SK TELECOM CO., LTD
 

 
 
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 SEPTEMBER 2006
 
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 if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):                    
     Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.                    
     Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):                    
     Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submission to furnish a report or other document that the registration foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
     Indicate by check mark whether by furnishing the information contained in this Form, the registrant 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-                    
 
 

 

 

SK TELECOM CO., LTD.
NON-CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 2006 AND 2005
AND INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

 

 

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 June 30, 2006 and the related non-consolidated statements of income and cash flows for the three months and six months ended June 30, 2006 and 2005, all expressed in Korean won. These financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these 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 misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data, and this 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 the financial statements referred to above are not presented fairly, in all material respects, in conformity with accounting principles 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, 2005, 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 February 3, 2006, we expressed an unqualified opinion on those non-consolidated financial statements. The accompanying balance sheet as of December 31, 2005, 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 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 of Korea.
Accounting principles and review standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to review such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable about Korean accounting principles and review standards and their application in practice.
July 28, 2006
/s/ Deloitte Anjin LLC
Seoul, Republic of Korea
Notice to Readers
This report is effective as of July 28, 2006, 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 financial statements and may result in modification to the accountants’ review report.

 

 

SK TELECOM CO., LTD.
NON-CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2006 AND DECEMBER 31, 2005
                                 
                    Translation into U.S.dollars  
    Korean won     (Note 2)  
    June 30,     December 31,     June 30,     December 31,  
    2006     2005     2006     2005  
    (In millions)     (In thousands)  
ASSETS
                                
CURRENT ASSETS:
                                
Cash and cash equivalents (Notes 2 and 11)
   W 621,127     W 151,766     $ 654,852     $ 160,006  
Short-term financial instruments (Note 18)
     183,765       73,062       193,743       77,029  
Trading securities (Notes 2 and 3)
     923,333       745,360       973,467       785,830  
Current portion of long-term investment securities (Notes 2 and 3)
     64       —       67       —  
Accounts receivable — trade, net of allowance for doubtful accounts of W 89,113 million as of June 30, 2006 and W121,319 million as of December 31, 2005 (Notes 2, 11 and 20)
     1,519,312       1,607,596       1,601,805       1,694,882  
Short-term loans, net of allowance for doubtful accounts of W9,144 million as of June 30, 2006 and W648 million as of December 31, 2005 (Notes 2, 5 and 20)
     55,244       64,150       58,244       67,633  
Accounts receivable — other, net of allowance for doubtful accounts of W18,192 million as of June 30, 2006 and W14,246 million as of December 31, 2005 (Notes 2, 11 and 20)
     1,306,972       1,333,238       1,377,936       1,405,628  
Inventories (Note 2)
     7,467       5,986       7,872       6,311  
Prepaid expenses
     122,262       101,274       128,900       106,773  
Current deferred income tax assets, net (Notes 2 and 16)
     63,664       61,152       67,121       64,472  
Advanced payments and other
     19,510       28,901       20,569       30,471  
 
                        
 
                                
Total Current Assets
     4,822,720       4,172,485       5,084,576       4,399,035  
 
                        
 
                                
NON-CURRENT ASSETS:
                                
Property and equipment, net (Notes 2, 6, 10, 19 and 20)
     4,428,435       4,595,883       4,668,882       4,845,422  
Intangible assets, net (Notes 2, 7 and 23)
     3,237,970       3,386,547       3,413,780       3,570,424  
Long-term investment securities (Notes 2 and 3)
     1,038,513       1,203,333       1,094,900       1,268,669  
Equity securities accounted for using the equity method (Notes 2 and 4)
     1,218,239       925,904       1,284,385       976,177  
Long-term loans, net of allowance for doubtful accounts of W23,703 million as of June 30, 2006 and W23,737 million as of December 31, 2005 (Notes 2, 5 and 20)
     10,845       14,204       11,434       14,975  
Guarantee deposits, net of allowance for doubtful accounts of `W311 million as of June 30, 2006 and December 31, 2005 (Notes 2, 11 and 20)
     119,279       122,846       125,755       129,516  
Long-term deposits and other (Note 18)
     117,400       100,474       123,775       105,931  
 
                        
 
                                
Total Non-current Assets
     10,170,681       10,349,191       10,722,911       10,911,114  
 
                        
 
                                
TOTAL ASSETS
   W 14,993,401     W 14,521,676     $ 15,807,487     $ 15,310,149  
 
                        
(Continued)

 

 

SK TELECOM CO., LTD.
NON-CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF JUNE 30, 2006 AND DECEMBER 31, 2005
                                 
                    Translation into U.S. dollars  
    Korean won     (Note 2)  
    June 30,     December 31,     June 30,     December 31,  
    2006     2005     2006     2005  
    (In millions)     (In thousands)  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                
 
                                
CURRENT LIABILITIES:
                                
Accounts payable (Notes 11 and 20)
   W 915,079     W 971,558     $ 964,764     $ 1,024,310  
Income tax payable (Note 16)
     325,045       366,579       342,694       386,483  
Accrued expenses (Notes 2 and 21)
     456,085       362,178       480,849       381,843  
Dividend payable
     360       298       380       314  
Withholdings
     294,419       205,060       310,405       216,194  
Current portion of long-term debt, net (Notes 2, 8 and 10)
     898,530       809,490       947,317       853,442  
Current portion of subscription deposits (Note 9)
     15,455       14,875       16,294       15,683  
Advanced receipts and other
     20,091       17,230       21,181       18,165  
 
                        
 
                                
Total Current Liabilities
     2,925,064       2,747,268       3,083,884       2,896,434  
 
                        
 
                                
LONG-TERM LIABILITIES:
                                
Bonds payable, net (Notes 2 and 8)
     2,292,738       2,314,208       2,417,225       2,439,861  
Long-term borrowings (Note 8)
     200,000       —       210,859       —  
Subscription deposits (Note 9)
     22,359       23,770       23,573       25,061  
Long-term payables — other, net of present value discount of W49,051 million as of June 30, 2006 and W58,413 million as of December 31, 2005 (Note 2)
     510,949       591,587       538,692       623,708  
Obligations under capital lease (Notes 2 and 10)
     5,061       10,204       5,336       10,758  
Accrued severance indemnities, net (Note 2)
     18,556       64,029       19,564       67,506  
Non-current deferred income tax liabilities, net (Notes 2 and 16)
     402,916       409,715       424,793       431,961  
Long-term currency swap (Notes 2 and 22)
     115,249       73,450       121,507       77,438  
Long-term interest rate swap (Notes 2 and 22)
     802       —       845       —  
Guarantee deposits received and other (Note 20)
     28,880       29,565       30,448       31,170  
 
                        
 
                                
Total Long-term Liabilities
     3,597,510       3,516,528       3,792,842       3,707,463  
 
                        
 
                                
Total Liabilities
     6,522,574       6,263,796       6,876,726       6,603,897  
 
                        
 
                                
STOCKHOLDERS’ EQUITY :
                                
Capital stock (Notes 1 and 12)
     44,639       44,639       47,063       47,063  
Capital surplus (Notes 2, 12 and 16)
     2,963,880       2,966,198       3,124,808       3,127,251  
Retained earnings (Note 13):
                                
Appropriated
     6,679,235       5,470,701       7,041,892       5,767,740  
Before appropriations
     712,210       1,799,160       750,880       1,896,848  
Capital adjustments:
                                
Treasury stock (Note 14)
     (2,023,624 )     (2,047,105 )     (2,133,499 )     (2,158,255 )
Unrealized gains (losses) on valuation of long-term investment securities, net (Notes 2, 3 and 16)
     54,223       (42,134 )     57,167       (44,422 )
Equity in capital adjustments of affiliates, net (Notes 2, 4 and 16)
     64,105       77,119       67,586       81,306  
Loss on valuation of currency swap, net (Notes 2, 16 and 22)
     (26,505 )     (14,178 )     (27,944 )     (14,948 )
Loss on valuation of interest rate swap, net (Notes 2, 16 and 22)
     (582 )     —       (614 )     —  
Stock options (Notes 2,15 and 20)
     3,246       3,480       3,422       3,669  
 
                        
 
                                
Total Stockholders’ Equity
     8,470,827       8,257,880       8,930,761       8,706,252  
 
                        
 
                                
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   W 14,993,401     W 14,521,676     $ 15,807,487     $ 15,310,149  
 
                        
See accompanying notes to non-consolidated financial statements.

 

 

SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
                                                                 
    Korean won     Translation into U.S, dollars (Note 2)  
    2006     2005     2006     2005  
    Three months     Six months     Three months     Six months     Three months     Six months     Three months     Six months  
    ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30  
            (In millions except for per share data)                     (In thousands except for per share data)          
OPERATING REVENUE (Notes 2 and 20)
   W 2,638,332     W 5,178,646     W 2,527,150     W 4,939,086     $ 2,781,584     $ 5,459,827     $ 2,664,365     $ 5,207,260  
 
                                                                
OPERATING EXPENSES (Notes 2 and 20)
                                                                
Labor cost (Note 20)
     (60,908 )     (219,830 )     (61,887 )     (197,572 )     (64,215 )     (231,766 )     (65,247 )     (208,299 )
Commissions paid
     (875,244 )     (1,591,529 )     (715,927 )     (1,429,763 )     (922,766 )     (1,677,943 )     (754,799 )     (1,507,394 )
Depreciation and amortization (Notes 2, 6, 7 and 10)
     (344,596 )     (673,524 )     (359,805 )     (701,053 )     (363,306 )     (710,094 )     (379,341 )     (739,118 )
Network interconnection
     (268,891 )     (504,338 )     (240,446 )     (458,353 )     (283,491 )     (531,722 )     (253,501 )     (483,240 )
Leased line
     (98,868 )     (197,611 )     (95,190 )     (192,057 )     (104,236 )     (208,341 )     (100,358 )     (202,485 )
Advertising
     (80,176 )     (137,662 )     (66,033 )     (122,353 )     (84,529 )     (145,137 )     (69,618 )     (128,996 )
Research and development (Note 2)
     (48,925 )     (101,755 )     (46,480 )     (97,464 )     (51,581 )     (107,280 )     (49,004 )     (102,756 )
Rent
     (46,052 )     (93,640 )     (43,347 )     (87,083 )     (48,552 )     (98,724 )     (45,701 )     (91,811 )
Frequency usage
     (39,910 )     (78,310 )     (38,814 )     (77,733 )     (42,077 )     (82,562 )     (40,921 )     (81,954 )
Repair
     (35,508 )     (62,941 )     (28,286 )     (46,504 )     (37,436 )     (66,358 )     (29,822 )     (49,029 )
Cost of goods sold
     (7,987 )     (12,620 )     (2,433 )     (4,355 )     (8,421 )     (13,305 )     (2,565 )     (4,591 )
Other
     (111,978 )     (217,496 )     (115,112 )     (196,944 )     (118,060 )     (229,305 )     (121,363 )     (207,638 )
 
                                                
Sub-total
     (2,019,043 )     (3,891,256 )     (1,813,760 )     (3,611,234 )     (2,128,670 )     (4,102,537 )     (1,912,240 )     (3,807,311 )
 
                                                                
OPERATING INCOME
     619,289       1,287,390       713,390       1,327,852       652,914       1,357,290       752,125       1,399,949  
 
                                                
 
                                                                
OTHER INCOME:
                                                                
Interest income (Note 3)
     17,263       36,358       11,969       23,309       18,200       38,332       12,619       24,575  
Dividends
     369       15,376       227       16,430       389       16,211       239       17,322  
Commissions (Note 20)
     7,379       17,959       8,998       16,074       7,780       18,934       9,487       16,947  
Equity in earnings of affiliates (Notes 2 and 4)
     16,999       33,416       11,720       18,167       17,922       35,230       12,356       19,153  
Foreign exchange and translation gains (Note 2)
     1,375       2,044       246       613       1,450       2,155       259       646  
Reversal of allowance for doubtful accounts
     202       34       680       892       213       36       717       940  
Gain on disposal of investment assets
     690       2,469       —       957       727       2,603       —       1,009  
Gain on disposal of property and equipment
     532       754       515       604       561       795       543       637  
Gain on transactions and valuation of currency swap (Notes 2 and 22)
     —       —       3,040       2,645       —       —       3,205       2,789  
Other
     7,609       22,244       6,789       19,652       8,022       23,452       7,158       20,719  
 
                                                
 
                                                                
 
     52,418       130,654       44,184       99,343       55,264       137,748       46,583       104,737  
 
                                                
(Continued)

 

 

SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
                                                                 
    Korean won     Translation into U.S, dollars (Note 2)  
    2006     2005     2006     2005  
    Three months     Six months     Three months     Six months     Three months     Six months     Three months     Six months  
    ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30  
            (In millions except for per share data)             (In thousands except for per share data)  
OTHER EXPENSES:
                                                                
Interest and discounts
     (59,007 )     (116,790 )     (65,623 )     (131,932 )     (62,211 )     (123,131 )     (69,186 )     (139,095 )
Donations
     (4,836 )     (21,519 )     (1,854 )     (17,718 )     (5,099 )     (22,687 )     (1,955 )     (18,680 )
Foreign exchange and translation losses (Note 2)
     (560 )     (1,440 )     (161 )     (814 )     (590 )     (1,518 )     (170 )     (858 )
Loss on transactions and valuation of currency swap (Notes 2 and 22)
     (3,828 )     (9,125 )     —       —       (4,036 )     (9,620 )     —       —  
Equity in losses of affiliates (Notes 2 and 4)
     (32,089 )     (56,292 )     (17,554 )     (37,198 )     (33,831 )     (59,348 )     (18,507 )     (39,218 )
Loss on disposal of investment assets
     (1,917 )     (2,705 )     (15 )     (62 )     (2,021 )     (2,852 )     (16 )     (65 )
Loss on disposal of property, equipment and intangible assets
     (12,807 )     (13,634 )     (1,594 )     (3,484 )     (13,502 )     (14,374 )     (1,681 )     (3,673 )
Special severance indemnities (Note 2)
     (3,426 )     (144,021 )     —       —       (3,612 )     (151,841 )     —       —  
Other
     (26,853 )     (47,816 )     (20,078 )     (38,087 )     (28,311 )     (50,414 )     (21,168 )     (40,156 )
 
                                                
 
                                                                
Sub-total
     (145,323 )     (413,342 )     (106,879 )     (229,295 )     (153,213 )     (435,785 )     (112,683 )     (241,745 )
 
                                                
 
                                                                
ORDINARY INCOME
     526,384       1,004,702       650,695       1,197,900       554,965       1,059,253       686,025       1,262,941  
 
                                                
 
                                                                
INCOME BEFORE INCOME TAX
     526,384       1,004,702       650,695       1,197,900       554,965       1,059,253       686,025       1,262,941  
 
                                                                
PROVISION FOR INCOME TAX (Notes 2 and 16)
     (153,046 )     (294,204 )     (183,585 )     (362,372 )     (161,356 )     (310,178 )     (193,553 )     (382,047 )
 
                                                
 
                                                                
NET INCOME
   W 373,338     W 710,498     W 467,110     W 835,528     $ 393,609     $ 749,075     $ 492,472     $ 880,894  
 
                                                
 
                                                                
NET INCOME PER SHARE (In Korean won and U.S. dollars) (Note 17)
   W 5,068     W 9,648     W 6,345     W 11,350     $ 5,343     $ 10,172     $ 6,690     $ 11,966  
 
                                                
 
                                                                
DILUTED NET INCOME PER SHARE (In Korean won and U.S. dollars) (Note 17)
   W 4,996     W 9,511     W 6,243     W 11,175     $ 5,267     $ 10,027     $ 6,582     $ 11,782  
 
                                                
See accompanying notes to non-consolidated financial statements.

 

 

SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
                                                                 
    Korean won     Translation into U.S, dollars (Note 2)  
    2006     2005     2006     2005  
    Three months     Six months     Three months     Six months     Three months     Six months     Three months     Six months  
    ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30  
    (in millions)     (in millions)     (in thousands)     (in thousands)  
CASH FLOWS FROM OPERATING ACTIVITIES:
                                                                
Net income
   W 373,338     W 710,498     W 467,110     W 835,528     $ 393,609     $ 749,075     $ 492,472     $ 880,894  
 
                                                
 
                                                                
Expenses not involving cash payments:
                                                                
Provision for severance indemnities
     6,870       26,844       7,528       18,574       7,243       28,302       7,937       19,582  
Depreciation and amortization
     378,068       739,214       389,946       759,528       398,596       779,351       411,119       800,768  
Allowance for doubtful accounts
     9,323       29,616       20,293       35,339       9,829       31,224       21,395       37,258  
Foreign translation loss
     75       525       —       153       79       554       —       161  
Loss on transactions and valuation of currency swap
     3,828       9,125       —       —       4,036       9,620       —       —  
Equity in losses of affiliates
     32,089       56,292       17,554       37,198       33,831       59,348       18,507       39,218  
Loss on disposal of investment assets
     1,917       2,705       15       62       2,021       2,852       16       65  
Loss on disposal of property, equipment and intangible assets
     12,807       13,634       1,594       3,484       13,502       14,374       1,681       3,673  
Amortization of discounts on bonds and other
     12,369       24,430       12,519       24,967       13,041       25,756       13,197       26,323  
 
                                                
 
                                                                
Sub-total
     457,346       902,385       449,449       879,305       482,178       951,381       473,852       927,048  
 
                                                                
Income not involving cash receipts:
                                                                
Foreign translation gain
     (98 )     (219 )     (36 )     (93 )     (103 )     (231 )     (38 )     (98 )
Reversal of allowance for doubtful accounts
     (202 )     (34 )     (680 )     (892 )     (213 )     (36 )     (717 )     (940 )
Equity in earnings of affiliates
     (16,999 )     (33,416 )     (11,720 )     (18,167 )     (17,922 )     (35,230 )     (12,356 )     (19,153 )
Gain on disposal of investment assets
     (690 )     (2,469 )     —       (957 )     (727 )     (2,603 )     —       (1,009 )
Gain on disposal of property and equipment
     (532 )     (754 )     (515 )     (604 )     (561 )     (795 )     (543 )     (637 )
Gain on transactions and valuation of currency swap
     —       —       (3,040 )     (2,645 )     —       —       (3,205 )     (2,789 )
Other
     (686 )     (1,533 )     —       —       (724 )     (1,616 )     —       —  
 
                                                
 
                                                                
Sub-total
     (19,207 )     (38,425 )     (15,991 )     (23,358 )     (20,250 )     (40,511 )     (16,859 )     (24,626 )
 
                                                
(Continued)

 

 

SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
                                                                 
    Korean won   Translation into U.S, dollars (Note 2)
    2006   2005   2006   2005
    Three months   Six months   Three months   Six months   Three months   Six months   Three months   Six months
    ended June 30   ended June 30   ended June 30   ended June 30   ended June 30   ended June 30   ended June 30   ended June 30
    (in millions)   (in millions)   (in thousands)   (in thousands)
Changes in assets and liabilities related to operating activities:
                                                                
Accounts receivable — trade
     11,803       70,904       (61,614 )     (52,694 )     12,444       74,754       (64,959 )     (55,555 )
Accounts receivable — other
     (109,134 )     22,090       4,248       39,967       (115,060 )     23,289       4,479       42,137  
Inventories
     (3,009 )     (1,481 )     (876 )     (518 )     (3,172 )     (1,561 )     (924 )     (546 )
Prepaid expenses
     (5,874 )     28,971       6,859       2,644       (6,193 )     30,544       7,231       2,788  
Advanced payments and other
     1,842       9,388       (2,685 )     (22,968 )     1,942       9,898       (2,831 )     (24,215 )
Accounts payable
     69,192       (56,348 )     27,971       (416,209 )     72,949       (59,407 )     29,490       (438,808 )
Income tax payable
     (60,283 )     (45,957 )     19,662       63,434       (63,556 )     (48,452 )     20,730       66,878  
Accrued expenses
     87,045       93,907       72,935       56,631       91,771       99,006       76,895       59,706  
Withholdings
     (22,113 )     89,358       (5,671 )     60,242       (23,314 )     94,210       (5,979 )     63,513  
Current portion of subscription deposits
     275       579       373       831       290       610       393       876  
Advanced receipts and other
     650       2,945       16,897       11,247       685       3,105       17,814       11,858  
Deferred income taxes
     (2,741 )     (35,609 )     3,415       20,374       (2,890 )     (37,542 )     3,600       21,480  
Severance indemnity payments
     (8,774 )     (257,120 )     (10,606 )     (14,535 )     (9,250 )     (271,081 )     (11,182 )     (15,324 )
Deposits for group severance indemnities and other deposits
     5,378       183,645       4,919       7,616       5,670       193,616       5,186       8,030  
Dividends received from affiliate
     328       1,318       —       600       346       1,390       —       633  
 
                                                                
 
                                                                
Sub-total
     (35,415 )     106,590       75,827       (243,338 )     (37,338 )     112,379       79,943       (256,549 )
 
                                                                
 
                                                                
Net Cash Provided by Operating Activities
     776,062       1,681,048       976,395       1,448,137       818,199       1,772,324       1,029,408       1,526,767  
 
                                                                
(Continued)

 

 

SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
                                                                 
    Korean won     Translation into U.S, dollars (Note 2)  
    2006     2005     2006     2005  
    Three months     Six months     Three months     Six months     Three months     Six months     Three months     Six months  
    ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30  
    (in millions)     (in millions)     (in thousands)     (in thousands)  
CASH FLOWS FROM INVESTING ACTIVITIES :
                                                                
Cash inflows from investing activities :
                                                                
Withdrawal of short-term financial instruments
   W —     W —     W 72,199     W —     $ —     $ —     $ 76,119     $ —  
Disposal of trading securities
     294       —       125,025       —       310       —       131,813       —  
Decrease in current portion of long-term investment securities
     —       —       —       3,600       —       —       —       3,795  
Collection of short-term loans
     19,066       58,708       16,489       31,486       20,101       61,896       17,384       33,196  
Proceeds from sales of long-term investment securities
     108,519       113,745       28       1,714       114,411       119,921       30       1,807  
Proceeds from sales of equity securities accounted for using the equity method
     5,079       5,079       —       —       5,355       5,355       —       —  
Decrease in guarantee deposits
     5,721       20,299       2,971       117,827       6,032       21,401       3,132       124,225  
Decrease in other non-current assets
     2,175       8,775       6,168       16,214       2,293       9,251       6,503       17,094  
Proceeds from disposal of property and equipment
     982       1,814       17,988       18,460       1,035       1,912       18,965       19,462  
Proceeds from disposal of intangible assets
     52       56       52       53       55       59       55       56  
 
                                                
 
                                                                
Sub-total
     141,888       208,476       240,920       189,354       149,592       219,795       254,001       199,635  
 
                                                
 
                                                                
Cash outflows from investing activities :
                                                                
Acquisition of short-term financial instruments
     (172,302 )     (110,703 )     —       (17,603 )     (181,657 )     (116,714 )     —       (18,559 )
Acquisition of trading securities
     —       (177,973 )     —       (24,946 )     —       (187,636 )     —       (26,300 )
Extension of short-term loans
     (13,493 )     (51,920 )     (17,057 )     (43,964 )     (14,226 )     (54,739 )     (17,983 )     (46,351 )
Acquisition of long-term investment securities
     (294 )     (3,050 )     (12,376 )     (12,615 )     (310 )     (3,216 )     (13,048 )     (13,300 )
Acquisition of equity securities accounted for using the equity method
     —       (145,888 )     (9,266 )     (107,144 )     —       (153,809 )     (9,769 )     (112,962 )
Extension of long-term loans
     (1,805 )     (2,985 )     (1,376 )     (1,545 )     (1,903 )     (3,147 )     (1,451 )     (1,629 )
Increase in guarantee deposits and other non-current assets
     (23,937 )     (92,339 )     (21,210 )     (41,232 )     (25,237 )     (97,353 )     (22,362 )     (43,471 )
Acquisition of property and equipment
     (345,026 )     (431,132 )     (271,976 )     (365,267 )     (363,760 )     (454,541 )     (286,743 )     (385,100 )
Acquisition of intangible assets
     (4,077 )     (5,650 )     (4,475 )     (124,020 )     (4,298 )     (5,957 )     (4,718 )     (130,754 )
 
                                                
 
                                                                
Sub-total
     (560,934 )     (1,021,640 )     (337,736 )     (738,336 )     (591,391 )     (1,077,112 )     (356,074 )     (778,426 )
 
                                                
 
                                                                
Net Cash Used in Investing Activities
     (419,046 )     (813,164 )     (96,816 )     (548,982 )     (441,799 )     (857,317 )     (102,073 )     (578,791 )
 
                                                
(Continued)

 

 

SK TELECOM CO., LTD.
NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
                                                                 
    Korean won     Translation into U.S, dollars (Note 2)  
    2006     2005     2006     2005  
    Three months     Six months     Three months     Six months     Three months     Six months     Three months     Six months  
    ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30     ended June 30  
    (in millions)     (in millions)     (in thousands)     (in thousands)  
CASH FLOWS FROM FINANCING ACTIVITIES :
                                                                
Cash inflows from financing activities :
                                                                
Issuance of bonds
   W —     W —     W —     W 193,683     $ —     $ —     $ —     $ 204,199  
Proceeds from short-term borrowings
     —       —       300,000       100,000       —       —       316,289       105,430  
Proceeds from long-term borrowings
     200,000       200,000       —       —       210,859       210,859       —       —  
Increase in guarantee deposits received and other
     570       1,175       6,961       20,550       601       1,239       7,339       21,666  
 
                                                
 
                                                                
Sub-total
     200,570       201,175       306,961       314,233       211,460       212,098       323,628       331,295  
 
                                                
 
                                                                
Cash outflows from financing activities :
                                                                
Repayment of current portion of long-term debt
     (3,350 )     (7,489 )     (500,000 )     (500,000 )     (3,532 )     (7,896 )     (527,148 )     (527,148 )
Payment of dividends
     —       (588,936 )     (684,518 )     (684,529 )     —       (620,913 )     (721,685 )     (721,696 )
Decrease in subscription deposits
     (687 )     (1,411 )     (4,371 )     (5,738 )     (724 )     (1,488 )     (4,608 )     (6,050 )
Decrease in guarantee deposits and other
     (837 )     (1,862 )     (6,468 )     (16,577 )     (882 )     (1,962 )     (6,819 )     (17,477 )
 
                                                
 
                                                                
Sub-total
     (4,874 )     (599,698 )     (1,195,357 )     (1,206,844 )     (5,138 )     (632,259 )     (1,260,260 )     (1,272,371 )
 
                                                
 
                                                                
Net Provided by (Cash Used) in Financing Activities
     195,696       (398,523 )     (888,396 )     (892,611 )     206,322       (420,161 )     (936,632 )     (941,076 )
 
                                                
 
                                                                
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
     552,712       469,361       (8,817 )     6,544       582,722       494,846       (9,297 )     6,900  
 
                                                                
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD
     68,415       151,766       128,327       112,966       72,130       160,006       135,295       119,100  
 
                                                
 
                                                                
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD
   W 621,127     W 621,127     W 119,510     W 119,510     $ 654,852     $ 654,852     $ 125,998     $ 126,000  
 
                                                
See accompanying notes to non-consolidated financial statements.

 

 

SK TELECOM CO., LTD.
NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
1.   GENERAL
 
    SK Telecom Co., Ltd. (the “Company”) was incorporated in March 1984 under the laws of the Republic of Korea to engage in providing nationwide cellular telephone communication services in the Republic of Korea. The Company mainly provides wireless telecommunications in the Republic of Korea and recently acquired foreign wireless telecommunications operations in Vietnam, Mongolia and the United States of America. 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 June 30, 2006, the Company’s total issued shares are held by the following:
                 
            Percentage of
    Number of shares   total shares issued (%)
SK Group
     18,748,522       22.79  
POSCO Corp.
     2,341,569       2.84  
Institutional investors and other minority shareholders
     52,623,566       63.96  
Treasury stock
     8,563,054       10.41  
 
                
 
                
 
     82,276,711       100.00  
 
                
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    The accompanying financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the Republic of Korea, using the same accounting policies which were adopted in preparing the annual financial statements. Significant accounting policies followed in preparing the accompanying financial statements are summarized as follows:
  a.   Basis of Presentation
 
      The accompanying 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 accounting principles generally accepted in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been condensed, restructured and translated into English with certain expanded descriptions 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 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 translation of Korean won amounts into U.S. dollar amounts is included solely for the convenience of readers outside of the Republic of Korea and has been made at the rate of W 948.50 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 six months ended June 30, 2006. 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 that or any other rate.
 
  b.   Adoptions of New Statements of Korea Accounting Standards (“SKAS”)

13

 

      On January 1, 2006, the Company adopted SKAS No. 18 through No. 20, which are effective from the fiscal year beginning after December 31, 2005. Such adoption of SKASs did not have an effect on the non-consolidated financial position of the Company as of June 30, 2006 or the non-consolidated ordinary income and net income of the Company for the three months and six months ended June 30, 2006.
 
  c.   Cash Equivalents
 
      Cash equivalents are highly liquid investments and short term financial instruments, which are readily convertible without significant transaction cost, do not have significant risk of changes in interest rates, and with original maturities of three months or less.
 
  d.   Allowance for Doubtful Accounts
 
      Allowance for doubtful accounts is provided based on the estimated collectibility of individual accounts and historical bad debt experience.
 
  e.   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. The Company maintains perpetual inventory systems, which are adjusted to physical inventory counts performed at fiscal year end. When the market value of inventories is less than the acquisition cost, the carrying amount is reduced to the market value and any difference is charged to current operations as operating expenses. There was no such loss for the three months and six months ended June 30, 2006 and 2005.
 
  f.   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 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 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 asset section of the balance sheet if their maturities are within one year; otherwise such securities are recorded in the non-current section of the balance sheet.
 
  g.   Equity Securities Accounted for Using the Equity Method
 
      Investment securities of affiliated companies, in which the Company has the ability to exercise significant

14

 

      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 stockholders’ equity of the investee. Differences between the purchase cost and the acquisition date net asset fair value of the investee are amortized over 5 to 20 years using the straight-line method. When applying the equity method of accounting, unrealized inter-company gains and losses are eliminated (See Note 4). In addition, the Company provides for additional losses for those investments accounted for using the equity method that are reduced to zero to the extent that the Company has other investment assets related to the equity method investees.
 
      When the Company’s share of equity interest in the equity method investees increases as a result of capital transactions of the investees with (or without) consideration, the increase in the Company’s proportionate shares in the investees are treated as goodwill or negative goodwill and when the Company’s share of equity interest in the equity method investees decreases as a result of capital transactions of the investees with (or without) consideration, the decrease in the Company’s proportionate shares in the investees are accounted for as gain or loss on disposal. However, if equity method investees are subsidiaries, such differences in the Company’s proportionate shares in the investees are accounted for as capital adjustments of affiliates in the Company’s shareholders’ equity.
 
      In translating the foreign currency forward statements of the Company’s investees operating overseas, the Company applies (a) the foreign exchange rate at the balance sheet date to the investee’s balance sheet items (except historical rates applied for shareholders’ equity), and (b) the average foreign exchange rate for the current period for income statements items. After translating the balance sheet and income statements items as noted above, the Company’s portion of the amount after deducting the translated total liabilities from translated total assets and equity is recorded as capital adjustment of affiliates in the Company’s shareholders’ equity.
 
  h.   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.
 
  i.   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 six months ended June 30, 2006 and 2005 were W 171,260 million and W163,574 million, respectively, and for the three months ended June 30, 2006 and 2005 were W86,768 million and W82,520 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% (4.13% as of June 30, 2006). The

15

 

      future payment obligations are W90,000 million (related present value discount: W1,855 million) in 2007, W110,000 million in 2008, W130,000 million in 2009, W150,000 million in 2010 and W170,000 million in 2011. On December 4, 2001, SK IMT Co., Ltd. received the IMT 2000 license from 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 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. As of June 30, 2006, the present value discount related to the current portion and long-term portion of payments to be made to MIC totaled W1,855 million and W 49,051 million, respectively.
 
  j.   Convertible Bonds
 
      The proceeds from issuance of convertible bonds are allocated between the conversion rights and the debt issued; and the portion allocable to the conversion rights is accounted for as capital surplus with a corresponding conversion right adjustment 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.
 
  k.   Discounts on Bonds
 
      Discounts on bonds are amortized to interest expense using the effective interest rate method over the redemption period of the bonds.
 
  l.   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.
 
  m.   Provisions, Contingent Liabilities and Contingent Assets
 
      The Company recognizes a provision when i) it has a present obligation as a result of a past event, ii) it is probable that a disbursement of economic resources will be required to settle the obligation, and iii) a reliable estimate can be made of the amount of the obligation (See Note 21).

16

 

      The Company does not recognize the following contingent obligations as liabilities:
  -   Possible obligations related to past events, for which the existence of a liability can only be confirmed upon occurrence of uncertain future event or events outside the control of the Company.
 
  -   Present obligations arising out of past events or transactions, for which i) a disbursement of economic resources to fulfill such obligations is not probable or ii) a disbursement of economic resources is probable, but the related amount cannot be reasonably estimated.
      In addition, the Company does not recognize potential assets related to past events or transactions, for which the existence of an asset or future benefit can only be confirmed upon occurrence of uncertain future event or events outside the control of the Company.
 
  n.   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 upon termination of their employment based on length of service and rate of pay. 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 W 3,458 million and W 187,103 million as of June 30, 2006 and December 31, 2005, respectively, are 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 W 55 million and W 5,172 million as of June 30, 2006 and December 31, 2005, respectively, are deducted from accrued severance indemnities.
 
      Actual payment of severance indemnities amounted to W 257,120 million and W 14,535 million for the six months ended June 30, 2006 and 2005, respectively, and W 8,774 million and W 10,606 million for the three months ended June 30, 2006 and 2005, respectively.
 
      Effective March 31, 2006, the Company changed its policy for the severance indemnities applicable to those employees who joined the Company before or on December 31, 2002 from cumulative method, where employees are entitled to get paid more than one month of salary each year depending on the length of service, to simple multiplier method, where employees are paid one month of salary each year regardless of their service period in accordance with the resolution of the Company’s joint labor-management conference held on March 16, 2006. As a result of such policy change, the Company has decided to distribute early settlements to those eligible employees on their accumulated severance indemnities as of March 31, 2006 on a mandatory basis. In addition, the Company paid the additional bonuses of W 125,890 million for those employees who received the mandatory distribution for their early settlement as compensation for those employees. The Company recorded such compensation costs as special severance indemnities in other expenses for the six months ended June 30, 2006. In addition, the Company executed the early retirement program and the related special bonus of W 18,131 million were paid to eligible employees. Such costs are recorded as other expenses for the six months ended June 30, 2006.
 
  o.   Accounting for Employee Stock Option Compensation Plan

17

 

      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. In addition, recognized compensation costs related to stock options expired due to such stock options not being exercised within the exercisable period are transferred to other capital surplus from capital adjustments (See Note 12).
 
  p.   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 (See Note 10).
 
  q.   Research and Development Costs
 
      The Company charges substantially all research and development costs to expense as incurred. The Company incurred internal research and development costs of W 101,755 million and W 97,464 million for the six months ended June 30, 2006 and 2005, respectively, and W 48,925 million and W 46,480 million for the three months ended June 30, 2006 and 2005, respectively. In addition, external research and development costs were W 33,348 million and W 34,263 million for the six months ended June 30, 2006 and 2005, respectively, and W 16,306 million and W 17,096 million for the three months ended June 30, 2006 and 2005, respectively.
 
  r.   Accounting for Foreign Currency Transactions and Translation
 
      Transactions denominated in foreign currencies are recorded in Korean won based on the prevailing rate of 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 W 960.30 and W 1,013.00 to US$1.00 at June 30, 2006 and December 31, 2005, respectively. The resulting gains or losses arising from the translation or settlement of such assets and liabilities are included in current operations.
 
  s.   Derivative Instruments

18

 

      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 portions of the gains or losses on the hedging instruments are recorded as a separate component of stockholders’ equity and credited/charged to operations at the time the hedged transactions affect earnings, and the ineffective portions of the gains or losses are credited/charged immediately to operations.
 
  t.   Revenue Recognitions
 
      Operating revenue is recognized when cellular telephone communication services are provided.
 
  u.   Income Tax
 
      Income tax expense is determined by adding or deducting the total income tax and surtaxes to be paid for the current period and the changes in deferred income tax assets and liabilities.
 
      Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profits. Deferred tax liabilities are generally recognized for all taxable temporary differences with some exceptions and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which the deductible temporary differences can be utilized. The carrying amount of deferred tax assets is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered. Effective January 1, 2005, deferred income tax assets and liabilities, which were presented on the balance sheet as a single non-current net amount through 2004, are classified into current and non-current based on the classification of related assets or liabilities for financial reporting purposes (See Note 16).
 
  v.   Reclassifications
 
      Certain reclassifications have been made in prior period’s financial statements to conform to classifications used in the current period. Such reclassifications did not have an effect on the previously reported financial position as of December 31, 2005 and ordinary income and net income for the three months and six months ended June 30, 2005.

19

 

3. INVESTMENT SECURITIES
     a. Trading Securities
          Trading securities as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                                 
                            December 31, 2005  
    June 30, 2006     Fair value and  
    Acquisition cost     Fair value     Carrying amount     carrying amount  
Beneficiary certificates
   W 923,333     W 923,333     W 923,333     W 745,360  
 
                        
b. Long-term Investment Securities
Long-term investment securities as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                 
    June 30, 2006     December 31, 2005  
Available-for-sale equity securities
   W 847,973     W 907,069  
Available-for-sale debt securities
     190,604       296,264  
 
            
 
                
Total
     1,038,577       1,203,333  
Less: current portion
     (64 )     —  
 
            
 
                
Long-term portion
   W 1,038,513     W 1,203,333  
 
            
b-(1). Available-for-sale Equity Securities
Available-for-sale equity securities as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                                                 
    Number of   Percentage   Acquisition        
    shares at   (%) at   cost at   Fair value at   Carrying amount
    June 30,   June 30,   June 30,   June 30,   June 30,   December 31,
    2006   2006   2006   2006   2006   2005
(Investments in listed companies)
                                                
Digital Chosunilbo Co., Ltd.
     2,890,630       7.8     W 5,781     W 3,816     W 3,816     W 5,796  
hanarotelecom incorporated.
     11,045,000       4.8       121,677       61,079       61,079       56,440  
KRTnet Corporation
                                                
(Formerly Korea Radio Wave Basestation Management)
     234,150       4.4       1,171       2,353       2,353       2,646  
POSCO
     2,481,310       2.8       332,662       631,493       631,493       501,225  
Comas Interactive Co., Ltd.
                                                
(Formerly INNOTG Co., Ltd.)
     59,473       0.4       1,695       73       73       83  
 
                                                
Sub-total
                     462,986       698,814       698,814       566,190  
 
                                                

20

 

                                                 
    Number of     Percentage     Acquisition              
    shares at     (%) at     cost at       Fair value at   Carrying amount  
    June 30,     June 30,     June 30,       June 30,   June 30,     December 31,  
    2006     2006     2006       2006   2006     2005  
(Investments in non-listed companies)
                                                
LG Powercomm Co., Ltd.
                                                
(Formerly Powercomm Co., Ltd.)
     7,500,000       5.0     W 240,243       77,130 (Note a)   W 77,130     W 77,130  
Japan MBCO
     54,000       7.3       27,332     (Note b)         27,332       27,332  
Eonex Technologies Inc.
     144,000       12.6       3,600     (Note b)         4,593       4,593  
The Korea Economic Daily
     2,585,069       13.8       13,964     (Note b)         13,964       13,964  
Others
                     119,183     (Notes b & c)         21,944       22,825  
 
                                          
Sub-total
                     404,322               144,963       145,844  
 
                                          
 
                                                
(Investments in funds)
                                                
Korea IT Fund
                     —     (Note d)         —       190,000  
Others
                     4,196     (Note b)         4,196       5,035  
 
                                          
Sub-total
                     4,196               4,196       195,035  
 
                                          
 
                                                
Total
                   W 871,504             W 847,973     W 907,069  
 
                                          
 
(Note a)   The Company recorded its investments in common stock of LG 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 W118,257 million (net of tax effect of W44,856 million) as of December 31, 2005 was recorded as a capital adjustment. Based on the opinion of the outside professional valuation company, there was no significant change in LG Powercomm Co., Ltd.’s operation and financial results, which have an effect on the fair value of the common stocks, for the six months ended June 30, 2006. No additional unrealized loss or recovery on valuation of such investments was recorded accordingly.
 
(Note b)   As a reasonable estimate of fair value could not be made, the investment is stated at acquisition cost. The investment in common stock of Eonex Technologies Inc. was reclassified to available-for-sale securities from equity securities accounted for using the equity method during 2003, as the Company’s ownership in such investees decreased to less than 20% and the Company no longer exercises significant influence. Such securities were transferred to available-for-sale securities at the carrying amount valued using the equity method of accounting prior to the reclassification.
 
(Note c)   Due to the impairment of the Company’s investments in common stock of TeleMerc.com, the Company recorded impairment loss on such investments of W1,793 million for the 4th quarter of 2005.
 
(Note d)   The investment in Korea IT Fund was reclassified to equity securities accounted for using the equity method during the six months ended June 30, 2006 as the Company has the ability to exercise significant influence on the investee.

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b-(2). Available-for-sale Debt Securities
Available-for-sale debt securities as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                                 
                    Carrying amount        
            Acquisition cost     June 30,     December 31,  
    Maturity     of June 30, 2006     2006     2005  
Public bonds
   (Note a)   W 1,883     W 1,883     W 1,590  
Currency stabilization bonds
   (Note b)     188,657       188,721       294,674  
Convertible bonds of Real Telecom Co., Ltd. (Note c)
   March, 2007     10,656       —       —  
 
                            
 
                                
Total
             201,196       190,604       296,264  
Less: current portion
             (64 )     (64 )     —  
 
                          
 
                                
Long-term available-for-sale debt securities
           W 201,132     W 190,540     W 296,264  
 
                          
The interest income incurred from available-for-sale debt securities for the six months ended June 30, 2006 and 2005 and for the three months ended June 30, 2006 and 2005 were W6,886 million and W 630 million, W3,289 million and W16 million, respectively.
 
(Note a)   The maturities of public bonds as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                 
Maturity   June 30, 2006     December 31, 2005  
Within one year
   W 64     W —  
Within five years
     1,818       1,229  
Within ten years
     1       361  
 
            
 
                
 
   W 1,883     W 1,590  
 
            
 
(Note b)   The maturities of currency stabilization bonds as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                 
Maturity   June 30, 2006     December 31, 2005  
Within five years
   W 188,721     W 294,674  
 
            
 
(Note c)   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 during the period from September 29, 2004 to March 28, 2007. Due to the impairment of such bonds, the Company recorded an impairment loss of W10,656 million prior to December 31, 2004.

22

 

b-(3). Changes in Unrealized Gains (Losses) on Investments in Common Stock
The changes in unrealized gains (losses) on investments in common stock for the six months ended June 30, 2006 and 2005 are as follows (In millions of Korean won):
                                 
    For the six months ended June 30, 2006  
                    Transferred to        
    Beginning     Increase/     realized     Ending  
    balance     (decrease)     gain (loss)     balance  
Available-for-sales equity securities:
                                
Digital Chosunilbo Co., Ltd.
   W 14     W ( 1,980 )   W —     W ( 1,966 )
hanarotelecom incorporated
     (65,237 )     4,639       —       (60,598 )
KRTnet Corporation
     1,475       (293 )     —       1,182  
POSCO
     168,563       130,269       —       298,832  
Comas Interactive Co., Ltd.
     (1,611 )     (10 )     —       (1,621 )
LG Powercomm Co., Ltd.
     (163,113 )     —       —       (163,113 )
Eonex Technologies Inc.
     2,011       —       —       2,011  
Currency stabilization bonds
     (218 )     895       (614 )     63  
 
                        
 
                                
Sub-total
     (58,116 )     133,520       (614 )     74,790  
Less: tax effect
     15,982       (36,718 )     169       (20,567 )
 
                        
 
                                
Total
   W (42,134 )   W 96,802     W (445 )   W 54,223  
 
                        
                                 
    For the six months ended June 30, 2005  
                    Transferred to        
    Beginning     Increase/     realized     Ending  
    balance     (decrease)     gain (loss)     balance  
Available-for-sales equity securities:
                                
Digital Chosunilbo Co., Ltd.
   W ( 3,758 )   W 1,431     W —     W ( 2,327 )
hanarotelecom incorporated
     (50,657 )     (15,795 )     —       (66,452 )
KRTnet Corporation
     1,007       5       —       1,012  
POSCO
     131,343       (11,166 )     —       120,177  
Comas Interactive Co., Ltd.
     (1,543 )     (58 )     —       (1,601 )
SINJISOFT Corporation
     460       —       (460 )     —  
Cowon System, Inc.
     —       (243 )     —       (243 )
LG Powercomm Co., Ltd.
     (168,678 )     —       —       (168,678 )
Eonex Technologies Inc.
     2,011       —       —       2,011  
WiderThan Co., Ltd.
     (27 )     —       —       (27 )
 
                        
 
                                
Sub-total
     (89,842 )     (25,826 )     (460 )     (116,128 )
Less: tax effect
     —       31,935       —       31,935  
 
                        
 
                                
Total
   W (89,842 )   W 6,109     W (460 )   W (84,193 )
 
                        

23

 

4. EQUITY SECURITIES ACCOUNTED FOR USING THE EQUITY METHOD
Equity securities accounted for using the equity method of accounting as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                                                 
    June 30, 2006        
            Ownership                     Carrying Amount  
    Number     percentage     Acquisition     Net asset     June 30,     December  
    of shares     (%)     cost     value     2006     31, 2005  
Pantech Co., Ltd.
     25,570,306       22.7     W 26,309     W 52,651     W 53,153     W 55,634  
SK Capital Co., Ltd.
     10,000,000       100.0       50,000       37,506       37,506       37,501  
SK Communications Co., Ltd.
     7,844,454       86.5       175,441       150,188       169,973       158,170  
SK Telink Co., Ltd.
     943,997       90.8       5,296       78,342       78,342       70,863  
SK C&C Co., Ltd.
     300,000       30.0       19,071       202,087       206,754       198,251  
SK Wyverns Baseball Club Co., Ltd.
     199,997       100.0       1,000       —       —       —  
STIC Ventures Co., Ltd.
     1,600,000       21.9       8,000       8,379       8,379       8,308  
Paxnet Co., Ltd.
     5,590,452       66.7       26,563       10,992       28,693       27,372  
Global Credit &Information Co., Ltd.
     300,000       50.0       2,410       2,648       3,256       3,276  
TU Media Corp.
     12,922,266       29.6       64,611       18,426       19,314       32,393  
Aircross Co., Ltd.
     600,000       38.1       300       966       966       970  
WiderThan Co., Ltd.
     2,000,000       10.1       1,000     11,503   (Note a)   11,503       12,827  
IHQ, Inc.
     8,000,000       21.3       14,440       8,940       14,401       13,935  
Seoul Records, Inc.
     9,582,321       60.0       27,874       23,388       26,651       27,242  
Harex Info Tech, Inc.
     225,000       21.2       3,375       1,128       2,355       2,568  
SK Mobile
     —       42.5       10,322     6,618   (Note b)   9,650       —  
SLD Telecom PTE. Ltd.
     180,476,700       73.3       191,273       132,720       133,115       55,358  
Skytel Co., Ltd.
     1,756,400       28.6       2,159       4,852       4,852       4,872  
SK China Company Ltd.
     28,160       20.7       3,195       1,571       485       483  
SK Telecom China Co., Ltd.
     6,150,000       100.0       7,340       6,637       6,637       6,927  
ULand Company Limited.
     14,100,100       70.1       17,511       5,777       10,407       12,564  
SK Telecom USA Holdings, Inc.
     1,000       100.0       161,494     108,268   (Note c)   108,268       103,751  
SK Telecom International, Inc.
     1,099       100.0       17,467       24,920       24,920       25,957  
SK USA, Inc.
     49       49.0       3,184       3,352       3,352       3,353  
Korea IT Fund
             63.3       190,000     197,652   (Note d)   197,652       —  
Centurion IT Investment Association
             37.5       3,000       3,076       3,076       3,635  
1st Music Investment Fund of SK-PVC
             69.3       6,925       6,995       6,995       6,990  
2nd Music Investment Fund of SK-PVC
             79.3       7,925       7,966       7,966       7,966  
SK-KTB Music Investment Fund
             74.3       14,850       15,183       15,183       14,999  
IMM Cinema Fund
             48.4       12,000       11,852       11,852       11,884  
SKT-HP Ventures, LLC.
             —       —       —       —       5,272  
Other investments in affiliates
                     13,083     —   (Note e)   12,583       12,583  
 
                                          
 
                                                
Total
                   W 1,087,418             W 1,218,239     W 925,904  
 
                                          

24

 

 
(Note a)   Effective January 1, 2005, the investment in common stock of WiderThan Co., Ltd. was reclassified to equity securities accounted for using the equity method. Although the Company’s ownership in WiderThan Co., Ltd. is less than 20%, the Company exercises significant influences on the selection of directors and the investee has significant transactions with the Company.
 
(Note b)   On March 31 2006, the Company acquired 42.5% interests of common stock of SK Mobile from Pantech Co., Ltd. and others.
 
(Note c)   In 2005, the Company incorporated SK Telecom USA Holdings, Inc. with an investment of US$122 million in order to invest in and manage Helio, Inc., a joint venture company in the Untied States of America, which was established in order to provide wireless telecommunication services in the United States of America. In addition, the Company invested an additional US$ 39.5 million in SK USA Holdings, Inc. during the first half of 2006 (See Note 23).
 
(Note d)   The investment in Korea IT Fund was reclassified to equity securities accounted for using the equity method during the first half of 2006 as the Company has ability to exercise significant influence on the investee.
 
(Note e)   As allowed under Korean GAAP, investments in equity securities of SK Telecom Europe Limited and others were not accounted for using the equity method of accounting, as changes in the Company’s portion of stockholders’ equity of such investees were not expected to be material.

25

 

Details of the changes in investments in affiliates accounted for using the equity method for the three months and six months ended June 30, 2006 and 2005 are as follows (In millions of Korean won):
                                                                 
            For the six months ended June 30, 2006  
                                    Equity in                      
                            Equity in     capital surplus             Other        
            Beginning             earnings     and capital     Dividend     increase     Ending  
            balance     Acquisition     (losses)     adjustments     received     (decrease)     balance  
Pantech Co., Ltd.
   (Note a)   W 55,634     W —     W ( 2,381 )   W ( 100 )   W —     W —     W 53,153  
SK Capital Co., Ltd.
   (Note b)     37,501       —       5       —       —       —       37,506  
SK Communications Co., Ltd
             158,170       —       9,831       1,972       —       —       169,973  
SK Telink Co., Ltd.
   (Note a)     70,863       —       7,442       37       —       —       78,342  
SK C&C Co., Ltd.
   (Notes a and c)     198,251       —       11,643       (2,150 )     (990 )     —       206,754  
SK Wyverns Baseball Club Co., Ltd.
   (Note b)     —       —       —       —       —       —       —  
STIC Ventures Co., Ltd.
   (Note b)     8,308       —       71       —       —       —       8,379  
Paxnet Co., Ltd.
             27,372       —       1,218       103       —       —       28,693  
Global Credit & Information Co., Ltd.
   (Note b)     3,276       —       (20 )     —       —       —       3,256  
TU Media Corp.
   (Note a)     32,393       —       (13,079 )     —       —       —       19,314  
Aircross Co., Ltd.
   (Note b)     970       —       (4 )     —       —       —       966  
WiderThan Co., Ltd.
   (Notes b and d)     12,827       —       (500 )     (54 )     —       (770 )     11,503  
IHQ, Inc.
   (Notes a and d)     13,935       —       (504 )     417       —       553       14,401  
Seoul Records, Inc.
   (Note a)     27,242       —       (591 )     —       —       —       26,651  
Harex Info Tech, Inc.
   (Note b)     2,568       —       (213 )     —       —       —       2,355  
SK Mobile
   (Note a)     —       10,322       (578 )     (94 )     —       —       9,650  
SLD Telecom PTE Ltd.
   (Note a)     55,358       97,286       (6,893 )     (12,636 )     —       —       133,115  
Skytel Co., Ltd.
   (Notes b and c)     4,872       —       111       197       (328 )     —       4,852  
SK China Company Ltd.
   (Note b)     483       —       2       —       —       —       485  
SK Telecom China Co., Ltd.
   (Note a)     6,927       —       (269 )     (21 )     —       —       6,637  
ULand Company Limited.
   (Note a)     12,564       —       (3,196 )     1,039       —       —       10,407  
SK Telecom USA Holdings, inc.
   (Note a)     103,751       38,280       (27,341 )     (6,422 )     —       —       108,268  
SK Telecom International, Inc.
   (Note a)     25,957       —       240       (1,277 )     —       —       24,920  
SK USA, Inc.
   (Note b)     3,353       —       (75 )     74       —       —       3,352  
Korea IT Fund
   (Notes a and e)     —       —       2,646       5,006       —       190,000       197,652  
Centurion IT Investment Association
   (Note b)     3,635       —       (616 )     57       —       —       3,076  
1st Music Investment Fund of SK-PVC
   (Note b)     6,990       —       5       —       —       —       6,995  
2nd Music Investment Fund of SK-PVC
   (Note b)     7,966       —       —       —       —       —       7,966  
SK-KTB Music Investment Fund
   (Note a)     14,999       —       184       —       —       —       15,183  
IMM Cinema Fund
   (Note a)     11,884       —       (32 )     —       —       —       11,852  
SKT-HP Ventures, LLC
   (Note f)     5,272       —       18       —       —       (5,290 )     —  
 
                                                  
 
                                                                
Total
           W 913,321       145,888       (22,876 )     (13,852 )     (1,318 )     184,493     W 1,205,656  
 
                                                            
 
                                                                
Less: three months ended March 31, 2006
                     (145,888 )     (7,786 )     46,993       (990 )     (597 )        
 
                                                      
 
                                                                
Three months ended June 30, 2006
                   W —     W (15,090 )   W (60,845 )   W (328 )   W 185,090          
 
                                                      

26

 

 
(Note a)  Investments were recorded using the equity method of accounting based on unaudited and unreviewed financial statements as of and for the six months ended June 30, 2006 In order to verify the reliability of such unaudited and unreviewed financial statements, the Company has performed the following procedures and found no significant errors:
 
i) obtained the signature from the chief executive officer of the equity method investee asserting that the unaudited and unreviewed financial statements are accurate
 
ii) checked whether the major transactions identified by the Company, including public disclosures, were appropriately reflected in the unaudited and unreviewed financial statements
 
iii) performed an analytical review on the unaudited and unreviewed financial statements
 
(Note b)  Investments in equity securities are carried using the equity method of accounting based on the financial statements as of December 31, 2005 as information as of June 30, 2006 was not available and the change in the Company’s portion of stockholders’ equity of the investee for the six months ended June 30, 2006 was immaterial.
 
(Note c)  The Company received dividends from SK C&C Co., Ltd. and Skytel co., Ltd. and the corresponding amount was deducted from the carrying amount of equity method securities.
 
(Note d)  Other increase (decrease) in investments in equity securities of WiderThan Co., Ltd. and IHQ, Inc. represent gains (losses) on disposal of investments in equity securities, which have resulted from the dilution of the Company’s ownership as a result of investees’ sale of their unissued shares to third parties.
 
(Note e)  Other increase in investments in Korea IT Fund is the carrying amount transferred from available-for-sale equity securities.
 
(Note f)  Investment was fully liquidated due to dissolution of SKT-HP Ventures, LLC during the first half of 2006.

27

 

                                                                 
            For the six months ended June 30, 2005  
                                    Equity in                      
                            Equity in     capital surplus             Other        
            Beginning             earnings     and capital     Dividend     increase     Ending  
            balance     Acquisition     (losses)     adjustments     received     (decrease)     balance  
SK Teletech Co., Ltd.
           W 190,896     W —     (W 19,327 )   W (19 )   W —     W —     W 171,550  
SK Capital Co., Ltd.
   (Note a)     34,891       —       —       —       —       —       34,891  
SK Communications Co., Ltd
             143,096       —       2,582       (733 )     —       —       144,945  
SK Telink Co., Ltd.
             56,182       —       7,187       32       —       —       63,401  
SK C&C Co., Ltd.
             201,353       —       6,804       (8,293 )     (600 )     —       199,264  
SK Wyverns Baseball Club Co., Ltd.
   (Note a)     —       —       (3,904 )     —       —       —       —  
STIC Ventures Co., Ltd.
   (Note a)     7,321       —       (285 )     441       —       —       7,477  
Paxnet Co., Ltd.
             25,244       —       1,001       —       —       —       26,245  
Global Credit & Information Co., Ltd.
   (Note a)     3,054       —       (21 )     —       —       —       3,033  
TU Media Corp.
             34,607       —       (10,259 )     —       —       —       24,348  
Aircross Co., Ltd.
   (Note a)     944       —       (4 )     —       —       —       940  
IHQ, Inc.
             —       14,440       123       —       —       —       14,563  
SLD Telecom PTE Ltd.
             59,804       —       (3,072 )     (1,097 )     —       —       55,635  
Skytel Co., Ltd.
   (Note a)     3,633       —       88       (8 )     —       —       3,713  
SK China Company Ltd.
   (Note a)     803       —       35       (8 )     —       —       830  
SK Telecom China Co., Ltd.
   (Note a)     9,212       —       178       (178 )     —       —       9,212  
SK Telecom USA Holdings, inc.
             —       83,438       —       —       —       —       83,438  
SK Telecom International, Inc.
   (Note a)     21,995       —       (49 )     4       —       —       21,950  
SK USA, Inc.
   (Note a)     3,184       —       168       (296 )     —       —       3,056  
Centurion IT Investment Association
   (Note a)     3,205       —       (277 )     —       —       —       2,928  
SKT-QC Wireless Development Fund
   (Note a)     5,145       —       1       —       —       —       5,146  
SKT-HP Ventures, LLC
   (Note a)     5,284       —       —       (3 )     —       —       5,281  
 
                                                  
 
                                                                
Total
           W 809,853       97,878       (19,031 )     (10,158 )     (600 )     —     W 881,846  
 
                                                            
Less: three months ended March 31, 2005
                     97,878       (13,197 )     11,039       (600 )     —          
 
                                                      
Three months ended June 30, 2005
                   W —     (W 5,834 )   (W 21,197 )   W —     W —          
 
                                                      
 
(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 June 30, 2005 was not available and the change of the Company’s portion of shareholders’ equity of the investee for the six months ended June 30, 2005 was not expected to be material.

28

 

Details of changes in the differences between the acquisition cost and net asset value of equity method investees at the acquisition date for the three months and six months ended June 30, 2006 and 2005 are as follows (In millions of Korean won):
                                 
    For the six months ended June 30, 2006  
    Beginning                     Ending  
    balance     Increase     Amortization     balance  
Pantech Co., Ltd.
   W 793     W —     W (21 )   W 772  
SK Communications Co., Ltd.
     23,814       —       (699 )     23,115  
SK C&C Co., Ltd.
     4,870       —       (203 )     4,667  
Paxnet Co., Ltd.
     18,237       —       (536 )     17,701  
Global Credit & Information Co., Ltd.
     628       —       (21 )     607  
TU Media Corp.
     993       —       (105 )     888  
IHQ, Inc.
     6,267       (72 )     (734 )     5,461  
Seoul Records, Inc.
     3,670       —       (408 )     3,262  
Harex Info Tech, Inc.
     1,402       —       (175 )     1,227  
SK Mobile
     —       3,192       (159 )     3,033  
SLD Telecom PTE. Ltd.
     406       —       (11 )     395  
ULand Company Limited
     3,628       1,132       (129 )     4,631  
 
                        
 
Total
   W 64,708       4,252       (3,201 )   W 65,759  
 
                            
Less: three months ended March 31, 2006
             4,297       (1,433 )        
 
                            
Three months ended June 30, 2006
           W (45 )   W (1,768 )        
 
                            
                                 
    For the six months ended June 30, 2005  
    Beginning                     Ending  
    balance     Increase     Amortization     balance  
Pantech Co., Ltd.
   W 3,287     W —     W (86 )   W 3,201  
SK Communications Co., Ltd.
     24,622       —       (220 )     24,402  
SK C&C Co., Ltd.
     5,276       —       (203 )     5,073  
Paxnet Co., Ltd.
     19,310       —       (536 )     18,774  
Global Credit & Information Co., Ltd.
     670       —       (21 )     649  
IHQ, Inc.
     —       7,401       (93 )     7,308  
SLD Telecom PTE. Ltd.
     428       —       (11 )     417  
 
                        
 
                                
Total
   W 53,593       7,401       (1,170 )   W 59,824  
 
                            
Less: three months ended March 31, 2005
             7,401       (527 )        
 
                            
Three months ended June 30, 2005
           W —     W (643 )        
 
                            

29

 

Details of changes in unrealized inter-company gains incurred from sales of assets for the three months and six months ended June 30, 2006 and 2005 are as follows (In millions of Korean won):
                                 
    For the six months ended June 30, 2006  
    Beginning                     Ending  
Subsidiary   balance     Increase     Decrease     balance  
Pantech Co., Ltd.
   W —     W 270     W —     W 270  
SK Communications Co., Ltd.
     4,016       —       (686 )     3,330  
SK China Company Ltd.
     1,086       —       —       1,086  
 
                        
 
                                
Total
   W 5,102       270       (686 )   W 4,686  
 
                            
Less: three months ended March 31, 2006
             —       (478 )        
 
                            
Three months ended June 30, 2006
           W 270     W (208 )        
 
                            
                                 
    For the six months ended June 30, 2005  
    Beginning                     Ending  
Subsidiary   balance     Increase     Decrease     balance  
SK Communications Co., Ltd.
   W —     W 3,707     W —     W 3,707  
SK China Company Ltd.
     1,206       —       (120 )     1,086  
 
                        
 
                                
Total
   W 1,206       3,707       (120 )   W 4,793  
 
                            
Less: three months ended March 31, 2005
             —       (120 )        
 
                            
Three months ended June 30, 2005
           W 3,707     W —          
 
                            
Details of market price of the equity securities accounted for using the equity method as of June 30, 2006 are as follows (In millions of Korean won, except for market price per share):
                         
    Market price        
    per share   Shares owned by    
    (In Korean won)   the Company   Market price
Pantech Co., Ltd.
   W 3,700       25,570,306     W 94,610  
WiderThan Co., Ltd.
     9,881       2,000,000       19,762  
IHQ, Inc.
     7,400       8,000,000       59,200  
Seoul Records, Inc.
     4,040       9,582,321       38,713  

30

 

    The condensed financial information of the investees as of and for the six months ended June 30, 2006 is as follows (In millions of Korean won):
                                 
    Total   Total           Net
    assets   liabilities   Revenue   income (loss)
Pantech Co., Ltd.
   W 1,100,178     W 869,724     W 669,992     W (9,960 )
SK Communications Co., Ltd.
     241,357       60,384       86,937       13,860  
SK Telink Co., Ltd.
     128,053       42,081       91,941       9,600  
SK C&C Co., Ltd.
     1,615,838       942,213       443,718       39,606  
Paxnet Co., Ltd.
     21,457       4,390       18,386       2,613  
TU Media Corp.
     380,126       317,838       38,010       (43,690 )
IHQ, Inc.
     71,680       27,838       27,371       (618 )
Seoul Records, Inc.
     45,128       6,148       11,626       (283 )
SK Mobile
     22,363       6,791       550       (1,937 )
SLD Telecom PTE Ltd.
     207,775       26,760       —       (8,290 )
SK Telecom China Co., Ltd.
     9,826       3,189       7,400       21  
ULand Company Limited
     9,961       1,726       3,556       (3,869 )
SK Telecom USA Holdings, Inc.
     148,349       40,081       —       (26,716 )
SK Telecom International, Inc.
     26,483       1,563       6,183       742  
Korea IT Fund
     312,082       —       8,708       4,177  
SKT-KTB Music Investment Fund
     20,521       53       323       254  
IMM Cinema Fund
     24,494       —       247       (67 )
5.   LOANS TO EMPLOYEES
 
    Short-term and long-term loans to employees as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                                 
    June 30, 2006     December 31,  
    Short-term     Long-term     Total     2005  
Loans to employees’ stock ownership association
   W 2,366     W 7,085     W 9,451     W 14,586  
Loans to employees for housing and other
     78       241       319       433  
 
                        
 
                                
Total
   W 2,444     W 7,326     W 9,770     W 15,019  
 
                        
6.   PROPERTY AND EQUIPMENT
 
    Property and equipment as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                         
    Useful lives              
    (years)     June 30, 2006     December 31, 2005  
Land
     —     W 461,970     W 461,513  
Buildings and structures
     30,15       1,478,572       1,477,838  
Machinery
     6       10,465,317       10,376,529  
Vehicles
     4       20,546       20,442  
Other
     4       957,438       807,534  
Construction in progress
     —       342,478       264,309  
 
                    
 
 
             13,726,321       13,408,165  
Less: accumulated depreciation
             (9,297,886 )     (8,812,282 )
 
                    
 
Property and equipment, net
           W 4,428,435     W 4,595,883  
 
                    
    The standard value of land declared by the government as of June 30, 2006 and December 31, 2005 are W503,723 million and W412,829 million, respectively.
    Details of change in property and equipment for the three months and six months ended June 30, 2006 and

31

 

    2005 are as follows (In millions of Korean won):
                                                 
    For the six months ended June 30, 2006  
    Beginning                                     Ending  
    balance     Acquisition     Disposal     Transfer     Depreciation     balance  
Land
   W 461,513     W —     (W 344 )   W 801     W —     W 461,970  
Buildings and structures
     1,145,497       657       (527 )     825       (27,697 )     1,118,755  
Machinery
     2,429,564       492       (633 )     160,861       (500,755 )     2,089,529  
Vehicles
     2,786       723       (86 )     —       (830 )     2,593  
Other
     292,214       313,212       (13,140 )     (140,504 )     (38,672 )     413,110  
Construction in progress
     264,309       116,048       —       (37,879 )     —       342,478  
 
                                    
 
Total
   W 4,595,883       431,132       (14,730 )     (15,896 )     (567,954 )   W 4,428,435  
 
                                            
Less: three months ended March, 31, 2006
             86,106       (1,424 )     (4,741 )     (276,654 )        
 
                                        
 
                                                
Three months ended June 30, 2006
           W 345,026     W (13,306 )   W (11,155 )   W (291,300 )        
 
                                        
                                                 
    For the six months ended June 30, 2005  
    Beginning                                     Ending  
    balance     Acquisition     Disposal     Transfer     Depreciation     balance  
Land
   W 463,656     W 718     W (477 )   W 1,125     W —     W 465,022  
Buildings and structures
     1,163,070       6,351       (782 )     16,284       (27,430 )     1,157,493  
Machinery
     2,585,118       6,454       (17,764 )     194,793       (529,093 )     2,239,508  
Vehicles
     4,030       641       (116 )     —       (1,058 )     3,497  
Other
     251,377       208,087       (2,050 )     (143,803 )     (38,373 )     275,238  
Construction in progress
     138,002       143,016       —       (88,371 )     —       192,647  
 
                                    
 
Total
   W 4,605,253       365,267       (21,189 )     (19,972 )     (595,954 )   W 4,333,405  
 
                                            
Less: three months ended March 31, 2005
             93,291       (2,193 )     277       (288,528 )        
 
                                        
Three months ended June 30, 2005
           W 271,976     W (18,996 )   (W 20,249 )   (W 307,426 )        
 
                                        
7.   INTANGIBLE ASSETS
 
    Intangible assets as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                                                 
    June 30, 2006     December 31, 2005  
    Acquisition     Accumulated     Carrying     Acquisition     Accumulated     Carrying  
    cost     amortization     amounts     cost     amortization     amounts  
Goodwill
   W 2,335,532     W (578,979 )   W 1,756,553     W 2,335,532     W (514,648 )   W 1,820,884  
Frequency use rights
     1,384,433       (250,012 )     1,134,421       1,384,433       (200,141 )     1,184,292  
Software development costs
     225,790       (176,645 )     49,145       221,913       (160,657 )     61,256  
Computer software
     507,064       (248,039 )     259,025       489,807       (210,050 )     279,757  
Other
     105,420       (66,594 )     38,826       103,974       (63,616 )     40,358  
 
                                    
 
                                                
 
   W 4,558,239     (W 1,320,269 )   W 3,237,970     W 4,535,659     (W 1,149,112 )   W 3,386,547  
 
                                    

32

 

Details of changes in intangible assets for the three months and six months ended June 30, 2006 and 2005 are as follows (In millions of Korean won):
                                                 
    For the six months ended June 30, 2006  
    Beginning                                     Ending  
    balance     Increase     Decrease     Transfer     Amortization     balance  
Goodwill
   W 1,820,884     W —     W —     W —     W (64,331 )   W 1,756,553  
Frequency use rights
     1,184,292       —       —       —       (49,871 )     1,134,421  
Software development costs
     61,255       —       —       3,877       (15,987 )     49,145  
Computer software
     279,758       4,236       (1 )     13,070       (38,038 )     259,025  
Other
     40,358       1,414       (19 )     106       (3,033 )     38,826  
 
                                    
 
                                                
Total
   W 3,386,547       5,650       (20 )     17,053       (171,260 )   W 3,237,970  
 
                                            
Less: three months ended March 31, 2006
             1,573       (16 )     5,192       (84,492 )        
 
                                        
Three months ended June 30, 2006
           W 4,077     W (4 )   W 11,861     W (86,768 )        
 
                                        
                                                 
    For the six months ended June 30, 2005  
    Beginning                                     Ending  
    balance     Increase     Decrease     Transfer     Amortization     balance  
Goodwill
   W 1,949,546     W —     W —     W —     W (64,331 )   W 1,885,215  
Frequency use rights
     1,163,319       117,380       —       —       (48,204 )     1,232,495  
Software development costs
     100,579       35       —       —       (21,298 )     79,316  
Computer software
     190,745       5,643       (3 )     20,271       (25,866 )     190,790  
Other
     44,430       962       (200 )     493       (3,875 )     41,810  
 
                                    
 
                                                
Total
   W 3,448,619       124,020       (203 )     20,764       (163,574 )   W 3,429,626  
 
                                            
Less: three months ended March 31, 2005
             119,545       (80 )     425       (81,054 )        
 
                                        
Three months ended June 30, 2005
           W 4,475     W (123 )   W 20,339     W (82,520 )        
 
                                        
The book value as of June 30, 2006 and residual useful lives of major intangible assets are as follows (In millions of Korean won):
                 
    Amount   Description   Residual useful lives
Goodwill
  W 1,756,553     Goodwill related to acquisition of Shinsegi Telecomm, Inc.   13 years and 9 months
IMT license
    1,012,020     Frequency use rights relating to W-CDMA Service   (Note a)
WiBro license
    115,333     WiBro Service   (Note b)
DMB license
    7,069     DMB Service   10 years

33

 

 
(Note a)   Amortization of the IMT license commenced when the Company started its commercial IMT 2000 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.
 
(Note b)   The Company purchased the WiBro license from MIC on March 20, 2005. The license period is seven years from the purchase date. Amortization of the WiBro license commenced when the Company started its commercial WiBro services on June 30, 2006 using the straight line basis over the remaining useful life (5 years and 9 months).
8. BONDS PAYABLE AND LONG-TERM BORROWINGS
a. Bonds payable
Bonds payable as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won and thousands of U.S. dollars):
                                 
            Annual              
            interest     June 30,     December 31,  
      Maturity year     rate (%)     2006     2005  
Domestic general bonds
     2006       5.0 – 6.0     W 800,000     W 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       200,000  
”
     2011       3.0       200,000       200,000  
Dollar denominated bonds (US$300,000)
     2011       4.25       288,090       303,900  
Convertible bonds
     2009       —       364,309       385,885  
 
                            
 
                                
Total
                     3,152,399       3,189,785  
Less: discounts on bonds
                     (31,348 )     (40,016 )
conversion right adjustments
                     (53,343 )     (65,219 )
Add: long-term accrued interest
                     23,422       24,808  
 
                            
 
                                
Net
                     3,091,130       3,109,358  
Less: portion due within one year
                     (798,392 )     (795,150 )
 
                            
 
                                
Long-term portion
                   W 2,292,738     W 2,314,208  
 
                            
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 W218,098 per share in accordance with anti-dilution 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 June 30, 2006 is 1,677,812 shares. Conversion of notes to common shares may be prohibited under the Telecommunications Law or other

34

 

    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 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. During the six months ended June 30, 2006, the convertible bonds with a principal amount of US$18,420,000 were converted into 99,361 shares of treasury stock (See note 14), and the principal amount of the convertible bonds decreased from US$329,450,000 to US$311,030,000. In addition, the consideration for conversion right (capital surplus) decreased by W2,728 million (net of tax effect of W1,034 million) as a result of this conversion and the number of common shares to be converted decreased to 1,677,812 shares from 1,777,173 shares.
 
  b. Long-term borrowings
 
    Long-term borrowings as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won and thousands of U.S. dollars):
                                         
            Final   Annual interest   June 30,   December 31,
    Lender   maturity year   rate (%)   2006   2005
Long-term floating rate discount bill
   Shinhan Bank     2011.6.29     91 days CD yield + 0.25%     200,000       —  
    The above borrowings are classified as long-term borrowings as the borrowings are to be rolled-over exceeding 1 year from June 30, 2006 in accordance with the loan agreement.
 
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 June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won except deposit per subscriber amounts):
 
                         
    Deposit              
Service type   per subscriber     June 30, 2006     December 31, 2005  
Cellular
   W 200,000     W 22,359     W 23,770  
 
                    
    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.

35

 

10.   LEASES
 
    The Company acquired certain computer equipment and software from SK C&C Co., Ltd. and succeeded certain capital lease agreements between SK C&C Co., Ltd. and HP Financial Service. Details of capital lease assets and liabilities acquired from SK C&C Co., Ltd. as of and for the six months ended June 30, 2006 and as of and for the year ended December 31, 2005 are as follows (In millions of Korean won):
                     
        June 30, 2006     December 31, 2005  
Acquisition cost
   Office equipment   W 16,096     W 16,919  
 
   Computer software     7,609       7,625  
 
                
 
                    
 
       W 23,705     W 24,544  
 
                
 
                    
Accumulated depreciation
   Office equipment   W 4,771     W 744  
 
   Computer software     887       127  
 
                
 
                    
 
       W 5,658     W 871  
 
                
 
                    
Carrying amounts
   Office equipment   W 11,325     W 16,175  
 
   Computer software     6,722       7,498  
 
                
 
                    
 
       W 18,047     W 23,673  
 
                
 
                    
Depreciation expenses
   Office equipment   W 4,166     W 744  
 
   Computer software     762       127  
 
                
 
                    
 
       W 4,928     W 871  
 
                
    The Company’s minimum future lease payments as of June 30, 2006 are as follows (In millions of Korean won):
                         
    Annual lease payments     Interest     Principal  
2006
   W 7,291     (W 441 )   W 6,850  
2007
     8,846       (352 )     8,494  
2008
     1,734       (24 )     1,710  
 
                  
 
                        
Total
   W 17,871     (W 817 )     17,054  
 
                    
Less: portion due within one year
                     (11,993 )
 
                      
 
                        
Capital lease liabilities
                   W 5,061  
 
                      

36

 

11.   MONETARY 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 June 30, 2006 and December 31, 2005 are as 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 Singapore dollars, thousands of Swiss Franc and thousands of Euros):
                                 
    June 30, 2006     December 31, 2005  
    Foreign     Korean won     Foreign     Korean won  
    currencies     equivalent     currencies     equivalent  
Cash and cash equivalents
   US$ 5,384     W 5,170     US$ 4,175     W 4,229  
”
     —       —   EUR 3       3  
Accounts receivable — trade
   US$ 11,340       10,890     US$ 9,390       9,512  
”
   EUR$ 248       302     EUR 248       298  
Accounts receivable — other
   US$ 3,464       3,326     US$ 3,364       3,408  
Guarantee deposits
   US$ 9       9     JPY 16,156       139  
”
   JPPY 20,956       175       —       —  
 
                            
 
                                
 
           W 19,872             W 17,589  
 
                            
 
                                
Accounts payable
   US$ 9,094     W 8,733     US$ 15,633     W 15,836  
”
   JPY 37, 980       317     JPY 8,498       73  
”
   HK$ 216       27     HK$ 254     33  
”
   GBP 34       59     GBP 453       792  
”
   SG$ 44       26     SG$ 22       13  
”
   EUR 401       488     EUR 504       604  
”
     —       —     CHF 19       15  
 
                        
 
                                
 
           W 9,650             W 17,366  
 
                            
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 June 30, 2006 and December 31, 2005 are as follows:
                 
    June 30, 2006     December 31, 2005  
Authorized shares
     220,000,000       220,000,000  
Issued shares
     82,276,711       82,276,711  
Outstanding shares, net of treasury stock
     73,713,657       73,614,296  

37

 

    Significant change in capital stock and capital surplus for the six months ended June 30, 2006 and for the year ended December 31, 2005 are as follows (In millions of Korean won except for share data):
                         
    Number of shares              
    Issued     Capital stock     Capital surplus  
At January 1, 2005
     82,276,711     W 44,639     W 2,983,166  
Deferred tax liabilities deducted from capital surplus (Note a)
     —       —       (18,501 )
Transferred from stock options in capital adjustment (Note b)
     —       —       1,533  
 
                  
 
                        
At December 31, 2005
     82,276,711       44,639       2,966,198  
 
                  
 
                        
Consideration for conversion right (Note c)
     —       —       (2,728 )
Transferred from stock options in capital adjustment (Note d)
     —       —       234  
Gains on disposal of treasury stock (Note e)
     —       —       176  
 
                  
 
                        
June 30, 2006
     82,276,711     W 44,639     W 2,963,880  
 
                  
 
(Note a)   The tax effects of consideration for conversion rights, which resulted in temporary differences, were deducted directly from related components of stockholders’ equity, pursuant to adoption of SKAS No. 16 for the year ended December 31, 2005.
 
(Note b)   During the year ended December 31, 2005, the exercisable period for the stock options representing 17,800 shares, of which recognized compensation costs were W1,533 million, expired and the related stock options of W1,533 million in capital adjustments were transferred to capital surplus in accordance with Korean GAAP [See Note 2 (o)] .
 
(Note c)   During the six months ended June 30, 2006, the convertible bonds with a face value of US$18,420,000 were converted and the capital surplus amount (in connection with the related conversion rights) decreased by W2,728 million (net of tax effect of W1,034 million).
 
(Note d)   During the six months ended June 30, 2006, the exercisable period for the stock options representing 43,390 shares, of which recognized compensation costs were W234 million, expired and the related stock options of W234 million in capital adjustments were transferred to capital surplus in accordance with Korean GAAP [See Note 2 (o)].
 
(Note e)   In relation to the conversion of convertible bonds, 99,361 shares of treasury stock were issued and W176 million of gain on disposal of treasury stock were recorded.

38

 

13.   RETAINED EARNINGS
 
    Retained earnings as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                 
    June 30, 2006     December 31, 2005  
Appropriated
   W 6,679,235     W 5,470,701  
Before appropriations
     712,210       1,799,160  
 
            
 
                
 
   W 7,391,445     W 7,269,861  
 
            
    The details of appropriated retained earnings as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                 
    June 30, 2006     December 31, 2005  
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
     880,595       822,061  
Reserve for business expansion
     5,266,138       4,116,138  
 
            
 
                
Total
   W 6,679,235     W 5,470,701  
 
            
  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 for tax purposes. These reserves will be reversed from appropriated retained earnings in accordance with the relevant tax laws. Such reversal will be included in taxable income in the year of reversal.
 
  d.   Reserve for Business Expansion
 
      The reserve for business expansion is voluntary and was approved by the board of directors and stockholders.
14.   TREASURY STOCK

39

 

    Upon 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 through 2004. In addition, the Company acquired 8,584,445 shares of treasury stock in the market or through the trust funds for W2,040,995 million through 2004 in order to stabilize the market price of its stock. In addition, during the six months ended June 30, 2006, the convertible bonds with a principal amount of US$18,420,000 were converted into 99,361 shares of common stock. Such conversion was settled by the Company by using its treasury stock with carrying value totaling W23,481 million, which resulted in the Company recording W176 million of gain on disposal of treasury stock.
 
15.   STOCK OPTIONS
 
    On March 17, 2000, March 16, 2001 and March 8, 2002, in accordance with the approval of its stockholders or 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. The stock options will become exercisable after three years from the date of grant and shall be exercisable for two years from the first exercisable date. Upon exercise of stock options, the Company will issue its common stock. If the employees leave the Company within three years after the grant of stock options, such employees forfeit their unvested stock options awarded. Stock options representing 530 shares for which total compensation cost was W3 million and stock options representing 1,000 shares for which total compensation cost was W49 million were forfeited during the year ended December 31, 2004 and six months ended June 30, 2004, respectively.
 
    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 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 per share for 2000, 2001 and 2002. Under these assumptions, total compensation cost, the recognized compensation cost (included in labor cost) for the three months and six months ended June 30, 2006 and 2005 and the outstanding balance of stock options in capital adjustment as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                                                         
            Recognized     Recognized        
            compensation cost     compensation cost        
            for the three months     for the six months     Stock options in  
    Total     ended June 30,     ended June 30,     capital adjustment  
    Compensation                                     June 30,        
Grant date   cost     2006     2005     2006     2005     2006     December 31, 2005  
March 17, 2000(Note a)
   W 1,533     W —     W —     W —     W —     W —     W —  
March 16, 2001(Note b)
     234       —       —       —       —       —       234  
March 8, 2002
     3,246       —       —       —       180       3,246       3,246  
 
                                          
 
                                                        
 
   W 5,013     W —     W —     W —     W 180     W 3,246     W 3,480  
 
                                          
 
(Note a)   During the year ended December 31, 2005, the exercisable period expired for stock options representing 17,800 shares, for which the Company had recognized compensation cost of W1,533 million. The related capital adjustment of W1,533 million was transferred to capital surplus.
 
(Note b)   During the six months ended June 30, 2006, the exercisable period expired for stock options representing 17,800 shares, for which the Company had recognized compensation cost of W234 million. The related capital adjustment of W234 million was transferred to capital surplus.

40

 

    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 and six months ended June 30, 2006, 2005 and 2004 are as follows:
                         
    For the three months ended June 30,
    2006   2005   2004
Pro forma ordinary income (In millions of Korean won)
   W 526,384     W 650,695     W 410,235  
Pro forma ordinary income per share (In Korean won)
     5,068       6,345       4,052  
Pro forma net income (In millions of Korean won)
     373,338       467,110       298,282  
Pro forma net income per share (In Korean won)
     5,068       6,345       4,052  
                         
    For the six months ended June 30,
    2006   2005   2004
Pro forma ordinary income (In millions of Korean won)
   W 1,004,702     W 1,197,602     W 1,079,869  
Pro forma ordinary income per share (In Korean won)
     9,648       11,346       10,190  
Pro forma net income (In millions of Korean won)
     710,498       835,230       750,159  
Pro forma net income per share (In Korean won)
     9,648       11,346       10,190  
16.   INCOME TAX
  a.   Details of income tax expense
 
      Income tax expenses for the six months ended June 30, 2006 and 2005 consist of the following (In millions of Korean won):
                 
    2006     2005  
Current
   W 329,879     W 341,997  
Deferred (Note a)
     (35,675 )     20,375  
 
            
 
                
Income tax expenses
     294,204       362,372  
Less: three months ended March 31,
     (141,158 )     (178,787 )
 
            
 
Three months ended June 30,
   W 153,046     W 183,585  
 
            
 
(Note a)   Changes in net deferred tax liabilities for the six months ended June 30, 2006 and 2005 are as follows (In millions of Korean won):
                 
    2006     2005  
Ending balance of net deferred tax liabilities
   W 339,252     W 349,168  
Beginning balance of net deferred tax liabilities
     (348,563 )     (323,096 )
Adjustment to the beginning net deferred income tax liabilities based on tax return filed
     4,424       8,536  
Tax effect of temporary differences charged or credited directly to related components of stockholders’ equity
     (30,788 )     (14,233 )
 
            
 
                
 
   (W 35,675 )   W 20,375  
 
            

41

 

  b.   Reconciling items between accounting income and taxable income
 
      Reconciling items between accounting income and taxable income for the six months ended June 30, 2006 and 2005 are as follows (In millions of Korean won):
                 
    2006     2005  
(Temporary Differences)                
Additions:
                
Allowance for doubtful accounts
   W 130,375     W 87,035  
Accrued interest income — prior period
     3,931       4,423  
Reserves for research and manpower development
     94,000       65,733  
Reserves for loss on disposal of treasury stock
     118,570       —  
Equity in losses of affiliates
     23,026       37,198  
Unrealized loses on valuation of long-term investment securities
     —       26,286  
Accrued expenses
     15,300       —  
Depreciation
     28,669       8,665  
Loss on impairment of other assets
     1,980       —  
Loss on valuation of currency swap
     9,125       —  
Loss on valuation of currency swap (capital adjustments)
     17,004       —  
Accrued severance indemnities
     19,622       10,708  
Deposits for severance indemnities
     148,610       7,616  
Consideration of conversion right
     11,876       —  
Other
     41,454       38,533  
 
            
Sub-total
     663,542       286,197  
 
            
 
                
Deductions:
                
Reserves for research and manpower development
     (90,000 )     (65,000 )
Allowance for doubtful accounts — prior period
     (124,184 )     (59,612 )
Depreciation — prior period
     (9,802 )     (39,287 )
Accrued interest income
     (5,661 )     (6,947 )
Equity in earnings of affiliates
     (19,287 )     (18,167 )
Unrealized gains on valuation of long-term investment securities
     (130,269 )     —  
Accrued severance indemnities
     (155,046 )     (7,616 )
Deposits for severance indemnities
     (3,458 )     (102 )
Loss on impairment of other assets — prior period
     (5,109 )     (19,579 )
Loss on disposal of property, equipment
     (38,656 )     —  
Gain on valuation of currency swap
     —       (2,645 )
Gain on valuation of currency swap (capital adjustments)
     —       (21,702 )
Other
     (12,717 )     (11,728 )
 
            
Sub-total
     (594,189 )     (252,385 )
 
            
Total Temporary Differences
     69,353       33,812  
 
            
 
                
(Permanent Differences)
     220,901       73,171  
 
            
 
                
Total
   W 290,254     W 106,983  
 
            

42

 

c.   Change in cumulative temporary differences and deferred tax liabilities
 
    Changes in cumulative temporary differences for the six months ended June 30, 2006 and 2005 and deferred tax assets and liabilities as of June 30, 2006 and 2005 are as follows (In millions of Korean won):
 
    For the six months ended June 30, 2006
                                 
    January 1,     Increase     Decrease     June 30,  
Description   2006     (Note a)     (Note a)     2006  
Current:
                                
Allowance for doubtful accounts
   W 122,561     W 110,419     W 124,184     W 108,796  
Accrued interest income
     (3,931 )     (3,461 )     (3,931 )     (3,461 )
Accrued expenses
     61,967       15,514       19,286       58,195  
Other
     189,548       10,710       3,728       196,530  
 
                        
 
                                
Total
     370,145       133,182       143,267       360,060  
Temporary differences unlikely to be realized
     (147,774 )     —       (19,219 )     (128,555 )
 
                        
 
                                
Total current cumulative temporary differences-net
   W 222,371     W 133,182     W 124,048     W 231,505  
 
                        
 
                                
Current deferred tax assets-net (Note b)
   W 61,152                     W 63,664  
 
                            
 
                                
Non-current:
                                
Property and equipment
   W (196,446 )   W 14,089     W 20,067     W ( 202,424 )
Loss on impairment of long-term investment securities
     108,145       —       —       108,145  
Loss on impairment of other long-term assets
     7,461       —       5,480       1,981  
Reserves for research and manpower development
     (768,000 )     (90,000 )     (94,000 )     (764,000 )
Reserves for loss on disposal of treasury stock
     (474,081 )     —       (118,570 )     (355,511 )
Equity in (earnings) losses of affiliates
     5,379       13,594       5,380       13,593  
Equity in capital adjustment of affiliates
     (109,468 )     —       (12,269 )     (97,199 )
Unrealized loss on valuation of long-term investment securities
     58,116       —       132,905       (74,789 )
Accrued severance indemnities
     148,465       19,768       155,046       13,187  
Deposits for severance indemnities
     (148,465 )     (3,604 )     (148,610 )     (3,459 )
Loss on valuation of currency swap
     13,244       9,125       —       22,369  
Loss on valuation of currency swap (capital adjustment)
     19,554       17,004       —       36,558  
Loss on valuation of interest rate swap (capital adjustment)
     —       802       —       802  
Considerations for conversion right
     (67,279 )     —       (3,762 )     (63,517 )
Other
     (21,051 )     25,940       (11,253 )     16,142  
 
                        
 
                                
Total
     (1,424,426 )     6,718     W (69,586 )     (1,348,122 )
Temporary differences unlikely to be realized
     (65,447 )     (52,201 )     (620 )     (117,028 )
 
                        
 
                                
Total non-current cumulative temporary differences-net
   W (1,489,873 )   W (45,483 )   W (72,206 )   W (1,465,150 )
 
                        
 
                                
Total non-current deferred tax liabilities-net (Note b)
   W (409,715 )                   W (402,916 )
 
                            
 
(Note a)   These changes include adjustment to reflect the change in accumulated temporary differences based on the prior year tax return.
 
(Note b)   The tax rate used in measuring deferred tax assets and liabilities is 27.5%.

43

 

    For the six months ended June 30, 2005
                                 
    January 1,     Increase     Decrease     June 30,  
Description   2005     (Note b)     (Note b)     2005  
Current:
                                
Allowance for doubtful accounts
   W 59,622     W 87,026     W 59,612     W 87,036  
Accrued interest income
     (7,796 )     (3,574 )     (4,423 )     (6,947 )
Accrued expenses
     64,459       5,379       11,428       58,410  
Other
     170,541       (1,237 )     5,141       164,163  
 
                        
 
                                
Total
     286,826       87,594       71,758       302,662  
Temporary differences unlikely to be realized (Note a)
     (128,555 )     —       —       (128,555 )
 
                        
 
                                
Total current cumulative temporary differences-net
   W 158,271     W 87,594     W 71,758     W 174,107  
 
                        
 
                                
Current deferred tax assets-net (Note c)
   W 43,525                     W 47,879  
 
                            
 
                                
Non-current:
                                
Property and equipment
   W ( 127,822 )   W ( 29,635 )   W 4,086     W ( 161,543 )
Loss on impairment of long-term investment securities
     106,752       —       400       106,352  
Loss on impairment of other long-term assets
     21,070       8,467       19,579       9,958  
Reserves for research and manpower development
     (709,467 )     (65,000 )     (65,733 )     (708,734 )
Reserves for loss on disposal of treasury stock
     (474,081 )     —       —       (474,081 )
Equity in (earnings) losses of affiliates
     (89,441 )     19,031       —       (70,410 )
Equity in capital adjustment of affiliates
     —       (113,987 )     —       (113,987 )
Unrealized loss on valuation of long-term investment securities
     —       116,128       —       116,128  
Accrued severance indemnities
     139,524       7,321       7,616       139,229  
Deposits for severance indemnities
     (139,524 )     (7,321 )     (7,616 )     (139,229 )
Loss on valuation of derivative instruments
     15,789       —       2,645       13,144  
Loss on valuation of derivative instruments -capital adjustment
     —       27,750       —       27,750  
Considerations for conversion right
     —       (67,279 )     —       (67,279 )
Other
     (75,966 )     81,766       22,245       (16,445 )
 
                        
 
                                
Total
     (1,333,166 )     (22,759 )     (16,778 )     (1,339,147 )
Temporary differences unlikely to be realized (Note a)
     —       (104,664 )     —       (104,664 )
 
                        
 
                                
Total non-current cumulative temporary differences-net
   W (1,333,166 )   W (127,423 )   W (16,778 )   W (1,443,811 )
 
                        
 
                                
Total non-current deferred tax liabilities-net (Note c)
   W (366,621 )                   W (397,047 )
 
                            
 
(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)   The tax rate used in measuring deferred tax assets and liabilities is 27.5%.

44

 

    Deferred tax assets and liabilities before offsetting each other are as follows (In millions of Korean won):
                 
    June 30, 2006     December 31, 2005  
Deferred tax assets
   W 140,687     W 192,044  
Deferred tax liabilities
     (479,939 )     (540,607 )
 
            
 
                
Deferred tax assets (liabilities), net
   W (339,252 )   W ( 348,563 )
 
            
 
                
Current, net
   W 63,664     W 61,152  
Non-current, net
   W (402,916 )   W (409,715 )
 
            
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 June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
                 
    June 30, 2006     December 31, 2005  
Gains on disposal of treasury stock
   W ( 30,226 )   W ( 30,576 )
Considerations for conversion right
     (17,467 )     (18,502 )
Unrealized loss on valuation of long-term investment securities
     (20,567 )     15,982  
Equity in capital adjustment of affiliates, net
     (32,871 )     (32,350 )
Loss on valuation of currency swap
     10,053       5,377  
Loss on valuation of interest rate swap
     221       —  
 
            
 
                
Total
   W ( 90,857 )   W ( 60,069 )
 
            
e.   Effective tax rate
 
    Effective tax rates for the three months and six months ended June 30, 2006 and 2005 are as follows (In millions of Korean won):
                                 
    For the     For the  
    three months ended     six months ended  
    June 30, 2006     June 30, 2005     June 30, 2006     June 30, 2005  
Income before income tax
   W 526,384     W 650,695     W 1,004,702     W 1,197,900  
Income tax expenses
     153,046       183,585       294,204       362,372  
 
                        
 
                                
Effective tax rate
     29.07 %     28.21 %     29.28 %     30.25 %
 
                        

45

 

17.   NET INCOME AND ORDINARY INCOME PER SHARE
 
    The Company’s net income and ordinary income per share amounts for the three months and six months ended June 30, 2006 and 2005 are computed as follows (In millions of Korean won, except for per share income per share):
 
    Net income and ordinary income per share
                                 
    For the     For the  
    three months ended     six months ended  
    June 30,     June 30,     June 30,     June 30,  
    2006     2005     2006     2005  
Net income and ordinary income
   W 373,338     W 467,110     W 710,498     W 835,528  
Weighted average number of common shares outstanding
     73,668,589       73,614,296       73,614,592       73,614,296  
 
                        
 
                                
Net income and ordinary income per share
   W 5,068     W 6,345     W 9,648     W 11,350  
 
                        
    Net income and ordinary income per share for the year ended December 31, 2005 were W 25,421 and net income and ordinary income per share for the three months ended March 31, 2006 and 2005 are W 4,580 and W 5,005, respectively.
 
    The weighted average number of common shares outstanding for the three months and six months ended June 30, 2006 and 2005 is calculated as follows:
                         
    Number of     Weighted   Weighted  
    shares     number of days   number of shares  
For the three months ended June 30, 2006
                        
At April 1, 2006
     82,276,711       91 / 91       82,276,711  
Treasury stock, at the beginning
     (8,662,415 )     91 / 91       (8,662,415 )
Conversion of convertible bonds into treasury stock (Note a)
     99,361     50 / 91 (note a)     54,293  
 
                  
 
                        
Total
     73,713,657               73,668,589  
 
                    
For the six months ended June 30, 2006
                        
At January 1, 2006
     82,276,711       181 / 181       82,276,711  
Treasury stock, at the beginning
     (8,662,415 )     181 / 181       (8,662,415 )
Conversion of convertible bonds into Treasury stock (Note a)
     99,361     50 / 181 (note a)     27,296  
 
                  
 
                        
Total
     73,713,657               73,641,592  
 
                    
 
(Note a)   Treasury stocks were used to settle the conversion of the convertible bonds on several different dates in the first half of 2006 and weighted number of shares was calculated considering each transaction date.

46

 

                         
    Number of     Weighted     Weighted  
    shares     number of days     number of shares  
For the three months ended June 30, 2005
                        
At April 1, 2005
     82,276,711       91 / 91       82,276,711  
Treasury stock, at the beginning
     (8,662,415 )     91 / 91       (8,662,415 )
 
                    
 
                        
Total
     73,614,296               73,614,296  
 
                    
 
For the six months ended June 30, 2005
                        
At January 1, 2005
     82,276,711       181 / 181       82,276,711  
Treasury stock, at the beginning
     (8,662,415 )     181 / 181       (8,662,415 )
 
                        
Total
     73,614,296               73,614,296  
 
                    
    Diluted net income and ordinary income per share amounts for the three months and six months ended June 30, 2006 and 2005 are computed as follows (In millions of won, except for share data):
 
    Diluted net income and ordinary income per share
                                 
    For the     For the  
    three months ended     six months ended  
    June 30,     June 30,     June 30,     June 30,  
    2006     2005     2006     2005  
Adjusted net income and ordinary income
   W 376,630     W 470,260     W 717,078     W 841,794  
Adjusted weighted average number of common shares outstanding
     75,391,469       75,325,046       75,391,469       75,325,046  
 
                        
 
                                
Diluted net income and ordinary income per share
   W 4,996     W 6,243     W 9,511     W 11,175  
 
                        
    Diluted net income and ordinary income per share for the year ended December 31, 2005 were W 25,015 and diluted net income and ordinary income per share for the three months ended March 31, 2006 and 2005 are W 4,516 and W 4,932, respectively.
 
    Adjusted net income and ordinary income per share and the adjusted weighted average number of common shares outstanding for the three months and six months ended June 30, 2006 and 2005 are calculated as follows:
                                 
    For the     For the  
    three months ended     six months ended  
    June 30,     June 30,     June 30,     June 30,  
    2006     2005     2006     2005  
Net income and ordinary income
   W 373,338     W 467,110     W 710,498     W 835,528  
Effect of stock options (Note a)
     —       —       —       —  
Effect of convertible bonds (Note b)
     3,292       3,150       6,580       6,266  
 
                        
 
                                
Adjusted net income and ordinary income
   W 376,630     W 470,260     W 717,078     W 841,794  
 
                        
 
                                
Weighted average number of common shares outstanding
     73,668,589       73,614,296       73,641,592       73,614,296  
Effect of stock options (Note a)
     —       —       —       —  
Effect of convertible bonds (Note b)
     1,722,880       1,710,750       1,749,877       1,710,750  
 
                        
Adjusted weighted average number of common shares outstanding
   W 75,391,469     W 75,325,046     W 75,391,469     W 75,325,046  
 
                        

47

 

 
(Note a)   For the three months and six months ended June 30, 2006 and 2005, 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 and six months ended June 30, 2006 and 2005 and for the year ended December 31, 2005, respectively.
 
(Note b)   The effect of convertible bonds increased net income related to interest expenses that would not have incurred, and increase in the weighted average number of common shares outstanding related to common shares that would have been issued, assuming that the conversion of convertible bonds was made on the beginning of the period.
18.   RESTRICTED DEPOSITS
  a.   At June 30, 2006, the Company has restricted guarantee deposits for its checking accounts totaling W 26 million and deposits totaling W 10,000 million from which the interest incurred is restricted for use of the public interest until August 10, 2006, the due date.
 
  b.   The Company entered into a contract with First Data Corporation to sell the investment in common stock of KPMS Corporation, which was held by the Company and accounted for as available-for-sale securities. Certain portion of proceeds from sales of such investment totaling W 1,137 million is kept in escrow accounts in accordance with the Escrow Agreement, which is restricted for use until November 16, 2007, the final settlement date, and recorded as long-term deposits.
19.   INSURANCE
 
    As of June 30, 2006, certain Company’s assets are insured with local insurance companies as follows (In millions of Korean won and thousands of U.S. dollars):
                         
Insured   Risk     Carrying value     Coverage  
 
                   US$ 58,115  
Property and equipment
   Fire and comprehensive liability
   W 3,306,612     W 7,255,411  
 
                    
    In addition, the Company carries directors and officers liability coverage insurance totaling W 50,000 million.

48

 

20.   RELATED PARTY TRANSACTIONS
 
    As of June 30, 2006 and December 31, 2005, a list of parent company and subsidiaries of the Company are as follows:
 
    a. Holding company and subsidiaries
                 
        Ownership   Types of
Type   SK Corporation   percentage (%)   business
Parent company
   SK Corporation   22.8 (Note a)   Manufacturing and selling petrochemicals
Subsidiary
   SK Capital Co., Ltd.     100     In arrangement to commence the business
”
   SK Telink Co., Ltd.     90.8     Telecommunication service
”
   SK Communications Co., Ltd.     86.5     Internet website services
”
   SK Wyverns Baseball Club Co., Ltd.     100.0     Business related sports
”
   Global Credit & Information Co., Ltd.     50.5     Credit and collection services
”
   PAXNet Co., Ltd.     67.1     Internet website services
”
   Seoul Records, Inc.     60.0     Release of music disc
”
   SLD Telecom PTE Ltd.     73.3     Telecommunication service
”
   SK Telecom China Co., Ltd.     100.0     Telecommunication service
”
   U-Land Company Limited     70.1     Telecommunication service
”
   SK Telecom USA Holdings, Inc.     100.0     Telecommunication service
”
   SK Telecom International Inc.     100.0     Telecommunication service
”
   Centurion IT Investment Association     37.5     Investment association
”
   The First Music Investment Fund of SK-PVC     69.3     Investment association
”
   The Second Music Investment Fund of SK-PVC     79.3     Investment association
”
   SK-KTB Music Investment Fund     74.3     Investment association
”
   IMM Cinema Fund     48.4     Investment association
”
   Cyworld, Inc.     100.0     Internet website services
”
   Cyworld Japan Co., Ltd.     100.0     Internet website services
”
   SK Cyberpass Inc.     70.5     Telecommunication service
”
   Masoolpiri   51.4 (Note b)   Film production
”
   YTN Media Inc.,   51.4 (Note b)   Broadcasting program production
”
   Ntreev Soft Co., Ltd   51.0 (Note b)   Game program production
”
   Ifilm Co., Ltd.   45.0 (Note b)   Film production
”
   IHQ USA, Inc.   100.0 (Note b)   Surveying marketing information
 
(Note a)   The ownership percentage represents parent company’s ownership over the Company.
 
(Note b)   The ownership percentage represents subsidiaries’ ownership over their subsidiary, in which the Company has no direct investment.

49

 

b. Transactions and balances with related companies
Significant related party transactions for the three months and six months ended June 30, 2006 and 2005, and account balances as of June 30, 2006 and December 31, 2005 are as follows (In millions of Korean won):
b-(1) Transactions
                                                 
    For the three months ended June 30, 2006     For the six months ended June 30, 2006  
    Purchases of     Commissions     Commission     Purchases of     Commissions     Commission  
    property and     paid and     and     property and     paid and     and  
    equipment     other expenses     other income     equipment     Other expenses     other income  
Parent Company:
                                                
SK Corporation
   W 565     W 7,747     W 3,747     W 853     W 15,958     W 5,095  
 
                                                
Subsidiaries:
                                                
SK Communications Co., Ltd.
     11       12,562       1,030       11       20,099       1,408  
Global Credit & Information Co., Ltd.
     —       5,406       343       —       16,370       635  
PAXNet Co., Ltd.
     —       2,287       633       —       4,813       854  
SK Telink Co., Ltd.
     —       5,427       4,197       —       8,314       8,456  
Others
     —       752       —       3       12,172       —  
 
                                                
Equity Method Investees:
                                                
WiderThan Co., Ltd.
     350       26,090       902       967       47,996       972  
Helio, LLC.
     —       —       8,262       —       —       12,922  
SK C&C Co., Ltd.
     35,947       76,550       2,085       45,777       141,878       3,868  
Others
     1,812       4,042       12,112       3,518       7,949       22,098  
 
                                                
Others :
                                                
SK Engineering & Construction Co., Ltd.
     46,205       929       762       46,205       1,075       1,391  
SK Networks Co., Ltd.
     201       118,190       3,170       1,884       218,132       5,464  
Innoace Co., Ltd.
     1,045       2,410       62       1,384       2,866       107  
SK Telesys Co., Ltd.
     75,133       988       288       83,740       1,167       1,049  
Others
     29       1,233       764       29       3,252       1,349  
 
                                    
 
                                                
Total
   W 161,298     W 264,613     W 38,357     W 184,371     W 502,041     W 65,668  
 
                                    
                                                 
    For the three months ended June 30, 2005     For the six months ended June 30, 2005  
    Purchases of     Commissions     Commission     Purchases of     Commissions     Commission  
    property and     paid and     and     property and     paid and     and  
    equipment     other expenses     other income     equipment     Other expenses     other income  
Parent Company:
                                                
SK Corporation
   W 259     W 14,329     W 3,188     W 470     W 23,073     W 4,168  
 
                                                
Subsidiaries:
                                                
SK Communications Co., Ltd.
     —       11,477       251       126       18,910       485  
Global Credit & Information Co., Ltd.
     —       8,685       271       —       15,962       474  
PAXNet Co., Ltd.
     —       4,093       593       —       9,386       1,007  
SK Telink Co., Ltd.
     —       3,662       4,301       —       6,408       7,153  
Others
     576       6,713       591       576       14,030       976  
 
                                                
Equity Method Investees:
                                                
WiderThan Co., Ltd.
     3,317       24,512       25       4,562       45,874       32  
SK C&C Co., Ltd.
     24,277       74,570       2,427       28,056       143,099       4,243  
Others
     —       4,310       6,011       90       6,890       9,162  
 
                                                
Others:
                                                
SK Engineering & Construction Co., Ltd.
     48,883       495       657       50,147       594       896  
SK Networks Co., Ltd.
     436       108,650       4,647       1,126       205,145       7,221  
Innoace Co., Ltd.
     3,981       427       59       4,646       1,116       110  
SK Telesys Co., Ltd.
     53,123       1,378       136       66,805       1,536       190  
Others
     270       1,739       677       288       3,232       1,067  
 
                                    
 
                                                
Total
   W 135,122     W 265,040     W 23,834     W 156,892     W 495,255     W 37,184  
 
                                    

50

 

b-(2) Account balances
                                                 
    As of June 30, 2006  
                                            Guarantee  
    Accounts     Short-term     Long-term     Guarantee     Accounts     deposits  
    receivable     loans     loans     deposits     payable     received  
Parent Company:
                                                
SK Corporation.
   W 2,693     W —     W —     W 291     W 6,794     W 6,174  
 
                                                
Subsidiaries:
                                                
SK Communications Co., Ltd.
     401       —       —       —       10,163       3,681  
SK Wyverns Baseball Club Co., Ltd.
     236       575       4,706       —       —       —  
Global Credit & Information Co., Ltd.
     34       —       —       —       6,033       —  
PAXNet Co., Ltd.
     114       —       —       —       794       —  
SK Telink Co., Ltd.
     1,260       —       —       —       1,763       826  
 
                                                
Equity Method Investees:
                                                
WiderThan Co., Ltd.
     —       —       —       —       8,430       —  
SK C&C Co., Ltd.
     148       —       —       —       45,318       346  
Helio, LLC.
     12,921       —       —       —       —       —  
Others
     5,589       —       —       —       5,463       3,183  
 
                                                
Others:
                                                
SK Engineering & Construction Co., Ltd.
     156       —       —       —       1,062       942  
SK Networks Co., Ltd.
     627       —       —       113       34,895       2,967  
Innoace Co., Ltd.
     —       —       —       —       3,319       2,291  
SK Telesys Co., Ltd.
     9       —       —       —       40,126       —  
Others
     472       —       —       900       802       —  
 
                                    
 
                                                
Total
   W 24, 660     W 575     W 4,706     W 1,304     W 164,962     W 20,410  
 
                                    
                                                 
    As of December 31, 2005  
                                            Guarantee  
    Accounts     Short-term     Long-term     Guarantee     Accounts     deposits  
    receivable     loans     loans     deposits     payable     received  
Parent Company:
                                                
SK Corporation
   W 1,643     W —     W —     W 1,307     W 6,767     W 6,174  
 
                                                
Subsidiaries:
                                                
SK Communications Co., Ltd.
     195       —       —       —       5,891       3,681  
SK Wyverns Baseball Club Co., Ltd.
     527       1,150       4,706       —       —       —  
Global Credit & Information Co., Ltd.
     70       —       —       —       6,533       —  
PAXNet Co., Ltd.
     401       —       —       —       2,077       —  
SK Telink Co., Ltd.
     436       —       —       —       1,179       514  
Others
     2       —       —       —       2,755       70  
 
                                                
Equity Method Investees:
                                                
WiderThan Co., Ltd.
     4       —       —       —       17,398       —  
SK C&C Co., Ltd.
     91       —       —       —       174,884       346  
Helio, LLC.
     11,914       —       —       —       —       —  
Others
     6,048       —       —       —       4,154       3,062  
 
                                                
Others:
                                                
SK Engineering & Construction Co., Ltd.
     97       —       —       —       21,326       942  
SK Networks Co., Ltd.
     1,760       —       —       113       20,465       2,700  
Innoace Co., Ltd.
     —       —       —       —       6,100       2,138  
SK Telesys Co., Ltd.
     3       —       —       —       65,496       —  
Others
     223       —       —       900       7,495       —  
 
                                    
Total
   W 23,414     W 1,150     W 4,706     W 2,320     W 342,520     W 19,627  
 
                                    

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c. Compensation for the key management
                                                 
    For the three months ended     For the six months ended  
    June 30, 2006     June 30, 2006  
            Severance                     Severance        
Payee   Payroll     indemnities     Total     Payroll     indemnities     Total  
Registered directors (including eight outside directors)
   W 542     W 136     W 678     W 3,180     W 662     W 3,842  
 
                                    
In addition, on March 8, 2002, the Company granted stock options to its nine key members of the management, representing 15,110 shares at an exercise price of W267,000 per share. The stock options fully vested after three years from the date of grant and are exercisable for two years upon vesting. Upon exercise of stock options, the Company will issue its common stock or deliver treasury stock. In May 2006, stock options representing 1,000 shares were forfeited due to the resignation of one outside director.
21. PROVISION FOR MILEAGE POINTS
The Company, for its marketing purposes, grants certain mileage points (“Rainbow Points”) to its subscribers based on their usage of the Company’s services. Rainbow Points provision was provided based on the historical usage experience and the Company’s marketing policy. Such provision was recorded as accrued expenses and details of change in the provisions for such mileage points for the six months ended June 30, 2006 and 2005 are as follows (In millions of Korean won):
                 
    June 30, 2006     June 30, 2005  
    (Note a)     (Note a)  
Beginning balance
   W 52,172     W 61,596  
Increase
     5,606       5,159  
Decrease
     (6,093 )     (8,816 )
 
            
 
                
Ending balance
   W 51,685     W 57,939  
 
            
 
(Note a)    Beginning and ending balances for the six months ended June 30, 2006 are discounted value in accordance with SKAS No. 17 and beginning and ending balances for the six months ended June 30, 2005 are stated at their nominal values.
Rainbow Points expire after 5 years; thus, all unused points are expired on their fifth anniversary.
The expected year when unused Rainbow Points as of June 30, 2006 are expected to be used and the respective estimated monetary amount to be paid in a given year are as follows (In millions of Korean won):
                 
Expected year   Estimated amount to be paid        
Of the usage (Note b)   In nominal value (Note b)     Current value (Note b)  
Within June 2007
   W 26,314     W 25,013  
Within June 2008
     15,739       14,222  
Within June 2009
     8,384       7,201  
Within June 2010
     4,328       3,534  
Within June 2011
     2,210       1,715  
 
            
 
                
Ending balance
   W 56,975     W 51,685  
 
            
 
(Note b)    The above expected year of the usage and the current value of the estimated amount to be paid are estimated based on the historical usage experience.
     22. DERIVATIVE INSTRUMENTS
a. Currency swap

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The Company has entered into a fixed-to-fixed cross currency swap contract with Citibank, BNP Paribas and Credit Suisse First Boston International to hedge the foreign currency risk of unguaranteed U.S. dollar denominated bonds with face amounts totaling US$300,000,000 at annual fixed interest rate of 4.25% issued on April 1, 2004. As of June 30, 2006, 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 W26,505 million (excluding tax effect totaling W10,053 million and foreign exchange translation gain arising from unguaranteed U.S. dollar denominated bonds totaling W56,322 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 U.S. dollar denominated convertible bonds with face amounts of US$329,450,000 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, loss on valuation of currency swap of W9,125 million for the six months ended June 30, 2006 and gains on valuation of currency swap of W2,645 million for the six months ended June 30, 2005 were charged to current operations.
b. Interest rate swap
The Company has entered into a floating-to-fixed interest rate swap contract with Shinhan Bank to hedge the interest rate risk of floating rate discounted bill with face amounts totaling W200,000 million indebted on June 29, 2006. As of June 30, 2006, in connection with unsettled interest rate swap contract to which the cash flow hedge accounting is applied, an accumulated loss on valuation of derivatives amounting to W582 million (excluding tax effect totaling W220 million) was accounted for as a capital adjustment.
As of June 30, 2006, fair values of above derivatives are recorded in long-term liabilities and details of derivative instruments as of June 30, 2006 are as follows (In thousands of U.S. dollars and millions of Korean won):
                                                 
                            Fair value  
                            Designated              
            Face     Duration     as cash     Not        
Type   Hedged item     Amount     of contract     flow hedge     designated     Total  
Fix-to-fixed cross
   Unguaranteed U.S. dollar           March 23, 2004                        
currency swap
      denominated bonds   US$ 300,000     ~ April 1, 2011   W 92,880     W —     W 92,880  
Fix-to-fixed cross
   Unguaranteed U.S. dollar           May 27, 2004                        
currency swap
      denominated convertible bond   US$ 100,000     ~ May 27, 2009     —       22,369       22,369  
 
                                          
 
                                                
 
                             92,880       22,369       115,249  
 
                                          
 
                                                
Floating-to-fixed
   Long-term floating rate           June 29, 2006                        
Interest rate swap
      discounted bill   W 200,000     ~ June 29, 2010     802       —       802  
 
                                          
 
                                                
 
                           W 93,682     W 22,369     W 116,051  
 
                                          

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23. COMMITMENTS
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 ‘Helio, LLC.’, 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, has invested US$161.5 million from 2005 through June 30, 2006 and will additionally invest US$58.5 million through 2007 for a 50% equity interest in the joint venture company. Helio, LLC. launched cellular voice and data services extensively across the United States of America in May 2006 by renting networks from network operators throughout the United States of America also known as partial mobile virtual network operator (MVNO) system.
24. STATEMENTS OF CASH FLOWS
The statements of cash flows are prepared using the indirect method and significant non-cash transactions for the three months and six months ended June 30, 2006 are as follows (In millions of Korean won):
                 
    For the three months   For the six months
    ended June 30, 2006   ended June 30, 2006
Conversion of convertible bonds
   W 21,575     W 21,575  
There was no significant non-cash transaction for the three months and six months ended June 30, 2005.
25. SUBSEQUENT EVENTS
a. Retirement of treasury stock
The board of directors of the Company resolved to acquire and retire 491,000 shares of the treasury stock. Upon the retirement of such treasury stock, the related purchases price will be recorded in the Company’s retained earnings. The Company is scheduled to purchase the treasury stock from August 1, 2006 to October 31, 2006 and the daily order limit to purchase treasury stocks is 49,100 shares in accordance with the Act of Issuance and Public Announcement of the Securities No. 106.
b. Interim dividend
On July 28, 2006, the board of directors of the Company resolved to pay interim cash dividends of W1,000 per share totaling W73,714 million. The ex-dividend date was June 30, 2006 and the interim dividends are expected to be paid within twenty days after the date of the board of directors’ resolution.
c. Acquisition of equity interest in IHQ, Inc.
The Company acquired additional 5,000,000 shares of IHQ, Inc.’s common stock by exercising its stock options at the exercise price of W5,740.49 per share on July 3, 2006 in order to strengthen the Company’s communication service and platform business. As a result, the Company’s ownership in IHQ, Inc. increased from 21.3% to 34.6% and the Company become the largest stockholder of IHQ, Inc.
d. Acquisition of convertible bonds issued by China Unicom Limited
The Company acquired convertible bonds (with principal amount of US$1 trillion) issued by China Unicom for W955,119 million (US$1 trillion) on July 5, 2006 in order to build a foundation to penetrate the telecommunication market in China through the business cooperation of China Unicom. The conversion right can be exercised during the period from July 5, 2007 to June 28, 2009 and if all conversion rights are exercised, the Company would acquire 899,745,075 shares of China Unicom and the Company’s ownership in China Unicom would be 6.67%.

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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.    
    (Registrant)    
 
            
    By: /s/ Hyun Jong Song    
         
    (Signature)    
 
  Name:
Title: 		  Hyun Jong Song
Vice President		    
Date: September 25 , 2006

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