SK TELECOM COMPANY LIMITED
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE MONTH OF JULY 2005

SK Telecom Co., Ltd.

(Translation of registrant’s name into English)

11, Euljiro2-ga Jung-gu
Seoul 100-999, Korea
(Address of principal executive offices)

 

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

Form 20-F þ                    Form 40-F — o

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

Yes — o                    No þ

     (If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82-               .)

 
 

 


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-CONSOLIDATED BALANCE SHEETS
NON-CONSOLIDATED STATEMENTS OF INCOME
NON-CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES


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     This report on Form 6-K shall be deemed to be incorporated by reference in the prospectuses included in Registration Statements on Form F-3 (File Nos. 333-91034 and 333-99073) filed with the Securities and Exchange Commission and to be a part thereof from the date on which this report is filed, to the extent not superseded by documents or reports subsequently filed or furnished.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This report on Form 6-K contains “forward-looking statements”, as defined in Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, 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”, “consider”, “depends”, “estimate”, “expect”, “intend”, “plan”, “project” and similar expressions, or that certain events, actions or results “will”, “may”, “might”, “should” or “could” occur, be taken or be achieved.

     Forward-looking statements in this report on Form 6-K include, but are not limited to, statements related to the following:

    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;
 
    our ability to comply with governmental rules and regulations, including Korean Ministry of Information Communication (MIC) regulations related to telecommunications providers and rules related to our status as a “market-dominating business entity” under the Fair Trade Commission of Korea’s Korean Monopoly Regulation and Fair Trade Act;
 
    our expectations and estimates related to: interconnection fees; tariffs charged by wireless operators; regulatory fees; operating costs and expenditures; working capital requirements; principal repayment obligations with respect to long-term borrowings, bonds and obligations under capital leases; research and development expenditures; and other financial estimates;
 
    the effect of the number portability system that allows wireless subscribers to switch wireless service operators while retaining the same mobile phone number and the use of the common prefix identification system; and
 
    the telecommunications industry in Korea and other markets in which we do business and the effect economic, political or social conditions have on our number of subscribers, call volumes and results of operations.

 


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     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; currency risks; foreign ownership limitations; credit risks and other risks and uncertainties that are more fully described under the heading “Key Information — Risk Factors” beginning on page 11 of our annual report on Form 20-F filed with the United States Securities and Exchange Commission on May 31, 2005. 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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

     We must file reports with the Financial Supervisory Commission of Korea and the Korea Exchange Inc. These quarterly reports contain our audited, reviewed and non-consolidated financial statements as of and for the three months ended March 31, 2004 and 2005, that are prepared in accordance with Korean GAAP, which differs in some respects from U.S. GAAP. You should read the following discussion together with our audited non-consolidated financial statements as attached hereto.

     The financial information described below and in our audited non-consolidated financial statements as of December 31, 2004 and March 31, 2005 and for the three months ended March 31,2004 and 2005 is non-consolidated, and therefore does not reflect the results of operations of our subsidiaries other than those reflected under the equity method of accounting. While non-consolidated net income reflects the results of our consolidated subsidiaries, our other non-consolidated financial data, including operating revenue and operating income, do not. Accordingly, we believe that while there should not be any material differences between our net income on a non-consolidated basis and our net income on a consolidated basis, our other financial data, including those items noted herein, may be materially different on a consolidated basis. As a result, the financial information below is not comparable with the consolidated financial information presented in our annual report on Form 20-F for the year ended December 31, 2004, filed with the United States Securities and Exchange Commission on May 31, 2005.

     Under Korean GAAP, our non-consolidated revenues accounted for approximately 92.7% and 91.8% of our consolidated revenues in the years ended December 31, 2003 and 2004, respectively; and at December 31, 2003 and 2004, our non-consolidated assets were approximately 96.8% and 98.2% of our consolidated assets and our non-consolidated current assets were approximately 85.0% and 94.5% of our consolidated current assets, respectively. We can give no assurance as to what the ratios will be for the year ending December 31, 2005.

 


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     Accounting principles and their application in practice vary among countries. The following discussion and our annual non-consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. Accordingly, this report and the non-consolidated financial statements that was disclosed on May 13, 2005 are for use by those knowledgeable about Korean accounting principles and review standards and their application in practice.

Selected Financial Data

     The following table sets forth selected financial data derived from our non-consolidated financial statements as of and for the three months ended March 31, 2005. You should read the selected non-consolidated financial data below in conjunction with our non-consolidated financial statements included in this report.

                 
    For the three months Ended March 31,
    2004     2005  
    (In Billions of Won)
Non-consolidated income statement data
               
Operating Revenue
  W 2,400.6     W 2,411.9  
Wireless Service1
    2,161.0       2,194.6  
Interconnection
    239.6       217.3  
 
               
Operating Expenses
    1,709.4       1,797.5  
Operating Income
    691.2       614.5  
Other Income
    89.9       55.6  
Other Expenses
    110.8       122.8  
Income Taxes
    217.8       178.8  
Net Income
  W 452.5     W 368.4  
 
           
 
               
 
               
                 
    As of     As of  
    December 31,     March 31,  
    2004     2005  
    (In Billions of Won)  
Non-consolidated income statement data
             
Total Current Assets
  W 3,854.3     W 4,147.5  
Total Non-Current Assets
    10,166.3       10,007.7  
Total Assets
    14,020.7       14,155.2  
Total Current Liabilities
    2,859.7       2,998.0  
Total Long-Term Liabilities
    4,033.9       4,330.9  
Total Stockholders’ Equity
    7,127.1       6,826.3  

Results of Operations

     Non-Consolidated Revenue. We earn revenue principally from initial connection fees and monthly access fees, usage charges and value-added service fees paid by subscribers to our

 
1   Includes revenues from line leases and solution sales.

 


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wireless services and interconnection fees paid to us by other telecommunications operators. The amount of our revenue depends principally upon the number of wireless subscribers, the rates we charge for our services, subscriber usage of our services, and the terms of our interconnection with other telecommunications operators. Government regulation also affects our revenues.

     Non-Consolidated Operating Revenue. Our operating revenue increased by 0.5% to Won 2,411.9 billion in the year ended March 31, 2005 from Won 2,400.6 billion in the corresponding period in 2004. This increase was principally a result of a 38.1% increase in our wireless internet service revenue to Won 547.7 billion in the year ended March 31, 2005, up from Won 391.6 billion in the corresponding period in 2004, as a result of an increase in the Nate service revenue and the phone mail service revenue, which was offset by a 9.3% decrease in interconnection revenue due in part to the adjusted interconnect rates announced by the MIC on July 9, 2004 (described below).

     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. Subscribers who switch operators to or from SK Telecom must purchase a new handset, as we use a different frequency than our competitors, KT Freetel and LG Telecom. In accordance with the plan published by the MIC, we were required to permit number portability first, beginning on January 1, 2004. The following number of subscribers have transferred to the service of our competitors during each month following our implementation of the number portability system:

     * Number of Subscribers Transferred to Other Operator

                                                         
Month   SKTàKTF     SKTàLGT     KTFàSKT     KTFàLGT     LGTàSKT     LGTàKTF     Total  
Jan. 2004
    203,853       101,414                               305,267  
Feb. 2004
    102,282       81,594                               183,876  
Mar. 2004
    111,077       103,155                               214,232  
Apr. 2004
    139,508       122,146                               261,654  
May 2004
    167,228       92,414                               259,642  
Jun. 2004
    137,489       73,100                               210,589  
Jul. 2004
    53,611       23,116       277,751       20,504                   374,982  
Aug. 2004
    29,698       60,240       67,743       45,724                   203,405  
Sep. 2004
    90,075       49,959       5,744       42,995                   188,773  
Oct. 2004
    64,563       46,169       62,131       39,701                   212,564  
Nov. 2004
    74,478       56,135       59,578       51,802                   241,993  
Dec. 2004
    97,210       47,635       94,466       41,773                   281,084  

 


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Month   SKTàKTF     SKTàLGT     KTFàSKT     KTFàLGT     LGTàSKT     LGTàKTF     Total  
Jan. 2005
    145,295       71,142       135,862       75,069       115,197       106,024       649,589  
Feb. 2005
    120,638       32,654       106,099       33,629       49,159       57,555       399,734  
Mar. 2005
    125,453       43,690       112,711       47,696       48,823       56,743       435,116  
Apr. 2005
    120,781       69,318       131,266       72,072       55,483       47,863       496,783  
Total
    1,783,239       1,073,881       1,053,351       470,965       268,662       268,185       4,919,283  

     Subscribers who choose to transfer to a different wireless operator have the right to return to us without paying any penalties within 14 days of the initial transfer. KT Freetel introduced number portability beginning on July 1, 2004 and LG Telecom introduced number portability beginning on January 1, 2005. Notwithstanding our implementation of number portability on January 1, 2004, our total number of wireless subscribers increased to approximately 19.0 million as of March 31, 2005, up from approximately 18.8 million as of December 31, 2004. We believe that the increase in the number of wireless subscribers resulted in part from our service quality and marketing efforts.

     On an aggregate basis, interconnection revenue decreased by 9.3% to Won 217.3 billion in the three months ended March 31, 2005, down from Won 239.6 billion in the corresponding period in 2004. This decrease was due in part to the new adjusted interconnect rates announced by the MIC on July 9, 2004, which were applied retroactively. The new interconnect rates are as follows:

                         
Year   SK Telecom     KT Freetel     LG Telecom  
2003
    41.02       47.99       52.89  
2004
    31.81       47.66       58.55  
2005
    31.19       46.70       54.98  

     The interconnection rates were adjusted based on the original cost of individual operators under Long Run Incremental Cost (LRIC) method and the competitive market situation in the telecommunication service industry of Korea. The LRIC method is designed to calculate costs of interconnection of individual telecommunication service providers within a network using certain models called “bottom-up” and “top-down.” The LRIC method was adopted by other countries such as the United States, the United Kingdom and Japan.

     Our non-consolidated average monthly revenue per subscriber (excluding interconnection revenue) decreased by 1.39% to Won 38,722 in the year ended March 31, 2005, down from Won 39,268 in the corresponding period in 2004.

     Our non-consolidated average monthly revenue per subscriber from monthly fee and call charges decreased by 11.23% to Won 26,325 in the year ended March 31, 2005, down from Won 29,655 in the corresponding period in 2004. The decrease is primarily due to the reduction in monthly fee effective September 1, 2004.

 


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     Our non-consolidated average monthly revenue per subscriber from wireless Internet services sales (including line lease and solution sales) increased by 35.81% to Won 9,664 in the year ended March 31, 2005, up from Won 7,116 in the corresponding period in 2004. Wireless Internet services sales increased by 39.9% to Won 547.7 billion in the year ended March 31, 2005 (representing 22.7% of our wireless service revenue), up from Won 391.6 billion in the corresponding period in 2004, primarily due to the increased number of subscribers who use wireless Internet-enabled handsets.

     Our non-consolidated average monthly revenue per subscriber from value-added services such as caller ID service and ring tone service and other sales increased by 8.0% to Won 1,651 in the year ended March 31, 2005, up from Won 1,529 in the corresponding period in 2004. Value-added services and other sales increased by 11.2% to Won 93.6 billion in the year ended March 31, 2005 up from Won 84.2 billion in the corresponding period in 2004, primarily due to an increase in usage of caller ID service, coloring service and roaming service.

     Non-Consolidated Operating Expenses. Our operating expenses in the year ended March 31, 2005 increased by 5.2% to Won 1,797.5 billion compared to Won 1,709.4 billion in the corresponding period in 2004, primarily due to increases in commissions paid, leased line expenses and interconnection expense, which offset decreases in labor costs and advertising expenses.

     Commissions increased by 9.5% to Won 713.8 billion in the year ended March 31, 2005, compared to Won 651.9 billion in the corresponding period in 2004, primarily because commissions paid to our content providers increased as the wireless Internet usage increased and the increase in the roaming commissions, which offset a decrease in marketing commissions by 1.7% to 379.7 billion in the year ended March 31, 2005 from 386.1 billion in the corresponding period in 2004.

     Labor costs decreased by 8.9% to Won 147.9 billion in the year ended March 31, 2005, compared to Won 162.4 billion in the corresponding period in 2004. The decrease was primarily due to decreases in severance payment and salaries.

     Depreciation and amortization expense decreased by 0.6% to Won 341.2 billion in the year ended March 31, 2005, compared to Won 343.2 billion in the corresponding period in 2004. The decrease in depreciation and amortization expenses was primarily due to a decrease in depreciable assets.

     Leased line expenses increased by 18.1% to Won 96.9 billion in the year ended March 31, 2005, up from Won 82.0 billion in the corresponding period in 2004, primarily due to more lines leased to accommodate the increase in wireless internet traffic, and efforts to enhance call quality after the implementation of the number portability system.

 


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     Miscellaneous operating expenses decreased by 18.0% to Won 74.9 billion in the year ended March 31, 2005, compared to Won 91.4 billion in the corresponding period in 2004, primarily due to decreases in taxes and other dues.

     Network interconnection expenses increased by 30.0% to Won 217.9 billion in the year ended March 31, 2005, compared to Won 167.6 billion in the corresponding period in 2004, primarily due to an increase in the level of interconnection fees that we must pay to other operators for calls using their networks and an increase in call volume and short message services. Mobile-to-mobile interconnection expenses increased by 33.4% to Won 169.6 billion in the year ended March 31, 2005, compared to Won 127.2 billion in the corresponding period in 2004. Mobile-to-land interconnection expenses increased by 24.4% to Won 40.3 billion in the year ended March 31, 2005, compared to Won 32.4 billion in the corresponding period in 2004.

     Cost of goods sold increased by 497.7% to Won 1.9 billion in the year ended March 31, 2005, compared to Won 0.3 billion in the corresponding period in 2004. The increase was primarily due to increases in sales of wireless Internet solutions (including software, hardware and service) and wireless modems for automatic reading systems, a telemetry service.

     Advertising expenses decreased by 38.5% to Won 56.3 billion in the year ended March 31, 2005, compared to Won 91.6 billion in the corresponding period in 2004. We reduced advertising for promotion of our unique services.

     Non-Consolidated Operating Income. Our operating income decreased by 11.1% to Won 614.5 billion in the year ended March 31, 2005, down from Won 691.2 billion in the corresponding period in 2004. Our operating income decreased due in part to an increase in commissions paid to our contents provider and interconnection expense.

     Non-Consolidated Other Income. Other income, consisting primarily of equity in earnings of affiliates, interest income, dividend income, commission income and foreign exchange and translation gains, decreased by 38.2% to Won 55.6 billion in the year ended March 31, 2005, compared to Won 89.9 billion in the corresponding period in 2004, primarily due to decreases in equity in earnings of affiliates and interest income , which were partially offset by an increase in other miscellaneous income.

     Non-Consolidated Other Expenses. Other expenses include interest and discount expenses, loss on disposal of property, equipment and intangible assets and donations. Other expenses increased by 10.8% to Won 122.8 billion in the year ended March 31, 2005, compared to Won 110.8 billion in the corresponding period in 2004. The increase was primarily due to increases in R&D contribution and donations and equity in losses of affiliates, which offset decreases in interest expense, other miscellaneous expenses, loss on disposal of property and equipment and loss on disposal of investment assets. As a percentage of operating revenue, other expenses increased to 5.1% in the year ended March 31, 2005, from 4.6% in the corresponding period in 2004.

 


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     Non-Consolidated Income Tax. Provision for income taxes decreased by 17.9% to Won 178.8 billion in the year ended March 31, 2005, from Won 217.8 billion in the corresponding period in 2004. Our effective tax rate increased to 32.7% in the year ended March 31, 2005, from an effective tax rate of 32.5% in the corresponding period in 2004.

     Non-Consolidated Net Income. Principally as a result of the factors discussed above, our net income decreased by 23.1% to Won 368.4 billion in year ended March 31, 2005, down from Won 452.5 billion in the corresponding period in 2004, with net income as a percentage of operating revenues at 15.3% in the year ended March 31, 2005 as compared to 18.9% in the corresponding period in 2004.

Liquidity and Capital Resources

     Liquidity

     We had a working capital (current assets minus current liabilities) surplus of Won 1,149.5 billion as of March 31, 2005 compared to a surplus of Won 994.6 billion as of December 31, 2004. We had cash, cash equivalents, short-term financial instruments and trading securities of Won 1,016.2 billion as of March 31, 2005 and Won 761.1 billion as of December 31, 2004. We had outstanding short-term borrowings of Won 200.0 billion as of March 31, 2005 and Won 400.0 billion as of December 31, 2004.

     Operating cash flow is our principal source of liquidity. Cash and cash equivalents increased by Won 15.3 billion to Won 128.3 billion at March 31, 2005, up from Won 113.0 billion at December 31, 2004.

     Net Cash Flow from Operating Activities. Our principal source of liquidity is cash flow from operations. Cash flow provided by operations was Won 471.1 billion in the year ended March 31,2005, compared to Won 175.5 billion during the same period in 2003.

     Net Cash from Investing Activities. Net case used in investing activities was Won 451.6 billion in the year ended March 31, 2005, compared to a net cash inflow of Won 39.5 billion during the same period in 2004. Cash inflows from investing activities were Won 146.3 billion in the year ended March 31, 2005, compared to Won 319.9 billion during the same period in 2004, and the primary contributor to such inflows related to a decrease in guarantee deposits of Won 114.9 billion in the year ended March 31, 2005, compared to Won 5.6 billion? during the same period in 2003. Cash outflows for investing activities were Won 597.8 billion in the year ended March 31, 2005, compared to Won 280.4 billion during the same period in 2004. The primary contributors to the overall cash outflows for investing activities were increase in trading securities, which were Won 150.0 billion in the year ended March 31, 2005, compared to nil during the same period in 2004 and an increase in construction in progress, which were Won 162.7 billion in the year ended March 31, 2005, compared to Won 63.6 billion during the same period in 2004.

 


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     Net Cash from Financing Activities. Financing activities used cash of Won 211.5 billion in the year ended March 31, 2005, compared to using cash of Won 383.5 billion during the same period in 2004. Cash inflows from financing activities included net increase in issuance of bonds, which provided cash of Won 193.7 billion in the year ended March 31, 2005, compared to Won 147.5 billion during the same period in 2004. Cash outflows for financing activities included, among other items, net repayment of short-term borrowing of Won 200.0 billion in the year ended March 31, 2005, compared to Won 153.0 billion during the same period in 2004; repayment of the current portion of long-term debt, which used nil in the year ended March 31, 2005, compared to Won 224.4 billion during the same period in 2004; acquisition of treasury stock, which used nil in the year ended March 31, 2005, compared to Won 2.1 million during the same period in 2004; and payment of dividends which used cash of Won 11.0 million in the three month period ended March 31, 2005, compared to Won 20.1 million during the same period in 2004.

     The net increase in cash and cash equivalents was Won 15.4 billion in the year ended March 31, 2005, compared to Won 15.5 billion decrease during the same period in 2004.

     Long Term Debt

     We had total non-consolidated long-term debt (excluding current portion) of Won 4,330.9 billion as of March 31, 2005 and Won 4,033.9 billion as of December 31, 2004. Our non-consolidated long-term debt as of March 31, 2005 included, among other items, bonds payable in the net amount of Won 3,087.5 billion, facility deposits of Won 30.1 billion, long-term payables of Won 580.7 billion and deferred income tax liabilities of Won 409.7 billion. Our non-consolidated long-term debt as of December 31, 2004 included, among other items, bonds payable in the net amount of Won 2,891.8 billion, facility deposits of Won 31.4 billion, long-term payables of Won 577.3 billion and deferred income tax liabilities of Won 323.1 billion. As of March 31, 2005, substantially all of our foreign currency-denominated long-term debt was denominated in Dollars. 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 addition, in May, July, August and November 2002, we issued Won 500.0 billion, Won 200.0 billion, Won 200.0 billion and Won 300.0 billion principal amount of unsecured and unguaranteed Won-denominated bonds, respectively. The Won 500.0 billion bonds with an annual interest rate of 6% matured in May 2005. The other bonds mature in July 2007, August 2007 and November 2007, and have an annual interest rate of 6%, 6% and 5%, respectively. We used the net proceeds from the sale of these bonds to repay maturing long-term indebtedness. We issued Won-denominated bonds with a principal amount of Won 300.0 billion, Won 150.0 billion and Won 250.0 billion in March, August and November 2003, respectively. These bonds mature in March 2008, August 2006 and November 2006, respectively, and have an annual interest rate of 5.0%. In March, May and December 2004, we issued Won-denominated bonds with a principal amount of Won 150.0 billion, 150.0 billion and 200 billion, respectively. These bonds will mature in April 2009, May 2009 and December 2011, respectively, and have an annual interest rate of

 


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5.0%, 5.0% and 3.0%, respectively. The proceeds of the Won-denominated note offering in March, May and December 2004 were used for our operations.

During the year 2004, we completed the following debt offerings:

In April 2004, we issued notes in the principal amount of US$300,000,000 with a maturity of seven years and an interest rate of 4.25%. The proceeds from the offering in April 2004 were used to pay maturing debt.

On May 27, 2004, we issued our US$329,450,000 Zero Coupon Convertible Notes due 2009, pursuant to an indenture dated as of May 27, 2004 between us and Citibank, N.A. Holders of Zero Coupon Convertible Notes will have the right to convert their notes (or any portion thereof being US$100,000 in principal amount or an integral multiple of US$10,000 in excess thereof) into shares of our common stock at the initial conversion price of Won 235,625 per share, subject to adjustments for stock splits, dividends, sub-divisions and similar distributions, at any time on or after July 7, 2004 up to the close of business on May 13, 2009, subject to our right of redemption. In connection with the issuance of the zero coupon convertible notes, we deposited 1,645,000 shares of our common stock with Korea Securities Depository to be reserved and used to satisfy the note holders’ conversion rights. This will be deemed as the repurchase of treasury stock and cancellation thereof for the purposes of Korean law. 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 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 ratify the conversion right, then we will pay a converting holder a cash settlement payment. In such situations, we intend to 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 Law or other legal restrictions. We entered into a swap agreement to reduce our exposure with respect to cash settlement payments exceeding the proceeds from sales of treasury shares held in trust.

On March 14, 2005, we filed a report with the Financial Supervisory Services to disclose that we adjusted the conversion price of the convertible notes issued in May 2004 in the principal amount of US$329,450,000 from Won 235,625 to Won 226,566 and made additional deposit of its common stocks accordingly so that the total number of shares of common stock deposited with Korea Securities Depository to satisfy the note holders’ conversion rights increase from 1,644,978 to 1,710,750.

Such adjustment of conversion price has been made as a result of the payment of cash dividend in excess of 1% of the market capitalization in the fiscal year of 2004.

     Off Balance Sheet Arrangements. In June 2002 and December 2002, we sold Won 631.4 billion and Won 650.6 billion, respectively, of accounts receivable resulting from our mobile

 


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phone dealer financing plan to Nate First Special Purpose Company and Nate Second Special Purpose Company, respectively, in asset-backed securitization transactions, and recorded a loss on disposal of accounts receivable-other of Won 10.9 billion and Won 12.9 billion, respectively. Nate First Special Purpose Company and Nate Second Special Purpose Company were liquidated in August 2003 and April 2004, respectively.

     On May 2,2003, September 4, 2003 and December 15, 2003, we sold Won 577.3 billion, Won 549.3 billion and Won 498.4 billion of accounts receivable resulting from our mobile phone dealer financing plan to Nate Third Special Purpose Company, Nate Fourth Special Purpose Company and Nate Fifth Special Purpose Company, respectively, in asset-backed securitization transactions, and recorded a loss on disposal of accounts receivable-other of Won 10.8 billion, Won 12.9 billion and Won 9.9 billion, respectively. As of March 31, 2005, such special purpose companies are all liquidated.

     Capital Requirements and Resources

     We have spent Won 90.3 billion on capital expenditures in the three month period ended March 31, 2005. Of the Won 90.3 billion for capital expenditures in the first quarter of 2005, we spent Won 4.0 billion on capital expenditures related to expansion and improvement of our 95A/B and CDMA 1xRTT Network; Won 37.4 billion on capital expenditures related to construction of our W-CDMA network and provision of W-CDMA services, which began service on a limited basis in Seoul at the end of 2003; and Won 48.9 billion on other capital expenditures and projects.

     In addition, construction of our new headquarters were completed at the end of 2004. As a result, our capital expenditures related to construction of buildings have decreased substantially this year.

     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 digital multimedia broadcasting (“DMB”) business. Under the terms of the agreement, SK Telecom is committed to fund 34.7% of the cost of launching and maintaining the operations of the satellite, which was approximately Won 100.8 billion. We launched the satellite in March 2004. We began our test service in February 2005, and began commercial service in May of 2005 although it depends on many factors including the Korean Broadcasting Commission’s approval of resending of terrestrial broadcasting.

     On March 24, 2005, we established a joint venture with EarthLink, Inc. (“EarthLink”) to launch cellular voice and data services across the U.S. under a partial mobile virtual network operator system, or partial MVNO. Each of EarthLink and us has committed to invest an aggregate of USD 220 million in the joint venture over the course of 3 years beginning in 2005, of which we invested USD 83 million this year.

     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

 


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time to time, we may also dispose of existing investments when we believe that doing so would be in our best interest.

     As of March 31, 2005, our principal repayment obligations (on a non-consolidated basis) with respect to long-term borrowings, bonds and obligations under capital leases outstanding were as follows for the periods indicated:

         
Twelve Months Ending March 31,2005  
(In Billions of Won)  
2005
  W 500.0  
2006
  W 800.0  
2007
  W 700.0  
Thereafter
  W 1,693.1  

     We also intend to incur research and development expenses, which are influenced by the MIC, which makes annual recommendations concerning the level of our research and development spending. Our research and development expenses (including donations to research institutes and educational organizations) equaled 2.9% of operating revenue in 2003 and 2.8% of operating revenue for the year ended December 31, 2004.

     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. We believe that we have never operated near our limit with any Korean commercial bank.

     We generally collect refundable, non-interest bearing deposits from our customers as a condition to activating their service. Subject to the approval of the MIC, we set the amounts to be collected for deposits for cellular services. Effective February 1, 1996, we generally require cellular subscribers to pay a facility deposit of Won 200,000. These deposits were an important source of interest-free capital for us and historically funded a substantial portion of our capital expenditures. Since 1997, we have been offering existing and new cellular subscribers the option of obtaining facility insurance from the Seoul Guarantee Insurance Company, instead of paying the facility deposit. In order to obtain this facility insurance, subscribers must meet Seoul Guarantee Insurance Company’s credit requirements and pay a Won 10,000 premium for three years of coverage. Since August 1, 2002, SK Telecom has been paying initial premium for the first three years as well as renewal premium on behalf of the subscriber who elects to have facility insurance. For each defaulting insured subscriber, Seoul Guarantee Insurance Company reimburses us up to Won 350,000. We refund the facility deposit to any existing subscriber who elects to have facility insurance. As a result of the facility insurance program, we have refunded a substantial amount of facility deposits, and facility deposits decreased from Won 31.4 billion as of December 31, 2004 to Won 30.1 billion as of March 31, 2005. We do not expect to have a significant amount of facility deposits to be refunded in the future.

 


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     Dividend Policy

     In 2004, we amended our articles of incorporation to permit payment of interim dividends in accordance with relevant laws. On July 23, 2004, SKT’s board of directors approved the interim dividend rate of 1,000 Korean Won per common stock for the first half of fiscal year 2004. The shareholders who are registered in the SKT’s shareholders registry as of June 30, 2004 were entitled to receive the interim dividends. The interim dividend was paid in August 2004. The total amount of the interim dividend paid was 73,614,296,000 Korean Won.

     At the ordinary shareholder’s meeting on March 11, 2005, our shareholders approved a cash dividend of 9,300 Won per common share, of which 4,100 Won is ordinary dividend (excluding interim dividend) and 5,200 Won is special dividend. The cash dividend was paid in April 2005.

     Derivative Instruments

     We did not have any outstanding swap or derivative transactions as of December 31, 2004 other than currency swap agreements and currency forward contracts entered into in the first quarter of 2004 to reduce our foreign currency exposure with respect to our issuance of US$300 million notes on April 1, 2004 and a fixed-to-fixed cross currency swap contract with Credit Suisse First Boston International to hedge the foreign currency risk of unguaranteed US dollar denominated convertible bonds with face amounts of US$329.5 million issued on May 27, 2004. See note 23 of the notes to our consolidated financial statements.

     In May 2004, we sold US$329.5 million in zero coupon convertible notes due 2009. These convertible notes are convertible by the holders into shares of our common stock at the rate of Won 235,625 per share. In connection with the issuance of the zero coupon convertible notes, we deposited 1,645,000 shares of our common stock with Korea Securities Depository to be reserved and used to satisfy the note holders’ conversion rights. This will be deemed as the disposition of treasury stock and cancellation thereof for the purposes of Korean law. On March 14, 2005, we filed a report with the Financial Supervisory Services to disclose that we adjusted the conversion price of the convertible notes issued in late May 2004 in the principal amount of US$329.5 million from Won 235,625 to Won 226,566 and made additional deposit of its common stocks accordingly so that the total number of shares of common stock deposited with Korea Securities Depository to satisfy the note holders’ conversion rights increase from 1,644,978 to 1,710,750. Such adjustment of conversion price has been made as a result of the payment of cash dividend in excess of 1% of the market capitalization in the fiscal year of 2004. 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 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 ratify the conversion right, then we will pay a converting holder a cash settlement payment. In such situations, we intend to 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 Law or other legal restrictions. As described in the preceding paragraph, we entered into a swap agreement to reduce our exposure

 


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with respect to cash settlement payments exceeding the proceeds from sales of treasury shares held in trust.

     We may consider in the future entering into additional currency swap agreements, currency forward contracts transactions and other arrangements solely for hedging purposes.

     Other Information

     As a condition to the approval of the merger of Shinsegi into SK Telecom in January 2002, the MIC imposed certain conditions on us. The MIC periodically reviews our compliance with the conditions to our merger with Shinsegi. On May 25, 2004, a policy advisory committee to the MIC announced the results of its review and stated that the committee believed that our market dominance may significantly restrict competition in the telecommunications market and that we have violated a merger condition related to our acquisition of Shinsegi by providing subsidies to handset buyers. The advisory committee subsequently recommended that the MIC extend the post-merger monitoring period by two years until January 2007 and take appropriate corrective measures against us for providing subsidies to handset buyers. On June 7, 2004, MIC imposed a Won 11.9 billion fine on us and extended the post-merger monitoring period until January 2007.

     On May 25, 2004, we voluntarily undertook to limit our market share to 52.3% of the wireless telecommunications market through the end of 2005, the level of our market share at the time of the approval of our merger with Shinsegi in January 2002. As of April 30, 2005, we had approximately 19.1 million subscribers, representing a market share of approximately 51.2%. If we are subject to additional market share limitations in the future, our ability to compete effectively will be impeded.

     Twenty eight former minority shareholders of Shinsegi, including Jin Kap Park, filed a lawsuit against Shinsegi with the Seoul District Court in December 2001 to void the shareholders’ resolution approving the merger. In the lawsuit, the plaintiffs argued that the merger did not meet certain requirements of a “small scale” merger under the Korean Commercial Code and that the merger ratio was unfair and illegal. The Seoul District Court dismissed the lawsuit on April 25, 2002 on the grounds that the requirements of a “small scale” merger as claimed y the plaintiffs are not required under the correct interpretation of the Korean Commercial Code and that there is no evidence supporting the plaintiffs’ claim as to the unfairness of the merger ratio. After the plaintiffs’ appeal to the High Court on May 8, 2002 was denied, the plaintiffs further appealed to the Supreme Court which finally dismissed the claim on December 9, 2004.

     In October 2002, Korea Multinet Inc. (“Multinet”) filed a lawsuit against the MIC in the Seoul Administrative Court to revoke the MIC’s registration with the International Telecommunication Union for the frequency spectrum necessary for DMB business. Multinet had been previously granted the right to use this frequency by the MIC, but their right had been granted on the condition that Multinet would renounce its right to use the frequency upon implementation of a DMB business (to the extent necessary for the operation of our DMB business) and that Multinet would comply with any directive of the MIC to reallocate the frequency. The Seoul

 


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Administrative Court ruled in favor of the MIC in December 2002. Multinet filed an appeal with the Seoul High Court, but the Seoul High Court ruled in favor of the MIC in June 2004. Based on the application and registration with the International Telecommunication Union for such frequency, the MIC has allotted us a frequency with a license to run DMB business as a network service operator. Multinet, in June 2004 and September 2004, filed two lawsuits against the MIC to revoke such allotment by the MIC.

     In November 2002, in connection with certain technology used in the provision of Coloring service, Mr. Park Won-Seop filed a lawsuit against us in the Seoul Central District Court. In the lawsuit, Mr. Park alleged that we have infringed upon his patent rights relating to Coloring service. While the lawsuit is currently pending before the Seoul Central District Court, we sought an administrative action to nullify Mr. Park’s patent rights in the Intellectual Property Tribunal. The Tribunal upheld the nullification of Mr. Park’s patent rights. Mr. Park appealed the decision, and the appeal is currently pending before the Patent Court.

 


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SK TELECOM CO., LTD.
NON-CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
(See Independent Accountants’ Review Report)

                                 
    Korean won     Translation into U.S. dollars
(Note 2)
 
    March 31,     December 31,     March 31,     December 31,  
A S S E T S   2005     2004     2005     2004  
    (In millions)     (In thousands)  
CURRENT ASSETS :
                               
Cash and cash equivalents (Note 11)
  W 128,327     W 112,966     $ 126,381     $ 111,253  
Short-term financial instruments
    97,502       7,700       96,023       7,583  
Trading securities (Notes 2 and 3)
    790,360       640,389       778,373       630,677  
Current portion of long-term investment securities (Notes 2 and 3)
          3,600             3,545  
Accounts receivable — trade (net of allowance for doubtful accounts of W73,406 million at March 31, 2005 and W58,248 million at December 31, 2004) (Notes 2, 11 and 20)
    1,538,968       1,562,774       1,515,627       1,539,072  
Short-term loans (net of allowance for doubtful accounts of W717 million at March 31, 2005 and W562 million at December 31, 2004, respectively) (Notes 2, 5 and 20)
    70,953       55,613       69,877       54,770  
Accounts receivable — other (net of allowance for doubtful accounts of W13,606 million at March 31, 2005 and W13,665 million at December 31, 2004) (Notes 2, 11 and 20)
    1,329,551       1,365,226       1,309,386       1,344,520  
Inventories (Note 2)
    10,603       10,961       10,442       10,795  
Prepaid expenses
    99,902       80,768       98,387       79,543  
Deferred income tax assets (Notes 2 and 16)
    46,713             46,005        
Accrued income and other
    34,632       14,348       34,107       14,130  
 
                       
 
                               
Total Current Assets
    4,147,511       3,854,345       4,084,608       3,795,888  
 
                       
 
                               
NON-CURRENT ASSETS :
                               
Property and equipment, net (Notes 2, 6, 19 and 20)
    4,408,101       4,605,253       4,341,246       4,535,408  
Intangible assets, net (Notes 2, 7 and 22)
    3,487,455       3,448,619       3,434,563       3,396,316  
Long-term investment securities (Notes 2 and 3)
    951,203       923,537       936,777       909,530  
Equity securities accounted for using the equity method (Notes 2 and 4)
    925,269       826,246       911,236       813,715  
Long-term loans (net of allowance for doubtful accounts of W22,990 million at March 31, 2005 and W19,173 million at December 31, 2004) (Notes 2, 5 and 20)
    21,051       28,284       20,732       27,855  
Guarantee deposits (Notes 11 and 20)
    132,086       242,387       130,083       238,711  
Long-term deposits and other (Notes 11 and 18)
    82,522       92,034       81,269       90,638  
 
                       
 
                               
Total Non-Current Assets
    10,007,687       10,166,360       9,855,906       10,012,173  
 
                       
 
                               
TOTAL ASSETS
  W 14,155,198     W 14,020,705     $ 13,940,514     $ 13,808,061  
 
                       

(Continued)

 


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SK TELECOM CO., LTD.
NON-CONSOLIDATED BALANCE SHEETS (CONTINUED)
MARCH 31, 2005 AND DECEMBER 31, 2004
(See Independent Accountants’ Review Report)

                                 
    Korean won     Translation into U.S. dollars (Note 2)  
    March 31,     December 31,     March 31,     December 31,  
LIABILITIES AND STOCKHOLDERS' EQUITY   2005     2004     2005     2004  
    (In millions)     (In thousands)  
CURRENT LIABILITIES :
                               
Accounts payable (Notes 11 and 20)
  W 626,417     W 1,070,588     $ 616,916     $ 1,054,351  
Short-term borrowings
    200,000       400,000       196,967       393,933  
Income taxes payable
    320,105       267,797       315,250       263,735  
Accrued expenses
    361,998       378,303       356,508       372,565  
Dividend payable
    684,865       263       674,478       259  
Withholdings
    254,111       188,197       250,257       185,343  
Current portion of long-term debt, net (Notes 2 and 8)
    499,400       498,278       491,826       490,721  
Current portion of subscription deposits (Note 9)
    13,863       13,405       13,653       13,202  
Other
    37,230       42,880       36,665       42,230  
 
                       
 
                               
Total Current Liabilities
    2,997,989       2,859,711       2,952,520       2,816,339  
 
                       
 
                               
LONG-TERM LIABILITIES :
                               
Bonds payable, net (Notes 2 and 8)
    3,087,500       2,891,843       3,040,674       2,847,984  
Subscription deposits (Note 9)
    30,073       31,440       29,617       30,963  
Long-term payables — other (net of present value discount of W69,325 million at March 31, 2005 and W72,663 million at December 31, 2004) (Note 2)
    580,675       577,337       571,868       568,581  
Accrued severance indemnities, net (Notes 2 and 20)
    85,972       75,409       84,668       74,265  
Deferred income tax liabilities (Notes 2 and 16)
    409,690       323,096       403,476       318,196  
Long-term currency swap (Notes 2 and 21)
    95,501       96,743       94,053       95,276  
Guarantee deposits received and other (Note 20)
    41,515       38,034       40,885       37,457  
 
                       
 
                               
Total Long-Term Liabilities
    4,330,926       4,033,902       4,265,241       3,972,722  
 
                       
 
                               
Total Liabilities
    7,328,915       6,893,613       7,217,761       6,789,061  
 
                       
 
                               
STOCKHOLDERS’ EQUITY :
                               
Capital stock (Notes 1 and 12)
    44,639       44,639       43,962       43,962  
Capital surplus (Note 12)
    2,964,664       2,983,166       2,919,701       2,937,922  
Retained earnings : (note 13)
Appropriated
    5,470,701       4,733,936       5,387,730       4,662,139  
Unappropriated
    369,812       1,422,772       364,203       1,401,194  
Capital adjustments :
                               
Treasury stock (Note 14)
    (2,047,105 )     (2,047,105 )     (2,016,058 )     (2,016,058 )
Unrealized loss on valuation of long-term investment securities (Notes 2 and 3)
    (44,688 )     (89,842 )     (44,010 )     (88,479 )
Equity in capital adjustments of affiliates, net (Notes 2 and 4)
    93,718       124,145       92,297       122,262  
Loss on valuation of currency swap (Notes 2 and 21)
    (30,472 )     (49,452 )     (30,010 )     (48,702 )
Stock options (Notes 2 and 15)
    5,014       4,833       4,938       4,760  
 
                       
 
                               
Total Stockholders’ Equity
    6,826,283       7,127,092       6,722,753       7,019,000  
 
                       
 
                               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  W 14,155,198     W 14,020,705     $ 13,940,514     $ 13,808,061  
 
                       

See accompanying notes to non-consolidated financial statements.

 


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SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(See Independent Accountants’ Review Report)

                                 
    Korean won     Translation into U.S. dollars (Note 2)  
    2005     2004     2005     2004  
    (In millions     (In thousands  
    except for per share data)     except for per share data)  
 
                               
OPERATING REVENUE (Notes 2 and 20)
  W 2,411,935     W 2,400,568     $ 2,375,355     $ 2,364,160  
 
                       
 
                               
OPERATING EXPENSES (Notes 2 and 20)
                               
Labor cost
    (135,685 )     (150,900 )     (133,627 )     (148,611 )
Commissions paid
    (713,836 )     (651,940 )     (703,010 )     (642,052 )
Depreciation and amortization (Notes 2, 6, 7 and 10)
    (341,248 )     (343,203 )     (336,072 )     (337,998 )
Network interconnection
    (217,907 )     (167,568 )     (214,602 )     (165,027 )
Leased line
    (96,867 )     (82,001 )     (95,398 )     (80,757 )
Advertising
    (56,319 )     (91,645 )     (55,465 )     (90,255 )
Research and development (Note 2)
    (50,984 )     (46,219 )     (50,211 )     (45,518 )
Rent
    (43,736 )     (39,132 )     (43,073 )     (38,539 )
Cost of goods sold
    (1,922 )     (322 )     (1,893 )     (317 )
Other
    (138,968 )     (136,467 )     (136,860 )     (134,398 )
 
                       
 
                               
Sub-total
    (1,797,472 )     (1,709,397 )     (1,770,211 )     (1,683,472 )
 
                       
 
                               
OPERATING INCOME
    614,463       691,171       605,144       680,688  
 
                       
 
                               
OTHER INCOME :
                               
Interest income
    11,341       19,209       11,169       18,918  
Dividends
    16,204       17,529       15,958       17,263  
Commissions (Note 20)
    7,076       8,804       6,969       8,670  
Equity in earnings of affiliates (Notes 2 and 4)
    6,446       23,765       6,348       23,405  
Foreign exchange and translation gains (Note 2)
    390       9,479       384       9,335  
Reversal of allowance for doubtful accounts
    212       1,574       209       1,550  
Gain on disposal of property and equipment
    89       57       88       56  
Other
    13,819       9,522       13,609       9,378  
 
                       
 
                               
Sub-total
    55,577       89,939       54,734       88,575  
 
                       
 
                               
OTHER EXPENSES :
                               
Interest and discounts
    (66,309 )     (76,044 )     (65,303 )     (74,891 )
Donations
    (15,865 )     (1,184 )     (15,624 )     (1,166 )
Foreign exchange and translation losses (Note 2)
    (678 )     (1,900 )     (668 )     (1,871 )
Loss on disposal of property, equipment and intangible assets
    (1,889 )     (6,672 )     (1,860 )     (6,571 )
Loss on disposal of investment assets
    (47 )     (806 )     (46 )     (794 )
Equity in losses of affiliates (Notes 2 and 4)
    (19,644 )           (19,346 )      
Loss on transaction and valuation of currency swap (Notes 2 and 21)
    (394 )     (4,953 )     (388 )     (4,878 )
Other
    (18,009 )     (19,279 )     (17,737 )     (18,986 )
 
                       
 
                               
Sub-total
    (122,835 )     (110,838 )     (120,972 )     (109,157 )
 
                       
 
                               
ORDINARY INCOME
    547,205       670,272       538,906       660,106  
 
                       

(Continued)

 


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SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(See Independent Accountants’ Review Report)

                                 
    Korean won     Translation into U.S. dollars (Note 2)  
    2005     2004     2005     2004  
    (In millions     (In thousands  
    except for per share data)     except for per share data)  
 
                               
INCOME BEFORE INCOME TAXES
  W 547,205     W 670,272     $ 538,906     $ 660,106  
 
                               
PROVISION FOR INCOME TAXES (Notes 2 and 16)
    (178,787 )     (217,757 )     (176,076 )     (214,454 )
 
                       
 
                               
NET INCOME
  W 368,418     W 452,515     $ 362,830     $ 445,652  
 
                       
 
                               
NET INCOME PER SHARE (In Korean won and U.S. dollars) (Note 17)
  W 5,005     W 6,147     $ 4.93     $ 6.05  
 
                       

See accompanying notes to non-consolidated financial statements.

 


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SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(See Independent Accountants’ Review Report)

                                 
    Korean won     Translation into U.S. dollars (Note 2)  
    2005     2004     2005     2004  
    (In millions)     (In thousands)  
CASH FLOWS FROM OPERATING ACTIVITIES :
                               
 
                               
Net income
  W 368,418     W 452,515     $ 362,830     $ 445,652  
 
                       
 
                               
Expenses not involving cash payments :
                               
Provision for severance indemnities
    11,046       16,565       10,878       16,314  
Depreciation and amortization
    369,582       371,791       363,977       366,152  
Allowance for doubtful accounts
    15,046       103       14,818       101  
Foreign translation loss
    174       1,679       171       1,654  
Loss on disposal of property, equipment and intangible assets
    1,889       6,672       1,860       6,571  
Loss on disposal of investment assets
    47       806       46       794  
Equity in losses of affiliates
    19,644             19,346        
Loss on transaction and valuation of currency swap
    394       4,953       388       4,878  
Amortization of discounts on bonds and other
    12,449       8,780       12,261       8,646  
 
                       
 
                               
Sub-total
    430,271       411,349       423,745       405,110  
 
                       
 
                               
Income not involving cash receipts :
                               
Foreign translation gain
    (79 )     (9,165 )     (78 )     (9,026 )
Reversal of allowance for doubtful accounts
    (212 )     (1,574 )     (209 )     (1,550 )
Gain on disposal of property and equipment
    (89 )     (57 )     (88 )     (56 )
Equity in earnings of affiliates
    (6,446 )     (23,765 )     (6,348 )     (23,405 )
Other
    (956 )     (2,546 )     (941 )     (2,507 )
 
                       
 
                               
Sub-total
    (7,782 )     (37,107 )     (7,664 )     (36,544 )
 
                       
 
                               
Changes in assets and liabilities related to operating activities :
                               
Accounts receivable — trade
    8,920       17,389       8,785       17,125  
Accounts receivable — other
    35,718       (401,093 )     35,176       (395,010 )
Inventories
    358       (285 )     353       (281 )
Prepaid expenses
    (4,215 )     (11,111 )     (4,151 )     (10,942 )
Accrued income and other
    (17,585 )     (2,458 )     (17,318 )     (2,421 )
Accounts payable
    (444,180 )     (343,989 )     (437,443 )     (338,772 )
Income taxes payable
    43,772       6,259       43,108       6,164  
Accrued expenses
    (16,305 )     (34,542 )     (16,058 )     (34,018 )
Withholdings
    65,913       87,307       64,913       85,983  
Current portion of facility deposits
    458       1,147       451       1,130  
Other current liabilities
    (5,649 )     (269 )     (5,564 )     (265 )
Deferred income taxes
    16,959       39,709       16,702       39,107  
Severance indemnity payments
    (3,929 )     (9,290 )     (3,869 )     (9,149 )
 
                       
 
                               
Sub-total
    (319,765 )     (651,226 )     (314,915 )     (641,349 )
 
                       
 
                               
Net Cash Provided by Operating Activities
    471,142       175,531       463,996       172,869  
 
                       

(Continued)

 


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SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(See Independent Accountants’ Review Report)

                                 
    Korean won     Translation into U.S. dollars (Note 2)  
    2005     2004     2005     2004  
    (In millions)     (In thousands)  
CASH FLOWS FROM INVESTING ACTIVITIES :
                               
Cash inflows from investing activities :
                               
Decrease in trading securities
  W     W 240,628     $     $ 236,979  
Decrease in current portion of long-term investment securities
    3,600       36,978       3,545       36,417  
Decrease in short-term loans
    14,996       20,782       14,769       20,467  
Proceeds from sales of long-term investment securities
    1,686       511       1,660       503  
Proceeds from sales of equity securities accounted for using the equity method
    600       868       591       855  
Decrease in guarantee deposits
    114,855       5,650       113,113       5,564  
Decrease in other non-current assets
    10,047       11,162       9,895       10,993  
Proceeds from disposal of property and equipment
    472       3,354       465       3,303  
Proceeds from disposal of intangible assets
    1       1       1       1  
 
                       
 
                               
Sub-total
    146,257       319,934       144,039       315,082  
 
                       
 
                               
Cash outflows for investing activities :
                               
Increase in short-term financial instruments
    (89,801 )     (33,132 )     (88,439 )     (32,630 )
Increase of trading securities
    (149,971 )           (147,696 )      
Increase in short-term loans
    (26,907 )     (2,579 )     (26,499 )     (2,540 )
Acquisition of long-term investment securities
    (239 )     (11,096 )     (235 )     (10,928 )
Acquisition of equity securities accounted for using the equity method
    (97,878 )     (58,415 )     (96,394 )     (57,529 )
Increase in long-term loans
    (169 )     (24,744 )     (166 )     (24,369 )
Increase in guarantee deposits and other non-current assets
    (20,022 )     (30,383 )     (19,719 )     (29,922 )
Acquisition of property and equipment
    (93,291 )     (115,665 )     (91,876 )     (113,911 )
Increase in intangible assets
    (119,545 )     (4,391 )     (117,732 )     (4,324 )
 
                       
 
                               
Sub-total
    (597,823 )     (280,405 )     (588,756 )     (276,153 )
 
                       
 
                               
Net Cash Provided by (Used in) Investing Activities
    (451,566 )     39,529       (444,717 )     38,929  
 
                       

(Continued)

 


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SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(See Independent Accountants’ Review Report)

                                 
    Korean won     Translation into U.S. dollars
(Note 2)
 
    2005     2004     2005     2004  
    (In millions)     (In thousands)  
CASH FLOWS FROM FINANCING ACTIVITIES :
                               
Cash inflows from financing activities :
                               
Issuance of bonds
  W 193,683     W 147,510     $ 190,746     $ 145,273  
Other
    13,589       5,411       13,382       5,329  
 
                       
 
                               
Sub-total
    207,272       152,921       204,128       150,602  
 
                       
 
                               
Cash outflows for financing activities :
                               
Repayment of short-term borrowings
    (200,000 )     (152,994 )     (196,967 )     (150,674 )
Repayment of current portion of long-term debt
          (224,435 )           (221,031 )
Payment of dividends
    (11 )     (20 )     (11 )     (20 )
Decrease in facility deposits
    (1,367 )     (2,958 )     (1,346 )     (2,913 )
Acquisition of treasury stock
          (2 )           (2 )
Other
    (10,109 )     (3,115 )     (9,955 )     (3,067 )
 
                       
 
                               
Sub-total
    (211,487 )     (383,524 )     (208,279 )     (377,707 )
 
                       
 
                               
Net Cash Used in Financing Activities
    (4,215 )     (230,603 )     (4,151 )     (227,105 )
 
                       
 
                               
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    15,361       (15,543 )     15,128       (15,307 )
 
                               
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD
    112,966       28,393       111,253       27,962  
 
                       
 
                               
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD
  W 128,327     W 12,850     $ 126,381     $ 12,655  
 
                       

See accompanying notes to non-consolidated financial statements.

 


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SK TELECOM CO., LTD.

NON-CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
AND INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

 


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  INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

English Translation of a Report Originally Issued in Korean

To the Stockholders and Board of Directors of
SK Telecom Co., Ltd.

We have reviewed the accompanying non-consolidated balance sheet of SK Telecom Co., Ltd. (the “Company”) as of March 31, 2005 and the related non-consolidated statements of income and cash flows for the three months ended March 31, 2005 and 2004 (all expressed in Korean won). These non-consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these non-consolidated financial statements based on our reviews.

We conducted our reviews in accordance with standards for review of interim financial statements in the Republic of Korea. Those standards require that we plan and perform the review to obtain moderate assurance as to whether the non-consolidated financial statements are free of material misstatements. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and accordingly, we do not express an audit opinion.

Based on our reviews, nothing has come to our attention that causes us to believe that such non-consolidated balance sheet as of March 31, 2005 and the related non-consolidated statements of income and cash flows for the three months ended March 31, 2005 and 2004 are not presented fairly, in all material respects, in accordance with financial accounting standards generally accepted in the Republic of Korea.

We have previously audited, in accordance with auditing standards generally accepted in the Republic of Korea, the non-consolidated balance sheet of the Company as of December 31, 2004, and the related non-consolidated statements of income, appropriations of retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated January 28, 2005, we expressed an unqualified opinion on those non-consolidated financial statements. The accompanying non-consolidated balance sheet as of December 31, 2004, which is comparatively presented, does not differ in material respects from such audited non-consolidated balance sheet.

Our reviews also comprehended the translation of the Korean won amounts into U.S. dollar amounts and, based on our reviews, nothing has come to our attention that causes us to believe that such translation has not been made in conformity with the basis stated in Note 2(a). Such U.S. dollar amounts are presented solely for the convenience of readers outside Korea.

 


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Without affecting our conclusion, we draw attention to the following :

As described in Note 23 to the accompanying non-consolidated financial statements, in accordance with the resolution of the Company’s board of directors dated May 3, 2005, the Company decided to sell 4,542,000 shares of 6,747,421 shares of SK Teletech Co., Ltd. (“SKTT”) held by the Company, representing 60% of the total outstanding common stock of SKTT for a total selling price of W300 billion (W66,050 per share), to Curitel Communications, Inc., a handset maker in Korea. As a result, the Company’s ownership in SKTT will decrease from 89.1% to 29.1% and the Company’s management rights of SKTT are expected to be transferred to Curitel Communications, Inc. by the end of May 2005.

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

May 9, 2005

Notice to Readers

This report is effective as of May 9, 2005, the accountants’ review report date. Certain subsequent events or circumstances may have occurred between the accountants’ review report date and the time the accountants’ review report is read. Such events or circumstances could significantly affect the accompanying non-consolidated financial statements and may result in modifications to the accountants’ review report.

 


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SK TELECOM CO., LTD.
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(See Independent Accountants’ Review Report)

1.   GENERAL

    SK Telecom Co., Ltd. (the “Company”) was incorporated in March 1984 under the laws of Korea to engage in providing nationwide cellular telephone communication services in the Republic of Korea. The Company’s common shares and depositary receipts (DRs) are listed on the Stock Market of Korea Exchange (formerly “Korea Stock Exchange”) and the New York and London Stock Exchanges, respectively. As of March 31, 2005, the Company’s total issued shares are held by the following :
                 
            Percentage of  
    Number of shares     total shares issued (%)  
 
               
SK Group
    19,772,042       24.03  
POSCO Corp.
    4,098,496       4.98  
Institutional investors and other minority shareholders
    49,743,758       60.46  
Treasury stock
    8,662,415       10.53  
 
           
 
               
 
    82,276,711       100.00  
 
           

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    The accompanying non-consolidated financial statements of the Company have been prepared in accordance with Korean Financial Accounting Standards and Statements of Korea Accounting Standards (“SKAS”) No.1 through No.10 and No.12 through No.17, using the same accounting policies which were adopted in preparing the annual financial statements, and significant accounting policies followed in preparing the accompanying non-consolidated financial statements are summarized as follows.

  a.   Basis of Presentation

      The accompanying non-consolidated statutory financial statements have been prepared in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea (“Korean GAAP”). Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying non-consolidated

 


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      financial statements have been condensed, restructured and translated into English from the Korean language financial statements. Certain information included in the Korean language financial statements, but not required for a fair presentation of the Company’s financial position, results of operations or cash flows, is not presented in the accompanying non-consolidated financial statements.

      The official accounting records of the Company are maintained and expressed in Korean won, the currency of the country in which the Company is incorporated and operates. The translations of Korean won amounts into U.S. dollar amounts are included solely for the convenience of readers outside of the Republic of Korea and have been made at the rate of W1,015.4 to US$1, the Noon Buying Rate in the City of New York for cable transfers in Korean won as certified for customs purposes by the Federal Reserve Bank of New York on the last business day of the three months ended March 31, 2005. Such translations into U.S. dollars should not be construed as representations that the Korean won amounts could be converted into U.S. dollars at the above or any other rate.

  b.   Allowance for Doubtful Accounts
 
      An allowance for doubtful accounts is provided based on the estimated collectibility of individual accounts and historical bad debt experience.
 
  c.   Inventories
 
      Inventories, which consist mainly of replacement units for wireless telecommunication facilities and supplies for sales promotion, are stated at the lower of cost or market value, with cost determined using the moving average method. During the year, perpetual inventory systems are used to value inventories, which are adjusted to physical inventory counts. When the market value of inventories is less than the acquisition cost, carrying amount is reduced to the market value and any difference is charged to current operations as operating expenses. There was no such valuation loss for the three months ended March 31, 2005 and 2004.
 
  d.   Securities (excluding securities accounted for using the equity method of accounting)
 
      Debt and equity securities are initially recorded at their acquisition costs (fair value of considerations paid) including incidental cost incurred in connection with acquisition of the related securities and classified into trading, available-for-sale and held-to-maturity securities depending on the acquisition purpose and nature.
 
      Trading securities are stated at fair value with gains or losses on valuation reflected in current operations.
 
      Securities classified as available-for-sale are reported at fair value. Unrealized gains or losses on valuation of available-for-sale securities are included in capital adjustments and the unrealized gains or losses are reflected in net income when the securities are sold or if an impairment is other than temporary. Equity securities are stated at acquisition cost if fair value cannot be reliably measured. If the declines in the fair value of individual available-for-sale securities below their acquisition or amortized cost are other than temporary and there is objective evidence of impairment, write-downs of the individual securities are recorded to reduce the carrying value to their fair value. The related write-downs are recorded in current operations as a loss on impairment of investment securities.
 
      Held-to-maturity securities are presented at acquisition cost after premiums or discounts are amortized or

 


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      accreted, respectively. The Company recognizes write-downs resulting from other-than-temporary declines in the fair value below its book value on the balance sheet date if there is objective evidence of impairment. The related write-downs are recorded in current operations as a loss on impairment of investment securities.

      Trading securities are presented in the current asset section of the balance sheet, and available-for-sales and held-to-maturity securities are presented in the current and/or non-current asset section of the balance sheet, based on their maturities from the balance sheet date.
 
  e.   Investment Securities Accounted for Using the Equity Method of Accounting
 
      Investment securities of affiliated companies, in which the Company has the ability to exercise significant influence, are carried using the equity method of accounting, whereby the Company’s initial investment is recorded at cost and the carrying value is subsequently increased or decreased to reflect the Company’s portion of shareholders’ equity of the investee. Differences between the purchase cost and net asset value of the investee are amortized over 20 years using the straight-line method. When applying the equity method of accounting, unrealized intercompany gains and losses are eliminated and the effect of eliminations is reflected in the investment securities account. There were no such unrealized gains or losses during the three months ended March 31, 2005 and 2004 (See Note b).
 
  f.   Property and Equipment
 
      Property and equipment are stated at cost. Major renewals and betterments, which prolong the useful life or enhance the value of assets, are capitalized; expenditures for maintenance and repairs are charged to expense as incurred.
 
      Depreciation is computed using the declining balance method (except for buildings and structures acquired on or after January 1, 1995 which are depreciated using the straight-line method) over the estimated useful lives (4-30 years) of the related assets (See Note 6).
 
      Interest expense and other financing charges for borrowings related to the manufacture or construction of property and equipment are charged to current operations as incurred.
 
  g.   Intangible Assets
 
      Intangible assets are recorded at cost, less amortization computed using the straight-line method over 5 to 20 years. The amortization for the three months ended March 31, 2005 and 2004 was W81,054 million and W76,554 million, respectively.
 
      With its application for a license to provide IMT 2000 service, the Company has a commitment to pay W1,300,000 million to the Ministry of Information Communication (“MIC”). W650,000 million was paid in March 2001 by SK IMT Co., Ltd. (a former subsidiary of the Company), which was merged into the Company on May 1, 2003, and the remainder is required to be paid over 10 years with an annual interest rate equal to the 3-year-maturity government bond rate minus 0.75% (3.22% as of March 31, 2005). On December 4, 2001, SK IMT Co., Ltd. received the IMT 2000 license from the MIC, and recorded the total license cost as an intangible asset. As a result of the merger with SK IMT Co., Ltd., the Company acquired such IMT license of W1,259,253 million and assumed the related long-term payable with a principal amount of W650,000 million on May 1, 2003 (the date of merger). Amortization of the IMT license commenced when the Company started its commercial

 


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      IMT 2000 service in December 2003, using the straight-line method over the estimated useful life of the IMT license which expires in December 2016.

  h.   Convertible Bonds
 
      The proceeds from issuance of convertible bonds are allocated between the conversion rights and the debt issued; the portion allocable to the conversion rights is accounted for as capital surplus with a corresponding conversion right adjustment which is deducted from the related bonds. Such conversion right adjustment is amortized to interest expense using the effective interest rate method over the redemption period of the convertible bonds. The portion allocable to the conversion rights is measured by deducting the present value of the debt at time of issuance from the gross proceeds from issuance of convertible bonds, with the present value of the debt being computed by discounting the expected future cash flows (including call premium, if any) using the effective interest rate applied to ordinary or straight debt of the Company at the issue date.
 
  i.   Discounts on Bonds
 
      Discounts on bonds are amortized to interest expense using the effective interest rate method over the redemption period of the bonds.
 
  j.   Valuation of Long-term Payables
 
      Long-term payables resulting from long-term installment transactions are stated at the present value of the expected future cash flows. Imputed interest amounts are recorded in present value discount accounts which are deducted directly from the related nominal payable balances. Such imputed interest is included in operations using the effective interest rate method over the redemption period.
 
  k.   Accrued Severance Indemnities
 
      In accordance with the Company’s policy, all employees with more than one year of service are entitled to receive severance indemnities, based on length of service and rate of pay, upon termination of their employment. Accruals for severance indemnities are recorded to approximate the amount required to be paid if all employees were to terminate at the balance sheet date.
 
      The Company has deposits with insurance companies to fund the portion of the employees’ severance indemnities which is in excess of the tax deductible amount allowed under the Corporate Income Tax Law, in order to take advantage of the additional tax deductibility for such funding. Such deposits with outside insurance companies, where the beneficiaries are the Company’s employees, totaling W152,532 million and W155,228 million as of March 31, 2005 and December 31, 2004, respectively, is deducted from accrued severance indemnities.
 
      In accordance with the Korean National Pension Fund Law, the Company transferred a portion of its accrued severance indemnities to the National Pension Fund through March 1999. Such transfers, amounting to

 


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      W5,525 million and W5,612 million as of March 31, 2005 and December 31, 2004, respectively, are deducted from accrued severance indemnities.

      Actual payment of severance indemnities amounted to W3,929 million and W9,290 million for the three months ended March 31, 2005 and 2004, respectively.
 
  l.   Accounting for Employee Stock Option Compensation Plan
 
      The Company adopted the fair value based method of accounting for its employee stock option compensation plan (See Note 15). Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. For stock options, fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, expected dividends and the current risk-free interest rate for the expected life of the option. However, as permitted under Korean GAAP, the Company excludes the volatility factor in estimating the value of its stock options granted before December 31, 2003, which results in measurement at minimum value. The total compensation cost of an option estimated at the grant date is not subsequently adjusted for changes in the price of the underlying stock or its volatility, the actual life of the option, dividends on the stock, or the risk-free interest rate.
 
  m.   Accounting for Leases
 
      Lease agreements that include a bargain purchase option, result in the transfer of ownership at the end of the lease term, have a lease term equal to 75% or more of the estimated economic life of the leased property or where the present value of minimum lease payments equals or exceeds 90% of the fair value of the leased property, are accounted for as capital leases. All other leases are accounted for as operating leases.
 
      Assets and liabilities related to capital leases are recorded as property and equipment and obligations under capital leases, respectively, and the related interest is calculated using the effective interest rate method and charged to other expenses. For operating leases, the future minimum lease payments are expensed ratably over the lease term while contingent rentals are expensed as incurred.
 
  n.   Research and Development Costs
 
      The Company charges substantially all research and development costs to current operations as incurred. The Company incurred internal research and development costs of W50,984 million and W46,219 million for the three months ended March 31, 2005 and 2004, respectively, and external research and development costs of W17,167 million and W17,770 million for the three months ended March 31, 2005 and 2004, respectively, all of which were charged to current operations.
 
  o.   Accounting for Foreign Currency Transactions and Translation
 
      Transactions denominated in foreign currencies are recorded in Korean won based on the prevailing rate of

 


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      exchange at the dates of transactions. Monetary assets and liabilities denominated in foreign currency are translated into Korean won at the Base Rates announced by Seoul Money Brokerage Services, Ltd. on the balance sheet date, which were, for US dollars, W1,024.30=US$1 and W1,043.80=US$1 at March 31, 2005 and December 31, 2004, respectively. The resulting gains or losses arising from the translation or settlement of such assets and liabilities are included in current operations.

  p.   Derivative Instruments
 
      The Company records 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 portion of the gains or losses on the hedging instruments are recorded as a separate component of shareholders’ equity and credited/charged to operations at the time the hedged transactions affect earnings, and the ineffective portions of the gains or losses is credited/charged immediately to operations.
 
  q.   Revenue Recognitions
 
      Operating revenue is recognized when cellular telephone communication services are provided.
 
  r.   Income Taxes
 
      Deferred tax assets and liabilities are recorded for future tax consequences of operating loss carryforwards, tax credits and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized to the extent that they are expected to be realizable.
 
  s.   Adoptions of New Statements of Korea Accounting Standards (“SKAS”)
 
      On January 1, 2005, the Company adopted SKAS No.15, No.16 and No.17, which are effective from the fiscal year beginning after December 31, 2004. Such adoption of SKAS has caused the following changes in the Company’s accounting policies :
 
      Through 2004, the Company discontinued applying the equity method when the investment is reduced to zero and should not provide for additional losses. Effective January 1, 2005, additional losses are provided for to the extent that the Company has other investment assets related to equity method investees, including preferred stock and long-term receivables, pursuant to adoption of SKAS No.15, “Investments : Equity Method”. As a result of this accounting change, total assets as of March 31, 2005 decreased by W3,904 million and ordinary income and net income for the three months ended March 31, 2005 decreased by W3,904 million (See Note 4).

 


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      Through 2004, tax effects of temporary differences directly charged or credited to capital surplus and/or capital adjustments, were excluded in determining the deferred tax assets or liabilities. Effective January 1, 2005, such tax effects of temporary differences are included in determining the deferred tax assets or liabilities, pursuant to adoption of SKAS No. 16 “Income Taxes”. Accordingly, those adjustments made directly in capital surplus or capital adjustments, which result in temporary differences, are recorded at net of related tax effects. In addition, effective January 1, 2005 deferred income tax assets and liabilities which were presented on the balance sheet as a single non-current net number through 2004, are separated into current and non-current portions based on the classification of related assets or liabilities for financial reporting purposes. As a result of this accounting change, total assets and total liabilities as of March 31, 2005 increased by W46,713 million and W78,171 million, respectively, and total stockholders’ equity as of March 31, 2005 decreased by W31,458 million, which was directly reflected in capital surplus or capital adjustments (See Note 16).
 
      Such accounting changes are prospectively applied as allowed by SKAS No. 15 and No. 16. As a result, the non-consolidated balance sheet as of December 31, 2004 and the non-consolidated statements of income and cash flows for the three months ended March 31, 2004 which is comparatively presented herein, were not made to reflect the effect of adoptions of SKAS No. 15 and No. 16, retrospectively.

3.   INVESTMENT SECURITIES

    a. Trading Securities

      Trading securities as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won) :
                                 
    March 31, 2005     December 31, 2004  
                            Fair value and  
    Acquisition cost     Fair value     Carrying amount     carrying amount  
 
                               
Beneficiary certificates
  W 790,360     W 790,360     W 790,360     W 640,389  
 
                       

 


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    b. Long-term Investment Securities

      Long-term investment securities as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won) :
                 
    March 31, 2005     December 31, 2004  
 
               
Available-for-sale equity securities
  W 899,636     W 872,209  
Available-for-sale debt securities
    1,567       4,928  
Held-to-maturity securities
    50,000       50,000  
 
           
Total
    951,203       927,137  
Less current portion
          (3,600 )
 
           
 
               
Long-term portion
  W 951,203     W 923,537  
 
           

    b-(1). Available-for-sale Equity Securities

      Available-for-sale equity securities as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won) :
                                                                 
            Ownership     Acquisition           Unrealized                
            percentage     cost at     Fair value     gain (loss)             Carrying amount  
    Number of     (%) at Mar. 31,     Mar. 31,     at Mar. 31,     at Mar.31,             March 31,     December 31,  
    shares     2005     2005     2005     2005             2005     2004  
(Investments in listed companies)
                                                               
Digital Chosunilbo Co., Ltd.
    2,890,630       7.8     W 5,781     W 3,180     W (2,602 )   (note a)   W 3,180     W 2,023  
Hanaro Telecom Inc.
    22,090,000       4.8       121,677       63,288       (58,389 )   (note a)     63,288       71,019  
Korea Radio Wave Basestation Management
    234,150       4.5       1,171       2,470       1,300     (note a)     2,470       2,178  
POSCO Corporation
    2,481,310       2.7       332,662       498,743       166,082     (note a)     498,743       464,005  
INNOTG Co., Ltd.
    594,737       3.9       1,695       202       (1,493 )   (note a)     202       152  
SINJISOFT Corporation
          0.0                       (note a, b)           590  
Cowon Systems, Inc.
    335,999       6.2       1,600       1,757       157     (note a)     1,757       1,600  
 
                                                       
sub-total
                    464,586               105,055               569,640       541,567  
 
                                                       

 


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            Ownership     Acquisition           Unrealized                
            percentage     cost at     Fair value     gain (loss)             Carrying amount  
    Number of     (%) at Mar. 31,     Mar. 31,     at Mar. 31,     at Mar. 31,             March 31,     December 31,  
    shares     2005     2005     2005     2005             2005     2004  
(Investments in non-listed companies)
                                                               
Powercomm Co., Ltd.
    7,500,000       5.0     W 240,243     W 71,565     W (168,678 )   (note c)   W 71,565     W 71,565  
Japan MBCO
    84,000       7.3       27,332     (note e)                   27,332       27,332  
Real Telecom Co., Ltd.
    398,722       8.3       5,981                 (note d)            
Enterprise Networks Co., Ltd.
    423,244       4.0       14,438                 (note d)            
Eonex Technologies Inc.
    144,000       14.1       3,600     (note e)     2,011               4,593       4,593  
WiderThan Co., Ltd.
    2,000,000       14.3       1,000     (note e)     (27 )             3,188       3,188  
Others
                    101,940     (note e)         (note f)     26,912       27,558  
 
                                                       
sub-total
                    394,534               (166,694 )             133,590       134,236  
 
                                                       
 
                                                               
(Investments in funds)
                                                               
Korea IT Fund
                    190,000     (note e)                   190,000       190,000  
Others
                    6,406     (note e)                   6,406       6,406  
 
                                                       
sub-total
                    196,406                             196,406       196,406  
 
                                                       
 
                                                               
Total
                                  W (61,639 )           W 899,636     W 872,209  
 
                                                         
     
(note a)  
The net unrealized gain on investments in common stock of listed companies as of March 31, 2005 and December 31, 2004, totaling W105,055 million and W76,852 million, respectively, were recorded as capital adjustments.
(note b)  
The investment in common stock of SINJISOFT Corporation was sold and the Company recorded a gain on disposal of W931 million for the three months ended March 31, 2005.
(note c)  
The Company recorded its investments in common stock of Powercomm Co., Ltd. at its fair value, which was estimated by an outside professional valuation company using the present value of expected future cash flows and the unrealized loss on valuation of investments amounting to W168,678 million as of December 31, 2004 was recorded as a capital adjustment. Based on the advice of the outside professional valuation company that there was no significant change which had an effect on the fair value of Powercomm Co., Ltd. for the three months ended March 31, 2005, no additional unrealized loss or recovery on valuation of such investments was recorded.
(note d)  
Due to the impairment of the Company’s investments in common stock of Real Telecom Co., Ltd. and Enterprise Networks Co., Ltd., the Company recorded impairment losses of W20,419 million for the year ended December 31, 2004.
(note e)  
As a reasonable estimate of fair value could not be made, the investment is stated at acquisition cost. The investments in common stock of Eonex Technologies Inc. and WiderThan Co., Ltd. were reclassified to available-for-sale equity from equity securities accounted for using the equity method during 2003 and 2004, respectively, as the Company’s ownership in such investees decreased to less than 20%. Such securities were transferred to available-for-sale securities at the carrying amount valued using the equity method of accounting prior to the reclassification.

 


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(note f)  
Due to the impairment of the Company’s investments in common stock of Mobilewelcom Co., Ltd. in 2004, the Company recorded impairment losses of W1,000 million for the year ended December 31, 2004.

b-(2). Available-for-sale Debt Securities

Available-for-sale debt securities as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won) :
                                 
                    Carrying amount  
    Maturity     Acquisition cost     Mar. 31, 2005     Dec. 31, 2004  
 
                               
Public bonds
  (note a)   W 1,567     W 1,567     W 1,328  
Convertible bonds of Real Telecom Co., Ltd. (note b)
  March, 2007     10,656              
Convertible bonds of Eonex Technologies, Inc. (3rd) (note c)
  January, 2005                 3,600  
 
                         
Total
            12,223       1,567       4,928  
Less current portion of available-for-sale debt securities
                        (3,600 )
 
                         
 
                               
Long-term available-for-sale debt securities
          W 12,223     W 1,567     W 1,328  
 
                         
     
(note a)  
The maturities of public bonds as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won) :
                 
Maturity   March 31, 2005     December 31, 2004  
Within five years
  W 1,198     W 904  
Within ten years
    369       424  
 
           
 
  W 1,567     W 1,328  
 
           
     
(note b)  
The convertible bonds of Real Telecom Corp. with a principal amount of W10,656 million can be converted into 371,018 shares of common stock of Real Telecom Corp. at W28,721 per share over the period from September 29, 2004 to March 28, 2007. Meanwhile, due to the impairment in such bonds, the Company recorded an impairment loss of W10,656 million for the year ended December 31, 2004.
 
                                                               
(note c)  
The convertible bonds of Eonex Technologies, Inc. (3rd) were all repaid during the three months ended March 31, 2005.

 


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    b-(3). Held-to-maturity Securities

    Held-to-maturity securities as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won) :
                                 
                    Carrying amount  
    Maturity     Acquisition cost     Mar. 31, 2005     Dec. 31, 2004  
Subordinated bonds of SK Life Insurance Co., Ltd.
  April, 2006   W 50,000     W 50,000     W 50,000  
 
                           
Total
                    50,000       50,000  
Less current portion of held-to-maturity securities
                           
 
                           
 
                               
Long-term held-to-maturity securities
                  W 50,000     W 50,000  
 
                           

4.   EQUITY SECURITIES ACCOUNTED FOR USING THE EQUITY METHOD

    Equity securities accounted for using the equity method as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won, except for share data) :
                                                         
    March 31, 2005             Carrying Amount  
    Number     Ownership     Acquisition     Net Asset             Mar. 31,     Dec. 31,  
    of shares     Percentage (%)     Cost     Value             2005     2004  
SK Teletech Co., Ltd.
    6,747,421       89.1     W 80,491     W 177,987             W 181,230     W 190,896  
SK Capital Co., Ltd.
    10,000,000       100.0       50,000       34,891     (note a)     34,891       34,891  
SK Communications Co., Ltd.
    7,844,454       92.2       175,441       115,869               140,382       143,096  
SK Telink Co., Ltd.
    943,997       90.8       5,296       59,085               59,085       56,182  
SK C&C Co., Ltd.
    300,000       30.0       19,071       212,279               217,453       201,353  
SK Wyverns Baseball Club Co., Ltd.
    199,997       100.0       1,000           (note a)            
STIC Ventures Co., Ltd.
    1,600,000       24.1       8,000       7,477     (note a)     7,477       7,321  
Paxnet Co., Ltd.
    5,590,452       67.1       26,563       6,718               25,760       25,244  
Global Credit & Information Corp.
    300,000       50.0       2,410       2,384     (note a)     3,054       3,054  
TU Media Corp.
    7,800,000       28.5       39,000       32,122               32,122       34,607  
Aircross Co., Ltd.
    600,000       38.1       300       940     (note a)     940       944  
SLD Telecom PTE. Ltd.
    75,941,700       55.1       89,203       56,065               56,487       59,804  
Skytel Co., Ltd.
    1,756,000       28.6       2,159       3,713     (note a)     3,713       3,633  
SK China Company Ltd.
    28,160       20.7       3,195       830     (note a)     830       803  
SK Telecom International, Inc.
    1,099       100.0       17,467       21,950     (note a)     21,950       21,995  
SK Telecom China Co., Ltd.
    6,150,000       100.0       7,340       9,212     (note a)     9,212       9,212  
SK USA, Inc.
    49       49.0       3,184       3,056     (note a)     3,056       3,184  
SK Telecom USA Holdings, Inc.
    1,000       100.0       83,438       83,438     (note b)     83,438        
IHQ, Inc.
    8,000,000       21.7       14,440       7,039     (note c)     14,440        
Centurion IT Investment Association
            37.5       3,000       2,928     (note a)     2,928       3,205  
SK-QC Wireless Development Fund
            50.0       6,540       5,147     (note a)     5,147       5,145  

 


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    March 31, 2005             Carrying Amount  
    Number     Ownership     Acquisition     Net Asset             Mar. 31,     Dec. 31,  
    of shares     Percentage (%)     Cost     Value             2005     2004  
SKT-HP Ventures, LLC
            50.0       6,415       5,281     (note a)     5,281       5,284  
Other investments in affiliates
                    16,393             (note d)     16,393       16,393  
 
                                                   
 
                                                       
Total
                                          W 925,269     W 826,246  
 
                                                   
     
(note a)  
Net asset value was calculated based on the financial statements as of December 31, 2004, as the information as of March 31, 2005 was not available and the change in the Company’s portion of shareholders’ equity of the investee for the three months ended March 31, 2005 was not expected to be material.
   
 
(note b)  
In the first quarter of 2005, the Company incorporated SK Telecom USA Holdings, Inc. with initial investment of US$83 million in order to invest in and manage SK-Earthlink, a joint venture company in the Untied States of America, which was established in order to provide wireless telecommunication service across the United States of America.
   
 
(note c)  
In February 2005, the Company acquired 8,000,000 shares of IHQ, Inc., an entertainment management company, for W1,805 per share with an option to purchase additional 5,000,000 shares at the previously agreed upon price during the period from March 15, 2006 to April 30, 2006, in order to secure high-quality contents for the Company’s wireless internet services.
   
 
(note d)  
As allowed under Korean GAAP, investments in equity securities of SK Telecom Europe Limited and certain others were not accounted for using the equity method of accounting, as their total assets at the beginning of 2005 were less than W7 billion, and the Company’s portion of shareholders’ equity of such investees were not expected to be material.

Details of the changes in investments in affiliates accounted for using the equity method for the three months ended March 31, 2005 and 2004 are as follows (in millions of Korean won) :
                                         
    For the three months ended March 31, 2005  
    Beginning     Equity in                    
    balance or     earnings     Equity in capital     Dividend        
    acquisition cost     (losses)     adjustments     received     Ending balance  
SK Teletech Co., Ltd.
  W 190,896     W (9,666 )   W     W     W 181,230  
SK Capital Co., Ltd. (note a)
    34,891                         34,891  
SK Communications Co., Ltd.
    143,096       (1,274 )     (1,440 )           140,382  
SK Telink Co., Ltd.
    56,182       2,876       27             59,085  
SK C&C Co., Ltd.
    201,353       2,582       14,118       (600 )     217,453  
SK Wyverns Baseball Club Co., Ltd. (notes a and b)
          (3,904 )                  
STIC Ventures Co., Ltd. (note a)
    7,321       (285 )     441             7,477  
Paxnet Co., Ltd.
    25,244       516                   25,760  
Global Credit & Information Corp. (note a)
    3,054                         3,054  
TU Media Corp.
    34,607       (2,485 )                 32,122  
Aircross Co., Ltd. (note a)
    944       (4 )                 940  
SLD Telecom PTE. Ltd.
    59,804       (1,701 )     (1,616 )           56,487  
Skytel Co., Ltd. (note a)
    3,633       88       (8 )           3,713  

 


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    For the three months ended March 31, 2005  
    Beginning     Equity in                    
    balance or     earnings     Equity in capital     Dividend        
    acquisition cost     (losses)     adjustments     received     Ending balance  
SK China Company, Ltd. (note a)
    803       35       (8 )           830  
SK Telecom International, Inc. (note a)
    21,995       (49 )     4             21,950  
SK Telecom China Co., Ltd. (note a)
    9,212       179       (179 )           9,212  
SK USA, Inc. (note a and c)
    3,184       169       (297 )           3,056  
Centurion IT investment Association (note a)
    3,205       (277 )                 2,928  
SKT-QC Wireless Development Fund (note a)
    5,145       2                   5,147  
SKT-HP Ventures, LLC (note a)
    5,284             (3 )           5,281  
SKT Telecom USA Holdings, Inc. (note d)
    83,438                         83,438  
IHQ, Inc. (note d)
    14,440                         14,440  
 
                             
 
                                       
 
  W 907,731     W (13,198 )   W 11,039     W (600 )   W 908,876  
 
                             
     
(note a)  
Investments in equity securities are carried using the equity method of accounting based on the financial statements as of December 31, 2004 as information as of March 31, 2005 was not available and the change of the Company’s portion of shareholders’ equity of the investee for the three months ended March 31, 2005 was not expected to be material.
   
 
(note b)  
Additional losses of W3,904 million was provided for the three months ended March 31, 2005 in accordance with SKAS No.15, which requires the Company to provide additional allowance for doubtful accounts related to the long-term loans to SK Wyverns Baseball Club Co., Ltd. at the same amount.
   
 
(note c)  
As the investee’s total assets at the beginning of 2005 were over W7 billion and the Company’s portion of the investee’s shareholders’ equity for the three months ended March 31, 2005 was material, investments in equity securities of SK USA, Inc. were accounted for using the equity method of accounting, effective January 1, 2005.
   
 
(note d)  
As the acquisitions of investments in common stock of SK Telecom USA Holdings, Inc. and IHQ, Inc. were assumed to be on March 31, 2005, there is no change in such investments to be reported for the three months ended March 31, 2005.
                                         
    For the three months ended March 31, 2004  
    Beginning balance     Equity in earnings     Equity in capital     Dividend     Ending    
    or acquisition cost     (losses)     adjustments     received     Balance    
SK Teletech Co., Ltd.
  W 159,267     W 17,874     W     W     W 177,141  
SK Capital Co., Ltd.
    45,865       (4 )                 45,681  
SK Communications Co., Ltd
    120,718       (2,521 )     3,701             121,898  
SK Telink Co., Ltd.
    43,452       2,874                   46,326  
SK C&C Co., Ltd.
    93,433       4,341       45,635       (600 )     142,809  
STIC Ventures Co., Ltd. (note a)
    7,098       (11 )                 7,087  
Paxnet Co., Ltd.
    25,712       (41 )     47             25,718  

 


Table of Contents

                                         
    For the three months ended March 31, 2004  
    Beginning balance     Equity in earnings     Equity in capital     Dividend     Ending  
    or acquisition cost     (losses)     adjustments     received     Balance  
VCASH Co., Ltd.
    943       (242 )                 701  
Global Credit & Information Corp. (note a)
    2,773                         2,773  
TU Media Corp.
    39,000       (1,178 )     173             37,995  
WiderThan Co., Ltd. (note a)
    3,166       49       (27 )           3,188  
SLD Telecom PTE. Ltd. (note a)
    24,701       2,056       (348 )           26,409  
Skytel Co., Ltd. (note a)
    3,053       195       172       (19 )     3,401  
SK China Co., Ltd. (note a)
    2,187       (568 )     65             1,684  
SK Telecom International Inc. (note a)
    18,963       915       5             19,883  
Centurion IT investment association
    3,125       1                   3,126  
SK-QC Wireless Development Fund (note a)
    5,906       (5 )                 5,901  
SKT-HP Ventures, LLC (note a)
    5,964       30       (34 )           5,960  
 
                             
 
  W 605,326     W 23,765     W 49,389     W (619 )   W 677,861  
 
                             
     
(note a)  
Investments in equity securities are carried using the equity method of accounting based on the financial statements as of December 31, 2003, as information as of March 31, 2004 was not available and the change of the Company’s portion of shareholders’ equity of the investee for the three months ended March 31, 2004 was not material.

    Details of changes in the differences between the acquisition cost and net asset value of equity method investees for the three months ended March 31, 2005 and 2004 are as follows (in millions of Korean won) :
                                 
    For the three months ended March 31, 2005  
    Beginning                     Ending  
    balance     Increase     Amortization     balance  
SK Teletech Co., Ltd.
  W 3,287     W     W (43 )   W 3,244  
SK Communications Co., Ltd.
    24,622             (108 )     24,514  
SK C&C Co., Ltd.
    5,276             (102 )     5,174  
Paxnet Co., Ltd.
    19,310             (268 )     19,042  
Global Credit & Information Corp.
    670                   670  
SLD Telecom PTE. Ltd.
    428             (6 )     422  
IHQ, Inc. (note a)
          7,401             7,401  
 
                       
 
  W 53,593     W 7,401     W (527 )   W 60,467  
 
                       
     
(note a)  
As the acquisition of investments in common stock of IHQ, Inc. was assumed to be on March 31, 2005 for accounting purposes, the amount to be amortized for the three months ended March 31, 2005 was nil.

 


Table of Contents

                                 
    For the three months ended March 31, 2004  
    Beginning                     Ending  
    balance     Increase     Amortization     balance  
SK Teletech Co., Ltd.
  W     W 3,520     W (106 )   W 3,414  
SK Communications Co., Ltd.
    21,799             (75 )     21,724  
SK C&C Co., Ltd.
    5,682             (101 )     5,581  
Paxnet Co., Ltd.
    20,383             (268 )     20,115  
Global Credit & Information Corp.
    712                   712  
 
                       
 
  W 48,576     W 3,520     W (550 )   W 51,546  
 
                       

    The condensed financial information of the investees as of and for the three months ended March 31, 2005 are as follows (in millions of Korean won) :
                                 
    Total     Total             Net  
    Assets     Liabilities     Revenue     Income (loss)  
SK Teletech Co., Ltd.
  W 350,204     W 150,519     W 127,219     W (10,591 )
SK Communications Co., Ltd.
    165,702       37,298       27,157       (512 )
SK Telink Co., Ltd.
    101,795       36,616       34,620       3,202  
SK C&C Co., Ltd.
    1,438,250       730,654       177,195       11,068  
Paxnet Co., Ltd.
    16,711       6,096       9,875       1,169  
TU Media Corp.
    241,266       128,387             (8,670 )
SLD Telecom PTE. Ltd.
    105,748       3,927             (3,387 )
IHQ, Inc.
    44,087       10,719       14,832       2,020  

5.   LOANS TO EMPLOYEES
 
    Short-term and long-term loans to employees as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won) :
                                 
    March 31, 2005     December 31,  
    Short-term     Long-term     Total     2004  
       
Loans to employees’ stock ownership association
  W 3,936     W 16,659     W 20,595     W 22,546  
Loans to employees for housing and other
    107       461       568       612  
 
                       
Total
  W 4,043     W 17,120     W 21,163     W 23,158  
 
                       

 


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6.   PROPERTY AND EQUIPMENT
 
    Property and equipment as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won) :
                         
    Useful lives              
    (years)     March 31, 2005     December 31, 2004  
Land
        W 464,488     W 463,656  
Buildings and structures
    30, 15       1,445,237       1,441,937  
Machinery
    6       9,447,794       9,452,751  
Vehicles
    4       20,330       20,268  
Other
    4       737,089       721,032  
Construction in progress
          186,554       138,002  
 
                   
 
                       
 
            12,301,492       12,237,646  
Less accumulated depreciation
            (7,893,391 )     (7,632,393 )
 
                   
 
                       
Property and equipment, net
          W 4,408,101     W 4,605,253  
 
                   

    The standard value of land declared by the government as of March 31, 2005 and December 31, 2004 are W401,939 million and W401,771 million, respectively.
 
    Details of change in property and equipment for the three months ended March 31, 2005 and 2004 are as follows (in millions of Korean won) :
                                                 
    For the three months ended March 31, 2005  
    Beginning                                     Ending  
    balance     Acquisition     Disposal     Transfer     Depreciation     balance  
Land
  W 463,656     W 649     W (54 )   W 237     W     W 464,488  
Buildings and structures
    1,163,070       3,436       (219 )     155       (13,558 )     1,152,884  
Machinery
    2,585,118       484       (900 )     12,704       (255,859 )     2,341,547  
Vehicles
    4,030       62                   (489 )     3,603  
Other
    251,377       42,990       (1,020 )     (15,700 )     (18,622 )     259,025  
Construction in progress
    138,002       45,670             2,882             186,554  
 
                                   
 
                                               
Total
  W 4,605,253     W 93,291     W (2,193 )   W 278     W (288,528 )   W 4,408,101  
 
                                   

 


Table of Contents

                                                 
    For the three months ended March 31, 2004  
    Beginning                                     Ending  
    balance     Acquisition     Disposal     Transfer     Depreciation     balance  
Land
  W 446,574     W 33     W (1,816 )   W     W     W 444,791  
Buildings and structures
    840,237       58       (5,852 )     131       (10,349 )     824,225  
Machinery
    2,625,306       4,178       (503 )     46,858       (264,644 )     2,411,195  
Vehicles
    3,836       2,274       (5 )           (543 )     5,562  
Other
    326,109       45,516       (1,789 )     (102,342 )     (19,701 )     247,793  
Construction in progress
    309,564       63,606             51,456             424,626  
 
                                   
 
                                               
Total
  W 4,551,626     W 115,665     W (9,965 )   W (3,897 )   W (295,237 )   W 4,358,192  
 
                                   

7.   INTANGIBLE ASSETS
 
    Intangible assets as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won) :
                                                 
    March 31, 2005     December 31, 2004  
    Acquisition     Accumulated     Carrying     Acquisition     Accumulated     Carrying  
    cost     amortization     amounts     cost     amortization     amounts  
Goodwill
  W 2,335,532     W (418,151 )   W 1,917,381     W 2,335,532     W (385,986 )   W 1,949,546  
Frequency use rights
    1,384,433       (127,836 )     1,256,597       1,267,053       (103,734 )     1,163,319  
Software development costs
    221,312       (131,348 )     89,964       221,278       (120,699 )     100,579  
Other
    447,600       (224,087 )     223,513       445,359       (210,184 )     235,175  
 
                                   
 
                                               
 
  W 4,388,877     W (901,422 )   W 3,487,455     W 4,269,222     W (820,603 )   W 3,448,619  
 
                                   

 


Table of Contents

      Details of changes in intangible assets for the three months ended March 31, 2005 and 2004 are as follows (in millions of Korean won) :
                                                 
    For the three months ended March 31, 2005  
    Beginning                                     Ending  
    balance     Increase     Decrease     Transfer     Amortization     balance  
Goodwill
  W 1,949,546     W     W     W     W (32,165 )   W 1,917,381  
Frequency use rights
    1,163,319       117,380                   (24,102 )     1,256,597  
Software development costs
    100,579       35                   (10,650 )     89,964  
Other
    235,175       2,130       (80 )     425       (14,137 )     223,513  
 
                                   
 
                                               
 
  W 3,448,619     W 119,545     W (80 )   W 425     W (81,054 )   W 3,487,455  
 
                                   
                                                 
    For the three months ended March 31, 2004  
    Beginning                                     Ending  
    balance     Increase     Decrease     Transfer     Amortization     balance  
Goodwill
  W 2,078,208     W     W     W     W (32,165 )   W 2,046,043  
Frequency use rights
    1,251,278                         (23,926 )     1,227,352  
Software development costs
    133,833       258                   (10,574 )     123,517  
Other
    136,949       4,133       (4 )     4,400       (9,889 )     135,589  
 
                                   
 
                                               
 
  W 3,600,268     W 4,391     W (4 )   W 4,400     W (76,554 )   W 3,532,501  
 
                                   

    The book value as of March 31, 2005 and residual useful lives of major intangible assets are as follows (in millions of Korean won) :
                     
                Residual useful  
    Amount     Description   lives  
 
  W 1,917,381     Goodwill related to acquisition   15 years
Goodwill
          of Shinsegi Telecomm, Inc.   and 9 months
 
          Frequency use rights relating to        
IMT license
    1,131,649     W-CDMA service   (note)
Development costs
    89,964     Software for business use   1 ~ 5 years

  (note)   Amortization of the IMT license commenced when the Company started its commercial IMT service in December 2003, using the straight-line method over the estimated useful life (13 years) of the IMT license which expires in December 2016.

 


Table of Contents

8.   BONDS PAYABLE
 
    Bonds payable as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won and thousands of U.S. dollars) :
                         
        Annual interest   March 31,     December, 31  
    Maturity year   rate (%)   2005     2004  
Domestic general bonds
  2005   6.0   W 500,000     W 500,000  
’’
  2006   5.0 - 6.0     800,000       800,000  
’’
  2007   5.0 - 6.0     700,000       700,000  
’’
  2008   5.0     300,000       300,000  
’’
  2009   5.0     300,000       300,000  
’’
  2010   4.0     200,000        
’’
  2011   3.0     200,000       200,000  
Dollar denominated bonds (US$300,000)
  2011   4.25     307,290       313,140  
Convertible bonds (US$329,450)
  2009       385,885       385,885  
 
                   
 
                       
Total
            3,693,175       3,499,025  
Less discounts on bonds
            (52,901 )     (51,467 )
Less conversion right adjustments
            (78,182 )     (82,245 )
Add long-term accrued interest
            24,808       24,808  
 
                   
 
                       
Net
            3,586,900       3,390,121  
Less portion due within one year
            (499,400 )     (498,278 )
 
                   
 
                       
Long-term portion
          W 3,087,500     W 2,891,843  
 
                   

    All of the above bonds will be paid in full at maturity.
 
    On May 27, 2004, the Company issued zero coupon convertible bonds with a maturity of five years in the principal amount of US$329,450,000 for US$324,923,469, with an initial conversion price of W235,625 per share of the Company’s common stock which was greater than market value at the date of issuance. Subsequently, the initial conversion price was changed to W226,566 per share in accordance with antidilution protection. The Company may redeem their principal amount after 3 years from the issuance date if the market price exceeds 130% of the conversion price during a predetermined period. On the other hand, the bond holders may redeem their notes at 103.81% of the principal amount on May 27, 2007 (3 years from the issuance date). The conversion right may be exercised during the period from July 7, 2004 to May 13, 2009 and the number of common shares to be converted as of March 31, 2005 is 1,710,750 shares. Conversion of notes to common shares may be prohibited under the Telecommunications Law or other legal restrictions which restrains foreign governments, individuals and entities from owning more than 49% of the Company’s voting stock, if this 49% ownership limitation is violated due to the exercise of conversion rights. In this case, the Company will pay a bond holder a cash settlement determined at the average price of one day after a holder exercises its conversion right or the weighted average price for the following five business days. The Company intends to sell treasury shares held in trust by the Company that corresponds to the number of shares of common stock that would have been delivered in the absence of the 49% foreign

 


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    shareholding restrictions. The Company entered into an agreement with Credit Suisse First Boston International to reduce the effect of fluctuation with respect to cash settlement payments that may be more or less than the proceeds from sales of treasury shares held in trust. Unless either previously redeemed or converted, the notes are redeemable at 106.43% of the principal amount at maturity.
 
9.   SUBSCRIPTION DEPOSITS
 
    The Company receives subscription deposits from customers of cellular services at the subscription date. The Company has no obligation to pay interest on subscription deposits but is required to return them to subscribers upon termination of the subscription contract.
 
    Long-term subscription deposits held as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won except deposit per subscriber amounts) :
                         
    Deposit              
Service type   per subscriber     March 31, 2005     December 31, 2004  
Cellular
  W 200,000     W 30,073     W 31,440  
 
                   

    The Company offers existing and new cellular subscribers the option of obtaining credit insurance from Seoul Guarantee Insurance Company (“SGIC”) in lieu of the subscription deposits. Existing subscribers who elect this option are refunded their subscription deposits. As a result, the balance of subscription deposits has been decreasing.
 
10.   LEASES
 
    As the Company merged with Shinsegi Telecomm, Inc. in January 2002, certain capital leases made by Shinsegi Telecomm, Inc. were transferred to the Company. The Company has an option to acquire the leased machinery and equipment, free of charge, upon termination of the lease period. Depreciation expense for the three months ended March 31, 2004 was W37 million. For the three months ended March 31, 2004, all capital leases were terminated and the Company acquired the related leased machinery free of charge.
 
    As the Company merged with Shinsegi Telecomm, Inc., certain operating lease made by Shinsegi Telecomm, Inc. was transferred to the Company and the related lease expense for the three months ended March 31, 2004 was W261 million. This operating lease was terminated in 2004.
 
11.   ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES
 
    The details of monetary assets and liabilities denominated in foreign currencies (except for bonds payable denominated in foreign currencies described in Note 8) as of March 31, 2005 and December 31, 2004 are as

 


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    follows (in millions of Korean won, thousands of U.S. dollars, thousands of HK dollars, thousands of Japanese yen, thousands of Great Britain pounds, thousands of Chinese yuan, thousands of Singapore dollars, thousands of Swiss Franc, and thousands of Euros) :
                                 
    March 31, 2005     December 31, 2004  
    Foreign     Korean won     Foreign     Korean won  
    currencies     equivalent     currencies     equivalent  
Cash and cash equivalents
  US$ 516     W 529     US$ 3,851     W 4,020  
Accounts receivable — trade
  US$ 3,294       3,374     US$ 2,163       2,257  
’’
  SG$ 347       215              
Accounts receivable — other
  US$ 2,930       3,001     US$ 2,930       3,058  
Long-term deposits
  US$ 96       98              
Guarantee deposits
  US$ 46       48     US$ 142       149  
’’
  JPY 15,756       150     JPY 15,756     160  
 
                           
 
                               
 
          W 7,415             W 9,644  
 
                           
 
                               
Accounts payable
  US$ 7,807       7,996     US$ 5,158       5,384  
’’
  JPY 35,987       343     JPY 38,618       391  
’’
  HK$ 375       49     HK$ 217       29  
’’
  GBP 93       179     GBP 67       135  
’’
  SG$ 5       3     SG$ 5       3  
’’
  CNY 1       1     CNY 1       1  
’’
  EUR 45       59     EUR 119       169  
’’
  CHF 1       1              
 
                           
 
                               
 
          W 8,631             W 6,112  
 
                           

12.   CAPITAL STOCK AND CAPITAL SURPLUS
 
    The Company’s capital stock consists entirely of common stock with a par value of W500. The number of authorized and issued shares as of March 31, 2005 and December 31, 2004 are as follows :
                 
    March 31, 2005     December 31, 2004  
Authorized shares
    220,000,000       220,000,000  
Issued shares
    82,276,711       82,276,711  

 


Table of Contents

    Significant changes in capital stock and capital surplus for the three months ended March 31, 2005 and for the year ended December 31, 2004 are as follows (in millions of Korean won except for share data) :
                         
    Number of shares              
    issued     Capital stock     Capital surplus  
At January 1, 2004
    82,276,711     W 44,639     W 2,915,964  
Excess unallocated purchase price (note a)
                (77 )
Considerations for conversion right (note b)
                67,279  
 
                 
At December 31, 2004
    82,276,711       44,639       2,983,166  
Deferred tax liabilities deducted from capital surplus (note c)
                (18,502 )
 
                 
 
                       
March 31, 2005
    82,276,711     W 44,639     W 2,964,664  
 
                 

(note a)   During the year ended December 31, 2004, the Company paid W77 million to certain former shareholders of Shinsegi Telecomm, Inc. in accordance with the ruling of the court and deducted it from capital surplus in accordance with Korean GAAP.
 
(note b)   The Company issued zero coupon convertible bonds in the principal amount of US$329,450,000 at US$324,923,469 with an initial conversion price of W235,625 per share of the Company’s common stock on May 27, 2004 and the consideration for conversion right of W67,279 million was added to capital surplus in accordance with Korean GAAP (See Note 2(h)).
 
(note c)   Tax effects of considerations of conversion right, which resulted in temporary difference, was deducted directly from related components of stockholders’ equity, pursuant to adoption of SKAS No. 16 for the three months ended March 31, 2005.

13.   RETAINED EARNINGS
 
    Retained earnings as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won) :
                 
    March 31, 2005     December 31, 2004  
Appropriated
  W 5,470,701     W 4,733,936  
Unappropriated
    369,812       1,422,772  
 
           
 
  W 5,840,513     W 6,156,708  
 
           

 


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    The details of appropriated retained earnings as of March 31, 2005 and December 31, 2004 are as follows (in millions of Korean won) :
                 
    March 31, 2005     December 31, 2004  
Legal reserve
  W 22,320     W 22,320  
Reserve for improvement of financial structure
    33,000       33,000  
Reserve for loss on disposal of treasury stock
    477,182       477,182  
Reserve for research and manpower development
    822,061       776,296  
Reserve for business expansion
    4,116,138       3,425,138  
 
           
 
               
Total
  W 5,470,701     W 4,733,936  
 
           

  a.   Legal Reserve
 
      The Korean Commercial Code requires the Company to appropriate as a legal reserve at least 10% of cash dividends for each accounting period until the reserve equals 50% of outstanding capital stock. The legal reserve may not be utilized for cash dividends, but may only be used to offset a future deficit, if any, or may be transferred to capital stock.
 
  b.   Reserve for Improvement of Financial Structure
 
      The Financial Control Regulation for listed companies in Korea requires that at least 10% of net income (net of accumulated deficit), and an amount equal to net gain (net of related income taxes, if any) on the disposal of property and equipment be appropriated as a reserve for improvement of financial structure until the ratio of stockholders’ equity to total assets reaches 30%. The reserve for improvement of financial structure may not be utilized for cash dividends, but may only be used to offset a future deficit, if any, or may be transferred to capital stock.
 
  c.   Reserves for Loss on Disposal of Treasury Stock and Research and Manpower Development
 
      Reserves for loss on disposal of treasury stock and research and manpower development were appropriated in order to recognize certain tax deductible benefits through the early recognition of future expenditures. These reserves will be unappropriated from appropriated retained earnings in accordance with the relevant tax laws. Such unappropriation will be included in taxable income in the year of unappropriation.

14.   TREASURY STOCK
 
    Upon the issuances of stock dividends and new common stock and the merger with Shinsegi Telecomm, Inc. and SK IMT Co., Ltd., the Company acquired fractional shares totaling 77,970 shares for W6,110 million until 2004. In addition, the Company acquired 7,452,810 shares of treasury stock in the market or through the trust funds for

 


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    W1,771,507 million through 2003 in order to stabilize the market price of its stock.
 
    Under the Mutual Agreement on Stock Exchange between the Company and KT Corporation, on December 30, 2002 and January 10, 2003, the Company acquired 8,266,923 shares of the Company’s common stock from KT Corporation for W1,853,643 million.
 
    On January 13, 2002, the Company merged with Shinsegi Telecomm, Inc. and distributed 2,677,653 shares of treasury stock to minority shareholders of Shinsegi Telecomm, Inc., of which the cost was W584,646 million.
 
    On January 6, 2003, the Company retired 4,457,635 shares of treasury stock that were purchased from KT Corporation as mentioned above in accordance with a resolution of the board of directors dated December 26, 2002 and reduced unappropriated retained earnings by W1,008,882 million including the tax effect of W9,373 million, in accordance with the Korean Commercial Laws.
 
    On June 30, 2003, in accordance with a resolution of the board of directors dated June 24, 2003, the Company announced a stock repurchase program to acquire 2,544,600 shares of common stock in the market in order to enhance stockholders’ interest and to stabilize the stock price. Pursuant to the program, the Company acquired a total of 2,544,600 shares of Company’s outstanding common stock for W525,174 million during the period from June 30, 2003 to August 11, 2003 and retired such treasury shares on August 20, 2003, which reduced the unappropriated retained earnings by W537,138 million including the tax effect of W11,964 million, in accordance with Korean Commercial Laws.
 
    On February 20, 2004, the Company additionally acquired fractional shares totaling 12 shares for W2 million which resulted from the merger with SK IMT Co., Ltd.
 
15.   STOCK OPTIONS
 
    On March 17, 2000, March 16, 2001 and March 8, 2002, in accordance with the approval of its stockholders and its board of directors, the Company granted stock options to its management, representing 17,800 shares at an exercise price of W424,000 per share, 43,820 shares at an exercise price of W211,000 per share and 65,730 shares at an exercise price of W267,000 per share, respectively. The stock options will become exercisable after three years from the date of grant and shall be exercisable within two years from the first exercisable date. If the employees leave the Company within three years after the grant of stock options, such employees forfeit their unvested stock options awarded. Upon exercise of stock options, the Company will issue its common stock. During the year ended December 31, 2004, stock options representing 530 shares, of which total compensation cost was W3 million, were forfeited. During the three months ended March 31, 2005, there was no such forfeiture of stock options.
 
    The value of stock options granted is determined using the Black-Scholes option-pricing model, without considering the volatility factor in estimating the value of its stock options, as permitted under Korean GAAP. The following assumptions are used to estimate the fair value of options granted in 2000, 2001 and 2002; risk-free

 


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    interest rate of 9.1% for 2000, 5.9% for 2001 and 6.2% for 2002; expected life of three years for 2000, 2001 and 2002; expected dividend of W500 for 2000, 2001 and 2002. Under these assumptions, total compensation cost, the recognized compensation cost for the three months ended March 31, 2005 and 2004 and the outstanding balance of stock option in capital adjustment as of March 31, 2005 and December 31, 2004 are as follows and there was no compensation cost to be recognized for the following period after March 31, 2005 (in millions of Korean won) :
                                         
            Recognized        
            compensation cost        
            for the three months     Stock option in  
    Total     ended March 31,     capital adjustment  
    Compensation                     March 31,     December 31,  
Grant date   cost     2005     2004     2005     2004  
March 17, 2000
  W 1,533     W     W     W 1,533     W 1,533  
March 16, 2001
    234             13       234       234  
March 8, 2002
    3,247       181       271       3,247       3,066  
 
                             
 
                                       
 
  W 5,014     W 181     W 284     W 5,014     W 4,833  
 
                             

    The pro forma net income and net income per common share, if the Company had not excluded the volatility factor (expected volatility of 66.8% for options granted in 2000, 67.5% for options granted in 2001 and 63.0% for options granted in 2002) in estimating the value of its stock options, for the three months ended March 31, 2005, 2004 and 2003 are as follows :
                         
    For the three months ended March 31,  
    2005     2004     2003  
Pro forma ordinary income (in millions of Korean won)
  W 546,906     W 669,634     W 649,238  
Pro forma ordinary income per common share (in Korean won)
    5,001       6,138       5,860  
Pro forma net income (in millions of Korean won)
    368,120       451,877       447,758  
Pro forma net income per common share (in Korean won)
    5,001       6,138       5,860  

16.   INCOME TAXES

  a.   Details of income tax expense
 
           Income tax expenses for the three months ended March 31, 2005 and 2004 consist of the following (in millions of Korean won) :

 


Table of Contents

                 
    2005     2004  
Current
  W 161,828     W 178,048  
Deferred (note 1)
    16,959       39,709  
 
           
 
               
Income tax expenses
  W 178,787     W 217,757  
 
           

  (Note 1)    Changes in net deferred tax liabilities for the three months ended March 31, 2005 and 2004 are as follows (in millions of Korean won) :
                 
    2005     2004  
Beginning balance of net deferred tax liabilities
  W (323,096 )   W (242,057 )
Ending balance of net deferred tax liabilities
    362,977       282,008  
Adjustment to the beginning net deferred income tax liabilities based on tax return filed
    8,536       (242 )
Tax effect of temporary differences charged or credited directly to related components of stockholders’ equity
    (31,458 )      
 
           
 
               
 
  W 16,959     W 39,709  
 
           

  b.   Reconciling items between accounting income and taxable income
 
      Reconciling items between accounting income and taxable income for the three months ended March 31, 2005 and 2004 are as follows (in millions of Korean won) :
                 
    2005     2004  
(Temporary Differences)
               
 
               
Additions :
               
 
               
Allowance for doubtful accounts
  W 78,864     W 62,329  
Accrued interest income
    4,423       5,978  
Reserves for research and manpower development
    32,867       21,059  
Equity in losses of affiliates
    19,644        
Foreign currency translation gain
          2,802  
Depreciation
    4,401        
Loss on impairment of other assets
    11,930       16,387  
Loss on valuation of derivative instruments
    394       4,953  
Accrued severance indemnities
    7,451       8,002  
Deposits for severance indemnities
    2,696       2,429  
Other
    23,297       14,256  
 
           
Sub-total
    185,967       138,195  
 
           

 


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    2005     2004  
Deductions:
               
Reserves for research and manpower development
    (32,500 )     (70,000 )
Allowance for doubtful accounts
    (59,612 )     (67,482 )
Depreciation
    (19,698 )     (27,589 )
Accrued interest income
    (4,614 )     (9,717 )
Foreign currency translation loss
          (5,617 )
Equity in earnings of affiliates
    (6,446 )     (23,765 )
Accrued severance indemnities
    (2,696 )     (2,428 )
Deposits for severance indemnities
    (7,451 )     (8,002 )
Loss on impairment of other assets
    (14,156 )     (14,009 )
Other
    (65,740 )     (31,722 )
 
           
Sub-total
    (212,913 )     (260,331 )
 
           
Total Temporay Differences
    (26,946 )     (122,136 )
 
           
               
 
               
(Permanent Differences)
    80,511       60,896  
 
           
 
               
Total
  W 53,565     W (61,240 )
 
           

  c.   Change in cumulative temporary differences and deferred tax liabilities

        Changes in cumulative temporary differences for the three months ended March 31, 2005 and 2004 and deferred tax assets and liabilities as of March 31, 2005 and 2004 are as follows (in millions of Korean won) :

    For the three months ended March 31, 2005
                                 
    January 1,     Increase     Decrease     March 31,  
Description   2005     (note b)     (note b)     2005  
Current :
                               
Allowance for doubtful accounts
  W 59,622     W 78,854     W 59,612     W 78,864  
Accrued interest income
    (7,796 )     (1,241 )     (4,423 )     (4,614 )
Other
    235,000       843       11,673       224,170  
 
                       
 
                               
Total
    286,826     W 78,456     W 66,862       298,420  
 
                           
Temporary differences unlikely to be realized (note a)
    (128,555 )                     (128,555 )
 
                           
 
                               
Total current cumulative temporary differences-net
  W 158,271                     W 169,865  
 
                           
 
                               
Current deferred tax assets-net (note c)
  W 43,525                     W 46,713  
 
                           
 
                               
Non-current :
                               
Property and equipment
    (127,822 )     (16,264 )     2,175       (146,261 )
Loss on impairment of long-term investment securities
    106,752       (400 )           106,352  
Loss on impairment of other long-term assets
    21,070       11,930       14,156       18,844  
Reserves for research and manpower development
    (709,467 )     (32,500 )     (32,867 )     (709,100 )

 


Table of Contents

                                 
    January 1,     Increase     Decrease     March 31,  
Description   2005     (note b)     (note b)     2005  
Reserves for loss on disposal of treasury stock
    (474,081 )                 (474,081 )
Equity in earnings (losses) of affiliates
    (89,441 )           (13,198 )     (76,243 )
Equity in capital adjustment of affiliates
          (135,183 )           (135,183 )
Unrealized loss on valuation of long-term investment securities
          61,639             61,639  
Accrued severance indemnities
    139,524       4,064       2,696       140,892  
Deposits for severance indemnities
    (139,524 )     (4,064 )     (2,696 )     (140,892 )
Loss on valuation of derivative instruments
    15,789       395             16,184  
Loss on valuation of derivative instruments
                               
-capital adjustment
          49,452       7,422       42,030  
Considerations for conversion right
          (67,279 )           (67,279 )
Other
    (122,004 )     117,148       20,742       (25,598 )
 
                       
 
                               
Total
    (1,379,204 )   W (11,062 )   W (1,570 )     (1,388,696 )
 
                           
Temporary differences unlikely to be realized (note a)
    46,038                       (101,086 )
 
                           
 
                               
Total non-current cumulative temporary differences-net
  W (1,333,166 )                   W (1,489,782 )
 
                           
 
                               
Total non-current deferred tax liabilities-net (note c)
  W (366,621 )                   W (409,690 )
 
                           

  (note a)    Through 2004, the tax effects of temporary differences, which are unlikely to be realized, and temporary differences directly adjusted to capital surplus or capital adjustments, such as net unrealized loss on valuation of long-term investment securities, were excluded in determining the net deferred tax assets or liabilities. However, effective January 1, 2005, pursuant to adoption of SKAS No. 16, “Income Taxes”, temporary differences are presented on a gross basis, including temporary differences which are unlikely to be realized. In addition, tax effects of temporary differences related to adjustments made directly to capital surplus or capital adjustments are included in determining the net deferred tax assets or liabilities.
 
  (note b)    These changes include adjustment to reflect the change in accumulated temporary differences based on the prior year tax return.
 
  (note c)    Effective January 1, 2005, pursuant to adoption of SAKS No. 16 deferred tax assets and liabilities are separated into current and non-current based on the classification of related assets or liabilities for financial reporting purpose.

    For the three months ended March 31, 2004
                                 
    January 1,     Increase     Decrease     March 31,  
Description   2004     (note b)     (note b)     2004  
Property and equipment
  W 41,373     W (20,153 )   W 3,478     W 17,742  
Allowance for doubtful accounts
    66,833       62,978       67,482       62,329  
Loss on impairment of long-term investment securities
    95,269             250       95,019  
Foreign currency translation loss
    5,617             5,617        
Foreign currency translation gain
    (2,802 )           (2,802 )      
Reserves for research and manpower development
    (663,702 )     (70,000 )     (21,059 )     (712,643 )
Reserves for loss on disposal of treasury stock
    (474,081 )                 (474,081 )
Accrued interest income
    (5,978 )     (9,717 )     (5,978 )     (9,717 )
Equity in earnings (losses) of affiliates
    (35,616 )     (23,765 )           (59,381 )
Loss on impairment of other assets
    22,459       16,386       14,009       24,836  
Loss on valuation of derivative instruments
          4,953             4,953  
Accrued severance indemnities
    148,963       8,002       20,964       136,001  

 


Table of Contents

                                 
    January 1,     Increase     Decrease     March 31,  
Description   2004     (note b)     (note b)     2004  
Deposits for severance indemnities
    (139,054 )     624       (2,429 )     (136,001 )
Other
    57,547       15,487       42,419       30,615  
 
                       
                               
 
                               
Total temporary differences
                               
  
  W (883,172 )   W (15,205 )   W 121,951     W (1,020,328 )
 
                       
 
                               
Deferred tax liabilities-net (note a)
  W (242,057 )                   W (282,008 )
 
                           

  (note a)    The tax effects of temporary differences which are not realizable and the net unrealized loss on valuation of long-term investment securities are excluded in determining the above net deferred tax liabilities as of March 31, 2004. Pursuant to a revision in the Korean Corporate Income Tax Law, statutory corporate income tax rate has been changed from current 29.5% to 27.5%, effective January 1, 2005. As a result, 27.5% was used for measurement of a deferred tax assets or liabilities, which are attributable to temporary differences to be realized on and after January 1, 2005.
 
  (note b)    These changes include adjustment to reflect the change in accumulated temporary differences based on the prior year tax return.

  d.   Deferred tax assets (liabilities) added to (deducted from) capital surplus or capital adjustments

     Deferred tax assets (liabilities) added to (deducted from) capital surplus or capital adjustments as of March 31, 2005 are as follows (in millions of Korean won) :

         
Considerations for conversion right
  W (18,502 )
Unrealized loss on valuation of long-term investment securities
    16,951  
Equity in capital adjustment of affiliates
    (41,465 )
Loss on valuation of currency swap
    11,558  
 
     
 
       
Total
  W (31,458 )
 
     

  e.   Effective tax rate

     Effective tax rates for the three months ended March 31, 2005 and 2004 are as follows (in millions of Korean won) :

                 
    2005     2004  
Income before income tax expenses
  W 547,205     W 670,272  
Income tax expenses
    178,787       217,757  
 
           
 
               
Effective tax rate
    32.67 %     32.49 %
 
           

17.   NET INCOME AND ORDINARY INCOME PER SHARE
 
    The Company’s net income and ordinary income per share amounts for the three months ended March 31, 2005 and 2004 and for the year ended December 31, 2004 are computed as follows (in millions of Korean won, except for share and income per share) :

 


Table of Contents

    Net income and ordinary income per share
                         
    For the three months ended     For the year  
                    ended  
    March 31,     March 31,     December 31,  
    2005     2004     2004  
Net income and ordinary income
  W 368,418     W 452,515     W 1,494,852  
Weighted average number of common shares outstanding
    73,614,296       73,614,303       73,614,297  
 
                 
 
                       
Net income and ordinary income per share (in Korean won)
  W 5,005     W 6,147     W 20,307  
 
                 

    The weighted average number of common shares outstanding for the three months ended March 31, 2005 and 2004 is calculated as follows :
                         
    Number of     Weighted     Weighted  
    shares     number of days     number of shares  
For the three months ended March 31, 2005
                       
At January 1, 2005
    82,276,711       90 / 90       82,276,711  
Treasury stock, at the beginning
    (8,662,415 )     90 / 90       (8,662,415 )
 
                   
 
                       
Total
    73,614,296               73,614,296  
 
                   
For the three months ended March 31, 2004
                       
At January 1, 2004
    82,276,711       91 / 91       82,276,711  
Treasury stock, at the beginning
    (8,662,403 )     91 / 91       (8,662,403 )
Purchase of fractional share related to merger with SK IMT Co., Ltd.
    (12 )     41 / 91       (5 )
 
                   
 
                       
Total
    73,614,296               73,614,303  
 
                   

    Diluted net income and ordinary income per share amounts for the three months ended March 31, 2005 and 2004 and the year ended December 31, 2004 are computed as follows (in millions of won, except for share data) :
 
    Diluted net income and ordinary income per share
                         
    For the three months ended     For the year  
                    ended  
    March 31,     March 31,     December 31,  
    2005     2004     2004  
Adjusted net income and ordinary income
  W 371,533     W 452,515     W 1,502,398  
Adjusted weighted average number of common shares outstanding
    75,325,046       73,614,303       74,596,777  
 
                 
 
                       
Diluted net income and ordinary income per share
  W 4,932     W 6,147     W 20,140  
 
                 

 


Table of Contents

    Adjusted net income and ordinary income per share and the adjusted weighted average number of common shares outstanding for the three months ended March 31, 2005 and 2004 and for the year ended December 31, 2004 are calculated as follows :
                         
    For the three months ended     For the year  
                    ended  
    March 31,     March 31,     December 31,  
    2005     2004     2004  
Net income and ordinary income
  W 368,418     W 452,515     W 1,494,852  
Effect of stock option (note a)
                 
Effect of convertible bonds
    3,115             7,546  
 
                 
 
                       
Adjusted net income and ordinary income
  W 371,533     W 452,515     W 1,502,398  
 
                 
Weighted average number of common shares outstanding
  W 73,614,296     W 73,614,303     W 73,614,297  
Effect of stock option (note a)
                 
Effect of convertible bonds (note b)
    1,710,750             982,480  
 
                 
 
                       
Adjusted weighted average number of common shares outstanding
  W 75,325,046     W 73,614,303     W 74,596,777  
 
                 

  (note a)    In the three months ended March 31, 2005 and the year ended December 31, 2004, the outstanding stock options did not have a dilutive effect because the exercise price exceeded the average market price of common stock for the three months ended March 31, 2005 and the year ended December 31, 2004, respectively. In the three months ended March 31, 2004, the average market price of common stock for the three months ended March 31, 2004 exceeded the exercise price, but such stock options were not included in the diluted income per share calculation as the related adjustments to net income creates an anti-dilutive effect.
 
  (note b)    The effect of convertible bond is the weighted average number of common shares to be converted upon exercise of conversion right (see Note 8).

18.   COMMITMENT
 
    At March 31, 2005, the Company has guarantee deposits restricted for its checking accounts totaling W26 million and deposits restricted for the interest of the public totaling W10,000 million.
 
19.   INSURANCE
 
    At March 31, 2005, certain of the Company’s assets are insured with local insurance companies as follows (in millions of Korean won and thousands of U.S. dollars) :

 


Table of Contents

                         
Insured   Risk     Carrying value     Coverage  
 
                  US$ 63,000  
Property and equipment
  Fire and comprehensive liability   W 3,697,732     W 6,867,720  
 
                   

    In addition, the Company carries directors and officers liability coverage insurance totaling W30,000 million.
 
20.   TRANSACTIONS WITH RELATED COMPANIES
 
    Significant related party transactions and balances as of and for the three months ended March 31, 2005 and 2004 were as follows (in millions of Korean won) :
                 
    For the three months ended March 31,  
Description   2005     2004  
• Transactions
               
 
               
SK C&C Co., Ltd. :
               
Purchases of property and equipment
  W 3,780     W 20,786  
Commissions paid and other expenses
    68,529       63,860  
Commission and other income
    1,816       1,937  
 
               
SK Engineering & Construction Co., Ltd. :
               
Construction
    1,264       13,000  
Commissions paid and other expenses
    99       2  
Commissions and other income
    239       219  
 
               
SK Networks Co., Ltd. :
               
Purchases of property and equipment
    690       744  
Commissions paid and other expenses
    96,494       81,965  
Commissions and other income
    2,574       3,723  
 
               
SK Corporation :
               
Purchases of property and equipment
    211        
Commissions paid and other expenses
    8,745       9,398  
Commissions and other income
    980       469  
 
               
Innoace Co., Ltd. :
               
Purchases of property and equipment
    665       1,772  
Commissions paid and other expenses
    689       127  
Commissions and other income
    51       78  
 
               
SK Communications Co., Ltd. :
               
Purchases of property and equipment
    126       35  

 


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    For the three months ended March 31,  
Description   2005     2004  
Commissions paid and other expenses
    7,432       10,705  
Commissions and other income
    233       4,142  
 
               
SK Telesys Co., Ltd. :
               
Purchases of property and equipment
    13,681       488  
Commissions paid and other expenses
    158       352  
Commissions and other income
    53       89  
 
               
WiderThan Co., Ltd. :
               
Purchases of property and equipment
    1,245       158  
Commissions paid and other expenses
    21,361       15,958  
Commissions and other income
    6       13  
                 
Description   March 31, 2005     December 31, 2004  
               
 
               
• Balances
               
 
               
SK C&C Co., Ltd. :
               
Accounts receivable
  W 657     W 219  
Accounts payable
    37,378       42,662  
Guarantee deposits received
    346       346  
 
               
SK Engineering & Construction Co., Ltd. :
               
Accounts receivable
    49       68  
Accounts payable
    1,499       14,300  
Guarantee deposits received
    398       408  
 
               
SK Networks Co., Ltd. :
               
Accounts receivable
    241       1,174  
Guarantee deposits
    113       113  
Accounts payable
    6,662       59,659  
Guarantee deposits received
    1,003       719  
 
               
SK Corporation :
               
Accounts receivable
    1,405       67  
Guarantee deposits
    1,307       103,720  
Accounts payable
    2,781       9,073  
Guarantee deposits received
    10,194       10,194  
 
               
Innoace Co., Ltd. :
               
Accounts receivable
    5        
Accounts payable
    4,414       12,947  
Guarantee deposits received
    2,138       1,069  

 


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Description   March 31, 2005     December 31, 2004  
SK Communications Co., Ltd. :
               
Accounts receivable
    166       1,797  
Accounts payable
    2,809       4,394  
Guarantee deposits received
    3,681       8,408  
 
               
SK Telesys Co., Ltd. :
               
Accounts receivable
    16       47  
Accounts payable
    23,761       18,404  
 
               
SK Wyverns Baseball Club Co., Ltd. :
               
Long-term and short-term loans
    8,357       13,532  
 
               
SK Life Insurance Co., Ltd. :
               
Deposits for severance indemnities
    60,455       58,139  
Guarantee deposits paid
    60       60  
Accounts receivable
    1,515       1,509  
Guarantee deposits received
    821       821  
 
               
WiderThan Co., Ltd. :
               
Accounts receivable
    7       14  
Accounts payable
    10,165       6,263  

21.   DERIVATIVE INSTRUMENTS
 
    The Company has entered into a foreign currency forward contract and a fixed-to-fixed cross currency swap contract with Citi Bank, BNP Paribas and Credit Suisse First Boston International to hedge the foreign currency risk of unguaranteed US dollar denominated bonds with face amounts totaling US$300,000 thousand at annual fixed interest rate of 4.25% issued on April 1, 2004. As of March 31, 2005, in connection with unsettled foreign currency swap contract to which the cash flow hedge accounting is applied, an accumulated loss on valuation of derivatives amounting to W30,472 million (excluding tax effect totaling W11,558 million and foreign exchange translation gain arising from unguaranteed US dollar denominated bonds totaling W37,287 million) was accounted for as a capital adjustment.
 
    In addition, the Company has entered into a fixed-to-fixed cross currency swap contract with Credit Suisse First Boston International to hedge foreign currency risk of unguaranteed US dollar denominated convertible bonds with face amounts of US$329,450 thousand issued on May 27, 2004. In connection with unsettled fixed-to-fixed cross currency swap contract to which the cash flow hedge accounting is not applied, a loss on valuation of currency swap of W394 million for the three months ended March 31, 2005 is charged to current operations. As of March 31, 2005, fair values of above derivatives totaling W95,501 million are recorded in long-term liabilities.
 
    Details of derivative instruments as of March 31, 2005 are as follows (in thousands of US dollars and millions of Korean won) :

 


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                    Fair value  
                    Designated              
    Hedged   Face   Duration     as cash     Not        
Type   item   amount   of contract     flow hedge     Designated     Total  
Fix-to-fixed cross
  Unguaranteed US dollar   US$300,000   March 23, 2004                        
currency swap
    denominated bonds       ~ April 1, 2011   W 79,317     W     W 79,317  
Fix-to-fixed cross
  Unguaranteed US dollar   US$100,000   May 27, 2004                        
currency swap
    denominated convertible bonds       ~ May 27, 2009           16,184       16,184  
 
                                 
 
                                       
 
                  W 79,317     W 16,184     W 95,501  
 
                                 

    The above derivative instruments designated as cash flow hedge mature within 72 months from March 31, 2005 at the longest; and the expected portion of capital adjustments as of March 31, 2005, related to loss on valuation of currency swap, to be recorded in earnings within the next 12 months amounted to W4,874 million.
 
22.   SUBSTANTIAL CHANGES IN THE BUSINESS ENVIRONMENT

  a.   Acquisition of WiBro License
 
      The Company, together with KT Corporation and Hanaro Telecom Inc., acquired the license for WiBro, a portable internet service which is scheduled to start commercial operations in June 2006 as a result of the decision of the Committee of Information and Communication Policy dated January 20, 2005. With regard to this service, the Company made a contribution of W117 billion and received the WiBro license from the Ministry of Information and Technology in March 2005, which was recorded in intangible asset.
 
  b.   Establishment of SK-EarthLink, a joint venture company in the U.S.A.
 
      In accordance with the resolution of the Company’s board of directors dated January 26, 2005, the Company and EarthLink, Inc., an internet service provider in the United States of America, agreed to establish ‘SK-EarthLink’, a joint venture company, in the United States of America in February 2005 in order to provide wireless telecommunication service across the United States of America. The Company, via SK Telecom USA Holdings, Inc., its wholly-owned subsidiary in the United States of America, will invest US$220 million for a 50% equity interest in the joint venture company from 2005 through 2007. SK-EarthLink plans to launch cellular voice and data services across the United States of America by the third quarter of 2005 by renting networks from network operators throughout the United States of America also known as partial mobile virtual network operator (MVNO) system.

 


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23.   SUBSEQUENT EVENT

  a.   Resolution to dispose of the Company’s investments in common shares of SK Teletech Co., Ltd.
 
      In accordance with the resolution of the Company’s board of directors dated May 3, 2005, the Company decided to sell 4,542,000 shares of 6,747,421 shares of SK Teletech Co., Ltd. (“SKTT”) held by the Company, representing 60% of the total outstanding common stock of SKTT, for a total selling price of W300 billion (W66,050 per share), to Curitel Communications, Inc., a handset maker in Korea. As a result, the Company’s ownership in SKTT will decrease from 89.1% to 29.1% and the Company’s management rights of SKTT are expected to be transferred to Curitel Communications, Inc. by the end of June 2005.
 
  b.   Fine for providing handset subsidies
 
      On May 9, 2005 the Communications Commission of the Republic of Korea fined the Company W23.1 billion for improper marketing activities such as providing handset subsidies.

 


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SIGNATURES

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

         
  SK Telecom Co., Ltd.
 
 
  By /s/ Hyun Jong Song    
  Name:   Hyun Jong Song   
Date: July 11, 2005  Title:   Vice President