain of Won 269 billion through the end of 2009.
 
In addition, in May 2006 our subsidiary, HELIO, LLC, launched cellular voice and data services across the United States. In August 2008, together with EarthLink Inc., our joint venture partner in HELIO, we sold our equity interest in HELIO to Virgin Mobile USA, Inc., in exchange for an equity stake in Virgin Mobile USA, Inc. In November 2009, we sold our equity interest in Virgin Mobile USA, Inc. to Sprint Nextel Corporation in connection with the merger of Virgin Mobile USA, Inc. with and into Sprint Nextel Corporation, in exchange for a 0.6% equity interest in Sprint Nextel Corporation. In connection with our investment in HELIO, we have recognized a cumulative loss of Won 20 billion through the end of 2009. See “Item 4.B. Business Overview — Our Business Strategy — Global Business — United States” for more information regarding our investments in HELIO and Virgin Mobile USA, Inc. We continue to seek other opportunities to expand our business abroad, particularly in Asia and the United States, as such opportunities present themselves. These global businesses may require further investment from us. For a more detailed description of our investments in our global business, see “Item 4.B. Business Overview — Our Services — Global Business”.
 
We believe that we must continue to make significant investments to build, develop and broaden our existing businesses. Entering into new businesses and regions in which we have limited experience may require us to make substantial investments, and, despite such investments, we may still be unsuccessful in these efforts to expand and diversify. We might not be able to recoup or profit from our investments in new businesses and regions. In addition, when we enter into these businesses and regions with partners through joint ventures or other strategic alliances, we and those partners may have disagreements with respect to strategic directions or other aspects of business, or may otherwise be unable to coordinate or cooperate with each other, any of which could materially and adversely affect our operations in such businesses and regions.
 
We may fail to successfully integrate our new acquisitions and joint ventures and may fail to realize the anticipated benefits.
 
We have pursued convergence growth opportunities. For example, in 2008 and 2009, we acquired an additional equity stake in SK Broadband, Korea’s second-largest fixed-line operator, for an aggregate purchase price of approximately Won 1.45 trillion and currently hold a 50.6% equity stake in the company. In February 2010, we acquired a 49% equity stake in Hana Card Co., Ltd. for the purchase price of Won 402 billion in order to provide cross-over services between telecommunication and finance. In September 2009, we also acquired the leased-line business of SK Networks Co., Ltd. for Won 892.8 billion and assumed Won 620.2 billion of debt as part of the transaction. While we are hoping to benefit from a range of synergies from the acquisitions, including by offering our customers bundled fixed-line and mobile telecommunications services, we may not be able to integrate our new businesses and may fail to realize the expected benefits in the near term, or at all.
 
In particular, we may experience difficulties in operating SK Broadband’s fixed-line telecommunications and broadband Internet services with our existing products and services, and we may be unsuccessful in retaining SK Broadband’s existing customers. Since April 2008, customers of SK Broadband have filed lawsuits against SK Broadband in the Seoul Central District Court, alleging that SK Broadband had violated customers’ privacy, and an investigation against SK Broadband was initiated by the Seoul Central Prosecutor’s Office, the KCC and the Korea Trade Commission. In connection with its investigation, the KCC suspended SK Broadband from soliciting new subscribers for its broadband Internet services for a period of 40 days from July 1, 2008 and, in addition, imposed an administrative fine of Won 178 million. As of March 31, 2010, the number of plaintiffs was 23,821 and the aggregate amount of damages claimed by such plaintiffs was approximately Won 24.1 billion. For more


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information regarding this lawsuit, see “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings — SK Broadband Litigation”.
 
Due to the existing high penetration rate of wireless services in Korea, we are unlikely to maintain our subscriber growth rate, which could adversely affect our results of operations.
 
According to data published by the KCC and our population estimates based on historical data published by the National Statistical Office of Korea, the penetration rate for the Korean wireless telecommunications service industry as of December 31, 2009 was approximately 98.4%, which is high compared to many industrialized countries. Therefore, the penetration rates for wireless telecommunications service in Korea will not grow significantly. As a result of the already high penetration rates in Korea for wireless services coupled with our leading market share, we expect our subscriber growth rate to decrease. Slowed growth in penetration rates without a commensurate increase in revenues through the introduction of new services and increased use of our services by existing subscribers would likely have a material adverse effect on our financial condition, results of operations and cash flows.
 
Our business and results of operations may be adversely affected if we fail to acquire adequate additional spectrum or use our bandwidth efficiently to accommodate subscriber growth and subscriber usage.
 
One of the principal limitations on a wireless network’s subscriber capacity is the amount of spectrum available for use by the system. According to KCC’s final plan announced in February 2010, the amount of spectrum in the 800 MHz band allocated to us will be reduced to 2 x 15 MHz of spectrum beginning in July 2011 from the current 2 x 22.5 MHz. Instead, we have been allocated an additional 2 x 10 MHz of spectrum in the 2.1 GHz band, which will be used for our 3G services. As a result of bandwidth constraints, our CDMA 1xRTT network is currently operating near its capacity in the Seoul metropolitan area, although capacity constraints are not as severe for transmissions utilizing CDMA 1xEV-DO technology. While we believe that we can address this issue through system upgrades and efficient allocation of bandwidth, inability to address such capacity constraints in a timely manner may adversely affect our business, results of operations, financial position and cash flows.
 
The growth of our wireless data businesses has been a significant factor in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than voice services. This trend has been offset in part by the implementation of CDMA 1xEV-DO upgrades to our CDMA 1xRTT network and, more recently, the completion of our HSDPA-capable WCDMA network, which both enable more efficient usage of our bandwidth than was possible on our basic CDMA and CDMA 1xRTT networks. However, if the current trend of increased data transmission use by our subscribers continues, or the volume of the multimedia content we offer through our wireless data services substantially grows, our bandwidth capacity requirements are likely to increase. In the event we are unable to maintain sufficient bandwidth capacity, our subscribers may perceive a general slowdown of wireless services. Growth of our wireless business will depend in part upon our ability to manage effectively our bandwidth capacity and to implement efficiently and in a timely manner new bandwidth-efficient technologies if they become available. We cannot assure you that bandwidth constraints will not adversely affect the growth of our wireless business.
 
We rely on key researchers and engineers and senior management, and the loss of the services of any such personnel or the inability to attract and retain them 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 services has meant that we must aggressively recruit engineers with expertise in cutting-edge technologies.
 
We also depend on the services of experienced key senior management, and if we lose their services, it would be difficult to find and integrate replacement personnel in a timely manner, or at all.
 
The loss of the services of any of our key research and development and engineering personnel or senior management without adequate replacement, or the inability to attract new qualified personnel, would have a material adverse effect on our operations.


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We need to observe certain financial and other covenants under the terms of our debt instruments, the failure to comply with which would put us in default under those instruments.
 
Certain of our debt instruments contain financial and other covenants with which we are required to comply on an annual and semi-annual basis. The financial covenants include, but are not limited to, maintenance of credit ratings and debt-to-equity ratios. The documentation for such debt also contains negative pledge provisions limiting our ability to provide liens on our assets as well as cross-default and cross-acceleration clauses, which give related creditors the right to accelerate the amounts due under such debt if an event of default or acceleration has occurred with respect to our existing or future indebtedness, or if any material part of our indebtedness or indebtedness of our subsidiaries is capable of being declared payable before the stated maturity date. In addition, such covenants restrict our ability to raise future debt financing.
 
If we breach our financial or other covenants, our financial condition will be adversely affected to the extent we are not able to cure such breaches or repay the relevant debt.
 
We may have to make further financing arrangements to meet our capital expenditure requirements and debt payment obligations.
 
As a network-based wireless telecommunications provider, we have had, and expect to continue to have, significant capital expenditure requirements as we continue to build out, maintain and upgrade our networks. We spent Won 2,162.4 billion for capital expenditures in 2009 and we expect to spend a similar amount for capital expenditures in 2010 for a range of projects, including investments in our backbone networks, investments to improve our WCDMA network-based products and services, investments in our wireless Internet-related and convergence businesses and funding for mid- to long-term research and development projects, as well as other initiatives, primarily related to our ongoing businesses and in the ordinary course. In 2010, we plan to continue HSUPA upgrades to our WCDMA network and expand our WiBro service to more extensive “hot zone” areas in 84 cities, as well as introduce HSPA+ service by the end of this year. For a more detailed discussion of our capital expenditure plans and a discussion of other factors that may affect our future capital expenditures, see “Item 5.B. Liquidity and Capital Resources”
 
As of December 31, 2009, we had approximately Won 1,823.7 billion in contractual payment obligations due in 2010, almost all of which involve repayment of debt obligations. See “Item 5.F. Tabular Disclosure of Contractual Obligations”.
 
We have not arranged firm financing for all of our current or future capital expenditure plans and contractual payment obligations. We have, in the past, obtained funds for our proposed capital expenditure and payment obligations from various sources, including our cash flow from operations as well as from financings, primarily debt and equity financings. Any material adverse change in our operational or financial condition could impact our ability to fund our capital expenditure plans and contractual payment obligations. Still volatile financial market conditions may also curtail our ability to obtain adequate funding. Inability to fund such capital expenditure requirements may have a material adverse effect on our financial condition, results of operations and business. In addition, although we currently anticipate that the capital expenditure levels estimated by us will be adequate to meet our business needs, such estimates may need to be adjusted based on developments in technology and markets. In the event we are unable to meet any such increased expenditure requirements or to obtain adequate financing for such requirements, on terms acceptable to us, or at all, this may have a material adverse effect on our financial condition, results of operations and business.
 
Termination or impairment of our relationship with a small number of key suppliers for network equipment and for leased lines could adversely affect our results of operations, financial position and cash flows.
 
We purchase wireless network equipment from a small number of suppliers. We purchase our principal wireless network equipment from Samsung Electronics Co., Ltd. and LG Nortel Co., Ltd. To date, we have purchased substantially all of the equipment for our CDMA 1xRTT and CDMA 1xEV-DO networks from Samsung Electronics and substantially all of the equipment for our WCDMA network, including the software and firmware used to implement HSDPA and HSUPA upgrades, from Samsung Electronics and LG Nortel. In addition, to date,


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we have purchased substantially all of the equipment for our WiBro network from Samsung Electronics. We believe Samsung Electronics currently manufactures approximately half of the wireless handsets sold to our subscribers. Although other manufacturers sell the equipment we require, sourcing such equipment from other manufacturers could result in unanticipated costs in maintenance and upkeep of the CDMA 1xRTT, CDMA 1xEV-DO and WCDMA networks, as well as unanticipated increased costs in the planned expansion of our WiBro network. Inability to obtain the equipment needed for our networks in a timely manner may have an adverse effect on our business, financial condition, results of operations and cash flows.
 
We cannot assure you that we will be able to continue to obtain the necessary equipment from one or more of our suppliers. Any discontinuation or interruption in the availability of equipment from our suppliers for any reason could have an adverse effect on our results of operations. Inability to lease adequate lines at commercially reasonable rates may impact the quality of the services we offer and may also damage our reputation and our business.
 
Our business relies on technology developed by us as well as technologies provided by third parties, and our business will suffer if we are unable to protect our proprietary rights, obtain new licensing agreements or renew existing licensing agreements with third parties.
 
We own numerous patents and trademarks worldwide, and have applications for patents pending in many countries, including Korea, Japan, China, the United States, and Europe. We also license a number of patented processes and trademarks under cross-licensing, technical assistance and other agreements. In addition to active internal and external research and development efforts, our success depends in part on our ability to obtain patents, licenses and other intellectual property rights covering our services.
 
We may be required to defend against charges of infringement of patent or other proprietary rights of third parties. Although we have not experienced any significant patent or other intellectual property disputes, we cannot be certain that any significant patent or other intellectual property disputes will not occur in the future. Defending our patent and other proprietary rights could require us to incur substantial expense and to divert significant resources of our technical and management personnel, and could result in our loss of rights to employ certain technologies to provide services. If we are unable to renew our technology licensing arrangements on acceptable terms, we may lose the legal protection to use certain of the technologies we employ to provide services and be prohibited from using those technologies which may prevent us from providing our services. In addition, we could be at a disadvantage if our competitors obtain licenses for protected technologies on more favorable terms than we do. We also cannot provide assurance that we will be able to obtain additional licenses for new or existing technologies on acceptable terms or at all.
 
Labor disputes may disrupt our operations.
 
Although we have not experienced any significant labor disputes, there can be no assurance that we will not experience labor disputes in the future, including protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operation.
 
Every two years, the union and management negotiate and enter into a new collective bargaining agreement that has a two-year duration, which is focused on employee benefits and welfare. Employee wages are separately negotiated on an annual basis. Although we consider our relations with our employees to be good, there can be no assurance that we will continue such a working relationship with our employees and will not experience labor disputes resulting from disagreements with the labor union in the future.
 
Our businesses are subject to extensive Government regulation and any change in Government policy relating to the telecommunications industry could have a material adverse effect on our results of operations, financial condition and cash flows.
 
All of our businesses are subject to extensive governmental supervision and regulation. The MIC has periodically reviewed the tariffs charged by wireless operators and has, from time to time, suggested tariff reductions. Although these suggestions are not binding, we have in the past implemented some degree of tariff reductions in response to MIC recommendations. After discussions with the KCC, in November 2009, we adopted


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various tariff reduction measures, including a reduction of the initial subscription fee by 27% and an increase in discounts for long-term subscribers. In March 2010, we also began to charge voice calls on a per-second basis, which has the effect of reducing the usage charges compared with the previous system of charging per ten seconds.
 
The Government also plays an active role in the selection of technology to be used by telecommunications operators in Korea. The MIC adopted the WCDMA and CDMA2000 technologies as the only standards available in Korea for implementing 3G services. The KCC may impose similar restrictions on the choice of technology used in future telecommunications services, and it is possible that technologies promoted by the Government in the future may not provide the best commercial returns for us.
 
Furthermore, the Government sets the policies regarding the use of frequencies and allocates the spectrum of frequencies used for wireless telecommunications. In February 2010, the KCC announced its final plan to reallocate the spectrum of frequencies among us, KT Corporation and LGT. See “Item 4.B. Business Overview — Law and Regulation — Competition Regulation”. While we do not believe the reallocation of spectrum will materially impact our ability to maintain sufficient bandwidth capacity, the reallocation and new allocation of the spectrum to our existing or new competitors could increase competition among wireless service providers, which may have an adverse effect on our business.
 
Pursuant to recent amendments to the Telecommunications Business Act, which will become effective as of September 23, 2010, certain mobile network operators designated by the KCC, which we expect will include us, are required to lease their networks or allow use of their networks (collectively, “wholesale lease”) to other network service providers, such as an MVNO, that have requested such wholesale lease in order to provide their own services using the leased networks. We expect a few MVNOs will commence providing wireless telecommunications services using the networks leased from us by early 2011. We believe that leasing a portion of our bandwidth capacity to an MVNO would impair our ability to use our bandwidth in ways that would generate maximum revenues and would strengthen our MVNO competitors by granting them access and lowering their costs to enter into our markets. Accordingly, our profitability may be adversely affected.
 
Our wireless telecommunications services depend, in part, on our interconnection arrangements with domestic and international fixed-line and other wireless networks. Our interconnection arrangements, including the interconnection rates we pay and interconnection rates we charge, affect our revenues and operating results. The KCC determines the basic framework for interconnection arrangements, including interconnection policies relating to interconnection rates in Korea, and the MIC has changed this framework several times in the past. We cannot assure you that we will not be adversely affected by future changes in the KCC’s interconnection policies. See “Item 4.B. Business Overview — Interconnection — Domestic Calls”.
 
In January 2003, the MIC announced its plan to implement number portability with respect to wireless telecommunications service in Korea. The number portability system allows wireless subscribers to switch wireless service operators while retaining the same mobile phone number. In addition, the MIC has also required all new subscribers to be given numbers with the ‘010’ prefix starting January 2004, and it has been gradually retracting the mobile service identification numbers which had been unique to each wireless telecommunications service provider, including ‘011’ for our cellular services. Historically, ‘011’ has had high brand recognition in Korea as the premium wireless telecommunications service. The MIC’s adoption of the number portability system has resulted in and may continue to result in weakened customer loyalty, increased competition among wireless service providers and higher costs of marketing, increased subscriber deactivations and increased churn rate, all of which had, and may continue to have, an adverse effect on our results of operations. See “Item 5. Operating and Financial Review and Prospects” and “Item 4.B. Business Overview — Subscribers — Number Portability”.
 
In addition, the KCC 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 KCC may levy a monetary penalty of up to 3% of the average of our annual revenue for the preceding three fiscal years. The revocation of our cellular licenses, suspension of our business or imposition of monetary penalties by the KCC could have a material adverse effect on our business. We believe we are currently in compliance with the material terms of all our cellular licenses, including our IMT-2000 and WiBro licenses.


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We are subject to additional regulations as a result of our dominant market position in the wireless telecommunications sector, which could harm our ability to compete effectively.
 
The KCC endeavors to promote competition in the Korean telecommunications markets through measures designed to prevent a dominant service provider from exercising its market power and deterring the emergence and development of viable competitors. We are currently designated by the KCC as the “market dominant service provider” in respect of our wireless telecommunications business. As such, we are subject to additional regulations to which certain of our competitors are not subject. For example, under current Government regulations, we must obtain prior approval from the KCC to change our existing rates or introduce new rates. See “Item 4.B. Business Overview — Law and Regulation — Competition Regulation — Rate Regulation”. We could also be required by the KCC to charge higher usage rates than our competitors for future services. In addition, we were required to introduce number portability earlier than our competitors, KT and LGT. The MIC also awarded the IMT-2000 license to provide 3G services to LGT at a fee lower than our license fee and on terms generally more favorable than the terms of our license.
 
We also qualify as a “market-dominating business entity” under the Fair Trade Act, which subjects us to additional regulations. For instance, during our acquisition of Shinsegi Telecom, Inc. in 2002, the Fair Trade Commission of Korea, or the FTC, approved the acquisition on the condition that, among other things, our and Shinsegi Telecom’s combined market share in the wireless telecommunications market, based on numbers of subscribers, be less than 50% as of June 30, 2001. In order to satisfy this condition, we reduced the level of our subscriber activations and adopted more stringent involuntary subscriber deactivation policies beginning in 2000 and ceased accepting new subscribers from April 1, 2001 through June 30, 2001. While we are no longer subject to any market share limitations, the Government may impose restrictions on our market share in the future. If we become subject to market share limitations, our ability to compete effectively will be impeded.
 
The additional regulation to which we are subject has affected our competitiveness in the past and may materially hurt our profitability and impede our ability to compete effectively against our competitors in the future.
 
Concerns that radio frequency emissions may be linked to various health concerns could adversely affect our business and we could be subject to litigation relating to these health concerns.
 
In the past, allegations that serious health risks may result from the use of wireless telecommunications devices or other transmission equipment have adversely affected share prices of some wireless telecommunications companies in the United States. We cannot assure you that these health concerns will not adversely affect our business. Several class action and personal injury lawsuits have been filed in the United States against several wireless phone manufacturers and carriers, asserting product liability, breach of warranty and other claims relating to radio transmissions to and from wireless phones. Certain of these lawsuits have been dismissed. We could be subject to liability or incur significant costs defending lawsuits brought by our subscribers or other parties who claim to have been harmed by or as a result of our services. In addition, the actual or perceived risk of wireless telecommunications devices could have an adverse effect on our business by reducing our number of subscribers or our usage per subscriber.
 
Risks Relating to Korea
 
Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.
 
We are incorporated in Korea, and a significant portion of our operations is based in Korea. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea. Recent difficulties affecting the U.S. and global financial sectors, adverse conditions and volatility in the U.S. and worldwide credit and financial markets, fluctuations in oil and commodity prices and the general weakness of the U.S. and global economies have increased the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. Any future deterioration of the Korean and global economy could adversely affect our business, financial condition, results of operations and cash flows.


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Developments that could have an adverse impact on Korea’s economy include:
 
  •  continuing difficulties in the housing and financial sectors in the United States and elsewhere and the resulting adverse effects on the global financial markets;
 
  •  adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. dollar or Japanese Yen exchange rates or revaluation of the Chinese renminbi), interest rates and stock markets;
 
  •  substantial decreases in the market prices of Korean real estate;
 
  •  increasing delinquencies and credit defaults by consumer and small and medium sized enterprise borrowers;
 
  •  declines in consumer confidence and a slowdown in consumer spending;
 
  •  adverse developments in the economies of countries that are important export markets for Korea, such as the United States, Japan and China, or in emerging market economies in Asia or elsewhere;
 
  •  the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China);
 
  •  social and labor unrest;
 
  •  a decrease in tax revenues and a substantial increase in the Government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased Government budget deficit;
 
  •  financial problems or lack of progress in the restructuring of Korean conglomerates, other large troubled companies, their suppliers or the financial sector;
 
  •  loss of investor confidence arising from corporate accounting irregularities and corporate governance issues at certain Korean conglomerates;
 
  •  the economic impact of any pending or future free trade agreements, including the Free Trade Agreement recently negotiated with the United States;
 
  •  geo-political uncertainty and risk of further attacks by terrorist groups around the world;
 
  •  deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from trade disputes or disagreements in foreign policy;
 
  •  political uncertainty or increasing strife among or within political parties in Korea;
 
  •  Government regulations of the Korean financial market and business environment that are not attractive to foreign investors;
 
  •  hostilities involving oil producing countries in the Middle East and any material disruption in the supply of oil or increase in the price of oil; and
 
  •  an increase in the level of tension or an outbreak of hostilities between North Korea and Korea or the United States.
 
Increased tensions with North Korea could have an adverse effect on us and the market value of the common shares and 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 recent years, there have been heightened security concerns stemming from North Korea’s nuclear weapons and long-range missile programs and increased uncertainty regarding North Korea’s actions and possible responses from the international community.


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Tension persists around the border between North Korea and Korea and sometimes results in deadly casualties. On March 26, 2010, Korean Navy warship Cheonan suffered an explosion and sank near the Northern Limit Line, a disputed maritime demarcation line in the Yellow Sea between North Korea and Korea. As a result, 46 sailors were killed. The Korean military authority determined a torpedo manufactured by North Korea to be the cause of the explosion of the warship and death of the sailors. On May 16, 2010, two North Korean patrol boats crossed the Northern Limit Line, escalating the tension between the two countries again.
 
In May 2010, the Government formally accused North Korea of causing the sinking and is seeking United Nations Security Council sanctions for the act. North Korea has threatened retaliation for any attempt to punish it for the act.
 
In addition, there recently has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its implications for economic and political stability in the region. In June 2009, U.S. and Korean officials announced that Kim Jong-il, the North Korean ruler who reportedly suffered a stroke in August 2008, designated his third son, who is reportedly in his twenties, to become his successor. The succession plan, however, remains uncertain. In addition, North Korea’s economy faces severe challenges. For example, in November 2009, the North Korean government redenominated its currency at a ratio of 100 to 1 as part of a currency reform undertaken in an attempt to control inflation and reduce income gaps. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which led to severe inflation and food shortages. Such developments may further aggravate social and political tensions within North Korea.
 
There can be no assurance that the level of tension on the Korean peninsula will not escalate in the future. Any further increase in tensions may occur, for example, if North Korea experiences a leadership crisis, high-level contacts break down or military hostilities occur, and could have a material adverse effect on the Korean economy in general, on our operations and the market value of the common shares and ADSs.
 
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 (i) false or inaccurate statements provided in the registration statements, prospectuses, business reports and audit reports and omission of material information in such documents, (ii) insider trading, (iii) market manipulation and (iv) 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 the operation of a business. 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.
 
Risks Relating to Securities
 
Continued difficulties in global credit and financial markets and the resulting governmental actions around the world could have a material adverse impact on our business and the ability to meet our funding needs, and could cause the market value of the common shares and ADSs to decline.
 
Global credit markets have been experiencing difficulties and volatility since the second half of 2008. While the rate of deterioration of the global economy slowed in the second half of 2009 and into 2010, with some signs of stabilization and possible improvement, the overall prospects for the Korean and global economy in 2010 and beyond remain uncertain. The legislators and financial regulators in the United States and other jurisdictions, including Korea, have implemented a number of policy measures designed to add stability to financial markets. The overall impact of these legislative and regulatory efforts on the global financial markets continues to be uncertain,


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and they may not have the intended stabilizing effects. The U.S. Securities and Exchange Commission, other regulators, self-regulatory organizations and exchanges are authorized to take extraordinary actions in the event of market emergencies, and may effect changes in law or interpretations of existing laws.
 
We are exposed to risks related to changes in the global and Korean economic environments, changes in interest rates and instability in the global financial markets. Furthermore, as a result of adverse global and Korean economic conditions, there has been a significant overall decline and volatility in securities prices of Korean companies, including ours, which may result in trading and valuation losses on our trading and investment securities portfolio. Increases in credit spreads, as well as limitations on the availability of credit resulting from heightened concerns about the stability of the markets generally and the strength of counterparties specifically may lead many lenders and institutional investors to reduce or cease providing funding to borrowers, which may negatively impact our liquidity and results of operation. Major market disruptions and the current adverse changes in market conditions and regulatory climate may further impair our ability to meet our desired funding needs. We cannot predict how long the current market conditions will last. These recent and developing economic and governmental factors may have a material adverse effect on our business and the ability to meet our funding needs, as well as negatively affect the market prices of the common shares and ADSs.
 
Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on our results of operations and the market value of our common shares and ADSs.
 
Substantially all of our revenues are denominated in Won. Depreciation of the Won may materially affect our results of operations because, among other things, it causes:
 
  •  an increase in the amount of Won required by us to make interest and principal payments on our foreign currency-denominated debt; and
 
  •  an increase, in Won terms, of the costs of equipment that we purchase from overseas sources which we pay for in Dollars or other foreign currencies.
 
Fluctuations in the exchange rate between the Won and the Dollar will affect the Dollar equivalent of the Won price of the shares of our common stock on the KRX KOSPI Market of the Korea Exchange, or the KRX KOSPI Market. These fluctuations also will affect:
 
  •  the amounts a registered holder or beneficial owner of ADSs will receive from the ADR depositary in respect of dividends, which will be paid in Won to the ADR depositary and converted by the ADR depositary into Dollars;
 
  •  the Dollar value of the proceeds that a holder will receive upon sale in Korea of the common shares; and
 
  •  the secondary market price of the ADSs.
 
For historical exchange rate information, see “Item 3.A. Selected Financial Data — Exchange Rates”.
 
If SK Holdings causes us to breach the foreign ownership limitations on shares of our common stock, we may experience a change of control.
 
The Telecommunications Business Act currently sets a 49% limit on the aggregate foreign ownership of our issued shares. Under the Telecommunications Business Act, as amended, a Korean entity, such as SK Holdings, is deemed to be a foreign entity if its largest shareholder (determined by aggregating the shareholdings of such shareholder and its related parties) is a foreigner and such shareholder (together with the shareholdings of its related parties) holds 15% or more of the issued voting stock of the Korean entity. As of December 31, 2009, SK Holdings owned 18,748,452 shares of our common stock, or approximately 23.22%, of our issued shares. If SK Holdings were considered to be a foreign shareholder, then its shareholding in us would be included in the calculation of our aggregate foreign shareholding and our aggregate foreign shareholding (based on our foreign ownership level as of December 31, 2009, which we believe was 48.51%) would exceed the 49% ceiling on foreign shareholding. As of December 31, 2009, a foreign investment fund and its related parties collectively held a 2.9% stake in SK Holdings. We could breach the foreign ownership limitations if the number of shares of our common stock or ADSs owned by other foreign persons significantly increases.


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If our aggregate foreign shareholding limit is exceeded, the KCC may issue a corrective order to us, the breaching shareholder (including SK Holdings if the breach is caused by an increase in foreign ownership of SK Holdings) and the foreign investment fund and its related parties who own in the aggregate 15% or more of SK Holdings. Furthermore, if SK Holdings is considered a foreign shareholder, it may not exercise its voting rights with respect to the shares held in excess of the 49% ceiling, which may result in a change in control of us. In addition, the KCC may refuse to grant us licenses or permits necessary for entering into new telecommunications businesses until our aggregate foreign shareholding is reduced to below 49%. For a description of further actions that the KCC could take, see “Item 4.B. Business Overview — Law and Regulation — Foreign Ownership and Investment Restrictions and Requirements”.
 
If our convertible notes are converted by foreign holders and such conversion causes a violation of the foreign ownership restrictions of the Telecommunications Business Act, or in certain other circumstances, we may sell common stock in order to settle the converting holders’ conversion rights in cash in lieu of delivering common stock or ADSs to them, and these sales might adversely affect the market price of our common stock or ADSs.
 
In April 2009, we sold US$332.5 million in 1.75% convertible notes due 2014. As of May 18, 2009, these convertible notes became convertible by the holders into shares of our common stock at the rate of Won 230,010 per share and the conversion price was adjusted to Won 221,370 effective as of December 31, 2009 as a result of the annual dividend payment. These notes are held principally by foreign holders. If (1) the exercise by the holder of the conversion right would be prohibited by Korean law or we reasonably conclude that the delivery of common stock or ADSs upon conversion of these notes would result in a violation of applicable Korean law or (2) we do not have a sufficient number of shares of our common stock to satisfy the conversion right, then we will pay a converting holder a cash settlement payment. In such situations, we may sell such number of treasury shares held in trust for us that corresponds to the number of shares of common stock that would have been deliverable in the absence of the 49% foreign shareholding restrictions imposed by the Telecommunications Business Act or other legal restrictions. The number of shares sold in these circumstances might be substantial. We cannot assure you that such sales would not adversely affect the market prices of our common stock or ADSs.
 
Sales of our shares by SK Holdings and/or other large shareholders may adversely affect the market value of the common stock and ADSs.
 
Sales of substantial amounts of shares of our common stock, or the perception that such sales may occur, could adversely affect the prevailing market price of the shares of our common stock or ADSs or our ability to raise capital through an offering of our common stock.
 
As of December 31, 2009, SK Holdings owned 23.22% of our total issued common stock and has not agreed to any restrictions on its ability to dispose of our shares. See “Item 7.A. Major Shareholders”. We can make no prediction as to the timing or amount of any sales of our common stock. We cannot assure you that future sales of shares of our common stock, or the availability of shares of our common stock for future sale, will not adversely affect the market prices of the shares of our common stock or ADSs prevailing from time to time.
 
If an investor surrenders his or her ADSs to withdraw the underlying shares, he or she may not be allowed to deposit the shares again to obtain ADSs.
 
Under the deposit agreement, holders of shares of our common stock may deposit those shares with the American Depositary Receipt (“ADR”) depositary’s custodian in Korea and obtain ADSs, and holders of ADSs may surrender ADSs to the ADR depositary and receive shares of our common stock. However, under the terms of the deposit agreement, as amended, the depositary bank is required to obtain our prior consent to any such deposit if, after giving effect to such deposit, the total number of shares of our common stock represented by ADSs, which was approximately 24,000,810 shares as of June 1, 2010, exceeds a specified maximum, subject to adjustment under certain circumstances. In addition, the depositary bank or the custodian may not accept deposits of our common shares for issuance of ADSs under certain circumstances, including (1) if it has been determined by us that we should block the deposit to prevent a violation of applicable Korean laws and regulations or our articles of incorporation or (2) if a person intending to make a deposit has been identified as a holder of at least 3% of our common stock. See “Item 10.B. Memorandum and Articles of Incorporation — Description of American Depositary Shares”. It is possible that we


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may not give the consent. Consequently, an investor who has surrendered his or her ADSs and withdrawn the underlying shares may not be allowed to deposit the shares again to obtain ADSs.
 
An investor in our ADSs may not be able to exercise preemptive rights for additional new shares and may suffer dilution of his or her equity interest in us.
 
The Korean Commercial Code and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer a right to subscribe for additional new shares of our common stock or any other rights of similar nature, the ADR depositary, after consultation with us, may make the rights available to an ADS holder or use reasonable efforts to dispose of the rights on behalf of the ADS holder and make the net proceeds available to the ADS holder. The ADR depositary, however, is not required to make available to an ADS holder any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:
 
  •  a registration statement filed by us under the Securities Act is in effect with respect to those shares; or
 
  •  the offering and sale of those shares is exempt from, or is not subject to, the registration requirements of the Securities Act.
 
We are under no obligation to file any registration statement with respect to any ADSs. If a registration statement is required for an ADS holder to exercise preemptive rights but is not filed by us, the ADS holder will not be able to exercise his or her preemptive rights for additional shares. As a result, ADS holders may suffer dilution of their equity interest in us.
 
Short selling of our ADSs by purchasers of securities convertible or exchangeable into our ADSs could materially adversely affect the market price of our ADSs.
 
SK Holdings, through one or more special purpose vehicles, has engaged and may in the future engage in monetization transactions relating to its ownership interest in us. These transactions have included and may include offerings of securities that are convertible or exchangeable into our ADSs. Many investors in convertible or exchangeable securities seek to hedge their exposure in the underlying equity securities at the time of acquisition of the convertible or exchangeable securities, often through short selling of the underlying equity securities or similar transactions. Since a monetization transaction could involve debt securities linked to a significant number of our ADSs, we expect that a sufficient quantity of ADSs may not be immediately available for borrowing in the market to facilitate settlement of the likely volume of short selling activity that would accompany the commencement of a monetization transaction. This short selling and similar hedging activity could place significant downward pressure on the market price of our ADSs, thereby having a material adverse effect on the market value of ADSs owned by you.
 
A holder of our ADSs may not be able to enforce a judgment of a foreign court against us.
 
We are a corporation with limited liability organized under the laws of Korea. Substantially all of our directors and officers and other persons named in this document reside in Korea, and all or a significant portion of the assets of our directors and officers and other persons named in this document and substantially all of our assets are located in Korea. As a result, it may not be possible for holders of our ADSs to effect service of process within the United States, or to enforce against us any judgments obtained from the United States courts based on the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Korea, either in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated on the United States federal securities laws.
 
We are generally subject to Korean corporate governance and disclosure standards, which may differ from those in other countries.
 
Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies, which may differ in some respects from standards applicable in other countries, including the United States. As a reporting company registered with the U.S. Securities and Exchange Commission and listed on the New York Stock Exchange, we are, and in the future will be, subject to certain corporate governance


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standards as mandated by the Sarbanes-Oxley Act of 2002. However, foreign private issuers, including us, are exempt from certain corporate governance requirements under the Sarbanes-Oxley Act or under the rules of the New York Stock Exchange. There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public or non-public companies in other countries. Such differences in corporate governance standards and less public information available could result in corporate governance practices or disclosures that are perceived as less than satisfactory by investors in certain countries.
 
Item 4.   INFORMATION ON THE COMPANY
 
Item 4.A.   History and Development of the Company
 
As Korea’s first wireless telecommunications service provider, we have a recognized history of leadership and innovation in the domestic telecommunications sector. Today, we remain Korea’s leading wireless telecommunications services provider and have continued to pioneer the commercial development and implementation of state-of-the-art wireless technologies. We have also strengthened our global competitiveness by expanding into key overseas markets, and we continue to look outside Korea for investment and growth opportunities. We believe we are also a leader in developing new products and services that reflect the increasing convergence of telecommunications technologies, as well as the growing synergies between the telecommunications sector and other industries.
 
We provide our wireless telecommunications services principally through backbone networks using CDMA and WCDMA technologies. Collectively, these networks can access approximately 99% of the Korean population. In addition, we also provide wireless broadband Internet access through our WiBro service. For a more detailed description of our backbone network infrastructure, see “— Digital Cellular Network” below. Our advanced and extensive wireless telecommunications infrastructure has enabled us to offer high-quality cellular voice transmission services at competitive prices, as well as to develop and deploy an increasingly sophisticated range of wireless data and multimedia products and services, including wireless Internet services, in step with technological advancements and growing consumer demand. We believe our network infrastructure also provides us with a competitive advantage in pioneering new business opportunities created by digital convergence.
 
As of December 31, 2009, we had approximately 24.3 million wireless subscribers throughout Korea, of which 23.3 million owned Internet-enabled handsets capable of accessing our wireless Internet services. As of December 31, 2009, our share of the Korean wireless market was approximately 50.6%, based on number of subscribers, according to the KCC.
 
In March 2008, we completed the acquisition of an additional 38.7% equity stake in SK Broadband for approximately Won 1.1 trillion, increasing our total equity interest in SK Broadband to 43.4%. In September 2009, we acquired additional shares of SK Broadband’s common stock, increasing our equity stake to 50.6%. Through SK Broadband, we currently provide broadband Internet access service and other Internet-related services, including video-on-demand and Internet protocol TV, or IP TV, services, as well as fixed-line telephone services. As of December 31, 2009, we had approximately 3.8 million broadband Internet access subscribers and 1.7 million fixed-line telephone subscribers.
 
In September 2009, we completed the acquisition of leased-line business and related ancillary businesses of SK Networks for approximately Won 892.8 billion and assumed Won 620.2 billion of debt as part of the transaction. Historically, we have relied on KT Corporation and SK Networks to provide a substantial majority of the transmission lines we lease.
 
On June 1, 2010, we had a market capitalization of approximately Won 13.3 trillion (US$10.94 billion, as translated at the noon buying rate of June 1, 2010) or approximately 1.5% of the total market capitalization on the KRX KOSPI Market, making us the 14th largest company listed on the KRX KOSPI Market based on market capitalization on that date. Our ADSs, each representing one-ninth of one share of our common stock, have traded on the New York Stock Exchange since June 27, 1996.
 
We established our telecommunications business in March 1984 under the name of Korea Mobile Telecommunications Co., Ltd. We changed our name to SK Telecom Co., Ltd., effective March 21, 1997. In January 2002, we merged with Shinsegi, which was then the third-largest wireless telecommunications service provider in Korea. Our registered office is at SK T-Tower, 11, Euljiro 2-ga, Jung-gu, Seoul 100-999, Korea and our telephone number is 82-2-6100-2114.


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Korean Telecommunications Industry
 
Established in March 1984, we became the first wireless telecommunications service provider in Korea. We remained the sole provider of wireless telecommunications services until April 1996, when Shinsegi commenced cellular service. The Government began to introduce competition into the fixed-line and wireless telecommunications services markets in the early 1990’s. During this period, the Government allowed new competitors to enter the fixed-line sector, sold a controlling stake in us to the SK Group, and granted a cellular license to our first competitor, Shinsegi. In October 1997, three additional companies, KT, LGT, and Hansol PCS, began providing wireless services under Government licenses to provide wireless telecommunications services.
 
In 2000 and 2001, the Korean wireless telecommunications market experienced significant consolidation. In January 2002, Shinsegi was merged into us. Additionally, two of the other wireless telecommunications services operators merged. See “Item 4.B. Business Overview — Competition”.
 
There are currently three providers of wireless voice telecommunications services in Korea: our company, KT (into which KTF merged) and LGT. According to the KCC, as of December 31, 2009, the market share of the Korean wireless telecommunications market in terms of number of subscribers of KT and LGT was 31.3% and 18.1%, respectively (compared to our market share of 50.6%).
 
In December 2000, the MIC awarded to two companies the right to receive a license to provide 3G services using WCDMA, an extension of the Global System for Mobile Communication standard for wireless telecommunications, which is globally the most widely used wireless technology. These rights were awarded to two consortia of companies, one led by our former subsidiary, SK IMT Co., Ltd., and the other to a consortium that included KT Corporation. SK IMT Co., Ltd. was merged into us on May 1, 2004. The right to acquire an additional license to operate a network using CDMA2000 technology was awarded to LGT in August 2001, but was later revoked in July 2006.
 
A one-way mobile number portability, or MNP, system was first implemented in the beginning of January 2004 when our subscribers were allowed to transfer to KT and LGT. From July 2004, a two-way MNP was implemented so that KT subscribers could transfer to us and LGT. A three-way MNP has been in effect since January 2005 so that subscribers from each of the wireless service providers may transfer to any other wireless service provider. During 2007, 2008 and 2009, approximately 3.4 million, 3.0 million and 3.1 million, respectively, of our subscribers migrated to our competitors. Approximately 1.1 million, 0.6 million and 1.1 million of LGT’s subscribers in 2007, 2008 and 2009, respectively, and approximately 2.3 million, 2.5 million and 2.0 million in 2007, 2008 and 2009, respectively, of KT’s subscribers migrated to our service.
 
In January 2005, the Government granted each of KT Corporation and us a license to offer WiBro service. Both KT Corporation and we are currently expanding the coverage area of WiBro services.
 
Telecommunications industry growth in Korea has been among the most rapid in the world, with fixed-line penetration increasing from under five lines per 100 population in 1978 to 45.5 lines per 100 population as of December 31, 2009, and wireless penetration increasing from 7.0 subscribers per 100 population in 1996 to 98.4 subscribers per 100 population as of December 31, 2009. The table below sets forth certain subscription and penetration information regarding the Korean telecommunications industry as of the dates indicated:
 
                                         
    As of December 31,
    2005   2006   2007   2008   2009
    (In thousands, except for per population amounts)
 
Population of Korea(1)
    48,294       48,297       48,456       48,607       48,747  
Wireless Subscribers(2)
    38,342       40,197       43,498       45,607       47,944  
Wireless Subscribers per 100 Population
    79.4       83.2       89.8       93.8       98.4  
Telephone Lines in Service(2)
    22,920       23,119       23,130       22,132       20,090  
Telephone Lines per 100 Population
    47.5       47.9       47.7       45.5       41.2  
 
 
(1) Source: National Statistical Office of Korea.
 
(2) Source: KCC.


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The Korean telecommunications industry is one of the most developed in the world in terms of wireless penetration and in terms of the growth of wireless data services, including wireless Internet services. The wireless penetration rate, which is calculated by dividing the number of wireless subscribers by the population, was 98.4% as of December 31, 2009 and the number of wireless subscribers has increased from approximately 3.2 million in 1996 to approximately 47.9 million as of December 31, 2009.
 
Since the introduction of short text messaging in 1998, Korea’s wireless data market has grown rapidly. This growth has been driven, in part, by the rapid development of wireless Internet service since its introduction in the second half of 1999. All of the Korean wireless operators have developed extensive wireless Internet service portals. As of December 31, 2009, approximately 46.3 million of Korean wireless subscribers owned Internet-enabled handsets capable of accessing wireless Internet services. The table below sets forth certain penetration information regarding the number of Internet-enabled handsets and wireless subscribers in Korea as of the dates indicated:
 
                                         
    As of December 31,
    2005   2006   2007   2008   2009
    (In thousands)
 
Number of Wireless Internet Enabled Handsets
    37,202       38,894       41,598       42,740       46,301  
Total Number of Wireless Subscribers
    38,342       40,197       43,498       45,607       47,944  
Penetration of Wireless Internet Enabled Handsets
    97.0 %     96.8 %     95.6 %     93.7 %     96.6 %
 
 
Source: KCC.
 
In addition to its well-developed wireless telecommunications sector, Korea has one of the largest Internet markets in the Asia Pacific region. According to National Internet Development Agency of Korea, or NIDA, the number of Internet subscribers in Korea increased from approximately 3.1 million at the end of 1998 to approximately 36.6 million at the end of 2009, representing a 2.6% compound annual growth rate. From the end of 2005 to the end of 2009, the number of broadband Internet access subscribers increased from approximately 12.2 million to approximately 16.3 million, representing a 7.6% compound annual growth rate. The table below sets forth certain information regarding Internet users and broadband subscribers as of the dates indicated:
 
                                         
    As of December 31,
    2005   2006   2007   2008   2009
    (In thousands)
 
Number of Internet Users(1)
    33,010       34,120       34,820       35,360       36,580  
Number of Broadband Subscribers(2)
    12,191       14,043       14,709       15,475       16,349  
 
 
(1) Source: NIDA.
 
(2) Source: KCC. Includes subscribers accessing Internet service using digital subscriber line, or xDSL, connections; cable modem connections; local area network, or LAN, connections; and satellite connections.
 
Item 4.B.   Business Overview
 
Overview
 
We are Korea’s leading wireless telecommunications services provider and continue to pioneer the commercial development and implementation of state-of-the-art wireless technologies. We provide the following core services:
 
  •  Cellular voice services.  We provide wireless voice transmission services to our subscribers through our backbone cellular networks and also offer wireless global roaming services through service agreements with various foreign wireless telecommunications service providers. (Accordingly, while “cellular voice services” principally refer to our core wireless voice transmission services, they also comprise our wireless voice and data global roaming services.)


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  •  Wireless data services.  We also provide wireless data transmission services, including wireless Internet access services, which allow subscribers to access a wide range of online digital contents and services, as well as to send and receive text and multimedia messages, using their mobile phones.
 
  •  Broadband Internet and fixed-line telephone services.  Through our consolidated subsidiary, SK Broadband, we provide broadband Internet access service and other Internet-related services, including video-on-demand and IP TV services. Through SK Broadband, we also provide local, domestic long-distance and international long-distance fixed-line telephone services to residential and commercial subscribers. We currently own a 50.6% equity interest in SK Broadband following our acquisition of a 7.2% equity stake in the company in September 2009.
 
  •  Digital convergence and new businesses.  We have pioneered new services that reflect the growing convergence within the telecommunications sector, as well as between the telecommunications sector and other industries, including satellite digital media broadcasting, or satellite DMB, service, which enables satellite broadcasting to mobile devices, and “Telematics” service, which makes use of global positioning system, or GPS, technology.
 
We provide our wireless services through our proprietary backbone networks based on CDMA and WCDMA technologies. We also offer wireless data transmission and wireless Internet access services through our WiBro network. For more information on our backbone networks, see “— Digital Cellular Network”.
 
Our Business Strategy
 
We believe that trends in the Korean telecommunications industry during the next decade will mirror those in the global market and will be characterized by rapid technological change, reduced regulatory barriers and increased competition. Against the backdrop of these industry trends, we aim to enhance shareholder value by maintaining and consolidating our leading position in the Korean market for wireless services, including wireless voice and data transmission services, as well as by leveraging our competitive strengths to exploit new opportunities arising from increasing digital convergence and the globalization of the telecommunications market.
 
Our principal strategies are to:
 
  •  Enhance the technical capabilities of our wireless networks to improve data transmission rates and service quality and to offer an increased range of services, including in connection with our development of new and advanced wireless technologies.   We believe we have the most extensive and advanced wireless telecommunications network in Korea, and we are committed to ensuring that our delivery platforms keep pace with the latest technological advancements. In March 2007, we completed the nationwide build-out of our HSDPA-capable WCDMA network. We are currently further upgrading our WCDMA network to support HSUPA technology and expanding the coverage area of our WiBro service, as well as introducing evolved high speed packet access, or HSPA+, service by the end of the year 2010. We plan to continue upgrading and expanding our backbone network infrastructure in line with new developments in wireless telecommunications technology. We believe that ensuring the quality and technical sophistication of our wireless networks will, among other things, allow us to provide our subscribers with top-quality service, to introduce the latest wireless telecommunications products and services more quickly and to efficiently implement new wireless technologies as market opportunities arise.
 
  •  Drive the growth of wireless Internet in Korea.  We aim to lead the smartphone market by providing more than 2 million units of smartphone handsets this year and releasing more than 20 smartphone models. We plan to introduce smartphones from various manufacturers around the globe, including smartphones employing Android operating system. We also intend to focus on developing differentiated services and various platforms in order to achieve our goal of leading the Korean smartphone market.
 
  •  Offer a broad range of new and innovative wireless data contents and services.  We plan to improve the service quality and expand the range of our wireless data contents and services, through NATE, with a view to increasing revenues from these services to complement our core cellular revenues. In particular, we believe demand for wireless access to entertainment-related digital contents and services, wireless access to community and social networking platforms and wireless access to financial-related contents and services, or


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  “m-commerce” services, will continue to grow. We continue to actively seek partnerships with, as well as strategic investments in, digital media content providers, financial services providers and wireless application developers to improve the breadth and quality of the wireless data contents and services we offer to our subscribers.
 
  •  Expand the operation of T Store, our online application store.  T Store is an open market place to which any user can connect. We plan for T Store to be also open to, and operate with, other open markets such as the Android market and manufacturers’ open markets. This year, we plan to focus on completing the system vitalizing the use of smartphones and, in the long-term, we plan to construct an environment where outstanding developers can be nurtured and high-quality content can be produced. We intend to employ our augmented reality and other technologies in the development of content in order to differentiate ourselves from our competitors and lead the wire and wireless Internet markets by developing business models integrating the wired and wireless services.
 
  •  Leverage our extensive network infrastructure, technical know-how and leading market position to exploit opportunities that arise from an increasingly convergent era in telecommunications and to pioneer new businesses.  We believe that increasing convergence among communications technologies, as well as between the telecommunications sector and other industries, creates growth opportunities for incumbent telecommunications service providers, like us, whose existing infrastructure, know-how and extensive subscriber base provide a competitive advantage. We further believe that digital convergence will support demand for increasingly integrated products and services. We hope to create greater convergence opportunities across our various network platforms through various acquisitions, such as the acquisition of an equity stake in SK Broadband, Korea’s second largest fixed-line operator, or the acquisition of a leased-line business from SK Networks. We also plan to continue to improve our existing convergence services, such as Telematics and the satellite DMB service operated by our subsidiary, TU Media Corp.
 
  •  Pursue Industry Productivity Enhancement.  In 2009, we established the industry productivity enhancement, or IPE, business division to generate greater value and growth for both us and our customers and partners around the globe. IPE is a concept that endeavors to provide customized value-added services such as applications and solutions to clients in different businesses based on the existing network infrastructure. Building on existing infrastructures, we anticipate that value-added services to business clients will generate greater revenues compared to the current B2B business model. Once we establish prototypes categorized by business and size of the business, we intend to expand and apply such IPE models to other businesses in the same field. We are in the process of working with various clients in finance, education, health, shopping and other areas.
 
  •  Continue global expansion by seeking opportunities in overseas markets.  We participate in various overseas markets and continue to seek opportunities to expand our global business, primarily using a “start small and scale fast” expansion strategy. In light of the highly penetrated Korean wireless market, we believe that strategic expansion into overseas markets offers important opportunities for future growth.
 
Digital Cellular Network
 
We offer wireless voice and data telecommunications services throughout Korea using digital wireless networks, including a CDMA network, a CDMA 1xRTT/CDMA 1xEV-DO network, a HSDPA-capable WCDMA network and a WiBro network.
 
CDMA Networks
 
CDMA technology is a continuous digital transmission technology that accommodates higher throughput than analog technology by using various coding sequences to allow concurrent transmission of voice and data signals for wireless communication. In January 1996, we launched our first wireless network based on CDMA technology and became the world’s first to commercialize CDMA cellular service. Our CDMA-based network infrastructure has been the core platform for our wireless telecommunications business.
 
CDMA technology is currently in commercial operation in several countries including Korea, Hong Kong and the United States. A majority of the digital wireless networks currently in use around the world are based on either


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the European Global System for Mobile Communication standard or other time division multiple access technologies. Unlike the continuous digital transmission method of CDMA technology, these technologies break voice signals into sequential pieces of a defined length, place each piece into an information conduit at specific intervals and then reconstruct the pieces at the end of the conduit.
 
CDMA 1xRTT and CDMA 1x EV-DO Networks
 
In October 2000, we began offering wireless voice and data services on our CDMA 1xRTT network. CDMA 1xRTT is an advanced CDMA-based technology that allows transmission of data at speeds of up to 144 Kbps (compared to a maximum of 64 Kbps for our basic CDMA network).
 
Unlike our CDMA network, our CDMA 1xRTT network has been designed to allow upgrades in step with advances in wireless technology. In the first half of 2002, we launched an upgrade of our CDMA 1xRTT network to a more advanced technology called CDMA 1xEV-DO. CDMA 1xEV-DO is a CDMA-based technology, similar to CDMA 1xRTT, but enables data to be transmitted at speeds of up to 2.4 Mbps. This higher transmission speed permits interactive transmission of data required for videophone services, a high-speed wireless Internet connection, as well as a multitude of multimedia services. In 2004, we completed the full upgrade of our CDMA 1xRTT network to CDMA 1xEV-DO technology. For details of our capital expenditures relating to CDMA 1xRTT and CDMA 1xEV-DO, see “Item 5.B. Liquidity and Capital Resources”.
 
WCDMA Network
 
WCDMA is a 3G, high capacity wireless communication system that enables us to offer an even wider range of telecommunications services, including cellular voice communications, video telephony, data communications, multimedia services, wireless Internet connection, and automatic roaming. We commenced provision of our 3G services using our HSDPA-upgraded WCDMA network on a limited basis in Seoul at the end of 2003. In March 2005, we developed and launched dual band/dual mode handsets, to offer seamless nationwide 3G service, an important factor for a nationwide deployment of WCDMA services.
 
In 2005, we completed commercial development of HSDPA technology and integrated this technology in the subsequent build-out of our WCDMA network. HSDPA, which represents an evolution of the WCDMA standard, is a more advanced 3G technology than the initial WCDMA technology we implemented and is sometimes referred to as “3.5G” technology. In March 2007, we completed nationwide expansion of our HSDPA-capable WCDMA network, which currently reaches approximately 99% of the Korean population. Our WCDMA network enables significantly faster and higher-quality voice and data transmission and supports more sophisticated wireless data transmission services, including video telephony and other multimedia communications, than is possible through our 2G networks. In June 2007, we began HSUPA upgrades to our WCDMA network, which is currently in progress. HSUPA technology represents the next stage in the evolution of the WCDMA standard. In particular, while HSDPA enables significantly improved downlink data transmission speeds, HSUPA permits faster uplink speeds. We plan to introduce more evolved high speed packet access, or HSPA+, service by the end of the year 2010. Our implementation of HSDPA, HSUPA and HSPA+ technology will allow us to offer significantly improved, and a wider range of, wireless data transmission services, including more sophisticated multimedia digital contents and products. We also plan to continue enhancing our 3G service quality in 2010, including through the installation of additional small cell sites or cellular repeaters to improve reception quality in subterranean areas, buildings or any remaining “blind spots” where reception quality may not be optimal. For more information about our capital expenditures relating to our WCDMA-based network, see “Item 5.B. Liquidity and Capital Resources”, and for more information about risks relating to our WCDMA-based network, see “Item 3.D. Risk Factors — Implementation of 3G and WiBro technologies has required, and may continue to require, significant capital and other expenditures, which we may not recoup”.
 
WiBro
 
We received a license from the MIC in 2005 to provide wireless broadband, or WiBro services, which we believe will complement our existing networks and technologies. WiBro is a data-only transmission technology that enables high-speed wireless broadband access to portable computers, mobile phones and other portable devices. We


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conducted initial pilot testing of WiBro service in limited areas of metropolitan Seoul in May 2006 and currently service “hot zone” areas in 84 cities.
 
Network infrastructure
 
The principal components of our wireless networks are:
 
  •  Cell sites, which are physical locations equipped with transmitters, receivers and other equipment that communicate by radio signals with wireless handsets within range of the cell (typically a 3 to 40 kilometer radius);
 
  •  Switching stations, which switch voice and data transmissions to their proper destinations, which may be, for instance, a mobile phone of one of our subscribers (for which transmissions would originate and terminate on our wireless networks), a mobile phone of a KT Corporation or LGT subscriber (for which transmissions would be routed to KT Corporation’s or LGT’s wireless networks, as applicable), a fixed-line telephone number (for which calls would be routed to the public switched telephone network of a fixed-line network operator), an international number (for which calls would be routed to the network of a long distance service provider) or an Internet site; and
 
  •  Transmission lines, which link cell sites to switching stations and switching stations with other switching stations.
 
As of December 31, 2009, our CDMA, CDMA 1RTT, CDMA 1xEV-DO, WCDMA and WiBro networks had an aggregate of 15,979 cell sites.
 
We have purchased our principal digital wireless equipment for our CDMA networks from LG Electronics and Samsung Electronics. We have purchased substantially all of the equipment for our CDMA 1xRTT and CDMA 1xEV-DO networks from Samsung Electronics and have purchased substantially all of the equipment for our WCDMA network, including the software and firmware used to implement HSDPA and HSUPA upgrades, from Samsung Electronics and LG Nortel. We have purchased substantially all of the equipment for our WiBro network from Samsung Electronics.
 
Most of the transmission lines we use, including virtually all of the lines linking switching stations, as well as a portion of the lines linking cell sites to switching stations, comprise optical fiber lines that we own and operate directly. However, we have not undertaken to install optical fiber lines to link every cell site and switching station. In places where we have not installed our own transmission lines, we have leased lines from SK Networks, KT Corporation and, to a lesser extent, SK Broadband and LG Powercomm. In September 2009, we acquired a leased-line business and related ancillary businesses from SK Networks for Won 892.75 billion. We intend to increase the efficiency of our network utilization and provide optimal services by internalizing transmission lines.
 
We use a cellular network surveillance system. This system oversees the operation of cell sites and allows us to monitor our main equipment located throughout the country from one monitoring station. The automatic inspection and testing provided to the cell sites lets the system immediately rebalance to the most suitable setting, and the surveillance system provides automatic dispatch of repair teams and quick recovery in emergency situations.
 
Our Services
 
We offer wireless digital voice and data transmission services via networks that collectively can access approximately 99% of the Korean population. We continually upgrade and increase the capacity of our wireless networks to keep pace with advancements in technology, the growth of our subscriber base and the increased usage of voice and wireless data services by our subscribers.
 
For a discussion of our backbone networks, see “— Digital Cellular Network” above.
 
Cellular Voice Services
 
Our cellular voice services, which comprise basic wireless voice transmission services and related “value-added” services, as well as global roaming services, remain our core business area. We derive revenues from our


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cellular voice services principally through initial subscription fees, plan-specific monthly fees, usage fees and value-added service fees. For a more complete description of the fees we charge, see “— Revenues, Rates and Subscription Deposits” below.
 
To complement our basic voice transmission services, in recent years, we have begun to offer increasingly sophisticated and differentiated subscriber-oriented value-added services made possible due to rapid advancements in network technology. Our most popular value-added voice-related services in 2009 included services that provide a record of missed calls in the event a subscriber’s mobile phone is engaged or switched off, known as our “Call Keeper” service; services that play a “ring back” melody in lieu of a conventional dial tone when callers dial a subscriber’s mobile phone, known as “COLORing” service, as well as COLORing services that periodically change the default ring-back melody according to the subscriber’s music category selection, known as “Auto COLORing” service, and services that alert subscribers when a dialed number that was engaged when first dialed is no longer engaged.
 
We also offer cellular global roaming services, branded as our “T-Roaming” service, through service agreements with various foreign wireless telecommunications service providers. Global roaming services allow subscribers traveling abroad to make and receive calls, often using their regular mobile phone numbers. Subscribers using EV-DO- and WCDMA-capable handsets are able to make and receive calls using their regular mobile phone number without changing their handsets. In addition, we provide global roaming service to foreigners traveling to Korea. In such cases, we generally receive a fee from the traveler’s local wireless service provider.
 
Our global roaming service is offered in three basic technologies, in part depending on which mobile phone standards are available in a particular region: CDMA, GSM and WCDMA roaming. We currently offer CDMA voice roaming services in 21 countries, including countries in Asia, North and South America, as well as, Guam, Saipan and New Zealand; GSM voice roaming services in 182 countries, including countries in Europe, North America, Africa, the Middle East and Asia; and WCDMA voice roaming services in 72 countries, including countries in Asia, Europe, the Middle East, Africa and Australia. In addition, we offer global data roaming services in 85 countries, including countries in Asia, Europe, North and South America, the Middle East and Africa. In 2009, approximately 5.6 million subscribers utilized our global roaming services. The global roaming service we provide to foreigners visiting Korea is generally WCDMA-based.
 
In addition, we provide interconnection service to connect our networks to domestic and international fixed-line and other wireless networks. See “— Interconnection” below.
 
Wireless Data Services (including Wireless Internet Services)
 
We plan to take advantage of the efficiency of our wireless network in order to enable our clients to easily access the Internet. We are in the process of expanding our main 3G network and upgrading HSPA+ for commercialization by the end of 2010. We also continue to invest in our Wi-Fi network by, among other things, utilizing WiBro as a backhaul. In particular, we plan to establish Wi-Fi zones in more than 10,000 spots in public areas such as shopping malls, coffee shops and airports where, generally, the demand for Wi-Fi is high. Our goal is to achieve parity with our competitors in terms of ease of use by our clients. We will also provide differentiated services in the Wi-Fi zones such as granting free access to the wirelss NATE portal.
 
We intend to position ourselves as a leader in the smartphone market by providing more than 2 million units of smartphone handsets and more than 20 smartphone models, including those employing Android operating system, from competitive domestic manufacturers as well as various manufacturers around the globe.
 
As it becomes common for a user to own multiple mobile electronic devices, we have implemented a “one person, multi device” system whereby we provide comprehensive services and subscription plans that cover a subscriber’s use of multiple mobile devices. We will consider implementing various other innovative systems to accommodate our clients’ needs.
 
We plan for T Store to be open to, and operate with, other open markets such as the Android market and manufacturers’ open market. We intend to contribute to the vitalization of the wireless interest contents by employing our augmented reality technology in the content development and participating in the development of an integrated application store in Korea.


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SMS and MMS Services.  We provide wireless data communication services, including our basic short text message service, or SMS, which allows subscribers to send and receive short text messages to and from their mobile phones. SMS, which is also known as our “phone mail” service, continues to be one of our most popular data transmission services. In addition to text-only SMS, we also offer a multimedia message service, or MMS. MMS allows subscribers to send and receive multimedia messages containing graphic, audio and video clips to and from their mobile phones. While MMS is possible through our CDMA 1xEV-DO network, the implementation of WCDMA technology has significantly increased the quality, speed and range of our multimedia message services.
 
Wireless Internet Services.  In addition to our wireless data communications services, we also offer our subscribers wireless access to the Internet, primarily through our “NATE” portal, which is our integrated wired and wireless Internet platform that utilizes wireless application protocol, or WAP, technology, to provide a gateway between our cellular network and the Internet. Through our NATE portal, subscribers can access a wide variety of multimedia contents and interactive services, as well as send and receive email and instant text and multimedia messages, using their mobile phones and other wireless devices. As of December 31, 2009, approximately 23.3 million, or 95.9%, of our subscribers owned Internet-enabled handsets capable of accessing our wireless Internet services.
 
  •  Wireless Entertainment and Community Services:  We offer our subscribers a wide range of wireless entertainment-related contents and services, primarily through content-specific portal sites that we operate, including:
 
  •  MelOn, a music portal operated by our consolidated subsidiary, Loen Entertainment, Inc., that provides wireless access to a wide range of digital music contents. To aggregate and manage our digital music contents offerings, we also operate an integrated wireless and fixed-line MelOn website, which subscribers can access using wireless devices, such as their mobile phones and MP3 players, as well as fixed-line devices, such as personal computers. As of December 31, 2009, we had approximately 14.5 million subscribers to our MelOn service;
 
  •  Gaming Services, which we offer subscribers through our NATE portal. For example, we offer a variety of multi-player, interactive mobile games, as well as animation-based mobile games. In addition, we also offer 3D mobile games that subscribers can download to mobile phones and other wireless devices equipped with a mobile gaming-specific chip;
 
  •  Cizle, a movie portal, which provides subscribers access to a broad range of movie-related contents. As with our MelOn service, we operate an integrated wireless and fixed-line Cizle website, which subscribers can access using both wireless and fixed-line devices. Subscribers can also purchase movie tickets, check theater schedules and purchase video-on-demand contents through our Cizle portal;
 
  •  Mobile Cyworld, a wireless web community portal site, which is a mobile version of the Cyworld community site operated by our subsidiary, SK Communications Co., Ltd. For a more detailed description of the fixed-line Cyworld portal, see “— Other Products and Services — Other Portal Services — Community Portal Service”; and
 
  •  June, a wireless multimedia content data service that provides streaming content, primarily using our CDMA 1xEV-DO technology. Content provided through the June service includes digital video and music downloads and television programs, which can be viewed real-time. June subscribers with EV-DO- or WCDMA-capable handsets can also access the Internet through NATE.
 
  •  Wireless Financial and Commercial Services:  We also offer our subscribers a range of wireless finance-related contents and m-commerce services. Our wireless financial businesses include:
 
  •  Moneta, a financial portal that allows subscribers to use their mobile phones to access an array of financial contents and services relating to securities trading, insurance, real estate and personal asset management;
 
  •  T-cash, a mobile payment technology that allows subscribers to use their mobile phones to pay for public transportation fares in lieu of cash payment or pre-paid transportation cards and to make payments at certain affiliated stores. T-cash requires a WCDMA-capable handset with a built-in universal subscriber identity module, or USIM, card;


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  •  M-Banking, a banking portal, which provides access to certain electronic banking services operated by participating commercial banks, and, accordingly, enables subscribers to perform certain banking transactions, such as account inquiries, wire transfers and credit card payments, through their mobile phones;
 
  •  11th Street, an online shopping mall that links wired and wireless shopping services. As of March 31, 2010, 11th Street had strengthened its position as one of the three biggest enterprises in its field. In 2010, we intend to continue to expand and reinforce our new businesses to capitalize on future commerce markets such as m-Commerce and m-Payment markets;
 
  •  For a discussion of T Store, see “— Our Business Strategy”; and
 
  •  Gifticon, a service that allows users to pay for and give gifts using their mobile phone. Payments are settled wirelessly and recipients are notified of their gifts by instant messaging or via our NATE data service.
 
  •  Wireless News and Search Services:  We offer our subscribers a range of wireless news and search services, including access to domestic and international news content, dictionary resources and real-time weather information. Subscribers can also search for and purchase books, DVD’s, CDs and lottery tickets, as well as download discount coupons for use at offline stores.
 
Broadband Internet and Fixed-line Telephone Services
 
In March 2008, we completed the acquisition of an additional 38.7% equity stake in SK Broadband for approximately Won 1.1 trillion, increasing our total equity interest in SK Broadband to 43.4%. In 2009, we purchased additional shares of SK Broadband’s common stock, further increasing our equity interest to 50.6%. Through SK Broadband, we currently provide broadband Internet access service and other Internet-related services, including video-on-demand and IP TV services, as well as fixed-line telephone services.
 
SK Broadband is the second largest provider of broadband Internet access services in Korea in terms of both revenue and subscribers, and its network covers 83% of households in Korea as of December 31, 2009. Its fixed-line telephone services comprise local, domestic long distance, international long distance and voice over Internet Protocol, or VoIP, services. VoIP is an advanced technology that transmits voice data through an Internet Protocol network. SK Broadband has offered video-on-demand services since 2006 and has rolled out real-time IP TV services since January 2009. For the year ended December 31, 2009, SK Broadband had revenues of Won 1,894.0 billion and net loss of Won 191.2 billion.
 
As of December 31, 2009, SK Broadband had approximately 3.8 million broadband Internet access subscribers. Its market share of Korean broadband Internet access subscribers was approximately 23.5%. Broadband Internet access services (including revenues from video-on-demand services) accounted for 55.5% of SK Broadband’s revenues for the year ended December 31, 2009.
 
As of December 31, 2009, SK Broadband had 1.7 million fixed-line telephone subscribers. Since the nationwide implementation of fixed line number portability on August 1, 2004, SK Broadband has been expanding the coverage and subscriber base with its integrated services of long distance and international telephony as well as VoIP services. Fixed-line telephone services accounted for 29.1% of SK Broadband’s revenues for the year ended December 31, 2009.
 
Digital Convergence and New Businesses
 
We believe that digital convergence is the new paradigm in telecommunications. While we acknowledge as a potential threat the increasing equivocation of conventional industry boundaries and the entrance of non-traditional players into the mobile communications space, we also view convergence as a significant growth opportunity. We believe that incumbent telecommunications service providers, like us, with existing advanced infrastructure, technical know-how and a large subscriber base, are especially well positioned to pioneer new “convergent” businesses. In recent years, we have focused on developing cross-over services that provide synergies with our existing business.


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One of our recent efforts to pursue new opportunities in the convergence business area is our acquisition of an equity stake in SK Broadband, as described above. In order to solidify our presence in the fixed-mobile convergence marketplace, in September 2009, we also acquired the leased line business of SK Networks. We are hoping to continue to benefit from a range of synergies from these acquisitions, including by offering our customers bundled fixed-line and mobile telecommunications services. We also believe the acquisitions create opportunities to aggregate and broadcast digital content across various media platforms.
 
In February 2010, we purchased shares newly issued by Hana Card Co., Ltd., a credit card and related services provider, for the total purchase price of Won 402 billion. As a result, we currently hold 49.0% of the total outstanding shares of Hana Card. We expect that this acquisition of shares will enable us to provide cross-over services between telecommunication and finance.
 
For a discussion of IPE, see “— Our Business Strategy.”
 
Our other convergence services include:
 
Satellite DMB Business.  In September 2003, we entered into an agreement with Mobile Broadcasting Corporation for the purposes of co-owning and launching a satellite for the satellite DMB business. Under the terms of the agreement, we committed to fund 34.7% of the cost of launching and maintaining the operations of the satellite. The aggregate acquisition cost of the satellite was approximately Won 205.2 billion, of which we committed to pay Won 71.2 billion. DMB technology allows broadcasting of multimedia content through transmission by satellite to various mobile devices. For example, DMB technology allows users to view satellite television broadcasts on mobile phones, portable handsets or vehicle-mounted televisions that are enabled to receive DMB transmission. TU Media is currently developing new convergence services that combine wireless telecommunications technologies with traditional broadcasting contents, advertising contents and retail services. We believe that this business will enable us to improve the breadth of wireless multimedia services that we already offer and to remain competitive in the face of increasing convergence in the telecommunications and broadcasting industries.
 
We launched a satellite DMB in March 2004. In October 2004, we granted the right to use the satellite DMB to our then-affiliate, TU Media. TU Media began to provide commercial satellite DMB services in May 2005 and today remains Korea’s sole operator of satellite digital mobile broadcasting services. TU Media currently offers a range of broadcast content including education, games, drama, music, news and culture over more than 36 channels, including TUBOX, a pay-per-view movie channel that broadcasts movies before their DVD release. As of December 31, 2009, TU Media had more than 2.1 million subscribers.
 
In February 2007, we purchased 4,615,798 new shares of TU Media for Won 32.4 billion, increasing our equity interest to 32.7%. Following this equity investment, TU Media became our consolidated subsidiary. In March 2008, we made an additional Won 55.0 billion capital contribution to TU Media, increasing our equity interest to 44.2%. We are currently TU Media’s largest shareholder.
 
Telematics Service.  In February 2002, we introduced a Telematics service called T-Map Navigation. T-Map Navigation is an interactive navigation service that uses GPS technology and our NATE platform to transmit driving directions, real-time traffic updates and emergency rescue assistance to wireless devices, including vehicle-mounted devices and portable handsets.
 
We believe that Telematics also creates opportunities for synergy between mobile telecommunications and other industries. Under an agreement entered into in April 2002 with Renault Samsung Motors and Samsung Electronics, we are co-developing a customized Telematics system for use in Renault Samsung vehicles. The implementation of more advanced 3G transmission technologies has also facilitated the increased integration of our wireless platforms customized for vehicular use and, in particular, created synergies between our Telematics services and satellite DMB broadcasting services. We offer bundled Telematics and satellite DMB broadcasting services through a single, integrated vehicle-mounted device.


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Global Business
 
We participate in various overseas markets and continue to seek opportunities to expand our global business, primarily using a “start small and scale fast” expansion strategy.
 
United States.  On March 24, 2005, we entered into a joint venture with EarthLink Inc., a major Internet services provider in the United States, and formed HELIO, LLC, a Delaware limited liability company, to provide wireless voice and data services in the United States. We and EarthLink Inc. made a combined investment in HELIO of US$440 million in cash and non-cash assets. In 2007 and the first half of 2008, we made additional equity contributions of US$160 million in aggregate to HELIO.
 
In August 2008, together with EarthLink, we sold our equity interest in HELIO to Virgin Mobile USA, Inc., a provider of wireless communications services in the United States that was founded as a joint venture between Sprint Nextel Corporation and the Virgin Group, in exchange for limited partnership units of Virgin Mobile USA, L.P. (Virgin Mobile USA, Inc.’s operating company), which were valued at approximately US$31 million at the time of sale. In December 2008, we exchanged all of our limited partnership units of Virgin Mobile USA for approximately 11 million shares of Virgin Mobile USA, Inc.’s Class A common stock.
 
In connection with the sale of HELIO, we and the Virgin Group each invested US$25 million of equity capital in Virgin Mobile USA, Inc. in exchange for mandatory convertible preferred stock, convertible into Virgin Mobile USA, Inc.’s Class A common stock. On November 24, 2009, Virgin Mobile USA, Inc. merged with Sprint Nextel Corporation. Pursuant to the terms of the merger, all of the shares of Class A common stock owned by us, including Class A common stock issuable upon conversion of the preferred stock, were converted into the right to receive shares of series 1 voting common stock of Sprint Nextel Corporation. We received 1.2279 shares of such series 1 voting common stock of Sprint Nextel Corporation per one share of Class A common stock of Virgin Mobile USA, Inc. and cash in lieu of fractional shares.
 
Since December 2004, we have been also offering our COLORing solution to Verizon Wireless, a major mobile phone service provider in the United States. As an application service provider, we receive a previously agreed percentage of Verizon’s COLORing service related revenues.
 
China.  In February 2004, we and China Unicom, the second largest telecom operator and the only CDMA-based telecommunications service provider in China, established a joint venture company called UNISK Information Technology Co., Ltd., with an aggregate initial investment of approximately US$6 million. We owned a 49% stake of UNISK and China Unicom held a 51% stake. In addition, on July 5, 2006, we purchased US$1 billion in aggregate principal amount of zero coupon convertible bonds issued by China Unicom, convertible into common shares of China Unicom. In August 2007, we converted such bonds into shares representing a 6.6% equity interest in China Unicom to become China Unicom’s second-largest shareholder. In October 2008, China Unicom merged with China Netcom Group Corporation (Hong Kong) Limited, a leading broadband communications and fixed-line telecommunications operator in China. As a result of the merger, our equity interest in China Unicom, which is the surviving entity after the merger, decreased to 3.8% from 6.6%. On November 5, 2009, we sold all of the shares of the common stock of China Unicom held by us to China Unicom. We no longer hold any shares in China Unicom.
 
In July 2004, we, through our subsidiary U-Land Company Ltd., acquired ViaTech, an Internet portal service and mobile content provider in China, to enhance our wireless Internet content and expand our service area. Through ViaTech, we offer a Chinese-language version of Cyworld to users in China. ViaTech had more than 8 million registered users of Cyworld as of December 31, 2009.
 
In August 2006, we entered into a memorandum of understanding with China’s National Development and Reform Commission to assist China develop TD-SCDMA technology, China’s 3G standard. To support joint research and development in 3G multimedia services, value-added services and development of the TD-SCDMA network, we and the Chinese government established a research and development center in Beijing in February 2007. To further facilitate the commercialization and implementation of TD-SCDMA, we also opened a TD-SCDMA test center in Bundang, Korea in April 2007.
 
In February 2008, through our wholly-owned Chinese subsidiary, SK Telecom China Holding Company, we invested US$15.6 million to acquire a 65.5% equity interest in Shenzhen E-eye High Tech Co., Ltd., a global


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positioning system service company in China. We believe the acquisition of Shenzhen E-eye High Tech allows us to leverage opportunities created by the rapidly growing telematics market in China.
 
In March 2008, we acquired a 42.2% equity interest in TR Music, a major record label in China, for US$10.7 million. In addition, in May 2008 we invested US$7.8 million to acquire a 30.0% equity interest in Magic Tech Network, a Hong Kong company that develops and publishes online games in China.
 
Mongolia.  In July 1999, we acquired a 27.8% equity interest in Skytel Co., Ltd., Mongolia’s second-largest cellular service provider, by providing approximately Won 1.5 billion worth of analog infrastructure. We, together with Skytel, have been providing cellular service in Mongolia since July 1999, and CDMA service since February 2001. In April 2001, we completed installation of the equipment necessary to provide WAP service. In December 2002, we increased our equity interest in Skytel to 28.6% through the subscription of newly issued common shares in return for an additional investment of approximately US$500,000. As of December 31, 2009, our equity interest in Skytel was 29.3%.
 
Malaysia.  In May 2010, our board of directors approved a $100 million investment in Packet One, or P1, a Malaysian 4G WiMAX Telecommunications company and subsidiary of Green Packet Berhad. Pending the signing of the proposed agreement, we are to become a significant minority shareholder with approximately a 25% stake in P1. P1 is the first WiMAX service provider in the country which has established itself as the market leader in high-speed wireless broadband services. We also consider such investment in P1 as groundwork for our IPE business expansion abroad and expect the strategic relationship with P1 to create powerful synergies, attracting potential IPE customers and business partners in the process.
 
Regional and International Strategic Alliances.  We have also entered into various strategic alliances with leading companies in the Asian and European wireless telecommunications markets. For instance, we are a member of the Bridge Alliance, the largest pan-Asian alliance of its kind, which includes eleven of the region’s leading wireless service providers. In June 2007, we also signed a memorandum of understanding with the Freemove Alliance, an alliance of leading European wireless service providers, including Orange SA of France, Telecom Italia Mobile S.p.A. of Italy, T-Mobile International AG & Co. AG of Germany and Teliasonera Mobile Networks AB of Sweden, for the development of expanded WCDMA-based roaming service in Europe. We plan to continue to improve customer service as well as service quality, by developing co-marketing programs and other joint projects with our regional and global partners and by further fostering our regional and international alliances.
 
Provision of Wireless Internet Platforms and Cellular Network Solutions to Foreign Cellular Network Operators.  We have also sought to expand our global business through sales of our wireless Internet platforms and cellular network solutions, as well as provision of consulting services in the field of mobile communications. In addition, we have also been successful in exporting to other Asian countries and the United States the technological solutions underlying certain value-added and other wireless services, such as our color mail solution, which is a messaging service that allows subscribers to send messages containing multimedia files including graphic, audio and video clips.
 
Other Products and Services
 
International Calling Services.  Through our 90.8% owned subsidiary, SK Telink Co., Ltd., we provide international telecommunications services, including direct-dial as well as pre- and post-paid card calling services, bundled services for corporate customers, voice services using Internet protocol, Web-to-phone services, and data services. SK Telink provides affordable international call services under the brand name “00700” and has been offering commercial long-distance telephony service since February 2005. SK Telink also operates certain value-added domestic telephone services, including a “080” service that allows companies to establish “toll-free” customer service telephone hotlines, for which all call charges would be paid by the company, as well as a “general corporate number” service that automatically routes calls made to a company’s general telephone number to the caller’s nearest local branch.
 
Other Portal Services.
 
  •  Fixed-line NATE portal service.   Our subsidiary, SK Communications, offers a fixed-line portal service under our “NATE” brand name and at the website www.NATE.com. NATE.com includes information and


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  content formerly offered under our Netsgo brand as well as the content and services formerly available on Lycos Korea, which our subsidiary, SK Communications, acquired in 2002. NATE.com offers a wide variety of content and services, including an Internet search engine, as well as access to free e-mail accounts. SK Communications also operates NATE-ON, an instant messaging service available to NATE users. NATE-ON allows users to chat online using a variety of wireless, as well as wired, devices, such as mobile phones, personal digital assistants and portable computers.
 
  •  Community Portal Service.   “Cyworld”, also operated by SK Communications, is one of the most popular online community portal services in Korea. Cyworld is a social networking site that encompasses an ever-expanding virtual forum where users can meet to exchange information and ideas and share multimedia contents, including through the publication of personal homepages and blog sites. We have also sought to expand our global reach by launching Cyworld service in overseas markets, including the United States, Japan, China and Taiwan. While retaining many aspects of the original Korean version that make Cyworld unique among social networking sites, we have redesigned foreign versions of Cyworld to make it more appealing to local audiences. As of December 31, 2009, our Cyworld portal service had over 34 million registered users globally. In March 2004, we launched “Mobile Cyworld”, allowing wireless subscribers to access the Cyworld portal community site through their cellular phones. In September 2009, we launched an application store on Cyworld.
 
In November 2007, SK Communications merged with Empas Corp., an Internet search engine and portal site. We believe the merger created valuable convergence synergies among our NATE, Cyworld and Empas services. In 2009, we merged Cyworld into Nate.com, and as a result, the search traffic on Nate.com grew substantially.
 
Revenues, Rates and Subscription Deposits
 
Our wireless revenues are generated principally from initial subscription fees, monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services, value-added-service fees and interconnection revenue. The following table sets forth information regarding our cellular revenues (net of taxes) and facility deposits for the periods indicated:
 
                         
    As of or for the Year Ended December 31,
    2007   2008   2009
    (In billions of Won)
 
Initial Subscription Fees
  W 387.8     W 400.2     W 403.8  
Monthly Fees
    3,949.8       4,348.0       4,945.0  
Usage Charges(1)
    5,598.4       5,473.0       5,192.7  
Interconnection Revenue
    1,062.2       1,149.2       1,245.4  
Revenue from Sales of Digital Handsets
                185.3  
Other Cellular Revenue(2)
    17.9       19.4       61.9  
Total
  W 11,016.1     W 11,389.8     W 12,034.1  
Additional Subscription Deposits
  W 2.4     W 2.7     W 2.7  
Refunded Subscription Deposits
    17.1       4.3       2.1  
Subscription Deposits at Period End
    6.4       4.8       5.4  
 
 
(1) Usage charges principally include revenues from monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services, value-added-service fees, as well as international charges and interest on overdue subscriber accounts (net of telephone tax).
 
(2) Other cellular revenue includes revenue from the sale and licensing of Internet platform solutions.
 
We charge our new customers an initial subscription fee for initial connection and service activation. In addition to the initial subscription fee, we require our customers to pay monthly plan-based fees, usage charges for outgoing voice calls and usage charges for wireless data services. We do not charge our customers for incoming calls, although we do receive interconnection charges from KT Corporation and other companies for calls from the fixed-line network terminating on our networks and interconnection revenues from other wireless network


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operators. See “— Interconnection”. Monthly plan-based fees for some plans include free airtime and/or discounts for designated calling numbers. We bill subscribers on a monthly basis and subscribers may make payment at a bank, post office, any of our regional headquarters or sales offices, or at any of our authorized dealers.
 
We offer a variety of differentiated Standard Rate Plans that are designed to meet a wide range of subscriber needs and interests. Popular Standard Rate Plans include our couples discount plan, region discount plan and friends and family discount plan. The basic monthly fee for our Standard Rate Plans ranges from Won 12,000 to Won 110,000.
 
In addition, we offer optional “add-on” service plans, which may supplement the basic service plan a subscriber has chosen, including:
 
  •  Data Plans, which target subscribers with high usage patterns for wireless data transmission and wireless Internet services. We offer various Data Plans that provide wireless data services for monthly fees ranging from Won 3,500 to Won 19,000.
 
  •  Videoconferencing Plans, for subscribers to our 3G services, which we provide primarily using our WCDMA and CDMA EV-DO network. The basic monthly fee for our WCDMA and CDMA EV-DO Videoconferencing Plans ranges between Won 3,500 and Won 9,000 and between Won 5,000 and Won 30,000, respectively.
 
We began to provide Caller ID service to customers free of charge commencing January 1, 2006. In January 2007, we reduced our usage fees for wireless Internet services by 30% and in October 2007 we began providing 50% discount on usage fees between our subscribers for a fixed payment of Won 2,500 per month. In addition, in January 2008 we reduced our SMS usage charges from Won 30 per message to Won 20 per message. In March 2008, we reduced usage charges for voice calls between family members by 50%. In November 2009, we also adopted various tariff reduction measures, including a reduction of the initial subscription fee from Won 50,000 to Won 36,000 and an increase in discounts for long-term subscribers. In March 2010, we began to charge voice calls on a per-second basis, rather than per ten seconds as previously charged, and effectively reduced the usage charges. See “Item 5.A. Operating Results — Overview”.
 
For all calls made from our subscribers’ handsets in Korea to any destination in Korea, we charge usage fees based on a subscriber’s cellular rate plan. The fees are the same whether the call is local or long distance. With respect to international calls placed by a subscriber, we bill the subscriber the international rate charged by the Korean international telephone service provider through which the call is routed. We remit to that provider the international charge less our usage charges. See “— Interconnection”.
 
We offer a variety of value-added services, including our ring back tone (COLORing), Auto COLORing, Call Keeper and Perfect Call services. Depending on the rate plan selected by the subscriber, the monthly fee may or may not include these value-added services, except Caller ID and call waiting services, which are offered free of charge to all beginning subscribers.
 
We offer wireless Internet access services to our subscribers through NATE. Subscribers using our CDMA network may elect to pay a monthly fee, which includes a fixed amount of airtime or data packets, or may elect to pay on a variable, usage basis. A subscriber using our CDMA 1xRTT and CDMA 1xEV-DO networks is charged based on the amount of data that is transmitted to such subscriber’s handset. Subscribers using our WCDMA network are also charged based on the amount of data transmitted. The data transmitted is measured in packets of 512 bytes. We charge Won 4.55 per text packet, Won 0.9 per multimedia packet for large volume data transfers, and Won 1.75 per multimedia packet for smaller volume data transfers. In addition, we charge subscribers for purchases of certain digital contents and for certain wireless services, such as m-commerce transaction services.
 
Until February 2007, we generally required new subscribers (other than certain corporate and Government subscribers) to pay a non-interest bearing subscription deposit of Won 200,000, which we utilized to offset a defaulting subscriber’s outstanding account balance. Since March 2007, we generally no longer require new subscribers to pay the subscription deposit. We refund the subscription deposit to any existing subscriber who had initially made a subscription deposit and later requests such subscription deposit to be refunded. As a result of the subscription insurance program and the termination of the subscription deposit requirement, we have refunded a


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substantial amount of subscription deposits, and subscription deposits decreased from Won 21.1 billion as of December 31, 2006 to Won 5.4 billion as of December 31, 2009. We do not expect to have to refund a significant amount of subscription deposits in the future, because we believe that most of our subscribers who wish to have the subscription deposit refunded have already done so.
 
Because we have been designated by the KCC as a “market dominant service provider”, any modification to our fees, charges or the terms and condition of our service, including promotional rates and subscription deposits, requires prior approval by the KCC.
 
We also charge our customers a 10.0% value-added tax. We can offset the value-added tax we collect from our customers against value-added tax refundable to us by the Korean tax authorities. We remit taxes we collect from our customers to the Korean tax authorities. We record revenues in our financial statements net of such taxes.
 
Subscribers
 
We had 25 million subscribers as of April 30, 2010, representing a market share of 50.7%, the largest market share among Korean wireless service providers. We believe that, historically, our subscriber growth has been due to many factors, including:
 
  •  our expansion and technical enhancement of our networks, including with high-speed data capabilities;
 
  •  increasing consumer awareness of the benefits of wireless telecommunications;
 
  •  an effective marketing strategy;
 
  •  our focus on customer service;
 
  •  the introduction of new, value-added services, such as voicemail services, call-forwarding, Caller ID, three-way calling and wireless Internet services; and
 
  •  our acquisition of Shinsegi in January 2002.
 
The following table sets forth selected historical information about our subscriber base for the periods indicated:
 
                         
    As of or for the Year Ended December 31,
    2007   2008   2009
 
Subscribers
    21,968,169       23,032,045       24,269,553  
Subscribers Growth Rate
    8.4 %     4.8 %     5.4 %
Activations
    8,344,784       8,493,340       8,821,695  
Deactivations
    6,647,748       7,429,464       7,284,187  
Average Monthly Churn Rate(1)
    2.6 %     2.7 %     2.7 %
 
 
(1) Average monthly churn rate for a period is the number calculated by dividing the sum of deactivations during the period by the simple average of the number of subscribers at the beginning and end of the period and dividing the quotient by the number of months in the period. Churn includes subscribers who upgrade to CDMA 1xRTT or CDMA lxEV-DO-capable handsets by terminating their service and opening a new subscriber account.
 
We had 24.3 million wireless subscribers as of December 31, 2009. For the year ended December 31, 2009, we had 8.8 million activations and 7.3 million deactivations, representing an average monthly churn rate of 2.7% during the same period. Our subscribers include those subscribers who are temporarily deactivated, including (1) subscribers who voluntarily deactivate temporarily for a period of up to three months no more than twice a year and (2) subscribers with delinquent accounts who may be involuntarily deactivated up to two months before permanent deactivation, which we determine based on various factors, including prior payment history.
 
Number Portability
 
Prior to January 2003, Korea’s wireless telecommunications system was based on a network-specific prefix system, in which a unique prefix was assigned to all the phone numbers of a specific network operator. We were


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assigned the “011” prefix, and all of our subscriber’s mobile phone numbers began with “011” (former Shinsegi subscribers use the “017” prefix) and our subscribers could not change their wireless phone service to another wireless operator and keep their existing numbers. In January 2003, the MIC announced a plan to implement number portability with respect to wireless telecommunications services in Korea, allowing wireless subscribers to switch wireless service operators while retaining the same mobile phone number. As mandated by the MIC, we were the first wireless telecommunications provider to introduce number portability in January 1, 2004, allowing our customers to transfer their numbers to our competitors. Our competitors’ customers were not able to transfer their number to our service, however, until KT and LGT introduced number portability beginning July 1, 2004 and January 1, 2005, respectively. Subscribers who choose to transfer to a different wireless operator have the right to return to their original service provider without paying any penalties within 14 days of their initial transfer.
 
In 2007, 2008 and 2009, respectively, approximately 3.4 million, 3.0 million and 3.0 million subscribers switched their wireless telecommunications service provider from us to KT or LGT and approximately 3.4 million, 3.1 million and 3.1 million subscribers switched from KT or LGT to us.
 
In 2007, 2008 and 2009, respectively, we gained approximately 1.6 million, 1.0 million and 1.2 million new subscribers, which represented approximately 51.1%, 50.4% and 52.9% of the aggregate number of new wireless subscribers gained by us, KT and LGT in each year.
 
In addition, in order to manage the availability of phone numbers efficiently and to secure phone number resources for the services, the MIC has begun to integrate mobile telephone identification numbers into a common prefix identification number “010” and to gradually retract the current mobile service identification numbers which had been unique to each wireless telecommunications service provider, including “011” for our cellular services, starting from 2004. All new subscribers were given the “010” prefix starting January 2004.
 
For 2009, our churn rate ranged from 2.1% to 3.2%, with an average churn rate of 2.7% for 2009, compared to an average churn rate of 2.7% for 2008. For details regarding certain fines imposed on us by the MIC in connection with our marketing efforts related to the number portability system, see “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings — MIC and KCC Proceedings”.
 
Interconnection
 
Our networks interconnect with the public switched telephone networks operated by KT Corporation and SK Broadband and, through their networks, with the international gateways of KT Corporation, LG DACOM and Onse Telecom Corporation, as well as the networks of the other wireless telecommunications service providers in Korea. These connections enable our subscribers to make and receive calls from telephones outside our networks. Under Korean law, service providers are required to permit other service providers to interconnect to their networks. If a new service provider desires interconnection with the networks of an existing service provider but the parties are unable to reach an agreement within 90 days, the new service provider can appeal to the KCC.
 
For 2007, our total interconnection revenues were Won 1,062.2 billion and our total interconnection expenses were Won 1,078.7 billion. For 2008, our total interconnection revenues were Won 1,149.2 billion, and our total interconnection expenses were Won 1,327.4 billion. For 2009, our total interconnection revenues were Won 1,245.4 billion and our total interconnection expenses were Won 1,317.7 billion.
 
Domestic Calls
 
Guidelines issued by the MIC require that all interconnection charges levied by a regulated carrier take into account (i) the actual costs to that carrier of carrying a call or (ii) imputed costs. The interconnecting parties are required to calculate the relevant imputed costs on an annual basis. In the event of a dispute regarding the imputed costs, the KCC is empowered to act as arbitrator.
 
Wireless-to-Fixed-line.  According to our interconnection arrangement with KT Corporation, for a call from our wireless network to KT Corporation’s fixed-line network, we collect the usage rate from our wireless subscriber and in turn pay KT Corporation the interconnection charges based on KT Corporation’s imputed costs.


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Fixed-line-to-Wireless.  The KCC determines interconnection arrangements for calls from a fixed-line network to a wireless network. For a call initiated by a fixed-line user to one of our wireless service subscribers, the fixed-line network operator collects our usage fee from the fixed-line user and remits to us an interconnection charge. Interconnection with KT Corporation accounts for substantially all of our fixed-line-to-wireless interconnection revenue and expenses.
 
In July 2004, the MIC introduced a new method of calculating interconnection rates for calls from fixed-line networks to wireless networks, based on the long-run incremental cost of each wireless service provider, taking into consideration technology development and future expected costs. The long-run incremental cost method has been adopted by other countries such as the United States, the United Kingdom and Japan. The interconnection rates paid by fixed-line network service providers to each wireless network service provider are set out below. The KCC announced the interconnection rates for 2008 and 2009 in December 2008, which were applied retroactively from January 1, 2008.
 
                         
    Rate per Minute
Applicable Year
  SK Telecom   KT   LGT
 
2005
  W 31.19     W 46.70     W 54.98  
2006
    33.13       40.06       47.01  
2007
    32.78       39.60       45.13  
2008
    33.41       38.71       39.09  
2009
    32.93       37.96       38.53  
 
Wireless-to-Wireless.  The MIC implemented interconnection charges for calls between wireless telephone networks in Korea starting in January 2000. Under these arrangements, the operator originating the call pays an interconnection charge to the operator terminating the call. For all operators, the amount of the charge is derived from our imputed cost, which was Won 32.78 per minute, Won 33.41 per minute and Won 32.93 per minute for 2007, 2008 and 2009, respectively. Our revenues from the wireless-to-wireless charge were Won 651.5 billion in 2007, Won 745.3 billion in 2008 and Won 774.0 billion in 2009. Our expenses from these charges were Won 784.7 billion in 2007, Won 821.3 billion in 2008 and Won 849.5 billion in 2009. The charges above were agreed among the parties involved and confirmed by the KCC.
 
Despite the decrease in our interconnection rate for 2009, an increase in incoming call volume in 2009 contributed to an overall increase of Won 6.1 billion in interconnection revenues. Our interconnection expenses also increased in 2009 by Won 29.0 billion, primarily due to higher subscriber numbers resulting in higher call volume. The Won 29.0 billion increase in interconnection expenses includes the increase in the mobile-to-mobile interconnection expenses that were paid to other wireless service providers.
 
International Calls
 
With respect to international calls, if a call is initiated by a wireless subscriber, we bill the wireless subscriber for the international charges of KT Corporation, DACOM or SK Broadband, and we receive interconnection charges from such operators. If an international call is received by our subscriber, KT Corporation, DACOM or SK Broadband pays interconnection charges to us based on our imputed costs.
 
International Roaming Arrangements
 
To complement the services we provide to our subscribers in Korea, we offer international voice and data roaming services. We charge our subscribers usage fees for global roaming service and, in turn, pay foreign wireless network operators fees for the corresponding usage of their network. For a more detailed discussion of our global roaming services, see “— Our Services — Cellular Voice Services” above.


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Marketing and Service Distribution
 
Marketing, Sales and Service Network
 
We market our services and provide after-sales service support to customers through 27 marketing teams, 38 branch offices and a network of 1,119 authorized exclusive dealers located throughout Korea. Our dealers are connected via computer to our database and are capable of assisting customers with account information. In addition, approximately 12,000 independent retailers assist new subscribers to complete activation formalities, including processing subscription applications.
 
Currently, authorized dealers are entitled to an initial commission for each new subscriber registered by the dealer, as well as an average ongoing commission calculated as a percentage of that subscriber’s monthly plan-based and usage charges from domestic calls for the first four years. In order to strengthen our relationships with our exclusive dealers, we offer a dealer financing plan, pursuant to which we provide to each authorized dealer an interest-free or low-interest loan of up to Won 2.0 billion with a repayment period of up to three years. As of December 31, 2009, we had an aggregate of Won 735 billion in loans to authorized dealers outstanding.
 
In April 2009, we established a wholly-owned subsidiary to diversify our sales activities. The new subsidiary, PS & Marketing Co., Ltd., was established with an investment of Won 150 billion and began operating 13 stores in May 2009. We expect PS & Marketing Co., Ltd. to expand its sales network focusing on areas that are not covered by our existing sales network.
 
Over the last several years, competition in the wireless telecommunications business has caused us to increase significantly our marketing and advertising expenses. However, we expect such expenses to stabilize due to the KCC’s new guideline on marketing expenses. In 2007, 2008 and 2009, advertising expenditures amounted to 2.6%, 2.6% and 2.3% of our revenues, respectively.
 
Marketing Strategies and Marketing Information Management
 
Information technology improvements.  We have implemented certain information technology improvements in connection with marketing strategy, including customer relationship management systems, as well as more effective information security controls. We believe these upgrades have enhanced our ability to process and utilize marketing- and subscriber-related data, which, in turn, has helped us to develop more effective and targeted marketing strategies.
 
We currently operate a customer information system designed to provide us with an extensive customer database. Our customer information system includes a billing system that provides us with comprehensive account information for internal purposes and enables us to efficiently respond to customer requests. Our customers can also change their service plans, verify the charges accrued on their accounts, receive their bills online and send text messages to our other subscribers through our website at www.tworld.co.kr.
 
“T”-brand Marketing Strategy.  To increase brand awareness and promote our corporate image, in August 2006, we launched our “T”-brand marketing campaign. Our “T” brand signifies the centrality of “Telecommunications” and “Technology” to our business and also seeks to emphasize our commitment to providing “Top” quality, “Trustworthy” products and services to our customers. We have begun to market all new products and services under the “T” brand, while brands existing prior to August 2006 will be re-branded and gradually integrated under the “T” brand umbrella.
 
Other Investments and Relationships
 
We have investments in several other businesses and companies and have entered into various business arrangements with other companies. Our principal investments fall into the following categories:
 
Wireless Content Providers and Application Providers
 
As part of our strategy to develop additional applications and content for our wireless data services, we invest in companies which develop wireless applications and provide Internet content, including content accessible by users of our wireless networks.


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Digital Content Providers.  We also hold investments in companies that develop content for use in our fixed-line and wireless Internet businesses, particularly in the entertainment sector, to better capture growth opportunities arising from the provision of varied, high-quality digital contents. As wireless data transmission services have become increasingly important in the growth of our business, we are seeking to secure valuable mobile data and digital contents by making equity investments in various content providers.
 
We currently hold a 9.99% equity interest in iHQ Inc., an entertainment management firm that produces films, manages entertainers and operates online game services. We also hold a 63.5% stake in Loen Entertainment Inc. (formerly, Seoul Records Inc.), Korea’s largest music recording company in terms of records released and revenues. We currently hold a 63.7% equity interest in Ntreev Soft Co., Ltd., an online game developer, particularly known for its multi-player sports games and anime-based games. Through our investments in companies such as iHQ, Loen Entertainment and Ntreev Soft, we are able to offer customers of our MelOn, Cizle and Gaming portal services access to an expanded range of music- and entertainment-related digital contents and mobile games, respectively.
 
In 2005, we and certain other Korean investment companies invested an aggregate of Won 40.0 billion to establish three funds to invest in the music industry and seek strategic partnerships with recording companies. As of December 31, 2009, our contribution to the funds amounted to Won 39.6 billion. In addition, in 2005 and in 2008, we and certain co-investors invested an aggregate Won 74.7 billion to establish five movie-production funds to strengthen our ability to obtain movie content. We had invested Won 42.0 billion in the funds as of December 31, 2009. Furthermore, in 2008, we and certain co-investors invested an aggregate Won 105.4 billion to establish six additional funds to invest in the production of various cultural contents, including movies and television dramas. As of December 31, 2009, our contribution to these funds amounted to Won 66.3 billion. Such investments reflect our business strategy of diversification into new areas, such as media and entertainment.
 
Wireless Application Developers.  We hold investments in companies that help enable us to further develop and improve our wireless applications and multimedia platforms. In particular, we have invested in developers of wireless financial, or m-commerce, services, including companies that provide wireless billing solutions; developers of wireless modem devices; and developers of Internet search applications.
 
Other Investments
 
Our other investments include:
 
  •  POSCO.  We currently own a 2.8% interest in the outstanding capital stock of POSCO, with a book value as of December 31, 2009 of Won 1,533.4 billion. POSCO is the largest fully integrated steel producer in Korea, and one of the largest steel producers in the world.
 
  •  SK C&C.  In November 2009, we sold common shares of SK C&C held by us on the KRX KOSPI market. As a result, our equity stake in SK C&C decreased from 30.0% in 2008 to 9.0%. SK C&C is an information technologies services provider. We are party to several service contracts with SK C&C related to development and maintenance of our information technologies systems. See “Item 7.B. Related Party Transactions”. In June 2009, the FTC approved the sale of our equity stake in SK C&C, and, in that connection, we are required to sell the shares in SK C&C held by us by July 2, 2011.
 
  •  SKY Property Management.  We currently own a 60% equity interest in SKY Property Management Ltd., with a book value as of December 31, 2009 of Won 265 billion. SKY Property Management was established in 2008 to manage buildings and real estate developments in China, in which affiliated companies of the SK Group had invested or will invest.
 
  •  SK Marketing & Company.  We currently own a 50% equity interest in SK Marketing & Company Co., Ltd., with a book value as of December 31, 2009 of Won 113 billion. SK Marketing & Company Co., Ltd. provides marketing-related services to corporate and individual clients.
 
  •  PS & Marketing.  In April 2009, we established a wholly-owned subsidiary, PS & Marketing Co., Ltd., to diversify our sales and marketing activities. PS & Marketing was established with an investment of Won 150 billion and began operating 13 stores in May 2009. We expect PS & Marketing to expand its sales network focusing on areas that are not covered by our existing sales network.


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For more information regarding our investment securities, see note 4 of the notes to our consolidated financial statements.
 
Competition
 
We were Korea’s only provider of cellular telecommunications services until April 1996, when Shinsegi began offering its CDMA service. In 1996, the Government issued three additional licenses to KT, LGT and Hansol PCS to operate CDMA services. Each of KT, LGT and Hansol PCS commenced operation of its CDMA service in October 1997. Furthermore, in 2001, the Government awarded three companies the licenses to provide high-speed third generation, or 3G, wireless telecommunications services. In Korea, this 3G license is also known as the “IMT-2000” license. IMT-2000 is the global standard for 3G wireless communications, as defined by the International Telecommunication Union, an organization established to standardize and regulate international radio and telecommunications. One of these licenses was awarded to our former subsidiary, SK IMT Co., Ltd., which was merged into us on May 1, 2003. The other two licenses were awarded to LGT, and to consortia led by or associated with KT Corporation. In addition, our wireless voice businesses compete with Korea’s fixed-line operators, and our wireless Internet businesses compete with providers of fixed-line data and Internet services. In addition, KMI announced in 2010 that it plans to enter the wireless telecommunications market as a fourth telecommunications service provider in Korea and provide wireless Internet and mobile VoIP services based on WiBro technology.
 
Beginning in 2000, there has been considerable consolidation in the wireless telecommunications industry, resulting in the emergence of stronger competitors. In 2000, KT Corporation acquired 47.9% of Hansol M.Com’s outstanding shares and renamed the company KT M.Com. KT M.Com merged into KT in May 2001. In June 2009, KT merged into KT Corporation, which had held a 54.25% interest in KT before the merger. In addition, in January 2010, LG DACOM and LG Powercomm merged into LGT.
 
Significant advances in technology are occurring that may affect our businesses, including the roll-out or the planned roll-out by us and our competitors of advanced high-speed wireless telecommunications networks based on technologies including CDMA 1xEV-DO, WCDMA, CDMA2000 and WiBro.
 
As of December 31, 2009, according to the KCC, KT and LGT had 15.0 million and 8.7 million subscribers, respectively, representing approximately 31.3% and 18.1%, respectively, of the total number of wireless subscribers in Korea on such date. As of December 31, 2009, we had 24.3 million subscribers, representing a market share of approximately 50.6%.
 
For a description of the risks associated with the competitive environment in which we operate, see “Item 3.D. Risk Factors — Competition may reduce our market share and harm our results of operations and financial condition”.
 
Under a multilateral agreement on basic telecommunications services among the members of the World Trade Organization effective November 1997, the Government has agreed to gradually reduce the restrictions on foreign and individual shareholdings in telecommunications service providers, including us, in Korea. The relevant Korean law, the Telecommunications Business Act, was amended to give effect to the provisions of the WTO agreement. While the WTO agreement enables us to seek foreign investors and strategic partners and to more easily take advantage of opportunities for investments in overseas telecommunications projects, it may also benefit our competitors and further intensify competition in the domestic market.
 
Law and Regulation
 
Overview
 
Korea’s telecommunications industry is subject to comprehensive regulation by the KCC, which is responsible for information and telecommunications policies, radio and broadcasting management. The KCC regulates and supervises a broad range of communications issues, including:
 
  •  entry into the telecommunications industry;
 
  •  scope of services provided by telecommunications service providers;


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  •  allocation of radio spectrum;
 
  •  setting of technical standards and promotion of technical standardization;
 
  •  rates, terms and practices of telecommunications service providers;
 
  •  customer complaints;
 
  •  interconnection and revenue-sharing between telecommunications service providers;
 
  •  disputes between telecommunications service providers;
 
  •  research and development budgeting and objectives of telecommunications service providers; and
 
  •  competition among telecommunications service providers.
 
Pursuant to an amendment to the Government Organization Act, effective as of February 29, 2008, the Ministry of Information and Communication, or MIC, has become the Ministry of Knowledge Economy, and functions formerly performed by the MIC are now performed separately by the Ministry of Knowledge Economy, the Ministry of Culture, Sports and Tourism, the Ministry of Public Administration and Security, and, particularly, the KCC. In this report, we refer to the MIC as the relevant governmental authority in connection with any approval granted or action taken by the MIC prior to such amendment and to such other relevant governmental authority in connection with any approval granted or action taken by such other relevant governmental authority subsequent to such amendment.
 
Telecommunications service providers are currently classified into three categories: network service providers, value-added service providers, and specific service providers. We are classified as a network service provider because we provide telecommunications services with our own telecommunications networks and related facilities. As a network service provider, we are required to obtain a license from the KCC for the services we provide. Our licenses permit us to provide cellular services and third generation wireless services using WCDMA and WiBro technology. Our cellular license did not provide for a fixed term but, upon the amendment of the Radio Wave Act of Korea in 2005, our cellular license is valid until 2011, our IMT-2000 license is valid until 2016 and our WiBro license is valid until 2012. The cellular license will be re-issued and extended to 2021. As of June 2010, the plans for other licenses have not been decided.
 
The KCC 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 and corrective orders issued in connection with any violation of rules restricting beneficial ownership and control or any violation of the conditions of our licenses. Alternatively, in lieu of suspension of our business, the KCC may levy a monetary penalty of up to 3% of the average of our annual revenue for the preceding three fiscal years. A network services provider that wants to cease its business or dissolve must obtain KCC approval.
 
In February 2010, the KCC announced its final plan to reallocate 2 x 10 MHz of spectrum in the 800 MHz band that we are currently using to other service providers in June 2011. The KCC’s plan also contemplates new allocations of 2 x 10 MHz of spectrum in the 900 MHz band and 2 x 10 MHz of spectrum in the 2.1 GHz band for wireless telecommunication services. KT and LGT have been allocated the spectrum in the 900 MHz and 800 MHz bands, respectively. We have been allocated an additional 2 x 10 MHz of spectrum in the 2.1 GHz band, which will be used for our 3G services.
 
In the past, the MIC has stated that its policy was to promote competition in the Korean telecommunications market through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors. While all network service providers are subject to KCC regulation, we are subject to increased regulation because of our position as the dominant wireless telecommunications services provider in Korea.
 
Competition Regulation
 
The KCC is charged with ensuring that network service providers engage in fair competition and has broad powers to carry out this goal. If a network service provider is found to be in violation of the fair competition


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requirement, the KCC may take corrective measures it deems necessary, including, but not limited to, prohibiting further violations, requiring amendments to the articles of incorporation or to service contracts with customers, and requiring the execution or performance of, or amendments to, interconnection agreements with other network service providers.
 
In addition, we qualify as a “market-dominating business entity” under the Fair Trade Act. Accordingly, we are prohibited from engaging in any act of abusing our position as a market-dominating entity, such as unreasonably determining, maintaining or altering service rates, unreasonably controlling the rendering of services, unreasonably interfering with business activities of other business entities, hindering unfairly the entry of newcomers or substantially restricting competition to the detriment of the interests of consumers.
 
Because we are a member company of the SK Group, which is a large business group as designated by the FTC, we are subject to the following restrictions under the Fair Trade Act:
 
  •  Restriction on debt guarantee among affiliates.  Any affiliate within the SK Group may not guarantee the debts of another domestic affiliate, except for certain guarantees prescribed in the Fair Trade Act, such as those relating to the debts of a company acquired for purposes of industrial rationalization, bid deposits for overseas construction work or technology development funds.
 
  •  Restriction on cross-investment.  A member company of the SK Group may not acquire or hold shares in an affiliate belonging to the SK Group that owns shares in the member company.
 
  •  Public notice of board resolution on large-scale transactions with specially related persons.  If a member company of the SK Group engages in a transaction with a specially related person in the amount of 10% or more of the member company’s capital or paid-in capital or for Won 10 billion or more, the transaction must be approved by a resolution of the member company’s board of directors and the member company must publicly disclose the transaction.
 
  •  Restrictions on equity investments in other domestic companies.  Under the Fair Trade Act, a company that is a member of a large business group as designated by the FTC was generally required to limit its total investments in other domestic companies to 40% of its non-consolidated net assets. In March 2009, an amendment to the Fair Trade Act abolished such restrictions on total investments in other domestic companies.
 
  •  Restrictions on investments by subsidiaries and sub-subsidiaries of holding companies.  The Fair Trade Act prohibits subsidiaries of holding companies from investing in, or holding shares of common stock of, domestic affiliates that belong to the same large business group, unless such domestic affiliates are their own subsidiaries. Furthermore, any subsidiaries of a holding company’s subsidiaries (“sub-subsidiaries”) are prohibited from investing in, or holding shares of common stock of, domestic affiliates that belong to the same large business group, unless all shares issued by the affiliates are held by the sub-subsidiary. Therefore, we and other subsidiaries of SK Holdings may not invest in any domestic affiliate that is also a member company of the SK Group, except in the case where we invest in our own subsidiary or where another subsidiary of SK Holdings invests in its own subsidiary.
 
  •  Public notice of the current status of a business group.  Pursuant to a recent amendment to the Enforcement Decree of the Fair Trade Act which became effective in June 2009, a member company of the SK Group must publicly disclose the general status of the SK Group, including the name, business scope and financial status of affiliates, information on the officers of affiliates, information on shareholding and cross-investments between member companies in the SK Group and information on transactions with certain related persons on a quarterly basis.
 
Number Portability.  In January 2003, the MIC announced its plan to implement number portability with respect to wireless telecommunications service in Korea. The number portability system allows wireless subscribers to switch wireless service operators while retaining the same mobile phone number. For details of the number of subscribers who transferred to the services of our competitors following the implementation of the number portability system, see “— Subscribers”.


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In addition, the MIC has begun to integrate mobile telephone identification numbers into a common prefix identification number “010” and to gradually retract the current mobile service identification numbers which had been unique to each wireless telecommunications service provider, including “011” for our cellular services, starting from January 1, 2004. All new subscribers have been given the “010” prefix starting January 2004. For details of the number of new subscribers for each of the major wireless cellular providers following the adoption of the “010” prefix January 2004, see “— Subscribers”.
 
For risks relating to number portability, see “Item 3.D. Risk Factors — Our businesses are subject to extensive Government regulation and any change in Government policy relating to the telecommunications industry could have a material adverse effect on our results of operations, financial condition and cash flows”.
 
Rate Regulation.  Most network service providers must report to the KCC the rates and contractual terms for each type of service they provide. However, as the dominant network services provider for specific services (based on having the largest market share in terms of number of subscribers and meeting certain revenue thresholds), we must obtain prior approval of the KCC on our rates and terms of service; provided, however, that such pre-approval of the KCC will not be required under the amended Telecommunications Business Act, which will become effective on September 23, 2010, if we are planning to reduce the rates for each type of services we provide under the KCC-approved contractual terms. In each year in which this requirement has been applicable, the KCC has designated us for wireless telecommunications service, and KT Corporation for local telephone and Internet services, as dominant network service providers that are subject to such approval requirement. As a condition to its approval of our merger with SK IMT Co., Ltd., the MIC required that we submit the rates for our third generation mobile services using WCDMA technology to the MIC for approval prior to the launch of such services. The KCC’s policy is to approve rates if they are appropriate, fair and reasonable (that is, if the rates have been reasonably calculated, considering supply costs, profits, classification of costs and profits for each service, cost savings through changes in the way services are provided and the influence on fair competition, among others). The KCC may order changes in the submitted rates if it deems the rates to be significantly unreasonable or against public policy. In May 2007, the MIC terminated the monitoring of whether we met the condition for the MIC’s approval of our merger with SK IMT.
 
Furthermore, in 2007, the MIC announced a “road map” highlighting revisions in regulations to promote deregulation of the telecommunications industry. In accordance with the road map and pursuant to the Combined Sales Regulation, promulgated in May 2007, telecommunications service providers are now permitted to bundle their services, such as wireless data service, wireless voice service, broadband Internet access service, fixed-line telephone service and Internet protocol television, or IP TV, service, at a discounted rate; provided, however, that we and KT Corporation, as market-dominating business entities under the Telecommunications Business Act, allow other competitors to employ the services provided by us and KT Corporation, respectively, so that such competitors can provide similar discounted package services. In September 2007, the regulations and provisions under the Telecommunications Business Act were amended to permit licensed transmission service providers to offer local, domestic long-distance and international telephone services, as well as broadband Internet access and Internet phone services, without additional business licenses.
 
Moreover, under the amended Telecommunications Business Act, which will become effective on September 23, 2010, an MVNO (Mobile Virtual Network Operator) system will be adopted. Under the system, KCC may designate and obligate certain telecommunications services providers to allow a mobile virtual network operator, or MVNO, at such MVNO’s request, to use their telecommunication facilities at a rate mutually agreed upon that complies with the standards set by the KCC. We may be designated as such telecommunications services provider, and if designated, we are obligated to allow the other telecommunications services provider to use our telecommunications facilities; provided, however, that the provision will be effective only for 3 years from the effective date of the amended Telecommunications Business Act. We expect a few MVNOs will commence providing wireless telecommunications services using the networks leased from us by early 2011.
 
On May 13, 2010, the KCC announced a guideline that recommends telecommunication service providers limit their marketing expenses of telecommunication service providers to 22% of their annual sales in 2010. Such marketing expenses do not include advertising expenses. In order to meet the new guideline, we, as well as our competitors, would have to decrease our marketing expenses. Given that the competition in the telecommunication


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industry continues to intensify, such limitation on our ability to expend in marketing may have a material adverse effect on our business.
 
Interconnection.  Dominant network service providers such as ourselves that own essential infrastructure facilities or possess a certain market share are required to provide interconnection of their telecommunications network facilities to other service providers upon request. The KCC sets and announces the standards for determining the scope, procedures, compensation and other terms and conditions of such provision, interconnection or co-use. We have entered into interconnection agreements with KT Corporation, LG Telecom Corporation, Onse Telecom Corporation and other network service providers permitting these entities to interconnect with our network. We expect that we will be required to enter into additional agreements with new operators as the KCC grants permits to additional telecommunications service providers.
 
Frequency Allocation.  The KCC has the discretion to allocate and adjust the frequency band for each type of service. Upon allocation of new frequency bands or adjustment of frequency bands, the KCC is required to give a public notice. The KCC also regulates the frequency to be used by each radio station, including the transmission frequency used by equipment in our cell sites. All of our frequency allocations are for a definite term. We pay fees to the KCC for our frequency usage that are determined based upon our number of subscribers, frequency usage by our networks and other factors. For 2007, 2008 and 2009, the fee amounted to Won 166.4 billion, Won 163.9 billion and Won 159.7 billion, respectively.
 
In addition, we paid Won 650 billion of the Won 1.3 trillion as the cost of the IMT-2000 license in March 2001 and are required to pay the remainder of the license cost in annual installments for a five-year period from 2007 through 2011. For more information, see note 2(k) and note 8 of the notes to our consolidated financial statements for the years ended December 31, 2007, 2008 and 2009.
 
Mandatory Contributions and Obligations
 
Contributions to the Fund for Development of Information Telecommunications.  The Ministry of Knowledge Economy has the authority to recommend to network service providers that they provide funds for national research and development of telecommunications technology and related projects.
 
In May 2002, the MIC announced significant changes to the Government contribution system, and the annual contribution which was set at 1.0% of total revenues for the previous year was lowered to 0.5% (0.75% for market dominant service providers like us) of total revenues for the previous year, and will be applicable only to those network service providers who have Won 30 billion in total sales for the previous year and have recorded no net loss in the current period. Under the policy, the maximum amount of the annual contribution to be made cannot exceed 70% of the net profit for the corresponding period of each company.
 
For 2007, the MIC recommended that we contribute 0.75% of budgeted revenues (calculated pursuant to MIC guidelines that differ from our accounting practices) to the Fund for Development of Information Telecommunications operated by the MIC. Our contribution to this fund in 2007, 2008 and 2009 was Won 73.7 billion, Won 71.9 billion and Won 55.5 billion, respectively, based on the new MIC requirement of 0.75% of MIC-calculated revenues.
 
Universal Service Obligation.  All telecommunications service providers other than value-added service providers, specific service providers and regional paging service providers or any telecommunications service providers whose net annual revenue is less than an amount determined by the KCC (currently set at Won 30.0 billion) are required to provide “universal” telecommunications services including local telephone services, local public telephone services, telecommunications services for remote islands and wireless communication services for ships and telephone services for the handicapped and low-income citizens, or contribute toward the supply of such universal services. The KCC designates universal services and the service provider who is required to provide each service. Currently, we are required to offer free subscription fee and a discount of between 35% to 50% of our monthly fee for cellular services to the handicapped and the low-income citizens.
 
In addition to such universal services for the handicapped and low-income citizens, we are also required to make certain monetary contributions to compensate for other service providers’ costs for the universal services. The size of a service provider’s contribution is based on its net annual revenue (calculated pursuant to KCC guidelines


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which differ from our accounting practices). In 2007, our contribution amount was Won 23.9 billion for our fiscal year 2006. In 2008, our contribution amount was Won 32.3 billion for our fiscal year 2007. In 2009, our contribution amount was Won 31.0 billion for our fiscal year 2008. As a wireless telecommunications services provider, we are not considered a provider of universal telecommunications services and do not receive funds for providing universal service. Other network service providers that do provide universal services make all or a portion of their “contribution” in the form of expenses related to the universal services they provide.
 
Foreign Ownership and Investment Restrictions and Requirements
 
Because we are a network service provider, foreign governments, individuals, and entities (including Korean entities that are deemed foreigners, as discussed below) are prohibited from owning more than 49% of our voting stock. Korean entities whose largest shareholder is a foreign government or a foreigner (together with any of its related parties) that owns 15% or more of the outstanding voting stock of such Korean entities are also deemed foreigners. If this 49% ownership limitation is violated, certain of our foreign shareholders will not be permitted to exercise voting rights in excess of the limitation, and the KCC may require other corrective action.
 
As of December 31, 2009, SK Holdings owned 18,748,452 shares of our common stock, or approximately 23.22% of our issued shares. As of December 31, 2009, a foreign investment fund and its related parties collectively held a 2.9% stake in SK Holdings. If the foreign investment fund and its related parties increase their shareholdings in SK Holdings to 15% or more and such foreign investment fund and its related parties collectively constitute the largest shareholder of SK Holdings, SK Holdings will be considered a foreign shareholder, and its shareholding in us would be included in the calculation of our aggregate foreign shareholding. If SK Holdings’ shareholding in us is included in the calculation of our aggregate foreign shareholding, then our aggregate foreign shareholding, assuming the foreign ownership level as of December 31, 2009 (which we believe was 48.51%), would reach 71.73%, exceeding the 49% ceiling on foreign shareholding.
 
If our aggregate foreign shareholding limit is exceeded, the KCC may issue a corrective order to us, the breaching shareholder (including SK Holdings if the breach is caused by an increase in foreign ownership of SK Holdings) and the foreign investment fund and its related parties who own in the aggregate 15% or more of SK Holdings. Furthermore, SK Holdings may not exercise its voting rights with respect to the shares held in excess of the 49% ceiling, which may result in a change in control of us. In addition, the KCC may refuse to grant us licenses or permits necessary for entering into new telecommunications businesses until our aggregate foreign shareholding is reduced to below 49%. If a corrective order is issued to us by the KCC arising from the violation of the foregoing foreign ownership limit, and we do not comply within the prescribed period under such corrective order, the KCC may:
 
  •  revoke our business license;
 
  •  suspend all or part of our business; or
 
  •  if the suspension of business is deemed to result in significant inconvenience to our customers or to be detrimental to the public interest, impose a one-time administrative penalty of up to 3% of the average of our annual revenue for the preceding three fiscal years.
 
Additionally, the Telecommunications Business Act also authorizes the KCC to assess monetary penalties of up to 0.3% of the purchase price of the shares for each day the corrective order is not complied with, as well as a prison term of up to one year or a penalty of Won 50 million. See “Item 3.D. Risk Factors — If SK Holdings causes us to breach the foreign ownership limitations on shares of our common stock, we may experience a change of control”.
 
We are required under the Foreign Exchange Transaction Act to file a report with a designated foreign exchange bank or with the Ministry of Strategy and Finance, or the MOSF, in connection with any issue of foreign currency denominated securities by us in foreign countries. Issuances of US$30 million or less require the filing of a report with a designated foreign exchange bank, and issuances that are over US$30 million in the aggregate within one year from the filing of a report with a designated foreign exchange bank require the filing of a report with the MOSF.


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The Telecommunications Business Act provides for the creation of a Public Interest Review Committee under the KCC to review investments in or changes in the control of network services providers. The following events would be subject to review by the Public Interest Review Committee:
 
  •  the acquisition by an entity (and its related parties) of 15% or more of the equity of a network services provider;
 
  •  a change in the largest shareholder of a network services provider;
 
  •  agreements by a network service provider or its shareholders with foreign governments or parties regarding important business matters of such network services provider, such as the appointment of officers and directors and transfer of businesses; and
 
  •  a change in the shareholder that actually controls a network services provider.
 
If the Public Interest Review Committee determines that any of the foregoing transactions or events would be detrimental to the public interest, then the KCC may issue orders to stop the transaction, amend any agreements, suspend voting rights, or divest the shares of the relevant network services provider. Additionally, if a dominant network services provider (which would currently include us and KT Corporation), together with its specially related persons (as defined under the Financial Investment Services and Capital Markets Act) holds more than 5% of the equity of another dominant network services provider, the voting rights on the shares held in excess of the 5% limit may not be exercised.
 
Patents and Licensed Technology
 
Access to the latest relevant technology is critical to our ability to offer the most advanced wireless services and to design and manufacture competitive products. In addition to active internal and external research and development efforts as described in “Item 5.C. Research and Development”, our success depends in part on our ability to obtain patents, licenses and other intellectual property rights covering our products. We own numerous patents and trademarks worldwide, and have applications for patents pending in many countries, including Korea, Japan, China, the United States, and Europe. Our patents are mainly related to CDMA technology and wireless Internet applications. We also acquired a number of patents related to WCDMA technology.
 
We also license a number of patented processes and trademarks under cross-licensing, technical assistance and other agreements. The most important agreement is with Qualcomm Inc. and relates mainly to CDMA applications technology. This agreement generally grants us a non-exclusive license to manufacture handsets in return for royalty payment or a sub-license to manufacture and sell certain products both in Korea and overseas during a fixed, but usually renewable term. We consider our technical assistance and licensing agreements to be important to our business and believe that we will be able to renew this agreement on commercially reasonable terms that will not adversely affect our ability to use the relevant technologies.
 
We are not currently involved in any material litigation regarding patent infringement. For a description of the risks associated with our reliance on intellectual property, see “Item 3.D. Risk Factors — Our business rely on technology developed by us as well as technologies provided by third parties, and our business will suffer if we are unable to protect our proprietary rights, obtain new licensing agreements or renew existing licensing agreements with third parties”.
 
Seasonality of the Business
 
Our business is not affected by seasonality.
 
Item 4.C.   Organizational Structure
 
Organizational Structure
 
We are a member of the SK Group, based on the definition of “group” under the Fair Trade Act of Korea. As of December 31, 2009, SK Group members owned in aggregate 23.2% of the shares of our issued common stock. The SK Group is a diversified group of companies incorporated in Korea with interests in, among other things,


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telecommunications, trading, energy, chemicals, engineering and leisure industries. Until mid-1994, our largest shareholder was KT Corporation (formerly known as Korea Telecom Corp.), Korea’s principal fixed-line operator that recently merged with KT, one of our principal wireless competitors.
 
Significant Subsidiaries
 
For information regarding our subsidiaries, see note 2(b) of the notes to our consolidated financial statements.
 
Item 4.D.   Property, Plants And Equipment
 
The following table sets forth certain information concerning our principal properties as of December 31, 2009:
 
             
        Approximate Area
Location
 
Primary Use
 
in Square Feet
 
Seoul Metropolitan Area
  Corporate Headquarters     988,455  
    Regional Headquarters     1,095,992  
    Customer Service Centers     384,223  
    Training Centers     397,574  
    Central Research and     482,725  
    Development Center        
    Others     480,484  
Busan
  Regional Headquarters     363,272  
    Others     227,770  
Daegu
  Regional Headquarters     153,578  
    Others     212,291  
Cholla and Jeju Provinces
  Regional Headquarters     265,595  
    Others     314,629  
Choongchung Province
  Regional Headquarters     459,240  
    Others     480,555  
 
In December 2004, we constructed a building with an area of approximately 82,624 square feet, of which we have full ownership, for use as our corporate headquarters. We relocated our corporate offices into the new building in January 2005. In addition, we own or lease various locations for cell sites and switching equipment. We do not anticipate that we will encounter material difficulties in meeting our future needs for any existing or prospective leased space for our cell sites. See “Item 4.B. Business Overview — Digital Cellular Network — Network Infrastructure”.
 
We maintain a range of insurance policies to cover our assets and employees, including our directors and officers. We are insured against business interruption, fire, lightening, flooding, theft, vandalism, public liability and certain other risks that may affect our assets and employees. We believe that the types and amounts of our insurance coverage are in accordance with general business practices in Korea.
 
Item 4A.   UNRESOLVED STAFF COMMENTS
 
We do not have any unresolved comments from the U.S. Securities and Exchange Commission, or the SEC, staff regarding our periodic reports under the Exchange Act.
 
Item 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
You should read the following discussion together with our consolidated financial statements and the related notes thereto which appear elsewhere in this annual report. We prepare our financial statements in accordance with Korean GAAP, which differs in some respects from U.S. GAAP. Notes 34 and 35 of the notes to our consolidated financial statements provide a description of the significant differences between Korean GAAP and U.S. GAAP as


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they relate to us and provide a reconciliation to U.S. GAAP of our net income and shareholders’ equity for fiscal years 2007, 2008 and 2009. In addition, you should read carefully the section titled “— Critical Accounting Policies, Estimates and Judgments” as well as note 2 of the notes to our consolidated financial statements which provide summaries of certain critical accounting policies that require our management to make difficult, complex or subjective judgments relating to matters which are highly uncertain and that may have a material impact on our financial conditions and results of operations.
 
Item 5.A.   Operating Results
 
Overview
 
We earn revenue principally from initial subscription fees and monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services and value-added service fees paid by subscribers to our wireless services and interconnection fees paid to us by other telecommunications operators for use of our network by their customers and subscribers. Our revenue amount depends principally upon the number of our wireless subscribers, the rates we charge for our services, the frequency and volume of subscriber usage of our services and the terms of our interconnection with other telecommunications operators. Government regulation also affects our revenues.
 
A number of recent developments have had or are expected to have a material impact on our results of operations, financial condition and capital expenditures. These developments include:
 
Market Share Limitations.  We have historically been, and continue to be, the market leader in the wireless telecommunications sector in terms of number of subscribers. Our wireless subscriber base has steadily increased over the years from approximately 10.1 million subscribers at the end of 1999 to approximately 24.3 million subscribers at the end of 2009. As a result of our dominant market share, we have been designated by the Government as the “market dominant service provider” in respect of our wireless telecommunications business. As such, we are subject to additional regulation. For a more detailed discussion of Government mandated and voluntary measures we have undertaken to limit our market share, see “Item 4.B. Business Overview — Subscribers — Market Share Limitations” and “Item 4.D. Risk Factors — We are subject to additional regulation as a result of our dominant market position in the wireless telecommunications sector, which could harm our ability to compete effectively”.
 
Number Portability and Common Prefix Identification System.  In January 2003, the MIC announced a plan to implement number portability with respect to wireless telecommunications service in Korea. The number portability system allows wireless subscribers to switch wireless service operators while retaining the same mobile phone number. In order to manage the availability of phone numbers efficiently and to secure phone number resources for new services, in January 2004, the MIC also began implementing a plan to integrate all mobile telephone numbers under the common prefix identification number “010”, including by gradually retracting the current mobile service identification numbers that had been unique to each wireless telecommunications service provider. All new subscribers have been given the “010” prefix starting January 2004.
 
We believe that the adoption of the common prefix identification system has had, and may continue to have, a greater negative effect on us than on our competitors because, historically, “011” has had a very high brand recognition in Korea as the premium wireless telecommunications service. Adoption of the number portability system has resulted in, and may continue to result in, increased competition among wireless service providers and higher costs as a result of maintaining the number portability system, increased subscriber deactivations, increased churn rate and higher marketing costs. For a more detailed discussion of the common prefix identification number plan, see “Item 4.B. Business Overview — Subscribers — Number Portability” and “Item 3.D. Risk Factors — Our businesses are subject to extensive Government regulation and any change in Government policy relating to the telecommunications industry could have a material adverse effect on our results of operations, financial condition and cash flows”.
 
Handset Subsidies.  In March 2006, the MIC partially lifted, and in March 2008 fully lifted, the prohibition on the provision of handset subsidies, which had been in place since June 2000, and began to allow mobile service providers to subsidize the purchase of new handsets by certain qualifying customers. In order to compete more


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effectively, we have begun providing such handset subsidies, which has increased, and may continue to increase, our marketing expenses. Since April 2008, we have also begun offering long-term installment payment plans of 24 months for new handset purchases by our new or existing subscribers, which has increased, and may continue to increase, our capital requirements. However, on May 13, 2010, the KCC announced a guideline that recommends that the telecommunication service providers limit their marketing expenses to 22% of their annual sales. The guideline is not binding and such marketing expenses do not include advertising expenses. In order to meet the new guidelines, we, as well as our competitors, would have to decrease such marketing expenses. Such decrease in our marketing expenses may have a material adverse effect on our businesses and results of operations.
 
Changes in Tariffs and Interconnection Fees.  Under current regulations, we must obtain prior KCC approval of the rates and fees we charge subscribers for our cellular services. Generally, the rates we charge for our services have been declining. For more information about the rates we charge, see “Item 4.B. Business Overview — Revenues, Rates and Subscription Deposits” and “Item 4.B. Business Overview — Law and Regulation — Competition Regulation — Rate Regulation”.
 
In addition, our wireless telecommunications services depend, in part, on our interconnection arrangements with domestic and international fixed-line and other wireless networks. Charges for interconnection affect our revenues and operating results. The KCC determines the basic framework for interconnection arrangements in Korea and has changed this framework several times in the past. Under our interconnection agreements, we are required to make payments in respect of calls which originate from our networks and terminate in the networks of other Korean telecommunications operators, and the other operators are required to make payments to us in respect of calls which originate in their networks and terminate in our network. For more information about our interconnection revenue and expenses, see “Item 4.B. Business Overview — Interconnection”.
 
Average Monthly Outgoing Voice Minutes and Revenue per Subscriber.  The following table sets forth selected information concerning our wireless telecommunications network during the periods indicated:
 
                         
    Year Ended December 31,
    2007   2008   2009
 
Outgoing voice minutes (in thousands)(1)
    51,295,166       54,080,231       56,111,864  
Average monthly outgoing voice minutes per subscriber(2)
    201       200       197  
Average monthly revenue per subscriber, excluding interconnection revenue(3)
  W 40,154     W 38,526     W 38,171  
Average monthly revenue per subscriber, including interconnection revenue(4)
  W 44,416     W 43,016     W 42,469  
 
 
(1) Does not include minutes of incoming calls or minutes of use relating to the use of SMS, MMS and other wireless data services.
 
(2) The average monthly outgoing voice minutes per subscriber is derived by dividing the total minutes of outgoing voice usage for the period by the monthly average number of subscribers for the period, then dividing that number by the number of months in the period. The monthly average number of subscribers is derived by dividing (i) the sum of the average number of subscribers for each month in the period, calculated as the average of the number of subscribers on the first and last days of the relevant month, by (ii) the number of months in the period.
 
(3) The average monthly revenue per subscriber, excluding interconnection revenue, is derived by dividing the sum of total initial subscription fees, monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services, value-added service fees and other miscellaneous revenues for the period by the monthly average number of subscribers for the period, then dividing that number by the number of months in the period.
 
(4) The average monthly revenue per subscriber, including interconnection revenue, is derived by dividing the sum of total initial subscription fees, monthly plan-based fees, usage charges for outgoing voice and wireless data transmissions, charges for purchases of digital contents, value-added service fees, other miscellaneous revenues


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and interconnection revenue for the period by the monthly average number of subscribers for the period, then dividing that number by the number of months in the period.
 
Our average monthly outgoing minutes of voice traffic per subscriber decreased by 0.5% in 2008 and 1.5% in 2009. We believe that this trend principally reflects the existing high penetration rate of wireless services in Korea and the general maturation of the Korean wireless market.
 
Our average monthly revenue per subscriber, excluding interconnection revenue, decreased by 4.1% to Won 38,526 in 2008 from Won 40,154 2007 and decreased by 0.9% to Won 38,171 in 2009 from Won 38,526 in 2008. The decrease in average monthly revenue per subscriber in 2008 was due to decreases in average monthly revenue per subscriber from usage charges for wireless data services, usage charges for outgoing voice calls and initial subscription fees, partially offset by increases in average monthly revenue per subscriber from monthly plan-based fees and value-added and other service fees. The decrease in average monthly revenue per subscriber in 2009 was due to decreases in average monthly revenue per subscriber from usage charges for voice services and initial subscription fees, partially offset by increases in average monthly revenue per subscriber from monthly plan-based fees and wireless data services as further described in “— Operating Results” below.
 
Acquisition of SK Broadband Shares.  In March 2008, we completed the acquisition of an additional 38.7% equity stake in SK Broadband, Korea’s second-largest fixed-line operator, for approximately Won 1.1 trillion, increasing our total equity interest in SK Broadband to 43.4%. In July 2009, we acquired additional shares of SK Broadband’s common stock, and our equity stake in SK Broadband increased to 50.6%. Following the 2008 acquisition, SK Broadband became our consolidated subsidiary under Korean GAAP and our results of operations in 2009 include those of SK Broadband. SK Broadband and its subsidiaries had revenues of Won 1,886.3 billion and net loss of Won 178.3 billion for 2008 and Won 1,904.9 billion and net loss of Won 263.0 billion for 2009. For a more detailed discussion of our acquisition of SK Broadband, see “Item 4.B. Business Overview — Our Services — Broadband Internet and Fixed-line Telephone Services” and “Item 3.D. Risk Factors — Our growth strategy calls for significant investments in new businesses and regions, including businesses and regions in which we have limited experience”.
 
Acquisition of SK Networks Assets.  In September 2009, we acquired the leased-line business and related ancillary businesses, including all assets, liabilities and other rights and obligations related to such businesses, of SK Networks. The acquisition price was Won 892.8 billion. As of September 30, 2009, the assets and liabilities of the businesses being acquired amounted to Won 635.9 billion and Won 611.4 billion, respectively.
 
Acquisition of Hana Card Shares.  In accordance with the resolution of our board of directors in December 2009, we purchased shares of Hana Card for Won 400 billion in February 2010. We currently hold 49% of the total outstanding shares of Hana Card.
 
Operating Expenses and Operating Margins.  Our operating expenses consist principally of commissions paid to authorized dealers and our subscribers (including, beginning in March 2006, handset subsidies), depreciation and amortization, network interconnection, labor costs, leased line expenses, advertising expenses and rent expenses. Operating income represented 17.7% of our operating revenue in 2007, 12.5% in 2008 and 12.9% in 2009.
 
Reclassification of Prior Year Financial Statements
 
As a result of our sale of HELIO to Virgin Mobile USA, Inc. in August 2008, HELIO’s results of operations have been classified as discontinued operations under Korean GAAP. The consolidated statement of income and the consolidated statement of cash flows for the year ended December 31, 2007 appearing in our consolidated financial statements included elsewhere in this report have been reclassified to present HELIO’s results of operations and cash flow activities as separate single-line items. SK Communications sold the Spicus division, our telephone English education division, to Spicus Inc., a subsidiary of Altos Ventures, in August 2009, and sold Etoos Co., Ltd. to Cheong Sol in October 2009. Operating revenue, operating expenses, operating income and income before income taxes and minority interest for the years ended December 31, 2006, 2007 and 2008 have been revised to exclude HELIO’s, the Spicus division’s and Etoos’ results of operations.


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Operating Results
 
The following table sets forth selected income statement data, including data expressed as a percentage of operating revenue, for the periods indicated:
 
                                                 
    For the Year Ended December 31,
    2007   2008   2009
    (In billions of Won, except percentage data)
 
Operating Revenue
  W 11,843.4     W 100.0 %     13,995.9       100.0 %   W 14,555.4       100.0 %
Operating Expenses
    9,741.7       82.3       12,244.7       87.5       12,676.9       87.1  
Operating Income
    2,101.7       17.7       1,751.2       12.5       1,878.5       12.9  
Other Income
    861.3       7.3       1,057.1       7.6       881.1       6.1  
Other Expenses
    678.1       5.7       1,547.9       11.1       1,359.1       9.3  
Income Before Income Taxes and Minority Interest
    2,284.9       19.3       1,260.4       9.0       1,400.5       9.6  
Income Taxes
    694.2       5.9       299.3       2.1       355.7       2.4  
Preacquisition Net Loss of Subsidiaries
    21.1       0.2       32.6       0.2       0.0       0.0  
Loss from Discontinued Operation(1)
    (49.4 )     (0.4 )     (21.4 )     (0.1 )     10.8       0.0  
Net Income Attributable to:
                                               
Majority Interest
    1,648.9       13.9       1,215.7       8.7       1,247.2       8.6  
Minority Interests
    (86.6 )     (0.7 )     (243.4 )     (1.7 )     (191.6 )     (1.3 )
Net Income
  W 1,562.3       13.2 %   W 972.3       6.9 %     1,055.6       7.3  
Depreciation and Amortization(2)
  W 1,819.3       15.4 %   W 2,599.5       18.6 %   W 2,593.6       17.8  
 
 
(1) Relates to results of operations of HELIO, the Spicus division and Etoos Co., Ltd., which have been classified as discontinued operations after our sale of such companies in 2008 and in 2009.
 
(2) Excludes the depreciation and amortization allocated to internal research and development costs and manufacturing costs of Won 149.3 billion, Won 159.5 billion and Won 139.2 billion for the years ended December 31, 2007, 2008 and 2009, respectively.


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The following table sets forth additional revenue information about our operations during the periods indicated:
 
                                                 
    Year Ended December 31,
    2007   2008   2009
        Percentage
      Percentage
      Percentage
        of Total
      of Total
      of Total
    Revenue   Revenue   Revenue   Revenue   Revenue   Revenue
    (In billions of Won, except percentages)
 
Cellular Revenue:
                                               
Wireless Services(1)
  W 9,953.9       84.0 %   W 10,240.6       73.2 %   W 10,603.4       72.8 %
Interconnection
    1,062.2       9.0       1,149.2       8.2       1,245.4       8.6  
Digital Handset Sales
                            185.3       1.3  
Total Cellular Revenue
    11,016.1       93.0       11,389.8       81.4       12,034.1       82.7  
Broadband Internet and Fixed-line Telephone Service
                1,821.8       13.0       1,714.9       11.8  
Other Revenue:
                                               
International Calling Service(2)
    211.8       1.8       243.1       1.7       274.1       1.9  
Portal Service(3)
    178.7       1.5       216.4       1.6       201.1       1.4  
Miscellaneous(4)
    436.8       3.7       324.8       2.3       331.2       2.2  
Total Other Revenue
    827.3       7.0       784.3       5.6       806.4       5.5  
Total Operating Revenue
  W 11,843.4       100.0 %   W 13,995.9       100.0 %   W 14,555.4       100.0 %
Total Operating Revenue Growth
    7.6 %             18.2 %             4.0 %        
 
 
(1) Wireless services revenue includes initial subscription fees, monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services, value-added-service fees and other miscellaneous cellular revenues, including international interconnection charges, interest on overdue subscriber accounts (net of telephone tax) and revenue from the sale and licensing of Internet platform solutions.
 
(2) Provided by SK Telink Co. See “Business — Our Services — Other Products and Services — International Calling Services”.
 
(3) Portal service revenue attributable to our subsidiaries (including SK Communications, Paxnet Co., Ltd., which operates a financial portal site, and U-Land Company Limited, the Hong Kong-incorporated holding company through which we hold our interest in ViaTech).
 
(4) Miscellaneous revenue attributable to our subsidiaries (including Commerce Planet Co., Ltd., which operates neotam.com, an online outlet shopping mall, Morning365.com, an online bookstore, and cherrya.com, an online cosmetics store; and TU Media).
 
2009 Compared to 2008
 
Operating Revenue.  Our operating revenue increased by 4.0% to Won 14,555.4 billion in 2009 from Won 13,995.9 billion in 2008, principally due to an increase in the sales revenue of each of SK Telecom and Loen Entertainment by Won 426.5 billion and Won 70.6 billion, respectively, and a Won 185.3 billion increase in the handset sales by PS & Marketing.
 
The increase in our cellular revenue was principally due to an increase in our wireless services revenue, as well as digital handset sales of Won 185.3 billion by PS & Marketing, a wholly-owned subsidiary, in 2009 compared to no such sales in 2008. Wireless services revenue increased 3.5% to Won 10,603.4 billion in 2009 from Won 10,240.6 billion in 2008, primarily as a result of a 5.1% increase in our average subscriber base in 2009 over 2008, as well as increased subscriptions to service plans with higher monthly charges, partially offset by a decrease in revenue from call charges as a result of increase in number of subscribers signing up for discount price plans.


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Our average monthly revenue per subscriber, excluding interconnection revenue, decreased by 0.9% to Won 38,171 in 2009 from Won 38,526 in 2008, which reflects the effect of factors, including a decrease in call charges for voice services and sign up fees, partially offset by increases in average monthly revenue per subscriber from monthly fee plans. Our average monthly revenue per subscriber from wireless data services, which includes usage charges for SMS and wireless Internet services, increased in 2009, attributable mainly to an increase in revenue from data flat rate plans. Our average monthly revenue per subscriber from usage charges for outgoing calls decreased in 2009, primarily due to discounts we offered for voice calls between subscribers. Our average monthly minutes per user declined to 197 minutes in 2009 from 200 minutes in 2008. Our average monthly revenue per subscriber from value-added and other service fees increased in 2009, primarily due to an increase in revenues from global roaming services and leased-line revenue.
 
Interconnection revenue increased by 8.4% to Won 1,245.4. billion in 2009 from Won 1,149.2 billion in 2008. The increase was due to increases in incoming call volume, more than offset the decrease in interconnection rates in 2009. Our average monthly revenue per subscriber, including interconnection revenue, decreased 1.3% to Won 42,469 in 2009 from Won 43,016 in 2008.
 
Portal service revenues decreased 7.1% to Won 201.1 billion in 2009 from Won 216.4 billion in 2008 mainly due to the exclusion of ULand Company Limited from our consolidated financial statements. International call service revenues increased 12.8% to Won 274.1 billion in 2009 from Won 243.1 billion in 2008 mainly due to an increase in the revenue in VoIP B2B business. Miscellaneous revenue increased by 2.0% to Won 331.2 billion in 2009 from Won 324.8 billion in 2008 mainly due to the inclusion of certain of our subsidiaries, including Sky Property Mgmt., Ltd. and Shenzhen E-eye Hightech Co., Ltd. to our consolidated financial statements.
 
Operating Expenses.  Our operating expenses in 2009 increased by 3.5% to Won 12,676.9 billion from Won 12,244.7 billion in 2008, primarily due to increases in commissions paid, cost of goods sold and provision for bad debt. Commissions paid, including to our authorized dealers and to our subscribers, increased by 5.2% to Won 5,140.7 billion in 2009 from Won 4,884.7 billion in 2008, primarily attributable to an increase in initial commissions resulting from intensified marketing competition and in the number of new subscribers. The cost of goods sold increased primarily due our digital handset sales that commenced in 2009. The increase in provision for bad debt resulted primarily from the increase in bad debt experience ratio from accounts receivable-trade.
 
Operating Income.  Our operating income increased by 7.3% to Won 1,878.5 billion in 2009 from Won 1,751.2 billion in 2008 due to the factors discussed above.
 
Other Income.  Other income consists primarily of foreign exchange and translation gains and gains on transactions and valuation of currency swaps, as well as interest income, dividend income and equity in earnings of affiliates. Other income decreased by 16.6% to Won 881.1 billion in 2009 from Won 1,057.1 billion in 2008, due primarily to decreases in foreign exchange and translation gains for our investments in foreign currency-denominated assets and gains on the valuation of currency swaps.
 
Other Expenses.  Other expenses consist primarily of losses on transactions and the valuation of currency swaps, interest and discount expenses, impairment losses on investment securities and foreign exchange and translation losses. Other expenses decreased by 12.2% to Won 1,359.1 billion in 2009 from Won 1,547.9 billion in 2008. This decrease was primarily attributable to decreases in losses on transactions and valuation of currency swaps and impairment loss on investment securities.
 
Income Tax.  Income tax for continuning operation increased by 18.8% to Won 355.7 billion in 2009 from Won 299.3 billion in 2008. Our effective tax rate in 2009 increased to 25.4% from an effective tax rate of 23.75% in 2008. Income taxes increased in 2009 compared to 2008 primarily due to an increase in our income from continuing operation before income tax and an increase in vaulation allowance, which together more than offset a decrease in our corporate income tax rate to 22% in 2009 from 25% in 2008.
 
Net Income.  Principally as a result of the factors discussed above, our net income, after adjusting for non-controlling interests, increased by 8.6% to Won 1,055.6 billion in 2009 from Won 972.3 billion in 2008. Net income as a percentage of operating revenues was 7.3% in 2009 compared to 6.9% in 2008.


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2008 Compared to 2007
 
Operating Revenue.  Our operating revenue increased by 18.2% to Won 13,995.9 billion in 2008 from Won 11,843.4 billion in 2007, principally due to the inclusion of Won 1,886.3 billion of revenue in 2008 of SK Broadband and its subsidiaries, which became our consolidated subsidiaries in April 2008, and, to a lesser extent, due to a 3.4% increase in our cellular revenue to Won 11,389.8 billion in 2008 from Won 11,016.1 billion in 2007.
 
The increase in our cellular revenue was principally due to an increase in our wireless services revenue, as well as an increase in our interconnection revenue. Wireless services revenue increased 2.9% to Won 10,240.6 billion in 2008 from Won 9,953.9 billion in 2007, primarily as a result of a 6.8% increase in our average subscriber base in 2008 over 2007, as well as increased subscriptions to service plans with higher monthly charges, partially offset by a decrease in revenue from wireless data services primarily as a result of the reduction of the SMS charge rate implemented in January 2008.
 
Our average monthly revenue per subscriber, excluding interconnection revenue, decreased by 4.1% to Won 38,526 in 2008 from Won 40,154 in 2007, which reflects the net effect of several factors, including decreases in average monthly revenue per subscriber from usage charges for wireless data services, usage charges for outgoing voice calls and initial subscription fees, partially offset by increases in average monthly revenue per subscriber from monthly plan-based fees and value-added and other service fees. Our average monthly revenue per subscriber from wireless data services, which includes usage charges for SMS and wireless Internet services, decreased in 2008, attributable mainly to the reduction of the SMS charge rate implemented in January 2008. Our average monthly revenue per subscriber from usage charges for outgoing calls decreased in 2008, primarily due to discounts we offered for voice calls between subscribers. Our average monthly minutes per user declined slightly to 200 minutes in 2008 from 201 minutes in 2007. Our average monthly revenue per subscriber from monthly plan-based fees increased in 2008, primarily as a result of increased subscriptions to service plans with higher monthly charges. Our average monthly revenue per subscriber from value-added and other service fees increased in 2008, primarily due to an increase in revenues from global roaming services.
 
Interconnection revenue increased by 8.2% to Won 1,149.2 billion in 2008 from Won 1,062.2 billion in 2007. The increase was due to increases in our interconnection rates in 2008, as well as an increase in incoming call volume in 2008. See “Item 4.B. Business Overview — Interconnection”. Our average monthly revenue per subscriber, including interconnection revenue, decreased by 3.2% to Won 43,016 in 2008 from Won 44,416 in 2007.
 
Portal service revenues increased by 21.1% to Won 216.4 billion in 2008 from Won 178.7 billion in 2007, primarily due to increased use by our subscribers of our wireless Internet contents services, such as NATE and Cyworld services.
 
International call service revenues increased by 14.8% to Won 243.1 billion in 2008 from Won 211.8 billion in 2007 as a result of general increases in outbound and inbound international call traffic volume.
 
Miscellaneous revenue decreased by 25.6% to Won 324.8 billion in 2008 from Won 436.8 billion in 2007, primarily as a result of decreases in revenues of our subsidiaries engaged in electronic commerce and exclusion of Aircross Co., Ltd. from consolidation.
 
Operating Expenses.  Our operating expenses in 2008 increased by 25.7% to Won 12,244.7 billion from Won 9,741.7 billion in 2007, primarily due to the inclusion of expenses of Won 1,982.7 billion in 2008 of SK Broadband and its subsidiaries, as well as increases in commissions paid, depreciation and amortization and interconnection expenses.
 
Commissions paid, including to our authorized dealers and to our subscribers, increased by 20.6% to Won 4,884.7 billion in 2008 from Won 4,050.0 billion in 2007, primarily attributable to the inclusion of SK Broadband and its subsidiaries’ commissions paid of Won 602.9 billion, as well as an increase in handset subsidies paid to our existing subscribers who changed their handsets and an increase in expenses relating to our alliance arrangements with businesses that agree to offer benefits to our subscribers. An increase in non-marketing related commissions paid for global roaming services, in line with increased usage of our expanded global voice and data roaming services, also contributed to the increase in commissions paid.


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Depreciation and amortization increased 42.9% to Won 2,599.5 billion in 2008 from Won 1,819.3 billion in 2007, primarily due to the inclusion of SK Broadband and its subsidiaries’ depreciation and amortization of Won 521.1 billion, together with the continued high level of capital expenditures related to expansion and upgrade of our WCDMA network and an increase in our capital expenditures related to expansion and upgrade of our WiBro network.
 
Interconnection expenses increased by 23.1% to Won 1,327.4 billion in 2008 from Won 1,078.7 billion in 2007, primarily due to higher subscriber numbers resulting in higher call volume. See “Item 4.B. Business Overview — Interconnection”.
 
Operating Income.  Our operating income decreased by 16.7% to Won 1,751.2 billion in 2008 from Won 2,101.7 billion in 2007 due to the factors discussed above.
 
Other Income.  Other income consists primarily of foreign exchange and translation gains and gains on transactions and valuation of currency swaps, as well as interest income, dividend income and equity in earnings of affiliates. Other income increased by 22.7% to Won 1,057.1 billion in 2008 from Won 861.2 billion in 2007, due primarily to foreign exchange and translation gains for our investment in foreign currency-denominated assets and gains on the valuation of currency swaps hedging our foreign currency-denominated debt, partially offset by a decrease in gains on the conversion of convertible bonds, which in 2007 included a one-time gain of Won 373.1 billion derived from our conversion of China Unicom convertible bonds into shares, and a decrease in equity in earnings of affiliates, which in 2007 reflected the recognition of previously unrealized gain on the valuation of SK C&C’s investment in the common stock of SK Energy Co., Ltd. As a percentage of operating revenue, other income increased to 7.6% in 2008 compared to 7.3% in 2007.
 
Other Expenses.  Other expenses consist primarily of losses on transactions and valuation of currency swaps, interest and discount expenses, impairment losses on investment securities and foreign exchange and translation losses. Other expenses increased by 128.3% to Won 1,547.9 billion in 2008 from Won 678.1 billion in 2007. This increase was primarily attributable to losses on the valuation of currency swaps hedging our foreign currency-denominated assets, foreign exchange and translation losses for our foreign currency-denominated debt and an impairment loss of Won 201.2 billion on our investment in LG Powercomm. For a discussion of the effect of fluctuations in foreign exchange rates and our hedging activities, see “Item 11. Quantitative and Qualitative Disclosure about Market Risk”. As a percentage of operating revenue, other expenses increased to 11.1% in 2008 compared to 5.7% in 2007.
 
Income Tax.  Income tax for continuing operation decreased by 59.0% to Won 299.3 billion in 2008 from Won 694.2 billion in 2007. Our effective tax rate in 2008 decreased to 23.75% from an effective tax rate of 30.38% in 2007. The decreases in income tax and effective tax rate are attributable primarily to the decrease in our income before income tax, a tax refund for prior periods, the decrease in the valuation allowance as a result of the sale of our investment in HELIO and the decrease in deferred tax liabilities due to the reduction of corporate income tax rate in December 2008 from the current rate of 25% to 22% for 2009 and 20% for 2010 and afterwards. See note 17 of the notes to our consolidated financial statements.
 
Net Income.  Principally as a result of the factors discussed above, our net income, after adjusting for non-controlling interests, decreased by 37.8% to Won 972.3 billion in 2008 from Won 1,562.3 billion in 2007. Net income as a percentage of operating revenues was 6.9% in 2008 compared to 13.2% in 2007. Won 32.7 billion of pre-acquisition net loss of SK Broadband, which was newly consolidated as of April 1, 2008, was added to, and Won 21.4 billion of loss from discontinued operation attributable to HELIO was deducted from, the calculation of net income for 2008.
 
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 2.5% in 2007, 4.7% in 2008 and 2.8% in 2009.


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Item 5.B.   Liquidity and Capital Resources
 
Liquidity
 
We had a working capital (current assets minus current liabilities) surplus of Won 1,796.2 billion, Won 793.6 billion and Won 1,475.7 billion as of December 31, 2007, 2008 and 2009, respectively.
 
We had cash, cash equivalents, short-term financial instruments and short-term investment securities of Won 1,770.6 billion as of December 31, 2007, Won 1,752.7 billion as of December 31, 2008 and Won 1,682.3 billion as of December 31, 2009. We had outstanding short-term borrowings of Won 24.6 billion as of December 31, 2007, Won 627.7 billion as of December 31, 2008 and Won 677.2 billion as of December 31, 2009. As of December 31, 2009, we had credit lines with several local banks that provided for borrowings of up to Won 2,095.2 billion, of which Won 865.6 billion was outstanding and Won 1,229.6 billion was available for borrowing.
 
Operating cash flow and debt financing have been our principal sources of liquidity. We had cash and cash equivalents of Won 953.9 billion as of December 31, 2009, Won 1,011.3 billion as of December 31, 2008 and Won 885.8 billion as of December 31, 2007. 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.
 
                                                         
    Year Ended December 31,     Change  
    2007     2008     2009     2007 to 2008     2008 to 2009  
    (In billions of Won, except percentages)  
 
Net Cash Flow from Operating Activities
  W 3,721.0     W 3,295.4     W 2,933.3     W (425.6 )     (11.4 )%   W (362.1 )     (11.0 )%
Net Cash Used in Investing Activities
    (2,415.4 )     (3,875.3 )     (1,828.2 )     (1,459.9 )     60.4       2,047.1       52.8 %
Net Cash Provided by (Used in) Financing Activities
    (1,041.3 )     869.4       (1,205.1 )     1,910.7       N/A       (2,074.5 )     N/A  
Effect of Exchange Rate Changes on Cash and Cash Equivalents Held in Foreign Currencies
    6.2       37.4       (7.5 )     31.2       503.2       (44.9 )     N/A  
Net Cash Flow due to Changes in Consolidated Subsidiaries
    102.1       36.4       46.3       (65.7 )     (64.3 )     9.9       27.2 %
Preacquisition Cash Flows of Subsidiaries(1)
    (11.4 )     17.3             28.7       N/A       (17.3 )     N/A  
Net Increase in Cash and Cash Equivalents due to Merger(2)
    50.4                   (50.4 )     (100.0 )           N/A  
Cash Flows from Discontinued Operation(3)
    (11.6 )     (255.1 )     3.6       (243.5 )     2,099.1       258.7       N/A  
Net Increase (Decrease) in Cash and Cash Equivalents
    400.0       125.5       (57.6 )     (274.5 )     (68.6 )     (183.1 )     N/A  
Cash and Cash Equivalents at Beginning of Period
    486.0       886.0       1,011.5       400.0       82.3       125.5       14.2 %
Cash and Cash Equivalents at End of Period
    886.0       1,011.5       953.9       125.5       14.2 %     (57.6 )     (5.7 )%
 
 
N/A = Not applicable.
 
(1) In 2007, we adopted SKAS No. 25. Pursuant to SKAS No. 25, when a subsidiary is acquired during the year, such subsidiary’s statement of income is included in consolidation as if it had been acquired at the beginning of the year, and pre-acquisition earnings (losses) are presented as deduction (addition) at the bottom of the consolidated statements of income. In addition, in connection with our adoption of SKAS No. 25, we have also begun to present pre-acquisition cash flows of subsidiaries as a separate deduction (addition) at the bottom of our consolidated statements of cash flows.
 
(2) Net increase in cash and cash equivalents due to merger for the year ended December 31, 2007 relates to the merger of Empas into SK Communications in November 2007.
 
(3) Relates to cash flow activities of HELIO, the Spicus division and Etoos Co., Ltd., which have been classified as discontinued operations after our sale of such companies in 2008 and in 2009.


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Net Cash Flow from Operating Activities.  Net cash flow provided by operations was Won 3,721.0 billion in 2007, Won 3,295.4 billion in 2008 and Won 2,933.3 billion in 2009. Net income was Won 1,562.3 billion in 2007, Won 972.3 billion in 2008 and Won 1,055.6 billion in 2009.
 
Net Cash from Investing Activities.  Net cash used in investing activities was Won 2,415.4 billion in 2007, Won 3,875.3 billion in 2008 and Won 1,828.2 billion in 2009. Cash inflows from investing activities were Won 296.7 billion in 2007, Won 934.0 billion in 2008 and Won 2,906.3 billion in 2009. The primary contributor to such inflows, in 2007, largely related to the collection of short-term loans of Won 119.6 billion and in 2008, largely related to proceeds from the disposal of long-term investment securities of Won 386.7 billion and the collection of short-term loans of Won 215.1 billion. Cash inflows in 2009 largely related to proceeds of sales of long term investment securities of Won 1,977.9 billion, mostly relating to our sale of China Unicom and SK C&C shares. Cash outflows from investing activities were Won 2,712.1 billion in 2007, Won 4,809.3 billion in 2008 and Won 4,734.5 billion in 2009. The primary contributors to the overall cash outflows for investing activities were expenditures related to the acquisition of property and equipment, which were Won 1,804.4 billion in 2007, Won 2,236.9 billion in 2008 and Won 2,162.4 billion in 2009, all primarily relating to expenditures in connection with the maintenance and build-out of our wireless network, including upgrades to and expansion of our HSDPA-capable WCDMA network, as well as initial build-out of our WiBro network; increases in equity of consolidated subsidiaries, Won 12.5 billion in 2007, Won 1,093.1 billion in 2008 (which was primarily due to our acquisition of shares of SK Broadband in March 2008) and nil in 2009; acquisitions of equity securities accounted for using the equity method, which were Won 76.6 billion in 2007, Won 601.1 billion in 2008 (which was primarily due to our investment in SKY Property Management Ltd. of Won 283.4 billion and investment in SK Marketing & Company Co. Ltd. of Won 190.0 billion) and Won 107.4 billion in 2009; and acquisitions of long-term investment securities, which were Won 371.4 billion in 2007 (which was primarily due to our purchase of beneficiary certificates for Won 351.4 billion), Won 31.4 billion in 2008 and Won 539.1 billion in 2009.
 
Net Cash from Financing Activities.  Net cash used in financing activities was Won 1,041.3 billion in 2007 and Won 1,205.1 billion in 2009. Net cash provided by financing activities was Won 869.4 billion in 2008. Cash inflows from financing activities were primarily driven by issuances of bonds, which provided cash of 761.1 billion in 2007, Won 1,307.7 billion in 2008 and Won 1,114.9 billion in 2009. Proceeds from long-term borrowings of Won 510.6 billion in 2008 and Won 9.9 billion in 2009 and proceeds from short-term borrowings of Won 35.9 billion in 2007, Won 473.0 billion in 2008 and Won 350.4 billion in 2009 also contributed to cash inflows from financing activities. Cash outflows for financing activities included payment of dividends, repayments of current portion of long-term debt, repayment of long-term borrowings, acquisition and retirement of treasury stock and repayment of short term borrowings, among other items. Payment of dividends were Won 581.3 billion in 2007, Won 682.5 billion in 2008 and Won 681.5 billion in 2009. Repayments of current portion of long-term debt were Won 907.2 billion in 2007, Won 558.1 billion in 2008 and Won 851.1 billion in 2009. Repayment of long-term borrowings were Won 93.3 billion in 2007, Won 193.4 billion in 2008 and Won 111.6 billion in 2009. The acquisition and retirement of treasury shares also accounted for Won 118.5 billion, Won 63.5 billion and Won 28.9 billion of cash outflows for financing activities in 2007, 2008 and 2009, respectively. Repayment of short-term borrowings also accounted for Won 86.6 billion in 2007 and Won 1,007.6 billion in 2009.
 
As of December 31, 2007, we had total long-term debt (excluding current portion and subscription deposits) outstanding of Won 2,672.1 billion, which included bonds in the amount of Won 2,348.7 billion and bank and institutional borrowings in the amount of Won 323.4 billion. As of December 31, 2008, we had total long-term debt (excluding current portion and subscription deposits) outstanding of Won 4,930.9 billion, which included bonds in the amount of Won 4,074.4 billion and bank and institutional borrowings in the amount of Won 856.5 billion. The increase in our long-term debt in 2008 was primarily due to the inclusion of SK Broadband’s long-term debt (which amounted to Won 1,066.5 billion as of December 31, 2008), as well as our incurrence of long-term debt to finance the acquisition of shares of SK Broadband and our subscribers’ handset purchases on installment payment plans. As of December 31, 2009, we had total long-term debt (excluding current portion and subscription deposits) outstanding of Won 5125.0 billion, which included bonds in the amount of Won 4,280.4 billion and bank and institutional borrowings in the amount of Won 844.6 billion. For a description of our long-term liabilities, see notes 9, 10, 11 and 22 of the notes to our consolidated financial statements.


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As of December 31, 2009, substantially all of our foreign currency-denominated long-term borrowings, which amounted to approximately 13.6% of our total outstanding long-term debt, including current portion as of such date, was denominated in Dollars. Appreciation of the Won against the Dollar will result in net foreign exchange and translation gains, while depreciation of the Won against the Dollar will result in net foreign exchange and translation losses. Changes in foreign currency exchange rates will also affect our liquidity because of the effect of such changes on the amount of funds required for us to make interest and principal payments on our foreign currency-denominated debt.
 
In late May 2004, we issued zero coupon convertible notes with a maturity of five years in the principal amount of US$329,450,000, with an initial conversion price of Won 235,625 per share of our common stock, subject to certain redemption rights. In May 2009, we repaid all outstanding zero coupon convertible notes at their maturity.
 
On April 7, 2009, we issued convertible notes in the principal amount of US$332,528,000 with a maturity date of five years and an annual interest rate of 1.75%. The aggregate net proceeds from the offering was US$326,397,463. We are required to redeem the convertible notes held by the holders thereof who exercise their put option, at their principal amount on the date of the third anniversary from the issuance date. After the third anniversary of the issuance date, we may redeem the convertible notes at our option if the price of the shares of our common stock during a pre-determined period (translated into Dollars at the then prevailing exchange rate) exceeds the conversion price (translated into Dollars at the exchange rate of Won 1,383.40 to US$1.00) by 30%. As of June 25, 2010, the conversion price was Won 221,370 per share of our common stock at the exchange rate of Won 1,383.40 to US$1.00. If the conversion of convertible notes into shares would exceed the 49% limit on aggregate foreign ownership of our shares, we intend to make cash payments to the holders of the convertible notes in lieu of the shares of our common stock. See “Item 4.B. Business Overview — Law and Regulation — Foreign Ownership and Investment Restrictions and Requirements” for a more detailed discussion of foreign share ownership restrictions. As of June 1, 2010, a total of 2,078,055 shares would be issued upon the exercise of the conversion rights by all of the holders of the convertible notes.
 
In June 2006, we issued floating rate discounted bills in the aggregate principal amount of Won 200 billion. The discounted bills have a five-year maturity and an interest rate based on a 91-day certificate of deposit yield plus 0.25%. In September and November 2006, we issued Won-denominated corporate bonds, in each case, in aggregate principal amount of Won 200 billion. These bonds will mature in September 2016 and November 2013, respectively, and have annual interest rates of 5.0% and 4.0%, respectively. In October 2006, we also made long-term borrowings in aggregate principal amount of US$100 million with a maturity of seven years and an annual interest rate based on six-month LIBOR plus 0.29%.
 
In July 2007, we issued U.S. dollar-denominated bonds in the principal amount of US$400,000,000 with a maturity of twenty years and an annual interest rate of 6.625%. In November 2007, we issued Japanese Yen-denominated notes in the principal amount of Japanese Yen 12,500,000,000 with a maturity of five years and an annual interest rate based on Yen LIBOR plus 0.55%. In November 2007, we issued Korean Won-denominated bonds in the principal amount of Won 200 billion with a maturity of seven years and an annual interest rate of 5.00%.
 
In March 2008, we issued two tranches of Korean Won-denominated bonds, each tranche in the principal amount of Won 200 billion with an annual interest rate of 5.00%, maturing in seven and ten years, respectively. In October 2008, we issued Korean Won-denominated bonds in the principal amount of Won 250 billion with a maturity of five years and an annual interest rate of 6.92% and Korean Won-denominated bonds in the principal amount of Won 50 billion with a maturity of two years and an annual interest rate of 6.77%. In November 2008, we issued U.S. dollar-denominated notes in the principal amount of US$150,000,000 with a maturity of two years and an annual interest rate based on three-month U.S. dollar LIBOR plus 3.05%.
 
In January 2009, we issued notes in the principal amounts of Won 40 billion and Yen 3 billion with maturities of four and three years, respectively, and annual interest rates of 5.54% and 3-month Euro Yen LIBOR plus 2.50%, respectively. In March 2009, we issued notes in the principal amounts of Won 230 billion and Yen 5 billion with maturities of seven and three years, respectively, and annual interest rates of 5.92% and 3-month Euro Yen TIBOR plus 2.50%, respectively. In April 2009, we issued floating rate notes in the principal amounts of US$220,000,000 with a maturity of three years and an annual interest rate based on LIBOR plus 3.15%. In May 2009, SK Broadband,


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our consolidated subsidiary, filed a securities registration statement in Korea in order to raise up to Won 300 billion by selling its common shares through a rights offering. We participated in the rights offering in proportion to our 43.4% equity interest in SK Broadband and purchased 47,187,105 shares of SK Broadband’s common stock at Won 5,000 per share. As a result, our equity stake in SK Broadband has increased from 43.4% to 50.6%.
 
We also have long-term liabilities in respect of subscription deposits received from subscribers, which stood at Won 6.4 billion at December 31, 2007, Won 4.8 billion at December 31, 2008 and Won 5.5 billion at December 31, 2009. These non-interest bearing deposits were collected from some subscribers when they initiated service and are returned (less unpaid amounts due from the subscriber for our services) when the subscriber’s service is deactivated. We generally no longer collect these deposits from our subscribers. See “Item 4.B. Business Overview — Revenues, Rates and Subscription Deposits”.
 
Substantially all of our revenue and operating expenses are denominated in Won. We generally pay for imported capital equipment in Dollars. For a description of swap or derivative transactions we have entered into, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.
 
Capital Requirements
 
Historically, capital expenditures, repayment of outstanding debt and research and development expenditures have represented our most significant use of funds. In recent years, we have also increasingly dedicated capital resources to develop new and growing business areas, including our broadband Internet and fixed-line telephone business, wireless Internet business, convergence businesses and overseas operations, including through acquisitions and strategic alliances. In addition, we have used funds for the acquisition of treasury shares, financing of our subscribers’ handset purchases on installment payment plans and payment of retirement and severance benefits.
 
To fund our scheduled debt repayment and planned capital expenditures over the next several years, we intend to rely primarily on funds provided by operations, as well as bank and institutional borrowings, and offerings of debt or equity in the domestic or international markets. We believe that these sources will be sufficient to fund our planned capital expenditures for 2010. Our ability to rely on these alternatives could be affected by the liquidity of the Korean financial markets or by Government policies regarding Won and foreign currency borrowings and the issuance of equity and debt. Our failure to make needed expenditures would adversely affect our ability to sustain subscriber growth and provide quality services and, consequently, our results of operations.
 
Capital Expenditures.  The following table sets forth our actual capital expenditures for 2007, 2008 and 2009:
 
                         
    Year Ended December 31,  
    2007     2008     2009  
    (In billions of Won)  
 
CDMA Networks(1)
  W 198     W 148     W 274  
WCDMA Network
    1,044       905       939  
WiBro(2)
    154       405       147  
Others(3)
    408       779       802  
                         
Total(4)
  W 1,804     W 2,237     W 2,162  
                         
 
 
(1) Includes our basic CDMA, CDMA 1xRTT and CMDA EV-DO networks.
 
(2) We commenced WiBro service in May 2006.
 
(3) Includes investments in infrastructure consisting of equipment necessary for the provision of data services and marketing.
 
(4) Also, see note 7 of the notes to our consolidated financial statements.
 
We set our capital expenditure budget for an upcoming year on an annual basis. Our actual capital expenditures in 2007 were Won 1,804.4 billion. Of such amount, we spent approximately Won 1,044.3 billion on capital


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expenditures related to upgrade and expansion of our WCDMA network, Won 153.6 billion related to development and expansion of our WiBro network, Won 198.4 billion related to general upkeep of our CDMA 1xRTT and CMDA EV-DO networks and Won 408.1 billion on other capital expenditures and projects. Our actual capital expenditures in 2008 were Won 2,236.9 billion. Of such amount, we spent approximately Won 904.8 billion on capital expenditures related to upgrade and expansion of our WCDMA network, Won 404.8 billion related to development and expansion of our WiBro network, Won 148.2 billion related to general upkeep of our CDMA 1xRTT and CMDA EV-DO networks and Won 779.1 billion on other capital expenditures and projects. Our actual capital expenditures in 2009 were Won 2,162.4 billion. Of such amount, we spent approximately Won 939.3 billion on capital expenditures related to upgrade and expansion of our WCDMA network, Won 146.8 billion related to development and expansion of our WiBro network, Won 273.5 billion related to general upkeep of our CDMA 1xRTT and CMDA EV-DO networks and Won 802.8 billion on other capital expenditures and projects. We are required to pay the remainder of the cost of our IMT-2000 license in annual installments for a five-year period from 2007 through 2011. For more information, see note 8 of the notes to our consolidated financial statements for the years ended December 31, 2007, 2008 and 2009.
 
In March 2005, we obtained a license from the MIC to provide WiBro services and paid the related Won 117.0 billion WiBro license fee. We currently provide WiBro service to “hot zone” areas in 84 cities. We are planning to make additional capital expenditures in 2010 to build and expand our WiBro network to more extensive hot zone areas in the 84 cities, and we may also make further capital investments to expand our WiBro service in the future. Our investment plans are subject to change depending on the market demand for WiBro services, the competitive landscape for similar services and development of competing technologies.
 
We expect that our capital expenditure amount in 2010 will be similar to that of 2009. Our expenditures will be for a range of projects, including investments in our backbone networks, investments to improve our WCDMA network-based products and services, investments in our wireless Internet-related and convergence businesses and funding for mid-to long-term research and development projects, as well as other initiatives, primarily related to our ongoing businesses and in the ordinary course. However, our overall expenditure levels and our allocation among projects remain subject to many uncertainties. We may increase, reduce or suspend our planned capital expenditures for 2010 or change the timing and area of our capital expenditure spending from the estimates described above in response to market conditions or for other reasons. We may also make additional capital expenditure investments as opportunities arise. Accordingly, we periodically review the amount of our capital expenditures and may make adjustments based on the current progress of capital expenditure projects and market conditions. No assurance can be given that we will be able to meet any such increased expenditure requirements or obtain adequate financing for such requirements, on terms acceptable to us, or at all.
 
Repayment of Outstanding Debt.  As of December 31, 2009, our principal repayment obligations with respect to long-term borrowings, bonds and obligations under capital leases outstanding were as follows for the periods indicated:
 
         
Year Ending December 31,
  Total
    (In billions of Won)
 
2010
  W 658.1  
2011
    1,658.4  
2012
    1,157.6  
After 2012
    2,549.0  
 
We note that no commercial bank in Korea may extend credit (including loans, guarantees and purchase of bonds) in excess of 20% of its shareholders’ equity to any one borrower. In addition, no commercial bank in Korea may extend credit exceeding 25% of the bank’s shareholders’ equity to any one borrower and to any person with whom the borrower shares a credit risk.
 
Investments in New Businesses and Global Expansion and Other Needs.  We may also require capital for investments to support our development of growing businesses areas, as well as the purchase of additional treasury shares and shares of our affiliates.


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For example, in March 2008, we completed the acquisition of an additional 38.7% equity stake in SK Broadband, Korea’s second-largest fixed-line operator, for approximately Won 1.1 trillion, increasing our total equity interest in SK Broadband to 43.4%. In July 2009, we purchased additional shares of SK Broadband’s common stock, and as a result, our current equity stake increased to 50.6%. We may make additional capital investments in order to develop SK Broadband’s business in line with our growth strategy.
 
In September 2009, we also acquired a leased-line business and related ancillary businesses of SK Networks for the acquisition price of Won 892.8 billion. In connection with such acquisition, we also assumed liabilities of the businesses in the amount of Won 611.4 billion.
 
In February 2010, we purchased shares of Hana Card Co., Ltd. for the purchase price of Won 400 billion. As a result, we are a major shareholder of Hana Card Co., Ltd. with 49% equity stake.
 
In addition, we, via SK Telecom USA Holdings, Inc., our wholly-owned subsidiary in the United States, had invested US$380 million in HELIO as of June 30, 2008. In August 2008, we sold our equity interest in HELIO to Virgin Mobile USA, Inc. in exchange for approximately 14.05% equity interest in Virgin Mobile USA, Inc. In addition, we invested US$25 million of equity capital in Virgin Mobile USA, Inc. in exchange for mandatory convertible preferred stock, convertible into Virgin Mobile USA, Inc.’s Class A common stock. As a result of the merger of Virgin Mobile USA, Inc. and Sprint Nextel Corporation, all of the shares of common and convertible preferred stock of Virgin Mobile USA, Inc. held by us were converted to the shares of Sprint Nextel Corporation. For a more detailed description of our investments in HELIO and Virgin Mobile USA, Inc., see “Item 4. Information on the Company — Item 4.B. Business Overview — Global Business — Overseas Operations”.
 
From time to time, we may make other investments in telecommunications or other businesses, in Korea or abroad, where we perceive attractive opportunities for investment. From time to time, we may also dispose of existing investments when we believe that doing so would be in our best interest.
 
Acquisition of Treasury Shares.  In October 2001, in accordance with the approval of our board of directors, we established trust funds with four Korean banks with a total funding of Won 1.3 trillion for the purpose of acquiring our shares at market prices plus or minus five percent. Each of the trust funds has an initial term of three years but is terminable at our option six months after the establishment of the trust fund and at the end of each succeeding six-month period thereafter. While held by the trust funds, our shares are not entitled to voting rights or dividends. Upon termination of the trust funds, we are required to resell the shares acquired by the trust funds. In October 2004, we extended the terms of the trust funds (then with a balance of Won 982 billion) for another three years, and, in October 2007, we extended the terms of the trust funds (then with a balance of Won 982 billion) for additional three years. As such, the trust funds will expire in October 2010. As of June 1, 2010, we have not decided whether to extend the trust funds.
 
In a series of open market purchases in the period between November 1, 2007 and December 31, 2007, we acquired 471,000 shares of our common stock at an aggregate purchase price of Won 118.5 billion. In a series of open market purchases in the period between December 2, 2008 and December 30, 2008, we acquired 306,988 shares of our common stock at an aggregate purchase price of Won 63.5 billion. In January 2009, we acquired 141,016 shares of our common stock at an aggregate purchase price of Won 28.9 billion. As of December 31, 2009, the total number of our common stock outstanding was 72,344,999.
 
Financing of Installment Payment Plans.  Since April 2008, we have been offering installment payment plans for new handset purchases by our new or existing subscribers. Under installment payment plans, we provide financing to our new or existing subscribers who wish to purchase new handsets on credit and, in certain cases, charge fees or interest. As of December 31, 2009, short-tem and long-term accounts receivable (other), each net of present value discount, amounted to Won 1,644.4 billion and Won 761.7 billion, respectively, compared to Won 1,067.3 billion and Won 572.1 billion, respectively, as of December 31, 2008. These increases were primarily attributable to the increase in purchases of new handsets on installment payment plans, which has required, and may continue to require, our capital resources.


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Severance Payments.  The total accrued and unpaid retirement and severance benefits for our employees as of December 31, 2009 of Won 57.6 billion was reflected in our consolidated financial statements as a liability, which is net of deposits with insurance companies totaling Won 76.4 billion to fund a portion of the employees’ severance indemnities.
 
Also see “Item 6.D. Employees — Employee Stock Ownership Association and Other Benefits” and note 2(r) of the notes to our consolidated financial statements.
 
Dividends.  Total payments of cash dividends amounted to Won 581.3 billion in 2007, Won 682.5 billion in 2008 and Won 681.5 billion in 2009.
 
In March 2010, we distributed annual dividends at Won 8,400 per share to our shareholders for an aggregate payout amount of Won 607.7 billion.
 
Contractual Obligations and Commitments
 
The following summarizes our contractual cash obligations at December 31, 2009, and the effect such obligations are expected to have on liquidity and cash flow in future periods:
 
                                         
    Payments Due by Period(1)  
          Less
                   
          Than
                After
 
    Total     1 Year     1-3 Years     4-5 Years     5 Years  
    (In billions of Won)  
 
Bonds
                                       
Principal
  W 5,017.8     W 575.1     W 2,018.0     W 1,087.7     W 1,337.0  
Interest
    1,224.1       243.2       320.4       203.1       457.4  
Long-term borrowings
                                       
Principal
    857.0       12.3       721.2       123.5        
Interest
    51.0       30.2       19.5       1.3        
Capital lease obligations
                                       
Principal
    148.3       70.6       76.8       0.9        
Interest
    14.2       9.1       5.1              
Operating leases
    2.7       1.4       1.3              
Facility deposits
    13.0       7.5                   5.5  
Derivatives
    70.8       36.3       34.5              
Other long-term payables(2)
                                       
Principal
    320.0       150.0       170.0              
Interest
    16.5       10.8       5.7              
Short-term borrowings
    677.2       677.2                    
                                         
Total contractual cash obligations
  W 8,412.6     W 1,823.7     W 3,372.5     W 1,416.5     W 1,799.9  
                                         
 
 
(1) We are contractually obligated to make severance payments to eligible employees we have employed for more than one year, upon termination of their employment, regardless of whether such termination is voluntary or involuntary. Accruals for severance indemnities are recorded based on the amount we would be required to pay in the event the employment of all our employees were to terminate at the balance date. However, we have not yet estimated cash flows for future periods. Accordingly, payments due in connection with severance indemnities have been excluded from this table.
 
(2) Related to acquisition of IMT-2000 license. See note 8 of the notes to our consolidated financial statements.
 
See note 22 of the notes to our consolidated financial statements for details related to our other commitments and contingencies.


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U.S. GAAP Reconciliation
 
Our consolidated financial statements are prepared in accordance with Korean GAAP, which differs in certain significant respects from U.S. GAAP. For a discussion of significant differences between Korean GAAP and U.S. GAAP, see notes 34 and 35 of our notes to consolidated financial statements.
 
Our net income in 2007 under U.S. GAAP is lower than under Korean GAAP by Won 111.2 billion, primarily due to the differing treatment of unrealized gains or losses on the valuation of convertible notes receivable and the differing treatment of nonrefundable activation fees under U.S GAAP, partially offset by the differing treatment of reclassification of our investment in the common stock of SK C&C, reversal of goodwill amortization and the tax effect of reconciling items under U.S. GAAP. Our net income in 2008 under U.S. GAAP is lower than net income under Korean GAAP by Won 20.6 billion, primarily due to the differing treatment of valuation of currency and interest rate swaps and loss on impairment of goodwill under U.S. GAAP, partially offset by differing treatment in loss on impairment of investment securities, the reversal of goodwill amortization, scope of consolidation and reclassification of our investment in the common stock of SK C&C under U.S. GAAP. Our net income in 2009 under U.S. GAAP is higher than net income under Korean GAAP by Won 301.1 billion, primarily due to the differing treatment of unrealized gains or losses on the valuation of convertible bonds payable, the reversal of goodwill amortization and valuation of currency and interest rate swap, partially offset by remeasuring our previously held equity interest in SK Broadband at its acquisition-date fair value and reclassification of our investment in the common stock of SK C&C under U.S. GAAP.
 
Our shareholders’ equity as of December 31, 2007, 2008 and 2009 under U.S. GAAP is higher than under Korean GAAP by Won 1,210.0 billion, Won 737.6 billion and Won 1,916.1 billion, respectively, in each case, primarily due to increases from the differing treatment of additional equity investment in subsidiaries, reversal of goodwill amortization and tax effect of the reconciling items, partially offset by decreases from the differing treatment of goodwill impairment, nonrefundable activation fees in 2009 and scope of consolidation. The non-controlling interest in a subsidiary shall be reclassified to an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. As a result of such retroactive application, the presentation of our shareholders’ equity in this annual report under U.S. GAAP is higher than those presented in our annual report for 2008.
 
New Accounting Pronouncements under U.S. GAAP
 
In December 2007, the Financial Accounting Standards Board (“FASB”) amended the accounting and disclosure guidance for business combinations. The amendment applies to all transactions or other events in which an entity obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. The amendment modifies the prior accounting provisions for business combinations and requires, with limited exceptions, the acquirer in a business combination to recognize 100% of the assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition-date fair value. In addition, it requires the expensing of acquisition-related transaction and restructuring costs, and certain contingent assets and liabilities acquired, as well as contingent consideration, to be recognized at fair value. The amendment also modifies prior accounting provisions for certain acquired income tax assets and liabilities. Amended guidance was effective for new acquisitions consummated on or after January 1, 2009, and we have accounted for the business combinations occurred on or after January 1, 2009 in accordance with this new guideline.
 
In June 2009, the FASB amended the derecognition provisions in the accounting guidance for transfers and servicing, including the removal of the concept of qualifying special-purpose entities (“QSPEs”). The amendment also includes amendments to initial measurement of beneficial interests that are received as proceeds by a transferor in connection with transfers of financial assets and additional disclosure about transfers of financial assets and a transferor’s continuing involvement with such transferred financial assets. The amended derecognition provisions will be effective for financial asset transfers occurring after the beginning of the first fiscal year that begins after November 15, 2009 or January 1, 2010 for us. We are currently assessing the potential impact of the guidance upon its effectiveness.


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In June 2009, the FASB amended the accounting and disclosure guidance for the consolidation of variable interest entities. This amendment requires ongoing assessments to determine whether an entity is a variable interest entity (“VIE”) and whether an enterprise is the primary beneficiary of a VIE. It also amends the guidance for determining which enterprise, if any, is the primary beneficiary of a VIE by requiring the enterprise to initially perform a qualitative analysis to determine if the enterprise’s variable interest or interests give it a controlling financial interest. Consolidation is based on a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. If a company has control and the right to receive benefits or the obligation to absorb losses which could potentially be significant to the VIE, then consolidation is required. Also, additional disclosure about transfers of financial assets and a transferor’s continuing involvement with such transferred financial assets will be required. This amendment is effective January 1, 2010, at which time any QSPEs will also be evaluated for consolidation in accordance to this amendment. Amendments on how to account for transfers of financial assets will apply prospectively to transfers occurring on or after the effective date. We are currently assessing the potential impact of the amendment upon its effectiveness.
 
In September 2009, the FASB issued additional guidance on Fair Value Measurements and Disclosures: Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The guidance discusses how to use a net asset value per share to estimate the fair value on investments in investment vehicles such as hedge funds, private equity funds, real estate funds, venture capital funds, offshore fund vehicles and fund of funds. Investors may use net asset value to estimate the fair value of investments in investment companies that do not have a readily determinable fair value if the investees have the attributes of investment companies and the net asset values or their equivalents are calculated consistent with the AICPA Audit and Accounting Guide, Investment Companies, which generally requires investments to be measured at fair value. This approach is deemed to be a “practical expedient” for investors in investment companies as the GAAP fair-value measurement framework defines an asset’s fair value as its current exit price. The guidance has limitations and disclosure requirements about the nature and terms of the investments within the scope of the new guidance. The guidance was effective December 31, 2009. The adoption of this guidance did not have a material effect on our financial condition, results of operations or cash flows.
 
In January 2010, the FASB issued guidance on improving disclosures about fair value measurements. The guidance requires disclosing the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and to describe the reasons for the transfers. The disclosures are effective for reporting periods beginning after December 15, 2009. Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in Level 3 fair value measurements will be required for fiscal years beginning after December 15, 2010. We are currently assessing the potential impact of the guidance upon its effectiveness.
 
In March 2010, the FASB issued guidance on scope exception related to embedded credit derivatives. The guidance clarifies that certain embedded derivatives, such as those contained in certain securitizations, CDOs and structured notes, should be considered embedded credit derivatives subject to potential bifurcation and separated fair value accounting. The guidance allows any beneficial interest issued by a securitization vehicle to be accounted for under the fair value option at transition. The new accounting guidance is effective July 1, 2010. We do not expect the new accounting guidance to have any impact on the consolidated financial statements.
 
In October 2009, the FASB amended guidance on multiple deliverable revenue arrangement. As a result of those amendments, multiple-deliverable arrangements will be separated in more circumstances than under existing U.S. GAAP. The amendments establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor specific objective evidence nor third-party evidence is available. The amendments also will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The guidance will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are currently assessing the potential impact of the amendment upon its effectiveness.


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Significant Changes in Korean GAAP
 
The amended SKAS No. 25, “Consolidated Financial Statements”, which is effective December 29, 2008 (but the early adoption is allowed from 2008), clarifies that when the parent’s ownership interest in a subsidiary is increased after control is obtained, the difference between the consideration for additional acquisition of interest and portion of net asset of subsidiary, which had been previously recognized as capital surplus, should be recognized as other capital adjustment if the difference is negative amount and there is no related capital surplus earned at previous transaction. As the amended SKAS No. 25, “Consolidated Financial Statements” is applied retroactively during the year ended December 31, 2008, the 2006 and 2007 financial statements presented comparatively are restated, which results in the increase in capital surplus by W16,072 million and W31,146 million as of December 31, 2006 and 2007, respectively, and the decrease in other capital adjustment by W16,072 million and W31,146 million as of December 31, 2006 and 2007, respectively.
 
Transition to IFRS Starting in 2011
 
In March 2007, the Financial Services Commission and the Korea Accounting Institute announced a road map for the adoption of the Korean equivalent of International Financial Reporting Standards (“Korean IFRS”), pursuant to which all listed companies in Korea will be required to prepare their annual financial statements under Korean IFRS beginning in 2011. All standards and interpretations issued by the International Accounting Standards Board (“IASB”), and the International Financial Reporting Interpretations Committee have been adopted by the Korean IFRS. In preparation of such adoption, we began preparing our internal financial statements under both Korean GAAP and Korean IFRS starting in January 2010.
 
Critical Accounting Policies, Estimates And Judgments
 
Our consolidated financial statements are prepared in accordance with Korean GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. We continually evaluate our estimates and judgments including those related to revenue recognition, allowances for doubtful accounts, inventories, useful lives of property and equipment, intangible assets, investments, employee stock option compensation plans and income taxes. We base our estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We also provide a summary of significant differences between accounting principles followed by us and our subsidiaries and U.S. GAAP. We believe that of our significant accounting policies, the following may involve a higher degree of judgment or complexity:
 
Allowances for Doubtful Accounts
 
An allowance for doubtful accounts is provided based on a review of the status of individual receivable accounts at the end of the year. We maintain allowances for doubtful accounts for estimated losses that result from the inability of our customers to make required payments. We base our allowances on the likelihood of recoverability of accounts receivable based on past experience and taking into account current collection trends that are expected to continue. If economic or specific industry trends worsen beyond our estimates, we increase our allowances for doubtful accounts by recording additional expenses.
 
Derivative Instruments
 
We record rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. The gains and losses that result from the change in the fair value of derivative instruments are reported in current earnings. However, for derivative instruments designated as hedging the exposure of variable cash flows, the effective portions of the gains or losses on the hedging instruments are recorded as accumulated other comprehensive income (loss) and credited or charged to operations at the time the hedged transactions affect earnings, and the ineffective portions of the gains or losses are credited or charged immediately to operations.


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Estimated Useful Lives
 
We estimate the useful lives of long-lived assets in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. The useful lives are estimated at the time the asset is acquired and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expense in future periods.
 
Impairment of Long-lived Assets Including the WCDMA Frequency Usage Right
 
Long-lived assets generally consist of property, plant and equipment and intangible assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, we evaluate our long-lived assets for impairment each year as part of our annual forecasting process. An impairment loss would be considered when estimated undiscounted future net cash flow expected to result from the use of the asset and its eventual disposition are less than its carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
 
Our intangible assets include the WCDMA frequency usage right, which has a contractual life of 15 years and is amortized from the date commercial service is initiated through the end of its contractual life, which is December 15, 2015. We started to amortize this frequency usage right on December 29, 2003. Because WCDMA presents risks and challenges to our business, any or all of which, if realized or not properly addressed, may have a material adverse effect on our financial condition, results of operations and cash flows, we review the WCDMA frequency usage right for impairment on an annual basis. In connection with our review, we utilize the estimated long-term revenue and cash flow forecasts. The use of different assumptions within our cash flow model could result in different amounts for the WCDMA frequency usage right. The results of our review using the testing method described above did not indicate any need to impair the WCDMA frequency usage right for 2009.
 
Provision for Point Program and Handset Subsidy
 
For its marketing purposes, we grant Rainbow Points and Point Box Points to our subscribers based on their usage of our services. Points are provided based on the historical usage experience and our marketing policy. Such provision is recorded as accrued expenses or other non-current liabilities in accordance with the expected points usage duration from the end of the reporting period. Points expire after 5 years and all unused points are expired on their fifth anniversary.
 
We provide handset subsidies to the subscribers who purchase handsets on an installment basis. Such provision was recorded as accrued expenses or other non-current liabilities in accordance with the expected points when the subsidies are paid.
 
Impairment of Investment Securities
 
When the declines in fair value of individual available-for-sale and held-to-maturity securities below their acquisition cost are other than temporary and there is objective evidence of impairment, the carrying value of the securities is adjusted to their fair value with the resulting valuation loss charged to current operations.
 
As part of this review, the investee’s operating results, net asset value and future performance forecasts as well as general market conditions are taken into consideration. If we believe, based on this review, that the market value of an equity security or a debt security may realistically be expected to recover, the loss will continue to be classified as temporary. If economies or specific industry trends worsen beyond our estimates, valuation losses previously determined to be recoverable may need to be charged as an impairment loss in current operations.
 
Significant management judgment is involved in the evaluation of declines in value of individual investments. The estimates and assumptions used by management to evaluate declines in value can be impacted by many factors, such as our financial condition, earnings capacity and near-term prospects in which we have invested and, for publicly-traded securities, the length of time and the extent to which fair value has been less than cost. The


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evaluation of these investments is also subject to the overall condition of the economy and its impact on the capital markets.
 
Income Taxes
 
We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for the future tax consequences of events that have been reflected in our financial statements or tax returns. This process requires management to make assessments regarding the timing and probability of the tax impact. Actual income taxes could vary from these estimates due to future changes in income tax law or unpredicted results from the final determination of each year’s liability by taxing authorities.
 
We believe that the accounting estimate related to establishing tax valuation allowances is a “critical accounting estimate” because (i) 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 (ii) 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.
 
Item 5.C.   Research and Development
 
Overview
 
We maintain a high level of spending on our internal research activity. We also donate funds to several Korean research institutes and educational organizations that focus on research and development activity. We believe that we must maintain a substantial in-house technology capability to achieve our strategic goals.
 
The following table sets forth our annual research and development expenses:
 
                         
    As of and for the Year Ended December 31,  
    2007     2008     2009  
    (In billions of Won)  
 
Internal R&D Expenses
  W 218.7     W 226.7     W 236.3  
External R&D Expenses
    74.4       73.0       56.9  
Total R&D Expenses
  W 293.1     W 299.7     W 293.2  
 
Our total research and development expenses were approximately 2.5% in 2007, 2.1% in 2008 and 2.0% in 2009, respectively, of operating revenue.
 
Our external research and development expenses have been influenced by the Ministry of Knowledge Economy, which makes annual recommendations concerning our minimum level of contribution to the Government-run Fund for Development of Information and Telecommunications. The minimum level of contribution recommended by the Ministry of Knowledge Economy was 0.75% for each of 2007, 2008 and 2009. We are not obligated to make donations to any other external research institutes.
 
Internal Research and Development
 
The main focus of our internal research and development activity is the development of new wireless technologies and services and value-added technologies and services for our CDMA-based, WCDMA-based and WiBro networks, such as wireless data communications, as well as development of new technologies that reflect the growing convergence between telecommunications and other industries. We spent approximately Won 236.3 billion on internal research and development in 2009.
 
Our internal research and development activity is centered at a research center with state-of-the-art facilities and equipment established in January 1999 in Bundang-gu, Sungnam-si, Kyunggi-do, Korea. To more efficiently


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manage our research and development resources, our research and development center is organized into three core areas:
 
  •  The access technology R&D center, which has pioneered the development of 3G and 3.5G technologies. This center is developing next-generation technologies with a view toward leading global standardization of mobile telecommunications technologies. Current projects include the development of multimedia handsets and location-based services, as well as development of network technologies, with respect to, among other things, WiBro, personal area network, ubiquitous sensor and broadband convergence networks. In anticipation of the evolution of 4G technology, the access technology R&D center also plans to develop core 4G technologies such as technologies using smart antenna and multi-frenquencies and the user-friendly 4G network. We intend to prepare an optimization plan to accommodate all evolution possibilities of WiMax and LTE technologies.
 
  •  The service technology R&D center, which focuses on improving the quality and operation of our core networks; building a flexible service infrastructure that will support the introduction of new products and services and enable easy maintenance; and developing new services based on customer needs. Specifically, this center has been developing an array of value-added services, including COLORing services and developing new wireless data and convergent products and services.
 
  •  The technology innovation center, which is responsible for developing and maintaining our overall management and information technology infrastructure, including billing and subscriber information security systems. The information technology R&D center is also currently upgrading our customer relationship management system.
 
Each business unit also has its own research team that can concentrate on specific short-term research needs. Such research teams permit our research center to concentrate on long-term, technology-intensive research projects. We aim to establish strategic alliances with selected domestic and foreign companies with a view to exchanging or jointly developing technologies, products and services.
 
External Research and Development
 
In addition to conducting research in our own facilities, we have been a major financial supporter of other Korean research institutes, and we have helped coordinate the Government’s effort to commercialize CDMA-based, WCDMA-based and WiBro technology. We do not independently own intellectual property rights in the technologies or products developed by any external research institute.
 
Item 5.D.   Trend Information
 
These matters are discussed under Item 5.A. and Item 5.B. above where relevant.
 
Item 5.E.   Off-Balance Sheet Arrangements
 
None.
 
Item 5.F.   Tabular Disclosure of Contractual Obligations
 
These matters are discussed under Item 5.B. above where relevant.
 
Item 5.G.   Safe Harbor
 
These matters are discussed under “Forward-Looking Statements.”
 
Item 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
Item 6.A.   Directors and Senior Management
 
Our board of directors has ultimate responsibility for the management of our affairs. Under our articles of incorporation, our board is to consist of at least three but no more than twelve directors, more than a half of whom


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must be independent non-executive directors. We currently have a total of eight directors, five of whom are independent non-executive directors. We elect our directors at a general meeting of shareholders with the approval of at least a majority of those shares present or represented at such meeting. Such majority must represent at least one-fourth of our total issued and outstanding shares with voting rights.
 
As required under relevant Korean laws and our articles of incorporation, we have a committee for recommendation of independent non-executive directors within the board of directors, the Independent Director Nomination Committee. Independent non-executive directors are appointed from among those candidates recommended by the Independent Director Nomination Committee.
 
The term of offices for directors is until the close of the third annual general shareholders meeting convened after he or she commences his or her term. Our directors may serve consecutive terms. Our shareholders may remove them from office by a resolution at a general meeting of shareholders adopted by the holders of at least two-thirds of the voting shares present or represented at the meeting, and such affirmative votes also represent at least one-third of our total voting shares then issued and outstanding.
 
Representative directors are directors elected by the board of directors with the statutory power to represent our company.
 
The following are the names and positions of our standing and non-standing directors. The business address of all of our directors is the address of our registered office at SK T-Tower, 11, Euljiro 2-ga, Jung-gu, Seoul 100-999, Korea.
 
Standing directors are our full-time employees and executive officers, and they also comprise the senior management, or the key personnel who manage us. Their names, dates of birth and positions at our company and other positions are set forth below:
 
                         
                    Other
   
                    Principal
   
    Date of
  Director
  Expiration
      Directorships
  Business
Name
  Birth   Since   of Term  
Position
 
and Positions
 
Experience
 
Man Won Jung
  Oct. 5, 1952   2009   2012   President, Chief
Executive Officer & Representative Director
    CEO & President, SK
Networks; Vice President, Internet Business Divisional Group, SK Telecom; Vice President, Customer Business Development Group, SK Corporation
Ki Heung Cho
  Jan. 5, 1959   2010   2013   President, GMS business, SK Telecom     Vice President, Head of Corporate Management, SK Corporation; President and COO, SK Networks


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Our current non-standing directors are as set forth below:
 
                         
                    Other
   
                    Principal
   
    Date of
  Director
  Expiration
      Directorships
  Business
Name
  Birth   Since   of Term  
Position
 
and Positions
 
Experience
 
Jae Won Chey
  May 16, 1963   2009   2012   Vice Chairman & CEO, SK Holdings Vice Chairman &
CEO, SK Gas Vice Chairman &
CEO, SK E&S
      Executive Vice
President, Head of Corporate Center, SK Telecom; Executive Vice President, Head of Strategic Support Division, SK Telecom
Hyun Chin Lim
  Apr. 26, 1949   2009   2012   Independent Non-executive Director   Dean, College of Social Science, Seoul National University   President, Korea Sociological Association; Dean, Faculty of Liberal Education, Seoul National University; President, Korean Association of NGO Studies
Dal Sup Shim
  Jun. 27, 1950   2010   2013   Independent Non-executive Director   Auditor, Korea Technology Investment Corp.   Auditor, Korea Credit Guarantee Fund; Financial Attaché, Korean Embassy in the United States; Audit Officer, Korea Customs Service; Tax & Customs Office, Ministry of Strategy and Finance (formerly Ministry of Finance and Economy)
Rak Young Uhm
  Jun. 23, 1948   2008   2011   Independent Non-executive Director   Visiting Professor Graduate School of Public Administration, Seoul National University   Independent Non-executive Director, Tong Yang Insurance Co., Ltd., Non-Standing Director KOTRA; President, Korea Development Bank
Jay Young Chung
  Oct. 15, 1944   2008   2011   Independent Non-executive Director   Non-Executive Director of Corporate Citizenship Committee, SK Telecom   Chief, Asia-Pacific Economic Association; Vice President, Sung Kyun Kwan University; Independent Non-executive Director, POSCO
 
Item 6.B.   Compensation
 
The aggregate of the remuneration paid and in-kind benefits granted to the directors (both standing directors, who also serve as our executive officers, and non-standing directors) during the year ended December 31, 2009 totaled approximately Won 6.7 billion.
 
Remuneration for the directors is determined by shareholder resolutions. Severance allowances for directors are determined by the board of directors in accordance with our regulation on severance allowances for officers, which was adopted by shareholder resolutions. The regulation provides for monthly salary, performance bonus, severance payment and fringe benefits. The amount of performance bonuses is independently decided by a resolution of the board of directors.
 
In March 2002, pursuant to resolutions of the shareholders, and in accordance with our articles of incorporation, certain of our directors and officers were granted options to purchase our common shares. In 2002, 70 officers were granted options to purchase 65,730 common shares. The exercise price for the shares is Won 267,000. Each stock option agreement also provides for adjustments to the amount and exercise price of the shares in cases where the share price may become diluted as a result of issuance of new shares, stock dividends or mergers. No officer exercised the option to purchase for shares granted in 2002. The board of directors may, by resolution, cancel any director’s or officer’s stock options under certain circumstances. Since 2003, none of our directors and officers have been granted options to purchase our common shares.
 
Item 6.C.   Board Practices
 
For information regarding the expiration of each director’s term of appointment, as well as the period from which each director has served in such capacity, see the table set out under “Item 6.A. Directors and Senior Management”, above.


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Termination of Directors, Services
 
Directors are given a retirement and severance payment upon termination of employment in accordance with our internal regulations on severance payments. Upon retirement, directors who have made significant contributions to our company during their term may be appointed to serve either as an advisor to us or as an officer of an affiliate company.
 
Audit Committee
 
Under relevant Korean laws and our articles of incorporation, we are required to have an audit committee under the board of directors. The committee is composed of at least three members, two-thirds of whom must be independent non-executive directors independent with respect to applicable rules. The members of the audit committee are appointed annually by a resolution of the board of directors. They are required to:
 
  •  examine the agenda for the general meeting of shareholders;
 
  •  examine financial statements and other reports to be submitted by the board of directors to the general meeting of shareholders;
 
  •  review the administration by the board of directors of our affairs; and
 
  •  examine the operations and asset status of us and our subsidiaries.
 
In addition, the audit committee must appoint independent auditors to examine our financial statements. An audit and review of our financial statements by independent auditors is required for the purposes of a securities report. Listed companies must provide such report on an annual, semi-annual and quarterly basis to the Financial Services Commission of Korea, or the FSC, and the KRX KOSPI Market.
 
Our audit committee is composed of four independent non-executive directors: Dal Sup Shim, Hyun Chin Lim, Jae Ho Cho and Jay Young Chung, each of whom are financially literate and independent under the rules of the New York Stock Exchange as applicable. The board of directors has determined that Jae Ho Cho is an “audit committee financial expert” as defined under the applicable rules of the SEC. See “Item 16A. Audit Committee Financial Expert”.
 
Independent Director Nomination Committee
 
This committee is devoted to recommending independent non-executive directors for the board of directors. The objective of the committee is to help promote fairness and transparency in the nomination of candidates for these positions. The board of directors decides from time to time who will comprise the members of this committee. The committee is comprised of two executive directors and two independent directors.
 
Capex Review Committee
 
This committee is responsible for reviewing our business plan (including the budget). It also examines major capital expenditure revisions, and routinely monitors capital expenditure decisions that have already been executed. The committee is comprised of one executive director and three independent directors.
 
Compensation Review Committee
 
This committee oversees our overall compensation scheme for top-level executives and directors. It is responsible for reviewing both the criteria for and level of compensation. It is comprised of all independent directors, Hyun Chin Lim, Dal Sup Shim, Rak Young Uhm, Jay Young Chung and Jae Ho Cho.
 
Corporate Citizenship Committee
 
This committee was established to help us achieve world-class sustainable growth and to help us fulfill our corporate social responsibilities. It is comprised of one executive director and three independent directors.


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Item 6.D.   Employees
 
The following table sets forth the numbers of our regular employees, temporary employees and total employees as of the dates indicated:
 
                         
    Regular
  Temporary
   
    Employees   Employees   Total
 
December 31, 2007
    7,524       1,961       9,485  
December 31, 2008
    8,964       1,662       10,626  
December 31, 2009
    9,298       1,416       10,714  
 
Labor Relations
 
As of December 31, 2009, we had a company union comprised of 9,298 regular employees. We have never experienced a work stoppage of a serious nature. Every two years, the union and management negotiate and enter into a new collective bargaining agreement that has a two-year duration, which is focused on employee benefits and welfare. Employee wages are separately negotiated on an annual basis. Our wage negotiations completed in November 2008 resulted in an average wage increase of 2% for 2008 from 2007. Our wage negotiations completed in June 2009 resulted in a wage freeze for 2009. Our wage negotiations for 2010 has not commenced yet. We consider our relations with our employees to be good.
 
Employee Stock Ownership Association and Other Benefits
 
Since April 1999, we have been required to contribute an amount equal to 4.5% of employee wages toward a national pension plan. Employees are eligible to participate in an employee stock ownership association. We are not required to, and we do not, make any contributions to the employee stock ownership association, although we subsidize the employee stock ownership association through the Employee Welfare Fund by providing low interest rate loans to employees who desire to purchase our stock through the plan in the event of a capitalization by the association. On December 26, 2007 and January 23, 2008, we loaned Won 31.0 billion and Won 29.7 billion, respectively, to our employee stock ownership association to help fund the employee stock ownership association’s acquisition of our treasury shares. Such loans will be repaid over a period of five years, beginning on the second anniversary of each loan date. As of March 31, 2009, the employee stock ownership association owned approximately 0.56% of our issued common stock.
 
We are required to pay a severance amount to eligible employees who voluntarily or involuntarily cease employment with us, including through retirement. This severance amount is based upon the employee’s length of service with us and the employee’s salary level at the time of severance. As of December 31, 2009, the accrued and unpaid retirement and severance benefits of Won 134.0 billion for all of our employees are reflected in our consolidated financial statements as a liability, of which a total of Won 76.4 billion was funded. Under Korean laws and regulations, we are prevented from involuntarily terminating a full-time employee except under certain limited circumstances. In September 2002, we entered into an employment stabilization agreement with the union. Among other things, this agreement provides for a one-year guarantee of the same wage level in the event that we reorganize a department into a separate entity or we outsource an employee to a separate entity where the wage is lower.
 
Under the Korean Intra-Company Labor Welfare Fund Law, we may also contribute up to 5% of our annual earnings before tax for employee welfare. Contribution amounts are determined annually following negotiation with the union. The contribution amount for 2007, which was decided in December 2007, was set at 0.9% of our earnings before tax, or Won 20.0 billion. The contribution amount for 2008, which was decided in December 2008, was set at 2.6% of our earnings before tax, or Won 40 billion. The contribution amount for 2009 has not been decided as of the date of this filing.
 
Effective March 31, 2006, we implemented certain changes to our severance payment policy in respect of employees who had joined our company on or before December 31, 2002. As a result of such policy change, we required applicable employees to receive and settle all severance benefits accrued as of March 31, 2006. These accrued severance payments were made in April 2006. As compensation for the mandatory early settlement of their accrued severance benefits, we also paid such employees additional special bonuses of Won 125.9 billion in


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aggregate amount. We recorded the special bonus payments as special severance indemnities in other expenses for the year ended December 31, 2006. In 2006, we also sponsored a voluntary early retirement plan with respect to certain eligible employees. These early retirees were also paid special bonuses of Won 18.1 billion in the aggregate, which amount was also reflected in special severance indemnities in other expenses for the year ended December 31, 2006. We may, in the future, again sponsor early retirement plans, in part, to improve operational efficiencies.
 
In addition, we provide our employees with miscellaneous other fringe benefits including housing loans, free medical examinations, subsidized on-site child care facilities and sabbatical programs for long-term employees.
 
Item 6.E.   Share Ownership
 
The following table sets forth the share ownership by our standing and non-standing directors as of June 1, 2010:
 
                                     
            Percentage of
       
        Number of
  Total
  Special
   
        Shares
  Shares
  Voting
   
Name
 
Position
  Owned   Outstanding   Rights   Options
 
Standing Directors:
                                   
Man Won Jung
  President, Chief Executive Officer and Representative Director     5,500       0       None       None  
Ki Heung Cho
  President, GMS business, SK Telecom     0       0       None       None  
Non-Standing Directors:
                                   
Jae Won Chey
  Independent Non-executive Director     0       0       None       None  
Hyun Chin Lim
  Independent Non-executive Director     0       0       None       None  
Dal Sup Shim
  Independent Non-executive Director     0       0       None       None  
Rak Young Uhm
  Independent Non-executive Director     0       0       None       None  
Jay Young Chung
  Independent Non-executive Director     0       0       None       None  
Jae Ho Cho
  Independent Non-executive Director     0       0       None       None  
 
Item 7.   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
Item 7.A.   Major Shareholders
 
As of December 31, 2009, approximately 57.6% of our issued shares were held in Korea by approximately 46,000 shareholders. The following table sets forth certain information as of the close of our shareholders’ registry on December 31, 2009 with respect to any person known to us to be the beneficial owner of more than 5.0% of the


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shares of our common stock and with respect to the total amount of such shares owned by our employees and our officers and directors, as a group:
 
                         
          Percentage
    Percentage
 
    Number of
    Total Shares
    Total Shares
 
Shareholder/Category
  Shares     Issued     Outstanding  
 
Domestic Shareholders
                       
SK Holdings
    18,748,452       23.22 %     25.92 %
Employees(1)
    467,924       0.58       0.65  
Treasury shares(1)(2)
    8,400,712       10.40       N/A  
Officers and Directors
    15,167       0 *     0 *
Other Domestic Shareholders
    18,917,648       23.43       26.15  
Foreign Shareholders
    34,195,808       42.35       47.26  
Total Issued Shares(3)
    80,745,711       100.00 %      
Total Outstanding Shares(4)
    72,344,999             100.00 %
 
 
Less than 0.00%.
 
(1) Represents shares owned by our employee stock ownership association. See “Item 6.D. Employees”.
 
(2) Treasury shares do not have any voting rights; includes 1,999,997 treasury shares that were deposited with Korea Securities Depository to be reserved and used to satisfy the conversion rights of the holders of US$332.5 million in 1.75% convertible notes that were sold in April 2009.
 
(3) On January 9, 2009, the Company purchased (using retained earnings) and cancelled 448,000 common shares. As a result of such retirement of common shares, the total number of shares decreased to 80,745,711 from 89,278,946 which is the total number of shares issued to date.
 
(4) Represents total issued shares excluding treasury shares.
 
The following table sets forth significant changes in the percentage ownership held by our major shareholders during the past three years:
 
                         
    As of December 31,  
Shareholder
  2007     2008     2009  
    (As a percentage of total issued shares)(1)  
 
SK Group(2)
    23.09 %     23.09 %     23.22 %
SK Holdings
    21.75       23.09       23.22  
SK Networks
    1.34       0       0  
POSCO(3)
    2.88       2.88       2.90  
 
 
(1) Includes 8,526,252, 8,609,034 and 8,707,696 shares held in treasury as of December 31, 2007, 2008 and 2009, respectively.
 
(2) SK Group’s ownership interest as of December 31, 2007 consisted of the ownership interests of SK Holdings and SK Networks. SK Group’s ownership interest as of December 31, 2008 and 2009 consisted of the ownership interest of SK Holdings only.
 
(3) POSCO acquired these shares in connection with our acquisition of a 27.7% equity interest in Shinsegi.
 
Except as described above, other than companies in the SK Group and POSCO, no other persons or entities known by us to be acting in concert, directly or indirectly, jointly or severally, own in excess of 5.0% of our total shares outstanding or exercise control or could exercise control over our business.
 
On July 1, 2007, the company formerly known as SK Corporation underwent a corporate rehabilitation, pursuant to which SK Corporation spun off substantially all of its operating business divisions into a newly established corporation named SK Energy Co., Ltd. The surviving company currently operates as a holding company, renamed SK Holdings Co., Ltd. Ownership of all our shares held by SK Corporation immediately preceding the rehabilitation passed to SK Holdings as of July 1, 2007.


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As of March 31, 2010, SK Holdings held 23.22% of our shares of common stock. For a description of our foreign ownership limitation, see “Item 3.D. Risk Factors — If SK Holdings causes us to breach the foreign ownership limitations on shares of our common stock, we may experience a change of control” and “Item 4.B. Business Overview — Law and Regulation — Foreign Ownership and Investment Restrictions and Requirements”. In the event that SK Holdings announces plans of a sale of our shares, we expect to be able to discuss the details of such sale with them in advance and will endeavor to minimize any adverse effects on our share prices as a result of such sale.
 
As of May 31, 2010, the total number of shares of our common stock outstanding was 72,344,999.
 
Other than as disclosed herein, there are no other arrangements, to the best of our knowledge, which would result in a material change in the control of us. Our major shareholders do not have different voting rights.
 
Item 7.B.   Related Party Transactions
 
SK Networks
 
In September 2009, we acquired the leased-line business and related ancillary businesses from SK Networks for Won 892.95 billion. We assumed Won 620.2 billion of debt as part of the transaction. Prior to such acquisition, KT and SK Networks provided a substantial majority of our leased lines. For a more detailed discussion of the lines we lease from fixed-line operators, see “Item 4.B. Business Overview — Digital Cellular Network — Network Infrastructure”.
 
As of December 31, 2009, we had Won 5.2 billion of accounts receivables from SK Network. As of the same date, we had Won 281.3 billion of accounts payable to SK Networks, mainly consisting of leased line charges and commissions to dealers owned by SK Networks.
 
Other Related Parties
 
On July 22, 2003, we acquired 2,481,310 shares of POSCO common stock held by SK Holdings at a price of Won 134,000 per share in accordance with a resolution of our board of directors dated July 22, 2003. We decided to purchase the shares for strategic reasons in order to address overhang concerns arising from POSCO’s ownership of our shares. As of December 31, 2009, POSCO owned 2.9% of our shares.
 
We are a party to an agreement with SK C&C pursuant to which SK C&C provides us with system maintenance services. This agreement will expire on December 31, 2013. We also enter into agreements with SK C&C from time to time for specific information technology-related projects. The aggregate fees we paid to SK C&C for information technology services amounted to Won 251.4 billion in 2007, Won 273.3 billion in 2008 and Won 317.5 billion in 2009. We also purchase various information technology-related equipment from SK C&C from time to time. The total amount of such purchases was Won 205.7 billion for 2007, Won 232.2 billion for 2008 and Won 237.5 billion in 2009. We are a party to several service agreements with SK C&C relating to the development and maintenance of our information technologies systems.
 
We are part of the SK Group of affiliated companies. See “Item 7.A. Major Shareholders” As disclosed in note 24 of the notes to our consolidated financial statements, we had related party transactions with a number of affiliated companies of the SK Group during the year ended December 31, 2009. All other loans were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and did not involve more than the normal risks of non-collection or present other unfavorable features.
 
In March 2005, we invested Won 14.4 billion to purchase 8,000,000 shares, representing a 21.5% equity stake, in iHQ, Inc., or iHQ, one of Korea’s largest entertainment companies and the controlling shareholder of YTN Media, Inc. In 2006, as a result of an additional increase in our equity interest, iHQ became a consolidated subsidiary. In July 2007, we further invested Won 10 billion in iHQ, increasing our equity interest to 37.1%. In accordance with the resolution of the board of directors in April 2010, we entered into an agreement pursuant to which we will sell 10,930,844 shares of iHQ’s common stock at Won 1,700 per share in the Korean over-the-counter market. The estimated total sales price is Won 18,582,435,000. After such sale, our equity stake in iHQ will decrease to 9.99%.


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Item 7.C.   Interests of Experts and Counsel
 
Not applicable.
 
Item 8.   FINANCIAL INFORMATION
 
Item 8.A.   Consolidated Statements and Other Financial Information
 
See “Item 18. Financial Statements” and pages F-1 through F-108.
 
Legal Proceedings
 
FTC Proceedings
 
In December 2006, the FTC fined us Won 330 million in respect of certain allegedly anti-competitive tactics we employed in connection with MelOn, our digital music portal. We paid such fine in April 2007 and filed an appeal at the Seoul High Court, an appellate court, which found in our favor. The case is currently pending before the Supreme Court of Korea.
 
In January 2009, the FTC fined us Won 1.3 billion for our activities allegedly restricting competition in markets for wireless Internet services. We paid such fine in March 2009. In February 2009, the FTC fined us Won 500 million for our activities allegedly restricting competition in markets for personal digital assistant, or PDA, devices. We paid such fine in April 2009 and filed an appeal at the Seoul High Court. The Seoul High Court entered a judgment in our favor in April 2010. The FTC appealed and the case is currently pending before the Supreme Court of Korea.
 
MIC and KCC Proceedings
 
When the MIC approved the merger of Shinsegi into us in January 2002, the MIC imposed certain conditions on us. The MIC periodically reviews our compliance with the conditions related to our merger with Shinsegi. We can give no assurance that the MIC will not take action that may have a material adverse effect on our business, operations and financial condition. See “Item 3.D. Risk Factors — Our businesses are subject to extensive Government regulation and any change in Government policy relating to the telecommunications industry could have a material adverse effect on our results of operations, financial condition and cash flows”.
 
In April 2007, the MIC imposed fines on us, KTF, LGT and KT of Won 7.5 billion, Won 5.8 billion, Won 4.7 billion and Won 1.6 billion, respectively for allegedly improperly providing handset subsidies. We paid such fines in May 2007.
 
In September 2007, the MIC imposed fines on us, KTF and KT for violating regulations regarding number portability in the amounts of Won 800 million, Won 200 million and Won 80 million, respectively. We paid such fine in October 2007.
 
In December 2007, the MIC imposed fines on us, KTF, LGT and KT for improperly continuing to apply discounted youth rates to subscribers who had reached legal majority in the amounts of Won 800 million, Won 200 million, Won 150 million and Won 50 million, respectively. We paid such fine in January 2008.
 
In January 2008, the MIC ordered us, KTF and LGT to pay fines in the amounts of Won 950 million, Won 250 million and Won 150 million, respectively, alleging we had improperly solicited subscribers to our value-added services. We paid such fine in March 2008.
 
In February 2008, the MIC ordered us, KTF, LGT and KT to pay fines of Won 600 million, Won 150 million, Won 100 million and Won 50 million, respectively, alleging our authorized dealers had artificially inflated subscriber numbers. We paid such fine in March 2008.
 
In September 2008, the KCC ordered us to pay a fine of Won 600 million alleging that we enrolled subscribers for our T-Ring service without such subscribers’ consent. We paid such fine in September 2008.
 
On December 30, 2008, we were fined in the amount of Won 50 million for a violation of Telecommunications Law involving the mismanagement of privacy policy. We paid such fine in January 2010.


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On October 13, 2009, the KCC ordered us to pay Won 140 million and publish a newspaper notice in a case relating to the subscription for mobile telephone services using national identification numbers of the deceased and our failure to verify the required documents. We paid such fine in November 2009.
 
SK Broadband Litigation
 
Since April 2008, customers of SK Broadband (then Hanarotelecom Incorporated) have filed lawsuits against SK Broadband in the Seoul Central District Court, alleging that subscribers’ personal information was leaked due to the company’s poor data protection policies. The plaintiffs also alleged that current and former employees were involved in the sale of subscribers’ personal information, including resident registration identification numbers, telephone numbers and mailing addresses. As of March 1, 2010, the number of plaintiffs was 23,821 and the aggregate amount of damages claimed by such plaintiffs was approximately Won 24.1 billion. The case is currently pending before the Seoul Central District Court.
 
In addition, in April 2008, an investigation against SK Broadband was initiated by the Seoul Central Prosecutor’s Office, the KCC and the Korean Trade Commission. The main subjects of this investigation include the possible improper provision of broadband service by misusing subscribers’ personal information and the violation of standardized customer contracts by SK Broadband. In connection with its investigation, the KCC suspended SK Broadband from soliciting new subscribers for its broadband Internet services for a period of 40 days from July 1, 2008 and, in addition, imposed an administrative fine of Won 178 million on the grounds that SK Broadband had violated the Telecommunication Business Act and standard customer contracts. SK Broadband paid such fine in July 2008.
 
Except as described above, neither we nor any of our subsidiaries are involved in any litigation, arbitration or administrative proceedings relating to claims which may have, or have had during the twelve months preceding the date hereof, a significant effect on our financial position or the financial position of our subsidiaries taken as a whole, and, so far as we are aware, no such litigation, arbitration or administrative proceedings are pending or threatened.
 
Dividends
 
Annual dividends, if any, on our outstanding shares must be approved at the annual general meeting of shareholders. This meeting is generally held in March of the following year, and the annual dividend is generally paid shortly after the meeting. Since our shareholders have discretion to declare annual dividends, we cannot give any assurance as to the amount of dividends per share or that any dividends will be declared at all. Interim dividends, if any, can be approved by a resolution of our board of directors. Once declared, dividends must be claimed within five years, after which the right to receive the dividends is extinguished and reverted to us.
 
We pay cash dividends to the ADR depositary in Won. Under the terms of the deposit agreement, cash dividends received by the ADR depositary generally are to be converted by the ADR depositary into Dollars and distributed to the holders of the ADSs, less withholding tax, other governmental charges and the ADR depositary’s fees and expenses. The ADR depositary’s designated bank in Korea must approve this conversion and remittance of cash dividends. See “Item 10.B. Memorandum and Articles of Incorporation — Description of American Depositary Shares” and “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations”.
 
The following table sets forth the dividend per share and the aggregate total amount of dividends declared (including any interim dividends), as well as the number of outstanding shares entitled to dividends, with respect to the years indicated. The dividends set out for each of the years below were paid in the immediately following year.
 
                         
                Number of
 
    Dividend
    Total Amount
    Shares Entitled
 
Year Ended December 31,
  per Share     of Dividends     to Dividend  
    (In Won)     (In billions of Won)        
 
2005
  W 9,000     W 662.5       73,614,296  
2006
    8,000       582.4       72,667,459  
2007
    9,400       682.4       72,584,677  
2008
    9,400       682.0       72,524,203  
2009
    9,400       680.0       72,344,999  


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We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. The common shares represented by the ADSs have the same dividend rights as other outstanding common shares.
 
Holders of non-voting shares are entitled to receive dividends in priority to the holders of common shares. The dividend on the non-voting shares is between 9.0% and 25.0% of the par value as determined by the board of directors at the time of their issuance. If the dividends for common shares exceed the dividends for non-voting shares, the holders of non-voting shares will be entitled to participate in the distribution of such excess amount with the holders of common shares. If the amount available for dividends is less than the aggregate amount of the minimum required dividend, holders of non-voting shares will be entitled to receive such accumulated unpaid dividend from dividends payable in the next fiscal year before holders of common shares. There are no non-voting shares issued or outstanding.
 
We declare dividends annually at the annual general meeting of shareholders which is generally held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record or registered pledges as of the end of the preceding fiscal year. We may distribute the annual dividend in cash or in shares. However, a dividend of shares must be distributed at par value. If the market price of the shares is less than their par value, dividends in shares may not exceed one-half of the annual dividend. Our obligation to pay dividend expires if no claim to dividend is made for five years from the payment date.
 
Under the Korean Commercial Code, we may pay an annual dividend only out of the excess of our net assets, on a non-consolidated basis, over the sum of (1) our stated capital and (2) the total amount of our capital surplus reserve and legal reserve accumulated up to the end of the relevant dividend period. In addition, we may not pay an annual dividend unless we have set aside as a legal reserve an amount equal to at least 10% of the cash portion of the annual dividend or until we have accumulated a legal reserve of not less than one-half of our stated capital. As a KRX KOSPI Market-listed company, we are also required under the relevant laws and regulations to set aside in reserve a certain amount each fiscal year until the ratio of our own capital to total assets is at least 30%. We may not use our legal reserve to pay cash dividends but may transfer amounts from our legal reserve to capital stock or use our legal reserve to reduce an accumulated deficit.
 
In addition, the Korean Commercial Code and our articles of incorporation provide that, in addition to annual dividends, we may pay interim dividends once during each fiscal year. Unlike annual dividends, the decision to pay interim dividends can be made by a resolution of the board of directors and is not subject to shareholder approval. Any interim dividends must be paid in cash to the shareholders of record as of June 30 of the relevant fiscal year. In August 2009, we distributed such interim dividends at Won 1,000 per share to our shareholders for a total amount of Won 72.3 billion.
 
Under the Financial Investment Services and Capital Markets Act, the total amount of interim dividends payable in a fiscal year shall not be more than the net assets on the balance sheet of the immediately preceding fiscal year, after deducting (1) a company’s capital in the immediately preceding fiscal year, (2) the aggregate amount of its capital reserves and legal reserves accumulated up to the immediately preceding fiscal year, (3) the amount of earnings for dividend payments confirmed at the general shareholders’ meeting with respect to the immediately preceding fiscal year and (4) the amount of legal reserve that should be set aside for the current fiscal year following the interim dividend payment. Furthermore, the rate of interim dividends for non-voting shares must be the same as that for our common shares.
 
Our obligation to pay interim dividends expires if no claims to such dividends are made for a period of five years from the payment date.


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Item 8.B.   Significant Changes
 
Not applicable.
 
Item 9.   THE OFFER AND LISTING
 
Item 9.A.   Offering and Listing Details
 
These matters are described under Item 9.C. below where relevant.
 
Item 9.B.   Plan of Distribution
 
Not applicable.
 
Item 9.C.   Markets
 
The principal trading market for our common stock is the KRX KOSPI Market. As of May 31, 2010, 72,344,999 shares of our common stock were outstanding.
 
The ADSs are traded on the New York Stock Exchange and the London Stock Exchange. The ADSs have been issued by the ADR depositary and are traded on the New York Stock Exchange under the ticker symbol “SKM”. Each ADS represents one-ninth of one share of our common stock. As of June 1, 2010, ADSs representing approximately 24,000,810 shares of our common stock were outstanding.
 
Shares of Common Stock
 
The following table sets forth the high, low and closing prices and the average daily trading volume of the shares of common stock on the KRX KOSPI Market since January 1, 2005:
 
                                 
                Average Daily
    Prices   Trading
Calendar Year
  High(1)   Low(1)   Close   Volume
    (Won per shares)   (Number of shares)
 
2005
    216,500       163,500       181,000       186,239  
First Quarter
    200,500       171,000       171,000       202,857  
Second Quarter
    192,500       163,500       182,000       137,021  
Third Quarter
    216,500       178,500       202,500       156,019  
Fourth Quarter
    209,500       181,000       181,000       249,550  
2006
    235,000       177,000       222,500       190,565  
First Quarter
    203,500       177,000       192,500       177,491  
Second Quarter
    235,000       190,000       204,000       216,607  
Third Quarter
    204,500       181,000       201,500       204,167  
Fourth Quarter
    233,000       195,000       222,500       163,534  
2007
    274,000       188,500       249,000       244,056  
First Quarter
    223,000       190,500       191,500       206,155  
Second Quarter
    215,000       188,500       213,000       220,091  
Third Quarter
    221,000       192,000       210,000       198,816  
Fourth Quarter
    274,000       204,500       249,000       349,701  
2008
    232,000       178,000       209,000       322,706  
First Quarter
    232,000       178,500       186,500       330,196  
Second Quarter
    212,000       180,000       190,500       265,973  
Third Quarter
    210,500       178,000       205,500       317,506  
Fourth Quarter
    227,500       187,500       209,000       374,768  


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Table of Contents

                                 
                Average Daily
    Prices   Trading
Calendar Year
  High(1)   Low(1)   Close   Volume
    (Won per shares)   (Number of shares)
 
2009
                               
First Quarter
    218,000       180,500       192,000       231,340  
Second Quarter
    183,500       170,500       174,000       278,545  
Third Quarter
    185,500       166,600       182,500       242,112  
Fourth Quarter
    190,500       169,500       169,500